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Bitcoins *prove* Mengerian account of money creation?

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kendo451 replied on Mon, Oct 1 2012 11:10 AM

Gold bugs also need to educate themselves on the history of digital money and where Bitcoin fits into the picture.

The attempts at "digital gold currencies" that sprung up shortly after the widespread adoption of the World Wide Web (1996 for e-gold) were specifically attempts to bypass statist controls over money and to provide a free-market P2P payment system based on gold.  (Essentially a gold derivative or gold voucher.)

While the market embraced these systems, or at least, A market embraced them - about ~$6 billion of digital gold per year was turning over at the peak of the digital gold era in 2006 - ultimately it was the state that crushed the digital gold systems.

Bitcoin was invented only a year after the US Treasury Department's 2007-2008 intifada against digital gold companies.  (They indicted or otherwise shut down five US gold/silver based currency systems in that time...)

Bitcoin was a market reaction to state interference in the digital gold market.  The only way to allow such a market to exist in a way that the state could not control was to decentralize it (so indicting one, or 100 people, would not affect the system), and to devise a way of storing value solely as information - beacuse any digital gold system depends on physically stored gold - that the state can seize.

The inventor of Bitcoin deliberately imitated the properties of gold as best he could using the art of financial cryptography to limit both couterfeiting, and limit the growth of supply.

The result is that the "black market" or Systeme D" has embraced Bitcoin and seems thus far to be successful in using it to bypass State controls.

The question is how long this will last.  The NSA has some amazingly powerful resources at its command.   The question is whether the cost of those computing resources are low enough to make it possible for the FBI and other agencies to prosecute the trade in "prohibited goods" enough to actually deter the masses from buying them.

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AJ replied on Mon, Oct 1 2012 11:16 AM

I'm starting to side with Anemone: theory is hard to apply, and how to apply it is controversial; what is not controversial is that if you have 100,000 bitcoins you are in a rather comfortable position financially (the odds that the price dips enough to make this untrue before you can cash out are quite low, and that was true even in the thick of last year's bubble burst).

To indulge my theoretical bent, I'll put forward this theory: When there is already a quasi-universal medium of exchange (e.g., US dollars), any other tiny niche medium of exchange could "piggyback" on that, because even if only 100 people say they are willing to accept the new crazycoin as money, if they can easily set up a cash-for-crazycoin exchange and people can easily access it, and if that exchange sticks around for 2-3 years (as Bitcoin has) while being even somewhat stable, and if crazycoins have some major advantages as a medium of exchange over dollars, it makes sense for many people to accept them in certain situations.

For example, someone selling something where it is only possible to make the sale in crazycoins may do so even in spite of their belief that crazycoin is a silly, phantom, risky, bubble, tiny-nerd-niche game token, because they know the chance they can exchange the crazycoins for dollars in time - before they collapse - is sufficiently high to make the transaction worthwhile. Bitcoins can absolutely be exchanged for dollars and the price has been very steady recently for the past few months at least.

That Bitcoin fulfills those improbable if's is already noncontroversial: Mt. Gox and other bitcoin-to-cash exchanges exist and do swift business, it has been around for over two years (along with other exchanges), and transacting in bitcoins does have some major advantages.

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Anenome replied on Tue, Oct 2 2012 10:40 PM
 
 

Peter Šurda:
Furthermore, as I said, Mises neglected to address money as service. From this neglect, some people incorrectly deduce that it does not exist.

Right, this is what SD has continually failed to even address, much less understand.

 
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Right, this is what SD has continually failed to even address, much less understand.

All I ask of the bitcoiners is one simple thing, which, after dozens of pages of ramblings, none of them has done.

State Mises' Regresssion Theorem, summarize the proof, then show at exactly which line of the proof his argument fails for bitcoin, and why it fails at that particular line.

So far, after all this verbiage, nobody has shown exactly where bitcoin being "money as service" causes a particular part of Mises argument to fall apart.

So guys, tape a note to your bathroom mirrors. Focus. "Where exactly does the proof fail?" Memorize this. Then you will either retreat in embarrassment, or more likely. spew forth some venom, but in any case you will see that you cannot accomplish the simple task that will prove your point. 

If you want to be taken seriously, mere vague assertions don't cut it. 

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Smiling Dave,

for the time being, I'll ignore that I already did formulate the regression theorem to you, and your only reaction was that you disagree, without any explanation.

Nevertheless, in the meantime I have come up with a better formulation of the regression theorem:

  • Once a medium of exchange is sufficiently liquid, it can sustain itself through the network effect (liquidity creates demand)
  • Before a medium of exchange is a medium of exchange, it must be liquid
  • Before it is liquid, it must have a price
  • Both of these are fundamentally market phenomena, i.e. both price and liquidity must be established as a catallactic process

Bitcoin has a price, and is relatively liquid. Not as liquid as money, not as liquid as some blue chip stock or precious metal ETFs, but I would put it right after that. You can trade Bitcoin 24/7, from anywhere. There's a minimal bid-ask spread and a relatively high availability of ready buyers and sellers. You don't have this with any physical commodity (apart from money), only with financial instruments. I already told you that changes in liquidity, not changes in price, are relevant for predictability of Bitcoin as a medium of exchange in the future. Between February and May 2012, for example, the price fluctuated less than the price of silver (I did not actually calculate this myself, but people claim it), but the liquidity (measured on Mt. Gox BTCUSD market) tripled (at 0.001 threshold) or doubled (at 0.01 threshold). I did calculate the liquidity myself and will publish it eventually.

So, bitcoin adheres to the regression theorem. It has a price and it is liquid. It's not money (yet), but it is a secondary medium of exchange (Mises) or quasi-money (Rothbard).

Commodity money adheres to the theorem, because the initial price is based on the non-monetary uses. Fiat money adheres to the theorem, because the initial price is created by a peg (and through Gresham's law, it then pushes the preceding money out of the market).

Why Bitcoin had an initial price and why it became liquid I leave open for a debate. Jon Matonis speculated about that, Robert Murphy speculated about that. For the purpose of the regression theorem, it's irrelevant. Similarly as your denial is irrelevant.

For the future, the most important thing to realise is that unless there is a major exogenous change, the users of Bitcoin do not have anything to switch to. Neither fiat nor precious metals can beat the technological innovation in transaction costs Bitcoin provides, and other cryptocurrencies have comparably lower liquidity.  Fiat/precious metals offer a higher liquidity, but that's often not enough. There are plenty of businesses which are either highly sensitive to transaction costs, or which would be heavily burdened by transaction costs if they switched. This creates plenty of demand for Bitcoin. As its liquidity increases, this further lowers the transaction costs (in the broader sense), creating a reinforcing spiral.

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Pete,

The bitcoin people have basically three arguments to defend bitcoin from the regression theorem.

1. They mis-state the theorem, and argue that bitcoin is consistent with their mis-statement. This would be like someone arguing that there is human life on Mars, despite a theorem that states humans need oxygen to live, and Mars has no oxygen. They claim the theorem states you need nitrogen, and Mars has plenty of nitrogen. Pete has done this in his post right here, but since it is irrelevant to the "money as service" argument, we will move on. See point 3 below.

2. They claim that the theorem is proven wrong, because bitcoin is a counterexample to it. This would be like someone claiming humans do not need oxygen to live, because there are humans living on Mars right now. He will then point to some pile of rocks and claim it is a human. With bitcoin, this consists of arguing that bitcoin is generally accepted right now. Pete has done this as well in his last post, confusing liquidity with general acceptance as a medium of exchange. But again, since this is irrelevant to the "money as service" argument, we will move on.

3. They claim bitcoin has a Get Out of Jail Free card. They will argue that some special feature of bitcoin excludes it from the domain of the theorem. This is what  Anenome and Pete have been arguing in the last few posts. Bitcoin is "money as service", and the theorem does not apply to money as service.

My rejoinder has been please show exactly what line of the proof of the theorem is invalid when it comes to money as service. Pete has made no response to this, choosing instead to jump around to arguments of type 1 and 2. 

 

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Smiling Dave,

since you have neither formulated the regression theorem yourself, nor shown what is wrong with my argument, you fail.

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since you have neither formulated the regression theorem yourself

http://smilingdavesblog.wordpress.com/2011/06/22/bitcoin-takes-a-beating/

nor shown what is wrong with my argument

But I have.

Your statement of the theorem is wildly inaccurate, see link. So much for the type one argument you spread as a smokescreen.

You confuse liquidity with general acceptance as a medium of exchange.  So much for the type two argument you spread as a smokescreen.

You have not shown what line of the proof of the regression theorem is invalid for "money as service". Which is what we were talking about before you tried to confuse the issue with unrelated stuff.

Pete, I know you insist on having the last word. Go ahead and have it.

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Smiling Dave,

I read your blog post several times since you published, yet it does not contain a formulation of the theorem. If not for anything else, then because it fails to explain fiat money. You think that vague stories are a substitute for scientific rigour.

You have yet to show what is wrong with my argument, or formulate the regression theorem in a coherent manner.

You erroneously attribute "general acceptance" to media of exchange, whereas it should only be attributed to money.

Your insistance that the non-monetary demand for money is the reason why it's money is at odds not only with the Austrian school, but with almost any currently active conomic school.

You have basically invented your own economic school.

If you still want to object, I recommend you pick any Austrian economist (a real economist, not just a random blogger) and ask them to decide which formulation of the regression theorem is more accurate: mine presented above, or your non-existent/fairy tale.

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Malachi replied on Wed, Oct 3 2012 3:52 PM
Dave, what is your response to the observation that bitcoin conforms to the regression theorem, and the inarguable fact that Mises himself defined "immaterial goods" as "services"? It appears that you keep link-spamming and ducking arguments because you have no rebuttal.
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Anenome replied on Thu, Oct 4 2012 1:01 AM
 
 

Malachi:
Dave, what is your response to the observation that bitcoin conforms to the regression theorem, and the inarguable fact that Mises himself defined "immaterial goods" as "services"? It appears that you keep link-spamming and ducking arguments because you have no rebuttal.

(as SmiliingDave:) Well clearly I've proven this false a thousand times already on my blog. Everyone disagreeing with me is lying or formulating the theorem wrong or something crazy like that. I'm really just going to ignore your good points and keep saying the same thing over and over while not considering, much less addressing, your rationale at all.

Blog.

 
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The main problem with Smiling Dave's arguments is the methodological absurdity which becomes apparent when you attempt to explicitly formulate his implied, unwritten and unsaid, conclusion. Smiling  Dave's full argument is this: Bitcoin does not conform to the regression theorem, therefore it does not exist.

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Maybe this whole debate is just a confusion over a subtelty.

Mises regression theorem explains an apparent paradox of how to untangle that we want to explain a media of exchange (of which money is the most widely and readily accepted kind) 's purchasing power by reference to the demand for the media and that we would explain the demand for the media by referring to its purchasing power.

If someone posed such a paradox, the bitcoiners would go the Mises route to explaining how that it has purchasing power because they would talk about the past purchasing power and demand, right back to day one when it had a non-monetary demand (Industrial demand)

A non-monetary demand, should be understood subjectively. It could be, a new gizmo that others will think is amazing and so the fools will pay me lots of money I want to buy it not to facilitate exchange but to sell of this gizmo to make money which I can then use to facilitate my exchanges !

There are some of us on this board that would buy a 'Rothbard note', not for its exchange value but for its I have a Rothbard note value.
If enough people value Rothbard notes industrially in this way, then it could provoke thoughts that it should be acquired so as to facilite exchange with
owners who value it, or who see that others value it enough to enable them to accept it as payment.

-------------

The side issue of whether Bitcoin is Money, is altogether different. Thats a question of whether its the most widely and readily accepted media of exchange within a particular domain. If you pick a fairly standard domain... its not money by a long shot.

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nirgrahamUK, you're halfway through. The problem is twofold, a potential medium of exchange needs a starting price and liquidity. Starting price alone is not enough. See this wonderful lecture by Walter Block: http://www.youtube.com/watch?v=m2690Fy0sM8. Let me quote from it:

 

But the point is, you see, ten Rothbards, if I really had ten Rothbards, I could probably sell it for a lot of money. But it would not really be money, it would be more like, art or something like that, a unique kind of thing.
 
The starting price of Bitcoin, at least the oldest public record of a price that I could find, from October 9th 2009, is 1 USD = 1309.03 BTC, and the total value of all Bitcoins existing at that time was 932.68 USD. It's a reasonable price for an experiment. Its high enough to be "not nothing" and low enough to avoid noticeable costs. For a Rothbard, that would be prohibitive for liquidity to arise. For Bitcoin, this is not a problem. Bitcoin has super low transaction costs, and can be transferred anywhere at almost no cost. As time progresed, it gained liquidity and with it many of the features associated with media of exchange. For example its price is independent of location.
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Anenome replied on Thu, Oct 4 2012 11:07 AM

If you concede that bitcoin is a medium of exchange, then to me you've conceded that it is money. End of discussion.

Anything being purchase for its exchange value is money.

With bitcoin, that's basically the only kind of value it has.

Mises's theory seeks to explain how something becomes money, and focuses on first its commodity value. Those relying on it claim bitcoin can't be money because it has no pre-existing commodity value before its use as money.

But to claim this they must ignore its current use as money. That's where the flaw seeps in.

Mises's regression theory does not exist to invalidate what's currently being used as money. That would be like using the law of gravity to claim that jetliners can't fly, even as you're sitting inside one on a trip to New York. Oh they must surely crash because the law of gravity is inviolate.

No.

Bitcoin only apparently violates Mises's regression theory. Its commodity value is not non-existent but rather vanishingly small, a bit of energy. It's still being sought out and used for its exchange value.

Thus, it is money, no matter how it arose as money, it's money now.

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Anenome,

money is only the most liquid medium of exchange. Bitcoin does not fulfill this criterion (yet). But that's not a big issue. There are media of exchange that are not money, i.e. are less liquid. See Theory of Money and Credit, Chapter 17 Section 17:  http://mises.org/humanaction/chap17sec17.asp.

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AJ replied on Sat, Oct 6 2012 12:46 PM

Peter Šurda:
money is only the most liquid medium of exchange. Bitcoin does not fulfill this criterion (yet).

It does in some corners of the Deep Web.

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Malachi replied on Sat, Oct 6 2012 12:55 PM
Bitcoin only apparently violates Mises's regression theory. Its commodity value is not non-existent but rather vanishingly small, a bit of energy. It's still being sought out and used for its exchange value.
you are correct, in situ bitcoin has very small industrial value. But even if bitcoin network crashed, one could use the network for pseudonymous encrypted communications. All you need is software, really.
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AJ:

Peter Šurda:
money is only the most liquid medium of exchange. Bitcoin does not fulfill this criterion (yet).

It does in some corners of the Deep Web.

Well, during my research I did a survey, and less than 1% of respondents (Bitcoin users) would fall into the category which could be said of that for them, Bitcoin is the most use medium of exchange. I think that's too small. But it's difficult to exactly ascertain whether something is merely a medium of exchange or money. I think one of the factors that will indicate that it's crossed the threshold is when people start using Bitcoin as a unit of account. In my opinion, that's still far ahead.
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Malachi replied on Sat, Oct 6 2012 1:48 PM
Youre making the same folly. Monetary status is a subjective determination. For me, bitcoins and poker chips arent money because I dont transact with them. For some classes of people, poker chips, bitcoins, and cigarettes and the like are money, and thus within that context are properly referred to as "money." monetary status is not a categorical distinction that could be expressed with econometrics as in "when a given transactor employs greater than x metric transaction cost for a transaction in any given other medium" or somesuch. Monetary status is a subjective determination, and cant be otherwise because any attempt to define a population is inherently arbitrary, unless you define a population in terms of its use of the given currency, where its 100%.
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I find these ongoing debates amusing.  For not other reason than the silly idea that people continue to argue whether or not bitcoin is a medium of exchange or not.  I've used it for so many transactions, and bought so many things (both real and virtual) that I consider the ongoing debate rediculous.  Even I, once upon a time, considered Bitcoin to be young and at risk.  I no longer believe this.  It's beyond the point that it could be deliberately crushed, and far beyond the point that a natural failure could even enter the realm of possibilities.  Bitcoin will outlive me, so long as the Internet will.  I cannot be as certain about the US FRN, and most certianly don't think the Euro will survive the decade in any recognizable form other than name.

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Anenome replied on Sat, Oct 6 2012 7:48 PM
 
 

Malachi:
Youre making the same folly. Monetary status is a subjective determination. For me, bitcoins and poker chips arent money because I dont transact with them. For some classes of people, poker chips, bitcoins, and cigarettes and the like are money, and thus within that context are properly referred to as "money." monetary status is not a categorical distinction that could be expressed with econometrics as in "when a given transactor employs greater than x metric transaction cost for a transaction in any given other medium" or somesuch. Monetary status is a subjective determination, and cant be otherwise because any attempt to define a population is inherently arbitrary, unless you define a population in terms of its use of the given currency, where its 100%.

This is the only answer that makes sense on that score of when something becomes money.

 
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