What Bitcoin is

Miscellaneous General
121

Completely wrong. Can you not read? The very sentence is:

“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_,_ and a confirmation of Menger’s hypothesis concerning the origin of the use of money.”

He was saying that fiat money could not come about through general agreement, and he then explains how - despite the fact that it is worthless in itself - fiat money could nevertheless come about. That sentence and the next two paragraphs are closely linked on purpose.

Again, incorrect. I was not arguing anything that you addressed in your blog post. I wasn’t talking about what Mises argued with the regression theorem, I’m talking about what you are saying now.

Where exactly did you clarify this? I did not see any such explanation or definite definition of ‘money’. Do you disagree with Mises and Rothbard that the classification of a medium of exchange as ‘money’ is not clear-cut?

Moving on: You have said “money is based on intrinsic value, not trust and confidence.” You fail to realise that money can rely on either of those things, and that the ‘trust and confidence’ relies merely on some link with ‘intrinsic value’. The difficulties in explaining the emergence of money was due to an infinite regress: demand for money being based on its past exchange value, and that exchange value being based on its past demand, and that past demand being based on its past exchange value, and so on. How was this solved? By showing how the demand for goods most marketable for their direct use resulted in their use in exchange. Now one of the most important aspects of the theory is that the particular medium of exchange can remain money even if its link to the original, direct use commodity is completely severed. We have provided outlines of this aspect both from Mises and Rothbard. When you understand this, you realise that a money does not need value in itself, but rather that in order to come about, it needed to have a historical relation to a good already in demand (either for direct or exchange use). Now, assume for the moment that bitcoin is being used as a medium of exchange (which you in fact admitted above). Either this is for its own historical direct use, its link to a commodity for direct use, or its link to a commodity for exchange use. Some here have posited that bitcoin has cryptographical direct use. It is also the case that bitcoin can be used to facilitate employment of fiat currencies, thus its use is like that of gold-backed currencies in regard to the regression theorem.

There is a big question hovering over you. You are saying that the particular commodity that money is made of must have ‘intrinsic value’, and therefore an industrial use. How is it that most commodities used as money today do not have such intrinsic value but are nevertheless used as money? Because of their historical link. But this link no longer exists, and they therefore have no intrinsic value!! They can never be money, according to you. According to Mises and Rothbard, however, they can indeed be money due to their historical link which made them generally accepted. Mises only argued that money cannot come about by general agreement and that its origin relies on the demand of directly used goods, not that it cannot remain in common use even if it has no ‘intrinsic value’. Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys (since it facilitates the use of those moneys), which can then be easily traced back to a good directly used per the regression theorem? I have not seen you address this.

122

You are saying that the particular commodity that money is made of must have ‘intrinsic value’…

No. A careful reading will teach you that it must have started off its career as a medium of exchange having intrinsic value. It can later lose this intrinsic value and still remaion a money, yes.

Bitcoin had, has, and will have, zero intrinsic value. Thus it can never start off a career as money. Thus it can never be a money at all, because you have to start somewhere, and it cannot.

Let me give you an example. To be a cop, you have to pass a physical. If you have been enough years on the force, they will value you for your experience and may give you a desk job, even though you are now a walking mound of blubber.

Does that mean that someone who was born obese, spent all his life obese, and plans to remain obese forever can get a job as a cop, just like the fat experienced sergeant? No it does not. I hope you understand why.

Same thing with money. Replace “pass a physical” with “has intrinsic value” and you will get the picture.

123

Nope, logically it simply needs to be in demand for a reason other than its own exchange value, thus preventing the infinite regress (assuming intrinsic value = direct use value). Answer the question at the end of my last post.

124

Yes, this. If we simply look at the facts today, we see in Bitcoin a medium of exchange. That much is a fact already. And we are asking how it gained value initially.

To argue that it can’t become a medium of exchange because of X, Y, or Z misses the point entirely. It has exchange value today. That ship has sailed. The question of how it got value enough to serve as a medium of exchange is perhaps a question still open for scholarship.

Personally I think the best answer is that people desired them because they speculated on them, which turned out to be a well founded speculation.

And your point about the separation in time of a currency’s use-value and exchange value is well taken. That would explain why the dollar still has value despite being printed on worthless paper. That indeed explains near all fiat currency, including the Somalian one that exists sans gov controls.

Bitcoin’s speculation value still yet hasn’t been eclipsed by its exchange value, since miners are still mining primarily to find new coin blocks, not for transaction fees. If Bitcoin successfully makes the transition into being financed by transaction fees, the the currency will have passed the final test and all will go well.

125

Aris,

I don’t see what we are disagreeing about.

Please summarize your understanding of my position. Then I can get what you think is wrong about it.

I presum that the q at the end of your post you wish answered is “Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys (since it facilitates the use of those moneys), which can then be easily traced back to a good directly used per the regression theorem?”

Ok, let me take it slow here. “Is there any reason that the demand for bitcoin cannot be based off the demand for other moneys…”

The problem there is the words “based off”. What do they even mean? Maybe you mean that bitcoin, by facilitating the use of other moneys, creates a demand for itself as a money. If that’s what you mean, then my answer is that of course not. Because bitcoin was never used to facilitate the use of other rmoneys. It was supposed to be the money. Once you get paid for something in bitcoin, you are on your own. Should the market for bitcoin die instantly you have no recourse to get any dollars. You have been paid in full in bitcoins, and so long, sucker.

Next. …“which can then be easily traced back to a good directly used per the regression theorem?” I don’t know what this means either. Maybe you mean that if we accept step one, [that bitcoin had value as a facilitator, and becomes demanded as one, so much so that people are walking around saying, “Where’s my bitcoins? I need to send someone dollars.”], then, like fiat currency after it loses connection to gold, it has no problem with the regression theorem, since it started off with a connection.

No to that also. There are four steps.

Step one, bitcoin is used as a mere facilitator. This of course never happened in the real world, and so all the other steps will not get off the ground, but let’s pretend we are in an alternate universe, where it did happen.

Step two. Demand for bitcoin as a facilitator increases so much that bitcoins as facilitators that they in general use as facilitators, and there is widespread demand for them as facilitators. Just as there is widespread demand for envelopes to move physical checks from hand to hand, so there is widespread demand for bitcoins to move digital dollars from computer to computer. his has not happened either yet. There is no widespread demand for bitcoin for any use whatsoever, and it is not in general use for anything at all. Go out into the real world, say Walmarts, or some bar, or anywhere the masses gather, and find out how many of them have even heard of bitcoin, let alone use it. [HInt: In a sample of ten thousand, you wont need more than five fingers to keep tally. Not exactly widespread use]. But let us assume that we are in an alternate universe, where in addition to step one happening there, so has step two.

Step three. Bitcoins are so popular, in such incredible demand, that people start actually paying each other in bitcoins, because they know they can easily find someone who will give them anything they want for bitcoins. For example this has happened in prisons, where cigarettes are used as money, for this very reason. But like steps one and two, this has not happened to bitcoin either.

Those who accept payment in bitcoin do not do so because they know everyone is dying to get them some bitcoin. If they are drug dealers, they do it because they have no other way of selling to someone far away, and better to sell their surplus in exchange for some risky speculative whatever than just have it rot in the warehouse. In other words, some idiots will give you dollars for bitcoins for the time being, so hey, take advantage of them while you can. If they are not drug dealers they do it because they are foolish, or because it’s a pastime for them, or other personal reasons not based on what anybody else thinks about bitcoins.

Step four: Bitcoins are no longer usable as facilitators for dollars, for some reason or other. But once they graduated to step 3, it doesn’t matter. Like any fiat currency , they can happily keep on trucking.

In other words, if you are asking whether steps one and two are enough to get to step four, the answer is no, you need step 3 also.

126

SD,

What I was getting at is that the commodity from which a money arises does not necessarily need direct use value, but that it needs to have at least had an historical link to a commodity that was demanded for direct use, from which the exchange demand arose per the regression theorem. Now you said that “money is based on intrinsic value, not trust and confidence.” You also said "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." But that is not true. As you seem to agree in the last post, the demand for money B can be based on its ability to enhance the use of money A, e.g. in the case of paper substitutes for gold.

The broader point, however, is that until you can rule out all kinds of demands for bitcoin - whether for its own direct use, its link to a good for direct use, for a link to a good for indirect use, or even as a result of speculation, we cannot say that the regression theorem tells us anything about the future of bitcoin. If you can definitively rule out all of the options, and show that there cannot be any demand for bitcoin, then I am happy to agree with you that the regression theorem proves that bitcoin cannot be a money. Failing that, however, any statement that bitcoin cannot become money is a thymological rather than a praxeological argument. Moreover, the task itself seems a fairly difficult one due to the fact that people do indeed demand bitcoins.

I would like those with knowledge on how people use bitcoins to comment on this.

Currently I see no reason to disagree with you on most of the rest of your post, but I think the question on the demand for bitcoins is still up in the air (see above).

Anenome,

So you’re saying that the initial speculation created the possibility of stable transfer between bitcoin and already established currencies?

127

Decent, non-technical, sympathetic overview of the technical aspects of Bitcoin.

Clayton -

128

Ari: “So you’re saying that the initial speculation created the possibility of stable transfer between bitcoin and already established currencies?”

Initial speculation explains why bitcoin has a non-zero value in the first place.

There’s two steps to it:

  1. It had to establish an initial value. This was taken care of by speculators who began mining and hoarding them, expecting the price to rise later. Thus initial demand was taken care of.

  2. Once bitcoin had any nonzero price, it was possible to use it as a service for buying things–as a medium of exchange.

1 leads directly into 2, but as we’ve seen with fiat money, once its original reason for having a non-zero initial value is taken care of, it’s existence as a medium of exchange is possible.

SD’s entire argument is that step 1 for bitcoin can’t happen, that there is no use, no reason to value bitcoin, and that this must hold for all future periods and therefore the price must inevitably collapse.

However, this isn’t how currencies have tended to work. Even within the framework of the Regression theory, if there is some reason to value a thing then based on that value the thing can become a medium of exchange. And its exchange value from there becomes the supporter and stabilizer of its price, but it needed step 1 to get there.

That’s actually a more general formulation of the Regression theory that includes Bitcoin. All you need to turn anything into a medium of exchange is an initial reason to value it separate from its exchange value. Whether that’s because of industrial use, or any other reason.

Mises used commodity / industrial value because all previous currencies seemed to fit into that mold. But that’s not really what you need. All you need is any reason to value a thing. It need not be commodity value, need not be industrial value, any value. Could be its beauty, its uniqueness, or in this case its value as an object of speculation.

Once you have any value, it’s possible to use existing money to buy the thing valued, for anything with any quantifiable value will be purchaseable in any other currency. So people started buying bitcoin and using it in the transactions in which it has a competitive monetary advantage.

Bitcoin only has a major competitive monetary advantage in a few specific kinds of transactions. Thus you have Silk Road and international currency transfers where Bitcoin is either more anonymous than other currencies or less expensive.

I expect Bitcoin to continue to be the currency of choice in those kinds of transactions where it has an advantage. And, later down the road, we may find that its advantage as un uninflateable currency is what will cause it to be generally accepted.

We all know the US dollar can’t keep up trillion dollar deficits forever. I did the math today, trillion dollar deficits should be something like 8% inflation. But we lost a lot of capital on paper in the '08 crash. Eventually the slack gets taken up but the deficit will likely continue. At that point, get ready for heavy inflation.

It’s gonna suck. And Bitcoin will begin skyrocketing in value. Because if the US dollar begins crashing, not like there’s any other national currency you can escape to. If Wall Street ever flees to Bitcoin, then the currencies of the world will be like lemmings off a cliff.

Imagine stocks on the NASDAQ and NYSE being valued in Bitcoins. That’s a day I want to see :slight_smile:

129

Yes, that’s what I was thinking, and perhaps so too were the initial speculators who demanded bitcoins. Good post.

I have no idea what the future holds for bitcoin - whether rising popularity, stagnation, or collapse - but as yet I see nothing a priori that means it cannot ever be considered money.

130

This is an interesting idea. In yesterday’s Economic Policy Journal podcast, Robert Wenzel interviews Bitcoin advocate Trace Mayer (who makes some LTV-based errors in trying to defend Bitcoin versus the regression theorem but otherwise makes good points). In the interview, Robert Wenzel says that the essence of the regression theorem is that you can’t get some guy to accept something as payment unless you can convince him he can easily “lay it off” on some other guy. This is an apt thymological observation on Wenzel’s part.

The keyword here is “easily.” It is actually pretty easy to lay bitcoins off on someone else, because you can sell them on Mt. Gox or another exchange. But it is true that it is not easy to lay them off on some random merchant down the street, at least compared with gold coins.

We are now talking about thymological judgments rather than apodictic theorems, and judgments involve weighing various aspects. What bitcoins lack in ease of laying off on someone down the street, they perhaps make up for in ease and speed and cheapness of transmission to anyone in the world. The Internet facilitates finding such people and communicating and transacting with them. As more people start to accept bitcoins and more payment infrastructure (escrow, BTC-to-national-currency exchanges, Bitcoin debit cards, POS systems, eBay-like sites, etc.) comes online and matures, the ease of laying them off will increase. If Bitcoin continues its growth trend, the usage loop will close for more and more people, where they both make significant amounts of their income in bitcoins and turn around and spend it in bitcoins rather than “cashing out” (this seems to already be the case for some Silk Road users who sell one drug they can make or procure and use the proceeds to buy other drugs they don’t have access to).

Today’s article in Scientific American covers many of these market growth issues excellently: http://www.scientificamerican.com/article.cfm?id=3-years-in-bitcoin-digital-money-gains-momentum

Here is an older article, but it gives an interesting take on what Bitcoin is and the potential it has to disrupt the Establishment.

131

In the present order or do you mean even sans government interference in money? The reason I ask is that the Bitcoin fanatics keep asserting that Bitcoin would be viable and would naturally arise in an unhampered market in money production.

Clayton -

132

Well if we assume that bitcoin’s in demand for some reason then we cannot say a priori that it cannot be used as money. That would depend on its own marketability and the marketability of its competitors.

Your question is a thymological one which I can’t say I can answer with any confidence. But I would still guess that bitcoin would be much more likely to grow in popularity under the current order than in a free market.

133

I think you’re stating the case too weakly. Banknotes were bearer titles to property (money) and functioned as money-substitutes. Digital tokens - which is what Bitcoins really are - could also function as money-substitutes. We can state praxeologically that no one would ever take payment in an unbacked paper banknote (title to nothing) in preference to a backed banknote (title to property). So why can’t we state the same thing for a digital banknote which differs only in the technology by which the note is implemented? Why would someone accept a digital title to nothing over a digital title to property when we know, praxeologically, that no one would ever accept a paper title to nothing over a paper title to property?

Clayton -

134

I dont think thats praxeologically certain. A digital cryptotitle involves more counterparty risk than a digital cryptodatum. Once you have the bitcoins in your wallet, youre good. The bearer of bitgold tokens must trust that the actual gold is there.

put it this way, do you acknowledge that its possible for a person to prefer a hard copy of a newspaper over a potentially bad check?

135

Just to clarify, am I correct in saying you’re talking about bitcoin on the free market, and not the first part of my last post? Well it isn’t even necessarily the case that something like bitcoin would remain unbacked if a free market in money was to come about.

136

The relevant is the last one: https://forum.freecapitalists.org/t/bitcoins-prove-mengerian-account-of-money-creation/21195/125

That’s not a formulation, that’s a story. It’s a long shot from a proper argument.

You’re essentially talking to yourself, you avoid confronting the arguments your opponents have made. I thought it’s just me, but it looks like you’re avoiding others too. I told you to pick an Austrian economists to decide which definition of the regression theorem is correct, but you didn’t. Already in the past I provided references to Austrians saying that an initial “intrinsic value” is not necessary (e.g. Bagus, Selgin, Kinsella), but you just dismissed them as irrelevant.

137

Let me quote from it:

You’re back to your old tricks where you attempt to obfuscate the difference between money and a medium of exchange.

And here you conflate the (broader) transaction costs with a subset of transaction costs (the size of the network, AKA “double coincidence of wants”).

But these are just auxiliary issues. The more fundamental one is that you lack a solid framework. I challenge you to formulate the regression theorem in up to five simple implications, like I did here: https://forum.freecapitalists.org/t/bitcoins-prove-mengerian-account-of-money-creation/21195/125.

138

I can comprehend your conflusion as you appear to conflate the (broader) transaction costs with the size of the network. Even if more people want either dollar or yen than Bitcoin, using Bitcoin for a forex transaction between US and Japan decreases transaction cost (presumably, I did not calcuate it, but in other cases I did). Usually, the transaction costs are determined by liquidity, which in turn is usualy determined by the size of the network, but this is not the only factor influencing transaction costs. See Menger in Principles of Economics:

You admit yourself that after a certain threshold is crossed, a medium of exchange does not need “intrinsic” value anymore to sustain itself. If intrerpreted as a network effect, this threshold is called critical mass. If you consider the size of network (= double coincidence of wants) as the only factor influencing the demand, then it follows that the critical mass can only be reached once the corresponding medium of exchange is the dominant one (i.e. money). But if other factors are considered, then the critical mass can hypothetically be lower.

Bitcoin shows that there are cases when it is much lower than previously anticipated. This is due to the unprecedented technological innovation it provides, a dramatic reduction of transaction costs compared to anything else available. Various other factors, e.g. regulation and the existence of multiple currencies (as opposed to one worldwide) make the difference transaction costs higher.

In absence of these features (significant decrease of transaciton costs, higher resistance to interference from the state and banks), Bitcoin could not have arisen. On the other hand, as long as this difference persist, so will Bitcoin. For the foreseeable future, the typical user of Bitcoin does not have anything to switch to, as that would increase their transaction costs.

And Carl Menger recognises too that transction costs can be reduced:

139

In the absence of governments, Bitcoin would have it more difficult to establish itself, as the absence of governments would lead to a small number of currencies (maybe even one), and regulation would make bank transfers cheaper. In principle, Bitcoin would still have a comparative advantage, but it’s possible that it wouldn’t have been significant to overcome the network effect of the existing system.

140

We can, but the transaction costs of such a system would be higher than a pure abstract monetary base, because the maintenance costs of the underlying property. Money substitutes would also lead to credit expansion, and I’m not even talking about the effect of regulation on the transaction costs.

Because it decreases their transaction costs.

It’s like asking what the purpose of email is and suggest that we use fax instead.