In his
presentation to the SEC for the Winkervoss twins' ETF application, Professor Jorge Stolfi wrote:
For the purpose of the fund, bitcoin is being characterized as a commodity. However, bitcoins do not really exist.
Commodities don't have to be physical. A commodity is defined to be a fungible good whose supply is not controlled by any one entity:
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A reasonably interchangeable good or material, bought and sold freely as an article of commerce."
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A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type"
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a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price"
They do not have material existence, of course; but they don't have even the virtual existence of MP3 or video files.
The latter are specific patterns of bits, that can be "owned" in the broad sense of the DCMA and other "intellectual property" legislation. Bitcoins are not specific patterns of bits, however. One cannot display them on a screen, print them, play them on a speaker -- as one can do with other forms of intellectual property.
Duh, Bitcoins are fungible, so they can qualify as a commodity. Non-fungible digital content such as MP3s can not be a commodity.
Proving ownership over a quantity of Bitcoins does require possession of a specific pattern of bits. Which is analogous to proving ownership over gold is having possession of a quantity of gold.
In that respect, bitcoins are similar to the money in a bank account. The bank client cannot see his money, either. All he can do is see a ledger entry that states that he has a certain amount in his account. Likewise, he cannot display his bitcoins, but only see a ledger entry -- in the "blockchain" -- that states that he owns a certain amount of bitcoins.
There are important differences, however. A bank is bound by contract and by law to transfer the amount stated in that ledger to other banks, or to cash, if the client requests it; and the government is morally obliged to preserve the purchase value of that cash, to a reasonable degree. But there are no legal, contractual, or moral obligations about bitcoin transfer or conversion to other money instruments; and there is no entity tasked with preserving its value.
Hodling gold is also similar to the money in a bank account and also has the analogous independence from banking regulation. Yet there is a gold ETF in existence!
Thus, bitcoins are more like "penny stock", shares of a company with no assets, no products, and no staff; or shares in a pure ponzi schema, like Madoff's fund. The value of bitcoin is supposed to come only from the existence of an
(allegedly) secure ledger that records the distribution of coins among numerous accounts ("addresses" in the system's terminology), and therefore allows their use as a means for internet payments. But penny stocks and ponzi funds offer that capability, too.
While it is true that shares of bearer stock equity certificates of an individual issuer company are fungible (i.e. there is no name associated with the certificates so they can be freely bought and sold), they are not divisible, not tradeable in an unregulated exchange markets, and are
not a fungible money because the value of the stock fluctuates w.r.t. to the performance of the company, i.e. a form of 3rd party liability. Whereas, Bitcoin like gold has no 3rd party dependence, nearly infinite divisibility, trades on unregulated exchange markets. These factors in addition to rarity and anonymity, give Bitcoin and gold their perceived value and nearly constant marginal utility as money. Bitcoin is superior to gold in that it has an inelastic supply and can move non-physically across borders unregulated which enables it to be more efficient than existing fiat currencies, and more difficult to regulate all possible exchange market markers for Bitcoin compared to gold. The lack of regulation is what makes Bitcoin very efficient, per John Nash's Ideal Money concept. When politicians/central bankers can get their grubby regulatory hands on money and issuance, they distort the free market causing inefficiencies.
So first Jorge compares Bitcoin to money which was correct, but complains it is not regulated, yet gold is also not (at least not entirely) regulated and has an ETF. Then he compares Bitcoin to equities which are not money. Duplicitous much.
Jorge insinuates that Bitcoin is high risk because its small market cap, but note that Bitcoin's market cap already exceeds by far any penny stock and it will soon exceed the marketcap of every company in the world.
Another important difference between bitcoin and other assets, real or virtual, is that the ledger (blockchain) does not really establish ownership of the bitcoins to identified individuals. The bitcoins are assigned to "addresses" (accounts) that are identified by numbers, and can be moved anonymously by using "private keys" associated to the addresses.
Anyone who knows the private key of an address can move the bitcoins stored there. By design, there is no identity verification, not even the possibility of it. In that regard, bitcoin accounts in the blockchain are like the old numbered accounts in Swiss banks. As the case of the MtGox exchange showed, when btcoins are stolen, it is nearly impossible to identif the thief, or even to determine whether it was an outside or inside job. This feature creates a security risk that is impossible to quantify.
Since 2010 or so, bitcoin has been heavily used for for investment and speculative trading, more than as a currency or payment network. All that trade has been occurring in totally unregulated exchanges that are not subjected to any meaningful auditing.
All of those statements apply to gold also.
Although gold trades less on entirely unregulated exchanges, that is one of the reasons that gold is inferior to Bitcoin as an investment commodity money.
The market price of bitcoin, like that of a penny stock or ponzi fund, is entirely speculative, based on expectations of traders about future prices, which will be based on expectations of future expectations...
Unlike legitimate stocks and bounds, that infinite regression is not ultimately grounded on fundamentals -- because bitcoin does not have any. In fact, its primary use as speculative financial instrument causes extreme price volatility, that prevents its use as a currency.
Ownership of bitcoins does not yield any dividends or interest. While eventual users of bitcoin as a currency would be required to pay transaction fees, those fees will not be paid to bitcoin holders, but to the "miners" that maintain the public ledger.
The only way to make a profit by investing in bitcoins is by selling them to other investors, for more than their purchase price. Thus, bitcoin has the essential character of a penny stock, or a pyramid schema: the profit of early investors comes entirely from the investment of later ones.
All of those statements apply to gold also. Gold has nearly no utility other than as money. The ornamental jewelry demand (i.e. that people want to flaunt it) is because of the perceived value of gold as money. If we remove that perceived value as money, then the tangible material of gold would have nearly no use and thus no value, except as its price dropped it might become economic for new uses.
The basis of gold's perceived value are the qualities I mentioned already, e.g. rarity, fungibility, infinite divisibility, lack of 3rd party dependence, etc.. Bitcoin has these same attributes and also excels in ways that gold can't, for the purpose of money.
Again the comparison to equities is incredibly stupid for the reasons I had already stated.
Investment in bitcoin does not contribute to mankind's real wealth or well-being: it does not finance the creation of any material goods or real services. On the other hand, it has ruined many naive investors who have been induced to put their savings into it, by spurious promises of fantastic price increases in some undefined future.
This is incredibly myopic. Jorge Stolfi doesn't seem to appreciate the entire reason for money to exist is because it raises the efficiency of commerce. The free market Invisible Hand of money is doing things that can't be seen (because they occur decentralized). For example, Jorge Stolfi can't see that Bitcoin as a reserve currency of altcoins has motivated and financed my development of BitNet which I posit will entirely revolutionize the Internet. I even told Jorge about my project in our private discussions on Reddit in 2016.
In my view, since it is primarily used for investment, bitcoin should be regulated like a security; in which case it would probably get from the regulators the same treatment that a penny stock or ponzi fund would get.
No single government can regulate blockchains, because it is a globalized phenomenon and it is like playing Whac-A-Mole (even if you could kill Bitcoin, another altcoin would rise to replace it and all the value from the public keys of Bitcoin would be burned to the new altcoin seamlessly). Analogously no single government can regulate gold outside its borders. Gold's disadvantage compared to Bitcoin is that gold can't be traded across borders without government interference with the free market. John Nash's Ideal Money states that huge distortions in the free market are caused by government interference with money.
Bitcoin's addresses are like a genetic DNA from a virus that can't be permanently destroyed. Shut down all the mining, yet the dormant virus will come back alive in the future will all value still intact. So we can say that Bitcoin is at least as durable as gold (and I will soon show a Theory of Everything for our universe in which I can posit Bitcoin being intangible information is more durable than tangible gold, because information is transferable to dimensions not representable in the tangible classical mechanics).
As for the proposed ETF, it does not add any productive mechanism to the underlying bitcoins. It only provides a level of indirection, that is intended to make bitcoin accessible to investments funds that it would not otherwise get (such as retirement funds). But, would the SEC authorize an ETF whose shares are to be backed exclusively by shares of a specific penny stock?
Adding to the market cap of Bitcoin will grow Bitcoin's utility.
The physical gold backing any gold ETF only has value because of the perceived monetary value of gold, of which Bitcoin has the same attributes. The physical gold would become worthless tomorrow if people decided that gold has no utility as a store-of-value money (and in fact this is coming because gold is inferior to Bitcoin and governments are intent on confiscation of physical assets and regulated assets such as bank money, stocks, and real estate).
