Sen. Max Baucus (D-Mont.) was one of the key architects of Obamacare and one of the legislation’s greatest champions. But now he fears a “train wreck” as the Obama administration implements its signature healthcare law. In a recent hearing he asked Human Services Secretary Kathleen Sebelius for details about how the Health Department will explain the law and raise awareness of its provisions, which are supposed to take effect in just a matter of months:
I am curious, though, what the justification is for referring to Bitcoin as a “commodity” currency. Consider this from Izabella Kaminska at the FT Alphaville blog:
For those who insist that the term “fiat” refers exclusively to government-issued fiat currency, it’s perhaps better to interpret our use in the evolutionary sense.
Meaning that Bitcoin (and other virtual currencies) represent not commodity money, not managed money, nor even old fashioned government-issued fiat money, but a whole new type of super fiat that is rendered valuable by the issuing crowd (made up of independent entities) rather than the state.
The idea is that Bitcoin isn’t “declared” to be valuable by the state, but that it is “declared” to be valuable by common consent of the community of Bitcoin users. Consider this a kind of communal rather than governmental fiat.
This is why I wondered earlier about Bitcoin as “merely fiat money without the pretensions.”
But then again, isn’t this kind of communal agreement or declaration of value what money has always really been? Isn’t that, as Joe relates, what we learn from the example of the rai of Yap? (Their real innovation seems to be that they anticipated something like the “virtualization” of money exchange.)
Here again I’ll invoke the insight of Richard Whately: “It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.” People are mining Bitcoins because they fetch a high price…at least for now.
The Disadvantages of Bitcoin
For people who are not obsessed with anonymity and are not waiting for the U.S. to return to the gold standard, the reasons for avoiding entering the Bitcoin market are numerous:
1. Convertibility – Whereas other currencies are convertible into other financial instruments (dollars to checks to certificates of deposit, etc.) and through numerous third-party services (e.g., Visa, PayPal, Citibank), commodity currencies like Bitcoin can only be exchanged for fiat currencies—and then only through an online exchange. Indeed, unless your computer is working overtime on Bitcoin mining, the only way to acquire the currency is to buy it from one of the 30 online exchanges.
These exchanges are completely unregulated and are subject to problems that do not affect other financial markets. For instance, in 2011 the largest Bitcoin exchange, MTGox, had a security breach that resulted in the theft of nearly $9 million worth of Bitcoins. The theft caused the value of Bitcoins to crash from $17.50 to one cent before the market was able to recover.
2. Instability – The MTGox breach—and the subsequent market crash—taught Bitcoin owners a harsh lesson about commodity currencies: they can be wildly unstable. Over the 8 month span from October 1 2010 to June 9 2011, the market value of Bitcoins skyrocketed 9667-fold from a value of $0.06 to $29.
The rate had dropped in 2012 and at the end of last year a Bitcoin was worth only $13.51. Last week, though, Bitcoins were trading as high as $266 before plummeting to less than $100. Anyone who had bought $1,000 worth of currency in October 2010 would theoretically have $4.4 million worth of Bitcoins. However, the convertibility problem would make it nearly impossible to extract that money without crashing the market and devaluing the entire currency. A gradual sell-off over an extended period of time would be necessary to take advantage of increase in valuation.
Still, being the seller of the overvalued currency is preferable to being the buyer. The Winklevoss twins, millionaires famous for their legal battle with Facebook, claim to own around one percent of all Bitcoins currently in existence (around 108,000). They began buying the currency in 2012, making some early Bitcoin holders very rich.
How Bitcoin Works (The Simplified Version)
In order to use the Bitcoin system, a user installs a “wallet” on their computer or mobile phone. Once installed the wallet generates a Bitcoin address (similar to an email address) that allows the user to send and receive payments. Bitcoins are divisible to 8 decimal places yielding a total of approx. 21×1014 currency units. This allows a person to spend a fraction of a Bitcoin (the current exchange rate as of April 15, 2012 is 1 Bitcoin = $95.36000). Unlike standard e-commerce and money transfer system, Bitcoin transactions are irreversible.
How Bitcoin Works (The More Complicated Version)
A Bitcoin is merely a chain of digital signatures attached to a transaction log. In the very first transaction of the system, Nakamoto’s computer program (which is open source and distributed across a peer-to-peer network) created 50 Bitcoins. When Nakamoto spent some of the coins, it created a new transaction that subtracted the amount from his account and credited it to the recipient’s. All such transfers entail the owner digitally signing a hash (a numerical value created by an algorithm) of the previous transaction and providing the public key for the encryption to the next owner. Both items are then added to the coin’s transaction log. A payee can verify the signatures to verify the chain of ownership, which prevents double spending of the same coins.
This transaction—and all subsequent exchanges—is distributed to the entire network for verification. Collections of transactions, known as “blocks,” are deemed valid when another computer on the network creates a transaction log for it that matches the previous blocks. To prevent the falsified logs from being accepted, the system must provide a means of verification that is prohibitively costly to any individual user, but relatively cheap for the network as a whole. As explained in The Economist:
We’ve had some intriguing discussion about Bitcoin at the Acton Institute offices today. It is certainly a phenomenon worth greater attention, and something of significant cultural, social and economic import. But I’m not buying Bitcoin, at least not yet.
My initial skepticism is in part due to my lack of familiarity with the details of the currency and its formation. I certainly need to learn more.
But also in large part my skepticism is due to my doubt about the productiveness of the effort that generates the currency. Is it merely fiat money without the pretensions? Is it the logic of subjective value-theory brought to the final conclusion? I worry that the computing power expended to mine BitCoins is vacuous and parasitic at its core. It does not represent a good or service that has been provided for or contributed to anyone.
A Bitcoin has value simply because people have decided it has value. People “mine” Bitcoins because, as Whately would note, “they fetch a high price.”
But what does a Bitcoin block represent in terms of actual human utility? I worry too that this is a system that relies parasitically on real-world resources, e.g. coal which provides a large part of the electricity, which is used to run computers so that they can then in turn “mine” something entirely virtual.
What is Bitcoin teaching us, really?
If you’ve had experience with Bitcoin or thoughts about the phenomenon, please share them in the comments below.
The morticians wanted the monks shut down—or even thrown in jail—for the crime the Benedictines were committing.
Until 2005, the monks of St. Joseph Abbey in St. Benedict, Louisiana had relied on harvesting timber for income. But when Hurricane Katrina destroyed their pine forest they had to find new sources of revenue to fund the 124-year-old abbey. For over 100 years, the monks had been making simple, handcrafted, monastic caskets so they decided to try to sell them to the public.
According to the Wall Street Journal, after a local Catholic newspaper publicized the effort in 2007, local funeral directors got the Louisiana State Board of Embalmers and Funeral Directors—of which eight of the nine members are funeral industry professionals—to serve the abbey with a cease-and-desist order. Louisiana law makes it a crime for anyone but a licensed parlor to sell “funeral merchandise.” Violating the statute could land the monks in jail for up to 180 days.
Since the sole purpose of the “casket cartel” law is to protect the economic interest of the funeral industry, the Institute for Justice filed a federal lawsuit on behalf of the monastery claiming the legislation restricts “the right to earn an honest living just to enrich government-licensed funeral directors.”
Yesterday, the 5th U.S. Circuit Court of Appeals issued a unanimous final decision in favor of the casket-making monk, setting up what could become a historic clash at the U.S. Supreme Court. The Court of Appeals rejected Louisiana’s argument that it was constitutional to enact a law forbidding anyone but a government-licensed funeral director from selling caskets, especially if the only purpose of the law is to make funeral directors wealthier by limiting competition. In other words, the Court didn’t buy the State’s argument that crony capitalism is constitutionally protected.
On Friday the Obama administration proposed a rule that it says will appease the concerns religious organizations have about the controversial abortion/contraceptive mandate issued last year by the Department of Health and Human Services. Here’s what you should know about the mandate and the proposed changes.
As part of the universal health insurance reform passed in 2010 (often referred to as “Obamacare”), all group health plans must now provide—at no cost to the recipient—certain “preventive services.” The list of services includes sterilization, contraceptives, and abortifacient drugs.
If this mandate is from 2010, why are we just now talking about it?
On January 20, 2012, the Obama Administration announced that that it would not expand the exemption for this mandate to include religious schools, colleges, hospitals, and charitable service organizations. Instead, the Administration merely extended the deadline for religious groups who did not already fall within the existing narrow exemption so that they will have one more year to comply or drop health care insurance coverage for their employees altogether and incur a hefty fine. For example, Hobby Lobby, a Christian-owned company that is opposing the mandate, is facing fines up to $1.3 million per day.
Is there a religious exemption from the mandate? If so, who qualifies for the exemption?