George Selgin explains why the ‘no backing’ criticism of Bitcoin is wrong

By March 5, 2015Bitcoin Business
Click here to view original web page at www.reddit.com

It all boils down to: what guarantee does one have about the "thing" retaining its value between the time it is received and the time it is given in exchange for something else.

The question will have different answers depending on the time frame. If the time frame is a couple of months -- say, between monthly payday and spending all of it, or investing on other things, before the next payday -- then ordinary currencies, whether paper or in banks, are usually trustworthy enough, even in countries with chronic 5-10% inflation. However, a currency that has a high probability of losing 10% of its value in one month is not suitable, even on that time scale.

For a time frame of a year or two, a curency with 5% inflation would be unacceptable. A currency with 1-2% inflation may be acceptable if the goal is merely to store value, but since there are many alternatives with similar risks but yielding profits instad fo losses, there is no reason to keep large amounts of currency, whether paper or in banks. Stocks of solid companies are a popular choice: the main risk is that the company fails for internal or external cause. Shares of solid funds or bonds of stable governments are also OK, with similar risks.

For investment of a decade or more, even 3% of inflation per year would erode too much of the value, and the risk of the currency collapsing in the meantime is not negligible, even if ithas been stable in the past decade or two.

For that application, one could use financial instruments rom really solid banks or governments that are guaranteed by them to compensate for inflation. Then the main risk would be those entities being unable to fulfill that promise. Gold funds also have that risk, namely the fund may be unable to issue the gold, or its equivalent market value in currency; but also has the risk that the market price of gold may collapse. Another alternative is durable material goods, like real estate; then the main risks are the goods being stolen or destroyed, or losing value because of progress.

Bitcoin's probelm is not that is has "no backing" specifically, but more generally that there is no guarantee that it will preserve its value, on any time scale. Its supposed virtues -- scarcity, decentralization, robustness -- are not even certain, and anyway one cannot derive from them neither an expected price, not an assurance that the price will not change wildly from day to day.

The question will have different answers depending on the time frame. If the time frame is a couple of months — say, between monthly payday and spending all of it, or investing on other things, before the next payday — then ordinary […]

Leave a Reply

All Today's Crypto News In One Place