Mises.org has been pushed very hard to comment on the Bitcoin issue, and I’ve probably read and sent 10 articles around for review. We’ve run nothing on it just because the right piece that takes full account of both the technology and robust monetary theory just hasn’t been written. In the meantime, it seems that Bitcoin is tanking.
Any libertarian has to have some sympathy for any effort to create an alternative currency, and the state has narrowed the options so much that we can fully expect a long series of nonviable projects to emerge in the future. It is part of the terrible struggle of our times to find ways of living free in an age of government omnipotence.
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This is a small selection of the economic ideas of Tim Lee, Forbes blogger, the author of the piece you link to:
“The value of Bitcoins is (like any fiat currency) ultimately driven by supply and demand. With dollars, the supply is controlled by the Federal Reserve, and the demand is driven by the size of the US economy. The supply of Bitcoins grows automatically, asymptotically approaching 21 million, and the demand for Bitcoins is driven by the volume of Bitcoin-denominated transactions.”
“But the value of a currency is built on its reputation, and five months of bad news and depreciation have done serious damage.”
“(Bitcoin) is different from traditional currencies. The fact that there are 300 million Americans who use dollars for their day-to-day transactions creates a floor for the value of dollars. Most of us don’t pay much attention to the exchange rate between dollars and other currencies, because we’re used to thinking of dollars as our fundamental unit of value.”
Its odd that you cannot find any good articles to publish on Bitcoin, but when a bad article on Bitcoin emerges, by a Krugmanite Keynesian no less, you cite it as authoritative. I expect much, much more from Mises!
The irony here is that Bitcoin is founded on nothing but Keynesian ideas.
The Austrian position is that a money freely emerges as the most commoditable or exchangeable item on the market. It is not artificially constructed like dollars or bitcoins. Carl Menger traces this out in his 1871 treatise The Principles of Economics.
True, that is how money historically arose. But is it always necessary for money to arise in this fashion?
No. One can coerce others into using his fiat.
Sure, but that’s not what I’m asking. It seems to be that an “artificial” currency could be introduced if they can provide enough people with confidence in its value and supply. Better still would be to issue certificates on some actual, valued commodity, like gold. Wasn’t E-gold supposed to be like that?
Good question. The Mises regression theorem shows how money can arise when no one has any idea what money is good for.
Now that everybody knows what money is good for, there is absolutely no reason for money to emerge just in this way. People can and will try to invent better forms of money.
As for bitcoin it is a very well thought and technically sound attempt of doing just that. Doesn’t mean it will succeed, still I hope it will.
Well if bitcoin continues to tank then it will contribute to the idea that for money to be successful then it should have some intrinsic non-money value. The most important stage in the development of a money may simply be acceptance and finding how much the money is actually worth.
This barrier is the most significant one to overcome. You need to have sound accounting and acceptance. Without these two things no amount of saying ‘money does not need value beyond being money’ is going to make it actually true.
Dollars and other Fiat currencies, even though they have no value at all besides simply being money, overcome this issue by originally being based on Gold or being based on something that was based on Gold in the past. So they overcome this initial hurdle. Of course the problem is that they are inherently unstable and if they lose acceptance then they can lose 100% of their value.
Traditionally we depended on printed paper and signatures to ensure the security of ‘bank notes’ (or receipts or whatever).. that is a paper in place of gold (or tobacco or cows or whatever) that is used so we can reduce the problems of dividing, accounting, transport, and security. As long as it’s exchangeable for gold (or whatever) then it is going to have a easy acceptance in the market. Bank notes like that are important for reducing transaction costs involved in commodity-based money.
It make sense that we would use a cryptographic-based electronic version of a ‘bank note’ /receipt to do the same thing.
The first part is true. Money emerges in that way. The second part that something “artificially constructed” can not emerge, has nothing to do with Menger. The fact that you italicized it, when that phrase appears nowhere in Menger’s texts, is deliberate obfuscation.
It’s “pissin’ into the wind,” James.
Tyrone Dell,
Keynesianism is based on the idea that alterations in money supply can be used to achieve political goals, such as adjusting unemployment. Bitcoin is based on the idea that money supply should be predictable and degressive. So no, Bitcoin is not founded on Keynesian ideas.
Cannot find a definition of “commoditable” although it was used in the title of a master’s thesis in 1986. https://docs.google.com/viewer?url=http%3A%2F%2Fcms.mit.edu%2Fresearch%2Ftheses%2Fmweigel2002.pdf
Hard to believe this was accepted as a college thesis.
” . . . money freely emerges as the most commoditable or exchangeable item on the market.”
More exchangeable than electronic transfer? The why is 90% of the US money in circulation electronic transfer?
Some economies freely used pigs or big round stones with a hole in the middle as money. Northwest American Indian People were so rich that they invented the potlatch and gained status by giving away property, not collecting property.
If you’re talking about the emergence of money, then you’re talking about the past, long before computers and electronic transfers existed. Modern electronic transfers are just debits and credits, but are denominated in dollars, so these electronic transfers are not money, but money substitutes.
As long as you’ve been reading at this site, and you still don’t get it.
I think the better alternative to bitcoin, fiat, and even gold has more to do with not monopolizing any one commodity as a medium of exchange. It used to be that the method of storage and exchange had to be one in the same and recognized by all those who participated. This is not an issue anymore. It’s entirely possible with the digital economy to exchange items with absolutely no currency using fractional barter between multiple sellers and buyers, this of course does not preclude people from storing that wealth in any of many accepted forms including precious metals and other assets. The neat thing about the separation of trade from value storage is it would prevent the money of gold as in the past from becoming a bubble that destroys other exchange of commodities especially when enforced by the guns of a state. The trading tokens if any and being temporary would be created and destroyed after each transaction, thus credit and debt would be non centralized and balanced at the end of the day. And yes a peer to peer network similar to bitcoin would be used but not to create some token of some unknown value, but rather permit trade of items in the present tense. The end result is that people want to be anonymous and not have fees or support the welfare-warfare state and still have the freedom in exchange, but they are going at this totally wrong! Don’t create a fixed currency of expanding or depreciating value, create an exchange token that lasts no longer than the agreed participants and gets destroyed after services rendered. Heck even provide a peer to peer network that logs and allows people to comment and give feedback on a peer to peer so that with the temporary exhange token also comes a method for people to grade and thus build credit rating on an individual and not centralized scheme. Do you realize how many people hate centralized sites like Ebay because of the fee’s and centralized sites demanding seller extortion, that in its own right makes digital fractional barter very attractive. Mises is right that you can’t create money in its conventional form (which includes storage value) from thin air, but what you can create is an anonymous, peer to peer, seller/buyer credit peer to peer rating, and organization to connect multiple sellers and buyers together. Can you imagine if the economist of years ago could have feasibly separated the exchange tokens from storage value of money, they couldn’t conceive of this but its possible with today’s technology. BitCoin sadly is not the answer but that does not mean that what it aims to achieve is impossible. What I really like about this fractional barter marketplace idea on a peer to peer network is that it decentralizes enough that it destroys the base of taxation (necessary for corrupt government) but doesn’t declare what money storage is. When you think of token exchange you have to think creation and destruction (credit and debt) of the tokens in the very near present tense (days to weeks). For example everytime I wanted to sell my 1 apple for 2 oranges the token would be relative 1/2 for me and relative 2/1=2 for him, credit doesn’t seem possible here but in fact is until both parties receive credit until their agreed share of apple and 2 oranges arrives in the mail, then both give a favorable rating if happy with the transaction or bad rating if not happy. Therefore theft would be assumed only at the level of the participants and not passed onto other people, secure peer to peer rating system would curtail bad behavior. Notice the relative tokens seen by each participant as fraction of their commodities they own are present tense and immediately get created and equally destroyed at the end of transaction. Also notice this token system would work for services rendered as the credit would be the same.
BTW, I support Ron Paul and if you ever read this Ron I’d love to meet you sometime. I know there is a good chance that Ron might peruse this article sometime and if you aren’t too busy as President maybe we could have a cup of coffee and talk about fractional barter, the internet, and decoupling of exchange money tokens (which should be short lived) and storage money (long term commodities). Well anyway Ron thanks for trying to fix things and no matter what we appreciate the hope you give to us and you’ve fixed my complacency.
Olaf,
Bitcoin is not fiat currency. Fiat currencies are created by government decree.
Like any bubble, the correction is painful but necessary. I actually see this as a positive for Bitcoin in the long run, since it needs to hit a stable price floor before people can trust it as a currency. It doesn’t matter so much where the price settles, so long as it does at some point.
the exchange rate with the dollar swung, yes, but dollars move, too.
the author inspected exactly zero bitcoin-denominated assets at any of the merchants that accept them. and it is known that the supply of bitcoins follows a specific algorithm, which means it might as well be a fixed supply.
maybe bitcoin is imploding, but let’s see some actual analysis.
If Bitcoins are cheaper, more of them are needed to transact. It’s not the stock, but the flow!
The problem with the article is that it fails to realize that what made bit coin so unstable was that there was no hard funds backing the actual currency. Hulsman in his book “Ethics of Money Production” gave a very interesting analysis of fiat collapse under a gold standard. Say your bit coins were stolen by a third party. If the bank finds itself at fault, then bit coin will still be able to reimburse its customer with the gold stored in its vaults or its value in bit coin thereof. Secondly, any consumer using bit coin without any gold backing will automatically be singled out as the thief since all the currency should be backed in hard currency. The same problem exists with today’s currency system. If the dollar is devalued by the Federal Reserve (thus indirect theft is taking place) there is no way for the people to be reimbursed in gold or silver currency for the act of theft. Imagine the panic that will ensue if the currency does collapse without any means of reimbursing the customer with some sort of hard metal. Also, inflation and deflation is not the sole issue of currency that economists need to worry about. There is nothing special about keeping the number of bit coins fixed at a certain number. After all, gold and silver are not fixed in any one market place and constantly flow and change in price depending upon the quantity of the metals in any given area. I believe Mises pointed this out in his “Theory on Money and Credit”, but it might have been in “Human Action” (sorry I forgot which one). So those asking for a “stable” currency don’t know what they are talking about. The problem with the government printing press is that it manipulates interest rates thus messing with production and consumption calculations among the various actors in the economy. Furthermore, the use of the printing press to stimulate demand in the economy in the absence of desired production (which can only really be cured through price readjustment in the face of new realities) leads to further depression as there is not enough useful production to keep up with the useless consumption. Most of this comes from the fact that economists choose to ignore Say’s Law of Markets at their own peril. In the end, bit coin’s failure was the fact that it just didn’t have any way to back their currency in case of situations such as this. Even if it held the dollars and tied those bit coins with the account, then they could have found the perpetrator of the theft as soon as he tried to use the bit coin and the bank found his account empty of any hard backing. Just my two cents.
No hard funds backing the actual currency? There are no hard funds backing gold. Or are you claiming it needs “intrinsic value?”
The fact that Bitcoins are not “backed” by any promise of a third-party is one of its greatest strengths. There is no counter-party risk with Bitcoin. It is a commodity valued for its own sake – for the usefulness of its properties. It requires no backing and benefits from not having any. A “backed” currency is only as good as the backer.
How about a currency based on a value that hasn’t appreciably changed for 500 years? The amount of work done in an hour by one person using a shovel. Pragmatically, minimum wage for adults would 1 shov/hour. A child or feeble person would earn a fraction of a shov. A lawyer could bill at 10 or 20 shovs/hour. The shov would be a world wide standard. The local price of consumer goods would vary according to local taxes and the efficiency of production.
And a person with an excavator could bill 10000 shovels per hour? How can you possibly have been here for so long and yet learned nothing?
I do not like the Bitcoin idea It’s just virtual money and IMHO not better than Fiat-money. I want a simple and solid and durable solution, which has worked for centuries. So I’m always for money as value therefor money deem able in gold. Why must we invent something new? Why can’t we use gool ‘ole stuff.
Historically, silver was money for much longer than gold.
You ask why we can’t use good ‘ole stuff? Try donating your gold to an organization like Wikileaks when the payment processors and governments say no. Try moving $1m worth of gold across a border between governments hostile to its possession. Bitcoin was never intended to replace gold, but it makes an excellent compliment.
Erik,
Compliment and complement
. You don’t need to hate gold to love Bitcoin.
Whoops, sorry Peter. . .just realized I somehow replied to you accidentally instead of Erik, but my comment and compliments (not complements) apply equally to you.
Erik,
I really appreciate what you and Peter Surda and some others are saying on this thread, and trying to clarify the obvious misconceptions that some (especially the gold bugs) seem to hold. . . I’ve also read your stuff on the bitcoin forums.
I sincerely hope that you have been one the people who Jeffrey Tucker alluded to, who has submitted a piece. I can understand LvMI’s hesitation at coming out officially on the topic, but I think that now it is high time that they publish an article from someone like you who has a deep understanding of bitcoin and austrian money theory. It is time for them to break with the orthodoxy Menger school of thought so to speak, by understanding that what bitcoin lacks in physical money properties, it possesses as a digital property. But mostly, that, while not perfect as a money or money substitute, Bitcoin represents exactly the types of market alternatives that we preach can peacefully supplant and replace the institutions of the State.
Also, revising their take on it is no different than the fairly recent adoption of the Stephan Kinsella view of intellectual property. I trust that LvMI will stay true to it’s standard of consistency and academic standards, even if the truth amends their entrenched beliefs.
Kwanijml,
I didn’t. I have been working on a paper about economics of Bitcoin for a couple of months, but it hasn’t been published yet. I read tons of books and papers, emailed with several Austrian economists, talked to some people involved in Bitcoin (was also at the London Bitcoin Weekend last month), created some models and performed econometric analyses, and did a survey of Bitcoin users about their economic behaviour and opinions. I expect the full paper to be available within a couple of weeks.
To LVMI’s credit, both Jeffrey and Justin Ptak earlier did not really take an entirely dismissive position on Bitcoin. It is a complicated topic because it challenges a lot of implicit assumptions. It’s easy to get confused by bubbles, so I recommend completely ignoring the market price for the time being. I created some models and they all indicate a downward trend at this time, so the bubble is probably not yet over and the price will continue falling.
Erik,
I really appreciate what you and Peter Surda and some others are saying on this thread, and trying to clarify the obvious misconceptions that some (especially the gold bugs) seem to hold. . . I’ve also read your stuff on the bitcoin forums.
I sincerely hope that you have been one the people who Jeffrey Tucker alluded to, who has submitted a piece. I can understand LvMI’s hesitation at coming out officially on the topic, but I think that now it is high time that they publish an article from someone like you who has a deep understanding of bitcoin and austrian money theory. It is time for them to break with the orthodoxy Menger school of thought so to speak, by understanding that what bitcoin lacks in physical money properties, it possesses as a digital property. But mostly, that, while not perfect as a money or money substitute, Bitcoin represents exactly the types of market alternatives that we preach can peacefully supplant and replace the institutions of the State.
Also, revising their take on it is no different than the fairly recent adoption of the Stephan Kinsella view of intellectual property. I trust that LvMI will stay true to it’s standard of consistency and academic standards, even if the truth amends their entrenched beliefs.
Bitcoin was economically a ponzi scheme, but even technologically it has flaws. The security would require ever larger expenses for mining hardware and electricity, like an arms race.
It is no more a “ponzi scheme” than gold is. Those who buy it when the price is low get rich if others bid up the price later. That is not a ponzi scheme, it’s called supply and demand.
Ponzi scheme requires that the organiser of it is promoting it as an investment strategy, and the money flows to him. Neither of these factors are present in Bitcoin: it’s produced in a decentralised manner, and the people directly involved in providing Bitcoin-related services are not promoting it as an investment. Satoshi’s (and other early adopters’) Bitcoins have not moved, i.e. none of the money was flowing to them.
BitCoin failed exclusively because it’s software lacked security. Money got stolen easily. It got to news. That’s it.
Adam,
Bitcoin didn’t fail, merely the bubble the media produced is deflating.
This has to do with viruses and trusting random guys who you don’t know, and has nothing to do with Bitcoin as such. Also, based on a survey I conducted, even people who somehow lost Bitcoins did not perceive this as something inherent in Bitcoin.
That’s not it.
The software is now encrypted by default. But with freedom comes responsibility – the “security” you hide behind at the bank holding your Federal Reserve Notes is subsidized by taxpayers and the Federal Government. You might be enjoying that security, but it’s not moral. The security one can achieve with Bitcoin is substantial, but it requires education and a pinch of due diligence instead of relying on the comfort of socialist protections.
I still think the fundamental issue is the same. Is bitcoin still useful enough for transactions to justify the market finding a backing for it? I honestly don’t know the answer to that question, but even if bitcoin finds a bottom at 10 cents, and maintains staying power, then it will by definition become a successful currency.
I am surprised none have mentioned it’s astounding rate of inflation, somewhere upwards of 30%. Could this not be the reason for it’s “collapse”? We should also remember that the inflation rate is declining, dropping under 2% in a decade, and ceasing entirely by 2140. This is clearly a long term project.
Will bitcoin fail? I don’t know, but I think it is too early to tell. Perhaps instead of tearing down a potentially useful competing currency, we should use it to illustrate the damage that inflation does.
Shit-coin!
Myself, Peter Schiff and Doug Casey comment on Bitcoin: http://vforvoluntary.com/bitcoin .
And here is me refuting Nielsio:
http://mises.org/Community/forums/p/24195/429209.aspx#429209
http://mises.org/Community/forums/p/24923/437449.aspx#437449
Early detractors of Bitcoin are slowly warming up. Max Keiser did not get it during his first interview, and now he’s speaking at the first European Bitcoin Conference. Another guy says he was wrong here: http://dailyanarchist.com/2011/10/02/i-was-wrong-about-bitcoin/#more-5001
Detlev Schlichter (who’s book was recently reviewed here) got it right on the first try and is also speaking at the conference. Larry White mentioned Bitcoin in a congressional hearing.
Schiff and Casey will probably get it sometime too.
The question is, will dogmatic bloggers?
“The question is, will dogmatic bloggers?”
Apparently not Jeff Tucker.
Has anyone stopped to notice that Bitcoin is still trading at many many times what it was just a year ago?
Has anyone stopped to notice that the transaction volume of the Bitcoin network has not fallen off like the price has? In other words, it’s still being used actively as a medium of exchange, regardless of it’s price.
Chris,
Actually, it did, and it’s still falling. Bitcoin spending propensity calculated as cumulative Bitcoin Days Destroyed relative to the number of Bitcoins in existence peaked on June 28th and has been falling since. Not dramatically but steadily. Now, there is nothing bad about that: there was a bubble which inflated the price. Once the price is low enough, the transaction volume will pick up again.
What’s more interesting, in my opinion, is the resilience against various attacks, including attacks by trolls.
“Not dramatically but steadily.”
Sorry, I meant that it hasn’t declined to the degree that the price has. Or, it hadn’t the last time I parsed the blockchain, which has been several weeks now that I think about it.
As you say, it was clearly a bubble. I look forward to when the price bottoms out so that people can stop calling it a failure.
“What’s more interesting, in my opinion, is the resilience against various attacks, including attacks by trolls.”
Agreed.
Chris,
Well, I would agree with this, but in my opinion, the transaction volume is still too low for that price. Based on the data, on average a Bitcoin has been spent less than once. And this includes payouts from the mining pools and transfers to/from exchanges. That’s not what a normal economy looks like.
It’s interesting challenge to traditional fiat vs commodity-based metallic (gold) currencies aesthetics.
Gold is valuable even though it’s not money, and it cannot be counterfeited by anybody (although attempts to counterfeit gold lead to modern chemical sciences…)
Fiat money has value only as money, and is designed to be trivially produced by one party at nearly no cost.
Bit coin can be produced at virtually no cost… however it is limited by it’s design. It cannot be counterfeited.
So it’s limited by nature, but has no inherent value.
So it has one of the features of Gold, but one of the features of Fiat.
Up to a certain point, of course.
nate-m
… but only if it’s not many people are mining. Currently in a lot of countries the variable costs of producing Bitcoins with commodity hardware are above the market price of Bitcoin.
It’s troubling that such a wise institution gets distracted by short-term price movements in Bitcoin. The protocol is sound, and thousands of us are using the currency daily as a form of money. Frankly, Bitcoin deserves more respect as a free-market monetary system – yet the Mises folks tend to ignore it because it’s not gold, and because the manner in which it fulfills the Regression Theorem isn’t obvious until you understand the system better.
Something so revolutionary deserves much more attention from a thought-leader in free-market economics. Try carrying $1m worth of gold across a border and tell me there’s no use value in Bitcoin. Try hiding gold when the government decides to take it out of your safety deposit box and tell me Bitcoin is a silly idea. Ignore it at your peril.
Well said. I too was anti-Bitcoin for a long time. But then I decided to learn more about it and am now a convert.
Oh I just linked your article
Erik,
the whole ramifications of Bitcoin are so far reaching that it’s difficult to get. I doubt that even Satoshi understood that, and if he did, he’s a double genius.
1. Media creates bubble
2. Bubble collapses
3. Media rejoices
4. Profit
Rinse & repeat. Now with media attention being hopefully over, scammers and speculators being less profitable, the Bitcoin community can work on maturing services and clarifying legal status.
Release early, release often, is one of the core features of a successful open source project. Some people don’t get that. These are the people who did not get Linux 10 years ago. Well, guess what: the geeks don’t care. And there are plenty of geeks with experience working in the banking sector.
Bitcoin FRB?
https://en.bitcoin.it/wiki/Controlled_Currency_Supply#Inflation_and_Deflation
FRB with Bitcoin is very difficult to do, because there is no need for circulating Bitcoin-substitutes. If you want banknotes, cheques or bank accounts with gold, you need substitutes. With Bitcoin you don’t: there are, among other things, Casascius coins, Bitbills, Bit-pay mobile payment solutions, and of course the “classical” Bitcoins which work like a bank transfer. All the situations that I know of where (non-circulating) fractional reserve substitutes were created (mainly MtGox hack, mybitcoin whatever it was, bitomat crash) resulted almost immediately in dissolution of the extraneous substitutes, or in bankruptcy. Not only are circulating Bitcoin substitutes not necessary, they are also technologically incompatible with the “normal” Bitcoins. If someone insists on making them, they will be facing an uphill battle with getting them into circulation.
Larry White mentioned that there are no historical examples of bearer notes without FRB because there would be noone to pay the deposit fees. So (when using gold/silver) you have the choice between a degressive nominal value (e.g. demurrage) and FRB. Turns out that historically, FRB won.
Gold-promoting FRB opponents do not offer a solution to prevent FRB. Bitcoin does.
Gold-promoting FRB opponents do not offer a solution to prevent FRB.
Property rights, bank runs.
Juraj,
again, that’s not a complete solution. Or to put it into different words, it’s not a practical solution: it wouldn’t have the expected results. Given the choice between FRB and demurrage, people historically chose FRB. If you make FRB illegal and manage to enforce it, you’d only damage the position of gold because people will switch to alternatives that do not require you to use monetary instruments that have degrading nominal value.
Gold+antiFRB proponents wonder why people use money that that has a value that degrades over time (inflation), and as a solution provide money that has a value that degrades over time (demurrage). That’s not a very convincing argument.
I think antiFRB proponents do have to recognize that they would never get to 100% without government force. Plenty of people will willingly accept without violence much less than that.
I think a decent argument could be made that these bank runs lead to demands for a bigger and bigger state because people will take the simple way out and look to government to fix the problems with the banks rather than trying to sort them out through the court system.
On an individual level the cost of dealing with bank runs through the courts is much bigger than going to the state, so it’s entirely rational. Recognizing that you can’t convince everyone to go along with the NAP it seems to me that limiting financial panics may may be the best way to promote liberty. Bitcoin or something similar may be a way to accomplish that in the long run.
On an individual level the cost of dealing with bank runs through the courts is much bigger than going to the state, so it’s entirely rational
It’s only costly to enforce property rights with regards to bank deposits because the State is involved. If State gets involved in bailing them out, it’s even more expensive. Banks used to go under all the time unless they were allowed to suspend specie payments by the State or the State judges ruled in their favour thus violating property rights.
People would ultimately prefer hard assets rather than a piece of paper or an electronic entry. As if you forgotten that FRB notes lose value and have smaller purchasing power than less inflationary ones. Yes one can prefer inflationary FRB but absent government interference, people would prefer exchanging for more valuable money, not less.
People use fiat because they have to, State says so. Also, because it’s the only thing they know and they’ve been brought up with fiat dollar etc. This is not a given and will change when paper currencies collapse again.
Juraj,
you elegantly avoided the issue by diverting the flow of debate into a non-sequitur. Even if it was true that people would prefer to hold “hard assets” (which is also debatable), it still does not follow that these hard assets are preferable as a medium of exchange. If that was true, international business would be conducted in gold rather than through the banking system, forex and various other instruments such as letter of credit and so on. The reason why banking system is used is that the transaction costs of using it are lower than using gold. With Bitcoin, the transactions costs are even lower. Just a couple of days ago, there was an article how to use Bitcoin to cheaply send USD to China (converted into CNY), http://bitcoin-trader.blogspot.com/2011/10/send-money-to-china-with-bitcoin-and.html . Bitcoin transactions even support scripting, which allows innovative solutions that noone thought about so far yet. For example, if you’re buying goods, you can designate an arbiter, and create a scripted transaction that in 14 days transfers the money to the seller if the goods arrive, and to an arbiter if they don’t, and this works without central control. You can’t do this with gold or the current banking system.
Once again, if you use gold as a basis for money substitutes, you have a choice between FRB and demurrage. There is no way around this. This is not my idea, for example Larry White said so on the congressional hearing last month. They lose purchasing power anyway, just the effects are different.
One can prefer FRB to demurrage, but they both cause the substitute to lose value over time. With gold, there is no other alternative as long as there is a demand for forms which require substitutes. With Bitcoin, this problem is eliminated because other forms can be implemented without substitutes.
This is inaccurate. They are not always forced to, most of it is network effect piggybacking on the force. Particularly in international trade the restrictions are absent and people do not use gold. However, now they can use Bitcoin.
The Rothbardian history of money makes too many implicit assumptions: for example that the demand for various functions of money is homogeneous, that substitutes are an unavoidable afterthought and have no effect on the choice of money and so on. These errors were difficult to foresee in the past because there was no internet, no public key cryptography and no digital goods (with the exception of books, but again their effect was difficult to foresee). But now there is no need to cling to these assumptions, especially since their refutation is blown into your face.
People do not know about gold? That’s news to me.
Paper money collapse (sorry Detlev for borrowing your title) does not magically give gold features that it does not have now. It won’t allow it to create forms without substitutes, it won’t create substitutes which have no maintenance costs (FRB or demurrage) associated with it, it won’t cause any meaningful reduction of the the transaction costs of using gold. On the other hand, as long as there is internet, transactions costs of using Bitcoin will approach zero, no matter what form you use.
There are already hybrid merchant solutions available (Bit-pay merchant solutions) or being developed (Casascius Bitcoin POS system) which allow a merchant to quote the price in the national currency (e.g. USD), accept Bitcoins at the market price from the customer, and the payment processor sells the Bitcoins in the background for the national currency and delivers the national currency balance to the merchant. The advantage is that the transactions fees are much lower than when using debit/credit cards, and the whole system is decentralised. Of course, should the merchant decide to accept native Bitcoins in either online or offline form, the fees would be even lower, next to zero, and he wouldn’t need a payment processor at all.
Offline forms such as Bitbills and Casascius coins are usable even without the internet assuming you trust the issuer. Gold cannot use economies of scale or the network effect to the extent Bitcoin can, you cannot decentralise parts of the system and because you still need a bank to use other forms than coins/bullion, it’s still prone to cartelisation.
Oh and one more thing: I don’t have anything against gold. I have gold myself. But gold had the opportunity to protect us from fiat, and it failed. Now, after months of studying money, I know why. As money, it’s inadequate. Bitcoin fixes the deficiencies gold has. There could be successors that are even better. But Bitcoin drives the innovation in money now, creating new services and infrastructure, a parallel to the corrupt banking system, and its successors will be able to reuse the infrastructure. What I wonder is: will the infrastructure mature before fiat collapses?
Peter – “because there is no need for circulating Bitcoin-substitutes”
What is a Bitbill if its not a bitcoin-substitute?
Kid Salami,
from technical point of view, Bitbill is a miniature Bitcoin wallet (one address) where data is stored in an analogue optical form rather than magnetic/semiconductor digital form that’s on your hard drive/USB stick/whatever. The Bitcoin address is visible on the outside both as a string and as a QR code, and if you break the card open (which requires visibly destroying both the plastic and the holograms), it will reveal the public and private key. These you can import into a digital wallet. Because the address is visible on the outside, you can verify the balance anytime by going to any website that provides access to the blockchain. Regrettably, the normal client does not have this verification functionality, at least I don’t see it neither in the API reference nor in the source code, but you can use something like bitcoin-abe to make your own search website if you don’t trust those provided by third parties.
There is a potential risk that the Bitbill is fraudulent and when you open it, it won’t actually contain the key, or that there are copies (either duplicate Bitbills or the issuer didn’t delete the keys after creating the Bitbills), but you can still verify it by cracking it open right away, importing the keys and transferring the balance to your other wallet. So issuing problematic Bitbills like this is risky because the fraud can be determined without auditing the issuer (unlike with gold). Since Bibills are native Bitcoin, the issuer has no maintenance costs with it, and when the Bitbill is lost or damaged, the balance is unrecoverable.
Transferring Bitbills is analogous to giving someone your savings account passbook. In the past, it used to be possible to have bearer passbooks, I think the governments got rid of it though.
For more info checkout an interview with the creator.
Casascius Coins work similarly. The address has a different format (uses hashing to reduce the number of bits), and the private key is hidden behind a hologram that you need to peel off from the coin.
I don’t blame Rothbard etc for not foreseeing it. I only realised all the consequences a posteriori, months after I had Bitbills in my hand. Paradoxically it was after reading Selgin that I realised this.
I do feel bad for those who bought into the bubble prices (which may still be too high) but bitcoin will probably not go down to zero unless the coins became truly reproducible, which seems extremely unlikely.
All of the hacks/etc. that have happened at this point that Jeffrey has cited could just as easily occur with banks holding dollars. The hacks involved problems with the exchange websites which allowed encrypted passwords to be obtained, and because many users don’t make strong passwords their accounts became accessible to others.
Regular banks have had all kinds of security holes and even major technology companies like Sony have had major hacks where private data (not even encrypted!) was copied from their servers.
It also seemed to me that MtGox handled the situation fairly well considering.
The biggest hurdle to bitcoin is slow momentum, as unlike gold it’s not already valuable and unlike the dollar it has no legal tender laws.
Matthew,
Exactly. Also, some of these Bitcoin services are run by teenagers who have no experience with computer security or banking (Bitcoinica’s Zhou Tong being one of the few exceptions), and others are hiding their identities or are outright frauds. If a teenager with a heavy slavic accent approached you on a street with “hey dude, got a bank, wanna deposit some gold”, you probably wouldn’t.
With fiat, failed enterprises are bailed out by the central bank. With Bitcoin, failures go bankrupt, quickly. B7 shut down only like 4 months after being launched. That’s a good thing.
This has been hotly debated. They probably could have done some things better, on the other hand compared to what happens with banks and credit card companies, it’s been handled way better.
The biggest hurdle to bitcoin is slow momentum, as unlike gold it’s not already valuable and unlike the dollar it has no legal tender laws.
Bitcoin is an open source project. It behaves differently than projects launched centrally by individual companies. The slow momentum helps services to mature and legal status to be clarified.
They can go to zero if nobody decides to use/accept them (drop in confidence due to e.g. security issues in implementation, emergence of better competition etc).
Which is praxeologically the same as with gold.
Can’t argue with that.
“All of the hacks/etc. that have happened at this point that Jeffrey has cited could just as easily occur with banks holding dollars.”
Yes, but then this would matter only to this single bank not to the currency as a whole like if security issue in bitcoin protocol implementation were to be found. IF protocol itself is flawed, then it is gg. It needs more time to prove itself stable, secure and useful.
boniek,
Exactly.
Same as with anything else.
Exactly. That’s why it would be great for the media hysteria should recede so that people can concentrate on evolving Bitcoin.
Serious question. What does one need to produce in order to obtain bit coins? The answer tells what they are worth.
Well you can always obtain a Bitcoin at the market price, but if you mean how does one create a Bitcoin, you need advanced hardware to solve a cryptographic algorithm that is extremely difficult to solve. By solving this algorithm, you produce a “block” in the transactional block chain, and this helps secure the network from attack and manipulation. Solving the algorithm gets more difficult the more people try to solve it. Thus, the greater the adoption of Bitcoin, the stronger and more secure the network becomes, and the supply of new coins falls at a diminishing rate with a cap at 21m coins. This mechanism has little to say about the “worth” of a Bitcoin however – which comes more from a combination of its usefulness and its scarcity.
the latest graphics card.
no seriously.
Technically – you could obtain Bitcoins with a 20 year old desktop computer… but you’ll mine forever and get almost nothing. The more advanced the hardware, the more Bitcoins you can mine in a given time – but if everyone upgrades their hardware to be twice as powerful, none of them are any better off.
Coins creation is divided among those trying to create them.
Let’s be even more serious. Value is subjective.
I saw that coming a couple of months ago, there are a couple of posts in the mises.org forums when I was talking about some of its structural problems how the prices of bitcoins would inevitably fall. That was when the price of bitcoins was around $20.
It was very clear that bitcoins was a scam, a mix of a pump and dump and a ponzi-scheme. Four or five people, probably the scammers, held almost 30% of all bitcoins. These were the people who were pumping the value of bitcoins, now they are rich and a bunch of economics ignoramus are poorer.
Unfortunately a mix of government education and government sponsored media has created this myth that fiat money is something that can be viable. A couples of decades ago, unless people were forced at gunpoint, no one would ever use a currency that has no non-monetary value, the mere mention of exchanging your goods and labor for something with no non-monetary value would be absurd, today we had thousands of people, voluntarily, “supporting” bitcoins. Truly sad.
Go study Austrian economics, people, why bitcoin is a utter failure was explained, in detail, almost a century ago.
Frederique,
Except there are no such thing as “its structural problem”.
Except it was the media hyping it, rather than the developers and people offering services. If anything, the developers were trying to calm down the hype whenever they were interviewed.
Except most of the bitcoins of the first adopters were never moved. This is easily verifiable, since the transaction log is public.
This is refuted by the points above (hyping was done by media, not by early adopters, and the early Bicoins are still stuck where they were mined).
Bitcoin is not fiat money.
Austrian economics does not say anything objectionable about Bitcoins, merely some confused bloggers misrepresent it, add a bunch of implicit assumptions and derive nonsense out of it. Also, you got your facts wrong.
Intelligent people can debate the economic merits of Bitcoin, but it is certainly no scam. The fact that a small minority of early adopters held a plurality of coins is because they were early adopters! Is Amazon.com a ponzi scheme because the “early adopters” who held shares got mega-rich? As Peter Surda mentioned, many of those large Bitcoin accounts have not been sold or liquidated, undermining your “pump and dump” theory.
And if you’re going to call people “economic ignoramuses,” you might try to avoid labeling something as “fiat” when it is not so. Fiat means “value by decree”… it requires government diktat, and this is the very opposite of Bitcoin.
Now, if you still hold your belief that Bitcoin is folly, I encourage you to open a large 5:1 margin short position using a site like Bitcoinica. Then, when your truth becomes known, you’ll be rich, and us silly “believers” will beg forgiveness.
It seems gold prices pretty much imploded after 1980 as well.
The bitcoin is not fiat money. The value of a bitcoin is not being established by a violent agency threatening people to transact using the currency literally at gunpoint. It is clearly being established in a market place of sorts.
The bitcoin is in my opinion more similar to fiat money than it is to commodity money for two reasons:
1. It has no value outside of being a currency.
2. It can be created in mass simply by a majority (A MOB) of users downloading software that will allow for the use of more than 23million bitcoin units.
There is no Austrian arguments against bitcoin. The only Austrian argument would be that the only relevant test of the quality of bitcoin as a currency is user acceptance in the the marketplace with other competing currencies.
Bogart – regarding your point #2, that would simply fork the block chain. Bitcoin’s chain would remain, and a secondary new chain would form with the removed coin limit. I’m guessing few people would be interested in coins from this new chain, and thus it’d be futile to establish it in the first place. The 21m bitcoin ruleset would likely persist.
Likely or not, the possibility still exists. If you can get enough people to use the new software you effectively make 2 distinct currencies old and new. So now my old bitcoins are completely valueless to users with new bitcoins and vice versa. Who do I keep up with? What is the difference in value? This are legitimate questions at this point and ones I would be very interested in knowing the answers to if I was say Walmart or Amazon and deciding to take bitcoins.
With a gold, silver, platinum, palladium, etc backed currencies you have a significant technological problem to solve before you can make currency at will. Sure people can counterfeit coins or notes backed by coins but this is still fraud. And eventually people will be able to transform elements but that is a long way off.
These are good questions Bogart. There are already “alternative chains” to the original Bitcoin, and they’re trying to compete in the open market. They have a price and it floats against Bitcoins and against other currencies. None of these new chains have gained wide adoption at all – the first mover advantage (among other things) is simply too strong, even in these early days.
Any new forked chain will immediately not be compatible with the vast infrastructure that Bitcoin has built up around it. A new chain’s coins cannot be traded at an exchange (until the exchange puts in the effort and work to accept them). A new chain’s coins will not be valid with a merchant (until the merchant decides to accept them).
Those people who hold the original Bitcoins will always have a natural competitive advantage, but like all things in a free market, if a new chain was created that was vastly superior to Bitcoin, it could displace the original. In practice, this is hard to achieve, and it becomes harder with each passing day as Bitcoin becomes more established.
The Silk Connection?
When the Silk Road Annonymous Marketplace became popular, BitCoin saw a corresponding rise in value. The Silk Road website crashed a few weeks ago, and perhaps this revaluation of BitCoin reflects a belief that the Silk Road isn’t coming back.
I’d imagine the Silk Road would be quite popular amongst a certain type of libertarian, so I’m surprised it’s not been mentioned yet…
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