Continuation of the Bitcoin Debate

By Aristippus

In response to my recently posted article on Bitcoin and the Regression Theorem of Money, Smiling Dave has written what he believes is a rebuttal of the points contained in that article.  I welcome this exchange.  Unfortunately, he has mostly misunderstood the points I was making, and so I must address those errors.  The arguments that Smiling Dave brings up have already been addressed by me and others on the mises.org forums.  I shall still, however, counter them here:

1.  He argues that the difference between Bitcoin and gold certificates is that the latter could surely be redeemed for gold, while the former has no such certainty. I agree that the extent to which people are willing to receive gold or Bitcoins depends on the belief of its future exchangeability.  My point is that there are indeed people who receive Bitcoin because they are confident that it can be exchanged in the future for fiat money.  There is, of course, no certainty in this, and I never claimed there was.  That belief nevertheless exists.

He also writes:

Because when the grocer was offered a gold certificate in exchange for his wares, he did not look at and say, “I’ll take it because it facilitates the exchange of true money. Rather, he thought, “I’ll take it because I can get gold with it anytime I want.

But why use certificates at all, instead of physical gold?  Because they are easier to transport without losing the features of gold (since they are redeemable for gold).  In the same way, Bitcoin can ease the use of other money if there is confidence in exchange between the two (which evidently exists).

2.  Here he has completely misunderstood what I was saying, and takes it to mean that all people who acquire Bitcoin do so because they are speculating on its price.  That is not my argument.  The point is that through some people speculating in Bitcoin, a reliable exchange between Bitcoin and fiat currencies is established, which then allows people to have a greater belief that they can easily exchange between those two media.  This then allows them to have confidence that they can use Bitcoin to facilitate the use of already established money.

3.  Here he criticizes an implication that Bitcoin is a generally accepted medium of exchange.  As I pointed out, whether or not something is a ‘generally accepted’ medium of exchange is not clear-cut, and can also depend on the context.  Within certain circles, Bitcoin is generally accepted, just as with other moneys.  Is the AUD a generally accepted medium of exchange?  Not in the USA it isn’t.

He also writes:

If there is demand for it, why that means it’s a generally accepted medium of exchange. right? Wrong. A market exists for bananas, too, but they are not a medium of exchange.

I ask then: what is the reason for this demand if not for use in exchange (or for speculation, which he already discounted)?

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14 thoughts on “Continuation of the Bitcoin Debate

  1. claytonkb 12/08/2012 at 22:46 Reply

    The essential difference between Bitcoins (or any unbacked digital currency) and gold notes is that the former is not securitized – there is no contractual obligation on anybody’s part to redeem them for anything.

    Hence, the value of a Bitcoin is strictly dependent on the market cap of Bitcoins as a whole. This is true of any fiat money but is particularly pronounced in the case of Bitcoin which, by construction, cannot be significantly inflated and cannot be deflated at all. In the event of a collapse in confidence, USD’s can be deflated to an extent by the central bank, thus providing the potential to restore confidence by “outrunning” the collapse in demand.

    By design, Bitcoins cannot do this. Should there be another collapse in confidence in Bitcoins, the holder of Bitcoins is at the mercy of other holders of Bitcoins and the value of his own holdings is strictly conditioned on the decisions of others.

    A final note is that securitization is not a magic cure. If the government’s courts will not honor the contractual obligations of banks and induce the bank’s owners to make good its notes in the event of a bank run and/or bankruptcy, you have a similar collapse scenario from the point-of-view of note-holders. So, both arrangements involve confidence but of a different kind.

    • AristippusofCyrene 12/09/2012 at 12:56 Reply

      Some great points there, Clayton.

  2. happmacdonald 12/09/2012 at 03:15 Reply

    I’ve said it many times, and I’ll say it again.

    The primary use-value I wish to highlight of bitcoin as a unit of currency is heavily tied to the nature of the Bitcoin notarization network. So I will begin by summarizing that.

    == Summary:

    The Bitcoin notarization network is the first distributed solution to the Byzantine General’s problem, and thanks to network effects the most powerful distributed notarization engine in the world. With it, you can pass digital, counterfeit-proof tokens (namely, satoshis; the atomic unit of bitcoin currency) to any other interested party in the world in a manner uniquely protected from regulation or interference. The power and fidelity of this Notary system is generally undisputed, up to and not including people who claim “it’s open source so anyone can make a system just as powerful” and thus ignore the network effect which makes Facebook nearly impossible to dethrone regardless of it’s now sub-par infrastructure.

    == / Summary

    The Use Value of the Bitcoin Currency is that it is the only denomination of currency with which Miners in this system can be compensated in exchange for their mining work. During this early era, Miners are compensated primarily in newly minted coin and secondarily in transaction fees. As rewards half and volumes increase, they will come to rely more on the transaction fees. Regardless of era, the bread and butter of the workers who keep this notary system running is in Bitcoin Currency. From this, they must purchase hardware and electricity and beat opportunity cost in order to remain solvent.

    THAT is the floor price index for the Bitcoin Currency: how valuable is it to the world to keep on mining, for which you will only be remunerated in bitcoin? It is a transaction tax (subsidized by inflation for the short term), denominated in Bitcoin, which guarantees transactors the capacity to utilize this notary system and distributed ledger to settle accounts with anyone in the world. It’s no different from a nation levying a tax in their national fiat currency to utilize that nation’s services or protection; save that the Bitcoin network will operate with greater predictability and fidelity than any corruptible state ever could.

    • AristippusofCyrene 12/09/2012 at 12:55 Reply

      Thanks for explaining that!

  3. sdavesblog 12/10/2012 at 13:53 Reply

    1. “There are indeed people…”
    This whole line of reasoning shows an ignorance of what “generally accepted” means. “There are indeed people” is a far far cry from generally accepted.

    2. Same flaw here. The non exchange value Mises was talking about that is needed to get a money up and running is not that some tiny fraction of the populace is gambling it will go up, and an equal fraction is gambling it will go down. By that reasoning, any stock or commodity or even future traded on any exchange is already a medium of exchange. I hope we can agree that it is absurd to claim such a thing.

    3. “Within certain circles, Bitcoin is generally accepted…” Same mistake here, again. Such an assertion is outlandish.

    ” Is the AUD a generally accepted medium of exchange? Not in the USA it isn’t.”
    Same mistake, yet again. You know where my website is, and how to find the articles that explain what generally accepted means.

    4. “He also writes:

    “If there is demand for it, why that means it’s a generally accepted medium of exchange. right? Wrong. A market exists for bananas, too, but they are not a medium of exchange.

    “I ask then: what is the reason for this demand if not for use in exchange (or for speculation, which he already discounted)?”

    Same mistake yet again, only deeper. Here A. shows that he does not understand what “exchange” means.

    Aristipuss, do you really think bananas are a medium of exchange?

    Guys, I’m tired of writing the same thing over and over about bitcoin. I only replied to A.’s articles out of respect and admiration for this new website, and what you are trying to do here.

  4. AristippusofCyrene 12/10/2012 at 22:28 Reply

    All the points on ‘generally accepted medium of exchange’ are simply you playing with a definition which is in reality not as clear-cut as you claim (and this is emphasised by both Mises and Rothbard). When something is brought up that reveals that, it is simply called ‘outlandish’.

    You have still not shown why Bitcoin violates the Regression Theorem, and on top of that there is a whole host of new points for you to address, from people commenting on my Bitcoin articles. I suggest you take them in.

  5. sdavesblog 12/11/2012 at 22:38 Reply

    I’m not playing with a definition. Please quote any definition you please and show how your proposals, such as “some people gamble with it”, fit that definition.

    I’ve shown why bitcoin violates the theorem in my blog, especially in the article Bitcoin Takes a Beating.

    There are indeed a host of points in the comments, but they are not new. My earlier articles [and the comments thereon] already talk about all of them. The short answer is that none of them understand what generally accepted medium of exchange is, and/or what intrinsic value is. The one new one is yours, that bitcoin has intrinsic value and/or is a generally accepted medium of exchange because people gamble with it, which suffers from the same flaw.

    I stand by my statement that it’s outlandish to say that.

    Note to people following this back and forth. Ask yourselves these q’s. What points did A. make? How did SD refute them, he thinks? What was A.’s reply exactly?

    For example, SD claims that “there are indeed people” is a far cry from “generally accepted”. What is his source for this? [Hint: inspect his article Bitcoin All in One Place]. What is A.’s refutation? It seems to be that yes it does fit at least one definition. What is his source?

    Thank you, A., for sharing your interesting views on this fascinating subject.

  6. sdavesblog 12/12/2012 at 12:40 Reply

    OOPS. Consulted my notes and I see that I already destroyed the bitcoin got its “initial value as speculation” argument back in the forums.

    Here it is:

    A person speculates when he thinks the demand for something is, or will be, higher than the current price indicates. He assumes this imbalance will right itself in time, and so buys it, with intent to sell when market forces of supply and demand finally give the object the higher price.

    You see where we are going with this. Saying a thing has value because it is underpriced is putting the cart before the horse. We are now discussing how the price of a bitcoin determined in the first place. And your answer is by people thinking its price is too low. But the question is how did those people themselves determine what the price should be?

    Here’s another objection to your explanation. You think that a person can make money by taking something that has no use whatsoever, gambling that the price he pays for it now will rise, and then sell at the new price. Yes, he can sometimes do that, if he can convince fools to buy his useless object. But of course those buyers are just fools. A useless object will, by the inexorable market forces of supply and demand, drop to zero in the long run. In other words, you have admitted that bitcoin is doomed.

  7. AristippusofCyrene 12/12/2012 at 13:22 Reply

    1. What exactly are you asking here, why speculators think the price would rise?

    2. People who use Bitcoin in transactions clearly find it useful and are not mere fools for purchasing them.

    Also, I make no specific claims about the future of Bitcoin. Its price could in fact drop to 0 if it is no longer useful. But it is evident that it currently finds use as a medium of exchange: https://en.bitcoin.it/wiki/Trade

  8. sdavesblog 12/12/2012 at 13:37 Reply

    I’m saying they think its price is too low. That’s why they are buying it now, to sell when the price will go up. That;s what speculating is all about.

    But how do they know what its price should be? Its price, according to one of your arguments, is determined by its value as a means of speculating, meaning thinking its price is too low. Clearly circular reasoning.

    Here is a clarification about medium of exchange: https://smilingdavesblog.wordpress.com/2012/12/12/what-is-a-medium-of-exchange/

    • AristippusofCyrene 12/13/2012 at 06:11 Reply

      Well, no. They could be betting that if a reliable exchange between Bitcoin and fiat money comes about, the demand for Bitcoin in exchange will drive the price higher due to the usefulness of Bitcoin. The reason for that coming about doesn’t necessarily matter in their speculation.

  9. Marcos 12/12/2012 at 17:41 Reply

    Would bit coin more accurately be labelled as a money substitute? It isn’t a generally accepted medium of exchange but it is a medium of exchange as a money substitute–similar to a gift card or store credit. You mention that some use it in confidence that it can be redeemable in fiat, much like a gift card can be redeemable in fiat or goods (which is why people are comfortable in using it).

    Also, what of the dangers of government intervention/control of the internet? Does this effect the safety of bit coin consider the free reigning internet is its vehicle and only realm in which it can exist?

    • AristippusofCyrene 12/13/2012 at 23:37 Reply

      Yes, I think that it could perhaps be framed in that way instead. As for your second question, I suppose that any full government takeover of the internet would indeed have a huge impact on Bitcoin.

  10. […] not disprove Mises’ Regression Theorem has been discussed to some lengths, even right here (1 or 2) at our humble blog. My own position on the issue is quite close to Aristippus’: Bitcoin does not […]

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