http://market-ticker.org/akcs-www?post=219665Destruction of BitCon-Accepting Businesses
By Karl Denninger -
www.tickerforum.org If you remember I wrote an article a few days ago entitled "BitCon: DON'T" in which I laid out the premise of what a currency should be.
A currency should permit one to express their preference for goods, services and time. That is the essence of currency; it permits you to engage in the intercourse of goods and services without regard to what you produce or desire, provided that someone in the economy values your product or service.
That person could be in the next house over, the next town over or across the nation. It doesn't matter. So long as such a person exists you can transact.
A good currency also allows you to express time preference. That is, your desire to buy tomorrow instead of today.
An ideal currency places no thumb on the scale for any of these preferences. That is, its value is invariant over periods of time. This is important for many people but for business use it can be essential, because many businesses take goods and "refine" them in some fashion. A baker takes wheat and makes bread and pastries; to do so requires time, and he therefore ideally wants the value of currency he exchanges to remain stable during the time between his acquisition of wheat and the sale of the end product. If it is not to remain stable he must know the rate of change with a reasonable degree of certainty so he can adjust his prices to match cost in real terms.
There is a further problem -- businesses in virtually all cases and individuals in many cases are subject to tax. Taxes are a cost of doing business and therefore unknown variation in the value in invariant terms for a currency is therefore quite damaging to the ability to pay taxes. If you can't pay the tax man you're out of business.
When governments adopted currencies and denominated taxes in a given one, they made possible business planning. You could then accept anything but you priced your goods and services in that currency, whether you accepted only that or a whole host of things in payment. This allowed you to stabilize your expected profit margin and thus know you could pay the taxes due to the government.
Before this adoption farmers were frequently dispossessed of their lands by the Lord of the realm, who came through demanding payment of taxes in grain. If you didn't harvest sufficient grain you were screwed and lost your lands. But when payment was made in coin you could always go help on someone else's farm, milk their cows or engage in some other act that had value to someone, get the required coin, and pay those taxes. This was a stabilizing influence in society.
Now here's the problem for BitCon:
Let's say you denominated one month of Internet Hosting in "1 Bitcoin." You accepted payment. Then, in the next few minutes, the value of that coin collapses as happened today.
What happens to you? If your effective tax rate at the expected exchange rate was 25% it has now doubled. There is every possibility you will be unable to pay the taxes due along with the rest of your fixed costs.
If that happens you're done.
This is why businesses should not take Bitcoin.
Sure, when the price was "only" going up it felt great -- it was free money! You got paid 2 BTC for that hosting and guess what -- two days later you were laughing your ass off because you made a huge profit on the FX exchange. If you cashed it, that is.
Nobody in their right mind knowingly takes FX risk with 50% swings in minutes in a common business context. That's nuts. If you're a trader and like speculating in commodities, then sure, have at it. Just make sure that you're ok with the sort of dislocation you saw today, and while you're at it also make sure that you've not deposited funds into a roach motel where you can't get out when you want to -- that is, where there won't be a sudden appearance of "gates" or "limits" preventing you from exchanging back to some other currency and withdrawing the funds.
By the way, that little issue is likely to be a problem too.
Bitcoin is in my view not a currency since it posseses none of the required properties of currency. It is a digital commodity with zero intrinsic value, much like Tulip futures were. Tulip bulbs had actual tangible value, even if small, as they grew into flowers -- futures, on the other hand, had no tangible value at all.
When TulipMania collapsed the government deemed the futures an illegal gambling contract and voided them, incidentally.
You might want to think about that sort of risk too.
I have no intention of ever accepting an alleged "currency" that moves 20, 30, 50% or more in value over a short period of time and you shouldn't either.
