What Bitcoin is

Miscellaneous General
361

One of the key misunderstandings of people reading the regression theorem is they focus on the word ‘commodity’ and then knock bitcoin as having no commodity value.

Money needs to be a commodity only because each unit needs to to be identical to the next one so that they’re equal units, and they have to be broadly available so that they’re fungible (ie: if there was only 1 lb of gold in the world it would be useless as money).

Commodities have thus filled this gap and served as money. It’s not that a money -must- be a physical commodity, only that commodities possess these qualities a money needs.

Bitcoin too allows each unit to be identical and allows very many of them to exist and for them to be easily subdivisible.

To the serve as money, the RT says it must have been initially valued in some way to later serve as money.

Clearly bitcoin was valued, for it was produced at a cost by the early miners. Miner’s chose to create it and pay for the cost of creation with dollars, over the cost-savings of not creating it. That gave it a non-zero value at that point.

Good points. Here is the essence of the regression theorem according to Mises:

“…no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.” (Human Action, 3rd rev. p. 410)

Here Mises refers to the notion of a “good” which in formal economics simply means a thing which an actor seeks to obtain or utilize toward an end. Individual bitcoins thus fit the formal definition of a “good.”

Besides the argument that bitcoins violate the regression theorem, there is also the notion (which is remaining largely unspoken) that gold or the gold standard are absolute values or ends in themselves. Some libertarians have come to conceive gold as an absolute value of libertarianism itself, and not merely as a means to an end. For Mises, gold or the gold standard were not absolute values or ends in themselves, but merely the best means available at that time for forestalling government monetary intervention:

*The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.

*The superiority of the gold standard consists in the fact that the value of gold develops independent of political actions.

*The gold standard alone makes the determination of moneys purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups.

*The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary units purchasing power independent of the policies of governments and political parties.

*The classical or orthodox gold standard alone is a truly effective check on the power of the government to inflate the currency. Without such a check all other constitutional safeguards can be rendered vain.

(Source:http://mises.org/quotes.aspx?action=subject&subject=Gold%20Standard)

Mises held that:

“The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard.” (HA, 3rd rev. p. 473)

There was no other monetary system imaginable or available at that time to achieve a separation of money and state. What some Bitcoin advocates argue is that Bitcoin (or a virtual currency similar to it) has the potential to be a more efficacious means for achieving and maintaining a separation of money and state.

362

Excellent post, Adam. I referenced you here.

363

And how’s that bitcoin has no “commodity value”.

What has happened to the whole “everything is worth what it’s purchaser will pay for it?”?

The discussion about bitcoin commodity reminds me of the debates about the “value” of water versus “diamonds” that boggled many philosophers.

Bitcoin is a commodity, with value to some people. Even if this value is just the value of a collectible item with a brand name. It doesn’t matter.

And once a few people recognize its value, they start trading it for other valuables and for money.

There’s no need. But it is indeed very practical.

For instance, diamonds do not have very practical commodity features, since they are not homogenous or divisible.

You can grade the quality based on clarity and color, but a diamond weighting 10 carats is not worth ten times a similar diamond weighting 1 carat since they are rarer and diamonds can not (easily) be merged into bigger diamonds.

But that doesn’t mean gems do not share some good money properties. They are very liquid (it’s easy to find a market for them), they are durable, portable, etc.

They are even very good for concealing value in small volumes, allowing certain transactions that would otherwise be too cumbersome or risky. They are a major means of payment in markets like weapons, drugs and human trafficking.

Up until recently we’ve used physical commodities as money because they were available and nothing else was.

However, fiat money is not a physical commodity, it’s a complex institution where a local authority enforces the use of it’s token accounting unities and rules of transactions. It’s is partly based on a paper currency commodity, whose scarcity is (partly) at the autorithy’s discretion. However most of the monetary mass is already dematerialized, and exist only as information in books.

Now, electronic computers and cryptography seem to have created a commodity that is essentially information, and without the need of a central enforcer.

This feature is indeed pretty sweet. But you don’t need to have 10-digit precision in your transactions, unless you’re doing billions and billions of transactions.

That might be interesting for algorithmic traders though.

Well.

Cost per se doesn’t add value. If you dig a whole and then cover it you have added zero value at a high cost.

But rational people won’t incur costs unless they perceive value in what they’re doing.

Maybe early bitcoiners mined for fun, to see how the system worked. To tinker with an idea.

And once a few bitcoins were around, they started tossing them around, for fun.

Since they were of limited availability, they become a scarce resource and become sought for.

And that’s when the regression theorem kicks in.

Yep, that seems to be the case.

Exactly. But the non-zero value is always to some people, not to the whole world.

Bitcoin can very well be a worthless notion for 99.99999% of the people and still be a valuable commodity for the remaining 00.00001%, and that will be enough to emerge it’s market price.

Yeah, I got that feeling too.

But they are worse than flat-earthers. At least the earth “seems” flat from up-close. To realize the earth is round takes a lot of insight and imagination.

But the anti-bitcoiners are denying something that is happening before their very eyes.

That’s why I ask what they are really saying. It’s very difficult for me to understand their proposition, I must be missing something. It must be something more than this fact-free crusade.

I’ve asked Smiling Dave what are his concrete predictions based in the non-moneyness of bitcoin. What real world phenomena he expects.

He told me he can’t predict a thing, and as far as he knows, bitcoin can last 20 years or something.

So what the fuck are they screaming about?

By the way, cool post dude.

364

“That’s why I ask what they are really saying. It’s very difficult for me to understand their proposition, I must be missing something. It must be something more than this fact-free crusade.”

The unstated belief system you are missing:

  1. Libertarianism consists of a set of concrete institutional values of which the gold standard is one.

  2. The phenomenon of Bitcoin implies a future libertarian society where Bitcoin serves in place of the gold standard.

  3. This cannot be true because by premise #1 libertarianism consists of a set of concrete institutional values of which the gold standard is one.

No matter what the empirical evidence may be regarding Bitcoin, there can be no future libertarian society in which Bitcoin (or some virtual currency) serves the function of the gold standard, because by definition, libertarian society entails the gold standard as its monetary system.

That is the reasoning and implicit belief system you are missing; the belief that the gold standard is an absolute value of libertarianism (not merely one possible means to effect a separation of money and state).

You are dealing with an ideology which sees libertarianism as much more than liberty from the state. This ideology mandates certain concrete institutions and prohibits others regardless whether they are voluntarily constructed and supported. In other words, it is a theory of libertarianism conceived in terms of objective or absolute or intrinsic values.

365

Thanks TA, you make some interesting rejoinders that I found compelling.

As for the gold standard being an ideology, that’s interesting but somehow I don’t think Smiling Dave is motivated by goldbug fever. It doesn’t seem like it anyway.

I think the ideology is much deeper and subtle, approaching to the level of psychology instead of ideology.

It’s the fact that bitcoin is of a whole new category, a “spiritual” entity, an invisible substance, a money that is pure idea, without physical correspondence. I think there are classes of people that yet have trouble accepting that such things are or can be real in a true sense.

Look at Ron Paul’s recent quote about bitcoin, where he said basically he had trouble trusting anything he couldn’t put in it pocket. He wants to wrap his hands around it for it to be real to him. It’s a corollary of a purely materialist philosophy.

I remember when I told my investment advisor about bitcoin, his first question was ‘are they metal, what are they made out of’?

How do you say they’re made out of math? :stuck_out_tongue:

There is no such thing as a bitcoin! They are immaterial, just ideas. They dont’ even exist as bits in a computer. They’re just tracked as accounting entries in the block-chain. They are persistent records, numbers in a distributed database that can’t be controlled. Where are they located physically? Technically they have no one location–they are distributed idea-objects, a part of which exists everywhere a record of the blockchain is kept.

Or you could say their actual existence lies with the corresponding private key that can spend them, since control implies ownership and you need that key for control. And from that, material existence can be derived in the form of cold-storage wallets and the like.

It’s something that people have to wrap their heads around, how this new system works, and when you challenge people’s materialist biases, they sometimes perform a category rejection. I think that’s more likely what Smiling Dave is doing, rejecting cryptocurrency as a category because it doesn’t quite fit the historical categories that were used to define money.

Cognitive bias against immaterial objects can be a pernicious influencer of one’s thinking, and a subtle and difficult thing to uproot in one’s own self, because it operates on a level that would be nearly invisible to the thinker.

366

That’s possible Anenome

But I wasn’t referring to the arguments of just one person. I was more referring to the general opposition to Bitcoin along ideological lines. This is manifesting through the articles the Mises Institute is choosing to publish about Bitcoin, which seem to be indicative of a general opposition to the idea of Bitcoin. I’m suggesting that on a theoretical level, the opposition derives from the theoretical creed of value objectivism which is still tenaciously clung to in some libertarian schools of thought. Recall the infamous passage: “Value in the sense of valuation or utility is purely subjective, and decided by each individual. This procedure is perfectly proper for the formal science of praxeology, or economic theory, but not necessarily elsewhere. For in natural-law ethics, ends are demonstrated to be good or bad for man in varying degrees; value here is objective—determined by the natural law of man’s being…”

It can’t be stated much more clearly than that. In objective value philosophy, ends, such as the gold standard, are not to be considered subjective values of some individuals. Rather, in objective value philosophy, the gold standard, as an objective value, is demonstrated to be good for man by natural law, independent of whether any individual values it. In this way of thinking, the gold standard has absolute or “intrinsic” value (i.e., objective value) separate from mere “subjective” value. The gold standard is seen as one of the primary objective values of libertarianism.

For example, Randian social theory (definitely a theory of objective value) entails intellectual property as an objective or absolute value. Subjective value has nothing to do with it. Intellectual property enforcement is an absolute, non-negotiable, aspect of the Randian conception of society.

In the same way I believe that some have come to subscribe to an objective-value conception of libertarianism wherein gold as the primary medium of exchange has become an absolute and objective value of libertarianism. In the same way that intellectual property laws are an inseparable institution of Rand’s objective value social vision, gold as a medium of exchange has become an inseparable institution of libertarian society for some people. To suggest that Bitcoin might supplant gold as the libertarian currency is tantamount to suggesting an overthrow of libertarianism. Bitcoin advocates believe they are furthering the cause of libertarianism, but objective-value libertarians see Bitcoin as a threat to the very notion of libertarianism in which gold must be the medium of exchange.

That this is happening is perplexing for some who believe that subjective value theory is unanimously agreed upon by all “Austro-libertarians.” But subjective value theory is not unanimously agreed upon by Austro-libertarians. Objective value theory is still clung to by some influential libertarians. This fact does not manifest in their writing essays entitled “Objective Value Theory is Correct.” Rather, it manifests in the choice of the articles that they will and will not publish. There is some good thinking writing being done on Bitcoin by Austrian libertarians. What explains the Institute’s unwillingness (so far) to publish articles by these writers? In my opinion, the explanation lies in the Institute’s vision of libertarianism which is defined in terms of a number of positive, concrete (objective) values, as opposed to a vision of libertarianism defined in terms of the negative value which is liberty from the state.

367

“Bitcoin advocates believe they are furthering the cause of libertarianism, but objective-value libertarians see Bitcoin as a threat to the very notion of libertarianism in which gold must be the medium of exchange.”

That makes sense, and I have no doubt you’re correct that some are thinking in these terms. But I don’t know how much of that accounts for the institute’s position and take so far instead of other factors I’ll elaborate on hereafter.

“There is some good thinking writing being done on Bitcoin by Austrian libertarians. What explains the Institute’s unwillingness (so far) to publish articles by these writers? In my opinion, the explanation lies in the Institute’s vision of libertarianism which is defined in terms of a number of positive, concrete (objective) values, as opposed to a vision of libertarianism defined in terms of the negative value which is liberty from the state.”

I find that compelling, but it seems like it’s rooted in the process of ideological momentum which seeks to turn theory into ideology, and thus solidifies it as a dogma. That systematizing process of turning theory into policy-prescription is very conservative, because it is generated as a response to attacks from outsiders, it is repeated and developed into soundbites, argument structures and strictures, and becomes -the- solution to -X- problem that is the best answer from libertarians.

So along comes bitcoin, an alternate answer to X problem libertarians have been decrying for so long, and it seems like the old guard is taken aback. The gold-reflex to X problem has long-sinced become ingrained and groove-worn. They would have to return to theory, do the hard work of re-application of basics, to root out bitcoin.

And not everyone has the time, interest, or intelligence to do this. But many have the time to accept the work of others on the field of gold as solution to X, that dialogue has already been written for them.

So I think it is in part two thing, conservatism on the part of Mises institute that wants to stick to the age old solution to the problem and be inflexible about it because inflexibility has been their major defense against fiat. Gold is a bulwark in that fight, and bitcoin threatens to tear down that scaffolding they’ve so carefully built into a castle wall.

Secondly the desire to maintain some perception of respectability leads to conservatism. They’d rather profess bitcoin a failure and be surprised by its success than join the bandwagon and end up looking like a fool if it fails. That pressure to maintain a level of prestige has a direct effect on what’s published and who’s allowed to publish it, leading to innate theoretic conservatism.

Gold is a viable answer, so they’ll stick with it, even if it can never happen in today’s world.

368

Ha!

“In Kreuzberg, Berlin, virtual currency Bitcoin has expanded off the internet to become a favoured medium of exchange in real shops and bars. Joerg Platzer, the owner of bar Room 77 is helping to establish what he believes to be the world’s first Bitcoin local economy”

(video)

http://www.guardian.co.uk/technology/video/2013/apr/26/bitcoin-currency-moves-offline-berlin-video

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Someone should send Bitcoin on a USB memory stick to Ron Paul, so he can put it in his pocket. I think his instinct is to avoid a middleman between him and his money, and that it’s a bit abstract to understand that Bitcoin has no middleman.

Bitcoin is obviously designed to help people avoid the problems of fiat currency. That’s its original value. Some guys pushed to try to make it happen, by themselves using it and popularizing it. I don’t understand what the problem is here.

The regression theorem describes how money comes into being when no other money exists. How prices are born. Like why gold became money thousands of years ago, or why cigarettes is money in prisons. Exchanging between existing currencies is not what the regression theorem describes, as I understand it. For example, what intrinsic value did the euro have before it became money? Well, none, except what people chose (or rather were forced) to exchange it for in terms of previous currencies. And now some guys have started to exchange Bitcoin for existing currencies. What’s so mysterious with that? If this escalates, Bitcoin might well become money.

371

When the Euro got started, the banks promised to exchange the old money for euros at a fixed rate. Everyone was confident they would get a certain rate for their old money.

Contrast this with bitcoin, where nobody promises anything.

“Some guys” is not enough. You need “many guys”.

If this escalates, Bitcoin might well become money.

The regression theorem proves it will never escalate.

The reality is, bitcoin is not what is buying things now. The established currencies are, even when bitcoin intrudes itself into the sale. Nobody sells their wares for a fixed amount of bitcoins. A few weeks ago bitcoin was $266. Now it’s half that. Please find me one thing in the universe whose price in bitcoins is the same now as it was when bitcoin was $266.

372

I think you overestimate the significance of people trusting a central official formal institution, like the governmental banking system, promising stuff. People obviously use Bitcoin because they trust that they will be able to exchange them later on again. As I see it, Bitcoin’s intrincic value is its potential to replace fiat currencies. And that’s quite a huge value.

So, why Bitcoin and not Nextcoin?
Because of first mover advantage. Established standard. Inertia or habit, if you want. Nextcoin would not have the advantage over Bitcoin, which Bitcoin has over fiat currencies. Nextcoin would not have the originial intrinsic value which Bitcoin has.
And of course it isn’t money today, but RT doesn’t say that it can’t become money one day.

373

Helloween,

Good luck in your study of this facinating subject.

374

Clearly bitcoin was valued, for it was produced at a cost by the early miners. Miner’s chose to create it and pay for the cost of creation with dollars, over the cost-savings of not creating it. That gave it a non-zero value at that point.

Sounds pretty convincing, no? Until you realize that there are several explanations why the early miners were doing it:

  1. To speculate, meaning to pass on to the next sucker some day. But not for any intrinsic value. Now there are some here who, like a fish seeing a worm, automatically bite at the words “intrinsic value” and say all value is subjective. Typical noob mistake. As my humble blog explains at length, with quotes, Mises himself used “intrinsic value” in this very context.

  2. As an idle pastime. Sitting in Mommy’s basement, time on their hands, bored with all their other video games, they played this one. In other words, they valued the time killing, not the bitcoin. Surely no one here will argue that bitcoin has intrinsic value because it wastes their time.

  3. Because, and do not underestimate this, they are stupid. A small group out of the many billions living on the planet can always be found to do almost anything. Some people eat their own fingers, as the psychiatric literature states. Some people thought the Ithaca Hour is money. They were stupid, and lost money. Even now, after Smiling Dave has gone out of his way to explain in simple language how bitcoin is a farce, there are a few people here who don’t get it. That’s the profile of one of your early users.

375

I’ve been following reddit’s bitcoin forum and there’s lots of excitement and people talking about and adopting bitcoin. How can you say that it’s just a fad?

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I’ve been following reddit’s bitcoin forum and there’s lots of excitement and people talking about and adopting bitcoin. How can you say that it’s just a fad?

You’ve just defined a fad, Blargg. Let’s look at a few variations of your question.

From Holland, 1637:

I’ve been following the newspapers and there’s lots of excitement and people talking about and bujying tulips. How can you say that it’s just a fad?

…some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.

I’ve been following reddit’s beanie babies forum and there’s lots of excitement and people talking about and buying beanie babies. How can you say that it’s just a fad?

How did these beanies escalate from $5.00 to $5000.00 or more for a beanie in just a few short years, and then fade away, as if it never had happened? How did beanie babies command so much attention that they were hijacked from United Parcel Service trucks making deliveries, to sitting on store shelves unsold?

I’ve been following reddit’s Tamagotchi forum and there’s lots of excitement and people talking about and buying these virtual pets. How can you say that it’s just a fad?

It sold for $16.00 – $18.00 and sold more than 500,000 units within the 1st two months of its release. This only seemed to create an even greater demand, so much so that they sold on the black market for more than $400.00.

Now bidding on ebay for 99 cents.

You get the idea. Mind, it took the Ithaca Hour 20 years to die, so who knows how long it will last? But die it will.

377

Oh, gold is just a fad. People like it just because it’s shiny and sunlike. It never had any intrinsic value, it will never be money. It’ll pass. In another 6,000 years or so anyway…

Actually, Bitcoin has tangible competitive advantages over what is money today. That’s why some think it might become money. It’s not a collectors object of some tamaguchi subculture.

378

Sorry, fellas. The bitcoin creators admit it’s a fad. They compared it to myspace openly in their faq. Even if it turns out not to be, you have to start with their own admission that it is.

379

Exactly, it’s actuallky really obvious. Bitcoin is fungible–each is like the next one, interchangeable. Neither tulips nor beanie babies are. They had scarcities by type, some more rare than others. The tulip bulbs that became very expensive were valued for their striped pattern transmitted by a plant virus.

It’d be like saying that Mona Lisa is a fad and not money.

Welll, it’s not money, and its value is largely a product of history, but that’s beside the point.

Bitcoin may take over as a currency because it’s simply a better currency.

I love how SD has to keep qualifying that this or that money took 20 years to collapse so therefore he has no idea when bitcoin will. Liberty dollars, or whatever, collapsed for a couple specific reasons. Either it wasn’t a better money compared to the dollar, or the government cracked down on them for challenging the dollar, or the like. But bitcoin is a better money than any fiat.

380

Yes, anemone, Bitcoin has superior features compared to current fiat money, or even gold. I don’t need to repeat those features for you here. Onions or whatever-coins are obviously inferiour. A Bitcoin is not a tulip. Government CANNOT crack down on Bitcoin, that’s one of its main beauties and intrinsic values ehich might make it money some day.