One could argue that the USD is at least partially backed by its ability to discharge real tax obligations. But bitcoins truly are purely fiat in nature (they have no intrinsic use in either consumption or production). Does this mean that the value of bitcoins must eventually crash to zero (their fundamental value)? No.That is to say, modern money is not only chartal, after Knapp, but also social credit, as Innes observed. Since money is chiefly information, digital money can serve the purpose of money if certain conditions are met. Andolfatto is mildly positive about Bitcoin in this regard.
Bitcoins are information -- record-keeping devices. You can't eat my credit history either, but some companies would value (and pay for) this information nevertheless. So as long as Bitcoin conveys accurate information, its value can persist indefinitely.
MacroMania
A bit more on the economics of Bitcoin
David Andolfatto | Vice President, FRBSL
Chicago Fed Letter
Bitcoin: A primer
François R. Velde, senior economist
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Money is not "information". Money can convey information, but only in the trivial sense in which everything conveys information. A digital currency might be thought of as information in a special sense, but only according to the broad contemporary mathematical metaphor according to which everything digital is called "information". In that sense even my MP3 audio files are information, although they do not function as a currency.
Bitcoin purports to be a new medium of exchange. For some object - whether animal, vegetable or digital - to establish a sustainable niche as a medium of exchange, it is necessary that those who a considering accepting it in exchange for some good or service can form reasonable and reliable predictions about what its exchange value will be when they have an opportunity to exchange it later for something else. To the degree that they can't form such expectations, that object becomes a poor candidate to play the role of a currency. The viability of some entity as a medium of exchange varies inversely with the risk involved in holding the entity. The most desirable currencies are super-stable; bad currencies fluctuate wildly.
This is the problem Bitcoin will continue to have, since there are no significant legal or institutional mechanisms stabilizing its value, and such stability as it has is based solely on social conventions, which are notoriously volatile and erratic when not buttressed by legal constraints.
However, that still leaves open the possibility that people can use bitcoins in an immediate term way for quick exchanges. You take your dollars, buy some bitcoins, and use the bitcoins to buy something more-or-less immediately. Then the person on the other end cashes the bitcoins out into dollars again. So perhaps the Bitcoin platform can maintain itself as a niche payment system offering some privacy for the purchase of such things as porn, Viagra, illegal drugs, vibrators, rhino horns, prostitution services and other items for which some degree of additional privacy might be desired. It would exist only as an ancillary to existing state currencies, not as an alternative to them.
But the feds and other governments have already begun the process of cleaning out the Bitcoin stables, arresting black marketeers, drug dealers and fraudsters, prosecuting tax evaders, and investigating the other unseemly doings in the world of Bitcoin. So even this more limited use is likely to be severely curtailed in the future.
Once you clean all the black market dealing and tax evasion out of the Bitcoin platform, and the risk of holding Bitcoins becomes apparent to most users, the "crypto-currency" aspect is gone. As far as I can tell, Bitcoin is already in the process of degenerating from a crypto-currency libertarian pipe dream into a mere payment platform. The true believers are already whining about how the entrepreneurs have moved in and co-opted Bitcoin to turn it into something legally domesticated, legit and fully integrated with existing state currencies.
Money is not "information". Money can convey information, but only in the trivial sense in which everything conveys information.
In this "information" view of money, money is the accounting record of social credit.
This analysis leads to a simple conclusion: If the func- tion performed by money can be superseded by a perfect historical record of transactions, then money's only technological role must be to provide that record. In other words, money is a form of record keeping, or societal memory
Narayana R. Kocherlakota
"The Technological Role of Fiat Money" (cited by Andolfatto)
As far as I can tell, Bitcoin is already in the process of degenerating from a crypto-currency libertarian pipe dream into a mere payment platform. The true believers are already whining about how the entrepreneurs have moved in and co-opted Bitcoin to turn it into something legally domesticated, legit and fully integrated with existing state currencies.
Yes this is taking place. The entrepreneurs, who are the only ones that can make this work viably on a large scale, recognize that the economic value of Bitcoin is chiefly as an international payments system and to make it viable they have to conform to government requirements. This, of course, is driving the Libertarians into fits.
As usual, Dan Kervick says what I'm thinking, although much more eloquently than I could have myself. Thanks Dan. I'm stealing that comment for later use.
"For some object - whether animal, vegetable or digital - to establish a sustainable niche as a medium of exchange, it is necessary that those who a considering accepting it in exchange for some good or service can form reasonable and reliable predictions about what its exchange value will be when they have an opportunity to exchange it later for something else."
Sounds like foreign exchange risk in global trade and investing.
"So perhaps the Bitcoin platform can maintain itself as a niche payment system offering some privacy for the purchase of such things as porn, Viagra, illegal drugs, vibrators, rhino horns, prostitution services and other items for which some degree of additional privacy might be desired. It would exist only as an ancillary to existing state currencies, not as an alternative to them."
Agreed. Bitcoin is small change. There are far more deals transacted in illegal drugs, weapons and money laundering in federal reserve $100 notes, the currency of choice for the criminal class.
"money" is a unit of measurement. Just like inches or kilograms.
KGs measure mass
inches measure distance
"money" measures claims on resources
I haven't read the whole piece yet, but what I think Kocherlakota is saying is that money implies money trail as in accounting record. This is embedded in what he calls "social memory" (collective consciousness) in small gift economies in which all known to each other and are based on trust. In a monetary economy that information is stored in the money trail, which in modern economies is preserved in the accounting record. Which why the statement at the time of the MF Global kerfuffle that the money "disappeared" was ridiculous. It was obviously on someone's books and it would be found by the investigators. And we were correct in thinking that it would turn up on the books of JPM.
That's the information aspect of money that cash can avoid by being passed under the table in suitcases, but Bitcoin does not in that the record of transactions is public although ostensibly anonymous. But anyone doing illegal deals who assumes that the code can't be broken by security agents is dumb.
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