What Bitcoin is

Miscellaneous General
21

Your argument is incorrect. People choose their medium of exchange based on transaction costs, not on “backing”. And the transaction costs are almost always determined by liquidity. This is why gold cannot compete with fiat unless fiat collapses, irrespective of government interference. Kindly consult Rothbard’s The Case for Genuine Gold Dollar, http://mises.org/rothbard/genuine.asp. Rothbard makes it clear that abolishing legal tender laws is insufficient and people would still continue to use fiat dollar. He does not use the term liquidity, but other economic schools do.

Bitcoin presents a revolution in technological aspect of transaction costs which cannot be matched either by fiat nor by what has been commonly understood as commodity money. Market actors that are sensitive to transaction costs, or that whatever reason suffer from high transaction costs with fiat are motivated to switch to Bitcoin.

Depending on where you are, Bitcoin already has higher liquidity than many forms of fiat. The example I like to use is when I came back to Dublin last year from the Bitcoin conference in Prague, and the exchange shop at the airport refused to take the Czech crown coins I had, because they only take notes. So I’m stuck with Czech crown coins that I cannot use unless I go to the Czech Republic in the future, or find someone in my proximity who goes there and is willing to trade it against euros (or Bitcoin). But Bitcoins are form-invariant. If I want to sell them, I just need to transform them into a digital form and anytime from any location transfer them at a negligible cost into an exchange and putting an order. That gives me digital euros or usd which I can then use for spending.

Bitcoin does not necessarily have to survive, but the reason for its doom will not be a lack of backing. It is actually the exact opposite, adding backing to Bitcoin would mean its end. It would make it into a wannabe money substitute. This would both increase their transaction costs, as well as eliminate the purpose of the exchanges (as there would be no floating exchange rate). The demand for Bitcoin would become a derivative of a demand for whatever the backing was, rather than a demand for a medium of exchange, which would screw up with the remaining markets. No exchanges and screwed up markets result in no liquidity and the whole thing would collapse.

22

Kindly consult Rothbard’s The Case for Genuine Gold Dollar, http://mises.org/rothbard/genuine.asp.

Funny how that remarkable essay provides no proof whatsoever to what you write. He makes no mention of liquidity, nor of transaction costs. You have gone on and on for a while with those two red herrings, and it’s time to stop, Pete.

What does appear quite clearly in that article is a masterful summary and exposition of the regression theorem. Anyone who reads that essay with open eyes will understand quite clearly how bitcoin can never, ever, not in a million years, be money.

But hey, maybe I’m wrong. Maybe I totally misunderstood or misread that essay. Maybe Rothbard is all about liquidity and transaction costs, and loves bitcoin to death. Let the reader decide.

23

Smiling Dave,

just another example of unprofessionalism. Even though I explicitly said that Rothbard does not use the term liquidity, you object that he really does not.

And the main point, as usually, you do not get. Rothbard wrote that even if you abolish legal tender laws, people would not switch to gold and would continue to use the fiat dollar:

Even the variant on Hayek whereby private citizens or firms issue gold coins denominated in grams or ounces would not work, and this is true even though the dollar and other fiat currencies originated centuries ago as names of units of weight of gold or silver. Americans have been used to using and reckoning in “dollars” for two centuries, and they will cling to the dollar for the foreseeable future. They will simply not shift away from the dollar to the gold ounce or gram as a currency unit. People will cling doggedly to their customary names for currency; even during runaway inflation and virtual destruction of the currency, the German people clung to the “mark” in 1923 and the Chinese to the “yen” in the 1940s. Even drastic revaluations of the runaway currencies which helped end the inflation kept the original “mark” or other currency name.

There goes the nonsense about “backing”.

Even though Rothbard, nor most Austrians for that matter, do not use terms like liquidity, network effect or transaction costs, this is what their arguments mean. You can’t handle arguments, so you’re stuck with denial.

24

@Graham: Nope, I’m perfectly comfortable with “contradictory”. Please, explain to me how you get widespread use of Bitcoin sans extensive government interference in the market. The closest example I can think of to Bitcoin is the Somali shilling which is, to my knowledge, still in use long after the collapse of the Barre regime. Nevertheless, Somali shillings are virtually worthless and only used in very small transactions… the only reason Somalis still use them is because they are very poor. So, if a) Bitcoins are imposed on the developed world by government and then b) the developed world implodes on itself and regresses to the dark ages, then you could have an unbacked, extremely low-value currency continuing in use despite the absence of government enforcement. But wait, in order to have Bitcoins, you need a power grid and computers. So, sorry, there’s no way you can have Bitcoins without government creating the demand either by direct imposition or through other means.

Clayton -

25

You could say those two premises are unlikely to both be true at the same time, but they are not "contradictory…

Not that Clayton needs my help, but for my own amusement, I will spell it all out.

By the rules of logic, A and not-A cannot both be true; the technical term is that they are contradictory.

Similary, if C leads one to conclude A, and D leads one to conlude not-A, then C and D are also called contradictory.

Bitcoin widely used implies there is no free market at work, by Mises regression theorem, which states that in a free market bitcoin will never ever be widely used.

Free market implies free market, a tautology.

Thus Clayton’s first statement implies not-A, where A=there exists a free market.

Clayton’s second statement implies A.

Thus they are contradictory.

26

That is not Austrian monetary theory - people choose their medium of exchange on the basis of its suitability for exchange. Things like liquidity, durability, scarcity, commodity use (expectation of future valuation), etc. In the history of the world, no one ever freely chose to use an unbacked paper money.

Clayton -

27

Dave,

In that piece, Rothbard makes the following prediction:

“Hayek should be free to issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance and acceptance are two very different matters. No one will accept new currency tickets”

“no one will accept any entity as money unless it had been demanded and exchanged earlier”

“But one crucial problem with the Hayekian ducat is that no one will take it.”

And yet some people do accept bitcoins. Do you accept that he has been proved empirically wrong here? Or at least that he was overstating his argument and really meant “not many people will accept…”?

28

@Graham: “No one” here is meant in the grown-up sense of “nobody to speak of”. As PT Barnum said, there’s a fool born every minute.

The market cap of Bitcoin is infinitesimal. The number of people using it is immaterial. When Gramma Marge puts her husband’s life-insurance windfall into Bitcoin Bank, then I’ll agree that BTC is money. In the meantime, it’s a lot of mental masturbation.

Clayton -

29

Clayton,

the criteria you mention, “liquidity, durability, scarcity, commodity use (expectation of future valuation), etc”, are merely a factor that influences transaction costs.

Furthermore, if people do have a choice other than the legal tender, they normally shift to the most liquid fiat currencies (dollar, euro, swiss franc, or the money from neighbouring country). They do not shift to commodity money, because no commodity money currently in existence has sufficiently high liquidity to compete. Unless the fiat system collapses worldwide, or the legal tender switches to commodity money, commodity money will not be chosen voluntarily.

Bitcoin has a technological advantage that cannot be matched. That allows it to compete even if it has comparably lower liquidity than fiat money. To what extent it can compete, that’s a more nuanced question.

30

Clayton,

the transaction volume of Bitcoin has been increasing, and will probably soon start to reach the level of countries with underdeveloped banking. Futhermore, you still ignore that many people do not use Bitcoin merely to prove Mises wrong, but from a purely rational perspective, as it decreases their transaction costs.

31

Not in Austrian monetary theory. How many times do we have to go around this?

Clayton -

32

That’s a terrible argument, Clayton. Bitcoin is already unregulatable and has a non-zero value.

33

I agree with you that current government interference is giving Bitcoin a helping hand, in the same way that it gives a helping hand to sellers of emergency food supplies or water purifiers. But it seems to me that even if we had a free market, there is still at least one thing that Bitcoin can do better than any physical medium of exchange, and that is: be transferred long distances. Sure, you can still wire money electronically with fiat or commodity media, but ultimately, at some point down the line, transfers of money must inevitably involve shuffling bits of paper or bits of gold around, and this involves an expense. This will always give Bitcoin (and any non-physical medium) a slight competitive advantage over all physical media, all other things being equal. Are you claiming that it is inconceivable that people in a free market might prefer using Bitcoin just for this reason, even if for no other? That it is inconceivable that people might value this advantage over any disadvantages the system might have (lack of anonymity, for example)? I don’t feel as confident as you seem to be about what people will value and what they won’t value in the future.

Whether this is enough of an advantage to overcome the huge network effect problem that any new currency (actually any new standard of anything) faces is debateable. If government interference continues to increase, Bitcoin may just be given the leg up it needs to reach a stage where the network effect is already largely overcome by the time our free market arrives. Or there might be a big bitcoin sell-off tomorrow and Bitcoin falls out of use… like you said, it’s a risky business.

34

In that piece, Rothbard makes the following prediction…no one…no one… no one…

Within the gambling establishments in Las Vegas you may be able to buy a drink with poker chips. But that does not make poker chips generally accepted, and it does not make them money.

When Rothbard wrote “no one” he meant “at best a trivial amount”.

35

in las vegas it does.

since we can go around amending other people’s statements in order to save ridiculous assertions I will likewise…oh wait. I dont have to modify anything to win this argument, because bitcoin is money according to the regression theorem.

Dave, I know youre itching to link spam, but please refrain. If you have an argument to make, please make it in this thread, do not link me to an argument on another site.

36

Malachi, with all due respect, I consider you for the moment a lost case.

I have pointed out to the horse where the water is. The limitations of cyberspace prevent me from actually leading him there.

I have made my argument dozens of times, most succinctly you know where. We are not always fortunate enough to have a mommy to spoon feed us. At times we must move our wrist and finger muscles an iota to press on a link.

BTW my website has no ads that I know of, though of course I use an ad blocker. So that spam is a curious description.

37

as you have consistently failed to respond to my criticisms of your arguments, I consider this a concession of victory. I will accept, and thank you.

Consider how little you have contributed to the discussion with this statement.

as others have observed, that argument is lacking. Bitcoin network has industrial value. Bitcoins are necessary to use Bitcoin network. Immaterial goods are services, per Mises. Rather than address this, something that might contribute to the discussion, you just mouth off, insulting the intelligence of hypothetical people who hold certain opinions. Since youre not actually calling any specific member of the forums a horse or a sucker, its legal (apparently you learned your lesson) so you get away with spamming the forums with noncontent and nonsense.

You might actually want to clicky-clicky yourself then, cause mommy isnt around to tell you that theres a thing called spam and it isnt always trying to sell you something. Or do you have a crackhead interpretation of some other great thinker’s work, and now spam is only spam when it tastes like spam to you?

38

Wow, he denies that Vegas chips are money in Vegas? Just, wow.

39

But that’s only true by virtue of government interference! There is nothing stopping gold/cash/etc. from being wired anywhere in the world using exactly the same protocol as Bitcoin itself.

No, it really doesn’t. You can transfer digital token claims to the same physical backing without having to move the physical backing an angstrom. It just sits there while people exchange the digital token claim to it.

Now, someone does have to pay for the secure storage of that physical backing. But that’s the whole point of backing a digital currency… It’s backed by something valuable enough that it needs to be locked up. The cost savings is that the currency is no longer solely backed by confidence.

See above. The hidden cost is the mind-numbingly huge risk. It is conceivable that gold could experience a collapse tomorrow. It could drop to $800. It could even drop to $250 in a sufficiently sci-fi-end-of-the-world scenario. But it won’t drop to zero short of a discovery that the Earth is about to be impacted by an extinction-level-event comet. BTC could drop to $0.000000000000000001 overnight. There is literally no reason why it couldn’t drop that low. The difference here is that people will always want to wear gold or silver as jewelry. Always. As long as females are being born on this planet, gold and silver will never be $0. But not so with BTC.

This risk-discrepancy is what’s being completely overlooked here. BTC is wholly speculative in a way that gold or silver are not. Sure, buying gold and silver is a form of speculation on the margins. You’re not betting that gold won’t be $0 when you wake up tomorrow because there’s just no way it can be $0 tomorrow.

Note that even when bank certificates were the state of the art in money substitutes, no one ever used an unbacked paper certificate except as a consequence of some government chicanery. A digital token is a digital token. BTC has no special claim on being a digital token. So gold-banknote:unbacked-paper is precisely logically equivalent to digital-gold-currency-token:Bitcoin. Only an insane person would choose to be paid in unbacked digital tokens over backed digital tokens.

Again, anonymity problems are wholly manufactured by governments. Have you ever heard of a numbered bank account? If you don’t have to give identifying information in order to obtain secure storage services, the anonymity problem is solved. It’s the OECD/PATRIOT Act and all the KYC rules that are the root cause of the problem.

Clayton -

40

No one is arguing that bitcoins are money right now, because obviously right now they are not commonly accepted (and that is part of the definition of money from Mises, Rothbard, Hoppe, Salerno, Murphy et al). That is not the dispute. But just like poker chips in Vegas, bitcoins are undeniably being used as a medium of exchange by a small number of people for a small number of transactions. Those are the empirical facts confronting us.

The argument at this stage is about whether the medium of exchange will continue growing as it has done to the point where we would call it “commonly accepted” or whether it will always remain in a small niche, or even stop being used completely. We can talk about reasons why poker chips or bitcoins or gold coins might or might not be able to displace dollars/pounds/euros as the most commonly accepted medium of exchange. And we can imagine how the likelihood of that would change if we had a free market right now. These would be thymological predictions.

Here is my understanding of the regression theorem. No doubt you will tell me that I have got it all wrong.

The regression theorem, as described by Rothbard, is about how an object first begins to be used as a medium of exchange, not how a medium of exchange becomes a commonly accepted medium of exchange. The regression theorem is about the difficulty of forming an initial price and this involves some assurance of a stable price going forward, and an already established price and stable direct demand obviously helps with that.

He says: “[F]or any commodity to become used as money, it must have originated as a commodity valued for some nonmonetary purpose, so that it had a stable demand and price before it began to be used as a medium of exchange.”

But Bitcoin is already being used as a medium of exchange (albeit only by a relatively small number of people for a relatively small number of transactions), unless you have a non-standard definition of “medium” or “exchange”. So we are already past the point that the regression theorem, as explained by Rothbard, applies to.

Perhaps we can be generous in our reading of Rothbard (again) and assume that he forgot to add a caveat: “… before it began to be used as a medium of exchange by anyone except a trivial amount of people (whom we shall call ‘fools’)”. We then have the problem of recognising what would be a non-trivial amount. And we also now have four categories to consider:

A) not being used as a medium of exchange by anyone.

B) a medium of exchange being used by a trivial amount of people.

C) a medium of exchange being used by a non-trivial amount of people.

D) a medium of exchange which is commonly accepted.

A strict reading of that Rothbard passage would suggest he is talking only about the transition from A to B. If we are generous, we could suppose that he really meant the transition from B to C. The regression theorem is essentially saying: only something with direct use value can go from being a medium of exchange used by a trivial amount of people, to being a medium of exchange used by a non-trivial amount of people.

My interpretation is that the regression theorem it is not concerned at all with the final transition from C to D, because by the time we are at point C the price is already established and relatively stable, given that there are a non-trivial number of users.