Thursday, April 11, 2013

What is Bitcoin?

Might as well wander into the fray.

I won't say whether Bitcoin is "money" or not, because that depends on your definition of "money". It is certainly not a "fiat currency" because fiat currencies are manifestations of a Sovereign's power to set and enforce taxes. If the US$ can tax you, you will need US$ to extinguish that tax obligations, which mean you will need US$. The Schelling Point, or Nash equilibrium (pick your model) is not spontaneous -- it is an outcome of demand creation generated by power.

Now, there may be users who do wish to use it as a store of value, and to that extent it may be money in some true Schelling or Nash sense, but this will only be true if it actually wins. Which it won't. Bitcoin is not a good alternative to your sovereign's scrip, nor is it a better mechanism to hold wealth than land or other real assets.

It is also not a Ponzi scheme because it does not rely on new investors to fund payouts to old investors.

It is certainly a vehicle for financial speculation, much like a penny stock except there are no real assets at all behind it. Making it, perhaps, a perfect, purely speculative instrument. It's ironic that it's championed by gold bugs who tend to be suspicious of flimsy specie.


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