Don't buy Bitcoins (video)

Miscellaneous General
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To understand why you are wrong, you need to understand the genesis behind the idea of Bitcoin.

Interestingly enough, it started with the goal of stopping bulk spam. The reason why there aren’t dump trucks backing up to your mailbox each morning to unload massive amounts of spam is because there is a larger cost associated with sending postal mail versus email. There’s the cost of the ink, paper, envelope and stamp. This means that any spam that can’t recoup those costs simply doesn’t get sent. Contrast that with email which is orders of magnitudes cheaper, the price being whatever it costs to send a few bytes over an Internet connection.

So, the idea was to attach a higher cost to emails in much the same way that postal mail has a higher cost. There are several schemes. One of these is run by a company called “GoodMail”. They convinced a bunch of email providers to give certain emails a special icon in your inbox. These icons only display if you pay an extra fee to send the email. This prevents spammers from having such a huge economic incentive for sending spam, if they want the special icon. The service still exists but it really hasn’t caught on.

However, a precursor to this idea was called “HashCash”. Instead of charging money outright, it is based on a proof-of-work system. Under this system, you run a program and it starts generating tokens by using CPU resources. You attach a token to each email you send and the recipient can verify your token for relatively no cost. This makes it easy for the typical user to send and receive emails while making bulk spam prohibitively expensive.

After this system was proposed, someone came to the natural conclusion that there would be individuals that wouldn’t want to run the program but instead would rather buy the tokens outright. This gave rise to the idea of an entire market based on buying and selling tokens. Fast forward over a decade later and the creator of Bitcoin says, “Hey, who cares about email? Let’s use this stuff for money!” The rest is history.

So, what’s my point? My point is that Bitcoin is a proof-of-work system which has value as a good because people, even if not used as money, would still want to use Bitcoins to prevent bulk spam. I imagine that if/when Bitcoin becomes widespread, we will see an actual implementation of this where sending an email costs a tiny fraction of a BTC.

I really hope this will put to rest the myth that Bitcoin has no possible use aside from being a medium of exchange.

How To Use Bitcoin – The Most Important Creation In The History Of Man
42

Yeah agreed. Kinda a funny video to watch now after the massive rally in Bitcoins. Guess reality does not always conform to the premises of Mises Regression axiom when it might seem to do. An 800% increase in value roughly after the video was posted, what a gag.

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Nielso, I think bitcoin is a good means of exchange, but I think until there’s a reliable platform to take existing RL monies in exchange for a bitcoin there’s no real purpose for it. Also, the current exchange systems (bitcoin-to-cash and reverse) is centrally managed, which means if a federal agency wants to kill the whole thing it’s quite easy. Plus, there’s no real good way to secure your banking information away from your bitcoin wallet. I hope to do a Masters project on that. :3

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I think Nielso has one point wrong about money. Money by itself may have been at some point a commodity of value, but no where in the Regression Theorem is it necessary for all monies to have some economic value. It just happens that commodities are the easiest to bootstrap into indirect exchange, especially if they have limited economic utility and relatively stable economic value.

But anything can be used for money if it meets the criteria: relatively scarce as to keep supply stable, hard to make forgeries and easier to detect forgeries, easily divisible, easily portable, and generally seen as valuable (last and most important, obviously). BTC meets all these quite well. To say otherwise is to pretend the definition has some mythical caveats.

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More discussion on Bitcoin here.

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Nielsio,

I think you got the argument almost right. I agree with your application of the Austrian School up to the point where you say that Bitcoin does not have non-monetary uses. I think you are prematurely jumping to conclusions.

I submit that Bitcoin does have non-monetary uses other than speculation. The same laws that give the government the power to tax, inflate and confiscate, give the Bitcoin the power to protect you against those intrusions, and do this better than gold. Done properly, government won’t find out about your Bitcoins, nor can it confiscate them. You can transact them online without going through the current banking and payment processing system (I used to work in an online payment processing company so I know a bit about this) and being subject to their scrutiny and rules. You can store them encrypted, and keep an offsite encrypted backup on hosting services in another countries. If the government imprisons you, they might be able to get the encrypted copy from one of the devices that you posess, but as long as you don’t divulge the password, it’s useless to them. Other members of your family can still access the offsite copies and have full access to your hard earned money.

Furthermore, black markets, such as online gambling, drugs and copyright violations can find bitcoin more useful than the alternatives. For example, in the US, banks and credit card companies need to make sure you do not pay for gambling, even if it’s a website in another country. Bitcoin does not need middlemen for transactions.

There is a reasonable chance your conclusion would be correct in the absence of a government. But we do have governments. Gold-backed currency competition gets targeted and shut down: Liberty Dollar, e-bullion, e-gold and so on. Pecunix (launched in 2002) is still up, but based on the data from Wikipedia, the total market value of their gold is only about 4 million USD. Compared to the current market value of the Bitcoins, which at the time of writing is about 60 milliion USD (after only about 2.5 years). Goldmoney’s stores market value is about 1.9 billion USD, but it does not seem to be very suitable for trading or even microtransactions, plus it requires you to provide them with all kinds of documents to setup (i.e to a certain extent it is still a part of the problematic banking system). Also, Goldmoney’s assets can be confiscated, albeit they provide a certain level of protection (they store the metals in London, Zurich and Hong Kong). With Bitcoin, on the other hand, there is no centralisation, so also nothing to confiscate.

Compare, for example, a minter like Nothaus with a Bitcoin miner. Nothaus’ business premises were raided and the gold coins belonging to him as well as his customers, presumably) confiscated. If someone raids Bitcoin miner’s premises, they can take his mining rigs and other computers. But there is no guarantee that such a raid will confiscate his bitcoins. They can be in anywhere online. To Nothaus, a raid is the end. A Bitcoin miner just has a minor disruption, buys new hardware and off (s)he goes again.

It is a very paradoxical situation. On a genuinly free market, Bitcoins probably would not have value. But in the environment of governments, central banking, prosecution of victimless crimes and legal tender laws, they “magically” (or maybe I’ll be bold and claim “praxeologically”) gain very real value.

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http://forum.bitcoin.org/?topic=6452.0

they’re talking about this thread in the bitcoin forum

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As an Austrian dominated community, the Bitcoin forum has long been both amused and dismayed at the general vitrol bitcoiners receive while on this forum. It’s to be expected on other forums, but we once held a greater expectation from members of this forum.

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IM conversation between me and John James (from Mises Community):

*Third paragraph:

"[..]

Yes, a bitcoin is not a contract for a future payment, so there is no fixed value in terms of some other good. But I’m not so sure that would matter given the way this could evolve. I could imagine a transition in which it catches on as an easy way to send money without having to pay wiring fees, as well as making it anonymous (which, despite Wenzel’s constant invocation of drugs, there are legitimate reasons for having transactions be private). Someone would go to an exchange, convert to bitcoins, send a payment, and the receiver would get them, and exchange them back. Over time, with more popularity (and comfort) people will feel less and less of a need to convert out of their bitcoins right away…and as more and more merchants accept them, there will be less and less of a need to. With a process like this, I don’t have much of a problem conceptualizing a tipping point at which it would be almost impossible for the demand to go to zero. There would just simply be too many people using it.

[..]"

(01:49:28 AM) Nielsio: Re: your third paragraph*,

You’re sidestepping the issue here. My claim is that there is only a market for bitcoins because they have been able to get a continuing stream of new people willing to buy them.
(01:50:18 AM) Nielsio: There is no way to price in bitcoins because they have no use-value,
(01:50:28 AM) Nielsio: So it’s 100% speculation.
(01:50:32 AM) Nielsio: This is a speculation bubble.
(01:50:50 AM) Nielsio: And the higher it goes the more riskier it is to lose the money you put into it.
(01:51:26 AM) Nielsio: This means it’s going to crash and many holders of it will become losers in monetary terms.
(01:51:40 AM) Nielsio: This will then cause the major collapse.
(01:52:10 AM) Nielsio: Any benefits that people perceive from them (anonymous, etc) all rely on there being a market for bitcoins.
(01:52:39 AM) John James: Isn’t that true for anything?
(01:52:41 AM) Nielsio: I also have some criticisms about the anonymous aspect of it.
(01:52:55 AM) Nielsio: But I don’t think it’s the main issue.
(01:53:31 AM) John James: Yeah I’d be interested in hearing those, but yes, I’m much more interested in the viability as a currency.
(01:53:50 AM) Nielsio: No, this is not true for anything.
(01:54:29 AM) Nielsio: Prices for commodities are very stable
(01:55:12 AM) John James: You said “Any benefits that people perceive from them (anonymous, etc) all rely on there being a market for bitcoins.” Is that not true of virtually any money?
(01:55:32 AM) John James: How many people have an actual use for gold or silver?
(01:55:38 AM) Nielsio: Any medium of exchange requires there to be a market for it, yes
(01:55:59 AM) Nielsio: As such, almost anything can be used as a medium of exchange.
(01:56:06 AM) John James: Sure there are industrial uses, but practically speaking, people do not have a use for metal coins other than money.
(01:56:14 AM) Nielsio: Some things are just more viable than other things.
(01:56:52 AM) Nielsio: And gold is the most viable ( http://www.npr.org/blogs/money/2011/02/15/131430755/a-chemist-explains-why-gold-beat-out-lithium-osmium-einsteinium )
(01:57:11 AM) Nielsio: Use of gold as a money is secundary
(01:57:24 AM) Nielsio: And it 100% dependent on there being a market for gold (use value)
(01:57:28 AM) Nielsio: *is
(01:57:38 AM) Nielsio: Gold is continuingly being used
(01:57:47 AM) Nielsio: There is a constant stream of gold production and gold consumption
(01:57:53 AM) Nielsio: And gold as money relies on that
(01:58:12 AM) Nielsio: Having gold as a coin for 50 years is perfectly fine in that arrangement.
(01:58:24 AM) Nielsio: It remains just as replacable for gold that is being used.
(01:58:29 AM) Nielsio: They’re functionally equivalent.
(02:00:02 AM) John James: Of course. Fungibility is one of the fundamental requisites for a money. And I fully concede some goods, like gold, are more viable than others as a money. My concern is discerning the truth about bitcoin’s viability…more specifically, whether that viability is zero or not. And I’m not fully convinced it is zero.
(02:01:03 AM) John James: As I was saying, sure I wouldn’t recommend buying into bitcoins and these prices and expecting to protect your wealth there…but as a medium of exchange, I’m not seeing a theoretical reason it could not work
(02:02:38 AM) Nielsio: If you don’t recommend buying them to store value, then how do you expect them to be usable as a medium of exchange?

Something to be used as a medium of exchange, means there needs to be a steady demand for them.
(02:02:50 AM) Nielsio: If the demand is not steady, then it cannot be used as a medium of exchange.
(02:03:40 AM) John James: I’m just saying that’s how I could see it transitioning. Like I described in the message.
(02:04:58 AM) Nielsio: You have to explain why someone would want to hold it. If the only reason to hold it is to sell it, then that’s a scam, because the only thing you would want to do with it is get rid of it. And to sell if off to a person is to pass on that problem to them.
(02:06:09 AM) Nielsio: Austrian theory explains where prices come from
(02:06:27 AM) Nielsio: And it comes from utility
(02:06:44 AM) Nielsio: That’s the only non circular explanation
(02:07:28 AM) John James: But I still haven’t heard a reason there absolutely has to be a non-monetary utility.
(02:07:34 AM) Nielsio: Where do prices comes from?:
http://www.youtube.com/watch?v=NBf60Iue5nQ#t=4m18s
(02:08:28 AM) Nielsio: Monetary utility requires use utility
(02:08:56 AM) Nielsio: If an item has no use utility, then any prices paid for it are a purely speculatory bubble
(02:09:02 AM) Nielsio: Which will collapse
(02:09:08 AM) John James: why?
(02:09:33 AM) Nielsio: Because it is a wrong prediction about the future keeping it’s value up
(02:09:45 AM) Nielsio: There is no way bitcoins can keep growing like it does
(02:10:00 AM) Nielsio: It would have to grow forever
(02:10:07 AM) Nielsio: That’s the insight of bubbles
(02:10:13 AM) John James: I wasn’t aware one said they would, could or should.
(02:10:17 AM) Nielsio: Things that are not caused by genuine use demand
(02:10:28 AM) John James: Why would bitcoins have to keep growing?
(02:10:40 AM) Nielsio: Because nobody is using bitcoins
(02:11:01 AM) John James: how do you know?
(02:11:10 AM) Nielsio: Because they are designed to be useless
(02:12:06 AM) Nielsio: They have no use AND they cost resources to be held.
(02:12:14 AM) John James: Obviously that has been proven false, as there is plenty of evidence that they have been used for monetary transactions of real goods…even if for illicit goods.
(02:12:28 AM) John James: what resources do they cost to hold?
(02:18:26 AM) Nielsio: Hang on, looking into the anonymous thing.
(02:21:22 AM) Nielsio: As for your second question, I don’t want to spell out what the costs are. Do you think they cost no resources to hold?
(02:23:03 AM) John James: Maybe I’m missing what you’re saying. You’re saying if I have bitcoins, they are costing me money just to hold them? Other than opportunity cost?
(02:23:14 AM) John James: On the anonymous thing…:

(02:23:29 AM) Nielsio: Yes, that’s what I’m saying
(02:24:42 AM) John James: In what way am I spending money to hold a bitcoin?
(02:28:14 AM) Nielsio: What happens if your harddisk crashes.
(02:28:54 AM) Nielsio: What happens if someone hacks your computer.
(02:30:32 AM) John James: I’m not following how those questions answer my question about how I’m spending resources to hold a bitcoin.
(02:30:39 AM) John James: And what happens if you forget where you hid your gold? What happens if someone robs your house or mugs you on the street?
(02:30:50 AM) Nielsio: That’s not the point
(02:31:03 AM) Nielsio: I was pointing out that holding bitcoins has a cost
(02:31:30 AM) John James: and holding anything else doesn’t?
(02:31:49 AM) Nielsio: We’re not talking about other things here
(02:32:28 AM) Nielsio: I’m talking about the general question of there being a demand for holding bitcoins
(02:33:09 AM) Nielsio: If something has no non-monetary value, that’s problematic.
(02:33:27 AM) Nielsio: On top of that, having a cost and a risk is also bad for it.
(02:34:29 AM) John James: It sounds like you’re saying that people would be averse to holding bitcoins because there is a cost. But that doesn’t sound like much of an argument, as there is cost to holding anything. So how is that a minus for bitcoin?
(03:17:52 AM) Nielsio: You may be right about that, but it may be more expensive than other items, especially with the risk of ruin.
(03:18:24 AM) Nielsio: I think I figured out the anonymous monetary use thing.
(03:18:51 AM) John James: what did you figure out
(03:20:46 AM) Nielsio: Yes, it does appear to add a layer of anonymity to purchases of goods, and the reason this can work is because it requires this kind of continual group of people buying them up,
(03:21:42 AM) Nielsio: That’s the requirement to be able to anonymize purchases.
(03:22:01 AM) Nielsio: Which is esp important to the seller.
(03:22:23 AM) Nielsio: Because you can’t anonymously receive goods.
(03:22:29 AM) Nielsio: So a buyer will always be f**ked.
(03:23:31 AM) Nielsio: But you see, these people wanting to do anonymous purchasing rely on there first being a market for bitcoins.
(03:23:51 AM) Nielsio: And that ties in to what I was talking about earlier,
(03:24:52 AM) Nielsio: As an aside: people selling bitcoins would be prosecutable for whitewashing.
(03:24:59 AM) Nielsio: I think.
(03:25:19 AM) John James: whitewashing?
(03:25:28 AM) Nielsio: money laundering
(03:27:39 AM) Nielsio: So as it looks like to me now, more anonymous purchases appear to be a benefit that comes along with speculatory bubble.
(03:27:58 AM) Nielsio: But the speculation has to come first.
(03:28:29 AM) Nielsio: You can only do anonymous purchases AFTER the speculation has started.
(03:28:48 AM) Nielsio: So anonymous purchases cannot explain their value; that would be circular.
(03:29:43 AM) Nielsio: So you’re still left with the problem of an unpredictable purchasing power of the bit’coins’.
(03:29:58 AM) Nielsio: Which is: the pricing problem.
(03:30:07 AM) Nielsio: Which is: the use value problem.
(03:30:35 AM) Nielsio: That’s as best as I can see it now.
(03:38:42 AM) John James: Here’s what I’ve got so far:

Any time you purchase something for the purpose of trading it in the future, you are speculating on the future demand for that good. The advantage of something like gold over something like bitcoins is that (a) it has a long history of value, so there appears to be evidence that it will continue to be valued, and (b) it has use other than its monetary use, so you have an extra layer of protection adding to the probability that it will still be useful in the future.

…So really, all I’m seeing so far is that it boils down to simply bitcoin’s future value is more uncertain? Is that really it? That’s the argument against them?
(03:41:21 AM) Nielsio: You want to trace where the demand comes from. Monetary use comes after commodity use. And commodity price comes from subjective utility.

So if there is no commodity use, then the monetary prices will collapse.
(03:41:30 AM) Nielsio: Sooner or later.
(03:42:07 AM) Nielsio: The buyers, the people who predict it will have value in the future, will be shown to be wrong and make losses.
(03:43:00 AM) Nielsio: The video link I gave earlier should be really instructive.
(03:43:16 AM) Nielsio: About the question: where do prices come from.
(03:43:45 AM) Nielsio: Because it actually illustrates what keep the prices up at any height at all.
(03:43:59 AM) Nielsio: And that’s important for bitcoin.

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Nielsio,

if possible, could you address my point that Bitcoin does have a non-monetary value? To repeat/rephrase it, the non-monetary value is created because government interferes with money (e.g. by legal tender and confiscating gold) and that creates a market gap. As long as government continues to interfere with money, and unless displaced by another new competitor, Bitcoin will have value.

Furthermore, I am not entirely convinced that non-monetary value is even necessary for having a usable medium of exchange. There are plenty of goods whose only value is derived from the context. The best example are positional goods. In general, any information that can be used to affect others in some contexts is valuable. If a new good is specifically designed to affect other people in the context of indirect exchange, and has significant advantages over the encumbents in some of such indirect exchanges, then logically it can displace the encumbent in those situations.

Of course, it does not necessarily mean that the future of Bitcoin will be rosy. It merely means that there is no praxeological refutation of Bitcoin.

You also brought up other technical points. In general, they are not a showstopper for Bitcoin, but still I’d like to address them:

Cost of holding Bitcoins: of course there are some costs, but they not significantly different from costs of keeping other goods. One thing however Bitcoin provides is the flexibility. You can store them on your computer, or leave it to a third party that specialises in this. You can put your private keys onto a usb key and put it into a bank safe. The ability to encrypt the keys makes them more difficult to steal, and the ability to copy the keys makes them more difficult to lose. You can’t encrypt or copy gold, so there you have a comparative advantage.

Money laundering: based on my research of the topic, this only affects BTC exchanges as Mt. Gox, not transactions that involve goods. The existing exchanges are as far as I know properly registered businesses.

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Few recent vids with Stephan Molyneux of Freedomain Radio:

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Russ Roberts (of GMU, EconTalk, and Keynes & Hayek rap fame) interviews Bitcoin project developer Gavin Andresen

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I’m glad there are people in these forums denouncing bitcoins.

I was reading the excellent (but rather basic) “The Mystery of banking” by Rothbard and there was this amusing excerpt describing the reaction of Scottish bankers who practiced fractional reserve banking when their clients tried to redeem their gold.

“Before the Scottish banks suspended payment, all Scottish bank offices were crowded with depositors demanding gold and small-note holders demanding silver in payment. They were treated with contempt and loathing by the bankers, who denounced them as the “lowest and most ignorant classes” of society, presumably for the high crime of wanting their money out of the shaky and inherently bankrupt banking system. Not only the bankers, but even elite merchants from Edinburgh and throughout Scotland complained, in 1764, of “obscure people” demanding cash from the banks”

A couple of days ago the value of bitcoins fell from around $30 to around $10. Someone started a thread to express concern, asking “why the rapid decline in price” and was met with the following response:

“Because a bunch of down’s syndrome panickers in their moms basement kept pushing the price lower and lower because they had a compulsion to get rid of all their BTC.”

Some things never change.

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Frederique,

the analogy makes no sense whatsoever. FRB is based on the assumption that you can promise someone to pay even though you might not have the money to fulfill all promises simultaneously. Of course, sometimes the bank is overwhelmed and without special “protection” it fails. There is no comparable phenomenon in Bitcoin, since noone is promising to pay anything. Who is defaulting on their promises on Bitcoin exchanges? Noone. It makes no sense. All trades require the buyer and seller to conduct business voluntarily. If a buyer cannot find a seller or vice versa, that just means they are unable to meet each other’s expectations. If there are fluctuations in market price, some lose and some win. Welcome to free market.

Furthermore, you say that you’re glad people are denouncing Bitcoins. This is just another example how the thread is overwhelmed by posts from people who are unable to make coherent arguments and rather use the opportunity to express their emotions.

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I am very skeptical about bitcoins, but if it succeeds, it will be the second greatest human invention after the internet :slight_smile:

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I was not comparing bitcoins and FRB as systems, it was more like since both pieces of paper backed by nothing and bitcoins don’t have any non-monetary value, it’s ironic how the people who realize that and want to get out are stigmatized as ignorants, lobscure people and other insults.

Oh, and before you say that bitcoins can be hypothetically used to prevent spam hence they have non-monetary value, that’s like saying that dollar bills have non-monetary value because you can use it for personal hygienics purposes.

58

Pretty much everything about bitcoins is amazing but that’s not enough to qualify it as a reliable indirect exchange method, as it doesn’t have any use but indirectly exchange goods. I mean, a couple of days ago in a matter of 48 hours its value in dollars went up 50%, went down by 70%, went up by 100%. There is no way we see many retailers accepting something as unstable as bitcoins in exchange for their tangible stuff.

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that’s one of the reasons why I am skeptical about it. I’d like to believe, but I would rather wait and see what happens.

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Explain how Bitcoin qualifies as money more than anything else, like toilet paper and World of Warcraft gold.