Friday, June 10, 2011

Bitcoins Real Money or Bogus?

David Kramer over at LRC is calling bitcoins bogus. I'm not sure I can buy into his argument completely.

He writes:
I'm afraid that those people [bitcoin supporters] are losing sight of how a real medium of exchange arises in a free market. A medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange, i.e., it was also a good being bartered for other goods and services.
That's not exactly correct. What he is referring to is Ludwig von Mises' Regression Theorem on how money first began to circulate. It is not a forward looking theorem, in that sense.

For example, the dollar is beyond question a medium of exchange. Yet, it never had a use value in the economy before it was a receipt for gold, and now the link to gold is cut, yet it continues to circulate and be used as money.(If anyone doesn't think dollars are money, they are free to send any they have to me.)

Thus, if someone now starts an exchange that is nothing more than an electronic receipt for dollars. Those electronic receipts could eventually become a real money, if overtime the electronic receipts are generally accepted in the way that dollars have become an accepted currency. Indeed, it may at some point be possible to cut the link between the dollar and the generally accepted electronic receipt, which could be beneficial if the dollar goes into a hyper inflation.

What I'm thinking of is not a fraudulent situation like that conducted by the U.S. government where they completely reneged on their promise to pay out gold for dollars, but more of a situation where an electronic currency operator continues to redeem any receipts for dollars but announces that he will no longer create any new receipts. Under these conditions, traders would be comfortable in trading the electronic receipts, and I could see where the receipts might immediately jump to a slight premium over the dollar---and if the Fed continues to inflate, to a huge premium.

That said, the Bitcoin appears to be a complex version of my simple electronic receipt. It's not exactly clear how many bitcoins will be created, and for what reason. And it is not clear that they are anywhere near a receipt guaranteeing a certain dollar redemption. At best, it appears, if you understand the backstory, to be a sort-of receipt to buy a certain amount of illegal drugs. This in itself means the bitcoin has some value, especially if you need to score some LSD.

But one glance at the bitcoin site, especially after looking at their scrolling news, should be enough to scare anyone from keeping any money in bitcoins. If on the other hand, I am in need of some wala wala shoes that are normally only found on the planet Venus, I would have no problem converting dollars into bitcoins in an amount necessary to buy wala wala shoes.

Bitcoins seems to be a first step at creating a truly digital money.  There will be others attempts that will eliminate the unnecessary complexity of bitcoins and make them more like travelers checks, which are fully convertible into dollar.  (Note: Bitcoins may have added the complexity to confuse those who want to charge bitcoins with being a money launderer.)

Somewhere something between a bitcoin and a traveler check type electronic currency could emerge, at some point. I'm not sure how it will emerge, or how payments and withdrawals will be made under such a system. My point here is that there is no theoretical reason that an electronic money could not exist as first a receipt for, say, the dollar, and then at some point become its own currency. The problems I see at this point are dealing with the purchase and sale of physiacl dollars for such a virtual receipt and how that would be executed, and how to develop this without getting caught up in a web of United States and international laws that are surely aimed at preventing such a virtual currency.  I'm not technically savvy enough to know how well torrent or some other technological medium could speed things along. For now, I am a fascinated bystander that can not rule out, based on Austrian theory, the possibility of a future electronic money that is not created by governments or that had any prior use value other than having perhaps an interim period as a receipt for a currency or commodity.


  1. Here's what I've read about Bitcoin and the money regression.

    "Bitcoins may therefore currently serve as a money intermediary for paypal dollars\pecunix\euros. But why is there demand for Bitcoin over USD?? This is a subjective valuation arising from properties such as anonymity, decentralized system of clearance, cryptographic trust, predetermined and defined rate of growth, built in deflation, divisibility, low transaction fees, etc.... inherent to the Bitcoin system."

    Seems plausible it could evolve into actual money.

  2. Thanks for the cool-headedness on this topic. I've noticed a few Austrians now who are hostile to BC (see: and Kramer's post). Here's the email I sent to Kramer after he posted (still haven't gotten a response, although his LRC post was also reposted on the Mises Blog):

    "Your recent post cited Mises and Rothbard in your attack on the virtual currency Bitcoin. While I'm likely less familiar with Austrian theory than you, it seems to me that Mises's regression theorem was simply a logical explanation of how money in fact *did* develop, out of goods that had previous value in exchange. I fail to see how this implies that all currencies for all time *must* develop in this same way. That Bitcoin was not originally used as a good previously is irrelevant. While it might not be Bitcoin specifically, a virtual currency like Bitcoin that is created from scratch with the intention of serving as a medium of exchange has the potential to be the best money of all time, since every aspect of it would be a choice made by the designer(s) in order to serve that purpose.

    I want to specifically address your claim regarding the "real value" of Bitcoin: "The fact that it's called "virtual currency" gives you an idea about its actual value as a real medium of exchange." Firstly, the fact that Bitcoins are virtual means absolutely nothing as they are still scarce. The fact that only a fixed amount of Bitcoins can be generated in an hour, no matter how many people are attempting to generate them, ensures that Bitcoins cannot lose their value due to inflation (i.e. inflation is a mechanically fixed rate that cannot be accelerated, and will stop completely in 2049, which would result in deflation from that point). Given that, I cannot understand what you meant when you called into question the value of Bitcoins as a money; they are as valuable as people perceive them to be (value is in the mind, not the good). Secondly, Bitcoins already *are* a medium of exchange; they facilitate indirect exchange every day(!)."

    I'd still like to hear Kramer respond to his critics...

  3. I have no idea why services like gold money dot come are not more popular. Use your debt card to buy something in whatever currency and your fractional amount of gold is converted at that instant at the spot rate. Never has a switch to gold money been easier to accomplish.

  4. Yes, the dollar (USD) is a medium of exchange. However, it did not arise in a free market, which is (I think) Kramer's point. Dollars could not have come into usage as a medium of exchange without gold/silver having first been money.

    Sure, people can use bitcoins or some other invented currency as money, but are they *good* money? Do they possess the attributes that have historically made gold and silver the ideal moneys?

  5. I only heard about bitcoin a few days ago and it's fascinating even if it never amounts to much. Certainly it's a predecessor of things to come. The fact that enough people find it interesting enough to give it a whirl says a lot about the dollar and the euro in particular.

    All it would take is some small nation to pledge itself to the fidelity of a digital currency to lend it international legitimacy, stave off the money laundering label and give people a reason to jump in to it headlong.

    I believe the driving force behind such a move could be on-line gambling. The US government has really come down on the wrong side of this issue. People want it and the technology exists to circumvent international law. Throw in a few more sophisticated attempts a digital currency and governments will be continuously playing catch up.

    Just like the war on drugs was supposed to reduce demand, trying to FORCE people only to use government approved money is a losing proposition. People use government money when they have confidence in it. When they lose their confidence, they will move on to other mediums of exchange regardless of the laws in place to stop them.

  6. I have some primary problems with bitcoin, many of which are grounded in Austrian theory, and one of them is directly related to the regression theorem.

    The first is that all bitcoins are created by transferring current government money in order to create a "bitcoin".

    The second is that bitcoins are only pertinent to the digital realm. Though, I do not discount the possibility of bitcoins being issued in redeemable paper; but, redeemable in what, exactly?

    All products that are sold in bitcoin denominations are sold on an exchange with government currencies. Ex: If I can buy 2 bitcoins for $40 (i.e. the exchange is $20 per bitcoin), then the products that I purchase will be determined by such exchange rate (i.e. a product that would usually cost $40 will cost 2 bitcoins). This is not an independently valued currency.

    Bitcoins are dependent upon a mathematical distribution, meaning that their creation is limited at a particular point, and that each subsequent bitcoin does not necessarily reflect productive resources, but that the value of each subsequent bitcoin (after it reaches its limit) is determined by a mathematical determinant. In other words, the value of the bitcoin is not subjective after it reaches its peak, rather its value is determined by a predetermined mathematical determinant.

    Now, to get into the regression theorem, one must assume a world in which all economic goods (money included) have been stricken from the planet. In this situation, what value does a bitcoin have without a computer? Obviously, the idea of a bitcoin would be known, and it could eventually be recreated after the structure of production and the division of labor become more complex in order to produce computers, but this could take hundreds of years. The knowledge of things does not obliterate the structure, individual valuations, and the specialization of labor to accomplish those things; sure it may happen quicker than how it was conceived in human history, but it is not automatic.

    While I am an Austro-libertarian, and I love to see any sort of exchange that is concealed or separated from governmental controls, I just do not see the bitcoin as a viable alternative to market money. And, that is just what the bitcoin is, an alternative currency. It is not, and never will be, a generally excepted money that is valued on its own merits the primary reason being that it can only be purchased in terms of government currency, and that it is not a commodity that requires investment, labor, and production to produce; in essence, it is nothing more than an exchange currency (it value is determined by what it is exchanged with and how much).

  7. Excellent post, Robert. It is correct to refute Kramer, because there may indeed be a corollary to the regression theorem. Transitioning to a digitally-based cash should not give up any of the same anonymity and untraceability features of a $100 bill.

    Kramer was refuted here as well:

    I have been blogging about digital currency from an Austrian perspective here.

  8. The site you linked to is not the official Bitcoin site: the Bitcoin site is

    > It's not exactly clear how many bitcoins will be created, and for what reason.
    This is actually very, very clear: the algorithm enforces the fact that the number of Bitcoins created decreases every 4 years, which means the total number of Bitcoins asymptotically approaches 21 million, and gets reasonable close by 2030. This is vanishingly unlikely to change.

  9. @original
    before the dollar was a receipt for gold it was the spanish silver dollar the principal coin in colonial america.

    rate at which bitcoins are created is very predictable and clear.

    "all bitcoins are created by transferring current government money in order to create a "bitcoin"."

    no that's one way to buy bitcoins. they're created predictably and awarded to participants that help secure the network.

    btw market cap of bitcoins is $150 million.

    If you're going to point out that bitcoins have declined in value recently then you should also point out that they've easily been the best investment of the year, having a 8500% YTD return a couple days ago.

  10. Jaffi Joe: bitcoins are not created by exchanging USD for them. They can only be created by discovering them in a time consuming process of computation which is mathematically as far as we know impossible to cheat. This process is called "mining." The rewards mining serve to recruit massive computing resoures from the many participants in the bitcoin economy. The bitcoin economy requires this massive peer to peer cloud of compute resources in continual operation to verify transfers from owner to owner.

    If you want a bitcoin you must either mine it or purchase one from someone who has one already. Or you can earn on as part of a pool of miners working cooperatively.

    The profitability of mining is a function of equipment cost and power consumption. Electricity and compute power are two basic necessary commodities of our current technological civilization.

  11. See my 4 part series on bitcoin here:

  12. As one person said: "bitcoin is backed up by the lack of trust of the government".

  13. Value is subjective. Apparently a lot of people value that fact that it is private, in limited supply, inexpensive, decentralized, and can't be manipulated the way national currencies can.

  14. Bitcoins share many of the qualities of money. With an asymptotic limit of 20,999,999.9769 BTC (reached around the year 2140), they are scarce. They are highly divisible, with 0.00000001 BTC being the smallest amount able to be represented. And being solely information, they are capable of having an extremely high value per unit weight.

    Bitcoins are not universally in high demand, and this is their greatest impediment to being used as money. However, they are completely anonymous and decentralized. No one can manipulate the system, not even the creators, without solving the proof of work (impossible without an astronomical and ever increasing amount of computing resources).

    These features might increase their demand and make them a viable money.

    For more information, see:

  15. Theres the legitimate medium of exchange that is born from the free market, and theres the illegitimate medium of exchange that is the USD or any other fiat currency. Bitcoin belong to the illegitimate medium of exchange not born from he free market. Be it governemnt who make a decree that this is now currency or a private individual who decree that these bytes is currency, its still a decree and did not happen naturally from the barter system

  16. "That said, the Bitcoin appears to be a complex version of my simple electronic receipt."


    "It's not exactly clear how many bitcoins will be created, and for what reason."


    "But one glance at the bitcoin site, especially after looking at their scrolling news, should be enough to scare anyone from keeping any money in bitcoins."

    False; that is not the Bitcoin site, and furthermore it is not clear where the source of their problems comes from; it is probably their own software that is interfacing with Bitcoin that is their problem.

    I simply cannot believe that Kramer and you do not have the sense to download the Bitcoin client:

    try it out for yourselves and then take 30 minutes to read about how it actually works. It would help you come to the correct conclusions about it, instead of writing articles that demonstrate that you have not run the software, read the documentation or in fact know anything about it at all.

    What is the point of making a post like this if you have not 'done your homework'? Its pointless, and adds nothing to the discussion.

  17. Ok, I see that some people here have clung to my "problem" that bitcoins must be created by government currencies. They attempted to side-track the issue by bringing up blocks and mining operations. However, the neglected to take into account that these operations must first be undertaken in the government currency before they receive any bitcoins for their efforts (i.e. their investment in capital equipment is first denominated in government currency). I am just going to take a stab at this, but I am guessing that they aren't econ majors.

    Now, to move on to my other problems with bitcoin,,,, Oh, what is that? Oh my me, they only addressed the that one single point (which is easily obliterated), and completely ignored the other problems that I had with bitcoin.

    Sorry, folks. I am going to have to side with the regression theorem here, if it doesn't first have "use value", then its "exchange value" is meaningless. Production must always precede exchange... Remember that in any case that your computers stop working.

  18. Bob, I'm struggling to grok bitcoin, and not there yet (though I'm not sure you are right about it being backed by drugs).

    I found this comment of yours interesting:

    "That's not exactly correct. What he is referring to is Ludwig von Mises' Regression Theorem on how money first began to circulate. It is not a forward looking theorem, in that sense."

    You seem to get here a point I've argued in private discussion with friends about the nature of the regression theorem: that the regression theorem was created as an explanation for the actual origin of our current money, not at a description of the exclusive means by which money may arise. I.e., it seems to me that the regression theorem does not prove, or purport to prove, that money can ONLY arise this way. It simply shows how to stop the infinite regress in the explanation of how our current money, which did evolve from a commodity standard, has value.

    Do you agree with this interpretation? And do you know if it is widely held among Austrians?

  19. I personally believe Mr. Kramer's argument is sound and Bitcoin is not all it's cracked up to be by its proponents. I also happen to believe there is a level of sophistry being employed by its proponents that is disingenuous and faulty, though probably not intentional, re: Mises' theorum, which seems to me to be the main thrust of Mr. Kramer's argument. Perhaps I am incorrect. See here for a fascinating and lengthy exchange:

  20. @aonymous at 6:08 AM

    I do now see that the .org site is the main site for bitcoin. When I first statrted looking into bitcoin, I went to and it appeared to be the bitcoin site, given its reference to the market for bitcoin etc.

    That bitcoin does not control the .com domain for bitcoin, I would consider that a fail of bitcoin. A lot of people are going to do what I did and go to

    Further, I did eventually end up at and watched the very uninformative video, which did not impress. It appeared to be a bunch of mumbo jumbo with "mining" etc. I now see that quite a bit (no pun intended) of thought was given to the design of bitcoin.

    As for downloading the software that would require a lot more comfort in bitcoin than I have now. Since I use my computers for work, I do not download any software until I am completely comfortable with it.

    But aside from the problems that are being displayed, I do admit that bitcoin is fascinating.

  21. Fiat money is a contract. That's why it works. The USD is essentially an all-purpose IOU. Suppose you are a farmer, and you have a cow. I have bull, but no cow. You have no cows to spare but your cow just gave birth to female calf so I give you a some chickens, and you give me an IOU for the calf after it is weaned.

    The IOU is backed by the calf. The only question here is a matter of trust. I have to trust you to deliver the calf. Otherwise, I would not have given up my chickens. The IOU is just a piece of paper, but it represents real value in the community. So I can trade that IOU and some more chickens for a full grown cow from another neighbor provided that other neighbor also trusts you to deliver on the IOU.

    The government's fiat money is accepted because the government will accept it in payment of taxes and because it is required to be used for settlement of debts in courts of law. But the creation of additional money is a violation of that trust because it reduces the value of outstanding money. So government money creation is a scam. But it is the creation of money that doesn't represent any real product or service that is the scam. The fiat money, per se is not necessarily a scam. An IOU is a perfectly legitimate free market instrument.

    So private fiat money must be able to solve the problem of trust. I don't see why a private fiat currency couldn't work if its originators can get people to accept it in the first place. Perhaps the bitcoin people have found the solution. Perhaps they will lose out to a competitor. Faithfulness and trust is an inherent characteristic of the free market for anyone who wants an ongoing business. I doubt that the bitcoin will lose out to the dollar as any trust in it has been misplaced, and its collapse is merely a matter of time.

  22. HI Stephan,

    I was being a bit (no pun intended) tongue in cheek here with the drugs. I was trying to show that in a way if you could exchange a certain amount of bitcoins for a tab(?) of LSD it was in fact backed by a hard good. But more seriously, if there is an advantage for an LSD user to buy LSD via bitcoins, then you sort of know that there will always be value for bitcoins as long as LSD holders want them do buy LSD.In other words, I might be willing to accept bitcoins for some kind of payment not for my direct use, but becasue I know I can always sell them to an LSD user. So there is a bit of first stage regression theorem type money development here.
    There is a little bit of subtlelty in the theorem, Mises is really exlainning how money did arrive, but I believe there is an underlying implication that for any money to arise it needs to have a prior exchange value relative to an existing money or good.

    Notice that bitcoins do have an exchange value relative to the dollar and LSD. If they didn't have at least one of these it would never have a chance that it could be used in exchange. But, bitcoins seem to have arisen without a long prior history of exchange, which seems to be where the knee jerk reaction of some Austrians against bitcoins is.

    But I think that the bitcoin does meet the Regression Theorem requirement that it has to have some type of exchange value before it will be generally accepted as money.

    As far as such a money necessarily first being a good in itself, that part I believe is as you say an explantion of how money developed and not a requirement of any new money.

    A further note should be added that Austrians tend to think of a non-commodity money as often introduced by governments, with Austrians always pointing to the fact that it has a prior link to a money and that you can't simply introduce a money without that link.

    I remember many, many years ago I attended a Mises event in Washigton DC where there was a finance minister speaking (if memory serves, from Lithuania). During his speech on plans for the country he mentioned the government planned on creating its own currency. During the Q&A, I asked how they planned to introduce a new currency,since obviously as an Austrian I knew that it would have to be backed by something and I was curious to see if the finance minister understood this. When I asked the question, Murray Rothbard sitting a few chairs down turned to me and said, "Good question."

    The point being that for Austrians the link to something already in exchange has to be there, and Austrians are very sensitive to this link, but I don't think it has to be a hard good, it can be a link to a readiy exchangable fiat money such as the dollar.

    To your question on how many Austrians differentiate between the historical role of money developing as a money and the possibility of a new money developing from a link to a fiat currency,I'm not sure. Until this development of the bitcoin, the question would be only theoretical and not much discussion would have been made of it. My argument would be though that Mises and Rothbard would understand that bitcoin could be an extension from a fiat money, the way that the dollar developed out of being a receipt for gold.

  23. I'd suggest that Bitcoin is a good start, in the same way Ron Paul is, a step away from everything that people have had to put up with with the shit produced by the state and its cronies.
    Whats more annoying. is a bunch of drugged up hippies got....something up and running and all we can do is bitch about whether its in accord with what the master said, not offering up anything of our own(except of course a pdf of "what has the government done to our money".)

  24. Bob,

    While I myself am still not convinced of Bitcoin viability, I do believe it is quite obvious you have a lot to learn. As you somewhat admitted, I think your lack of technical knowledge may be holding you back here. And while I appreciate any learned economist's take on the subject, I've been waiting quite some time now to get an actual educated assessment and I have yet to find one.

    I have to somewhat agree with the poster above who mentioned people writing articles without even running the software, looking at the code, reading the documentation, and actually understanding how the whole concept works.

    I can understand and appreciate this level of tech being "after your time" so to speak, but that's not really an excuse for writing a piece with what essentially equates to false information. As others have noted, we know exactly how many bitcoins will be created and a close idea of exactly in what time. This is no small issue and in my opinion it's inexcusable to miss something this important. It really shows the extent to which you've actually researched the subject.

    And the apparent complexity you say Bitcoins unnecessarily have is not really there. Here again I think it is more your lack of technical knowledge (and research) that makes the concept seem much more complex than it is. I have no idea how much you really know or what exactly you understand about how peer 2 peer networks function, but it is not a new concept and while it may seem like "mumbo jumbo" to you, it is not complicated at I'm sure you'd have no problem finding a preteen who could explain to you how Bittorrent works, how Limewire worked, and after giving them half an hour (if they haven't heard of it), how Bitcoin works.

    I encourage you to at least read the literature on the site and that of others who understand it in its entirety. A good place to start would be this paper:

    I still have yet to find someone who has what I consider to be a firm grasp of both Bitcoin AND economics, so I look forward to reading an update...because so far, people either understand Bitcoin and don't know much about econ, or they know quite a bit of Austrian theory and nothing about Bitcoin...but that hasn't stopped either side from running their mouths.

    I think it will be much easier (and quicker) for an economist to become familiar with Bitcoin than vice versa, but the knowledge has got to be there to have a meaningful discussion. Having to correct such fundamental errors from people who obviously haven't taken nearly enough interest is just not a good use of time.

    Is there anyone out there whose got enough of a handle on both to answer the tough questions?

  25. @5:53 PM

    Well the first problem is that is going to be very difficult launching a money when you have to read a scientific paper on it to decide if you want to use.

    Second, it is a major fail of bitcoin to launch without controlling

    Third no way, no how am I am going to download software that is coming from a site I am not familiar with

    Fourth, if I am ever in the mood for an LSD trip I will keep you guys in mind.

  26. Bob, I've been thinking about this today. Interesting subject.

    Wouldn't any fiat currency like asset ultimately be a claim on someone? Why is gold different?


  27. @Richard Dale Fitzgerald

    I'm not sure what you mean by a claim on someone. A money has to have an exchange value, but that is it.

  28. @Bob

    1a) Well they haven't seemed to have any trouble launching so far, as it's gone from $.06 to $30 in 2 years. (Sure there is a case to be made that there's some heat there, but still. You make it sound like Crystal Pepsi.)

    1b) I don't expect everyone to read a "scientific paper" on it before they decide if they're going to use it. I do however expect people to at least understand the basic fundamentals of something if they're going to write an article on it. And my point was it was obvious you didn't so much as read the Wikipedia entry on Bitcoin before typing out this piece..because if you had, you wouldn't have gotten so many things blatantly wrong. Including the website.

    And I guarantee virtually none of those preteens who could explain BitTorrent to you read a scientific paper on it before they started to use it. And on top of that, as many of those kids as there are, I would expect there are just as many, if not more, who use it without understanding how it works..Just as the case is with cars, computers, toilets, & microwaves..all of which cost money, and some of which can even pose a risk to your physical well-being. And let’s not get started on casino games.

    My point here is of course, people have no problem getting into something they don't fully understand, so long as enough other people are doing it.

    2) Okay. So the official website isn't "" and you didn't figure that out without being told. Firefox didn't have (it's name)".com" when it launched. Neither did Craigslist. Neither did Facebook. I think they've done just fine. And again, I am still led to believe that your mistake is just evidence as to how little you actually looked into the out of the more than 1.5 million hits that come from a Google search of "bitcoin", not only are two of the 1st three listings official Bitcoin sites (with being the 1st), "" doesn't even show up in the first 20 pages of results..and that's just where I got tired of clicking.

    Even entries on and show up on the 2nd & 3rd pages of results.

    I think you must admit your error is much more due to your own lack of research and common Internet search understanding than any "fail" on the part of Bitcoin.

    3) That's fine. That's actually what I'd expect based on your article here, as you (a) don't care enough to look much into the subject in the first place, & (b) have what I think even you would admit is a pretty low level of technical & Internet knowledge..So I wouldn't expect you know how to download a file and run a malware scan on it, let alone run it in a safe environment, or inspect the source code. (Which, even if you could, it doesn't seem like you'd bother to take the time to do).

    4) "You guys?" I can assure you I didn't have any hand in developing Bitcoin. I don't even own a single fraction of a bitcoin and I never have. I only heard about it this year, and only recently started looking into it..and as I said, I'm not completely convinced of its viability..which is why I found your blog entry: I'm looking for more assessments..particularly from those of an Austrian persuasion and an understanding of monetary theory. And also as I said, I have yet to find one from anyone who has bothered to learn much of anything about Bitcoin.

    Maybe it's just too much of a cross-curriculum. Maybe there just aren't that many economists who are tech savvy enough.

    Again I'm very hopeful I'll find an assessment with a competent understanding of both subjects..which is why I said I hope you do take the time to try and learn and do a followup, as I would love to hear your perspective on it, but I would think you would agree that the perspective (even of a learned man) on a topic he knows almost nothing about is not really worth much.

  29. @ Aonymous 11:20 PM

    1a: "Well they haven't seemed to have any trouble launching so far, as it's gone from $.06 to $30 in 2 years"

    Come on, you sound like a penny stock broker

    1b: I wouldn't use this as a selling point:
    " I guarantee virtually none of those preteens who could explain BitTorrent to you read a scientific paper on it before they started to use it. And on top of that, as many of those kids as there are, I would expect there are just as many, if not more, who use it without understanding how it works"...

    My point isn't that you should go into something blindly like a preteen, but that the reason to go into a money should be obvious without having to read a scientific paper on it. That's what money is the most marketable commodity, reading a paper to understand it or that preteens are gaga about something they don't understand are not selling points...

    You want me to get my information from Wikipedia?

    2. "Firefox didn't have (it's name)".com" when it launched. Neither did Craigslist. Neither did Facebook."

    I think you just made my point. They all do now. That a money site doesn't control the .com site, but some agent does who is pasting scary things about bitcoin is a major fail.

    3. Let's assume you are accurate in my knowledge of the internet and malware. So is this money only for those who are tech savvy and willing to download an unkonwn software? Never mind that this is going to be about my money?

    4."I have yet to find one {economist]... who has bothered to learn much of anything about Bitcoin.

    Maybe it's just too much of a cross-curriculum. Maybe there just aren't that many economists who are tech savvy enough."

    I just think you are missing the point. The problem is that you need to "understand" this money. That's the current problem with bitcoin, money is something that everyone wants. It is the most marketable commodity.There is nothing for the economist to undertand after it is clear bitcoins are not being broadly used and there is no immediate reason that they should be, and that they are unlikely to be anytime soon, if ever.

    Email me when I can have bitcoins on my cellphone, I can wave them over a reader in any store and buy whatever I want. Until then, they are a specialty token that allows you to purchase illegal drugs and that's about it.

    I hope it develops beyond that market, but the test for an economist is not what a paper says or that preteens are using it, but whether or not I can walk into Macy's and buy a pair of socks with them. I can't currently, this tells me bitcoins aren't money. They might be such when I can do this. In the United States, the dollar is money.

    Like I said email me if things change.

  30. Robert, The additional consideration for money is if others use it as money -- not just you at Macy's. The digital realm is an entirely new monetary realm and attributes that maintain the anonymity, untraceability, and non-confiscation ability of physical paper cash take on enhanced importance. Bitcoin for the moment is able to satisfy that which does qualify it as money (unless, of course, you don't care about those features).

  31. Robert,

    You're completely overlooking legal tender laws, which leads you to misapply Austrian theory on the USD.

    I've made a video on the topic of Bitcoin, which was already linked in the comments I saw ( ).

    In it I reference Guido Hulsmann's work, I and recommend you take a look at what he has to say about why the USD holds value.

    In the video description of my video you can further find statements by Henry Hazlitt and Murray Rothbard.


  32. 1a) what am I supposed to say? What does a launch sans "trouble" look like?

    1b) That wasn't a selling point. I'm not selling anything. I was pointing out the flaw in your argument. You implied you have to read a scientific paper before deciding to use Bitcoin. My point was that (a) Bitcoin is not as complicated as you make it out to be, as I'm sure you could find a preteen to explain it to you. And (b) people (including adults) get involved in things all the time without knowing all the details. It has nothing to do with a preteen being "gaga" over something. Preteens do not drive. Preteens do not frequent casinos. Those were two examples I gave of things people engage in (and put their money at risk) without fully understanding them.

    Ergo it is not necessary to expect that people "have to read a scientific paper before deciding to use" Bitcoin.

    And despite your ironic implication that Wikipedia is not a good source for information, yes, had you actually bothered to look there you would have been vastly more educated on the subject than what you displayed in this article.

    2) This is what you said: "it is a major fail of bitcoin to launch without controlling"...

    How in the world does the act of pointing out that at least three of the most successful companies on the Internet launched doing the exact same thing you term a "fail" make your point?

    3) No, obviously that is not the case, as I refuted that notion in point #2 by pointing out how plenty of people have no problem getting involved with something they do not fully understand. But more than that, you have demonstrated that I am correct in my assessment that Internet and technology is not your realm of expertise, and what you might consider to be "tech savvy" is quite a pedestrian level of knowledge.

    It is more than obvious from the way you speak about this subject that you are an older gentleman and are just not familiar with the way the world now works on the Internet. And I guess the larger point to take away here is that just because you are uncomfortable doing something and/or have trouble understanding it, doesn't mean most everyone else is in the same boat.

    I am reminded of this musing from Andy Rooney. I think he captures what's going on here quite well.

    4) I believe it is you who is missing the greater point. You do not have to understand money to use it. (Just as I was saying is the case with cars, computers, toilets, microwaves, and casino games.) That doesn't mean there isn't something more going on under the surface that people could write entire tomes on. (Or are you suggesting The Theory of Money and Credit is a waste of paper and binding because any money worth using doesn't need to be "understood"?)

    You of all people should know how ignorant the average person is about money and banking and market exchange. Very few people understand how economies work. They have no comprehension how those groceries get on those shelves or how in the world that oil gets from miles underground into their gas tank. And they don't care. They still use it.

    I don't expect everyone who uses Bitcoin to understand it. As I said, what I do expect is for anyone who attempts to make an assessment from a monetary/economic perspective to understand the structure behind it before they try to form an opinion on how viable it is. You didn't even bother to learn how many coins would be created.

    And do you not find it the least bit ironic that you're arguing one has to understand the workings of Bitcoin before they'll use it, when you're telling me to "email" you when you can have and use them on your "cell phone" and wave them over a "reader" to make a purchase? How much of the technology that you use do you have the first clue of how it works?

  33. Is anyone familiar with American economist David Ames Wells? (1828-1898)? He wrote a book called "Robin Crusoe's money":

    I have not seen him referred to as an Austrian, but this books sure feels Austrian to me. He takes the Robin Crusoe approach to money, and at the critical point when bartering is no longer viable, he writes:

    "For in the absence of all law defining what money should be, and regulating exchanges, the adoption of any article to serve as money which represented little or no effort for its production or accumulation- would enable the shrewd, the idle, or unscrupulous, easily, and without fear of punishment or restraint, to take from the rest of the community products which represented the expenditure of time and labor, without giving in return any equivalent."

    So the main concern here when choosing currency is that we assume that people will go off behind closed doors and do nefarious things to effectively steal from friends and neighbors. They will try to counterfeit in secret, so we want money that is hard to reproduce and easy to verify (like gold). They will try to enter nature to obtain the currency-thing itself, so we want something relatively scare and difficult to produce (like gold). Our choice for money is largely driven by the assumption that bad people are going to go off on their own and try to cheat us any way they can.

    The notion that a currency ought to have a non-monetary use I think is another way to protect ourselves from cheaters. If it has a non-monetary use, then it has a production process. Ideally we want something with a expensive production process, and we use the result of that production process as the bartering token. Gold is useful because the production process to obtain reasonably useful quantities is expensive, and the result (the gold itself) is easily divisible, portable, verifiable, etc. So I think the "non-monetary use" property of good money is a little misleading. It is not that we could theoretically melt our coins down to make circuit boards and jewelry. Is is that the non-monetary use of the currency demonstrates that the commodity is not trivial to counterfeit.

    Now, Bitcoin changes money fundamentally by creating peer-verified transactions. Consequently, bad people can't cheat us. They can't counterfeit, and one can "mine" only at a known rate so scarcity is preserved. In this environment, some of the properties of good money are no longer relevant, especially the requirement for non-monetary use. If we are not afraid of being cheated by counterfeiters, then we no longer need a commodity that was created via an expensive production process. The "mining" process is a clever way to bootstrap the currency without a land grab and with predicable, smooth increases in the money supply.

  34. @ Ben Kennedy

    But you can't even claim that the bitcoin "mining" is not an expensive production process. Sure it's not labor intensive the way we think of gold mining, but it takes a significant degree of capital investment (computing hardware, GPUs, etc.) as well as energy (electricity to run the hardware, cooling systems, etc.) much so that there certainly is a threshold at which the return from "mining" is actually less than the investment put in.

    Sure gold is on a different scale, in that the investment is much larger, in terms of equipment, time, and pretty much every aspect, but fundamentally I don't think bitcoin mining is all that different from gold mining in this context.

  35. Terrance, let me clarify "expensive" -

    Gold is a reasonable commodity for storing value precisely because of difficult and time-consuming the nature of the production process. Furthermore, the most efficient way for anyone who needs gold (other than a mining company) to obtain it is to trade for it. Because I predict gold will still be needed in the future, and because I predict that it will still take takes time and resources to obtain gold from the ground, gold becomes a good candidate to be money. However, to the extent that gold becomes easier to mine (say due to new mining techniques), the prices of gold will be bid down relative to other commodities, and money-as-gold will lose value.

    By contrast, any perceived value to Bitcoin will not be due to the infrastructure costs of generating them, given the controlled way the algorithm lets them be created. In fact, given things like Moore's Law, we even predict that the real cost of generating and using Bitcoins to go down over time. I suppose this could affect the value of them, but given what we know about the alogorith, I have never heard this mentioned as a concern. Bitcoins can only have value do to the other properties of the algorithm, mainly that they cannot be counterfeited.

    So I agree that the "mining" of Bitcoins and gold are in fact similar due to the fact that both require some kind of real-world resources. The distinction I am trying to create is for gold, the perceived value is precisely because of the real-world expense of mining, while for Bitcoin the perceived value is completely unconnected to the real-world expense of digital mining

  36. I know that bitcoins are so "last week", but here is an abbreviated version of my e-mail exchanges with David Kramer, after his posting on LRC about bitcoins:

    Me: blah blah, bitcoins are worthwhile.

    David: blah, blah, read Rothbard and you will understand.

    Me: I have read both Rothbard books. Bitcoins:
    - can't be counterfeited
    - you can hold them anonymously
    - if you send someone bitcoins:
    - they can't be traced back to you
    - there is no middleman for the transfer
    - there are no fees for the transfer
    - there is nobody "in charge" of bitcoins that can be arrested (very much unlike with e-gold, DigiCash, and all previous forms of electronic "money"). It is all peer-to-peer.

    It is unlikely that you will ever go into Starbucks and buy a cup of coffee with bitcoins. They have already been "banned" by PayPal (an erstwhile competitor of bitcoins?), and it is likely that, as they grow in popularity, governments around the world will do everything they can to suppress them (unsuccessfully). Yes, they're not "money"! But, that's not what they are trying to be. You convert your fiat currency into bitcoins, and wait. At any later time, you can convert them back. Meanwhile, you are every bit as protected from inflation (and, separately, hyperinflation) as if you owned gold (which I also do own). You can incidentally use them as a transfer medium, with other bitcoin users, but that is not why they are insanely great.

    David: blah, blah, read Rothbard some more.

    Me: You: "they aren't a real medium of exchange". Hello? I agree! They're not! You win!

    This is like me trying to convince someone of the value of gold and they say, "well, you can't eat gold". Yes, I agree with that too. But that doesn't mean that FRNs are better than gold, or that gold has no purpose, or that you shouldn't own as much gold and silver as you can manage.

    Bitcoins are the same deal. You can't eat them, either. But they can store value in a way that is immune from any government theft or intervention. The government can never even know that you have them. They are great. For you to compare them to what the Federal Reserve does is ludicrous. You are saying they're not a medium of exchange (Yes!--remember, I agree with you!). You then leave it at that, implying they are of no use. This part that you only imply is what I disagree with.

    David: (no response)

    Me: By the way, I saw your "Update", and I think it is quite patronizing of you to think that anyone who likes bitcoins is obviously a misguided bumpkin who hasn't read enough Rothbard.

    We are all on your side, trying to help you understand something that you're obviously misunderstanding. No, not that bitcoins are money, but that they have other very valuable properties.

  37. Robert,

    Early adopters are more than happy with something that looks hokey, silly, or iffy. What did eBay look like in 1995? In fact, how Internet savvy were you in 1995? Most people didn't know what Netscape was, how to get it, or how to configure a TCP/IP network connection to make it work. Yet we have the Internet as we know it today precisely because geeks adopted it in 1994 and 1995.

    The early bird gets the worm. The skeptic comes on board when it goes mainstream.

    When did you sign up for Facebook? Ever? In 2004? When was your first Amazon purchase? If you know Facebook's history, you know what a hack job it was in its early days. Did that prevent it from becoming a major influence in the world?

    Look at the uprisings in the Middle East. Disruptive technologies are changing the world. Cell phones, text messaging, Facebook and Twitter are playing a huge role in changing that part of the world. Imagine that. Look how fast things are changing today. Disruptive technologies, by their very definition, often begin like Bitcoin - as open source projects loved by geeks, yet inscrutable by the mainstream.

    Most of the Internet is run on Linux servers running Apache software and being browsed on open source software. In case you aren't aware, Linux and Apache are open source software, the same model used by Bitcoin. The beloved Wiki, such as Wikipedia is another example of the open source mentality that is now mainstream, yet was perplexing to the non-geeks in the beginning.

    Will Bitcoin change the world? It very well might. Consider that.

    Regarding, and your insistence that it is not currently controlled by bitcoin, the first thing that you must understand is, there is no controlling body known as bitcoin. That is its main premise - it is decentralized. You must understand that. Essentially, an entity known as bitcoin does not exist.

    If disappeared, bitcoins and their use would not. That is because the bitcoin software is now open source, and can be copied and hosted anywhere. Furthermore, there is no central bank or clearinghouse for bitcoins. They exist on the network, and cannot be counterfeited, nor fail due to any central authority. Their existence is a result of many thousands of computing devices performing cross checks with each other, yours among them once you become a bitcoin user.

    True, it does have vulnerabilities, but it is in fact an extraordinarily secure entity in its whole. Most of its vulnerabilities are not its insecurity, but its perception. But let the geeks continue to refine it, and let the entrepreneurs find ways to make money by creating services around it, and it will grow. That is the model in today's digital economy.

  38. @Stephan Kinsella

    This is a surprising claim about Ludwig von Mises’s money regression theorem. According to Kinsella, “the regression theorem was created as an explanation for the actual origin of our current money, not at [sic] a description of the exclusive means by which money may arise. I.e., it seems to me that the regression theorem does not prove, or even purport to prove, that money can ONLY arise this way. It simply shows how to stop the infinite regress in the explanation of how our current money, which did evolve from a commodity standard, has value.”

    This would be news to Mises. In The Theory of Money and Credit, Mises makes his position unmistakably clear: “If the objective exchange value of money must always be linked with a preexisting market exchange ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange value based on some other use. This provides both a refutation of those theories which derive the origin of money from a general agreement to impute fictitious value to things intrinsically valueless and a confirmation of Menger's hypothesis concerning the origin of the use of money. This link with a preexisting exchange value is necessary not only for commodity money, but equally for credit money and fiat money” (Chapter 8, Section 2).

    Mises’s position in Human Action
    is exactly the same. He writes: “no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments. And all these statements implied in the regression theorem are enounced apodictically as implied in the apriorism of praxeology. It must happen this way. Nobody can ever succeed in constructing a hypothetical case in which things were to occur in a different way" (Scholar’s Edition, p. 407).

  39. Although the "bit coin crash" last week has knocked some of the shine (no pun intended...well, maybe a little) off of them, I've thoroughly enjoyed and learned a great deal from this discussion.

    Bob, I think your "tongue in cheek" assessment that they are backed by illegal drugs (as well as the alternate explanation that it is backed by lack of faith in government) are actually valid and solid bases for value. Gold has no intrinsic value, but evolved into money anyway. Bitcoins, for all their flaws, seem to be evolving along the same lines. In a world where financial privacy is almost gone, bitcoins provide an anonymity that is valuable.

    I look forward to following your future thoughts on this subject.