A Bitcoin bet

I have yet to hear reasoned arguments about why Bitcoin should be considered a currency. Nor have the perceived advantages over existing currencies and their settlement systems ever really been properly elucidated.

Somehow that does not stop people believing that Bitcoin is a currency. In many cases, people argue that it is even better than existing national currencies without even knowing about the security and settlement features of the current payment systems used across the world. Perhaps this is why the benefits of crypto-currencies are never made clear, and all you get is hand-waving about governments debasing their currency, being anonymous, or some such thing.

Bitcoin is a financial roulette wheel, spinning on ideology, and attracting suckers with every turn. It has none of the core features of a currency, which means it will never be used as one.

Professor Jason Potts, a founder of Crypto Economics, seems for some reason to think otherwise. On Facebook, I suggested to a mutual friend that I was willing to bet that Bitcoin will never be used as a currency, by which I mean as the unit in which goods and services are priced and as the medium for settling payments.

I said:

I have yet to hear why Bitcoin or any other cryptocurrency functions better than current monetary and payment systems, except nonsense anarchist handwaving about the idea of ‘distributed’, and ‘trust’ which is no longer even the case with a small set of Chinese organisations essentially taking over Bitcoin mining, and the trust problem being totally misinterpreted…

Jason decided that a bet was interesting and would take me up on it if I decided terms. After a little back and forth the following terms were agreed to.

I [Cameron] will lose the bet if, as at 19 September 2022, Bitcoin (meaning Bitcoin or any other cryptocurrency not backed by a national banking institution) meets all three following criteria.

1. Bitcoin can be used to buy groceries in a physical store in my suburb where prices are posted in Bitcoin and not simply converted from AUD pricing periodically.

2. More than three listed companies in Australia pay salaries in Bitcoin (or have an option to), and advertise their salary rates in Bitcoin (i.e. you do not just get paid AUD converted at the going exchange rate each time).

3. At least one OECD country accepts Bitcoin for income tax payments and will calculate tax obligations in Bitcoin (not convert from the local currency to Bitcoin).

4. Jason Potts is being paid in Bitcoin at a fixed Bitcoin price (not simply converting an AUD salary to Bitcoin).

Loser pays the winner AUD 100 at an event the loser organises in their city that involves lively discussions, debates, and socialising.

I see a huge number of problems with Bitcoin and want to outline some of them here in the context of this bet. Some of the main ones are:

Money-ness
It is not clear what the advantage of a blockchain tracking all transactions is. My view is that this comes from a fundamental misunderstanding of money. Money is a not an object, or token. It is not a gold coin. It is a common accounting system.

This is why we price in the national currency. There is nothing stopping any company setting their prices in all manner of things — gold, iron, US dollars, or other units. But we don’t. Because we want to integrate into the common system of accounting that our suppliers and customers use, and one where it makes financial sense to can keep relatively stable and predictable pricing, in addition to easy payment.

Every online store that I have found that accepts Bitcoins does not price in Bitcoins. It prices in the national currency, and allows you to pay using Bitcoin. An Australian service that allows you to ‘get paid in Bitcoin’ prefers to be paid themselves in Aussie Dollars for that service.

Indeed, the fundamental misunderstanding of money is evident at some of these retailers. For example, when Mission Market announced they would start accepting Bitcoin, they noted the following:

Unlike credit cards, Bitcoin payments are not sent through a labyrinthine network of banks and processors, meaning that transactions can be completed faster and more cheaply than conventional electronic transactions. Bitcoin retains many of the useful features of cash while offering more security. And because Bitcoin has a finite supply and is not issued by a central bank such as the Federal Reserve, its purchasing power cannot be eroded through excessive money creation. [my emphasis]

Here again, we get the ‘money as object’ myth rearing its head. Payments are not ‘sent’. They are accounted for. The ‘finite supply’ again reinforces this idea.

Now, this same myth is true in much of economics. The quantity theory of money talks about the supply of money very much as a token. This is why the theory fails routinely. Properly considering the nature of money, the theory would not apply to some quantity stock measure, but would instead apply to the rate of expansion of current money accounts used for transactions of newly-produced real goods and services. But that is a fight for another day.

The last main problem for Bitcoin in terms ‘money-ness’ is that if its value keeps rising no one will want to use it for transactions when an alternative currency that isn’t rising in value is available. That’s just Gresham’s Law. And of course, if the value doesn’t keep rising, it is not clear why anyone would want Bitcoin as a means of payment, and its value will likely converge to zero.

Governments
Since money is a common accounting system, those who make the rules of money — government, central banks, and private banks — can exercise a great deal of power via this system. As we see now in China, those holding this power do not want it threatened. If a private crypto-currency did evolve into a more widely accepted alternative monetary system, it would be immediately crushed politically.

Trust
One of the arguments in favour of Bitcoin is that you don’t need to trust a banking system to settle a payment, nor identify yourseld. Instead, you trust a different system. Surely in normal commercial arrangements, the very choice to use Bitcoin rather than established currencies would be a signal of a lack of trust on the part of a transaction partner.Imagine you are a new retailer in a market and approach a wholesaler about purchasing a variety of goods. You ask to pay in Bitcoin. What would their response be? Would it increase their trust that you will pay your bills, or decrease it?

Perhaps this is why Bitcoin’s main commercial use has been in black markets.

And indeed, the main advantages of using Bitcoin — anonymity of transaction partner in digital payments — seem to be the very reasons that governments would want to crack down, particularly if it is widely used to avoid tax.

Technical limits
Around $180 billion worth of non-cash payments are settled each day in Australia. This excludes a great number of within-bank settlements between account holders, and all cash payments in the economy. Since cash payments are about 30% of all payments, and accounting for some within-bank settlements, the total daily payments could be closer to $300 billion.

I have no idea how Bitcoin or any other crypto-currency could handle that sort of settlement need in a timely manner. That’s over $200 million per minute. And yet, the Bitcoin system can only settle about 3 to 7 transactions per second. Mmmm…

Compare this to, say, VISA, the credit card payments company. They alone settle over 56,000 transactions per second during peak times.

Also, the cost of settling Bitcoin transactions is growing. To buy a coffee in Bitcoin today takes over 10 minutes and costs a few dollars for the transaction.

My view

If Bitcoin wants to be more “currency like” it will have to start centralising and becoming a lot more like existing currencies. It will have to change its structure to allow the balance sheets of the system to grow extremely rapidly as the market for them grows. In effect, it will have to become more like existing currencies. Which will then beg the question — why change to a new private currency that works fundamentally the same as the existing one?

Comments

  1. This bet is so contrived. Why does Bitcoin need to meet his specific criteria to be considered currency? Japan has ALREADY deemed it so. Thailand is next. As for transaction capacity, ERC 20 tokens will match Visa transaction rates within two years. Some can already do 1M transactions per second. I can use AUD and BTC and ETH. I don’t have to be stuck on any of them. I can choose the monetary models I prefer rather than being railroaded by government policy, which I may not agree with.

    I’m willing to buy Bitcoin from anybody one year from now at USD$5,000 per BTC. Please contact me if interested.

    • There is the rub… Lemme C…

      Your expectations center around BTC et al increasing in value significantly, not as a means of exchange nor creating any increase in value above what sovereign currency already does. Its sorta like the Uber app of exchange, black box market and all the attendant features with it.

      disheveled…. you can’t make a thing moral or ethical… that is reserved [snicker] for dominate mythos and its effect on people…

    • Why wouldn’t you simply buy them for US$4000 now? Holding something else that you think will rise more than 25% over the next 12 months?

      BTW I agree the bet criteria is so specific that it is unlikely to be won by the BTC advocate, despite what changes or uptake we might see over the next 5 years.

    • Lemme C

      I’ll sell you, today, 1 BTC for delivery on 27/09/2018 @ $5,000, for a premium payable now by you of $1,000.

      You on ?

    • In all seriousness, this is disastrous news for Bitcoin fans.

      This is exactly why powerful governments will not let bitcoin persist as soon as it threatens their interests.

      Watch the US and China squash this like a bug.

      • ErmingtonPlumbing

        I worked with an Electrician when working in WA, who purchased those Perth mint, 1/10 of an ounce gold coins over the counter, with all his “Cash in hand payments.

        Because they were small purchases, usually under $1000 each visit, they didn’t ask him for any ID for quite some time,…but due to the fact he was there almost weekly making these purchases with his “Cash in hand money” they finally asked him to provide ID.

        He never went back in there again,…he was a nervous kinda fellow.

  2. In previous posts you made the comment that the CB’s will probably be able to avoid an outright crash by new and extreme forms of QE. If you look at places where currencies are devalued to the extreme like Zimbabwe and Venezuela bitcoin provides a lifeline as their currency is more volatile and devaluing faster than bitcoin. I think this shows gives an indication where things are heading. The only paths forward are devaluing currencies and no crash or a crash. Both will cause crypto currencies to increase in value.

    Bitcoin probably won’t end up being the main currency that gets worldwide adoption because of the scaling issues but it has the brand and all other crypto currencies are priced and traded against it so I see it as a type of reserve currency. It was also designed as a proof of concept so the cost and speed of transactions weren’t the priority. Subsequent crypto currencies can easily solve these scaling problems in a variety of ways.

    It’s also not going to make sense or is necessary to price things in bitcoin. There are so many crypto currencies now that are become more important(https://coinmarketcap.com/charts/#dominance-percentage) so solutions like debit cards that allow you to easily interface between a variety of crypto currencies are probably going to be the thing that is more practical (See Centra – https://www.youtube.com/watch?v=M5oLXD0FPkE)

  3. It is not clear what the advantage of a blockchain tracking all transactions is.

    This to me – thought slightly less specifically – is the biggest “problem” for the “Bitcoin is going to take over the world” meme.

    Bitcoin offers no meaningful advantage for the typical – or even fairly atypical – punter, and a hell of a lot of downside.

    There is no reason why I would use Bitcoin over cash and credit cards in my day to day transactions (and at the moment, many reasons why I would not).

    Even for international transactions, something I do reasonably often – money transfers, overseas purchases and spending while overseas – I see no advantage to Bitcoin. The (maybe) 1% I lose in bank fees/arbitrage is insignificant in context of Bitcoin’s disadvantages (and probably less than its transaction fees would be anyway).

    So if adoption seems unlikely to be driven from the bottom up, then it would need to be driven from the top down, and why would banks or governments adopt a currency with a fixed supply ?

  4. To be a currency it needs to fulfil the following criteria.
    1) People use it as a currency.

    Do I get my degree now?

    • Cigarettes, shells, can be currency: parallel tokens which simulate currencies are useful in some cases, but have limited utility for multiple reasons, and only the state collects taxes and enforces the rules with its currency.

      • Good looks are a currency. Check out real estate. I can barely walk back to the farmstead without tripping over my boner from all the good looking people on the pamphlets staring up at me. Apparently, people are interested in buying farms in my area! (no they aren’t!! Old fellas dropping like flies left right and centre and land is going to fallow!!!)

        So much currency.

  5. Jason Potts was a lecturer of mine at UQ back in the day. Smart man. But I’m with you on this one…

  6. I think it is a good bet and you’ll win it. I also think you either underestimate or not understand the technology. Blockchain is here to stay. The moment things get priced in btc, day goodbye to USD as world reserve currency. Will it happen before 2022 is the bet. We will see…

  7. the author reveals his fundamental lack of understanding of bitcoin/crypto and the blockchain. very dissapointing. macrobusiness should hire a more informed sceptic like jamie dimon. ha

  8. I am disappointed that the contributors on this site are yet to do the research to understand what a smart contract is and why you (and Jamie Dimon) would use one.

    I do agree though in that btc isn’t a currency. It’s current value stems from its brand recognition and its status as an entry point into other cryptos. It is hopelessly limited in terms of transaction rate, and doesn’t really have a path to achieve the thousands to millions of transactions per second required to function as one. It also can’t do smart contracts or provide true anonymity so it’s likely to become a historical curiosity.

    Ethereum on the other hand, might have a future – but that is a whole different kettle of fish and is trying to be framework rather than a currency.

  9. Bitcoin is not a currency it is a substitute for gold, which is easier to transact and has no carry cost. Millennials do things right from their phones expecting no delays they will not wait 3 days for local bank transfer if they need to send money to a friend or relative overseas. The fact that more and more people trust less and less to “established system” and its piece of paper which is debased at a rate of 3 to 7%, this piece has no difference to any other invented currency except you are forced to use it and accept it as medium of exchange by its creators.

  10. In a world where blockchain technology exists, which NOBODY doubts, it is inconceivable to me that a currency application based on the Blockchain does not exist.