Nobel Prize winner in economics Eugene Fama on Bitcoin

This week, Eugene Fama, the 2013 Nobel Prize winner in economics, was interviewed on Junseth and Chris Derose’s Bitcoin Uncensored Podcast.

Professor Fama is the father of modern finance and is famous for proposing the "Efficient Market Hypothesis". His definition of an efficient market is: if the price in a securities market fully reflects all available information, then such a market is called an efficient market. In other words, you cannot "beat the market", that is, technical analysis of the stock market is actually invalid.

The assumption of the efficient market hypothesis is very close to the concept of the mathematical random walk hypothesis, which states that prices follow random patterns, which are unpredictable.

BitcoinCT: Hello, Professor Fama.

Eugene Fama: Hello.

BU: First of all, let me ask you a question. What do you think Bitcoin is?

Fama: Oh, I have a cursory understanding of it, and for me, I really don't know the difference between Bitcoin and a checking account. I read all the literature from the 80s about how you and the bank process a transaction, and you check the telegram, and it's just an accounting system that runs in the background for transactions. It seems like Bitcoin is doing the same thing. It's just a transaction accounting system. I don't know, maybe it's a better protocol or something, but I really don't know the difference between the two.

BU: Well, there are many ways to explain the difference. The biggest difference is that the existing solutions are done through centralized solutions, such as banks or some bill exchanges.

EFMA: But actually, it's done with a computer.

BU: Right. But it's also a computer that's connected to a review and is subject to audit, which is different from cash.

Fama: No anonymity, that's the main difference I can point to. Bitcoin can provide you with anonymity, for example, all transactions over $10,000 will be reported.

BU: Bitcoin is more like paper money. In addition to ensuring the same functions as paper money, there is no need to worry about deductions.

Fama: Yes, it's essentially anonymous.

BU: That will be a big part of it, for sure.

EFMA: I don’t know, what would the other part be?

BU: Bitcoin has censorship resistance and other forms of value. Regarding financial issues, how do you view the volatility of the currency market? Take the example of Bitcoin.

Fama: Yeah, that's a good question because the standard view among economists of money is that a unit of account, like Bitcoin, can't survive if its price changes too quickly. People won't use it because it's hard to know how much it costs to solve certain problems. It's so volatile that people won't use it as a way to solve payments, and they'll quickly abandon it. That's not good for the survival of a unit of account. It can't be a unit of account if it doesn't have a stable value. That means its value could go to zero at some point. What value does it have other than a unit of account?

BU: Bitcoin can be used as a store of value and it is censorship-resistant.

Fama: No, it's 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 for transactions. If people decide not to use it for transactions, then its value goes away. I don't understand why people defend the theory of censorship resistance. I guess it would have more value to a drug dealer. But beyond that, I don't see much value.

BU: What do you think about gold? It is not a stable unit of account either, but it is still an effective store of value.

Fama: Gold has the same problem. It is a very volatile store of value.

BU: But it hasn’t returned to zero either.

Fama: Gold has other uses. For example, I have a wedding ring, which is a good application. Gold has limited value because it can replace other metals and products for some purposes. It depends a lot on what people are willing to do with it. In fact, it depends entirely on that. And it is no longer a currency. No one uses gold for accounting.

BU: What is the value of Bitcoin? Let's talk about darknet markets. Forbes estimates that this untapped market of economic activity is worth $11 trillion. What if Bitcoin is the only universal equivalent for these markets, because of censorship resistance?

EF: Well, I don’t know how much it will be worth, so people who care about it will say, “Well, this is valuable to me, and I’m willing to accept this volatility of Bitcoin to settle transactions because its anonymity is worth that much to me,” but right now, it’s nothing to me. (Laughter)

BU: Bitcoin has a built-in deflation mechanism, with a maximum of 21 million bitcoins ever created. In a world where bitcoin continues to retain value, what does that mean for things like bitcoin loans?

Fama: It's just another way of doing things. You can say: I will lend you this much bitcoin, and you have to give me the same amount, whether you add interest or not. This is equivalent to saying: I will lend you this much US dollars, and you will pay me back with interest, but you don't actually pay me back. Behind it, it's actually a kind of asset transaction, mainly financial assets. This is the principle, and Bitcoin will do the same way if it wants to survive.

But in the same way, you will encounter a problem. If I use Bitcoin for lending, for example, to buy a house, or I take out a $500,000 loan, denominated in Bitcoin, and then suddenly the price of Bitcoin skyrocketed, or plummeted, how do I solve it? I don't think it will be effective.

BU: Bitcoin can reduce transaction fees, even to cents, and almost no settlement fees for any settlement. Can you talk about this?

Fama: (Laughs) In that case, you have competition. What’s going to happen is, if Bitcoin becomes popular, what you’re going to see is that the transaction fees of traditional businesses…will disappear.

BU: Isn't this inconsistent with the efficient market hypothesis? Because traditional transaction costs reflect the cost of processing transactions.

Fama: No, my bank will process my transactions for free. It doesn't matter how big or small they are, because I'm a good customer. They don't check anything. In a wire transaction, the cost is basically zero. It's just accounting, the entry is done on the computer, so the cost is zero.

BU: Bitcoin is like paper money, but you don’t need to have any relationship with any financial institution.

Fama: Can you carry Bitcoin on paper?

BU: Yes, you absolutely can.

Fama: Well, then you can do the same thing as with dollars. You carry around pieces of paper with bitcoins on them, and it's no different than carrying around dollars.

BU: Right, but you can actually put $1 million in Bitcoin on a piece of paper.

Fama: Who cares about a million dollars? Who thinks it has value? The drug dealers. (Laughter)

BU: If you carry that much cash, you might think of the anonymity of Bitcoin. On the other hand, why do we have a 2% processing fee on credit cards if the cost of moving money is zero, as it were?

Fama: Well, there's a difference between a credit card transaction and a bank transaction. For the credit card company, there's a risk that you won't pay me back. But the bank doesn't have any risk because when I send the money to the bank by check or wire, they know whether I can pay the transaction. But the credit card company doesn't know whether you can fulfill the transaction, so they charge a 2% or 1.5% fee, which is basically a bad debt fee. This possibility doesn't exist with Bitcoin. Because you either have it or you don't, right? It's like a deposit at a bank. Of course, my bank knows how much I can write and how much I can pay. If my check is too large, the bank can refuse the transaction.

BU: Yes, so why don’t we have free wire transfers? Why do we charge 2% even for debit card transfers?

Fama: You know, it's a competition issue. If Bitcoin becomes popular, these fees will disappear.

BU: What do you think about the fact that Bitcoin can be used to send money from the US to foreign countries in a very short time? A wire transfer to Spain would take 2-3 days...

EF: No, no, no. This can be done instantly. When all the systems, the computers, are connected together.

BU: Why do we have to pay for remittances?

Fama: You pay a fee to convert one currency into another. You are basically paying a broker's fee. Depending on whether you are a good customer, that will determine how much the transaction costs.

BU: What about regulatory issues for remittances? For example, taxes? Maybe taxes alone would be a huge amount of money.

Fama: I don't know. I don't think there's any specific number because I know it's a negotiable total. Bitcoin doesn't pay (taxes) at all, which is definitely an advantage. (Laughter)

Original article: http://cointelegraph.com/news/115593/nobel-prize-winner-eugene-fama-on-bitcoin
By Omar Bessa
Compiled by: Satuoxi
Editor: Satuoxi
Source (translation): Babbitt Information