Bitcoin DO NOT WANT!?

Economics Economics Questions
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1

Well hello peoples. I am increasingly amazed at the harsh criticism Bitcoin has gotten from Austrian economists.

Everyone is all hot and bothered about the fact that Bitcoin does not have any physical backing.

So here’s an experiment: Imagine that tomorrow someone releases a website called GoldBackedBitcoin.com claiming the following;

“I hereby promise that I will redeem one ounce of gold for 250 bitcoins.”

Skepticism sets in and many people sell their bitcoins to this mysterious buyer, a thousand ounces of gold are redeemed before people start to have confidence that the promise is legitimate.

Confident that the buyer isn’t going anywhere, people buy back into bitcoins, and a merry digital gold-backed peer-to-peer currency goes on its way doing what it does best; Facilitating trade.

Is this what it would take for people to accept Bitcoins? A jedi mind trick? “Backing bitcoin with gold” is no different than simply buying bitcoins to facilitate an exchange of goods and services. To be fair, this same mind trick was used to jump start us onto fiat paper money.

“But why wouldn’t everyone just sell out of Bitcoins!?”
Gold Advantages:
1.) Rare.
2.) Divisible.
3.) Restistant to decay.
4.) Useful in manufacturing.
5.) Can’t be hacked.
6.) Anonymous
7.) Restricted supply.

Bitcoin Advantages:
1.) Rare.
2.) Divisible. (Easier than gold.)
3.) Practically immortal
4.) No central authority.
5.) Deflationary.
6.) Can be transferred quickly to anyone on the planet.
7.) No transaction fees.
8.) Very little storage space required.
9.) Anonymous (If used correctly.)
10.) Restricted and perfectly predictable supply.

Some people would sell out of bitcoins but it would be their loss, as the value of bitcoins would quickly surpass the value floor of 250 bitcoins for an ounce of gold. The utility of bitcoins as a medium of exchange clearly far surpasses gold.

This whole conversation is vexing to me since people are beating their chest and growling at bitcoin while they sit on a wad of fiat paper based currency which begs the question: If a paper based currency can facilitate transactions, why can’t an electronic currency?

2

I understand what youre saying.

When you get bitcoins you either buy it with money or you can mine it with your computer.

To get gold, you can buy it with money or you can mine it with a pick axe.

But the thing is, the amount of bitcoins in circulation can be infinity.

I dont understand bitcoins that much but how are they deflationary>?

3

Your criticism is valid enough. I personally like the idea of bitcoin, but will like it more if we can get a large userbase to make it their primary currency. I’m not sure bitcoin in its current technical implementation will ever achieve that, but perhaps a version descended from the current one will be able to pull it off.

One thing that’s vexed people about bitcoin now is its price fluctuations. In a sense that’s because it doesn’t have a commodity backing, but having one wouldn’t help too much either on that score.

Rather, bitcoin, like everything, is subject to supply and demand. We had hoped that a currency with strictly limited supply would be price-stable, but regardless of constant supply we still have to deal with variable demand, so the price will still always move.

Now, in theory that would level out if enough people were demanding bitcoin, that is if it were the primary currency of some large economy. So, again I return to that point :stuck_out_tongue:

But, bitcoin or some similar scheme, is to my mind definitely the future of currency. And if I ever start a new country, I would start it with bitcoin.

4

o_O? clearly you don’t understand bitcoin at all, or you’d know the number of bitcoin is strictly limited to 20 million, iirc. There can never be more unless the whole system were to be hijacked, which is not likely.

20 million might seem small, but each bitcoin is essentially infinitely divisible, so it doesn’t matter. You can take any fraction of bitcoin and that would work too.

5

There are already lots of existing threads on Bitcoin. My view.

Can you cite where some Austrian economists have expressed opposition to Bitcoin? To my knowledge, they haven’t commented on it at all.

Also, here’s a recent thread I started explaining what I think would be a superior alternative to unbacked digital currency.

Clayton -

6

What makes you think that all the people would buy bitcoins after selling them for gold? If I had bitcoins and somesone started selling them for gold at a good price, I would buy the gold with the bitcoins. The bitcoins would have to be available at a better price for me to want to purchase them again. Which I think would be unlikely. I don’t think it would also create what could be called a gold backed bitcoin currency. It would just be some one selling gold for bitcoins.

7

Is it a commodity? No.

Then it will never be a money.

8

Because bitcoins are far more valuable as a medium of exchange than the gold. Imagine you had 250 bitcoins and you decided to sell them for the gold coin. Now you’re sitting on a gold coin in your safety deposit box. (Not bad!)
But why bother with that? You have a website that is guaranteeing you that the bitcoin will always be worth 250 bitcoins to one ounce of gold. With bitcoins you can transact with anyone in the world at borderline no cost to yourself and it will always be worth at least ~$6 a bitcoin, you have nothing to lose! Even if you don’t buy back in, others will.

Bitcoins are not a commodity, Intellectual Property, or Fiat money, in the strictest definition of the words. It’s a cryptocurrency, which is perfectly legitimate as a medium of exchange.

I really do regret creating another Thread on the subject. I was way too hasty.

There are an incredible amount of Blog posts and forum posts. I was giving the benefit of the doubt that some were actual Austrian economists, though I haven’t seen any of the more famous/infamous ones speak on it with any authority or conviction one way or the other. Wasn’t Bob Murphy going to do a piece on the subject?

Yep. Whether Bitcoin will survive it or not, only the future will tell. Perhaps someone will get a bunch of people to invest together in a new cryptocurrency to supply a “price floor”. (After all, the value of the currency could only go up from there.)
Or perhaps a new cryptocurrency will be put in place that limits the size of transactions based on the total supply of currency.
Whatever the case, you’re absolutely right when you say that it’s the currency of the future. There are far too many advantages for a free market to ignore.

9

Yeah, he said he’s writing an article on it. If you haven’t already you can hear some of his thoughts on Bitcoin in this video:

[view: http://www.youtube.com/watch?v=tmvqihHaT2k]

I think it’s the second question he answers.

10

This isn’t supported by reality. The US currency is not commodity-backed and functions just fine as money. It may be fraught with long-term risks by doing so, primarily vulnerability to inflation (because politicians control the presses), but it is money nonetheless.

The reason why commodities make an excellent money, rather than being the only things that can serve as money, is because if you don’t want to use a commodity for money you can always just use it for something else. It always has built in utility, and thus the price of that commodity-money will, in theory, not drop below the price of commodity. Which means built-in inflation protection.

However, a quick historical look at the price of silver will show massive silver inflation when the Spanish were sucking silver out of the Americas and the price of silver dropped some 400%+. Much harder to inflate a commodity currency, but it does happen.

We prefer gold for many good reasons, but even gold could be easily inflated. We’re on the cusp, as a planet, of mining asteroids. It’s possible we could find an asteroid with more mineable gold on it than exists on the entire planet now, which would have the effect of halving the price of gold on the planet in the long-term, or thereabouts, were it immediately dumped on the market.

In this sense, bitcoin is a far, far better currency if your main desire in having a currency is inflation-protection.

Also, there is another major problem with all commodity currencies: they cannot be transacted digitally. Sure, you can make commodity certificates and transmit those digitally, but where’s the law saying you can’t make more certificates than you have commodities? The second you make a certificate, you have the inflation problem yet again.

An inherently digital currency with built in inflation-protection is the best possible currency available if your primary value is inflation protection, which for many people it is.

11

Except bitcoins can be effectively shut down by putting up enough transaction servers that do what you want, rather than what the bitcoin market wants to do (I believe it was Peter Surda who explained this), which is far more likely than finding and mining an asteroid with more gold than there exists in use in the world today.

So if we’re going to judge currencies on the most remote and unlikely scenarios, bitcoin is just another failure that will be used by the state to defraud anyone who uses them, which means weimar republic(bitcoin) versus a 50% drop in purchasing value (double the gold).

12

Well, that’s one reason why I always say that Bitcoin is the future but perhaps not in its current incarnation. A future incarnation may be more resistant to takeover. Or it may be that, once adopted as a currency by a large population that taking over the network in that fashion becomes effectively impossible.

On the other side of the coin, we don’t really know what the likelihood of finding a golden asteroid is. Go look up the state of the art, they think there’s a lot of heavy metals in asteroids. I think they said a single (relatively small) asteroid had about $20 trillion worth of metals in it, and there’s many millions of asteroids up there. Finding one rich in gold might not be as far out as we imagine. They already assume many of them are quite rich in platinum. And supposedly the vast majority of the gold we have on the planet has come from asteroid strikes in the first place.

13

You dont unless its forcibly imposed monopoly provider of certificates. In order for me to trust you dont debase your certificates you will have to convince me that you can’t just print them up and you have to do better than competition.

For me store of value is more fundamental property of money than just inflation protection. Gold at least has other utility than to be used as money so it is better at this (I admit - not perfect, just relatively better). As it currently stands bitcoin to me has no value at all besides being used as ticket to a speculation game. I am not convinced this is enough to store my purchasing power over a longer period of time.

14

I can’t prove to you in particular that Bitcoin has value, but the simple fact that it is currently being used as a medium of exchange should prove to you that it has value beyond just speculation.

15

Which it inevitably is in the modern world.

You can’t get a better guarantee of that than the cryptographic guarantee. All these people talking about auditing commodity reserves, it’s silly to think that’s even in the same category as a cryptographic guarantee.

Whoa, whoa, store of value is exactly what inflation protection gives you. One of the primary causes of value-loss is inflation.

Bitcoin has a certain inherent value as money, because of its exchange value. The price / value of bitcoin isn’t likely to significantly stabilize until a large population adopts it as currency.

In any case, we’d better hope that a commodity-currency isn’t the only viable kind of currency, because the future will be full of digital currencies.

16

The number of ‘transaction servers’ has nothing to do with the ability to control the network. Participation does not equate to direct control any more than speaking a language directly changes the words used. Similarly, initiating many transactions (called ‘dusting’) causes the network to raise transaction fees in response, so flooding the network would rapidly become prohibitively expensive.

Bitcoin’s current weakness is in the proof-of-work mechanism that prevents double spending. Control over more than half of the processing power would afford an attacker the ability to slow or stop transactions. It would still not allow an attacker to spend anyone else’s funds, only his own. In addition, this 51% of network processing power control would need to be maintained in order to prevent the attacker’s double spending from being rolled back.

At its current processing capacity, the Bitcoin network is prohibitively expensive to attack in a direct manner even for most nations. It is still vulnerable, but this processing power is rapidly growing. An attacker would also need time to set up such a system, leading to a race against the network itself as it naturally expands its capacity through private interests.

Even if such an attack were to be implemented, the blockchain (a record of all transactions) would fork (split in half) and lead to continuation of the ‘natural’ blockchain. A simple software update or adjustment to network routing separate from Bitcoin could easily redirect processing power to the natural chain, ignoring the attacker.

So no, Bitcoin cannot be effectively shut down any more than the Internet can be turned off.

17

That sadly seems true.

Why certificates cant be digital? Granted as long as certificates are backed government can just shut down warehouse with backing material of competition to its FIAT, that is why I think we can agree that commodity money is not perfect.

That is not true or at least it is not whole picture. Bitcoin to me has no value at all as store of value because I have no guarantee it wont become worthelss so guarantee that number of bitcoins wont grow is not relevant (and useless). Scarcity doesnt make something valuable by itself. Gold wont ever become completely worthless because it has utility outside of monetary usage.

There is no such thing as inherent value. Value is subjective. Just because people are giving money in exchange for bitcoins (for whatever reason) now is not a guarantee of any value whatsoever in the future because bitcoin is useless outside of monetary use. Imagine that something better than a bitcoin comes around or somebody permanently compromises bitcoin - bitcoin will become completely worthless very quickly. If something better than gold come along gold would still retain some value because of its use in various industries. Thus bitcoin is in my opinion not a really good money system and not a solution to problems with commodity money and commodity backed certificates.

18

“This isn’t supported by reality. The US currency is not commodity-backed and functions just fine as money. It may be fraught with long-term risks by doing so, primarily vulnerability to inflation (because politicians control the presses), but it is money nonetheless.”

Check your facts. The dollar arose out of its relation with gold. It was redeemable in gold therefore it was backed by a commodity.

19

Bitcoin is a non-material good, aka a service. Its a purpose-built cryptographic language that is used to convey information. It may not be a very good money for any given person, but there is no reason why it cannot be money per se.

20

Bitcoin is the best form of money currently available to mankind, based on its specific attributes.

Given that Bitcoin is A) 100% free-market and B) works beautifully, It’d be nice if the Mises community would stop fussing about how it does or doesn’t fit the Regression Theorem and actually helped us build it.

Personally, I feel there is a bit of hypocrisy in any Austrian or more broadly any free-market advocate who condemns Bitcoin while simultaneously using government fiat on a daily basis. Bitcoin works and it is growing. Try it. Use it. Learn about it. Again, it is the best form of money currently available to mankind.

Chart of daily Bitcoin transactions globally…

http://blockchain.info/charts/n-transactions?showDataPoints=false&timespan=all&show_header=true&daysAverageString=7&scale=0&address=