What Bitcoin is

[excel]

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.

Overall, the maintenance and transaction cost of a modern monetary system is negligible compared to the physical (goods) part of the transaction, and with the centralization of money into banks their offering of interest on deposits and loans would cover this cost.

I suppose it would be as easy for banks to lend bitcoins as any other kind of money, but since they can’t engage in fractional reserve banking they would be hard pressed to prefer this to other kinds of money, which would give a substantial advantage to traditional digital and pseudo-physical currencies.

Because it decreases their transaction costs.

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

I’ll disagree with this, because I don’t think it answers Clayton’s objection. A more accurate analogy to his objection would be asking what the purpose of a piece of property is, and then suggesting that someone trade their deed for an actual real physical property with a deed of a fantasy-property that doesn’t exist. (Or might exist on a distant planet that’s unreachable within a human life-time.)

It seems more likely that someone would prefer the deed to a property that exists and is ‘achievable’ in the forseeable future rather than an ‘unreal’ deed, even though the maintenance on the fantasy property would be far lower.

[shurdeek]

@excel

Overall, the maintenance and transaction cost of a modern monetary system is negligible compared to the physical (goods) part of the transaction, and with the centralization of money into banks their offering of interest on deposits and loans would cover this cost.

It is smaller, but it is still present. In a system with a fiat base and money substitutes, the commercial banks need to keep reserves with the central bank, and reserves of cash, and they need to authenticate the users to make sure the deposit is there, and redeem the claims (this is in addition to authenticating clearing transactions). With commodity money, the commodity must be stored, redeemed and claims authenticated. If the base is purely abstract, these costs are absent.

I also suspect that regulation plays a significant role in the transaction costs.

@excel

I’ll disagree with this, because I don’t think it answers Clayton’s objection. A more accurate analogy to his objection would be asking what the purpose of a piece of property is, and then suggesting that someone trade their deed for an actual real physical property with a deed of a fantasy-property that doesn’t exist. (Or might exist on a distant planet that’s unreachable within a human life-time.)

This would be the case if there was an underlying property in the first place, and then a claim on it. But Bitcoin is not a claim in the first place. It’s a pure network good, like other communication standards, including languages or the internet. Network effect creates value without property, by decreasing transaction costs of communication. This is not only true for money, but for all communication. If you

@excel

It seems more likely that someone would prefer the deed to a property that exists and is ‘achievable’ in the forseeable future rather than an ‘unreal’ deed, even though the maintenance on the fantasy property would be far lower.

It highly depends on the purpose for which you intend to use it. If you do it for the purposes of consuming it directly, then holding a claim on something real is preferable, because it is expected that eventually someone will redeem the claim. If you want to “use” it within the context of communication, then it’s completely irrelevant that it’s purely abstract.

The example I like to use are IP addresses. They are not a claim to anything, they are purely abstract, the legal system does not recognise property rights in them. They are only usable within the context of communication, you cannot consume them. Yet they have a price. You can rent them and you can buy them. Renting or buying gives you the ability to use them within the context of communication, and make them unavailable to others in this context (with minor corner cases which we ignore for the purpose of the argument), therefore within the context of communication, they are scarce.

Using an IP address creates new communication possibilities that would not be possible with something that has a physical standard (e.g. a snailmail). Would adding something physical under IP addresses them make them more desirable? No. It would make them more difficult to be used within the only context where they can be used.

It would be absurd to argue that because IP addresses are a pure network good with no use for anything else outside of the context of the network, they cannot have happened, and that due to that, the internet will collapse. They happened because they presented a technological innovation, and had a first mover advantage, so the network effect had time to grow. In the past, more people who wrote letters, for example, than users of the internet. But already at the low penetration numbers, using the internet gave a comparative advantage to writing a letter. The advantages were not obvious to many, and could not be used all the time or by everyone, but they existed. The critical mass of network effect is lower when there is a disparity in technological level.

Even 15 years ago there were people who viewed the internet a fad. There was also the dot com bubble. But there was no competitor strong enough to satisfy the consumers in the way the internet can. So the adoption rate grew.

[Smiling_Dave]

Pete,

A reply to your recent posts:

1. Let’s keep to the topic at hand, the one I repeat over and over to the bitcoin folks that they ignore:

Please show exactly what line of the proof of the theorem is invalid, and why.

2. You did write some straw man version of the regression Theorem. But that doesn’t cut it. You see, the way it works between serious people is that you summarize the theorem and the proof to your opponent’s satisfaction, and then refute it.

The version you wrote is full of red herrings. Both Clayton and I have responded that it is not our version of the theorem, meaning not Mises’ version either.

3. I’m sorry you could not follow my argument in Bitcoin Takes a Beating, and all you managed to grasp of it is “a story”. Others with different intellectual capacity have said they understood it, and written so in the comments.

4. I’m not sure why you insist I appeal to authority. In serious discussion, laying out my case is considered sufficient.

5. You ask me to copy your style and give a five line summary of my thoughts. Sadly, that is indeed the current state of arrested development of certain people, whose minds cannot absorb anything longer than a sound byte. But as Einstein wrote, you should explain things as simply as possible, but not simpler. Obviously, the regression Theorem is a subtle concept, with many people unable to get it after so many attempts at clarifying, and cannot be placed in a Procustrean bed.

6. Transaction costs, network effects, are all red herrings. You have enough there for a large Bar Mitzvah. Make your summary using only concepts Mises used. Follow Einstein’s directive. As simple as possible. Mises managed quite well without all the bloat and jargon and red herrings you introduced, and without referring to other obscure works, just using simple common sense and ordinary English.

7. Pete, I am not really replying to you, since I suspect you have an agenda, but merely responding so that interested readers know that you are wrong.

You may consider yourself honored that you are the second member of my Book of Trolls, so expect no further response. Number one, btw, is Malachi.

[shurdeek]

@Smiling Dave

Please show exactly what line of the proof of the theorem is invalid, and why.

Since you have yet to formulate the theorem, I cannot address this. I addressed some auxilliary issues, which you also ignored.

@Smiling Dave

You did write some straw man version of the regression Theorem. But that doesn’t cut it. You see, the way it works between serious people is that you summarize the theorem and the proof to your opponent’s satisfaction, and then refute it.

You have yet to show where exactly my argument is wrong. I presented four implications. Are any of them incorrect? Did I miss something? You don’t say.

@Smiling Dave

I’m sorry you could not follow my argument in Bitcoin Takes a Beating, and all you managed to grasp of it is “a story”. Others with different intellectual capacity have said they understood it, and written so in the comments.

I understand the story, but it’s not an argument. It’s not a formulation of the regression theorem, because it’s not a formulation of anything. It’s a story.

@Smiling Dave

I’m not sure why you insist I appeal to authority. In serious discussion, laying out my case is considered sufficient.

In this very post, you essentially said “been there done that”, without actually having been there and having done that.

@Smiling Dave

You ask me to copy your style and give a five line summary of my thoughts. Sadly, that is indeed the current state of arrested development of certain people, whose minds cannot absorb anything longer than a sound byte. But as Einstein wrote, you should explain things as simply as possible, but not simpler. Obviously, the regression Theorem is a subtle concept, with many people unable to get it after so many attempts at clarifying, and cannot be placed in a Procustrean bed.

Thank you for rejecting praxeology and reclusing to mysticism. Another indication is that you don’t really intend to contribute to a debate, as if the year and a half of evasions wasn’t a hint enough.

@Smiling Dave

Transaction costs, network effects, are all red herrings. You have enough there for a large Bar Mitzvah. Make your summary using only concepts Mises used. Follow Einstein’s directive. As simple as possible. Mises managed quite well without all the bloat and jargon and red herrings you introduced, and without referring to other obscure works, just using simple common sense and ordinary English.

Mises did not use these terms because they did not exist at that time. The term “saleability” nowadays is called liquidity. “economic sacrifices” (Menger) are now called transaction costs. And so on. Now we have more general names for them. Furthermore, by rejecting my terms you don’t actually refute my argument. You’re just saying that you don’t like it.

@Smiling Dave

Pete, I am not really replying to you, since I suspect you have an agenda, but merely responding so that interested readers know that you are wrong.

Since from the point of view of argumentation you have been ignoring me all along, you’re essentially confirming that this was not a tactical decision but a strategy.

@Smiling Dave

You may consider yourself honored that you are the second member of my Book of Trolls, so expect no further response. Number one, btw, is Malachi.

Since you have yet to actually provide an argument, this means nothing to me.

[shurdeek]

@Smiling Dave

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.

The Euro never had intrinsic value. Yet, for some 300 million people, it is money. Therefore, your argument is incorrect.

[excel]

It is smaller, but it is still present. In a system with a fiat base and money substitutes, the commercial banks need to keep reserves with the central bank, and reserves of cash, and they need to authenticate the users to make sure the deposit is there, and redeem the claims (this is in addition to authenticating clearing transactions). With commodity money, the commodity must be stored, redeemed and claims authenticated. If the base is purely abstract, these costs are absent.

I also suspect that regulation plays a significant role in the transaction costs.

Present, but again, negligible. That is, when you purchase a good, the transaction cost of your electronic payment is functionally irrelevant compared to the transaction cost of the good. (Especially when you use it to purchase goods over large distances.) When you purchase a hardcover book on amazon with bitcoins, do you consider the transaction cost required by you turning on your PC, typing in, and sending an electronic packet to amazon (totalling, let’s say .002 cents of cost due to use of electricity) as a more important factor then the transaction cost of having the book delivered by snail-mail at a 3 dollar fee?

This would be the case if there was an underlying property in the first place, and then a claim on it. But Bitcoin is not a claim in the first place.

Exactly. So a bitcoin is a ‘claim to nothing’. A claim to a non-existent phantom-property. A good whose value is arbitrarily determined by the collective fiat of the participants in bitcoin-exchange related markets and backed by your trust in their willingness to exchange goods for bitcoins at that value.
Which was Clayton’s objection.

It’s a pure network good, like other communication standards, including languages or the internet. Network effect creates value without property, by decreasing transaction costs of communication. This is not only true for money, but for all communication. If you

Most online Bitcoin related literature display a shocking lack of agreement with you in this claim, at least in terms of the classical use of the term network good. In fact, I can find no use of the term network good at all (beyond a 2000 paper on microsoft pricing), especially in regards to bitcoin. They also show no agreement with you in terming bitcoin a communication standard.

It highly depends on the purpose for which you intend to use it. If you do it for the purposes of consuming it directly, then holding a claim on something real is preferable, because it is expected that eventually someone will redeem the claim. If you want to “use” it within the context of communication, then it’s completely irrelevant that it’s purely abstract.

Right, and since we’re talking about a currency it follows that we want to hold and use it within the context of exchange and value-retinence,
and not within the context of communication, so I will take that as a concession that people would therefore prefer to hold claims to something over claims to nothing, even in terms of currency.

This would further imply that the transaction-cost gain of bitcoin over traditional electronic currencies would have to be high enough to overcome that preference. This seems unlikely, considering transaction costs of goods are far higher than transaction costs of traditional electronic currencies.

The example I like to use are IP addresses. They are not a claim to anything, they are purely abstract, the legal system does not recognise property rights in them.

I’m not sure if that is accurate (is it possible to sue someone for using the IP address you’ve paid to exclusively hold?), but in any case this is not a good example since IP addresses are not supposed to be used for currency, nor for the exchange of goods.

They are only usable within the context of communication, you cannot consume them.

You cannot consume a view, either. And yet, people are able to value a view. Does that mean
that houses with a great view cannot collapse due to faulty construction work? How does mentioning
a collapse in this context even make sense? (See your later comment)

Yet they have a price. You can rent them and you can buy them. Renting or buying gives you the ability to use them within the context of communication,

No it doesn’t. If you purchase an IP address you can’t use it for anything unless you have the necessary networking equipment.

and make them unavailable to others in this context (with minor corner cases which we ignore for the purpose of the argument), therefore within the context of communication, they are scarce.

I think there’s a strong case to be made that they are scarce in and of themselves, in that they require exclusivity of use (ignoring NAT at the moment) in order to be useful for their purpose while at the same time consisting of a finite range of acceptable values.

(If 2 people could employ the same land in the same way at the same time, land would not be scarce.

If any number of people people could use the same hammer at to hammer 2 different nails at the same time, hammers would not be scarce, even if there existed only a single hammer in the world. (conceptually, at least))

In other words, things are only scarce in the context of which people use them, and IP addresses are no exception to this.)

Using an IP address creates new communication possibilities that would not be possible with something that has a physical standard (e.g. a snailmail).

IP address communication would be impossible without a physical standard for communication. (e.g. computers, switches,etc)

Would adding something physical under IP addresses them make them more desirable? No. It would make them more difficult to be used within the only context where they can be used.

Adding a physical network system under IP addresses would not only makes them more desirable, it gives them the only reason to BE desirable. Not adding a physical under the IP addresses would make them IMPOSSIBLE to use under the only context where they can be used.

It would be absurd to argue that because IP addresses are a pure network good with no use for anything else outside of the context of the network, they cannot have happened, and that due to that, the internet will collapse.

What does this even mean? What are you even trying to say here?
The rest of the example is sort of a faux history lesson, so I’m going to skip it.
All in all this is a terrible example and makes no sense within this context (Clayton’s objection).

[shurdeek]

@excel

Present, but again, negligible. That is, when you purchase a good, the transaction cost of your electronic payment is functionally irrelevant compared to the transaction cost of the good. (Especially when you use it to purchase goods over large distances.) When you purchase a hardcover book on amazon with bitcoins, do you consider the transaction cost required by you turning on your PC, typing in, and sending an electronic packet to amazon (totalling, let’s say .002 cents of cost due to use of electricity) as a more important factor then the transaction cost of having the book delivered by snail-mail at a 3 dollar fee?

It looks like you missed my point. You talk about transaction costs of goods that you are trying to purchase, not the transaction costs of the payment system, and not about the costs associated with storage of the specie. You turned my argument upside down.

Bitcoin is also form-invariant and can exist in practically any form. There is no need to turn on the PC to perform the payment. You can use it in a mobile phone (QR codes, NFC, …) and there are developments for dedicated platforms such as the one at http://bitcoincard.org.

If money substitutes have lower transaction costs than specie, they will be preferred to specie (indeed, without the difference in transaction costs, money substitutes would not exist in the first place). But money substitute needs an issuer, and a clearing process based on this issuer. This creates enormous costs.

@excel

Exactly. So a bitcoin is a ‘claim to nothing’. A claim to a non-existent phantom-property. A good whose value is arbitrarily determined by the collective fiat of the participants in bitcoin-exchange related markets and backed by your trust in their willingness to exchange goods for bitcoins at that value.

Which was Clayton’s objection.

Bitcoin is not a claim to nothing because it’s not a claim. Similarly as gold is not a claim to nothing because it’s not a claim. The value of Bitcoin is determined purely by its liquidity (which is a subset of the the network effect). Similarly as with other network goods, it remains to have value until a better competitor outcompetes it.

We use network goods all the time. Language is another example. Language is purely abstract and only has value because we build goods and services based on it.

@excel

Most online Bitcoin related literature display a shocking lack of agreement with you in this claim, at least in terms of the classical use of the term network good. In fact, I can find no use of the term network good at all (beyond a 2000 paper on microsoft pricing), especially in regards to bitcoin. They also show no agreement with you in terming bitcoin a communication standard.

Check out Mikael Stenkula’s paper Carl Menger and the Network Theory of Money for example.

@excel

Right, and since we’re talking about a currency it follows that we want to hold and use it within the context of exchange and value-retinence,and not within the context of communication, so I will take that as a concession that people would therefore prefer to hold claims to something over claims to nothing, even in terms of currency.

As economy evolves, money becomes more and more a communication standard and less an object.

@excel

This would further imply that the transaction-cost gain of bitcoin over traditional electronic currencies would have to be high enough to overcome that preference. This seems unlikely, considering transaction costs of goods are far higher than transaction costs of traditional electronic currencies.

This is not only not unlikely, it is already happening. You can do international transfers cheaper when you add Bitcoin to the mix, for example.

@excel

I’m not sure if that is accurate (is it possible to sue someone for using the IP address you’ve paid to exclusively hold?), but in any case this is not a good example since IP addresses are not supposed to be used for currency, nor for the exchange of goods.

As both Bitcoin and IP addresses are only usable within the context of communication, the problems of exclusivity can be to a much larger extent resolved by technological means.

IP addresses are a network good. They are not very liquid, but that’s not because they are abstract but because their features make them unsuitable for liquidity.

@excel

You cannot consume a view, either. And yet, people are able to value a view. Does that mean that houses with a great view cannot collapse due to faulty construction work? How does mentioninga collapse in this context even make sense? (See your later comment)

My point was to demonstrate that the opponents of Bitcoin cannot explain why Bitcoin should suddenly lose value. They think that there is something irrational about the valuation. But as I’ve been trying to explain, Bitcoin already allows one to decrease transaction costs. It does not need to be money to do that. It would be irrational to switch from it. I’m not saying it’s impossible, but the reasoning is poor.

It’s like saying that the internet would suddenly collapse because IP addresses are abstract and therefore worth nothing.

@excel

No it doesn’t. If you purchase an IP address you can’t use it for anything unless you have the necessary networking equipment.

Ah, here I see your confusion. Yes, of course you need something physical, like the networking equipment. But without an abstract protocol, the networking equipment is worthless. That’s the whole point. Bitcoin allows the physical banks to be replaced by computers, similarly as the networking equipment all but replaced the post office. But without a common underlying protocol, this would be impossible.

@excel

I think there’s a strong case to be made that they are scarce in and of themselves, in that they require exclusivity of use (ignoring NAT at the moment) in order to be useful for their purpose while at the same time consisting of a finite range of acceptable values.

They are only exclusive within the context of communication. Plenty of computers have 127.0.0.1, and it’s not exclusive, for example

@excel

(If 2 people could employ the same land in the same way at the same time, land would not be scarce.

If any number of people people could use the same hammer at to hammer 2 different nails at the same time, hammers would not be scarce, even if there existed only a single hammer in the world. (conceptually, at least))

In other words, things are only scarce in the context of which people use them, and IP addresses are no exception to this.)

The scarcity of physical world is irrespective of context, as a use of a physical object always makes some other uses impossible. And the scarcity of abstract things is always only contextual and manifests itself through the exclusivity of physical objects (e.g. media).

@excel

IP address communication would be impossible without a physical standard for communication. (e.g. computers, switches,etc)

Correct, but a communication protocol is a prerequisite for the computers to communicate.

@excel

Adding a physical network system under IP addresses would not only makes them more desirable, it gives them the only reason to BE desirable. Not adding a physical under the IP addresses would make them IMPOSSIBLE to use under the only context where they can be used.

Here we confuse “under” and “above”. You build networking infrastructure on top of the IP protocol, not below it. Similarly, the nodes, goods and services are built on top of the Bitcoin protocol, rather than below it. Putting something below IP would make no economic sense, just like putting something below Bitcoin protocol would make no economic sense.

@excel

What does this even mean? What are you even trying to say here?

That network goods can be purely abstract, and in some cases it makes no sense at all of for them not to be abstract.

[excel]

It looks like you missed my point. You talk about transaction costs of goods that you are trying to purchase, not the transaction costs of the payment system, and not about the costs associated with storage of the specie. You turned my argument upside down.

No, I consider your point misguided, in that the transaction cost of the payment system is so miniscule compared to the other transaction costs normally associated with an exchange that they become near irrelevant in terms of economic calculation by individuals. At most, this would be a calculation question for suppliers of payment systems, and since there is no supplier of a bitcoin payment system there’s no real comparison for potential suppliers to make.

Bitcoin is also form-invariant and can exist in practically any form. There is no need to turn on the PC to perform the payment. You can use it in a mobile phone (QR codes, NFC, …) and there are developments for dedicated platforms such as the one at http://bitcoincard.org.

And yet, all these forms are also available to any other modern digital currencies, and all suffer from the same transaction costs.

If money substitutes have lower transaction costs than specie, they will be preferred to specie (indeed, without the difference in transaction costs, money substitutes would not exist in the first place).

Where the first ‘rags’ lower in transaction cost than gold coins? Depends on what you mean by transaction costs in this instance.

Bitcoin is not a claim to nothing because it’s not a claim. Similarly as gold is not a claim to nothing because it’s not a claim. The value of Bitcoin is determined purely by its liquidity (which is a subset of the the network effect). Similarly as with other network goods, it remains to have value until a better competitor outcompetes it.

So why the need for a bitcoin system, if all you need is the liquidity? You can far better liquidity from just writing ‘5 dollas’ in an e-mail and sending it back and forth… (No need for all those clearing houses that tell you whether this is a ‘real’ bitcoin or not.)

We use network goods all the time. Language is another example. Language is purely abstract and only has value because we build goods and services based on it.

Irrelevant.

Check out Mikael Stenkula’s paper Carl Menger and the Network Theory of Money for example.

Transaction cost too high.

As economy evolves, money becomes more and more a communication standard and less an object.

Concession accepted.

This is not only not unlikely, it is already happening. You can do international transfers cheaper when you add Bitcoin to the mix, for example.

International transfers of what? Are you saying the cost of transporting a crate of bananas from new york to singapore magically becomes less expensive if you pay for it in bitcoin? By how much?

As both Bitcoin and IP addresses are only usable within the context of communication, the problems of exclusivity can be to a much larger extent resolved by technological means.

Oh, I thought bitcoins were supposed to be used for exchange. I guess real actual currencies don’t have to worry about any competition from it at all, then.

IP addresses are a network good. They are not very liquid, but that’s not because they are abstract but because their features make them unsuitable for liquidity.

So why make a comparison with a good that is SUPPOSED to be liquid?

My point was to demonstrate that the opponents of Bitcoin cannot explain why Bitcoin should suddenly lose value. They think that there is something irrational about the valuation. But as I’ve been trying to explain, Bitcoin already allows one to decrease transaction costs. It does not need to be money to do that. It would be irrational to switch from it. I’m not saying it’s impossible, but the reasoning is poor.

So you made a completely irrelevant point in regards to Clayton’s objection. Why doesn’t bitcoin need to be money to decrease transaction costs? I thought the whole point was that bitcoin AS A CURRENCY decreases transaction costs by removing the need for clearing houses. Now you’re saying that it doesn’t have to be currency to more efficiently do the thing it was designed for which it isn’t?
(
Ie;
prop 1: bitcoin was designed to be a currency.
prop 2: bitcoin when functioning as currency, lowers transaction costs.
concl : therefore, bitcoin doesn’t need to be currency to lower transaction costs.
)
Does not compute.

It’s like saying that the internet would suddenly collapse because IP addresses are abstract and therefore worth nothing.

No it isn’t.

Ah, here I see your confusion. Yes, of course you need something physical, like the networking equipment. But without an abstract protocol, the networking equipment is worthless. That’s the whole point. Bitcoin allows the physical banks to be replaced by computers, similarly as the networking equipment all but replaced the post office. But without a common underlying protocol, this would be impossible.

No. Without the equipment, the IP address and protocol is worthless.
Without the IP address and protocol, the equipment can still be used.

They are only exclusive within the context of communication. Plenty of computers have 127.0.0.1, and it’s not exclusive, for example

They are exclusive in the only context that matters. Plenty of computers may have 127.0.0.1, and plenty may have 10.0.0.23, but that
addresses are not conducive to communication if both computers exist within the same network with the same IP address.

The scarcity of physical world is irrespective of context

No it isn’t. A world that doesn’t know about gasoline does not have a scarcity of gasoline.
A world where people don’t harvest crude oil doesn’t have a scarcity of crude oil.

Here we confuse “under” and “above”. You build networking infrastructure on top of the IP protocol, not below it. Similarly, the nodes, goods and services are built on top of the Bitcoin protocol, rather than below it. Putting something below IP would make no economic sense, just like putting -something below Bitcoin protocol would make no economic sense.

Actually the OSI model is pretty specific about where the physical layer is compared to the network layer.

That network goods can be purely abstract, and in some cases it makes no sense at all of for them not to be abstract.

Then I think you should work on your communication protocols, because they aren’t up to par. Or maybe mine are from another supplier?

[shurdeek]

@excel

No, I consider your point misguided, in that the transaction cost of the payment system is so miniscule compared to the other transaction costs normally associated with an exchange that they become near irrelevant in terms of economic calculation by individuals. At most, this would be a calculation question for suppliers of payment systems, and since there is no supplier of a bitcoin payment system there’s no real comparison for potential suppliers to make.

Ah, I see your point now. You need to consider however that the transaction is not an isolated one, but occurs within the broader marketplace. It is preceded by the transaction costs of the capital goods you are using, and succeeded by the transaction costs of the produce. So it is not the revenue that is the relevant base for comparison, but profit. If you need to pay, say, 3% fee for accepting a debit card payment, and your markup when using cash is 6%, then by accepting a debit card you halve your profit. Is that minuscule?

I used to work in the online payment industry, so I know firsthand the costs associated with processing transactions. Admittedly, a lot of that is due to the lack of competition (as banking is regulated), but I already admitted that in a pure free market economy the difference between Bitcoin and another system would be lower.

@excel

And yet, all these forms are also available to any other modern digital currencies, and all suffer from the same transaction costs.

Only as money substitutes, which I already explained suffer from both unavoidable costs due to issuance and regulatory costs due to the state. A prime example is GoldMoney, which due to regulation you can only use as a method of payment if you live in Jersey (and since Jersey now accepted FATCA, it might not be true for long either). So the transaction costs are prohibitive: GoldMoney does not want to risk legal actions against it, and without their cooperation you cannot use the deposits you have with them as a medium of exchange. You need to either sell them for fiat, or withdraw them in specie, which eliminates the purpose of a money substitute in the first place.

@excel

Where the first ‘rags’ lower in transaction cost than gold coins? Depends on what you mean by transaction costs in this instance.

I do not understand this.

@excel

So why the need for a bitcoin system, if all you need is the liquidity? You can far better liquidity from just writing ‘5 dollas’ in an e-mail and sending it back and forth… (No need for all those clearing houses that tell you whether this is a ‘real’ bitcoin or not.)

You need a common standard if you want to use the network effect. That is why we have language, IP addresses and Bitcoin.

@excel

International transfers of what? Are you saying the cost of transporting a crate of bananas from new york to singapore magically becomes less expensive if you pay for it in bitcoin? By how much?

No. If you, for example, change dollars to Bitcoins in the US, then transfer Bitcoins to China, and then sell the bitcoins locally for yuan, you end up with more yuan as if you used other methods of transfer, and it’s also faster. See http://www.thebitcointrader.com/2011/10/send-money-to-china-with-bitcoin-and.html. The idea that by having more steps you can lower your transaction costs seems counterintuitive, but it’s been researched already. Krugman for example wrote two papers where he argues that people are motivated to use dollar for international payments in preference to local fiat monies, as it is more liquid. With Bitcoin, the technological improvements have a similar effect on international trade as liquidity has on dollar.

@excel

Oh, I thought bitcoins were supposed to be used for exchange. I guess real actual currencies don’t have to worry about any competition from it at all, then.

You admitted just above that as economy progresses, money is becoming more about communication, and now you object to it.

@excel

So why make a comparison with a good that is SUPPOSED to be liquid?

Because liquidity is a subset of the network effect.

@excel

So you made a completely irrelevant point in regards to Clayton’s objection.

It is not irrelevant, it explains exactly where his mistake is. He thinks that one particular factor (“backing”) precedes others in deciding what to use as a medium of exchange. But which factor takes precedence depends on context. Normally, liquidity, not “backing”, takes precedence. That does not mean that “backing” is never the determinant, but that it is neither in case of Bitcoin nor in case of fiat.

@excel

Why doesn’t bitcoin need to be money to decrease transaction costs?

Because it provides a technological advantage, and that allows it to have a comparative advantage in transaction costs even in some cases where normally liquidity is the determining factor. It merely needs to be a medium of exchange, which it already is.

@excel

I thought the whole point was that bitcoin AS A CURRENCY decreases transaction costs by removing the need for clearing houses. Now you’re saying that it doesn’t have to be currency to more efficiently do the thing it was designed for which it isn’t?

No. I’m saying that already at the current level, Bitcoin can be used to decrease transaction costs, even though it is not liquid enough to be called money. From the perspective of self-sustaining liquidity, the critical mass has already been reached, even though Austrians in the past seem to argue that this can only happen if the medium of exchange is already the most liquid one.

@excel

concl : therefore, bitcoin doesn’t need to be currency to lower transaction costs.

I did not say Bitcoin doesn’t need to be currency. I said Bitcoin doesn’t need to be money, i.e. the most liquid medium of exchange. It just needs to be a medium of exchange at a level where it can provide a comparative advantage in transaction costs compared to money. And that level already has been reached, as there is empirical evidence of transactions where it does decrease transaction costs. The only way to revert this is to provide to the market actors an alternative that has a more desired combination of liquidity and technological transction cost reduction. But this seems highly unlikely in the foreseeable future. Fiat and gold are burdened by regulation, so are unlikely to reduce their transaction costs, and other cryptocurrencies do not have sufficient liquidity.

@excel

No. Without the equipment, the IP address and protocol is worthless. Without the IP address and protocol, the equipment can still be used.

Similarly as the computers and goods and services that build the Bitcoin ecosystem can be used for something else without Bitcoin.

@excel

No it isn’t. A world that doesn’t know about gasoline does not have a scarcity of gasoline. A world where people don’t harvest crude oil doesn’t have a scarcity of crude oil.

This is more a definition of a good than a definition of scarcity. Menger specifies that the knowledge that a the “thing” can be used to satisfy needs is a prerequisite for that to be a good. But scarcity in the sense of mutual exlusivity exists independently of our knowledge of it.

@excel

the OSI model is pretty specific about where the physical layer is compared to the network layer.

This is a visual misunderstanding. In the OSI model, the IP protocol is located above the physical one, but from economic point of view it is under it. The protocol is virtual and defined in advance, so the physical objects need to be modelled to fit into the protocol, not the other way around.

[boniek]

@AJ

However, the “no starting value” argument died for me the day I realized that sending money home from Japan would be way cheaper and faster if I used Bitcoin.

In the days before Bitcoin system I could send money faster an cheaper almost anywhere in the world by using my credit card or checking account as compared to going there by foot and giving recipient money myself. Still credit cards and checking accounts did not become money. Why? I think because these are services not commodities. Bitcoins themselves are useless as commodity. What is valuable to some extent, to me and judging from this quote to you, is Bitcoin system (as defined by OP in Step1) which, to me, can be considered as a service.

[shurdeek]

@boniek

In the days before Bitcoin system I could send money faster an cheaper almost anywhere in the world by using my credit card or checking account as compared to going there by foot and giving recipient money myself. Still credit cards and checking accounts did not become money.

Actually, a checking account is a money substitute (credit cards are not according to the Austrian definition of the money supply).

@boniek

Why? I think because these are services not commodities. Bitcoins themselves are useless as commodity. What is valuable to some extent, to me and judging from this quote to you, is Bitcoin system (as defined by OP in Step1) which, to me, can be considered as a service.

It is indeed helpful to view Bitcoin as a service, but that alone still leaves the questions of price and liquidity open. Checking account and credit card use units that are external to them, Bitcoin does not. It also does not automatically negate the viewpoint that Bitcoin are a commodity. Services can become commoditised.

[Anenome]

@Peter Šurda

@Smiling Dave

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.

The Euro never had intrinsic value. Yet, for some 300 million people, it is money. Therefore, your argument is incorrect.

Hah, check and mate

[Malachi]

What else is funny, is that value is subjective, so any eliminative process tha relies on value or the lack thereof will necessarily yield subjective results. Thats where I can say “bitcoins arent money” and its true, for me, and for everyone else that doesnt value bitcoins. But if we want to step back, and observe other market participants and evaluate money as an outsider, then bitcoin is money, because there are people out there who consider it money. Since the regression theorem is apodictically certain we can say with certainty that bitcoin must have inherent value, as our only means of measuring value is the actions of other humans and they never would have been able to start using bitcoins as a medium of exchange if there werent already people who valued bitcoin for non-monetary uses. So whenever someone says “bitcoin isnt money” they cannot be speaking as an economist, unless that economist were ignorant or misinformed. Speaking as an economist, the response to the assertion “bitcoin is money” would be “money to whom?” at which point one can refer to examples, many of which are familiar to us.

[Smiling_Dave]

Just and a thought here. You may remember that my humble blog recently listed a whole slew of attempts at creating “money”, such as the Ithaca Hour, all of whom flopped on their faces in a few years.

Let’s pretend we are in the year 2009, right before the Ithaca Hour flopped. There must have been a Smiling Dave out there, a lone voice of sanity, saying the Hour is doomed, and there must have been plenty of Petes and his ilk, crowing about how the Hour proves Mises wrong, or satisfies the theorem in some spiritual way, and all the other gems of flawed reasoning we have seen here. What could that 2008 version of Smiling Dave had said? For one, what I have been saying, that we are talking about a small population, not big enough to count, that give the thing time and will flop, that no flaw exists in Mises logic. And sure enough, in 2010, Happy New Year. The Ithaca Hour is dead. Short live the latest scam, bitcoin.

So guys, count not your chickens before they hatch. Come back in a few years and we’ll pick up the discussion again.

BTW, the last few posts here have sunk to new lows, thinking they have discovered America with fiat currency, or redefining “money” the way they want it, when that nonsense has already been rejected long ago. Mises took care of fiat money [read what he wrote, guys, before thinking you know anything about it. I mean, would you offer your critique on Godel’s Theorem when all your knowledge on any subject comes from I Love Lucy?], and Wikipedia on Money took care of the money definition [already mentioned in this forum].

[shurdeek]

Smiling Dave,

Ithaca Hours are not money in the narrower sense, i.e. they are not what economists call outside money, specie or money proper. They are a wannabe money substitute. They are not subject to independent valuation (they are pegged to the dollar).

There is, however, a more successful attempt: WIR. WIR is pegged to the Swiss Franc and has existed for about 78 years. In 2005 the amount of existing WIR was about 3 billion, and it had 62.000 users.

Bitcoin is not a money substitute as its value is not pegged to anything, rather is purely the result of interplay of supply and demand for Bitcoin. The number of users of Bitcoin is nowadays estimated at between 500.000 to 1.000.000 and the value of existing Bitcoins is about 120 million USD.

The two problems Mises’ Regression theorem addresses are the emergence of price and the emergence of liquidity. With Ithaca Hours and WIR the price emerges through a peg, similarly as with other money substitutes, or with fiat money. That leaves the question of liquidity open, it may or may not be at a level where the network effect is self-sustaining (i.e. critical mass). I did not actually measure liquidity of either, but based on the anecdotal data I would say for Ithaca Hour it hasn’t been crossed, and for WIR it has.

Whereas projects like Ithaca Hours and WIR attempt to motivate the users to use them by increasing the money supply, Bitcoin motivates people to use them by decreasing transaction costs. So the reasons for their use are fundamentally different.

Last but not least, my claim that your argument does not apply to Euro wasn’t an attempt to refute Mises, as you continue to erronously ascribe to me. Rather, it was a demonstration of an utter lack of scientific rigour on your part.

[Amanojack]

Some random news: Although the price of a bitcoin is only about 1/3 what it was in last year’s blow-off top, total bitcoin market capitalization is approaching par with the $150 million it reached at that same peak.

[shurdeek]

AJ,

for quite some time I’ve been critical of using market capitalisation or the exchange rate as a meaningful variable for measuring the success of Bitcoin. I prefer liquidity.

On a somewhat lighter note, my attempts to debate with Smiling Dave remind me of this scene (between 7:23 - 8:18): http://www.dailymotion.com/video/xsmjsn_dvd-clannad-07_shortfilms

[ClaytonB]

@Ithaca Hour: The key to remember is that Ithaca Hours, USD and Bitcoin all have something in common - they are unbacked currency. The difference between Ithaca Hours and USD is that the former is not backed by an aggressive, warmongering gang with taxing authority, whereas the latter is.

The Regression Theorem does not say that it’s impossible for backed money to be exchanged for unbacked money, it merely states that what really gave an unbacked money its value when it first came into use was not the government’s declaration that “this shall now be money” but, rather, the liquid exchangeability of the unbacked money for backed money. What motivated people to make the exchange is a separate matter.

So, the Regression Theorem is only applicable to Bitcoin in terms of restricting how it may become valued - it will not become valued through any government dictate or by any gimmick or tech-sexiness. It will become valued solely through its liquid exchangeability for present money (US dollars, other monies).

Going back to the issue of what motivates people to exchange better money for worse money, I think that we can fairly state that this is solely the consequence of some kind of government interference in the market. Hence, the debate over Bitcoin is really a speculative debate over whether it is, in fact, better or worse than existing monies (i.e. can Bitcoin compete in the government-fiat market in money production) and/or any possible money (i.e. can Bitcoin compete in an unhampered market in money production).

a) Can Bitcoin compete in the government-fiat market in money production? Contrary to the more pessimistic folks, I believe that Bitcoin - or any unbacked digital token service - is actually well-situated to compete with government-fiat money. The problem that Bitcoin creates for central-banker-money is similar to the problem created by BitTorrent for Establishment media copyright-holders: To shut down the “pirate” network, you either have to resort to unrestrained brutality in enforcement or you have to shut down all communication networks (on a separate topic, now you know where the “Internet Kill Switch” crap is coming from).

This makes Bitcoin virtually ineradicable and may make the adoption of a Bitcoin-like technology - in order to stop the Bitcoin threat - by official governments inevitable as the “future of fiat money.”

b) Can Bitcoin compete in an unhampered market in money production? My bet is “no”. There is no a priori theoretical reason that can be derived to determine that Bitcoin could not possibly succeed unless you posit that Bitcoins are inherently valueless (which, I think, is not far from the truth).

In an unhampered market in money production, the bar of competition would be much higher. In the present environment Bitcoin merely has to attract people away from nearly worthless bits of constantly-devaluing slips of paper. Bitcoin, or any unbacked digital token, does not have to be that great of a money, it merely has to be better than the alternative (horrible, central-bank paper money).

There are a few major problems with Bitcoin that I think eliminates it from the race in an unhampered market in money production:

1. Collapse risk. This was demonstrated last year with the massive run-up and crash in Bitcoin in a matter of a couple days. Even were the market-cap of Bitcoin so large that no one individual or group could launch any meaningful attack on it, it would still be vulnerable at all times to a collapse in confidence/demand in a way greater than any competing money substitute that is actually backed by something (contractually redeemable/securitized). Bitcoins are said to be “backed by what they can be traded for” but this is sophistry - a Bitcoin is not a secured claim to anything, unlike a banknote or similar legal agreement.

2. Inflation. Yes, inflation. The Bitcoin enthusiasts go on and on about the 21 million limit. But that limit can be changed at any time by the Bitcoin community. This is not likely to happen with circumstances in their present state because of the distributed nature of the Bitcoin client. Nevertheless, the point bears repeating as I believe that central banks may move to supplant Bitcoin by rolling out their own Bitcoin-like protocols (Canada has already announced its plans to do something like this). One argument they are doubtless going to put forward is “Bitcoin is inflation-proof!” It needs to be noted that there is nothing actually stopping Bitcoins from being expanded by an arbitrary degree and that the incentives to do so only increase as the Bitcoin user-base increases. There is always more than one way to skin the cat.

Do pay attention to the man behind the curtain.

Clayton -

[shurdeek]

Clayton,

it looks like you’re seeing things increasingly my way. I think you’re more forthcoming now to Bitcoin than before.

Ithaca Hours are not money in the narrower sense, as they have a fixed exchange rate, similarly as other community currencies. They are a wannabe money substitute. While there is little research about this, I think that if they ever become unpegged they collapse. They don’t have sufficient comparative advantage over fiat. Bitcoin or USD are valued however on their own.

The influence of government intervention on the use of fiat currencies is, in my opinion, exaggerated. That’s not to say it isn’t present, but after a while, if liquidity is sufficiently high, the influence becomes unnecessary. As evidenced by international trade and countries where legal tender laws are weak, or even countries which have a comparably faster depreciating currency, people normally choose based on liquidity, not by “backing” (i.e. they switch to dollar rather than gold). The governments tend to impose harsher restrictions (e.g. capital controls) as the currency collapses (e.g. recently Venezuela or Iran), because as long as it “kind of” works, the restrictions are unnecessary. If all legal tender laws were abolished (and Bitcoin didn’t exist), I would expect everyone to move to the dollar, unless the FED screws up horribly.

I fully agree that Bitcoin would have it much more difficult on a free market. The existence of fiat money, banking regulation and multiple currencies benefits Bitcoin enormously, and it looks like they were a significant motivator in its inception and adoption. But if Bitcoin reaches sufficient liquidity before a free market is established, then this liquidity would make it harder for newcomers to compete. It’s a dynamic process. Similarly as in the previous paragraph with the dollar, what happens if there ever is a free market depends on the level of liquidity cryptocurrencies have at that time. If it is sufficiently high, then “backed” money cannot outcompete it anymore.

I am very critical of using the exchange rate of Bitcoin as a measurement of its success. Liquidity is more important. So I am not worried about the bubble that occurred last year, or big players causing price fluctuations. A complete collapse is highly unlikely as long as there is no reasonable alternative. The fall of Bitcoinica worries me much more, because while it was operating it had a positive influence on liquidity.

The change in the money supply worries me even less. Even if you manage to persuade a large chunk of users to accept the change, the result would be a fork in the blockchain: two mutually incompatible versions with the same starting point, with everyone being free to choose which one to follow. You wouldn’t be able to scam someone to accept payments from the inflated fork if they prefer the non-inflated one. Most likely the new version would collapse right away. You can’t do this stealthily like the bank holidays favoured for redenominations for fiat money.

A government-sponsored alternative is unlikely to compete because the unwillingness to relinquish control increases transaction costs. MintChip, for example, while it can hypothetically decrease transction costs, requires a blackbox chip, so it’s not form-invariant, and it’s not a money in the narrower sense either, it’s a money substitute. It’s a centralised solution.

[ClaytonB]

MintChip … [is] a centralised solution.

Exactly. What did I say earlier in the thread - when Gramma Marge puts her husband’s life insurance award payment into Bitcoins (or MintChip), then I will call it money. But Gramma Marge hasn’t the slightest inclination to differentiate between the security of a distributed, cryptographic protocol - something she will never comprehend and even most average folks of the street will not comprehend - and the security of a government mint. The fact that a distributed protocol that is under no one’s specific control is actually more secure than a government mint (look at all those huge steel vaults, it must be secure!) is lost on the man-off-the-street. Furthermore, as a general principle, “the unwashed masses” are distinctly distrusted by those very same masses, particularly when it comes to matters of finance and security.

Hence, if the governments of the world decide to go the MintCoin direction, you can kiss Bitcoin goodbye. It might stick around as an ineradicable fringe money but it could never compete shoulder-to-shoulder with central-bank-issued digital fiat money.

Part of what informs my pessimism on this point is the failure of popular cryptography. During the heady days of the mid-to-late 1990’s, everyone was predicting that military-grade crypto would become a widespread, de facto phenomenon on the Internet. It is my belief that the NSA and other leading intelligence services around the world were ordered to treat this as a dire threat to national security and develop a strategy to stop it. Their answer? Google, Gmail, YouTube, Facebook, Twitter, iPhone, iPad, Android, etc. etc. How do these sites prevent the use of cryptography? By providing free-but-unencrypted services. Combined with shiny, fun User Interfaces, the man-on-the-street happily chooses to fork over his name, number, address, SSN, credit-card info, bank account numbers, financial documents, legal documents, compromising photographs and every imaginable sort of data which any sane person should want to keep under physical lock and key at best, or at least encrypted with state-of-the-art crypto if it must be stored on a medium that is not in one’s physical possession. What we have looming now is “The Cloud” which, in Google’s model, is a completely unecrypted, “trust our servers not to be hacked or compromised by our employees or turned over to the FBI or IRS (or NSA) on request”-model. Cf Google Drive. Dropbox is the same story. Encrypting your data is still at least a two-step, wholly-manual process.

If you think that the Fed is any less aggressive in its intent to maintain an iron grip on the production of money than the NSA is in scheming to take over virtually the entire consumer market for Internet services to keep them crypto-free, you’re mistaken. No expense will be spared. After all, they own a fully-legal money-printing press with unlimited printing speed.

Clayton -