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Don't buy Bitcoins (video)

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Nielsio:
Bitcoins are not good for anything besides trading.
 
To understand why you are wrong, you need to understand the genesis behind the idea of Bitcoin.
 
Interestingly enough, it started with the goal of stopping bulk spam. The reason why there aren't dump trucks backing up to your mailbox each morning to unload massive amounts of spam is because there is a larger cost associated with sending postal mail versus email. There's the cost of the ink, paper, envelope and stamp. This means that any spam that can't recoup those costs simply doesn't get sent. Contrast that with email which is orders of magnitudes cheaper, the price being whatever it costs to send a few bytes over an Internet connection.
 
So, the idea was to attach a higher cost to emails in much the same way that postal mail has a higher cost. There are several schemes. One of these is run by a company called "GoodMail". They convinced a bunch of email providers to give certain emails a special icon in your inbox. These icons only display if you pay an extra fee to send the email. This prevents spammers from having such a huge economic incentive for sending spam, if they want the special icon. The service still exists but it really hasn't caught on.
 
However, a precursor to this idea was called "HashCash". Instead of charging money outright, it is based on a proof-of-work system. Under this system, you run a program and it starts generating tokens by using CPU resources. You attach a token to each email you send and the recipient can verify your token for relatively no cost. This makes it easy for the typical user to send and receive emails while making bulk spam prohibitively expensive.
 
After this system was proposed, someone came to the natural conclusion that there would be individuals that wouldn’t want to run the program but instead would rather buy the tokens outright. This gave rise to the idea of an entire market based on buying and selling tokens. Fast forward over a decade later and the creator of Bitcoin says, “Hey, who cares about email? Let’s use this stuff for money!” The rest is history.
 
So, what's my point? My point is that Bitcoin is a proof-of-work system which has value as a good because people, even if not used as money, would still want to use Bitcoins to prevent bulk spam. I imagine that if/when Bitcoin becomes widespread, we will see an actual implementation of this where sending an email costs a tiny fraction of a BTC.
 
I really hope this will put to rest the myth that Bitcoin has no possible use aside from being a medium of exchange.

 

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aervew replied on Mon, May 16 2011 12:27 PM

Yeah agreed. Kinda a funny video to watch now after the massive rally in Bitcoins. Guess reality does not always conform to the premises of Mises Regression axiom when it might seem to do. An 800% increase in value roughly after the video was posted, what a gag.

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ladyattis replied on Mon, May 16 2011 12:37 PM

Nielso, I think bitcoin is a good means of exchange, but I think until there's a reliable platform to take existing RL monies in exchange for a bitcoin there's no real purpose for it. Also, the current exchange systems (bitcoin-to-cash and reverse) is centrally managed, which means if a federal agency wants to kill the whole thing it's quite easy. Plus, there's no real good way to secure your banking information away from your bitcoin wallet. I hope to do a Masters project on that. :3

"The power of liberty going forward is in decentralization.  Not in leaders, but in decentralized activism.  In a market process." -- liberty student

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ladyattis replied on Mon, May 16 2011 1:08 PM

I think Nielso has one point wrong about money. Money by itself may have been at some point a commodity of value, but no where in the Regression Theorem is it necessary for all monies to have some economic value. It just happens that commodities are the easiest to bootstrap into indirect exchange, especially if they have limited economic utility and relatively stable economic value.

But anything can be used for money if it meets the criteria: relatively scarce as to keep supply stable, hard to make forgeries and easier to detect forgeries, easily divisible, easily portable, and generally seen as valuable (last and most important, obviously). BTC meets all these quite well. To say otherwise is to pretend the definition has some mythical caveats.

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AJ replied on Tue, May 17 2011 2:48 AM

More discussion on Bitcoin here.

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Nielsio,

I think you got the argument almost right. I agree with your application of the Austrian School up to the point where you say that Bitcoin does not have non-monetary uses. I think you are prematurely jumping to conclusions.

I submit that Bitcoin does have non-monetary uses other than speculation. The same laws that give the government the power to tax, inflate and confiscate, give the Bitcoin the power to protect you against those intrusions, and do this better than gold. Done properly, government won't find out about your Bitcoins, nor can it confiscate them. You can transact them online without going through the current banking and payment processing system (I used to work in an online payment processing company so I know a bit about this) and being subject to their scrutiny and rules. You can store them encrypted, and keep an offsite encrypted backup on hosting services in another countries. If the government imprisons you, they might be able to get the encrypted copy from one of the devices that you posess, but as long as you don't divulge the password, it's useless to them. Other members of your family can still access the offsite copies and have full access to your hard earned money.

Furthermore, black markets, such as online gambling, drugs and copyright violations can find bitcoin more useful than the alternatives. For example, in the US, banks and credit card companies need to make sure you do not pay for gambling, even if it's a website in another country. Bitcoin does not need middlemen for transactions.

There is a reasonable chance your conclusion would be correct in the absence of a government. But we do have governments. Gold-backed currency competition gets targeted and shut down: Liberty Dollar, e-bullion, e-gold and so on. Pecunix (launched in 2002) is still up, but based on the data from Wikipedia, the total market value of their gold is only about 4 million USD. Compared to the current market value of the Bitcoins, which at the time of writing is about 60 milliion USD (after only about 2.5 years). Goldmoney's stores market value is about 1.9 billion USD, but it does not seem to be very suitable for trading or even microtransactions, plus it requires you to provide them with all kinds of documents to setup (i.e to a certain extent it is still a part of the problematic banking system). Also, Goldmoney's assets can be confiscated, albeit they provide a certain level of protection (they store the metals in London, Zurich and Hong Kong). With Bitcoin, on the other hand, there is no centralisation, so also nothing to confiscate.

Compare, for example, a minter like Nothaus with a Bitcoin miner. Nothaus' business premises were raided and the gold coins belonging to him as well as his customers, presumably) confiscated. If someone raids Bitcoin miner's premises, they can take his mining rigs and other computers. But there is no guarantee that such a raid will confiscate his bitcoins. They can be in anywhere online. To Nothaus, a raid is the end. A Bitcoin miner just has a minor disruption, buys new hardware and off (s)he goes again.

It is a very paradoxical situation. On a genuinly free market, Bitcoins probably would not have value. But in the environment of governments, central banking, prosecution of victimless crimes and legal tender laws, they "magically" (or maybe I'll be bold and claim "praxeologically") gain very real value.

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http://forum.bitcoin.org/?topic=6452.0

they're talking about this thread in the bitcoin forum

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Hazel Brazell:

http://forum.bitcoin.org/?topic=6452.0

they're talking about this thread in the bitcoin forum

 

As an Austrian dominated community, the Bitcoin forum has long been both amused and dismayed at the general vitrol bitcoiners receive while on this forum.  It's to be expected on other forums, but we once held a greater expectation from members of this forum.

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Nielsio replied on Tue, Jun 14 2011 9:50 PM

IM conversation between me and John James (from Mises Community):

 
 
*Third paragraph:
 
"[..]
 
Yes, a bitcoin is not a contract for a future payment, so there is no fixed value in terms of some other good.  But I'm not so sure that would matter given the way this could evolve.  I could imagine a transition in which it catches on as an easy way to send money without having to pay wiring fees, as well as making it anonymous (which, despite Wenzel's constant invocation of drugs, there are legitimate reasons for having transactions be private).  Someone would go to an exchange, convert to bitcoins, send a payment, and the receiver would get them, and exchange them back.  Over time, with more popularity (and comfort) people will feel less and less of a need to convert out of their bitcoins right away...and as more and more merchants accept them, there will be less and less of a need to.  With a process like this, I don't have much of a problem conceptualizing a tipping point at which it would be almost impossible for the demand to go to zero.  There would just simply be too many people using it.
 
[..]"
 
 
 
(01:49:28 AM) Nielsio: Re: your third paragraph*,
 
You're sidestepping the issue here. My claim is that there is only a market for bitcoins because they have been able to get a continuing stream of new people willing to buy them.
(01:50:18 AM) Nielsio: There is no way to price in bitcoins because they have no use-value,
(01:50:28 AM) Nielsio: So it's 100% speculation.
(01:50:32 AM) Nielsio: This is a speculation bubble.
(01:50:50 AM) Nielsio: And the higher it goes the more riskier it is to lose the money you put into it.
(01:51:26 AM) Nielsio: This means it's going to crash and many holders of it will become losers in monetary terms.
(01:51:40 AM) Nielsio: This will then cause the major collapse.
(01:52:10 AM) Nielsio: Any benefits that people perceive from them (anonymous, etc) all rely on there being a market for bitcoins.
(01:52:39 AM) John James: Isn't that true for anything?
(01:52:41 AM) Nielsio: I also have some criticisms about the anonymous aspect of it.
(01:52:55 AM) Nielsio: But I don't think it's the main issue.
(01:53:31 AM) John James: Yeah I'd be interested in hearing those, but yes, I'm much more interested in the viability as a currency.
(01:53:50 AM) Nielsio: No, this is not true for anything.
(01:54:29 AM) Nielsio: Prices for commodities are very stable
(01:55:12 AM) John James: You said "Any benefits that people perceive from them (anonymous, etc) all rely on there being a market for bitcoins."  Is that not true of virtually any money?
(01:55:32 AM) John James: How many people have an actual use for gold or silver?
(01:55:38 AM) Nielsio: Any medium of exchange requires there to be a market for it, yes
(01:55:59 AM) Nielsio: As such, almost anything *can* be used as a medium of exchange.
(01:56:06 AM) John James: Sure there are industrial uses, but practically speaking, people do not have a use for metal coins other than money.
(01:56:14 AM) Nielsio: Some things are just more viable than other things.
(01:57:11 AM) Nielsio: Use of gold as a money is secundary
(01:57:24 AM) Nielsio: And it 100% dependent on there being a market for gold (use value)
(01:57:28 AM) Nielsio: *is
(01:57:38 AM) Nielsio: Gold is continuingly being used
(01:57:47 AM) Nielsio: There is a constant stream of gold production and gold consumption
(01:57:53 AM) Nielsio: And gold as money relies on that
(01:58:12 AM) Nielsio: Having gold as a coin for 50 years is perfectly fine in that arrangement.
(01:58:24 AM) Nielsio: It remains just as replacable for gold that is being used.
(01:58:29 AM) Nielsio: They're functionally equivalent.
(02:00:02 AM) John James: Of course.  Fungibility is one of the fundamental requisites for a money.  And I fully concede some goods, like gold, are more viable than others as a money.  My concern is discerning the truth about bitcoin's viability...more specifically, whether that viability is zero or not.  And I'm not fully convinced it is zero.
(02:01:03 AM) John James: As I was saying, sure I wouldn't recommend buying into bitcoins and these prices and expecting to protect your wealth there...but as a medium of exchange, I'm not seeing a theoretical reason it could not work
(02:02:38 AM) Nielsio: If you don't recommend buying them to store value, then how do you expect them to be usable as a medium of exchange?
 
Something to be used as a medium of exchange, means there needs to be a steady demand for them.
(02:02:50 AM) Nielsio: If the demand is not steady, then it cannot be used as a medium of exchange.
(02:03:40 AM) John James: I'm just saying that's how I could see it transitioning.  Like I described in the message.
(02:04:58 AM) Nielsio: You have to explain why someone would want to hold it. If the only reason to hold it is to sell it, then that's a scam, because the only thing you would want to do with it is get rid of it. And to sell if off to a person is to pass on that problem to them.
(02:06:09 AM) Nielsio: Austrian theory explains where prices come from
(02:06:27 AM) Nielsio: And it comes from utility
(02:06:44 AM) Nielsio: That's the only non circular explanation
(02:07:28 AM) John James: But I still haven't heard a reason there absolutely has to be a non-monetary utility.
(02:07:34 AM) Nielsio: Where do prices comes from?:
(02:08:28 AM) Nielsio: Monetary utility requires use utility
(02:08:56 AM) Nielsio: If an item has no use utility, then any prices paid for it are a purely speculatory bubble
(02:09:02 AM) Nielsio: Which will collapse
(02:09:08 AM) John James: why?
(02:09:33 AM) Nielsio: Because it is a wrong prediction about the future keeping it's value up
(02:09:45 AM) Nielsio: There is no way bitcoins can keep growing like it does
(02:10:00 AM) Nielsio: It would have to grow forever
(02:10:07 AM) Nielsio: That's the insight of bubbles
(02:10:13 AM) John James: I wasn't aware one said they would, could or should.
(02:10:17 AM) Nielsio: Things that are not caused by genuine use demand
(02:10:28 AM) John James: Why would bitcoins have to keep growing?
(02:10:40 AM) Nielsio: Because nobody is using bitcoins
(02:11:01 AM) John James: how do you know?
(02:11:10 AM) Nielsio: Because they are designed to be useless
(02:12:06 AM) Nielsio: They have no use AND they cost resources to be held.
(02:12:14 AM) John James: Obviously that has been proven false, as there is plenty of evidence that they have been used for monetary transactions of real goods...even if for illicit goods.
(02:12:28 AM) John James: what resources do they cost to hold?
(02:18:26 AM) Nielsio: Hang on, looking into the anonymous thing.
(02:21:22 AM) Nielsio: As for your second question, I don't want to spell out what the costs are. Do you think they cost no resources to hold?
(02:23:03 AM) John James: Maybe I'm missing what you're saying.  You're saying if I have bitcoins, they are costing me money just to hold them?  Other than opportunity cost?
(02:23:14 AM) John James: On the anonymous thing...:
 
http://techliberation.com/2011/06/03/bitcoin-silk-road-and-lulzsec-oh-my/
(02:23:29 AM) Nielsio: Yes, that's what I'm saying
(02:24:42 AM) John James: In what way am I spending money to hold a bitcoin?
(02:28:14 AM) Nielsio: What happens if your harddisk crashes.
(02:28:54 AM) Nielsio: What happens if someone hacks your computer.
(02:30:32 AM) John James: I'm not following how those questions answer my question about how I'm spending resources to hold a bitcoin.
(02:30:39 AM) John James: And what happens if you forget where you hid your gold?  What happens if someone robs your house or mugs you on the street?
(02:30:50 AM) Nielsio: That's not the point
(02:31:03 AM) Nielsio: I was pointing out that holding bitcoins has a cost
(02:31:30 AM) John James: and holding anything else doesn't?
(02:31:49 AM) Nielsio: We're not talking about other things here
(02:32:28 AM) Nielsio: I'm talking about the general question of there being a demand for holding bitcoins
(02:33:09 AM) Nielsio: If something has no non-monetary value, that's problematic.
(02:33:27 AM) Nielsio: On top of that, having a cost and a risk is also bad for it.
(02:34:29 AM) John James: It sounds like you're saying that people would be averse to holding bitcoins because there is a cost.  But that doesn't sound like much of an argument, as there is cost to holding anything.  So how is that a minus for bitcoin?
(03:17:52 AM) Nielsio: You may be right about that, but it may be more expensive than other items, especially with the risk of ruin.
(03:18:24 AM) Nielsio: I think I figured out the anonymous monetary use thing.
(03:18:51 AM) John James: what did you figure out
(03:20:46 AM) Nielsio: Yes, it does appear to add a layer of anonymity to purchases of goods, and the reason this can work is because it requires this kind of continual group of people buying them up,
(03:21:42 AM) Nielsio: That's the requirement to be able to anonymize purchases.
(03:22:01 AM) Nielsio: Which is esp important to the seller.
(03:22:23 AM) Nielsio: Because you can't anonymously receive goods.
(03:22:29 AM) Nielsio: So a buyer will always be f**ked.
(03:23:31 AM) Nielsio: But you see, these people wanting to do anonymous purchasing rely on there *first* being a market for bitcoins.
(03:23:51 AM) Nielsio: And that ties in to what I was talking about earlier,
(03:24:52 AM) Nielsio: As an aside: people selling bitcoins would be prosecutable for whitewashing.
(03:24:59 AM) Nielsio: I think.
(03:25:19 AM) John James: whitewashing?
(03:25:28 AM) Nielsio: money laundering
(03:27:39 AM) Nielsio: So as it looks like to me now, more anonymous purchases appear to be a benefit that comes along with speculatory bubble.
(03:27:58 AM) Nielsio: But the speculation has to come first.
(03:28:29 AM) Nielsio: You can only do anonymous purchases AFTER the speculation has started.
(03:28:48 AM) Nielsio: So anonymous purchases cannot explain their value; that would be circular.
(03:29:43 AM) Nielsio: So you're still left with the problem of an unpredictable purchasing power of the bit'coins'.
(03:29:58 AM) Nielsio: Which is: the pricing problem.
(03:30:07 AM) Nielsio: Which is: the use value problem.
(03:30:35 AM) Nielsio: That's as best as I can see it now.
(03:38:42 AM) John James: Here's what I've got so far:
 
 
Any time you purchase something for the purpose of trading it in the future, you are speculating on the future demand for that good.  The advantage of something like gold over something like bitcoins is that (a) it has a long history of value, so there appears to be evidence that it will continue to be valued, and (b) it has use other than its monetary use, so you have an extra layer of protection adding to the probability that it will still be useful in the future.
 
 
...So really, all I'm seeing so far is that it boils down to simply bitcoin's future value is more uncertain?  Is that really it?  That's the argument against them?
(03:41:21 AM) Nielsio: You want to trace where the demand comes from. Monetary use comes after commodity use. And commodity price comes from subjective utility.
 
So if there is no commodity use, then the monetary prices will collapse.
(03:41:30 AM) Nielsio: Sooner or later.
(03:42:07 AM) Nielsio: The buyers, the people who predict it will have value in the future, will be shown to be wrong and make losses.
(03:43:00 AM) Nielsio: The video link I gave earlier should be really instructive.
(03:43:16 AM) Nielsio: About the question: where do prices come from.
(03:43:45 AM) Nielsio: Because it actually illustrates what keep the prices up at any height at all.
(03:43:59 AM) Nielsio: And that's important for bitcoin.
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Nielsio,

if possible, could you address my point that Bitcoin does have a non-monetary value? To repeat/rephrase it, the non-monetary value is created because government interferes with money (e.g. by legal tender and confiscating gold) and that creates a market gap. As long as government continues to interfere with money, and unless displaced by another new competitor, Bitcoin will have value.

Furthermore, I am not entirely convinced that non-monetary value is even necessary for having a usable medium of exchange. There are plenty of goods whose only value is derived from the context. The best example are positional goods. In general, any information that can be used to affect others in some contexts is valuable. If a new good is specifically designed to affect other people in the context of indirect exchange, and has significant advantages over the encumbents in some of such indirect exchanges, then logically it can displace the encumbent in those situations.

Of course, it does not necessarily mean that the future of Bitcoin will be rosy. It merely means that there is no praxeological refutation of Bitcoin.

You also brought up other technical points. In general, they are not a showstopper for Bitcoin, but still I'd like to address them:

Cost of holding Bitcoins: of course there are some costs, but they not significantly different from costs of keeping other goods. One thing however Bitcoin provides is the flexibility. You can store them on your computer, or leave it to a third party that specialises in this. You can put your private keys onto a usb key and put it into a bank safe. The ability to encrypt the keys makes them more difficult to steal, and the ability to copy the keys makes them more difficult to lose. You can't encrypt or copy gold, so there you have a comparative advantage.

Money laundering: based on my research of the topic, this only affects BTC exchanges as Mt. Gox, not transactions that involve goods. The existing exchanges are as far as I know properly registered businesses.

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Few recent vids with Stephan Molyneux of Freedomain Radio:

 

 

 

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Russ Roberts (of GMU, EconTalk, and Keynes & Hayek rap fame) interviews Bitcoin project developer Gavin Andresen

 

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I'm glad there are people in these forums denouncing bitcoins.

I was reading the excellent (but rather basic) "The Mystery of banking" by Rothbard and there was this amusing excerpt describing the reaction of Scottish bankers who practiced fractional reserve banking when their clients tried to redeem their gold.

"Before the Scottish banks suspended payment, all Scottish bank offices were crowded with depositors demanding gold and small-note holders demanding silver in payment. They were treated with contempt and loathing by the bankers, who denounced them as the “lowest and most ignorant classes” of society, presumably for the high crime of wanting their money out of the shaky and inherently bankrupt banking system. Not only the bankers, but even elite merchants from Edinburgh and throughout Scotland complained, in 1764, of “obscure people” demanding cash from the banks"

A couple of days ago the value of bitcoins fell from around $30 to around $10. Someone started a thread to express concern, asking "why the rapid decline in price" and was met with the following response:

"Because a bunch of down's syndrome panickers in their moms basement kept pushing the price lower and lower because they had a compulsion to get rid of all their BTC."

Some things never change.
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Frederique,

the analogy makes no sense whatsoever. FRB is based on the assumption that you can promise someone to pay even though you might not have the money to fulfill all promises simultaneously. Of course, sometimes the bank is overwhelmed and without special "protection" it fails. There is no comparable phenomenon in Bitcoin, since noone is promising to pay anything. Who is defaulting on their promises on Bitcoin exchanges? Noone. It makes no sense. All trades require the buyer and seller to conduct business voluntarily. If a buyer cannot find a seller or vice versa, that just means they are unable to meet each other's expectations. If there are fluctuations in market price, some lose and some win. Welcome to free market.

Furthermore, you say that you're glad people are denouncing Bitcoins. This is just another example how the thread is overwhelmed by posts from people who are unable to make coherent arguments and rather use the opportunity to express their emotions.

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MaikU replied on Thu, Jun 16 2011 1:49 PM

I am very skeptical about bitcoins, but if it succeeds, it will be the second greatest human invention after the internet :)

"Dude... Roderick Long is the most anarchisty anarchist that has ever anarchisted!" - Evilsceptic

(english is not my native language, sorry for grammar.)

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I was not comparing bitcoins and FRB as systems, it was more like since both pieces of paper backed by nothing and bitcoins don't have any non-monetary value, it's ironic how the people who realize that and want to get out are stigmatized as ignorants, lobscure people and other insults.

Oh, and before you say that bitcoins can be hypothetically used to prevent spam hence they have non-monetary value, that's like saying that dollar bills have non-monetary value because you can use it for personal hygienics purposes. 

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MaikU:

I am very skeptical about bitcoins, but if it succeeds, it will be the second greatest human invention after the internet :)

 

 

Pretty much everything about bitcoins is amazing but that's not enough to qualify it as a reliable indirect exchange method, as it doesn't have any use but indirectly exchange goods. I mean, a couple of days ago in a matter of 48 hours its value in dollars went up 50%, went down by 70%, went up by 100%. There is no way we see many retailers accepting something as unstable as bitcoins in exchange for their tangible stuff.

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MaikU replied on Thu, Jun 16 2011 3:38 PM

that's one of the reasons why I am skeptical about it. I'd like to believe, but I would rather wait and see what happens.

"Dude... Roderick Long is the most anarchisty anarchist that has ever anarchisted!" - Evilsceptic

(english is not my native language, sorry for grammar.)

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Explain how Bitcoin qualifies as money more than anything else, like toilet paper and World of Warcraft gold.

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Nielsio replied on Fri, Jun 17 2011 11:42 PM

Don't Buy Bitcoins, part 2

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bitbutter replied on Sun, Jun 19 2011 7:21 AM
Bitcoins are not good for anything besides trading. You can't have a worse 'money' than that.

That's too strong a claim since their advantages when used for trading (there are several very important ones), may outweigh the disadvantage that they can only be used for that purpose.

A metal money thats sufficiently costly to store, protect, transport may very well work out, for many people, to be a 'worse' money than bitcoin wrt its ability to satisfy people's wants.

It is irrational to trade something which is a good for something which is not a good.

It would be, but since Bitcoin is an economic good, this doesn't apply.

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Clayton replied on Wed, Jun 22 2011 12:46 PM

This thread is incorrectly titled... should be "Can't buy Bitcoins." I'm not usually one for gloating and Schadenfreude but those damn Bitcoin people were really annoying, so... nyah, nyah told you so!!!

:-D

http://voluntaryistreader.wordpress.com
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bitbutter replied on Wed, Jun 22 2011 1:29 PM

@Clayton: 'Can't buy Bitcoins'

Puzzling thing to say.

@Nielsio: It's not clear to me how the cartoon addresses the rejoiners posted here already, it doesn't seem to as far as I can see.

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justmoon replied on Wed, Jun 22 2011 1:39 PM

What are you talking about? Bitcoin is being traded like normal on TradeHill, Bitomat, Bitcoin7, Bitmarket, Britcoin as well as over the counter. Price is 14-15$, which is still pretty bubbly imho. Anyway, the whole point of Bitcoin is that it's decentralized, so in my opinion this is just a good example of that. The largest, most vulnerable part of Bitcoin - MtGox - got completely taken out, yet the currency goes on without problems.

The only places where people ran into trouble is where they were over-reliant on MtGox, so for example a lot of automatic price converters got taken down, they should be made such that they use the prices from multiple exchanges. And of course people who left all their coins in MtGox can't get at it now, which is kind of a like having your gold at an insecure bank - you have institutional risk. In this case they should be ok once Gox comes back online, but let it be a lesson and don't keep your coins at an exchange, put it on USB sticks at multiple secure locations.

The whole thing does show though that a lot more work has to be done until Bitcoin is ready for the mainstream. This kind of vetting is necessary, the free market is getting rid of the insecure exchanges - they either adapt or they will go broke.

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Clayton replied on Wed, Jun 22 2011 1:59 PM

Where is all the money for these shiny new websites coming from? This whole Bitcoin thing is as fishy as a can of cat food.

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Maybe I should start a new thread warning people not to learn English, because it's not backed by commodities or by force, and if one day people lose interest in it it will wither away. Instead people should use hieroglyphics, because it has a good solid foundation (rock or at least papyrus), is very scarce and has been around for thousands of years. Clearly, an abstract language is pointless, because it has no other uses than communication. Hieroglyphics are superiour: you can use the rock to smash your opponents' head, and the papyrus to wipe your ass. That gives hieroglyphics a starting value and network effects will eliminate other competitors. By using induction, this proves that without a starting value a competitor will lose.

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Clayton replied on Wed, Jun 22 2011 4:57 PM

@Peter: I think you Bitcoin guys keep getting confused... we're not saying people shouldn't try things. I'm happy to see this Bitcoin experiment and it's actually fascinating to watch except for the sometimes annoying and know-it-all attitude of the hardliners. That said, the theoretical foundation for Bitcoin just isn't there. It's like an alternative energy research experiment... interesting and could even uncover some new facts and technology along the way but if close investigation shows the proposal is not consistent with the laws of physics, it's just not going to fly. Nick Szabo (one of the largely uncredited grandfathers of Bitcoin who is also mega-brilliant) has written a defense of Bitcoin here (scroll down, he links to an article he wrote on the origin of money). Unfortunately, Szabo suggests that Mises's regression theorem is just an account of how money can arise, rather than the only way money can arise. The simple fact is that something could never have been used in indirect exchange which was not first demanded in direct exchange. This is a praxeological fact, it's not just "one way things could be." From this fact, it immediately follows that a medium of exchange must have its origins either directly as a commodity or in a regressive chain of money substitutes which can ultimately be traced back to a commodity of some sort.

Let's look at Bitcoin from a purely physical point of view. The bits are mined by expending electrical energy. The proof-of-work bit string is basically a certification that such-and-such watts of electricity have been expended. This can be translated back into terms of physical goods expended to generate the proof-of-work... so many barrels of oil were drilled and burnt or so many tons of coal mined or so many cubic meters of water spilled over a generator, and so on. However, unlike a commodity substitute (a certificate for a bushel of wheat or a barrel of oil or a gold banknote), the proof-of-work certifies purely wasteful expenditure of energy. This is the polar opposite of how money arises. The point of using shells as money is not that it's costly to dive and find the right shells and then craft them into the desired shape. The point is that the shells were demanded for adornment (jewelry) and eventually became used as a medium of exchange for the usual reasons... high liquidity, fungibility, etc. Szabo is very brilliant but, in focusing solely on the issue of the costliness of producing a monetary commodity, he commits a rather elementary blunder. The near-zero cost of producing fiat money is not its only problem or even its most important problem. Instead of using paper to manufacture dollars, we could use soot from the burning of fossil fuels, stamped into the shape of a coin. Such tokens would be costly to produce (require the burning of fossil fuel) but would make horrible money because they have no commodity value. There is no demand for the monetary medium for its own sake in alternative (non-monetary) uses. This is the closest physical analogy I can think of to what Bitcoins actually are... with the exception that carbon soot coins could at least be produced as a by-product to some useful enterprise (powering an electrical plant) whereas Bitcoins would be equivalent to just burning up fuel for the sole purpose of creating the soot to create the coins.

Keep in mind that people used paper banknotes long before there was fiat paper notes. But no one ever accepted a paper banknote with really fancy un-counterfeitable designs (by the technology of the day) on it because "it's useful in exchange" and "has value solely on its usefulness in exchange." People only accepted paper banknotes insofar as such banknotes were immediately and directly convertible into money. A banknotes is a money substitute. A banknote is a bearer title and this is what any money substitute is. Bitcoins are title to nothing. A technology like Bitcoin could certainly be viable as some kind of money substitute. A full-dollar-reserve Bitcoin would be fantastic if you could solve the auditing-anonymity problem.

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For those interested in a simple English explanation of why bitcoin is doomed, based on Mises in Human Action,  just drop in on my blog:

Bitcoin Takes a Beating.

My humble blog

It's easy to refute an argument if you first misrepresent it. William Keizer

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Nielsio replied on Wed, Jun 22 2011 7:42 PM

Peter Schiff:

http://www.youtube.com/watch?v=vTr_hTC90oQ#t=3m14

 

Dough Casey:

"L: Do they have value in themselves?

 
Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.
 
I’ve always said that the dollar is an “I owe you nothing,” and that the euro is a “Who owes you nothing.” With Bitcoins – which no individual can be held accountable for and which have no value in themselves – I’d have to say they are a “No one owes you anything.” It was inevitable, therefore, that the scheme would collapse… at least in its present form.
 
Their main value seems to have been as a speculative medium. Worse, actually, in that they are – or were – based on finding a “greater fool” to pass them on to, for something of value. The bubble in Bitcoins is, however, just one of many to come as people try to get out of paper currencies in the years to come. With the bubble that arose in tulip bulbs in 17th century Holland, you might at least have wound up with a flower. This time, people just got stung.  The message is clear: Get used to bubbles, as governments print up more and more fiat money.
 
Bitcoin reminds me of the so-called “barter currencies” people tried to start in the U.S. some time ago, supposedly trading units of “barter.” People traded chits, where a barber might charge ten for a haircut, and a lawyer 100 for an hour of counsel. But they were just another paper currency, based on confidence. And, when you’re dealing with total strangers, confidence is hard to come by…"
 
 
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Clayton replied on Wed, Jun 22 2011 7:53 PM

Anyone still holding Bitcoins at $12 (on the 2nd largest BTC exchange listed on the above website) is crazy.

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Clayton replied on Wed, Jun 22 2011 8:02 PM

Nielsio:

 

Maybe if the UN starts denominating its member fees in Bitcoin... :-P

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Guys, esp. Clayton and Nielsio,

I have been trying to point out for a while that the regression theorem is based on arbitrary normative assumptions and induction. It's not praxeological. I thought my little analogy with the English language demonstrates the logical fallacies involved in the regression theorem, but it looks like I wasn't successful in communicating it.

If the regression theorem was true, by the same logic we would not have languages. The only use of languages is in communication, they have no use outside of it. Yet, they outcompeted other methods of communication. So it is not true that in order for a good that is subject to network effects (which also includes money) to outcompete others, it requires a value which is not related to that specific use that is covered by the network effects. Network effects were known at the time of Mises, but did not receive a systematic treatment yet, so he probably thought money is special. It's not, it's just another good subject to network effects, like communication.

Wikipedia says about network effects:

Network effects become significant after a certain subscription percentage has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service. As the value of the good is determined by the user base, this implies that after a certain number of people have subscribed to the service or purchased the good, additional people will subscribe to the service or purchase the good due to the positive utility to price ratio.

A key business concern must then be how to attract users prior to reaching critical mass. One way is to rely on extrinsic motivation, such as a payment, a fee waiver, or a request for friends to sign up. A more natural strategy is to build a system that has enough value without network effects, at least to early adopters. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base.

(emphasis added by me)

Clearly, Bitcoin does have some value to early adopters. Based on the quote from Wikipedia, once it reaches critical mass, it won't matter that it does not have value to other people apart from the network effect itself.

Furthermore, in another thread I listed at four normative assumptions that I could think of the regression theorem is based on. Two of them are untrue, one of them is science fiction but hypothetically can be incorrect and the last one is simply unsubstantiated. Here is the list again.

- the non-existence of government interference with money. This can create a gap and the gap can be filled by something that does not fulfill the regression theorem

- the non-existence of the digital. The digital is not a commodity, nor property, yet it can behave as quasi-commodity. Digital clearly outcompetes physical alternatives in some areas.

- the non-existence of replicators (Star Trek). Replicators make the value of all physical goods with known composition dependant on their weight, i.e. a kilogram of dung would have the same value as a kilogram of gold. There would still be scarcity (like there is still scarcity with computers and internet), but commodities would not be practically usable as money.

- homogeneity of requirements for a medium of exchange. Same as with languages. Or programming languages even.

While you two have been sticking to rational approach and unlike some others not resorted to emotional reactions to Bitcoin, I would like to stress that the issues I have raised have not been addressed yet.

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Clayton replied on Thu, Jun 23 2011 1:48 AM

Peter Šurda:

Guys, esp. Clayton and Nielsio,

I have been trying to point out for a while that the regression theorem is based on arbitrary normative assumptions and induction. It's not praxeological. I thought my little analogy with the English language demonstrates the logical fallacies involved in the regression theorem, but it looks like I wasn't successful in communicating it.

If the regression theorem was true, by the same logic we would not have languages. The only use of languages is in communication, they have no use outside of it. Yet, they outcompeted other methods of communication. So it is not true that in order for a good that is subject to network effects (which also includes money) to outcompete others, it requires a value which is not related to that specific use that is covered by the network effects. Network effects were known at the time of Mises, but did not receive a systematic treatment yet, so he probably thought money is special. It's not, it's just another good subject to network effects, like communication.

Wikipedia says about network effects:

Network effects become significant after a certain subscription percentage has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service. As the value of the good is determined by the user base, this implies that after a certain number of people have subscribed to the service or purchased the good, additional people will subscribe to the service or purchase the good due to the positive utility to price ratio.

A key business concern must then be how to attract users prior to reaching critical mass. One way is to rely on extrinsic motivation, such as a payment, a fee waiver, or a request for friends to sign up. A more natural strategy is to build a system that has enough value without network effects, at least to early adopters. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base.

(emphasis added by me)

I think there is a logical problem with your analogy of language since communication itself is a network and language (I assume you mean spoken language) is just one medium by which humans communicate.

Anyway, the quote you gave from Wikipedia answers your argument: "A more natural strategy is to build a system that has enough value without network effects, at least to early adopters. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base." That is precisely what the regression theorem says... the early adopters of what would eventually become recognized as money were not consciously going about trying to establish a medium of exchange or reach a "critical mass", they simply found the use of highly liquid goods as media for indirect exchange to be profitable. As Dr. Hoppe says on the subect, all we need to do is assume self-interest and from this flows the division of labor and from this flows indirect exchange (money). So, yes, the regression theorem and the Austrian account of the emergence of money is praxeological and not inductive.

- the non-existence of government interference with money. This can create a gap and the gap can be filled by something that does not fulfill the regression theorem

The regression theorem does not assume non-interference from government. Please listen to this lecture on the subject by Dr. Hoppe (a bit long, but definitely worth it). In fact, this was one of the central insights of the regression theorem... even government is subject to the regression theorem. Nobody can escape the regression theorem so long as any form of voluntary exchange is possible (i.e. outside of complete tyranny).

- the non-existence of the digital. The digital is not a commodity, nor property, yet it can behave as quasi-commodity. Digital clearly outcompetes physical alternatives in some areas.

This is gibberish as far as I can tell. I'll help you out and suggest that perhaps you mean that certain cryptographic protocols (hashing, public-key signing, etc.) are possible with the assistance of a computer that would not be possible with just static production technologies (i.e. minting, printing, etc.)?

- the non-existence of replicators (Star Trek). Replicators make the value of all physical goods with known composition dependant on their weight, i.e. a kilogram of dung would have the same value as a kilogram of gold. There would still be scarcity (like there is still scarcity with computers and internet), but commodities would not be practically usable as money.

I reject this as a valid objection.

- homogeneity of requirements for a medium of exchange. Same as with languages. Or programming languages even.

You'll have to elaborate, I don't understand how you're using these terms.

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ribuck replied on Thu, Jun 23 2011 4:07 AM

Clayton wrote: The point is that the shells were demanded for adornment (jewelry) and eventually became used as a medium of exchange for the usual reasons... high liquidity, fungibility, etc

When you phrase it like that, the parallel with Bitcoin becomes apparent.

Just as shells were first demanded for adornment, so were Bitcoins. For two years they were generated and traded as nothing more than a sign of "geek coolness". That's just as genuine an adornment as the wearing of shells.

What made Bitcoins "cool" for geeks? Cool enough that geeks would adorn their forum signatures with their Bitcoin public keys? The geek coolness probably arose from the excitement factor of "hey wow, we're the first people to be using this cool new peer-to-peer digital commodity that's independent of banks and might one day supplant fiat currency".

Then, after a couple of years, a guy offered 10,000 bitcoins for a couple of pizzas (pretty-much for lolz) and eventually found someone to trade with, and Bitcoins started to become used as a medium of exchange for valid reasons: low transaction cost, fast confirmation, easy use across national boundaries, irreversibility, etc.

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bitbutter replied on Thu, Jun 23 2011 5:29 AM

@Clayton: Is there any empirical evidence you can imagine that would overturn your belief (as far as I can tell) that BitCoin cannot be legitimate money? Or persuade you that your complaints against it are not relevant? (eg. a given market size, a certain coverage of accepting traders, etc)

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Clayton,

ribuck already pointed out the obvious. Let me address your post in a bit more detail.

Clayton:
I think there is a logical problem with your analogy of language since communication itself is a network and language (I assume you mean spoken language) is just one medium by which humans communicate.

Communication is not a network. But if you combine the need for communication and the fact that communication is more subject to network effects than other needs, you get a network. Just like people want to communicate, people want to trade. That creates a demand for a medium by which to communicate or by which to trade.

Clayton:
that is precisely what the regression theorem says... the early adopters of what would eventually become recognized as money were not consciously going about trying to establish a medium of exchange or reach a "critical mass"

The wiki quote does not say that it's necessary that the early adopters are unaware of the potential network effects. As ribuck pointed out, Bitcoin is valued, because otherwise people would not use or trade it. The wiki quote implies that the original reason for the value is irrelevant to the utility of the network effects manifesting themselves later. The regression theorem (or at least the interpretation that is used to refute the utility of Bitcoins), however, combines those two by an arbitrary connection. The connection may quite well be often there, but it is not a praxeological connection. That's the fatal error in it. It's inductive reasoning (based on observation of some historical facts) rather than deductive. Observing other historical facts refutes the connection.

Clayton:
all we need to do is assume self-interest and from this flows the division of labor and from this flows indirect exchange

But the self-interest does not require either that people are ignorant of the potential future network effects, nor does it require that there is a separate value in that good for other people than the critical mass. Two more unfounded assumptions.

Clayton:
The regression theorem does not assume non-interference from government.

If it did not, then people would choose gold (or something like that) whenever force was absent from the relationship. But the network effects work both ways. People often use fiat even in situations where there is no force involved. I for example often buy things from Asia, and I pay in US dollars. I live in Europe. US dollars are not legal tender either here or there. Once you realise this, you can also realise that just like negative reinforcement can affect the outcome, positive reinforcement (e.g. a community project like Bitcoin) can also influence the outcome. That makes the whole argument fall apart.

Clayton:
Nobody can escape the regression theorem so long as any form of voluntary exchange is possible (i.e. outside of complete tyranny)

See above. Network effects can influence the outcome in both ways. While network effects have natural causes and are, from this point of view, unavoidable, it does not mean that people who are aware of this cannot influence the outcome to their advantage. If the regression theorem was merely saying that money is always subject to network effects, I would be fine with that. But a claim like that has a very limited use and you certainly can't derive the superiourity of gold or the inferiourity of Bitcoin from it. Furthermore, as I elaborated above, regression theorem says more, it says that the result of the network effects cannot be deliberately influenced. I provided multiple counterexamples as well as theoretical reasoning why this is untrue.

Clayton:
This is gibberish as far as I can tell.

This point is difficult to explain for me. But read Kinsella's Against Intellectual Property. You cannot own the digital, and you cannot trade it or steal it. But it can nevertheless exhibit some behaviour of goods. Furthermore, if I was using the same inductive reasoning before the age of computers, I could "prove" that there would forever be physical books because that is what always happened, and there would never be books that are not sold or traded in a media-agnostic way (e.g. by downloading). I thought the example with hieroglyphics demonstrated the absurdity of the argument but evidently it is not easy get it through.

Clayton:
I reject this as a valid objection.

The example with replicators is a reductio ad absurdum of the regression theorem. You do not provide a reason why this should be rejected (other than, of course, not rejecting it would show that your argument is invalid).

Clayton:
You'll have to elaborate, I don't understand how you're using these terms.

People look for certain features in a medium of exchange, like divisibility, high value per unit of weight, durability, being easy to transport and so on. A specific good provides a specific combination of these in different ratios. In order for the regression theorem to be correct, it would require either that one good trumps all the others in all of these features, or at least a the ratio of these features required for all transactions is stable and constant. Neither of these is true (I think this is obvious, but if you do not believe and want examples, I can of course provide). This is just another way of saying that there is a limit to the network effects.

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ribuck replied on Thu, Jun 23 2011 10:10 AM

Anyone still holding Bitcoins at $12 (on the 2nd largest BTC exchange listed on the above website) is crazy.

Do you mean they are crazy because you expect the market price of Bitcoin to move towards zero? If you are right, you can make an absolute killing with Bitcoin put options.

Anyway, Bitcoins are trading on that same exchange for $15 now, so I don't think the holders are too upset.

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