This week the Bitcoin Uncensored Podcast with Junseth and Chris Derose interviewed the winner of the 2013 Nobel Prize in Economics, Eugene Fama. Bitcoin Uncensored has given CoinTelegraph the first peek at the interview so that we could publish it for the greater Bitcoin community.
Professor Fama is the father of Modern Finance, and one of the biggest proponents of what is known as Efficient-Market Hypothesis (EMH), which states that markets are efficient and that their information is broadcast in their current price. In its different forms this also means that it is impossible to “beat the market”, and that technical analysis of stock markets is ineffective.
This is basically saying that it is impossible to buy undervalued stock or sell it a higher rate, making arbitrage an illusion. The EMH hypothesis is very close in conception to the mathematical random walk hypothesis, that states that prices follow a random pattern. Random patterns are unpredictable by nature, so then the arrive at the same conclusion.
Bitcoin Uncensored: Hello Professor Fama.
Eugene Fama: Hello.
BU: To begin with, what do you know about bitcoin?
EF: Ohhh. I have a cursory knowledge of it. To me it seems like I really don’t know the difference between bitcoin and a checking account. I read all these papers in the 80s about how when you conduct transactions to a bank you check a wire that’s really just an accounting system for exchange...running in the background to clear accounts. And it seems that bitcoin is pretty much the same thing. It’s an accounting system of exchange. I don’t know, maybe it’s a better protocol or whatever, but I don’t really know the difference between the two.
BU: Well, there’s a lot of ways to explain the differences. but right at the top, the existing settlement solutions are solutions by the way of a centralized authority such as the bank or such as some clearing house.
EF: But really, it’s just a computer.
BU: Correct. But it’s also a computer tied to censorship and subject to moderation, which is unlike cash.
EF: There is no anonymity, that’s the main difference as I can tell. Bitcoin gives you anonymity, and transactions through a bank. For example, all transactions higher than ten thousand dollars are reported.
BU: Bitcoin is more like paper money. Subject to the same type of assurances that paper money is subject to, without fear of chargebacks.
EF: Yeah, it’s basically anonymity.
BU: That would be a huge part of it. Certainly.
EF: I don’t know, what would be the other part?
BU: Bitcoin has added value in the form of censorship resistance and other tangentials that can be built onto the protocol. Regarding the financial aspects of it. What do you think about the volatility of a currency with regards to markets in general? In this case being Bitcoin.
EF: Yeah, that’s a very good question because, the standard belief among monetary economists, is that a unit of account—which is what bitcoin is—to which prices get stated, can’t survive if it’s highly variable. People won’t use it because basically it’s very difficult to know how much you need to settle. It is quite variable, they won’t want to hold it as just a way of settling payments, they will try to get rid of it quickly, as they do; and that’s not good for the survival of that kind of a unit of account. As if it doesn’t have a stable value it’s probably not going to survive as a unit of account. What that means is that it’s value is likely to go to zero at some point. What value does it have except as a unit of account?
BU: Bitcoin can be used as a store of value, and it has censorship resistance components.
EF: No, it’s a not a store of value. Unless it has some other value, the core value has to come from something. It comes from its use as a unit of account in transactions. If people decide they don’t want to take it in transactions it’s value is gone. I don’t get what people who defend the censorship resistance are talking about. I guess that for a drug dealer that has a lot more value. But otherwise, I don’t see the big value about that.
BU: How do you feel about gold? Where there's no stable unit of account, and it is nonetheless store of value.
EF: Gold has the same problem. It's a highly volatile store of value.
BU: But it hasn’t gone to 0 either.
EF: Gold has other uses. For example, I have a wedding ring on, that’s a use right there. Gold has a limited value because it can be substituted for other metals and goods for some uses. It depends a lot on people being willing to use it for other things. In fact it depends entirely on that. It's use as money has long gone. Nobody is on the gold standard.
BU: What value would Bitcoin have, let’s say to dark markets. Forbes estimates about 11 trillion dollars on untapped economic activity. What if Bitcoin’s only value was in censorship resistance for those markets?
EF: Well, I don’t know how much value it would have then, and so, people who are concerned about that would have to say: “Ok, that’s worth so much to me, I’m willing to accept the volatility of the value of bitcoin in settling my transactions because this anonymity is worth so much to me.” Now, to me, that is a tough sell. *laughs*
BU: Bitcoin has a built-in deflation mechanism that caps at a maximum of 21 million coins. In a world where Bitcoin continues to retain value, what does this mean for things like taking out a loan in Bitcoin?
EF: It’s just another way in which you do things, you can say: I will lend you this many bitcoins and you have to pay me that same number whatever plus a interest, that’s like saying: I will lend you so many dollars and you will pay me back so many dollars with interest, but you’re not really paying me back dollars. What happens in the background is that there is an exchange of assets, basically financial assets. And that’s how everything settles, bitcoin will work the same way if it has to survive.
But again you have this problem, if I take out a loan in bitcoin and I, for example, buy a house; or I take out a 500k dollar loan, denominated in bitcoin, and all of a sudden, it’s value goes down or up or whatever, what I’m gonna owe paying back is going to be different in real terms. I don’t think that’s going to work.
BU: Bitcoin has the potential to lower transaction fees to even fractions of a penny, with little to none settlement costs. What can tell us regarding that?
EF: *laughs* You’re going to run into competition in that case. So what’s gonna happen is, if bitcoin gets popular for things like that you’re gonna see the transaction fee in traditional services…disappear.
BU: Isn’t that inconsistent with the efficient market hypothesis? Because that traditional cost reflects the cost of processing the transaction.
EF: No, my bank will process my wire transfers for nothing. No matter how big they are. Or how small they are, because I’m a good customer. They don’t check anything for that. In a wire transfer, which is basically the way everything settles, the costs are zero. It’s just accounting. It’s an entry on a computer, the cost is zero.
BU: Bitcoin is like paper money in the same way, that with a piece of paper money you don’t have a relationship with any banking institution.
EF: You don’t carry around bitcoin in pieces of paper, do you?
BU: Yes, you absolutely can.
EF: Ok, then you can do the same thing as with dollars, and if you carry around pieces of paper marked with bitcoin that’s no different than carrying around dollars.
BU: That’s correct, except that you can actually put a million dollars of bitcoin into one piece of paper.
EF: Who cares about a million dollars? Who is this valuable to? Drug dealers *laughs*.
BU: If you’re carrying that much cash, you probably would want the anonymity features of bitcoin. On another note, why do we have 2% processing charges on credit cards you would say? If in fact the cost of moving money is zero.
EF: Well, on credit cards transactions, that’s different than a transaction with a bank. The credit card company is taking a risk that you won’t pay. A bank is not taking that risk because when I send in a check or wire transfer to a bank, they know whether I can cover that transaction. The credit card company doesn’t know if you can cover that transaction, so that 2% you pay or whatever it is 1.5% that’s basically a bad debt charge, to cover the amount that they lose to people who can’t eventually pay their account. That possibility doesn’t exist with bitcoin. Because you either have it or you don’t, right? It’s like a deposit in a bank, my bank knows exactly how much what I can write and what I can cover. It can refuse checks that are too big.
BU: Yes. Why don’t we do wire transfers online at free cost? Why do we use the debit transfers at 2%?
EF: You know, that’s just competition. If Bitcoin catches on, those charges are going to disappear.
BU: What about talking in terms of sending money from the US to foreign countries in a very short time? A wire transfer from here to Spain takes 2 to 3 days...
EF: No, no, no, no. That can be done instantly. The system, the computers, are all linked.
BU: Why do we pay charges on remittance then?
EF: There you're paying a fee for the change from one currency into another. You're paying a broker's fee basically. Depending on how good a customer you're that would determine the size of that fee. There's bids and spreads on currency transaction which basically has to be paid.
BU: How much of that is regulation, with regards to remittances? How much of it is tax for example? Perhaps tax alone is a substantial amount.
EF: I don't know. I don't think there's any specific number because I know that's a negotiable sum. Bitcoin pays none of that, it definitely has an advantage. *laughs*