Anenome:Sure, but that really only stops it in a region. It can take root anywhere, any-time. And will likely prove impossible, in time, to block bitcoin transactions and also allow citizens to have computers and internet access. I dunno how hard it would be to incorporate something like the tor network into bitcoin... The whole world would have to crack down at once to cause a loss of confidence. Not even sure that would work if it did happen. It would probably drive people to it
I have not said it would be something that per definition could be shut down completely. But it could be something that only “bad” guys do. I mean would you honestly think that you could use BTC if it was illegal to order something at Amazon? How is it supposed to be the future this way?
Anenome:True, but the free market will take care of this by itself. This wouldn't likely create a mass loss of confidence, but rather isolated incidents. Where there's value to be protected there will be those willing to provide that protection, and they will.
But if you had companies that take care of your wallets, then you are not independent and anonym anymore. Especially if it is declared to be illegal, what is likely in case it grows, this will not be a solution. So the free market is quite restrained in helping there.
Anenome:Nah, it's open source, not really an issue. Code's been combed.
Please read what I wrote. How the hell am I supposed to know? Because you say so?
Anenome:Eh? Not sure I see the point. Do people sue the Fed when dollar bills go wrong or something? Huh?
First private banks that go bust can be sued for mismanagement and damages even if they were caused initially by Bernanke. Yes for public entities this is more complicated, but at least there is something/someone who needs to fear repercussions if things don’t go well. Yes the political/democratic system is not a very good transmitter. But it at least is some mechanism, if all of New York went on the street to protest against Bernanke you can be pretty damn sure that they will fire him, as well as maybe the government needs to do reelections. Not possible if your BTC wallet goes bust, or is hacked.
Anenome:The only thing likely to beat a crypto-currency at being currency is a better crypto-currency, so really a non-issue in the long term, as you'd be trading up in essence. There wouldn't be a devalutation in such a case, but rather some discounting, as people traded good money for better money. If your point here were accurate, all other fiat currencies with less confidence than the dollar would've been repudiated long ago, but they haven't been. … I would agree that it is risky, but primarily because of the age of the currency, which means it hasn't proven itself. Four years simply isn't long enough. … Industrial value isn't guaranteed either. Silver has crashed several times historically. Gold prices right now are ridonkulous and will crash at some future point. It's not industrial value that makes gold $1600 or w/e an ounce right now. Get that fallacy out of your head. It's gold's value-store ability which is what's making it so valuable right now. And that value store ability has almost nothing to do with industrial value and everything to do with uninflateability. Gold's primary use in human history is as money.
…
I would agree that it is risky, but primarily because of the age of the currency, which means it hasn't proven itself. Four years simply isn't long enough.
Industrial value isn't guaranteed either. Silver has crashed several times historically. Gold prices right now are ridonkulous and will crash at some future point. It's not industrial value that makes gold $1600 or w/e an ounce right now. Get that fallacy out of your head. It's gold's value-store ability which is what's making it so valuable right now. And that value store ability has almost nothing to do with industrial value and everything to do with uninflateability. Gold's primary use in human history is as money.
You have a clear double standard. You simply assert that BTC is crash proof (if it was just a little bit older) but on the other hand argue that even Gold and Silver had huge price movements although they are thousands of years old, and yes even Silver was nearly completely demonetized, that is exactly the point! Also you even argue that Golds value is unsustainably inflated because you compare it to its industrial value but you do not allow such an argument in case of BTC. How can you say Gold is risky because of this but BTC is not? That only is possible if you think BTC is crash proof just because it is a crypto. Another point: To believe that a change from BTC to BTC2 (a better crypto) would go along orderly slow manners without heavy or fast market movements is just another proof that you are biased, especially if you at the same time consider Gold as unsustainably inflated that could crash to 10% of its value in a short time, if people just recognized how good BTC was. But it’s not possible in case BTC2 comes along… That's 3 clear reasons that show that you are not fair in your assessment.
Anenome:Have you got a source for these ratios?
I got the number for 2011 wrong. It is actually 53/47. Not 43/57… For 60/40 (Go down to Consumption)
Also just as a hint how the demand for Jewelry is historically working with Gold. The lower the price the higher the demand for Jewelry. So I think you are mistaken if you believe people would stop buying Gold Jewelry and even sell all of it in case the price drops significantly.
Anenome:Industrial value isn't guaranteed either.
What I meant with „only industrial value is guaranteed” while “monetary is not” is just that the function of medium of exchange can be theoretically performed by a lot of other things. Theoretically by different commodities, fiat money and even cryptos, which means its very volatile. To substitute industrial demand for Gold is either very hard or outright impossible. If you want a Gold ring, there is no way around, you only can use Gold. Monetary demand on the other hand can be done e.g. by Silver just as well, and therefore theoretically taken over entirely by it. I didn’t mean that industrial value couldn’t increase or decrease, but just that is hard to substitute this kind of demand. Sorry was badly worded though..
skylien: But if you had companies that take care of your wallets, then you are not independent and anonym anymore.
skylien: You [,Anenome,] have a clear double standard. You simply assert that BTC is crash proof (if it was just a little bit older) but on the other hand argue that even Gold and Silver had huge price movements although they are thousands of years old,
I have thought about a theory for some time now. I think it is quite relevant for BTC although at first I thought about it only in regard to Gold (If Gold would tend to be the sole money in a world which had a money market completely free of government intervention). It is a bit longer though:
I have to define following terms first:
Industrial value: This arises from industrial demand only hence consuming it.
Monetary value: This is demand for the purpose to be used as medium of exchange.
Investment value: I think it makes sense to differentiate investment demand from monetary demand for the further elaboration, since demanding something for the purpose of a medium of exchange and a store of value are not tantamount!
Overvaluation/Undervaluation: This is when market participants try to anticipate future price movements. If the price of commodity X is at 5$ now but is expected by someone to be at 7$ in the future, then there is an arbitrage that can be reaped if this expectation turns out to be right. Hence commodity X was undervalued now compared to the future. The other way around is overvaluation. What actually is done is trying to assess the fundamentals of supply and demand of commodity X.
For non-monetary goods this is comparably easy to do, since it is only about industrial value. The investment aspect of value that is attached to it due to speculation/investment in such a good is neutral in the long run. If I invest today and increase its demand now, I will reduce the demand by the same amount when I finally sell it to realize either my profit or loss.
For a monetary good like Gold this is tricky. You not only have to assess the fundamentals of supply and demand due to its industrial value, but also of its monetary value. Although it may seem to many as an investment demand if a central bank holds hundreds of tons of Gold admittedly not to be a medium of exchange in the foreseeable future, but for “traditional” reasons of insuring themselves against tail risks, like a disintegration of the current fiat money regime, then this is not neutral in the long run. The central bank implicitly assumes that in case the current money standard fails they will need their Gold as a medium of exchange. Hence the demand of Gold really is purely of a monetary nature, not an investment nature that is usually based on an increase/decrease in industrial value. To make matters even more complicated such a demand for insurance purposes against tail risks also comes from private market participants. Such a demand generally can cause investments by other people who don’t see Gold as an insurance but only bet on an increase/decrease in monetary demand on Gold (that is tantamount to increasing/decreasing fear of a failing fiat money regime).
As I already suggested, it was good maybe to use BTC for transactions but other things like Gold as a store of value. No why is this, and why (I guess at least) does it sound intuitively reasonable to most people. Now please consider my following argument is based on the condition of a complete free market in money. Neither governments nor any central banks are involved. Think of a world in which only Gold is used as medium of exchange initially. Now like Clayton argued money is inherently eliminative to variation. If that was true no other medium of exchange could come up and gain monetary value and rival Gold as a medium of exchange in this environment. I will argue here that is only true to a certain extent and counter forces are working that act in form of opportunity costs which at a certain level are bigger than the benefit to use the standard money which is Gold in this case.
If only Gold is used as medium of exchange then of course this means that its monetary value is huge compared to its industrial value. One effect would be that, if there were no electronic payment systems and money substitutes, this would cause a big problem because it is hard to split Gold into such small units as to reflect the value of small transactions. And as we really see in history in fact it has, therefore also other metals were used who did have smaller value per ounce like Silver and Copper. Today of course I think this would not pose a problem anymore due to electronic payment and clearing systems banks could easily “divide” Gold as small as necessary.
While I guess so far everyone will agree I am arguing there is even one more reason that drives people to use other things as medium of exchange as well. It really is the spread between the monetary value over the industrial value coupled with added volatility due to investment value that acts as a counterforce the bigger the spread. The basic concept is that markets try to find things that are undervalued to buy while at the same time they try to find things that are overvalued to sell, making a profit and avoiding possible losses this way. Monetary value for my point of view is very prone to overvaluation since no commodity also not Gold does have a monopoly to act as a medium of exchange. Silver for example can do the job just as well.
And this is how I think it would work: This means you will not save in cash only, but only as far as your subjective cash preference (How much of a cash balance you actually think you need for daily spending and unforeseeable events) goes. The excess cash will be invested in something other. This of course can be stocks, a mutual fund, general commodities, bonds or whatever. All of them will act as a store of value for you. Yet most investments will not pose a problem for Gold as money, but some are not only a good investment idea as a store of value because they are undervalued but are also quite potent to act as medium of exchange. Especially at the beginning there is a huge incentive not to have too much in Gold, because it is at its peak value, it just cannot go any higher in its value, which means losses are practically guaranteed. The next best solution was to invest in Silver. There is not much downside risk since it is at its industrial value. Gold only can lose, Silver only can gain. Since Silver is very liquid it can even replace the cash balance function of Gold extremely well. So from the outset we already have a strong incentive that would tend to drive Gold’s value down and Silver’s value up.
Additionally with companies like GoldMoney you can not only invest in different precious metals but they also allow you to transfer any amount of any metal (even very small amounts for quite low fees!) to other customers at GoldMoney (They even offer a general payment system as well, I guess it is a bit like PayPal.). So if Gold was initially the sole medium of exchange and I have invested in Silver and a too small cash balance in Gold and I want to buy something from someone who also has an account at GoldMoney and would accept Silver it would be stupid to sell Silver to have the Gold to transfer it to the other guy. Gold would still be the unit of account for the reason of economic calculation. In terms of payment however I just would transfer the Silver directly using it as medium of exchange and therefore decreasing the demand for Gold as medium of exchange, saving the sell and buy spread of Silver, while at the same time increasing the demand for Silver as medium of exchange. This would cause a small shift of demand for a medium of exchange from Gold to Silver which in itself could drive other people to invest in Silver to gain from this increase in value, at the same time encouraging them to use Silver directly as medium of exchange, which again would decrease the demand for Gold as medium of exchange and so on...
This could go on until Silver was overvalued compared to Gold. I don’t know in how far other assets and commodities like oil and so on could play a role, but I really think this would basically be a thing of precious metals. And the point at which this process would ultimately be limited is of course their industrial values. So while an expected rise in value might trigger also a demand not only as store of value but also as a medium of exchange, also the reverse is true, which is an expected loss of value that could drive people away from it and therefore also reducing its demand as medium of exchange. A change in value due to changes of industrial demand doesn’t seem to be itself quite volatile, the more important part is that the decrease and increase in the monetary value itself would always act as positive feedback (compounded by investment behavior) to strengthen the current trend upward and downward, which is simple “bubble” mentality. The fundamentals of the industrial value are quite stable since no matter what only Gold is Gold. If you want a Gold ring, there is no way around it. However the monetary value which is derived from it as medium of exchange can be performed by Silver just as well as already said above. I hope you see where I am getting with this example.
I maintain that Gold would not stay the only medium of exchange in my given example. Its extreme spread between monetary and industrial value would make it absolutely unattractive as store of value for excess cash and maybe even large parts of the cash balance. This then would trigger a need to transact directly in whatever store of value that was chosen, which could be successfully met by commodities like Silver. This would level this spread of industrial versus monetary value among at least some precious metals.
Every market has an ideal amount of competing firms, some have thousands, some hundreds and some very few like less than 5. I believe the market of money, that is eliminative to variation yet also is still prone to volatility due to the market process that always seeks under- and overvaluation from which monetary value is not exempted, might be like the civil aeroplane market with Boing and Airbus. There are a handful of choices but at least 2 quite big ones.
How does BTC come into play here? I think not at all. There is no starting/stopping point of industrial value. This spread is infinite. Therefore there is no genuine undervaluation possible. There only is overvaluation possible (Of course it would be possible for BTC to be technically oversold and overbought -> market psychology). Think of the same world as described above with the exception that BTC is the sole thing used as money at the beginning. As described before people/markets will look for undervalued possibilities to invest their excess cash. This necessarily will also include precious metals and maybe other things that might be easily transferable to other people made possible by firms like GoldMoney. BTC in this scenario can only go down from there; it cannot reach a higher value as at the beginning of our thought experiment just as it (nearly) was with Gold. The same thing would happen as explained above, but while there is a logical stopping point at which Gold really cannot go lower in value, for BTC such a point just doesn’t exist. I am not saying BTC would be demonetized in one day. If there really is a full-fledged economy based solely on BTC at the beginning of our thought experiment, then it would be possible that BTC might be the main medium of exchange for years or even decades. My conclusion is that in a world free of government intervention in the money market BTC would tend to become worthless.
Now you are saying that that the transactions costs are lower than of Gold. Yes right, but so are the transaction costs of Gold compared to Silver. While this is true that would hardly stop the whole process as described above in neither case. They would merely have an effect on how fast it would play out. If you agree above that Gold was successfully rivaled by at least e.g. Silver, you also must consistently agree that BTC would be affected the same way, with the difference that it has no industrial value. Yes transaction costs play a role, but only in so far as they increase the opportunity costs to switch to a different medium of exchange, but do not prevent it entirely. Especially not if you are already invested in e.g. Silver or Gold anyway. Compared to possible gains in value transaction costs of precious metals really are negligible (Electronic payment systems, Money substitution and clearing systems would make this costs very low anyway).
My conclusion: In a money market free of government intervention due to the market process not one thing alone could be medium of exchange (although one of them could be the ultimate unit of account for the purpose of economic calculation). This also is the reason why a crypto currency like BTC could not survive in such an environment, because it needs a huge barrier of entry into the money market that only a government could supply.
Any thoughts on this?
Well that was quite a read. And you ended with a doozy.
Skylien: BTC could not survive in such an environment, because it needs a huge barrier of entry into the money market that only a government could supply.
We're not talking about quantity of money, only velocity. To avoid monetary cylces it should be more or less constant, and demurrage can achieve that (with a fixed monetary base).
The fact that freicoin solves the potential "tragedy of the commons" problem in bitcoin is only a nice side effect. Even if that's not a problem, miners would charge lower transaction fees because they're earning demurrage fees. But this is not the main reason to start freicoin.
Holding cash is like an insurance agaisnt, so all the users pay for that proportionally.
The distribuition of funds to miners is more random in bitcoin than in freicoin (after max supply), bitcoin miners need luck to get their block in when there's high transaction fees.
The main Gesellian idea is that capital yields are artificially prevented from dropping near zero (like economic profits thend to do by competition), by the basic interest (nominal/gross interest = real interest + inflation premium = basic interest + risk premium + inflation premium), which is dependendent on the structure of money. The basic interest is an economic rent and should be eliminated. That's the main motivation behind gesell's free-money (freigeld) and freicoin. Anyway, I don't want to disturb the forum. We can keep on discussing it in the Gesell thread in this forum, in the freicoin forum or in any of the various threads dedicated to it in bitcointalk. I'm always happy to do that, but probably not here, this thread is about bitcoin.
I was just asking for an austrian critique to Gesell, if there's any. Just like in the other thread, I just thought that Andre could know about one.
Thank you for your interest,
pairunoyd: Can't just about any nerd or group of nerds that are highly educated in programming duplicate what bitcoin is doing? I mean, couldn't there fairly easily be created bitcoin2, bitcoin3, bitcoin4, bitcoin5, bitcoin6, bitcoin7, etc, etc, ad infinitum? If so, then this would seem to indicate that bitcoin and it's successors are easily duplicated. Granted, some may be able to set themselves apart based upon their history, patronage, network of users, etc, but I don't see how such an easily duplicated 'me-too' currency could gain a decisive edge. It seems as though every single person in the world could be given his own software tools to create his very own currency or his own set of currencies. Sorry if this was addressed before (I only browsed through 70% of the thread and didn't see anything not already discussed in other bitcoin threads), and pushing all theoretical issues aside, wouldn't the above be an obvious and major obstacle for bitcoin to ever become a widely accepted medium of exchange (i.e. money)? Would anyone keep any significant portion of their net worth in bitcoins whose value would be inversely proportional to how widely bitcoin13s or bitcoin97s become accepted as media of exchange? I know I wouldn't. | Post Points: 35
Can't just about any nerd or group of nerds that are highly educated in programming duplicate what bitcoin is doing? I mean, couldn't there fairly easily be created bitcoin2, bitcoin3, bitcoin4, bitcoin5, bitcoin6, bitcoin7, etc, etc, ad infinitum? If so, then this would seem to indicate that bitcoin and it's successors are easily duplicated. Granted, some may be able to set themselves apart based upon their history, patronage, network of users, etc, but I don't see how such an easily duplicated 'me-too' currency could gain a decisive edge. It seems as though every single person in the world could be given his own software tools to create his very own currency or his own set of currencies.
There's a bunch of them already. Just look at their prices in btc: https://btc-e.com/ https://vircurex.com/ Starting a currency doesn't give it value. It needs users. And for users to switch they have to include a meaningful change. Chain currencies need to be free software, so technical improvements can be backported. You need a reason to move from one money to another. Just having a different name and less users won't do it. Cash monies are more valuable the more people they accept them. Credit monies are another story.
jtimon, so no answer?
The answer is no. Cash money needs a lot of users. A money with one user just makes no sense. For everybody to print their own money you have mutual credit.
Your answer to the last question in my post is "no"?
No to your previous questions
So what would your answer be to the last one?
z1235: wouldn't the above be an obvious and major obstacle for bitcoin to ever become a widely accepted medium of exchange (i.e. money)?
No. There's a bunch of them already and look at their prices in btc: https://btc-e.com/ https://vircurex.com/ Starting a currency doesn't give it value. It needs users. And for users to switch they have to include a meaningful change. Chain currencies need to be free software, so technical improvements can be backported. You need a reason to move from one money to another. Just having a different name and less users won't do it. Cash monies are more valuable the more people they accept them. Credit monies are another story.
You're being deliberately obtuse. I said the last one:
"Would anyone keep any significant portion of their net worth in bitcoins whose value would be inversely proportional to how widely bitcoin13s or bitcoin97s become accepted as media of exchange? I know I wouldn't."
Can you guarantee that bitcoin97 would not be marketed better or not have features that are subjectively valued more by more people than bitcoin? Every single pro-bitcoin argument put out here (their merit notwithstanding) is also an argument for bitcoin97 -- which paradoxically makes them arguments against both.
There have been people who had subjectively valued beenie babies during a period of time, after all. Who could have predicted that?
Z, my answer to that would be: the same could be said of the BitTorrent protocol. Such a protocol is nearly useless if traffic gets split up among too many mutually incompatible systems. The arguments for bitcoin don't all apply to bitcoin-2, since currently much of the reason for adopters to take the plunge with bitcoin is because it's by far the biggest and most established of its kind. There is an effect where people gravitate to the most promising standard. There are cases where two very similar standards might compete for a while because adoption is close to even between them, but the odds would seem to approach zero as the number of similar standards competing grows (of course, the argument hinges on "how similar is similar," because perhaps even small differences in a protocol or infrastructure built around it could result in adoption by different, entrenched groups).
Why anarchy fails
Aj summarized it well, but I'll answer to all your questions.
Would anyone keep any significant portion of their net worth in bitcoins whose value would be inversely proportional to how widely bitcoin13s or bitcoin97s become accepted as media of exchange?
Bitcoin has currently a market cap of 61,562,040 USD, there's many people doing it. I would. http://bitcoincharts.com/bitcoin/
Every single pro-bitcoinprecious metals argument put out here (their merit notwithstanding) is also an argument for bitcoin97silver -- which paradoxically makes them arguments against both(gold and silver).
Yeah, I don't find Bitcoin97 argument compelling. People are more likely, for a number of reasons, to stick with the biggest playe.
I could see two parties to a transaction creating a one-off currency to facilitate an exchange at agreed upon ratios and then abandoning the currency, like a barter with the help of temporary money, but that's not even worth talking about, flash in the pan.
AJ: The arguments for bitcoin don't all apply to bitcoin-2, since currently much of the reason for adopters to take the plunge with bitcoin is because it's by far the biggest and most established of its kind.
What if bitcoin-2 is not of bitcoin's kind, but better? Bit-torrent or VHS (vs. Betamax) are not proper analogies. No one has ever bet more than 1% of their net worth on them remaining at the top.
jtimon:Bitcoin has currently a market cap of 61,562,040 USD, there's many people doing it. I would.
This does not answer the question: "Would anyone keep any significant portion of their net worth in bitcoins whose value would be inversely proportional to how widely bitcoin13s or bitcoin97s become accepted as media of exchange?"
Your analogy with gold/silver does not hold water. When alchemists can design metals in the same manner that coders can design crypto-patterns, then perhaps the analogy may work. Also, when bitcoin survives as the prefered medium of exchange and holder of value over many thousands of years, during rises and falls of empires, and across multiple continents, then perhaps the analogy may have a chance of working. In the meantime, beanie babies and tullips are much closer analogies.
Anenome:People are more likely, for a number of reasons, to stick with the biggest player.
What if bitcoin-97 was much better?
I have been intrigued by bitcoin ever since I heard about it years ago, but the more I read about it I am less convinced that it is, or that it will ever become, money. I can see how all sorts of crypto-patterns will be used as envelopes through which parties transfer money (payments), or say, Amazon-backed crypto-Amazon-coins being used as media of exchange, but I see any such scenario working only if the crypto-patterns act as mere envelopes for real money or as "notes" backed by real money (i.e. gold).
According to Mises in The Theory of Money and Credit, a certain type of money "must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, its already possesses an objective exchange-value based on some other use' (110). People claim that the cost of producing the currency thus creates an objective-exchange value, but that would then apply to fiat money as well; but we know that is not true. Once again, according to Mises (I just read his book so I'm paraphrasing what he said), the reason why the fiat money of today has any value, is because at one point it was backed by gold, and when the gold standard was dropped, people still had an understanding of its objective-exchange value.
An in regard to your point about gold inflating, I believe I read in Rothbard's book, What has the government done to our money, that if gold were to inflate, it would act just like any fiat currency would, and therefore who adjust itself eventually to normal conditions. The other possibility is that we would just switch to silver, or whatever the market desired. And speculating that we could find gold on an asteroid, and that we will be able to mine it, seems like a far-reaching argument in order to substantiate why we should use Bitcoin.
I personally, haven't done much research on this specific topic, I'm going off the top of my head a bit and resorting back to what I remember from these books, so if you prove that I'm wrong I will appreciate it. This is my first economist forum where I feel intimated, so criticism is helpful.
A significant? Yes, many people do.
Most of it? I would not. I would not put most of my net worth in gold or silver neither. Any form of cash-money can be demonetized. Better diversify.
But why does it matters? Who wants to hoard most of its wealth?
Anyway, that doesn't have anything to do with othercoin. The question that matters... Doesn't othercoin contradicts the limited supply of bitcoin? No, it doesn't.
Competitors need to be somehow better enough to compensate their lack of users (which make them less useful as a money).
What are your conclusions about the prices of the other coins?
@Hunter Hello and welcome! What you are referring to in your first paragraph is the "Regression Theorem" and before we talk about it I think it's important to lay the groundwork on why the theorem was postulated to begin with. There was a long debate among economists on why fiat money has purchasing power that far surpasses what it would normally have if it was suddenly introduced on the open market. One of the common answers was, "It has value as money because it is used as money." but that doesn't answer the question. How did it get to that point? How did it get the purchasing power of money? So Mises came along and said, look, we here all accept dollars because we knew from yesterday that it had a certain purchasing power. Yesterday we knew it had purchasing power from the day before. And so forth. Eventually we will get back to a point where the fiat currency is redeemable for a specific amount of commodity. This is the Regression Theorem in a nutshell. Looking at the Regression theorem we can say that it is essentially impossible for a fiat currency to arise in any other way. Fiat currencies are always begat by commodity backed currencies. Many very intelligent people erroneously apply this theorem to Bitcoins, including Smiling Dave, Hashem, and John James, and it's very easy to see why this mistake is made. Bitcoins, like all fiat currencies, are not made from a valuable resource. They have no industrial purpose. You can't make a sandwich out of them or hammer a nail with them. On the surface it seems perfectly legitimate to say Bitcoins could never work because we could never decide what 1 bitcoin could purchase. But the free market has decided on how much a bitcoin can purchase. Hundreds of thousands of dollars are traded for Bitcoins every day. How is this possible? Was Mises wrong? The key is in scarcity. Fiat currencies are all non-scarce. That is, they can be infinitely inflated, as was unfortunately demonstrated in Zimbabwe. Bitcoins are not scarce, and because of this the free market can trade them on the open market, attaining value solely for their unparalleled utility as a medium of exchange, something that a fiat currency essentially cannot do. But if that hasn't convinced you, imagine that gold didn't exist. The element on the periodic table was predicted by scientists but it simply has never been found, and then one day a digging operation in Alaska recovers thousands of tons of the stuff, and it floods the market. Would gold be unable to ever be a currency? After all, no one has any use for it. What could we possibly decide it could be exchanged for? The answer, of course, is that it could likely attain the same status, with time, as it has today. People would realize that it has intrinsic properties that make it highly suitable as a medium of exchange (And other uses!), and would gain value proportionately. Bitcoins are like finding those tons of gold in Alaska. At first, no one knew what to do with them, but as they were traded on the open market people came to realize that they had intrinsic attributes that make them highly suitable for a medium of exchange (Even better than Gold!) and are gaining value proportional to that percieved value. Take home point (TL;DR): Bitcoins do not need to be tied to any commodity because they are scarce and can therefore compete on the open market like anything else. (No Regression Theorem needed!)
Seraiah,
Scarce means nothing if it has no value. Polar bear dung is scarcer than bitcoin, but nobody will ever use it for money.
The Alaskan gold would just not be used as a medium of exchange until people first coveted it for its indutrial and aesthetic value.
As for the free market deciding how much bitcoin is worth, be patient. Beany babies were very very highly priced for a dozen years, at prices bitcoin can only dream of, thousands of dollars for one, and with a much much larger market than bitcoin, before they finally went down to zero when their novelty wore off.
That is why the phrase "generally accepted" is so important when trying to understand money. Fads, follies, and delusions can have a huge grip on people in the short term, much stronger than bitcoin has now, or will ever have. But those fads and follies and delusions, [three terms that describe bitcoin perfectly, btw] all die a humilating death pretty quickly.
From a peak of $33, bitcoins are now what, six bucks? That happened in a six month period. Let's see what happens in ten years, if anyone will even remember the word bitcoin. Mises has pointed out a fatal flaw in bitcoin [no intrinsic value, therefore no reason for it to have any minimum price at all, meaning it will go to zero sooner or later], and made his prediction. We shall see.
I've mentioned all this many times in the various bitcoiin threads here and in my blog. The info is there. One need but grasp it.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave,
I agree with much of what you write about bitcoins (perhaps all, but I have a question). I know you have explained what you mean (or what Mises means) by intrinsic value, but could you either explain it again for me, or could you point me to a quick read to get caught up? It just seems odd to me talking about intrinsic value when Austrians consider value to be subjective.
I know I've read your thoughts on the matter before, but I can't remember what you said (or what you said Mises said, or what you quoted Mises as saying).
Thanks,
gotlucky
Smiling Dave:Seraiah, Scarce means nothing if it has no value.
Scarce means nothing if it has no value.
Yet, you refuse to allow that a thing could be valued for its ability to serve as money.
Smiling Dave: Polar bear dung is scarcer than bitcoin, but nobody will ever use it for money.
Polar bear dung is scarcer than bitcoin, but nobody will ever use it for money.
Dung has no qualities that make it attractive as a medium of exchange, unlike bitcoin.
Smiling Dave:The Alaskan gold would just not be used as a medium of exchange until people first coveted it for its indutrial and aesthetic value.
It's not merely that, gold has properties that make it valuable as money. It is very difficult to make a passable fake gold coin. You can be sure that you're getting pure gold with a few tests and a simple scale.
Here's an example of what a gold-based merchant can use to test gold, only gold will pass this test:
http://www.youtube.com/watch?v=ohKdBJzwlYY
Smiling Dave:As for the free market deciding how much bitcoin is worth, be patient. Beany babies were very very highly priced for a dozen years, at prices bitcoin can only dream of, thousands of dollars for one, and with a much much larger market than bitcoin, before they finally went down to zero when their novelty wore off.
Beanie babies are analogous then to the tulip craze. However, they make poor money.
Unlike gold, unlike bitcoin.
Both are perishable, and deteriorate with storage.
Smiling Dave:That is why the phrase "generally accepted" is so important when trying to understand money.
Before government got into the money business, individuals banks, and even states, printed their own moneys and it worked perfectly well. Even after the dollar came around, some moneys were more readily accepted than the dollar in particular areas. Plenty of exchanges will transfer BTC immediately into and out of dollars; it's only one abstraction away from complete acceptance. Should the dollar begin to have trouble, transacting in btc generally might become preferable. In fact, you'd have virtually no other alternative besides barter.
Smiling Dave:Fads, follies, and delusions can have a huge grip on people in the short term, much stronger than bitcoin has now, or will ever have. But those fads and follies and delusions, [three terms that describe bitcoin perfectly, btw] all die a humilating death pretty quickly.
You assume your premise.
Smiling Dave:From a peak of $33, bitcoins are now what, six bucks? That happened in a six month period. Let's see what happens in ten years, if anyone will even remember the word bitcoin.
Psh, this sort of uptake and die off is a typical organic bubble pattern and hardly should be taken as btc's death knell :P If anything it means the currency achieved critical mass.
Smiling Dave:Mises has pointed out a fatal flaw in bitcoin [no intrinsic value, therefore no reason for it to have any minimum price at all, meaning it will go to zero sooner or later], and made his prediction. We shall see.
It can only go to zero if there's a confidence crisis. Which generally is only caused by some political entity which controls the supply of that particular currency -- a situation which is impossible for BTC. So, I sincerely doubt your prediction.
If anything, Mises points out that all things can have use-value as well as value as money. Good moneys have a large ratio of money-to-use value. Gold has a very large ratio compared to other things, but btc's ratio is much larger, since the industrial usage of a vanishingly small amount of electricity and processing power is the extent of each bitcoin's physical existence.
Smiling Dave:I've mentioned all this many times in the various bitcoiin threads here and in my blog. The info is there. One need but grasp it.
You shall suffer the fate of Gresham, I think, who couldn't believe the people didn't follow his expectation and repudiate the cheap coins the king was passing.
Your theory has plausibility, as did Gresham's, but where the problem lies is we disagree on the weight to put behind certain factors and considerations.
Does the average person care the btc doesn't have some industrial usage? Heck no. They only care that anything they're using as money has relatively stable demand so that they don't see large valuation/price changes. The best money would be one that absolutely did not change in price whatsoever.
But such a currency is impossible. We can strictly limit supply but can never limit demand.
It's probably correct to say that all demand drops in a currency are ultimately supply-related. Every run on a bank is caused by fear that the bank has over-lent the existing reserves. Every currency crash revolves around either hyperinflation of supply or a government not being able to pay its bills leading to devaluation, which means destroying the basis of 'full faith and credit'.
Gold's primary virtue is that its supply is limited inherently by reality itself.
Bitcoin's primary virtue is that its supply is limited by reality as found in mathematics.
Beanie babies were never supply limited. Neither tulips.
But again, were you guys correct that industrial value was so damn important, it's more likely that Bitcoin could've never achieved any demand at all. You can't explain via your theory initial demand. So, there's likely something wrong with it.
gotlucky,
To sum up what is happening with intrinsic value. It is one of those phrases whose meaning changes depending on the context.
When Austrians say nothing has intrinsic value, that all value is subjective, they are speaking in a certain context. The discussion there centers about the question, why does bread cost a dollar a pound? What makes it worth exactly a dollar?
The old way of thinking was that there was some mystical entity hidden in the loaf of bread that made it worth a dollar. That's what they meant when they were discussing the intrinsic value of a loaf of bread. There were those who thought that the mystical entity inside the bread is "cost of production". Others thought that the mystical entity is "amount of socially necessary labor put into the loaf".
The Austrian conclusion is that there is no mystical entity, no intrinsic value. The price, the value, of the bread comes from something outside the bread, mainly, from the potential customer who is willing to pay a dollar for it. In other words, its value is subjective, not intrinsic.
That is one context in which intrinsic value is used, and in that context, there is no such thing as intrinsic value.
2. The other context in which the phrase is used is when discussing the value of money. In the article in my blog, Bitcoin Takes a Beating, I quote and explain Mises at length on this subject. Mises analyzed the value of money, say of a gold coin, as being made up of two elements.
The first value comes from answering the question, "What could Robinson Crusoe do with it?" Crusoe had nobody on his island to buy from or sell to, so the gold coin had no use as money. But it did have some use. He could use it for jewelry, if he was vain. He could use it as a component of his computer chips, or whatever.
OK, now Crusoe comes off the island back to civilization. He finds that everything has a price pretty much as he valued things on the island, except for one thing. His gold coin, he finds, is worth much more than he thought. "Why are people setting such a high value on something of so limited a use?" he wonders. Then he finds out that gold is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can easily buy stuff with it, anything from everyone. That is a useful feature, that increases the usefulness, and thus the price, of gold.
So those are the two sources of value that money has. Mises gave those values clumsy names, industrial value for the first, and exchange value for the second. As time went on, people [including Mises and respected Austrians, as I have quoted at length somewhere in these forums] instinctively starting calling that first value, that Robinson Crusoe had for it when alone on the island, its "intrinsic value".
[Note that in this context, intrinsic value is also subjective, because the two concepts are not contradictory. Whereas in the first context a subjective value and an intrinsic value cannot be the same. If you grasp these last statements, you now understand the two meanings of intrinsic value.]
Mises' Regression Theorem states and proves that a money cannot have that second value, what Crusoe saw off the island back in civilization, unless it first has intrinsic value, meaning that Crusoe had a use for it on the island. In the article Bitcoin Takes a Beating, I explain his reasoning at length.
[Now one can readily understand why someone writing that bitcoin has "intrinsic value, as money", is being quite amusing, like a clown falling off a bicycle. Intrinsic value is what it has on the island, and there it has no use as money.]
Since bitcoin is totally useless on the island, obviously, then by the Regression Theorem it will remain useless off the island. The bitcoin crowd howls at this obvious statement, trying to find some flaw. The most common thing they try is saying that we see it has some value, just go to mygox.com. So Mises must be wrong. The second thing they try is to say that bitcoin has some magical property that excludes it from the Regression Theorem, which was only talking about non magical objects. I've addressed both these arguments many times.
In case someone didn't bother to read my awefully long post (which I can fully understand) I can summarize it roughly with this: Monetary value is a bitch.
@ Seraiah
1: There actually is a huge barrier of entry into the money market. It is quite a doozy to think otherwise.
2: You didn't say one word about why the process I explained above wouldn't happen, or would happen differently. You are just arguing that BTC is supperior as unit of account. First, how do you know that there was a significant difference between BTC and Gold that actually mattered? Secondly even if do you honestly think this will keep someone from selling BTC and buying Gold when he sees a profit in doing so? Nobody bases his decision of buying and selling on what would be the best unit of account for economic calculation in an economy.
3: Scarcity alone doesn't make something valuable. It is a necessary condition but not a sufficient one.
4: Fiat money is scarce as well! Else it would be worthless. The scarcity level is controlled by the FED system.
Skylien:1: There actually is a huge barrier of entry into the money market. It is quite a doozy to think otherwise. Well I completely agree with that, but what you said was that a money can't enter the money market without government intervention. I pointed out that Bitcoins are already competing as a currency and already work as currency, so government intervention is demonstrably not necessary. Skylien: 2: You didn't say one word about why the process I explained above wouldn't happen, or would happen differently. You are just arguing that BTC is supperior as unit of account. First, how do you know that there was a significant difference between BTC and Gold that actually mattered? Secondly even if do you honestly think this will keep someone from selling BTC and buying Gold when he sees a profit in doing so? Nobody bases his decision of buying and selling on what would be the best unit of account for economic calculation in an economy. All I have to do is prove that Bitcoin is superior. Why would a superior product be supplanted by an inferior one in a free market? It's true that bad money tends to push out good money, but that's only when the government is able to force the bad money down its subject's throats. That kind of manipulation would be extraordinarily difficult with Bitcoin. Skylien: 3: Scarcity alone doesn't make something valuable. It is a necessary condition but not a sufficient one. Absolutely, that's why it's so crucial that I point out that Bitcoin is as good or better than gold as a medium of exchange in almost every category. (Fiat money isn't even in the same ballpark.) Skylien: 4: Fiat money is scarce as well! Else it would be worthless. The scarcity level is controlled by the FED system. Also true. In fact, Fiat currencies could make a fairly decent money if no one conterfeited, but they are counterfeited, because it's easy. Again, that's exactly why I pointed out that Bitcoins can compete with gold as a medium of exchange. Bitcoins are scarce and are useful as a medium of exchange, this is how they've gotten their value in the free market. People that try to speculate with Bitcoins are going to continue to lose money while those that trade with Bitcoins will continue to reap the rewards. @Dave I think the main error has already been addressed. You're comparing apples and oranges. I pointed out why the Regression Theorem can't be used with Bitcoins and you came out of nowhere throwing a handful of polar bear dung saying, "[See, this can't be used as a medium of exchange, and the Regression Theorem doesn't apply to that either!]" I'm just sitting here with a baffled expression on my face, trying to wipe the feces off my keyboard and make sense of it all. Yes, polar bear dung is also scarce. I think you've successfully found the only similarity between Bitcoins and polar bear dung. So what? As already said, Bitcoins scarcity isn't the only attribute that makes it useful as a medium of exchange. But I wanted to point out the flaw in this idea that every medium of exchange has to have some other use before being used as a medium of exchange. This is like if someone invented an axe and then someone saying that they don't want to use it and refuse to use it because it wasn't used for anything else prior. Maybe he'd insist that a cork screw be put on the bottom and that they open a few wine bottles before he'd come within a hundred yards of it for the purpose of chopping down a tree. The inventor is standing there, hardly knowing what to say. Inventor, "I've invented this thing to chop down trees. I can demonstrate that it's fantastic at what I designed it for. Why do you want me to jump through these bizarre hoops to prove to you that it has some other uses? I agree that it would be cool if my axe could open wine bottles just as easily, but who cares?" The world, "We do." Inventor, "I don't want to live on this planet anymore." And then everyone goes back to chopping down trees by bashing their heads against them. Bitcoin is a fantastic currency, it doesn't need any industrial use. It would be cool if you could open a wine bottle with Bitcoins, but who cares?
Skylien:1: There actually is a huge barrier of entry into the money market. It is quite a doozy to think otherwise.
Skylien: 2: You didn't say one word about why the process I explained above wouldn't happen, or would happen differently. You are just arguing that BTC is supperior as unit of account. First, how do you know that there was a significant difference between BTC and Gold that actually mattered? Secondly even if do you honestly think this will keep someone from selling BTC and buying Gold when he sees a profit in doing so? Nobody bases his decision of buying and selling on what would be the best unit of account for economic calculation in an economy.
Skylien: 3: Scarcity alone doesn't make something valuable. It is a necessary condition but not a sufficient one.
Skylien: 4: Fiat money is scarce as well! Else it would be worthless. The scarcity level is controlled by the FED system.
I see that while Smiling Dave now recognises that there is no such thing as "intrinsic value" and switches to "use value", which is a more accurate representation of Mises, he's still utterly clueless both to the foundation of the regression theorem as well as praxeology.
Even if Mises' Regression Theorem was not consistent with Bitcoin, the way Smiling Dave presents it is methodologically absurd. He makes it into what Mises calls an acatallactic monetary doctrine. According to Smiling Dave, the actions of the market participants with respect to Bitcoin must be ignored, and instead his own opinion that Bitcoins are "stupid" and "worthless" must be substituted for it. If not anything else, this makes him into a clear anti-Misesian.
Smiling Dave also does not understand the concept of salability (i.e. what we nowadays call liquidity) pioneered by Menger, and instead uses price to evaluate the "moneyness" of Bitcoin. "moneyness" is not determined by price, but by liquidity. Or even more accurately, moneyness is liquidity. And based on empirical data, the liquidity of Bitcoin has increased since the bubble popped. The market depth charts on the exchanges are steeper, and the number of services built upon Bitcoin, as well as merchants accepting Bitcoin have increased as well. There are now two magazines that specialise in Bitcoin (The Bitcoin Magazine and Coineer), hardware devices in development (Bitcoincard and Ellet), and organisations like the Cryptocurrency Legal Advocacy Group.
Smiling Dave also does not apply the temporal component of the regression theorem consistently. While he realises that the flow of time is crucial for Mises' argument, he ignores that Bitcoin already has a price, therefore the regression can only say something about the past, not the future.
He also misses why media of exchange exist in the first place and why some media of exchange are more widely used than others. Even though it is not emphasised sufficiently by the Austrians, they nevertheless occasionally admit that media of exchange compete based on transaction costs, not use value (as Smiling Dave appears to imply). And Bitcoin easily beats transaction costs of both fiat and gold (both as money proper and money substitutes), so there is no reason for it to go away anytime soon. If anything, it shows that monetary systems based on abstractions and featuring super low transaction costs which have been hypothesised for the last 40 or so years are empirically possible.
But the main problem is that Dave fails to formulate his position in a consistent manner. Instead he offers partials and anecdotes. So it's not that his argument is wrong, it's does not even exist.
Anyone recognize the shape of this chart, which the accompanying article describes as typical of silly fads?
Hint:
Coincidence?
Dave, some of these people might start accusing you the false cause fallacy. For the record, I called it first if any of them do this!
EDIT: And when I say I called it, I don't mean that I'm accusing you of the fallacy. I agree with you. I'm just saying that those people will.
That's OK gotlucky. I provided myself an out with the last word of the post.
So did that article about intrinsic value clarify things for you?
Seraiah: Bitcoins do not need to be tied to any commodity because they are scarce and can therefore compete on the open market like anything else. (No Regression Theorem needed!) There is an infinite number of possible crypto-patterns. Bitcoin is but a sub-set of an infinite set. | Post Points: 35
Bitcoins do not need to be tied to any commodity because they are scarce and can therefore compete on the open market like anything else. (No Regression Theorem needed!)
This is a chart of price of gold in USD between 1979 - 1985:
I could not get the data for 1975-1978 in a usable form and I'm too lazy to copy&paste them into a spreadsheet manually, but rest assured if you go back to 1975 it really starts looking like a bubble, in summer 1976 the price was barely above 100.
What does it prove? Nothing really. It's just yet another reason why Smiling Dave's "arguments" are a fail.
Malachi,
I stand by all I ever wrote about bitcoin.
What am I ascribing to Mises that he did not say? What is the flaw in the argument I present? Facts, man, facts. Leave the unsupported assertions and other sillyness to Peter Surda; he has first dibs on that.
It's not a good money because it is not a money at all, and never will be.
I've stopped trying to convince people because what more is there to say? I've laid it all out for the meanest intelligence to grasp, if that mean intelligence but have the open mind that comes with humility and absence of agenda. Oh yes, willingness to actually think logically is also necessary.
Yes, it makes sense. It seems to me that modern Austrian economists should pick the first context and use it that way, and use the term "first value" (or something better) in the second context. It causes needless confusion, especially considering that there is nothing wrong with having technical jargon - especially if it helps clarify things from the get-go.
Do you happen to know if people like Bob Murphy use a different term for the second context? Or do they still stick with how Mises used it?