Home > Economic policy > Bitcoin kills the efficient market hypothesis (now with full article)

Bitcoin kills the efficient market hypothesis (now with full article)

I have a piece in the New York Times looking at the implications for the bitcoin bubble for economic theory and, in particular, for the (Strong) Efficient (Financial) Markets Hypothesis (EMH) which states that prices determined in financial markets reflect all the available information about the value of any asset. If that’s true then governments can’t improve on a policy of allocating investment to those assets with the highest market return, which can be achieved by letting private capital markets determine all investment decisions.

Bitcoins have no inherent usefulness, being a record of pointless calculations. They are useless as a currency (their putative purpose) and are now being promoted as a store of value on the basis of scarcity alone. This leaves supporters of the EMH with a dilemma.

If Bitcoins are indeed worthless, then financial markets should price them at zero. But the introduction of futures trading actually boosted the price in the short run. Even after recent declines, there’s no sign that prices will reach zero any time soon.

On the other hand, if Bitcoins are valuable simply because people value them, then asset prices are entirely arbitrary. The same argument can be applied to any financial asset.

Dean Baker at CEPR has a nice followup, making the obvious but crucial point that, since financial services are an intermediate input to production, we want the financial sector to be as small as possible, consistent with doing its essential tasks. As the experience of the mid-20th century shows, a market economy can function perfectly well with a financial sector much smaller than the one we have today. As Bitcoin shows, the massive expansion since then is nothing but wasteful speculation. The financial sector should be cut down to (a small fraction of its present) size.

What Bitcoin Reveals About Financial Markets

The spectacular increase and recent plunge in the price of Bitcoin and other cryptocurrencies have raised concerns that the bursting of the Bitcoin bubble will cause financial markets to crash. They probably won’t, but the Bitcoin bubble should finally destroy our faith in the efficiency of markets.

Since the 1970s, economic policy has been based on the idea that financial market prices reflect all the information relevant to the value of any asset. If this is true, market prices are the best estimates of the value of any investment and financial markets should be relied on to allocate capital investment.

This idea, referred to in the jargon of economics as the efficient market hypothesis (technically, the strong efficient market hypothesis), implicitly underlay the deregulation of financial markets that started in the 1970s. Although rarely stated now with as much confidence as it was during its heyday in the 1990s, the efficient market hypothesis remains a background assumption of much central-bank and economic policy.

The hypothesis survived the absurdities of the dot-com bubble in the late 1990s and early 2000s, as well as the meltdown in derivative markets that led to the global financial crisis in 2007 and 2008. Although the hypothesis should have been refuted by those disasters, it lived on, if only in zombie form.

But at least each of those earlier bubbles began with a plausible premise. The rise of the internet has transformed our lives and given rise to some very profitable companies, such as Amazon and Google. Even though it was obvious that most 1990s dot-coms would fail, it was easy to make a case for any of them individually.

As for the derivative assets that gave us the global financial crisis, they were viewed favorably in light of a widely held theory, known as the “great moderation,” that suggested that major economic crises were a thing of the past, thanks to certain systemic changes in the way developed nations ran their economies. The theory was backed by leading economists and central bankers. Asset-backed derivatives were, ultimately, a bet on the great moderation.

The contrast with Bitcoin is stark. The Bitcoin bubble rests on no plausible premise. When Bitcoin was created about a decade ago, the underlying idea was that it would displace existing currencies for transactions of all kinds. But by the time the Bitcoin bubble took off last year, it was obvious that this would not happen. Only a handful of legitimate merchants ever accepted Bitcoin. And as the Bitcoin bubble drove up transactions charges and waiting times, even this handful walked away.

For a while, Bitcoin was used for transactions that people wanted to keep secret from government authorities, like drug deals. It soon became apparent, however, that if authorities wanted to track these transactions, they could. For instance, Silk Road, the first major online drug market, which made use of Bitcoin, was shut down by the F.B.I. in 2013.

Hardly anyone now suggests that Bitcoin has value as a currency. Rather, the new claim is that Bitcoin is a “store of value” and that its price reflects its inherent scarcity. (By design, no more than 21 million Bitcoins can be created.)

Most economists, including me, dismiss this claim. And if the claim is false, Bitcoin’s value is obviously another deadly strike against the efficient market hypothesis.

But even if the claim is true, the idea that Bitcoin is valuable simply because people value it and because it is scarce should shake any remaining faith in the efficient market hypothesis.

Consider: If Bitcoin is a “store of value,” then asset prices are entirely arbitrary. As the proliferation of cryptocurrencies has shown, nothing is easier than creating a scarce asset. The same argument would apply to any existing financial assets. Any stock in the S & P 500 could be priced not in terms of future earnings prospects but on the basis that people choose to value it highly.

Suppose, more plausibly, that Bitcoin has no underlying value and will eventually become worthless. According to the efficient market hypothesis, financial markets will correctly estimate the true value of Bitcoin and will drive the price to zero immediately.

But that hasn’t happened either. Until recently, it wasn’t even possible because the Bitcoin markets were themselves as opaque as the currency.

Now it is possible: Futures trading for Bitcoin on the Chicago Mercantile Exchange has been going on since December. But Bitcoin prices rose after the creation of futures trading and began their sharp decline only when governments took measures to limit speculation.

Current futures contracts in Bitcoin extend as far as June of this year. According to those contract prices, the market expects Bitcoin to retain its current value well into the future.

Whatever happens to Bitcoin, we must not lose sight of a more fundamental — and more worrisome — development: A financial product with a purely arbitrary value has been successfully introduced in the world’s most sophisticated financial markets.

Bitcoin probably won’t bring financial markets crashing down. But it shows that regulators need to cut those markets down to size.

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  1. February 9th, 2018 at 22:45 | #1

    For me as a monetary sociologist the bitcoin phenomenon shows lack of trust in the financial system and in governmental regulation. Though it is called a currency, it is not a currency, but like the derivatives phenomenon a way to speculate and/or transact illegal activities.

    A real currency as a financial intermediary is not only to be boring, but also trustworthy. Thus, I have proposed a currency that is not only determined by markets but also human global valuation. In Verhagen 2012 “The Tierra Solution: Resolving the climate crisis through monetary transformation” I have proposed the conceptual, institutional, ethical and strategic dimensions of a carbon-based international monetary system with its Tierra currency based upon the monetary standard of a specific tonnage of CO2e per person.

    An economic thinker and global warming activist stated the following about this transformative approach: “The further into the global warming area we go, the more physics and politics narrows our possible paths of action. Here’s a very cogent and well-argued account of one of the remaining possibilities.” Bill McKibben, May 17, 2011

  2. Ikonoclast
    February 10th, 2018 at 08:28 | #2

    If nothing else Bitcoin Mania will prove a fruitful ground for research and conclusions by economists, sociologists and their students, after the full drama has played out. I am assuming here a very big crash will happen to this bubble and it will pretty much wipe out crypto-currencies but not necessarily all block-chain applications.

  3. hc
    February 10th, 2018 at 08:40 | #3

    Gold seems similar to bitcoin. It is mined with increasing extraction costs as is bitcoin and gold is in finite supply in the earth’s crust just as the bitcoin supply is fixed. People say that gold has intrinsic value as jewelry etc but that seems a minor issue – most gold purchased these days is stored in vaults where it is never used. The thing that gold has unlike bitcoin is a history of acceptance (although Lenin thought it would be used to decorate public toilets). Bitcoin does not have a history and is seen as “flaky” for that reason. BTW I would not invest in either gold or bitcoin – I prefer money claims that can be used to pay taxes.

  4. February 10th, 2018 at 09:52 | #4

    The Bitcoin bubble is a real bubble with money changing hands. But it’s paralleled by a virtual bubble in generic blockchain hype, with startups all over the place. The syllogism is classic Underpants Gnome:
    1. Blockchain app
    2.???
    3. Profit!

    JQ has a point that finance is too big, and many financial markets are obese. Do we really need a foreign exchange market turning over $3trn a day? (Some say $5 trn, but what’s a couple of trillion between friends?) But they do run efficiently in the narrow engineering sense that the transactions clear quickly and transactions costs are low. The spread on a $1m interbank foreign currency trade is apparently around 0.01%, or $100. If that’s representative, there should be 3m trades a day, between a large number of banks, say 10,000. If this were run on a distributed blockchain ledger, each bank would need a copy of the 3m daily trades, dutifully encrypted. The overhead would be monstrous. At first sight, it would be impossible to get anywhere near the costs of the current system of centralised ledgers. As far as I can make out, this is two-tier: 53 major banks jointly own a specialised settlement clearing-house in New York called CLS, which logs everything and nets out the positions at the end of each 5-hour trading day so only 53 transfers need to be made to make things all square. In turn, the lesser banks use one of the majors in a similar way.

    What if anything is wrong with this system? Is it vulnerable to fraud? $3 trn is an attractive target, but when they put their minds to it, big banks are capable of designing security good enough to prevent hacking. Lack of trust? FX trading must be a small share of bank profits, and the reputational costs of cheating to other business lines would be far higher. Herstatt risk? (From a German bank that went bust in the middle of the trading day, causing temporary chaos.) I don’t know if CLS have proofed their system against this, but the blockchain projectors haven’t even heard of it and it’s hard to see how they could deal with the issue.

    I suggest that this picture is replicated across other financial markets: central counterparties and settlement avoid duplication and keep transactions costs to professionals low. Trust isn’t much of a problem in practice: you need a public profile to play, and there are enough duplicate records of any transaction to provide an audit trail. SFIK very few frauds are actually committed by falsifying ledger entries, they are too easy to discover. Bernie Madoff’s books were no doubt fine in that sense, as were Enron’s.

  5. Joe Blow
    February 10th, 2018 at 11:33 | #5

    I bought into bitcoin years ago, not to get rich but because I saw the potential for it to completely disrupt the financial system. From where I sit it seems to be doing exactly that.

    The fact that it is annoying the right people is a bonus.

  6. may
    February 10th, 2018 at 11:56 | #6

    i thought it was something that could be indisputably tracked and so not be stolen.

    i thought it was a medium of exchange that was not loaded with an energy cost to create.

    i wuz wrong.

  7. Ikonoclast
    February 10th, 2018 at 12:24 | #7

    @may

    It takes guts to admit when one is wrong. I was sitting on the fence about bitcoin but as soon as I learned some facts like its energy cost and its slow, slow transaction clearing rate I knew it was a pile of Dodo doo-doo. However, I am quite happy my son speculated early and made a little pile on it (a five figure sum). This is despite the fact that as an armchair democratic socialist I should be against all speculation.

    My rationale now is that I can see that capitalism is going to stay dominant and irrational a lot longer than I previously thought possible. I would rather my son be able to play the capitalist game (he already has a good share portfolio too) rather than get exploited, like I was for part of my working career.

    Ultimately, capitalism will still fail. I remain certain of that. It is too irrational, too inefficient, too unequal, too unjust and too environmentally destructive. It does not have the correct or near enough to correct system characteristics to survive in a finite system (the biosphere). I will post on that sometime.

  8. Ernestine Gross
    February 10th, 2018 at 12:35 | #8

    JQ, I admire your perseverance in using empirical data to counteract the ‘efficient market hypotheses’ (plural), as first promoted by Fama-Fisher-Jensen during the early days of what became known as ‘the discipline of Finance’ in some academic circles.

    Of course your aim is important for exactly the reasons you have stated, in the article referenced as well as elsewhere. This ‘stuff’ has crucially contributed to changing the institutional framework away from a ‘market oriented economy’ (as understood in theoretical models developed since Adam Smith and as understood in societies where people have the liberty to trade useful things, going back in time much longer) toward a casino capitalist society. (Using the term ‘capitalist’ as synonymous for ‘market’ is, IMHO, not helpful). The ‘stuff’ is not only fixed in institutions, temporarily perhaps, but also in heads and I am not sure I’ll live long enough for this fog to clear.

    I hope your contributions succeed fighting what I believe has become a religion of sorts. It requires less mental effort to believe instead of working through Econometrica articles, compare empirical observations with theoretical conditions and draw conclusions that are not supported by residual analysis of econometric studies of price behaviour in financial markets. (This is where, IMHO, Milton Friedman’s methodology wins each time for the wrong reasons.)

    As for bitcoins, your argument that the value relies on a limited supply and what people want does not bite because it actually corresponds to what many if not most economists take as the fundamental problem of economics.

    Your argument that the limited supply does not underwrite value because ‘anybody’ can create a crypto-currency looked strong on first impression. But it isn’t because not ‘anybody’ can actually create a cryptocurrency (technological know-how and financial capital is required). So, the value of any one cryptocurrency could approach zero, without ever reaching it as the number of competitors increases. But what would this prove if the long term aim, conscious or as an unintended byproduct of the curiosity of IT people, is to create a system of private monies to replace to a large extent national currencies? Far fetched? Well yes and no. Considering that there is pressure to have corporate tax rates reduced again and again (approaching zero not only in fact but also legally), is it not conceivable that multinationals have their corporate cryptocurrencies with which they deal among each other?

    Since the mid-1970s we have been on a path of going back to the future (19th and 18th century). What comes next – 17th 16th century? Merchant baron X (late 20th century wealth aristocrat) exchanging his currency for wares from merchant baron Y who pays land baron Z with his currency?

    The value of bitcoins and others becoming zero is not an argument in favour of national currencies because some national currencies have also completely devalued.

    The questions raised by bitcoins etc are actually questions in the category ‘what is money’, an age old question in economics.

  9. Joe Blow
    February 10th, 2018 at 12:45 | #9

    Ikon,
    LN – a layer 2 over bitcoin, potentially has sub second settlement times and there are lots of other possibilities as well. It is way to early to write the tech off as a bad joke.

  10. QuentinR
    February 10th, 2018 at 15:51 | #10

    JQ says: “Bitcoins have no inherent usefulness …”. I was under the impression that money launderers and others who don’t want their financial positons known/traced by the financial system or governments find using bitcoins useful by permitting the movement of funds (and hence assets) around the world. Doesn’t this give them value, at least to criminals?

    I suppose others could provide a value – those who have a “lack of trust in the financial system and in governmental regulation” per comment by Frans Verhagen #1 … although I don’t see how to differentiate between those with a lack of trust and those with a fear of being caught.

    Perhaps bitcoins have no inherent legal usefulness?

  11. Ikonoclast
    February 10th, 2018 at 16:33 | #11

    @Ernestine Gross

    A thoughtful response. I find myself in substantial agreement with you. One of my current theories, for the last few years at least, is that the age of bourgeois democracy is over . By “bourgeois democracy” I mean, in a definition broader than normal, the composite democracy of large capitalists, small capitalists, professionals, intelligentsia, middle class and working class all having an effective vote and some effective say in matters by votes and/or by money and lobbying. Whilst New Zealand had universal suffrage in 1893, the UK did not have it until 1928 and the USA not fully and effectively until 1965. This sidelight shows for how little time did true “bourgeois democracy” under my definition last. It is already effectively over as I outline below.

    This “bourgeois democracy” has given way to effective plutocracy and corporatocracy. The change occurred roughly when neoliberalism took over and was finally backed by monied interests and neoliberal ideology taking over the UK and Australian labor Parties. The US Democrats probably lost their democratic pretentions somewhat earlier. Now, we have two-party, one-ideology systems run by the money and influence of the plutocrats and corporatocrats.

    The age of democracy, albeit only bourgeois democracy not true social democracy, is over. The age of Corporatocracy has begun. One can date it very roughly from about 1988. So it is now 30 years old and still consolidating its power. The age of Corporatocracy is also the age of increasing monopoly, or more accurately of Oligopolies demostrating cartel behavior. The writers at Monthly Review (yes, a Marxist publicatio) have done empirical work charting the rise of monopoly and oligopoly in late stage Monopoly Finance Capital as they call it. I recommend you read their work on this topic and judge it solely on empirical content. Our major political parties are bought and subservient to the Monopoly Finance Capitalism or Corporatocracy system and agenda (or whatever descriptive term one wants to give this system and its agenda). Its agenda is the agenda of that minority of persons which is powerful enough to run the main agendas now. The descriptive term of the system is not important anyway. We do not have to agree on that. What we need to do is examine the empirical characteristics and the system and its trends. We need to understand what it is and where it is headed as much as is humanly possible via empirical and philosophical study.

  12. Troy Prideaux
    February 10th, 2018 at 21:34 | #12

    To me, the most fundamentally flawed concept in economics is that a currency or “money” has a value because you can pay taxes with it. I mean… seriously??? Those who value money the most tend to go to great lengths not to pay taxes or at least make their tax payments a trivial fraction of their use of it.
    At least cryptocurrencies have a value to the black market or in transferring wealth through regulatory brick walls eg. China.

  13. Ikonoclast
    February 11th, 2018 at 05:31 | #13

    @Troy Prideaux

    But Troy, that was formulated in the day when corporations still paid taxes! 😉

    More seriously, money has accepted value for a number of reasons I would think and not for any one simple reason. And the reasons vary in time and place.

    The MMT thesis that money has value because you can pay taxes with it has some truth as a formalism, as a reflection of modern money accounting for a fiat currency and as a reflection of sociopolitical customs and laws which surround modern money use. But money’s acceptance (the reasons it is accepted and in what forms) is an historical accretion of socioeconomic and political economy development.

  14. Collin Street
    February 11th, 2018 at 10:15 | #14

    Doesn’t this give them value, at least to criminals?

    Not quite. The problem is difficult to frame but calling it a subtle equivocation on “value” seems to work.

    Or… use as currency doesn’t give value, it uses value that something else created; inherent value [specie] or guaranteed acceptor [canadian tire money, bills of exchange] or government demand [fiat money].

    [there are cases of unbacked money circulating, but… two of the ones I’m thinking of — wampum, swiss dinars — I think they arose out of original use as one of the others where the underpinning eroded away. Yap stone money… eh.]

  15. Ernestine Gross
    February 11th, 2018 at 11:29 | #15

    @Troy Prideaux

    “To me, the most fundamentally flawed concept in economics is that a currency or “money” has a value because you can pay taxes with it.”

    The theory pertains to ‘fiat money’ or ‘fiat currency’. Furthermore, it is not that you ‘can pay taxes with it’ but rather that you must pay taxes with fiat money. In this ‘monetary system’ fiat currency also serves as the unit of account and a large part of the legal system is involved, including the government’s power to tax.

    The term ‘money’ is not well defined. The RBA lists various forms of ‘money’ (related to the money multiplier model), indicating there is no unique definition of ‘money’. In daily conversations people often use the term ‘money’ for ‘wealth’. While the fiat money system requires that all transactions which enter some registration books somewhere are denominated in the currency unit (‘money’), not all transactions are paid for with currency units. For example, company A can acquire part of all of company B’s equity paying the agreed amount with shares issued by A.

    So, IMHO, bitcoins are a form of private money, better described as an electronic form of financial security issued by a private entity somewhere in the global economy, denominated in ‘bitcoin units’ with the distinction that at most those bitcoin-national fiat money exchanges, which are recorded in the books of a financial institution in the specific national economy (‘country’), enter the ‘national accounts’ in an indirect way (‘washed’ or ‘unwashed’).

  16. Nicholas
    February 11th, 2018 at 16:35 | #16

    bitcoins are a form of private money, better described as an electronic form of financial security issued by a private entity somewhere in the global economy

    If bitcoins were a monetary instrument, the issuer of the currency unit (bitcoin miners) would promise to accept the bitcoin back and give you something valuable in exchange (e.g. reduction of a debt that you owe them, or gold, or goods and services). But bitcoin’s issuers make no such promise. The bitcoin issuers do not accept any liability at all.

    When the Australian government issues Australian dollars, it promises to accept those dollars back and give the bearer something in exchange (extinguishment of tax liability).

    When a private bank accepted a deposit of gold from you, and issued a paper bank note to you with a face value of that amount of gold, it promised to accept the note back and give you the gold.

    What is the equivalent promise that bitcoin issuers make?

    Bitcoin isn’t a monetary instrument. It doesn’t even fall within the broader category of “financial asset” (because an asset has to be backed up somewhere by an equivalent liability).

    Bitcoin is a type of commodity (like gold, oil, or tulips), except unlike those commodities bitcoin has no intrinsic use at all. You can use gold to make electronic parts or jewellery; you can use oil as industrial input and as an energy source; you can use tulips to make a room look pretty. Bitcoins don’t have an intrinsic use. They are a purely speculative commodity.

  17. Ernestine Gross
    February 11th, 2018 at 19:27 | #17

    Concept of ‘commodity’ and ‘financial security’.

    My terminology draws on elementary concepts in theoretical economics of the math econ variety. Specifically,

    “commodity” as characterised in theoretical models of the Arrow-Debreu type (ie commodity is characterised by its physical properties, time of availability, location of availability and state of nature conditional upon which it is made available);

    “financial securities” is a generalisation of Radner’s elementary tradeable contract.

    (To the best of my knowledge, terms like ‘monetary instrument’ belong to legal and regulatory terminology; in this literature, ‘concepts’ are represented exclusively in words. ‘Financial asset’, as used by Nicholas belong to the accounting or ‘balance sheet notion of money’. The question I have in mind is whether the difficulties, including booms and busts and crises, created by so called ‘financial innovation’ isn’t due to the legal framework always lagging behind due to its language. I can’t quite find the right words to express clearly what I want to say! I want to say it is futile to try to fit something new – good or bad according to some criteria – into existing legal conceptual frameworks. If the ‘thing’ would fit in, it wouldn’t be ‘new’ – a criteria used in theoretical research.)

  18. Peter T
    February 11th, 2018 at 21:17 | #18

    Once you move away from armchair theorising and look at what actually constitutes money, the issue of the relationship to value becomes clearer. A coin or note is a credit instrument recognised wherever that currency circulates – ie it’s a debt owed by a political community. A credit card, corporate bond or central bank bond are debts owed by the issuer. So money is a system of transferable debts (and this is quite clear from the origins of money in tally sticks and merchant IOUs). So the question is – from whom is a debt in bitcoin recoverable? Bitcoin and other cryptocurrencies are bids to build political communities. If they succeed, then their value is in recognition by that community. So JQ’s judgement, correct in my view, is that bitcoin will not succeed and, when this is recognised, bitcoin will be valueless. No great surprise there – it joins the South Vietnamese piastre, the notes issued by Confederate states and numerous others.

  19. Ernestine Gross
    February 12th, 2018 at 00:15 | #19

    Except in Sydney where the ‘political community’ gives toll road companies the right to collect tolls from road users (denominated in its currency unit, A$) AND the right to refuse ‘money’, as defined by Peter T.

  20. Ikonoclast
    February 12th, 2018 at 07:43 | #20

    “Bitcoins don’t have an intrinsic use.” – Nicholas.

    To play devil’s advocate, it depends on how broadly one defines “intrinsic use”. If the intrinsic use of something is its use as an element in a confidence trick, then that is its intrinsic use. The intrinsic use of bitcoins is to con people out of other forms of money (defining money as broadly as possible). The bitcoin is an elaborate confidence trick with elements of a chain latter and/or a ponzi scheme. The increasing “rarity” algorithmically enforced is a stroke of duplicitous genius. It ensures creators and early investors, just like those in a chain letter scam which works, get high returns and all late comers, sooner or later, lose money.

    Probably, if our regulators were on their toes, Bitcoin would be declared illegal as a “pure speculative instrument of duplicitous design and responsible for a vast waste of energy and creation of excessive pollution”.

  21. Ikonoclast
    February 12th, 2018 at 07:54 | #21

    @Ernestine Gross

    How many pollies get campaign donations or jobs after political life on the boards of such companies.

    https://upload.wikimedia.org/wikipedia/en/1/16/Drevil_million_dollars.jpg

  22. Peter T
    February 12th, 2018 at 08:44 | #22

    @Ernestine Gross

    The point of the definition is that it separates the unit of account (usually but not always legally defined) from any particular debt issued in it. Some money comes no strings attached, much more comes with terms and conditions. While one essential feature of money is that it is transferable, it’s not always transferable to anyone. The allure of gold is that is both pretty much acceptable anywhere AND that it is not tied to any particular political community. So it appeals to the many people who feel want to keep [their] wealth away from politics.

  23. February 12th, 2018 at 09:09 | #23

    BTW, congratulations to JQ for getting a platform from the NYT. I know they give space to shills like Bret Stephens as well as Paul Krugman, but it’s still the paper Davos Man (and the few Davos Women) read.

  24. Ernestine Gross
    February 12th, 2018 at 10:05 | #24

    @Peter T

    1. But I have separated the ‘unit of account’ from the ‘means of payment’ in my little example. So, what is the point?

    2. The generalised concept of ‘financial securities’ I have mentioned allows making explicit what you call ‘strings attached’ to ‘some money’; fiat money is a special case. For a precise formulation see Furche, A, “The Model of Token Money”, PhD dissertation, Macquarie University, NSW, Australia, March 2001. (I supervised this thesis. Andreas’ background is in IT, mine in GE.)

    3. Transferability:= ‘marketability’, ‘novation’, ‘exchangeable’, …. Commodities, as defined are also ‘transferable’. Human services are ‘transferable’. When humans are ‘transferable’ in their role as ‘labour’, then we call it slavery.

    4. I prefer the term ‘monetary objects’ instead of ‘token money’ because it can cover both financial securities with redemptions in quantitities of commodities, valued in a currency unit, and financial securities with redemptions in other financial contracts (including tally sticks and merchant IOUs).

    5. Like gold, crypto-currencies are not tied to any particular political community (not sure what this means), or are both tied to it (used by members of a set of people who don’t trust governments)?

  25. Ernestine Gross
    February 12th, 2018 at 10:06 | #25

    @James Wimberley

    Would like to second your point.

  26. may
    February 12th, 2018 at 15:41 | #26

    Icono you are too kind.

    i’ve been wrong so many times in my life it’s no problemo at all to go

    “oh, so that’s how you don’t do it”

    bravery doesn’t come into it.

    what i can’t understand is what possible benefit can be found in grimly holding on to a situation one knows is not in line with reality when doing so is going to cost you.

  27. Blissex
    February 12th, 2018 at 23:41 | #27

    «Dean Baker at CEPR has a nice followup, making the obvious but crucial point that, since financial services are an intermediate input to production, we want the financial sector to be as small as possible, consistent with doing its essential tasks.»

    Finance like say accounting or firefighting is indeed a cost, an intermediate input, but so are a lot of services. But the national statistics community seem very keen to “improve” GDP by any means available, so they often revise the “methodologies” used to compute the GDP index to includes intermediate inputs, quality improvements, etc., as much possible. Probably it is “just a coincidence” that this ends up flattering the debt-to-GDP ratio.

  28. Greg Pius
    February 13th, 2018 at 06:57 | #28

    Bitcoins are just one of the vast array of crypto currencies out there at the moment. The media fascination with only bitcoins is not surprising. The principle of observation is that if it moves around human interest is stimulated. The difference between gold and bitcoins is that sometimes the price of gold is relatively stable. But the price of bitcoins moves continuously. It is the “look at me” syndrome. Meanwhile other crypotocurrency go on their merry way unnoticed by mainstream media outlets. John Quiggin points out the weakness of the efficient market hypothesis for financial assets. Bitcoins and other ‘stealth’ crypto currencies are an excellent case study of the warping of block chains by excessive speculation.

  29. Jim Birch
    February 13th, 2018 at 11:36 | #29

    @hc
    Gold has significant inherent engineering value. It is a malleable electrical conductor that doesn’t oxidise in normal conditions. If it was as common and cheap as copper it would be used for house wiring. It is used for special electical applications, eg, connectors and IC chips, among other niche uses. That is not to say that its price is largely determined by the cumulative actions of speculators. It is. I wonder what its history would have been if it wasn’t shiny, after all there are lots of scarce things.

    The only possible real value of bitcoin I see is heating your home.

  30. February 13th, 2018 at 12:10 | #30

    Even Bloomberg is giving you well deserved plug, John

    The Economy Is Full of Crypto (And Collective Delusion) – Bloomberg
    John Quiggin arguing that “the Bitcoin bubble should finally destroy our faith in the efficiency of markets.” In particular, he notes that Bitcoin is a terrible currency, and then dismisses the alternative argument that Bitcoin’s value comes from its usefulness as a store of value:
    https://www.bloomberg.com/view/articles/2018-02-11/the-economy-is-full-of-crypto-and-collective-delusion

    https://www.theguardian.com/technology/2018/feb/08/bitcoin-what-the-experts-have-said

  31. hc
    February 13th, 2018 at 19:02 | #31

    “That is not to say that its price is largely determined by the cumulative actions of speculators. It is.” I agree.

    There are several other uses of gold – e.g. as tooth fillings etc but most gold is not used, In this sense it is analogous to bitcoin. Something scarce that is “mined” with increasing extraction costs.

    The main difference with bitcoin is that it has relatively low social acceptability and/or a negligible history.

  32. John Brookes
    February 15th, 2018 at 23:51 | #32

    I’m reminded that tobacco was sometimes used as currency. If its value fell too much, you could always smoke it.

  33. hc
    February 16th, 2018 at 11:45 | #33

    A penny dreadful mining exploration company that I have followed in the past (to my regret) has made losses for each of the past 10 years. It has several exploration sites that it owns or co-owns, but none is anything close to a producing mine – indeed at some “promising” sites, only a single drill sample has been analyzed. Several of the sites are in Africa. The firm is capitalized at about $40m but has cash at the bank of only about $500,000. Over the past 6 months, it spent $1.7m on “administrative and corporate costs” (it pays its CEO $700,000 annually) and it spent about $900,000 on “exploration and evaluation” activities. It is scheduled to spend about another million over the next quarter on “exploration and evaluation”.

    To me, it isn’t just Bitcoin that raises questions about the rationality of investor expectations. Of course, the firm might strike it rich – I might win Tattslotto too – but a market capitalization of $40m suggests more than a little exuberant optimism. A reasonable question can be raised as to whether it is a going concern – but new issues of stock to credulous investors can keep it ticking over I suppose. It has 700 million shares out there now. A few more hundred million will not make too much difference and once the amount of script gets to a billion or so the board can decide on a 10 for 1 share consolidation and start off the money-mining operation again.

  34. Graeme Bird
    February 20th, 2018 at 13:26 | #34

    I don’t advocate a monopoly of metallic monies. But the good thing about metallic monies, if there were enough of them, they would be pretty costless. Now don’t scoff. Obviously historical events like the California gold rush, or worse still the Klondike …. these involved enormous dead-weight loss. But thats because we were so dependent on gold and silver. Gold is way overpriced in my view but silver is way underpriced. If we had a broad base of digitalised metal monies, the premium price of the money metals would reduce the cost of bringing up the base metals.

    Nothing wrong with government fiat money. It is after all a tax voucher. Its debt as money that is the problem. Non-cash money-supply that carries interest. Thats what we want to avoid. We want more cash than debt and many different types of cash that will hold value.

    Bitcoin is really a joke. It costs $1000 dollars to “mine” a bitcoin. And this is pure dead-weight loss with no redeeming feature. Just computers running solving mathematical problems. What a senseless waste of energy. Its failed as a money because there is no stability of value. I like the idea that you can cross borders without carrying a bag of silver, perhaps on the run, and still get value across the border. But that could be achieved with digitised 100% backed titanium. We don’t need to go to the extreme of buying fresh air to get that effect.