Bitcoin DO NOT WANT!?

Economics Economics Questions
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Would anyone keep any significant portion of their net worth in bitcoins whose value would be inversely proportional to how widely bitcoin13s or bitcoin97s become accepted as media of exchange?

A significant? Yes, many people do.

Most of it?
I would not. I would not put most of my net worth in gold or silver neither. Any form of cash-money can be demonetized. Better diversify.

But why does it matters? Who wants to hoard most of its wealth?

Anyway, that doesn’t have anything to do with othercoin. The question that matters…
Doesn’t othercoin contradicts the limited supply of bitcoin? No, it doesn’t.

Competitors need to be somehow better enough to compensate their lack of users (which make them less useful as a money).

What are your conclusions about the prices of the other coins?

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@Hunter
Hello and welcome!
What you are referring to in your first paragraph is the “Regression Theorem” and before we talk about it I think it’s important to lay the groundwork on why the theorem was postulated to begin with.

There was a long debate among economists on why fiat money has purchasing power that far surpasses what it would normally have if it was suddenly introduced on the open market. One of the common answers was, “It has value as money because it is used as money.” but that doesn’t answer the question. How did it get to that point? How did it get the purchasing power of money?

So Mises came along and said, look, we here all accept dollars because we knew from yesterday that it had a certain purchasing power. Yesterday we knew it had purchasing power from the day before. And so forth. Eventually we will get back to a point where the fiat currency is redeemable for a specific amount of commodity. This is the Regression Theorem in a nutshell.

Looking at the Regression theorem we can say that it is essentially impossible for a fiat currency to arise in any other way. Fiat currencies are always begat by commodity backed currencies.

Many very intelligent people erroneously apply this theorem to Bitcoins, including Smiling Dave, Hashem, and John James, and it’s very easy to see why this mistake is made. Bitcoins, like all fiat currencies, are not made from a valuable resource. They have no industrial purpose. You can’t make a sandwich out of them or hammer a nail with them. On the surface it seems perfectly legitimate to say Bitcoins could never work because we could never decide what 1 bitcoin could purchase.

But the free market has decided on how much a bitcoin can purchase. Hundreds of thousands of dollars are traded for Bitcoins every day. How is this possible? Was Mises wrong?

The key is in scarcity. Fiat currencies are all non-scarce. That is, they can be infinitely inflated, as was unfortunately demonstrated in Zimbabwe. Bitcoins are not scarce, and because of this the free market can trade them on the open market, attaining value solely for their unparalleled utility as a medium of exchange, something that a fiat currency essentially cannot do.

But if that hasn’t convinced you, imagine that gold didn’t exist. The element on the periodic table was predicted by scientists but it simply has never been found, and then one day a digging operation in Alaska recovers thousands of tons of the stuff, and it floods the market.

Would gold be unable to ever be a currency? After all, no one has any use for it. What could we possibly decide it could be exchanged for?

The answer, of course, is that it could likely attain the same status, with time, as it has today. People would realize that it has intrinsic properties that make it highly suitable as a medium of exchange (And other uses!), and would gain value proportionately.

Bitcoins are like finding those tons of gold in Alaska. At first, no one knew what to do with them, but as they were traded on the open market people came to realize that they had intrinsic attributes that make them highly suitable for a medium of exchange (Even better than Gold!) and are gaining value proportional to that percieved value.

Take home point (TL;DR): Bitcoins do not need to be tied to any commodity because they are scarce and can therefore compete on the open market like anything else. (No Regression Theorem needed!)

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Seraiah,

Scarce means nothing if it has no value. Polar bear dung is scarcer than bitcoin, but nobody will ever use it for money.

The Alaskan gold would just not be used as a medium of exchange until people first coveted it for its indutrial and aesthetic value.

As for the free market deciding how much bitcoin is worth, be patient. Beany babies were very very highly priced for a dozen years, at prices bitcoin can only dream of, thousands of dollars for one, and with a much much larger market than bitcoin, before they finally went down to zero when their novelty wore off.

That is why the phrase “generally accepted” is so important when trying to understand money. Fads, follies, and delusions can have a huge grip on people in the short term, much stronger than bitcoin has now, or will ever have. But those fads and follies and delusions, [three terms that describe bitcoin perfectly, btw] all die a humilating death pretty quickly.

From a peak of $33, bitcoins are now what, six bucks? That happened in a six month period. Let’s see what happens in ten years, if anyone will even remember the word bitcoin. Mises has pointed out a fatal flaw in bitcoin [no intrinsic value, therefore no reason for it to have any minimum price at all, meaning it will go to zero sooner or later], and made his prediction. We shall see.

I’ve mentioned all this many times in the various bitcoiin threads here and in my blog. The info is there. One need but grasp it.

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Smiling Dave,

I agree with much of what you write about bitcoins (perhaps all, but I have a question). I know you have explained what you mean (or what Mises means) by intrinsic value, but could you either explain it again for me, or could you point me to a quick read to get caught up? It just seems odd to me talking about intrinsic value when Austrians consider value to be subjective.

I know I’ve read your thoughts on the matter before, but I can’t remember what you said (or what you said Mises said, or what you quoted Mises as saying).

Thanks,

gotlucky

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Yet, you refuse to allow that a thing could be valued for its ability to serve as money.

Dung has no qualities that make it attractive as a medium of exchange, unlike bitcoin.

It’s not merely that, gold has properties that make it valuable as money. It is very difficult to make a passable fake gold coin. You can be sure that you’re getting pure gold with a few tests and a simple scale.

Here’s an example of what a gold-based merchant can use to test gold, only gold will pass this test:

Beanie babies are analogous then to the tulip craze. However, they make poor money.

Unlike gold, unlike bitcoin.

Both are perishable, and deteriorate with storage.

Unlike gold, unlike bitcoin.

Before government got into the money business, individuals banks, and even states, printed their own moneys and it worked perfectly well. Even after the dollar came around, some moneys were more readily accepted than the dollar in particular areas. Plenty of exchanges will transfer BTC immediately into and out of dollars; it’s only one abstraction away from complete acceptance. Should the dollar begin to have trouble, transacting in btc generally might become preferable. In fact, you’d have virtually no other alternative besides barter.

You assume your premise.

Psh, this sort of uptake and die off is a typical organic bubble pattern and hardly should be taken as btc’s death knell :stuck_out_tongue: If anything it means the currency achieved critical mass.

It can only go to zero if there’s a confidence crisis. Which generally is only caused by some political entity which controls the supply of that particular currency – a situation which is impossible for BTC. So, I sincerely doubt your prediction.

If anything, Mises points out that all things can have use-value as well as value as money. Good moneys have a large ratio of money-to-use value. Gold has a very large ratio compared to other things, but btc’s ratio is much larger, since the industrial usage of a vanishingly small amount of electricity and processing power is the extent of each bitcoin’s physical existence.

You shall suffer the fate of Gresham, I think, who couldn’t believe the people didn’t follow his expectation and repudiate the cheap coins the king was passing.

Your theory has plausibility, as did Gresham’s, but where the problem lies is we disagree on the weight to put behind certain factors and considerations.

Does the average person care the btc doesn’t have some industrial usage? Heck no. They only care that anything they’re using as money has relatively stable demand so that they don’t see large valuation/price changes. The best money would be one that absolutely did not change in price whatsoever.

But such a currency is impossible. We can strictly limit supply but can never limit demand.

It’s probably correct to say that all demand drops in a currency are ultimately supply-related. Every run on a bank is caused by fear that the bank has over-lent the existing reserves. Every currency crash revolves around either hyperinflation of supply or a government not being able to pay its bills leading to devaluation, which means destroying the basis of ‘full faith and credit’.

Gold’s primary virtue is that its supply is limited inherently by reality itself.

Bitcoin’s primary virtue is that its supply is limited by reality as found in mathematics.

Beanie babies were never supply limited. Neither tulips.

But again, were you guys correct that industrial value was so damn important, it’s more likely that Bitcoin could’ve never achieved any demand at all. You can’t explain via your theory initial demand. So, there’s likely something wrong with it.

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gotlucky,

To sum up what is happening with intrinsic value. It is one of those phrases whose meaning changes depending on the context.

When Austrians say nothing has intrinsic value, that all value is subjective, they are speaking in a certain context. The discussion there centers about the question, why does bread cost a dollar a pound? What makes it worth exactly a dollar?

The old way of thinking was that there was some mystical entity hidden in the loaf of bread that made it worth a dollar. That’s what they meant when they were discussing the intrinsic value of a loaf of bread. There were those who thought that the mystical entity inside the bread is “cost of production”. Others thought that the mystical entity is “amount of socially necessary labor put into the loaf”.

The Austrian conclusion is that there is no mystical entity, no intrinsic value. The price, the value, of the bread comes from something outside the bread, mainly, from the potential customer who is willing to pay a dollar for it. In other words, its value is subjective, not intrinsic.

That is one context in which intrinsic value is used, and in that context, there is no such thing as intrinsic value.

  1. The other context in which the phrase is used is when discussing the value of money. In the article in my blog, Bitcoin Takes a Beating, I quote and explain Mises at length on this subject. Mises analyzed the value of money, say of a gold coin, as being made up of two elements.

The first value comes from answering the question, “What could Robinson Crusoe do with it?” Crusoe had nobody on his island to buy from or sell to, so the gold coin had no use as money. But it did have some use. He could use it for jewelry, if he was vain. He could use it as a component of his computer chips, or whatever.

OK, now Crusoe comes off the island back to civilization. He finds that everything has a price pretty much as he valued things on the island, except for one thing. His gold coin, he finds, is worth much more than he thought. “Why are people setting such a high value on something of so limited a use?” he wonders. Then he finds out that gold is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can easily buy stuff with it, anything from everyone. That is a useful feature, that increases the usefulness, and thus the price, of gold.

So those are the two sources of value that money has. Mises gave those values clumsy names, industrial value for the first, and exchange value for the second. As time went on, people [including Mises and respected Austrians, as I have quoted at length somewhere in these forums] instinctively starting calling that first value, that Robinson Crusoe had for it when alone on the island, its “intrinsic value”.

[Note that in this context, intrinsic value is also subjective, because the two concepts are not contradictory. Whereas in the first context a subjective value and an intrinsic value cannot be the same. If you grasp these last statements, you now understand the two meanings of intrinsic value.]

Mises’ Regression Theorem states and proves that a money cannot have that second value, what Crusoe saw off the island back in civilization, unless it first has intrinsic value, meaning that Crusoe had a use for it on the island. In the article Bitcoin Takes a Beating, I explain his reasoning at length.

[Now one can readily understand why someone writing that bitcoin has “intrinsic value, as money”, is being quite amusing, like a clown falling off a bicycle. Intrinsic value is what it has on the island, and there it has no use as money.]

Since bitcoin is totally useless on the island, obviously, then by the Regression Theorem it will remain useless off the island. The bitcoin crowd howls at this obvious statement, trying to find some flaw. The most common thing they try is saying that we see it has some value, just go to mygox.com. So Mises must be wrong. The second thing they try is to say that bitcoin has some magical property that excludes it from the Regression Theorem, which was only talking about non magical objects. I’ve addressed both these arguments many times.

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In case someone didn’t bother to read my awefully long post (which I can fully understand) I can summarize it roughly with this: Monetary value is a bitch.

@ Seraiah

1: There actually is a huge barrier of entry into the money market. It is quite a doozy to think otherwise.

2: You didn’t say one word about why the process I explained above wouldn’t happen, or would happen differently. You are just arguing that BTC is supperior as unit of account. First, how do you know that there was a significant difference between BTC and Gold that actually mattered? Secondly even if do you honestly think this will keep someone from selling BTC and buying Gold when he sees a profit in doing so? Nobody bases his decision of buying and selling on what would be the best unit of account for economic calculation in an economy.

3: Scarcity alone doesn’t make something valuable. It is a necessary condition but not a sufficient one.

4: Fiat money is scarce as well! Else it would be worthless. The scarcity level is controlled by the FED system.

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Beanie babies have not regressed to zero, Dave. They stabilized at a market clearing price, which varies per item.

no such thing as inherent value. Just subjective value. Bitcoin is money, it has the industrial property of being a pseudonymous digital medium of exchange, the benefits (and risks) are obvious. This doesnt make it money. This makes it an industrial/financial good. The fact that communities of people use it as a commonly accepted medium of exchange makes it money. You can claim its not a very good money, you can state that it isnt money to you, but to claim that it is somehow objectively not-money and never will be, well thats just emotion talking. Even Mises recognizes that nonmaterial goods exist. You guys might as well be lamarckian biologists.

229

Well I completely agree with that, but what you said was that a money can’t enter the money market without government intervention. I pointed out that Bitcoins are already competing as a currency and already work as currency, so government intervention is demonstrably not necessary.

All I have to do is prove that Bitcoin is superior. Why would a superior product be supplanted by an inferior one in a free market?
It’s true that bad money tends to push out good money, but that’s only when the government is able to force the bad money down its subject’s throats. That kind of manipulation would be extraordinarily difficult with Bitcoin.

Absolutely, that’s why it’s so crucial that I point out that Bitcoin is as good or better than gold as a medium of exchange in almost every category. (Fiat money isn’t even in the same ballpark.)

Also true. In fact, Fiat currencies could make a fairly decent money if no one conterfeited, but they are counterfeited, because it’s easy.
Again, that’s exactly why I pointed out that Bitcoins can compete with gold as a medium of exchange.

Bitcoins are scarce and are useful as a medium of exchange, this is how they’ve gotten their value in the free market. People that try to speculate with Bitcoins are going to continue to lose money while those that trade with Bitcoins will continue to reap the rewards.

@Dave
I think the main error has already been addressed. You’re comparing apples and oranges. I pointed out why the Regression Theorem can’t be used with Bitcoins and you came out of nowhere throwing a handful of polar bear dung saying, “[See, this can’t be used as a medium of exchange, and the Regression Theorem doesn’t apply to that either!]”
I’m just sitting here with a baffled expression on my face, trying to wipe the feces off my keyboard and make sense of it all. Yes, polar bear dung is also scarce. I think you’ve successfully found the only similarity between Bitcoins and polar bear dung. So what?
As already said, Bitcoins scarcity isn’t the only attribute that makes it useful as a medium of exchange.

But I wanted to point out the flaw in this idea that every medium of exchange has to have some other use before being used as a medium of exchange.

This is like if someone invented an axe and then someone saying that they don’t want to use it and refuse to use it because it wasn’t used for anything else prior. Maybe he’d insist that a cork screw be put on the bottom and that they open a few wine bottles before he’d come within a hundred yards of it for the purpose of chopping down a tree. The inventor is standing there, hardly knowing what to say.

Inventor, “I’ve invented this thing to chop down trees. I can demonstrate that it’s fantastic at what I designed it for. Why do you want me to jump through these bizarre hoops to prove to you that it has some other uses? I agree that it would be cool if my axe could open wine bottles just as easily, but who cares?”

The world, “We do.”

Inventor, “I don’t want to live on this planet anymore.”

And then everyone goes back to chopping down trees by bashing their heads against them.

Bitcoin is a fantastic currency, it doesn’t need any industrial use. It would be cool if you could open a wine bottle with Bitcoins, but who cares?

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I see that while Smiling Dave now recognises that there is no such thing as “intrinsic value” and switches to “use value”, which is a more accurate representation of Mises, he’s still utterly clueless both to the foundation of the regression theorem as well as praxeology.

Even if Mises’ Regression Theorem was not consistent with Bitcoin, the way Smiling Dave presents it is methodologically absurd. He makes it into what Mises calls an acatallactic monetary doctrine. According to Smiling Dave, the actions of the market participants with respect to Bitcoin must be ignored, and instead his own opinion that Bitcoins are “stupid” and “worthless” must be substituted for it. If not anything else, this makes him into a clear anti-Misesian.

Smiling Dave also does not understand the concept of salability (i.e. what we nowadays call liquidity) pioneered by Menger, and instead uses price to evaluate the “moneyness” of Bitcoin. “moneyness” is not determined by price, but by liquidity. Or even more accurately, moneyness is liquidity. And based on empirical data, the liquidity of Bitcoin has increased since the bubble popped. The market depth charts on the exchanges are steeper, and the number of services built upon Bitcoin, as well as merchants accepting Bitcoin have increased as well. There are now two magazines that specialise in Bitcoin (The Bitcoin Magazine and Coineer), hardware devices in development (Bitcoincard and Ellet), and organisations like the Cryptocurrency Legal Advocacy Group.

Smiling Dave also does not apply the temporal component of the regression theorem consistently. While he realises that the flow of time is crucial for Mises’ argument, he ignores that Bitcoin already has a price, therefore the regression can only say something about the past, not the future.

He also misses why media of exchange exist in the first place and why some media of exchange are more widely used than others. Even though it is not emphasised sufficiently by the Austrians, they nevertheless occasionally admit that media of exchange compete based on transaction costs, not use value (as Smiling Dave appears to imply). And Bitcoin easily beats transaction costs of both fiat and gold (both as money proper and money substitutes), so there is no reason for it to go away anytime soon. If anything, it shows that monetary systems based on abstractions and featuring super low transaction costs which have been hypothesised for the last 40 or so years are empirically possible.

But the main problem is that Dave fails to formulate his position in a consistent manner. Instead he offers partials and anecdotes. So it’s not that his argument is wrong, it’s does not even exist.

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Anyone recognize the shape of this chart, which the accompanying article describes as typical of silly fads?

Hint:

Coincidence?

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Dave, some of these people might start accusing you the false cause fallacy. For the record, I called it first if any of them do this!

EDIT: And when I say I called it, I don’t mean that I’m accusing you of the fallacy. I agree with you. I’m just saying that those people will.

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That’s OK gotlucky. I provided myself an out with the last word of the post.

So did that article about intrinsic value clarify things for you?

234

Glad you decided to switch to convincing people its not a good money, rather than attempt to convince them of all that other ridiculous nonsense you ascribe to Mises.

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There is an infinite number of possible crypto-patterns. Bitcoin is but a sub-set of an infinite set.

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This is a chart of price of gold in USD between 1979 - 1985:

I could not get the data for 1975-1978 in a usable form and I’m too lazy to copy&paste them into a spreadsheet manually, but rest assured if you go back to 1975 it really starts looking like a bubble, in summer 1976 the price was barely above 100.

What does it prove? Nothing really. It’s just yet another reason why Smiling Dave’s “arguments” are a fail.

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Malachi,

I stand by all I ever wrote about bitcoin.

What am I ascribing to Mises that he did not say? What is the flaw in the argument I present? Facts, man, facts. Leave the unsupported assertions and other sillyness to Peter Surda; he has first dibs on that.

It’s not a good money because it is not a money at all, and never will be.

I’ve stopped trying to convince people because what more is there to say? I’ve laid it all out for the meanest intelligence to grasp, if that mean intelligence but have the open mind that comes with humility and absence of agenda. Oh yes, willingness to actually think logically is also necessary.

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There are an infinite number of aircraft designs, but not all of them are equally desireable. There are an infinite number of possible operating systems, but people still pay for proprietary versions of linux. Its funny how people who think value is subjective are always trying to tell other people what they shoukd and shouldnt value.

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Yes, it makes sense. It seems to me that modern Austrian economists should pick the first context and use it that way, and use the term “first value” (or something better) in the second context. It causes needless confusion, especially considering that there is nothing wrong with having technical jargon - especially if it helps clarify things from the get-go.

Do you happen to know if people like Bob Murphy use a different term for the second context? Or do they still stick with how Mises used it?

240

Bitcoin is a service, as defined by Mises, its an intangible good. People can use bitcoin as a digital pseudonymous medium of exchange, therefore it has characteristics that people find valuable. This makes it a good, and establishes a starting point for monetary value. This is all in complete agreement with Mises’ regression theorem, your many assertions to the contrary notwithstanding. You dont value bitcoins, fine. I dont own any bitcoins because I’m not active in those markets and I dont plan to be. Thats life. But your opinion of bitcoin value is subjective and irrelevant. Other people value it as a medium of exchange, other people use it as money, its money. You can continue to say that they are idiots if you like, but trying to say that what they use as money isnt money because its not money to you makes you the idiot. Freedom of association in a multilateral society means multiple markets. We arent part of this one.