What Bitcoin is

[Malachi]

What is the term in the original german?

http://mises.org/books/Theory_Money_Credit/AppendixB.aspx

This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless, [like those stupid bitcoins] and a confirmation of Menger’s hypothesis concerning the origin of the use of money.

whatever this value is, bitcoin has it. Pseudonymous cryptographic tokens are useful in and of themselves. You see, crusoe can tell friday that there are coconuts on the other side of the island without building a fire to send smoke signals, tiring his lungs out screaming, or trekking all the way back.

[Smiling_Dave]

whatever this value is, bitcoin has it.

I like that. You dont know what it means, but are ready to tell us all about it.

As for your smoke signals, I can but admire your originality. So you are saying [and my quotes are from Tim Terrell’s elaboration of the Regression Theorem] that bitcoins started off as “a commodity already in general use” as a smoke signal, enough to “develop the widespread demand that must precede its use as a medium of exchange”. There was widespread demand to use bitcoins as a smoke signal, before it was ever a medium of exchange.

Malachi, really.

[Malachi]

I like that. You dont know what it means, but are ready to tell us all about it.

I know exactly what it means, my point is that the language is irrelevant. It means that people value bitcoins because they are useful.

As for your smoke signals, I can but admire your originality. So you are saying [and my quotes are from Tim Terrell’s elaboration of the Regression Theorem]

I think we can dismiss with the appeals to authority now that youve moved beyond Mises.

that bitcoins started off as “a commodity already in general use” as a smoke signal, enough to “develop the widespread demand that must precede its use as a medium of exchange”.

they began exchanging information cryptographically before it was a monetary “medium of exchange” . Since the information was encrypted, one can only speculate as to its content. But as you said, the regression theorem is apodictically certain. It tells it like it is. Its not necessary to speculate on the ends to which things are valued, it is enough to know that they are valued in and of themselves before they were valued for monetary purposes.

Malachi, really.

I cant imagine that cryptographic communication seems useless to you. What dont you understand?

[Aristippus]

This post will be about intrinsic value. The next one will clear up all misunderstanding about common use etc.

Everything you have said in that post is irrelevant since the writers are talking about the use of goods as media of exchange, from which money can arise. But if a good is already classed as a medium of exchange, which you admitted bitcoin is*,* then whether or not this item was originally a good that wasn’t a medium of exchange is irrelevant concerning the question as to whether this medium of exchange can or cannot become money. That is not in fact what Mises is talking about where he says ‘intrinsically valueless’ in Theory of Money and Credit (the German for which, by the way, is “an sich wertlosen”, valueless in itself - note that he did not use ‘intrinsic’ in his English discussion of the topic). He is not talking about a transition from medium of exchange to money.

Have a look at this, from the very next two paragraphs:

“Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money substitutes already in circulation, that is, claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting point for their valuation lay in the objective exchange value that they had at the moment when they were deprived of their character as claims.”

“Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange**.**”

All he is talking about is a situation where money that was based on a commodity that originally had other uses and became the most marketable commodity for exchange, loses the original link and remains money. The “an sich wertlosen” refers only to the idea that a money can come about from a commodity that has had no existence as a medium of exchange, by general agreement, i.e. without any marketable qualities or links to previous moneys, but by fiat alone.

Now if it’s your belief that bitcoin does not have the requisite marketable qualities to move from medium of exchange to money, then that’s one thing. But it has nothing to do with the regression theorem somehow proving that bitcoin cannot become money, or even with economics at all. It is simply a thymological, rather than a praxeological, observation.

What you have to show is why a medium of exchange already in use has to have another direct use in itself in order to become ‘money’ (as opposed to merely having an historical link to direct use goods as bitcoin does). Since, as Mises and Rothbard both note, ‘money’ is in itself a subjective and imprecise term, there is still grounds to argue that bitcoin already can be considered money in certain contexts. So what is your precise definition of money? How many people have to use it and in how many transactions? Is the US dollar, for example, money?

[Anenome]

@Peter Šurda

Another grave error by Smiling Dave:

@Smiling Dave

Mises proves, step by step, that an object cannot ever have use A alone.

Wrong. This is what he writes in Theory of Money and Credit:

@Mises

In the case of money, subjective use-value and subjective exchange value coincide. Both are derived from objective exchange value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

Also, Rothbard affirms that once liquidity is sufficient (i.e. critical mass of the network effect is reached), the function of a medium of exchange is self-sustaining:

@Rothbard

On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.

Rothbard affirms that the point of the regression theorem is to explain how the market price and liquidity are established. He made a couple of other problematic remarks (e.g. he thinks that for this critical mass, it is necessary that the medium of exchange is money first, and that this cannot happen without other uses), but he clearly refutes Smiling Dave’s nonsense.

Wow, what a find! Great quote! If SD doesn’t at least give pause after reading that, he’s simply a partisan and reason means nothing to him.

Of course, he’d be eating gigantic helpings of crow, so, he’d have to be superhumanly rational and ego-less to back down at this point. But it would be the only right thing to do.

[Aristippus]

Yes, and Mises said essentially the same thing where I quoted him in my last post.

[Anenome]

@Smiling Dave

Pete,

Yes, I was imprecise. The correct statement is “Mises proves, step by step, that an object cannot ever begin with use A alone”.

Which is all that’s needed to doom bitcoin.

For this argument to hold, you’d be arguing that bitcoin has no value outside its use as a medium of exchange. It’s true that it’s industrial value is vanishly small, but not true that that value is zero. For it is made up of two things: a small amount of electricity, and the system in which it has been arranged known as the bitcoin network.

The latter is directly tied into its use as a medium of exchange, however the cost of making such a thing would probably be perhaps millions of dollars of development were you attempting to reproduce this from scratch as it now exists.

Furthermore, you could only use this argument as an explanatory one after bitcoin had already failed or failed to gain any marketshare or marketprice at all. In the face of a successful Bitcoin actively being used, valued, and traded, it’s an argument that flies in the face of experience and what’s actually happening in the real world.

So, try again.

[Anenome]

@Smiling Dave

Yes, but by the same token there is nothing a priori which says that it cannot become money, since we have already said that it is a medium of exchange. Do you agree?

Yes. The proof that it cannot ever become money stems from it not having intrinsic value.

Is anyone even bothering to read and/or understand the theorem?

Electricity has value. So does development costs of a computer program and cryptographic specialists.

@Smiling Dave

Again, you are using words incorrectly…

The underlying idea is very simple. It is a question of degree, as Rothbard makes clear in the paragraphs preceding the one you quoted.

The way it works is this. At some point, some object becomes very popular, meaning in great demand, for its intrinsic uses. The next stage is that people start using it in many instances as a medium of exchange. This happens more and more often until, at some point that is not clearly defined, it is so widely used that it is called money.

What happens when an object’s intrinsic use is as a medium of exchange? You keep acting as if this possibility were impossible. But why should it be?

[Aristippus]

To sum up a response to the confusion, the regression theorem exists to explain the emergence of money from a no-money environment. It was never necessary to explain the existence of bitcoin as a medium of exchange or even as money in the same terms.

[ClaytonB]

+1 aristippus

[Smiling_Dave]

…the regression theorem exists to explain the emergence of money from a no-money environment. ..

False. Once again, please show us which line exactly of the Theorem falls apart if there is a money environment.

[Hint: You won’t find one].

[Smiling_Dave]

Electricity has value.

Of course it does, But not everything that consume electricity therefor has value as well. The old cost of production fallacy rears its head in this surprising place.

What happens when an object’s intrinsic use is as a medium of exchange? You keep acting as if this possibility were impossible. But why should it be?

I am glad that you noticed that I indeed insist on the impossibility. Are you the same person that suggested bitcoin has “intrinsic value as money”? In any case, go back and reread Bitcoin Takes a Beating. To help you along this time, I will point out that Mises divides the two possible uses of anything in the univers into two mutually exclusive, all encompassing when taken together, sets. Set A is the set of all uses of the thing AS MONEY. Set B is all other uses. Note that sets A and B are mutually exclusive, by definition. Set B has been called by many names, industrial use, intrinsic value, non-monetary value.

The regression theorem goes on to prove that to ever have Set A be non empty, the thing must originally have Set B non empty.

You are asking why can Set A and set B not have any element in common. Do you get why not yet?

[Hint. Consider the following simpler case Let set A be the set of currently living things, and set B be all currently dead things. You are asking why can there not be something that is both alive and dead at the same time].

[Smiling_Dave]

Of course, he’d be eating gigantic helpings of crow…

Sorry, youweren’t paying attention. I made a minor correction to a slip of the keyboard. It cannot originate with use A alone. See above.

[Anenome]

@Aristippus

To sum up a response to the confusion, the regression theorem exists to explain the emergence of money from a no-money environment. It was never necessary to explain the existence of bitcoin as a medium of exchange or even as money in the same terms.

Yeah, been saying this for so long now :\

[Smiling_Dave]

It means that people value bitcoins because they are useful.

Close, but no cigar. It is like saying “woman” means the same as “human being”.

I think we can dismiss with the appeals to authority now that youve moved beyond Mises.

Nice try. However Terrell is just stating the same idea Mises did in a more modern English.

…they began exchanging information cryptographically before it was a monetary “medium of exchange”…

First of all, I don’t believe you. Link?

Second of all, how many people exactly were doing this? Where was the “already in general use” ? Where was the “widespread demand” ? How much money were they paying for using it that way? How come nobody ever heard of bitcoins until some charlatan tried to pass them off as money?

Third, and most important, you don’t get what a bitcoin is. It is an arangement of the innards of your computer that sends out a message that you now own one bitcoin. That has nothing to do with cryptography.

[Smiling_Dave]

Aristipus,

All he is talking about…

That’s all he is talking about in the section you quoted. But in the section I quoted he is talking about what I said he’s talking about. You are trying to prove that a Superman comic does not talk about Superman by showing me a Batman comic.

Now if it’s your belief that bitcoin does not have the requisite marketable qualities to move from medium of exchange to money.

No. Its problem begins way before that.

But it has nothing to do with the regression theorem somehow proving that bitcoin cannot become money, or even with economics at all.

I have laid out the proof. Which line exactly, is flawed? Guys, do I have to repeat this one simple idea a thousand times? OK, I’ll repeat it yet again, to wit: If you say a proof is flawed, show me where the flaw is exactly. Quote the line that is flawed, and explain why it is flawed. Have you never had an intelligent discussion before? Do you not know how it’s done?

It is simply a thymological, rather than a praxeological, observation.

That’s what you get for not reading my blog. I have addressed this bit of ignorance right here: http://smilingdavesblog.wordpress.com/2011/12/was-mises-regression-theorem-a-mere.html

What you have to show is why a medium of exchange already in use…

I thought we cleared this up already. One instance of used toilet paper being used by some retard as a medium of exchange is insufficient to make used toilet paper into money. Do you disagree with this?

The question then becomes, what magic does gold have that used toilet paper does not? Why has gold been money [=generally accepted, commonly accepted, universally accepted] in various places, but used toilet paper never was? Mises regression theorem proves that the magic ingredient that gives gold the upper hand is that gold, before it ever was a medium of exchange, was first in widespread demand for its non monetary use. It was a commodity already in general use despite having zero monetary value. Bitcoin, like used toilet paper, was never in this envious situation.

To help you along even further, I will post tomorrow, God willing, clarifying the numbers game element of this topic. How much is enough, how much of what, why is that number what really counts, etc. All will be answered.

[Smiling_Dave]

At last, the moment everyone has been waiting for.

Smiling Dave will

• lay out with even great clarity the case for bitcoin being useless garbage, certainly not money now or ever, with replies to the various arguments against raised in this thread
• show how this follows from the Regression Theorem,
• prove that the theorem applies even in a money economy [not just a barter economy],
• explain in great detail the numbers game that people have been wondering about when it comes to medium of exchange and other aspects of bitcoin.
• and many other goodies.

Due to the length of the article and the lateness of the hour, it will be in two parts. Here is a link to the first part. http://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game/

For Malachi’s benefit, I will copy and paste the whole thing in the next post right here.

[Smiling_Dave]

Here you go Malachi. Part one:

Bitcoin and the Numbers Game..

by Smiling Dave.

Over at the mises.org forum, there is a lot of confusion concerning bitcoin, Mises Regression Theorem, and the numbers involved in these topics.

First question. What is a medium of exchange. If Mr A and Mr B use playing cards as their money, meaning that they buy and sell things to each other and accept payment in playing cards [which they don’t intend to play card games with, but to use as money at a later date with each other], but nobody else does, does that make playing cards a medium of exchange?

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange in those transactions in which it was not used.

OK, so far so good. Now let’s take a look at Mises’ Regression Theorem. He writes:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the 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.

1. This is a very important quote. I would like to deduce something very important about the regression theorem from it. There are those who claim that the Regression Theorem is talking about a barter economy that changes into a money economy. Only for the first money in a barter economy does it apply, they think. But once we are in a money economy, where barter is a thing of the past, then the regression theorem no longer applies, and a second money does not have to start off having intrinsic value to ever make it as a money.

This is clearly absurd, because how will these people answer Mises’ question about the circular reasoning involving demand for money and value of money, each one requiring it’s mate to precede it? But in addition, the text we just quoted shows he was not confining himself to a barter economy transitioning into a money economy. Let’s quote in bold the part that shows these people wrong:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the 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.

Put that in your pipe and smoke it, guys. Of course, to those too intellectually challenged to see the significance or relevance of the bolded section, I say that Dave is tired now. If you cannot figure it out, ask your more intelligent friends. If you don’t have any friends, you will just have to rely on the first proof, mainly how is the circular reasoning question going to be answered. But we digress.

2. Mises writes very clearly, and of course there is no other possibility [proof: find one], that the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object. After all, there is no monetary demand right now. Nobody has ever used it as a money before. Just like everything else in the world, the price of something is determined by supply and demand. Since non monetary demand is the only thing that exists at this stage, at the very first time a bitcoin or a gold coin is about to be used as a medium of exchange, there has to be enough non monetary demand for the thing to be worth something. Maybe the demand will make it be worth a penny, maybe a tenth of a penny, but it has to be something. Because if the demand is so lame that nobody is willing to pay anything for gold or for a bitcoin, then it will not be accepted as money that very first time, will it?

OK, on to Economics 101. This is the kind of thing you have to know before dipping your toes in the deep waters of bitcoin theory. What determines the demand for something? What makes demand so great that it makes the market price of the thing demanded rise up from zero?

The answer, of course, is that it depends on how many people find the thing useful. If very few people have a use for it, then the demand will be lame and the market price will be zero. Thus Timothy Terrel was merely stating the obvious when he wrote that in order for something to be used as a medium of exchange the very first time, it must have a large non monetary demand:

…money must arise from a commodity already in general [non- monetary] use. If there is no nonmonetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange.

OK, on to bitcoin. What non- monetary use is there for a bitcoin? None. What can I do with the fact that my computer has stored deep in its innards the assertion that I am the proud possessor of a bitcoin if I cannot spend that bitcoin? Nothing.

OK, Watson, from here it’s easy. It has no use, therefore it has no demand, therefore the price people will pay for ownership of it, considering only its non monetary use, is zero. Ergo, it cannot be a medium of exchange the first time. Therefore there will never be a first time. Therefore it will never be a medium of exchange, and certainly never a money, at all.

At this point Devil’s Advocate jumps out of his seat. We give him the floor.

DA: Smiling Dave, that sounds very nice on paper, but the reality is that bitcoin has been used many thousands of times as a medium of exchange. So many beers, so many pizzas, so many trinkets of marginal use have been bought with it, that the first time is by now in the way distant past. How can you say there never will be a first time, when we are already in the thousandth time?

SD: Advocate, what would this humble blog do without you? You ask a deep question here, but the hour is getting late. Keep your eyes peeled for the next humble article, which will answer thy questions.

DA: Yeah, right.

[Aristippus]

I’m on my phone so I can’t write a proper reply right now but I didn’t mean to say that the theorem does not apply to a money economy (is that part a reply to me?)

[Anenome]

@Smiling Dave

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange in those transactions in which it was not used.

Well, can’t argue with that genius logic

One should note that the same could be said about every ‘money’ ever used on the planet.

@Smiling Dave

OK, so far so good.

Lol.

@Smiling Dave

Now let’s take a look at Mises’ Regression Theorem. He writes:

If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins.

Notice this is a backwards looking theory. There is something being used as money and we’re attempting to explain the praxeologic means by which it became so. It does not determine what is money, only attempts to explain how what is money became so. It is not a rubric for determining what is money.

@Smiling Dave

At this point yesterday’s exchange value is exclusively determined by the 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.

This can’t be used to claim that something without industrial value can’t be money. It can only explain why something with current exchange value got that exchange value.

Thus, with bitcoin, something that already has exchange value, it would be ridiculous to use this to theorem to try to invalidate bitcoin as money.

@Smiling Dave

Put that in your pipe and smoke it, guys. Of course, to those too intellectually challenged to see the significance or relevance of the bolded section

Lovely.

@Smiling Dave

2. Mises writes very clearly, and of course there is no other possibility [proof: find one], that the very first time something is used as a medium of exchange, be it gold or be it bitcoin, the exchange value of the thing [=how many apples you are willing to trade it for, how many oranges, how many dollars, if dollars exist] is determined by one thing only: the demand that exists for the non monetary use of the object.

The theorem-explanation does not flow in that direction, and your attempt to invert the logic fails thereby.

The theorem explains how something with exchange value got it.

Bitcoin already has exchange value. So, therefore… your reasoning is flawed.

@Smiling Dave

After all, there is no monetary demand right now. Nobody has ever used it as a money before.

If that were true its current market price would be zero. This is not true, so there’s a flaw in your reasoning.

@Smiling Dave

Just like everything else in the world, the price of something is determined by supply and demand. Since non monetary demand is the only thing that exists at this stage, at the very first time a bitcoin or a gold coin is about to be used as a medium of exchange, there has to be enough non monetary demand for the thing to be worth something. Maybe the demand will make it be worth a penny, maybe a tenth of a penny, but it has to be something. Because if the demand is so lame that nobody is willing to pay anything for gold or for a bitcoin, then it will not be accepted as money that very first time, will it?

You do realize the price of bitcoin, right now, is ~$10 per bitcoin, right?

@Smiling Dave

The answer, of course, is that it depends on **how many people find the thing useful.

**

Which defines its exchange value.

@Smiling Dave

If very few people have a use for it, then the demand will be lame and the market price will be zero. Thus Timothy Terrel was merely stating the obvious when he wrote that in order for something to be used as a medium of exchange the very first time, it must have a large non monetary demand:

But bitcoin is being used as a medium of exchange right now. So…

@Smiling Dave

…_**money must arise from a commodity already in general [non- monetary] use.

**_

The original use of bitcoin was mining them as an investment. This is what got the demand for them going, speculators with processing power. Anticipation of value has proved well-founded.

@Smiling Dave

OK, on to bitcoin. What non- monetary use is there for a bitcoin? None.

False. Investment.

@Smiling Dave

What can I do with the fact that my computer has stored deep in its innards the assertion that I am the proud possessor of a bitcoin if I cannot spend that bitcoin? Nothing.

But… you can spend bitcoin.

@Smiling Dave

OK, Watson, from here it’s easy. It has no use, therefore it has no demand, therefore the price people will pay for ownership of it, considering only its non monetary use, is zero.

Except that it’s price is not zero. Today. Right now. Duh?

@Smiling Dave

Ergo, it cannot be a medium of exchange the first time. Therefore there will never be a first time. Therefore it will never be a medium of exchange, and certainly never a money, at all.

It already is a medium of exchange, and therefore a money for anyone whom uses it as such.

@Smiling Dave

At this point Devil’s Advocate jumps out of his seat. We give him the floor.

This passes for wit?

@Smiling Dave

DA: Smiling Dave, that sounds very nice on paper, but the reality is that bitcoin has been used many thousands of times as a medium of exchange. So many beers, so many pizzas, so many trinkets of marginal use have been bought with it, that the first time is by now in the way distant past. How can you say there never will be a first time, when we are already in the thousandth time?

SD: Advocate, what would this humble blog do without you? You ask a deep question here, but the hour is getting late. Keep your eyes peeled for the next humble article, which will answer thy questions.

DA: Yeah, right.

So you don’t even address the issue? Bah.