Wednesday, 6 March 2013

Re: Bitcoin Bubble 2.0 by Patrik Korda

Patrik Korda recently published an critique of Bitcoin: http://seekingalpha.com/instablog/7761841-patrik-korda/1616371-bitcoin-bubble-2-0.

I get agitated when I disagree with others, so I wrote a rebuttal.

Competition under the network effect

Korda's first argument is that because it is easy to create a new cryptocurency, they will compete each other out of the market, kinda "race to the bottom", ending up with a hyperinflation and a collapse. However, he does not seem to understand the network effect, one of the most important aspects of money. The network effect both allows that money actually exists in the first place, as well as creates switching costs. As JP Koning said, "liquidity is sticky".

The problem with Korda's argument becomes more apparent because he himself shows a counterexample. He quotes Mises in explaining that silver has been replaced by gold and this demonetised silver. This explains how competition works under the presence of a strong network effect: the expected long term state is where a small number (maybe even one) media of exchange are the dominant ones, and other market players are far less liquid. For the same reason, a situation where there is a large number of competing cryptocurrencies without clear dominant players is not a stable state, rather a small number of dominant players will emerge. The network effect is recognisable in particular with immaterial goods: there are a small dominant number of general purpose operating systems (Windows, iOS, Linux), a small dominant number of languages (Mandarin and English dominate, then Spanish and Hindi follow after a gap, and those four account for about half of the world population (I'm approximating, as people can speak more than one language)), there is only one dominant general purpose communication protocol (what we commonly call "the internet"), and so on. Surely, the composition of the dominant players can change, but it is a relatively slow process that does not magically happen overnight. Surely, there are a myriad of minor players, but there always tend to be a low number of dominant players.

If I said that everyone can create their own language, therefore without barriers to entry, everyone would end up with their own language and the ability to communicate would collapse, you'd surely think that I'm a moron.

Another important factor related to the network effect is path dependence. This means that the order in which choices are made influences the end result. This can mean, for example, the first mover advantage. Bitcoin is the first practically usable cryptocurrency, so it has a head start against others. And surely, JP Koning has a useful infographic showing that the market capitalisation of Bitcoin, the first mover, far outstrips the market capitalisation of others (by a factor of 100, at the time of making the graphic). This is also consistent with my claim from above that there typically is a small number of dominant players. Even though there is government interference in the choice of media of exchange (what we call fiat monies), international trade is affected significantly less than national, and we still have a small amount of major players (the USD and Euro).

I'm not arguing here that Bitcoin can't be replaced by something else, but that the scenario described by Korda makes no sense.

Usability

Korda makes the argument that Bitcoin is only usable with electricity and smart phone, but this is incorrect. Bitcoin is the first form-invariant medium of exchange, and can be used in almost any imaginable form, without having to rely on a middleman. Something like this never existed before in the history. People that criticise Bitcoin from this point of view tend to confuse implementation with the fundamentals.

Mises' Regression theorem

Korda, unfortunately, missed the core point of Graf's article. Even if there appears to be a wide disagreement on what the regression theorem actually says, we can be pretty sure about what it doesn't say. It doesn't say what happens to a medium of exchange after it becomes medium of exchange (and Robert Murphy concurs). It only talks about what happens before it becomes a medium of exchange. It does not say what happens between a medium of exchange becoming a medium of exchange and it becoming money, and it does not say what happens after it becomes money. It also does not talk about the scope of usage as a medium of exchange, how many people use it for something else than a medium of exchange, which media of exchange are sustainable, or any such invention that is frequently ascribed to it in particular by critics of Bitcoin. So unless Korda decides to mimick Smiling Dave and claim that Bitcoin is not a medium of exchange (and neither are gold, blue chip stocks or US bonds), the objection with respect to regression theorem is methodologically flawed.

Can Bitcoin become money?

Similarly as in the section about the regression theorem, Korda conflates medium of exchange (whatever is used in indirect exchange) and money (the most liquid good, and thus by implication, the most liquid medium of exchange). I consider the question of Bitcoin becoming money irrelevant for the near future. I have the same opinion as Vijay Boyapati, I think that if Bitcoin becomes money, that would be an unprecedented success. It would be the end of fiat money, and possibly also the state. But the implied criticism of Korda is a false dichotomy: either Bitcoin is money, or it's useless. I dub this fallacy money or nothing (and chicks for free). Contrary to this dichotomy, there is a wide range on the liquidity scale which is called "secondary media of exchange" (Mises) or "quasi monies" (Rothbard), that do provide, through liquidity, useful services. Bitcoin's further advantage is the decrease of transaction costs, which can be practically utilised as long as some level of liquidity persists. It already can be utilised now. There already are plenty of situations where the switch to Bitcoin improves utility. The criticism is like saying that unless everyone learns English, it makes no sense to learn it. Or even better, that it makes no sense to get an email address unless everyone uses email already.

Classification according to ToMC

As I wrote in my thesis, as Bitcoin is not money (yet), merely a medium of exchange, it is impossible to use the classification system of Mises to classify Bitcoin. If it becomes money, then we would have a classification problem. How to solve it I leave open in this post, as I consider it merely a theoretical question with no practical relevance. In my thesis I present options for solving it.

Now, Korda claims that Bitcoin is token money. However, going upwards from the bottom of the graphic in Mises' ToMC Appendix B, Bitcoins are not token money, because they are not fiduciary media, because they are not money substitutes. The Austrians use two definitions of money substitutes (I explain the difference between the two in my thesis):
  • absolutely secure and immediately payable claims to money (in the narrower sense)
  • things that act as full substitutes to money (in the narrower sense) from economic point of view
Irrespective of which of these definitions is correct, Bitcoins, clearly, are neither, as there is no underlying "money in the narrower sense". So the attempt of Korda to provide a classification of Bitcoin failed.

Anonymity

This is a complicated question, I just want to dissolve some unclarities. While some information about Bitcoin transactions is recorded in the blockchain, and publicly available, this information does not include any references to the identity of the parties involved in the transaction. While a vector analysis can reveal some relationships hidden upon first look, there are on the other hand many other things that can be done to obfuscate this. Examples are mixers (either explicit ones or ones that can do that function indirectly, e.g. Satoshi Dice), and some features that have not been fully implemented yet, e.g. transaction rewriting, or proposals for new opcodes.

From economic point of view, the "perfectness" of Bitcoin's anonymity is not the relevant question. The relevant question is whether this is significantly (from the point of view of users) better than the alternatives, and if it presents a significant cost increase for the attacker (e.g. the state). I'll leave this one open too, I'll just add that for transactions that do not involve a physical meeting of the trading parties, anything else than cryptocurrencies is highly unlikely to provide a comparative advantage over Bitcoin from the perspective of anonymity.

Bubble

Korda seems to think that the question of the Bitcoin price being a bubble is important. I on the other hand consider it completely irrelevant. The relevant question is if Bitcoin decreases transaction costs, and the answer is that it does. Whether the price changes are a bubble or not does not change the answer to the question whether it has a comparative advantage against other media of exchange. The price is irrelevant (thanks for the slogan, Tony). Emphasising the bubble is kind of like saying that when the dot com bubble burst, this must mean that the internet is unsustainable and must collapse.

Almost all critiques of Bitcoin entirely ignore transaction costs. It's like arguing that there's no point in internet if we already have the library, the post office and the TV. According to the logic of these critiques, the businesses will decide to forego a highly profitable opportunity of providing services that increase the efficiency of social interaction and their potential customers are going to forego a reduction of costs of these interactions. Instead, the arbitrary judgement of these critics concludes that the target market is somewhere entirely elsewhere (in barter in a village, for example), and at the same time that arbitrary target market is not a good match for Bitcoin. It baffles me all the time. But I hear it all the time too. People have fixed ideas about what they think money should do, and when Bitcoin doesn't fit into that scope, they don't understand it. It is difficult to recognise a paradigm shift while it's happening, but it is always obvious after it already has taken place. I guess some people just have to endure having their brains in an ignorant state while the market structure changes around them and those with more foresight are able to increase the efficiency of their business operations (and increase their profit)

My recommendation for serious economic analysis of Bitcoin is to ignore the price as much as possible, as long as there is one (i.e. the price is higher than zero). It's simply not relevant.

Conclusion

Regrettably, Korda's criticism contains many flaws. Hopefully I manged to address them. My most important argument is that one should be careful to avoid mixing theoretical and empirical issues. To summarise my counterarguments:

  • Due to network effect, the market structure will move towards a small number of dominant cryptocurrencies, so there's no hyperinflation
  • Whether Bitcoin can become money is not important, as using it is already advantageous now, as a medium of exchange. If it ever becomes money, that would really rock though.
  • Non-economists do not understand the regression theorem and invent their own versions of it which are nonsensical
  • Bitcoin is not token money as it never was a money substitute
  • Bitcoin is pseudonymous, and has a comparative advantage against competitors from this point of view
  • The price of Bitcoin is irrelevant

28 comments:

  1. Excellent rebuttal, Peter. I would expect nothing less.

    ReplyDelete
  2. Per investopedia:
    ‘A phenomenon whereby a good or service becomes more valuable when more people use it. The internet is a good example. Initially, there were few users of the internet, and it was of relatively little value to anyone outside of the military and a few research scientists. As more users gained access to the internet, however, there were more and more websites to visit and more people to communicate with. The internet became extremely valuable to its users.’

    The internet itself was a bubble during the late 1990’s. That is not to say the internet was a completely worthless invention. Rather, it became overvalued due to New Era thinking, just as was the case with tulips, the Mississippi bubble, railways, radios, et cetera. As put by James Buchan, ‘The great stock market bull seeks to condense the future into a few days, to discount the long march of history, and capture the present value of all the future.’ (Frozen Desire, New York, 1997)

    Token money in digital form may very well about around in the future. As I pointed out, bitcoin is a starfish so there will most likely be various flavors of them. However, that in no way negates the fact that bitcoin has turned into a bubble, for the second time mind you.

    Comparing bitcoins to a language is sort of like comparing Napster, Kazaa, eMule, and the various other peer-to-peers to a language. It doesn’t hold much water. The point in the article is that new digital tokens can spring up ad infinitum. Whether or not people will accept them depends on the circumstances, which are unknowable. What we do know is that people no longer use xanga, or myspace, but facebook and twitter. Will facebook be around forever? If you think so, I suggest you buy some of their stock, the valuations of which are still in the stratosphere since IPO. I have been short BTC since $49, as per my article, so far, so good. But you say price doesn’t matter, transaction costs do. That reminds me of the idiots who focused on the interest rates of the mortgages they were taking out during the housing bubble, instead of the cost of the house itself. But hey, what does a non-economist such as myself know.

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    Replies
    1. I am sorry but you didn't address any of the points that I made.

      You provided a definition of the network effect. How does that address my argument?

      You agree with me that there was a bubble in the valuation of the internet. You also mention some historical bubbles. However, apart from the Mississippi bubble, all the goods you mentioned (internet, radios, railways, tulips) still exist. So the connection between a bubble and a collapse of the good itself that you imply is an empirical phenomenon, not an economic rule.

      The Mississippi bubble, like many attempts to create a new currency, was based on the idea that an increase in the money supply is beneficial, and it failed because it hyperinflated. Bitcoin, on the other hand, is based on the idea that a decrease of the transaction costs is beneficial and can't hyperinflate.

      Your point about P2P transfer software I don't get at all. Googling reveals for example this study from 2009: http://www.ipoque.com/sites/default/files/mediafiles/documents/internet-study-2008-2009.pdf
      Bittorrent has 58% of P2P traffic, followed by eDonkey with 34%, and the next one is Gnutella with 2.75%. All consistent with my claim about dominant players.

      Furthermore, while in the original article you made the argument that the entry of new participants will lead to a collapse of the whole market, now you made an entirely different argument, that Bitcoin can be replaced. Which I agree with. This is not a valid reason not to use Bitcoin. In their respective markets Latin was replaced with English, the british pound with USD, napster with Bittorrent. Does that mean that it is never utility-enhancing to use the encumbent market leader? Because that's what you imply.

      Last but not least, you invoke the housing bubble. As far as I know, houses still exist and people live in them. And as long as living in a house has utility, this trend will continue. Sure, some houses were demolished. But compared to Bitcoin, houses are illiquid. Bitcoin can always be sold at the market, even if the price drops by a factor of 1000.

      Out of the features of Bitcoin, you arbitrarily assign weight to them based on your own preconceptions. That's fine, everyone has their own biases. But why should your biases be relevant for other people?

      Delete
    2. ‘I am sorry but you didn't address any of the points that I made’

      Actually neither have you. My central point was that bitcoin was a bubble, your response was that prices do not matter.

      ‘However, apart from the Mississippi bubble, all the goods you mentioned (internet, radios, railways, tulips) still exist’

      There is no doubt that token money in digital form will be around in the future.

      ‘The Mississippi bubble, like many attempts to create a new currency, was based on the idea that an increase in the money supply is beneficial, and it failed because it hyperinflated. Bitcoin, on the other hand, is based on the idea that a decrease of the transaction costs is beneficial and can't hyperinflate’

      You are missing the point with the Mississippi bubble. John Law wasn’t doing anything original, the catalyst for the bubble was New Era thinking. I may put air in a vault, throw away the code, and claim that it cannot be debased. As for mtgox, who says they will only exchange bitcoins for the various currencies out there? They were pumping and dumping magic the gathering cards a decade ago, why couldn’t they pump and dump litecoins?

      ‘Bittorrent has 58% of P2P traffic, followed by eDonkey with 34%, and the next one is Gnutella with 2.75%. All consistent with my claim about dominant players’

      Wasn’t always this way. There was a time when Napster ruled the world, then Kazaa, then Kazaa Lite, et cetera. Those who think that bitcoin is a hedge against inflation are sadly mistaken. Moreover, those who think that bitcoin is anonymous need to keep in mind that the developers explicitly want it to be the exact opposite of anonymous.

      https://mtgox.com/privacy_policy

      ‘Furthermore, while in the original article you made the argument that the entry of new participants will lead to a collapse of the whole market, now you made an entirely different argument, that Bitcoin can be replaced’

      The bubble will collapse, that doesn’t mean token money in digital form may be around forever.

      ‘Last but not least, you invoke the housing bubble. As far as I know, houses still exist and people live in them. And as long as living in a house has utility, this trend will continue;

      Never claimed that housing is worthless, nonsense argument. I merely claimed that ignoring the price can get one in trouble.

      ‘Bitcoin can always be sold at the market, even if the price drops by a factor of 1000’

      So can houses.

      ‘Out of the features of Bitcoin, you arbitrarily assign weight to them based on your own preconceptions. That's fine, everyone has their own biases. But why should your biases be relevant for other people?’

      I simply pointed out that the dynamics of a bubble were taking form. Moreover, I simply pointed out that in the monetary scheme that Ludwig von Mises had developed in the TMC, bitcoins cannot fit anywhere else but as token money. You claim that bitcoins cannot be token money because they are not a money substitute. Sure they are, the same way that the token money you get at Chuck E. Cheese’s or poker chips are.

      Delete
    3. Ok Patrik, so let's deal with it one by one.

      > Actually neither have you.
      What specifically I didn't deal with?

      > My central point was that bitcoin was a bubble, your
      > response was that prices do not matter.
      Correct. You have yet to explain why the presence or absence of the bubble is relevant. The price volatility has a negligible effect on the people who use Bitcoin to reduce transaction costs.

      > There is no doubt that token money in digital form will
      > be around in the future.
      Bitcoin is not a token money as it's not a money substitute. Furthermore, now you actually agree with me that cryptocurrencies have a future, so you contradict your former claims.

      > As for mtgox, who says they will only exchange bitcoins
      > for the various currencies out there? They were pumping
      > and dumping magic the gathering cards a decade ago, why
      > couldn’t they pump and dump litecoins?
      I can only repeat that in markets with strong network effect, there tend to be a small number of dominant players. Furthermore, Mt.Gox earns money on fees. Volatility or changes in the relative market share of cryptocurrencies do not increase the revenue of exchanges, rather increases in trade volume. For Mt. Gox, it does not matter whether the price of Bitcoin is 100/USD and they trade one per day, or 50/USD and they trade two. The scenario you describe has no meaningful business strategy behind it.

      > Wasn't always this way.
      And from this you conclude that it is never utility-enhancing to use the encumbent dominant player, without providing any reason.

      > Those who think that bitcoin is a hedge against inflation
      > are sadly mistaken.
      Now, this is an entirely new argument from you. You're essentially arguing that it wasn't a good idea to buy Napster shares. But the utility derived from using Napster while it was operating does not depend on the share price of Napster. You're conflating the two.

      > https://mtgox.com/privacy_policy
      Mt. Gox is not Bitcoin. There are many other places where you can trade Bitcoin, and some are anonymous. Ripple might allow completely decentralised Bitcoin/fiat exchanges in the future.

      (continued)

      Delete
    4. > The bubble will collapse, that doesn't mean token money
      > in digital form may be around forever.
      Once again, Bitcoin is not token money, and the bubble of Bitcoin has no relevance for transaction costs of Bitcoin. What matters is liquidity, not price.

      > Never claimed that housing is worthless, nonsense
      > argument. I merely claimed that ignoring the price can
      > get one in trouble.
      So, we're getting a bit closer. If you went into debt in order to buy a house, or if you bought it with the expectation of earning future income from it (either as rent or as a sale markup), then you might be in trouble. But if you bought it in order to live in it, using your savings, you're unaffected by the bubble. You miss that Bitcoin has a dual character: you can buy it both in order to generate income as well as to decrease your transaction costs. If one the plan to earn future income fails, it does not follow that the plan to decrease transaction costs fails as well, analogously to the situation with the house.

      > So can houses.
      Well, not really. The price of the land might be higher than the price of the house on the land, or the transaction costs of sale might exceed the teardown costs, or the upkeep costs might not be sustainable, or the person with the mortgage might not be able to pay the mortgage off. In such a case, the better choice is to demolish the house. These issues don't exist with Bitcoin, unless you borrow in order to invest in it, and that is something that I really do not recommend.

      > I simply pointed out that the dynamics of a bubble were
      > taking form.
      You did more than that. You claimed that this is relevant for the future of Bitcoin. It isn't.

      > Moreover, I simply pointed out that in the monetary
      > scheme that Ludwig von Mises had developed in the TMC,
      > bitcoins cannot fit anywhere else but as token money.
      It does not fit into token money, as elaborated in my original post. Furthermore, why is it relevant? Bitcoin exists. That you can't classify it does not refute its existence, that's a methodological absurdity.

      > Sure they are, the same way that the token money you get
      > at Chuck E. Cheese’s or poker chips are.
      If Bitcoin is a money substitute, then what's the underlying money in the narrower sense? Hint: the issuer of casino chips is obligated to exchange them at a fixed exchange rate on demand. Who is the issuer of Bitcoin, and at what rate are they obligated to exchange Bitcoin against the underlying money in the narrower sense? I don't know Chuck E. Cheese so I can't comment on that.

      Delete
    5. ‘What specifically I didn't deal with?’

      The name of the article is Bitcoin Bubble 2.0. You didn’t deal with the bubble, you simply said prices don’t matter.

      ‘Correct. You have yet to explain why the presence or absence of the bubble is relevant. The price volatility has a negligible effect on the people who use Bitcoin to reduce transaction costs’

      The data says otherwise. Interest always follows price, bitcoins are no different.
      http://www.google.com/trends/explore#q=bitcoin
      It may not be relevant to a scholar such as yourself. However, to us non-economists prices are quite important. Say some fool buys bitcoins for $49, and bitcoin pops to $12, that’s a lot of money that the given fool has just lost. There are now less goods and services that he may buy because his tokens have been pumped and dumped.

      ‘Furthermore, now you actually agree with me that cryptocurrencies have a future, so you contradict your former claims’

      I never claimed that digital token money will forever disappear. It is not an either or situation on the extremes. Rather, like a lot of dotcom stocks, they will lose a lot of their value. Ironically, during the dotcom bubble a lot of bulls accused the naysayers of believing that the internet will not be a success. This was a strawman argument, the correct assessment of the bears was that there was a bubble at hand. I understand that prestigious economists such as yourself ignore prices, but for us non-economists and traders they are quite relevant.

      ‘I can only repeat that in markets with strong network effect, there tend to be a small number of dominant players. Furthermore, Mt.Gox earns money on fees. Volatility or changes in the relative market share of cryptocurrencies do not increase the revenue of exchanges, rather increases in trade volume’

      Volume, as with interest, follows prices. This has not only been true with bitcoins but is true with markets overall.

      ‘Now, this is an entirely new argument from you. You're essentially arguing that it wasn't a good idea to buy Napster shares. But the utility derived from using Napster while it was operating does not depend on the share price of Napster. You're conflating the two’

      Actually, I made this argument in the article. Feel free to read it.
      “Eventually, the peer-to-peer programs got more and more numerous, including Kazaa Lite, eDonkey, eMule, BitTorrent, et cetera. While this may be good news for people who like to download and share content for free, it certainly is not for people who are under the impression that bitcoin is a hedge against inflation.”

      Delete
    6. ‘There are many other places where you can trade Bitcoin, and some are anonymous. Ripple might allow completely decentralised Bitcoin/fiat exchanges in the future’

      Feel free to watch the video I include in the article, where developer Jeff Garzik claims that they want bitcoin to be the exact opposite of anonymous, and proactively want to work with the government as well as regulators.

      ‘You miss that Bitcoin has a dual character: you can buy it both in order to generate income as well as to decrease your transaction costs’

      I can purchase anything online from across the globe using my amex with no transaction costs whatsoever aside from shipping, handling, and the product price itself. I can hardly get anything that I like with bitcoins online. Moreover, even if I had the ability to pay with bitcoins on say, Amazon, it would simply add another transaction cost.

      ‘Well, not really. The price of the land might be higher than the price of the house on the land, or the transaction costs of sale might exceed the teardown costs, or the upkeep costs might not be sustainable, or the person with the mortgage might not be able to pay the mortgage off. In such a case, the better choice is to demolish the house. These issues don't exist with Bitcoin, unless you borrow in order to invest in it, and that is something that I really do not recommend’

      Maybe it’s because I am a non-economist but I was under the impression that one cannot simply go around demolishing things before buying them.

      ‘You did more than that. You claimed that this is relevant for the future of Bitcoin. It isn't’

      Sure it is. I used a number of analogies to try and point this out. Maybe a graph will help explain the situation:
      http://research.stlouisfed.org/fredgraph.png?g=ewB

      Suppose there was no housing bubble and home prices tracked inflation as they have always done (outside of localized manias such as the real estate boom in Florida during the Roaring Twenties). There would have been no financial crisis. However, there was in fact a housing bubble and we can fully expect housing prices to underperform inflation for the next decade. From the article:

      “It is sort of like someone deciding to go full speed in the middle of a marathon. Surely, one would look good for a few minutes. However, at a certain point one would inevitably collapse, with the possibilities of finishing the race being greatly diminished, let alone doing as well as they would have otherwise”

      I suggest giving this lecture by Jörg Guido Hülsmann a watch.
      http://www.youtube.com/watch?v=Bxq_mhdYeBM

      ‘If Bitcoin is a money substitute, then what's the underlying money in the narrower sense?’

      The various fiat money that it is exchanged for

      ‘Who is the issuer of Bitcoin, and at what rate are they obligated to exchange Bitcoin against the underlying money in the narrower sense?’

      There is no prerequisite that in order for something to be a token money it need be a fixed exchange rate.

      It may very well be that the scheme Ludwig von Mises had formulated is wrong. However, there is no other place on that formulation where bitcoins can be placed. Some have claimed that bitcoins are a commodity money because they have to be mined. However, these economists typically mistake the regression theorem with the labor theory of value.

      Delete
  3. I will buy your bit coins for a dollar... in the short term.

    ReplyDelete
  4. > You didn’t deal with the bubble, you simply said prices don't
    > matter.
    In other words, I dealt with the bubble in a way that you don't like. You're simply giving the bubble too much weigh and relevance. I've been trying to explain to you the consequences and underlying activities of the bubble, and you actually seem to agree with me. But you're still giving it too much weigh.

    > Interest always follows price, bitcoins are no different.
    Did you actually calculate the correlation between trade volume and price or are you just guessing? Just for the kicks, I did take my data and calculated it. The USD trade volume does correlate with the price, but the BTC trade volume doesn't. In fact, some of the peaks in BTC trade volume occurred at the market bottom or during slumps, such as November 2011 or August 2012. That does not indicate a dying market. At best you could say that that's consistent with pump&dump.

    Furthermore, your original argument was that pump&dumping a NEW cryptocurrency is beneficial for Mt. Gox, and that's an entirely different argument from the one that you're making now.

    > Say some fool buys bitcoins for $49, and bitcoin pops to $12,
    > that’s a lot of money that the given fool has just lost.
    And why is it relevant for the future of Bitcoin? There are plenty of other ways people can lose money to others by speculating stupidly.

    > This was a strawman argument, the correct assessment of the
    > bears was that there was a bubble at hand.
    So it looks like we are in agreement in the core point.

    > I understand that prestigious economists such as yourself ignore
    > prices, but for us non-economists and traders they are quite
    > relevant.
    And why is it relevant for anyone else than forex speculators? They are not the market segment whose future is relevant for Bitcoin. Indeed, if there is only one worldwide money, such as it almost was with gold, there is no forex and no forex speculators.

    > Volume, as with interest, follows prices.
    Actually, volume follows with liquidity, not prices. Illiquid expensive items do not have a large trade volume.

    > Actually, I made this argument in the article. Feel free to read
    > it.
    So we're in agreement, just not in the assessment of the relevance.

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  5. > Feel free to watch the video I include in the article, where
    > developer Jeff Garzik claims that they want bitcoin to be the
    > exact opposite of anonymous, and proactively want to work with
    > the government as well as regulators.
    I saw the video back in 2011 and I think that I actually reference it in an earlier draft of my maser's thesis (I have it in my bibliography collection anyways). I also know Garzik's earlier work while he was more actively involved in the kernel development, and I met him at the Bitcoin 2012 conference in London. I think Garzik actually pulled off a great PR stunt in that video, by saying something that is technically correct(ish) and sounding important in a reassuring voice, but actually not having meaningful substance. The developers cannot really do anything regarding regulation, as they do not have any access to information other than the blockchain, and that's public anyway. The only ones that are affected are exchange operators.

    > I can purchase anything online from across the globe using my
    > amex with no transaction costs whatsoever aside from shipping,
    > handling, and the product price itself.
    Except you end up overpaying due to the fees the merchant pays and due to the fraud he has to compensate against (that's why BitcoinStore can provide lower prices), when doing international trades (I was recently refused two credit cards and paypal because they were issued in a different country that I live in), or you're unlucky living in a country which does not have free access to international markets. Also, the bank can arbitrarily suspend your card.

    > I can hardly get anything that I like with bitcoins online.
    Credit cards took decades to become widespread. Bitcoin is four years old. On the other side of the spectrum, there are some things that you can do with Bitcoin and can't do with credit card. You can donate to organisations that are politically undesirable, you can do P2P transfers all around the globe, if you happen to live in Argentina, and many others.

    > Maybe it’s because I am a non-economist but I was under the
    > impression that one cannot simply go around demolishing things
    > before buying them.
    The banks can demolish foreclosed houses, and they often do when it makes economic sense, that was my point. There is no analogous situation to Bitcoin.

    > I used a number of analogies to try and point this out.
    Once again, we are giving different weighs to different market players. You are obsessed with the future of the speculator? Why is he the relevant market player?

    > Suppose there was no housing bubble and home prices tracked
    > inflation as they have always done (outside of localized manias
    > such as the real estate boom in Florida during the Roaring
    > Twenties). There would have been no financial crisis.
    Actually, according to the Austrian Business Cycle Theory, the crisis is an unavoidable consequence of credit expansion. If there was no housing bubble, there would be a different bubble. Unless you have an indication that the Bitcoin boom is fueled by debt, I don't see why this is even a proper analogy. And, most importantly, even though the bubble occurred, people still live in houses, and that's my main point. You actually reference a video about the ABCT while missing its point.

    ReplyDelete
  6. > However, there was in fact a housing bubble and we can fully
    > expect housing prices to underperform inflation for the next
    > decade.
    But unless you bought a house during this boom with the intention of milking it for income, that's entirely irrelevant for you. I didn't buy any new house during that period. And while I used to live in Dublin during the recession, my rent decreased. So I actually benefited.

    > The various fiat money that it is exchanged for
    This is not how it works. That way you could argue that the euro is a money substitute of USD, because it can be exchanged for it. Look at the definitions I provided. The first one, which is the one that Austrians (in particular Rothbard and Salerno) tend to emphasise, says that a money substitute is a CLAIM. Who is Bitcoin a claim against?

    > There is no prerequisite that in order for something to be a
    > token money it need be a fixed exchange rate.
    Sure there is. Kindly read the section about money substitutes in ToMC.

    > However, there is no other place on that formulation where
    > bitcoins can be placed.
    Sure there is. It can be a new subcategory of "money in the narrower sense", e.g. "quasi-commodity money" as Selgin suggests. Or you can just concentrate on the elasticity of supply and put Bitcoin into the commodity money category (in the narrower sense) like Schlichter does. But it's clearly not a money substitute. It's not a claim, nor does it act as a (nearly) perfect substitute to any other money.

    ReplyDelete
  7. ‘In other words, I dealt with the bubble in a way that you don't like’

    You deal with the bubble by claiming prices do not matter. They do not matter according to who? Certainly not according to the vast majority of bitcoiners. Once again, the data speaks for itself, interest follows the price.

    http://www.google.com/trends/explore#q=bitcoin

    ‘You're simply giving the bubble too much weigh and relevance. I've been trying to explain to you the consequences and underlying activities of the bubble, and you actually seem to agree with me. But you're still giving it too much weigh’

    Considering the title of the article is Bitcoin Bubble 2.0, I think I am sticking to the topic. Moreover, by your standards the only way to not give it too much weight is to dig your head into the ground and say prices do not matter.

    ‘Did you actually calculate the correlation between trade volume and price or are you just guessing?’

    What is there to calculate, there is no need to waste time, just look at the chart.
    http://bitcoincharts.com/charts/mtgoxUSD#tgCzm1g10zm2g25zi1gSStochzvzcv

    ‘And why is it relevant for the future of Bitcoin? There are plenty of other ways people can lose money to others by speculating stupidly’

    For the same reason that the silver bubble in 2011 was relevant to the future price movement of silver. When a lot of people get burned, they tend not to come back for emotional reasons.

    ‘And why is it relevant for anyone else than forex speculators? They are not the market segment whose future is relevant for Bitcoin. Indeed, if there is only one worldwide money, such as it almost was with gold, there is no forex and no forex speculators’

    Once again, contrary to your arbitrary assertion, the vast majority of bitcoiners have been attracted due to rising prices. As I stated a few times already, interest follows price. This has been true since time immemorial in any and every market.

    http://www.google.com/trends/explore#q=bitcoin

    ‘The only ones that are affected are exchange operators’

    That may very well be true. What’s the biggest exchange and is definitely 100% going to remain the biggest exchange in the world and is only going to grow until it absolutely consumes everything due to the network effect? Why, that would be the magic the gathering online exchange. Let’s have a quick look at their privacy policy.

    https://mtgox.com/privacy_policy

    Interesting, so they can take your name, photographic information, address, phone number, e-mail address, banking details including account numbers, date of birth, and your trades. Sounds pretty anonymous to me. I wonder how they may use that information. Oh, that’s right, ‘as required for regulatory purposes’

    ‘Except you end up overpaying due to the fees the merchant pays and due to the fraud he has to compensate against’

    I can find much better and far cheaper product qualitatively and quantitatively on a place that accepts usd, such as Amazon. On the other hand, were I to waste time exchanging usd for bitcoins, which entails a transaction cost, I would then have to go to some crappy place to find inferior product that accepts bitcoins. Moreover, once my transaction is complete I have no recourse in case I do not get the product I wanted, get a shoddy one, or simply want to make a return. The cost of fraud insurance will not be eliminated with bitcoin. Until it is there, people will not use it on a widespread basis. Ironically, once it is there, not only do the lower fees disappear, it actually becomes more expensive to do business with bitcoins because you first have to exchange them for actual money.

    ‘I was recently refused two credit cards and paypal because they were issued in a different country that I live in’

    No idea what that means.

    ReplyDelete
  8. ‘you're unlucky living in a country which does not have free access to international markets’

    Bitcoin isn’t going to help you if goods cannot get across a border, this is a physical problem.

    ‘Also, the bank can arbitrarily suspend your card’

    I can arbitrarily go to another bank.

    ‘You can donate to organisations that are politically undesirable’

    I can wire transfer up to $50,000 dollars to any account in the world, no questions asked.

    ‘you can do P2P transfers all around the globe, if you happen to live in Argentina’

    What good is having bitcoins in North Korea, Egypt, Venezuela, etc., if you also need a bank account into which those bitcoins can be converted. The way to get by in a third world country is not with bitcoins, that’s just plain stupid, ignorant, and unrealistic. Currency crisis after currency crisis has shown that you want to have some reserve currency with you, which happens to be the us dollar. As for transaction costs, that is all a matter of properly communicating with your bank. I studied abroad for 3 years and was able to periodically get money transferred over at absolutely no cost.

    https://www.youtube.com/watch?v=92yaK4wjJeM

    ‘The banks can demolish foreclosed houses, and they often do when it makes economic sense, that was my point. There is no analogous situation to Bitcoin’

    I was under the impression that when banks foreclose on a property, they sell it in the market place (typically at a loss). I never knew banks were in the construction and demolition business.

    ‘Actually, according to the Austrian Business Cycle Theory, the crisis is an unavoidable consequence of credit expansion. If there was no housing bubble, there would be a different bubble. Unless you have an indication that the Bitcoin boom is fueled by debt, I don't see why this is even a proper analogy. And, most importantly, even though the bubble occurred, people still live in houses, and that's my main point. You actually reference a video about the ABCT while missing its point’

    I wrote my thesis on the ABCT a few years ago. I used it to extrapolate bubbles in Chinese real estate, Treasury bonds, and potentially in gold. I have received a good number of positive reviews from the likes of Doug French and Mark Thornton, with whom I run a facebook page called Fighting Apoplithorismosphobia. Historically, bubbles occur in times of inflation, not necessarily due to credit expansion. The tulipmania is a great example, the catalyst for which was new gold and silver supplies coming in from the New World.

    ‘But unless you bought a house during this boom with the intention of milking it for income, that's entirely irrelevant for you. I didn't buy any new house during that period’

    If someone bought a house during the last decade, for whatever reason, presumably because the price doesn’t matter, then they made a huge mistake. For one, they could have had a lot more money for other purposes had they not bought during the bubble. Second, their underlying asset will not even keep up with inflation, meaning it will be hard to take equity out of the house. Want to start a business by taking a loan against the house? Not gonna happen. Third, unless they want to pocket a loss, they are stuck at the location and immobilized. Fourth, if you have a bitcoin fetish and want as much of the stuff as possible, then prices should be just as relevant to you as any other normal person. For one, you can buy low instead of buying blind and thus have more bitcoins than would otherwise have been the case.

    ‘This is not how it works. That way you could argue that the euro is a money substitute of USD, because it can be exchanged for it’

    There is no mystery to the Euro, it is plainly and clearly a fiat money under the TMC formulation.

    ReplyDelete
  9. ‘Look at the definitions I provided. The first one, which is the one that Austrians (in particular Rothbard and Salerno) tend to emphasise, says that a money substitute is a CLAIM. Who is Bitcoin a claim against?’

    Bitcoins are a claim on the various fiat moneys for which they trade. This doesn’t mean that the value has to be fixed in stone. Just as bonds or stocks fluctuate in value, so does money and so do money-substitutes.

    Nowhere throughout TMC does Mises state that by definition token money has to have a fixed exchange rate, as oppose to a floating one. He does claim that historically, token money were ascribed with a certain nominal value, as the US dime is worth 1/10 of a dollar for example. However, the fact that token money have often had a legal character does not mean that they must have a legal character in order to be such. Likewise, the fact that fiat money has often been made of paper does not mean that fiat money is by definition paper money. There are numerous fiat moneys, for example, that are made of plastic. What is important when it comes to token money, per Mises, is the following:

    ‘Quite correctly, Laughlin stresses as the peculiar
    characteristic of money-substitutes their constant and immediate
    convertibility into money’

    You may go to various arcades, or Chuck E. Cheese’s, or magic the gathering online exchange and trade in your tokens for actual money. Moreover, there are plenty of arcades, for example, that frequently change the value of their tokens. The purpose of this is so that people do not hold on to them but instead spend them.

    Understandably, Mises did not spend much time on token money in the TMC because it is not a serious matter. The concept of token money is really not that hard to grasp. However, if you need further assistance I would recommend giving this a read.
    http://books.google.com/books?id=RWsCAAAAYAAJ&lpg=PR20&ots=y7btJlg4mM&dq=token%20fluctuate&pg=PP1#v=onepage&q=token%20fluctuate&f=false

    ‘Sure there is. It can be a new subcategory of "money in the narrower sense", e.g. "quasi-commodity money" as Selgin suggests. Or you can just concentrate on the elasticity of supply and put Bitcoin into the commodity money category (in the narrower sense) like Schlichter does. But it's clearly not a money substitute. It's not a claim, nor does it act as a (nearly) perfect substitute to any other money’

    Commodity money must have use-value prior to acquiring exchange-value. What possible use-value do bitcoins have?

    I once again quote Menger,
    ‘I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost'

    This is not to say that money must be a commodity. Rather, a commodity money by definition needs to have use-value prior to becoming money. Thus, we have no other place to put bitcoins on the formulation that Ludwig von Mises had made other than token money. I am not saying the formulation is wrong or right, I am merely stating the fact that flows from that formulation.

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  10. This comment has been removed by a blog administrator.

    ReplyDelete
  11. > You deal with the bubble by claiming prices do not matter. They do
    > not matter according to who?
    Does not matter for the future of Bitcoin.

    > Certainly not according to the vast majority of bitcoiners.
    You provide no evidence to support this claim.

    > Once again, the data speaks for itself, interest follows the
    > price.
    You provide no evidence to support your claim.

    > Considering the title of the article is Bitcoin Bubble 2.0, I
    > think I am sticking to the topic.
    Once again, the bubble is one thing, and the future of Bitcoin is another one.

    > Moreover, by your standards the only way to not give it too much
    > weight is to dig your head into the ground and say prices do not
    > matter.
    Once again, you're mixing the question of the bubble with the question of the future of Bitcoin. If you didn't do that, I would have no problem with your arguments. I do not claim that the current price spike is not a bubble (I do not make predictions about the price, see for example here: http://www.youtube.com/watch?v=yzMgiAJ1b-E )

    > What is there to calculate, there is no need to waste time, just
    > look at the chart.
    In other words, you did actually do a scientific empirical analysis.

    > For the same reason that the silver bubble in 2011 was relevant
    > to the future price movement of silver. When a lot of people get
    > burned, they tend not to come back for emotional reasons.
    Last time I checked, silver still exists and it is still a highly liquid commodity. So again the implied connection is not there.

    > Once again, contrary to your arbitrary assertion, the vast
    > majority of bitcoiners have been attracted due to rising prices.
    You provide no evidence to support your claim, and even if it was true, that does not mean that the users that use it or might potentially use it due to a decrease in transaction costs are affected.

    > What’s the biggest exchange and is definitely 100% going to
    > remain the biggest exchange in the world and is only going to
    > grow until it absolutely consumes everything due to the network
    > effect?
    This is only mainly relevant for forex traders. Once you have bitcoins, you do not need to use an exchange. And if you worry about the exchange rate, you can just use forex to hedge and there will be no link between your trades and your hedges. Furthermore, there are things like the Bitcoin ATM ( http://news.cnet.com/8301-13578_3-57570925-38/need-bitcoins-this-atm-takes-dollars-and-funds-your-account/ ) or localbitcoins, or you directly exchange bitcoins for the goods you sell or buy.

    And even if you use an exchange, that only discloses to the regulator who you are. They still don't know who your trading party is. That requires additional costs and is additional data sources, which may or may not be available. Once again, the point is comparative advantage, not absoluteness.

    ReplyDelete
  12. In other words, a forex is an optional component of Bitcoin trades, and there ar
    e more anonymous methods of obtaining it than through regulated exchanges.

    > I can find much better and far cheaper product qualitatively and
    > quantitatively on a place that accepts usd, such as Amazon.
    Not compared to the Bitcoin store, for example.

    > Moreover, once my transaction is complete I have no recourse in
    > case I do not get the product I wanted, get a shoddy one, or
    > simply want to make a return.
    Of course you do, it just does not involve the credit card company.

    > The cost of fraud insurance will not be eliminated with bitcoin.
    The control over fraud is shifted away from the middlemen.

    > Until it is there, people will not use it on a widespread basis.
    On the contrary, there are plenty of areas where Bitcoin already decreases transaction costs, and the adoption is growing. One example is online gambling.

    > Ironically, once it is there, not only do the lower fees
    > disappear, it actually becomes more expensive to do business
    > with bitcoins because you first have to exchange them for actual
    > money.
    See above.

    > No idea what that means.
    I wanted to buy something online. The merchant refused payment with two credit cards and paypal, because my cards were issued in a different country than the country that I live in now, when I was trying to make the payment, and my paypal address is in a different country as well. All within the EU I might add. This is their anti-fraud policy. Bitcoin eliminates this issue.

    It might be a smaller issue if you live in the US and only shop in US, but this is hardly a globally representative datum.

    ReplyDelete
  13. > Bitcoin isn’t going to help you if goods cannot
    > get across a border, this is a physical problem.
    Again, you arbitrarily assign weighs. In the worst case scenario, smugglers exist, but they can't help much with payments. Now with Bitcoin, there is a complement for smugglers.

    > I can arbitrarily go to another bank.
    That does not help to unfreeze your balance, and that does not help if they coordinate their efforts (through your credit rating, or blockade, for example), and if there is no compatible alternative (such as paypal). You'd have to switch technology. And there you have the option of Bitcoin right away.

    > I can wire transfer up to $50,000 dollars to
    > any account in the world, no questions asked.
    Unless you want to donate to Wikileaks, or are unfortunate to live in a country that has been blockaded from SWIFT. You seem to live in your own world which consists of the US and Amazon, but that is hardly globally relevant.

    > What good is having bitcoins in North Korea,
    > Egypt, Venezuela, etc., if you also need a
    > bank account into which those bitcoins can be
    > converted.
    You don't. You trade them for cash, and in cases such as the above, people typically trade them for US or EUR cash.

    > Currency crisis after currency crisis has
    > shown that you want to have some reserve
    > currency with you, which happens to be the us
    > dollar.
    That's one option, assuming though they don't confiscate it while you're crossing the border.

    > As for transaction costs, that is all a matter
    > of properly communicating with your bank. I
    > studied abroad for 3 years and was able to
    > periodically get money transferred over at
    > absolutely no cost.
    I also had cases where I had no problems of using the banking system. But absence of evidence is not evidence of absense, and indeed there is evidence to the contrary. That you personally wasn't exposed to it is not relevant. You're just one of seven billion.

    > I was under the impression that when banks
    > foreclose on a property, they sell it in the
    > market place (typically at a loss).
    This assumes that this is the most profitable option, and I explained that that is not necessarily the case. But even if, as you suggest, we ignore demolitions, that only proves my point that the utility of the house qua being able to live in it is not affected by the bubble.

    ReplyDelete
  14. > Historically, bubbles occur in times of
    > inflation, not necessarily due to credit
    > expansion. The tulipmania is a great example,
    > the catalyst for which was new gold and silver
    > supplies coming in from the New World.
    Technically, you are correct, methods of increasing the money supply other than credit expansion also trigger ABCT. But you failed to address my question: where's the increase in the money supply with respect to Bitcoin? Is QE money being used to buy bitcoins?

    > If someone bought a house during the last
    > decade, for whatever reason, presumably
    > because the price doesn.t matter, then they
    > made a huge mistake.
    While simultaneously this huge mistake is entirely irrelevant for the question whether people will continue living in houses.

    > they could have had a lot more money for other
    > purposes had they not bought during the bubble
    The money isn't destroyed, it simply changes owner. For every mistake there is a counter-win.

    > Second, their underlying asset will not even
    > keep up with inflation, meaning it will be
    > hard to take equity out of the house
    Again, irrelevant for the question of whether people will continue to live in houses.

    > Third, unless they want to pocket a loss, they
    > are stuck at the location and immobilized.
    Again, irrelevant.

    > Fourth, if you have a bitcoin fetish and want
    > as much of the stuff as possible, then prices
    > should be just as relevant to you as any other
    > normal person
    Again, irrelevant.

    > There is no mystery to the Euro, it is plainly
    > and clearly a fiat money under the TMC
    > formulation.
    You avoided responding to my argument, which was that the exchangability is not a defining criterion to classify something as a money substitute.

    ReplyDelete
  15. > Bitcoins are a claim on the various fiat moneys
    > for which they trade.
    WHO not what. Who is obligated to exchange your bitcoins if you present them to him?

    > This doesn’t mean that the value has to be fixed
    > in stone.
    However, fixed exchange rate is a necessary requirement for something to be a money substitute. Without a fixed exchange rate, it's merely non-circulating credit (and Bitcoin is not credit either). On this, there are writings of Rothbard, Salerno and Pollaro. The last one writes at http://mises.org/daily/4297 :

    > To paraphrase the Austrian masters, money
    > substitutes are perfectly secure and
    > immediately convertible, par-value claims to
    > standard money which, by virtue of this
    > immediate convertibility substitute fully for
    > standard money in individual's cash balances,
    > and, as such, are used by individuals as a
    > surrogate for cash — namely, a thing that all
    > other goods and services are traded for, the
    > final payment for such goods and services on
    > the market.

    > Just as bonds or stocks fluctuate in value, so
    > does money and so do money-substitutes.
    Wrong. See above "par-value".

    > Nowhere throughout TMC does Mises state that
    > by definition token money has to have a fixed
    > exchange rate, as oppose to a floating one.
    Right the first sentence of Chapter 3 says:

    > When an indirect exchange is transacted with
    > the aid of money, it is not necessary for the
    > money to change hands physically; a perfectly
    > secure claim to an equivalent sum, payable on
    > demand, may be transferred instead of the
    > actual coins.
    EQUIVALENT SUM. He continues in the same chapter regarding claims:

    > They themselves are not valued directly, but
    > indirectly; their value is derived from that
    > of the economic goods to which they refer.
    and

    > Two elements are involved in the valuation of
    > a claim: first, the value of the goods to
    > whose possession it gives a right; and,
    > second, the greater or less probability that
    > possession of the goods in question will
    > actually be obtained.
    In other words, your argument is wrong.

    > You may go to various arcades, or Chuck E.
    > Cheese’s, or magic the gathering online
    > exchange and trade in your tokens for actual
    > money.
    ... at a predefined nominal value.

    > Commodity money must have use-value prior to
    > acquiring exchange-value.
    Wrong. This is what Mises writes:

    > We may give the name commodity money to that
    > sort of money that is at the same time a
    > commercial commodity
    AT THE SAME TIME. Not prior to that. You're mixing the definition of commodity money with the regression theorem.

    > What possible use-value do bitcoins have?
    The answer is in Graf's article that you yourself quote.

    ReplyDelete
    Replies
    1. I apologize for not realizing that prices are irrelevant. I hope you understand, since I am a non-economist. My co-worker was just complaining that the price of crude oil is slowly eating away at the discretionary spending of US consumers. Having learned from the great economist Peter Šurda, I said prices are irrelevant. I would respond to the rest of your points, but being a non-economist, they are probably irrelevant.

      p.s. Thanks for paraphrasing the Austrian stance on commodity money. I had no idea that Mises rejected the regression theorem. It looks like Hans-Hermann Hoppe and a few other non-economists should have done their homework.

      Delete
    2. Patrik,

      you now failed to respond entirely, you made two points which are not related to the actual arguments that I made.

      The issue is the relationship of the price of Bitcoin with the future of Bitcoin. You imply there is one. I claim there isn't. Instead of explaining the relationship, you just make up new situations and attempt to show that the price is relevant for them. That may or may not be true, but it's a completely separate argument.

      The second issue you avoided is that you mixed two definitions. The problem is not the validity of the two individual arguments, the problem is that the mix of the definitions, and even more so, it ends up with a partially circular argument.

      I think I might actually make a new post where I summarise the arguments.

      Delete
  16. Patrik,

    I sent a reply in seeking alpha, but was not able to log in and post. Your analogy is flawed. The forge-ability of a proof-of-work cryptocurrency is inversely related to its blockchain depth and the hashing power in the network. In your analogy the non-forgeability of the various currencies is already established on day one and is invariant from there on. That is most definitely, not the cryptocurrency situation as of today. The ability to forge a cryptocurrency reduces as the computing power applied to it increases.

    Bitcoin came in early and the hashing power of the network today is beyond the top 500 computers of the world combined. Unless and until a new cryptocurrency offers something very innovative, this hashing power will remain with bitcoin. With ASICs, this will only increase in the future, not decrease. Any normal use case for the current list of alternate coins can be achieved by using fractions of bitcoins, and secured much more thoroughly.

    ReplyDelete
    Replies
    1. I think his argument isn't that forgery causes hyperinflation, but that the market shares of individual cryptocurrencies would fluctuate rapidly and unpredictably, and an individual cryptocurrency can thus experience a depreciation as a result of a decrease of its market share. While I agree in principle that another cryptocurrency can overtake Bitcoin, I don't think that there will be unpredictable rapid fluctuations in relative market shares, rather it will behave similarly as with other industry standards, due to the network effect. I am writing a separate post where I address this in more detail.

      Delete
  17. Mises' regression theorem is still the best theorem for money but because of confusing concepts many people can not see that it fits Bitcoin perfectly.

    The riddle is in the definition of money. Before bitcoin, defining money as a commodity or good didn't matter much. It was wrong, but it didn't have consequences.

    But money is not a commodity or a good. it is a function. Money is a medium of exchange function.

    Mises' theory in essences claims that, only commodities can gain money function through the market place and this is true and the existence and success of bitcoin doesn't invalidate it.

    If a commodity has certain attributes, like fungibility, durability, etc, it may gain money function. Of course this doesnt happen overnight for every one that needs a medium of exchange. İt is a slow process.

    Let us say gold, besides its commodity use, started gaining money function. If it is not very widely used as money, its commodity function as a good is much more than its money function.

    But once the commodity becomes more and more popular as money, the commodity enters a cycle. It becomes more popular and thus more liquid. Its money function increases while its good function decreases. This is what happened to gold and silver.

    Today gold still retains some of its money function (silver does not), although it decreased a lot with the central banks and fiat money starting at the beginning of 20th century. But it is still used by central banks as high power money so it doesn't just have good function. If it did, if central banks and other investors that are hoarding gold for its money function, sold it in the market, the prices of gold jewelry would fall very much. Because gold would only be left with good function, tis demand would be much lower.

    Now for bitcoin.

    The start of bitcoin isn't known very much. People think bitcoin one day started and with zero interaction with other existing moneys and magically gained money function.

    This is false. Bitcoin became money on the back of other moneys, mainly US dollar. Just as US dollar became money on the back of silver and gold. If there werent for exchanges that let you exchage bitcoins for US dollars or other currencies, I highly doubt bitcoins would become the medium of exchage that they are today.

    But this dependence on existing good function or other money that one time has good functions, is temporary as fiat currencies already showed us. US dollar known as federal reserve notes needed silver and gold to become money but it doesn't anymore, not since 1971. And bitcoins, though they still probably need exchanges, will not need them forever.

    So Mises is still correct, you can not introduce something to the market out of the blue and make people accept it as money. Especially not by government fiat. Something gaining money function is not an easy task.

    The difference of Bitcoin is it is the result of human design. That is what's unique about it since every other money is the result of human action but not design.

    So bitcoin is money, because it has the medium of exchange function. It literally functions as a medium of exchange. Of course it doesn't have the liquidity and network effect of US dollars, but it is getting there because of all the reasons we already know.

    ReplyDelete
  18. “I love how your escapist reply stands for it’s effete inability to rebut what I point out.”
    http://www.bitcoinmoneyatm.com

    ReplyDelete
  19. Thanks for sharing the article on how to transfer money easily. This will help us Bitcoin ATM Card.

    ReplyDelete