Tuesday, May 2, 2017

Understanding #Bitcoin - #Uganda #MoneySense

---"Is the bitcoin a sustainable form of currency, in accord to propertarianism?"--
It is not a form of currency. Demand for a currency is warrantied by a state treasury through the combination of law and taxes.
A bitcoin (or equivalent) is a fractional share in the bitcoin (or equivalent) network, liquid within that network, and only within that network. 
The difference between these money substitutes, as between all money substitutes, is the degree of INSURANCE, or what is called 'backing' that
Think of tickets you buy at a carnival.  A bitcoin is a ticket.  Tickets can only be spent at the carnival. No one else will trade with you for them. You can buy a ticket and spend it on a ride, or sell it to someone else to do the same.  The difference is that the carnival can issue as many tickets as it wants, and fractional shares are issued by the profitable carnival rider operators.
However, as we have seen, (a) bitcoin operators are generally even more incompetent than banks, and (b) often more dishonest than bankers. And those investments are uninsured.
Commodity money (hard money) is insured by demand for the commodity.  The fact that we break it into countable units and trademark them guaranteeing their weight and measure, serves to increase the value of that commodity.  
So commodity money is insured by demand for the commodity independent of any institution or technology, and independent of time and space. 
Everything else we use as money is a money substitute, and as a money substitute, requires insurance by weaker and weaker means. 
Fiat money ("currency") is insured by a government treasury. As we have seen governments can lose the ability to insure a currency.
Banks and other asset holders issue "notes" (promises) that are redeemable for money at a face value. 
Some banks and treasuries issue "fractional reserve notes", meaning that under normal circumstances, these notes are redeemable for money - but as we have seen, when 'runs' occur, very little of a bank's assets are liquid and very little of its assets can be made liquid. 
Companies issue stocks. Stocks can be traded but only within a network or through the company. 
Bitcoins different from stock companies in that they only issue stocks in payment for validation of transactions, and because shares in the bitcoin network can be divided at will by their owner, these each bitcoin is a 'fractional' share of the network, backed only by demand for these fractional shares, hosted on a fragile voluntary network lacking all insurance.
Bitcoins are technically, fractional shares of token money substitutes, in a token money substitute network, and the least insurable and insured form of money substitute that man has yet invented.
The material benefits are that they (should be) reasonably hard to steal, (should have) near zero carrying and transaction costs, and if achieve sufficient scale (trillions) might provide some limited market demand - until there is a power failure.
BTW: the primary means of war has evolved from military to economic. The primary future means of war will be deprivation of electricity and communication lines.  We are currently more dependent upon electricity than water.
So, what propertarianism would say is that unless an individual consumer of bitcoins has been informed of these facts, he has been the victim of deception. But if he is informed of these facts then it constitutes a productive, fully informed, warrantied exchange, limited to positive externalities.                       
PS: The above was shared by Edgar Luwaga who is the Admin of our Business Briefing group on WhatsApp.  Edgar works in the Insurance Industry and knows risk.

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