One day, while I was learning about cipherspace, I discovered BitCoin. BitCoin is a completely decentralized, anonymous online monetary system that relies on a distributed database to facilitate transactions. The creator put a great deal of effort into ensuring that the system is secure and reliable. Unfortunately, there are no real assets backing he currency of BitCoin (and no coercive government backing it either). Thus ends BitCoin.
I can imagine, though, a system like BitCoin that allows people to write promissory notes and sign them with an RSA digital signature (to prevent couterfeiting). These promissory notes could be backed by gold, silver, fiat currencies, stocks and bonds, or pretty much anything. Then, these notes could be transfered from one person to another anonymously.
Couple this with an ebay-like service that allows people to swap these virtual currencies. Say, for example, that I have a gold note issued by a bank in South Africa. Since taking delivery of the gold could be a problem, I trade my notes for notes issued by a bank in U.S.A. Then, I can redeem those notes and have them FedEx me the gold (insured, of course).
This system would be Fed-proof, IRS-proof, FBI-proof and judgment-proof. This system would protect the users against monetary inflation, making it Fed-proof. Since nobody has a bossman ratting out their earnings, it is IRS-proof. It is FBI and NSA proof because all transactions are encrypted and anonymous. And, most importantly, it is judgment-proof because it is perfectly legal.
There are, at present, no laws that could be used to criminalize what I propose. Laws against money-laundering, for example, do not apply because there is no way to prove that the money came from an illegal source, such as drug dealing. Laws against tax-evasion do not apply either, because no taxes have ever been levied on imaginary currency. In addition, if you had your day in court, you could defend yourself on First Amendment grounds. Besides, international free trade agreements also have generous loopholes.
So what we are dealing with is anarcho-capitalism and wildcat banking on a global scale. If not for my non-existant programming skills, I'd be forking a new project off BitCoin right now.
Anybody here know C++?
"As long as there are sovereign nations possessing great power, war is inevitable."
@gabriel: Oh, man, you're begging for a flame-war.... ;-)
Of course, C++ and Perl are not even in the same solution-space... but I absolutely love Perl. Unfortunately, Perl has lost its roots with Perl6, which I think is going to be a fork, I don't think Perl5.x is ever going to be truly end-of-life'd, the code base is a large part of what makes Perl so powerful. Ruby and Python are Perl's closest relatives but they both lack the "down-and-dirty" quality of Perl5 that I fell in love with.
Clayton -
No worries, I'm just being inflammatory. I write C/C++ (C#, and some assembly) for a living, so I have a certain affection for them :). Now if there's any "God that Failed" book that should be written about a programming language, it's Ruby. Not a fan.
Bit coin is backed by something: Computing time! Bitcoins are introduced into the "economy" by performing time consuming calculations. This controls inflation and ensures a money supply that grows as more people enter the network.
That does not mean it's backed by something, that means that there is proof-of-work to produce them. Backed would mean that you can exchange Bitcoins into some commodity at a flat/guaranteed rate with the issuing institution or perhaps the Bitcoins themselves are a commodity that can be "consumed" or "used".
For example, soy beans as a form of currency could be eaten at any time or gold as a form of currency could be used for industrial purposes at any time. Bitcoins on the other hand have no use besides as that of a currency. You can not take a Bitcoin and consume it or use it for something else. Once it is produced it can not be "un-produced", much like a service can not be "taken back".
@Micah: Well, Mises and Rothbard both argued that, since money is just a medium of exchange, the quantity of money is immaterial to its economic role. In other words, neither increases nor decreases in the supply of money can have any beneficial effects and - by virtue of its destructive effects on the interest rate causing the business-cycle - manipulation of the money supply has many disastrous effects.
If a monetary commodity were truly only a medium of exchange and nothing else, then Mises's and Rothbard's argument regarding the quantity of money would be correct when applied to a natural order economy. Guido Hulsmann has recently argued, however, that M&R's quantity-of-money argument is only correct when applied to fiat money, not when applied to natural money (market money). That is, the quantity of money is important for money in its role as a medium of exchange and changes in demand for cash balances do have a necessary effect on the interest rate.
This is a consequence of Mises's regression theorem. All money must have begun as an ordinary good. And not just any ordinary good, it had to be among the most marketable goods (Hoppe explains why here, in his usual, laser-guided, logical fashion). As such, it had value in its non-money use. In the natural order, nothing became money which was not already valued for its non-monetary use. Gold was valued for adornment. Dried tobacco - used as money in the American colonies - was valued for smoking. And so on. That the monetary good was scarce and costly to produce is merely a corollary to the requirement that it be valuable (non-scarce things and things which are costless to produce are necessarily not valuable since no one would part with something valuable to get them since they are essentially free... think of air, for example).
We cannot know why there might be increases in the demand for money. It could be that geologists have predicted an imminent, cataclysmic eruption in the Yellowstone volcano and there might be a rush to liquidity. Or, it could be - as you suggested - that economic productivity has reached a point where the monetary unit has appreciated to a value that is inconvenient in hand-to-hand transactions. Like any price, however, we do not need to know why it has gone up or down. We only need to know that it has gone up or down in order to know how to invest. As the value of money goes up, capital will tend to move into the money-production industry.
@Clayton
All things equal, I cannot imagine someone choosing to use an unbacked over a backed currency.
Well, all things are not equal - backed currency does not provide the same degree of anonymity as unbacked one.
If the market participants value the properties of BitCoins that allow them to be used as money for counter-economy, they will use BitCoins.
@abirkmanis: Backing or lack thereof is independent of anonymity. "XYZ Corp. will pay to the bearer 1 oz. of gold on redemption of this note" is every bit as anonymous as "XYZ Corp. will pay to the bearer a note identical to this one on redemption." The same is true in the digital realm.
BitCoin is not "more anonymous" than other digital currencies. Its claim to fame is that it is a bit-gold system with an asymptotic mining potential. If BitCoin was not trying to be money itself but, rather, a money-substitute (like gold-backed paper money), it would be a different story completely.
And please do not confuse my criticism of BitCoin to opposition to alternative currencies or currency experimentation. I want to see the Fed come crashing down as badly as the next guy. Nevertheless, I am predicting that BitCoin will not be the agency of that collapse.
Fare and I agreed to a bet about the bitcoin economy. 500 bucks.
The rules are:
1. Over or less than 10,000 unique users before July 22, 2015. Activate usage. Independent reporting from a major news source or something reputable will select the winner.
2. If it is in dispute by 2015, a judge will be selected by the two party to decide who won. However, either party can name the judge at any time before the date if both party agreed to it.
My email is hackerkiba______________________________AT__________gmail.com
http://libregamewiki.org - The world's only encyclopedia on free(as in freedom) gaming.
Bitcoin does NOT violate Mises' Regression Theorem
First posted here (not by me; I just happened to find this post and thought it worthy of cross-posting in this thread): http://www.bitcoin.org/smf/index.php?topic=583.0
The Money Regression and Emergence of Money from the Barter Economy The entire purpose of the regression theorem was to help explain an apparent paradox of money: how does money have value as a medium of exchange if it is valued because it serves as a medium of exchange? Menger and Mises helped break this apparent circularity by explaining the essential time component missing from the phrasing of the paradox. As Rothbard explains in Man, Economy, and State (p 270), "...a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based, as we have seen above, on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X – 1. The economic analysis of money prices is therefore not circular. If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday." [all emphasis added] Rothbard then goes on to explain that in order for money to emerge from a barter economy, it must have a preexisting commodity value. This commodity value arises from barter demand for the potential money in direct consumption (i.e. ornamentation). This value seeds future estimations of the value of the money as a medium of exchange. The natural market emergence of money is thus fully explained. The Monetary Economy However, once an economy has been monetized and a memory of price ratios for goods and services has been established, a money may lose its direct commodity value and still be used as a money (medium of indirect exchange). Rothbard explains (p 275): "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." This explains the history of fiat currencies. They originally started off as simple names for weights of commodity money (silver) that developed out of the pre-monetary barter economy. Despite later losing their ties to direct commodity value through state interference, paper currency retained status as money because of memory of previous money prices. This factor is so strong that the relationship between gold and the USD, for example, is somewhat inverted. Gold no longer circulates as a common medium of exchange. Prices are set in USD, not in gold. Most individuals wishing to trade in gold do so based on their knowledge of USD/gold price ratios. ("Hey, let me buy that $100 couch from you in gold?" "Ok, USD/gold is $1000/oz. Give me 1/10oz of gold.") Legal tender laws, state taxation, and the entire financial regulatory environment maintain this inertia of USD prices and make it challenging to return to gold money directly, despite the destructive inflationary nature of fiat currencies. The Emergence of the Bitcoin Economy The very first businesses in the Bitcoin economy were exchangers (NewLibertyStandard, BitcoinMarket, BitcoinExchange,....). This is not an accident, but flows from the analysis above. In order for Bitcoins to serve as a medium of exchange without commodity value for uses besides indirect exchange, there must be a translated knowledge of money prices. Market exchangers fill this gap and give Bitcoin users access to this knowledge. Bitcoins may therefore currently serve as a money intermediary for paypal dollars\pecunix\euros. But why is there demand for Bitcoin over USD?? This is a subjective valuation arising from properties such as anonymity, decentralized system of clearance, cryptographic trust, predetermined and defined rate of growth, built in deflation, divisibility, low transaction fees, etc.... inherent to the Bitcoin system. The essential point is that once exchange can occur between a money (USD) and Bitcoins, providers of goods have a means by which to value Bitcoins as a potential medium of exchange. The money regression is satisfied, because taken back far enough we reach traditional commodity money: BITCOINS -> USD -> MONETIZED GOLD & SILVER [start monetary economy] -> [end barter economy] COMMODITY GOLD & SILVER. Of course, if a major meltdown occurred and knowledge of all price ratios was wiped out, Bitcoin could NOT directly emerge as a money (and neither could fiat currencies). Commodities such as gold and silver that have direct value in barter would emerge first. The economy would then be monetized with price ratios in gold and silver. Bitcoins then, being valued for intrinsic properties amenable to exchange, might then become prevalent in trade. Initially, creators of value would continue to make their price value ratios in terms of the true money (gold oz/BTC ratio), but with time Bitcoin prices (BTC) can emerge (see vekja.net as example). We are in this initial phase now. Therefore, so long as exchange of BTC and USD/Euros/etc… occurs, knowledge of existing price ratios can be utilized in the Bitcoin economy. In time as Bitcoins become increasingly marketable, these fiat<->BTC price ratios will seed direct BTC price ratios. The Bitcoin Economy thus emerges. The Misean regression theorem is satisfied. XC
@Ultima: But that BitCoins be exchangeable for what is, today, money is only a necessary condition, not a sufficient condition, for BitCoin to become money. The most serious problem with BitCoin is that proof-of-work is not among the most marketable goods, so there is no reason that people would choose it - in a free market of currency competition - over other goods which are more marketable.
The same can be said for unbacked fiat currency. All the USD is anymore is "proof of work" (printing), yet they still are considered money. You could easily argue that the USD is losing favor in the market and this is because it is unbacked (and I would agree with you) but I do believe that if the USD was printed at a fixed rate, regardless of economic and political influences, it would retain it's value as a currency of choice for other reasons (such as being widely accepted).
I believe that for essentially the same reason, BitCoins could also be chosen over alternative currencies without backing but only after it has become established as the popular choice. Perhaps these intermediary companies who buy/sell BitCoins for USD/EUR at a fixed rate are the key to the rise of the BitCoin but I am uncertain if it is enough to obtain popular favor, which in my opinion is really the key to a successful currency.
Whoever bet that Bitcoin would not make 10K users within 5 years will lose, badly, but there is no way to judge how many users there are. There are nearly 1000 members on the Bitcoin forum, and Google Trends says that Bitcoin is significantly more popular in Russian than English.
BTW, the market rate for a bitcoin has been over a dime for over a week, despite the fact that it is still in it's high inflation stage at about 60% APR. About 2012 the rate drops below 6% APR and the algorithem continues that trend so that by the 2015 mark of the bet, the inflation rate of bitcoin will be under 2% APR. It's not as good as gold, but buy 2012 it will be a more stable currency than every fiat currency in the world and no one will hold a monopoly on further creation.
Clayton,
Excellent thread. I enjoy reading your posts because I have thought through the same implications. If Bitcoin performs as a money substitute with a strong exchanger network at the ready to redeem into specie (namely, gold and silver), then it can bridge both worlds. Scarcity is different and desireable on the Internet because it is typically an environment where everything can be replicated. And, it just may be enough for a true digital currency to emerge. With Bitcoin freely convertible into specie, either thru exchanger or even vending machines now, then it is no different than circulating gold reserve notes, with the added benefit of no seignorage possible.
A Rally in Bitcoin: http://themonetaryfuture.blogspot.com/2010/10/rally-in-bitcoin.html
Clayton, Excellent thread. I enjoy reading your posts because I have thought through the same implications. If Bitcoin performs as a money substitute with a strong exchanger network at the ready to redeem into specie (namely, gold and silver), then it can bridge both worlds. Scarcity is different and desireable on the Internet because it is typically an environment where everything can be replicated. And, it just may be enough for a true digital currency to emerge. With Bitcoin freely convertible into specie, either thru exchanger or even vending machines now, then it is no different than circulating gold reserve notes, with the added benefit of no seignorage possible. A Rally in Bitcoin: http://themonetaryfuture.blogspot.com/2010/10/rally-in-bitcoin.html
The thing is that bitcoin will never have a fixed exchange rate with gold. There will be gold and silver shops that will let you exchange bitcoin for gold and silver, but a fixed rate wont work. In fact, there are already gold and silver business inside the bitcoin economy.
I think its fine that way. People can use bitcoin to trade and then move into gold and silver if they plan to save more long term.
The Ripple project is trying to build a network for trading (or more accurately, "routing") promissory notes in the way you describe. Anyone can issue a obligations, and users choose whose obligations they will accept. Users may also agree to accept someone's obligations and in exchange issue their own. The system uses this exchange network to route payments from payer to payee by finding a set of exchanges that convert the payer's obligations into obligations acceptable to the payee.
A bitcoin-type system really isn't necessary to accomplish all this, only a system to track balances on accounts between users.
For more information, visit ripple-project.org and ripplepay.com.
Bitcoin is "backed" by the fact that there will never be more than exactly 21 million Bitcoins ever.
Gold and Silver cannot say that.
See http://BitcoinMe.com for details.
Actually you could argue that gold and silver are a limited resource, though it's only theoretical (there is only so much of it on the earth, in the solar system, in the galaxy, etc.). However, changes in mining technology and/or particle physics (energy to matter, matter conversion, etc.) have the potential to drastically alter the rate at which new gold/silver can enter the economy and also the cost associated with adding more to the economy. If all of a sudden it becomes really cheap to mine or otherwise produce gold due to a technological breakthrough or the location of a new source the value of gold/silver can be heavily impacted.
BitCoins on the other hand, with a fixed number in circulation, can only increase in value once the 21M are all in circulation. I do believe that they need to be infinitely divisible as I have mentioned here before if they want to truly stand the test of time but in the end the big question isn't whether they have merit over the alternatives but rather whether or not they can gain enough popularity to actually become a common currency.