When I first stated traveling for work, I was surprised and amused by the various currencies I saw. Pre-euro, one would encounter a multitude of paper bills of different sizes and colors, each imprinted with a famous man or woman I probably hadn’t heard of.

Imagine that: The locals actually believed these silly pieces of colored paper had value. Sure, paper currency worked as a medium of exchange, and it allowed you to buy goods and services within that society. But how far off was it to observe that this shared belief system was little more than a collective delusion? Take the paper to another land that didn’t share that belief system — they had their own, different delusion — and the paper seemed to be worthless.

That is the simplified version of paper currencies. The real world is obviously more complex. Banks exist, and foreign delusions (currencies if you will) can be exchanged for a fee for the local paper delusion. There is also a nation behind the “worthless” paper, with a standing army, the power to tax and an enormous enforcement mechanism. Perhaps that is the authority that makes our collective delusion seem to be somewhat less deluded.

This brings me to the digital currency, Bitcoin.

continues here

Category: Currency, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “The Collective Delusion that is Bitcoin (and All Currencies)”

  1. rd says:

    Our retirement accounts are similar illusions. I keep getting requests for me to join the 21st century and eliminate all paper trails of my accounts. However, there is some semblence of assurance I get when a handful of times a year a piece of paper shows up at my door where the company affirms what is in the electronic records. At least it is something that I could go into a courtroom with and wave around if the electronic record keeping system pulled a Mt. Gox.

    My basic approach to electronic record-keeping is the old Russian proverb “Trust but verify”.

  2. Iamthe50percent says:

    Perhaps I should investigate further, but it seems to me that Bitcoin is no more than 19th Century “blue sky” bank notes. It will work well until there is a run. And.yes, the same applies to the Federal Reserve Notes, except the Fed is not obligated to redeem their notes in anything other than more of their notes (i.e. “lawful money”) and that they are “legal tender for ALL debts, public AND private”. It is indeed the power of the combined armed forces and police forces of the USA that ultimately gives the value. If those forces disappear, the Federal Reserve Note has no more value than a Confederate dollar. So, I don’t really understand the attraction of this private money and shadow Fed. I must be missing something.

    I hope I haven’t “demonstrated my own ignorance” here too much.

    • willid3 says:

      seems like it wasn’t that long ago that the US had more than just the dollar. as may banks and others issued their own ‘currency’ . and that didnt work out so well either. and it seems we have gone and redid that test again. and the results dont appear to be much different

  3. ch says:

    Barry – it is not exactly true that currencies represent a collective delusion.

    The way the world’s currency system works is that only the dollar is as good as gold for oil after Kissinger set up the Petrodollar arrangement. And the rest of the world’s currencies are then built on the foundation of the dollar as their reserves, which they need in order to acquire oil, which is the world’s primary energy source. Given that energy = work = money, the world’s system is not fiat at all. It’s effectively backed by oil.

    Where things start to get interesting are when the supplies of oil, the backing for the world’s currency system, is essentially flat for the past 9 years, leading to a 4x rise in prices…then that system starts to not work so well (see the US & global economy since 2005, making sure to strip out the $4T growth in the Fed’s balance sheet in that time, to say nothing of the EU’s & Japan’s, etc.)

  4. b_thunder says:

    The BIGGEST problem with BitCoin is exactly what’s been touted as its biggest benefit: pseudo-anonymity. If each “coin” was traceable, it would a) attract less money laundering activities, b) would be easier to police, c) as a result of (a) and (b) it would be licensed by the Feds like other money transfer services, d) would be harder to steal.

    They will never be a reliable store of value, but at the very least the “digital currencies” will lower money transfer and foreign currency exchange fees for individuals and in the process will killing margins for Western Union, Visa and MasterCard – basically they will do to them what online brokers did to trading commissions.

    I predict that when Mr. Ritholtz travels abroad in 2015, he will pay much lower fees for converting one funny paper into another, thanks to the digital intermediary.

  5. LeftCoastIndependent says:

    Fad investments like dot com bubble and real estate bubble are bad enough, but fad money like Bitcoin is the icing on the cake. If anyone disagrees, I have a bunch of Wampum I can sell you.

  6. ByteMe says:

    “Delusion” may not be the right word. It’s “faith”. Just like any religion, the currency is as real as we believe it to be. When we stop believing in a currency, there’s a run on it. When we believe strongly in it, it’s stable. Fiat currencies are a faith-based system.

  7. wally says:

    Collective agreement is not always collective delusion.
    Having money simply means that somebody else owes you something; use any marker for that that you wish, but that is all it means and it is common to every form of ‘money’ ever used.

  8. carchamp1 says:

    Barry,

    If the U.S. economy is a collective delusion then so is the dollar. Fortunately our economy is real and so is the dollar.

    Now, as for Bitcoin, it will go down as one of the greatest frauds/heists of all time. Think about it – “investors” have been handing over real money for what amounts to electronic Monopoly money. That is nothing.

    You have to ask yourself how many founders of legitimate operations disappear or prefer to remain anonymous. None. That’s the stuff of drug lords and mob bosses. I would be completely shocked if the authorities weren’t hunting down the kingpins as we speak.

  9. emaij says:

    The day BR writes about Bitcoin… must be some kind of watershed moment for the currency.

  10. I think of the real Economic Output as being the net collection of goods and services produced and delivered in a given year. There is also a real Economic Capital Stock, the collection of things (goods, land, people…) presently in existence, having been previously produced but not yet consumed, destroyed or transformed into something else. Finally, there is a collectively agreed fiction, a legal structure, which describes agreements between people regarding the current and potential future ownership of various combinations of the economic capital stock and/or the economic output.

    Among those agreements are immediate exchanges (barter), but there are also various promises to exchange either capital or output in the future. Among this latter group are credit, loans, debt etc. Paper currencies are a form of credit and can be valued just like debt and ownership claims on the capital stock: their worth can be assessed in terms of the amount of goods or services they are expected to command at some point in time, either now or the future.

    But like all legal fictions, the currency is only as valuable as the strength of the system which supports it. (Ask the Native Americans and Aborigines how their ownership rights to North and South America and Australia turned out… or ask the Romans or Mongols about their historic land ownership rights…) Conversely, the strength of the system supporting a currency depends in part on how useful a given currency appears to be. A useful currency will attract support and tend to develop a strong system to support it, thus maintaining value. A useless currency will not have a strong support system and can lose value very quickly.

    It is a great danger to a group of people when the quantity of debt-claims (which are just promises) grows too large relative to the economic output or the economic capital stock, because it becomes clear that not all of these promises can be kept at the agreed-upon times. This in turn implies that the system supporting those debt-claims is not strong enough to maintain the value of these claims, raising doubts about the entire system of ownership, and thus the future of the group of people. At those times, the debtors who have made promises they cannot keep, will seek to change the rules of ownership instead.

    However, unless the group is small, no single person can persuade the whole group not to make promises. It requires a change in the group’s perspective, a shift in the zeitgeist. That requires an economic crisis, or more likely a series of crises.

    In the meantime, I would place much greater value on those promises which are most likely to be kept, and those forms of ownership which are least likely to be threatened by the defaulting debtors.

  11. Petey Wheatstraw says:

    Psychology and forced use aside, a purely fiat currency regime attempts to violate the law of supply and demand while remaining valid within the framework of the economic ‘universe’ (probably why TPTB need the guns to back their paper, in the first place).

  12. Alex says:

    I think it’s significant that most of the replies are about currencies other than bitcoin. Not bad, but significant – people seem to be uncomfortable talking about bitcoin, unless you are on slashdot or reddit or some place like that.

    What the hackers exploited was more of a weakness in Mt Gox than a weakness in bitcoin. Bitcoin transactions are secure, and as a result they can be somewhat time-consuming, and Mt Gox (and others) have tried to speed things up, and paid the price. That kind of thing has happened with lots of currencies.

    Bitcoin may not be the cryptocurrency of the future – it is the first one that really had a bright light shined on it, and it is surprising to me that more flaws haven’t shown up. But I think as a proof-of-concept, it is pretty sound. The problem to date hasn’t been security, it has been speculation and price fluctuation. There are probably ways to solve that, if people want to solve it. A lot of the people who like cryptocurrencies probably equate “stability” with “compromise” and don’t want to go there. Tying a cryptocurrency to the dollar, or euro, or whatever would miss the libertarian goal, and it would have regulators swooping in.

    I don’t own any bitcoin, but I can’t imagine a future without cryptocurrencies.

  13. Clif Brown says:

    Anything can be valuable if the production of the thing is limited. At a trivial level, this is why “limited edition” is frequently used as a selling tool, and why there are collectors of old things that are no longer made. So what is anything really worth that doesn’t have a practical use?

    What I don’t get about BitCoin is the mechanics of production. Apparently software limits the amount produced, but who runs the software and what is the mechanism for allowing more (or fewer) to be in circulation? (I demonstrated ignorance – I want a star by my name!)