Economics of Bitcoin – Part 1

It’s been described in all sorts of ways from all sort of economists – ranging from the global currency of the future to a complete digital scam. The truth as always, probably lies somewhere between the two descriptions. In some markets though it’s become an important currency already, for example digital transactions that take place using anonymous methods like rotating proxies will often have the need for anonymous payments.

Whatever the real future of the digital currency turns out to be there’s one thing that is certain – people will make money from Bitcoin whether it’s successful or not. This useful video was recorded at the Mises Institute in Auburn, Alabama, on 27 July 2017.

Text Transcript follows: (Part 1)

I am Dr. Malawi, I teach at the Johnson Center (School of Political Economy) at Troy University. If you don’t know the Johnson Center, you can go to Google to get a little understanding of it. We have a great teaching team there. We have a major in economics and master’s degree Anyone interested in a deep understanding of economics has a cool teaching team at the Johnson Center. I teach there, my husband is also teaching there. Have time to find out about us I teach “Currency and Banking” This is my main job, and I graduated from this major. So I am really excited to come here to talk to you about something that I find very fascinating “the economics of Bitcoin” How many of you have bought or held Bitcoin before I started? OK, not too bad, it is much better than my past class.

But such a result is expected I will focus on the economics of Bitcoin Not too deep into the technical level you know, this is not the theme of today I will take some backgrounds very quickly so that everyone has a basic understanding. “What is Bitcoin” is just a few basic technical aspects Then we will enter the part of its economics So what is it? Obviously, we now know that it is a digital currency. It is completely decentralized It’s a peer-to-peer network meaning there is no monopolist issuer It can be said that this protocol is used to generate bitcoin from this computer code. And no one can control it Basically this network of computers is producing bitcoin At the same time this network is also responsible for verifying them. This is why it is so interesting. Because usually, when we think about money and fiat money Specifically, you know that there is a monopoly issuer. There is always a government behind to issue these currencies and endorse them. And this is totally different This is a kind, you know… Basically produced by the market and completely decentralized What does it do specifically? It solves the problem of double spending (repetitive consumption) (meaning that the same money is used for different expenses) This is a big problem when you use any kind of electronic data.

Imagine when you send an email or send an attachment on an email You can attach a file to a person and then go back and send the same file to another person. No cost, right? It can be perfectly copied and sent to others And electronic data or digitally sending valuable data or money through the Internet has the same problem. It is easy to be copied by double flowers This is the role of commercial banks. They play the role of a third party They stand in the middle of the people of the trading parties and maintain a set of books This is their role, right? So when you log in to your debit or checking account online You will see every sale and purchase transaction for you. Every expenditure goes to someone’s account. That is what commercial banks are doing. They are responsible for maintaining the books and maintaining account records.

Okay? Maintain those electronic money transactions Otherwise, if it is directly paid by us to each other, it is easy to cause double flowers. Now let’s see how Bitcoin solves such problems. Again, no third party in Bitcoin is supervising the transaction. Bitcoin’s solution to this problem is through what we call the blockchain. It is a complete… Maintaining the books with respect to the supervisor who uses a monopoly of a third party Bitcoin provides a fully publicly verifiable ledger So it’s like everyone’s supervision, okay? Everyone is supervising this book, the book is called the blockchain. Basically the blockchain records all transactions that have occurred Another cool thing is It is set to, or the code it writes is designed to only generate up to 21 million bitcoins, ok? The bitcoin that has been dug out in circulation is about 16.5 million.

Another very important feature, we will go back and discuss in detail later. It is based on the facts of open source software It has considerable economic significance. We will discuss it again later. And the way it works is that miners produce bitcoin by investing in computer computing power. To help blockchain operations So you are confirming the transaction You provide your computer computing skills to help blockchain work If you are the first person to dig into a particular block or someone who completes this set of transaction verifications You will be given a bitcoin reward So he fits the incentives to some extent. It rewards anyone and anyone can become a miner. It provides a reward for monetary rewards.

If you have finished your work, you can get Bitcoin rewards. Bitcoin is produced in this way. But not just that This mechanism also ensures the operation of the blockchain ledger. That is, the verification of the transaction So it’s really fun The incentives it is designed for So let’s take a quick look at the price of Bitcoin. This is the historical price of Bitcoin from the beginning to the present. This is January 2009 This is the beginning, you know that there is nothing happening for a while, of course no one cares. Here, things have become interesting since this time. Its price has come to about $100 Yes, about this time I bought a few bitcoins I will tell you this story later. At this time I started some This time is about July to September of 2013. I was teaching “Monetary and Banking” classes. My students and I talked about Bitcoin. After a semester, the price has risen here in December (about $700~900) In that class, I said, I will tell you earlier, you should buy some At this time, you have already made a lot of money.

Then this happened later (price fell) Of course, when prices fall, people say it, it’s a bubble, it’s a bubble. The bubble is about to break, it will be broken. The point is that the bubble will not show this trend You know, the bubble won’t go up, then go down, then go up again, then hover again, stop, then go up again You know, right? The bubble won’t be like this, it’s not a bubble.

No matter what it is, it is definitely not a bubble, right? I mean, whenever something happens, a group of people will yell, it’s over, it’s over. You know, it’s still there. So it is definitely not a bubble The next picture is how many wallet users there are. one more time I think it is about from 2012. Once again you can see that it has been growing almost Let you probably have a concept We saw that it probably remained there But is it being used for speculation, or is it really used as a currency transaction, like buying a commodity and it’s indeed This is the number of confirmed transactions per day It is a very obvious long-term growth trend It has some recent declines I am not sure why, maybe it is the relationship of rising prices.

So obviously it’s not just a bubble to illustrate it. It is not just used for speculation There are people who buy it, hold it, use it to trade, okay? This is the information we have. Now the first question I think is this is money? Economics can tell us what we can say is bitcoin money? Is it money? Right What makes money money, right? How do we define the money? Basically money is very interesting stuff. Money is determined by its function. Not determined by its style If you think about what is Apple Do you know what apple is? Apple is an apple, banana is not an apple. What is a car? The car is different by certain functions and certain styles of cars and trains. But what is money? Money does not have a specific natural style Many different things can become money So money is defined by what it can do. It satisfies the function as a trading medium So what is the trading medium? It is a thing used to trade and buy goods and services.

It’s something we hold it just to be able to exchange and buy goods or services with it. If we look back at history, we will find Many things have been used as money There are many examples of different commodity currencies Recently, we have more money in the form of legal currency paper and money in electronic form. So I mean there is no real reason to say that Bitcoin can’t be money. A basic question we have to answer is whether you can buy and sell goods and services in Bitcoin now. If you only consider this, is it now a medium of trading? Can you buy a bunch of things and people will accept that you pay in bitcoin and give you goods and services? The answer is yes It is a trading medium that is used as a trading medium Although it has not been widely used, I will not call it a currency. But it must be a medium of trading, so it is a kind of money, right? I think to be called currency, it must be extremely widely used.

But this does not actually have a clear definition. What can you buy with bitcoin? Now you can buy a lot of things in Bitcoin. Like restaurant consumption, hotel reservations, gold, movie tickets, etc. Anything on overstock.com (an online e-commerce that uses bitcoin transactions for global users) Over one million items on Overstock.com Like those things Someone will accept Bitcoin to sell the goods to you. This is the fact that makes it a medium or money for trading So it must be a kind of money because money is based on what it can provide as a function of the transaction.

And people voluntarily use it to trade This is the interesting part of it This brings me to the next level. Which kind of money does it categorize? If it is a kind of money, how do we classify it? How to understand it Because many people You know when such a scene appears It is very interesting for monetary economists. Like, what is this? Is this legal tender? Because it is obvious that it does not have any value support or value. How do we understand this thing? I want to use Mises’s classification of money to look at this problem. He divided the money into three categories.

One is credit currency Legal and commodity currencies We look back Credit currency is a kind of money that has redemption value in the future. But it is treated as cash in the current circulation. So the credit currency is no longer so popular. It was used at the time when Mises was writing. So it is more like a thing that is equivalent to a deposit (storage) proof. Circulated in reality and used to trade goods and services People nowadays basically no longer do this. Legal tender, we all know what legal tender is Technically, legal tender is the currency issued by the government. It is accepted by the public for circulation because the government has enacted a law saying that this is legal tender. Legislation with legal currency endorses it Because people have confidence in their government So people believe and use this legal currency Generally speaking, the legal currency is banknotes, right? So you can see the denomination of legal tender For example, 100 yuan banknotes and 10 yuan banknotes have the same commodity value.

But their denominations are different But what actually supports it is that there is a government endorsing it. There is a monopoly power that puts confidence on it. Finally, the commodity currency Mises further classified it as a real currency and an alternative currency. Here tells you what is the concept of alternative currency For now, your account balance is like an alternative currency. Every time you use a debit card to swipe your card, your account balance will be reduced. And someone’s account balance will increase Such an account balance is an alternative currency About 150 years ago, banks will issue their own bills, bank notes Those bank notes are also an alternative currency You deposit gold in the bank. Gold is a real currency. It is a commodity currency with its own value, right? In addition to the meaning of the money itself, it also has value and use value.

This is the so-called commodity currency The alternative currency is basically a piece of paper that can be used to redeem (evaporate) the real currency. There has been a lot of controversy What exactly is Bitcoin? Is it an alternative currency? Or is it a so-called internal currency? (The bank has the responsibility to redeem the assets) Can it be used to redeem (exchange) dollars? My point is that it is not an internal currency Although many markets have been developed to use Bitcoin to exchange dollars, it does not have the conditions to redeem the US dollar. Have a complete definition when it comes to redeeming or redeeming on request Especially for monetary economists The implication is that you deposit money to someone who promises to give you the same amount of money when you make a request. There is no price in the middle, it is one-on-one There is no price in the middle, this price can’t change. He is one-on-one (how much is saved) And the difference between buying and selling bitcoin in dollars so easily is that there is a price in the middle, and this price fluctuates frequently, right? This tells you that it is not the same as what can be redeemed.

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