Don’t Buy Bitcoins, part 2
my response:
http://www.libertariannews.org/2011/06/18/the-economics-of-bitcoin-how-bitcoins-act-as-money/
Bitcoins are not good for anything besides trading. You can’t have a worse ‘money’ than that.
That’s too strong a claim since their advantages when used for trading (there are several very important ones), may outweigh the disadvantage that they can only be used for that purpose.
A metal money thats sufficiently costly to store, protect, transport may very well work out, for many people, to be a ‘worse’ money than bitcoin wrt its ability to satisfy people’s wants.
It is irrational to trade something which is a good for something which is not a good.
It would be, but since Bitcoin is an economic good, this doesn’t apply.
This thread is incorrectly titled… should be “Can’t buy Bitcoins.” I’m not usually one for gloating and Schadenfreude but those damn Bitcoin people were really annoying, so… nyah, nyah told you so!!!
@Clayton: ‘Can’t buy Bitcoins’
@Nielsio: It’s not clear to me how the cartoon addresses the rejoiners posted here already, it doesn’t seem to as far as I can see.
What are you talking about? Bitcoin is being traded like normal on TradeHill, Bitomat, Bitcoin7, Bitmarket, Britcoin as well as over the counter. Price is 14-15$, which is still pretty bubbly imho. Anyway, the whole point of Bitcoin is that it’s decentralized, so in my opinion this is just a good example of that. The largest, most vulnerable part of Bitcoin - MtGox - got completely taken out, yet the currency goes on without problems.
The only places where people ran into trouble is where they were over-reliant on MtGox, so for example a lot of automatic price converters got taken down, they should be made such that they use the prices from multiple exchanges. And of course people who left all their coins in MtGox can’t get at it now, which is kind of a like having your gold at an insecure bank - you have institutional risk. In this case they should be ok once Gox comes back online, but let it be a lesson and don’t keep your coins at an exchange, put it on USB sticks at multiple secure locations.
The whole thing does show though that a lot more work has to be done until Bitcoin is ready for the mainstream. This kind of vetting is necessary, the free market is getting rid of the insecure exchanges - they either adapt or they will go broke.
Where is all the money for these shiny new websites coming from? This whole Bitcoin thing is as fishy as a can of cat food.
Maybe I should start a new thread warning people not to learn English, because it’s not backed by commodities or by force, and if one day people lose interest in it it will wither away. Instead people should use hieroglyphics, because it has a good solid foundation (rock or at least papyrus), is very scarce and has been around for thousands of years. Clearly, an abstract language is pointless, because it has no other uses than communication. Hieroglyphics are superiour: you can use the rock to smash your opponents’ head, and the papyrus to wipe your ass. That gives hieroglyphics a starting value and network effects will eliminate other competitors. By using induction, this proves that without a starting value a competitor will lose.
@Peter: I think you Bitcoin guys keep getting confused… we’re not saying people shouldn’t try things. I’m happy to see this Bitcoin experiment and it’s actually fascinating to watch except for the sometimes annoying and know-it-all attitude of the hardliners. That said, the theoretical foundation for Bitcoin just isn’t there. It’s like an alternative energy research experiment… interesting and could even uncover some new facts and technology along the way but if close investigation shows the proposal is not consistent with the laws of physics, it’s just not going to fly. Nick Szabo (one of the largely uncredited grandfathers of Bitcoin who is also mega-brilliant) has written a defense of Bitcoin here (scroll down, he links to an article he wrote on the origin of money). Unfortunately, Szabo suggests that Mises’s regression theorem is just an account of how money can arise, rather than the only way money can arise. The simple fact is that something could never have been used in indirect exchange which was not first demanded in direct exchange. This is a praxeological fact, it’s not just “one way things could be.” From this fact, it immediately follows that a medium of exchange must have its origins either directly as a commodity or in a regressive chain of money substitutes which can ultimately be traced back to a commodity of some sort.
Let’s look at Bitcoin from a purely physical point of view. The bits are mined by expending electrical energy. The proof-of-work bit string is basically a certification that such-and-such watts of electricity have been expended. This can be translated back into terms of physical goods expended to generate the proof-of-work… so many barrels of oil were drilled and burnt or so many tons of coal mined or so many cubic meters of water spilled over a generator, and so on. However, unlike a commodity substitute (a certificate for a bushel of wheat or a barrel of oil or a gold banknote), the proof-of-work certifies purely wasteful expenditure of energy. This is the polar opposite of how money arises. The point of using shells as money is not that it’s costly to dive and find the right shells and then craft them into the desired shape. The point is that the shells were demanded for adornment (jewelry) and eventually became used as a medium of exchange for the usual reasons… high liquidity, fungibility, etc. Szabo is very brilliant but, in focusing solely on the issue of the costliness of producing a monetary commodity, he commits a rather elementary blunder. The near-zero cost of producing fiat money is not its only problem or even its most important problem. Instead of using paper to manufacture dollars, we could use soot from the burning of fossil fuels, stamped into the shape of a coin. Such tokens would be costly to produce (require the burning of fossil fuel) but would make horrible money because they have no commodity value. There is no demand for the monetary medium for its own sake in alternative (non-monetary) uses. This is the closest physical analogy I can think of to what Bitcoins actually are… with the exception that carbon soot coins could at least be produced as a by-product to some useful enterprise (powering an electrical plant) whereas Bitcoins would be equivalent to just burning up fuel for the sole purpose of creating the soot to create the coins.
Keep in mind that people used paper banknotes long before there was fiat paper notes. But no one ever accepted a paper banknote with really fancy un-counterfeitable designs (by the technology of the day) on it because “it’s useful in exchange” and “has value solely on its usefulness in exchange.” People only accepted paper banknotes insofar as such banknotes were immediately and directly convertible into money. A banknotes is a money substitute. A banknote is a bearer title and this is what any money substitute is. Bitcoins are title to nothing. A technology like Bitcoin could certainly be viable as some kind of money substitute. A full-dollar-reserve Bitcoin would be fantastic if you could solve the auditing-anonymity problem.
Clayton -
For those interested in a simple English explanation of why bitcoin is doomed, based on Mises in Human Action, just drop in on my blog:
Peter Schiff:
http://www.youtube.com/watch?v=vTr_hTC90oQ#t=3m14
Dough Casey:
"L: Do they have value in themselves?
Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.
I’ve always said that the dollar is an “I owe you nothing,” and that the euro is a “Who owes you nothing.” With Bitcoins – which no individual can be held accountable for and which have no value in themselves – I’d have to say they are a “No one owes you anything.” It was inevitable, therefore, that the scheme would collapse… at least in its present form.
Their main value seems to have been as a speculative medium. Worse, actually, in that they are – or were – based on finding a “greater fool” to pass them on to, for something of value. The bubble in Bitcoins is, however, just one of many to come as people try to get out of paper currencies in the years to come. With the bubble that arose in tulip bulbs in 17th century Holland, you might at least have wound up with a flower. This time, people just got stung. The message is clear: Get used to bubbles, as governments print up more and more fiat money.
Bitcoin reminds me of the so-called “barter currencies” people tried to start in the U.S. some time ago, supposedly trading units of “barter.” People traded chits, where a barber might charge ten for a haircut, and a lawyer 100 for an hour of counsel. But they were just another paper currency, based on confidence. And, when you’re dealing with total strangers, confidence is hard to come by…"
http://www.caseyresearch.com/cwc/doug-casey-bitcoin-and-currencies
Anyone still holding Bitcoins at $12 (on the 2nd largest BTC exchange listed on the above website) is crazy.
Maybe if the UN starts denominating its member fees in Bitcoin… 
Clayton -
Guys, esp. Clayton and Nielsio,
I have been trying to point out for a while that the regression theorem is based on arbitrary normative assumptions and induction. It’s not praxeological. I thought my little analogy with the English language demonstrates the logical fallacies involved in the regression theorem, but it looks like I wasn’t successful in communicating it.
If the regression theorem was true, by the same logic we would not have languages. The only use of languages is in communication, they have no use outside of it. Yet, they outcompeted other methods of communication. So it is not true that in order for a good that is subject to network effects (which also includes money) to outcompete others, it requires a value which is not related to that specific use that is covered by the network effects. Network effects were known at the time of Mises, but did not receive a systematic treatment yet, so he probably thought money is special. It’s not, it’s just another good subject to network effects, like communication.
Wikipedia says about network effects:
(emphasis added by me)
Clearly, Bitcoin does have some value to early adopters. Based on the quote from Wikipedia, once it reaches critical mass, it won’t matter that it does not have value to other people apart from the network effect itself.
Furthermore, in another thread I listed at four normative assumptions that I could think of the regression theorem is based on. Two of them are untrue, one of them is science fiction but hypothetically can be incorrect and the last one is simply unsubstantiated. Here is the list again.
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the non-existence of government interference with money. This can create a gap and the gap can be filled by something that does not fulfill the regression theorem
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the non-existence of the digital. The digital is not a commodity, nor property, yet it can behave as quasi-commodity. Digital clearly outcompetes physical alternatives in some areas.
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the non-existence of replicators (Star Trek). Replicators make the value of all physical goods with known composition dependant on their weight, i.e. a kilogram of dung would have the same value as a kilogram of gold. There would still be scarcity (like there is still scarcity with computers and internet), but commodities would not be practically usable as money.
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homogeneity of requirements for a medium of exchange. Same as with languages. Or programming languages even.
While you two have been sticking to rational approach and unlike some others not resorted to emotional reactions to Bitcoin, I would like to stress that the issues I have raised have not been addressed yet.
I think there is a logical problem with your analogy of language since communication itself is a network and language (I assume you mean spoken language) is just one medium by which humans communicate.
Anyway, the quote you gave from Wikipedia answers your argument: “A more natural strategy is to build a system that has enough value without network effects, at least to early adopters. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base.” That is precisely what the regression theorem says… the early adopters of what would eventually become recognized as money were not consciously going about trying to establish a medium of exchange or reach a “critical mass”, they simply found the use of highly liquid goods as media for indirect exchange to be profitable. As Dr. Hoppe says on the subect, all we need to do is assume self-interest and from this flows the division of labor and from this flows indirect exchange (money). So, yes, the regression theorem and the Austrian account of the emergence of money is praxeological and not inductive.
The regression theorem does not assume non-interference from government. Please listen to this lecture on the subject by Dr. Hoppe (a bit long, but definitely worth it). In fact, this was one of the central insights of the regression theorem… even government is subject to the regression theorem. Nobody can escape the regression theorem so long as any form of voluntary exchange is possible (i.e. outside of complete tyranny).
This is gibberish as far as I can tell. I’ll help you out and suggest that perhaps you mean that certain cryptographic protocols (hashing, public-key signing, etc.) are possible with the assistance of a computer that would not be possible with just static production technologies (i.e. minting, printing, etc.)?
I reject this as a valid objection.
You’ll have to elaborate, I don’t understand how you’re using these terms.
Clayton -
Clayton wrote: The point is that the shells were demanded for adornment (jewelry) and eventually became used as a medium of exchange for the usual reasons… high liquidity, fungibility, etc
When you phrase it like that, the parallel with Bitcoin becomes apparent.
Just as shells were first demanded for adornment, so were Bitcoins. For two years they were generated and traded as nothing more than a sign of “geek coolness”. That’s just as genuine an adornment as the wearing of shells.
What made Bitcoins “cool” for geeks? Cool enough that geeks would adorn their forum signatures with their Bitcoin public keys? The geek coolness probably arose from the excitement factor of “hey wow, we’re the first people to be using this cool new peer-to-peer digital commodity that’s independent of banks and might one day supplant fiat currency”.
Then, after a couple of years, a guy offered 10,000 bitcoins for a couple of pizzas (pretty-much for lolz) and eventually found someone to trade with, and Bitcoins started to become used as a medium of exchange for valid reasons: low transaction cost, fast confirmation, easy use across national boundaries, irreversibility, etc.
@Clayton: Is there any empirical evidence you can imagine that would overturn your belief (as far as I can tell) that BitCoin cannot be legitimate money? Or persuade you that your complaints against it are not relevant? (eg. a given market size, a certain coverage of accepting traders, etc)
Clayton,
ribuck already pointed out the obvious. Let me address your post in a bit more detail.
Communication is not a network. But if you combine the need for communication and the fact that communication is more subject to network effects than other needs, you get a network. Just like people want to communicate, people want to trade. That creates a demand for a medium by which to communicate or by which to trade.
The wiki quote does not say that it’s necessary that the early adopters are unaware of the potential network effects. As ribuck pointed out, Bitcoin is valued, because otherwise people would not use or trade it. The wiki quote implies that the original reason for the value is irrelevant to the utility of the network effects manifesting themselves later. The regression theorem (or at least the interpretation that is used to refute the utility of Bitcoins), however, combines those two by an arbitrary connection. The connection may quite well be often there, but it is not a praxeological connection. That’s the fatal error in it. It’s inductive reasoning (based on observation of some historical facts) rather than deductive. Observing other historical facts refutes the connection.
But the self-interest does not require either that people are ignorant of the potential future network effects, nor does it require that there is a separate value in that good for other people than the critical mass. Two more unfounded assumptions.
If it did not, then people would choose gold (or something like that) whenever force was absent from the relationship. But the network effects work both ways. People often use fiat even in situations where there is no force involved. I for example often buy things from Asia, and I pay in US dollars. I live in Europe. US dollars are not legal tender either here or there. Once you realise this, you can also realise that just like negative reinforcement can affect the outcome, positive reinforcement (e.g. a community project like Bitcoin) can also influence the outcome. That makes the whole argument fall apart.
See above. Network effects can influence the outcome in both ways. While network effects have natural causes and are, from this point of view, unavoidable, it does not mean that people who are aware of this cannot influence the outcome to their advantage. If the regression theorem was merely saying that money is always subject to network effects, I would be fine with that. But a claim like that has a very limited use and you certainly can’t derive the superiourity of gold or the inferiourity of Bitcoin from it. Furthermore, as I elaborated above, regression theorem says more, it says that the result of the network effects cannot be deliberately influenced. I provided multiple counterexamples as well as theoretical reasoning why this is untrue.
This point is difficult to explain for me. But read Kinsella’s Against Intellectual Property. You cannot own the digital, and you cannot trade it or steal it. But it can nevertheless exhibit some behaviour of goods. Furthermore, if I was using the same inductive reasoning before the age of computers, I could “prove” that there would forever be physical books because that is what always happened, and there would never be books that are not sold or traded in a media-agnostic way (e.g. by downloading). I thought the example with hieroglyphics demonstrated the absurdity of the argument but evidently it is not easy get it through.
The example with replicators is a reductio ad absurdum of the regression theorem. You do not provide a reason why this should be rejected (other than, of course, not rejecting it would show that your argument is invalid).
People look for certain features in a medium of exchange, like divisibility, high value per unit of weight, durability, being easy to transport and so on. A specific good provides a specific combination of these in different ratios. In order for the regression theorem to be correct, it would require either that one good trumps all the others in all of these features, or at least a the ratio of these features required for all transactions is stable and constant. Neither of these is true (I think this is obvious, but if you do not believe and want examples, I can of course provide). This is just another way of saying that there is a limit to the network effects.
Anyone still holding Bitcoins at $12 (on the 2nd largest BTC exchange listed on the above website) is crazy.
Do you mean they are crazy because you expect the market price of Bitcoin to move towards zero? If you are right, you can make an absolute killing with Bitcoin put options.
Anyway, Bitcoins are trading on that same exchange for $15 now, so I don’t think the holders are too upset.