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What Bitcoin is

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Malachi replied on Sat, Oct 6 2012 6:54 PM
What is the term in the original german?

http://mises.org/books/Theory_Money_Credit/AppendixB.aspx

This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless, [like those stupid bitcoins] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.
whatever this value is, bitcoin has it. Pseudonymous cryptographic tokens are useful in and of themselves. You see, crusoe can tell friday that there are coconuts on the other side of the island without building a fire to send smoke signals, tiring his lungs out screaming, or trekking all the way back.
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whatever this value is, bitcoin has it.

I like that. You dont know what it means, but are ready to tell us all about it.

As for your smoke signals, I can but admire your originality. So you are saying [and my quotes are from Tim Terrell's elaboration of the Regression Theorem] that bitcoins started off as "a commodity already in general use" as a smoke signal, enough to "develop the widespread demand that must precede its use as a medium of exchange". There was widespread demand to use bitcoins as a smoke signal, before it was ever a medium of exchange.

Malachi, really.

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Malachi replied on Sat, Oct 6 2012 7:21 PM
I like that. You dont know what it means, but are ready to tell us all about it.
I know exactly what it means, my point is that the language is irrelevant. It means that people value bitcoins because they are useful.
As for your smoke signals, I can but admire your originality. So you are saying [and my quotes are from Tim Terrell's elaboration of the Regression Theorem]
I think we can dismiss with the appeals to authority now that youve moved beyond Mises.
that bitcoins started off as "a commodity already in general use" as a smoke signal, enough to "develop the widespread demand that must precede its use as a medium of exchange".
they began exchanging information cryptographically before it was a monetary "medium of exchange" . Since the information was encrypted, one can only speculate as to its content. But as you said, the regression theorem is apodictically certain. It tells it like it is. Its not necessary to speculate on the ends to which things are valued, it is enough to know that they are valued in and of themselves before they were valued for monetary purposes.
Malachi, really.
I cant imagine that cryptographic communication seems useless to you. What dont you understand?
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This post will be about intrinsic value. The next one will clear up all misunderstanding about common use etc.

Everything you have said in that post is irrelevant since the writers are talking about the use of goods as media of exchange, from which money can arise.  But if a good is already classed as a medium of exchange, which you admitted bitcoin is, then whether or not this item was originally a good that wasn't a medium of exchange is irrelevant concerning the question as to whether this medium of exchange can or cannot become money.  That is not in fact what Mises is talking about where he says 'intrinsically valueless' in Theory of Money and Credit (the German for which, by the way, is "an sich wertlosen", valueless in itself - note that he did not use 'intrinsic' in his English discussion of the topic). He is not talking about a transition from medium of exchange to money.

Have a look at this, from the very next two paragraphs:

"Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money substitutes already in circulation, that is, claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting point for their valuation lay in the objective exchange value that they had at the moment when they were deprived of their character as claims."

"Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange."

All he is talking about is a situation where money that was based on a commodity that originally had other uses and became the most marketable commodity for exchange, loses the original link and remains money.  The "an sich wertlosen" refers only to the idea that a money can come about from a commodity that has had no existence as a medium of exchange, by general agreement, i.e. without any marketable qualities or links to previous moneys, but by fiat alone.

Now if it's your belief that bitcoin does not have the requisite marketable qualities to move from medium of exchange to money, then that's one thing.  But it has nothing to do with the regression theorem somehow proving that bitcoin cannot become money, or even with economics at all.  It is simply a thymological, rather than a praxeological, observation.

What you have to show is why a medium of exchange already in use has to have another direct use in itself in order to become 'money' (as opposed to merely having an historical link to direct use goods as bitcoin does).  Since, as Mises and Rothbard both note, 'money' is in itself a subjective and imprecise term, there is still grounds to argue that bitcoin already can be considered money in certain contexts.  So what is your precise definition of money?  How many people have to use it and in how many transactions?  Is the US dollar, for example, money?

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Anenome replied on Sat, Oct 6 2012 8:04 PM
 
 

Peter Šurda:

Another grave error by Smiling Dave:

Smiling Dave:
Mises proves, step by step, that an object cannot ever have use A alone.

Wrong. This is what he writes in Theory of Money and Credit:

Mises:
In the case of money, subjective use-value and subjective exchange value coincide. Both are derived from objective exchange value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

Also, Rothbard affirms that once liquidity is sufficient (i.e. critical mass of the network effect is reached), the function of a medium of exchange is self-sustaining:

Rothbard:
On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.

Rothbard affirms that the point of the regression theorem is to explain how the market price and liquidity are established. He made a couple of other problematic remarks (e.g. he thinks that for this critical mass, it is necessary that the medium of exchange is money first, and that this cannot happen without other uses), but he clearly refutes Smiling Dave's nonsense.

Wow, what a find! Great quote! If SD doesn't at least give pause after reading that, he's simply a partisan and reason means nothing to him.

Of course, he'd be eating gigantic helpings of crow, so, he'd have to be superhumanly rational and ego-less to back down at this point. But it would be the only right thing to do.

 
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Yes, and Mises said essentially the same thing where I quoted him in my last post.

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Anenome replied on Sat, Oct 6 2012 8:08 PM
 
 

Smiling Dave:

Pete,

Yes, I was imprecise. The correct statement is "Mises proves, step by step, that an object cannot ever begin with use A alone".

Which is all that's needed to doom bitcoin.

For this argument to hold, you'd be arguing that bitcoin has no value outside its use as a medium of exchange. It's true that it's industrial value is vanishly small, but not true that that value is zero. For it is made up of two things: a small amount of electricity, and the system in which it has been arranged known as the bitcoin network.

The latter is directly tied into its use as a medium of exchange, however the cost of making such a thing would probably be perhaps millions of dollars of development were you attempting to reproduce this from scratch as it now exists.

Furthermore, you could only use this argument as an explanatory one after bitcoin had already failed or failed to gain any marketshare or marketprice at all. In the face of a successful Bitcoin actively being used, valued, and traded, it's an argument that flies in the face of experience and what's actually happening in the real world.

So, try again.

 
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Anenome replied on Sat, Oct 6 2012 8:11 PM
 
 

Smiling Dave:

Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange.  Do you agree?

Yes. The proof that it cannot ever become money stems from it not having intrinsic value.

Is anyone even bothering to read and/or understand the theorem?

Electricity has value. So does development costs of a computer program and cryptographic specialists.

Smiling Dave:
Again, you are using words incorrectly...

The underlying idea is very simple. It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange. This happens more and more often until, at some point that is not clearly defined, it is so widely used that it is called money.

What happens when an object's intrinsic use is as a medium of exchange? You keep acting as if this possibility were impossible. But why should it be?

 
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To sum up a response to the confusion, the regression theorem exists to explain the emergence of money from a no-money environment.  It was never necessary to explain the existence of bitcoin as a medium of exchange or even as money in the same terms.

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Clayton replied on Sat, Oct 6 2012 8:53 PM
+1 aristippus
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...the regression theorem exists to explain the emergence of money from a no-money environment. ..

False. Once again, please show us which line exactly of the Theorem falls apart if there is a money environment.

[Hint: You won't find one].

 

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Electricity has value.

Of course it does, But not everything that consume electricity therefor has value as well. The old cost of production fallacy rears its head in this surprising place.

What happens when an object's intrinsic use is as a medium of exchange? You keep acting as if this possibility were impossible. But why should it be?

I am glad that you noticed that I indeed insist on the impossibility. Are you the same person that suggested bitcoin has "intrinsic value as money"? In any case, go back and reread Bitcoin Takes a Beating. To help you along this time, I will point out that Mises divides the two possible uses of anything in the univers into two mutually exclusive, all encompassing when taken together, sets. Set A is the set of all uses of the thing AS MONEY. Set B is all other uses. Note that sets A and B are mutually exclusive, by definition. Set B has been called by many names, industrial use, intrinsic value, non-monetary value.

The regression theorem goes on to prove that to ever have Set A be non empty, the thing must originally have Set B non empty.

You are asking why can Set A and set B not have any element in common. Do you get why not yet?

[Hint. Consider the following simpler case Let set A be the set of currently living things, and set B be all currently dead things. You are asking why can there not be something that is both alive and dead at the same time].

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Of course, he'd be eating gigantic helpings of crow...

Sorry, youweren't paying attention. I made a minor correction to a slip of the keyboard. It cannot originate with use A alone. See above.

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Anenome replied on Sat, Oct 6 2012 10:03 PM

Aristippus:

To sum up a response to the confusion, the regression theorem exists to explain the emergence of money from a no-money environment.  It was never necessary to explain the existence of bitcoin as a medium of exchange or even as money in the same terms.

Yeah, been saying this for so long now :\

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It means that people value bitcoins because they are useful.

Close, but no cigar. It is like saying "woman" means the same as "human being". 

I think we can dismiss with the appeals to authority now that youve moved beyond Mises.

Nice try. However Terrell is just stating the same idea Mises did in a more modern English.

....they began exchanging information cryptographically before it was a monetary "medium of exchange"...

First of all, I don't believe you. Link?

Second of all, how many people exactly were doing this? Where was the "already in general use" ? Where was the "widespread demand" ? How much money were they paying for using it that way? How come nobody ever heard of bitcoins until some charlatan tried to pass them off as money?

Third, and most important, you don't get what a bitcoin is. It is an arangement of the innards of your computer that sends out a message that you now own one bitcoin. That has nothing to do with cryptography.

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Aristipus,

All he is talking about...

That's all he is talking about in the section you quoted. But in the section I quoted he is talking about what I said he's talking about. You are trying to prove that a Superman comic does not talk about Superman by showing me a Batman comic.

Now if it's your belief that bitcoin does not have the requisite marketable qualities to move from medium of exchange to money.

No. Its problem begins way before that.

But it has nothing to do with the regression theorem somehow proving that bitcoin cannot become money, or even with economics at all.

I have laid out the proof. Which line exactly, is flawed? Guys, do I have to repeat this one simple idea a thousand times? OK, I'll repeat it yet again, to wit: If you say a proof is flawed, show me where the flaw is exactly. Quote the line that is flawed, and explain why it is flawed. Have you never had an intelligent discussion before? Do you not know how it's done?

It is simply a thymological, rather than a praxeological, observation.

That's what you get for not reading my blog. I have addressed this bit of ignorance right here: http://smilingdavesblog.wordpress.com/2011/12/was-mises-regression-theorem-a-mere.html

What you have to show is why a medium of exchange already in use...

I thought we cleared this up already. One instance of used toilet paper being used by some retard as a medium of exchange is insufficient to make used toilet paper into money. Do you disagree with this?

The question then becomes, what magic does gold have that used toilet paper does not? Why has gold been money [=generally accepted, commonly accepted, universally accepted] in various places, but used toilet paper never was? Mises regression theorem proves that the magic ingredient that gives gold the upper hand is that gold, before it ever was a medium of exchange, was first in widespread demand for its non monetary use. It was a commodity already in general use despite having zero monetary value. Bitcoin, like used toilet paper, was never in this envious situation.

To help you along even further, I will post tomorrow, God willing, clarifying the numbers game element of this topic. How much is enough, how much of what, why is that number what really counts, etc. All will be answered.

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At last, the moment everyone has been waiting for. 

Smiling Dave will

  • lay out with even great clarity the case for bitcoin being useless garbage, certainly not money now or ever,  with replies to the various arguments against raised in this thread
  • show how this follows from the Regression Theorem,
  • prove that the theorem applies even in a money economy [not just a barter economy],
  • explain in great detail the numbers game that people have been wondering about when it comes to medium of exchange and other aspects of bitcoin.
  • and many other goodies.

  Due to the length of the article and the lateness of the hour, it will be in two parts. Here is a link to the first part. http://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game/

For Malachi's benefit, I will copy and paste the whole thing in the next post right here.

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Here you go Malachi. Part one:

Bitcoin and the Numbers Game..

by Smiling Dave.

 

Over at the mises.org forum, there is a lot of confusion concerning bitcoin, Mises Regression Theorem, and the numbers involved in these topics.

First question. What is a medium of exchange. If Mr A and Mr B use playing cards as their money, meaning that they buy and sell things to each other and accept payment in playing cards [which they don't intend to play card games with, but to use as money at a later date with each other], but nobody else does, does that make playing cards a medium of exchange?

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange in those transactions in which it was not used.

OK, so far so good. Now let’s take a look at Mises’ Regression Theorem. He writes:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

1. This is a very important quote. I would like to deduce something very important about the regression theorem from it. There are those who claim that the Regression Theorem is talking about a barter economy that changes into a money economy. Only for the first money in a barter economy does it apply, they think. But once we are in a money economy, where barter is a thing of the past, then the regression theorem no longer applies, and a second money does not have to start off having intrinsic value to ever make it as a money.

This is clearly absurd, because how will these people answer Mises’ question about the circular reasoning involving demand for money and value of money, each one requiring it’s mate to precede it? But in addition, the text we just quoted shows he was not confining himself to a barter economy transitioning into a money economy. Let’s quote in bold the part that shows these people wrong:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

Put that in your pipe and smoke it, guys. Of course, to those too intellectually challenged to see the significance or relevance of the bolded section, I say that Dave is tired now. If you cannot figure it out, ask your more intelligent friends. If you don’t have any friends, you will just have to rely on the first proof, mainly how is the circular reasoning question going to be answered. But we digress.

2. Mises writes very clearly, and of course there is no other possibility [proof: find one], that the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object. After all, there is no monetary demand right now. Nobody has ever used it as a money before. Just like everything else in the world, the price of something is determined by supply and demand. Since non monetary demand is the only thing that exists at this stage, at the very first time a bitcoin or a gold coin is about to be used as a medium of exchange, there has to be enough non monetary demand for the thing to be worth something. Maybe the demand will make it be worth a penny, maybe a tenth of a penny, but it has to be something. Because if the demand is so lame that nobody is willing to pay anything for gold or for a bitcoin, then it will not be accepted as money that very first time, will it?

OK, on to Economics 101. This is the kind of thing you have to know before dipping your toes in the deep waters of bitcoin theory. What determines the demand for something? What makes demand so great that it makes the market price of the thing demanded rise up from zero?

The answer, of course, is that it depends on how many people find the thing useful. If very few people have a use for it, then the demand will be lame and the market price will be zero. Thus Timothy Terrel was merely stating the obvious when he wrote that in order for something to be used as a medium of exchange the very first time, it must have a large non monetary demand:

money must arise from a commodity already in general [non- monetary] use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange.

OK, on to bitcoin. What non- monetary use is there for a bitcoin? None. What can I do with the fact that my computer has stored deep in its innards the assertion that I am the proud possessor of a bitcoin if I cannot spend that bitcoin? Nothing.

OK, Watson, from here it’s easy. It has no use, therefore it has no demand, therefore the price people will pay for ownership of it, considering only its non monetary use, is zero. Ergo, it cannot be a medium of exchange the first time. Therefore there will never be a first time. Therefore it will never be a medium of exchange, and certainly never a money, at all.

At this point Devil’s Advocate jumps out of his seat. We give him the floor.

DA: Smiling Dave, that sounds very nice on paper, but the reality is that bitcoin has been used many thousands of times as a medium of exchange. So many beers, so many pizzas, so many trinkets of marginal use have been bought with it, that the first time is by now in the way distant past. How can you say there never will be a first time, when we are already in the thousandth time?

SD: Advocate, what would this humble blog do without you? You ask a deep question here, but the hour is getting late. Keep your eyes peeled for the next humble article, which will answer thy questions.

DA: Yeah, right.

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I'm on my phone so I can't write a proper reply right now but I didn't mean to say that the theorem does not apply to a money economy (is that part a reply to me?)
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Anenome replied on Sun, Oct 7 2012 3:28 AM
 
 

Smiling Dave:

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange in those transactions in which it was not used.

Well, can't argue with that genius logic :P

One should note that the same could be said about every 'money' ever used on the planet.

Smiling Dave:

OK, so far so good.

Lol.

Smiling Dave:
Now let’s take a look at Mises’ Regression Theorem. He writes:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins.

Notice this is a backwards looking theory. There is something being used as money and we're attempting to explain the praxeologic means by which it became so. It does not determine what is money, only attempts to explain how what is money became so. It is not a rubric for determining what is money.

Smiling Dave:
At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

This can't be used to claim that something without industrial value can't be money. It can only explain why something with current exchange value got that exchange value.

Thus, with bitcoin, something that already has exchange value, it would be ridiculous to use this to theorem to try to invalidate bitcoin as money.

Smiling Dave:

Put that in your pipe and smoke it, guys. Of course, to those too intellectually challenged to see the significance or relevance of the bolded section

Lovely.

Smiling Dave:

2. Mises writes very clearly, and of course there is no other possibility [proof: find one], that the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object.

The theorem-explanation does not flow in that direction, and your attempt to invert the logic fails thereby.

The theorem explains how something with exchange value got it.

Bitcoin already has exchange value. So, therefore... your reasoning is flawed.

Smiling Dave:
After all, there is no monetary demand right now. Nobody has ever used it as a money before.

If that were true its current market price would be zero. This is not true, so there's a flaw in your reasoning.

Smiling Dave:
Just like everything else in the world, the price of something is determined by supply and demand. Since non monetary demand is the only thing that exists at this stage, at the very first time a bitcoin or a gold coin is about to be used as a medium of exchange, there has to be enough non monetary demand for the thing to be worth something. Maybe the demand will make it be worth a penny, maybe a tenth of a penny, but it has to be something. Because if the demand is so lame that nobody is willing to pay anything for gold or for a bitcoin, then it will not be accepted as money that very first time, will it?

You do realize the price of bitcoin, right now, is ~$10 per bitcoin, right?

Smiling Dave:
The answer, of course, is that it depends on how many people find the thing useful.

Which defines its exchange value.

Smiling Dave:
If very few people have a use for it, then the demand will be lame and the market price will be zero. Thus Timothy Terrel was merely stating the obvious when he wrote that in order for something to be used as a medium of exchange the very first time, it must have a large non monetary demand:

But bitcoin is being used as a medium of exchange right now. So...

Smiling Dave:
money must arise from a commodity already in general [non- monetary] use.

The original use of bitcoin was mining them as an investment. This is what got the demand for them going, speculators with processing power. Anticipation of value has proved well-founded.

Smiling Dave:
OK, on to bitcoin. What non- monetary use is there for a bitcoin? None.

False. Investment.

Smiling Dave:
What can I do with the fact that my computer has stored deep in its innards the assertion that I am the proud possessor of a bitcoin if I cannot spend that bitcoin? Nothing.

But... you can spend bitcoin.

Smiling Dave:
OK, Watson, from here it’s easy. It has no use, therefore it has no demand, therefore the price people will pay for ownership of it, considering only its non monetary use, is zero.

Except that it's price is not zero. Today. Right now. Duh?

Smiling Dave:
Ergo, it cannot be a medium of exchange the first time. Therefore there will never be a first time. Therefore it will never be a medium of exchange, and certainly never a money, at all.

It already is a medium of exchange, and therefore a money for anyone whom uses it as such.

Smiling Dave:
At this point Devil’s Advocate jumps out of his seat. We give him the floor.

This passes for wit?

Smiling Dave:
DA: Smiling Dave, that sounds very nice on paper, but the reality is that bitcoin has been used many thousands of times as a medium of exchange. So many beers, so many pizzas, so many trinkets of marginal use have been bought with it, that the first time is by now in the way distant past. How can you say there never will be a first time, when we are already in the thousandth time?

SD: Advocate, what would this humble blog do without you? You ask a deep question here, but the hour is getting late. Keep your eyes peeled for the next humble article, which will answer thy questions.

DA: Yeah, right.

So you don't even address the issue? Bah.

 
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Notice this is a backwards looking theory. There is something being used as money and we're attempting to explain the praxeologic means by which it became so. It does not determine what is money, only attempts to explain how what is money became so. It is not a rubric for determining what is money.

Been there, refuted that: http://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/

The original use of bitcoin was mining them as an investment. This is what got the demand for them going, speculators with processing power.

A person speculates when he thinks the demand for something is, or will be, higher than the current price indicates. He assumes this imbalance will right itself in time, and so buys it, with intent to sell when market forces of supply and demand finally give the object the higher price.

You see where we are going with this. Saying a thing has value because it is underpriced is putting the cart before the horse. We are now discussing how the price of a bitcoin determined in the first place. And your answer is by people thinking its price is too low. But the question is how did those people themselves determine what the price should be?

Here's another objection to your explanation. You think that a person can make money by taking something that has no use whatsoever, gambling that the price he pays for it now will rise, and then sell at the new price. Yes, he can sometimes do that, if he can convince fools to buy his useless object. But of course those buyers are just fools. A useless object will, by the inexorable market forces of supply and demand, drop to zero in the long run. In other words, you have admitted that bitcoin is doomed.

 

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AJ replied on Sun, Oct 7 2012 7:18 AM

Smiling Dave:

The uses of an object can be split into two mutually exclusive, but together all encompassing, categories, A and B. A is the use one gets from passing it on to the next guy, aka use as a medium of exchange. B is every other use, whether sentimental value, industrial use, anything that will make a person want to hang onto the object and not pass it on. That's why I prefer using the phrase "intrinsic value" for B instead of all the other slightly misleading ones like industrial value.

Mises proves, step by step, that an object cannot ever have use A alone. Use A will only latch onto an object that already has use B. A careful reading of his proof will make clear that he never confuses A with B, as you erroneously claim.

You're not reading. I didn't claim Mises confused anything, nor that anyone confused A with B (exchange value with non-exchange value). What I did say:

AJ, emphasis added:
And that really underscores what I find so unconvincing about the Regression Theorem objection [to bitcoin, of course; not the regression theorem itself]: it is presented as a "theorem" with all the mathematics-like precision and logical rigor that should entail, but then all the terms get muddled up at the arguer's own convenience.

It's so easy to equivocate on "industrial value" so that it simply means any non-exchange value when we are checking that the proof is rigorous, but then gets switcheroo'd to what it actually sounds like: not any non-exchange value, but only classical production and consumption value. And if we get to that stage the same trick can be pulled by equivocating again, this time on "consumption value," where sentimental value (for example) is counted as consumption value when talking about how the proof is rigorous, but then not counted as consumption value when talking about bitcoins.

The second paragraph wasn't addressed specifically to you. In your case, you seem to accept that any value - even sentimental - can count as "industrial/consumption value" in the theorem. No problem there.

Your core objection then seems to be that the number of people that value bitcoins for non-exchange purposes, their relevance in society, and the difference for them between having 1 BTC and 2 BTC are negligible. These are of course judgments, rather than anything that follows from the regression theorem itself.

Now, the following quote by Mises:

Mises in The Theory of Money and Credit, emphasis and bracketed comment by Smiling Dave:
If the objective exchange-value 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, it already possesses an objective exchange-value based on some other use. This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless, [like those stupid bitcoins] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

How many people make a market? How many people must agree on the price for it to be "objective"? If Grandma Koto down the street accepts 1 bitcoin for five loaves of bread, are individuals really not in any position at all to estimate the value of the money? These are fuzzy premises...and yet you go on to call this chain of reasoning "Impeccable logic. Apodictically certain."

This is why I can't take the regression theorem objection seriously. Apodictic certainty based on fuzzy premises is nothing but false rigor. And it shows when you have to make anciliary claims. If you really have apodictic certainty, you don't need to make additional supporting claims about nerds, retards, used tissues, tiny minorities, or other things that would appear to some to make bitcoin adoption improbable, to render it with negligible market value, etc. These just serve to belie the claimed rigor, showing that it rests finally on subjective judgments. Negligible and improbable are not concepts that mix well with apodictic certainty. You've got to choose one or the other!

Personally the regression theorem argument is dead to me. Barring some new angle on it, I see no reason to address it further as it doesn't seem to be misleading very many people anymore. The only thing left to discuss is whether the tens of thousands (hundreds of thousands?) of people who value bitcoin is not enough to network up to mass adoption.

Still unaddressed: Network effects, Grandma Koto, the fact that bitcoin is in right now the universal* medium of exchange on Silk Road (it has $2 million turnover per month in bitcoins), and the fact that anyone who owns 100,000 bitcoins is in a very good position in life.

*See how context-specific this word is? Again I ask, how can we privelege the statement, "Ithaca Hours (or whatever) are commonly accepted in the Ithaca community" over "Bitcoins are commonly accepted in the Bitcoin community"? What really does universal mean? "Universal" always references a community, and that community can of course be geographically small - this isn't controversial. Why is it OK for that community to be numerically small if it is geographically small, but not OK for it to be numerically small if it is geographically large? Let's at least get some consistency on this. If all 35,000 Lichtensteiners used Lichtenstein dollars and that makes those dollars a money, why does 35,000 bitcoiners worldwide using bitcoins not make bitcoins a money? This implicit bias toward geographically formed communities smacks of outdated, pre-Internet thinking. Many aspects of commerce are easier when people you can exchange with are nearby, but certainly not all of them.

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AJ,

http://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game/

That article shoule ease your troubled soul.

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Malachi replied on Sun, Oct 7 2012 7:36 AM
Thanks for the spam, creepy Dave! I appreciate you bowing out semi-gracefully now that AJ has annihilated every argument you have made.
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AJ replied on Sun, Oct 7 2012 7:44 AM

My response above is inclusive of that blog post.

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AJ,

That article makes no side assumptions of any kind. Well, one. It assumes the laws of supply and demand.

Please point out to me where you see any vaguness and/or side assumptions.

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Malachi replied on Sun, Oct 7 2012 7:52 AM
Close, but no cigar. It is like saying "woman" means the same as "human being".
red herring. Youre utterly unable to deny the fact that "people value bitcoins because they are useful" so you resort to simile.
Nice try. However Terrell is just stating the same idea Mises did in a more modern English.
the original german is properly translated as "valueless in itself" which certainly does not apply to bitcoin. Youre done here.
First of all, I don't believe you. Link?
you dont need to believe me. Such a thIng is apodictically certain. Refer to the regression theorem. Or do you now somehow believe that money can start out as money without ever having been non-money? And the regression theorem must be empirically verified?

Second of all, how many people exactly were doing this?
all of them. All of the people who are relevant, anyway.
Where was the "already in general use" ? Where was the "widespread demand" ?
right there, with the people who were using it, the only people who matter for this question.
How much money were they paying for using it that way?
Do you mean to ask me how much money they were paying for bitcoins before bitcoin was money to them?
How come nobody ever heard of bitcoins until some charlatan tried to pass them off as money?
you probably never heard of it because you dont get out much.
some charlatan tried to pass them off as money?
what part of apodictically certain are you confused over?
Third, and most important, you don't get what a bitcoin is. It is an arangement of the innards of your computer that sends out a message that you now own one bitcoin. That has nothing to do with cryptography.
you dont understand what bitcoin is. That "arrangement" is cryptographic in nature, as is the message. Since the message is public and encrypted, and the author is publicly pseudonymous, this system is a peer-to-peer decentralized cryptographic communications network. Once you understand this, you might begin to see why bitcoin has industrial value. Hopefully the public shame of having been so wrong for so long wont cause you to do something drastic like implode your account.
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AJ replied on Sun, Oct 7 2012 8:06 AM

Smiling Dave:

That article makes no side assumptions of any kind. Well, one. It assumes the laws of supply and demand.

Please point out to me where you see any vaguness and/or side assumptions.

The answer, of course, is that it depends on how many people find the thing useful. If very few people have a use for it, then the demand will be lame and the market price will be zero.  

For starters, the parts I bolded are fuzzy and/or judgments. Beyond that, the blog post just doesn't seem to address much of any of the recent points made, at least those I made. But again, I don't find the comments via the regression theorem necessary to address further at this point. 

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AJ,

If your problem is with the laws of supply and demand not being quantitative and are in your opinion fuzzy and judgemental, I can live with that, just like every economist on the face of the Earth, Austrian or not, has no problem with it.

 

 

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OK guys, Part Two is hot off the presses.

Here is the impressive title, complete with Olde English:

Bitcoin and the Numbers Game, Part 2, in Which we Shew Two Different Ways that Bitcoin has Never, Not even Once, been used as a Medium of Exchange.

The summary:

We talk about the history of currencies similar to bitcoin, which were all flops eventually, but in some cases lasted almost 20 years before dying.

We also explain why bitcoin has never been used as a medium of exchange, not even once, despite the existence of mtgox and all the other bitcoin hangouts.

And the link:

http://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game-part-2-in-which-we-shew-that-bitcoin-has-never-not-even-once-been-used-as-a-medium-of-exchange/

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Malachi replied on Sun, Oct 7 2012 9:05 AM
What is the point of all these sad stories of monies, that just like bitcoin, were based on nothing?
since you deliberately refuse to educate yourself on bitcoin, you must try to bolster your argument with irrelevancies. Oh the shame! Please end this pathetic charade, Dave, and forevermore refrain from commenting on bitcoin.
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AJ replied on Sun, Oct 7 2012 9:21 AM

Smiling Dave in his latest blog post:
All the buying and selling of bitcoins for dollars or pesos or other currencies over at mtgox.com and other places are not, repeat not, transactions where bitcoins are media of exchange. Only instances where a person sells his apples in exchange for a bitcoin, and then buys oranges with the bitcoins, count as bitcoin being a medium of exchange. [Look this up if you don't believe me].

I will take an educated guess and say that those events are extremely rare. I will go so far as to say they never happen. I think that everyone who sold something and accepted bitcoin in payment then went right ahead and redeemed them for dollars.

I'll just leave this here wink
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Addendum, just to make my point perfectly clear to all.

Now I think about it, I am positive that nobody ever got up in the morning and said, "I have some apples to sell, and i want to trade them for oranges, and and beer, and diapers for my little tyke. What's the most convenient way to do that? I know, I will look around for someone who will give bitcoins for my apples. Then I will look around for someone who will trade in my new bitcoins in exchange for apples, someone else who will give me beer, and a third person who will give me diapers." 

I can say with utmost confidence that such a thing never happened. But people say that every single day with dollars. That's why dollars satisfy the definition of medium of exchange, and bitcoins do not.

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Anenome replied on Sun, Oct 7 2012 11:57 AM
 
 

Smiling Dave:

Notice this is a backwards looking theory. There is something being used as money and we're attempting to explain the praxeologic means by which it became so. It does not determine what is money, only attempts to explain how what is money became so. It is not a rubric for determining what is money.

Been there, refuted that: http://smilingdavesblog.wordpress.com/2011/12/21/was-mises-regression-theorem-a-mere-history-lesson/

This is why I think the theory itself is deficient. And again, the theory nowhere says that something with exchange value can't be money. It only provides a rationale for how something with exchange value got that way. However, if it found something with exchange value and no commodity value, that would be something that shows the theory itself to be insufficient and thus require a new, broader theory, or some exception taking.

I've said from the beginning that you're worshipping authority on this topic without looks at the facts staring you in the face, and it's completely ridiculous. You simply don't see the forest for the tree.

Smiling Dave:

The original use of bitcoin was mining them as an investment. This is what got the demand for them going, speculators with processing power.

A person speculates when he thinks the demand for something is, or will be, higher than the current price indicates. He assumes this imbalance will right itself in time, and so buys it, with intent to sell when market forces of supply and demand finally give the object the higher price.

You see where we are going with this. Saying a thing has value because it is underpriced is putting the cart before the horse.

Not at all, that is the very job of any speculator. Can't believe you're still trying to weasel out of the obvious.

Smiling Dave:
We are now discussing how the price of a bitcoin determined in the first place. And your answer is by people thinking its price is too low. But the question is how did those people themselves determine what the price should be?

Doesn't really matter. We know they historically did value bitcoin assuming the price would go up, based on what's known about bitcoin. Just like any speculator on any object of speculation.

Smiling Dave:
Here's another objection to your explanation. You think that a person can make money by taking something that has no use whatsoever, gambling that the price he pays for it now will rise, and then sell at the new price.

Whether it has a use is immaterial and also subjective in terms of investments. One man's reasonable investment looks like folly to another. That's why speculation pays off--he whom perceives the future best makes money. All that's needed to speculate is a reasonable or even a scant suspicion that something may rise in price at some future point. Importantly here, the thing -does not- require any commodity or industrial use. People often speculate on art, for instance. I've read about a group of traders who loved speculating on odd things. One guy bought 30,000 tins of expired sardines. And, realizing what he'd done, he asked the group if he could eat them. Someone replied, 'they ain't for eaten, they're trading sardines.'

Smiling Dave:
Yes, he can sometimes do that, if he can convince fools to buy his useless object.

Or if just more people speculate like him, thus raising demand and the price with it.

Smiling Dave:
But of course those buyers are just fools.

You've devolved to attacking these speculators? Umm, you do realize a lot of them made serious money speculating on bitcoin, right? Like, moooooneeeeeh. This isn't a rational argument. Your reasoning is falling apart in the face of the speculation claim of its origin.

Smiling Dave:
A useless object will, by the inexorable market forces of supply and demand, drop to zero in the long run. In other words, you have admitted that bitcoin is doomed.

Unless it gains exchange value. Which it now has, as a direct consequence of the speculators pumping value into the currency on a speculation basis.

That's been the genius of the currency thus far, to tie together speculators (miners) and the exchange aspect--even to the point that the proocessing the miner does is conflated with the exchange aspect.

Yes, I think we have a good answer now as to bitcoin's original use and the way it gained value to become a medium of exchange. And I think it destroys your reasoning handily.

 

 
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Anenome replied on Sun, Oct 7 2012 12:06 PM

Now... one second here. If someone sold, say, yen and bought dollars... that would make bitcoin a medium of exchange by your own rationale.

And we know that's happening every day. So, why are you limiting a medium of exchange to mere goods like apples and oranges?

Seriously? Your whole argument comes down to this easily destroyed rationale? Man, you are way too committed to a bad premise. What exactly do you have against bitcoin? This has to go beyond mere reason, did you lose a fortune on them or something?

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People are selling yen and buying bitcoin, then buying dollars with the bitcoins? Why would they do that?

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I dunno Anenome. If you are happy with that long email you wrote, run with it. Feel good.

I see now we differ on the very basics, such as what constitutes rational thinking, and the chasm is too wide between us.

Good luck to you.

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Anenome replied on Sun, Oct 7 2012 1:30 PM

People are selling yen and buying bitcoin, then buying dollars with the bitcoins? Why would they do that?

To send money overseas, why else. Come on. Any number of reasons beyond that come immediately to mind. Businesses might want to repatriate profits or do business in the local currency, etc., etc.

***I don't know what 'email' you're referring to. I have not emailed you or anyone.

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+1 Malachi

Great point using cryptography as the first non-monetary use of bitcoin. Bitcoin adopted cryptograhpy in order to function.  This service was in place and "universally" valued before bitcoin could be developed and this service allows it to function as money. This is where I think the value of bitcoin lies, it's fast and private. It seems we can use the regression theorem to trace bitcoins origin back to this service.

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Malachi replied on Sun, Oct 7 2012 7:26 PM
Its true! Bitcoin is a cryptographic datum with properties that are perfect for anonymous clandestine communications, completely disregarding a monetary aspect. The monetary aspect improves the industrial properties by hiding the communications functions amongst so much commercial noise. And since we KNOW (per Mises) that something CAN NOT become money without some sort of industrial use beforehand, we are forced to conclude that this is it, the industrial use is a robust clandestine pseudonymous digital communications network. Bitcoins are divisible to eight decimals so I doubt this function will cease due to bitcoin appreciation. Does anyone know how to send and receive bitcoins via sms? Then all you need is a set of one-time pads and wallets for you and your friend.
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