What Bitcoin is

Miscellaneous General
321

Adam,

None of those quotes are relevant here. To explain why, let’s go with the example Hayek gave, cosmetics. Let’s say Mr A claimed that some rare poison is a cosmetic. Mr B counters with the argument that the poison is well known to kill someone the instant they touch it, and that a thing that kills on contact cannot be considered a cosmetic. Mr A counters that it doesn’t matter, because Hayek and others say that as long as people decide it is, it is. Mr B counters that the very fact that it is universally known to kill on contact is proof that no one will ever think of it as a cosmetic, because cosmetics are used to look good, and people want to look good when they are alive, not when they are dead.

In other words, B is arguing that from the very definition of a cosmetic, certain things are precluded from ever being considered a cosmetic by people.

Mr A is baffled. “Then what did Hayek mean when he said people decide what a cosmetic is?” B explains patiently that Hayek did not mean that people can decide that what does not fit the definition of a word X can become X by their decision. An apple does turn into an orange because everyone decided it does. [Although they might decide to change the definition of “apple” to include oranges, but that just means they started speaking a different language. If the definition of apple is fixed, people’s decisions cannot change it into an orange].

And once we accept that a word X has a fixed meaning, we can sometimes show by logical reasoning that an object Y will never fit the definition of X. 5 cannot become 4. A deadly poison that kills on contact cannot become a cosmetic. Something that does not fulfill the conditions of the regression theorem [Mises proved] cannot ever fit the definition of the word money.

322

Helloween,

You are saying that the regression theorem only applies in a barter economy, not in a money economy.

My humble article, Bitcoin All in One Place, proves otherwise.

323

BTW, that Shostak article, brilliant though it is, has a different explanation of why bitcoin has a mtgox number higher than zero.

He says it’s only because bitcoins are convertible to real money, like dollars. Meaning the moment the bitcoin folk say that bitcoin is like the roach motel, where you can buy in, but never exchange it for dollars, bitcoin will plummet to zero. Observe that historically other moneys have had that imposition placed on them by govts, and the money continued just fine. This, says Shostak, means that bitcoin is not desired per se as money, [and never will be], but only for its ability to shift real money back and forth.

He is correct of course in his analysis of why a price on mtgox means nothing, but I think he is giving bitcoiners to much credit for having any intelligence at all. The reason bitcoin has a mtgox price is

A. Because people are idiots caught up in some insane fad, like tulipmania and the Ithaca Hour and other well known examples.

B. Because the mtgox price is a fraud in the first place and proves nothing, as explained here.

C Because the truly trivial amount of people who use bitcoins to buy and sell things [75! See the important article and comments here], and the trivial amount of their income this trivial amount of people spend via bitcoin [because it is impossible to buy most things people use routinely with bitcoin, such as a car or a shopping bag full of name brand groceries], and the trivial amount of the stock of bitcoins used by this trivial amount of people to buy a tivial amount of things [one three thousanth of one percent] proves nothing at all. 75 people scattered all over the world spending a few pennies worth of bitcoin to buy one or two items apiece, while way over 99% of bitcoins in the universe just sit there, never used, means bitcoin is a joke.

324

Smiling Dave
Thank you for your extensive information on the topic in your link! I’ve just started to read it.
But what about this argument: Bitcoin does not regress in infinitum, it regresses to existing fiat money. And they in turn have their ultimate value because one can use them to buy oneself free from government violence (taxes). And they regress back to the gold the government stole and gold in turn has a value as good in itself for jewelry. I don’t understand why fiat money could be established, but why Bitcoin can’t. Bitcoin is a number without the fiat. Its inherent value and usefulness lies in avoidance of government monetary policies. Isn’t that as much an inherent value as is the perceived beauty of gold jewelry? If people value avoidance of political monetary policies, then Bitcoin could work as money as much as gold could work as money because people value the looks of it. _____ If the intrinsic value of Bitcoin is avoidance of government monetary polices, then if government disappeared, so ironically would Bitcoin too :slight_smile:

325

All in the articles, Helloween.

Ultra short answer: Jewelry is not using gold as money. Avoidance of govt is an advantage a money can have. But regression theorem proves it cannot be a money in the first place. The Emperor’s new clothes were far superior to other clothes in that they never had to be washed or ironed or repaired [=avoidance of govt], but since they werent clothing in the first place, such superiority is meaningless.

And that Shostak article is topnotch. His explanation of why the mtgox number is meaningless is, dare I say it, even better than mine.

326

I will read, but short answers are effective to inform marginally interested people.

What is the intrinsic value of a euro? Didn’t it just build on the price of the D-mark et c? Why couldn’t Bitcoin become money in a similar way in which the euro has become money? But this time without government and fiat.

327

How does one “build on a price”? If Mr A says a bitcoin should be worth ten dollars, and Mr B that it should be 20, how does one decide who to go by?

More, how did Mr A decide it should be ten dollars in the first place? Same for B.

All these questions have no answer, which is why bitcoin cannot get off the ground.

Euros on the other hand, had an answer. The govt said they would trade in your D marks for Euros at a rate they decided on. It was accept their rate or get nothing. There was no choice.

With bitcoins if you don’t like someones rate, and why should you, you just refuse to take bitcoins.

A word about short answers. In my limited experience, they are effective for very intelligent people who have the required background. The marginally interested will understand them as a hound dog understands advanced calculus. But hey, Smiling Dave takes requests.

328

Okay, but what quality of a full-commodity is lacking on bitcoin?

Or, rearranging the question, commodities are something more than non-unique/homogenous economic goods, that is, goods that are distinguishable only by quantity and standardized quality grades, and for which there are organized markets specialized in tradind them?

And if that’s all you’ll need to qualify as commodity, which criteria bitcoin fails?

329

Somehow this topic baffles me, I’ll have to think harder to reach a conclusion. I’m not convinced either way.

Couldn’t, and according to anecdotes didn’t, the initial value of Bitcoin have value because they were percieved as “cool”? Like the inital value of gold was that it was “cool”. Pure gold, as our ancestors found it lying around on the ground in nice pure metal nuggets thousands of years ago when it became money, is too soft to make weapons or tools, other than maybe a pee pot. (For the very same chemical reasons that it exists naturally as a pure metal). Did gold become money because it could be used to shape pee pots?

Since gold has (had) virtually no industrial usage, and its physical possession liberates you from any middlemen between you and your money, it really resembles Bitcoin in that way.

330

How many people thought it was “cool”?

Who says gold was money when its uses were not yet known?

331

Like gold or not, it’s a matter of individual taste.
Like Bitcoin or not, it’s a matter of individual taste.
With stuff like food or fuel, which actually produce utility when it is consumed, things would be different. But neither gold nor Bitcoin can in themselves be consumed in (chemical) exchange for utility. Imagine Robinson Crusoe. Isn’t the intrinsic value of gold as esthetic as that of Bitcoin?

Myself, I don’t care at all about gold as decoration, but I do have gold in my mouth as a placeholder in a tooth protesis. It seems gold isn’t more useful than that, for us who don’t go for bling bling. For me, plastics or cheramics would work as well in its place. I don’t know why my doctor used gold, maybe because material costs are zero because it will remain forever?

332

Like gold or not, it’s a matter of individual taste. Like Bitcoin or not, it’s a matter of individual taste…Isn’t the intrinsic value of gold as esthetic as that of Bitcoin? Myself, I don’t care at all about gold as decoration, but I do have gold in my mouth as a placeholder in a tooth protesis. It seems gold isn’t more useful than that, for us who don’t go for bling bling.

That is true. But, and this is a huge difference that makes all the difference, what is important is the numbers of likers. How many people like gold or bitcoin for non monetary use? Well, in India,with its billion people, every marriage has gold involved. Bitcoin would kill for that kind of popularity.

With stuff like food or fuel, which actually produce utility when it is consumed, things would be different. But neither gold nor Bitcoin can in themselves be consumed in (chemical) exchange for utility.

Why do you think that is the only thing that counts? Also, http://geology.com/minerals/gold/uses-of-gold.shtml

Imagine Robinson Crusoe.

To understand money, which is a medium of exchange, meaning there is trade going on, Robinson Crusoe alone on his island is the wrong model.

Helloween, I’m going to put answering you on hold until you tell me you have digested [not merely read or, horrors, skimmed], the articles I’ve written. It’s apparently a subtle topic, judging by the elementary blunders so many people are making.

333

Fair enough, I’ll read up on the subject and (maybe) come back with more specific questions.

However, your latest link about the usefulness of gold is ridiculous!
It mentions jewelry, money use and “glass making”. Also, of course, medical use as a placeholder since it doesn’t do anything, but it could easily be replaced with plastics or ceramics.

What’s more, oh, electronics. Extremely thin gold coating is used to prevent corrosion. But if gold and copper had the same price per kilogram, copper would be prefered as conductor in general, because gold is so extremely heavy that it’d be quite demanding to build conductive wires out of it. It would require very robust power pillars to keep it up as main power transfer lines. And then there are the laboratory and space flight usages. Same exotic experimentalists use any kinds of materials in microscopic quantities.

Your link missed that gold is used also as decoration on food and wine.

Please just accept fact: gold har an intrinsic value only for esthetic purposes, not at all for industrial. The intirinsic value of Bitcoin seems to be no more or less “real”. It’s just one in the row of translations from old money to new (like silver-gold-Reichmark-Dmark-euro-Bitcoin). And I doubt that even in India today you can on the street buy a lunch for a grain of gold.

334
335

I guess you don’t understand how much of a douche this sort of thing makes you look. And you do it over and over…

336

It depends on how you interpret it. Your interpretation is possible. However, my point is that concentrating on the term “commodity” is not helpful.

337

Attention all bitcoiners.

Send all your hate mail to Professor Shotak from now on. He argues exactly what I have been saying for years, only better.

http://mises.org/daily/6411/The-Bitcoin-Money-Myth

338

A thing that becomes money needn’t have commodity value originally.

All it needs is value originally, whether commodity or some other kind of value.

This point is obscured by history because previous forms of money have often had commodity value. But that doesn’t mean other kinds of money can’t have had another kind of value.

The giant money of Yap island has zero commodity value, they’re just giant round stones with a hole drilled in the middle. Yet no one says they aren’t money. Yet they have value and function as money.

Pinning down something’s value to any one thing isn’t even a necessary condition, nor is it a condition that that value be widely agreed upon or existent.

In practice this is why we focus on commodity value, because a commodity is widely desirable for its characteristics and broad demand.

As for bitcoin, originally it had only one valuer, that of its creator, Satoshi Nakamoto, who mined them alone for over a year.

Some say the early adopters after Nakamoto valued it for nerd-cred, for its mathematical beauty, for its elegant solution to the double-spend problem and the many applications that the blockchain could be put to as a result.

Bitcoin is an idea, not a material thing. This is the heart of why people are having difficulty groking it. And an idea is singular when it is first created by its first thinker, in this case Nakamoto, but an idea must be transmitted.

Because bitcoin offered qualities that would function in a superior manner as a medium of exchange, people began using it as such.

The first transaction done in bitcoin, the famous 10,000 btc pizza, which today would cost some $1.2 million, was the first public and high-profile transaction.

Why did the person who bought that pizza for the offerer value 10,000 bitcoin over the ~$20 it would cost him to send the pizza?

For whatever reason, that person did value 10k btc higher than $20.

What’s required for a thing to become money, at the most elementary level, is that it is valued at all.

Why it’s valued initially is not so important and in the case of bitcoin it’s not likely to have any one initial value.

Rather, bitcoin’s spread as a currency is due much more to its suitability as currency than to the reasons it was initially valued.

When a business-owner takes a look at bitcoin’s value-proposition today, what they see as relevant are the features that allow it to offer the lowest possible transaction costs, and the ability to avoid chargebacks and fraud.

Who the hell cares about commodity value when a business realizes it can make more profit on bitcoin sales than fiat sales? It no longer matters.

Mises showed that any money has multiple simultaneous kinds of value built into it. Gold’s price is only in part due to commodity value; most of its value is due to its use as a value store and its exchange value.

Bitcoin too–its price in terms of their mathematical beauty and nerd-cred value are fairly low compared to the value it obtains from its use as a currency–its exchange value, and its value-store proposition is tied to its limited number. Its fungibility is also second to none.

For me this ends the argument.

Bitcoin is already being used as a currency the world over. To argue it cannot be or the price must eventually collapse to zero seems beyond ridiculous, it seems ignorant and at this point pig-headed.

339

He makes some pretty silly assertions and conclusions.

“Observe that a bitcoin is not a thing; it is a unit of a non-material virtual currency.”

So digital objects are not things? I discur.

“A bitcoin has no material shape; hence from this perspective the notion that it could somehow replace fiat money is not defendable.”

According to Shostack money must, apparently, have a physical form to be used as money. Honestly?

“Consequently for something to be accepted as money, it must have a pre-existing purchasing power: a price. This price could have only emerged if it had an exchange value established in barter.”

He’s right it needs to have a pre-existing price, but that price need not be established based on commodity value. It could be based on collection-value, coolness-value, or any of a hundred other reasons to value a thing.

“Notwithstanding this, it is the historical link to gold that makes paper money acceptable in exchange.”

No, it’s the law which makes paper money viable in today’s world. If people had a choice they’d revert to good money, ie: gold and the like. And yes, maybe even bitcoin.

“Bitcoin can function only as long as individuals know that they can convert it into fiat money, i.e. cash on demand”

Unless bitcoin became the unit of account, a point he conveniently skips over. THis whole piece just seems hacked together. Earlier he called the creator of bitcoin “Satoshi Nakamote.” Not ‘Nakamoto.’ So what did he do, 30 seconds of research, or 45 seconds?

“Without a frame of reference or a yardstick, the introduction of new forms of settling transactions is not possible.”

How then does he explain bitcoin’s current use as a currency? Forest for the trees.

“It was through a prolonged process of selection that people had settled on gold as the most marketable commodity.”

So he’ll just conveniently ignore that virtually every commodity in existence has been used as a currency at some point, including wheat, iron, cloth, spices, etc., etc., etc. Using something as money makes that thing money for that transaction. It’s not the final selection of gold that alone can be considered money.

“Besides, Bitcoin is not a new form of money that replaces previous forms, but rather a new way of employing existent money in transactions.”

Again, if bitcoin becomes a unit of account then this point is obviated.

“Because Bitcoin is not real money but merely a different way of employing existent fiat money, obviously it cannot replace it.”

This is not anymore obvious than why gold replaced other commodities as a money. Suppose there were economies that used cowrie shells as money, and along came those who introduced the technology of gold. Some might have said the same thing, gold isn’t money, people are just buying gold with cowrie shells, it’s just a different way of buying with cowrie.

That reasoning only lasts until practically everyone’s using gold, then the story changes. And the story changes because gold is a better money than cowrie shells, in fairly objective terms. So too, bitcoin is a better money than fiat or gold for digital/online and distance transactions, which are the primary form of transacting in today’s world.

“Contrary to the recent hype, we hold that Bitcoin is not money but rather a new way of employing existent money in transactions. The fact that the price of bitcoins has jumped massively lately implies that people assign a high value for the services it offers and nothing more.”

This is silly, and I full expect Shostak to regret and eventually retract and correct this knee-jerk opinion piece.

340

My point is that once we all agree that bitcoin is a commodity then there are a few possible future scenarios:

  1. It becomes the most used item that serves as accounting unity, exchange means, buffer of liquidity or whatever other property that people think only money has.

  2. It becomes frequently used for certain types of things and transactions but not as a general means of exchange.

  3. It never fully grows into this money-potential and dies out eventually and everybody forgets it has ever existed.

That’s true for every commodity, from gold to crude oil to pork bellies, so if one accepts bitcoin is a commodity, one must accept that this is true for bitcoin aswell.

Of course, one can simply deny it is a commodity. But in that case it becomes kinda hard to explain what all these people owning and trading it are really doing. Is it all a fucking mirage, a trap, an evil scheme, an episode of collective hysteria?

So I decided it would be interesting to know if the anti-bitcoin crew at least accepted it is a commodity. Maybe a very obscure commodity that interests only a few geeks that like to read cyberpunk novellas. But still a commodity.

And once they accept that bitcoin is a commodity they have at least to accept that it has a potential to grow in usage and become money.

Because some people here seem to be sustaining some weird theological views, that seems to imply that bitcoin wouldn’t be “true” money even if most transactions were executed in this protocol and everybody talked in terms of bitcoin figures and income taxes were calculated in bitcoins.

Maybe I’m wrong, maybe I’m misunderstanding what they are saying.

Maybe they are simply saying that bitcoin is some fashionable commodity that will disappear sooner rather than later, never fulfulling it’s alledged money potential.

But still, I felt I needed to ask.

To understand what these people are really trying to say.

Because sometimes it just looks like they are waving their arms in the air babbling non-sense that can be roughly translated to something like “bitcoin is evil and bitcoiners are being fooled by some evil bitcoin overlord”.