Hi all,
I recently wrote an article on my blog entitled How To Use Bitcoin – The Most Important Creation In The History Of Man, in which I describe the peer to peer electronic currency Bitcoin and how to go about using it.
I though I would share this with you all since it makes for some interesting discussion.
For those of you who are unfamiliar with Bitcoin, take a moment to read the article do some googling to learn more about it.
I've looked into it and have concluded that, as a currency, it is functionally equivelent to the direct exchange of specie for goods and services. The only potential flaws in the system that I can determine is the strength of the encryption algo that is used to secure each "coin" and subsquent transactions. But that's not a really problem if one considers that if the algo becomes unsecure in the future, people can simply switch to a new currency that is based on an even stronger method of encryption.
The current algo it uses is considered secure by the NSA and is not currently in any danger of being able to be cracked.
There's no other real down sides and lots of potential upsides. Currently a coin is trading at over 10 USD. The coin market appears to be somewhat volitile in that it has recently surged in USD prices, but I think that is simply because more people are becoming aware of it. It has been in operation for a few years now, but it has only recently become popularized.
I haven't seen any articles on this by the Mises Institute, so I figured I'd post this here and hopefully encourage some economist to do more work on it.
If there are BTC dealers who will loan BTC, I'm more than happy to take out a BTC loan at $10/BTC to be repaid in BTC. BTC is obviously in a bubble, it was under a dollar just a few months back.
I'll make an analogy to BTC to hopefully explain the problem with it. Imagine a "guerilla paper currency network" consisting of thousands of printing presses distributed around printing an un-counterfeitable "currency." Also, the currency includes some natural element that is costly but useless so only so much of it can be printed up over time.
The question is this: Would people switch to using the guerilla paper currency over their legal, fiat currency? Perhaps, in a free market in currency, some would try it. However, we do not have a free market in currency. It will not be difficult for the government to impose a tax on BTC or prosecute the use of BTC as "unlicensed money transmission". The anonymity of the transactions is only technical... if I order a book from AmazonBTC.com, I have to send them my home address to where the book is to be shipped... there is no such thing as anonymity in the sense that programming nerds think of it.
So, if BTC ever does begin to represent any kind of competitive challenge to established, fiat currencies, it will be shut down and in short order. All the crypto algorithms and exchange protocols in the world won't save BTC. It will either die in obscurity or it will be killed by the dollar establishment. Mark my words.
Anybody willing to loan me some BTC (I'll pay 20% APR, way above market rates!!!)???
Clayton -
I hope the Bit-Coin movement gains steam and becomes a legitimate competitor to the horrible US Dollar. I prefer to be able to touch my money. That leaves precious and semi precious metals as the only real contenders for a currency. It is a lot easier to create Bit-Coins just like it is easier to create US Federal Reserve Notes than procuring, mining and minting real coins. So my preference is for reality. But I really hope the Bit-Coin works and takes down the dollar. Then precious metals will have a place and hopefully the Bit-Coin as well.
I don't think the government is capable of shutting it down.
The most they could do is declare transacting in it to be illegal, but since (with proper precautions), transacting in it can't be traced, making it illegal would simply be an excersize in futility.
Further, the government would have to justify why it should be illegal while trade in foreign currencies and digital tokens like "facebook credits" should not be. The courts would basically have to declare barter to be illegal. Obviously this is problematic for the government no matter how they try to go about doing it.
As for your analogies to its creation and operation, it is far more akin to people digging up gold nuggets and transacting with them than a bunch of people running around with printing presses.
But you're uderestimating the power of intimidation. Sure, the government declaring the download of copyrighted materials to be illegal is absolute futility. But if you have internet access at work, your employer will likely have blocked BitTorrent and any other peer-to-peer filesharing system. This has nothing to do with Internet security and everything to do with legal CYA. Your employer isn't going to risk prosecution by the Federal government as a result of your behavior. Doesn't matter that the government can't stop you from downloading once you get home.
Do you think any major corporation is going to deal in a currency declared illegal by the US government? Hell no. BTC has no future. If there's a way to short it, I would love to do it because I like having more money.
Nearly every forum that I frequent has a bitcoin sales man trying to convince everyone to join the party.
@Jack Roberts: It's up 10x from just 6 months ago... this is a pump & dump if there ever was one.
Clayton, no, this time it's different.
z1235: Clayton, no, this time it's different.
LOL. What really cracks me up is the hubris of these guys in thinking they can create a fiat money without the prerequisite for fiat money: government force. The "we represent competition to fiat money on its own terms" argument is novel but not persuasive because Bitcoin can be shut down with the stroke of a pen and it will be if it begins to have any sort of success, unless it is already blessed by those who Dwell on High, i.e. the Establishment, which I doubt.
There can never be too many Hoppe lectures in the world:
Im calling BS on bitcoin. Its a classic bubble Price of it fueled up by speculative bidding, has little practical use. Yeah what, i can buy some small time web hoster and hippie microbrewer products? Big fuckin deal. Its useless, and the sooner the dumbasses stop wasting their gpu cycles on calculating these worthless nerd algorithms to make stupid bitcoins, the better for them.
Because new currencies are automatically accepted as payment everywhere.
By the way, try exchanging some silver coins for merchandize next time you head over to Amazon for some books. At current prices, Bitcoins have around a 90 million dollar market capitalization. That is a lot of ching. You don't think retailers are gonna wanna part of that action?
So far I've seen some pretty weak arguments against the economic efficacy of bitcoins.
The arguements amount to:
1. It's not gold or a hard commodity, therefore it must be bad. (eventhough it takes massive resources to produce a coin).
2. Government can shut it down (as if it can't do that for gold or silver).
3. It's a pump and dump scam, with absolutely no proof or anyone that you can point your finger at who might benefit. (I agree it is probably in a bubble, that doesn't invalidate the economics of the currency system)
Great arguments.
I expected better from this place. Hopefully someone that could actually give me a run for my money. I guess not.
Man, why knock counter currencies? I mean, a currency has to start somewhere and as Suede points out a new currency will not be accepted by everyone and may never be accepted by everyone. That could even be a desirable situation in a world where currencies are allowed to compete freely.
1. It's not gold or a hard commodity, therefore it must be bad. (eventhough it takes massive resources to produce a coin). 2. Government can shut it down (as if it can't do that for gold or silver). 3. It's a pump and dump scam, with absolutely no proof or anyone that you can point your finger at who might benefit. (I agree it is probably in a bubble, that doesn't invalidate the economics of the currency system) Great arguments strawmen.
Great arguments strawmen.
1. Like any fiat currency, it has no non-monetary value. This means that it could not possibly become money through purely catallactic (voluntary exchange) means. That does not preclude the possibility of a government or government-like organization (say, the IMF or BIS) seizing on the idea and issuing their own digital fiat currency. However, sans government force, fiat money is impossible in any form, paper, tin, digital, you-name-it.
2. Actually, despite over a century of determined efforts to this end, governments have been unable to eradicate the use of gold and silver for their non-industrial use: insuring against fiat monetary collapse, that is, acting as a shadow-money. But even if the government had succeeded in eradicating the use of gold and silver for non-industrial uses, you've granted my point that the government could shut down BTC.
3. Pump & dump was hyperbole - I just mean that it's in a bubble. If I could find someone willing to loan BTC for shorting purposes, I would gladly short it. I wouldn't mind 10x earnings on the little bit of spare cash I have.
Clayton:Do you think any major corporation is going to deal in a currency declared illegal by the US government? Hell no.
That might actually be one of the best points I've heard made on this subject. The Feds were able to confiscate gold in a time when prohibition of alcohol required a Constitutional amendment. How much would it really take to declare "we need to protect the integrity of the dollar. Transacting in non-legal tender is like stealing from Americans everywhere"...or any of the similar arguments made for confiscating gold back in the 30s.
How hard would it really be to make transacting in bitcoins illegal? It would be easier and less controversial than sneaking into a foreign sovereign nation and assassinating someone.
And then, yes, it would be difficult to stop people from trading them between themselves...but who the hell is going to continue to use a currency that you can't transact in with any reputable business?
1. Bitcoin is not a fiat currency. Fiat means "by decree" and has value only because of government regulation or law. Bitcoin has value in the same way a Windows Operating System has value. It has all the inherent utility of gold and serves the exact same functions as gold in a monetary capacity, only unlike gold, it can do it over a wire without having to be represented by proxy.
2. Government's have been trying to irradicate bittorrents and have tried repeatedly to shut them down. However, I can still go to innumerable sites and download movies using bittorrents. Bittorrents are impossible for governments to shut down. Likewise, bitcoins are impossible to shut down short of pulling the plug on the entire web.
----
As for the comments that no reputable business would do business in Bitcoins if the US government declared it illegal - I would argue that perhaps no US BUSINESSES would do business in bitcoin, but since Bitcoin is a global market created currency, any country that is not under US jurisdiction would be free to pursue transactions in Bitcoin.
I could simply order from an Iranian or Somalian company over the net.
Michael Suede: 2. Government's have been trying to irradicate bittorrents and have tried repeatedly to shut them down. However, I can still go to innumerable sites and download movies using bittorrents. Bittorrents are impossible for governments to shut down. Likewise, bitcoins are impossible to shut down short of pulling the plug on the entire web.
'Net neutrality' says hi :D
Michael Suede: ---- As for the comments that no reputable business would do business in Bitcoins if the US government declared it illegal - I would argue that perhaps no US BUSINESSES would do business in bitcoin, but since Bitcoin is a global market created currency, any country that is not under US jurisdiction would be free to pursue transactions in Bitcoin. I could simply order from an Iranian or Somalian company over the net.
Last I heard bitcoin is not so anonymous to begin with (source: http://techliberation.com/2011/06/03/bitcoin-silk-road-and-lulzsec-oh-my/) so you may have Feds knocking on your door soon ;)
Michael Suede:1. Bitcoin is not a fiat currency. Fiat means "by decree" and has value only because of government regulation or law. Bitcoin has value in the same way a Windows Operating System has value. It has all the inherent utility of gold and serves the exact same functions as gold in a monetary capacity, only unlike gold, it can do it over a wire without having to be represented by proxy.
Microsoft Windows can be used for something. It runs other software on hardware.
Gold can be used for something. It has physical characteristics suitable as a producer good.
Gold was that good selected on the market for it's characteristics as medium of exchange (cut it in two and it still has the same value, a high value per mass, doesn't deteriorate, identifiable, etc).
Bitcoins on the other hand have no production or consumption utility. They can be traded, sure. But what is being traded? Is it a valuable good? No. Is it a money substitute (a promise to deliver a good)? No.
These proclammations that "Bitcoins are as good if not better than gold!" is perfectly sufficient to explain what is going on with the bitcoin bubble. There are thousands of people who get suckered into this and believe that because in the past there was a price paid for them (including by themselves) that in the future a good price will be paid for them.
The people who paid a low price and sell for a high price are winners. But to keep this line of winners going there needs to be an ever greater line of buyers, which is the reason why people such as yourself are so adamant about it's 'value'. Because once sanity starts to sink in, the prices paid for bitcoins will crash and the holders of bitcoins at that time will be the losers.
People are always going to have a voracious appetite for tulips; house prices could never fall across the country simultaneously; BitCoins will have value in the future by virtue of exchange demand.
Some things never change.
One could at least smell a tulip, enjoy its beauty, or use it as a means toward getting laid. Bitcoins, not so much.
So far I still haven't seen a single person present an argument that refutes the economic efficacy of bitcoins as a currency.
It's the same thing being repeated over again - bitcoins aren't gold, therefore they are bad.
Well no kidding they aren't gold. But they serve the exact same economic functions as gold.
They ARE a market currency. Bitcoins have value because the market says they have value. No government is running around demanding that people buy bitcoins or transact in them. They act exactly like gold in terms of the economics of the monetary system.
I'm still waiting for someone to give me an argument other than "bitcoins aren't gold, therefore they are bad". That is not an economic argument. That is a religious belief.
Why do you need an argument at all? Be merry buying/creating/exchanging your bitcoins and alow everyone else to refuse to do the same whatever their reasons may be. Not everyone bought the Dutch tulips, after all.
It's silly to compare this to the dutch tulip craze.
Bitcoins do not degrade over time.
Bitcoins can not be grown in nearly infinite amounts.
Bitcoins do not take up wearhouse space or require delicate shipping methods
Bitcoins are divisible to 8 decimal places and retain their value, tulips do not.
In fact all the properties that make gold such a wonderful currency are inherent in Bitcoins.
Listen to this lecture by Block on money and then tell me which point Bitcoins don't meet:
http://www.youtube.com/watch?v=QFbHw7VsNlI
Block reiterates about 20 times in that video (that I have uploaded) that money is a commodity.
The fact that bitcoins are so easily tradeable should be a hint to it's consumer and producer value (i.e. nil).
Bock reiterates about 20 times in that video that markets decide what money is, and if markets decide that bitcoins are money, then so be it.
Block says money must always start out as a commodity, but that does not mean that money must always remain a commodity.
Bitcoins are DIGITAL COMMODITIES - They are unique. They can not be arbitrarily replicated. They are valued for the properties they have.
At the end of the video Block lists off a series of properties that make Gold money. Everything that Block lists off, Bitcoin exceedes gold in terms of qualties.
Block says repeatedly that the key to a good money is that people are free to chose it. Markets decide what money is, and right now, the markets are deciding that Bitcoins are money.
Michael Suede:So far I still haven't seen a single person present an argument that refutes the economic efficacy of bitcoins as a currency.
That's because you don't want to see one.
False. I haven't seen that argument at all. I've seen the argument that: "Bitcoins are not a commodity. Bitcoins have no non-monetary value (meaning they aren't good for anything other than facilitating trade. Therefore Bitcoin is not a money."
I've never heard anyone say "money has to be gold". I've never heard anyone say "if it's not gold, it's bad". I've never heard anything even close to that. It is a strawman you have created to characterize the arguments that you do not wish to hear.
[Bitcoins] serve the exact same economic functions as gold.
I can use bitcoins to line the visor of my astronaut helmet?
Bitcoins are DIGITAL COMMODITIES
You clearly have no idea what the word "commodity" even means. Is the output of a random-number generator a commodity? I would argue that the output of a random-number generator has more commodity value than bitcoins do. Note that this website gives away large volumes of random bits for free, so that should give you an idea of just what the commodity value of a "bit" really is.
I can't sell random strings of numbers for 18 real world dollars right now, unlike a bitcoin.
Markets decide what has value and what money is.
@Suede: *shrug... I'm still looking for someone to loan me BTCs... if you're willing to earn a big profit in BTC, I will sign a real-world contract with you to repay you 150 BTC in one year's time in exchange for a loan of 100 BTC today. $18 is total bullshit and I'd be more than happy to relieve you of your unwanted money.
Markets do not presently decide what is money unless you define "market" in a very tortured way.
Why are austrians suddenly undercutting their positions when it comes to bitcoins? The increase in the price of bitcoin is not credit driven, nor even inflation driven. There is no reason for there to be a cluster of errors specifically in bitcoins. There are no policies favorable to buying bitcoins in place by the government. Nobody is giving out massive loans to people who aren't good debtors in order to buy bitcoins. All the reasons for a bubble are absent in bitcoin.
Are we suddenly giving into the idea that the Bull and Bear actually Exist?
Just so you know, I have 4 bitcents, given to me for free from bitcoin faucet and bitcoin bonus.
@Sam: There doesn't need to be artifical monetary expansion or government intervention in order for pump-and-dumps to occur.
Michael Suede:Block says money must always start out as a commodity, but that does not mean that money must always remain a commodity.
And what commodity did bitcoins start out as?
And I find it interesting you have not even acknowledged any of my questions or responses to your accusations. Perhaps you'll do us the courtesy of answering,
1. Whats to stop a govenment from banning BitCoin at any moment?
2. What happens to BitCoin IF it gets banned in the US?
3. Also please address the issue that there is virtually nothing available to purchase with BitCoin.
They have all of the necessary properties of being a called a commodity and trade exactly like a physical commodity would trade.
My full response:
http://www.libertariannews.org/2011/06/06/libertarian-goldbugs-hating-on-bitcoin-free-market-money/
Michael Suede:I clearly explained in my article above (which you didn't read) that bitcoins ARE commodities. They have all of the necessary properties of being a called a commodity and trade exactly like a physical commodity would trade.
Did you also answer all of the points I've listed throughout this thread too? Because that would really increase the utility of my reading it. If not, would you please address those points here please?
I think so.
I didn't realize I did not post that link in this thread yet.
It should address all the major points.
Max Keiser thought the article was good enough to run on his site.
Michael Suede:I think so.
Wait...you're not even sure if an article you wrote addresses a few simple, and quite obvious, and incredibly important issues regarding the subject you have so vehemently been defending this whole time?
The article addresses the economics of the currency system.
Your questions on what would happen if the government bans the currency (which has nothing to do with its economic efficacy) are not addressed.
However, Bitcoin is a peer-to-peer network that is impossible for the State to shut down. A ban on the coins would only serve to make them more valuable and legitimize them as a real threat to the monetary monopoly. Bans make things more popular.
The government can not stop Bitcoins any more than it can stop Bit Torrents.
Further, it is a new currency barely two years old. it is ridiculous to expect it to be widely accepted at the present moment. It only recently gained national media attention. Further, it has only been in the past month that its value has reached a substaintial market capitalization, thereby making it worth retailers while to accept.
Did you even read your own thread? You so condescendingly accuse me of not reading an article that you claim to have posted (when you actually had not), and it does not even appear that you have even read the actual comments in this thread you created.
One more time. If bitcoins were declared illegal, (which would not be hard, as supported in the link) do you think any major business is going to accept them or deal with them in any way? Of course not. And who the heck is going to continue to use a currency that you can't transact in with any reputable business?
@Sam Armstrong: There's nothing in Austrian theory that says that speculative booms and busts are impossible absent government intervention. The ABCT argument carries so much weight specifically because it is not a random sampling of entrepreneurs who commit predictive errors... everybody gets it wrong during the inflationary boom.
In addition, the government does play an indirect ideological role in the rise of Bitcoin. People believe that fiat money is natural because at least a century of government propaganda and policy has all but turned the world upside-down in terms of the average person's conception of money. Commodity money is seen as "inconvenient" "barbaric" "outmoded" and that "no one would voluntarily use it over the more convenient fiat money" while fiat money is seen as "backed by the full faith and credit of the government." The fanaticism surrounding Bitcoins is based on the prevalent belief of the masses that fiat money is natural and would arise even absent government force. Believing the government's propaganda that it has repealed the law of gravity by Act of Congress will not cause you to float when you jump off the cliff. Bitcoin believers are deluded, plain and simple.
"@Sam Armstrong: There's nothing in Austrian theory that says that speculative booms and busts are impossible absent government intervention."
I beg to differ.
Of all places to hear such nonsense, this is the last forum I would expect to hear it on.
ABT expressly says the manipulation of interest rates by government or private banks through manipulation of the money supply is cause of the boom bust cycles.
If the government isn't directly manipulating rates through a central bank, then government has to protect private banking interests by preventing fraud charges from being filed against fractional reserve banks. That IS government intervention by not acting to protect private property rights.
Either way, it is the manipulation of interest rates by direct government intervention or government ignoring property rights that bring about business cycles.
Please explain to me how fractional reserve banking or interest rate manipulation would be possible with Bitcoins.
The nature of bitcoins is such that interest rate manipulation or fractional reserve banking with them is impossible.
Sam Armstrong:Why are austrians suddenly undercutting their positions when it comes to bitcoins? The increase in the price of bitcoin is not credit driven, nor even inflation driven. There is no reason for there to be a cluster of errors specifically in bitcoins. There are no policies favorable to buying bitcoins in place by the government. Nobody is giving out massive loans to people who aren't good debtors in order to buy bitcoins. All the reasons for a bubble are absent in bitcoin. Are we suddenly giving into the idea that the Bull and Bear actually Exist?
I had forgotten to respond to this and Clayton got it. But to simplify and reiterate his point, he's just saying bitcoins are overvalued. I suppose it depends on how exactly you want to define "bubble", but what Clayton has been talking about in this thread is that the people involved in bitcoin are wrong. That's it. His argument is that they mistakenly place more value on the bitcoins than they are actually worth in terms of all other goods in the market.
It's the same as if I created a new company manufacturing widgets. Widgets aren't really very useful now, but a lot of people are convinced that they will be in the future...people believe that widgets will be widely sought after as an alternative to some good most people already use (making them more valuable)...and of course the more people that use widgets the more useful they become (which in turn makes them even more valuable). Based on this belief about future value, people are willing to pay much more for shares in my company than they otherwise would.
This is what Clayton is saying is the case with Bitcoin. You don't need new money being printed for people to mistakenly be willing to overpay for something and thus raise its price to an artificial level...especially not something starts off as basically a penny stock. It doesn't take much for something that's 6 cents per unit to see a price jump. And sure, if you look at it as a percentage, an increase to $20 over two years is ridiculous (which kind of supports Clayton's point)...but you don't need an increase in the money supply to show a 33,000% movement in something when that thirty-three thousand percent equates to $19.94.