The economics of BitCoin

Malthusian

AG47 wrote: »

Is holding the pound in cash or the bank gambling?

No.

Gambling is about variability of outcomes. If I hold a pound in cash today I will still have a pound in cash tomorrow (plus potentially a tiny amount of interest). There is no variability.

Yes I think it is. Just as holding any other currency, the use, the euro or Bitcoin or Litecoin

Holding Euros or Bitcoins is gambling if I have to pay my household bills in pounds, because I won't know from one day to the next how many loaves of bread my euros or Bitcoins will buy me. Variability of outcome.

Holding Euros is not a gamble if I am about to go on holiday and will have bills to pay in Euros. Holding Bitcoins is always a gamble, as nobody accepts Bitcoin.

This is essentially the "atheism is a religion too" shtick. To which the answer is 1) no it isn't 2) I thought you liked religion?

malkie76

Malthusian wrote: »

No.

Gambling is about variability of outcomes. If I hold a pound in cash today I will still have a pound in cash tomorrow (plus potentially a tiny amount of interest). There is no variability.



Holding Euros or Bitcoins is gambling if I have to pay my household bills in pounds, because I won't know from one day to the next how many loaves of bread my euros or Bitcoins will buy me. Variability of outcome.

Holding Euros is not a gamble if I am about to go on holiday and will have bills to pay in Euros. Holding Bitcoins is always a gamble, as nobody accepts Bitcoin.

This is essentially the "atheism is a religion too" shtick. To which the answer is 1) no it isn't 2) I thought you liked religion?

I genuinely see your point, but it works both ways - particularly if what you are buying or paying for is imported.

Take energy for example - the majority of the UKs energy usage is imported, so when the pound falls against the euro it costs more to import the same amount of energy. The utility companies pass the cost onto the consumer, making your unit of gas cost more in pounds than it did last week. Had you bought euros with your pound before the change in exchange rates you'd be saving money.

So, its equally as much of a gamble to hold pounds as it is euros.

Even things which aren't imported still rely on imported materials (everything from starting raw materials to the energy to heat the cow sheds).

I'm not advocating Bitcoins, just pointing out that I'm not sure your point holds up.

MobileSaver

malkie76 wrote: »

So, its equally as much of a gamble to hold pounds as it is euros. ... I'm not advocating Bitcoins, just pointing out that I'm not sure your point holds up.

I see your point but I disagree with your conclusion. If you stretch the definition of gambling in the way that you and AG47 advocate then everything in life is a gamble. Am I gambling by keeping £20 in my wallet? By your definition I am as petrol might go up 2p a litre tomorrow. If everything is a gamble then it comes down to the degree of risk and it is indisputable that Pounds and Euros are relatively very low risk while Bitcoin and Litecoin are relatively extremely high risk.

Similarly there's a huge difference between holding Pounds that you received as income and holding Bitcoin that you bought; the latter is unquestionably gambling while I don't believe receiving income in Pounds (for someone based in the UK) would meet the definition of "gambling" full stop.

Electrum

They are all currencies.

There seems to be alittle bit of confusion as to the meaning of the term FIAT. Alan Greenspan called all crypto currencies fiat currencies. and he should know he he

Others refer to government or sovereign currencies as fiat and crypto as not fiat currency

whatever the case, the lines are being blurred, as there are said to be more than a few government cryptos on the horizon, there already is a government crypto in Venezuela. That crypto certainly is fiat, even if bitcoin isnt.

Im interested to know what other people here think is the correct meaning of fiat currency? Id Greenspan correct that crypto is also fiat like the dollar, pound, yen etc etc

malkie76

It's bordering on semantics. I'm a bit old school and consider gambling something where you put a bet on something in a bookies. I should have maybe said "its equally as much of a risk to hold pounds as it is euros." which I think is a fair point. I didn't define gambling in my post, more responding to the suggestion you couldn't lose out if you kept your savings in pounds.

I wouldn't put Bitcoins in the same risk bucket as legacy currency (as you rightly point out). Personally, I remember looking at Bitcoin when they were trading at £800 thinking that was crazy thing to put money into. I was completely wrong (in hindsight), but revisiting the situation now I still feel exactly the same way about the risk associated with it. Too much personally for me.

Malthusian

malkie76 wrote: »

I genuinely see your point, but it works both ways - particularly if what you are buying or paying for is imported.

Take energy for example - the majority of the UKs energy usage is imported, so when the pound falls against the euro it costs more to import the same amount of energy. The utility companies pass the cost onto the consumer, making your unit of gas cost more in pounds than it did last week. Had you bought euros with your pound before the change in exchange rates you'd be saving money.

Utility companies buy their energy years in advance because consumers really don't like it if their energy bill doubles when the oil price doubles, even if the next month their energy bills halve when the oil price halves.

They also collect money from UK customers in pounds and buy energy in euros, which means the energy company will already be using hedging on behalf of you as a customer, to ensure your energy bills don't fluctuate to an unacceptable degree.

The cost of your energy bills has only the most tenuous connection with the exchange rate.

The price of your energy is stated in pounds and the energy company does a lot of hedging behind the scenes to ensure that the cost to you in pounds does not fluctuate dramatically from month to month. If you hold euros and convert some to pounds each month to pay your energy bill, the cost of paying your energy bill will fluctuate significantly each month in line with the exchange rate, more than it would if you just kept your earnings in pounds. Variability of outcome. Gambling.

In any one month I might say "my energy bill has just gone up but I bought some euros which have gone up against the pound, so I've successfully hedged". However this makes no more sense than if I won some money on online poker and used it to pay my energy bill and called it hedging. In another month, my energy bill might go up but my euros go down against the pound. So I pay more twice. In the long run, the expected return of holding euros instead of pounds is nil, and holding euros will increase my energy bills by the cost of currency conversion.

Electrum wrote: »

Im interested to know what other people here think is the correct meaning of fiat currency? Id Greenspan correct that crypto is also fiat like the dollar, pound, yen etc etc

Fiat currency is any currency which a national Government will let you pay their taxes in and is recognised in law as legal tender for the payment of debts. Even if every single person in the UK woke up tomorrow thinking that pounds sterling were worthless, pounds would still have value because people would have tax bills that could be settled using pounds and debts that, by law, could be settled using pounds. The Bitbot fantasy that the value of fiat currency is just a fantasy and at any moment the sheeple will wake up is practically speaking impossible (unless meteor strikes or nuclear war are involved).

Wikipedia suggests that some people define any currency which is intrinsically valueless (e.g. not bits of shiny metal) as fiat currency. Under this definition, Greenspan would be right that Bitcoin is a fiat currency. IMO this definition is wrong, because A) it ignores the connotation of the word "fiat", which clearly implies some sort of government edict, from the Latin for "let it be done". It makes the word less useful.

malkie76

Malthusian wrote: »

the energy company does a lot of hedging behind the scenes to ensure that the cost to you in pounds does not fluctuate dramatically

So "gambling" behind the scenes is ok, providing you have no sight of it?

Come now, you can't have it both ways.

Malthusian

Energy companies buy energy in advance to reduce variability of outcome - to reduce the extent to which their profits and/or prices fluctuate in line with energy prices - hence it is the opposite of gambling.

Are you about to tell me that taking out home insurance is gambling because your house might not burn down?

westernpromise

Malthusian wrote: »

Energy companies buy energy in advance to reduce variability of outcome - to reduce the extent to which their profits and/or prices fluctuate in line with energy prices - hence it is the opposite of gambling.

Correct, it's a cashflow hedge.

When I was in this business I was taught that a hedge is any trade that makes you care less than you otherwise would about what prices do.

If you buy oil on tankers and send it somewhere it takes them 6 weeks to reach, you risk the price falling over those 6 weeks below what you paid, so that you sell at what turns out to be a loss. So instead you sell oil futures when you buy the cargo, and you buy the futures back when it unloads. That way, if the price falls, you don't care because although you sell your oil for less you also buy back your futures for less. You no longer care what oil actually costs. Coffee same thing, metal concentrates same thing.

The case for an airline buying its jet fuel forward is more nuanced. There's an argument that if you buy it all up front and the price then falls, you would care because you could have paid less. On the other hand an airline has to lots of things to which fuel price is just one input, such as price its seats and finance its planes. If it can lock in its fuel cost at a price that keeps all those other things competitive, then it does care less than it otherwise would about what prices do, and it has removed a variable. It shouldn't in any case be making its money by speculating in jet fuel futures.

AG47

I still think bitcoin will be $100k by 2019, we have all seen how it like to go up thousands per week when there is a buying frenzy.