Wednesday, February 10, 2021

Is Bitcoin Really Real Money? Ontological and Epistemological Questions

 The movement to make Bitcoin into a de facto form of money has taken a step forward when Elon Musk declared that he would be purchasing over a billion btc.  Some are claiming that Musk did this to pump up an alternative asset because Tesla stock is overpriced and may fall hard soon.  But who knows? Anyway, although btc fell today, it has reached dramatic new highs well over $40,000, with various people calling for it to go to $100,000. Many respectable financial advisers seem to be changing their tune, shifting to maybe one should hold a percent or two of btc along with gold in the non-income-earning part of their portfolios. Gold has remained flat just above $1800, and btc is the "new gold.  But is it (or any other cryptocurrency) really real money?  That is the ontological question of money.

So what is the ontological nature of money?  We know there are debates over which of the standard textbook functions is the most important, with use as a means of exchange, a unit of account, and a store of value the standard list. Some emphasize one over another. MMT advocates emphasize the unit of account function, especially when that unit of account is used to pay taxes.  In that view this is the ontological foundation is the declaration by a government that something must be used to pay taxes, with this also resolving the epistemological issue assuming the government has sufficient existing credibility and communications skills as well as enforcement capability to enforce making its citizens actually pay their taxes using the established form of money.

As of now no government mandates taxes be paid in btc, any more than that former official form of money, gold, is so mandated.  We do see gold being held in large amounts by many central banks, with them even occasionally using it to make transfers between each other (and XRP is used by many commercial banks to carry out interbank transactions), but nobody uses any cryptocurrency or gold to pay taxes.  Currently taxes are all paid in pure fiat currencies backed only by the word of the governments involved.

Among non-MMT economists many probably think the most important role of money is the main medium of exchange.  Again, gold is not so used, and even when it was an official money, it was only infrequently used in actual transactions because it has always been scarce and highly valuable. It was only used for high value exchanges.  Bitcoin was initially set up to be a widely used medium of exchange, and gradually more and more entities will accept payments in bitcoin, and some will accept a few other cryptocurrencies.  However, apparently it is rarely used for these established venues. By most accounts its main use as a medium of exchange is by criminals attempting to hide their activities.  This could change, and maybe Elon Musk's move will push it over into wider use.  But it has not happened yet.

As it is the ontological reality of a medium of exchange is ultimately subjective.  It does not matter what a money is "backed by" (and btc is not backed by anything, even a government, while gold is supposedly what some monies were backed by in the past). In fact the ontological reality is that a medium of exchange exists as a self-fulfilling prophecy: people accept it because they believe others will accept it.  If they all believe it, it is real.  The epistemological problem is solved when people find that they can use it.  For btc, maybe people believe it, but it still does not get used much. 

Of course this self-fulfilling prophetic aspect of money is the key to the literature dating to Allais and Samuelson using overlapping generations models that show how a fiat currency with zero "fundamental value" (defined by the value of what it is backed by) can have a stationary positive value that persists.  It is a stationary bubble that is rational because of the overlapping generations, so there is never a need to have it get converted into its fundamental in the lifetime of anybody.  The bubble can just be passed on to the next generation of sucker believers, who are in fact not suckers because they can get to pass it on themselves.  Nobody ever has to "face the music."

Actually this matter of being a self-fulfilling prophecy applies even to the unit of account/usable to pay taxes also ultimately depends on such subjective prophecies. These do not seem like this because governments may be able to have armed police come to arrest you if you do not pay.  But their willingness to do that depends also on the broader public accepting that the government in question has legitimacy and exists. If people stop believing in the government, it ceases to exist, and its money becomes valueless, see the former Confederate States of America, whose money does have value as a collectible, but cannot be used to pay taxes or pay for groceries.

Of course the matter of being a store of value is a function that pretty much any asset can play, land, bonds, famous paintings, etc.  No doubt this function is now being performed by btc and gold. But in the case of cryptocurrencies there is a problem that is the high volatility that they have been experiencing.  That there has been a lot of increases in them, especially btc.  But we have also seen rounds of collapse.  There is all sorts of excitement by many for btc, with Musk's call further encouraging this.  But it remains the case that these do not have the stability of other things, even gold. If it crashes like Gamestop, Elon Musk will not step in to save it, although the Bank of China might step in if gold were to fall below $1000/oz as some claim is something the bank would, although that has never been promised.

In short, the ontological reality of any form of money is actually a social reality, a matter of people believing that other people believe something, rather like the famous beauty contest of Keynes.  This makes the epistemological question being a matter of ascertaining what those beliefs are and how solidly people believe them.  Bitcoin may have become somewhat more real as a possible quasi-money, but for now it remains mostly an asset but not a full form of money.

Barkley Rosser

16 comments:

Ahmed Fares said...

re: Bitcoin scalability problem

Bitcoin - 7 transactions per second

Visa - 1,700 transactions per second

David said...

My take on Tesla buying Bitcoin.

Tesla made the mistake of moving Yuan profits from selling cars in China, out of the country using Bitcoin.. Five different Chinese regulators are now twisting arms at Tesla.

Because of currency exchange restrictions, Tesla’s limited choice was to pay taxes and move profits abroad, invest profits into Chinese real assets (real estate, apartments, etc.), Chinese financial assets (stocks and bonds on China’s exchanges) or shift financial profits offshore using Bitcoin.

Apple is smarter

‘Luxury’ American brands with Chinese manufacturers that are able to sell products into the Chinese market need to shift those profits offshore like Apple does. Tesla needs to export some production outside of China. No coincidence they will soon start shipping $25,000 car made in China around the world

Now that the Hong Kong financial system has come under tight restrictions, BitCoin is attempting to become the new Hong Kong. Tesla will no longer need Bitcoin once it is able to export profits to Ireland like Apple, selling iPhones with artificially reducing profits in China and increasing them in low tax Ireland before selling them in the US.

Anonymous said...

David,

Please explain your interesting comment further. I do not follow all the reasoning yet.

David said...

No article I read says how Tesla bought the Bitcoin..

Did Tesla use dollars or Yuan?

My take is Tesla used Yuan.

China is upset.

Tesla will ‘export’ profits instead of using Bitcoin to avoid upsetting China.

‘Export’ will be in form of small car.

You saw real story here at Mike Norman Economics first!


David said...

https://www.cnn.com/2021/02/09/tech/tesla-china-regulators-intl-hnk/index.html

https://www.cnet.com/roadshow/news/musks-promised-25000-tesla-ev-will-be-sold-globally-china-exec-confirms/

David said...

https://www.pnc.com/en/corporate-and-institutional/international-services/china/how-to-repatriate-profits.html

Anonymous said...

David,

Thank you so much. However, Tesla could not have used Yuan to purchase Bitcoin since that is illegal (money-laundering) and the Chinese would be more than unhappy. I am thinking this through.

Anonymous said...

Now that the Hong Kong financial system has come under tight restrictions, BitCoin is attempting to become the new Hong Kong. Tesla will no longer need Bitcoin once it is able to export profits to Ireland like Apple, selling iPhones with artificially reducing profits in China and increasing them in low tax Ireland before selling them in the US.

[ This passage is almost certainly incorrect. Never, ever underestimate the skill of Chinese economists. Foreign investors will not be manipulating the Chinese financial system. Tracking of money flows in China is about as advanced and complete as can be. ]

Anonymous said...

Now that the Hong Kong financial system has come under tight restrictions, BitCoin is attempting to become the new Hong Kong....

[ An interesting assertion, but impossible. There will be no outflow of capital from Hong Kong beyond what is necessary for ordinary business and personal affairs. Capital is flowing into Hong Kong now and into mainland China. ]

Kaleberg said...

There's also the fact that courts can demand that you pay money to settle all sorts of disputes, civil and criminal. If you don't provide money, they can throw your ass in jail. When the government starts enforcing a need to pay in the form of bitcoin, I'll agree it is money, not an asset.

Granted, the requirement to pay taxes in the form of money is quite powerful. That's how Leopold turned the Congo into a complete hell hole. He instituted a head tax. That meant everyone had to do something to earn money from the colonial power or one of its agents, generally on unfavorable terms.

Fred C. Dobbs said...

When bitcoins rise astronomically in value,
it is most tempting to regard them as 'wealth',
i.e. assets.

Given that the first few of them were used to buy
a few pizzas, not that long ago, that will always
be somewhat doubtful.

Since richest-person-in-the world Elon Musk
now owns a bunch of them, perhaps there
is some comfort in the 'wealth' idea.

However, we know that tulips worked
pretty well in a similar vein.

Fred C. Dobbs said...

'However, we know that tulips worked
pretty well in a similar vein.'

For a while, but not recently.

The Real Story of the Dutch Tulip Bubble Is Even More Fascinating Than the Myth You’ve Heard"

via @BarronsOnline

Fred C. Dobbs said...

Bitcoin’s epic run is winning more attention on Wall Street

via @BostonGlobe - February 15

(Bloomberg) -- Signs of a widening embrace across the financial services industry sent Bitcoin to new heights, with the cryptocurrency closing in on $50,000 for the first time.

A week after Tesla announced its $1.5 billion investment in Bitcoin, the digital asset continues to make inroads into traditional finance, including news that an investment unit of Morgan Stanley is considering whether to bet on Bitcoin. Canada also approved the first North American Bitcoin exchange-traded fund.

And there’s evidence that more companies are beginning to add services for cryptocurrencies -- an asset class that is still lightly regulated and controversial among policymakers. On Thursday, BNY Mellon said it’s formed a new team that’s developing a custody and administration platform for traditional and digital assets. Mastercard Inc. has said it will begin allowing cardholders to transact in certain cryptocurrencies on its network.

The combination of luminaries like billionaire Elon Musk and powerhouse banks is adding fresh ammunition to Bitcoin’s meteoric gains. Price are up some 50% in February, and were at about $48,000 as of 9:37 a.m. in Hong Kong Monday.

“The key for Bitcoin’s path higher is to win over more corporate endorsements,” said Edward Moya, senior market analyst at Oanda Corp. “Bitcoin is no stranger to massive weekend moves and the next several days could easily see some wild swings.”

There remains a fierce debate over whether Bitcoin is a legitimate asset with any real purpose or value. The token has been derided for its role in money laundering and scams, and recently Nassim Nicholas Taleb, author of “The Black Swan,” said he’s getting rid of his Bitcoin. A currency is never supposed to be more volatile than what you buy and sell with it, Taleb said on Twitter, adding that you can’t price goods in the cryptocurrency. “In that respect, it’s a failure (at least for now).”

Even so, the price trend has been up, and Bitcoin stands as another example of the speculative excesses that are defining this bull market -- along with penny stocks and cannabis companies. ...

Fred C. Dobbs said...

Does China Have A Role In Bitcoin’s Rise?

Forbes - January 21

... One can almost see Chinese billionaires buying up Bitcoin, just in case Beijing comes for their wealth. Lord knows the dollar is in decline, and they probably already own a ton of stocks.

The Chinese currency, out of all the G10 currencies, has the strongest statistical correlation to BTC over the last 12 months, at around 84%. That means that as the RMB gets stronger against the dollar, so does Bitcoin, 84% of the time, says Vladimir Signorelli, head of Bretton Woods Research in Long Valley, New Jersey.

“When Bitcoin rises, the RMB is rising right along with it,” he says, adding that the euro has a 74% to 75% correlation with Bitcoin. The Russian ruble has a 25% correlation. ...

Fred C. Dobbs said...

Perhaps Chinese billionaires will
decide to buy class-A shares of
Berkshire Hathaway at some point.

When all the bitcoins are bought?

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