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What Bitcoin is

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Clayton,

I accept your objection about Grandma not understanding security. But you forget liquidity. Since MintChip (and similar) do not present a significant improvement in transaction costs over Bitcoin, they would have to outcompete Bitcoin on liquidity. And that's not easy. There is an enormous logistical problem. Not only you have to make sure the infrastructure is in place so that everyone can process those transactions, people need to learn how to use them and prefer to use them.

And what would they do with the banks? If they attempt to replace them, they won't be very happy. If you attempt to upgrade them, then the logistics become even more complicated.

There is also the issue of multiple currencies (whereas Bitcoin is one), so this would have to be done globally rather than within one country to be effective.

I'm not saying it's impossible, it's just more difficult to pull off than you present. Bitcoin has a first mover advantage.

PS I might be biased because I work for a cloud provider.

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AJ replied on Sat, Oct 13 2012 9:52 AM

http://www.loper-os.org/?p=939

This is a well-written article from a non-bitcoin supporter. Worth a read for anyone interested from either side of the debate.

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AJ replied on Sat, Oct 13 2012 10:25 AM

To address the "bitcoins aren't backed by anything (represent no claim on anything)" objection, I'd like to ask what specific benefits a backing is deemed to provide.

Gold or a gold-backed dollar (assuming for the sake of argument that this backing is completely non-fraudulent and will definitely be honored) appears to have at least the following advantages over a pure fiat dollar:

  1. The government cannot inflate it.
  2. Its market value can never go to zero.

Is there any other benefit to having a backing? If not, we can dismiss #1 since bitcoins cannot be inflated either (this would require a change to the protocol that is Bitcoin, and this would then be Bitcoin-2 and probably not be adopted by many people*).

That simply leaves us with #2. The market value of a bitcoin could indeed go to zero, but we already knew this. This constitutes no new objection.

In conclusion, provided there are no other benefits of backing, and since bitcoin has the first benefit (#1) and everyone already acknowledges that it lacks the second one (#2), the reminder that "bitcoins aren't backed by anything" boils down to the simpler and familiar "bitcoins could go to zero" objection.

--

On the other hand, if other benefits are deemed to accrue from having a backing, it seems clearer to enumerate and argue about those benefits specifically (benefit #3, #4, #5, etc.).

*If this is controversial, I'd like to bookmark this point in the argument so that we can come back to it after settling that question.

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Clayton replied on Sat, Oct 13 2012 12:05 PM

The potential of total collapse in value might seem to be "worth the risk" for a few hundred or even thousand dollars. But is Gramma Marge really going to put her multi-million dollar life insurance payout at risk of total collapse in value, regardless of how low it makes "transaction costs"??

As for the "Bitcoin can't be inflated", a) this isn't strictly true and b) I'm more concerned about a MintChip copy-cat system that claims to be like Bitcoin with the essential difference that its supply can be "controlled" for "policy purposes." Sure, the Bitcoin early-adopters will never be fooled by this but the masses easily will be... which means that all the hubbub about the uninflatability of Bitcoin could be fairly easily hijacked for propaganda purposes in promoting government-issued (and inflatable) digital fiat currencies.

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Anenome replied on Sun, Oct 14 2012 6:04 PM
 
 

Clayton:

The potential of total collapse in value might seem to be "worth the risk" for a few hundred or even thousand dollars. But is Gramma Marge really going to put her multi-million dollar life insurance payout at risk of total collapse in value, regardless of how low it makes "transaction costs"??

Right now most people aren't using bitcoin as a value store. This is rational because of its youth as an entity, and the previous price crash. However, that sort of boom-bust is a fairly typical curve you see replicated when anything becomes popular and then stabilizes in interest.

We should simply dial it back to strategies to fix what you fear. Are you afraid of devaluation? Simple, don't hold large amounts of value in bitcoin. Use it for transactions between what you want and a commodity that excels at value-store, like gold or silver. This is why the idea of a gold or silver backed bitcoin is largely irrelevant. As long as it has a fairly stable exchange-value, as it does now, you can buy whatever you want for value store.

Just because past currencies typically had the dual uses of exchange value and value store doesn't mean a future currency can't just as easily separate those aspects.

Clayton:
As for the "Bitcoin can't be inflated", a) this isn't strictly true

It's a possibility that is too remote to reasonably contemplate at this point. Maybe if the US government wanted to spend several billion dollars on hardware for the sole purpose of destroying bitcoin, they could pull it off. But most people would probably be able to exit the system before they'd taken control, getting most of their value out of bitcoin, and it wouldn't stop a successor from being built hardened against such an attack.

The genie is truly out of the bottle. Bitcoin is thermo-nuclear currency.

Clayton:
and b) I'm more concerned about a MintChip copy-cat system that claims to be like Bitcoin with the essential difference that its supply can be "controlled" for "policy purposes."

That would only lend legitimacy to Bitcoin. Secondly, such a system couldn't be P2P if they expect to control it, thus it would be subject to things like DDOS, hacking, and still couldn't prevent people from escaping onto Bitcoin if they wanted to.

Clayton:
Sure, the Bitcoin early-adopters will never be fooled by this but the masses easily will be... which means that all the hubbub about the uninflatability of Bitcoin could be fairly easily hijacked for propaganda purposes in promoting government-issued (and inflatable) digital fiat currencies.

Clayton -

The virtue of Bitcoin in getting around legal barriers still exists. As long as government allow open access to the internet, either worldwide or within any country (intranets), bitcoin in general or a local version will be possible.

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Clayton,

I think you have a too narrow viewpoint.

First of all, there is a wide variety of actors on the market with requirements for different forms of a medium of exchange. The requirements are heterogeneous. We can use the term "transaction costs" to refer to them in general, but empirically this manifests itself in many ways. So unless the state medium of exchange really is form-invariant as Bitcoin, there will always be a gap in the market left for Bitcoin.

But a form-invariant medium of exchange makes it impossible for the state to achieve a lot of its goals, for example regulation, control and tracking. So it is faced with two conflicting requirements. If it goes full-form-invariant in order to maintain a certain level of control over the money supply, it needs to give up a lot of its other powers.

The second thing is that unlike historical fiat reforms, it is impossible for the state to redenominate Bitcoin. It can only redenominate financial instruments denominated in Bitcoin. Also, there is the issue of compatibility, which makes it easier to differentiate the products and therefore treat them as having a different price. This makes it more difficult to use Gresham's law for the state's benefit.

The compatibility enforcement also alleviates your worry about inflating Bitcoin. Instead of inflating "the old" Bitcoin, you'd create two different versions of Bitcoin, mutually incompatible. It becomes the equivalent of people voluntarily choosing to switch from grams of gold to grams of silver, which would increase the nominal money supply (denominated in grams) but it can't just occur randomly.

In other words, if the state tries to tackle Bitcoin, some of the old tricks won't work anymore, and some would come at a higher cost.

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AJ replied on Tue, Oct 30 2012 10:41 AM
55-page European Central Bank white paper on virtual currencies (mainly Bitcoin). Surprisingly well-written, even references Hayek and the Austrian school. http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
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AJ replied on Tue, Oct 30 2012 2:26 PM
This was striking: “The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation.” – European Central Bank
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Anenome replied on Tue, Oct 30 2012 10:09 PM
 
 

Here's a good write-up on the report from some Bitcoin insiders:

http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

The report concedes btw that bitcoin is essentially equal to cash, as it is equally hard to control and track as hard card. But check this out:

But the report’s last conclusion regarding the negative impact of virtual currencies on central banks was, to be honest, a startlingly candid revelation by the ECB.

As it is written in the report’s Executive Summary,

“[virtual currencies] could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly.”

and:

“The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation.” – European Central Bank

 
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Anenome replied on Tue, Oct 30 2012 10:21 PM

Also:

http://www.reddit.com/r/bitcoin

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AJ replied on Wed, Nov 14 2012 6:44 AM
Doug French, former director of the LvMI, just wrote a very positive (and good) article on Bitcoin, in which he states that Bitcoin has "proven to be very useful in the digital age."
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AJ replied on Thu, Nov 15 2012 8:29 PM
WordPress.com, overwhelmingly the largest blogging platform on the internet, global traffic rank #22 with tens of millions of users, now accepts bitcoins.
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Is Bitcoin like Paypal?

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Anenome replied on Fri, Nov 16 2012 9:19 PM
 
 

Internal FBI risk assessment of Bitcoin network [pdf]

"Despite the virtual nature of Bitcoin, users
value the currency for many of the same
reasons people trust Federal Reserve notes:
they believe they can exchange the currency for
goods, services, or a national currency at a later
date. As such, Bitcoin is currently accepted as a
form of payment at hundreds of legitimate retailers including vendors selling clothing, games,
music, and some hotels and restaurants.7 In addition, the unregulated nature of Bitcoin,
combined with its other unique features, attracts criminals to this form of payment and transfer
method."

 
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AJ replied on Sun, Nov 18 2012 12:52 AM

Not to mention the new Bitcoin Store with 500,000 computer hardware products available through wholesaler Ingram Micro. The store only accepts bitcoins, and is reportedly in many case much cheaper than Amazon and NewEgg.

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Anenome replied on Sun, Nov 18 2012 1:40 AM
 
 

WordPress Now Accepts Bitcoin Across The Planet

I awoke to incredible news this morning. Leading web publishing service WordPress.com announced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.

Then I remembered that WordPress.org powers our online publishing platform. It also powers the blog platform for The New York Times, CNN, Reuters, Mashable, NBC Sports, GigaOm, TechCrunch, ELLE Girl, RealClearPolitics, TED, National Football League, General Motors, UPS, eBay, Sony, and Volkswagen...

 

 

 
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Anenome replied on Sun, Nov 18 2012 10:40 PM
 
 

I had a funny thought recently. We have different kinds of money: commodity money, fiat money, and credit money.

But what if we characterized bitcoin as debit-money; the opposite of credit-money.

It's money because you must pay into the system before you can spend anything.

This is reflected in over-the-counter exchanges which will sell you bitcoin for basically any currency.

Ah, you may say, but what of miners, they are not paying money into the system.

No, but you can't mine bitcoin without putting a lot of capital into the system first and turning those resources towards mining, and those resources have a non-zero dollar cost--electricity, computer hardware, maintenance, storage space, etc.

Bitcoin must have value in part because it's 100% safe to assume that each bitcoin has had resources put into its acquisition. This is further helped by its crypto-nature which ensures that inflation can't destroy that value.

It's just a thought, but maybe there's something to it.

 
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it's 100% safe to assume that each bitcoin has had resources put into its acquisition

As Clayton pointed out on another thread, it's not exactly 100%. Though, I would say, pretty close.

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AJ replied on Mon, Nov 19 2012 8:39 AM
I heard a rumor that Bob Murphy is working on a new article on Bitcoin. I'll be interested to see his thoughts at this stage. Doug French did his graduate thesis on tulipmania and he seems sympathetic to Bitcoin. Anyone know what other major Austrians are saying about Bitcoin recently?
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Clayton replied on Mon, Nov 19 2012 3:07 PM

What I'd really like to see is a Hawala-like system built on judge.me or a similar system. 

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AJ replied on Sat, Dec 1 2012 3:28 AM
Bloomberg Businessweek: Dollar-less Iranians Discover Virtual Currency
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AJ replied on Sat, Dec 1 2012 3:39 AM
Clayton:

What I'd really like to see is a Hawala-like system built on judge.me or a similar system. 

Hmm, just found this. As for Hawala, it seems like some of the agents could stand to make a lot through arbitrage, etc. using bitcoins.
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Anenome replied on Sat, Dec 1 2012 3:58 AM
 
 

AJ:

Freakin awesome ;) Here's my contribution:

Bitcoin, Dollars and Pot-Banging Protests in Argentina.

There's also a pretty fascianting discussion going on in the comments about how Bitcoinis effectively undermining regime control and how that scares the US too for they may fear they might be next.

Some are saying Iran should embrace bitcoin as it effective routes around economic sanctions. Others say that while true it would also diminish the Iranian gov's control over the Iranian people, which is also true. Other counter saying Iran's control is rooted in selling oil, wouldn't Iran love it if Bitcoin became the preferred currency for trading oil in the middle east (LOL), that would hurt the US by hurting the dollar.

Man, can you imagine if the middle-east switched to Bitcoin for oil sales? My god, I can actually see that happening one day. Impossible for now, but one day. Need way more market capitalization first. Combine the entire middle east's wishing they could switch off dollars with their similar fear to switch to any other nationally-sponsored currency and suddenly Bitcoin is a good alternative.

 
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AJ replied on Sat, Dec 1 2012 4:41 AM
Those comments are encouraging to see on reddit. The lazy part of me (that's all of me, actually) wants to just sit back and let Bitcoin dissolve state power, so that I don't have to bother arguing with statists.
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Anenome replied on Sat, Dec 8 2012 10:14 PM

Bitcoin going mainstream? Exchange approved to operate as a bank

Bitcoin Central, a Bitcoin exchange that is popular in the eurozone, says it has secured approval from regulators to operate as a bank under French law. The announcement could be another sign of the cryptocurrency's growing legitimacy.

The news was announced in a Thursday post on the Bitcoin forums. A representative for Paymium, the French company that runs Bitcoin Central, said the firm had partnered with the French payment processor Aqoba and the French bank Credit Mutuel to create a Bitcoin-based payment service. Users will be able to deposit funds in either euros or bitcoins, and to easily convert between the two.

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AJ replied on Tue, Dec 11 2012 6:43 AM
Best analysis I've found on the significance of the above development.
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matt_kyle replied on Tue, Dec 11 2012 6:48 AM

What is bitcoin?

As many people pointed out, if it is claimed that bitcoin is money, it violates the regression theorem. Indeed it does. More importantly, it doesn't function as money. That fact is easily proven.

I think that bitcoin is an intangible commodity. It is valued for its anonymity, low transaction costs, and so on. It certainly isn't a medium of exchange outside certain circles, but it can easily be exchanged for national currencies on commodity exchanges like mtgox.

That doesn't mean that bitcoin can never be money. It could potentially be money at some point, and even comply with the regression theorem.

I will expand on this later.

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Doug French...seems sympathetic to Bitcoin.

Link or it didn't happen.

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Anenome replied on Tue, Dec 11 2012 3:58 PM
 
 

matt_kyle:

What is bitcoin?

As many people pointed out, if it is claimed that bitcoin is money, it violates the regression theorem. Indeed it does.

We've discussed that to death. Ultimately I don't think it does violate it at all. Bitcoin represents pure exchange value.

matt_kyle:
More importantly, it doesn't function as money. That fact is easily proven.

Oh god.

matt_kyle:
I think that bitcoin is an intangible commodity. It is valued for its anonymity, low transaction costs, and so on.

Yes, those things constitute exchange value, not commodity value. It's commodity value (a bit of energy) is vanishingly small.

matt_kyle:
It certainly isn't a medium of exchange outside certain circles

Then you're in the contradictory position of saying it's money in those circles and not-money outside them.

If it's money anywhere, even once, in any time period, then it has been used as money. Practically everything has at one time been used as money, from corn to wheat to shells and stones. Tulips?

matt_kyle:
but it can easily be exchanged for national currencies on commodity exchanges like mtgox.

You can purchase a lot of things directly too.

matt_kyle:
That doesn't mean that bitcoin can never be money. It could potentially be money at some point, and even comply with the regression theorem.

I will expand on this later.

Suggest you find and read the various threads on this already. We've had nuclear war over this issue and studied it from every possible angle, and I think we've produced a lot of original philosophical solutions, especially regarding Mises's regression theorem.

 
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matt_kyle replied on Tue, Dec 11 2012 5:39 PM

Anenome,

I will assume that you are saying that bitcoin functions as money. I can easily prove that it does not function as money.

Take the typical user of bitcoin. Actually, take ANY user of bitcoin. Bitcoin amounts for only a tiny amount of his daily transactions, assuming he needs to eat, purchase products and so on. If he is a vendor accepting bitcoins, he adjusts his price in bitcoins daily or even several times daily against his local national currency, then exchanges his bitcoins through a commodity exchange immediately. Speculators there provide liquidity. Those habits prove it isn't money. Surely you are not claiming that bitcoin is widely accepted?

The commodity value of bitcoin isn't the energy used to create it. That is a definition of value applied nowhere else so it shouldn't be applied to bitcoin. The value of bitcoin, lets call it intangible value, exists in its function of anonymity, low transaction costs, the ability to bypass sanctions, ability to purchase drugs on SR and so on. 

The negligible transaction costs shouldn't be underestimated as a factor. They allow for transactions that otherwise may not take place. For example, let us say that I have someone in Japan to whom I must send money, for example $10. It is going to cost me $25 on my side to send it, and $30 on his side to receive it. This transaction would never take place. Bitcoin allows this transaction to take place.

Yes, I contradicted myself. I misspoke and should have said bitcoin is not considered money outside certain circles. It definitely is not money. That doesn't it can never be money. Over time if widely used and commonly accepted, it can meet the conditions for the regression theorem. Valued for something else initially, it becomes a common medium of exchange.

I don't think a currency needs to be backed, and many will disagree with me here but I don't think it needs to be backed by gold, silver, or anything else. The important thing is that the number of units in a currency remains stable so that people are able to make economic calculations. Bitcoin, when it reaches its maximum number of units does that.

The greatest danger to bitcoin, in my opinion, are technical threats to it in the future that we don't even know exist today, or could not exist today, but could exist at some future point. 

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Anenome replied on Tue, Dec 11 2012 8:15 PM

Kyle, I don't feel the need to rehash entire threads to answer you on these. You sound exactly like Smiling Dave in all his arguments, and you'll find in him a valiant and dogged defender of your point of view.

I urge you, read through this thread and the other large bicoin thread, see all the arguments against all the points you raised, by myself and others, and SD's counters, and see if you find anything new that either changes your mind or challenge some of the opposing args and come back. Seriously, we just did all this about two months ago and I don't think anyone's eager to retread ground.

In the end, I felt like all of SD's (and by extension your) arguments had deficiencies. Some of the biggest of which being that the Regression theorem is primarily explanatory rather than predictory. It doesn't limit what can be money to those stipulations, it seeks to explain why certain things became money.

On top of that, things like "it's not in wide use" fall apart on closer inspection. "Wide use" is a vague criterion, and it was possible for us to prove that the dollar itself, and certainly other admitted monies, can't be considered money under the 'wide use' doctrine.

There are also things about bitcoin that seem to break Mises's RT because digital good didn't exist in his time. You couldn't have money that didn't have physical existence in his time. Now we have 'spiritual' moneys made up of pure energy with practically zero commodity value at all--something unthinkable in his day.

And there's tons of theory on gold and considerations of its use, and much, much more.

Bottom line: if two people use bitcoin to facilitate a transaction--bitcoin has been used as money. End of story. That's what money does, facilitate transactions.

That's already occurred. Bitcoin is money. Or at least was money in the past, and is currently being used as money, by rather large numbers of people. It may be a small capitalization currency as of yet, but it is in fact being used as money, and denying that is flying in the face of existing experience.

The better question for people like you, the better line of attack too, is to question why bitcoin has any value at all. This was a productive discussion actually. I eventually realized the value of bitcoin is tied purely into its exchange value. Which -is- a feature of Mises's RT.

The current price of gold, for instance, what percentage of its price is reflective of commodity value and which percentage reflective of exchange value? Almost all of its value is exchange value. Bitcoin too is similar, mainly exchange value.

Anyway, read it all through, if you're interested in the topic you'll likely find it a fun read.

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AJ replied on Wed, Dec 12 2012 5:59 AM
Hi Dave, the link is above (http://lfb.org/today/currencies-of-the-future/).
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Anenome replied on Wed, Dec 12 2012 3:14 PM

If he really is just Smiling Dave back to rehash his same arguments then that's just sad.

 

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AJ replied on Thu, Dec 13 2012 10:18 AM
4chan now accepts Bitcoin for membership upgrades. ~100,000 users and second-largest forum on the internet by post volume.

Also, Bitcoin price is pushing $14 per coin.

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Anenome replied on Thu, Dec 13 2012 1:45 PM

"Widely accepted" objection quickly melting though the hands of adherents.

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AJ replied on Sat, Dec 15 2012 8:30 PM
And so it begins...
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Anenome replied on Sat, Dec 15 2012 9:27 PM

AJ:
And so it begins...

Ah if only Rothbard had lived to see it! He'd be so pleased I think ^_^

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matt_kyle replied on Sun, Dec 16 2012 8:32 AM

I have read every post on this thread, and still do not think that bitcoin qualifies as money at this point.

On the other hand, I agree with you that Rothbard would be pleased.

If bitcoins are money, then are not tokens at game arcades also money? Or Linden Dollars from Second Life?

If you look at the activity on the most prominent site actually using bitcoins for selling things, the prices go up and down according to movements in the national currency of the nation the vendor is in, sometimes several times daily. In addition, most of the users of that site buy the bitcoins, and make their purchase as quickly as possible. The vendors have their sales hedged, so they are not damaged by bitcoin volatility. Vendors without doubt change the bitcoins into their national currency as soon as they receive it. In every respect the bitcoins operate as tokens, a proxy for money, rather than money itself.

Those people that actually hold bitcoins are usually speculators, or those with only a handful of bitcoins in their accounts (like me).

Bitcoins may turn into money, and meet the regression theorem at some point in the future. At the moment, though, it has no foundation in reality. I would like bitcoin to replace national fiat currencies, but my desires do not colour my thinking.

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AJ replied on Fri, Dec 28 2012 10:51 AM
The former President of the Mises Institute AND its founder seem to be quietly coming around.
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