The Bitcoin community faced another crisis besides this on Sunday afternoon as the price of the currency on the most popular exchange, Mt.Gox, fell from $17 to pennies in a matter of minutes. Trading was quickly suspended and visitors to the home page were redirected to a statement blaming the crash on a compromised user account. Mt.Gox’s Mark Karpeles said that the exchange would be taken offline to give administrators time to roll back the suspect transactions.
A video of the collapse here. The message board freaking out is here. And, the details of the Mt. Gox hack and the Bitcoin drop down to pennies is here.
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Also of note: ‘within 10 minutes of the flash crash, the market bounced back to $13/btc (it was 17.5 previous to the crash)’ http://blogs.forbes.com/timworstall/2011/06/20/so-thats-the-end-of-bitcoin-then/#comment-49
I have no idea why Mr. Ptak is on the warpath against bitcoin. This is an extremely interesting event, but in drawing those conclusions, one must reason that bitcoin is still a relatively illiquid market searching for price discovery.
It’s interesting to witness the bootstrapping of bitcoin, which is taking place over days and weeks rather than years and generations. Technological advances are happening at a faster and faster pace. Products that used to take years to come to market now take months or weeks. Capitalism has democratized access to luxuries, as Mises wrote in Economic Freedom and Interventionism (in today’s daily). If this fails, bitcoin 2.0 will come about at the speed of information, and the process will be that much more refined.
Also, I may note, bitcoin seems superior to gold. Any disruption that takes out our bitcoin is, at this point, likely to wipe our billions of lives along with it. I’m not very interested lording over a horde of yellow metal in a post apocalyptic wasteland.
Ha. Invested much?
Not at all. I plan to though.
“I have no idea why Mr. Ptak is on the warpath against bitcoin.”
Me neither. Strikes me as an emotional reaction.
As I stated below, I am not on the “warpath” against Bitcoin. I find it a fascinating innovation albeit one with serious flaws and I have only discussed facts and relevant events.
My initial post discusses structural problems that as these events have evinced are real issues.
Of course there are issues. A new competitor with completely unique features cannot spring out of nothing, emerge fully matured and gain a significant market share overnight. There are growing pains and the mass media seems to spread the wrong ideas. Bitcoin may have a solid foundation, but that is not enough for market acceptance. It will take more time for Bitcoin to become easily usable and advantageous for the average Joe.
People still don’t have access to their Bitcoins at Mt. Gox.
Two sides of coin there always are: the positive and the negative. (that’s supposed to be a bad Yoda parody).
Now seriously: despite all the panic spread by the media, the hatred and denouncements by fanatic adherents either of fiat or gold, Bitcoin has always recovered, within hours. This is how open source works: people publicly analyse mistakes and learn from them. And if for some reason Bitcoin fails completely, there will be a successor that will do it better.
Whereas Keynesians are scared of having a currency that is not under the control of the government, many of the Austrians seem not to comprehend that the very thing they are looking for in the money, the value and scarcity of the physical commodity, makes it impractical to compete against government fiat for normal business operation. It’s still good as a hedge against inflation though.
Think of Bitcoin as the GPL of currencies. GPL is a great tool for people who object to copyright to turn it on its head. Instead of demanding closeness, it demands openness. So, it can be used for defence of real property. Of course, if copyright was abolished, the GPL would become pointless. Similarly, Bitcoin is a tool for people who object to fiat to turn it on its head. Instead of promoting inflation, it promotes deflation. If legal tender laws were abolished, Bitcoin would probably become pointless (assuming there are no replicators but we’ll leave that for another debate). Yet for some reason I don’t see anyone on the Mises site complaining how GPL is a bad idea, or denouncing people who licence their software under GPL, or how it contradicts the theory of property rights as developed by Rothbard/Evers/Hoppe/Kinsella. Stallman is making socialist arguments, but the GPL is widespread and promotes free markets.
Somehow a lot of people posting on this site understand that objecting to GPL is missing the point. So they just need to get used to Bitcoin being around and that complaining about it due to not fitting into the regression theorem is missing the point too.
I prophecise that one day a great Austrian will be born and he’ll squash the regression theorem like Kinsella squashed IP. I apparently can’t do that, because in order to shatter a paradigm, you have to master it first, and despite having been thinking about it for a long time, I still don’t get why it’s supposed to be a praxeological rather than normative argument. Also I don’t believe in prophecies.
Please, this is supposed to be perfect according to all those arguments with me. This can never happen. People don’t get compromised. It’s secure and impossible to violate. Now here we have one lone user completely destroying a supposedly “sound” monetary system in a matter of seconds. Now we have an arbitrary group called administrator’s taking on pseudo-governmental power and rolling back transactions THEY believe are suspect. No trial, nothing, just the suspicion of faulty transactions.
Another reason I have little faith this “money” will survive for very long.
Nobody was forced to use Mt.Gox – they accepted the terms of use freely, and one of those terms is that Mt.Gox can protect its reputation by rolling back trades which it discovers were fraudulent. Why on earth would anyone who believes in free markets be against that?
“Why on earth would anyone who believes in free markets be against that?”
Because he is just a troll and reflexively grabs any argument which superficially seems to support his case.
The terms of service stated that Mt. Gox would never be a counter party to a trade. Resetting is doing just that.
There are some issues with the legal formulation, on the other hand the trades were not legitimate so technically they are not reversing them, they are merely returning “stolen” goods.
Define “sound” and explain how it fits into context. Make sure it can be applied to gold.
@J.Murray,
“Now here we have one lone user completely destroying a supposedly “sound” monetary system in a matter of seconds.”
What makes you believe that Bitcoin has been destroyed in any significant sense? (FYI: right now its selling for 13 USD).
“Now we have an arbitrary group called administrator’s taking on pseudo-governmental power and rolling back transactions THEY believe are suspect”
I suspect that like Tim Worstall in the article i linked to earlier you’re conflating mtgox (a privately owned bitcoin exchange) with Bitcoin the system. The two are distinct. It’s not clear why you believe that control over private property is ‘pseudo governmental’.
J. Murray,
you got it all backwards. According to you, Bitcoin would have never existed in the first place. But it’s here, and whenever something unusual happens, all the denouncers get excited how the prophecies have been fulfilled, not realising that by the time they are writing “told you so”, it’s become a boring historical fact and everyone has moved on. It’s like Harold Camping’s quest for the end of the world. Are we there yet? Are we there yet? Whoops miscalculated.
Why are you so obsessed with denouncing Bitcoin? Afraid of the unknown?
If gold was so great at providing a better service than fiat, it already would have. If you want, feel free to wait until there’s no fiat.
“If gold was so great at providing a better service than fiat, it already would have. If you want, feel free to wait until there’s no fiat.”
What are you talking about? Gold has clearly been a better currency if you care about preserving purchasing power. You don’t have to wait until there is no fiat for gold to be better at that. If you want feel free to sell me gold for the fiat dollar price 10 years ago, 20 years ago, 30 years ago, 40 years ago etc.
Dan,
Preservation of purchasing power is not the main property of currency, rather indirect exchange. Gold is not used for indirect exchange very much nowadays compared to fiat. That does not mean it’s “bad”, just that as a medium of exchange it lost out to fiat.
If by lost out you mean the gov. forces people to accept dollars and puts taxes and other restrictions on gold, then I agree it lost to the force of a gun. If legal tender laws and taxes on gold were gone would you still use the dollar over gold?
Dan,
I’m not using the dollar anyway, I live in Europe. But of course, I agree with you, I’m just saying it’s missing the point of Bitcoin.
“If gold was so great at providing a better service than fiat, it already would have. If you want, feel free to wait until there’s no fiat.”
In the absence of coercion, this statement would be true. Ever noticed an absence like that?
Matt,
You are missing the point. Coercion does not alter the laws of economics, it just changes the answers to empirical questions. Gold winning or losing is an empirical question. And since I don’t think government meddling in money is going away anytime soon, gold isn’t going to be winning anytime soon either and that leaves a market gaps for projects like Bitcoin.
“If gold was so great at providing a better service than fiat, it already would have.”
It would have, had Govt.s and Central banks allowed gold to compete with fiat currency. Gold and silver are natural choices of people all over the world as money. Fiat is thrust upon humanity.
Srinivas,
Indeed. And since governments are not going to allow that anytime soon, that creates a market gap and projects like Bitcoin can fill it.
Peter,
Great point!
In regards to the regression theorem you are missing the obvious. Bitcoin already satisfies the theorem. Bitcoin is a mint providing the same service as a minter of gold coins. Because bits have an original, non-monetary, use-value they satisfy the requirement that money must arise from a marketable commodity.
Also any criticism of the recent crash is not failure of bitcoin but a failure of the absurd monetary system of competing currencies and fluctuating exchange rates.
Zach,
an interesting point. The digital obviously has non-monetary utility, and bitcoin mining puts it into a standardised form for indirect exchange. I’ll think about it.
There is still the issue that you cannot own the digital, so it can only be a quasi-commodity. Regression theorem supporters might complain on that too.
“Now we have an arbitrary group called administrator’s taking on pseudo-governmental power and rolling back transactions THEY believe are suspect. No trial, nothing, just the suspicion of faulty transactions.”
On bitcoin you can’t “roll back” transactions once their finished with arbitrary power. But since this site has the bitcoins that people gave it, and since this site wires out the money, that hasn’t been wired out yet, but is on account. They are more than capable of stopping any wires, deducting the account, and sending the bitcoins back to the people who gave them to them. Think of it like if a transaction was mis-rang up at wal-mart, and the door greeter caught it when you were exiting. Hardly a “pseudo-governmental power”.
There is nothing wrong with regression theorem, the only problem is taking it too literary as a religious zealot like many Mises Inst. folks.
The main point of the regression theorem is, no money can be introduced to the economy by a central authority and money must appear as a result of human action.
And bitcoin does not contradict this. The success of bitcoin, is the result of its design regarding the production or mining of it. All the bitcoins wasn’t created by a central figure and then dispersed, but on the contrary, many people use real resources and energy to create bitcoins. More simply bitcoin was not money when it was designed on paper or even when it first started. It became money because of its open source, or distributed qualities.
And Kinsella didn’t quash IP. He just created another property rights theorem with the help of Hoppe that has nothing to do with origianl Lockean/Rothbardian homesteading theory. Just like what Henry George did back in the 19th Century. The only difference is George picked land to make exceptions and Kinsella picked IP.
The reason this new theory is popular among libertarians is compartmentalization and the fact that there arent many philosphers left in the Mises Inst but second hand dealers of ideas(We can see this in the bitcoin debate also). Many libertarians do not think of the logical conclusions of this theory created by Hoppe and Kinsella. They look at the narrow issue of IP and the problems associated with the current statist handling of the issue and jump on the anti ip bandwagon.
anon,
In another thread I listed four unsubstantiated normative assumptions the regression theorem rests on.
You already pointed out that the problem is in interpreting this too tightly. But on the other hand, if you interpret it too loosely, this could mean that if money in the past emerged as a commodity with better features than other commodities, it can be replaced by anything in the future. And that is not really useful. Furthermore, there was an article on Mises Daily around April 2010 referenced by the Mises wiki (I think either the page about money or fiat money) that explains that government force can make money arise by government force from a previous barter situation.
While I am still hesitant to call Bitcoin money, I agree that the open source and decentralisation are crucial to its spread.
The main (from my perspective) contribution of Kinsella is demonstrating that IP contradicts property in physical rights. Contrast this with Henry George, who claimed that land rent should not be private but public. Positive vs. normative claims.
On the contrary. The logical conclusions allow for a coherent treatment of contracts and torts. Since IP is based on a self-contradiction, it often leads to contradictory conclusions, and these become only more apparent if you realise what Kinsella said. When these contradictions are pointed out to IP proponents, they just turn off logic and go emotional.
Hi Peter, I’m finding your comments very insightful. If you have the time/energy you may also be interested in a parallel bitcoin thread here: http://mises.org/Community/forums/p/24195/426753.aspx#426753
bitbutter,
I have already been contributing to that forum thread.
Justin Ptak,
Is there any way you can be reached by email?
justinptak @ post.harvard.edu
And, by the way, I am not on the “warpath” against Bitcoin. I find it a fascinating innovation albeit one with serious flaws and I have only discussed facts and relevant events.
By the way, Tradehill has resumed trading, after shutting down for long enough to allow their members to change any passwords which may have been compromised by Mt.Gox. http://www.tradehill.com/?r=TH-R13947
Finally, bitcoin is dead! I’m sick of going to alternativecurrencyporn.xxx to indulge my insatiable gold fetish and finding nothing but bitcoin videos.
Another day, another ridiculous post by Justin Ptak. The price of Bitcoins retraded back almost to par, but Justin is again being selectively misleading in reporting facts, just mentioning ‘dropped to pennies’ multiple times.
This issue and the 500k theft the other day have nothing to do with the Bitcoin system itself. These are just issues with the users and service providers that connect with the Bitcoin exchange system. Such poor service providers will quickly be replaced in the digital free market.
Why is is that soft libertarians like Kevin Carson….
http://thebitcoinsun.com/post/2011/06/09/Bitcoin,-the-Darknet-Economy,-and-the-Low-Over-Head-Revolution
….get what damage Bitcoin could do to State control of the system, yet the Mises Institute has this guy as it’s go to man for reporting on Bitcoin?
I don’t think it is fair to slam the Mises institute over a few posts. There’s much to say about bitcoin and there are many individuals associated with the institute. I don’t think we should read Ptak’s opinions as those of others that should be allowed to speak for themselves.
It is Tuesday and people still do not have access to their Mt. Gox accounts and are not able to exchange. The retraded back to “almost par” is certainly on very light trading.
I’m not sure what you think is ridiculous. He seems to be reporting on a very newsworthy event. If the NYSE was hacked into and went down for two plus days would you expect economic blogs to be silent?
Bitcoin cannot be physically delivered, isn’t convenient to serve my needs as money, and as of now has yet to earn my trust, so I don’t have any plans on using it. However, I do support any decentralizing movement (a la Rothbard), so I hope they keep it up.
To bitcoiners (?) I would say that anything new will be harshly questioned, but to win all you have to do is survive. So don’t sweat the crits so much.
You can get bitcoin in physical form if I recall, I believe some sell cards with bitcoins on them.
But the cards still have no inherent value. If the bitcoin market crashes, they’ll only be good for cutting lines.
@Matt. No currency has inherent value to begin with. Value is imputed to a good according to its expected serviceability in satisfying wants.
Yes, and gold has value other than in consumer confidence. Bitcoin does not.
“Yes, and gold has value other than in consumer confidence. Bitcoin does not.”The difference is less decisive than you’re making out. The reason that the overwhelming majority of those who value both BitCoin and gold do so is that they expect that people will accept these goods in trade in the future. It’s true that the non-trade related uses of gold make it more likely that there will be a _minimum_ price for gold for the near future at least. But it’s not obvious that this advantage trumps all those of BitCoin.
Bitbutter, can you go into what all those other advantages of bitcoin are? From my last reading of one of these threads Peter Surda made it clear to me that the only true advantage that bitcoins have is that they are open source and more flexible than holding physical gold.
There are many advantages, but they all come to two things (like you recognise): it’s a digital standard and it’s open source. This means that you can build services upon it at low cost and without worrying about interoperability.
The reason why a small amount of monies emerges on a free market (i.e. the least problematic interpretation of the regression theorem) is due to network effects. Probably at the time Mises was writing it the topic of network effects has not been address by economists yet. Gold “standard” is “created” by nature, and you can’t really “violate” it, you can just lie to people whether you are really selling gold or not. Digital standards are purely artificial and therefore can be designed to fit specific needs, rather than relying on nature to provide us with a solution.
You can think about language as another open source standard, a digital one even since there is only a fixed number of characters and punctuation marks in every language. It was not created by nature. If a specific company created their own language, they would need to provide significant advantages over the existing languages if they wanted to gain a usable market share (or they could use force).
Languages are useful because they allow communication. If you eliminate this feature, a language is useless. You can see a language as a sort of pseudo-commodity without any backing. Network effects cause that some languages become more spread and some less spread, and eventually die out. In the past, there were physical books, newspapers and so on developed as services upon language. Since we have the digital, these are being pushed out of circulation because they are seen inferiour by the market participants. Some writers now even ignore the non-digital. There are other ways of communicating, and before language was developed, they were dominant.
You can use this analogy to understand Bitcoin. There is a need to perform indirect exchange, just like there is a need to communicate. Before we had computers, there was accounting, bank notes and cheques to facilitate this, but now we can go purely digital. While I would not be entirely sure that this means we can completely abstract from backing on a free market, at least one can’t completely exclude that possibility. More importantly, it allows you to see that there can be a demand for something like Bitcoin simply because there is a need for standards, and gold is physical rather than digital. Making gold a digital standard is very complicated and it is questionable if it can be even done well enough to compete with Bitcoin because it might not be possible to do that in a decentralised manner.
Bitcoin is the future
2012 is the future.
I guess if you wrap it in technology, point out that it is “voluntary”, disregard that it is a pyramid on top of the pure fiat legal tender Federal Reserve note, then all of the problems created by every fiat currency, always and everywhere, will somehow not occur with the Bit(not-a)Coin.
Stop shooting the messenger.
http://mises.org/books/historyofmoney.pdf
“disregard that it is a pyramid on top of the pure fiat legal tender Federal Reserve note,”
Nonsense. The fact that it can be traded for USD (or EUR etc) doesn’t establish that it’s a ‘pyramid’ based on any of these fiat notes. BTC enthusiasts appreciate the characteristics of the Bitcoin independent of it’s expected USD resale price–for instance the ‘pseudonymity’, the ease with which it facilitates direct global payments without a third party involved, the near-zero storage and transfer costs etc.
You know how Keynsian inflationists dismiss Austrians and the gold standard without actually knowing anything about it?
That is what you are doing with Bitcoin by posting such statements.
@bitbutter & @yohan
you have not responded in any meaningful way.
the idea that Bit(not-a)Coin “enthusiasts” feel that the discount relative to the FRN (not USD) is acceptable for ‘pseudonymity’ (i hope you don’t really believe that btw) is not the issue. The issue is that the effective reserve is the FRN which is fiat. The best you can hope for is that the purchasing power of the BitCoin parallels the FRN. I doubt that. Even if it does, it is still subject to the vagaries of FRN inflation.
Even if BitCoin is a “success” by your standards, it is still an abject failure. Assuming BitCoin becomes widely accepted, it will then be lent out in a fractional manner. Don’t think so? Well, you are then denying thousands of years of history. If something is debasable, it will be debased, period. That is the only purpose of fiat currency.
Somehow I doubt that there is even a reserve of FRNs. What do you think would happen if everyone redeemed their BitCoins for FRNs? Collapse, that is what. Why? Like every other fiat known to mankind, it is being pryamided on top of some other reserve(FRNs- as in most cases).
I have no objection to anyone using BitCoin for any purpose whatsoever. If it makes you happy, then do it. Don’t get upset that people who have actually studied monetary history are pointing out the folly and true nature of BitCoin.
Fiat evangelicals on Mises. Now I’ve seen everything
“Fiat evangelicals on Mises. Now I’ve seen everything”
Bitcoin is not a fiat currency. Not sure why so many are getting this wrong still.
“What do you think would happen if everyone redeemed their BitCoins for FRNs? Collapse, that is what.”
If that would happen while the BTC economy was still in its infancy, sure. Argument form the apocalypse doesn’t get us anywhere in any case.
If the system stays capped at 21 million units then it is ‘technically’ not fiat, but the potential for it to become fiat and debased is possible.
It’s just an arguement of semantics that vcif would rather enage in that look at the important issues.
“If the system stays capped at 21 million units then it is ‘technically’ not fiat, but the potential for it to become fiat and debased is possible.”
Fiat means a state decree. For Bitcoin to fit the label fiat currency, a state somewhere would need to declare it legal tender.
What gives a bitcoin any utility or value? Is it useful in and of itself, like silver, gold or 5.56mm ammo, or is it useful just because others will accept it in exchange? If the latter, it is valuable only INSOFAR as others will accept it in exchange.
I accept the government’s dollars because I know it has lots of guns and assures me it will enforce contracts denominated in dollars, and I know it is in the government’s interest to do so. What does bitcoin do to keep people accepting it in exchange?
“What gives a bitcoin any utility or value?”
The same thing as what gives gold or ammunition value: expected serviceability in satisfying wants. In general I want to trade, and bitcoin has certain characteristics that already make it a more appropriate means for realising my goals than the use of gold or fiat currency is in certain cases.
Anti-Gnostic,
I sometimes also use dollars, although there is no force involved in that particular use (I live in Europe and dollars are not legal tender here). The government meddling in money has other, indirect, effects, apart from the pure force. These created a market gap, and Bitcoin has the ability to fill that gap. With a bit of exaggeration, you could therefore say that the government force is what gives value to Bitcoin. Like government force gives value to tax advisors.
So the answer is bitcoin has value because other people will accept it in exchange for goods and services.
That acceptance can evaporate in a heartbeat, unless bitcoin has guns to keep people using bitcoin or bitcoin has some intrinsic utility that enables it to retain value.
Anti-Gnostic,
the thing is, as long as governments meddle with money, there is a market gap. If people somehow lost faith in Bitcoin, that would not close the gap. Or vice versa: why would the people lose faith in Bitcoin unless an alternative to it was available?
“disregard that it is a pyramid on top of the pure fiat legal tender Federal Reserve note”
You can try to get out of it now vcif, but your statement above was ridiculous and has no relevance.
“all of the problems created by every fiat currency, always and everywhere, will somehow not occur with the Bit(not-a)Coin.”
A straw man. No-one who is a Bitcoin enthusiast (on this website anyway) claims that Bitcoin is not fiat, that it can not be tampered with and potentially debased. It has some great inbuilt mathematical features to stop debasement, so it is not technically like your fiat paper currency which can be printed at will.
We are just looking to the positives and see it as as the best tool to attack the current fiat money regime. Misesians such as yourself are not willing to concede the potential or leanr new tricks.
Tell me, when is the hard money gold standard going to appear? Only with the complete destruction of current fiat money and the State institutions that implement it. How will this be achieved? Not by Austrian scholars retiring to the study to read dusty books.
It will be achieved by digital and anonymous methods of exchange that gradually starve the State of it’s means to fund itself. Only then will we see the destruction of the State, destruction of fiat currency, and a return to true hard money. Bitcoin just happens to be the first and most useful tool that can achieve this.
Im sick of people like you and Justin Ptak condescending to us by linking to Mises and Rothbard publications as if we do not know what the fiat money issues are. Why do you think we are Mises.org in the first place?
“Im sick of people like you and Justin Ptak condescending to us by linking to Mises and Rothbard publications as if we do not know what the fiat money issues are. ”
Edit, I mean David Kramer, not Justin.
@Yohan: “A straw man. No-one who is a Bitcoin enthusiast (on this website anyway) claims that Bitcoin is not fiat”
I have to contradict you Yohan, I am claiming it’s not a fiat currency–since fiat means ‘by decree’, and Bitcoin is not the subject of any legal tender laws.
bitbutter, I only saw your post after I did mine.
I get your definition is correct, its just the fiat that most people refer to is debaseable currency backed by nothing.
vcif,
Although this is technically doable, there is a clear distinction between “FRB-Bitcoins” and real Bitcoins, like between bank account balance and fiat notes. The reason however why FRB works with banks is that in order to do a bank transfer, you need a bank account. Account balance and fiat notes are not directly compatible, you need to convert one into the other if you want to use it. But in order to do a Bitcoin transfer, you do not need a “FRB-Bitcoin” account. You do not need to convert Bitcoins into an “FRB Bitcoin account” if you want transfer them.
Would FRB be so widespread if everyone could be his own bank at negligible cost? I don’t think so. Some will probably still use banks due to division of labour, but unless the banks offer significantly more services, there is no big risk in that. And precisely because Bitcoin offers a standardised decentralised platform, there is a big pressure from competition, and no bailouts. Trying to FRB with Bitcoins is much more riskier than with fiat.
But let’s assume someone tries to do FRB, fails and there is a bank run. Let’s assume further that noone saves the bank. Well then the depositors will lose some Bitcoins. Where’s the problem in that? Profit and loss. That’s how markets work.
This is actually what already happened at least twice. One of the was legal, one with stolen Bitcoins.
There was no collapse, the price stabilised again. Your argument has been thereby refuted.
Don’t get upset that people who have actually studied monetary history are pointing out the folly and true nature of BitCoin.
And you shouldn’t get upset when someone points out to you the flaws in your arguments, and that history cannot prove or disprove economic laws.
Well, then maybe you “Bitcoin-opponents” could make up your mind if Bitcoin is fiat or not, because half of you claims one and half other. Mises wiki disagrees with you though.
vcif,
the problems with fiat are mainly the government’s use of force and the centralised control over the printing press. These do not exist with Bitcoin: noone has the the ability to force others to use Bitcoin, and the production is decentralised and follows well defined mathematical algorithms.
What we are left with then is the apparent lack of value for purposes other than the exchange. Let’s agree for simplicity that on a free market, this would be a problem. However, because we do not have a free market, there is a gap. Bitcoin is an open source platform that you can build services upon to fill this gap.
The only thing Bitcoin has going for it is that it could be considered a private currency, albeit one that I believe would fail amidst other competing currencies in an environment where fiat has been abolished.
And good luck to those waiting for some “great Austrian” to refute the regression theorem. Until that fateful day, it is not too much of a stretch to consider the setting of Bitcoin prices as arbitrary.
Use whatever you like, but give me my Gold and I’d know what I’d do.
Imagine if gold went through the last three weeks Bitcoin has. People would be crazy to think it was a stable and desired medium of exchange. One Friday it drops from $1500 to $500 as all the gold in Russia is stolen. Then it drops again from $1000 to $10 as all the gold in China is stolen and some is picked up for $10 an ounce while for two days the largest exchange has been closed and you have no no idea if your gold is secure as your username and password to your gold account has been flying around the internet for awhile.
Safe, secure, and stable new virtual currency, bro.
What people don’t understand is that bitcoin has no fluid market yet, there is no central exchange. All this ‘crash’ was was a swap of bitcoin for fiat currency between a few users at a single site on the internet. That site holds both the bitcoin and the fiat currency, so the situation was reverable. Mt gox does not interface with any other exchanges let alone all of them.
What interesting is that the price at other exchanges was not able to follow. This means that it takes along time to get money in and out of mt gox and along time to get money in and out of other exchanges, as no one was really able to react to the situation and profit from it as happens where there are forign exchange inbalances.
Because of bitcoins low volume and its decentralised exchange, bit coin is ironically like trading in the 18th century. You can’t know market prices until all of the exchanges have flowed to a common monetary point – usually the USD. This takes days of bank transfers.
As I understand it, bitcoin is still so small as to be a joke. There are an average of only 10,000 transactions per day, and currently they have a staggering average value of about $10,000 USD per transaction.
Of course this means preciesly nothing. As there is nothing stopping anyone from moving money back and forth as fast as they want between their own accounts and generating heaps of spam. The actual number of legit transactions for commerce is probably almost zero.
Based on bit coin days only about 2% of bitcoins are in any sort of active circulation. There are only 10,000 transactions per day, most of these seem to be rich people bouncing huge balances back and forth so everyone can watch in envy as these massive transactions move through the system. Most of the movement seems to have nothing to do with use in commerce and everything to do with speculating the market price (buying and selling just for the sake of it).
Bitcoin is 98% speculation and in its absolute infancy at the moment. Further more it seems to be fundamentally flawed in that the ‘finders fee’ for processing a block is not in any way related to the cost involved in finding it (in terms of energy for CPU calculation) – its just a some what guessed at value coded in by the most popular client is. What happens when the cost of processing a block is no longer worth the reward and block processing plumets?
The way I see it, bitcoin is not backed by anything physical but it is backed by something real, which is the lack of trust in fiat currency. Could that lack of trust evaporate overnight? Absolutely. But if you ask ten people what the chance of that is, you will get ten different answers, and each of the people would probably have different levels of tolerance for that risk too. I personally would not want to put a substantial portion of my wealth in bitcoins, but I’m happy to have another way of preserving wealth at my disposal, especially one that is so easily traded and currently isn’t subject to almost certain depreciation like the US $ is.
Bitcoin is not a perfect currency. This, however, should not be reason enough to hate it because there IS no perfect currency and never will be. Bitcoin takes us incrementally closer to a free market in which currencies compete based on which best serve the subjective preferences of those who hold them. Call me a fool if you think my probablistic assessment of bitcoin’s future perceived utility is wrong, but realize that our argument will be essentially the same thing as an argument of whether a car should be red or blue.
I agree with you Topher, the question of Bitcoin being able to compete with government fiat is empirical rather than theoretical.
Doug Casey on Bitcoins and currencies: http://www.caseyresearch.com/cwc/doug-casey-bitcoin-and-currencies?active-tab=archives
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-Ginger
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-Susan
I think a very interesting article, thanks for the info!!
That’s terrible, once the crisis to where we will stop.
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