Wednesday, December 4, 2013
Bitcoin
I am not sure how many of the blog readers know about bitcoin, I assume many more do nowadays as its been in the media recently and the US Senate held a hearing on digital currency 2 weeks ago. Anyway I first discovered bitcoin when it was a fledgling crypto-currency, worth only $10 a coin. As of today each coin is worth $1200. Although at this moment bitcoin does not have many practical uses (besides these mentioned here), the idea of a decentralized online currency is an interesting one to think about, with obvious flaws but perhaps even greater upsides. Recently more companies have been acknowledging bitcoin as a legitimate currency and this man even bought a Subway sandwich with bitcoin in Allentown, PA. I basically know next to nothing about bitcoin as I have only been interested in it for a short while and there are many experts out there. I usually go to bitcointalk.org to try and learn something but still my knowledge is minimal compared to some of the people on here. Anyway just wondering what other people thought about this topic or if anyone knew anything else about it.
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I keep hearing about bitcoins but, for the life of me, I still don't understand exactly what they are (other that they are virtual currency -- which means nothing to me), how they work and how you get them.
I suspect they are some elaborate flimflam.
To understand bit coin you must understand principles of money, monetary systems, and economics. I know a tiny amount about those things—just enough to know how complicated they are. That is why most people feel better that the mother country constantly reassures its citizen, "We know what we are doing." I'm sure its true, relatively speaking.
The one to ask is Chris Telmer.
I suppose one might also check with Ira Glass. SeeThe Invention of Money.
In this episode of This American Life, Glass asks the simple question about the trillion dollars that disappeared from the stock market in November and December of 2008: where did the money go, and who has it now?
It turns out that the money didn't go anywhere because it never existed in the first place. According to Jacob Goldstein's aunt, "Money is a fiction." (I suppose this makes money a bit like poetry, at least according to Wallace Stevens.)
And so, before November 2008, "[a]ll those houses used to be worth a certain amount and now they were worth a lower amount. Simply because that's what everyone now agreed. No money changed hands, no money vanished. Same with retirement funds and stock portfolios."
It seems, though, that the Federal Reserve is way ahead of the bitcoin people: it regularly invents money and then loans it out. I'm still not sure how the Fed does it and how bitcoin does it but, if you believe the people on This American Life, mostly it involves being really, really boring.
You're on the cusp. This afternoon this article was posted.
Here, Martin, is another article mainly on the speculative nature of Bitcoin. Apparently people are saving them as speculation, not spending them. The article use some data in chart form to make its point that Bitcoin is a bubble ready to burst.
With Bitcoin being the rage these days, here is another article which gives a good overall view. It reference a 2011 Planet Money show and a few other articles.
Here's another view: A Prediction: Bitcoin Is Doomed to Fail here
Adding a little more, the IRS has ruled that Bitcoin must be treated as property, basically as a stock or other capital goods. But the Ars Technica headline is confusing. The headline reads "IRS: Bitcoin is property…not a currency". But, in fact, currency is treated as property by the IRS. Banks must pay taxes on gains when they make money on buying and selling the Yen or any other currencies, and if you sell your quarters for more than a quarter, you must pay taxes on that too.
But, here's an article that suggests that the IRS ruling will kill the bitcoin, at least as a currency -- because a currency must by fungible. Why Bitcoin Can No Longer Work as a Virtual Currency, in 1 Paragraph.
I know I'm opening up myself for criticism (I get that anyway, so no big deal), but I disagree with that article. I read it briefly and did not read the original by Georgetown professor Adam J. Levitin (who knows much more than I about the subject), so there may be some misinterpretations on my part.
With that disclaimer, again, Bitcoin works no different than any other currency. The confusion is that it is not U.S. currency. Bitcoin is as fungible as any other currency. The example in the article is misleading. $10 at the ATM is the same $10, just as 10 Bitcoins at any outlet is 10 Bitcoins. They are the same and just as fungible. (Now currencies fluctuate in comparison to others, especially in times of inflation, war, speculation, etc.) When you get dollars from the Euro or the Yen or any other currency, it is a traceable value that determines capital gains. But if you find $10 dollars on the street, technically you have to pay taxes on that $10 gain (same as a poker game).
In the world of Bitcoin, just like the world of the U.S., it is completely fungible. Only when you convert from one currency to another is a different value assigned. This should not change Bitcoin in the least. However, if there is no world of Bitcoin, i.e. it is set up as a money making scheme and there isn't a lot of goods and services available, so you always have to be converting it to something else, then it is not a very viable currency.
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