tag:blogger.com,1999:blog-61896906336388345392024-03-15T09:21:58.021+01:00Economics of BitcoinPeter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-6189690633638834539.post-5164461953847391062023-06-23T08:55:00.000+02:002023-06-23T08:55:41.420+02:00Feedback for "Better Money" by Lawrence H. White or, I like the book but think like an engineer<p> </p><p style="caret-color: rgb(0, 0, 0); text-align: left;">I recently read <a href="https://www.cambridge.org/core/books/better-money/8B6D08E245653C381C9D3222028804AF">"Better Money: Gold, Fiat, or Bitcoin?" by Lawrence H. White</a>, and attended a webinar where Prof. White was presenting it. I found it sufficiently interesting to motivate me to give feedback. I wouldn't call it a review, it's more of an extended reaction. As for the review, the book is good and suitable for a wide range of people, has minor problems, which I will describe below, but they may or may not be important for people who read it.</p><p style="caret-color: rgb(0, 0, 0);">The overarching principle of my reaction is that people writing about Bitcoin bring in their own expertise into the writing. This is a double edged sword, because even experts can't be expert on everything. Given the current amount of knowledge that has been accumulated by humanity, people can at best be an expert in a very narrow area of an area of an area. This is not necessarily a bad thing. The problem is when experts start to believe that just because they are experts, they are experts on everything, or perhaps from a different point of view, every phenomenon can be reformulated to fit into their area of expertise, and therefore evaluating such a phenomenon from the point of view of their area of expertise is useful. Just to make it clear, I don't think professor White is suffering from this expertise delusion. You can see that he is very cautious and thorough in presenting his arguments. This is more of a general complaint about people writing about Bitcoin. However, professor White still thinks like an economist.</p><p style="caret-color: rgb(0, 0, 0);">I don't. I have been programming for about 35 years. I dabbled in some other areas, and my university degree is in Business Administration, however I still mainly write and review code and build computer infrastructure (or manage people who do). I think like an engineer.</p><h2 style="caret-color: rgb(0, 0, 0);">What would an engineer do?</h2><p style="caret-color: rgb(0, 0, 0);">When you ask why the gold standard failed, you'll receive a different response depending on the background of the person responding. Even though all the answers shown below are technically correct, they lead to vastly different conclusions about what should be done as a consequence of the end of gold standard.</p><p style="caret-color: rgb(0, 0, 0);">If you ask a mainstream economist, he'll respond along the lines of: There were bank panics and depressions and it wasn't good for the economy, on fiat the government is more able to conduct countercyclical policies and prevent bank runs. Going back to gold would be stupid.</p><p style="caret-color: rgb(0, 0, 0);">If you ask an Austrian economist, his answer would be more like: The government needed more money to wage wars or expand in general. We need to go back to gold standard to reduce the size of the government.</p><p style="caret-color: rgb(0, 0, 0);">If you ask an engineer, he'll say: Gold standard failed because gold was diluted and censored. Therefore, we should have money that resists dilution and censorship.</p><p style="caret-color: rgb(0, 0, 0);">Does the last one look familiar? This is basically what Satoshi Nakamoto wrote in a now famous post on the P2P foundation website shortly after launching Bitcoin. This is why Bitcoin is as it is and why for an engineer nothing else makes sense. Resistance to dilution and censorship should be the top priorities if you want to get rid of fiat. If something else is a priority, then it will be diluted and censored and we're back to fiat again. It will fail again, like gold did.</p><p style="caret-color: rgb(0, 0, 0);">It also explains Bitcoin Maximalism. Bitcoin Maximalism, for an engineer, is an ideology accompanying Bitcoin in order to preserve and enhance its resistance to dilution and censorship.</p><h2 style="caret-color: rgb(0, 0, 0);">What non-engineers think about Bitcoin</h2><p style="caret-color: rgb(0, 0, 0);">Here are some examples of what non-engineers think about Bitcoin.</p><p style="caret-color: rgb(0, 0, 0);">Nassim Nicholas Taleb thinks that that Bitcoin does not provide any revenue stream nor traditional services and therefore, US dollar denominated expected value of Bitcoin is zero. Taleb is a financial expert. Taleb is not an engineer.</p><p style="caret-color: rgb(0, 0, 0);">John Paul Koning thinks that Bitcoin is a gambling tool with a potentially positive expected value. Koning is a hybrid economics / financial expert. Koning is not an engineer.</p><p style="caret-color: rgb(0, 0, 0);">Lawrence H. White thinks that Bitcoin is great, but could be improved by having a more elastic supply. White is an economics expert. White is not an engineer.</p><h2 style="caret-color: rgb(0, 0, 0);">Why non-engineer critiques of Bitcoin are useless</h2><p style="caret-color: rgb(0, 0, 0);">An engineer's analysis of the gold standard explains his attitude towards criticism of Bitcoin from the point of view of economists or financial experts. A criticism only matters if it explains why it makes Bitcoin more dilutible and / or more censorable, and thus fiat more inevitable.</p><p style="caret-color: rgb(0, 0, 0);">But even then a criticism is still only halfway done. The reason for this is not an engineering one but an economic one: demand for liquidity exists. People want to be liquid (they want to be in control of media of exchange). It doesn't necessarily mean that everyone will always choose an option to remain liquid / increase liquidity. It just means that if people are using X to be liquid, and X stops being able to provide liquidity, they will look for a substitute, Y, to remain liquid. Conversely, as long as there is no Y, they will keep using X. In the absence of Y, they have no other option. Therefore, a critique of Bitcoin, even if valid, still would have to explain what better alternative there is available to provide liquidity.</p><p style="caret-color: rgb(0, 0, 0);">It's kind of like critiquing a computer for spying on you, and then silently implying that, well, because computers are bad, mathematics needs to end, instead of saying "use pen and paper or an abacus because they don't suffer from this problem". It's a half-assed argument. Proposing pen and paper may be an extreme alternative, but is still a valid alternative, as opposed to nothing.</p><p style="caret-color: rgb(0, 0, 0);">So what are my responses to the critiques above? They are all the same: if Bitcoin was altered to address the concerns you have, it would cause it to fail. It would cause Bitcoin to be diluted and censored and ultimately replaced by fiat. Therefore, in order for Bitcoin to succeed, your complaints must be rejected. If this was a code review, I'd write "You're optimising for the wrong thing".</p><p style="caret-color: rgb(0, 0, 0);">If Bitcoin had a US-dollar denominated revenue stream or was providing some traditional service, it would be diluted and censored and replaced by fiat.</p><p style="caret-color: rgb(0, 0, 0);">If Bitcoin was less suitable for gambling, it would be diluted and censored and replaced by fiat.</p><p style="caret-color: rgb(0, 0, 0);">If Bitcoin had a more elastic supply, it would be diluted and censored and replaced by fiat.</p><p style="caret-color: rgb(0, 0, 0);">The critiques use an invalid area of expertise. They aren't wrong, it's way worse: they are useless. Instead of taking us away from fiat, they take us closer to it. Often, they do not even enhance our understanding of the world, or contain actionable information (White however does present some other interesting information). They don't propose an alternative to Bitcoin (again, White does, gold).</p><p style="caret-color: rgb(0, 0, 0);">Just as I was about to publish this post, yet another <a href="https://twitter.com/TheBTCTherapist/status/1671967640313634819">comment by Taleb appeared on the news</a>:</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>At least with Federal Reserve, you have transparency, we know what's going on, we can influence it.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">My response: run a Bitcoin node. That's how you get transparency and influence the policy. Taleb's expertise is useless for Bitcoin.</p><h2 style="caret-color: rgb(0, 0, 0);">Cantillon effect explained: macroeconomics is bullshit</h2><p style="caret-color: rgb(0, 0, 0);">In order to understand the problem of dilution, it is critical to understand the Cantillon effect. And I mean<span class="Apple-converted-space"> </span><strong>really </strong>understand. Cantillon effect is often presented in the context of<span class="Apple-converted-space"> </span><strong>printing</strong><span class="Apple-converted-space"> </span>money. However, there is nothing special about the<span class="Apple-converted-space"> </span><strong>mechanism</strong><span class="Apple-converted-space"> </span>of the increase of the quantity of money that causes a relative change in allocation of money. The correct interpretation of the Cantillon effect is:<span class="Apple-converted-space"> </span><strong>any increase in the money supply is merely a redistribution of wealth</strong><span class="Apple-converted-space"> </span>(minus the costs incurred by the increaser). The relative change to allocation of the individuals' holdings of monetary units is unavoidable. In a commodity money standard, the producer of the base money has a comparably smaller gain, due to the expenses needed to produce said money, but the redistribution happens anyway.</p><p style="caret-color: rgb(0, 0, 0);">This process unfortunately tends to be misrepresented. Maybe you recognise some of the following:</p><ul style="caret-color: rgb(0, 0, 0);"><li><p>The central bank isn't redistributing wealth, it's conducting open market operations or countercyclical policies.</p></li><li><p>A fractional reserve bank isn't redistributing wealth, it's economizing the use of gold (sorry, Prof. White).</p></li><li><p>An economist isn't attempting to obscure redistribution of wealth, he's working with aggregates.</p></li><li><p>A redistribution of wealth isn't happening, just the economy is growing or shrinking.</p></li></ul><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/pz2p4EQtEXs" width="320" youtube-src-id="pz2p4EQtEXs"></iframe></div><p style="caret-color: rgb(0, 0, 0);">One may perhaps debate whether redistribution is desired or not. However, it still doesn't explain why a person would want to prefer to hold money that redistributes their wealth away from themselves. A masochist-coin? A virtue-signalling-coin? As <a href="https://nakamotoinstitute.org/mempool/bitcoins-shroud-of-subtlety-and-allure/">Daniel Krawisz explains in "Bitcoin's Shroud of Subtlety and Allure"</a>, even if a person has a logically correct objection against Bitcoin, they are still motivated to accumulate it.</p><h2 style="caret-color: rgb(0, 0, 0);">Fractional reserve banking</h2><p style="caret-color: rgb(0, 0, 0);">Unfortunately for Professor White, this doesn't bode well for the idea of fractional reserve banking. The users of any money have good reasons to avoid it: it both dilutes their wealth as well as increases the risk of losing control over them. With Bitcoin, the transaction costs of using the base money is low, and even lower if transactions are conducted on additional layers on top of Bitcoin. This reduces the transaction cost benefit of using Bitcoin substitutes. To be fair, White recognises this (unfortunately I don't have the quote in my notes), and doesn't seem to draw any conclusions regarding Bitcoin FRB, which I applaud.</p><p style="caret-color: rgb(0, 0, 0);">The protocols for using Bitcoin are specific to using Bitcoin, claims on Bitcoin can therefore be discriminated against directly on the protocol level, something which is impossible with a non-digital base layer.</p><p style="caret-color: rgb(0, 0, 0);">For Bitcoin Maximalists, avoiding using Bitcoin-substitutes is an important principle to follow. Some of the memes to promote this behaviour are:</p><ul style="caret-color: rgb(0, 0, 0);"><li><p>"Not your keys, not your coins" (don't use Bitcoin substitutes).</p></li><li><p>"Don't trust, verify" (run your own node).</p></li></ul><h3 style="caret-color: rgb(0, 0, 0);">This isn't a novel idea</h3><p style="caret-color: rgb(0, 0, 0);">The idea that money substitutes make gold standard more vulnerable certainly didn't originate with cypherpunks.</p><p style="caret-color: rgb(0, 0, 0);">In "The Theory of Money and Credit", Mises writes regarding his proposal to return to the classical gold standard:</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>Gold must be in the cash holdings of everyone. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">If Mises was still alive, he may just as well have said "not your keys, not your coins" and "don't trust, verify".</p><blockquote style="caret-color: rgb(0, 0, 0);"></blockquote><blockquote style="caret-color: rgb(0, 0, 0);"></blockquote><h2 style="caret-color: rgb(0, 0, 0);">Price stability is overvalued</h2><p style="caret-color: rgb(0, 0, 0);">Ever since I started studying Bitcoin over a decade ago and read articles and books about money, I was getting a bit suspicious about the argument, often repeated by people criticising Bitcoin, that people choose money based on its price stability. Superficially it seems to make sense. However, I found too little evidence for that in the books I read or in evaluating historical events. I recall these sources regarding price stability:</p><p style="caret-color: rgb(0, 0, 0);">In "On the origin of money", Carl Menger writes something along the lines that precious metals had a more stable price on account of being more liquid. However, it isn't clear to me to what extent he thinks it's a catalyst, rather than just a symptom, of the monetisation process.</p><p style="caret-color: rgb(0, 0, 0);">In "Denationalization of money", Hayek writes that people would choose such a private money candidate which provides the best price stability. He doesn't further elaborate how he came to that conclusion. In "The Case for a Genuine Gold Dollar", Rothbard criticised Hayek, I'm paraphrasing here, that people choose money based on liquidity, not price stability.</p><p style="caret-color: rgb(0, 0, 0);">The third such example is the very book that I'm reacting to. Professor White's explanation isn't in the book, but during the webinar he mentioned something along the lines that without price stability one needs to perform complex hedging operations. However, we already have technology to solve this problem. It's called a credit card and it allows you to spend fiat without having any. And, if you collateralise your Bitcoin (or gold, for that matter), you can spend even more fiat you don't have.</p><p style="caret-color: rgb(0, 0, 0);">To me, when I was studying Bitcoin and still now, the argument that people choose money based on price stability sounds like something that was made up<span class="Apple-converted-space"> </span><strong>after</strong><span class="Apple-converted-space"> </span>Bitcoin appeared, because it didn't fit well into pre-existing frameworks. Or, it was implied earlier, as a proxy variable for something else (e.g. stability of the money supply), and the emergence of Bitcoin got people confused. I may entertain an argument that a central bank's plan is to stabilise the price level, but that is an entirely different problem. I'm even starting to think that this is less of an economic issue, and more of a cultural issue, or, at the risk of sounding rude, a "boomer" argument.</p><p style="caret-color: rgb(0, 0, 0);">At the very least, people do not<span class="Apple-converted-space"> </span><strong>always</strong><span class="Apple-converted-space"> </span>choose the money based on price stability. White recognises that. He writes, for example,</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>It is noteworthy that residents of Latin America adopt the US dollar, rather than the Swiss Franc, even though the Swiss Franc has a better track record than the dollar for low and steady inflation.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">I.e. in this case, people prefer liquidity to price stability, as Rothbard predicted. Similarly, during the webinar, one of the participants asked (I'm paraphrasing both the question and answer) "I don't care about price stability, why is it relevant?", and White replied "If more people think like you, then Bitcoin may become money".</p><p style="caret-color: rgb(0, 0, 0);">As a side note, the argument that people<span class="Apple-converted-space"> </span><strong>always</strong><span class="Apple-converted-space"> </span>prefer a more liquid good for monetary purposes, is also wrong. If it was true, then, as I explained in "The Origin, Classification and Utility of Bitcoin", once money (a generally accepted medium of exchange) appears, there can never be another medium of exchange. Indeed, fiat money couldn't exist and we wouldn't have the problem of gold standard ending because a commodity standard couldn't end.</p><h2 style="caret-color: rgb(0, 0, 0);">Dealing with price volatility, and what is a medium of exchange</h2><p style="caret-color: rgb(0, 0, 0);">If price volatility isn't necessarily a reason to switch to a different source of liquidity, is there something that a Bitcoin Maximalist can do to deal with price uncertainty? Well, the obvious answer is, if you have expenses denominated in fiat, you borrow fiat. Then, you have an option of either</p><ol style="caret-color: rgb(0, 0, 0);"><li><p>paying with the borrowed fiat, or</p></li><li><p>paying with Bitcoin and using the fiat to re-buy Bitcoin.</p></li></ol><p style="caret-color: rgb(0, 0, 0);">This isn't a "complex hedging operation". However, it brings up another issue with the analysis of demand for Bitcoin. According to most classifications I'm familiar with, including that used by White, the first person has a speculative demand for Bitcoin, and the second person has a transaction demand for Bitcoin. Only the second person uses Bitcoin as a medium of exchange.</p><p style="caret-color: rgb(0, 0, 0);">Well, I'm sorry to say, but that's wrong. In both cases, the person in question holds the same amount of Bitcoin pre- and post- transaction, minus transaction cost, the size of which doesn't necessarily favour either scenario. In both cases, they take on the same amount of debt. From the point of view of finance and microeconomics, for that person, both are equivalent. And, merely based on observing their behaviour, we don't have sufficient information to conclude whether either have a speculative or transactional demand for Bitcoin.</p><p style="caret-color: rgb(0, 0, 0);">We could try to analyse the aggregate (yuck) demand for Bitcoin, but for that we need to look at what happens at the payee's end. Do they end up holding Bitcoin or fiat? That is what is relevant, but not for the payer. So, depending on what exactly you are analysing, it may or may not be relevant, but you need to use a different terminology, not "medium of exchange".</p><p style="caret-color: rgb(0, 0, 0);">Furthermore, Mises disagrees with such a definition of a "medium of exchange" as well. In "Human Action", he writes:</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>Money is an element of change not because it "circulates," but because it is<span class="Apple-converted-space"> </span><strong>kept in cash holdings</strong>.</p></blockquote><blockquote style="caret-color: rgb(0, 0, 0);"></blockquote><blockquote style="caret-color: rgb(0, 0, 0);"><p>[Money] is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the services which a man expects from<span class="Apple-converted-space"> </span><strong>holding cash</strong>.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">See? Mises would be a HODLer too.</p><p style="caret-color: rgb(0, 0, 0);">I came to the conclusion that determining whether people holding Bitcoin are speculating with it or using it as a medium of exchange merely based on observing their behaviour (i.e. empirically) is not possible. In the past, I also didn't always fully realise this so I made some hasty interpretations of this or that situation. The deciding factor is: are they looking for an opportunity, even a distant one, to dump Bitcoin or not? Merely because they expect Bitcoin to appreciate against fiat isn't an adequate criterion, because they may also simultaneously expect hyperbitcoinisation (meaning the disappearance of fiat). I think that while it can't be decisively concluded, we see the second aspect in the publications of Bitcoin Maximalists.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://i.redd.it/9gd13xexrpp81.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="714" data-original-width="500" height="494" src="https://i.redd.it/9gd13xexrpp81.jpg" width="346" /></a></div><p style="caret-color: rgb(0, 0, 0);">We can also investigate an opposite scenario, a hyperinflation. As a money hyperinflates, everyone is trying to get rid of it. If White's classification criteria was correct, observing a hyperinflation, he would have to conclude: look what a wonderful medium of exchange, there is no speculation and everyone is paying with it. I'm terribly sorry, dear economists, this is nonsense. Analysing the act of payment isn't helpful, instead we need to investigate the motivation of the payer, which is ultimately obscured from direct observation (maybe we could observe it using an MRI brain scan) and can only be inferred indirectly.</p><h2 style="caret-color: rgb(0, 0, 0);">The end of Bitcoin?</h2><p style="caret-color: rgb(0, 0, 0);">Even though so far Bitcoin is the best solution so far to the problem of the end of gold standard, it doesn't necessarily mean it's adequate. It may yet fail and be replaced by fiat. However, if it was to be replaced by a non-fiat medium of exchange, it would need to be something that still addresses the problems of dilution and censorship. A person who would come up with such a solution would have to understand the problem and propose and implement said solution. It would either be a person who can build, or a person who deals with trust or application of violence. Apart from engineers, it could thus also be, for example, a psychologist, a salesperson, a politician, a diplomat, a soldier, a conman. But I'm skeptical whether an alternative would come from an economist or a financial expert, or even be recognised by them once it appears.</p><h2 style="caret-color: rgb(0, 0, 0);">What does all of this have to do with the book?</h2><p style="caret-color: rgb(0, 0, 0);">Based on the notes I made while reading the book, I think Professor White is aware of the issues I brought up, even using the Bitcoin Maximalist lingo on several occasions, however prefers to treat them implicitly and neutrally (with minor exceptions). This is why I try to make them explicit, and why I don't consider my feedback a critique per se. If there was a critique, it would be that Professor White doesn't take the Cantillon effect seriously, and uses an incorrect definition of a medium of exchange.</p><h2 style="caret-color: rgb(0, 0, 0);">Correction requests</h2><p style="caret-color: rgb(0, 0, 0);">There are a couple of corrections I would like to recommend for the book. These are mainly technical in nature and not of primary import for the readers of the book.</p><p style="caret-color: rgb(0, 0, 0);">The book says:</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>Transfers of "Chaumian banknotes" were "blinded" from the issuer.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">This is an unfortunate formulation, I suspect this is due to misinterpretation of the word "blinded". Blinding is a technical name for one of the steps during issuance. In the final step of the issuance process, the signature is unblinded by the issuee and the subsequent transfer uses this already unblinded signature. At least this is a description of the implementation of blind signatures that I worked with, which is newer than the Chaum's, but I think the steps are the same. The point is, the transfer can happen publicly, but the issuer won't be able to identify the transferer based on the observed transaction data. It's probably better to say "the transferer is anonymized from the issuer", rather than blinded. The issuer may know the transfers happen, but they only know the transferer is one of their customers, not which one.</p><p style="caret-color: rgb(0, 0, 0);">In another place:</p><blockquote style="caret-color: rgb(0, 0, 0);"><p>The source code that governs the issue schedule is changeable only by consensus of the validators. .... Because they earn Bitcoin rewards for their work, the validators have been called "miners" by analogy to gold miners.</p></blockquote><p style="caret-color: rgb(0, 0, 0);">This is a common misconception, an issue that was fought over during the 2017 blocksize wars. All nodes validate the consensus, not merely the mining nodes. The power of developers and miners over the network isn't zero, but it is severely limited in case of changes which aren't backwards compatible. In order to reject a backwards-incompatible change, a node operator has to do exactly nothing. It's rejected by default. As a result, the protocol has a status-quo bias. This is why Bitcoin Maximalists promote operating your own bitcoin nodes ("don't trust, verify"), why it's desirable to keep the cost of operating such a node low, and why hard forks (backwards incompatible changes) in Bitcoin are shunned.</p>Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com8tag:blogger.com,1999:blog-6189690633638834539.post-77793257286984903972017-03-21T16:37:00.000+01:002017-03-21T16:37:57.136+01:00The great Bitcoin blocksize debate as an ideological battleI'm greatly saddened by the fighting between the two big Bitcoin camps. Even though they don't have official labels and my own labels may not be fully accurate, I have to use some labels, otherwise my article will make no sense. I'll simply label one of the groups "Bitcoin Core", and the other one "Bitcoin Unlimited".<br />
<br />
Even though I'm not involved in research of Bitcoin anymore because my work on <a href="https://bitmessage.org/">Bitmessage</a> takes almost all of my time, as a dedicated HODLer I feel it as my obligation to try to explain to the people interested in Bitcoin why the discord exists, and why it's pointless to spend time on it. I hope that it will help people deeply think about their own values, and use them productively instead.<br />
<h3>
Governance?</h3>
<div>
The conflict is often explained as a governance problem. I think this while there is an element of truth in it, misses the point. The reason for the conflict isn't a lack of procedures, but an emphasis of the differences in values.</div>
<h3>
Main axis: conservative versus progressive</h3>
<div>
The main reason why there is discord is the conservative vs. progressive affinity of the members of each groups. The "Bitcoin Core" group tends to be more conservative whereas the "Bitcoin Unlimited" tends to be more progressive. For the purposes of this article, I'll differentiate betwen the groups by their reaction to obstacles with respect to the existing rules; when facing an obstacle, the conservatives delay changing the rules and try to find a solution within, while the progressives more readily embrace a rule change and consider it as a part of solution. Conservatives view the rules as containing a historic wisdom which may not be apparent. Progressives view them as contextual and as a reaction to contemporary phenomena.</div>
<div>
<br /></div>
<div>
These tendencies are a naturally occurring phenomenon and are largely influenced by psychology. They reflect themselves in all areas of life. People are unlikely to change their affinity. They associate themselves with people with similar affinities, and the community membership gives them a sense of belonging. If someone tries to treat obstacles in a way conflicting with their affinity, they will view it as an attack on their values, and follow by an immediate counter by any means available. Typical reactions are accusations of being a traitor (collaboration with the enemy), segregating their opinions (censorship), ridicule and other ad hominems. It happens in politics (Brexit, Trump), or in religion (the different branches of Christianity or Islam). Even in cases when there is some element of truth in the accusations, they are mainly a symptom rather than a cause of the problem.</div>
<div>
<br /></div>
<div>
Unfortunately, psychology tends to catch up even well educated, highly experienced and an otherwise reasonable people, and they go full retard. This causes an enormous waste of resources, which otherwise could be spent on productive endeavours. Perhaps millenia ago, in hunter / gatherer societies, such a reaction to conflict made more sense, as there may not have been enough time to discuss the allocation of resources rationally.</div>
<div>
<br /></div>
<div>
People in the Bitcoin community of all should acknowledge that some people are naturally more conservative and some more progressive. This would help to calm down the situation.</div>
<h3>
Secondary axis: collectivism versus individualism</h3>
<div>
A second characteristic, orthogonal to the conservative / progressive one, is an affinity towards collectivism versus individualsim. Collectivists want everyone to adhere to a broad set of rules, whereas individualists want just a very narrow set of rules for everyone. In the forking debate, collectivists want there to be only one Bitcoin and the other to either die or never start in the first place, whereas individualists are either indifferent or prefer that both survive. In the forking debate, collectivists point to lost network effect, consumer confusion and similar things. Individualists argue that a fork would prevent oppression and allow to refocus resources productively.</div>
<div>
<br /></div>
<div>
While this axis explains a smaller proportion of the debate, it is perhaps more important. You see, conservatives and progresives can get along, as long as they are individualists. Once they calm down, they will leave each other alone and try to resolve conflicts peacefully. But there is no such solution with collectivists. They will appeal to the higher good and demand your subjugation to it (i.e. them).</div>
<h3>
Plea</h3>
<div>
Next time you're reading, writing, listening or talking on the topic of the blocksize, try to see the arguments from the point of view of the two axes I outlined. You'll be surprised how much of the underlying implications can be explained by the affinities. Please recognise that the conservative/progressive split is more or less a given and both sides have a legitimate reason for their position, and therefore there is a legitimate potential for a conflict. Remember that the real danger is collectivism and its most encroaching manifestation, the state. If afterwards you still think that a common solution cannot be found, then calmly prepare for a fork, and spend your time and resources in your part of the community, in a productive way.</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com6tag:blogger.com,1999:blog-6189690633638834539.post-66162002245184732012016-07-13T10:38:00.000+02:002016-07-13T10:44:51.521+02:00I'm still aroundYou may have noticed that there hasn't been a new blog post for a long time. It's not that I lost interest in Bitcoin or economics, but my goals with respect to its economic research I more-or-less reached. I studied the concept of liquidity and how it relates to Bitcoin. My papers about the topic have been referenced by economists that I admire (Lawrence White, Robert Murphy, Walter Block). I was able to meet many other extraordinary people, in person, including, in no particular order: my dear friend Stephan Kinsella, Jeffrey Tucker, Jörg-Guido Hülsmann, Doug French, George Selgin, Rahim Taghizadegan, Frank Shostak, Philipp Bagus, David Howden, Deidre McCloskey, Nassim Nicholas Taleb, Konrad S. Graf, Roger Ver, Eric Voorhees, Andreas Antonopoulous, Tuur Demeester, Jason King, Meni Rosenfeld, Johann Gevers, Juraj Bednár, Pavol Lupták. If I forgot to mention you, it's all my fault because I have a bad memory for people. This has been an amazing experience and I'm very satisfied about it.<br />
<br />
Last year I rediscovered <a href="https://bitmessage.org/">Bitmessage</a>, a project / protocol for anonymous, censorship-resistant, secure and decentralised communication. I had heard about it before but didn't realise all of the possibilities it opens. I became more and more involved in it. I joined the reference client/software (also known as <a href="https://github.com/Bitmessage/PyBitmessage/">PyBitmessage</a>) and successfully iterated it through a new cycle with the version 0.6 being released in two months ago. At the moment I'm transitioning into the lead position as the original author of Bitmessage, Jonathan Warren, does not have time for it anymore. I hope that I can help to make it into a sustainable and more formally managed open source project with clear goals and path for the future. I would also like to use this opportunity to thank all contributors, translators, and other people who work on a different Bitmessage implementation (like Daniel Krawisz and Justus Ranvier).<br />
<br />
Nevertheless, I am still interested in Bitcoin (my Bitmessage-Email gateway, mailchuck.com, takes bitcoin payments), and the Austrian School. I think that every now and then, I can probably still make a new post about something interesting. So don't delete me from your RSS feeds yet!Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com7tag:blogger.com,1999:blog-6189690633638834539.post-72513915624461457182014-10-20T21:41:00.000+02:002014-10-20T21:42:46.036+02:00My comments on the BitLicense<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I spent a lot of time researching the proposed BitLicense and associated issues, and today I submitted my comments to the NYDFS. Here it is.</span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Dear Superintendent Lawsky,</span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">dear General Counsel Syracuse,</span></div>
<b id="docs-internal-guid-4addf68c-2f10-1164-649a-91b666cc02d7" style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">kindly allow me to add my own comments to the proposed regulation Title 23, Chapter I, Part 200, henceforth “BitLicense”.</span></div>
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Introduction</span></h2>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I specialise in economic research of cryptocurrencies, with emphasis on the economic theory. My activities involve publications, lectures, reviews and consulting. I have started my research three years ago. Prior to that, my professional focus was in computer networks and security, for about fifteen years, including traditional payment processing, where I was mainly responsible for implementing security policies (PCI-DSS) and disaster recovery. This combination allows me a broad insight into the types of activities and problems of cryptocurrency companies. While my own business is unlikely to require to apply for the BitLicense, several of the companies that I have contractual relationships with might.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even though it is customary to give recommendations in comments to proposed regulation, I typically try to stay neutral. I strive to help people to understand rather than to tell them what to do. In this spirit, I hope that my comments will cause the NYDFS to become more aware of the consequences of the proposed regulation, which, according to my impression, are not well understood.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I read many of the publicly available comments to the proposal, and used some of them as input for my own comment, in order to make my arguments more complete. Nevertheless, I think that I bring new important insights, and my comment should not be simply be treated as a duplicate of other comments. Links to some of the sources that I used can be found at the end of the comment.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My comment is divided into four sections. The first one lists two issues which, in my opinion, make the BitLicense proposal unworkable. The second one lists issues which, while possible to adapt to, nevertheless cause significant hindrances for cryptocurrency companies. The third one lists issues which are comparably minor, such as omissions and unclarities. The fourth one is an attempt to ascertain the goals of the proposed regulation, its efficacy and is perhaps more “meta” in nature.</span></div>
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Grave issues</span></h2>
<h3 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 17px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Affects unrelated companies</span></h3>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The grave issues follow from the nature of cryptocurrencies. Unlike with traditional monies and financial systems, cryptocurrencies are just numbers. In particular, private keys in the Bitcoin protocol (which I presume is what the “digital unit” in 200.2.m refers to) are 32 bytes long. For a more casual explanation, four of such keys comfortably fit into a single SMS or a tweet. 32 bytes can be stored on any object, digital or analogue, and transferred by a wide variety of means (I explain this in my master’s thesis). Once you realise this, the terms “transmission” (200.2.l) and “storing” (200.2.n.2) gain a whole new meaning. As long as this storage or transfer involves a third party, at least one of the participants is potentially subject to BitLicense. This has the perhaps unexpected consequence of a wide variety of businesses, not merely those who use cryptocurrencies in a non-financial way (as has been pointed out by others, such as Sean King), but who do not even have a cryptocurrency-specific business, being faced with BitLicense requirements. For a better emphasis, let me reformulate that. </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Anyone storing or transporting data or physical objects, on behalf of their customers, is potentially subject to BitLicense.</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Some examples of businesses that will unexpectedly be affected:</span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">warehouses</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">vault providers</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">physical transport (e.g. trucking companies, car rentals, moving companies)</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">data centers, online hosting (e.g. DropBox) data processing (e.g. email), or ISPs. If I send an email to the superintendent and attach a private Bitcoin key, Microsoft, who process NYDFS’ email, will become subject to BitLicense. If he views my email on his mobile phone, his mobile phone provider will become subject to BitLicense.</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">decentralised hosting systems like bittorrent (or newer ones like StorJ or MaidSafe). This affects all kinds of non-commercial entities who merely participate in the provision of online storage or data transfer</span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Companies have no good way to identify whether whatever they store or transport is or isn’t a private key unlocking a positive balance. Even if they realise that they store data that might be a private key, if the key is encrypted, they have no way of knowing the balance or what cryptocurrency it is related to.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What is, to me, surprising, is that this is not an unforeseeable problem. Other types of regulations do contain a variety exemptions, and they actually do exempt at least some of these business types. For example, federal regulation, 31 CFR 1010.100(ff)(5)(ii), has exceptions, among other things, for physical transport of cash, network services, payment processors, and facilitating sale of goods/services. California financial code, division 1.2, chapter 2, section 2010-2011 also has some exemptions. There are no equivalent exemptions in the BitLicense. BitLicense does not even exempt local, state or federal agencies, foreign governments, or the US Postal Service. These might also become subject to BitLicense. The police, if they, during exercising their duties, confiscate physical objects that store private keys (such as computers), will also become subject to BitLicense.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even prior to cryptocurrencies, money transmitter laws already affected businesses in absurd ways. In “Regulating the New Cashless World”, professor Kevin V. Tu explains some of these problems. The proposed BitLicense makes no use of professor Tu’s analysis and only exacerbates the issue.</span></div>
<h3 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 17px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">No way to comply with BitLicense</span></h3>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even if a company realises it is subject to BitLicense and attempts to act according to it, they cannot comply with the identification requirements (200.12.a.1 and 200.15.d.1) or avoid “involving New York or a New York Resident” anyway. Once an address has non-zero balance, it is publicly visible on a ledger, and anyone can send transactions to that address, without identifying himself to anyone. The superintendent himself (being a “New York Resident”), if he desired so, could troll and send bitcoins to addresses of companies that try to exclude New York residents, forcing them to qualify their activities as “involving New York or a New York Resident” (200.2.n). The recipient cannot prevent this. If you think that I am exaggerating, similar things already happened in the past. Spammers sent small amounts of bitcoins to random addresses to advertise their products, for example the “Enjoy Sochi” or “Laxo Trade”.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The requirement to identify both of the parties involved in a transaction is akin to requiring a mail server or relay operator to identify the senders and recipients of each email. At least the mail server operator can reject an incoming email. A holder of a private key cannot prevent receiving a transaction, as required by 200.15.i. When Jeremy Allaire argued that the regulation is “technically impossible to comply with”, with other industry leaders (e.g. Wences Cesares) concurring, they were not exaggerating. My conclusion is actually that it is even more problematic than the comments of those gentlemen allege.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Significant hampering</span></h2>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">200.8.b requires the BitLicensee to invest retained profits in a few types of US-Dollar denominated investments. It is not clear whether this prohibits retaining profits in other fiat currencies (e.g. Euros or RMB). It however excludes investing into analogous types of investments issued in other countries and denominated in other currencies. Why should BitStamp or Huobi, who are not located in the US, be forced to interact with the US financial markets? Furthermore, here we have a paradoxical situation where most of the BitLicense treats non-financial uses of cryptocurrencies as financial, this restriction treats financial uses of cryptocurrencies as non-financial. Companies that use cryptocurrencies as functional currencies, for example to pay their suppliers or employees, might get cash flow problems due to this restriction. Some companies, such as CoinBase, need stashes of bitcoins to sell to their customers quickly. This could also be potentially hampered by this restriction.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Some companies do not use fiat money at all. In the past, blockchain.info presented itself as having no bank accounts (however, according to Jeremy Liew, who is or soon will be on their board, this is no longer the case). Purse.io, for example, is another company that, based on their business model, do not need a bank account (I do not personally know whether they do have one). Other types of businesses that do not require a fiat account are mining pools or sellers of physical bitcoin media, such as Casascius coins. Why should they be forced to obtain a bank account and/or services of a broker? What if they cannot find anyone that is willing to provide them such services?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This restriction also creates problems for companies that want to have more than 100% of reserves. According to audits published earlier this year, OKCoin, Kraken and Bitfinex were confirmed to have more than 100% reserves. This can be beneficial, for example, if the company wants to store 100% reserves in cold storage and a small amount in hot wallet. The additional reserves could also be used for other services, such as hedging or facilitating margin trading. If the company needs to liquidate excess reserves according to accounting deadlines rather than business demand, this would have negative impact on security and the provision of variety of business services.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Conversely, the requirement to hold no less than 100% reserves (200.9.a) is in conflict with certain business models (see the paper by Brito, Shadab and Castillo). It is also sometimes in conflict with other regulations, such as CFTC or SEC, as pointed out by Ryan Selkis in “Bitlicense letters #3”.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BitLicense seems to apply to certain type of intermediation services, for example escrow. This would include not only cryptocurrency businesses, but also others like notaries or lawyers. While I assume that in a typical escrow situation notaries and lawyers do identify the parties, why should they be subject to the other restrictions of the BitLicense?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BitLicense also applies to situations where encrypted keys are stored or transmitted by a third party and the holder/transmitter cannot use them in the financial sense (such as the aforementioned blockchain.info). Why?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Companies that bring together buyers and sellers are not specifically exempt. While they probably do not qualify as “Virtual Currency Business Activity”, perhaps they should be specifically exempt.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If I travel to New York, say for a conference, companies that I have contractual relationship with might become subject to BitLicense due to my trip. Why? Are these companies supposed to track my movements? My bank does not care whether I travel to US, why should a cryptocurrency company do?</span></div>
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Minor issues and pointless requirements</span></h2>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">All BitLicensees are required to have a cyber security program (200.16). This includes companies that do not deal with bitcoin electronically (e.g. sellers of Casascius coins) and in such case is pointless.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In some business models, the identity of the parties is known to another business involved in the transaction. In the case of purse.io, Amazon knows the identities of both the buyer and seller of bitcoins (it knows the credit card data of the bitcoin buyer and the shipping address of the bitcoin seller). If NYDFS wished to do so, they can obtain this information from Amazon by a court order. Why does purse.io also need to identify these two? This just makes the participants more vulnerable to identity theft.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Some companies act as an agent of the payee (e.g. payment processors). Why do they need to identify the payer? The payee can, with appropriate court order, provide the identity of the payer. During the Senate hearings in November 2013, Tony Gallippi of BitPay said that they do identify the merchant already, but as far as I know, none of the cryptocurrency payment processors identify the payer. The aforementioned professor Tu also uses the example of the agent of the payee, and the California financial code has an exemption in such as case.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It is unclear what happens with the customer's funds after revocation of license (200.6.c) or denial for people already engaged in Virtual Currency Business Activity (200.21). Is the company supposed to return them to the depositors? How much time do they have for it? Will NYDFS confiscate the deposits?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If two BitLicensees facilitate transfers between the two of their respective customers, do they need to identify each others’ customers? E.g. if a payment processor sells bitcoins on an exchange, does the processor need to know the identity of the buyer (of bitcoins) and does the exchange need to know the identity of either the merchant or the buyer of the goods or services?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Storing and transferring the blockchain (as opposed to storing the private key) is not clearly exempted, yet might fall under “Virtual Currency” (200.2.m). This may affect thousands of non-commercial entities and private persons if not rectified.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Fiat money” (200.2.d.) excludes commercial deposit accounts (only coins and notes are legal tender) and appears to be too narrow. On the other hand, "other value" and "retail conversion" (200.2.n.4) are not defined, can mean anything and appear to be too broad.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Transmission” (200.2.l) excludes transmission from a person to that same person. I don’t know whether this was intentional, I however think it is interesting.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Exemption 200.3.c.2 does not include the use of Virtual Currency for something else than a payment, i.e. merchants and consumers using of Virtual Currency for non-payment purposes (e.g. document timestamping) are not specifically excluded. Perhaps they should be.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 200.4.a.13 - "an explanation of the methodologies used to calculate the value of Virtual Currency in Fiat currency" should include "if applicable". 200.19.e.4, for example, does contain "the exchange rate, if applicable". Some businesses do not provide such valuation at all, so they should not be required to explain how they calculate it.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The requirement for a bond or trust account in dollars (200.9) causes a problem for companies that do not operate with fiat money. Perhaps NYDFS should consider signing up with one of the payment processors to alleviate this?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 200.10 (material change to business), BitLicense does not specify how long the superintendent has to approve or reject it, whereas 200.11 (change of control, mergers & acquisitions) does.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 200.12.a.1 (books and records), "transaction" is not defined.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 200.12.c, "non-completed, outstanding or inactive" is not defined.</span></div>
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Achieving goals</span></h2>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We all need to be aware that some of the purported goals of the BitLicense are, to a larger or smaller extent, in conflict with each other. For example, consumer protection and the requirement to conduct an AML/KYC program. If the BitLicensee is required to store personal identification of the customer, this increases the risk of identity theft. NYDFS needs to clarify their priorities. The superintendent’s remarks about not letting “a thousand flowers to bloom on the innovation side” gives us a bit of insight into his personal priorities. However, such attitude is more emotional than rational, and it is very dangerous, as explained by Adam Thierer in “Technopanics”. Jim Harper has been, for a long time, requesting a cost-benefit analysis from NYDFS, and has not received any yet.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">NYDFS might consider that certain types of companies, in particular exchanges that deal with fiat, and payment processors, will increasingly tend to do AML/KYC irrespective of regulation. This is because they need good relationships with banks, and the presence or absence of AML/KYC policies at exchanges or payment processors significantly affects banks’ perceived risk.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">NYDFS also does not appear to have given much merit to alternative methods to achieve the desired goals. The most obvious method is in my opinion the education of consumers (it is expected that the BitLicensees do this). NYDFS could also perform certification services of public keys or provide APIs for authenticating consumer identities, which would help BitLicensees to identify New York residents without having to store their identities themselves. In “Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, and Gambling”, </span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Brito, Shadab and Castillo attempt to provide examples of many such alternative approaches.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My own impression is that, mirroring the proverb “if you have a hammer, everything looks like a nail”, NYDFS continued in doing what and how it has been doing, the result looking similar to traditional banking and money transmission regulation, and the hearings conducted by NYDFS were moot.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sincerely,</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Peter Šurda</span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Vienna, Austria, October 20th 2014</span></div>
<h2 style="line-height: 1.15; margin-bottom: 0pt; margin-top: 10pt;">
<span style="background-color: transparent; color: black; font-family: 'Trebuchet MS'; font-size: 21px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Links:</span></h2>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BitLicense proposal: </span><a href="http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Jeremy Allaire: Thoughts on the New York BitLicense Proposal, </span><a href="https://www.circle.com/en/2014/08/13/thoughts-new-york-bitlicense-proposal" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">https://www.circle.com/en/2014/08/13/thoughts-new-york-bitlicense-proposal</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Jerry Brito and Eli Dourado: Comments to the New York Department of Financial Services on the Proposed Virtual Currency Regulatory Framework, </span><a href="http://mercatus.org/sites/default/files/BritoDourado-NY-Virtual-Currency-comment-081414.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://mercatus.org/sites/default/files/BritoDourado-NY-Virtual-Currency-comment-081414.pdf</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Jerry Brito, Houman B. Shadab, Andrea Castillo: Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets and Gambling, </span><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423461" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423461</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Wences Cesares: “[XAPO] WILL HAVE NO CHOICE BUT TO BLOCK NEW YORK CUSTOMERS FROM ACESSING SERVICES” AND WHY NEW YORK SHOULD CARE, </span><a href="https://xapo.com/post/xapo-will-have-no-choice-but-to-block-new-york/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">https://xapo.com/post/xapo-will-have-no-choice-but-to-block-new-york/</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Anthony Gallippi @ Senate Hearing, </span><a href="https://www.youtube.com/watch?v=uJYBlROTswo" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">https://www.youtube.com/watch?v=uJYBlROTswo</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Jim Harper (on behalf of Bitcoin Foundation): comments on NYDFS BitLicense Proposal, </span><a href="https://bitcoinfoundation.org/wp-content/uploads/2014/10/Bitcoin-Foundation-Comment-on-NYDFS-BitLicense-Proposal.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">https://bitcoinfoundation.org/wp-content/uploads/2014/10/Bitcoin-Foundation-Comment-on-NYDFS-BitLicense-Proposal.pdf</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sean King: Here Are My Official Comments on the New York Department of Financial Services' Proposed Bitcoin and Virtual Currency Regulations,</span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<a href="http://wefivekingsblog.blogspot.co.at/2014/07/here-are-my-official-comments-on-new.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://wefivekingsblog.blogspot.co.at/2014/07/here-are-my-official-comments-on-new.html</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sean Neville: Hammering on the BitLicense, </span><a href="https://medium.com/@psneville/hammering-on-the-bitlicense-d00a81e4f5c0" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">https://medium.com/@psneville/hammering-on-the-bitlicense-d00a81e4f5c0</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ryan Selkis: The BitLicense Papers #3, </span><a href="http://two-bit-idiot.tumblr.com/post/94458273399/the-bitlicense-papers-3" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://two-bit-idiot.tumblr.com/post/94458273399/the-bitlicense-papers-3</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Peter Šurda: Economics of Bitcoin: is Bitcoin an alternative to fiat currencies and gold?,</span></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<a href="http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Adam Thierer - Technopanics, Threat Inflation and the Danger of an Information Technology Precautionary Principle, </span><a href="http://mercatus.org/sites/default/files/Technopanics-by-Adam-Thierer_MN-Journal-Law-Science-Tech-Issue-14-1.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://mercatus.org/sites/default/files/Technopanics-by-Adam-Thierer_MN-Journal-Law-Science-Tech-Issue-14-1.pdf</span></a></div>
<div dir="ltr" style="line-height: 1.15; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 15px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Kevin V. Tu: Regulating the New Cashless World,</span></div>
<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2235937" style="font-family: Arial; font-size: 15px; line-height: 1.15; text-decoration: none; white-space: pre-wrap;">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2235937</a><br />
<div>
<br /></div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com3tag:blogger.com,1999:blog-6189690633638834539.post-63870744073432257642014-10-04T19:16:00.000+02:002014-10-04T20:52:50.231+02:00Review: BitCon: The Naked Truth About Bitcoin by Jeffrey RobinsonSince I read so much, I thought that maybe I can start posting reviews. I have already been asked by publishers to review other peoples' writings about Bitcoin, and I think I'm getting the hang of it. I take it seriously and I fully read everything that I review, and make highlights and comments. So let's start. Today I'll review <a href="http://www.amazon.com/dp/B00NUIUQ3A/ref=r_soa_w_d">BitCon: The Naked Truth About Bitcoin by Jeffrey Robinson</a>.<br />
<h3>
Introduction</h3>
While the author obviously did a lot of research, my main problem with this books is the author’s bias. The proponents of Bitcoin are, with a handful of exceptions, presented as anonymous, hysterical and associated with ad-hominems, for example: “pretend-currency” or “the Faithful”. Their arguments are ridiculed and derided, for example “I’d been hearing this made-up baloney for months, over and over again, thrown out like absolute fact with nothing to back it up”. The sources of proponents he uses are mainly comments and forum posts. Personally, what I found most outrageous was that instead of calling Jon Matonis (Executive Director of the Bitcoin Foundation, who has been researching money for 30 years and held senior positions in banks and at Visa) by his name, he refers to him as “the Bitcoin <strike>Foundation</strike> Fountain type” <b>[fixed]</b> and “the same chap”.<br />
The opponents, on the other hand are presented as rational, calm, they are named including their credentials and positions, for example “Yermack's explanation is a reasoned and rational one”. Their arguments are taken as unquestionable truth. He sources them from, among other things, personal interviews and blog posts.<br />
<h3>
Bias continues</h3>
The bias is all over the place. On one hand, he argues that “... all suspects are innocent until proven guilty …”, yet that does not prevent him from claiming that Ross Ulbricht is, as alleged by the US prosecutors, indeed Dread Pirate Roberts, prior to his sentencing. When addressing Bitcoin from the perspective of Austrian school of economics, he quotes three negative opinions, and ignores many others who are either neutral or positive about it, and instead of referencing research publications, he references blog posts.<br />
When describing the position of the Federal Election Commission towards using Bitcoin in political donations, he writes that their decisions “... speak volumes about the confidence the FEC lacks in bitcoin”. I listened to recordings of both of the FEC meetings which resulted in this decision. The debate was mainly regarding applications of internal regulations and how to technically implement them and had nothing to do with confidence.<br />
He says that he is “... skeptical of explanations where money is involved that are too complicated for an 8-year old to understand.”, yet I doubt anyone of that age can understand how the current financial system works. It probably takes at least a 12-year old, like <a href="https://www.youtube.com/watch?v=Bx5Sc3vWefE">Victoria Grant</a>. Many if not most adults don’t understand it either.<br />
The economic analysis is a mixed bag. On one hand, he describes the omnipresent hype, fraud, bubbles, pump and dump schemes, and so on, and how they are present a problem. I have no issue here and even agree to a large extent, just in one occasion, he describes a pump and dump scheme and incorrectly labels it as a ponzi scheme. Another thing that I agree with him is that Bitcoin is not suitable for money laundering (for similar reasons as he presents).<br />
On the other hand, he lacks understanding of largely uncontroversial concepts like the liquidity premium and transaction costs. Mainly he ignores the hidden costs of a trusted third party and the property rights enforcement of media of exchange. An example would be the costs associated with identity theft, which he does not mention at all. Without these, a lot of economic phenomena cannot be understood, not merely Bitcoin.<br />
He lacks a theory of evolution of media of exchange, and appears to think that one day he wakes up and something that didn’t exist before is now a “currency”. Again, without such a theory, a lot of economic phenomena cannot be understood.<br />
He complains in multiple places that merchants tend to use bitcoin only as a payment mechanism rather than a currency, and does not understand the relevance of this (he writes for buyers, “There is no monetary benefit … [n]or is there any benefit of convenience”). He misses that, among other things, merchant acceptance increases liquidity. When in <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2446604">Can Bitcoin Become a Major Currency?</a> Lawrence White and William Luther explained the economic relevance of the usage as a payment mechanism, I thought they were joking for writing something this obvious, but apparently it’s not as obvious as I thought.<br />
Jeffrey Robinson portrays, M-Pesa or Amazon Payments as potential competitors to Bitcoin, but misses, among other things, that they do not work internationally. Amazon Payments only works in the US, the Kenyan M-Pesa only works in Kenya. International trade is a non-negligible proportion of global trade.<br />
The more controversial economic topics, such as deflation, velocity, intrinsic value are portrayed in a one-sided way and again the statements of the sources are taken as undeniable.<br />
I would also complain about Jeffrey’s statist bias, but I think it probably would be unfair, because this is widely present everywhere and I don’t want to single him out.<br />
<h3>
Conclusion</h3>
In summary, don’t buy this book. There are better explanations of Bitcoin, and better critiques of it as well (indeed, it’s probably better if you read the original critiques he references). If you want to read more about bubbles, I recommend <a href="http://www.amazon.com/Boombustology-Spotting-Financial-Bubbles-Before/dp/0470879467">Boombustology</a>, and if you want to read more about taxation and Bitcoin, read <a href="http://www.bitcointaxblog.com/">Jason Tyra’s blog</a>.<br />
<br />
If you like this review, send me some Bitcoins: <a href="https://blockchain.info/address/1MKkciz5zT4Vg8pxkd3VtAwMMcxyWPiQtQ">1MKkciz5zT4Vg8pxkd3VtAwMMcxyWPiQtQ</a>.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com4tag:blogger.com,1999:blog-6189690633638834539.post-54303233608781026672014-03-14T12:01:00.000+01:002014-03-14T12:07:02.292+01:00The contradictions of Smiling Dave continueSmiling Dave continues to post about Bitcoin and making up more and more ridiculous arguments as the gaps in them are exposed, and continues to distance himself from the Austrian approach more and more. However, I recently noticed something more serious: he created a new contradiction.<br />
<br />
In <a href="http://smilingdavesblog.wordpress.com/2014/03/11/all-about-a-medium-of-exchange-having-to-be-in-wide-use/">All About a Medium of Exchange Having to Be in Wide Use</a>, he writes this:<br />
<blockquote class="tr_bq">
"It means a medium of exchange has to be more marketable than most things. It has to be in wide demand."</blockquote>
I will divide this into two parts: (1) a medium of exchange has to be more marketable than most things, and (2) it has to be in wide demand.<br />
<br />
<h3>
Marketability of media of exchange</h3>
<br />
The first part is the one where he introduced a contradiction. This is because when I previously <a href="http://archive.freecapitalists.org/forums/p/27611/493844.aspx#493844">explained to him</a> that the regression theorem is about the emergence of the function of a medium of exchange from liquidity, <a href="http://archive.freecapitalists.org/forums/p/27611/493849.aspx#493849">he disagreed</a>:<br />
<blockquote class="tr_bq">
"Pete has done this as well in his last post, <b>confusing liquidity with general acceptance</b> as a medium of exchange." [emphasis added]</blockquote>
Maybe he does not understand that liquidity and marketability are referring to the same phenomenon? In that case we can expect his next post to concentrate on explaining the difference between liquidity and marketability.<br />
<br />
Now, as I explained several times already, including in my thesis and earlier posts, the connection between liquidity and medium of exchange function is empirically observable with Bitcoin. It was already liquid in early 2010 when the first use as a medium of exchange was observed. It confirms both Menger's and Mises' observations. Furthermore, Menger emphasised the importance of "organised markets" (exchanges) and speculation in playing a role in the concept of liquidity. We observe these two with Bitcoin as well.<br />
<br />
<h3>
Wide acceptance and marketability</h3>
<div>
<br /></div>
<div>
Smiling Dave has erroneously argued that somehow wide acceptance is a characteristic of marketability. However, <a href="http://mises.org/document/4984">Menger</a> was very clear both in his definition of marketability:</div>
<blockquote class="tr_bq">
"A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices."</blockquote>
There is no sign of "how widely accepted/demanded it is". Furthermore, Menger explains that the factors influencing marketability can be divided into two categories: time (<b>when</b> the commodity can be sold) and place (<b>where</b> the commmodity can be sold). Again, no sign of "width".<br />
<br />
Wide demand is not marketability. There are goods which are widely demanded, yet they are illiquid. A very good example are houses: there is a practically universal demand for houses (apart from people who want to live homeless), yet it is difficult to sell a house easily at an economic price. You need to spend money on marketing, you might need to pay an expert for appraisal, you might need to clean it or fix it, there are often special taxes and fees and the necessity to hire a middleman and/or a lawyer to facilitate the sale, and you probably need to wait quite a while in order to get a price corresponding to the general economic situation. If you want to sell it right now and right here, you most likely need to take a huge price cut. This means that houses are illiquid. And illiquid goods cannot be a medium of exchange.<br />
<br />
Just like there are widely demanded illiquid goods, there are narrowly demanded liquid goods. Nothing exemplifies it better than early-stage cryptocurrencies. There are very few people demanding them when they emerge. Yet because the internet is accessible <b>anytime</b> and from almost <b>any place</b>, and exchanges allow to place bid and ask offers, the logistical obstacles for the emergence of liquidity are dramatically reduced. If you want to sell a cryptocurrency, you can do it no matter where you are and what the time is, and get a price very close to the current market price. Most exchanges operate 24/7. Then there is <a href="https://localbitcoins.com/">localbitcoins.com</a>, which helps you find people in your area if you want to sell for cash or a national bank transfer (at the time of writing claiming to have offers in 5451 cities in 216 countries). In the last couple of months, Bitcoin "ATMs" have started being deployed (even though only those that allow to sell, rather than only buy, bitcoins, are rarer and only those count towards liquidity). Furthermore, an increasing number of shops, online and offline, accept Bitcoin as a payment mechanism. This means that holders of Bitcoins can dispose of them in increasingly easier and varied ways at a price corresponding to the general economic situation. Bitcoins are increasingly more liquid, and this means people can use them as a medium of exchange, i.e. hold them for their purchasing power.<br />
<br />
<h3>
</h3>
<h3>
The gap between media of exchange and money</h3>
<div>
<br />
Bitcoin shows that the level of demand for liquidity to emerge is lower than many economists have anticipated (and many still don't get). However, we need to be careful when applying this to money. The level of liquidity necessary for money may still lie very high and be unattainable for Bitcoin for all we know. While the implied assumption so far has been that there is a big gap between "nothing" and a "medium of exchange" and a narrow gap between "medium of exchange" and "money", Bitcoin shows that there are goods where the relationship is reversed: there is a narrow gap between "nothing" and "medium of exchange", and a wide gap between "medium of exchange" and "money". This is why it is important to distinguish between money and a medium of exchange, yet another difficulty many economists seem to face: they do not have a theory for media of exchange that are not money. Neither does Smiling Dave.</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com1tag:blogger.com,1999:blog-6189690633638834539.post-39147884274913388982014-02-11T21:04:00.000+01:002014-02-11T23:14:45.835+01:00Mt. Gox and fractional reserve banking<br />
While Mt. Gox has been long accused of running a fractional reserve system, the accusations increased during the last couple of days due to an escalation of the <a href="https://en.bitcoin.it/wiki/Transaction_Malleability">transaction malleability aspect of Bitcoin</a>, and the inability of Mt. Gox to handle it on the technical, managerial and PR level. Some of the more elaborate accusals have been done by Dave Howden (<a href="http://mises.ca/posts/blog/bitcoin-bank-run/">first</a>, <a href="http://mises.ca/posts/blog/bitcoin-bank-run-take-2/">second</a>). While I don't know whether Mt. Gox is or isn't running fractional reserves, I thought I'd bring up a bit of my research on the theory of anti-FRB arguments. In an earlier version of the draft of my master's thesis, dating about two years ago (i.e. long before the situation at Mt. Gox started escalating), I had a section analysing the legitimacy of FRB from Austrian perspective. It didn't make it into the final version because my advisor argued that it is outside of the scope of the topic, so I should consider leaving it out (he was probably right). I think that it might be useful to look at the Mt. Gox situation from this perspective. The next section is quote from the draft (with some minor modifications).<br />
<br />
<h2>
Redeeming deposits on demand</h2>
<a href="http://mises.org/document/2745">de Soto (2009)</a> argues that a deposit contract requires that the deposited item be redeemable on demand, and because it is impossible to redeem all fractional reserves on demand in all cases, it is illegitimate:<br />
<br />
<blockquote class="tr_bq">
"Its [deposit contract, ed.] fundamental purpose is the custody or safekeeping of the good and it implies, for the duration of the contract, that the complete availability of the good remain in favor of the depositor, who may request its return at any moment. ... The obligation of the depositary is to guard and protect the good with the extreme diligence typical of a good parent, and to <b>return it immediately to the depositor as soon as he asks for it</b>." [emphasis added]</blockquote>
I submit that there are cases where redemption on demand is refused even during a full reserve deposit. Following is a list of some of these cases:<br />
<br />
<ol>
<li>it is outside of the opening hours of the bank</li>
<li>the bank is undergoing an audit during which access to reserves is suspended</li>
<li>the particular branch does not have sufficient reserves<a href="#bot1" name="top1"><sup>1</sup></a></li>
<li>there are technical difficulties in accessing the reserves, for example a malfunction in the lock in the safe, or the person with the key is indisposed</li>
<li>there is an issue with verifying the authenticity of the withdrawal request<a href="#bot2" name="top2"><sup>2</sup></a></li>
<li>the deposits were stolen by a third party and the bank was unable to obtain enough reserves from the insurance/bank owners/other financing source on time</li>
</ol>
<ul>
</ul>
In none of these cases is there a fraudulent behaviour by the bank. The last three cases could be argued to be a consequence of negligence and give a rise to liabilities, however the first three are perfectly legitimate occurrences. Therefore, the impossibility to redeem the deposit on demand is not a sufficient criterion to conclude illegitimacy.<br />
<br />
There is also the praxeological issue of differentiating withdrawal on demand and after a fixed period. The act of withdrawal is a type of action, and as such takes some time. It begins with the depositor initiating a contact with the bank, continues through the bank obtaining identification of the depositor or at least the bearer instrument he provides, verifying it, accessing their reserves, recording the withdrawal in their accounting systems and presenting the specie to the withdrawer<a href="#bot3" name="top3"><sup>3</sup></a>. During this time, the bank can liquidate some of their investments to compensate for the lack of reserves at the time of initiation of the withdrawal request. So from praxeological point of view, it is impossible to differentiate between on demand and not on demand deposits.<br />
<br />
<h2>
Applying the theory onto Mt. Gox</h2>
<div>
Based on known facts, Mt. Gox suffered from points 2, 4, 5 and 6. Their automated system for processing withdrawals is broken, they cannot verify if a withdrawal did or didn't occur, and have a mess in their accounting as a result and are re-auditing their systems. We don't know for sure if any of the deposited bitcoins have been stolen as a result of this, but previously, the US Department of Homeland Security and the US Secret Service <a href="http://techcrunch.com/2013/08/23/feds-seize-another-2-1-million-from-mt-gox-adding-up-to-5-million/">seized</a> (i.e. stole) about 5 million USD from Mt. Gox's bank accounts in the USA.</div>
<div>
<br /></div>
<div>
I'm not going to speculate whether Mt. Gox can fix this mess, but at least theoretically the problems casued by transaction malleability should be possible to audit, and at least there where account holders themselves successfully performed a double spend attack, Mt. Gox knows who they are, and can attempt legal action against them.</div>
<div>
<br />
<h2>
What can we learn from this?</h2>
</div>
<div>
I would like to introduce a saying: "Whatever bad happens with Bitcoin happens to Mt. Gox first". In other words, Mt. Gox is a lucrative target, because of its history, market share, poor management and PR skills. Attacks thus tend to affect Mt. Gox first. This generates knowledge, and entrepreneurs and users who observe these attacks, their consequences and reactions of Mt. Gox can learn from this, and not repeat the mistakes. Maybe we can argue that Mt. Gox should have spent more on management, auditing, PR or lobbying (to avoid the account seizures), but not all of this can be known in advance, and thus some level of experimenting is necessary. I don't want to present myself as <a href="http://southpark.wikia.com/wiki/Captain_Hindsight">Captain Hindsight</a>. Nassim Taleb <a href="http://www.amazon.com/Antifragile-Things-That-Gain-Disorder/dp/0812979680">argues</a> that we should honor failed entrepreneurs for showing us what doesn't work. Maybe we should do the same thing with Mt. Gox. After they repay everyone their deposits back.<br />
<br /></div>
<hr />
Footnotes:<br />
<a href="#top1" name="bot1"><b>1 </b></a>An analogous situation would be an ATM running out of cash.<br />
<a href="#top2" name="bot2"><b>2 </b></a>In a security breach in May 2012, Bitcoinica lost their main trading database and they had to gather the data required for the verification from other
sources, which was a time consuming process that took many weeks. Recent announcement (June 13th 2012) indicated that the payouts have started, however at the time of writing (June 17th) there were still unprocessed claims. Update for this blog post: Bitcoinica entered liquidation in November 2012 and still hasn't concluded.<br />
<a href="#top3" name="bot3"><b>3 </b></a>The process described is exactly the same irrespective of whether the withdrawal is done through a clerk, through an ATM or online banking.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com4tag:blogger.com,1999:blog-6189690633638834539.post-70994081433460898802013-12-07T11:42:00.001+01:002013-12-07T11:48:49.140+01:00"I, Broken Economist": An Analysis of Gary North's economics of Bitcoin<h3>
Conceited arrogance</h3>
There is one thing that becomes apparent when reading Gary North's articles. He knows a lot. But there is also another thing that becomes apparent sometimes, in particular in <a href="http://www.garynorth.com/public/11857.cfm">his latest article on Bitcoin</a>. He thinks he knows more than he actually knows. I can't address his article in full detail now as I'm at the <a href="http://labitconf.com/">Latin American Bitcoin Conference</a>, but I thought I'd mention some core issues with his article.<br />
<h3>
Heterogeneity of a monetary system</h3>
He writes that money enables economic calculation, and thus division of labour. He writes that Bitcoin couldn't exist if money did not already exist. He writes that you cannot buy everything with Bitcoin (yet). He writes that without goods being priced in Bitcoin, it can't be money.<br />
<br />
I agree with all of this (or let's just assume I do). I also claim that it's irrelevant. Because North does not have a <b>general</b> theory of liquidity, and a <b>general</b> theory of transaction costs. Which is very sad, because Menger was very eloquent on explaining both of these categories and made profound discoveries. People who claim that their arguments are based on Menger, yet do not have either a theory of liquidity or a theory of transaction costs do not really understand Menger.<br />
<br />
North only has a <b>partial</b> theory of liquidity (a theory of stable prices) and a <b>partial</b> theory of transaction costs (division of labour). But Menger was very elaborate on explaining why both liquidity and transaction costs are heterogenous and cannot be summed up to a particular activity. The implied error of the homogeneity of a monetary system is visible when North writes: <br />
<blockquote class="tr_bq">
"You cannot have a monetary system that does not apply across the board, yet still defend the concept of the division of labour through competitive pricing".</blockquote>
It is visible also in other partial implications of the alleged homogeneity, for example assuming that liquidity is a final means of payment. This already has been erroneously claimed by Smiling Dave. Final means of payment is merely one of the factors that influence liquidity. Liquidity is also not a unit of account. Unit of account and liquidity influence each other, but again are merely one of the factors.<br />
<br />
In other words, North's critique of Bitcoin misses that there are components of liquidity and transaction costs other than those he mentions. The total mix of all these influences the choice of a medium of exchange. The weight of the result is not only different based on the evolutionary stage of Bitcoin, but also on the particular circumstances of a particular user. This is why some people in some situations will find Bitcoin more advantageous, and other people or even the same people in a different situation disadvantageous. It is also why it cannot be apriori concluded what the future of Bitcoin will be, we can only make educated guesses. The only thing we can do as praxeologists is to conclude that Bitcoin might expand in those areas where its advantages are assessed as subjectively the most important with respect to other media of exchange. It might never develop into "money", but it would be erroneous to conclude that that's the only relevant issue (the good old "money or nothing" fallacy).<br />
<h3>
Heterogeneity of social interaction</h3>
The problem that North thinks he knows more than he actually does is exacerbated by his misapplication of the system of property rights and social frameworks to Bitcoin (or the lack thereof). North does not understand that Bitcoin <b>is</b> a social framework. It is a <b>more efficient</b> social framework. Contractual relationships that are currently expensive or impossible (have high transaction costs) are now profitable and/or possible with Bitcoin. Payments are merely the first, easiest, type of a contract, on which Bitcoin demonstrates its advantages. Rather than being an "implicit denial" of contracts, Bitcoin provides a more efficient framework for them. I think that we can all agree that Bitcoin is not perfect. But there are no perfect goods. There is always the subjective assessment, imperfect information, and opportunity costs.<br />
<br />
Bitcoin is at a very early stage, and the basis for the framework is still expecting human actors to fill it with their own activities. Contrary to North's claim that Bitcoin "put the cart before the horse", it's the opposite. Bitcoin first created a framework, and then this was incrementally use for payments.<br />
<br />
This is also, paradoxically, why North is clueless. He understands how social institutions evolve in theory, yet he cannot connect empirical data (when it happens right under his nose) with the theory.<br />
<h3>
Conclusion</h3>
North complains that people who criticise his position of Bitcoin do not understand the Austrian school. Well, I know for sure that North does not understand certain aspects of it (in particular Menger's approach to liquidity and transaction costs), and on other aspects he can't connect the theory with empirical data. He's also lazy (because he did not read Austrian literature on Bitcoin and he did not gather empirical data on Bitcoin), and conceited (because he thinks his credentials give him immunity from errors).<br />
<br />
As I wrote before, the future of Bitcoin does not depend on the understanding of economists. It depends on human action. I don't care about North's opinion. But as a researcher I see it as important that I address errors. Others than can read both, make up their own mind, and build on top of it. The Austrian school did not end with Menger, it began with him.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com5tag:blogger.com,1999:blog-6189690633638834539.post-19864722751587873022013-12-04T13:40:00.001+01:002013-12-04T14:06:56.922+01:00Gary North is clueless about Bitcoin<h3>
Introduction</h3>
<div>
In the last couple of days, Gary North has made posts about Bitcoin on his blog:</div>
<div>
<ol>
<li><a href="http://www.garynorth.com/public/11828.cfm">Bitcoins: The Second Biggest Ponzi Scheme in History</a></li>
<li><a href="http://www.garynorth.com/public/11843.cfm">Digital Tulips: The Bitcoin Mania</a></li>
<li><a href="http://www.garynorth.com/public/11844.cfm">Bitcoins: The Road to Investment Hell Is Paved With Good Intentions</a></li>
</ol>
<div>
The posts have already been addressed, but I thought I'd add my take.</div>
</div>
<div>
<br /></div>
<div>
My major irritation is that North makes two fundamental mistakes that a researcher shouldn't do. He did not review existing Austrian literature on Bitcoin, and he did not collect empirical data. Instead, he repeated long refuted fallacies, and he made up his own fictional history of Bitcoin. This is why I have said in the past that the people associated with the <a href="http://www.mises.org/">Ludwig von Mises Institute</a> have become lazy and stupid. There has been progress in the meantime, however. Mark Thornton, for example, has become a fan, and the LvMI actually started accepting both donations and payments for their webshop in Bitcoin. But then Gary North pops up.</div>
<div>
<br /></div>
<div>
To a small extent, I am familiar with North's work. I quote him in my master's thesis, and I read his chapter from the <a href="https://mises.org/store/Theory-of-Money-and-Fiduciary-Media-P10894.aspx">Theory of Money and Fiduciary Media</a> (more on that later, when I quote North based on the notes I made when I read it).<br />
<h3>
Inability to classify Bitcoin</h3>
<div>
North repeatedly argued that Bitcoin is not used in market exchanges. This is empirically false. I buy goods with Bitcoin all the time. And I was told that even Walter Block (whom I argued earlier to be clueless about Bitcoin) sold his book for bitcoins once. I don't know why North makes claims to the contrary. However, this allows him to perform a methodological trick: because he denies that Bitcoin is used in exchanges, he can avoid having to classify it within the Misesian framework for classification of goods (into consumer goods, producer goods, and media of exchange).</div>
<div>
<br /></div>
<div>
Instead of classifying Bitcoin as a good then, North classifies it as a ponzi scheme.</div>
<div>
<div>
<h3>
Ponzi scheme</h3>
</div>
<div>
North provides his own definition of a Ponzi scheme and a reason why it causes problems. I submit my own definition, which is in my opinion more economically useful.</div>
<div>
<br /></div>
<div>
A ponzi scheme is a hierarchical system of fractionally backed claims. By putting an amount of money into the system, the participant gains a claim for a larger amount of money than he put in. In order for the settlement of claims to work at the beginning, the system is built hierarchically, so that earlier participants can get money from later participants. The reason why a system like this collapses is that as the amount of debt increases, so does the risk of triggering a settlement of claims. A full settlement at any particular time is impossible: the system is insolvent. Once there are too many triggered claims, this causes a cascading wave of defaults, and the claims thus become unclaimable and worthless. In a ponzi scheme, the trigger typically happens when not enough new people enter the system on time as the old claims mature, but this is merely a special case of trigger. All kinds of other triggers can hypothetically cause the cascade.</div>
<div>
<br /></div>
<div>
Bitcoin is not a system of claims. Bitcoin is a pseudo-commodity, not a claim. People who purchase Bitcoins do not have a claim on anybody, nor does anybody have a claim on them. There is no debt to settle, and no default that makes Bitcoin unclaimable. The mechanism that makes a ponzi scheme to collapse is absent with Bitcoin. Whatever reasons are there for Bitcoin to succeed or to fail, the analogy to ponzi schemes is invalid.<br />
<br />
The necessity to classify Bitcoin as a claim, in the absence of the ability to classify it as a good, follows directly from the Misesian framework for classification of goods. The difference between a good and a claim is explained by Mises several times as relevant for determinant of their price: the price of claims is derived from the price of the underlying good. Sometimes, there are other factors influencing the price of a claim, but the price of the underlying good is a necessary component at least at the beginning.<br />
<br />
The connection between the price of a good and a claim has been expanded upon by Malavika Nair, who also has a chapter in Theory of Money and Fiduciary Media, actually precisely about this topic. I exchanged some emails with professor Nair and this is what she wrote in respect to the classification of Bitcoin:<br />
<blockquote class="tr_bq">
"I agree that Bitcoin is not a money substitute [i.e. not a claim, ed.], I think of it as closer to commodity money, just not a kind of commodity most people are used to. I know Selgin has come up with the term “synthetic money” but I’m not sure if that helps clear things up or confuses them. If anything, it’s a quasi-money or secondary money, which benefits greatly from its liquidity and the ease with which it can be sold for dollars".</blockquote>
In other words, Bitcoin is not a claim, but a good. It is priced for its own sake, not based on a price of another good it refers to. And since it is held in order to buy goods, it is a medium of exchange.<br />
<br />
But even if we disregard the methodological nonsense and stick with North's own empirical description of the beginnings of Bitcoin:</div>
<div>
<blockquote class="tr_bq">
"The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits."</blockquote>
even then the description is false. Almost all of Satoshi's Bitcoin are unspent, still where they were mined. As Bitcoin didn't even have a price for almost nine months, if Satoshi had attempted to sell his coins, he would have made a revenue of ... nothing. If he had tried to sell them when the price first formed on the market, he would have earned ... 932.68 USD. There's no typo, the value of all Bitcoin in existence at the time when the price emerged was less than a grand. If he waited until Mt. Gox started operating, he would have earned ... 171,517.5 USD (assuming he actually had all of the bitcoins himself). These sums are not even profit, only revenue, as they don't consider costs. Sounds like a real opportunity, doesn't it?<br />
<br />
The theoretical explanation of the purchasing power of Bitcoin is missing, and the empirical one is contradicted by the empirical data. Now I'll proceed to explain why North cannot provide a valid theoretical explanation of Bitcoin.<br />
<h3>
Lack of a theory of liquidity</h3>
</div>
</div>
<div>
North refers to the chapter "The Regression Theorem As Conjectural History". Luckily, I made some notes when I read the book. North quotes Menger as writing:<br />
<blockquote class="tr_bq">
"The theory of money necessarily presupposes a theory of the saleableness [nowadays we use the term liquidity, ed.] of goods. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case, - presenting only a difference of degree - of a generic phenomenon of economic life - namely, the difference in the saleableness of commodities in general."</blockquote>
This is precisely where and why North fails. He does not have a theory of liquidity. He has a theory of "stability of prices" instead. While Menger did claim that precious metals have a higher price stability than other goods, he argued that this is not a prerequisite for how the market participants treat it. In fact, with respect to the unit of account function, in Principles of Economics, Menger actually wrote this:<br />
<blockquote class="tr_bq">
"The function of serving as a measure of price is therefore not
necessarily an attribute of commodities that have attained money
character. And if it is not a necessary consequence of the fact that a
commodity has become money, <b>it is still less a prerequisite or cause of a
commodity becoming money</b>." [emphasis added]</blockquote>
If the unit of account function is not a prerequisite for a commodity to become money, then it shouldn't matter how stable it is. Liquidity is not price stability. Liquidity is, in Menger's own words:</div>
<blockquote class="tr_bq">
"A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices."</blockquote>
Apples have a relatively stable price. Yet apples are illiquid: they cannot be sold easily at the market price. Bitcoin does not have a stable price, yet Bitcoin is liquid. It's not as liquid as money, and it's probably not as liquid as gold. But it it is liquid and this satisfies the prerequisite for it acting as a medium of exchange. North's grasp of Menger's insights fails.<br />
<h4>
Speculation with Bitcoin</h4>
</div>
<div>
North argues that Bitcoin is used for speculation. The issue with this argument is that it does not contradict Bitcoin being used as a medium of exchange. The motivations of human actors in this respect are not mutually exclusive. If people hold a good in the expectation of dispensing with it in order to buy something else when they need that something else, it means they are using it as a medium of exchange. If they hold a good with the expectation of dispensing with it at a higher price when the time and place are opportune, they are speculating. But speculation is a normal part of life. A retailer buys, say, clothes wholesale, with the expectation of selling them at a higher price throughout the operating hours of his business, waiting for an opportunity. He speculates on the price of clothes. But that does not mean that clothes are a ponzi scheme or that there's something wrong about it. It does not refute the validity of other reasons for buying clothes.</div>
<div>
<br /></div>
<div>
People in countries with a high rate of inflation tend to increase the proportion of more foreign fiat monies in their liquidity portfolio. They simultaneously hold the foreign money because it is liquid (and can be used for its purchasing power), and because they expect the purchasing power to be higher than when holding their national, faster inflating, money. This proves that the motivations are not mutually exclusive.</div>
<h3>
The regression theorem</h3>
<div>
Regrettably, it turned out that a lot of Austrians do not comprehend the regression theorem. I suspect that this is because of the difference in the approaches of Mises and Menger. Mises spends the majority of his Theory of Money and Credit by analysing the mechanism by which prices form, and the factors influencing this. Based on this, he presents a threefold classification system of goods: consumer goods, producer goods and media of exchange. Mises himself did not invent this classification, he got it from an earlier economists but unfortunately I don't have my notes on this in a searchable form so I'll update this post with the proper reference later. Media of exchange, according to Mises, differ from other goods, because they are held for their purchasing power. He then goes on to explain how purchasing power (or "exchange value", another term he uses) emerges from use value through market exchange due to differences in marketability of goods (nowadays we use the term liquidity rather than marketability). He finishes with the conclusion that there is no other way for the exchange value to emerge than through a former use value and market exchange (catallactics), and theories that do not explain the exchange value of goods, "acatallactic monetary doctrines", cannot explain the exchange value of media of exchange.</div>
<div>
<br /></div>
<div>
While Mises viewed exchange value and use value as two components of the final price, Menger viewed the concept of liquidity as orthogonal to the concept of price. Their goals were different. Mises' approach is helpful for the analysis of the economic calculation, and for macroeconomics (business cycle, money supply and so on). Menger's approach on the other hand is helpful of understanding the microeconomic foundations of media of exchange.</div>
<div>
<br /></div>
<div>
Both Menger and Mises argued that the difference between money and a medium of exchange is quantitative rather than qualitative ("presenting only a difference of degree", in fact North himself has the same Menger's quote in his "The Regression Theorem As Conjectural History"). This is why we cannot make praxeological arguments about the origin of money that also do not apply to the origin of a medium of exchange. And this is why it's evident that some Austrians still don't understand the regression theorem.</div>
<div>
<br /></div>
<div>
The Mengerian approach to the origin of media of exchange is that media of exchange emerge out of liquid commodities. People recognise that some commodities are liquid (it is possible to"dispose of it at prices corresponding to the general economic situation, at economic prices"), and assisted by this knowledge, they start to hold them for this purpose (to dispose of them at economic prices). This is the moment when the function of a medium of exchange emerges. The Misesian approach is similar, but he uses the term "exchange value" to explain the liquidity premium of liquid goods (which is a more complex issue). This is why the Misesian approach is more helpful when examining prices, but less helpful when examining the motivations of market participants.<br />
<br />
As Bitcoin is a medium of exchange (people hold it in order to purchase goods in the future), it must logically adhere to the regression theorem. It must have been a liquid good before it was used as a medium of exchange. And indeed, empirical analysis shows that this is correct. Before people used Bitcoin as a medium of exchange, it was possible to trade it against the US dollars on bitcoin exchanges, which featured visible order books. This made it easier to sell Bitcoin at economic prices. The fact that the exchanges were founded deliberately does not invalidate their economic function. Menger realised that specialised services that help with sales have a beneficiary effect on liquidity:</div>
<div>
<blockquote class="tr_bq">
"The institution of an organized market for an article makes it possible
for the producers, or other economizing individuals trading in it, to
sell their commodities at any time at economic prices."</blockquote>
</div>
<div>
If we go even further chronologically, before Bitcoin exchanges existed, Bitcoin already had a price and was traded sporadically (i.e. was a good). The very early prices appear to have formed based on the variable production costs of Bitcoin at that time. And even further in the past, Bitcoin did not have a price, and while there were signs of using the blockchain, it probably didn't qualify as a good.<br />
<br />
I document the process both in my thesis, and in an earlier blog post <a href="http://www.economicsofbitcoin.com/2013/09/professor-walter-block-is-clueless.html">Professor Walter Block is clueless about Bitcoin</a>. The origin of the function of a medium of exchange for Bitcoin is right out of the book. Menger's book, that is. Not North's book. North needs to deny the purchasing power of Bitcoin, because if he admitted it exists, he'd be left without the ability to explain it, having no catallactic theory of the origin of Bitcoin.<br />
<h4>
The network effect</h4>
<div>
North is equally clueless on the network effect (which was brought up by one of his critics). He goes even further:</div>
<blockquote class="tr_bq">
"I can assure you that Carl Menger, the founder of Austrian school economics, did not use language like this: "money itself replaced non-money as a market network effect good." No Austrian school economist ever has. Austrian school economists do their best to communicate in something other than programmers' professional jargon."</blockquote>
North is wrong yet again. One economist familiar with the Austrian tradition, <a href="http://www.ifn.se/eng/people/research_fellows/mikaels">Mikael Stenukla</a>, wrote a paper <a href="http://www.tandfonline.com/doi/abs/10.1080/0967256032000137737#.Up787cRDtyM">Carl Menger and the network theory of money</a>. Many more Austrians are familiar with the network effect and understand that liquidity is a subset of the more generic concept of the network effect. The article was actually pointed out to me by Peter G. Klein, the executive director of the LvMI, who also did research the network effect.<br />
<br />
Once you comprehend the network effect, you'll realise that the issue with respect to media of exchange is the empirical question of the critical mass of liquidity: the threshold below which a potential medium of exchange needs other utility in order for the system to be self-sustaining. Economists (including Austrians), who did not comprehend the concept of liquidity, implied that this threshold can only happen at a very high level of demand (or other auxiliary criteria, such as "price stability" proposed by North). But demand is not the same thing as liquidity. Bitcoin simply shows that liquidity can emerge at a lower level of demand than previously thought.<br />
<br />
This is why it also cannot be concluded that Bitcoin cannot become money (the same non-sequitur that already was presented by Patrik Korda earlier this year). Of course it can. It just needs to outcompete other media of exchange. And this can't be determined apriori: it's an empirical issue. As I argued in my thesis, transaction costs play a major role in influencing the choice, and Bitcoin has lower transaction costs than anything that existed before that. Even though Austrians typically do not use the term "transaction costs" (I've heard Salerno use the term "transaction<b>s</b> costs" once though), Menger used the term "economic sacrifices" and it was evident that it's the same phenomenon. It is also evident from Menger's writing that transaction costs are heterogeneous, with many influencing factors, and that:<br />
<blockquote class="tr_bq">
"Economic development tends to reduce these economic sacrifices, with the result that even between the most distant lands more and more economic exchanges become possible which previously could not have taken place."</blockquote>
Bitcoin is just such an economic development as Menger mentions. It allows a more efficient conduct of market operations. This is why the claim of North that Bitcoin has no utility is absurd.</div>
<div>
<h3>
The utility of Bitcoin</h3>
<div>
North's denial of utility is filled with nonsense and lacks fundamental economic analysis. It has been repeated too often by others, but it's strange that reputable researchers like North come up with this too. In order to understand the utility of Bitcoin, I recommend the recent video by Stephan Molyneux. If you don't have the time to watch, I'll just provide some points which I consider important or interesting.</div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
The True Value of Bitcoin by Stephan Molyneux:</div>
<div class="separator" style="clear: both; text-align: center;">
<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/Cs6F91dFYCs?feature=player_embedded' frameborder='0'></iframe></div>
</div>
<div>
<br /></div>
<div>
Bitcoin can partially or fully replace the following services by more efficient ones:</div>
<div>
<ol>
<li>Proof of ownership (obsoletes notaries)</li>
<li>Dispute resolution (obsoletes mediators)</li>
<li>Record auditing (obsoletes accountants)</li>
<li>Smart property (obsoletes the police)</li>
<li>Decentralised stock exchange (obsoletes centralised stock exchanges)</li>
<li>Highly efficient payments (obsoletes banks, debit cards, money transmitters)</li>
<li>Full control over your money (obsoletes central banks and banking regulators)</li>
<li>Conditional payments (obsoletes lawyers)</li>
<li>No inflation</li>
<li>No business cycle</li>
</ol>
<div>
And now, here's the kicker: points 1-5 does not require that Bitcoin is a medium of exchange (because they do not require Bitcoin to have purchasing power) and points 6-8 do not require that Bitcoin is money (because they do not require that Bitcoin is used as a unit of account). Only points 9 and 10 require that Bitcoin is a unit of account. If that ever happens, that's just the cherry on the top. Some, for example <a href="http://www.libertariannews.org/2011/07/01/could-the-state-exist-if-property-rights-were-impossible-to-violate/">Michael Suede</a>, even come to the conclusion that without the ability to steal money, states couldn't exist.<br />
<br />
The claim that Bitcoin has no utility is ridiculous. North really should have done some research.<br />
<h3>
Conclusion</h3>
</div>
</div>
<div>
It looks like I still have a lot of work to do. I thought that the research that Austrians (and semi-Austrians) did with respect to Bitcoin (in particular John Paul Koning, Konrad S. Graf, Daniel Krawisz, and of course me) would be sufficient for the other Austrians to move on and continue contributing more new interesting things. Sadly, this didn't happen yet. There are still many Austrians that are lazy, ignorant, or sadly, outright fraudulent, as they fabricate a fictional history and present it as facts. This is in particular saddening as North is a historian.</div>
<div>
<br /></div>
<div>
I'm not an expert in North's writings. I did find his "Mises on Money" helpful and informative (I highlighted 35 passages into my research catalogue), while his "The Regression Theorem as Conjectural History" somewhat weak. I know he has something against George Selgin, but I don't care about that. However, his attempts to address Bicoin are just annoying. I attempted to address several core problems of his articles. I hope this helps people to understand Bitcoin, and Austrian economists to finally move on beyond long refuted nonsense, and produce something new and helpful.</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com12tag:blogger.com,1999:blog-6189690633638834539.post-29813614999972172512013-09-29T00:59:00.000+02:002013-09-29T00:59:12.120+02:00Research update #2I haven't posted a while, but that was because I have been reading, doing research for the book and writing it. I thought I'd post a quick update.<br />
<br />
I do have several partially written posts that I plan to finish and gradually release. Mostly they will provide topics related to Bitcoin in a more looser way, such as hypothetical changes in the future or effects of Bitcoin, or critiques of some non-core critiques of Bitcoin.<br />
<br />
In August, I started working part time at Megion Research & Development, which you might know under the name mycelium, the makers of the mycelium bitcoin wallet and the Bitcoincard. Once I finish the book I plant to work there full time. My role is business development.<br />
<br />
I would like to thank a generous donor who bought me 13 books out of my Bitcoin Research wishlist on amazon. Also to people who donate Bitcoins (see in the right column for link). Thank you. I exchanged some of the donations for cash to offset the costs of my server and books. I used bitcoins from the donation wallet directly to pay for the renewal of the economicsofbitcoin.com domain.<br />
<br />
Earlier this week I attended the <a href="http://www.buducnostpenazi.sk/?lang=english">Future of money 2.0</a> conference in Bratislava, organised by the <a href="http://www.hayek.sk/">F. A. Hayek foundation</a>. It was a conference about the risks of our financial system and possible consequences and outcomes, and how to protect one's assets. I was introducing the mostly Slovak and Czech audience into Bitcoin. I hope it helped people to understand the potential of it. You can download <a href="https://docs.google.com/presentation/d/1u7HqFH2kQ3deh3amL41rXxnAs0P-KIBw2s0t8RfjBXc/edit?usp=sharing">my slides</a> (in English), the talk was in Slovak and it should be available soon (I'll update this post and the publication subpage once that's ready). I met with <a href="http://en.wikipedia.org/wiki/James_G._Rickards">Jim Rickards</a> (keynote speaker) and <a href="http://wiki.mises.org/wiki/Philipp_Bagus">Philipp Bagus</a> (he was on my panel). I was lucky because I had read both <a href="http://www.amazon.com/dp/1591844495">Currency Wars</a> and <a href="http://wiki.mises.org/wiki/The_Tragedy_of_the_Euro">The Tragedy of the Euro</a> so I was familiar with both of their backgrounds. I had asked professor Bagus to read my thesis prior to the conference and he told me that it shows deep knowledge of Austrian economics. I actually promised him back in 2011 when I asked him some questions about Bitcoin that I'll post a review of his book on the German Amazon site, which I didn't do yet because I'm lazy. So go and buy his book, it's good. Jim Rickards liked my talk (I guess the translators did a good job too then) and asked if he can forward journalists to me because they keep asking him about Bitcoin and he's not a specialist on it. He also told me that <a href="http://www.bloomberg.com/video/malka-rickards-debate-bitcoin-utility-longevity-662IxXXTQl2e~49s0UZNhw.html">his debate with Micky Malka</a> about Bitcoin from earlier this year has been misinterpreted. He's not anti-bitcoin, he was just taking the anti- side of the debate because that's how a debate is supposed to work. I attempted to explain to him that some of the points he brought up are being addressed, and that it differs from country to country. I mentioned the taxation guide prepared by Trace Mayer and Bill Rounds, among other things. Jim seems like a smart and pragmatic guy. At a pre-conference dinner I also met Ivan Svejna, a libertarian-leaning member of the Slovak parliament. He was skeptical about Bitcoin, but luckily I had Bitbills and Casascius coins with me to "show" bitcoin, so he took a picture of them (Rickards also saw the coins and bills).<br />
<br />
Now I'm in a hostel in Amsterdam where I was at <a href="http://theconference.eu/">European Bitcoin Conference 2013</a>. I had a presentation about economic myths and Bitcoin. The <a href="https://docs.google.com/presentation/d/17BFg8eSblDNOXQdr9In1hfkSTQMT4T4SjmX1DFZNQDM/edit?usp=sharing">slides (in English)</a> are available for download, the recording will be put up by the organisers later. Today Eli Sklar couldn't make it for his presentation so Moe arranged an impromptu economics panel, where I was with Tuur Demeester (Macrotrends newsletter), Johann Gevers (Monetas/OpenTransactions) and Vitalik Buterin (Bitcoin Magazine). Both were a very enjoyable experience with participation of the audience and I thank you for your feedback.<br />
<br />
During the conference, I met some old friends, like molecular and Dominik, Jorge Timon from the Freicoin project (we were actually able to clarify some of our positions better to each other after having a sort of flamewar in August at the linkedin Bitcoin group), Hakim Mamoni, slush, Tamas Blummer from Bits of Proof, Patrick van Zuijlen, Meni Rosenfeld, Gary Rowe, Dmitry and many others (if I forgot to mention you, complain and I'll add you to the list). There were also some which I either met for the first time or spoke to for the first time even though we saw each other at previous conferences. I spoke with Tony Gallippi of BitPay, Charlie Lee (Litecoin/Coinbase), Ron Gross from Bitblu, Tomer Kantor's (he's making a documentary), Jörg Platzer (ROOM77) and many others. Thank you Moe, Dmitry and the rest of the organisers, thank to all the panelists and of course all attendees. I always look forward to yet another Bitcoin conference.<br />
<br />
I had the very pleasant surprise of meeting <a href="http://konradsgraf.com/">Konrad S. Graf</a> in person, a fellow Austrian researcher interested in Bitcoin and we spoke at length about many of the facets of the Austrian School and praxeology. There was a funny scene where Konrad and n8rwJeTt8TrrLKPa55eU (I always forget his real name, sorry) were talking about the Austrian school and Konrad asked me if I read <a href="http://mises.org/document/3747">The Ethics of Money Production</a>. I said that I read it twice, he laughed and said he read it twice too and told n8rwJeTt8TrrLKPa55eU that he should "witness this historical moment" and it's unlikely to ever happen that people like this are at the same place.<br />
<br />
I also had a great experience meeting the inventor of hashcash, <a href="http://en.wikipedia.org/wiki/Adam_Back">Adam Back</a> (also, one of the few people who were in contact with Satoshi before he published his paper). Among other interesting things he told me his experience with <a href="http://en.wikipedia.org/wiki/DigiCash">DigiCash</a>. DigiCash was a predecessor of Bitcoin in the early 90s. It was also a cryptographic currency that from economic point of view was a pseudo-commodity, like Bitcoin. And people did start to use it in trades, such as for t-shirts. There were no fiat-exchanges and no real time price. Adam said he just mimicked the approximate ratios that others were using, and traded t-shirts for DigiCash. The experiment however was shut down by the Dutch regulators and since then, cryptocash enthusiasts knew that you can't have a centralised server. Based on his description, I'm hesitant to classify DigiCash as "medium of exchange" or "liquid", but it appears to have become a good even though it was a completely virtual "thing" without non-monetary uses. So Bitcoin wasn't even the first wannabe-money to overcome the first step. Rather, Bitcoin was the first one to manage to overcome all the obstacles to become a medium of exchange, and to resist the regulators' attempt to shut it down for a significant amount of time. One thing Adam recollected that I found funny was that after Bitcoin launched, Satoshi emailed him again and Adam wasn't able to get excited because "we already know that it can work". Adam also doesn't want to own any Bitcoins and got "angry" when people used the bitcointip reddit bot to send him Bitcoins anyway (maybe he was joking, I'm not sure).<br />
<br />
Next week I'm in Atlanta at the <a href="http://www.cryptocurrencycon.com/">Crypto-Currency Con 2013</a>, I have a presentation about sound money. I try to create a new presentation for each conference I go to, so look forward to it. See you there.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com2tag:blogger.com,1999:blog-6189690633638834539.post-60540752042666613432013-09-22T14:07:00.001+02:002013-09-24T10:40:25.467+02:00Professor Walter Block is clueless about Bitcoin<div class="separator" style="clear: both; text-align: left;">
This is a second article in a series (the first being <a href="http://www.economicsofbitcoin.com/2013/04/the-mises-institute-is-clueless-about.html">Mises Institute is clueless about Bitcoin</a>). Sadly, one of my favourite Austrian economists, Walter Block, seems to be making the same blunders as some of the other economists associated with the institute. The purpose of the post is to address some of the fallacies he produced and explain where exactly the error is.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
Some of the arguments were not actually made by professor Block but by people talking with him and he did not subscribe to them. However, they are common fallacies and show cluelessness of their proponents, so I decide to pool all of them together</div>
<h3>
</h3>
<h3>
The source</h3>
<div class="separator" style="clear: both; text-align: left;">
The primary source of my complaint is the following video, published about a week ago couple of days ago on youtube. The relevant part starts at 4:21 (transcript on the right side):</div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/duDykrxwIxw?feature=player_embedded' frameborder='0'></iframe></div>
<ul>
<li>4:21 - Caller: We also seem to agree that it only exist because they've suppressed gold. And my question I guess is this is the biggest one, doesn't that make it by definition malinvestment?</li>
<li>4:35 - Block: Doesn't it make Bitcoin malinvestment?</li>
<li>4:39 - Caller: Yes. If it only exists because of the fiat, and the artificially lowered interest rates, and the counterfeiting and all the rest, isn't that by definition malinvestment?</li>
<li>4:53 - Block: Yes, I think it's malinvesment and it's contrary to Menger's theory.</li>
<li><br /></li>
</ul>
<div>
Now to the individual issues.</div>
<h3>
</h3>
<h3>
Bitcoin shows that Austrians do not really understand Menger</h3>
<div>
I am still baffled how an Austrian economist, in particular one who researched money, can invoke Menger as a method of "disproving" Bitcoin. Research in this area has been done and published by <a href="http://konradsgraf.com/blog1/2013/2/27/in-depth-bitcoins-the-regression-theorem-and-that-curious-bu.html">Konrad S. Graf</a>, <a href="http://themisescircle.org/blog/2013/07/02/the-original-value-of-bitcoins/">Daniel Krawisz</a>, and of course <a href="http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf">me</a>. One might argue that I'm a nobody and can be ignored. However, <a href="http://archive.mises.org/18069/action-based-jurisprudence-praxeological-legal-theory-in-relation-to-economic-theory-ethics-and-legal-practice-libertarian-papers-vol-3-no-19/">Graf had a paper</a> published in Libertarian Papers and <a href="http://konradsgraf.com/storage/WBwKGaMSA2.jpg">met with professor Block</a>. Daniel Krawisz had <a href="https://mises.org/authors/1314/Daniel-Krawisz">articles published on mises.org</a>.</div>
<h3>
</h3>
<h3>
What happened with Bitcoin and how does it match what Menger wrote</h3>
<div>
<div>
One of the most irritating things is the sheer ignorance of "Mengerian critics" of Bitcoin. They do not take the time to collect historical data, yet proclaim certain judgement about what did or didn't happen. The information is public and reachable with not much more than a search engine (not to mention that in my master's thesis I already did a lot of the work and summarised the findings for the lazier ones). Another summary for the lazy ones is <a href="https://en.bitcoin.it/wiki/History">the "History" page on the Bitcoin wiki site</a>. Let's take it step by step and iterate through what actually happened with Bitcoin, and how that matches the writings of Menger and Mises.<br />
<br /></div>
</div>
<div>
On October 31st 2008, "Satoshi Nakamoto" published <a href="http://article.gmane.org/gmane.comp.encryption.general/12588/">his paper</a>. At that time, Bitcoin as a "thing" did not exist yet. There was only an idea of Bitcoin. Ideas are not catallactic phenomena, so it's not really important, it just is a milestone that helps us in our understanding.</div>
<div>
<br />
On January 3rd 2009, <a href="http://www.blockexplorer.com/b/0">the "Genesis Block"</a> of Bitcoin was created by Nakamoto. From that moment on, bitcoins have existed as "things". However, a bitcoin was not a good at that time yet, it did not fulfil the <a href="http://mises.org/etexts/menger/one.asp">four Mengerian requirements for goods</a>. People did not know how to use bitcoins to satisfy their needs. <a href="https://soundcloud.com/mindtomatter/conference-2013-mike-hearn">One of the early adopters, Mike Hearn, reminisces</a> (at 4:27):</div>
<blockquote class="tr_bq">
"I found it very early on, when noone was using it, so noone, no exchanges, had no exchange rate at all, so they were just completely
floating in an abstract space. You know, <b>what was one coin? Well,
nothing really</b>." [emphasis added]</blockquote>
<div>
On October 5th 2009, one of the early miners, "NewLibertyStandard", <a href="http://newlibertystandard.wikifoundry.com/page/2009+Exchange+Rate">published the exchange rates he was using to sell bitcoins</a>. How did he know how much to charge? This is what he writes:</div>
<blockquote class="tr_bq">
"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."</blockquote>
In other words, he was using his own variable production costs as his asking price. "Theymos", who was also one of the early adopters, <a href="https://bitcointalk.org/index.php?topic=104287.msg1143955#msg1143955">did not like the price</a> and three years later, wrote:<br />
<blockquote class="tr_bq">
"His pricing methodology will seem very strange nowadays... At the time, I performed similar calculations and thought he was charging too much."</blockquote>
Theymos' objection exposes the fundamental problem with the critiques of Bitcoin (Theymos himself isn't a critic, he just exposes the problem). It does not matter what Theymos, Block, Korda, Smiling Dave and a whole bunch of other clueless critics think or thought. The fact is, sales occurred. That is the only relevant factor for an economist. There is no other way for prices to emerge than through catallactic processes. They cannot emerge by a critic liking it and disappear by a critic disliking it. That we do not like it or do not understand the reasons behind it is completely irrelevant. In <a href="http://en.wikipedia.org/wiki/Antifragile:_Things_That_Gain_from_Disorder">Antifragile</a>, Nassim Nicholas Taleb scolds theoreticians who imply that our understanding can influence whether something happens or not. Empirically, it did happen. I don't know if "NewLibertyStandard" was the first seller ever, but he probably is very close to being the first one. What we can safely say however is that from then on, Bitcoin was <b>a good</b>, which is demonstrated by people exchanging it for the US dollars.<br />
<br />
On February 6th 2010, the first traditional Bitcoin exchange launched. Its founder, "dwdollar", <a href="https://bitcointalk.org/index.php?topic=20.msg265#msg265">announced</a>:<br />
<blockquote class="tr_bq">
"I am trying to create a market where Bitcoins are treated as a commodity. People <b>will be able to trade Bitcoins for dollars and speculate on the value</b>. In theory, this will establish a real-time exchange rate so we will all have a clue what the current value of a Bitcoin is, compared to a dollar. I have an early version up at http://98.168.168.27:8080/</blockquote>
<blockquote class="tr_bq">
This is only a small demonstration of what I have in mind and to show everyone I'm actively working on it. Feel free to register and try it out. You will get 10 phoney dollars and 10,000 phoney bitcoins to trade. <b>ONLY the limit orders work. Market orders will come later</b>. [emphasis added]</blockquote>
<div>
The reason why this was an important milestone is the emergence of bid and order books for Bitcoin, and an easy mechanism for trading. The exchanges are what Menger refers to as "organised markets", places where people trading congregate, and allow for a qualitatively more efficient way to obtain price information and execute trades. The bid and ask order books, together with a trading mechanism, make, in Menger's terms, it easier to sell at "economic prices" and make a good more saleable:</div>
<blockquote class="tr_bq">
"A commodity is more or less saleable according as we are able, with more or less prospect of success, to <b>dispose of it at prices corresponding to the general economic situation, at economic prices.</b>" [emphasis added]</blockquote>
Unlike Block, Menger recognised the connection between specialised markets and liquidity:<br />
<blockquote class="tr_bq">
"Some commodities, <b>in consequence of the development of markets and speculation</b>, are able at any time to find a sale in practically any quantity at economic, approximately economic, prices." [emphasis added]</blockquote>
From the time Bitcoin exchanges with orderbooks existed, Bitcoin was <b>not merely a good, but a liquid, or in Mengerian terms, saleable, good</b>. And exactly as Menger predicted, specialised services that help buyers and sellers to coordinates their plans, played a significant role in the process. Many of the people attempting to determine the early motivations (e.g. <a href="http://www.youtube.com/watch?v=wyUNdzLwte4">Robert Murphy</a>, who, unlike Block, definitely is not clueless about Bitcoin) theorise that speculation was one of the factors. And indeed, again exactly as Menger predicted.<br />
<br />
On May 22nd 2010, Laszlo Henyecz, or just "laszlo", managed to <a href="https://bitcointalk.org/index.php?topic=137.msg1195#msg1195">purchase two pizzas for 10,000 bitcoins</a>. The purchase was facilitated by a Bitcoin buyer "jercos", who used a credit card to order two pizzas, to be delivered to Laszlo. This example of a trade of Bitcoins for a pizza is indirect exchange and therefore, from that time on, Bitcoin has been <b>a medium of exchange</b>. <b>This trade was only logically possible because at that time, Bitcoin not only had a price but also was liquid (or saleable, as the Austrians say)</b>. It would have been logically impossible to do this otherwise. A <b>good without a price cannot be a medium of exchange</b>, and as Menger brilliantly figured out, <b>an illiquid good cannot be a medium of exchange either</b>. Furthermore, as Mises elaborates, <b>liquidity must emerge as a catallactic phenomenon</b> and cannot be made up.<br />
<br />
I actually thought, based on his lecture (transcript right):<br />
<blockquote class="tr_bq">
</blockquote>
<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/m2690Fy0sM8?feature=player_embedded' frameborder='0'></iframe>"You can’t have a piece of paper be money. Let’s 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'm a little weird. They don’t call me Walter Weird Block for nothing. That’s 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 up 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, <b>I could probably sell it for a lot of money. But it would not really be money</b>, it would be more like, art or something like that, a unique kind of thing. But forget about that sort of 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." [emphasis added]<br />
<blockquote class="tr_bq">
</blockquote>
that Block comprehends that liquidity makes goods into media of exchange. It was actually this lecture that made me comprehend the whole issue. We're now apparently in a weird situation where the teacher teaches a student something the teacher himself doesn't know.<br />
<br />
While it was logically possible for "laszlo" and "jercos" to use Bitcoin as a medium of exchange, why did they actually do it? Let's just ask Menger:<br />
<blockquote class="tr_bq">
"But the willing acceptance of the medium of exchange presupposes already a knowledge of these interest on the part of those economic subjects who are expected to accept in exchange for their wares a commodity which in and by itself is perhaps entirely useless to them. <b>It is certain that this knowledge never arises in every part of a nation at the same time</b>. It is only in the first instance a limited number of economic subjects who will recognize the advantage in such procedure, an advantage which, in and by itself,<b> is independent of the general recognition of a commodity as a medium of exchange</b>, inasmuch as such an exchange, always and under all circumstances, brings the economic unit a good deal nearer to his goal, to the acquisition of useful things of which he really stands in need." [emphasis added]</blockquote>
Because "laszlo" and "jercos" <b>recognised</b> that Bitcoin is a liquid good, this provided them with the <b>knowledge</b> to use it in indirect exchange. Just like this knowledge arises in some people first, it consequently arises in other (clueless) people late. The latter seem to be in a majority now, but that is not a fundamental issue for an economist.<br />
<h3>
</h3>
<h3>
What happens when a medium of exchange evolves into money?</h3>
<div>
Some of the "Mengerians" seem to think that the "regression" applies to the evolution of a medium of exchange to money. Regrettably, it is not always clear in either Menger's or Mises' writings whether the theorem is supposed to explain the origin of media of exchange as such, or only that of money. They both arbitrarily change between "medium of exchange" and "money", add and remove "general acceptance" and that money is, and isn't, praxeologically different from other media of exchange. However, we can produce the following quotes by Menger:</div>
<blockquote class="tr_bq">
"If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case,—<b>presenting only a difference of degree</b>—of a generic phenomenon of economic life—namely, the difference in the saleableness of commodities in general." [emphasis added]</blockquote>
If there is only a difference in degree (i.e. what nowadays would be called a quantitative difference), then we cannot make praxeological distinctions between a medium of exchange and money. If the regression theorem is a praxeological insight, it either applies to both a medium of exchange and money or neither. Another relevant quote by Menger is the following:<br />
<blockquote class="tr_bq">
"The reason why the precious metals have become the generally current medium of exchange among here and there a nation prior to its appearance in history, and in the sequel among all peoples of advanced economic civilization, is <b>because their saleableness is far and away superior to that of all other commodities</b>, and at the same time <b>because they are found to be specially qualified for the concomitant and subsidiary functions of money</b>." [emphasis added]</blockquote>
Let me translate this into a more digestible form. Once a good becomes a medium of exchange (and we thus know it is saleable/liquid), then it competes with other media of exchange not on the basis of its origin, but on criteria unique to media of exchange, such as liquidity and transaction costs. The question of its origin becomes irrelevant. The Austrian critics of the origin of Bitcoin are too late. Their objection would only have been relevant in the narrow timeframe between October 2008 and May 2010. Since then, the criteria determining the future of Bitcoin, as Menger explains, have changed. Sadly, the Austrian critics didn't shift their attention accordingly, and remain silent on the issues of liquidity and transaction costs. This problem is emphasised in another video where Block comments on Bitcoin and the theorem:<br />
<br />
<br />
<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/8YirZoUUgrk?feature=player_embedded' frameborder='0'></iframe>37:47: Will it work? No, I don't think it will work either.<br />
38:07: If you compare it to gold or silver, where you have some intrinsic value, not intrinsic, but market value, Bitcoin won't work. On the other hand, if you compare Bitcoin not to market money, but to fiat currency, well now it's a bit of a horse race. Now I'm not sure, that's an empirical issue. Bitcoin is not based on the Mengerian theory of the creation of money. But on the other hand, if you compare it to theft, which is fiat currency, maybe not so bad. So I don't know about that.<br />
<div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
<div>
I fully agree that the issue "Bitcoin vs. fiat" is an empirical issue. What Block does not recognise however is that "gold vs. Bitcoin" is also an empirical issue. Not only <b>is</b> Bitcoin based on the Mengerian theory, it also <b>already works</b>. As I just said, Block's objection comes too late (in addition to, regrettably getting confused on the "market value" question and being silent on the issue of liquidity).</div>
</div>
<h3>
</h3>
<h3>
Is it possible to "violate" the regression theorem?</h3>
<div>
<a href="http://themisescircle.org/blog/2013/07/02/the-original-value-of-bitcoins/">As Daniel Krawisz points out</a>, if we interpret the regression theorem as a praxeological insight, then it must not be possible to violate it. If there is a disconnect between empirical data and a theory, then either we do not understand it or we do not correctly interpret the empirical data. <a href="http://mises.org/daily/5158/">Daniel Sanchez explains this in one of his articles</a>:</div>
<blockquote class="tr_bq">
"Yet the most history can do for an economist is to provide either an example with which to illustrate (but not prove) an economic theorem to help students grasp the concept by giving them a concrete manifestation of it, <b>or a clue that perhaps he has performed fallacious reasoning in deriving the economic theorems he has been operating with</b>. But even in the latter case, he must use discursive reasoning to catch the fallacy, and then to adjust his theory according to the corrected reasoning." [emphasis added]</blockquote>
<div>
The claim that Bitcoin can "violate" or "be contrary to" the regression theorem is methodologically absurd. Sadly, Sanchez himself allegedly is clueless about Bitcoin, and professor Block appears to commit all three offences (not understanding the theorem, not interpreting the empirical data, and claiming that you can "violate" praxeological fundamentals) togehter.<br />
<br /></div>
<div>
One could also argue, as Gary North in The Regression Theory as Conjectural History (was published in <a href="http://www.amazon.com/Theory-Money-Fiduciary-Media-ebook/dp/B00B50GEUO">The Theory of Money and Fidicuary Media (ed. Jörg Guido Hülsmann)</a>, that the theorem is merely a probabilistic conjecture rather than an aprioristic argument. I do not agree with this, and I also do not think that Menger and Mises viewed their arguments regarding the theorem from the Northean point of view. Mises in particular <a href="http://mises.org/humanaction/chap17sec4.asp">wrote</a>:</div>
<blockquote class="tr_bq">
"And all these statements implied in the regression theorem are enounced <b>apodictically as implied in the apriorism of praxeology.</b> It must happen this way. Nobody can ever succeed in construction a hypothetical case in which things were to occur in a different way." [emphasis added]</blockquote>
And he also denied that there can be exceptions in other forms of money:<br />
<blockquote class="tr_bq">
"This link with a preexisting exchange value is necessary not only for commodity money, but equally for credit money and fiat money. No fiat money could ever come to existence if it did not satisfy this condition."</blockquote>
Professor Block, and other Austrians clueless about Bitcoin should really spend some time on actually reading Menger and Mises. And of course, their own writings and lectures.<br />
<h3>
</h3>
<h3>
Conclusion regarding the regression theorem</h3>
<div>
As a medium of exchange, Bitcoin emerged exactly as Menger predicted. He and Mises also explained that it would not have been logically possible otherwise. It is regrettable, that people who proclaim to adhere to Menger's teachings do not recognise it when it happens right under their noses. It also is something which already happened over three years ago and cannot unhappen. My recommendation is that the "Mengerians" need to shut up and move on.</div>
<h3>
</h3>
<h3>
Is Bitcoin a "token" because it traded against the dollar first?</h3>
<div>
(presented by the caller rather than Block himself) This fallacious idea seems to have been popularised by <a href="http://seekingalpha.com/instablog/7761841-patrik-korda/1616371-bitcoin-bubble-2-0">Patrik Korda</a>. I already posted several rebuttals to that argument, <a href="http://www.economicsofbitcoin.com/2013/03/the-classification-future-of-bitcoin.html">the most specific one is the second one</a>, where I quote several Austrians, including Mises and Rothbard, in that token money must be a <b>par value claim</b> on the underlying base money. Bitcoin never was a claim on, or even had a peg to, any underlying base money, and its price was not derived from the price of the US dollar. However, that is not important here. Here another issue arose: the fact that it trades against money, seems to invoke in some observers the impression that that this somehow makes it suspicious.<br />
<br /></div>
<div>
On the contrary. There is nothing unusual about a new good to trade against money if we already live in a monetary economy. We do not have barter now anymore, and most exchanges occur with a medium of exchange. Indeed, from Mengerian and Misesian perspective it would be suspicious if Bitcoin <b>did not</b> at first trade against money, but against consumer and producers goods. As a new good, Bitcoin barely had a price and wasn't liquid. Such a good cannot act as a medium of exchange. What would such a good trade against in a monetary economy? Against consumer/producer goods rather than media of exchange? There would have been little motivation to use Bitcoin in barter (direct exchange). And as Menger explains, only as a good gains liquidity, do people start accepting it in a trade as indirect exchange. The fact that Bitcoin at first traded against fiat money (the most liquid one, the US dollar), is exactly what, according to Menger, happens at the beginning of the emergence of a good in a monetary economy. The other alternatives would have been either implausible or logically impossible.<br />
<br /></div>
<div>
That Bitcoin could "piggyback" on the US dollar is nothing strange. Different types of goods emerge in a monetary economy than in a barter economy. A barter economy has higher transaction costs, a lower specialisation of labour and does not allow for complex investment projects. A computer, for example, would not have likely been produced in a barter economy, and has to "piggyback" on a preexisting monetary system. Does that make computers suspicious?</div>
<div>
<br /></div>
<div>
Furthermore, even as it gains liquidity, there is still nothing unusual about a medium of exchange to trade against other media of exchange. Quite the opposite. The world forex market is the most liquid market that exists. <a href="http://en.wikipedia.org/wiki/Foreign_exchange_market">According to wikipedia</a>, the <b>daily </b>world forex volume was about <b>four trillion USD</b> in 2010. The article also lists the following characteristics that distinguish forex markets from others:</div>
<div>
<ol>
<li>its <b>geographical dispersion</b>;</li>
<li>its <b>continuous operation: 24 hours a day</b> except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;</li>
<li>the <b>variety of factors that affect exchange rate</b>s;</li>
<li>the <b>low margins of relative profit</b> compared with other markets of fixed income; and</li>
<li>the <b>use of leverage</b> to enhance profit and loss margins and with respect to account size.</li>
</ol>
<div>
Someone who spent at least five minutes researching the history and performance of Bitcoin exchanges can immediately recognise the first four points, and if you remember the now defunct Bitcoinica, you'll recognise the last one as well.<br />
<br /></div>
</div>
<div>
The critique that there is something suspicious about Bitcoin because it trades against other media of exchange has no basis in the Mengerian/Misesian approach to emergence of liquidity. It contradicts it, and is to be classified, using the same arguments as <a href="http://www.econlib.org/library/Mises/msTApp.html">Mises</a> in his own critique, as an acatallactic monetary doctrine, right next to the one which says that the opinion of an economist, rather than actual trades, determine prices and liquidity.</div>
<h3>
</h3>
<h3>
Can Bitcoin be used to discredit the Austrian school?</h3>
<div>
The caller submitted the hypothesis that Bitcoin can be used to discredit the Austrian school by associating it with illegal things (such as drug dealing). Well, gold-based payment systems have already been shut down (<a href="http://en.wikipedia.org/wiki/E-gold">E-gold</a> or <a href="http://en.wikipedia.org/wiki/Liberty_dollar">Liberty_dollar</a>) for exactly the same reasons, i.e. the <a href="http://en.wikipedia.org/wiki/Four_Horsemen_of_the_Infocalypse">Four Horsemen of the Infocalypse</a>. <a href="http://www.thebitcointrader.com/2011/12/goldmoney-is-no-longer-money.html">GoldMoney</a> has been neutered, they probably choose to not actually provide a competing system in order to prevent being shut down. I don't see how Bitcoin can be used to discredit the Austrians more than the gold based systems.</div>
<div>
<h3>
</h3>
<h3>
Gold, not Bitcoin, is a malinvestment</h3>
Professor Block made the argument that Bitcoin is a malinvestment (i.e. he agreed with the caller). They are not the first ones making this argument, it has been made by Patrik Korda before, and some other guy in a youtube interview (which I did not save and can't find it anymore, I thought it was Chris Duane but it looks like it wasn't). I will take the opposite side and make the argument that gold, rather than Bitcoin, is the malinvestment.</div>
<div>
<br />
The concept of malinvestment is popular in particular with the <a href="http://en.wikipedia.org/wiki/Austrian_business_cycle_theory">Austrian Business Cycle Theory</a>. The argument is that artificially lowered interest rates make it appear to be profitable to invest into projects farther removed from the consumption, even thought the availability of capital and the time preference of consumers do not make such a project possible at such a price structure. Eventually, either the project will run out of actual resources, or the prices adjust in a way unpredictable by the investors making the project unprofitable (the latter is more likely to happen in a market economy, only if the price adjustment is prevented you'll actually run out of all resources). The investment into the projects farther removed from consumption is called malinvestment, because the structure of available capital does not allow it to satisfy the needs of the consumers. The project will fail and the investment has to be liquidated at a loss. If the interest rate wasn't disturbed by an increase of the money supply through lending to investors, this would have been recognisable in advance and wouldn't have happened.<br />
<br />
Media of exchange are not producer goods. Furthermore, I don't know how about gold, but there appears to be little or no evidence that the purchasing of Bitcoins is fuelled by loans made at an artificially low interest rate. Certainly there is little reason to believe it is happening at a higher proportion with Bitcoin than with gold. So what other type of malinvestment can there be?<br />
<br />
Media of exchange serve in indirect exchange. They allow it to mitigate the uncertainty by having liquid goods and thus the ability to make unpredictable purchases in the future easier than doing so with illiquid goods. We can therefore posit that for media of exchange, whether obtaining them is a malinvestment depends on their future liquidity.<br />
<br />
Let us now compare the possible future liquidity of gold and Bitcoin.<br />
<h3>
</h3>
<h3>
Is gold evolving into money?</h3>
</div>
<div>
Many of the Austrians think or argue that the impeding fiat system collapse will make gold (or another "real" commodity) into money. There appears to make sense, doesn't it? Once fiat hyperinflates or actually stops working (banks go bankrupt), what will people use? The most liquid good that still works, i.e. gold.</div>
<div>
<br /></div>
<div>
Not so fast. First of all, the majority of transactions nowadays happen electronically, in particular in "western" countries. These transactions will need to find a replacement, not the physical exchange of a good. There would be a huge logistical issue of how to make gold, both in the physical sense as well as a clearing mechanism, work. Banks might have support for gold as a unit, but how will they gain gold-backed reserves? By people depositing their gold into the banks, right after a massive bank collapse? A more likely scenario is an increased role of gold in the assets of central banks, combined with a confiscation of physical gold from the populace, i.e. something like the gold exchange standard, where a normal guy never actually sees a gold in a transaction or has the ability to redeem his fiat for gold. GoldMoney would probably be one of the first stashes to be confiscated, accompanied by the statist propaganda how it is necessary to "fix" the economy.</div>
<div>
<br /></div>
<div>
One also needs to remember that normally, it is liquidity, rather than the use value or even the <a href="http://mises.org/Journals/qjae/pdf/Q11_2.PDF">question of fraud</a>, that determines the use of a medium of exchange. Even more strongly it is phrased by <a href="http://mises.org/journals/rae/pdf/RAE4_1_3.pdf">Hans-Hermann Hoppe</a>:</div>
<blockquote class="tr_bq">
"Driven by no more than narrow self-interest, <b>man will always prefer a more general</b>, and if possible, a universal <b>medium of exchange to a less general</b> or non-universal one."</blockquote>
If a fiat money collapses, it is thus replaced by a more liquid fiat money, because fiat money, whether we like it or not, is more liquid than gold. We've seen this empirically occur many times. The event is also called <a href="http://en.wikipedia.org/wiki/Dollarization">Dollarisation</a> rather than "Goldisation". Collapsing fiat systems are spontaneously replaced by the US dollar, not by gold. In other words, for gold to gain liquidity, it is the US dollar that needs to collapse, not just any fiat currency.<br />
<div>
<br /></div>
<div>
Of course, it could actually get so bad that there is a global collapse of the supply chain, something that <a href="http://www.feasta.org/2012/06/17/trade-off-financial-system-supply-chain-cross-contagion-a-study-in-global-systemic-collapse/">David Korowicz</a> or <a href="http://www.youtube.com/watch?v=58ayjFKRQ2A">Karen Hudes</a> warn us about. Gold is not going to fix that, because what is needed to prevent it is a replacement for the financial system, not a replacement of the unit. Merely liquidating unsustainable debt, while a necessary step, is completely inadequate to address this issue.</div>
<div>
<br /></div>
<div>
The only possible scenario which is advantageous for gold is that the financial system collapses without having a replacement, while at the same time the economy still having a sufficient amount of division of labour, and at the same time finding out some way of permanently preventing the possibility of fiduciary media or fiat money. Unless this prevention can be put into place, the "reign of gold" will be short, and will be replaced by fiduciary media and/or fiat money, it would just take longer than in a case of an "orderly" reform of the financial system.</div>
<div>
<br /></div>
<div>
<div>
I am not the only one skeptical about gold being able to fulfill the requirements of the Austrian critics of our monetary system. Michael Suede, <a href="http://www.libertariannews.org/2011/12/01/why-do-people-want-a-gold-standard-when-history-shows-us-it-does-not-last/">asked what the point of a gold standard is if we already know if failed</a>. It is not money anymore, it is merely a highly liquid good. Did gold gain new features that make it more likely to resist substitution and confiscation? I haven't noticed any. Comparing gold to Bitcoin is indeed, as professor Block argues, silly. To be fair, there have been technological advancements in helping gold be a medium of exchange:</div>
<div>
<ul>
<li><a href="http://www.youtube.com/watch?v=0cNwaA5sNr8">Valcambi CombiBar</a> which seem to be a favourite of Peter Schiff</li>
<li>GoldMoney <a href="http://www.youtube.com/watch?v=rh0Mcagio5Q">popularised ultrasound testing of gold bars</a></li>
<li>small gold weights can be put into transparent plastic casings. Historically, there was a technical problem with small change in gold, which plastics solve.</li>
</ul>
<div>
However, all of these are inadequate from the broader perspective. None of them allow gold to be sent electronically and none of them make it easier to transport, control, and with the exception of small change, resist substitution. And unless you find out how to violate the fundamental physics and chemistry laws, gold won't be able to overcome these obstacles (additionaly, if you find out how to violate these laws, then gold would become useless as money anyway). The situation is exactly the opposite as the caller and Block submit. Gold is amedium of exchange that does not solve any of the real issues (i.e. it does not work), while Bitcoin, so far, has been working. We don't know for sure how well it will be able to handle the issues in the future, however it has shown a path of how it is possible so solve them.</div>
</div>
<div>
<h2>
<div style="font-size: medium; font-weight: normal;">
</div>
</h2>
</div>
</div>
<div>
In summary, irrespective of a collapse of fiat money, the outlook for gold to gain more liquidity looks bleak.</div>
<div>
<h3>
</h3>
<h3>
Is Bitcoin evolving into money?</h3>
<div>
Bitcoin is, I would say, less liquid than gold. It has less people using it, less mature organised markets, more problems with cooperating with the banking sector or the regulators. However, there is nothing either fundamental or problematic with this. Bitcoin does not need the banking sector to work. It already can be traded in <a href="https://localbitcoins.com/statistics">over 3000 cities in 169 countries</a>. It does not need to cooperate with the regulators, because there is no middleman.</div>
<div>
<br /></div>
<div>
For Bitcoin, the issue is exactly the opposite as with gold. The reason why it has a comparative advantage as a medium of exchange is not because of liquidity rank, but because it decreases the transaction costs. It provides a payment processing system that is a replacement for the more common systems like POS terminals for debit cards, ATMs, paypal and so on. Except you don't need a middleman to either provide the service or to entrust your money to. The early adopters of Bitcoin are niches that can benefit from this decrease of transaction costs the most: <a href="https://en.bitcoin.it/wiki/Category:Gambling">online gambling</a>, <a href="http://en.wikipedia.org/wiki/Silk_Road_(marketplace)">black markets</a>, donations, <a href="http://seansoutpost.weebly.com/index.html">charity</a>, <a href="https://en.bitcoin.it/wiki/Trade#Online_products">online products</a> and so on. Event the emergence of <a href="http://altcoins.com/">altcoins</a> proves that Bitcoin decreases transaction costs: they piggybacked not on the US dollar, but on Bitcoin, and with small exceptions, they don't even have markets where they can be traded against the US dollar.</div>
<div>
<br /></div>
<div>
Not only does Bitcoin decrease transaction costs from the narrow point of view of a medium of exchange, it also does it from the <a href="http://www.youtube.com/watch?v=mD4L7xDNCmA">point of view of a financial system</a>. It provides a replacement for the <a href="http://news.cnet.com/8301-1023_3-57602258-93/bitcoin-ultimately-can-replace-wall-street-investor-says/">Wall Street</a>, <a href="http://www.pcworld.com/article/2039705/could-the-bitcoin-network-be-used-as-an-ultrasecure-notary-service.html">notaries</a>, <a href="http://bitcoinmagazine.com/7119/bootstrapping-an-autonomous-decentralized-corporation-part-2-interacting-with-the-world/">corporations</a>, and in general anything that has to do with transfer and enforcement property rights. It is a framework that implements an enforcement of transfer of property rights, analogous to the <a href="http://en.wikipedia.org/wiki/Title-transfer_theory_of_contract">title-transfer theory of contract</a>, where the transfer itself is transparent and enforced automatically or semi-automatically. All the problems with statist provision of services that has to do with property rights now have a competition not because the state permits it, but because it is more efficient.</div>
<div>
<br /></div>
<div>
What would happen to Bitcoin if the fiat system collapses? First of all, already the "dollarisation" is being amended by "bitcoinisation", such as in <a href="http://blogs.wsj.com/moneybeat/2013/07/17/bitcoin-downloads-surge-in-argentina/">Argentina</a> or <a href="http://www.businessweek.com/articles/2012-11-29/dollar-less-iranians-discover-virtual-currency">Iran</a>, despite the maybe overhyped media portrayal. In Kenya, which already has a high mobile payment penetration, <a href="http://kipochi.com/blog/kipochi-launches-first-bitcoin-wallet-in-africa-with-m-pesa-integration">Kipochi</a> provides an integration between M-PESA and Bitcoin. Bitcoin also allows them to overcome capital controls in a way that neither the dollar nor gold can. People in those countries are then increasingly more likely to migrate to Bitcoin rather than dollar or gold as their monetary system collapses. The USA might well be the last country where Bitcoin reaches sufficient liquidity to be called "money", and at the greatest cost. If the financial system collapses and is not reformed quickly (by the state), Bitcoin will still continue working, while there won't be a gold-based alternative for a while.</div>
<div>
<br /></div>
<div>
To be sure, there are many obstacles that Bitcoin has to overcome during its growth, such as scalability, user friendliness and so on. But there are no fundamental problems here. These are empirical issues that can be solved by entrepreneurship, and the development is happening right now as I write this. Can gold do any of that? I don't think so. That is why the liquidity of Bitcoin will most likely rise, and the liquidity of gold will most likely remain at approximately the level it is now. Maybe calling gold a malinvestment is an exaggeration, but I wanted to provoke the reader.</div>
</div>
<h3>
</h3>
<h3>
Concluding remarks</h3>
<div>
It is interesting that Austrians understood money 100 years ago better than their successors living now. We have been confused by the existence of all kinds of forms of money and media of exchange. It's long past to confront the confusion and improve clarity.<br />
<br />
Empirically, it ultimately does not matter whether Block is or isn't clueless about Bitcoin. The opinion of an economist does not take precedence over catallactic phenomena.</div>
<div>
<br /></div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com8tag:blogger.com,1999:blog-6189690633638834539.post-52729322456407891912013-06-26T12:27:00.000+02:002014-10-26T09:40:21.020+01:00Research update #1 <h3>
Conference</h3>
Late Monday I returned from the <a href="http://www.iss.nl/research/conferences_and_seminars/periodic_conferences_debates_and_seminars/complementary_currency_systems/">2nd International Conference on Complementary Currency Systems (CCS)</a> that took place in The Hague, Netherlands. I met with many researchers and practitioners, several of them I quote in my thesis (such as <a href="http://en.wikipedia.org/wiki/Thomas_H._Greco,_Jr.">Thomas Greco</a> or <a href="http://qoin.org/about-us-fellows-hugo-godschalk/">Hugo Godschalk</a>). Almost everyone knew about Bitcoin and I took the opportunity to explain how it can be used benficially for the people normally involved in CCS. My impression was that most didn't like the inelastic money supply. They do not like that banks are privileged to create money and would prefer that everyone can create money, including credit forms. Some even didn't like that the control over the balance is with the end user, arguing that this promotes crime. Both during my panel and the rest of the time (the conference took five days) I tried my best to explain that Bitcoin is a voluntary system and the technology can be used to construct other monetary systems (indeed, my co-panelists were Marco Sachy from <a href="http://freecoin.ch/">freecoin </a>and Jorge Timón from <a href="http://freico.in/">freicoin</a>) and even for other areas which have to do with property rights, such as finance, banking, legal and property rights enforcement. And, of course, that it makes it more difficult for the banks to create money.<br />
<br />
One thing however that I must say that I was pleasantly surprised about was that there appeared to be a unanimous support for a easy regulation and displeasure with the treatment Bitcoin has received. The legal troubles that have affected <a href="http://en.wikipedia.org/wiki/Liberty_Reserve">Liberty Reserve</a>, or before that <a href="http://en.wikipedia.org/wiki/Liberty_Dollar">Liberty Dollar</a>, and the recent public announcements from the regulators are not specific to "libertarian" alternatives. Many of the complementary currencies have suffered from regulatory pressure too, one of them being <a href="http://www.thepeople.co.ke/3277/bangla-pesa-plan-should-not-be-rejected-without-trial/">Bangla Pesa</a>, which was recently shut down in Kenya. The conference organised a petition for the ending of the prosecution of people involved with Bangla Pesa.<br />
<br />
I also was able to attend the <a href="https://bitcointalk.org/index.php?topic=238739.0">Utrecht Bitcoin meeting</a> as it was nearby, and finally meet <a href="http://koenswinkels.weebly.com/">Koen Swinkels</a> in person. Koen is similarly as me interested in deep fundamental economic questions related to Bitcoin and we discussed the topic online several times.<br />
<h3>
Donations</h3>
As I now conduct Bitcoin research full time, and <a href="https://blockchain.info/address/1MKkciz5zT4Vg8pxkd3VtAwMMcxyWPiQtQ">am accepting donations</a> for my research, I decided to make my research more open. First of all, <a href="https://www.zotero.org/groups/economics_of_bitcoin">I opened my research bibliography and notes</a>. Zotero is a collaborative tool for helping in research, I've been using it since I started my research, now I just made the data public. It contains over 400 entries (books, articles, lectures, ...), notes I made for them, such as quotations that are interesting from the point of view of Bitcoin. You can directly export a Zotero library into bibtex, and plugins are available for MS Office or Libre Office.<br />
<br />
Last but not least, I want to make the spending of the donations also publicly auditable. So far I haven't spent anything, but it's difficult to finance my research just from savings. So here is a list of intended uses for the donations:<br />
<br />
<ul>
<li><b>Server hosting</b>. I rent a dedicated server that gathers data from the blockchain (it runs a full node and I recently added several altcoins) and Mt Gox. I plan to add other data sources in the future. The server doesn't do anything else and costs 32 EUR per month</li>
<li><b>Zotero storage plan</b>. I mentioned Zotero above, I have an extensive bibliography (now public) and the storage required exceeds the free hosting plan. I currently pay 20 USD per year.</li>
<li><b>Books and articles</b>. I am not affiliated with any research institution and need to pay full price for any publication that I want to read. Of course I try to get them for free but this is sometimes difficult. I also created a separate <a href="http://www.amazon.com/registry/wishlist/3J59YXX288NHK/ref=cm_wl_rlist_go_o_C-2">Amazon wishlist</a> which includes items I find relevant for my Bitcoin research, so you can "donate" also by directly gifting me a book from that wishlist. I prefer kindle editions to paper books but not all are available in electronic form.</li>
<li>Potentially also <b>travel and accommodation costs for conferences</b>. Even though I take part on conferences that I find relevant for Bitcoin, not always do the organisers cover my costs. The <a href="http://www.bitcoin2013.com/">Bitcoin 2013: The Future of Payments</a> in San Jose cost me about 1100 EUR for travel and accommodation and the <a href="http://www.iss.nl/research/conferences_and_seminars/periodic_conferences_debates_and_seminars/complementary_currency_systems/">CCS 2013</a> about 600 EUR. I'm not counting other costs associated with the conferences such as food as I eat regardless of whether I am at a conference or at home. These two conferences already happened so I am not going to use the donations to cover the cost for these two. The other two conferences that I've been invited this year (<a href="http://www.cryptocurrencycon.com/">Cryptocurrencycon</a> and <a href="https://www.facebook.com/events/172469499583158/">Future of Money 2.0</a>) will cover my costs so it's less of a problem there, but there could be other conferences in the future.</li>
</ul>
<div>
I'll publish the expenditures on a separate page once they occur.</div>
<div>
<br /></div>
<div>
Let me know what you think, and if you have any comments on the donation spending.</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com1tag:blogger.com,1999:blog-6189690633638834539.post-23921755767594919462013-05-16T05:45:00.001+02:002013-05-16T05:46:22.854+02:00Status update, conference in San Jose and meeting professor SelginI thought I'd post an update. I haven't posted for a couple of weeks, but for a good reason. As some of you might know, last month I decided to concentrate on research of Bitcoin full time and I left my job. Now I'm a full blown "Bitcoin economist". What this means is that I read books all the time. Well, not entirely, I've also been spreading the word about Bitcoin among people, and trying to figure out how to earn money by doing research. I've also been working on my own book, which is an updated version of my master's thesis with some enhancements and fixes. I've been invited to present at two other conferences this autumn (I'm not sure they have been announced yet by the organisers, one is in the USA being organised by Jeff Tucker, and one will be in Slovakia, organised by the F. A. Hayek foundation). If you want economic research or consulting about Bitcoin, let me know, I'm sure we can work something out.<br />
<br />
I'm now at the airport in Vienna, waiting for a flight and hope to eventually arrive in San Jose, just in time for the <a href="http://www.bitcoin2013.com/">Future of Payments</a> Bitcoin conference, where I'll be one of the panelists on the Economics panel on Saturday between 4pm and 5pm. Some of you might be at the conference too, so I'm looking forward to meeting you.<br />
<br />
Earlier this week, I had the opportunity to meet one of the leading proponents of free market money, <a href="http://en.wikipedia.org/wiki/George_Selgin">professor George Selgin</a>. I corresponded with him before about economic aspects of Bitcoin and I quote him in my thesis, and after I found out he was going to have a lecture not very far from where I live, I registered and attended. I also briefly spoke to him, and it was very fruitful and helped me to understand some of his positions better. For example, on several occasions in the past as well as during the lecture, he claimed to have objections against Bitcoin. It wasn't entirely clear to me, I though that he had both macroeconomic objections (the evolution of the money supply does not follow the ideal of the freebanking branch of the Austrian school) as well as objections to its future as a medium of exchange. It turns out that it was only the former. He now clarified that he does not know how Bitcoin will evolve as a medium of exchange (he made a joke that if he did, he wouldn't be lecturing but rather talking to his broker). Just like me (and <a href="http://mises.org/rothbard/genuine.asp">Rothbard in The Case for Genuine Gold Dollar</a>) he thinks that people do not choose a medium of exchange based on price stability (or macroeconomic criteria in general), and that the analysis of macroeconomic features of media of exchange and their acceptance by the market are two separate questions. He also replied to some other things I asked him, but I'm not going to post it here yet, rather I want to integrate it into my book.<br />
<br />
I have several draft posts related to Bitcoin, some are boring and abstract, some are new and interesting, I'll update and post them as time progresses. Don't worry, I haven't forgot about the readers of my blog.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com46tag:blogger.com,1999:blog-6189690633638834539.post-87942433829087053722013-04-24T16:51:00.000+02:002013-04-24T16:51:28.332+02:00Bitcoin at the 2nd International Conference on Complementary Currency SystemsI've been invited to the <a href="http://www.iss.nl/research/conferences_and_seminars/periodic_conferences_debates_and_seminars/complementary_currency_systems/">2nd International Conference on Complementary Currency Systems (CCS)</a>, taking place between 19th and 23rd June 2013, in The Hague, Netherlands. I'm on a panel on the day 3, the strand of the conference specialised for local government officials and policy-makers. I'm looking forward to meeting the other participants, in particular Jorge Timón from the Freicoin project with whom I exchanged comments on the <a href="https://bitcointalk.org/">bitcointalk.org</a> forum.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com2tag:blogger.com,1999:blog-6189690633638834539.post-42365210418535359872013-04-17T16:00:00.000+02:002013-04-18T07:32:41.272+02:00The Mises Institute is clueless about Bitcoin<div>
The Ludwig von Mises Institute (the one behind <a href="http://mises.org/">mises.org</a>, located in Auburn, Alabama) posted several articles over the last week or so about Bitcoin:</div>
<ul>
<li><a href="http://mises.org/daily/6399/The-Moneyness-of-Bitcoins">http://mises.org/daily/6399/The-Moneyness-of-Bitcoins</a> (Nikolay Gertchev)</li>
<li><a href="http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble">http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble</a> (Patrik Korda)</li>
<li><a href="http://mises.org/daily/6411/The-Bitcoin-Money-Myth">http://mises.org/daily/6411/The-Bitcoin-Money-Myth</a> (Frank Shostak)</li>
</ul>
Prior to that, they posted about it during June 2011, by Justin Ptak:<br />
<ul>
<li><a href="http://archive.mises.org/17249/ideological-and-irrational-exuberance/">http://archive.mises.org/17249/ideological-and-irrational-exuberance/</a></li>
<li><a href="http://archive.mises.org/17294/a-clear-concise-look-at-bitcoin/">http://archive.mises.org/17294/a-clear-concise-look-at-bitcoin/</a></li>
<li><a href="http://archive.mises.org/17356/another-bitcoin-crash/">http://archive.mises.org/17356/another-bitcoin-crash/</a></li>
</ul>
<div>
And one in October 2011, by Jeffrey Tucker:</div>
<ul>
<li><a href="http://archive.mises.org/18767/bitcoin-implodes/">http://archive.mises.org/18767/bitcoin-implodes/</a></li>
</ul>
In the meantime, Jeffrey Tucker became a Bitcoin enthusiast (disclaimer: I've been interviewed by Jeffrey and Laissez-Faire Books is publishing my book about Bitcoin, so I might be biased). Justin Ptak appears now to be friends (on Facebook) with Bitcoin fans. This may or may not imply his change of opinion, but it doesn't look like he published anything more about Bitcoin at least.<br />
<br />
Now, there is nothing wrong with criticism. And Bitcoin can be criticised, there are many legitimate objections to it. But to criticise something merely because someone feels a pressure to criticise, and then rushes to hastily print something quickly is not scholarly work. It is symptomatic that the institute didn't publish anything in between. They are under pressure to publish something when there is a media interest in Bitcoin, and hence hastily rush to assemble something. But actual academic research appears to be absent.<br />
<br />
The main issue appears to be the conflation of money, unit of account and a medium of exchange. Unit of account is not a necessary function of either money or a medium of exchange. It is merely a possible byproduct of it.<br />
<br />
A further issue is the "self-reinforcing monetary spiral" (i.e. which mainstream economists call the network effect), in which one medium of exchange emerges victorious and beats all other media of exchange and that we call money. But this is merely a hypothetical model that is furthermore prone to misinterpretation. First of all, transaction costs can prevent this spiral to escalate to its final stage. Currently, we have hundred something currencies all over the world. Legal restrictions prevent this spiral from playing out. But this is merely an empirical factor, rather than a rule that gives legal restrictions magical powers. Even without legal restrictions, we can't be entirely sure that the transaction costs won't hinder a full monetisation.<br />
<br />
The second issue is the neglect of other media of exchange, those that are not money. Mises calls them "secondary media of exchange", and Rothbard calls them "quasi-monies". These goods are liquid, and a part of their demand is due to their liquidity. They are not liquid enough to be money, but nevertheless they serve, not only through their other uses, but also through their liquidity, a valuable purpose. This is what Bitcoin is. This is what gold is too. And this is also the pool for potential candidates for money. Before something can be money, it must be a medium of exchange.<br />
<br />
Bitcoin is somewhat liquid, and it has a very important advantage against extant money: it reduces transaction costs. It reduces transaction costs even further than existing payment mechanisms, so that even a fluctuating price is not enough to offset this reduction. We can therefore expect Bitcoin to be used as a payment mechanism in those areas where it can substitute for other payment mechanisms. This is also a type of network effect. Once they use it as a payment mechanism, people may decide that they do not actually need to fully convert it to/from fiat, and use Bitcoin as a store of value as well. Indeed, Tony Gallippi from BitPay reported (can't find the link now) that their customers are increasingly opting to keep a larger proportion of the payment in Bitcoin, whereas at the beginning they just converted the whole sum to fiat money.<br />
<br />
Yet again I have to quote <a href="http://www.jstor.org/discover/10.2307/1805134">White</a> in his brilliant insight, which has not yet been processed by other Austrians:<br />
<blockquote class="tr_bq">
"Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. <b>But these are empirical factors, and not something inherent in all possible monetary systems</b>."</blockquote>
Rather, other Austrians make empirical (!!!) statements like this (<a href="http://mises.org/document/5827">Salerno</a>):<br />
<blockquote class="tr_bq">
"With the use of clearing systems, money substitutes are virtually costless to transfer."</blockquote>
An adoption as a payment mechanism, and expansion into a store of value are the early stages of monetisation. This is the same mechanism as the Austrians hypothesised occurred during pre-monetary times, only we now already have a different money. But already existing money is not a showstopper for this mechanism to work. Liquidity is just not the only factor influencing the choice of media of exchange. The argument of <a href="http://mises.org/journals/rae/pdf/RAE4_1_3.pdf">Hoppe</a> that<br />
<blockquote class="tr_bq">
"Driven by no more than narrow self-interest, man will always prefer a more general, and if possible, a universal medium of exchange to a less general or non-universal one."</blockquote>
is therefore false. It is only apodictically true in a world without transaction costs. It still may happen in a world with transaction costs, we merely can't be sure about it. And Bitcoin is a hint that empirical factors can't be dismissed entirely. <b>EDIT</b>: If the statement of Hoppe was true, once money exists, it could never have been replaced by a new money, and we clearly know from history that that's not the case.<br />
<br />
Will Bitcoin ever become money? That's an empirical issue and we can't know this in advance. But equally we cannot dismiss it, unless we find a competitor to Bitcoin based on fiat money (or precious metals like gold) that is able to mitigate the transaction cost advantage of Bitcoin. And that would be very difficult to pull off. One of the reasons is the transaction costs associated with the boundary between money in the narrower sense and money substitutes (such as redemption, settlement, and so on), which Bitcoin does not need. Bitcoin is form-invariant and can exist in practically any imaginable (and unimaginable) form. The second one is regulation (management of money and money substitutes is strictly regulated and burdened by many restrictions which have nothing to do with monetary policy, such as anti-money-laundering, capital controls, war on drugs and so on). Even if regulation affects Bitcoin, unless there is an alternative that isn't affected by regulation, there is still no reason for Bitcoin users to switch to something else.<br />
<br />
But Bitcoin can do much more than become money. With algorithmic contracts, it can make large parts of the financial sector obsolete. With its ultra low transaction costs, it can make money substitutes redundant (and, obviously, without money substitutes there is no credit expansion and without credit expansion there is no business cycle). Again with its transaction costs and abstract base, anyone can make a payment to anyone, anytime, anyplace. Nothing that has existed so far in the history can do that. And even if we disregard it as a hypothetical, we just need to remember that <b>gold already failed</b>, because it was reduced from money to a secondary medium of exchange. This was only possible because money substitutes emerged. If nothing else, Bitcoin shows that money substitutes are merely an empirical quirk and not an inherent feature of monetary systems, and for that alone is it should change the landscape of the Austrian literature forever, and open a wide spectrum of possibilities for research and our understanding of money.<br />
<br />
For more in depth analysis, I recommend <a href="http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf">my master's thesis</a>, or if you wait a while you can get an updated version in a book format.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com28tag:blogger.com,1999:blog-6189690633638834539.post-62428306358517186712013-04-10T17:13:00.000+02:002013-04-10T17:13:09.608+02:00The economic fundamental of money substitutesSince Patrik Korda still criticises my approach to money substitutes, I thought I'd summarise here their fundamentals. This is not a definition of a money substitute, nor an exhaustive listing of all possible types of substitutes. Rather, it is to explain their essence in a way that is easily understandable and clarify why Bitcoin has nothing to do with them.<br />
<br />
The fundamental of a money substitute is a causal link between money in the narrower sense and the substitute. This causal link is the main, necessary, factor explaining the price of the substitute. For argument's sake, I'll leave it open whether other, optional, factors exist. This is the essence of the point Mises was making, he was trying to explain the price of money substitutes. And he found the explanation in the causal link to the money in the narrower sense.<br />
<br />
For Bitcoin, there is no such underlying causal link to a money in the narrower sense that explains the price of Bitcoin. The price of Bitcoin is determined by other factors.<br />
<br />
Therefore Bitcoin is not a money substitute (or it wouldn't be if Bitcoin was money).Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com7tag:blogger.com,1999:blog-6189690633638834539.post-88817104027350193132013-04-09T20:02:00.003+02:002013-04-09T20:02:21.254+02:00Another interview with me, and my reaction to the recent media hysteriaThe Slovak bitcoin Blog "bicoiner.sk" published a brief interview with me (I'll translate it when I have a bit more time): <a href="http://bitcoiner.sk/bitcoinova-horucka-kurz-presiahol-220-co-na-to-odbornik/">http://bitcoiner.sk/bitcoinova-horucka-kurz-presiahol-220-co-na-to-odbornik/</a>.<br />
<br />
However, there is an important thing that I want to get off my chest, because I don't think I've concisely addressed it yet. As far as I can remember, I have been refusing to give predictions about the future price of Bitcoin, I only indirectly explained how and why it will be influenced. In my master's thesis, I explained the mechanisms influencing the demand for Bitcoin and what it means for the future of Bitcoin. Here I'll summarise it here very briefly.<br />
<br />
For the foreseeable future, I expect the price of Bitcoin to be subject to fluctuations, just like it has been behaving until now, because the market isn't sufficiently liquid. It may currently be in a bubble phase, or not. I don't know. But it is also irrelevant for the future of Bitcoin, because a medium of exchange on the market gains market share through its reduction of transaction costs against competitors, not through its price stability. Indeed, in <a href="http://mises.org/rothbard/genuine.asp">A case for a genuine gold dollar</a>, Rothbard criticised Hayek's <a href="http://mises.org/document/3970">Denationalisation of Money</a> for precisely the same point: that price stability is not a valid reason for people to choose one medium of exchange in preference for another. Rothbard invoked, from the point of view of the network effect, the argument of critical mass: the competitor wouldn't be able to compete with something people are accustomed to. But other factors are unmentioned by Rothbard, in particular the reduction of transaction costs. This is because until Bitcoin, Austrians (with the exception of Lawrence White, whom I quoted several times) assume that money substitutes have lower transaction costs than money in the narrower sense. Bitcoin exposes this as an implicit assumption which is actually an empirical factor, and leaves most of the Austrians dead in the water, not understanding what's happening.<br />
<br />
Will Bitcoin ever become money? I don't know, and while that would be terrific, it's also not relevant for the broad question of the future of Bitcoin, because of the "money or nothing fallacy" (which is a false dichotomy that many critics, Austrian or not, of Bitcoin, invoke, arguing that if we can refute that Bitcoin is or will be money, it follows that it is nothing). But that's bogus. As long as it provides an significant advantage in transaction costs, it will be here and compete, even if it never becomes money (whether that's due to too much leverage the states have over fiat money, or due to inertia, or even if we admit all the arguments of <a href="http://mises.org/daily/6399/The-Moneyness-of-Bitcoins">Gertchevs</a> and <a href="http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble">Kordas</a> about impracticality of electronic money, even though <a href="http://qz.com/57504/31-of-kenyas-gdp-is-spent-through-mobile-phones/">31% of Kenya's GDP is now being spent through mobile phones</a>, i.e. if we accept whatever assumptions they make up on the fly). Non-Austrians have called such a medium of exchange "<a href="http://www.wired.com/threatlevel/2011/12/bitcoins-comeback/">metacurrency</a>", for example, Krugman (who is critical of Bitcoin, but missing that it confirm his own 30 year old papers) calls it "<a href="http://www.nber.org/papers/w0333">vehicle currency</a>". Austrians also have a name suitable for such class of media of exchange, for example "<a href="http://mises.org/humanaction/chap17sec17.asp">secondary media of exchange</a>" (Mises) or "<a href="http://mises.org/rothbard/mes/chap11d.asp">quasi monies</a>" (Rothbard). But whatever our classification of Bitcoin may be, from economic point of view it is an immaterial good with ultra low transaction costs and an inelastic supply, a perfect fit for a reform of payment mechanisms and the financial sector, irrespective of whether it also sucks up all the "<a href="http://jpkoning.blogspot.co.at/2013/01/bitcoin-is-amoeba-central-banks-are.html">moneyness</a>" from fiat, whether it "<a href="http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html">monetises</a>" or not, and irrespective of what people argue about it. In order to pull this off, Bitcoin does not have to be perfect, it just needs to provide a significant comparative advantage over competitors. This it has, and I expect it to stay that way for the foreseeable future.<br />
<br />
Bitcoin may fail for one reason or another, but it won't be because its price is susceptible to bubbles, because we argue how to classify it, <a href="http://seekingalpha.com/instablog/7761841-patrik-korda/1616371-bitcoin-bubble-2-0">because of low barriers to entry</a>, because economists or pundits don't understand it and have to hastily make things up to patch the holes in their arguments. It will be because it will stop having a comparative advantage in transaction costs, i.e. it will be replaced by something which provides better utility for the users.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com0tag:blogger.com,1999:blog-6189690633638834539.post-89449925010056767812013-04-09T14:51:00.002+02:002013-04-09T15:07:11.993+02:00Response to Patrik Korda #4This is a followup to the previous replies to Korda:<br />
<br />
<ul>
<li><a href="http://www.economicsofbitcoin.com/2013/03/re-bitcoin-bubble-20-by-patrik-korda.html">Re: Bitcoin Bubble 2.0 by Patrik Korda</a></li>
<li><a href="http://www.economicsofbitcoin.com/2013/03/the-classification-future-of-bitcoin.html">The classification and the future of Bitcoin (another Re: Patrik Korda)</a></li>
<li><a href="http://www.economicsofbitcoin.com/2013/03/is-bitcoin-money-substitute.html">Is Bitcoin a money substitute?</a></li>
</ul>
<div>
Korda made it to the <a href="http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble">Mises.org daily</a>, and he presented a couple of comments <a href="http://www.economicsofbitcoin.com/2013/03/is-bitcoin-money-substitute.html?showComment=1364358523698#c3312261106525854413">at the bottom of my post</a></div>
<div>
<br /></div>
<div>
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.</div>
<blockquote class="tr_bq">
"I believe that bitcoins are a lose-lose proposition for libertarian minded people going forward."</blockquote>
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?<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"I simply do not attribute as much weight to the network effect nor as much rationality to the market process as you do."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"This is the primary reason why people, such as myself, have piled into litecoins earlier this month. I banked on my parable."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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. <b>But that presented by Korda (low barriers to entry) is not one of them.</b><br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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 <a href="http://newlibertystandard.wetpaint.com/page/2009+Exchange+Rate">this</a>:<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<br />
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"The primary reason that I classified bitcoins as token money was that there was no other place to put them."</blockquote>
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?<br />
<blockquote class="tr_bq">
"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."</blockquote>
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?<br />
<br />
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).<br />
<blockquote class="tr_bq">
"In your thesis, you claim that “the price of bitcoin correlates with the public interest in bitcoin”".</blockquote>
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.<br />
<blockquote class="tr_bq">
"Although this is true, a more precise way of putting it would be that interest in bitcoin follows the price of bitcoin."</blockquote>
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.<br />
<blockquote class="tr_bq">
"This is exactly why I think the price of bitcoin is relevant towards its potential success and that a bubble will be very detrimental."</blockquote>
<blockquote class="tr_bq">
...</blockquote>
<blockquote class="tr_bq">
"I’ve been in the markets long enough to see how this story ends."</blockquote>
Korda has been around the <b>wrong</b> 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.<br />
<blockquote class="tr_bq">
"Your first article practically claims that all of my points are irrelevant."</blockquote>
Yes and that is still correct. I have yet to see why any of the arguments are relevant.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<blockquote class="tr_bq">
"I think transaction costs can be greatly eliminated via companies such as BullionVault or GoldMoney."</blockquote>
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.<br />
<blockquote class="tr_bq">
"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."</blockquote>
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.<br />
<br />
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, <b>these are not the only options, neithe</b><b>r are they mutually exclusive</b>. 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.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com128tag:blogger.com,1999:blog-6189690633638834539.post-51961755044524550852013-03-28T21:55:00.002+01:002013-03-28T23:33:46.561+01:00Jeff Tucker interviewed me earlier todayThe video is on youtube now:<br />
<br />
<a href="http://www.youtube.com/watch?v=FufYk_WDckw">http://www.youtube.com/watch?v=FufYk_WDckw</a><br />
<b><br /></b>
<b>Edit:</b> updated URL with a new version that has better audio sync.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com0tag:blogger.com,1999:blog-6189690633638834539.post-73732335943701350462013-03-28T21:48:00.000+01:002013-03-28T21:48:06.077+01:00... but you can use fiat to pay taxes!One of the critiques I've heard regarding Bitcoin, in particular from fans of the Austrian school, is that you can use fiat money to pay taxes, and that gives it value. I remember <a href="http://mises.org/community/forums/p/26017/436388.aspx#436388">Niels van der Linden making the argument</a>.<div>
<br /></div>
<div>
Well, it looks like whatever relevance there was in that argument, it's been rendered invalid as well. Apparently, in the USA now you can <a href="http://www2.egovlink.com/press-release-bitcoin.cfm">pay taxes with Bitcoin</a>. Or at least the infrastructure is in place. The solution is being pitched as something that provides lower fees and lower risk of fraud. The municipality will still receive US dollars, but the transaction will be facilitated with Bitcoin. Solutions with this forex functionality have been available for about 1.5 years (or I've known of them for this long, they may have existed even before that), and have been used by commercial and non-profit organisations. Now the municipalities can use them too.</div>
<div>
<br /></div>
<div>
This is just yet another example of how a lack of imagination is used as an excuse for sloppy arguments.</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com0tag:blogger.com,1999:blog-6189690633638834539.post-80150196311615535092013-03-26T15:54:00.002+01:002013-03-30T01:31:17.299+01:00Bitcoin and the Regression Theorem (UT Mises Circle)<p dir=ltr>This Monday, I was a guest at the weekly University of Texas Mises Circle. Originally, this was supposed to be attended by Konrad S. Graf and Patrik Korda, who have opposing views regarding the Mises' Regression Theorem and Bitcoin. However, Graf couldn't attend in the end and Korda had connection problems, so instead of being a passive observer as I originally intended, I had to kind of supplement for both of them. I apologise for my subpar performance, I wasn't expecting to talk so I didn't do any preparations, I screwed up a couple of times, such as with the "use value" or the confusion about credit vs. claim. But it looks like it's mostly understandable, so feel free to enjoy. Thanks to all the attendees, the grinning Jeffrey Tucker attending from a flying airplane, and Mattheus von Guttenberg for his contributions to the debate.</p>
<p dir=ltr><a href="http://www.youtube.com/watch?v=AQ_CQ5R--EU">http://</a><a href="http://www.youtube.com/watch?v=AQ_CQ5R--EU">www.youtube.com</a><a href="http://www.youtube.com/watch?v=AQ_CQ5R--EU">/watch?v=AQ_CQ5R--EU</a></p>
<p dir=ltr>PS. I'm writing this blog post from my mobile phone to test how well it works, if you see any problems let me know.</p>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com1tag:blogger.com,1999:blog-6189690633638834539.post-46357715244162140472013-03-25T15:39:00.001+01:002013-03-26T14:41:29.938+01:00Interview on Slovak national radioSlovak national radio just interviewed me about Bitcoin. I think it went ok. It will air today, 18:18 CET, on <a href="http://www.rozhlas.sk/radio-slovensko">Rádio Slovensko</a> (the main channel). After it airs, you can download the recording <a href="http://rozhlas.sk/radio-slovensko/k-veci/">on their website</a>. It's in Slovak, I'll try to arrange that I can post an English translation later.<br />
<br />
<b>Update #1</b>: The interview aired, I've been getting positive responses and I am allowed to put up a translation later on my blog. The recording isn't available yet but it probably won't take longer than a day or two. I didn't hear it myself, as I don't have a radio and don't live in Slovakia.<br />
<br />
<b>Update #2</b>: The recording is online: <a href="http://rozhlas.sk/radio-slovensko/k-veci/K-veci:-v-Pitsburghu-o-U.-S.-Steel...?l=2&i=61204&p=1">http://rozhlas.sk/radio-slovensko/k-veci/K-veci:-v-Pitsburghu-o-U.-S.-Steel...?l=2&i=61204&p=1</a>, the part about Bitcoin begins at around 7:12.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com0tag:blogger.com,1999:blog-6189690633638834539.post-36134059996410507072013-03-25T00:09:00.001+01:002013-03-25T00:14:14.556+01:00Is Bitcoin a money substitute?<h3>
Intro</h3>
<br />
This post is a third reaction to <a href="http://seekingalpha.com/instablog/7761841-patrik-korda/1616371-bitcoin-bubble-2-0">Patrik Korda's article about Bitcoin</a>. There have been three main topics in our debate:<br />
<ul>
<li>regression theorem</li>
<li>competition under network effect</li>
<li>money substitutes</li>
</ul>
<div>
With respect to the regression theorem, tomorrow, <a href="https://www.facebook.com/events/472964872775809/">Korda is debating Konrad S. Graf</a> at the weekly University of Texas Mises Circle. I assume as usually with the meetings, it will be done over Google+ Hangout and available on youtube after a couple of days. <a href="http://konradsgraf.squarespace.com/blog1/2013/2/27/in-depth-bitcoins-the-regression-theorem-and-that-curious-bu.html">Graf's arguments</a> are very similar to mine, so I don't think I have anything to add there. I'm just looking forwards to watching the debate.</div>
<div>
<br /></div>
<div>
The competition under the network effect I believe I addressed sufficiently. Korda does not see any mechanism for competition under the network effect (apart from barriers to entry), and appears to believe it's random, so the market shares of individual cryptocurrencies will randomly wildly fluctuate. I addressed the mechanics of competition under the network effect in previous two articles (<a href="http://www.economicsofbitcoin.com/2013/03/re-bitcoin-bubble-20-by-patrik-korda.html">first</a>, <a href="http://www.economicsofbitcoin.com/2013/03/the-classification-future-of-bitcoin.html">second</a>), and I think that Korda hasn't addressed my points sufficiently. So for the time being, I'll wait up his reaction on this topic.</div>
<div>
<br /></div>
<div>
The last discussed issue is whether Bitcoin is a money substitute (fiduciary medium, token money), or not. While I find it absurd, I decided to address the issue in yet another post. There are several reasons for it. First of all, I think that a proper scholar should address all arguments with a logically mounted defense, no matter how absurd they claim. So it's a matter of principle. The second issue is that I apparently have readers (how it happened is a mystery to me), and I have an obligation to explain the issue to them. So it's a social issue too. Last but not least, I tend to make very abstract arguments that expose implicit assumptions, and criticise my opponents for making these implicit assumptions and lacking imagination. But this problem is universal, I am not immune to making implicit assumptions either. In other words, it could be that I'm just arrogant and wrong, and miss a logical fallacy that I'm making myself. So it's a matter of pragmatism as well. I'm new to blogging so it's a learning process for me. I hadn't really put much thought about meta-blogging, I just thought that it's better to have a dedicated outlet for channeling my thoughts rather than having them distributed across dozens of sites of other people. But I now made the conscious decision that I'll stick to proper scholarly work, and I'll treat apparent absurdities seriously. I think I tend to do that often anyway (treat absurdities seriously, that is), so it's not really much effort, I just need to remain conscious about it.</div>
<div>
<br /></div>
<h3>
Definition of money substitutes</h3>
<div>
<br /></div>
<div>
With respect to money substitutes, Korda made several interesting arguments that I hadn't considered before, and in fact shows that some of the points Mises makes are incomplete. Foremost, he is the only Austrian I know of, apart from me, that does not think that money substitutes need to be claims. While I still think his classification of Bitcoin is wrong (and I intend to prove it conclusively in this post), I sense that he, similarly as me, has the ability to expose implicit assumptions. I think if he thinks about the issue more deeply, he'll recognise the problems in his arguments. Austrian school and Bitcoin can benefit greatly from his skills. And even if we never end up agreeing, I think that defending from attacks is what makes assumptions stronger.</div>
<div>
<br /></div>
<div>
The issue with Korda's argument becomes most apparent if we try to understand the purpose of <a href="http://mises.org/books/Theory_Money_Credit/Part1_Ch3.aspx">Part 1, Chapter 3</a> of Mises' Theory of Money and Credit (and the <a href="http://mises.org/books/Theory_Money_Credit/AppendixB.aspx">picture in Appendix B)</a>. I already touched upon that in my previous posts, where I argued that the reason for the classification is economic analysis, but I missed something even more fundamental (which Korda missed too). The purpose of the whole book is to analyse the exchange ratio between goods, with the particular emphasis on media of exchange (of which money is an example). In other words, Mises attempts to analyse prices. Why is it then necessary to divide money into different classes? <b>Because the mechanisms of determining the price of individual classes of money are different.</b> If the mechanism was the same, for the purpose of the whole book, a classification would be irrelevant. Mises realised that prices of different classes of monies are established differently, and that is why he invented those classes. In other words, he invented the class of money substitutes because the price of money in the narrower sense is determined by a different mechanism than that of money substitutes.</div>
<div>
<br /></div>
<div>
It is exposed a bit if we look at <a href="http://mises.org/books/Theory_Money_Credit/Part3_Ch15.aspx">Part 3, Chapter 15</a>:</div>
<blockquote class="tr_bq">
The fact that is peculiar to money alone is not that mature and secure claims to money are as highly valued in commerce as the sums of money to which they refer, but rather that such claims are complete substitutes for money, and, as such, are able to fulfill all the functions of money in those markets in which their essential characteristics of maturity and security are recognized. It is this circumstance that makes it possible to issue more of this sort of substitute than the issuer is always in a position to convert. And so the fiduciary medium comes into being in addition to the money certificate.</blockquote>
Korda interprets this in such a way that Mises was trying to show that money substitutes compete with money in the narrower sense. But this is an incomplete interpretation. If we view it from the perspective of the pricing mechanism, we realise that Mises was also trying to explain that the price of money substitutes is not determined by the same mechanism than that of money in the narrower sense. <b>The price of money substitutes is derived from the price of the price of money in the narrower sense.</b> That is the essence of the quote.<br />
<br />
Now, Mises, and the Austrians that follow him, have a more precise definition of money substitutes, they argue that they are "mature and secure claims to money [in the narrower sense, ed]". In my thesis, I argued that this is imprecise from both sides: first, not all mature and secure claims to money are money substitutes (it's unlikely if the claim does not decrease transaction costs), and second, causal relationships other than claims also may result in money substitutes (so-called "<a href="http://en.wikipedia.org/wiki/Complementary_currency">complementary currencies</a>" for example). But I didn't analyse the question of price in that depth. I assumed that the price is the same (now, other Austrians do that too, as I thoroughly quoted from in my previous article, so don't blame me, I didn't start it).<br />
<br />
Korda argues that the price of money substitute doesn't have to be the same as the money in the narrower sense. I countered that the price of the money substitute can be (in the extreme) lower, but it can't be higher. Korda argued that Mises himself showed examples of money substitutes that trade at a premium. I was kind of rushing my argument, so I didn't really think it through and I must admit he has a point. I didn't find a Mises quote to the same, but I found <a href="http://wiki.mises.org/wiki/Bank_of_Amsterdam">mises.org wiki article on the Bank of Amsterdam</a> which confirms it.<br />
<br />
This caused me to think more deeply about the issue of price. Austrians in general assume that money substitutes have the same price as money in the narrower sense. There are few exceptions. Rothbard, I believe in <a href="http://mises.org/document/694/Americas-Great-Depression">America's Great Depression</a>, argued that some claims must only be considered from the point of view of money supply only at a discounted rate. <a href="http://jpkoning.blogspot.co.at/">JP Koning</a>, on the other hand, argues all the time that different forms of money have different liquidity levels and also different prices. So, the argument that the price needs to be exactly the same certainly is flaky. Heck, if Korda is right in attributing the report of premium on bank notes to Mises, Mises contradicted himself. That's a problem, and it needs to be fixed. I am pretty strict about having consistent definitions.<br />
<br />
So how do we fix it? We define money substitutes from the same point of view that caused Mises to create the classification: the mechanism of establishing of price. But how to do that to allow for fluctuating prices? We borrow the concept of derivation from mathematics. In other words, <b>if a price of money in the narrower sense changes, ceteris paribus, the price of the money substitute will change proportionately</b> (i.e. there's a linear dependence). This allows for the possibility of a price change for another reason. If there is a perception of risk in the claim, the substitute will trade at a discount. If the money substitute is perfectly riskless, then it may appreciate to reflect the saving of transaction costs. It can't get out of these boundaries, because that would create an arbitrage opportunity. The funny thing is that the arbitrage opportunity also arises when complementary currencies (which I also count under money substitutes) attempt to trade at a fluctuating exchange rate, <a href="https://bitcointalk.org/index.php?topic=11627.msg1115743#msg1115743">an argument which I made some time ago in another debate</a>. Now, my point isn't that other factors can't influence the price, but that the <b>price of the underlying money in the narrower sense must.</b> I don't think that there are factors other than perception of risk and transaction costs, but I'm not building my argument to rely on that. For the purposes of this post, I will call this derivative relationship "coupling". The price of a money substitute is coupled to the price of the underlying money in the narrower sense.<br />
<br />
In order for me to conclude my definition, it helps to investigate what happens when the price decouples, i.e. that changes in the price of the underlying money in the narrower sense won't have a proportionate effect on the money substitute anymore. Assuming that the former money substitute survives, <b>it evolves into the new monetary base</b>. One possibility that Mises himself mentioned was <b>credit money</b>, which happened when the country went off a metallic standard and people were expecting this to be temporary. Another possibility, one that many of us know from personal experience, is <b>fiat money</b>. In my thesis, I demonstrate this on the example of the Euro: at the end of 1998, the exchange ratios of 14 (if I calculate correctly) currencies were fixed with respect to Euro, and thus the Euro became a money substitute. After the old currencies were decommissioned, the Euro became fiat money (a separate money in the narrower sense). Yet another possibility, arguably, is <b>commodity money</b>: <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047494">Luther</a> and <a href="http://www.pjsymes.com.au/articles/somalia(part3).htm">Symes</a> can be interpreted in a way that this is what happened with the old Somali Schilling: after the central bank and legal tender laws broke down, this increased the (now competitive) production of paper notes, until the production price of those notes was very close to the market price of these paper notes. Technically, the old Somali Schilling had been fiat money, not money substitute, but I argue in my thesis that all fiat money must begin as a money substitute, and according to Symes' historical analysis, originally, Somalia did have multiple competing commodity monies, and several monetary reforms after that, which introduced paper money substitutes.<br />
<br />
Which subtype of money in the narrower sense will be the result of a decoupling depends on the circumstances. But the point is that the coupling is a necessary feature of the money substitute. Without it, it either collapses or changes its nature, i.e. its price will be determined by a different mechanism.<br />
<h3>
<br /></h3>
<h3>
What determines the price of Bitcoin?</h3>
<div>
<br />
Now, let's look back at Bitcoin. Korda argues that Bitcoin is a money substitute of all of the fiat currencies it trades against. Let's take then the dollar for example. What happens to the price of Bitcoin if the price of dollar decreases by 1%? We don't know. It may change or it may not. We certainly can't be sure that it will decrease by 1%. We can't even be sure it will change in the same direction, it could perfectly well cause people to prefer Bitcoin to USD and increase its price. The issue becomes even more apparent if we investigate what happens if the USD decreases by 1%, and the EUR increases by 1%. The price of Bitcoin is not coupled to any other money, or any other good for that matter. So it's not a money substitute.</div>
<div>
<br /></div>
<div>
What's even more, it never was coupled to anything else in the first place. As I argue in my thesis, the first available records of market price of Bitcoin show that at the beginning, the market price was derived from the variable production costs of Bitcoin. It wasn't coupled to any other good, i.e. it wasn't only not a substitute of money, but not a substitute of anything. Once again, the term "substitute" in this context does not refer to the similarity, rather to the causal relationship, the "coupling".</div>
<h3>
<br /></h3>
<h3>
Conclusion</h3>
<div>
<br />
I believe that, motivated by Korda's resolute defense, I managed to both explain and fix the gaps in Mises' arguments. I exposed the essence of Mises' arguments, and the essence of a money substitute. I also showed that Bitcoin does not have this essence, and never had.</div>
<div>
<br /></div>
<div>
If Korda (or anyone else for that matter) would like to counter my argument, I'll make it very easy to respond. The only thing he needs to do is to answer the question "How is the price of money substitutes determined?"</div>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com10tag:blogger.com,1999:blog-6189690633638834539.post-49127352597459072962013-03-16T12:36:00.000+01:002013-03-16T12:36:31.795+01:00Interview: How Cryptocurrencies Could Upend Banks' Monetary RoleEarlier this week, Jon Matonis, inspired by random posts I've been making all over the internet over the last year or so, interviewed me via email. The posts and my replies were then edited into one article in an interview style and yesterday were published on the American Banker website:<br />
<br />
<a href="http://www.americanbanker.com/bankthink/how-cryptocurrencies-could-upend-banks-monetary-role-1057597-1.html">http://www.americanbanker.com/bankthink/how-cryptocurrencies-could-upend-banks-monetary-role-1057597-1.html</a><br />
<br />
The interview concentrates on how Bitcoin affects both theory of practice of fractional reserve banking, and the related questions of the money supply, credit markets and the interest rate.Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com0tag:blogger.com,1999:blog-6189690633638834539.post-91648049898052248262013-03-12T22:00:00.000+01:002013-03-12T22:22:06.419+01:00The classification and the future of Bitcoin (another Re: Patrik Korda)A short while ago I wrote <a href="http://www.economicsofbitcoin.com/2013/03/re-bitcoin-bubble-20-by-patrik-korda.html">a post where I made some arguments</a> regarding <a href="http://seekingalpha.com/instablog/7761841-patrik-korda/1616371-bitcoin-bubble-2-0">an earlier article about Bitcoin by Patrik Korda</a>. Patrik and I had a long session in the comment section after the article and I'd thought I'd provide a followup. I hope I don't misrepresent his position, but I think I have a pretty good idea by now.<br />
<br />
Patrik looks like a smart chap, he makes plenty of reasonably arguments, and it turns out that we actually agree on a very large proportion of arguments about economics and Bitcoin in specific. He can make on topic responses, which is not that common in internet debates. Nevertheless, in some important issues we disagree and I think these merit a closer assessment.<br />
<h3>
Classification of Bitcoin</h3>
<div>
Patrik argues that it is problematic to classify Bitcoin from Austrian perspective as a type of money, because it does not clearly fit into the decision tree presented by <a href="http://mises.org/books/Theory_Money_Credit/AppendixB.aspx">Ludwig von Mises in Theory of Money and Credit</a>. So far, I agree with him. This is what I wrote in my thesis:</div>
<blockquote class="tr_bq">
However, should it develop into money, it could present a problem. Bitcoin is not and never was a money substitute, never had a special legal status, nor was it a claim against anybody, nor was a commercial commodity. Therefore, it would not fit into any of the subcategories of the classification.</blockquote>
Now, merely because we cannot classify something, that does not really mean that there is an actual <b>empirical </b>problem. In <a href="http://www.amazon.com/Antifragile-Live-World-Understand-ebook/dp/B009K6DKTS/ref=tmm_kin_title_0">Antifragile</a>, Nassim Nicholas Taleb argues that the inability to formulate knowledge verbally is not a valid reason for ignoring this knowledge. I remember that during my studies <a href="http://www.amazon.de/Systemisches-Wissensmanagement-Uni-Taschenb%C3%BCcher-Helmut-Willke/dp/3825220478/ref=sr_1_1?s=books&ie=UTF8&qid=1362771626&sr=1-1">I read something similar</a>. Tacit knowledge still has an important role in our activities, and ignoring it decreases our ability to make sound decisions. It's funny that I agree with Taleb, because I'm usually pretty anal about getting the definitions right and I go mental when people cannot formulate coherently.<br />
<br />
The issue here, however, is not some abstract classification for its own sake, so that I know what shelf to put books about Bitcoin into in a library. The purpose of the classification system provided by Mises is to assist in the economic analysis of trade, money supply, price building, liquidity and so on. From this perspective, if we insist that we must keep the number of categories the same that Mises used, the economically closest category of Bitcoin would be commodity money.<br />
<br />
There are several reasons for this. First of all, Bitcoin never was a claim against anyone (credit) (or, if we use the second definition of money in the broader sense, it never was a nearly perfect substitute to any other money). Patrik claims that if Bitcoin trades against fiat money, it means it's a money substitute, and the issue of a exchange rate is irrelevant. However, the Austrian economists disagree:<br />
<br />
<ul>
<li><a href="https://mises.org/document/1042">Rothbard in Austrian Definitions of the Supply of Money</a> (referring to Mises):</li>
</ul>
<blockquote class="tr_bq">
Because, as he pointed out, bank demand deposits were not other goods and services, other assets exchangeable for cash; they were, instead, <b>redeemable for cash at par on demand</b>. Since they were so redeemable, they functioned, not as a good or service exchanging for cash, but rather as a warehouse receipt for cash, redeemable on demand at par as in the case of any other warehouse. Demand deposits <b>were therefore "money-substitutes"</b> and functioned as equivalent to money in the market. Instead of exchanging cash for a good, the owner of a demand deposit and the seller of the good would both treat the deposit as if it were cash, a surrogate for money.</blockquote>
<blockquote class="tr_bq">
... </blockquote>
<br />
<blockquote class="tr_bq">
Bluechip stocks, for example, can be easily sold for money, yet no one would include such stocks as part of the money supply. The operative difference, then, is <b>not whether an asset is liquid or not</b> (since stocks are no more part of the money supply than, say, real estate) but <b>whether the asset is redeemable at a fixed rate, at par, in money</b>. Credit instruments, similarly to the case of shares of stock, are <b>sold for money on the market at fluctuating rates.</b> The current tendency of some economists to include assets as money purely because of their liquidity must be rejected; after all, in some cases, inventories of retail goods might be as liquid as stocks or bonds, and yet surely no one would list these inventories as part of the money supply. <b>They are other goods sold for money on the market</b>.</blockquote>
[emphasis added]<br />
<br />
<ul>
<li><a href="http://blogs.forbes.com/michaelpollaro/money-supply-metrics-the-austrian-take/">Michael Pollaro in Money Supply Metrics - The Austrian Take</a>:</li>
</ul>
<blockquote class="tr_bq">
To paraphrase the Austrian masters, <b>money substitutes</b> are perfectly secure and IMMEDIATELY convertible, <b>PAR VALUE claims to standard money</b> which, by virtue of this immediate convertibility substitute FULLY for standard money in individual’s cash balances, and as such, are used by individuals as a surrogate for cash – namely, a thing that all other goods and services are traded for, the final payment for such goods and services on the market.</blockquote>
[emphasis added]<br />
<br />
<ul>
<li>and finally, the <i>urquelle </i>of all, <a href="http://mises.org/books/Theory_Money_Credit/Part1_Ch3.aspx">Mises in The Theory of Money and Credit</a>:</li>
</ul>
<blockquote class="tr_bq">
The special suitability for facilitating indirect exchanges possessed by <b>absolutely secure and immediately payable claims to money</b>, which we may briefly refer to as <b>money substitutes</b>, is further increased by their standing in law and commerce.</blockquote>
[emphasis added]<br />
<br />
Admittedly, he does not use the term "par value" here, but later, he points out to the difference in price when differentiating between credit money and money substitutes:<br />
<blockquote class="tr_bq">
A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure [i.e. the criteria that Mises uses to define money substitutes, ed]; if they were, there could be <b>no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation</b> on the part of those who dealt with them.</blockquote>
[emphasis added]<br />
<br />
<br />
<br />
Bitcoin is not a claim, nor is it treated at par with anything else. It is, to use Mises' terms, s<i>ubjected to an independent process of valuation</i>. It therefore cannot be a money substitute according to Mises. The issue is exacerbated because Patrik refuses to answer the question <b>who</b> is Bitcoin a claim against, i.e. <b>who </b>is obligated to redeem it (I'm sticking to Misesian terminology here, I disagree with the Austrians that money substitute must be a claim, but that just means I put more relaxed restrictions on Patrik than Mises would).<br />
<div>
<br /></div>
This eliminates the option of classifying Bitcoin as a money substitute, but also credit and fiat money (as according to my interpretation of the regression theorem, these have to begin as money substitutes), and the only option remaining is commodity money. Another reason for classifying Bitcoin as commodity money is the inelasticity of supply. <a href="http://detlevschlichter.com/2012/03/what-gives-money-value-and-is-fractional-reserve-banking-fraud/">Detlev Schlichter</a> made the same argument, and the paper of <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118">George Selgin</a> can probably also be interpreted from this perspective. Yet another alternative approach is that with commodity money, the marginal production costs and the market price tend to be close to each other (and Bitcoin fits here too).<br />
<br />
If we insist on the Misesian definition, then we're stuck with the controversial question of whether Bitcoin is, or was, a commodity. I don't want to get into that. The alternatives that I provide might or might not mean it's a commodity, but I think it gets the economic fundament of both gold and Bitcoin more accurately. But we should at least be able to say that Bitcoin is a quasi-commodity, or that it's a commoditised service, if we insist on using "commodity".<br />
<br />
Bitcoin is not the only medium of exchange that shows the Misesian definitions inadequate. For example, the <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047494">old Somali Shillings still work as money</a>. They do not have a special legal status anymore, they just used to have one in the past (that is how they obtained their initial value). So they used to be fiat money, but they evolved into something which a strict Misesian can't classify (quasi-commodity money, as Selgin suggests). The old Somali Shillings have been counterfeited so much that their production price is close to their market value. During the inflation the supply was elastic but now that the market price has dropped it's not elastic anymore. We see on this example that the removal of the legal status causes them to eventually gain features similar to the "real" commodity money. Another example of insufficient classification system are various <a href="http://en.wikipedia.org/wiki/Complementary_currency">complementary currencies</a>, <a href="http://en.wikipedia.org/wiki/Mutual_credit">mutual credit</a>, <a href="http://en.wikipedia.org/wiki/LETS">LETS</a>, or privately issued scrip like <a href="http://en.wikipedia.org/wiki/Ithaca_Hours">Ithaca Hours</a> or <a href="http://en.wikipedia.org/wiki/BerkShares">BerkShares</a>. Now, these are technically not money yet, merely media of exchange (same situation as Bitcoin), but if they ever developed into money, the question of classification would arise (I use a bit more relaxed definition than Mises, so to me, they would then count as money substitutes).<br />
<br />
I think that rather than insisting on a particular umbrella classification system, the classification should be done from the perspective which is most relevant for a particular context. In most economic debates, I tend to agree with Schlichter and Selgin that the elasticity of supply is the most relevant criterion. But I presented several other options too, they might be more suitable for different situations.<br />
<h3>
The future of Bitcoin</h3>
<div>
The question of classification of Bitcoin might be a bit boring. The question of the future of Bitcoin is probably much more interesting.</div>
<div>
<br /></div>
<div>
Patrik makes two separate arguments. The first one is that the latest price developments of Bitcoin are a bubble. I have absolutely no problem with this argument. I've been hesitant to make predictions about price myself, I don't think that that fits into the economic category. He could very well be right in this point. This is what I wrote on March 5th, around the same time that Patrik wrote his article:</div>
<blockquote class="tr_bq">
BTW I would be caution of not calling the increased price a bubble. The relevant factor for monetisation is liquidity and I haven't seen an improvement of liquidity (measured as bid/ask elasticity of Mt. Gox as laid out in my thesis), however I didn't analyse data after beginning of January (I don't have the full data set yet), so I am not making a final statement.</blockquote>
This post is not publicly available but I'm sure people who have access to it can confirm that I'm not making this up.<br />
<br />
However, Patrik makes a second argument too. He claims that this is relevant for the future of Bitcoin. And here is where we disagree. In the previous article, I argued that due to the network effect, I expect a small number of dominant cryptocurrencies to emerge, even if their relative market share and composition changes. Patrik however seems to have a more fundamental argument, in that the market shares will change quickly and unpredictably. This I also do not hold realistic, and will attempt to address it in this section.<br />
<br />
This section will be a bit more loose than normally. I'm not going to make a "hard" argument, merely point out to factors Patrik missed and that might be relevant. First I will formulate a "rule of thumb" for how I think the network effect behaves under competition, and then I'll explain it on the examples presented by Patrik, and some of my own.<br />
<br />
<ol>
<li>If a protocol is technologically better suited to fulfill the requirements of the users, it will take the leading role</li>
<li>Friction could prevent a change in the market share if the advantage is not sufficient</li>
<li>If protocols are technologically too similar to provide advantages vis-a-vis each other, a lagging one won't overtake the leading one (path dependence)</li>
<li>State interference can count as technological advantage</li>
<li>Multihoming (using of more than one standard simultaneously) is only possible to a certain extent, and can't affect the fundamental issues long term</li>
</ol>
The example Patrik uses are P2P protocols. Let's take a look at the history of the leaders (I'm approximating):<br />
<ol>
<li>1999-2001: Napster. First mover advantage.</li>
<li>2001-2004: Kazzaa (FastTrack protocol). Won over Napster because Napster shut down.</li>
<li>2004-2007: eDonkey. I think it won because it was less centralised and Kazzaa was hostile against third party clients.</li>
<li>2007+ BitTorrent. I think it won because it is less centralised, and open source. BitTorrent is the only one that actually gained wider industry acceptance (e.g. Blizzard downloader uses it).</li>
</ol>
<div>
There is nothing unusual here. All this is perfectly reasonable in hindsight. Purists might argue that Napster shut down because it lost a trial and that's not an endogenous failure, but clearly if a leader wants to keep its leading position, it needs to be able to resists the law, i.e. the resistance, or lack of it, is an endogenous property. We can also note that the newer leaders were increasingly less centralised and more resistant to legal action: while Napster was shut down with a single lawsuit, BitTorrent has several unrelated trackers, and also DHT, so a shutdown of one company has little effect on all users.</div>
<div>
<br /></div>
<div>
Furthermore, as the old leaders do not provide an technological advantage against Bittorrent, they are unlikely to take leading position again. What would take a leading position is something with a significant technological advantage over BitTorrent. At the moment there is no visible challenger. We could say that the technology matured.</div>
<div>
<br /></div>
<div>
Let's take at other examples. Some of the reasons below are subjective, if you think you have a better explanation, I can adapt it.</div>
<div>
<br /></div>
<div>
Browsers. Internet Explorer was the market leader. Then <a href="http://www.quora.com/Internet-Explorer/How-did-IE-get-to-be-so-bad-relative-to-Chrome-Safari-Firefox">Microsoft stopped spending development resources on it</a> because they didn't appreciate upcoming technological challenges. Eventually, Chrome took the lead, and I think it's because it's technologically superiour.</div>
<div>
<br /></div>
<div>
The internet took over IPX, NetBeui and other stuff because it's technologically superiour. There is no visible challenger at the moment (at best, IPv6 is a challenger to IPv4). VHS took over Betamax becuase it provided longer recording time.</div>
<div>
<br /></div>
<div>
Then we have examples of standards that are too similar. The metric system versus the imperial system only switch due to state interference. BluRay was too similar to HD-DVD and they also had similar market shares, but BluRay eventually got a majority of industry support and HD-DVD discontinued.</div>
<div>
<br /></div>
<div>
Now, how do we apply that to Bitcoin? The various altchains are, in my opinion, too similar to Bitcoin. None of them provides a meaningful technological superiourity. Therefore, I expect Bitcoin to remain the leader. If something challenges Bitcoin, it would be something with meaningful technological superiourity. Furthermore, the relevant factor that approximates "market share" isn't really the market capitalisation. Rather, it's liquidity. Even if one of the cryptocurrencies bubbles up and overtakes, unit per unit, the price of Bitcoin, it still won't overtake Bitcoin unless it also overtakes its liquidity. And that takes much longer to build up than just one bubble.</div>
<div>
<br /></div>
<div>
Furthermore, while people might multihome different cryptocurrencies (i.e. to use them in parallel, the costs are relatively low, so it's not a big problem), in the end they still use one standard for economic calculation. Nowadays this is typically their national fiat money. Even if then every cryptocurrency user would multihome, as their industry sector moves from fiat to cryptocurrency, they would choose one of them to do economic calculation, and then there would be a convergence on this level, and this would play out as the network effect. Rothbard makes the converse argument than me, in <a href="http://mises.org/rothbard/genuine.asp">The Case for a Genuine Gold Dollar</a>. He argues that merely because competition in media of exchange is allowed (as per <a href="http://mises.org/books/denationalisation.pdf">Hayek</a>), that does not mean that people would switch their unit of account (and without it the network effect can't kick in). That's essentially the point (3) from above. He however misses the possibility of capturing market share through technological improvement (Hayek missed it too, so I'm not really blaming Rothbard). He implies that the Hayekian private media of exchange would have the same transaction costs as coins or money substitutes that people use otherwise.</div>
<h3>
Summary</h3>
<div>
The classification of Bitcoin is problematic, but it's not an unsolvable problem. Bitcoin is not the only thing that challenges the Misesian definitions though. I recommend analysing economic fundamentals and context.</div>
<div>
<br /></div>
<div>
Competition under the network effect does not behave erratically, even if the people involved might. While switches in the leading position can occur, they are, within reasonable limits, predictable. More precisely, we can reasonably predict what won't happen. Altchains are unlikely to displace Bitcoin, due to path dependence.</div>
<div>
<br /></div>
<div>
I'm too lazy to check the whole post thoroughly, if you find any errors please let me know and I'll fix them.</div>
<br />
<ul>
</ul>
Peter Šurdahttp://www.blogger.com/profile/17346161576941109337noreply@blogger.com20