Let's Clear Up One Confusion About Bitcoin

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it's a superior means of exchange.

One of the most common comments I hear from bitcoin skeptics goes something like this: Bitcoin isn't real money until I can buy a cup of coffee with it.

In other words, bitcoin fails the first of the two core tests of "money": that it is a means of exchange and a store of value. If we can't buy a cup of coffee with bitcoin, it obviously doesn't qualify as a means of exchange.

The confusion here is the same one that plagues the conventional understanding of the foreign exchange markets: people confuse exchange and convertibility, which are both flows, i.e. transactions.

Here's an illustration of the difference.

Let's say Hipster Coffee Bar accepts payment in bitcoin (BTC) for a cup of coffee. In the U.S., the coffee bar accepts the BTC as payment, which is then converted into the local currency, the U.S. dollar, to pay rent, employees' wages and so on.

The Hipster Coffee Bar branch in Mexico converts the BTC into pesos, the branch in Thailand converts the BTC into baht, and so on around the world.

Another coffee shop, Most Excellent Coffee, doesn't accept bitcoin in exchange for a cup of coffee. So when I enter Most Excellent Coffee, I convert a sum of BTC into U.S. dollars if I'm in the US, to pesos if I'm in Mexico or into baht if I'm in Thailand, and proceed to buy the cup of coffee.

You see the point: what matters isn't whether the coffee shop accepts bitcoin directly; what matters is whether bitcoin is easily convertible to the local fiat currency. Put another way: convertibility rests on the recognition that the "money" is a reliable store of value that can be converted into a variety of other currencies.

As long as the cost of converting one form of "money" into another form of "money" is fast and low-cost (i.e. nearly frictionless), then it no longer matters whether the "money" in question can be used directly in an exchange or not.

Consider a credit card. Part of the service offered by the issuer isn't just a line of credit to fund purchases; it's convertibility from one's domestic currency into whatever currency is used in the place where you're making the purchase.

This convertibility is certainly fast in the credit card realm, but it's not frictionless; rather, it's costly, as a hefty fee is skimmed for every transaction paid in one currency and converted to the cardholder's domestic currency.

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it's a superior means of exchange.

In other words, it doesn't matter what currency the coffee shop accepts; what matters is the friction involved in converting the currency you hold with the one the shop accepts.

If bitcoin can be converted into U.S. dollars at a lower transaction cost that the USD can be converted into (say) Swiss francs, it's superior to fiat currencies as a means of exchange.

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Billy the Poet's picture

I have no intention of leaving the country so how does this affect me?

IH8OBAMA's picture

But Bitcon isn't suitable to be treated as a currency.  It is too volatile.  Right now the volitility is up so the Bitconers are happy.  But even if it doesn't find it's intrinsic value of zero at some point the volitlity will go in both directions.   When that starts to happen it will be useless as a currency.  The volitiliy with regard to the Dollar and other currencies will be it's downfall as a means of transaction facilitation.

 

Stuck on Zero's picture

The volatility is high because the velocity of BitCoin (as a currency) is very low compared to the volume of speculative transactions.

Gap Admirer's picture

One thing is incredibly clear about bitcoin: Many people will tard-out (AKA tmosley-out), rushing to comment on every bitcoin article and pump, Pump, PUMP.

Am I allowed to say tard on here? Microaggression?

SILVERGEDDON's picture

You cannot call tmosley a tard. 

You may call him a rama lama ding dong libtard snowflake rainbow skittle shitting dueling banjo inbred evil twin Jim Cramer style investment fucktard Klingon from Uranus though. 

The above description more accurately reflects his investment style histrionics, y'know.  

tmosley's picture

As per the norm, more comments devoid of content.

Your mother never teach you rhetoric?

Eager Beaver's picture

Do you really think any of these stupid faggots ever learned the trivium? They're shills, pimping either metals, stocks, or fiat, nobody but a shill or an idiot would do that. Hope you bought the $3k dip. I'm betting it corrects hard again at $8k. Can't wait for the next "crash"! One foot out the door, indeed. Actually one of the best articles this retarded author has ever written. It actually has me wondering if I haven't gotten in with the wrong crowd.

 

P.S. I don't like the Elliot wave that's forming here.

Mustafa Kemal's picture

"You cannot call tmosley a tard. 

You may call him a rama lama ding dong libtard snowflake rainbow skittle shitting dueling banjo inbred evil twin Jim Cramer style investment fucktard Klingon from Uranus though. "

Indeed, you can. But I suspect it will not bother him in the slightest. Think of him what you will but he is no snowflake

Mementoil's picture

I don't think name calling is helpful in any shape and form, and I try to refrain from it.
As much as I disagree with Tmosley's views I'll give him the basic respect any person deserves.
We are here to further our knowledge and challenge our assumptions, and the only way to do that is by debating calmly and rationally.

BallAndChained's picture

> what matters is whether bitcoin is easily convertible to the local fiat currency

Bernie Madoff fund units were convertible into large amounts of fiat currency too. It was convertible all the way up until it became worthless.

Coincidently, Bernie Madoff was selling the same NOTHINGNESS as the chain of NOTHINGNESS in Bitcon.

 

BallAndChained's picture

How much Bitcon did Tyler buy?

He must have bought a massive amount for him to put up so many Bitcon articles every day.

Eager Beaver's picture

Yeah, because surely Tyler is the only people on the planet interested in reading anything about cryptocurrencies on a financial web site, how silly of them.

tmosley's picture

>Claims he is going to make a point about bitcoin

>Comments about a person instead

Ad hominem is NOT AN ARGUMENT.

Rhetorical's picture

Buy every dip.

 

BUY ALL  THE DIPS YOU SLACK JAWED FAGGOT PUMP THIS TO 10K I FEEL NOTHING ANYMORE!!!!!!!!!

 

-holds altcoins

 

---

Buckaroo Banzai's picture

Yeah I fucking hate it when my currency of choice appreciates thousands of percent in one year. I mean, what good is that??

Dollars are way better because they depreciate at such a nice, predictable rate of 3% every year, year in, year out. Live long enough, and they become worthless! So comfy!

hedgeless_horseman's picture
I like Bitcoin because it is making more people think about the reality of money.
Also, all of us here on ZeroHedge are still Early Adopters, even if you buy your first BTC today, and if Bitcoin ever does cross the chasm, then we stand do quite well.
TeamDepends's picture

Indeed, and when even a small minority realize that the dollar has lost 98% of its purchasing power since the birth of FEDkenstein there will be a stampede into cryptos and away from central bankers.

Mustafa Kemal's picture

"ndeed, and when even a small minority realize that the dollar has lost 98% of its purchasing power"

And as the death of the petrodollar proceeds.............

Billy the Poet's picture

Isn't that what was supposed to send PMs to the moon and didn't?

Mustafa Kemal's picture

"Isn't that what was supposed to send PMs to the moon and didn't?"

Not was, will be. You have to wait for adoption. I still ask around. Now most have heard about, but that is about all. Most dont even know the petrodollar is dying or what a bailin is

Billy the Poet's picture

Balin was one of the dwarves that traveled with Bilbo to the Lonely Mountain.

IH8OBAMA's picture

What's the interest rate one can earn on those crypto fake-coins anyway?

 

vega113's picture

You don't earn interest as there's no counter party risk. There's nothing to compensate for - just like physical cash or gold.
You can rent out your bitcoins of course and earn interest, but as compensation for the counter party risk as you no longer control your bitcoins.

tmosley's picture

Volatility is a symptom of adoption and divestment. The volatility is "up" because bitcoin is being adopted.

This would be obvious to anyone not experiencing cognitive dissonance.

jimmy c korn's picture

Isn't that the same ARGUMENT you made about silver & gold just a few years ago? Or do I need to look that up, won't take but a second!

You underestimate the power of the government and money and control of the banksters. Nothing to stop them from creating their own crypto's, calling them "legal tender" and calling yours counterfeit. After all they have the means to do it.

Thinkpad's picture

some countries are already  talking about creating their own CC where have you been under a rock?

jimmy c korn's picture

Thanks for proving my point. No I don't live under a rock, nor do I live in never-never land where bubbles never pop.

tmosley's picture

The volatility was downward as the paper markets were abandoned, exactly as I predicted. I did not anticipate the emergence of a form of money superior to precious metals. They stole the bull case.

>Nothing to stop them from creating their own crypto's, calling them "legal tender" and calling yours counterfeit.

Appeals to cowardice only work on cowards.

>After all they have the means to do it.

The king can proclaim that the tide is in when it is out. That does not make it so.

jimmy c korn's picture

Doesn't appeal to cowardice, appeals to reality.

You wouldn't think the king could create money out of thin air, but he does.

tmosley's picture

The people don't like it. They just haven't had a workable alternative until now.

PMs are not a REAL alternative. Resorting to trading in gold dust you wind up with a nightmare like in Zimbabwe. You can trade cryptos and maintain a modern economy. This is why they will be adopted.

vega113's picture

You don't understand. Government CC are non sense. What they will do is digital currencies that are just a digital token on some government controlled ledger, those will function as electronic cash - different from regular Digital currency which is debt issued by private banks. Now, those electronic tokens will be freely tradable on exchanges over the world - similar to Bitcoin. What it means - it will just make it a lot easier to swap bitcoin for those digital currencies. The authorities will allow easier access to the markets while still maintaining some kind of control. But, this is mostly a huge win for Bitcoin. Basically the governments realized they can't win and look for a way to join in.

Mementoil's picture

But doesn't that defeat the very purpose of Bitcoin, which is to serve as a medium of exchange?
You obviously cannot conduct trade with a currency which is so volatile (I'm talking about paying for your groceries, not financial trade), and if you do not conduct any significant amount of trade in Bitcoin, then why is Bitcoin valuable in the first place? The entire premise of Bitcoin's value rests on the assumption that the entire world will one day conduct trade with it, something which is becoming less and less likely.

tmosley's picture

Ask yourself the same questions for gold.

Gold and bitcoin are both serving the roles of reserves, but bitcoin is doing a much, MUCH better job of gedging inflation, to the extent that it is making savers fabulously wealthy.

>The entire premise of Bitcoin's value rests on the assumption that the entire world will one day conduct trade with it

That is not the premise of Bitcoin's value. That is the most bullish case, implying a 2500x run from here. The more reasonable bull case has it acting as reserves, like gold, and thus acheiving a 60x run from here. From there, other coins more suitable for trade can take over for day to day transactions, or some new tech that can be applied to Bitcoin will come along and dramatically decrease the transaction cost and speed.

Mementoil's picture

But gold was a useful and desirable commodity before it became a store of value.
This is what lent it to become one, whereas Bitcoin has no practical use other than to facilitate trade.
If the public can decide arbitrarily and without any good reason that Bitcoin is the new store of value, what prevents them from changing their mind sometimes in the future and choosing something else (such as a new and improved crypto-currency, for instance)?

tmosley's picture

This is sort of like saying that horses were good for food before they were good transportation, therefore you should keep using horses as transportation.

>If the public can decide arbitrarily and without any good reason that Bitcoin is the new store of value, what prevents them from changing their mind sometimes in the future and choosing something else (such as a new and improved crypto-currency, for instance)?

Nothing! That's the greatest part. If bitcoin fucks up, some other crypto will take its place, and there is a long line of them with far better tech waiting in the wings for that day. I own many of them and will be a very wealthy man if it happens.

Mementoil's picture

In other words, an average person which doesn't have the resources to follow the entire crypto space cannot simply put his money in Bitcoin and forget about it for a few years, like people used to do with gold. He needs to constantly be on the look out for the next best crypto that may take the lead. That doesn't sound to me like a good recpie for long term reliability.

artytom's picture

Bitcoin isn't the blockchain. There are a lot of currencies that make tranactions a lot better and faster than Bitcoin. Litecoin and Ripple of instance and Ripple is the least expensive (in terms of transactions costs) and definitely the fastest. It's also very stable. Irritating for investors looking for a return but great for financial organisations looking for a predicible, reliable, fast currency. 

Billy the Poet's picture

Some have speculated that Ripple will hard fork into something new:

Champipple

https://www.youtube.com/watch?v=Esr4MEu20bs

Thinkpad's picture

Really? Check your facts 90 banks are using Ripple blockchain network to settle intl transfers. Japanese banks are even using it for domestic transfers as well because it's faster and cheaper. the IMF is looking into adoption to eliminate SWIFT. Isn't it uncomfortable to always be talking out of your ass smelly to I bet.

Billy the Poet's picture

Yes, it really is a clip from Sanford and Son. How retarded are you?

Thinkpad's picture

Smart enough to not waste my time watching inane programs like Sanford and Son and smart enough to NEVER click on a link on this site it's infected. I'm so retarded I started UCLA at 16 I'm that retarded you did you even get a university degree?

Billy the Poet's picture

I got my degree at Penn State where I learned that there is no point in attempting to refute a video one has not not watched.

If you took a class at UCLA which supposedly taught you how to effectively argue against that which you haven't reviewed then you didn't get your money's worth.

 

I'm so retarded I started UCLA at 16 I'm that retarded you did you even get a university degree?

I see that UCLA has a fine English department as well.

tmosley's picture

>Asking people to refute Sanford and Son videos

Why are you wasting people's time?

Billy the Poet's picture

I didn't ask him to refute it. He took that upon himself. Try to keep up.

Thinkpad's picture

Thank you T Mosley why does this dude think he's the new messiah and everyone must hang on to his every word and accept it a gospel. He's a real pill.

Thinkpad's picture

I'm not refuting your video I have no interest in wasting time watching some video some whacko blogger on ZH believes is worth the time. My major was politcal science theory and finance. I know nothing about their English dept but I can post a video from Utube you must watch that details the English dept at UCLA if you don't than I'm not responding any longer to your mindless dribble. Unless you do watch you don't qualify to respond to my blogs again. LOL

Bendromeda Strain's picture

Ripple is the least expensive (in terms of transactions costs) and definitely the fastest. It's also very stable. Irritating for investors looking for a return but great for financial organisations looking for a predicible, reliable, fast currency.

So why are these supposedly ubersophisticated investors chasing the bubble of Bitcoin when Ripple is a superior product? Won't evolution make Bitcoin a tar pit dinosaur?

Yes - irritating for investors. A hallmark of a currency replacement. Whatever, Beastcoin readies to wrap its blockchain around your neck.

Michigander's picture

Not true. Most who accept bitcoin immediately convert to their local fiat so volaitlity is actually quit low from the moment of purchase to the moment of exchange.

ebworthen's picture

The cost and risk for a small business to accept Bitcoin is too high.

The volatility alone would be a risky proposition for monthly lease payments, not to mention weekly payroll.

Thinkpad's picture

and yet they are. Google list of merchants accepting bitcoin 200 or so list of entities. So they have "f/x" risk some merchants like that and no you don't run day to day operations in Bitcoin but again flip the coin. amazon gives you a 15% discount if you pay with BTC conversely why would I pay with Bitcoin if I believed the mkt was going up? My entire dscounted amount would become a big premium paid in some cases by the time the transaction cleared.