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

Miscellaneous General
141

I don’t have the time to sort out the posts individually. I didn’t have time to reply until now as I was at the European Bitcoin Conference over the weekend.

Ad commodity/production: fiat money is issued by a monopolist and the production costs play practically no role in the production decision process. Bitcoins are produced by a competitive process, and at the moment, in most of the world, the electricity costs of running a typical mining rig exceed the market price of the Bitcoins thus produced. Miners are therefore stopping their machines (or even selling them for parts), which causes a decrease of the production price and speeds up reaching an equilibrium.

Ad “intrinsic value”. First of all, the concept of intrinsic value is praxeologically invalid. Value is subjective. The opponents of Bitcoin made this one up, I don’t know any actual economist claiming this (and I emailed with 9 austrian and a bunch of others). Detlev Schlichter at the conference said exactly the same thing, even though we have not discussed this particular topic with each other before. Second of all, unlike Bitcoin, gold does not have “intrinsic banking”. So evidently, there is something special Bitcoin has, it’s merely a service rather than something to consume in the classical sense. Furthermore, the argument misrepresents MRT. Mises did not claim that the transition from a medium of exchange to money requires “other employments” (this is the term he used, rather than “intrinsic value”). He claims that the transition from barter to a medium of exchange requires “other employments”. There is no way to conclude that MRT means Bitcoin will collapse or can’t be money. Last but not least, the argument is empirically false. If nothing else, this should clearly show that it’s nonsense. Bitcoin demonstrably is a medium of exchange (for example, I bought a beer with Bitcoins in Prague). So not only did the Bitcoin detractors make up the premise, they also made up the conclusion and the data, ending up with an argument completely detached from any economic theory and reality.

Ad “transaction costs”: Wondering why Bitcoin does not have a transaction cost advantage over fiat/gold is the equivalent of wondering what the point of email is since you can send letters over fax. It utterly misses a paradigm shift. The kids nowadays consider even emails obsolete and use IM, facebook and whatnot.

Ad “protecting your assets”: I’ll make an analogy with Harry Potter. Voldemort wanted to be immortal and therefore created 7 horcruxes, which preserved a part of his soul in case something happens to him. The main storyline of the 7 books is HP and Dumbledore trying to find these horcruxes, confiscate and destroy them. Voldemort is an elite wizard (let’s call him “the 1%”) and he paid a steep price for the creation of these horcruxes: he had to split his soul into 8 parts and die in the process, spent years on his plan and traveled into far places.

Let’s say that a genius wizard, Satoshi Nakamoto, invented a spell that allowed anyone, including the muggles (let’s call them “the 99%”) to create a million horcruxes spread all over the world, in a fraction of a second, at negligible cost, while sitting at a couch in their living rooms. He would then proceed to publish the spell for everyone to use and study.

Now, imagine the horcruxes are your financial assets and HP&Dumbledore are the bad guys.

142

Harry Potter as an economic analogy. Inverted.

Wow, just wow.

143

Yes that is very neat feature. I don’t see why it couldn’t be done with gold too using money substitutes.

There are people even today that don’t have bank accounts. It would probably be the same with bitcoin. There will always be people without thirparty security support for whatever reason. Still it is just easier to outsource security concerns to people that actually know what they are doing and focus on what you are doing the best. Thats how banks emerged. It is called law of comparative advantage.

144

Transaction costs. Same as letter+fax vs. email. In 10 years, people might laugh at the concept of email similarly as they now laugh at the concept of fax. The only reasons why fax even survives is obsolete laws about signatures.

Bitcoin is very flexible. There are at least two separate teams working on split keys. You can’t have split keys with gold. It’s the equivalent of gold materialising in a safe only when two people turn their keys.

Also, you can use your Bitcoins from a mobile phone already even though the services are not very mature. People in third world countries might not have bank accounts, but they have mobile phones, and this creates a market for alternative payment systems, like the m-pesa. In order to have Bitcoins on your mobile, you don’t need any bank account or a contract: you just download an app (for example I use BitcoinSpinner), it generates a keypair and you’re ready to receive Bitcoins (and, once you have them, spend them). Or if you don’t like electronic devices, you can get Casascius coins and BitBills.

A large proportion of activities of banks is what I call “an overglorified management of money substitutes”. With Bitcoins, this all falls away and specialists (like banks) can concentrate on providing useful services, like lending/borrowing without expanding the money supply.

145

I do not think it is that simple. Direct transaction costs are minimal only if we assume that both sides use bitcoin as currency and both sides use vanilla bitcoin with no or minimal security. The more security you use the harder and therefore more costly it is to transfer bitcoin. There are transaction costs associated with online money substitute transfers, but you get some useful services in turn (like possibility of rolling back your transaction) and we have to remember about taxes and regulations those firms have to comply with which raises cost to the consumer. These, with time (assuming bitcoin acceptance will grow), will be impossible to ignore with bitcoin too unless you or companies associated with bitcoin will want to risk jail time.

I do not understand what you are trying to say. Isn’t this simply authentication mechanism?

All this is possible with money substitutes too and is not unique to bitcoin: NFC makes possible paying with your mobile with any government imposed currency.

146

Having a Bitcoin-only transaction is not necessary to decrease costs. Multi-forex transactions already have often lower transaction costs if you add Bitcoin. Avoding fiat completely is just a bonus. The analogy one of the guys at the conference made (forgot who) is that banks could silently switch to Bitcoin for their settlement networks without telling anyone, just like phone companies switched large parts of their infrastructure to VoIP.

I don’t understand your point with security. With Bitcoin, you can choose the level of security you want and based on that you will have to carry the costs. The ability to reverse transactions is sometimes an advantage and sometimes a disadvantage. With Bitcoin, you can do e.g. the aforementioned multi-signing or conditional escrow, which can mitigate risks. If you’re transferring money with someone you know and trust, you just send the Bitcoins and forget about it. Nobody can prescribe you what decisions you should make.

Taxes and regulations are only an issue with respect to Bitcoin because there are no legal precedents and no official statements anywhere in the world. Opinions differ regarding what taxes and when should be payable (capital gains/income/VAT), because from legal point of view, Bitcoin most likely is not currency or security or commodity. Nor is it, according to the EU e-money directive, e-money. Also, as Detlev Schlichter rightfully pointed out, once the fiat currencies collapse, the legal status won’t matter.

It’s more an authorisation than authentication mechanism.

You can’t do this with money substitutes. That would require an account with the issuer of the substitute, and you’d be at his mercy.

147

I do not know how multi-forex transactions works so I won’t comment on that. I just imagine that when two parties want to trade and all you have is bitcoin and I want payments in USD for example then cost of such transaction is higher than if we both would be using the same currency. I do not know how it is possible otherwise - you have to physically do more operations for this transaction to succeed.

That would work only if bitcoin is equivalent to (it would have to be fiat)
or backed by (there would have to be guarantee of payout of certain amount) USD. I don’t see how it is. In fact if other bank would accept bitcoin I would deliver it to them but myself would never accept bitcoin. The other bank would soon be bankrupt because it owes USD and not bitcoin to its clients. VOIP is perfect equivalent and even improvement over traditional methods.

That was my point. Secure bitcoin transactions are not free.

Such tricks (I do not claim that all of them) are available to traditional money substitutes too. AFAIK ebay uses such things.

Sure but mistakes and frauds happen. Even from close family. I prefer to get my money back if this is possible in such situation.

Governments probably won’t care till bitcoin becomes threat to their monopoly. Then suddenly you will have law plus fear and smear campaign in the media. Somehow to me this is just expected and obvious :slight_smile:

Collapse of fiat currencies is not an end of the world and surely not an end of states. I do not see how this is revelant as long as states will exist.

Really nice feature:) Basically like from old mafia movies where bad guys tear one banknote in two and each receives one part. Then they deposit suitcase full of money to the other guy and tell him to only give it back to the person who presents him both parts of this particular banknote.

Let me clarify then. Mobile payment with money substitutes is perfectly possible as long as you have an account with issuer. In case of bitcoin it is very similar: but instead of account you need key pair. Admittedly it is a incomparably more decentralized with bitcoin, but we are comparing government controlled cartel with product that is totally free from this control. You are at mercy of issuer too with bitcoin. Issuer is bitcoin itself. I have no problem being at mercy with issuer as long as he operates on a free market (you know - with competition etc), because the fact that someone is issuing my money substitutes is not the problem. I believe that bitcoin if it ever becomes successful will bend to government will anyway if people will still believe that money is government businness.

148

We understood the point, and nothing is free, but secure bitcoin transactions are not only truely possible (unlike with any third party transaction system, such as a credit card or how digital gold certs would work) they are incrediblely cheap as compared to what is presently available, or even otherwise possible. I pay a (voluntary) fee for transactions for sheer speed, and they are normally about a tenth of a cent regardless of the value of the transaction. Increasing levels of security in Bitcoin doesn’t really come at a monetary cost, but more of a convience cost to the user. If it’s important to you, then you do the work to make it secure. With any third party system, the high mark of the security is beyond your control.

149

We understood the point, and nothing is free, but secure bitcoin transactions are not only truely possible (unlike with any third party transaction system, such as a credit card or how digital gold certs would work) they are incrediblely cheap as compared to what is presently available, or even otherwise possible. I pay a (voluntary) fee for transactions for sheer speed, and they are normally about a tenth of a cent regardless of the value of the transaction. Increasing levels of security in Bitcoin doesn’t really come at a monetary cost, but more of a convience cost to the user. If it’s important to you, then you do the work to make it secure. With any third party system, the high mark of the security is beyond your control.

150

If you want to transfer fiat money electronically, you pay transaction fees. If the sender and recipient use different currency, there are additional fees (forex fees). If you inject Bitcoin in the middle, you magically save money because the fees are lower. This by the way indicates that there’s something wrong with the banking system, because on a free market this would not be possible. The technology for lower fees has existed for a long time already.

Both sides would simply do the opposite forex transactions, and use Bitcoin for the transfer. Just like when you and I use a normal analogue phone, but the routing in the background occurs partially through VoIP.

Nothing is “free”. What Bitcoin does is it separates the layers, so that security providers can specialise and compete.

With ebay, the arbiter needs to be either ebay or paypal. With Bitcoin, you can choose anybody that both parties agree upon, even completely unrelated to the item being sold.

But Bitcoin does not prevent you from paying for a different security method. It liberates you from being forced to use the methods that banks or governments want you to use.

Well, laws against copyright violations and drug use are there to support established monopolies, yet the enforcement of these monopolies does not really have the anticipated effect. If anything, drugs are more expensive when illegal. Why should then the illegalisation of Bitcoin be a problem for Bitcoin users? If it’s illegal, there’s also no point in paying taxes for Bitcoin revenues, making it even more advantageous to use Bitcoin.

If you have hyperinflation and an alternative to the banking system, that could quite well affect the ability of the state to collect revenue and function. States are already affected by hyperinflations as is, but the banking system is also affected, so people do not really have much choice and have to revert to barter or foreign currencies. They still won’t have a working banking system, so the state can reestablish its role by supporting the banks with a new currency that is less inflationary. If there is a working alternative to the banking system (decentralised, international, based on predictable money supply), who knows what can happen?

In the 1930s, the US government confiscated private gold, promising the people to use it to “fix” the banking system and reissued the people with bank notes/checking accounts. People bought into this. What would happen today? Would people surrender their gold willingly? What would happen if not? Would government permit gold-backed banks to arise?

Kind of, except there is no person checking it, the result materialises out of nothingness. More like Captain Planet, or the warlock’s ritual spells (from World of Warcraft).

Do you prefer to trust in abstract concepts or in individuals?

151

First of all, the concept of intrinsic value is praxeologically invalid. Value is subjective. The opponents of Bitcoin made this one up, I don’t know any actual economist claiming this (and I emailed with 9 austrian and a bunch of others).

You don’t understand intrinsic value, a phrase used by respected Austrians. Google is your friend.

Detlev Schlichter at the conference said exactly the same thing, even though we have not discussed this particular topic with each other before.

Nobody’s perfect, not even Detlev Shlichter.

Second of all, unlike Bitcoin, gold does not have “intrinsic banking”. So evidently, there is something special Bitcoin has, it’s merely a service rather than something to consume in the classical sense.

Mere mumbo jumbo.

Furthermore, the argument misrepresents MRT. Mises did not claim that the transition from a medium of exchange to money requires “other employments” (this is the term he used, rather than “intrinsic value”).

Mises used the phrases "to use it for consumption or production," "industrial demand", and the killer, "nonmonetary --industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange."

So “other employments”, which is convenient enough to mean anything, is a misquote, Pete. Shame on you. He clarified many times what he meant. And he did not mean bitcoin, which is only an attempt at being a medium of exchange, and a miserable one at that, which has lost people 90% of their money forever.

Mises did not claim that the transition from a medium of exchange to money requires “other employments”. He claims that the transition from barter to a medium of exchange requires “other employments”. There is no way to conclude that MRT means Bitcoin will collapse or can’t be money.

First of all, bitcoin is not a medium of exchange, as has been explained here many times.

Second of all, thou art making a distinction without a difference. The reasoning why bitcoin is doomed from the start is exactly the reasoning of MRT, which has been explained many times very clearly both in my blog and various posts here at mises.org.

The only possible argument to say that bitcoin will not collapse is that it already has collapsed. In less than six months it has lost more than 90% [ninety percent!] of its pump and dump value, and has nowhere to go but down.

Last but not least, the argument is empirically false. If nothing else, this should clearly show that it’s nonsense. Bitcoin demonstrably is a medium of exchange (for example, I bought a beer with Bitcoins in Prague).

So what? One person buying one thing from one other person doesn’t make it a medium of exchange. Ask Detlev Shlechter.

152

Yet more dodging and nonsense form Smiling Dave.

The concept of intrinsic value contradicts the austrian school’s subjective theory of value. Stop making stuff up.

But “Smiling Dave’s made up stuff” is, right?

On the contrary, it explains the dual characteristics of Bitcoin as both commodity and service.

And the other employments Bitcoin has is the service it provides: transmitting balances. Clearly, since PayPal and Western Union exist are making money, this service has value. The existence of PP and WU is a refutation of your claims: if your argument was correct, they wouldn’t exist. Or, more precisely, once PayPal and Western Union’s shares started trading on a free market, the companies would collapse. That is the basis of your argument and the evidence of the stupidity thereof.

Mises did not explicitly mention possibility of value being caused by services within his formulation of MRT. From this you incorrectly conclude that this is impossible, and thereby support the absurd notion that the majority of our economy (services and information sectors) do not generate value.

Furthermore, since Bitcoin trades on a free market, saying that “has lost people 90% of their money forever” is a yet another example of ignorance of elementary economics. The money was not lost, it is owned by people who were more successful in estimating the future prices of Bitcoin.

This is empirically false, as documented many times. You are either utterly incompetent or a liar. At least here it should be obvious that your position has no connection to reality.

You fail to address my point and instead repeat a non-sequitur.

You arbitrarily select a variable and present it as a relevant factor, without establishing a connection. If you take another variable, for example the relative velocity (rougly corresponding to transaction volume divided by money supply) of Bitcoin transactions, the difference between the bubble peak and the bottom is only about 20%. Since the beginning of November, the relative velocity and price have been rising. These two values (relative velocity and market price) correlate throughout the whole period I have analysed: they were rising until mid-June, then falling until beginning of November, and then rising since. The correlation between the relative velocity and price is an indication that Bitcoin behaves as money (see equation of exchange / quantity theory of money).

There are about 210 transactions occurring hourly on the Bitcoin network. I made many transactions myself. The proof was particularly evident at the Prague Bitcoin conference two weeks ago, where I made many transactions with other people from all over Europe, in fact Bitcoins were more liquid than either czech crowns or euros.

What is, according to “Smiling Dave’s made up pseudoeconomic fairy tales”, the threshold for medium of exchange? Assuming you can count as high as 210.

You’re an ignorant fool, Smiling Dave. Your grasp of economics is in a shambles. You cannot coherently argue, you cannot present facts, you cannot counter arguments.

153

The evidence of Bitcoin as a medium of exchange (and not just another online value transfer mechanism like PayPal) is also evident at PorkFest in New Hampshire. One could, quite literally, have nothing else for exchange, nor any form of credit card, but bitcoin alone and pay for anything, anywhere in the event. That includes the event itself.

154

The evidence of Bitcoin as a medium of exchange (and not just another online value transfer mechanism like PayPal) is also evident at PorkFest in New Hampshire. One could, quite literally, have nothing else for exchange, nor any form of credit card, but bitcoin alone and pay for anything, anywhere in the event. That includes the event itself.

155

You are using “backing” in a different sense than it’s normally used wrt money. There are two separate issues here:

(1) The one you raise here, that for any medium of exchange (as opposed to just a store of value), you need goods to buy and sell with it. The same is true for gold. You can readily trade gold for dollars and dollars for goods and services. Historically, and in some hypothetical future disaster where central bank currencies and other alternatives were absent, people would buy and sell directly with gold. It’s certainly a problem with bitcoin, in terms of being a medium of exchange, that there’s not much buying or selling going on with it, other than with fiat currencies (and that using centralized and immature exchanges that are much more risky than buying or selling gold). But that’s a problem for bitcoin itself, not for the broader idea of a cryptocurrency that doesn’t depend on a centralzied authority for its scarcity.

(2) Whether somebody (esp. a bank when it issues paper money or electronic equivalents) is legally obligated to trade a certain amount of something (e.g. of a precious metal) for it. If we have mere printable paper or copyable electrons, we need something else of stable scarcity or value to “back” the currency with, otherwise it’s fiat. This is true of neither gold, bit gold, nor bitcoin. Bit gold and bitcoin supplies do not increase when you make copies of the bits. Bits representing money in these systems are costly to create, just as atoms of gold are costly to mine. They are not fiat currencies, for the same reason gold, tungsten, and rare postge stamps are not fiat currencies.

156

Scarcity is one of the objective factors going into making a good currency. Another, more important one, as bitcoin users are finding to their chagrin, is security. Another is the durability to be made into things like coins and jewelry that can be securely carried on the person. If you could make great coins and bars out of tungsten that were as durable as gold coins and bars, then in the future it would compete with gold as a secure store of value and emergency medium of exchange.

Diamonds are even more compact than gold, but cannot be made into fungible units like coins. Gems are an historically important store of value for situations where such fungibility was not so important.

Bits can be, given the proper security protocols, the ultimate in compact, securely and cheaply storable and transportable money, while retaining the crucial fungibility and scarcity property of gold.

Yes, value is ultimately subjective, but that does not mean there are not objective criteria when we choose our tools, whether they be hammers to drive our nails or money for conducting our transactions.

157

I agree bit gold is well worth looking at as a model for the next generation of securely scarce cryptocurrency. Szabo’s analogy to gold is more explicit and closer than with Bitcoin. Since the scarcity is based only on the cost of bit gold “mining” (requiring computer processing effort to solve mathematical puzzles of well-known difficulty to create new units of cryptocurrency), like gold there is no predeterminedly fixed money supply. The money supply as with gold increases as the demand for currency increases (i.e. as the supply of goods traded in gold or bit gold rises relative to the supply of gold or bit gold).

I’m afraid I don’t see how we can do without the age arbitrage or some similar mechanism. Without it, we are left with either non-fungible units (like diamonds or rare postage stamps rather than gold) or a currency whose supply inflates at the rate of Moore’s Law. A mechanism is needed to discount future bit puzzle solutions against past ones and create fungible bundles from them. Bitcoin solves this problem by increasing the puzzle difficulty according to a predetermined schedule, but that creates an inflexible response to changing demand for the currency compared to gold or bit gold – probably the biggest cause of Bitcoin’s extraordinary price flucutations.

158

LOL

“changing demand for currency”

My demand for currency is always infinite.

Clearly you are not from around here.

159

What bitcoin users would this be,since Bitcoin has had no security breeches to speak of? Sure, some online websites that function as rudimentary banks have had some serious security issues, but that was foreseeable by most of us. However, Bitcoin itself has not been compromised. I’ll say up front that a perfect form of security isn’t likely possible, but this system is damn strong.

160

I have a question about the custody chain. It’s been written that each bit of money has a custody chain that gets verified. How long is this chain or how long can it become? Is there a string limit or something? Couldn’t that custody chain get awfully long after awhile?