Tuesday, 9 April 2013

Response to Patrik Korda #4

This is a followup to the previous replies to Korda:

Korda made it to the Mises.org daily, and he presented a couple of comments at the bottom of my post

This is an attempt to address the outstanding points, in a more direct, quote by quote, manner, so it's not really a full blown article with a beginning and a conclusion. I just want to have the points sorted out.
"I believe that bitcoins are a lose-lose proposition for libertarian minded people going forward."
So what will people use to reduce their transaction costs of trade instead? Will people switch from the internet to the post office and library?
"Jeff Garzik stated that (1) bitcoins were either a bubble that will collapse or (2) bitcoins were coming up to the level at which they would trade as a worldwide digital currency, this was his response to the dramatic price increase at the time. In retrospect, bitcoin did in fact turn out to be a bubble."
Korda seems to ascribe the argument of Garzik too much power. He has yet to explain why the bubble is relevant. The relevance of the bubble is only for people who use Bitcoin for speculative purposes. People who use it for a reduction of transaction costs are unaffected, to the extent that the remaining prices still allow trade. Similarly, the tulip bubble was relevant for people who speculated on the tulips. But last time I checked, tulips still exist and are regularly bought and sold. In addition to that, there has been a lot of investment into Bitcoin projects, and these have nothing to do with the changes in price. I don't think there have been comparable investment into tulip infrastructure, and tulips do not decrease transaction costs, so there is no need to hold them for transactional purposes. In fact, we already did have a spike and a following crash in the prices of Bitcoin, in 2011. Yet, the market share grew irrespective of this development, and so did investment, the variety of goods and services related to Bitcoin. So the relevance of the argument is directly contradicted by empirical evidence.
"How could this be bad for libertarians? The answer to this question was also addressed by Jeff Garzik in the interview I posted in my article. Most consumers are not libertarians."
But many, if not all, consumers have liquid assets, such as money, and can recognise the benefit in decreasing transaction costs. Similarly as you don't need to be a geek to want to use the internet.
"With mainstream acceptance comes mainstream policy, which includes registration of the exchanges as money service businesses, regulation, fraud insurance, and higher fees to pay for all of this."
The exchanges already have long been subject to MSB regulations. But Bitcoin does not need exchanges to work. Even during communism with high capital controls, illegal forex brokers were quite present. Currently, we see the situation in countries Argentina and Iran.
"I simply do not attribute as much weight to the network effect nor as much rationality to the market process as you do."
Wait a minute. Now this is a turn in 180 degrees. If there is no network effect, then there is no demand for a new competitor in the first place.
"Nor does it always follow that a product which overtakes another has to be superior in some fashion or another. Standard economic theory would lead one to believe a competitor can win out by either offering a superior product or a lower price. However, there are times when offering what is virtually the same product but at a higher price is the right strategy, as Charlie Munger would point out."
In network effect, the "lower price" manifests itself as transaction costs, because the object is a tool, not a consumption good. It is used indirectly. What is the price of a language? What is the price of the internet? There is none. There are costs associated with using them, and benefits that are accessible through their use. In network effect, the transaction costs in the narrower sense can be compensated against by the network size, and if the transaction cost difference is small, the relative market share size can be permanent.
"The classic example of this is red bull, which used to come in large cans and sell for the same price it does today. Another example would be facebook, which is generally more clean-cut and does not allow as much personalization as does myspace."
Korda now himself admitted that there can be differences, and these might cause a switch, whereas before he argued that the switch can happen without an apparent reason. Of course, something like this could happen with Bitcoin. A new competitor can provide something different, which the users of Bitcoin consider relevant, and which Bitcoin can't mimick. But the chances of this happening are not very high. Bitcoin is open source, available for anyone without restriction, and its feature set can be enhanced long before the competitor starts gaining market share. If we do a bit of research on Xanga, we find out for example that they were found to be violating  "Children's Online Privacy Protection Act". In addition to paying a penalty, they were then subjected to monitoring by the FTC. If we do a bit of research on myspace, we find out for example that their system didn't scale, wasn't able to grow outside of US, made problematic decisions with respect to marketing and so on. I don't know which of these factors is relevant, but clearly there were a lot of differences and many of them could have been relevant.
"People typically do not have an incentive to make up their own language out of nowhere. On the other hand, there has since time immemorial been a great incentive for alchemy."
I already commented on this one in the mises.org comment section. This argument is a variant of the labour theory of value, i.e. it misses the demand part. Merely because people invest a lot of money into creating something, it does not follow that this creates demand for it. Indeed, the more people start their own competing projects in the area of network effect, the less likely it will be that any of them will reach significant market penetration, and the costs would be more distributed as well. Now, if someone started a single, big project, with the idea to overcome Bitcoin, and invested billions of dollars into its development, integration, promotion, and so on, that might work. But that would then raise the bar even higher for a subsequent challenger, requiring him to spend even more money. While there is no barrier to entry, there is a barrier to be able to reasonably compete. The network size is also a relevant factor, that gives preference if no relevant distinguishing (technical) factor is present.
"This is the primary reason why people, such as myself, have piled into litecoins earlier this month. I banked on my parable."
However, this exactly proves my point. The relevant factor for market share of Bitcoin is liquidity, not price. Investment into LTC infrastructure, good and services is still much smaller than that of Bitcoin, even if Mt. Gox opens a LTC market. Korda probably spent too much time on stock exchanges and too little in the payments industry.
"Moreover there are always, and I mean always, unforeseen complications. The most recent one as far as bitcoin is concerned are the so-called forks."
This is probably not apparent for the majority of observers, but the ability to fork are actually good, because they provide a method for resolving problems that arise.
"I believe that digital token money may very well have a big future, but that doesn’t mean bitcoins cannot go the way of xanga. Contrary to the network effect, the fact that bitcoins were first may very well be a detriment. If something major goes wrong, rationally or irrationally, people will switch over to a competitor, even if that competitor may be inferior or nearly identical with little to no improvements."
This is now again an entirely opposite argument, indeed this is the same thing that I said. There are valid reasons for people to switch, even if we do not understand them. But that presented by Korda (low barriers to entry) is not one of them.
"Actually, initially you argued that it [price of a money substitute, ed] must be fixed. It was only subsequently that you budged and stated that it can in fact fluctuate, but only downwards according to you."
The reason why I did this was that I am unhappy about the Austrian definition of a money substitute. If I insisted on it, then Korda's argument about classification of Bitcoin would be refuted outright and my job would be done. Korda uses Mises' Theory of Money and Credit to classify Bitcoin, but simultaneously rejects his whole reasoning and definitions when doing that.
"I don’t think this is correct. You can have credit money on a metallic standard. But as regards my article and our exchange, this point is irrelevant. All that needs to be said is that bitcoins are not a credit money."
Korda entirely missed my point here. My point was that a money substitute can evolve into something that is not a money substitute, and the primary cause for this switch is the breaking of the coupling of the prices between the money substitute and the underlying good. I was trying to explain the essence of Mises' classification system.
"This is more akin to the labor theory of value in my opinion. It takes time, energy, and in essence money to produce a desired outcome in a videogame. However, it does not follow that therefore the various gamers out there should be getting paid for accomplishing those objectives. The essence of the regression theorem is that the object at hand has use-value prior to attaining exchange-value."
I can see how one can mistake my argument for labour theory of value. However, what I still don't understand why Korda is missing the point of my argument. What I was doing here was analysing empirical data, not presenting a theoretical argument. I was referring to this:
"During 2009 my exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days."
and followed by a table of exchange rates between USD and BTC, rangining from 1/737 to 1/1622. In other words, the producer was using his costs to establish his ask position. If Bitcoin was a money substitute, he would not mention the costs at all, and the table would contain percentages (discounts/premiums or agios/disagios), possibly would not exist at all (because BTC would trade at par with USD). This is as clear as it gets that Bitcoin is not a money substitute. I don't know how else I can make it more apparent. The production costs of money substitute do not play a role in deciding the ask position of the producer, rather the market price of the underlying good. Which, in case of Bitcoin, doesn't exist.

Now to the second part, the regression theorem. I don't know to what extent Korda was paying attention when reading my thesis, but I clearly explained how the regression theorem fits into Bitcoin. But even if I was wrong, empirical evidence clearly shows that Bitcoin is a medium of exchange. So whatever objections Korda has regarding Bitcoin with respect to the theorem, they are irrelevant. It's like attempting to refute the existence of GPS by pointing out that the earth is flat. It's a methodological blunder, attempting to mix theoretical reasoning with empirical data.
"I have known of families and individuals who hoard things which are extremely durable, such as gold. However, I have not heard of anyone hoarding binary digits."
Surely though, Korda must have heard about the internet. While people are not hoarding the internet, they are using it to reduce their transaction costs.
"The primary reason that I classified bitcoins as token money was that there was no other place to put them."
But shouldn't then the proper approach be to attempt to understand the reasoning for the classification system and amend it based on that, instead of making up new stuff? That's what I tried to do. I established that the reason for the classification system is the different mechanisms by which the price of those goods emerges. What is Korda's underlying reasoning for his system? Is it based on catallactics or not?
"If we presume that bitcoins will eventually become money, which is presumably what most bitcoiners would like, then we are back to square one in having to classify them. In your thesis, you seem to claim that bitcoins are a commodity money, which is presumably why you have reformulated the regression theorem."
Now again we have several issues. First of all, there is no necessity for Bitcoin to become money, nor is there a necessity that we derive the evaluation of Bitcoin from it becoming or not becoming money. I dub this fallacy "money or nothing", it's a false dichotomy. It can remain a medium of exchange, and be primarily used as a payment mechanism, in a world dominated by fiat. How is that supposed to be "bad" for the future of users of Bitcoin?

The reason why I classified Bitcoin as commodity money I explained in my thesis (indeed included two references to support my decision), and elaborated on it in three (now fourth) blog posts. The reason was catallactics, the analysis of supply and demand for Bitcoin. And last but not least, the reason why I reformulated the theorem is that I have not seen it formulated in a coherent manner anywhere, and people were ascribing it features which it doesn't have. One of those people is Korda, who ascribes to it quantitative aspects ("handful of people consume them"), whereas it is a qualitative argument (emergence of price and liquidity). Even if Bitcoin didn't exist, my reformulation would be relevant for fiat money, for example, because many Austrians interpret it very weirdly, for example that the power to tax gives creates demand for money (which still does not explain the price and liquidity of fiat money).
"In your thesis, you claim that “the price of bitcoin correlates with the public interest in bitcoin”".
If this is an attempt to fully explain the price of Bitcoin, it is what what Mises calls an "acatallactic monetary doctrine". It is missing the essence. I explicitly say with respect to Chapter 4 that for Austrians, empirical data are not arguments.
"Although this is true, a more precise way of putting it would be that interest in bitcoin follows the price of bitcoin."
There is a research paper which comes to the opposite conclusion, i.e. that the price follows the interest. But that still does not answer the actual question.
"This is exactly why I think the price of bitcoin is relevant towards its potential success and that a bubble will be very detrimental."
...
 "I’ve been in the markets long enough to see how this story ends."
Korda has been around the wrong markets. Or more accurately, those that are not relevant for Bitcoin. The relevant factor for the future of Bitcoin isn't its price, but liquidity. In other words, the payment systems industry, and to a certain extent, the forex market.
"Your first article practically claims that all of my points are irrelevant."
Yes and that is still correct. I have yet to see why any of the arguments are relevant.
"You went on to say that the primary advantage of bitcoins were the lower transaction costs. While it is certainly true that exchanging binary digits is much cheaper than having to move fiat, or worse yet, specie around the globe, there is another edge to this sword. Let us not forget that the most common arguments for fractional-reserve banking or fiat money are in fact lower transaction costs."
Exactly. That is why on a free market with a metallic monetary standard, I expect fractional reserve banking to out-compete full reserve banking, due to transaction costs. And that is again why I expect Bitcoin to outcompete fiat money and gold as long as it can keep its comparative advantage in transaction costs.
"I think transaction costs can be greatly eliminated via companies such as BullionVault or GoldMoney."
I present theoretical arguments in my thesis why this is probably inadequate to compete with Bitcoin. Furthermore, empirical evidence shows that Bitcoin has already outgrown GoldMoney (2.1 vs 1.9 billion USD). And, you can't use GoldMoney anymore to pay, unless you live in Jersey. We may argue that this is due to regulation, but that is precisely my point, regulation is just yet another factor influencing the suitability of individual goods to reduce transaction costs.
"As for bitcoin, I think they are at present a lose-lose proposition. To reiterate, if it pops this is not good news for the holders of bitcoins. If it does not pop and is instead reasserting itself as a worldwide currency, then it is bound to lose its libertarianism as Garzik pointed out."
But now this is yet another argument. If it collapses, it means that it was replaced by something better suited for the users. If it doesn't, it means that it provides a better service than the competitors. Whether this has to do with libertarianism is irrelevant.

Last but not least, I want to address the name of the mises.org article, "Bitcoin: Money of the Future or Old-Fashioned Bubble?". As I have been hopelessly trying to explain, these are not the only options, neither are they mutually exclusive. It's a "money or nothing" fallacy I've been complaining about for a long time. Even if the current price was a bubble, it would have negligible effect on the ability of Bitcoin to decrease transaction costs, and therefore its prospects as a medium of exchange.

129 comments:

  1. ‘So what will people use to reduce their transaction costs of trade instead? Will people switch from the internet to the post office and library?’

    After NASDAQ popped, a lot of investors just left stocks altogether while others invested into other industries. People who rely on bitcoin, and I’m sure there is at least one such person, will most likely switch to an alternative that is not in the spotlight yet. As I pointed out in my article, p2p software is a starfish.

    ‘Korda seems to ascribe the argument of Garzik too much power. He has yet to explain why the bubble is relevant’

    Perhaps the best example would be using silver, since many of the same victims and pumpers like Max Keiser were also involved in that market. Moreover, like bitcoin, silver is also macro-economically insignificant.

    http://oi50.tinypic.com/2mi01ow.jpg

    Had silver followed its stable pattern, it would have been higher today. Instead, it went parabolic and subsequently crashed. It overshot and is now bound to undershoot for an extended amount of time. The NASDAQ is down over 50% in real terms from its peak over a decade ago. Surely we use the internet and tech related products more than was the case back then. The point being that even if you think digital currencies are the wave of the future, instead of a fad like magic the gathering cards or world of warcraft, it does not necessarily imply that prices will be higher in the future. Let’s face it, the vast majority of bitcoiners are in the game for capital appreciation. At least the litecoiners who have been making a killing over the past month are honest about it.

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    1. Your analogy still only caters for the market capitalisation, precisely what is irrelevant. At best, you could say that a fleeing will decrease liquidity. But even if the money then flows into LTC, that does not necessarily increase liquidity of LTC.

      If your analogy was supposed to be correct, you would explain the switch of the users of the products produced by the NASDAQ companies, not the switch of the shareholders.

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    2. Interest will continue to follow price. If we are to assume that there is a crash ahead, interest in bitcoin will shrivel. Some of those who get burned will be permanently absent the bitcoin market going forward, as has happened with Platinum post 2008 and silver post 2011.

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    3. As long as the price is not zero, Bitcoin still can serve for transactional purposes and provide utility. Furthermore, the price evolution in 2011 contradicts your claim. You're stuck in a stock market and don't actually comprehend the disruptive technology Bitcoin provides.

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    4. Actually, this time is different arguments are a hallmark of bubbles.

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    5. You're the one saying that it's different. You're saying that Bitcoin didn't collapse in 2011, but will now. Also you are still looking in the wrong direction, I'm afraid I can't do anything about that anymore.

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    6. It has been brought to my attention that I called the peak of the 2011 bubble, I completely forgot about this.

      In any case, it did collapse in 2011 and will collapse again this year. No asset has defied the laws of financial physics. Had bitcoins not turned into a bubble in 2011, they would have been more liquid today, albeit the price being a lot lower. Bitcoin seems to be incapable of slow and steady progress, which is a prerequisite for any asset to gain wide traction, especially a potentially currency.

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    7. Ah, so here we have it. Now you DO distinguish between a collapse of a price bubble, and a collapse of Bitcoin as a medium of exchange. That's what I call progress.

      Now you appear to be claiming that the problem isn't in something fundamental in Bitcoin as such, but that the price fluctuations negatively impact its ability to serve as a medium of exchange. Coincidentally, I tend to agree that without the bubble, liquidity would be higher, indeed in my thesis I found a negative correlation between liquidity and price volatility. But I think you're ascribing it too much weight. If you want to use Bitcoin as a medium of exchange, you can hedge against price fluctuations. Liquidity has many aspects and substituting it for price volatility might be misleading.

      The truth is, we have no idea what the ideal way is for a new medium of exchange to appear from a market. Hayek hypothesised that price stability is the key, while Rothbard criticised him. We are only accustomed to fiat reforms, and we attempt to extrapolate what could have happened in the distant past, where there was no monetary economy. But that doesn't help us now. Austrians so far have been arguing for a reformist policy to be conducted by the state, and presented different methods of how to deflate credit or reestablish 100% reserves. But we really have no idea what would happen on a free market.

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    8. 'Now you DO distinguish between a collapse of a price bubble, and a collapse of Bitcoin as a medium of exchange'

      Would you say bitcoin has increased as a medium of exchange over the past year or increased as a speculative vehicle. Relatively speaking, which one has bitcoin morphed into moreso over the past year?

      Do you think there are any reprecussions towards bitcoins growing as a medium of exchange if the price collapses?

      'The truth is, we have no idea what the ideal way is for a new medium of exchange to appear from a market. Hayek hypothesised that price stability is the key, while Rothbard criticised him. We are only accustomed to fiat reforms, and we attempt to extrapolate what could have happened in the distant past, where there was no monetary economy. But that doesn't help us now. Austrians so far have been arguing for a reformist policy to be conducted by the state, and presented different methods of how to deflate credit or reestablish 100% reserves. But we really have no idea what would happen on a free market'

      Personally, I am not interested in what should be, but in what will be. The way I see the writing on the wall is that eventually, the biggest holders of gold (who also happen to be some of the biggest international debtors) will remonetize gold but at a much higher price. I believe that after the treasury bond bubble bursts, people will rush into gold. The mechanism over the past decade has been one of the herd gradually shifting to more and more conservative assets: from tech stocks, to houses, to bonds, and subsequently to gold. The question left to be answered is what comes after gold. I do not have an answer for that yet.

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    9. You could be right that the use as a speculative vehicle increased more than that of a medium of exchange. I don't know, but I don't have a problem with that. I also however don't think that if the price drops, this would affect the use as a medium of exchange much, because you can hedge against fluctuations, and I think that most of the Bitcoin entrepreneurs (not speculators) didn't build their businesses on the assumption that the price will always rise.

      I'm not sure the scenario with gold is realistic, because gold has high transaction costs. It's not suitable for the uses of markets without deposit banking. Banking is heavily regulated and indeed companies like GoldMoney can't really compete due to this. I see gold only competing if either it is used to prop up central bank reserves, or if the whole system collapses entirely in a major catastrophe (including possible wars, famine, and so on), and then a new deposit banking system is built on top of gold from scratch. A scenario of a political reform in direction of free banking or full reserve banking I don't think likely.

      Bitcoin, on the other hand, is less susceptible to regulation and can compete on transaction costs without deposit banking. In a scenario of collapse, it therefore has more opportunities to monetise the economy than gold, and does not require total collapse or war. While fiat is failing, it does not magically become easier to do merchant transactions, international transfers or granting of loans with gold, but it is with Bitcoin. But if it's too immature when the collapse comes, it might not be enough.

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    10. 'I think that most of the Bitcoin entrepreneurs (not speculators) didn't build their businesses on the assumption that the price will always rise'

      I don't know about the online merchants, perhaps they are superhuman, but I know for a fact that the physical stores that accepted bitcoins did it primarily because they assumed the price would keep rising dramatically.

      'I'm not sure the scenario with gold is realistic'

      I'm confident gold will end in a bubble. The crowds aren't particularly smart and have been piling into more and more conservative assets. After treasuries start falling, the smart money will go into the NASDAQ and the dumb money will flock into gold, at which point I plan on selling.

      'Bitcoin, on the other hand, is less susceptible to regulation and can compete on transaction costs without deposit banking'

      Bitcoin has many flaws, the vast majority of which have not been uncovered yet. However, I do think that digital currencies are here to stay. I know several top-notch network developers who are working on their own versions.

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    11. Merely because someone uses Bitcoin for speculation purposes, that does not automatically exclude the possibility that the same act is also using Bitcoin for transactional purposes, for example the merchants. If they think that they price won't rise anymore, they can still switch to hedging the price and save on the fees compared to other payment methods. They do not need to stop accepting Bitcoin payments, as there are no real running costs associated with it (unlike, for example, with credit card payments where you're typically paying a maintenance fee every month irrespective of whether you trade).

      I don't know about the gold bubble. I was talking about using gold as a medium of exchange, not an investment. If the fiat system collapses, the stock market might still survive, but the stocks won't become the new money.

      Bitcoin is not perfect, but it runs circles around anything that existed so far. Bitcoin is also an open protocol and can evolve.

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  2. The underlying point of the ABCT is that while an initial burst of activity may lead to apparent prosperity, long-term growth is retarded. This is true for micro as well as macro markets. Sticking with the prices do not matter position is nonsensical.

    ‘In addition to that, there has been a lot of investment into Bitcoin projects, and these have nothing to do with the changes in price’

    Of course they do. During bitcoin bubble 1.0, several establishments here in NYC started accepting bitcoins. After the first bubble popped, that was no longer. As of recently, there are a number of establishments (obviously not the same ones) that have started accepting bitcoins. Is this time for real? Once again, it all comes down to price. Parabolic moves imply corrections. Extended parabolic moves imply crashes. The next pop will ensure that bitcoins won’t be used here in the city for another couple of years (at least).

    ‘Yet, the market share grew irrespective of this development, and so did investment, the variety of goods and services related to Bitcoin. So the relevance of the argument is directly contradicted by empirical evidence’

    Had bitcoin gone through a stable period of sustainably rising prices, as gold has for the past 12 years, then it would be far more acceptable. The past two speculative orgies, the present one included, have virtually guaranteed that smart money will not jump onto this market. The technical damage has already been done. FYI, technical analysis has been proven to be most effective in forex markets.

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    1. A decrease of transaction costs is not the same type of "burst of activity" as inflationary boom. Your insistence that prices matter is nonsensical.

      Please provide an example of a business that went bankrupt because the price of Bitcoin dropped.

      The price of gold dropped dramatically in the 80s, yet it's still here.

      Your argument about bubbles causing a decrease in interest for transactional purposes is neither supported by empirical evidence, nor theoretically sound.

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    2. I keep posting the empirical evidence. Look at what happened the last time the price dropped.
      http://www.google.com/trends/explore#q=bitcoin

      As for the gold price drop in the 1980's, there were a ton of gold miners that went bankrupt as a result.

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    3. Partik,

      you're stuck on the stock exchange and don't understand that that's not where the future of Bitcoin lies. You mind is unable to break from the narrow world you're accustomed to, not realising that there's much more to it that your eyes can see. I really wish you stopped referring to the the price altogether. It's like blind fanaticism without a real connection to the world.

      Bitcoin miners can theoretically go bankrupt, in particular if they go for ASICs. FPGAs and GPUs are commoditised and easily resellable. But that's not using Bitcoin for transactional purposes either, that's speculating on the price changes.

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    4. Actually, the predominant argument towards the tail-end of the silver bubble in 2011 went along these lines exactly. Price doesn't matter, keep on stacking. Same arguments, different bodies.

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    5. Even if your argument about the "price stacking" in 2011 was correct, you still ignore that the ecosystem matured and acceptance increased. You're looking at the wrong direction, like the illiterate who cannot grasp the point of writing.

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    6. Did acceptance increase or decrease from the bubble peak in 2011 until mid last year? You're looking at a time frame that works for you. It's entirerly possible that post-pop bitcoin can decline for years on end. The Nikkei is still down something like 70% from where it was over 20 years ago.

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    7. Ah, so now you admit that that the relationship can be prolonged. That makes your argument only weaker, because it gives the businesses the time to innovate.

      Tell me one thing. Do you see a potential in payment systems innovation at all? Do you think that paypal or M-PESA improved the lives of people in ways that haven't been done before, and that this can happen again in ways which we cannot foresee?

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    8. Actually the acceptence did increase. The wiki page for merchants accepting Bitcoin was growing, for example.

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    9. 'Tell me one thing. Do you see a potential in payment systems innovation at all? Do you think that paypal or M-PESA improved the lives of people in ways that haven't been done before, and that this can happen again in ways which we cannot foresee?'

      Different ballgame. Paypal was created by entrepreneurs and run by professionals. Moreover, it didn't have an emotional cult attached to it. Bitcoin is more of an ideological invention, and not a mainstream one with practical implications. The [potentially] lower transaction costs associated with digital currencies are an afterthought.

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    10. Bitcoin is a protocol, similarly as the internet. It's not an entrepreneur. Entrepreneurs as the guys form Mt. Gox, BitPay, and so on. Just like, say, Google is the entrepreneur using the internet, or linux. You're not much familiar with open source are you? Plenty of open source projects have fanboys, or people that are difficult to deal with, but this does not impact the market penetration of the products themselves.

      Back in the late 90s and early 2000s, there were pundits in the media dismissing Linux precisely along the similar lines as you dismiss Bitcoin. A bunch of nerds, can't compete with a guy in a suit. But they missed a paradigm shift. It wasn't as heavy with Linux as it was with the internet, but it still happened.

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    11. 'You're not much familiar with open source are you? Plenty of open source projects have fanboys, or people that are difficult to deal with, but this does not impact the market penetration of the products themselves'

      Silver wasn't an open source protocol in 2011, but I saw the same sentiments out there and a highly emotional crowd.

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    12. That does not negate my argument. I remember back around 1999 the VA Linux Systems IPO bubble, see http://en.wikipedia.org/wiki/Geeknet#Initial_public_offering . But Linux is still here, alive and kicking, and its market share increased.

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  3. ‘But many, if not all, consumers have liquid assets, such as money, and can recognise the benefit in decreasing transaction costs’

    Throughout the course of this day I made the following transactions. (1) I refilled my metrocard, (2) I got breakfast at Dunkin Donuts, (3) I went to the deli, (4) I got Chinese food for lunch, (5) I bought some stocks using my brokerage, (6) I ordered a course online, (7) I paid my phone bill online, and (8) I stopped by Subway for dinner.

    Guess how many of those transactions I would have been able to make with bitcoins? 0/8
    Guess how many of those transactions would have been cheaper had I been allowed to use bitcoins? 0/8

    Until the whole structure of production adapts to a digital currency, bitcoin simply piles on additional transaction fees, however miniscule they be.

    At least litecoiners, myself included, are honest about what they have been up to for the past month: speculation. Bitcoiners smell of insincerity when they expect one to believe that poor single mothers in a third-world country are just trying to send their kids around the globe some milk money, while those evil bourgeoisie bankers are skimming transaction fees off the top. The vast majority of bitcoiners are in it for capital appreciation. Once again, interest follows prices.

    ‘The exchanges already have long been subject to MSB regulations. But Bitcoin does not need exchanges to work. Even during communism with high capital controls, illegal forex brokers were quite present. Currently, we see the situation in countries Argentina and Iran’

    Garzik wasn’t simply pro-exchange regulations. He rightly realized that in order for this thing to go mainstream, you need lots of regulations across the board. I suspect the most important part of the puzzle will be ISP regulations specifically designed for digital currencies.

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    1. During yesterday, I made zero transactions with US dollar (which currently is the most liquid good). Does my experience negate the liquidity? Of course not. You're like someone in the 80s wondering what he can use the internet for, and concluding it has no future.

      Meanwhile, 31% of Kenya's GDP is transacted via mobile phones.

      Garzik does, in my opinion, as I said before, a very good PR. I can't know what he's thinking, but I would not jump to hasty conclusions like you do.

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    2. The implication you are making is that Garzik is appeasing to the authorities and playing nice. I have it on good authority that he is sincere, and I agree with him. If bitcoin, or another digital currency, wants to go mainstream, it has to cater to mainstream consumers.

      Delete
    3. Ok, so now you're actually not arguing anymore that Garzik is correct, but you agree with me that he has a goal, we just don't agree on what the goal is.

      Delete
  4. ‘What is the price of a language? What is the price of the internet? There is none. There are costs associated with using them, and benefits that are accessible through their use. In network effect, the transaction costs in the narrower sense can be compensated against by the network size, and if the transaction cost difference is small, the relative market share size can be permanent’

    Not only are there costs associated with using them, but also acquiring them. The network size of bitcoin, as far as an actually money is concerned, is virtually non-existent. As for the network size of bitcoin as far as speculation is concerned, there is a built-in incentive to give the copycats a go: they are starting for a smaller base. There is no coincidence whatsoever that litecoins are up well over 5,000% while bitcoins are up roughly 500% since March, this is the mechanism that my parable described. Moreover, it is no coincidence whatsoever that magic the gathering online exchange is planning on pumping litecoins going forward. The assumption that these exchanges would stay loyal to bitcoin only was just that: an assumption.

    ‘If we do a bit of research on myspace, we find out for example that their system didn't scale, wasn't able to grow outside of US, made problematic decisions with respect to marketing and so on. I don't know which of these factors is relevant, but clearly there were a lot of differences and many of them could have been relevant’

    There are always ex post facto justifications. What will be the excuse if and when facebook declines? My guess is that it will be a combination of too many ads, fees, and the valuation of the company itself being in the stratosphere. However, it would be a mistake to assume that consumers are some ultra-rational robots. Taste buds change, even if you have filet mignon for dinner every night, you will eventually get tired of it.

    ‘I already commented on this one in the mises.org comment section. This argument is a variant of the labour theory of value, i.e. it misses the demand part’

    As with penny stocks, the demand in these currencies backed by binary digits comes from rising prices.

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    1. Before a network size is big, it must be small. There is no way around it, so the objection is moot. The internet was also small once. So what? That's irrelevant for assessing its future. Credit card market was at the beginning small as well. So what?

      Then you're confusing market capitalisation with liquidity.

      Then you still are oblivious to how competition under network effect works. In fact I now have no idea now what you're talking about. You invented your own justification for a switch (low barriers to entry plus speculation), but again provide no evidence nor a theory of why it should affect anyone else than forex speculators, precisely the market segment you're supposed to ignore.

      Then you're confusing market capitalisation with liquidity again.

      Delete
    2. Value statements, the sign of defeat.

      Delete
    3. You are making value statements, in that the network is small. Not me. In fact, that's all you've been making all along! You arbitrarily assign values to arbitrary factors, and because you arbitrarily decide that they somehow relevant. But you are not analyse catallactics of media of exchange. That's the main fail.

      An economic argument would be whether the size is below or over the critical mass. I argue in my thesis that it probably is, and since then the ecosystem grew so much that I am now more certain of it.

      Arguing that it is "small" is an arbitrary, biased, unfounded judgement.

      Delete
    4. Actually, it is a drop in the bucket both in absolute and relative terms. Ironically, I was told that mtgox has a network effect just a few weeks ago and therefore the knockoffs will hardly gain any traction. These days, I am being told by the bitbulls that mtgox is insignificant. It all boils down to wishful thinking.

      Delete
    5. You forgot to make an actual argument.

      Delete
    6. It's a counter-argument to the network effect stuff I'm hearing parroted left and right. Last month: mtgox = network effect, the knockoffs will gain zero traction unless they have a huge mighty exchange behind them. Today: mtgox = useless exchange that will dwindle because they will be accepting litecoins.

      Delete
    7. Your argument is nonsensical. The network effect does not mean the absence of competitors of the impossibility of shifts between relative market shares. The size of the network effect is guided only by a threshold, the critical mass. Below that mass, the system doesn't provide its utility, above that mass it does. That's all. As long as the size is above the critical mass, the system will have utility. We don't know what the critical mass is in as measurement. That is why your complaints are arbitrary. Either it works, or it doesn't. If it does, you can't complain that it's too small.

      Delete
    8. 'Either it works, or it doesn't. If it does, you can't complain that it's too small'

      Why not? There are various fiat currencies with only a small geographical area for which they can be arbitrarily traded. One can certainly complain that the network of that currency is tiny. The same goes for bitcoin. Even today, with a 2 billion market cap, I cannot use it anywhere I want to with greater ease and lower transaction costs.

      Delete
    9. The examples that you use are mainly closed economies, and they do not provide a reduction of transaction costs. It's like a bunch of geeks who decide to talk in Klingon.

      Delete
  5. ‘While there is no barrier to entry, there is a barrier to be able to reasonably compete. The network size is also a relevant factor, that gives preference if no relevant distinguishing (technical) factor is present’

    Bitcoin has virtually no commercial moat. I’ve been fortunate enough to have been part of the due diligence process of several start-ups, with significant market caps, and if the only argument the various entrepreneurs had as to the viability of their respective companies was: we were first, so we should be fine, I know quantitatively exactly how much VC they would have received.

    ‘This is probably not apparent for the majority of observers, but the ability to fork are actually good, because they provide a method for resolving problems that arise’

    Forking, by definition, destroys some transactions as one ledger is ultimately chosen over another. I wouldn’t call this a resolution to problems. Imagine if JP Morgan, for example, worked on this methodology.

    ‘But that presented by Korda (low barriers to entry) is not one of them’

    Sure it is. One of the main arguments against bitcoin is that it is too complicated for some people to use. The future knockoffs will inevitably be trendier, easier to “mine”, and easier to use.

    ‘If Bitcoin was a money substitute, he would not mention the costs at all, and the table would contain percentages (discounts/premiums or agios/disagios), possibly would not exist at all (because BTC would trade at par with USD). This is as clear as it gets that Bitcoin is not a money substitute. I don't know how else I can make it more apparent. The production costs of money substitute do not play a role in deciding the ask position of the producer, rather the market price of the underlying good. Which, in case of Bitcoin, doesn't exist’

    Of course production costs play a role, by far the most silly argument you have made thus far. Well, maybe it’s tied with the prices don’t matter argument. Chuck E. Cheese’s does not produce their tokens at a loss, neither does the US Mint produce pennies, nickels, dimes, and quarters at a loss. Hint: This is why the metal content of these coins has changed over time. What is, however, akin to the labor theory of value in your chain of reasoning is the obvious implication: bitcoin has value because it costs energy to produce.

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    1. Again the argument from size. Let me make an analogy: you are small and irrelevant. Does that refute your arguments somehow?

      You're missing the point of forks, which is to resolve conflicts in cases where the alternative is either to create a counterparty risk or outright die.

      Your argument about low barriers to entry still make no sense. If it was true, the markets would be dominated by pump and dump schemes.

      You didn't read my argument about the production costs carefully. Indeed, this is one of the most ridiculous arguments you have made now. I did not claim that production costs of commodity money do not affect any choice the producer makes, but that it affects the his ask price (in particular when the market is immature or does not exist yet). With a money substitute, the ask price would be determined by the price of the underlying good that the substitute refers to. Your representation of my argument as "bitcoin has value because it costs energy to produce" is absurd. You have no theory of classification of types of money and you're just making up stuff on the fly.

      Delete
    2. 'Your argument about low barriers to entry still make no sense. If it was true, the markets would be dominated by pump and dump schemes'

      I agree

      'You're missing the point of forks, which is to resolve conflicts in cases where the alternative is either to create a counterparty risk or outright die.'

      I understand that, but it doesn't neglect that it is a pretty barbaric way of resolving an issue. If mainstream banking working on this principle, it wouldn't work.

      Delete
    3. So is stock exchange dominated by pump and dump schemes too or not? I don't understand. Because in order to do a pump and dump scheme, you do not need to be the creator of the instrument, so the argument about low barriers to entry is irrelevant.

      The point of forks is that they allow antifragility. It's a paradigm shift and I don't think many people get it yet (even less than get Bitcoin).

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    4. 'So is stock exchange dominated by pump and dump schemes too or not?'

      The lower down the food chain you go, all the way down to penny stocks, the more pump and dumps you see.

      'The point of forks is that they allow antifragility. It's a paradigm shift and I don't think many people get it yet (even less than get Bitcoin)'

      It's a pretty easy to understand concept, just quite crude and barbaric to meet the needs of 21st century finance. In a global market that churns $4Trillion, a fork could mean losses in the hundreds of billions. The fact that otherwise the system might have died is of no consolation to the potential victims.

      Delete
    5. Ok, so when you pump and dump a company, that eliminates the demand for the products of this company?

      You mistake the principle of a fork with a specific implementation. I thought that unlike other critics of Bitcoin, you actually don't suffer from a lack of imagination, but now I see you do. You use your lack of imagination as an argument.

      Delete
    6. 'Ok, so when you pump and dump a company, that eliminates the demand for the products of this company?'

      It may even bankrupt the company.

      'You mistake the principle of a fork with a specific implementation. I thought that unlike other critics of Bitcoin, you actually don't suffer from a lack of imagination, but now I see you do. You use your lack of imagination as an argument'

      Actually, a fork by definition eliminates transactions that would otherwise have occured. There is no way around this. It's not an issue of specific implementation. If this is how mainstream banking would work, there would be utter outrage. Government confiscating part of deposits that are over 100K? Try transactions vanishing into thin air.

      Delete
    7. So, if, say, the manufacturer of Bitbills goes bankrupt, my Bitbills wills top working?

      A fork does not necessarily eliminate transactions, merely the blocks are assembled differently. While it creates a possibility of a double spend, as an end user, you can still detect forks and follow both of them and detect if there's a discrepancy, without having to rely on someone to "fix" the fork. You don't need to stop processing anything, you see right away that some transactions are unconfirmed in some forks, so you treat them as unconfirmed until they are confirmed in all forks. We just don't have working user interfaces for this. In other words, there is no fundamental problem, just the current implementation does not fully benefit from the capabilities, just like the internet in the 80s didn't have the web yet.

      Delete
    8. The forking mechanism, by definition, chooses one chain over another. If they were both identical, there would be no point of a fork to begin with. Thus, by definition, some transactions will go poof. Imagine if Paypal had relied on this sort of framework. Looking at it from a mainstream consumer point of view, I wouldn't see it as an innovation but a potential black hole for my hard earned money.

      Delete
    9. I think you misunderstand how forking works. Forking mechanism doesn't "choose" one fork over another, while a fork exists, both forks exist simultaneously, just typically the client prefers one to the other. A fork does not have to have a different set of transactions, just differently assembled blocks from the same set of transactions.

      But there is no necessity for all operations to prefer one for over the other. For payment verification purposes, a node can treat them equally.

      With traditional banking, you have the problem of payment reversals. But this is not a fork, this is just a sequence, first it is there, then it isn't. You have no idea when or how it will happen, and are susceptible to "double spend" attack without having much control over it.

      With Bitcoin, you are in control. We don't have the tools to utilise it yet, but it's possible.

      Delete
  6. Honestly, you have been all over the place with this whole money-substitute issue. In your thesis you stated that money-substitutes do not have to be claims. Then, you argued against my classification stating that they must be fixed claims. Then, you argued that they can fluctuate downwards. Then, you argued that they can fluctuate either way but only somewhat. Now, you are claiming that production costs do not matter. One inconsistency and/or flatly wrong assertion after another.

    ‘But even if I was wrong, empirical evidence clearly shows that Bitcoin is a medium of exchange. So whatever objections Korda has regarding Bitcoin with respect to the theorem, they are irrelevant’

    The regression theorem proves that bitcoin cannot be a commodity money, it doesn’t in any way shape or form state that bitcoins cannot be a medium of exchange.

    ‘Surely though, Korda must have heard about the internet. While people are not hoarding the internet, they are using it to reduce their transaction costs’

    Ignoratio Elenchi. You jump from arguing that a good must be hoarded in order to provide a potential foundation as money, to making a completely different argument.

    ‘But shouldn't then the proper approach be to attempt to understand the reasoning for the classification system and amend it based on that, instead of making up new stuff?’

    I’m not willing to take the arrogant approach of simply making a brand new category. What is crystal clear is that bitcoins cannot be classified as a commodity money, and I don’t buy into the quasi-commodity nonsense. You’re either pregnant or you’re not. In light of recent findings by Daniel and Joe, I am trying to figure out if bitcoins can possibly be classified as fiat money.

    ‘It can remain a medium of exchange, and be primarily used as a payment mechanism, in a world dominated by fiat’

    I personally doubt it will even remain as a medium of exchange. The point of the initial article, however, was to give bitcoin the benefit of the doubt.

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    1. You have no underlying theory of classification of goods, nor of the regression theorem, you're just making up nonsensical stuff on the fly.

      You brought up hoarding. I countered with utility. You still don't get why people use money. They do not use it in order to hoard. They use it to make it possible to consume/produce in the future. But you can't just postpone consumption/production, because of imperfect information and transaction costs. So people will make choices under these limitations.

      You don't want to make a new category, but you're not willing to use the underlying reasoniong of Mises either. You reject his definition of money substitutes for reasons that you make up, and then continue through rejecting the underlying reasoning for the classification system in general. That's really something.

      If Bitcoin is to cease to be a medium of exchange, what will replace it?

      Delete
    2. How can you say I have been all over the place when you have self-admittedly contradicted yourself several times?

      I repeat: Honestly, you have been all over the place with this whole money-substitute issue. In your thesis you stated that money-substitutes do not have to be claims. Then, you argued against my classification stating that they must be fixed claims. Then, you argued that they can fluctuate downwards. Then, you argued that they can fluctuate either way but only somewhat. Now, you are claiming that production costs do not matter. One inconsistency and/or flatly wrong assertion after another.

      Delete
    3. Where did I contradict myself?

      You refer to Mises' classification system, yet you reject his definition of a money substitute. You need to make a decision: either you stick with Mises, and then you're clearly wrong, or you provide an alternative system, which you didn't. I'm sorry but your arguments in this area are completely nonsensical and incoherent.

      Mises (and all Austrians that I know of) defines money substitutes as claims to money in the narrower sense. You disagree with him. So complain to the other Austrians, and not me.

      My point about money substitutes has always been the causal link, even though I have not always been sufficiently precise about all the nuances. It's a work in progress.

      But you provide no alternative whatsoever! You have no explanation for your use of the term "money substitute", other than you had to pick something to classify Bitcoin. It's intellectual fraud. You have no argument whatsoever here, because you contradict me, the other Austrians, and instead just arbitrarily pull out a definition out of the air.

      Delete
    4. 'Where did I contradict myself?'

      Honestly, you have been all over the place with this whole money-substitute issue. In your thesis you stated that money-substitutes do not have to be claims. Then, you argued against my classification stating that they must be fixed claims. Then, you argued that they can fluctuate downwards. Then, you argued that they can fluctuate either way but only somewhat. Now, you are claiming that production costs do not matter. One inconsistency and/or flatly wrong assertion after another.

      Delete
    5. Repetition of misunderstandings is not an argument. In fact by repeating and refusing to address my argument you confirm that you're either not interested in the issue or do not understand it.

      Delete
    6. You asked where you contradicted yourself. You made a number of them. It's not simply a matter of being wrong, but a matter of chronically shifting positions and arguments.

      In your thesis you stated that money-substitutes do not have to be claims. Then, you argued against my classification stating that they must be fixed claims. Then, you argued that they can fluctuate downwards. Then, you argued that they can fluctuate either way but only somewhat. Now, you are claiming that production costs do not matter. One inconsistency and/or flatly wrong assertion after another.

      Delete
    7. Now hold on a minute. I first countered that according to Mises, a money substitute must be a claim to a fixed sum of money, and I provided tons of references of the Austrians claiming that. I at first didn't claim that their market price must be equal. But you just shrugged it off (which would normally already disqualify your argument), so I loosened the requirements to show that you're still wrong. I did that clumsily and made errors. But when I attempted to fix them, you simply returned to the errors and ignore everything else. That gives me a hint discussing this topic with you is probably a lost cause, because you're not interested in resolving the problems.

      Delete
    8. 'I first countered that according to Mises, a money substitute must be a claim to a fixed sum of money, and I provided tons of references of the Austrians claiming that.'

      (1) I wouldn't call it tons of references.
      (2) Let's remember why you changed your mind anyway, I provided quotes by Mises to the contrary as well as obvious historical examples.

      One thing about Mises, he was not a stubborn hard-headed economist that people often portray him to have been. He hardly ever used the word must.

      Delete
    9. I provided five references from four top Austrian experts in the money supply. You provided zero.

      I didn't change my mind about anything fundamental. I made an error while I was attempting to accommodate your position, which you yourself invented, contradicts Mises, and so far haven't backed with anything.

      You don't actually have an argument about substitutes. I provided refutations by Austrians, analysed Mises and explained his reasoning, as well as accommodated your own position. You're just bitching instead of arguing.

      Delete
    10. 'I didn't change my mind about anything fundamental'

      At first you claimed that money-substitutes must be claims to money proper and at a fixed exchange rate. From this you worked your way towards admitting that money-substitutes can fluctuates in either direction. Moreover, in your thesis you went so far as to claim that money-substitutes do not necessarily have to be claims.

      'I provided five references from four top Austrian experts in the money supply'

      Just wondering, which one of the several positions did these top four Austrian experts support?

      Delete
    11. I claimed that according to the quoted Austrians, money substitutes are par value claims on money in the narrower sense. That is still true and I still claim that. You choose to reject that. That is also fine, so I tried to accommodate your position based on the argument I made in my thesis. At first I wasn't successful, but after your counters, I fixed my arguments.

      You have nothing. You rejected Mises, and as a replacement provide your own theory, which is based on nothing, and is not supported by any of the Austrians. I have an explanation for the essence the Misesian classification system as well as how it can be reformulated to fix the discrepancies, and also explain why even without Bitcoin, such fix is necessary.

      The Austrians, I bet, would agree with me, that their position is that money substitutes is a par value claim on money in the narrower sense. They would tell you that Bitcoin does not fit into that definition and that your definition is gobbledygook.

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    12. 'I claimed that according to the quoted Austrians, money substitutes are par value claims on money in the narrower sense. That is still true and I still claim that'

      How can you claim something that is historically incorrect?

      In the discussions I've had with the folks at mises, I would able to dig up several points Mises made about fiduciary media not necessarily even being backed by a money. Mises correctly saw the possibility of a pure fiat money in a world that had not experienced yet, which was a pretty incredible accomplishment coming from a supposed "gold bug". Moreover, I think he also correctly saw the possibility of a fiduciary media not backed by anything. He did claim this was theoretically possible.

      In any case, we definitely agree on one thing: Bitcoin cannot be classified as a commodity money if it every does become a generally accepted medium of exchange.

      Delete
    13. Patrik, you're starting to lose coherence even more. I am merely quoting Austrians. Carefully observe that my quotes of the Austrians do not say that money substitutes must trade on a free market at the same price. They say that they are a claim for a fixed price. Whether you like it or not though, it has absolutely nothing to do with me. I do not agree with this definition, and explained why. So kindly go and complain to the other Austrians, like Sanches or Salerno. In particular Salerno is probably going to smack you, because he's pretty adamant about this, I asked him about the issue earlier this year on his Mises Academy course.

      Mises argued (and I quote him on this in my thesis), that the substitutes do not need to be claims in the juristic sense, it is sufficient if they are perceived as such by the market participants. In other words, even if they really aren't claims, if people think of them as claims, they are still money substitutes. Salerno formulates it slightly differently, but in essence his argument is exactly the same, he allows for two options: either very secure par value claims, or treated as equivalent by the market. That still does not improve your situation whatsoever.

      Commodity money is the option that follows from analysing the essence of the Misesian classification system, which is the mechanism of price formation. As I tried to explain to you, you have no explanation for the classification system of Mises, you're attempting a linguistic, instead of economic, analysis of his writings.

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    14. 'As I tried to explain to you, you have no explanation for the classification system of Mises, you're attempting a linguistic, instead of economic, analysis of his writings'

      I don't have one because I didn't make one or reformulated one. There is already a perfectly good classification system set up by Mises which has not been surpassed by the likes of more fickle thinkers such as yourself, Selgin, or Hayek. Bitcoin does not fit the description of a commodity money simply because it was not a commercial commodity used in industry. Indeed, the only way to get around this fact would be to make another theorem up, or to 'reformulate' it.

      Delete
    15. Patrik, you did reformulate it, because you rejected the Misesian definition of a money substitute.

      By repeating the term "commercial commodity", you emphasise that your method for analysing Mises is linguistic rather than economic.

      Delete
  7. ‘And last but not least, the reason why I reformulated the theorem is that I have not seen it formulated in a coherent manner anywhere, and people were ascribing it features which it doesn't have. One of those people is Korda, who ascribes to it quantitative aspects ("handful of people consume them"), whereas it is a qualitative argument (emergence of price and liquidity). Even if Bitcoin didn't exist, my reformulation would be relevant for fiat money, for example, because many Austrians interpret it very weirdly, for example that the power to tax gives creates demand for money (which still does not explain the price and liquidity of fiat money)’

    I tend to think the regression theorem is rather obvious: it must be an industrial commodity that has use-value before it has exchange-value. The reason why you made a reformulation was rather obvious: to make bitcoin stick. I respect the more honest approach of other bitcoiners who simply throw the theorem under the bus, instead of trying to play mental gymnastics around it.

    ‘If this is an attempt to fully explain the price of Bitcoin, it is what what Mises calls an "acatallactic monetary doctrine’

    I never claimed it was a full explanation. I was merely pointing out that in our exchanges you were claiming that prices are irrelevant. Yet, as was the case with your statement in regards to money-substitutes not necessarily being claims, you were in agreement with me in your thesis. Prices are very relevant when it comes to public interest, it’s pretty obvious.

    ‘There is a research paper which comes to the opposite conclusion, i.e. that the price follows the interest. But that still does not answer the actual question’

    Well, it’s obviously wrong simply by looking at the timing of the two data series. Prices rise first, then interest rises, not the other way around. The process also works in reverse i.e., when prices fall, interest subsequently falls.

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    1. Your interpretation of the regression theorem is acatallactic, while mine is catallactic. It may or may not be true, but I'm trying to understand the essence of Mises' reasoning instead of making up stuff on the fly. Furthermore, how does the regression theorem explain the euro then? When was euro an industrial commodity? Or doesn't it apply to fiat monies? Well there we have it then. You make up your own formulation of the regression theorem in order to prove that Bitcoin is fiat money.

      Stop conflating the price issue. Are you doing this intentionally? I already explained to you that the price is relevant for the classification of Bitcoin within the system designed by Mises, but irrelevant for its future as a medium of exchange. It's two entirely different contexts. So stop conflating them.

      Delete
    2. 'Furthermore, how does the regression theorem explain the euro then? When was euro an industrial commodity? Or doesn't it apply to fiat monies?'

      Really? This is the sort of questions you typically get from shallow Keynesians, who are typically mathematicians that transfered over to economics because they couldn't handle physics. I cannot believe your argumentation has degraded to such a low level.

      The Euro is a currency peg of the various fiat currencies that went to make it up. Think of it as a blanket. As for how does fiat money come out, for that I suggest you give the TMC a read, as a significant portion of the book is dedicated to just that topic.

      Actually, I'm not claiming that bitcoin is fiat money, Daniel at Mises has been doing so. I can include you in those discussion. He is basing his arguments on the later works of Mises.

      'I already explained to you that the price is relevant for the classification of Bitcoin within the system designed by Mises, but irrelevant for its future as a medium of exchange'

      Here we disagree, I tend to think prices matter.

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    3. My point was to expose the lack of coherence in your arguments, and the necessity why you need to reformulate the argument. I succeeded. If the euro satisfies the theorem, then your definition is invalid. If it doesn't, then there must be other ways for media of exchange to arise, and it's pointless to complain about Bitcoin from this perspective. QED.

      So why do prices matter, tell me? Why does the price of apple stock matter for the future of iphones?

      Delete
    4. The Euro is a currency peg of the various fiat currencies that went to make it up. Think of it as a blanket. As for how does fiat money come out, for that I suggest you give the TMC a read, as a significant portion of the book is dedicated to just that topic.

      'So why do prices matter, tell me? Why does the price of apple stock matter for the future of iphones?'

      If AAPL were to another lose +/-50% of its market cap, this has implications across the board. It has implications for the indexes that it is bundled in, for institutional investors, for R&D, for Samsung, and in fact the marketability of iPhones.

      Economist Wynne Godley, a man who correctly predicted both the dotcom and housing bubbles, corrected asserted that corporations do not seek to maximize profits, but share prices instead.

      The reason why the price of bitcoin is relevant towards bitcoin is blatantly obvious. The correlation between interest and price of bitcoin is spot-on. Lower prices = lower interest. Lower interest = less usage. Less usage = binary digits.

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    5. You fail to address the problem with your argument that I exposed. Indeed, you repeat yourself, oblivious to the gap in your argument. So does fiat money fulfill the regression theorem or not?

      The example with iphones was probably not the best, because in this sector, there is a fast product cycle. With Bitcoin, there is no such thing, there is no need for "Bitcoin" to create a new, better, standard, to displace the old one. The difficulty of analogies is probably the reason why you fail to grasp the fundamental paradigm shift.

      You still fail to explain why the price is relevant, you are stuck in your own narrow world.

      Delete
    6. 'So does fiat money fulfill the regression theorem or not?'

      Yes. The historical process of fiat money is rather simple and easy to understand.

      'The difficulty of analogies is probably the reason why you fail to grasp the fundamental paradigm shift'

      New era and this time is different.

      The reason why the price of bitcoin is relevant towards bitcoin is blatantly obvious. The correlation between interest and price of bitcoin is spot-on. Lower prices = lower interest. Lower interest = less usage. Less usage = binary digits.

      Delete
    7. If fiat money fulfills the regression theorem, then your definition of it is wrong, because euro was never "an industrial commodity that has use-value before it has exchange-value". It did, at one stage, have a fixed exchange rate to other fiat monies, which had had a fixed exchange rate to other monies and so on, until at one stage it had a fixed exchange rate to something which was a commodity money, which at some stage was a commodity before it was a medium of exchange. So far, we agree. The problem is that you didn't formulate the theorem in a way that fits the actual regression.


      I on the other hand explain in my thesis on the example of fiat money how it fits my formulation of the regression theorem. In other words, even if I'm wrong, I provide a coherent theory, while you do not. You wonder why I insist on formulating the theorem, when you can't do it yourself?

      Again you mistake the forex market for a payment system.

      Delete
    8. 'If fiat money fulfills the regression theorem, then your definition of it is wrong, because euro was never "an industrial commodity that has use-value before it has exchange-value". It did, at one stage, have a fixed exchange rate to other fiat monies, which had had a fixed exchange rate to other monies and so on, until at one stage it had a fixed exchange rate to something which was a commodity money, which at some stage was a commodity before it was a medium of exchange. So far, we agree. The problem is that you didn't formulate the theorem in a way that fits the actual regression'

      The Euro was not the first ever fiat money to blanket over another. Mises dealt with a few examples himself. I understand that Tucker couldn't comprehend how the Euro could exist, but that is because he misunderstood the regression theorem, not myself.

      'I on the other hand explain in my thesis on the example of fiat money how it fits my formulation of the regression theorem. In other words, even if I'm wrong, I provide a coherent theory, while you do not. You wonder why I insist on formulating the theorem, when you can't do it yourself?'

      In the article I deal with the regression theorem insofar as disproving bitcoins as a potential commodity is concerned. I was not trying to reformulate my own theory of the regression theorem, and I have no interested in doing so. The TMC is just fine.

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    9. You're dodging, you still haven't fixed the gap in your reasoning.

      The regression theorem cannot be used to "disprove" the commodity-ness of anything. That's absurd, and again you still haven't actually formulated the theorem in a coherent manner.

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    10. In plain english: In order for something to qualify as a commodity money, it must first be a commerical commodity that has use-value.

      Delete
    11. That is much better. And now, if you kindly look back at the article of Graf from February 27th, you'll see that Bitcoin did have a use-value before it had exchange value. Whether that qualifies as "commodity" is debatable, of course.

      Now, if we roll out the theorem in its fullness, what you call "commodity", I re-interpret as "liquidity". In other words, a commodity money must first be liquid, before it is logically possible to use it as a medium of exchange. The emergence of price and liquidity are, in my opinion, the fundamentals of the regression theorem.

      In other words, even if you say that the original use-value as per Graf's argument was inadequate even though the use-value generated a market price, I counter that the emergence of liquidity at a later time proves that it was enough, because once something is liquid, it is logically possible to use it as a medium of exchange.

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    12. 'Now, if we roll out the theorem in its fullness, what you call "commodity", I re-interpret as "liquidity". In other words, a commodity money must first be liquid, before it is logically possible to use it as a medium of exchange. The emergence of price and liquidity are, in my opinion, the fundamentals of the regression theorem'

      This completey turns the theorem upside down. Liquidity revolves around exchange-value, thus you are skipping the entire step and in fact brushing aside the entire point of the theoreom: use-value. Claiming that the exchange-value is the use-value of money is a true statement, but it doesn't explain anything as far as the regression theorem is concerned.

      'In other words, even if you say that the original use-value as per Graf's argument was inadequate even though the use-value generated a market price, I counter that the emergence of liquidity at a later time proves that it was enough'

      Just because something commands a price does not mean it can be money. Value and saleability are two different things.

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    13. On the contrary, my argument captures the essence of the theorem. Without liquidity, a medium of exchange cannot logically work as a medium of exchange. Therefore, it must gain liquidity before it can be used as a medium of exchange. Commodities may achieve a wide acceptance before anyone realises that they can use them in indirect exchange. This is the point, in my opinion, that Mises was making. It is maybe more evident for Menger, who spent a whole book explaining how liquidity emerges.

      I got the idea for my formulation of the theorem after watching this lecture of Walter Block: http://www.youtube.com/watch?v=m2690Fy0sM8

      Let me quote him in full, because I think it's brilliant:

      ----------
      You can't have a peace of paper be money. Look, suppose I wrote over on this piece of paper, I write "ten Blockheads". And I go around the room and I say, hey, Erin, will you give me your car I'll give you ten Blockheads. You know she's gonna look at me as if I am a little weird. They don't call me Walter Weird Block for nothing. That's the part and parcel of it. The point is that if somebody just printed up a piece of paper, noone would accept it, except in some sort of weird way. Murray Rothbard used to do this and he would say "Well, suppose I printed ten Rothbards and tried to trade..." and I would raise my hand and say "I'll accept them, I'll give you my bicycle for one" and he would say "Shut up Block, I'm trying to make a point here". But the point is, you see, ten Rothbards, if I really had ten Rothbards, I could probably sell it for a lot of money. But it would not really be money, it would be more like, art or something like that, a unique kind of a thing. But forget about that sort of a thing. In any real case, if someone said "Here is ten Rothbards, give me your house, ... Well, ten Blocks. Ten Rothbards I don't know what you can do with it, if it was real ten Rothbards, but you get the point.
      -------------

      This is where I realised that in order for something to be medium of exchange, it not only needs a price, but it needs liquidity. That's when it clicked with the theorem, and it took me a bit longer to formulate it the way I did in my thesis.

      You on the other hand are just skimming on the surface, giving linguistics a preference to economics.

      While I view Graf's argument is from the evolutionary point of view incomplete, it is just a more generic argument that I make and I find it adequate to refute this nonsense. He though does not argue that a price is sufficient for something to be a medium of exchange (not money, medium of exchange, you persistently conflate the two). He merely says that because Bitcoin is a medium of exchange, it must have had a starting price at some time, and that starting price must have been derived from its use-value.

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    14. 'This is where I realised that in order for something to be medium of exchange, it not only needs a price, but it needs liquidity'

      This is the point I made in the article before even getting into the theorem. Value is not saleability.

      Your 'reformulation' skips the core step in the logical chain of reasoning. The renminbi needs more liquidity before it can become an international currency. However, this has nothing to do with analysing the use-value of a commodity had prior to establishing exchange-value. In fact, one cannot analyse the prior use-value which bitcoins possessed as a commodity used in industry because it clearly is not a commodity.

      Delete
    15. Now you are, yet again, conflating medium of exchange with money. The essence of the theorem though is not about money, but about a about medium of exchange. See Murphy here (avout 15 minutes into the video): http://www.youtube.com/watch?v=wyUNdzLwte4

      Some of the "softer" symptoms of liquidity are also observable, as Menger explained. For example, there exist "organised markets" with bid-ask spread smaller than that of illiquid goods, the price is very similar around the whole world, and so on. That of course does not mean Bitcoin is money, but from the point of the theorem, the objection is irrelevant.

      The theorem does not talk about the transition from a medium of exchange to money. It talks about transition from something that is not a medium of exchange into a medium of exchange. And since Bitcoin already is a medium of exchange, anything that you say with respect to theorem, even if you disagree with my interpretation, must concern the past, not the future, of Bitcoin. You are ascribing to the theorem something which it was not designed to do, and this was long refuted by my quotations of Mises and Menger.

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    16. 'The theorem does not talk about the transition from a medium of exchange to money. It talks about transition from something that is not a medium of exchange into a medium of exchange'

      Actually, it deals with the transition of a commodity into commodity money. Bitcoin is not a commodity.

      There was a blog that Paul Krugman posted either in the late 90's or early 2000's regarding Yuppies who used certificates as a medium of exchange amongst each other. The certificates represented 1 hour worth of daycare for their children. There were main relevant points towards bitcoin in that blog, including hyperdeflation followed by a collapse. However, the bottom line is that these certificates became a medium of exchange. This, however, does not in any way shape or form mean that they must have been accord with the regression theorem.

      Delete
    17. Patrik, you're contradicting yourself now, because you claimed that the regression theorem applies to euro too, and Euro is not commodity money. You have yet to formulate the theorem in a coherent manner, and yet you complain that I reformulated it. You don't really come off as a very competent person in this area.

      You're referring to the infamous "babysitting commune" article. I read it, I also read the original paper and more research about the topic, and I'm working on an article on my blog about it. The scrip in the case was basically a medium of exchange in a form of a claim to a fixed value of babysitting time and a monopolistic issuer. The fact that it was a claim is what gave it purchasing power, similarly as with money substitutes, and the communal rules gave it liquidity. It obviously isn't enough for it to be money, but it is liquid. It is even less liquid than Bitcoin, it's only used by a couple of dozen users, and for one purpose only.

      But irrespective of whether we agree on the substitutes and commodities, it is methodologically invalid to use the regression theorem to predict the future of Bitcoin. It's a big blunder.

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    18. 'Patrik, you're contradicting yourself now, because you claimed that the regression theorem applies to euro too, and Euro is not commodity money. You have yet to formulate the theorem in a coherent manner, and yet you complain that I reformulated it. You don't really come off as a very competent person in this area'

      The euro is not a commodity money, the euro is a fiat money, or more technically a currency peg amongst 17 fiat currencies. Mises dealt with fiat money and the regression theorem quite extensively in TMC. There is no need to reformulate the regression theorem, the one Mises laid out is just fine.

      'But irrespective of whether we agree on the substitutes and commodities, it is methodologically invalid to use the regression theorem to predict the future of Bitcoin'

      The regression theorem is very useful insofar as proving that bitcoin cannot be a commodity money. This is useful because a lot of bitcoin proponents claim it to be a digital gold, which is false. Gold has been and is the most saleable commodity on earth, it has use-value outside of exchange-value.

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    19. I only have one last question. Does the regression theorem prevent from classifying Somali Shillings as commodity money too?

      Delete
    20. Actually, both Mises and Ben Powell have dealt with this issue, which I think is rather simple. Somali Shillings used to be a fiat money that eventually lost this status due to anarchy. As a result of not having a bond market or a tax farm behind the money, it transformed to the underlying physical asset: the paper itself. In fact, it doesn't make any sense to counterfeit Somali Shillings as the costs entailed outweigh their market value.

      Under the Misesian scheme Somali Shillings can be properly defined as a commodity money. You do not need to make a special category for them.

      Delete
    21. Did Somali Shillings they transfrom from a commodity into commodity money or not? And which commodity is that?

      Delete
    22. As a side note, I don't think you understand what I'm doing. I am not asking you to explain to me how Somali Shilings work. I am attempting to get to you formulate coherent arguments. You claimed that the regression theorem talks about a transition from commodity to commodity money. Then, since Bitcoin was never a commodity, it cannot be commodity money. But you also claim that Somali Shillings are a commodity money. So I'm asking, which commodity they were before they were commodity money?

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    23. I'm not sure whether the Somali Shilling has cotton in it like the usd, but I would suppose they are made of paper and ink.

      Delete
    24. So, if everyone printed their Bitcoins on paper (e.g. printcoins), does that mean that Bitcoins could become commodity money?

      Furthermore, can you maybe show an example of Bitcoin that is not made out of anything? Hint: as explained by Kinsella, Hoppe and Mises, only physical objects can be objects of human action.

      Delete
    25. 'So, if everyone printed their Bitcoins on paper (e.g. printcoins), does that mean that Bitcoins could become commodity money?'

      No. I have physical certificates of the various shares that I own, their value far exceeds that of the commodity value of the paper on which they are printed.

      In the case of the Somali Shilling, the money lost its fiat characteristics partly due to no longer having a tax form nor a bond market attached to it. The value that did remain was derived from the physical aspects of the note itself (very little). If bitcoin loses its characteristics of a severely limited medium of exchange as well as a speculative vehicle, it goes to zero, since it is not a commodity that can be used in industry i.e., it lacks any use-value. There may be some people who will look at them on their monitors, just as there are people who would pay for a bag of Justin Bieber's fart. However, those are exceptions to the rule.

      Delete
    26. Your reply is a non-sequitur (or, as you like to say, ignoratio elenchi), on multiple levels.

      Arguing that the market value of somali shillings is derived from their physical aspects is a labour theory of value. It's not how it works. You can't convert the Shillings back to paper and ink, at best you can use recycle them and get a fraction of their costs back. How it works is that for commodity money, the marginal production costs follow the market price, while their demand is influenced by the fact that they already are liquid. This is what happened with Somali Shillings, and this is also how Bitcoin works.

      Now I see that you really have no idea what you're talking about. You cannot provide an explanation of any underlying economic phenomena. If a real Austrian economists read this, he's going to laugh you out.

      Delete
    27. 'Arguing that the market value of somali shillings is derived from their physical aspects is a labour theory of value'

      LTV: The labor theories of value (LTV) are heterodox economic theories of value that argue the value of a commodity is only related to the labor needed to produce or obtain that commodity.

      First off, there is no doubt that you attempted the establish a relationship and justify the market price of bitcoin with the amount of time and energy required to produce it. This is obviously incorrect, the market price can go to $0.00 while the cost of production can be much much higer. It wasn't merely a description of some guy charging x for his bitcoins because that's is what he calculated they cost him to produce, there were obvious implications in putting that in the thesis.

      Second, the value of somali shillings post fiat is derived from the market price of the commodities (not labor) needed to produce it. The proof is in the pudding: They stopped being hyper-counterfeited after it was no longer profitable to do so. Ben Powell has done a ton of work on this. Once again, you are projecting your flaws and errors upon someone else.

      'This is what happened with Somali Shillings, and this is also how Bitcoin works'

      Bitcoin is made of binary digits. There were several million already "mined" before bitcoin had any price whatsoever.

      'Now I see that you really have no idea what you're talking about. You cannot provide an explanation of any underlying economic phenomena. If a real Austrian economists read this, he's going to laugh you out'

      I consider Mark Thornton a "real Austrian economist", whom I exchange with every day. Robert Murphy, on the other hand, questioned both Thornton and Schiff about the housing bubble as it was fully inflated in 2005-2006. Moreover, he predicted hyperinflation within a year in 2010. It's 2013 and CPI is running at single digits. Which one is sympathetic towards bitcoins? Murphy or Thornton?

      Delete
    28. You are wrong both on my account on Bitcoin, as well as on your account of Schilling. If you had read my thesis instead of wasting my time, then maybe you'd be able to make more progress. But you're not. You're just blabbering nonsense without attempting to understand anything.

      And in conclusion, you mention examples of failed empirical predictions, whereas I criticise you on poor economic analysis. So it's a non-sequitur and an appea to authority fallacy.

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    29. 'And in conclusion, you mention examples of failed empirical predictions, whereas I criticise you on poor economic analysis. So it's a non-sequitur and an appea to authority fallacy'

      I didn't appeal to any authority when writing my thesis, I was convinced bitcoin was overvalued based on my experience. It is not me who is addicted to appealing to authority. But if you must know, none of 'us' think bitcoin is either or money nor that it satisfies the regression theorem. The two exceptions being Tucker and perhaps Murphy. Tucker went so far as to tell me that the writings of a man that are over a hundred years old aren't too relevant. As for Murphy, I have no idea, stopped listening to him in early 2010 when he was calling for hyperinflation.

      'If you had read my thesis instead of wasting my time'

      Objectively speaking, who has been more considerate, you or me?

      I wrote an article about a bubble in bitcoins, you said the bubble was irrelevant. That's like criticizing an article about a soundtrack by stating the soundtrack is irrelevant.

      Moreover, I have stuck to ideas, whether time proves me wrong or right. On the other hand, you have repeatedly commited ad hominems. I never stated that authority x would laugh at you, that you are ignorant, a non-economist, x, y, and z. Honestly, take a moment and ask yourself who has been more considerate.

      My thesis, which extrapolated a real estate bubble in China, a bubble in US treasuries, and a potential bubble in gold was based on the ABCT, the way me and Doug French understand it anyway. I didn't say x,y, and z will happen. I merely said, if the ABCT is correct, this is what we should expect. On the other hand, I would never be arrogant enough to reformulate my own version of the regression theorem of Gresham's law, let alone in a thesis about the next magic the gathering fad.

      Delete
    30. Lastly, I do not have a fetish for having the last word, even if it be something as childish as "You have no argument"

      Delete
    31. Several times I have asked you to address the issues in your arguments I pointed to. You refuse, instead attempt to weasel out, derail the conversation to other topics. I pointed out where you contradict other Austrians, and yet you remain completely oblivious to it and instead you accuse me of deviating from Austrian teachings (which may be true, but I explain why I did it and am prepared to defend my position). You fail to formulate your own position in a coherent manner, yet accuse me of reformulating.

      Furthermore, you finally admitted that it does not follow that the bubble has a significant impact on the future of Bitcoin, and you admitted you are not interested in understanding the underlying principles.

      In summary, you're an intellectual fraud. You're an empiricist posing as a theoretician. I'm interested in a debate about fundamental logical and economic principles, not in linguistics or repetition of superficialities.

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    32. 'Several times I have asked you to address the issues in your arguments I pointed to. You refuse, instead attempt to weasel out, derail the conversation to other topics. I pointed out where you contradict other Austrians, and yet you remain completely oblivious to it and instead you accuse me of deviating from Austrian teachings (which may be true, but I explain why I did it and am prepared to defend my position). You fail to formulate your own position in a coherent manner, yet accuse me of reformulating'

      A paragraph full of ad hominems. I stick to ideas.

      'Furthermore, you finally admitted that it does not follow that the bubble has a significant impact on the future of Bitcoin, and you admitted you are not interested in understanding the underlying principles'

      My personal opinion is that bitcoin will not be around in 10 years, but I have no theory of proving this. I did, on the other hand, have a theory for calling bitcoin a bubble.

      'In summary, you're an intellectual fraud. You're an empiricist posing as a theoretician. I'm interested in a debate about fundamental logical and economic principles, not in linguistics or repetition of superficialities'

      Yet another ad hominem.

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    33. It's not an ad hominem, because the purpose of the sentences is not to refute your arguments. I already refuted your arguments independently. The purpose of my sentences above is to explain what is happening, why there is a disconnect between our two approaches and why the disagreements are unlikely to be resolved through a debate.

      Your argument about the future of Bitcoin is exactly what I am talking about: empiricism. I have no idea if Bitcoin will be around in ten years. But that's not something that is relevant for Austrians. An article by Daniel Sanches (including an approval from Salerno) from last year: http://mises.org/daily/6190/Horwitzs-Misreading-of-Mises emphasises that the Misesian approach is a twofold classification into praxeology and economic history. An argument about Bitcoin in ten years is neither.

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    34. Also, kindly note that I'm not taking a cheap shot and criticising your misprediction, such as when you announced shorting Bitcoin at around 40-ish, and that the liquidity from Bitcoin will flow into Litecoin. Those are empirical issues and from my point of view irrelevant.

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    35. I first shorted bitcoins at $49/btc and covered at $35/btc during the so-called fork. I have not since shorted simply because the sideways price action following the so-called fork was highly unusual. As one man said leading up to the great depression, "When I do not understand, I do nothing"

      I did, however, make a killing in litecoins during March, having pocketed a percentage-wise profit of more than all of my previous investments combined. The decision to buy litecoins was based on my parable and on my experience in coal stocks (small caps skyrocket relative to large caps during an uptrend). I'm with Doug Casey on this one: digital currencies are the ideal speculative vehicle.

      As for myself being an empiricist, I definitely like to look at data more than the average person. However, I would also point out that aside from a handful of peoplet, such as Mark Thornton, I consider myself as qualified to speak on and about the ABCT as any other person on this planet. The ABCT goes back to at least Richard Cantillon, who's insights allowed him to make a fortune during the Mississippi bubble and sell-out before the devil the the hindmost. There was also an American fellow prior to Ludwig von Mises by the name of William Leggett who also did a lot of work towards the ABCT. So far, the most theoretically (and empirically) rich body of economic text I have read is Business Cycles (Volume I&II) by Joseph Alois Schumpeter. It is not an easy read, however, it will teach you to think like an economist.

      To believe that simply uttering two words, network effect, will make bitcoin immune from competition is intellectual diarrhea.

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    36. You may have a solid understanding of the ABCT. I have not read your work on ABCT so I cannot comment on that. However, your work on Bitcoin is riddled with holes and a profound lack of understanding, and what's even more important, a lack of desire for understanding. In addition to that, had you read my thesis, I would have wasted less time with your nonsense (and pointing out to you repeatedly that you misstate my arguments) and could have concentrated more on your positive contributions (of which there were little, but nevertheless exist).

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    37. By the way, had read my thesis, you might have seen this sentence:

      Price and liquidity correlate weakly. It can be interpreted as a certain level of stability of its foundation, BUT BEING PRONE TO BUBBLES.

      [emphasis added]

      Delete
    38. Now we are back to square one. You argued that bubbles are irrelevant towards bitcoins future viability. I argue that the opposite is the case. It may very well be the case that bitcoin survives and thrives despite bubbling, but there can be no doubt that its prospects would have been better without bubbling. In fact, this insight is at the heart of the ABCT. I did not have space to write a book in the article, so I used my marathon analogy. The lecture that I previously posted by Hulsmann goes a long way towards explaining this. I also posted a chart of silver that is now below its stable trendline precisely due to having turned into a bubble, and is likely to linger below that trendline for some time.

      I believe that digital currencies are the wave of the future. I do not like this, but one must be capable of distinguishing what ought to happen and what will happen. That being said, I believe more reputable exchanges and currencies will come on stream without all the baggage that mtgox/btc currently possess. The unforeseen events are still yet to unfold. The knockoffs in the backround can easily claim to immune to those unforeseen events if and when they surely occur.

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    39. Indeed, the bubbles are irrelevant for the future, but I am not arguing that they cannot occur. I did have an empirical bubble analysis in an earlier draft of my thesis, but I scrapped it because it has nothing to do with Austrian economics. It appears that you actually agree with me, so I don't understand what the problem is.

      I analyse the issue of competition among media of exchange in my thesis, and if you had read it, you would maybe be a bit clear about the issue.

      If you want a digital transaction system, then you either have one that depends on the discretionary policy or predetermined rules. There really is no way around it. A system of a monetary base with money substitutes on top of it (such as may become of GoldMoney or BullionVault that you mention) must always be built on a discretionary policy, because there must be a social institution that maintains the link between the monetary base and the substitutes. With this come all the problems that I mentioned earlier. The only way to achieve a system with predetermined rules is to have a virtual unit that is subject to an independent valuation, and with this inevitably comes price volatility during lower liquidity phases.

      But large part of the the volatility is just another way for the social institutions to manifest themselves, if the virtual unit is to coexist with one that is based on a discretionary policy. It occurs because the exchange must occur through a social institution. But the point is that while a system based on a combination of money in the narrower sense and money substitutes needs these institutions to work at all, a system that is fully virtual does not need them and can be self-contained. While it still needs infrastructure, the infrastructure is policy-agnostic and that's the point. Even Ripple cannot avoid this issue, although it has the potential to fix a lot of technological problems.

      At least Mises and Hoppe appear to understand the dilemma, because they recommend the increased usage of gold coins (i.e. a deliberate avoidance of money substitutes). This however is unrealistic due to transaction costs, and is only more apparent now that we have the internet.

      Something like Bitcoin presents a different solution, because it does not require money substitutes to reduce transaction costs, which is unusual and confuses the heck of many economists, not only Austrians. The transaction cost reduction also solves a second issue, how to perform a migration without political support. The gold standard branch has so far viewed such an option as impossible.

      Delete
  8. ‘Korda has been around the wrong markets. Or more accurately, those that are not relevant for Bitcoin. The relevant factor for the future of Bitcoin isn't its price, but liquidity. In other words, the payment systems industry, and to a certain extent, the forex market’

    I know a few forex traders that would have to disagree. To claim that exchange rates are irrelevant, I mean, one might as well endorse central planning with that sort of attitude. If and when the price of bitcoins collapses, one would have to be delusional to assume that interest will not fall.

    ‘Yes and that is still correct. I have yet to see why any of the arguments are relevant’

    Suppose I wrote a review on the soundtrack of some new movie and I got a reply from someone saying that the soundtrack is irrelevant. That is precisely what your initial reply was akin to. The topic, nay, the title of my piece was bitcoin bubble 2.0. If you do not care or do not think that a bubble in bitcoin is relevant, that is perfectly fine, but why criticize a soundtrack review for being a soundtrack review?

    I find it absolutely inexcusable how one can criticize relatively short-term forecasts of a digital currency, based a pretty good empirical and theoretical footing, including parabolic price rises, moving averages, stochastics, and sentiment, for not dealing with the long-term picture. I am not a psychic, and unlike the typical bitcoiner, I am not ready to proclaim that digital currencies, bitcoins included, will or will not be around in 10 years. That was not the purpose of the article and I have no technical indicators that would help me to figure that out. I know coca-cola will be around in 10 years, I know gold will, but I have absolutely no idea whether facebook will be around in 10 years, let alone litecoins or bitcoins.

    ‘That is why on a free market with a metallic monetary standard, I expect fractional reserve banking to out-compete full reserve banking, due to transaction costs. And that is again why I expect Bitcoin to outcompete fiat money and gold as long as it can keep its comparative advantage in transaction costs’

    The reason why FRB drives out sound money is due to Gresham’s Law. However, as Hoppe would point out, Gresham’s Law requires legal tender laws. This is not what I would call a free market. Moreover, Gresham’s Law goes a long way towards explaining why bitcoins will in fact not “out-compete” fiat.

    ‘If it collapses, it means that it was replaced by something better suited for the users. If it doesn't, it means that it provides a better service than the competitors. Whether this has to do with libertarianism is irrelevant’

    The NASDAQ didn’t collapse because it was replaced by something better, it collapsed because it was a bubble.

    ‘Last but not least, I want to address the name of the mises.org article, "Bitcoin: Money of the Future or Old-Fashioned Bubble?". As I have been hopelessly trying to explain, these are not the only options, neither are they mutually exclusive. It's a "money or nothing" fallacy I've been complaining about for a long time. Even if the current price was a bubble, it would have negligible effect on the ability of Bitcoin to decrease transaction costs, and therefore its prospects as a medium of exchange.’

    FYI, I didn’t make the title.

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    Replies
    1. You still don't understand the process by which people choose media of exchange, even though I provided many references and examples. You're looking at speculative price movements, and think that that's what makes a medium of exchange into one. And you're continuing on insisting that these speculative price movements are a medium of exchange. It's like the late Roger Ebert claiming that video games are not art. Maybe they are, maybe they are not, but that's irrelevant for the future of video games.

      I was hoping that you'll eventually comprehend what medium of exchange actually is, but it's looking like a moot prospect. You're stuck in your own world, unable to imagine how Bitcoin can penetrate into it. But irrespective of whether it will or won't, your world is not the whole world, and your imagination is not the whole realm of possible futures.

      I know of Hoppe's (also Rothbard and some others) argument regarding FRB winning due to price fixing, but I don't think it's true. You yourself insist that money substitutes can trade at a discount/premium, so you contradict them yourself, irrespective of what I think.

      Again you conflate the NASDAQ bubble with the utility derived from the internet or computers in general. These are two separate issues and you apparently can't mentally bridge the gap.

      You might not have made the title, but you can't grasp the whole spectrum of possibilities either. You yourself said "either you're pregnant or not", reinforcing the false dichotomy.

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    2. 'I was hoping that you'll eventually comprehend what medium of exchange actually is, but it's looking like a moot prospect'

      The concept of a medium of exchange is quite simple. Something that enables indirect exchange.

      Would you say that presently bitcoin functions as a penny stock on steroids, or would you say it is presently more akin to a medium of exchange? I know for a fact what the present situation is. As for what it will resemble in the future, who knows.

      'I know of Hoppe's (also Rothbard and some others) argument regarding FRB winning due to price fixing, but I don't think it's true. You yourself insist that money substitutes can trade at a discount/premium, so you contradict them yourself, irrespective of what I think.'

      Why do you think everything is a contradiction? You can have money-certificates trading at a premium to bullion under full or fixed reserves, there is no contradiction here. Gresham's Law is actually not that difficult to follow. Moreover, if one were to take the position that bitcoin is the best money forever and ever, then ironically it cannot be a money in a world full of fiat, unless of course one is willing to throw Gresham's Law under the bus along with the regression theorem as well.

      Perhaps the best example would be using silver, since many of the same victims and pumpers like Max Keiser were also involved in that market. Moreover, like bitcoin, silver is also macro-economically insignificant.

      http://oi50.tinypic.com/2mi01ow.jpg

      Had silver followed its stable pattern, it would have been higher today. Instead, it went parabolic and subsequently crashed. It overshot and is now bound to undershoot for an extended amount of time. The NASDAQ is down over 50% in real terms from its peak over a decade ago. Surely we use the internet and tech related products more than was the case back then. The point being that even if you think digital currencies are the wave of the future, instead of a fad like magic the gathering cards or world of warcraft, it does not necessarily imply that prices will be higher in the future. Let’s face it, the vast majority of bitcoiners are in the game for capital appreciation. At least the litecoiners who have been making a killing over the past month are honest about it.

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    4. "medium of exchange" and "penny stock on steroids" are not mutually exclusive, that is why your argument is pointless.

      I see a contradiction because you simultaneously argue that money substitutes do not need to trade at the same market price as the underlying money, and that FRB is the result of Gresham's Law. These two claims contradict each other.

      I didn't say that Bitcoin cannot be money, but that it is not necessary for it to become money in order to be a beneficial good in the long term.

      Silver does not decrease transaction costs over fiat, so it's unlikely that it will become money. It is still a medium of exchange though, and one that has a high level of utility.

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    5. 'I see a contradiction because you simultaneously argue that money substitutes do not need to trade at the same market price as the underlying money, and that FRB is the result of Gresham's Law. These two claims contradict each other'

      Money-substitutes have in fact fluctuates relative to money proper in the past, for a variety of reasons. This is a matter of fact. Moreover, there is no doubt that reserve requirements have fallen throughout the course of history along with the rise of centralized banking, this is also a matter of fact.

      'It is still a medium of exchange though, and one that has a high level of utility'

      I don't think it is a medium of exchange or money. I'm sticking with Mises on this one, silver was fully demonetized in the late 19th century.

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    6. Gresham's Law requires fixed exchange rates, while you admit that the price of money substitutes does not have to be the same. So which is it now?

      Ah, so silver isn't a medium of exchange because it was demonetised? Well then I suggest you sort it out with the other Austrians because I don't think they will agree if you formulate it this way.

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    7. 'Gresham's Law requires fixed exchange rates, while you admit that the price of money substitutes does not have to be the same. So which is it now?'

      You are seeing an inconsistency where there is none, both are perfectly valid. If you artificially raise/decrease the price of a medium of exchange relative to another medium of exchange, Gresham is activated. On the other hand, money-substitutes can certainly fluctuate and have in fact fluctuated. The former is a political phenomenon, the latter is a market one.

      'Ah, so silver isn't a medium of exchange because it was demonetised? Well then I suggest you sort it out with the other Austrians because I don't think they will agree if you formulate it this way'

      Mises made it quite clear, the silver in circulation post 19th century was to be considered fiduciary media, just as are the nickel and copper coins in the US today, or the cheaper zinc coins in the EU.

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    8. Ok, so you do not count price floors or caps as fixed exchange rates? Ok then, in that case I agree that your argument is formally correct, I just disagree with Hoppe that FRB winning requires legal tender laws. I do have a couple of pages on that in an earlier unpublished draft of my thesis.

      I am not familiar with this Mises reference, but probably by "silver in circulation" he meant coined money, not silver as such. But I'm not talking about silver coins not being a medium of exchange. I'm talking about silver in general.

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  9. Several points were ignored, but I think this goes back to the beginning. Ironically, my initial article stated that discussions with bitcoiners typically lead to ignoratio elenchi's.


    ***Suppose I wrote a review on the soundtrack of some new movie and I got a reply from someone saying that the soundtrack is irrelevant. That is precisely what your initial reply was akin to. The topic, nay, the title of my piece was bitcoin bubble 2.0. If you do not care or do not think that a bubble in bitcoin is relevant, that is perfectly fine, but why criticize a soundtrack review for being a soundtrack review?

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    1. I answered that. It's the same as Roger Ebert arguing that video games are not art. It's a completely abstract question with a narrow application for a handful of academics and critics, but irrelevant for the millions of gamers.

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  10. 'But I'm not talking about silver coins not being a medium of exchange. I'm talking about silver in general'

    Silver today trades as an industrial commodity. In fact, the price movement (including percentage-wise) is nearly identical to that of copper, another industrial commodity, albeit at a different price level. Silver has been fully demonetized for over a decade, as Mises pointed out. Austrians should have read their TMC instead of listening to the likes of Max Keiser in 2011, same goes for bitcoiners today.

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    1. You are merely arguing that silver is less liquid than it used to be. That does not preclude it being a medium of exchange.

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    2. I am claiming what Mises had over 100 years ago. Like copper, silver has been demonetized. The likelyhood of going back to iron, silver, or copper as money is unprecedented. Central banks still hold gold and thousands of tons of it. It is still at the core of the international institutional framework of finance.

      'In the course of history this has always occurred when a good has been excluded from the constantly narrowing circle ofcommon rnedia of exchange. Generally speaking, we do not know much about this process, which to a large extent took place in times about which our information is scanty. But recent times have provided an outstanding exan1ple: the almost complete demonetization of silver'

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    3. I agree that gold is still a medium of exchange. But silver is also a medium of exchange, just less liquid than gold.

      And just like silver was demonetised because it lost against gold (with a little bit of help from politics and Gresham's Law), fiat can also be demonetised. But then something needs to replace it. It can, hypothetically, be demonetised into a cryptocurrency, as elaborated by Graf: http://konradsgraf.squarespace.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html It's a long shot, but for the time being we cannot exclude it.

      The point is that Bitcoin already is a medium of exchange, and the old systems cannot compete with it on transaction costs. If silver suddenly gained the ability to teleport itself, while gold or fiat didn't, then you can bet that legal tender laws or not, it would outcompete other media of exchange and become the most dominant one.

      The theoretical objection might have been made at a time when Bitcoin wasn't a medium of exchange, or when it didn't exist at all. But the objection is now moot, now it becomes an empirical issue.

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    4. 'The point is that Bitcoin already is a medium of exchange, and the old systems cannot compete with it on transaction costs. If silver suddenly gained the ability to teleport itself, while gold or fiat didn't, then you can bet that legal tender laws or not, it would outcompete other media of exchange and become the most dominant one'

      Silver already gained the ability to teleport itself a few hundred years ago with bank clearings. In fact, gold teleports itself thousands of times every single day despite the vast majority of it not physically moving and staying in the vaults here in New York.

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    5. Silver didn't get anything, rather people developed money substitutes. But money substitutes are an ugly hack. They expose you to counterparty risk, principal-agent problems, they allow credit expansion and fiat money. Money substitutes are, from the perspective of an anti-FRB-Austrian, the root of all evil.

      Money substitutes are like fax machines. And once you realise that you can use email, it's over for the fax machines.

      Lawrence white cleverly realised that this is an empirical issue. Bitcoin presents a system where its potential substitutes (probably) do not decrease transaction costs. So that not only explains why consumers can have a preference towards Bitcoin for purely market reasons, it also allows to perform a monetary "reform" in line with the gold-standard branch of the Austrian school without political support. If Bitcoin-substitutes were possible, the Bitcoin wouldn't exist in the first place, because it wouldn't be able to compete against fiat money substitutes on transaction costs and there would be no transactional demand for it.

      I don't think you really read my thesis because I carefully explain all this.

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    6. 'Silver didn't get anything, rather people developed money substitutes. But money substitutes are an ugly hack. They expose you to counterparty risk, principal-agent problems, they allow credit expansion and fiat money. Money substitutes are, from the perspective of an anti-FRB-Austrian, the root of all evil.'

      You are referring to banks. BullionVault is not a bank in the modern sense. In other words, it isn't in the business of credit creation. The way central banks use gold as money today is by ledger entries, without the bullion itself moving an inch. The way teenagers these days use bitcoins as a medium of exchange is by ledger entries on the increasingly larger (6GB last time I checked) blockchain, with no backing whatsoever. I would prefer to risk losing something, as opposed to owning nothing.

      'Money substitutes are like fax machines. And once you realise that you can use email, it's over for the fax machines'

      I deal with neurologists and all sorts of doctors on a daily basis. By and large they definitely prefer fax.

      'I don't think you really read my thesis because I carefully explain all this'

      I admit, I have not, mainly because I am not at all interested in bitcoins. I could careless about HPQ, yet I bought the stock towards the end of the year. Since then, it has doubled. I'm more interested in investing as opposed to finding out what processor or motherboard or whatever their new product-line is using. I look at valuations and technical analysis, and use emotion merely as a contrarian indicator.

      Money inherently has to be simple. Gold is simple. A medium of exchange made out of thin air that requires you to turn your basement into a warehouse for graphic cards and can move down 50%+ on any given day is no mainstream future. Like magic the gathering cards, I think bitcoin is a fad. Digital currencies may very well have a future, but I hardly doubt bitcoin will be the blue chip, network effect be damned.

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    7. Patrik,

      while full reserve deposit certificates are not prone to credit expansion, all the other problems that I mentioned remain.

      You and many other Austrians have problems grasping immaterial goods and the fact that a medium of exchange can exist which is not a substitute, yet it beats substitute on transaction costs. It's a paradigm shift, like the internet.

      So, some industries might keep faxes, and some libraries still exist. That does not invalidate the comparative future of the internet or endanger its market share. I didn't claim that the migration must be full.

      So, you aren't actually interested in research of Bitcoin. That's good enough for me to stop communicating with you, because now it's clear that I'm unlikely to learn anything from you.

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    8. Just one last remark, I forgot to say that it's possible that the doctors might prefer faxes for regulatory reasons, but that's a tangential issue.

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    9. 'You and many other Austrians have problems grasping immaterial goods and the fact that a medium of exchange can exist which is not a substitute'

      Sure it can, either in the form of credit money or fiat money.

      'So, you aren't actually interested in research of Bitcoin'

      I haven't been interestet in bitcoin from the start, not in any serious form. I bought the stuff in 2011 because I thought it would go up, same thing with litecoins this March. TruTouch is an amazing company, and while I have certainly done my due diligence, I could honestly care less about the inner workings of the machines. That's what the engineers are for.

      'Just one last remark, I forgot to say that it's possible that the doctors might prefer faxes for regulatory reasons, but that's a tangential issue'

      I tend to think it's because doctors are busy people. They don't have time to constantly be checking their voicemail and/or e-mails. Ironically, c-level executives are easier to reach via fax than any other form of communication as well. I think it's because of the higher barrier to entry. Any Joe can send an e-mail, not everyone has a fax machine.

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  11. 'They do not need to stop accepting Bitcoin payments, as there are no real running costs associated with it (unlike, for example, with credit card payments where you're typically paying a maintenance fee every month irrespective of whether you trade)'

    In theory this is correct, but I have already seen one wave of merchants no longer accepting bitcoins precisely because the price collapsed. Likewise, in theory it is possible for interest to keep rising and stay high despite a collapse in the price, but a look at the google trends charts suggests otherwise.

    'I don't know about the gold bubble. I was talking about using gold as a medium of exchange, not an investment. If the fiat system collapses, the stock market might still survive, but the stocks won't become the new money'

    Gold may be used as a medium of exchange after the gold bubble pops. However, it certainly won't be gold ducats trading hands, those days are over. BullionVault may be a glimpse into the future. FYI, despite BullionVault having a 2 billion market cap, I hardly doubt they have some sort of network effect.

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    1. I admit that it is hypothetically possible that someone started accepting Bitcoin payments only for speculation purposes, and that their costs are otherwise uneconomical to keep accepting them. But there is no necessity here. It might be more likely for brick and mortar shops, where I can imagine they have some maintenance costs with the physical infrastructure, but less so for online shops. Brick and mortar shops are also not in the category where I readily see Bitcoin significantly lowering the transaction costs at this moment. With these shops, credit card payment fraud is much less a problem, because you need to present the card physically. In online shops though it's the reverse.

      You are exactly right that it is unrealistic to expect physical gold to be used directly as a medium of exchange, and that rather gold-substitutes would be used. But this requires infrastructure, and this infrastructure now is suppressed by the state. And it can be suppressed for a very long time, because international banking requires a relatively peaceful environment, not one that is in a hyperinflationary spiral or a global recession with threatening civil wars. David Graeber, in his book "Debt, the first 5000 years" argues that in times of war, people prefer specie, and in times of peace, credit (which I loosely interpret as money substitutes). But Bitcoin does not require substitutes to be used in a realistic manner, so in situations where fiat is collapsing and gold competition is suppressed, it can find its sweet spot.

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