Bitcoins are forever

This is a story of mania, panic, and crash. It’s not new. 

Today’s market cap is roughly $150 billion. Averaged over, say, 3 million holders, that’s $50,000 each. Peanuts, if you belong to the 1%.

The trick is to kite the price to anywhere from 5 to 20 times the current level of $4,000.

The sales are essentially wash sales, as coins just go round and round. That’s why they’re coins, see.

Spectators – the victims – then want in, and the insiders pump and dump swimmingly, until the 3 million can get out with huge profits, at the expense of the latecomers.

The end is a classic Minsky Moment, when the latecomers try to sell. The algorithms in the trading platforms would ask: ‘To whom?’ And the price spirals to nothing.

Question for economists: Can the end trigger a financial or economic crisis? A dire scenario is that the latecomers’ loss results in bankruptcies and loan defaults, a retrenchment in purchases of housing and consumer durables, or in a general malaise in business and consumer confidence. Banks may fail if they finance bitcoin purchases.

With the benefit of foresight, monetary authorities will likely institute safeguards. Trading platforms are like banks, and will need adequate capital in case of an epidemic of ‘fails,’ which can happen if traders engage in short sales, or in margin trading. The Know Your Customer rule will have to be integrated into the block chain data base, and imposed by banks on customers operating trading platforms. 

Of course, theoretically, since virtual currencies can function as money, all trading can take place outside the banking system. If that were the case, the ponzi won’t work: How would the victims’ money enter into the bitcoin system? The price would go up and down forever, but that’s all. It’s funny money after all.

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Virtual currencies and their institutions

Or why Bitcoin and its variants are risky assets.

It’s fair to say that virtual currencies need block chain. Block chain is an essential or necessary innovation behind such currencies. That block chain is not sufficient becomes obvious when we consider the question of how many virtual currencies can exist.

This is pretty much a question in institutional economics. It would be like asking which fiat currency would dominate global transactions.

Ronald Coase’s transaction-cost theory of the firm probably has the answer.

The dominant virtual currency is the one with the least transactions cost. While trust is an unmeasurable element that reduces transactions cost, transaction cost can itself be measured.

There are other factors along with trust that augur well for the dominant virtual currency. Among these factors are:

It should have ‘standing’ with central banks if only because they issue legal tender, whereas virtual currencies are not.

Its value in terms of the dominant fiat currencies must be reasonably stable. For now, the leading virtual currency, Bitcoin, fails.

Also equally important is transparency in its creation and modification. It seems that users of a virtual currency will need at least an unwritten constitution that lays out the fundamental laws of the community of users, even if they wish to be as ‘decentralized’ as possible. Again, here, Bitcoin fails, as can be seen with the ongoing ‘fork’ controversy over Segwit2.

CONCLUSION. It’s too soon right now to say that Bitcoin is here to stay.

Some (maybe strange) economics questions

 

1. Can economics say anything about unforeseeable (uninsurable) disasters? I’m thinking about the idea that a butterfly moving its wings can cause a global tsunami.

2. Will robots cause permanent unemployment? Rephrase this question. In ancient history, the nobility didn’t do the work because they had vassals and slaves. Were the nobles unemployed? Was that a bad thing? Is employment/underemployment/unemployment an issue of quality of life?

3. What exactly is poverty? If stray dogs are poor, and pet dogs are rich, is it good policy to control the population of stray dogs? Or is it better policy to have feeding stations for stray dogs? Or is it an even better policy to mandate that those who have pet dogs also feed the poor and hungry humans nearby? After all, we seem to always say that humans have rights that animals don’t.

Living the lousy life of a telecom consumer

Remedies against monopoly

You can almost see  the present system of announced prices, with unannounced promos maintained by the telecoms, as a form of price discrimination, a concept familiar to students of economics.

The two aren’t quite monopolies. But for the sake of discussion only, imagine that they are a two-piece cartel, a bikini in nosebleed-speak.

What can consumers do to foil a price-discriminating monopolist/cartel?

Any interesting answers out there?

Bitcoin as money

BITCOIN Screen Shot 2016-01-29 at 10.04.16 AM

The following is a note found on Facebook.

Random ideas on what makes money money
by Kermit Kefafel,  Friday, January 29, 2016

Is money a public or private good? It is a private good imbued with public interest. The public goods that attach to money are the safety of the banking system and price stability, as conventionally promised by a central bank.

What are cryptocurrencies? They act as substitutes for the use of cash in untraceable transactions, the idea of Bitcoin. You can even buy bitcoins at your local 7-Eleven.

The market for Bitcoin has lately been shaken with the arrest of one of its principals; there is talk that it could collapse. Will other cryptocurrencies have the same problems?

I suspect that for a cryptocurrency to become viable, it must hurdle the trust problem — its users and holders must be assured that its supply and valuation are, in some sense, sacrosanct. That its price could bubble up and down like a financial asset is a negative. Even fiat-currency central banks pay some kind of lip service to exchange stability under the current system of floating exchange rates.

Because of the public-goods aspect of money, a stateless currency requires an enforcement mechanism that is private but viable. Does such an enforcement mechanism exist?

Or, are cryptocurrencies just another Ponzi scheme?

*******

For reference, see Lawrence White’s article in the Cato Journal.

The central bank (Bangko Sentral ng Pilipinas) has issued an advisory regarding the lack of regulation on virtual currencies.

A recent assessment predicts continued growth of Bitcoin in the Philippines.

 

 

How economists approach history

If only to inspire economics students to study history, and how to apply economics to solve historical puzzles, here’s an example of a very interesting study.

In this work, Douglas Allen and Peter Leeson explain the economics of warfare in the medieval ages, focusing on the technologies of the long bow versus the short bow.

Perhaps, perhaps, one can conclude that major human endeavors, including war and struggles for power, are drivers of innovation.  This echoes the idea of ‘creative destruction’ from Josef Schumpeter.

Flood coming? Let’s dig ponds and make lakes

Here’s an apparently serious proposal to solve the perennial flooding problem of Metro Manila.

For what it’s worth, I think the solution – to dig ponds and lakes – is plain silly and possibly even useless. It sounds good if you think of planning a beautiful community with artificial lakes, etc.  It also reminds me of that grade school catechism story about St. Augustine at the beach which was partly about digging holes in the sand.  Nonetheless, the solution won’t work.

Continue reading “Flood coming? Let’s dig ponds and make lakes”