Platt Perspective on Business and Technology

Considering the nature and qualities of money 5: crowdsourcing valuation and the peer-to-peer model 2

Posted in macroeconomics by Timothy Platt on January 29, 2014

This is my fifth posting to a series on money and on what monetary value functionally means (see Macroeconomics and Business, postings 142 and loosely following for Parts 1-4.)

I posed a question near the end of Part 4 that I cite here as a beginning point for this installment.

• What happens when the last bitcoin is successfully mined, and even when all but just that last fraction of one percent of them have been mined, and the fad bubble bursts?

Put somewhat differently but still addressing the same basic issues:

• How can bitcoin’s valuation be stabilized so as to make it a sustainably consistent, reliable metric of marketplace and overall economic value?

I would propose two distinct directions that this stability could come from, and both of them of necessity come from outside of bitcoin and its mining community itself, offering outside and independent validation – or at least its possibility.

• One of them would be regulatory systems recognition and approval and at the very least this would be a necessary due diligence validation for legitimizing any monetary transactions with governmental agencies, or with banks or banking systems as they deal with conventional nationally-backed currencies. This would be required in those contexts at least where direct bitcoin to conventional currency exchanges are to take place. And the goal of this regulatory framework would be to formally, operationally define a legitimate peer-to-peer currency and its valuation determination, and how that would be real-time calculated at any given time.
• The other stabilizer would be market-driven and would come from merchants and marketplaces accepting bitcoin as legal tender, with real-time valuation for it set by what the market will bear for it at any given time.

I am going to focus on the second of these stabilizing mechanisms in this posting, simply noting for now that organizational and governmental regulatory efforts are always reactive. They identify and address gaps and add consistent formalizations where marketplaces can and create ad hoc alternatives, and ambiguity and uncertainty. So I start with the second of these two bullet points as representing the cutting edge for stabilization of valuation here. And this brings me to some interesting questions.

• Who accepts bitcoin as legitimate tender?

Bitcoin was set up as a mechanism for making online payments that can be both secure and reliable but that at the same time can also be anonymous, hiding the identity of any buyer or seller. In this, using bitcoin online is supposed to be like walking into a bricks and mortar store and making a purchase with cash. Promise of anonymity of this sort is in fact a due diligence-swaying consideration for many marketplaces, where privacy and confidentiality can outweigh even significant potential risk as to currency valuation stability per se. So one of the first major markets to actively accept and even require bitcoin was a black market operation called Silk Road. When the United States Federal Bureau of Investigation shut down this operation, at least under that name in 2013, they seized approximately US$28.5 million in bitcoins, according to its then current per-US dollar valuation as part of its overall assets.

But bitcoin as an online currency has also started to be accepted by more legitimate businesses too, and in publically open marketplaces. Amazon.com accepts bitcoin now, as of this writing, and Overstock.com has announced that it will begin to accept it in payment in 2014. As a major corporation with significant reach and influence, Amazon’s decision to accept payments in bitcoin form counts as a validating coup for this new peer-to-peer currency.

Overall, only a small percentage of businesses that carry out sales transactions online currently accept bitcoins in payment for them, but their number is growing. And you can find listings of such businesses and links to them through a number of online forums including bitcoin trading sites such as spendbitcoins.com.

This makes bitcoin money, that it is accepted as such in trade. This still leaves the question of fluidity or stability in its valuation and the role of fad influence in bitcoin’s current touted per-coin value when benchmarked against more standard nationally backed currencies. And I end this posting with the same basic question that I began it with:

• What happens when the last bitcoin is successfully mined, and even when all but just that last fraction of one percent of them have been mined, and the fad bubble bursts?

And this brings me to the first stabilization mechanism bullet point that I listed above too: that of outside regulatory systems recognition and validation. I am going to at least briefly discuss what this means in a next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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