bitcoin intrinsic value and mises regression theorem

[dragonfish]

youtube.com/watch?v=HSpBfXCu024

wanted to talk about 'bitcoin' part of this big video.

 

I think Stef is mixing categories in his arguments for bitcoin's intrinsic value.

The categories being: commodity and currency.

Commodity: something we can consume directly or indirectly or enough people want to pay for it

Currency : A thing that can be used as medium of exchange.

 

Mises Regression theorem as I understand says before a 'thing' becomes 'currency' it must be a 'commodity'.

 

Eg: Gold, Cow, Goats, cigarets... any of these things can act as 'currency' as they are a commodity first.

The currency status comes only after someone respects it as a commodity, this keeps the value of currency

from becoming zero.

 

The caller rightly said, bitcoin can't be used as a commodity (i.e you can't consume it).

but bitcoin is used as exchange medium i.e currency

 

On Stefan's side, he explained how bitcoin can be an awesome low overhead currency...

but wait...before currency it *must* be a commodity. Stefan explained how blockchain can

provide wonderful services (such as time stamping and novel contract managements).

 

But the catch is, to treat a service as commodity someone must be willing to pay for it.

I think these time stamping and other services all can be implemented for free in p2p opensource setup.

 

 

I agree with most of Stefs argument about bitcoin how it can be an excellent medium of exchange.

But... am not sure how a bitcoin ever be a commodity first!

I am surprised Stefan never said anything about "Mises Regression Theorem" in his bitcoin podcasts.

 

 

any thoughts?

[ribuck]

The Regression Theorem shows how a commodity can become a currency, but it doesn't include any proof that it's impossible for a currency to arise in another way.

 

Buying and selling pizzas and alpaca socks seems like a good way for new instrument to become a currency. It certainly worked for Bitcoin.

 

Anyway, Bitcoin started as a commodity whose intrinsic value was as a "collectible", i.e. as a shiny new bunch of bits valued by geeks due to its incredible coolness as a potential free currency.

[st434u]

Hey dragonfish. I missed this when you posted it. I'm the one who called in that show about bitcoins.

 

I'm not sure why Stef didn't mention Mises' regression theorem, but this theorem is quite complex to understand, even if you think you get it, I think often you don't. I prefer Rothbard's explanation because it's simpler. And even to that of Rothbard, I prefer my own explanation, because I think my understanding of austrian monetary theory is slightly different (and in some ways slightly more advanced). This is why I didn't use the term "commodity" at all, even though you are quite right in that Mises (and Rothbard, too, btw) said that a money can *only* arise if it has first been a commodity.

 

In the show I tried to mention some ideas that I had at the time about how services could be used to provide intrinsic value to cryptocurrencies , but there was no opportunity for that. In either case, since then I have come to the realization that services probably can't be used as a form of money because you can't store them. The idea was that the processing power and/or internet bandwidth necessary to run the cryptocurrency transfer service could also be used to provide services which the coins are redeemable in (and I had some ideas about particular services that could be provided with these mining resources).

 

While this would be a lot better than bitcoin (where these resources are wasted and there is no redeemability at all), the problem remains that this system wouldn't allow for fluctuations in the supply of and demand for this service, whatever the service may be. If at one point there is a lot of production of the service, the only way to increase demand is for the price of the coin (and therefore, the service) to go down. If the demand for the service goes up, so will the price of the coins, and that will bring forth more production which will again drive down prices. So far so good. But the problem becomes that with money, you need the ability to store value. While it's true that the service could be just as valuable in the future, you can't actually "store" value in a digital coin in this way. Because whatever services are produced right now, must be consumed right now, in this very moment. So what you need is not only for the service in question to be wanted by others in the future, but also to continually be produced in the future, at a similar rate (always higher to that of the consumption demand, i.e. the redemption). If too many people want to redeem too many coins at the same time, the service collapses. An increase in price can alter consumers into redeeming less coins, and producers into producing more of the service, but this adjustment takes some time. It isn't instantaneous. This would create wild fluctuations in the value of the coins, regardless of speculation (which is what drives bitcoins' fluctuations) and it would mean that the service could not be reliable. Sometimes it'd work fine, sometimes (during times of high demand), it wouldn't.

 

Maybe I'm wrong about this though, I don't know. I haven't had enough time to process it, this realization only came to me about two weeks ago, while discussing the issue with a couple of friends. Until then I was a supporter of the idea of service-backed cryptocurrencies, even though I saw lots of difficulties with implementation and had never been able to come up with a plan that would work on my own; only ideas that needed more work.

 

I have to run right now, but I will have more to say on this topic tomorrow, and I'll also respond to your post, ribuck.

[st434u]

The Regression Theorem shows how a commodity can become a currency, but it doesn't include any proof that it's impossible for a currency to arise in another way.

No, The Regression Theorem shows how only something that had non-monetary value can become a money. 

Buying and selling pizzas and alpaca socks seems like a good way for new instrument to become a currency. It certainly worked for Bitcoin.

But this is a circular argument. You can only buy and sell things with BTC if it first has value. It doesn't answer the fundamental question of why they have value in the first place. Saying "it has value because you can exchange it for other things of value" is circular. It's like saying "pizzas have value because people pay for pizzas". Yes, of course, but why do they pay for pizzas? Because they derive value from eating the pizzas, or because they sell them to customers who do. Why would someone pay for a Bitcoin in the first place? Because they think it will go up. 

Anyway, Bitcoin started as a commodity whose intrinsic value was as a "collectible", i.e. as a shiny new bunch of bits valued by geeks due to its incredible coolness as a potential free currency.

I really don't think that's the case. Bitcoins are fundamentally nothing but numbers on a computer screen. You can't even play a game with them, the way you can with World of Warcraft Gold Coins or Second Life's Linden Dollars.And even if this was how they first became of value, it's no longer of any substance. How much are these collectors willing to pay to collect bitcoins, if you combine all the collectors in the world? I hardly doubt that would justify a price of even one penny per BTC.

[ribuck]

... even if this was how they first became of value, it's no longer of any substance.

 

Exactly! The Regression theorem says that money has value today because it had value yesterday. And so on, back into time.

 

At some point, if you go back far enough, there must have been some external reason why money was perceived to have value. But there's no need for that original external reason to continue to be of any substance.

[Josh F]

Bitcoins already disproved this, since it is being used as money.  Other types of money have disproved this as well, including modern fiat, tally sticks, and more.  If a theory is invalidated by evidence, it was not correct. 

[dragonfish]

Bitcoins already disproved this, since it is being used as money. Other types of money have disproved this as well, including modern fiat, tally sticks, and more. If a theory is invalidated by evidence, it was not correct.

When ever people say 'bitcoins proved this or that' they actual mean 'people started believing in this or that'.People can believe or convince themselves to any kind of crap but as the saying goes, "reality sets in and pops all stupid fantasies, sooner or later". I can get bunch of my friends to do any kind of retarded activities defying basic economic sense, but can we generalize that as 'sustainable socio economic reality'?We are talking about people interaction with volition, not mere billiard balls, if one billiard ball disproves a physics law, the law is gone, we can't say the same thing in social interactions. People should ask, "Whats the social & mathematical reality here, why reality should or shouldn't pop the bubble sooner or later? Can the math support social hysteria?" instead seeing events from the mindset of physics lab.

[st434u]

 

But there's no need for that original external reason to continue to be of any substance.

 

No, this is where a lot of people get the Regression Theorem wrong. If that original reason is no longer present, then sooner or later people will realize that what they're using as money is not a good store of value, and will begin getting rid of it at a faster pace, which is a reduction in the monetary demand (also expressed as an increase in money velocity), and the value of the money drops, which feeds back into the mentality that the money is not a good store of value (which it isn't), the demand for it goes down again, which drives the value even lower, and so on and so forth until there is no value left. Or until the value is so low that a demand arises again for the original purpose (in this case, this supposed demand to collect them, which I don't really think is real, but I grant it that there is a possibility that it could have existed at one point)

 

Another way to express this is that money enters the market through production (in the case of gold, mining), and it exits the market when it is demanded by individuals who will consume it, or use it in the production of other consumer items [in the case of gold, the exits would be the demand coming from all the non-monetary uses of gold (it's not necessary that the money is destroyed when it exits the market, only that it is demanded largely because of a non-monetary value which it provides.)]. A sound money is used as a medium of exchange only in the middle of a chain of exchanges which flow from the production, to the consumption. Because a good money is also durable, it can be stored, so that it can be consumed at a much later point in the future. While it is stored, it can be used for monetary purposes, serving to settle transactions as well as being used to accumulate savings and make loans. This is what is meant by austrians when we say that a sound money needs to be a good store of value.

 

If at any point the money finds no exit, then there is a perfectly reasonable expectation that the value will drop until it reaches the point at which it will find an exit. If no value would be low enough for an exit to emerge in the market, then the reasonable expectation is that all the value will disappear. If there is no consumption demand (and especially if there can never be any in the future), then the chain of exchanges no longer flows from production to consumption, it simply goes around in circles until, a few people at a time, everybody eventually realizes that all the value left is empty speculation, because it will never be realized.

 

Bitcoins are very durable, so they can be stored, but they're not a good store of value because, since they will never be demanded for consumption or production purposes, you can't store them in order for that consumption/production value (also called intrinsic value) to be realized in the future. It will never be realized, because it was never there in the first place. The only reason why Bitcoins have value is because of empty speculation. They have value right now, but there is no guarantee that they will have any in the future. There's not even a reasonable expectation they will have value in the future. In fact, the reasonable expectation is that at some point in the not too distant future, they will be worthless.

 

This realization has implications that people in FDR should be very concerned with. Not only will a lot of good people lose a lot of wealth when this happens, but most libertarians (especially of the anarcho-capitalist brand) will lose a lot of credibility in the eyes of the public when Bitcoins go bust. In particular, Stef has been one of the most ardent proponents of BTC. It really worries me to think of what will happen to the world of economic and political ideas when Bitcoins die.

[dragonfish]

> " It really worries me to think of what will happen to the world of economic and political ideas when Bitcoins die."

 

Even if bitcoin dies as a currency am sure its here to stay in different forms with profound implications.

Here are such ideas

* Smart Contracts without 3rd party

* Using block chain as some sort of public asset register enabling asset trading in brand new ways...

...

and lot more!

[ribuck]

st434u, history disagrees with you. Whenever something has been used as money, it has traded at more than its "intrinsic" value. Conch shells have little intrinsic value, Yap Stone Money has little intrinsic value. And the US dollar is of course the ultimate example.

 

The reason its called a "regression" theorem is because the monetary value can be traced (regressed) back to some original intrinsic value. Where in von Mises' work does it say anything about the monetary value being forever tied to the original intrinsic value?

 

This is not to say that Bitcoins will have monetary value forever. Forms of money come and go according to their utility, and when they fall out of usefulness their price returns to their intrinsic value.

 

When we use money, we prefer money which is maximally useful and which has minimum risk of losing its monetary value. For certain uses (such as low-cost international remittances), Bitcoin is extremely useful. For a long-term store of value its not so clear, but Bitcoin at least has the advantages that it can't be counterfeited and that its supply is limited and predictable. It has disadvantages too: it's hard to secure a stash of Bitcoins, there is a lot of friction imposed on Bitcoin-to-fiat exchange, and there are few places where you can spend Bitcoins (although that's rapidly changing).

[st434u]

st434u, history disagrees with you. Whenever something has been used as money, it has traded at more than its "intrinsic" value. Conch shells have little intrinsic value, Yap Stone Money has little intrinsic value. And the US dollar is of course the ultimate example.

No. Conch Shells were (and still are) used as ornaments. When they were used as money, there were still people using them as ornaments. Saying something trades "for more than it's intrinsic value" when at the same time many people are paying the going rate in order to consume the item is a wrong statement. It's like people who say that "gold is valued at more than it's intrinsic value". No. Many people still pay the average market price of gold in order to consume it. This means that at the going average market price, there is still significant consumption demand.

US Dollars are a special example because they were redeemable in gold up until 1971, and since then they have lost over 97% of their value. The main reason they are still valuable is because everybody in the US is forced to use them, and many people around the world are also forced to use it to settle international trade. Furthermore, many governments around the world tax their citizens in order to buy US Dollars, thus propping up it's value. Other fiat currencies are under a similar predicament, except it's usually only people inside the individual country or union (such as the EU) who are forced to use them.

 

Where in von Mises' work does it say anything about the monetary value being forever tied to the original intrinsic value?

Like I said, it's complex and many people misunderstand. I'll try and get you a quote later. 

This is not to say that Bitcoins will have monetary value forever. Forms of money come and go according to their utility, and when they fall out of usefulness their price returns to their intrinsic value.

But you do realize that once BTC holders at large realize this, it becomes a race to the bottom? It's about who can get rid of theirs before everyone else wises up; and who gets stuck holding the bag.

[Josh F]

When ever people say 'bitcoins proved this or that' they actual mean 'people started believing in this or that'.People can believe or convince themselves to any kind of crap but as the saying goes, "reality sets in and pops all stupid fantasies, sooner or later". I can get bunch of my friends to do any kind of retarded activities defying basic economic sense, but can we generalize that as 'sustainable socio economic reality'?We are talking about people interaction with volition, not mere billiard balls, if one billiard ball disproves a physics law, the law is gone, we can't say the same thing in social interactions. People should ask, "Whats the social & mathematical reality here, why reality should or shouldn't pop the bubble sooner or later? Can the math support social hysteria?" instead seeing events from the mindset of physics lab.

 

You're making a distinction that isn't valuable.  Currency is always based on people's belief in it as a viable technology, all free markets are based on people's demand.  People not only want bitcoin, but have already used it as a currency.  Saying it isn't a currency is ignoring reality. 

 

Now, is it in a bubble?  That is an unproven assertions.  Is it going to pop or grow?  Is it going to change the world?  I don't know.  But we do KNOW that it is being used as a currency.  Right?  Saying it isn't a currency requires a special set of ideological blinders.

The most important topic here, is what is the motivation behind some of the people in this community to discredit bitcoin?  Why is showing people that it is a bad idea so important to you?  Why waste your breath on VOLUNTARY ACTIONS by human beings.  This is simply NOT libertarian ethics, but defending the status quo, and attacking one of the most promising movements to fundamentally change the world's economy. 

 

There is only so many times someone can categorically ignore everyone's arguments, repeating "its just hard to explain" as a defensible excuse, before we all realize they're just being jealous haters. 

[ribuck]

But you do realize that once BTC holders at large realize this, it becomes a race to the bottom? It's about who can get rid of theirs before everyone else wises up; and who gets stuck holding the bag.

 

Whenever the value of any form of money has plummeted, it has invariably been because of monetary inflation, which cannot happen with Bitcoin. The worst-case scenario would be that Bitcoin loses its utility for some purposes while retaining it for others, which would cause a slide in value but not a race to zero.

 

Anyway, for the foreseeable future it's a race to the top, so it makes sense to embrace Bitcoin for as long as it's the most sound monetary instrument that's available to us.

 

 

US Dollars are a special example because they were redeemable in gold up until 1971, and since then they have lost over 97% of their value. The main reason they are still valuable is because everybody in the US is forced to use them, and many people around the world are also forced to use it to settle international trade. Furthermore, many governments around the world tax their citizens in order to buy US Dollars, thus propping up it's value. Other fiat currencies are under a similar predicament, except it's usually only people inside the individual country or union (such as the EU) who are forced to use them.

 

You understand that this "special example" is unsustainable, right?

[st434u]

The most important topic here, is what is the motivation behind some of the people in this community to discredit bitcoin?  Why is showing people that it is a bad idea so important to you?  Why waste your breath on VOLUNTARY ACTIONS by human beings.  This is simply NOT libertarian ethics, but defending the status quo, and attacking one of the most promising movements to fundamentally change the world's economy.  There is only so many times someone can categorically ignore everyone's arguments, repeating "its just hard to explain" as a defensible excuse, before we all realize they're just being jealous haters.

If you're referring to me, I already explained in this thread and elsewhere, the reasons why I have these pressing concerns and why I feel it's very important to share them with others in this community.In any case, I can't believe you're honestly accusing someone of defending the Status quo and attacking freedom by using Mises's theories.Regarding your comment about the voluntary nature of BTC: just because something is voluntary doesn't mean it's good. People engage in all sorts of things voluntarily that can be detrimental for them. Voluntarily chosen abusive relationships, pyramid schemes, BDSM, prostitution, self-cutting and mutilation, etc. In most of these cases, however, the people who engage in these acts are not trying to convince everybody else to also join in and participate and telling them that it's the best thing since sliced bread. And more importantly, the participation and support for these things is not tied to a community which I hold dear and fundamental to the future of civilization. So for me, talking about BTC, especially with other libertarians/anarcho-capitalists/voluntaryists is more important than all these other things I mentioned. And it is particularly important in FDR because FDR is the only large community of this type that I'm aware of, that also addresses psychology and parenting, which are essential; and it has generally very good views on these matters.And if you were talking about me in that last sentence I quoted, why would you say that I'm ignoring everyone's arguments, while I'm actually addressing every one and have always done this in the discussions you've seen me participate in about this topic?  

Whenever the value of any form of money has plummeted, it has invariably been because of monetary inflation, which cannot happen with Bitcoin.

No. Massive monetary inflation usually goes hand-in-hand with using a form of money which has no intrinsic value, because it's the sole purpose to force people to use this as a money. And it does accelerate the process. But ultimately it doesn't matter because once the money collapses, it doesn't matter how many zeros it has written on it, it will still be worthless.

 

This is a fundamental misunderstanding of austrian monetary theory that many people have.

 

Even if the US Dollar money supply stays frozen for several generations, it will still become worthless eventually. Of course, if the money supply increases at an accelerating rate as it has been doing, it will become worthless much sooner than if the supply staid frozen. 

Anyway, for the foreseeable future it's a race to the top, so it makes sense to embrace Bitcoin for as long as it's the most sound monetary instrument that's available to us.

How do you make this determination? If everybody realized that in the long term it will be worth nothing, then why wouldn't that affect the current value in the same way that the futures market affects the spot price for a commodity or a stock?  

You understand that this "special example" is unsustainable, right?

I'm not sure what you mean. Of course I'm not supporting US dollars or saying that they are a sound form of money.

[dragonfish]

@Josh F

am not bitcoin hater. I just can't comprehend bitcoin as currency thing, starting with premises I hold in my head (i.e Mises Regression Theorem). I admit am not economics pro, but wanted to make baby steps in right direction applying the principles of critical thinking.

I am 100% sure bitcoin is going to change the world for good in profound ways, so am not discrediting bitcoin either. Clearly I can see these implications because bitcoin has achieved something which was thought as impossible in history: i.e decentralized contract management without third party. Think what it means to have an autonomous agent to trade values in a market which can be programmed with triggers! Think what if a bitcoin represent 100 stocks of a company...I think colored coins are going in this direction... so its all pure awesomeness waiting to happen! well, some of those miracles have already been blooming eg: decentralized DNS system, escrow transactions, smart properties...etc. etc.

[Josh F]

If you're referring to me, I already explained in this thread and elsewhere, the reasons why I have these pressing concerns and why I feel it's very important to share them with others in this community.In any case, I can't believe you're honestly accusing someone of defending the Status quo and attacking freedom by using Mises's theories.Regarding your comment about the voluntary nature of BTC: just because something is voluntary doesn't mean it's good. People engage in all sorts of things voluntarily that can be detrimental for them. Voluntarily chosen abusive relationships, pyramid schemes, BDSM, prostitution, self-cutting and mutilation, etc. In most of these cases, however, the people who engage in these acts are not trying to convince everybody else to also join in and participate and telling them that it's the best thing since sliced bread. And more importantly, the participation and support for these things is not tied to a community which I hold dear and fundamental to the future of civilization. So for me, talking about BTC, especially with other libertarians/anarcho-capitalists/voluntaryists is more important than all these other things I mentioned. And it is particularly important in FDR because FDR is the only large community of this type that I'm aware of, that also addresses psychology and parenting, which are essential; and it has generally very good views on these matters.And if you were talking about me in that last sentence I quoted, why would you say that I'm ignoring everyone's arguments, while I'm actually addressing every one and have always done this in the discussions you've seen me participate in about this topic

 

This is about ethics now, which is cool, it is a better topic.

 

If the argument is that bitcoin is harmful then I would like to understand more about that position.

 

If the argument is that bitcoin is just not a wise investment, I kindly need to point out that the free market is based on voluntary purchases. 

 

When I think of the most philosophically consistent application of that principle to money, I think we might both agree, that the absolute best thing is a free market of currencies.  A market in which anyone is free to try any old thing without restriction, including gold and silver, and even Disney dollars if they want. 

 

Now, for this reason I support ideas like eGold and frankly any other currency.  However, the United States government and I apparently do not agree on this topic.  And as such they have repeatedly crushed these otherwise likely vibrant and brilliant currencies.  They crushed them because those currencies were backed by tangible assets (Gold mostly). 

 

In our current market, we do not have the luxury of being able to trade currency with "intrinsic value."

 

What then must we do, beat our heads against walls?  Cut open our wrists?  Storm the Bastille? 

 

Or can we create something that is, at best, an improvement upon our own systems?  Can we sneak past the guards?  Can we unmask Oz?  Can we find value in something which makes us more free? 

[aeonicentity]

Mieses wasn't always right about everything.

 

More importantly, There are actually really good reasons why not to use comodities as currency.

 

1) Commodity currencies can be devalued by supply, or inflated by demand.

 

This has been a serious problem with all commodity based currencies, including gold. If the gold supply increases dramatically, the value of gold drops dramatically as well.

 

2) Commodity currencies can be consumed rather than exchanged.

 

If there is an option to consume a currency, the currency can be destroyed, which can really screw up the money supply. The one thing that can be said about the US dollar, is that you can't eat the things.

 

3) Commodity currencies all inherently have a restriction on fluidity.

 

This is because not all commodities have the same value at the same time to the same people. While this is true of all currencies, non-commodity currencies don't have it to the same degree. Commodities are NOT ideal exchange mediums, since they physically have to be present in one place or another to be redeemed for that commodity. For example, in a true Gold economy, a dollar would represent x oz of gold, and in order to exchange it someone else must physically posess that commodity.

 

This is one reason why perishable currencies are so bad: Cows, plants, and food all loose value with distance, which makes them terribly unfluid. Gold doesn't loose value with distance, however, transporting it is risky, slow, and expensive, which makes gold a poor currency for an age when money might travel from the US, to Belgium, to Moscow, and then to China all in the same day, for the same deal. This is one reason why we have transitioned away from gold as a standard in the face of increasing global capitalism.

 

My concluding thought is this: I know we all like the stability that gold provided in the past, but past performance is not a guarantee of future results, and it is entirely possible that we will find ourselves worse off in the future because we decided to retain an outmoded and poorly suited currency to the age in which we live. While it is tempting to reach back into the past to find something that worked then it is not always a good idea. I advocate traditionalism as a general rule, but in this case there is good reason find alternatives to gold, and think outside the box on what we need in a currency in the next century.

[dragonfish]

Mieses wasn't always right about everything....1) Commodity currencies can be devalued by supply, or inflated by demand.2) Commodity currencies can be consumed rather than exchanged.3) Commodity currencies all inherently have a restriction on fluidity....

Richard Nixon... will be smiling from his grave I guess... "Another dude, thinking just like me!"

[Wesley]

Richard Nixon... will be smiling from his grave I guess... "Another dude, thinking just like me!"

I would just like to point out that this isn't an argument. I'm not saying I disagree, just that I would prefer you to point out where he was wrong in his thinking or argument rather than saying "That's like Nixon!" in the hope that it makes him uncomfortable enough to change his mind.

 

______________________________________

 

I think the reason why commodity monies were talked about in the past is because they were ones that emerged out of the market as opposed to ones decreed by fiat. The point, I feel, is to differentiate money chosen by the market and money chosen by the state. They had not developed the moral arguments, so they went with the intrinsic value argument as a way to determine that money had come out of the market and was actually valued by the people as money.

 

Bitcoin, even if you disagree with it, is fairly revolutionary and took several concepts that were rather cutting-edge to create a trustless, digitally scarce good that could not be imagined by people 10 years ago, let alone 50 or whenever Mises wrote his things.

 

I think that it is very likely that a small update would be in order in a few years, depending on whether or not the bitcoin experiment is successful as it has now become possible to create a scarce, market money, not based on a commodity. It easily could change how we view things.

 

I have bet on bitcoin as I have done the research and invested some of my money and time. However, we should be empirical about this.

 

How long would cryptocurrencies need to be successful in order to work? What adoption rate would there need to be? etc, etc

 

If we can look back at some point and have objective standards by which we can evaluate the experiment and by which we can decide if the theory needs to be refined or not, then I would be perfectly happy.

 

Obviously, there may need to be negotiation on those standards, but I float the idea. What would cryptocurrencies have to do to change your mind?

[aeonicentity]

Richard Nixon... will be smiling from his grave I guess... "Another dude, thinking just like me!"

I didn't say Nixon was right in floating the dollar, but I am saying that the gold standard (or any other commodity based currency) MAY NOT BE the best idea moving forward, for all of the reasons I stated.

[dragonfish]

@Wesley, @aeonicentity

 

> "I would just like to point out that this isn't an argument..."

sorry, if I had sounded sarcastic!

>> 1) Commodity currencies can be devalued by supply, or inflated by demand.

okay so what? All values in a market fluctuate and seek equilibrium, this is a good thing! If there is a golden asteroid shower tomorrow filling earth with gold stones, price of gold will collapse to its supply and another metal say silver may take the lead... Technically no value has been destroyed or stolen except new equilibrium of values has been calibrated with respect to gold supply. This is precisely because gold is a commodity. With bitcoins we have fixed coins but how does bitcoin withstand million different alt coin clones, leeching its value? Here supply seems to be infinite , which is worse than gold asteroid shower!

>> 2) Commodity currencies can be consumed rather than exchanged.

excess productivity (atleast in one area) is what allowing the growth of trade. If someone can't produce/specialize atleast one item in excess of his consumption, we can start to worry on this point, so lets move on to next point.

>> 3) Commodity currencies all inherently have a restriction on fluidity.

I agree on this point.

 

> "What would cryptocurrencies have to do to change your mind?"

 

Lets talk about "the race to bottom". Assume there is panic sell or simply bitcoin went out of fashion someday, what will prevent the value of bitcoin from reaching zero dollars. When "the race to bottom" begins do we have an alternate reason, which make economic (and game theory) sense and halt this down move? The race to bottom can be abrupt or slowly bitcoin losing its steam... doesn't matter. This is my falsification test for Bitcoin.

[Wesley]

> "What would cryptocurrencies have to do to change your mind?"Lets talk about "the race to bottom". Assume there is panic sell or simply bitcoin went out of fashion someday, what will prevent the value of bitcoin from reaching zero dollars. When "the race to bottom" begins do we have an alternate reason, which make economic (and game theory) sense and halt this down move? The race to bottom can be abrupt or slowly bitcoin losing its steam... doesn't matter. This is my falsification test for Bitcoin.

So do the several times where the bitcoin price has crashed and then recovered higher than it was before not cover this? Maybe I am confused about what test you are proposing.

[dragonfish]

So do the several times where the bitcoin price has crashed and then recovered higher than it was before not cover this? Maybe I am confused about what test you are proposing.

Sure, crashes and recoveries have been happening in bitcoin price chart. All recoveries could be easily explained away as speculative bubble. New speculators are jumping in as the bitcoin news is catching up, google search frequency chart for keyword 'bitcon' clearly reflects the bubbles and crashes in bitcoin chart! When no more new speculators are jumping in, old speculators *must* bail out... I think that's when a big down movement *may* happen... When the supply of speculators and their interests fade, do we have any other better reason that can avoid down move i.e provide resistance level in price chart? In case of commodities, price of one commodity is correlated with others, so the resistance price level is always there, can we say the same thing to bitcoin?

[Wesley]

You are digressing from my question. What would cryptocurrencies have to accomplish in order for you to say that they work or that the theory should be reformed?

 

I would like a test or an achievement. You are saying a lot of words and I do not understand what the test is in there.

[dragonfish]

You are digressing from my question. What would cryptocurrencies have to accomplish in order for you to say that they work or that the theory should be reformed?I would like a test or an achievement. You are saying a lot of words and I do not understand what the test is in there.

Okay, I will try to propose a concrete test:In any big country with decent GDP. 1. When 80% people are ready to accept their salaries fully in bitcoin. 2. When 80% of all shops accept bitcoin.and the setup is stable atleast for 5-10 years.

[Wesley]

Okay, I will try to propose a concrete test:1. When 80% people are ready to fully accept their salaries in bitcoin.2. When 80% all shops accept bitcoin.and the setup is stable atleast for 5-10 years.

Ok, this is much better. What do you mean the setup is stable? Also, we can just say at least 5 years instead of 5-10 for obscurity.

 

Also, I would replace bitcoin with cryptocurrency.

 

Also, in what country or region? I think even including gold and silver, never has 80% of the world's population accepted the same currency. So if that was the standard then it would be much higher than anything before it.

[dragonfish]

Ok, this is much better. What do you mean the setup is stable? Also, we can just say at least 5 years instead of 5-10 for obscurity.Also, I would replace bitcoin with cryptocurrency.Also, in what country or region? I think even including gold and silver, never has 80% of the world's population accepted the same currency. So if that was the standard then it would be much higher than anything before it.

In any of the top 10 GDP countries:(from wikipedia)1 United States 2 China 3 Japan 4 Germany 5 France 6 United Kingdom 7 Brazil 8 Russia 9 Italy 10 India --------80% full salary in crypto currency with 80% shop acceptance for 5 years.

[Josh F]

I don't understand why there should be a test based on your personal comfort.  Entrepreneurship is risk.  You don't have to be into entrepreneurship.  As someone who believes in market solutions to complex social problems, bitcoin sure takes the cake as something perhaps even bigger than the internet itself.  Soothsaying is just so boring and irrelevant and irrational.

[James Dean]

Regarding your comment about the voluntary nature of BTC: just because something is voluntary doesn't mean it's good. People engage in all sorts of things voluntarily that can be detrimental for them. Voluntarily chosen abusive relationships, pyramid schemes, BDSM, prostitution, self-cutting and mutilation, etc. In most of these cases, however, the people who engage in these acts are not trying to convince everybody else to also join in and participate and telling them that it's the best thing since sliced bread. And more importantly, the participation and support for these things is not tied to a community which I hold dear and fundamental to the future of civilization. So for me, talking about BTC, especially with other libertarians/anarcho-capitalists/voluntaryists is more important than all these other things I mentioned. And it is particularly important in FDR because FDR is the only large community of this type that I'm aware of, that also addresses psychology and parenting, which are essential; and it has generally very good views on these matters.

 

Even if BTC lost all it's value, how does that spell the end for FDR? 

[st434u]

Even if BTC lost all it's value, how does that spell the end for FDR? 

 

I didn't say that. I said it would hurt FDR's members and the credibility of the site.

[NumberSix]

There is no such thing as intrinsic value; value is a subjective concept and only exits in your mind.  I think a better term would be utility.  With gold jewelry, it is not only pretty, it has also become a way to show off your wealth (a very tacky way). One reason I bought Bitcoin is as a speculative investment.  A more import reason, for me, is I am scared that the dollar will crash, and my savings will be wiped out.  A problem with gold is I don't think I would be let through a national border carrying a large amount of gold.

 

The fact a country uses a currency does not prove anything; all countries use fiat and I think we all agree fiat is a poor money choice.

I found a great paper on this topic:Economics of Bitcoin: is Bitcoin an alternative to fiat currencies and gold?By Peter Surdahttp://dev.economicsofbitcoin.com/mastersthesis/“This paper presents an economic analysis of Bitcoin from a libertarian point of view. The theoretical part analyses the applicability of the Austrian School of Economics at Bitcoin. Of particular interest are the evolution of money, competition among media of exchange, and the concept of money supply. The empirical part analyses the following variables: price, price volatility, liquidity, visibility and velocity. I come to the conclusion that theoretically, Bitcoin can be closer to the Austrian ideal of money than either fiat money or gold, and it is possible that it will evolve into that position. The results of the empirical analysis are consistent with Bitcoin being a medium of exchange.” 

[st434u]

Peter Surda, like Paul Krugman (who he quotes in this section), does not understand what a "store of value" really is.

 

The reason gold is a store of value is because many people have always(*1) and will always derive value from consuming gold, and gold will always be used in the production of goods and services which many people demand because they derive value from consuming them. Hence, whatever gold is not consumed right now but is stored, can be consumed or used to produce consumer goods or services in the future, realizing that value. Therefore, when you store gold, you are really storing the value in it, to be realized at a later date.

 

Bitcoins(*2) only have value due to empty speculation(*3).  Thus the idea that these things are "stores of value" is completely misguided.

 

--------------------

(*1) Gold has been used to derive value in these ways for about 5000 years, and new ways of deriving value from it's consumption or use in production are coming up every day, the reasonable expectation would be that it will be demanded for these purposes for thousands of years into the future, if not until the end of time. So for all intents and purposes, we can use the terms "always" or "forever" here for simplification.

 

(*2) or US dollars, or any other fiat currency or any other paper or digital currency which doesn't have any intrinsic value as defined above AND in the call by me)

 

(*3) By the term "empty speculation", I mean speculation that is only based on further speculation, which is only based on further speculation, ad-infinitum.

[dragonfish]

"Once a medium of exchange is sufficiently liquid, it can, hypothetically, sustain itself

through the network effect even if it does not have non-monetary uses, as liquidity

creates demand" --Peter Surda

 

This claim is outright absurd, every bubble in history had enough 'network effect' and

strangely 'liquidity' never kept on creating demand. If liquidity creates demand,

Pepsi can fire all its board members/marketing teams etc and simply keep producing Pepsi infinitely

and run out water after depleting all oceans on this planet! Clearly this is absurd.

 

@st434u I can clearly see your point, I don't have any math/economics Ph.D...

how come these economics students cook up things like this!

[NumberSix]

Bitcoin is a payment infrastructure as well as a currency.  There are approximately 42,800,000 GH/s of physical computing power in the Bitcoin network.  There is utility in being able to accept payment worldwide (crypto currencies are only way to send worldwide due to other services being restricted by law).  Even if you don't want Bitcoin you can convert it instantly after receiving it with a service.  There are several businesses like Western Union and Visa which provide similar services that may be (at least partially) replaced with Bitcoin.  These services are valued by the market and are part of Bitcoins value.I agree with Surda about network effects.  An example is the US dollar.  A large part of what gives the dollar value is its use as the global reserve currency.  I don't see network effects in houses and there was a housing bubble.  If I have a house and new houses are built in my area, in excess of demand, they will drive down the market price of my house.  Dragonfish, Pepsi is a liquid beverage not a liquid commodity.  I don't understand your point. 

[dragonfish]

...Dragonfish, Pepsi is a liquid beverage not a liquid commodity. I don't understand your point....

no doubt Pepsi is in liquid state :)what I was trying to point out is... there is enough supply and demand of the goods and the sales kept growing from zero to several billion dollars.But the revenues can't keep growing on forever just because they reached a critical mass. As per Surda if just enough people are involved in exchange (liquid) it should create more demand. This will set an exponential demand on Pepsi with given customer base... if you understand exponential growths, soon Pepsi may need entire oceans of water to make Pepsi! 'having critical mass or having enough people as buyers/sellers (here seller is only one guy:Pepsi)' has not magically created exponential growth to Pepsi. Its growth *must* get saturated and there are practical constraints that are not allowing Pepsi to have a easy management life. They can't bank on Surda's wisdom of "more customers in our base means more demand and things can self sustain!"... there are practical constraints that can drag Pepsi's demand down (eg: people may forget Pepsi and fall for next shiny thing, certain beverages may go out fashion, a law suit...etc etc).I know the analogy is slightly off the marks, I have equated 'market liquidity (i.e availability of buyers/sellers of an instrument)' with 'demand and supply (availability of Pepsi buyers and sellers)'. I think if you replace Pepsi with Pepsi Shares... analogy may get closer to my point.What Surda is missing from his 'liquidity will create demand' assertion is:* Practical constraints will always set in and demand can't keep growing on... no one should be surprised if the demand gets reset to zero due to some other practical constraints. Having sufficient liquidity now is NOT an insurance against demand going to zero in future. To sustain a demand...a thing must have more attributes than just liquidity factor.In our topic, we are talking about sustained demand for 'medium of exchange'. st434u points out few attributes a money must have and some people think either bitcoin already have such attributes or bitcoin can fly even without those attributes! So far am with st434u... may be some new ideas or new data can shift my conclusion, am trying to think few such ideas..for instance:we never had a public ledger with global consent prior to Bitcoincan this factor eliminate the need of intrinsic value and set up an economy based on Bitcoin?In game theory when 2 strong dogs and a weak dog fight with each other for food, surprisingly the weak doghas a better chance of surviving without scratch and getting the food.Similarly can some kind of counter intuitive game theory construct help bitcoin to beat Regression Theorem?am just thinking...