Debate about Bitcoin has remained extremely murky, leading to a sort of gridlock with entrenched views, particularly as to whether bitcoins are money. With this post I hope to shed some light on Bitcoin with a view that I think transcends the central points of debate as it has so far transpired.
Step 1 in clarifying discussion about Bitcoin is to distinguish between Bitcoin (the protocol) and bitcoins (the token units). Bitcoin is a transaction system; bitcoins are the "things" that are being exchanged.
That brings us to Step 2 in clarifying discussion about Bitcoin: if we define money as a "physical object that serves as a medium of exchange," bitcoins are certainly not - and can never be - money. They are something different, yet they serve the same purpose. No, in fact it's more elucidating to say that the system (Bitcoin) serves the same purpose.
Step 3 is to discern this connotation that perhaps "money isn't needed anymore" from the leftist, Zeitgeister call for the elimination of money (really the elimination of transactions and hence the division of labor). Since transacting using the Bitcoin protocol, insofar as it is sound, would not in any way entail the destruction of the division of labor (in fact a great enrichment of it), this would only be a kneejerk response. Bitcoin - the system - simply obviates the need for money (and money substitutes) in many situations.
The following story illustrates a situation where a division of labor can function without money ("physical object that serves as a medium of exchange") or even money substitutes.
A bunch of college students decide to do a houseshare. They take turns making dinner. One day the dinner guy (A) is too busy, so he asks someone else (B) to fill in for him, with a promise to return the favor later.
Everyone in the house witnesses this, remembering that A owes B one.
There are many people in the house and this starts to happen a lot. People's memories get fuzzy, and some are not around to witness the transactions. So they decide to put a whiteboard on the fridge keeping track of who owes who how many dinners.
Some people start to rack up quite a tab. Eventually it is decided that no one can owe more than three dinners; if they skip three times they can skip no more.
To keep track of this, each person's name is written with a number underneath it. Everyone starts with a 3 underneath their name, like this:
Guy A Guy B Girl A etc...
3 3 3
Then if A skips because B agrees to fill in for him, the board now looks like this:
2 4
[signatures of every person in the house]
Everyone signs off that they witnessed the agreement for this transaction.
Cumbersome as it may be, this is now a working transaction system. We could call the units "housecoins." Later, for instance, Girl A can offer 2 of her housecoins in exchange for a DVD that Guy B owns. Everyone signs under the change to the ledger and it's a done deal.
What are these housecoins backed by? Nothing, in the usual monetary sense. However, they can be used reliably as long as the system remains popular with the house residents and people don't find a way to cheat the signature system.
I'm sure it's easy to see why this is so incredibly impractical that it has never been done before on a large scale. The existence of a ready medium of exchange makes this even more unnecessary for local commerce. Before the Internet and before public key cryptography, such a system would have been completely unworkable, and locally often unnecessary.
However, the Internet makes it possible for remote participants to sign off on transactions. With the Bitcoin protocol, the system is backed only by the willingness of people to participate, and the protocol prevents cheating by rewarding the transaction validators ("miners"). Technically anyone could change the protocol to benefit themselves, but that would result in a fork in the blockchain (two different public ledgers) and probably no one would use the rogue version.
Now there are a few more details that need to be seen in order to grasp how the system is able to function as it does, but the above should show that money (physical medium of exchange) and "backing" are not absolutely necessities for a division of labor; "housecoin"-type systems have failed to spring up so far simply because the technology known as "physical media of exchange" is a far easier one than the Internet, cryptography, "proof of work" systems, and the Bitcoin protocol that ties these together.
A physical medium-of-exchange system is only one type of transaction system. At a certain level of technology, others become feasible or even superior.
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Question for those reading the above: What elephant in the room has that long article ignored?
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Elephant in the room: Mises's regression theorem, or since bitcoins are not money we can talk directly about them having no starting value.
However, the "no starting value" argument died for me the day I realized that sending money home from Japan would be way cheaper and faster if I used Bitcoin.
We can simplify things by forgetting history: all we know are housecoins can be used for getting out of having to make dinner, and bitcoins can be used for sending money (dollars, etc.) quickly. How Bitcoins got to be valuable as an instrument for international wire transfers may be viewed as up for debate, but the fact that they are is not. Notably, the group of people who want cheaper and faster (and more private) international wire transfers is not a tiny nerd subculture.
So to me the regression theorem debate has been rendered moot by history; that horse has already left the stable. The above post is to address the "it has no backing" arguments and others that stem from equivocation on the word money (on both the pro and con side).
Bitcoin is a digital currency, it is not money.
To be money it has to be the most liquid good. US Dollars (in America) are more liquid than Bitcoins. If Bitcoins manage to become more liquid, more widely and generally accepted as currency of exchange than US dollars within the terriroty of the USA, then Bitcoin will have become money. On the day when Bitcoin becomes money (if that day should ever come) it will not have become money due to a fiat declaration, no one will have imposed it as money onto all economic agents in the territory, rather its new found status of money will be traceable by Misesian regression to its days as a 'non-money' economic good.
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@OP: I agree with the deflationary picture of Bitcoin - its proponents make way too much out of what is, at root, actually a hodge-podge of mundane computational tasks.
That said, I think you are mistaken to characterize Bitcoin as "cumbersome" precisely because it consists of mundane tasks that are all fully automated by software. Bittorrent "Magnet URI" links, for example, comprise a lot of the same kind of mundane computation and distributed network synchronization that Bitcoin does, but no one can dispute that Bittorrent is useful and exists independent of maniacal hype.
This is just part of a larger pattern of control versus innovation."Congress will [likely] attempt to outlaw the behavior that results from its outlawing of behavior, and the market will route, again, around legislative failure." The Establishment creates a status quo and new innovations seek to "route around" these obstacles. The computer is the ultimate "control evader", if it is properly harnessed. So far, we have some small wins but I'm starting to think that the balance is, once again, tipping in favor of the Establishment.
Clayton -
Clayton: I think you are mistaken to characterize Bitcoin as "cumbersome" precisely because it consists of mundane tasks that are all fully automated by software
Actually I agree. The fact that the process (of keeping a universal public ledger) is so cumbersome is what would have prevented it from happening before computers and the Internet. Now with these technologies it has become feasible for the first time.
As to the natural order re-routing around state control, Japan just enacted a law yesterday that sentences downloaders of copyrighted content to up to two years in prison. The privacy movement is still nascent by mainstream standards, but I think draconian laws like this are going to kickstart it bigtime. The more states tighten their grip, the more control mechanisms will slip through their fingers. It seems like a privacy arms race of epic proportions could start someday soon, especially if Bitcoin or similar massively disruptive technology takes off.
AJ:However, the "no starting value" argument died for me the day I realized that sending money home from Japan would be way cheaper and faster if I used Bitcoin.
Perfect. Real world praxeological evidence that Bitcoin's value as a medium of exchange explains why it has a non-zero value on the market.
AJ:How Bitcoins got to be valuable as an instrument for international wire transfers may be viewed as up for debate, but the fact that they are is not.
Exactly.
AJ:Notably, the group of people who want cheaper and faster (and more private) international wire transfers is not a tiny nerd subculture.
True, it is a group that potentially encompasses all people.
AJ:So to me the regression theorem debate has been rendered moot by history; that horse has already left the stable. The above post is to address the "it has no backing" arguments and others that stem from equivocation on the word money (on both the pro and con side).
I don't necessarily agree with your OP, but these points here have been spot on.
The regression theorem has been heavily misunderstood, misrepresented and obfuscated. But it is actually quite simple, it talks about how prices and liquidity form on a free market, and how both price and liquidity are prerequisites for a medium of exchange (i.e. need to be chronologically antecedent to the use of media of exchange). Bitcoin fits into this without problems, but again it is heavily misrepresented and misunderstood.
Media of exchange emerge because they decrease transaction costs. Economists often form the problem that media of exchange solve as "double coincidence of wants". That's just a particular aspect of transaction costs. Economists also typically try to backtrack the emergence of media of exchange to a pre-monetary, barter, society. But now we don't have barter. We have a monetary system. If we already have a monetary system, a new money does not have to be backtracked to barter (if it would, it would mean that nothing that was invented after people started using money can become money, which is absurd). However, how new money emerges on a market and replaces old money has not been investigated to a large extent by economists, including the Austrians.
New money must decrease transaction costs, otherwise it cannot replace the old money. Old money would beat the prospect on liquidity. If we already have money substitutes, unless the old money collapses for some reason (e.g. hyperinflation), or is pushed out through Gresham's law, the only thing that can replace it is a purely virtual commodity. Physical commodity cannot beat money substitutes on transaction costs, so it cannot replace them. This is also why Rothbard criticises Hayek in The Case For A Genuine Gold Dollar: merely abandoning legal tender laws does not give any new prospect the ability to overcome the liquidity of the encumbent dollar. But virtual commodities can beat the transaction costs even at lower relative liquidity, because they present a technological improvement which neither fiat nor physical commodities can match. Unlike gold, or Hayek's competing papers, virtual commodities have the potential to outcompete fiat. If they are more difficult to regulate than money substitutes, even better, that just increases the comparative advantage if the reaction of the state is to increase regulation.
Virtual commodities already exist, Bitcoin is not the first one. A prime example are IP addresses, which are abstract and therefore unconsumable, yet they decrease transaction costs of communication if one builds systems based on that common protocol. The ability to decrease transaction costs makes them into a good, even if without the context they become useless. They have a restricted supply, and they are tradeable on market (even though they are not a good medium of exchange).
“GIVE me control of a nation’s money supply, and I care not who makes its laws.” So said Mayer Amschel Rothschild, founder of the Rothschild banking dynasty. What would he make of Bitcoin, an online currency with no issuing authority whatsoever? Despite being written off following a speculative bubble and crash last year, the online cryptocurrency is still going strong, not least thanks to its ability to circumnavigate the law.
AJ, excellent post! I am thinking about Bitcoin in a whole new way now. The housemates analogy is ingenious.
AJ:A physical medium-of-exchange system is only one type of transaction system. At a certain level of technology, others become feasible or even superior.
I am wondering about the terminology. Would you still call Bitcoin a medium-of-exchange system - but a non-physical one? Or would you say it is not a medium-of-exchange system at all because there is no "medium"? The housemates system seems to involve no medium (nothing changes hands), making all the exchanges between the housemates direct exchanges (but disjointed in time, with the whiteboard-on-the-fridge protocol keeping track). Is Bitcoin the same in that respect? There doesn't seem to be anything analogous to bitcoins (the tokens) in the housemates system.
What is interesting to me is that if your statement above is accurate, money can be seen as a temporary workaround that our species has come up with to solve the problem of the whiteboard-on-the-fridge protocol becoming unworkable. When Zeitgeisters commented on my Government Explained video asking how come the alien knew what money is, my response was that the alien must come from an advanced society and all advanced societies must use money to enable economic calculation. But now, I am thinking they may be right (although for completely the wrong reasons). Maybe the alien would be baffled at why our system involves and relies on exchanging pieces of paper between ourselves - and the alien would surely be no less baffled if we were exchanging shiny coins between ourselves.
If the Bitcoin protocol expands and becomes the primary transaction method for most people, I see no reason why they wouldn't start using bitcoin tokens as their unit of account. So here we have an interesting conclusion: economic calculation doesn't require money! This is not to say that Mises was wrong, but that perhaps he never considered that the unit of account could be something other than the unit of the commonly accepted medium of exchange.
Government Explained 2: The Special Piece of Paper
Law without Government
Um, Graham, I'm shocked to say the least. Money doesn't just say "what belongs to who" as a ledger system does... it is a good in itself. The "offline" and "anonymous" aspects of cash/coins are a feature, not a bug. I don't understand why this is constantly overlooked.
What part are you shocked at?
economic calculation doesn't require money! This is not to say that Mises was wrong, but that perhaps he never considered that the unit of account could be something other than the unit of the commonly accepted medium of exchange.
That part. And the rest.
Please read this, starting from chapter 2. Money is a necessary but not sufficient condition for economic calculation. Destroying money (as all systems of debasement, including central banking, do) destroys economic calculation but it is not the only way to destroy economic calculation. A system for indirect exchange - whether based on fiat ledgers or actual money - is not sufficient for economic calculation. In order for there to be calculation, there must be actual choice, actual taking of entrepreneurial risk, because of the ever-present fact of uncertainty. This is why economic calculation is not just a knowledge problem. If there were no uncertainty about the future, it would just be exactly a knowledge problem and nothing more.
EDIT:
/rant
An interesting article just posted yesterday on Forbes by Jon Matonis that also remember us the story of e-gold:
"Bitcoin Prevents Monetary Tyranny"
excerpts:
Bitcoin is not about making rapid global transactions with little or no fee. Bitcoin is about preventing monetary tyranny. That is its raison d’être.
[...]
Just as the Second Amendment in the United States, at its core, remains the final right of a free people to prevent their ultimate political repression, a powerful instrument is needed to prevent a corresponding repression — State monetary supremacy. That task has fallen to an unlikely open source project that is based on cryptography protocols and peer-to-peer distributed computing. As the mechanism for a decentralized, nonpolitical unit of account, the Bitcoin project uniquely facilitates this protection. The timing of Bitcoin’s appearance, and subsequent growth, is no accident either. If one follows the relevant sentiments and trends, it’s evident that society was approaching a breaking point. Essentially, bitcoin is a reaction to three separate and ongoing developments: centralized monetary authority, diminishing financial privacy, and the entrenched legacy financial infrastructure. An alternative money provider that was centralized would probably not survive long in any jurisdiction. The emergence of Bitcoin was baked into the cake already.
Clayton: economic calculation doesn't require money! This is not to say that Mises was wrong, but that perhaps he never considered that the unit of account could be something other than the unit of the commonly accepted medium of exchange. That part. And the rest. Please read this, starting from chapter 2. Money is a necessary but not sufficient condition for economic calculation.
Please read this, starting from chapter 2. Money is a necessary but not sufficient condition for economic calculation.
I'm shocked that you think I was making that mistake. What I said seems to follow from what AJ said.
Economic calculation requires two things: 1) a unit of account, in which all goods have a price, and 2) those prices have got to be meaningful, i.e. they have got to embody/convey accurate information about supply and demand conditions. Crude socialists can't calculate because they have no unit of account. Market socialists can't calculate because their "prices" don't convey accurate information about supply and demand. Historically, these two requirements have led to the conclusion that we need 1) money, and 2) free markets.
If we posit that the Bitcoin protocol becomes commonly accepted, then as I said, people might start using bitcoin tokens as their unit of account. It would make more sense than converting so many of your purchase/sale prices into dollars/pounds/grams/whatever and then calculating in that unit. And the bitcoin-prices of goods are every bit as meaningful as prices of goods in terms of a traditional money unit. Here they are not at all like the so-called "prices" in the socialist schemes where bureaucrats "play market". The prices are formed by genuine free exchange of goods and services, so the information they convey is accurate. So the Bitcoin protocol meets the two requirements for economic calculation; economic calculation can be carried out using bitcoins as the unit. Do you deny this?
Then it becomes a question of terminology, hence my questions to AJ. Assuming they are commonly accepted, do the bitcoin tokens meet the definition of money? Money is usually defined as a commonly accepted medium of exchange, so this question becomes: are bitcoin tokens a medium of exchange? This seems to hinge on whether "medium" implies something physical. I don't think it necessarily does, so the bitcoin tokens could indeed be called a medium of exchange, in which case the conclusion that "economic calculation doesn't require money" is not true. The correct conclusion in that case would be that "economic calculation doesn't require physical money", with the important caveat that "so long as there is a unit of account and the prices of goods in that unit convey accurate information". Until now, the only way to generate accurate information has been to use a physical money, but Bitcoin presents the possibility of a non-physical money generating accurate information.
AJ is using a non-standard definition of money... he has added the term "physical" which is not usually part of the definition. Using AJ's terminology "physical money" is redundant of course, and so the correct conclusion is indeed that "economic calculation doesn't require money", since, as AJ explicitly says, bitcoin never can be money.
AJ... can you explain why you have added the term "physical" to the definition money? And do you agree that if we use the standard definition (and also use a broad definition of "medium" to include non-physical things), then bitcoin tokens can be money (and will be as soon as they are "commonly accepted"... if that ever happens, which is a whole other debate).
If we posit that the Bitcoin protocol becomes commonly accepted,
But this premise entails extensive government control of the economy because Bitcoin is an unbacked money. Government interference in the market would have to be at least as extensive as it is under the central banking system. I contend that these two premises are immediately contradictory:
1) Bitcoin widely used
2) Free market
That's a very strong statement and I don't see how you can justify it. You could say those two premises are unlikely to both be true at the same time, but they are not "contradictory", so there's nothing wrong with using them as premises together.
Clayton: But this premise entails extensive government control of the economy because Bitcoin is an unbacked money.
But this premise entails extensive government control of the economy because Bitcoin is an unbacked money.
Your argument is incorrect. People choose their medium of exchange based on transaction costs, not on "backing". And the transaction costs are almost always determined by liquidity. This is why gold cannot compete with fiat unless fiat collapses, irrespective of government interference. Kindly consult Rothbard's The Case for Genuine Gold Dollar, http://mises.org/rothbard/genuine.asp. Rothbard makes it clear that abolishing legal tender laws is insufficient and people would still continue to use fiat dollar. He does not use the term liquidity, but other economic schools do.
Bitcoin presents a revolution in technological aspect of transaction costs which cannot be matched either by fiat nor by what has been commonly understood as commodity money. Market actors that are sensitive to transaction costs, or that whatever reason suffer from high transaction costs with fiat are motivated to switch to Bitcoin.
Depending on where you are, Bitcoin already has higher liquidity than many forms of fiat. The example I like to use is when I came back to Dublin last year from the Bitcoin conference in Prague, and the exchange shop at the airport refused to take the Czech crown coins I had, because they only take notes. So I'm stuck with Czech crown coins that I cannot use unless I go to the Czech Republic in the future, or find someone in my proximity who goes there and is willing to trade it against euros (or Bitcoin). But Bitcoins are form-invariant. If I want to sell them, I just need to transform them into a digital form and anytime from any location transfer them at a negligible cost into an exchange and putting an order. That gives me digital euros or usd which I can then use for spending.
Bitcoin does not necessarily have to survive, but the reason for its doom will not be a lack of backing. It is actually the exact opposite, adding backing to Bitcoin would mean its end. It would make it into a wannabe money substitute. This would both increase their transaction costs, as well as eliminate the purpose of the exchanges (as there would be no floating exchange rate). The demand for Bitcoin would become a derivative of a demand for whatever the backing was, rather than a demand for a medium of exchange, which would screw up with the remaining markets. No exchanges and screwed up markets result in no liquidity and the whole thing would collapse.
Kindly consult Rothbard's The Case for Genuine Gold Dollar, http://mises.org/rothbard/genuine.asp.
Funny how that remarkable essay provides no proof whatsoever to what you write. He makes no mention of liquidity, nor of transaction costs. You have gone on and on for a while with those two red herrings, and it's time to stop, Pete.
What does appear quite clearly in that article is a masterful summary and exposition of the regression theorem. Anyone who reads that essay with open eyes will understand quite clearly how bitcoin can never, ever, not in a million years, be money.
But hey, maybe I'm wrong. Maybe I totally misunderstood or misread that essay. Maybe Rothbard is all about liquidity and transaction costs, and loves bitcoin to death. Let the reader decide.
Smiling Dave,
just another example of unprofessionalism. Even though I explicitly said that Rothbard does not use the term liquidity, you object that he really does not.
And the main point, as usually, you do not get. Rothbard wrote that even if you abolish legal tender laws, people would not switch to gold and would continue to use the fiat dollar:
Even the variant on Hayek whereby private citizens or firms issue gold coins denominated in grams or ounces would not work, and this is true even though the dollar and other fiat currencies originated centuries ago as names of units of weight of gold or silver. Americans have been used to using and reckoning in "dollars" for two centuries, and they will cling to the dollar for the foreseeable future. They will simply not shift away from the dollar to the gold ounce or gram as a currency unit. People will cling doggedly to their customary names for currency; even during runaway inflation and virtual destruction of the currency, the German people clung to the "mark" in 1923 and the Chinese to the "yen" in the 1940s. Even drastic revaluations of the runaway currencies which helped end the inflation kept the original "mark" or other currency name.
There goes the nonsense about "backing".
Even though Rothbard, nor most Austrians for that matter, do not use terms like liquidity, network effect or transaction costs, this is what their arguments mean. You can't handle arguments, so you're stuck with denial.
@Graham: Nope, I'm perfectly comfortable with "contradictory". Please, explain to me how you get widespread use of Bitcoin sans extensive government interference in the market. The closest example I can think of to Bitcoin is the Somali shilling which is, to my knowledge, still in use long after the collapse of the Barre regime. Nevertheless, Somali shillings are virtually worthless and only used in very small transactions... the only reason Somalis still use them is because they are very poor. So, if a) Bitcoins are imposed on the developed world by government and then b) the developed world implodes on itself and regresses to the dark ages, then you could have an unbacked, extremely low-value currency continuing in use despite the absence of government enforcement. But wait, in order to have Bitcoins, you need a power grid and computers. So, sorry, there's no way you can have Bitcoins without government creating the demand either by direct imposition or through other means.
You could say those two premises are unlikely to both be true at the same time, but they are not "contradictory...
Not that Clayton needs my help, but for my own amusement, I will spell it all out.
By the rules of logic, A and not-A cannot both be true; the technical term is that they are contradictory.
Similary, if C leads one to conclude A, and D leads one to conlude not-A, then C and D are also called contradictory.
Bitcoin widely used implies there is no free market at work, by Mises regression theorem, which states that in a free market bitcoin will never ever be widely used.
Free market implies free market, a tautology.
Thus Clayton's first statement implies not-A, where A=there exists a free market.
Clayton's second statement implies A.
Thus they are contradictory.
People choose their medium of exchange based on transaction costs
That is not Austrian monetary theory - people choose their medium of exchange on the basis of its suitability for exchange. Things like liquidity, durability, scarcity, commodity use (expectation of future valuation), etc. In the history of the world, no one ever freely chose to use an unbacked paper money.
Dave,
In that piece, Rothbard makes the following prediction:
"Hayek should be free to issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance and acceptance are two very different matters. No one will accept new currency tickets"
"no one will accept any entity as money unless it had been demanded and exchanged earlier"
"But one crucial problem with the Hayekian ducat is that no one will take it."
And yet some people do accept bitcoins. Do you accept that he has been proved empirically wrong here? Or at least that he was overstating his argument and really meant "not many people will accept..."?
@Graham: "No one" here is meant in the grown-up sense of "nobody to speak of". As PT Barnum said, there's a fool born every minute.
The market cap of Bitcoin is infinitesimal. The number of people using it is immaterial. When Gramma Marge puts her husband's life-insurance windfall into Bitcoin Bank, then I'll agree that BTC is money. In the meantime, it's a lot of mental masturbation.
Clayton,
the criteria you mention, "liquidity, durability, scarcity, commodity use (expectation of future valuation), etc", are merely a factor that influences transaction costs.
Furthermore, if people do have a choice other than the legal tender, they normally shift to the most liquid fiat currencies (dollar, euro, swiss franc, or the money from neighbouring country). They do not shift to commodity money, because no commodity money currently in existence has sufficiently high liquidity to compete. Unless the fiat system collapses worldwide, or the legal tender switches to commodity money, commodity money will not be chosen voluntarily.
Bitcoin has a technological advantage that cannot be matched. That allows it to compete even if it has comparably lower liquidity than fiat money. To what extent it can compete, that's a more nuanced question.
the transaction volume of Bitcoin has been increasing, and will probably soon start to reach the level of countries with underdeveloped banking. Futhermore, you still ignore that many people do not use Bitcoin merely to prove Mises wrong, but from a purely rational perspective, as it decreases their transaction costs.
merely a factor that influences transaction costs
Not in Austrian monetary theory. How many times do we have to go around this?
That's a terrible argument, Clayton. Bitcoin is already unregulatable and has a non-zero value.
Clayton:@Graham: Nope, I'm perfectly comfortable with "contradictory". Please, explain to me how you get widespread use of Bitcoin sans extensive government interference in the market.
I agree with you that current government interference is giving Bitcoin a helping hand, in the same way that it gives a helping hand to sellers of emergency food supplies or water purifiers. But it seems to me that even if we had a free market, there is still at least one thing that Bitcoin can do better than any physical medium of exchange, and that is: be transferred long distances. Sure, you can still wire money electronically with fiat or commodity media, but ultimately, at some point down the line, transfers of money must inevitably involve shuffling bits of paper or bits of gold around, and this involves an expense. This will always give Bitcoin (and any non-physical medium) a slight competitive advantage over all physical media, all other things being equal. Are you claiming that it is inconceivable that people in a free market might prefer using Bitcoin just for this reason, even if for no other? That it is inconceivable that people might value this advantage over any disadvantages the system might have (lack of anonymity, for example)? I don't feel as confident as you seem to be about what people will value and what they won't value in the future.
Whether this is enough of an advantage to overcome the huge network effect problem that any new currency (actually any new standard of anything) faces is debateable. If government interference continues to increase, Bitcoin may just be given the leg up it needs to reach a stage where the network effect is already largely overcome by the time our free market arrives. Or there might be a big bitcoin sell-off tomorrow and Bitcoin falls out of use... like you said, it's a risky business.
In that piece, Rothbard makes the following prediction...no one...no one... no one...
Within the gambling establishments in Las Vegas you may be able to buy a drink with poker chips. But that does not make poker chips generally accepted, and it does not make them money.
When Rothbard wrote "no one" he meant "at best a trivial amount".
Dave, I know youre itching to link spam, but please refrain. If you have an argument to make, please make it in this thread, do not link me to an argument on another site.
Malachi, with all due respect, I consider you for the moment a lost case.
I have pointed out to the horse where the water is. The limitations of cyberspace prevent me from actually leading him there.
I have made my argument dozens of times, most succinctly you know where. We are not always fortunate enough to have a mommy to spoon feed us. At times we must move our wrist and finger muscles an iota to press on a link.
BTW my website has no ads that I know of, though of course I use an ad blocker. So that spam is a curious description.
I have made my argument dozens of times, most succinctly you know where.
Wow, he denies that Vegas chips are money in Vegas? Just, wow.
there is still at least one thing that Bitcoin can do better than any physical medium of exchange, and that is: be transferred long distances.
But that's only true by virtue of government interference! There is nothing stopping gold/cash/etc. from being wired anywhere in the world using exactly the same protocol as Bitcoin itself.
Sure, you can still wire money electronically with fiat or commodity media, but ultimately, at some point down the line, transfers of money must inevitably involve shuffling bits of paper or bits of gold around, and this involves an expense.
No, it really doesn't. You can transfer digital token claims to the same physical backing without having to move the physical backing an angstrom. It just sits there while people exchange the digital token claim to it.
Now, someone does have to pay for the secure storage of that physical backing. But that's the whole point of backing a digital currency... It's backed by something valuable enough that it needs to be locked up. The cost savings is that the currency is no longer solely backed by confidence.
This will always give Bitcoin (and any non-physical medium) a slight competitive advantage over all physical media, all other things being equal.
See above. The hidden cost is the mind-numbingly huge risk. It is conceivable that gold could experience a collapse tomorrow. It could drop to $800. It could even drop to $250 in a sufficiently sci-fi-end-of-the-world scenario. But it won't drop to zero short of a discovery that the Earth is about to be impacted by an extinction-level-event comet. BTC could drop to $0.000000000000000001 overnight. There is literally no reason why it couldn't drop that low. The difference here is that people will always want to wear gold or silver as jewelry. Always. As long as females are being born on this planet, gold and silver will never be $0. But not so with BTC.
This risk-discrepancy is what's being completely overlooked here. BTC is wholly speculative in a way that gold or silver are not. Sure, buying gold and silver is a form of speculation on the margins. You're not betting that gold won't be $0 when you wake up tomorrow because there's just no way it can be $0 tomorrow.
Are you claiming that it is inconceivable that people in a free market might prefer using Bitcoin just for this reason, even if for no other?
Note that even when bank certificates were the state of the art in money substitutes, no one ever used an unbacked paper certificate except as a consequence of some government chicanery. A digital token is a digital token. BTC has no special claim on being a digital token. So gold-banknote:unbacked-paper is precisely logically equivalent to digital-gold-currency-token:Bitcoin. Only an insane person would choose to be paid in unbacked digital tokens over backed digital tokens.
That it is inconceivable that people might value this advantage over any disadvantages the system might have (lack of anonymity, for example)?
Again, anonymity problems are wholly manufactured by governments. Have you ever heard of a numbered bank account? If you don't have to give identifying information in order to obtain secure storage services, the anonymity problem is solved. It's the OECD/PATRIOT Act and all the KYC rules that are the root cause of the problem.
Smiling Dave: In that piece, Rothbard makes the following prediction...no one...no one... no one... Within the gambling establishments in Las Vegas you may be able to buy a drink with poker chips. But that does not make poker chips generally accepted, and it does not make them money. When Rothbard wrote "no one" he meant "at best a trivial amount".
No one is arguing that bitcoins are money right now, because obviously right now they are not commonly accepted (and that is part of the definition of money from Mises, Rothbard, Hoppe, Salerno, Murphy et al). That is not the dispute. But just like poker chips in Vegas, bitcoins are undeniably being used as a medium of exchange by a small number of people for a small number of transactions. Those are the empirical facts confronting us.
The argument at this stage is about whether the medium of exchange will continue growing as it has done to the point where we would call it "commonly accepted" or whether it will always remain in a small niche, or even stop being used completely. We can talk about reasons why poker chips or bitcoins or gold coins might or might not be able to displace dollars/pounds/euros as the most commonly accepted medium of exchange. And we can imagine how the likelihood of that would change if we had a free market right now. These would be thymological predictions.
Here is my understanding of the regression theorem. No doubt you will tell me that I have got it all wrong.
The regression theorem, as described by Rothbard, is about how an object first begins to be used as a medium of exchange, not how a medium of exchange becomes a commonly accepted medium of exchange. The regression theorem is about the difficulty of forming an initial price and this involves some assurance of a stable price going forward, and an already established price and stable direct demand obviously helps with that.
He says: "[F]or any commodity to become used as money, it must have originated as a commodity valued for some nonmonetary purpose, so that it had a stable demand and price before it began to be used as a medium of exchange."
But Bitcoin is already being used as a medium of exchange (albeit only by a relatively small number of people for a relatively small number of transactions), unless you have a non-standard definition of "medium" or "exchange". So we are already past the point that the regression theorem, as explained by Rothbard, applies to.
Perhaps we can be generous in our reading of Rothbard (again) and assume that he forgot to add a caveat: "... before it began to be used as a medium of exchange by anyone except a trivial amount of people (whom we shall call 'fools')". We then have the problem of recognising what would be a non-trivial amount. And we also now have four categories to consider:
A) not being used as a medium of exchange by anyone.
B) a medium of exchange being used by a trivial amount of people.
C) a medium of exchange being used by a non-trivial amount of people.
D) a medium of exchange which is commonly accepted.
A strict reading of that Rothbard passage would suggest he is talking only about the transition from A to B. If we are generous, we could suppose that he really meant the transition from B to C. The regression theorem is essentially saying: only something with direct use value can go from being a medium of exchange used by a trivial amount of people, to being a medium of exchange used by a non-trivial amount of people.
My interpretation is that the regression theorem it is not concerned at all with the final transition from C to D, because by the time we are at point C the price is already established and relatively stable, given that there are a non-trivial number of users.