I meant inflation in the mainstream use, i.e. absolutele loss of purchasing power.
See Mises-regression that I linked above.
I disagree that the bitcoin does not have value. Value is in the eyes of the buyers and sellers. So the value of the bitcoin as a currency like any other currency should be left up to the market for competiting currencies. This would be the same for gold and/or silver and paper money and what ever else the market place can discover.
Now I would bet that humans would settle on the traditional forms of currency precious metals and semiprecious metals:gold, silver and to a lesser degree copper, nickle, ect. There is no technology yet that can transform things into elements in a cheaper manner than it is to manufacture them.
“To be spontaneously adopted as a medium of exchange, a commodity must be desired for its nonmonetary services (for its own sake) and be marketable, that is, it must be widely bought and sold. The prices that are initially being paid for its nonmonetary services enable prospective buyers to estimate the future prices at which one can reasonably expect to resell it. The prices paid for its nonmonetary use are, so to speak, the empirical basis for its use in indirect exchange. It would be extremely risky to buy a commodity for indirect exchange without knowing its past prices; as a consequence, the spontaneous emergence of a medium of exchange is virtually impossible whenever such knowledge is lacking. On the other hand, when it exists, then there can arise a monetary demand for the commodity in question. The monetary demand then adds to the original nonmonetary demand, so that the price of the money-commodity contains a monetary component and a nonmonetary component. Although in a developed economy the former is likely to outweigh the latter quite substantially, it is important to keep in mind that the monetary use of a commodity ultimately depends on its nonmonetary use. The medieval scholastics called money a res fungibilis et primo usu consumptibilis. It was in the very nature of money to be a marketable thing that had its primary use in consumption.”
-The Ethics of Money Production (by Jörg Guido Hülsmann), p23.
This refers to the price emerging in the first place - with Bitcoin we’re already past that stage. For one and a half years Bitcoins were worthless. But people nonetheless created trading infrastructure, eventually bootstrapping a little economy.
Hülsmann correctly points out that this is “virtually impossible” to happen and it’s quite interesting to look at why it did happen in the case of Bitcoin. Like any chicken and egg problem, the solution is a mixture of small steps and some people investing their time and energy to make it happen against the odds.
Hmm. I can not find any arguments for this position in the excerpt you quoted. In fact it seems to contradict the preceding point. I would agree that a money emerging from a worthless good is unlikely (“virtually impossible” might be a bit strong, since there are other examples like Rai stones, Babunda, etc.), but once it has emerged, by what mechanism does it spontaneously disappear? Hyperinflation can wipe out a currency, criminalization, the emergence of a better currency, or in the case of Bitcoin a major technical flaw are all valid failure scenarios. However the mere collapse of a speculative bubble by itself may or may not wipe out its value completely, depending on whether people would still use it for trade. Since traders don’t plan on holding Bitcoins for a long time I think it’s arguable that trade would not seize completely - again, infrastructure like exchangers and financial services (ClearCoin, MyBitcoin, etc.) don’t disappear overnight.
Again I’m not claiming that the value of Bitcoin can not go to zero. I’m only saying that there is no basis for saying that it must go to zero - as you claim in the video.
I think you’re right about that. I imagine how bitcoin can spontaneously bootstrap like this. Let’s say you read the source code and the whitepapers and you totally grok bitcoin. You understand what it does, how it works, and why it would be valuable as currency IF it were to become established as such in the future. If you can forsee the very use of bitcoin as a medium of exchange in the future, it would logically behove you to try to generate some bitcoins in antipication of the future. You might be wrong so it’s naturally a risky venture, but this is also offset by the fact that at the start of bitcoin’s life it is significantly easier for each individual to generate a lot of bitcoins because their nodes will comprise a larger percentage of the total CPU power available in the network.
But also note you wouldn’t necessarily be alone. There will others too who can forsee the use of bitcoin as a medium of exchange in the future, so they will happily accept bitcoin in exchange for services today. They themselves would be taking a risk by doing this early, but they believe it will pay off in the long term if they were to earn some bitcoin today. So you could potentially find people to trade with in bitcoin even in the very early stages. Sure it’s risky, but it’s not therefore impossible to find people because of that; it just makes it harder. It’s also made easier because there is community of people around bitcoin, who want to see it become established, with a forum where you can communicate with anybody from anywhere in the world about it. So this makes it much easier to find like-minded people who also forsee the use of bitcoin as currency in the future.
So I think that this process by itself would provide the bootstrapping that bitcoin would need for its future use as an established currency, because it’s already being used as currency today. Those early adopters who see the potential in bitcoins and so trade with others who also see the potential in bitcoin (and who accept bitcoins because of the very fact that they see its future potential) are therefore bootstrapping the very potential that bitcoin has to become a currency. So the principle is a bit meta really, but the idea is that even with a lack of a consumption use behind an item that is very compatible with the task of it being used as a medium of exchange, the potential value it offers as an established currency in the future can serve to provide all of the bootstrapping requirements that it needs to get itself off the ground in the first place. People immediately begin to value it as a currency itself, because it has all of the properties that are good for that use case. So how do you price in bitcoins? The price of bitcoin early on is the based on the perceived probability of bitcoin becoming established in the future, and so the subjective perceived risk/reward analysis of getting your hands on some bitcoin today.
So I don’t think it is necessary for people to value it for some consumption use initially, because you can infact rationally value it as a potential future medium of exchange based on the intrinsic properties that lend it to be good at that very task. In history, Gold is the really the only item that has all of those neccessery intrinsic properties for a currency together in one. The fact that Gold has consumption uses too no doubt helped to bootstrap its use as an established currency, but I think it would have been an inevitable development in human history regardless of that. Because there’s nothing else that can truly fulfil its role as currency. The value that using currency brings by itself (over having to barter) is huge, so it’s inevitable that Gold would become used for this task even if it had no other foreseeable use case. Because there literally would be nothing else that could possibly do the job anyway. Does Nielsio contend that we were merely lucky that Gold is considered pretty, and so was desired as jewellery? What luck! If Gold were not pretty, life would be that much more difficult indeed because there is almost literally nothing else that could do as good a job as Gold for the task of being currency. You could still use silver, but it corrodes easily and the same argument of luck for consumption use cases could apply to it also.
But once a currency is rolling and established it won’t just spontaneously stop. It might fall out of circulation if the government controls it and devalues it majorly, and it becomes an unsustainable lost cause or if it loses the ‘benifit’ of its legal tender laws to back it up. But it wouldn’t happen on its own with a free currency, and this scenario is impossible with bitcoin anyway as no central authority can ever gain control over issuing it. Government could potentially declare credit notes redeemable in bitcoin to be a legal tender, and enact fractional reserve systems around it, but then it would be the credit that is considered to be legal tender and not the bitcoin itself. But even Mises and Rothbard contend that the consumption uses of Gold could be removed after the fact and it would continue perpetuate by itself as a medium of exchange. This is because the price of Gold as a currency on one day is evaluated based on the price of Gold as a currency on the previous day. As far as I’m aware, they did NOT contend that if for some reason Gold were to lose its non-monitary uses–after it had already become established as money–that it would therefore inevitably fizzle out of use and devalue.
Here’s a quote from Rothbard’s Man, Economy, and State (p 275) that I picked up from this interesting thread on the bitcoin.org forums. He is talking here about Mises’ Regression Theorem:
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.
So Mises’ Regression Theorem is only concerned with the initial bootstrapping of currency, not with its continuing use after it is already established. He contended that money needed a commodity use in order to get itself off the ground, but as I have described above I don’t even think that this is necessarily true. I think it can spontaneously bootstrap by voluntary action. It certainly helps to have another initial use case, but it’s not vital step, especially when considering an item whose task is explicitly designed to be used as money from the very outset. I find the whole idea really interesting, that we could design something new that would be even better at the task of being currency than Gold is. Bitcoin may just be that very something, though that is obviously very grandiose optimistic thinking. Even if it just finds use in some niche way, amongst a set of other competing currencies, it would still be very cool.
Yeah technically all that needs to happen is for a sizable number of people to have some passing interest in holding bitcoins for any reason (even a mistaken reason; this also qualifies as Hulsmann’s “nonmonetary use”), then bootstrapping is at least conceivable.
This is true to an extent, but if those of us who do own and trade in Bitcoin were to come and start preaching the merits of the system on this forum, would you be more or less suspicious? I don’t need to “talk my book” in order for Bitcoin to succeed. In fact, if it requires my participation in this context, or anyones, it’s already doomed to failure. You can read the documentation, and if you don’t trust it, don’t use it. If you have programming skills, you can look at the source code for yourself.
Porn sold for bitcoins before gamblers used them.
I suggest you try. What have you to lose? If you advertise your services on a Bitcoin forum, and you get Bitcoin business from it, would you have had that business otherwise? What do you risk besides your time?
Every single one of your criticisms could apply to Gold. There’s a reason Bitcoins was designed it was- it was modeled after Gold. If you don’t like Gold because you can’t eat it and it has no force behind it, then fine, come out and say that too. I await your “Don’t Buy Gold” video, where you are only selling worthless rocks to people gulliible enough to buy them from you.
Sure, Gold has some industrial uses. And it has some uses as jewelry and being pretty to look at. But really, how much of gold is used in industry and how much is used in jewelry, and how much is dug up, melted into bars, then put back underground?
Now Gold does have a big advantage over Bitcoins. Gold has a 5000 year plus track record. Gold cannot be “cloned” and create an alternative to it that is Green or Purple (someone could fork the Bitcoin code and make something identical to it, but in a different flavor). If you are going to pick on Bitcoins, find an actual argument for doing it. There actually are some good ones out there.
But I can’t send gold over the internet. I can’t verify it’s real very easily. I can’t measure it without a scale. I can’t divide it easily and arbitrarily small. A new discovery could happen that makes it not as scarce. Gold isn’t perfect. But it’s a damn good source of money, far better than government fiat currency that can be deflated at the will of a few people. And if you like Gold, you at least should like Bitcoins more than government fiat.
Bitcoins are about 95% speculation right now. There’s not a huge advantage in using them other than in niche areas. But that could change. There are some benefits of using them… if they catch on and you don’t need to constantly convert back to other currency. But buying them for speculative value isn’t due to gullibility, it’s due to insight into how they could be useful, but just aren’t at the present time. If you found some rare earth element that you could predict would be super useful in 5 years, but right now was only good as a paperweight, you wouldn’t be foolish for buying it now. You’d be a visionary. It could be your prediction is wrong, and you lose some money. But you aren’t relying on gullibility. You are relying on predicting how things might be used in the future and speculating in that part of the economy. Neilsio- after Black Friday, I would have thought you would be able to see the power of Bitcoins in the online gambling community. It’s a huge potential. Maybe nothing happens, but if ANY dent in the market happens with Bitcoins, you’ll see a potential 20 to 100x return on your investment. As long as you realize you are playing with fire, could lose your investment, etc… No gullibility is needed. Just being able to see something as being more useful in the future than it is right now.
I’m sure Grok the caveman was laughed at when he gathered gold in 10,000 BC, though.
The same criticisms do not apply to gold. Don’t knock gold as a useless rock. It is no more useless than a Monet painting. Gold has value to people other than as currency. It does have uses.
http://en.wikipedia.org/wiki/Gold_plating
These uses are what makes gold valuable to people. Gold was not only valuable as a commodity but it also had qualities that made it a good currency. Bitcoins may have qualities that are good for currency, but it has no commodity value. This is the complaint about bitcoins. Without having value as a commodity, there is no way to speculate as to its value to others.
It’s possible that bitcoin could be useful for online gambling in that it may be easier to evade the state and its laws. People could find a value in bitcoins in that manner, but something seems off to me. Perhaps someone could demonstrate to me how this could work (I am not claiming that it would or would not, I am actually curious about this).
My main point though: Gold has uses as a commodity and has qualities that make it useful as currency. Bitcoin has yet to show how it has uses as a commodity, but it does have qualities that make it useful as a currency. But that is not enough, it needs to have a value other than useful qualities for currency.
Hey there, Nielsio, others. Like many others on this thread, I’m a visitor from the Bitcoin.org forums. Several people from there have come to this thread for the purpose of defending Bitcoin from what they see as an unfair dismissal, but I think they’re going about it the wrong way.
Not because of their language or demeanor or choice of arguments, no, but because they’re trying to correct you with words. Like those folks, I think Bitcoin is undervalued on this forum. And the right way to correct an undervaluation is to buy!
I’d like to to buy call options on 1000 bitcoins for 2500 US dollars, redeemable at expiry at the end of 2012. Since you, Nielsio, think Bitcoin has effectively zero chance of success, I’d say $50 is more than fair as a premium—wouldn’t you?
In fact, I might be willing to buy nine or ten contracts at that price! I’d like them signed and notarized, of course, so I can minimize my counterparty risk. It would be nice if you had the bitcoins to cover it, but I don’t really expect that. If necessary we’ll just work out an installment plan: 250 bitcoins per year for 10 years? 50 bitcoins per year for 50 years? We’ll see when we get there, I guess.
Seriously, I agree with you though. Bitcoin has no chance of success, and I am basically offering to give you $500. You really should take this deal! Please, please take this deal! E-mail me if interested: ian dot maxwell AT gmail dot com.
Unless you’re not so sure, of course.
(While my point is rhetorical, this is a serious offer, open to anyone: I don’t promise to buy ten contracts, but I will buy at least four or five if we can agree on the details.)
And so it begins…
Gold has some value, but nowhere near what people are treating it as.
The commodity value of gold is SIGNIFICANTLY below the currency + commodity value.
I’m not disagreeing that Bitcoins have no commodity values. Having commodity value is not really neccessary for a currency. It just means it has some floor value if everyone else stops using it as a currency. If everyone who is buying gold now finally realizes everyone who is left to buy it is not as “gullible” as them, then they will lose their investment (save maybe a hundred bucks per ounce). You really think Gold has gone up in the last 5 years just because we found lots new industrial uses and lots of people now find it pretty that didn’t before?
Why is being a commodity required for a currency? To me, it seems like that actually is a negative. Fortunately Gold has much fewer industrial applications than other precious metals (maybe just because it’s so expensive, if it were $50/oz, it would be used just as often as Silver?), so it makes it a good money. People buy Gold not because it’s useful (that’s why they lock it in a box underground or hide it), but because it stores value well. Why is having commodity value useful? It seems to me that’s nothing more than an insurance policy if it stops being used as a currency. But if you are spending $1500/oz on something that would be worth $50/oz (making that number up, but it’s certainly a lot less than $1500), is it really that different than if it were $0? A 97% loss vs. 100% loss? As an investor, I really wouldn’t care that much either way between the two.
You ask how it works - it’s a decentralized network. Everyone has a copy of every transaction. If the government wants to shut down PayPal for funding gambling sites (it threatened them years ago), they can cut it off at a central point. If the government wants to shut down Neteller, they can. If the government wants to shut down Bitcoin, good luck. It’s the difference between shutting down Napster and shutting down P2P networks. There is no central person to sue or arrest. They would have to make using the currency illegal (it could happen). They’d have to then actually enforce it and prove various people were using it (possible, but it’s also possible to disguise this). But it would require going after each individual participant rather than a centralized clearinghouse. The Bitcoin network is like Terminator 2, you put a bullet in it, it’s like liquid, that hole is there, then it eventually regrows. Actually stopping it would be a huge pain. I’m not saying they won’t or couldn’t, but it has a lot of huge advantages in terms of being able to stop. I also have found the payments to be very simple and fast, especially compared to bank transfers or PayPal, and no transaction fees (within the currency). It’s a fantastic currency from a users point of view if widespread adoption takes place. But without widespread adoption, Neilsio is right, it’s not really that valueable. And I think most people entering the market right now are doing it not on hoping for gullibility, but for the vision of the future. Perhaps we are Grok who discovered Gold in 10,000 BC, or perhaps we are Grok Sr, who discovered Pyrite. Time will tell.
I’d like to to buy call options on 1000 bitcoins for 2500 US dollars, redeemable at expiry at the end of 2012.
Nice constructive idea!
Have you considered using something like intrade.com instead of a notary? Just an idea, it might be less expensive and more accessible.
Nielsio, I’d like to send a donation in recognition of the videos that you make and share. Let me know your Bitcoin address. I’m sure others would like to donate too.
I’m still trying to wrap my mind around this concept. So, right now as I write, there are people firing up their CPUs and accumulating BTCs into their accounts which they are exchanging for actual goods and services later on?
And the requirement that every node in the network must have an updated list of ALL BTC transactions everywhere since the first one seems logistically unrealistic if this is ever to grow to a size even approaching a national economy. As both the number of nodes (millions) and the frequency of transactions (millions/second?) increase this would turn into an exponentially difficult problem.
Not sure about “anonymity” if everyone out there has the whole history of all my BTC account’s transactions.
Also I’m not convinced that three 13-year old punks in a garage somewhere couldn’t hack a shortcut to a multi-million BTC bounty into their accounts.
This was a good article and discussion I just read on BTC:
Bitcoin: Virtual money created by CPU cycles
…and most of the above questions come from there.
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The protocol only requires nodes that generate blocks to keep the whole block chain. However the current software client keeps the whole block chain anyway, but it’s open source so someone can optimize it if/when it becomes a problem.
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It’s not anonymous, it’s pseudonymous. You don’t enter any identifying details into the system. You don’t have an “account”, you just have a list of keys (on your computer only) that can be used to spend transactions from the block chain that someone else has previously spent to you (or that you have generated).
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Don’t spread FUD about 13-year-old hackers unless you’ve read the technical details and still think it’s a problem:
If I knew enough to think that there’s a problem I most certainly wouldn’t be informing you of it here. Instead, I’d hire the three 13-year old punks to take advantage of it.
Do not buy bitcoins, said man with glasses… Turn camera off, and start buy bitcoins in bulk :))