The main focus of his comments is with regard to Bitcoin and the regression theorem. While I do think this is an interesting topic, a few byproducts of Block's discussion of Bitcoin and the RT have caught my eye.
First, Block writes:
Probably, the govt will soon blow this out of the water with regulations, taxes.I agree. Both China and India have provided examples of how this could occur with their recent shutdown of Bitcoin activity. While many argue that Bitcoin is beyond the reach of governments, daily commercial transactions are not. China and India have simply made it illegal for businesses to deal in Bitcoin at the daily transaction level. Beginning and end of story.
Bitcoin at present is not a threat to Master Card, Visa or American Express. Despite all the hype, there remains very few Bitcoin transactions at the retail level. If Bitcoin ever appears to become a threat to the major current day transaction processors such as MC, V and AE, you can be sure teams of lobbyists will descend on Capitol Hill to nudge Congress into some type of regulations on transactions that will cripple Bitcoin as a method of transacting business, the type of regulations that China and India have already implemented. It can be done.
A second point made by Block is this:
More than just a few people treat it [Bitcoin] as a money.I'm not sure this is the case. From my perspective, people treat something as money when they think in terms of that item and are willing to enter into fixed contracts with that item. In the US, dollars are money and we daily enter into all kinds of transactions with dollars, instant transactions and longer term contractual transactions.
This is not going on with Bitcoin, though it may appear that it does. We have seen a small town sheriff say he wants to get paid in Bitcoin, but he is surely not thinking in terms of Bitcoin. His salary is fixed in terms of dollars, and each month depending upon the price of Bitcoin, he will receive payment converted to bitcoins. BUT, he is getting a fixed dollar value of income. Both Virgin Airways and Overstock have announced that they are going to accept Bitcoin, BUT both are setting prices in terms of dollars and asking for Bitcoin payments at the time of the transaction based on the fixed dollar price, not a fixed amount of bitcoins. Both VA and O also appear to be converting immediately (or plan to convert immediately in the case of O) their bitcoin receipts to dollars.
In other words, no one is pricing things in terms of a fixed Bitcoin price, the way things are priced every day in terms of dollars. In my view, this means that Bitcoin is not being used as money, but is being used more like a gyrating American Express travelers check. If the day ever comes when prices are set in terms of fixed amounts of bitcoins, and people are willing to take their wages in terms of fixed amounts of bitcoins, then, in my view, we can say that people are treating Bitcoin as money. This is not occurring now.
Block also states that
I’m not aware of any formal discussion of this [Bitcoin and the regression theorem] in the literature.I would argue that part of Murray Rothbard's critique of Hayek's support for denationalized money applies to Bitcoin (See: Murray Rothbard: Bitcoin is a Crank Scheme)
Stay tuned, I am going to ask Prof. Block to respond to my thoughts.
I thought having the government as your regulatory "partner" was bullish for bitcoin... according to a bitcoin exchange architect.
ReplyDeletehttp://tradewithdave.com/?p=19715
you are being bit-conned
ReplyDeleteNothing gets this much traction in a manipulated media unless that is the agenda...
When Block says that "more than just a few people treat Bitcoin as money," he is confusing the term "money" with the term "medium of exchange." Under Mises' regression theorem, there first are commodities that are useful in ways other than as a medium of exchange. Over time, people start acquiring the most marketable of all the commodities, not for direct use in production or consumption, but solely to be traded for other commodities. At this point, the commodity is a "medium of exchange." Then when this medium of exchange becomes almost universally used as such in a single integrated market, it can be called "money."
ReplyDeleteApplying this to Bitcoin, Bitcoin is definitely a commodity. It is scarce and it is useful other than as a medium of exchange in that it can be used as a transfer of funds mechanism. But in this use, it is transferring dollars or other money - as you say, most people who currently use Bitcoin solely for transfers, and not for speculation, still price it in terms of actual money and quickly convert it, after the transfer, to actual money.
However, Bitcoin still fails the test of being the most marketable of all commodities, and thus it is not yet a medium of exchange, and certainly not money. No matter how useful Bitcoin currently is as a transfer mechanism, it is not that marketable, and certainly not the most marketable commodity. It has a thin market with wildly fluctuating prices and is not that easy to buy and sell.
Regardless of the dollar's flaws, and its certainly declining value, it is still the most marketable of all commodities over the entire world. Bitcoin cannot become money until it replaces the dollar at least in some integrated geographic area or market sector. For example, Bitcoin would become money along side of the dollar if all automobiles, or illegal drugs, became priced, and bought and sold, solely in Bitcoin.
Now the question that is of most interest is will Bitcoin ever become money, as opposed to just a useful mechanism for certain tranfers or trades that are actually effected in terms of dollars?
For this to happen, people who don't already own Bitcoin will need to want to acquire it solely as a medium of exchange, and NOT because they believe its price (in dollars) will increase. In fact, the key component of money is that people do not even think in terms of its price increasing or decreasing because it IS the price mechanism for all other goods. But it will be impossible for anyone to acquire Bitcoin without this price fluctuation in mind until Bitcoin has maintained a stable price against all other commodities for a long, long time, so long in fact that the thought of such is barely conceivable.
Now the key problem for Bitcoin attaining this stability of price is that despite its nonmonetary usefulness as a transfer mechanism, its inventors and early adopters never naturally started selecting bitcoin from an array of alternatives as the most marketable non-monetary commodity for use solely in exchange. They started with the idea that this complex product could eventually become money if enough people realized it. Then they acquired it and started exchanging it as a demonstration or for ideological reasons. When enough people did that, it increased in price such that now most people who buy it are valuing it solely for its potential to be adopted by others who, UNLIKE them, will have no expectation of any profit but want to acquire it solely as a stable medium of exchange.
But no one will ever acquire it with no expectation of profit until its price stops rising and falling. But because Bitcoin's non-monetary use is so limited, I would posit that its price can NEVER become stable. It's price will continue to climb, and fluctuate, as long as some people still hold out hope for its long-term monetary potential, but, if people do stop thinking about it in terms of profiting off of it, its price will fall to nearly zero, because it simply does not have a sufficiently strong non-monetary base of usefulness.
The beginning of the function of a medium of exchange does not begin when one commodity is the most marketable. Rather, it begins when people notice that some commodities are easily marketable (or liquid as we say now), and start relying on this easy marketability in order to hold the commodity as a part of their liquidity portfolio. This is explained by Menger in On The Origin Of Money, and has been put into connection with Bitcoin by me (in my master's thesis and several blog posts) and Konrad Graf in his "On the origin of Bitcoin" as well as his videos on youtube and blog posts.
DeleteBitcoin began exactly the same way as Menger posits that media of exchange begin (and Mises explainsmust begin). It became easily saleable, and people who noticed this were able to rely on this in order to hold Bitcoin as a part of their liquidity portfolio. It wouldn't have been logically possible to use Bitcoin (or anything for that matter) as a medium of exchange if it wasn't already a liquid good prior to that. And it happened in the first half of 2010 (and is well documented) and cannot unhappen anymore.
The use of a unit of account occurs much later, and requires a higher level of liquidity and probably several other conditions which are not entirely clear. And while this is a more complicated question (which I don't have a full answer to either), it is also practically far less relevant than implied by various economists. If that happens, it would probably mean that the us dollar and/or the global financial system has collapsed and there is no alternative unit of account anyway.
@ Peter Surda
DeleteI should have said "although Bitcoin is a medium of exchange, it is not one of the MOST marketable of such media, and in fact, probably not even in the top five." And of course, my main point was that it certainly cannot become money unless/until it does rise to very near the top of the list of "most marketable," at least in some area or market sector.
As to whether Bitcoin began in exactly the same way as Menger posits for media of exchange, the crux of my concern is that Bitcoin cannot fit the Mengerian/Mises requirements because Bitcoin is a very special situation, a commodity created out of whole cloth with no other obvious and material non-monetary purpose. In that sense, Bitcoin is not at all like gold, silver, fishhooks, or other long-existing non-monetary commodities that Menger had in mind. And this very special feature of Bitcoin could perversely prevent its becoming money because of the price instability associated with this history.
I do agree that the collapse of the dollar, etc, would be Bitcoin's best chance, but even then, it would be competing against more marketable media such as the other fiat currencies, unless they all collapsed, because despite their flaws, they are still much more marketable, and more price stable, than Bitcoin. And even if all fiat currencies collapsed, Bitcoin would probably be less universally marketable than say, gold or silver, which have historical antecedents as money.
You've just proven that the Euro, like bitcoin, is not money:
ReplyDelete"However, Bitcoin still fails the test of being the most marketable of all commodities, and thus it is not yet a medium of exchange, and certainly not money."
Since you've given the title of most marketable commodity to the dollar, the Euro fails to be the most marketable.
"But because Bitcoin's non-monetary use is so limited, I would posit that its price can NEVER become stable."
By that logic you should posit that the Euro's price can never be stable.
You need to read Wenzel more carefully. He says the dollar is money in the US.
Delete@ Neal G
DeleteI could have been more precise. I should have said, "the dollar is the most marketable commodity in the US, the Euro is the most marketable commodity in Europe," etc. The point is the same though. And I did say that Bitcoin too can become money as long as it becomes the most marketable commodity somewhere or in some sector.
I have no preference for Bitcoin' outcome either way. My only concern is to correctly predict the actual outcome. The profit lies in correctly predicting the future, regardless of the direction it takes. Thus the reason for my long analysis. I will miss out on large profits if I am incorrect and do not buy Bitcoins now. I will avoid losses if my analysis is correct and it causes me not to buy. My long analysis is my best thinking to date. I would love to hear substantive analysis to the contrary.
Go out on the street, right now, and ask 100 random people if they know what bitcoin is. Then ask those same people what the dollar is, what gold is, what silver is. I would even wager more people would know what "the Euro" is. I rest my case.
ReplyDeleteIt seems to me (very much a non-expert) that the regression theorem is meant to explain how people price money in accord with other goods. If, one day, somebody in your neighborhood starts passing out red pieces of paper (to use as money), forgetting the problems of scarcity, divisibility, durability, etc., you would have no idea how much one of them should or would be worth. That's what "regression" means; looking to the previous trading period (however arbitrary one wishes to make it) to get an idea of what this medium of exchange should trade at. That's why it must be bought for its own sake (whatever that subjective reason may be) before it can be a medium. So we know, approximately, what it can buy. The volatility of bitcoin makes the act of looking back (to the previous trading period) somewhat useless, since it's future value is so disconnected from it's past.
ReplyDeleteWhat you guys don't seem to grasp is that in the environment that we live in where there's massive QE and confiscation of wealth, bitcoin has value because of the fact that it is virtual, secure and can be transported across borders without the authorities being aware of it as well as being exchangeable by parties without government intervention and at very low transaction cost. That you've fail to grasp that basic fact is amazing!
ReplyDeleteIf the government gets involved in trying to regulate business using it as legal tender, that's not a bad thing. That's a good thing. And that you still think that by over the next 5-10 years we'll still be using and pricing things in dollar shows that you haven't grasped that people and states are moving away from the dollar. And when it's reaches a critical mass, the dollar will blow up. And the dollar will go the way of every massive devalued fiat currency. And Robert, bitcoin isn't volatile, the supply of bitcoin is reaching its limit and has been growing very very slowly towards that upper limit. It's the currencies it's being measured against (like the dollar being increased at more than $85 billion new dollars per month) that is volatile.
Can I suggest that rather than looking to M. Rothbard for how to understand things that didn't exist when he was alive, that you use your brain and think independently for yourself.
@JayTe
DeleteWhat you fail to grasp is that no one here is saying that Bitcoin does NOT have value. To say that would truly be amazing since Bitcoin is clearly being valued via regular trades at high prices, but no one has said that. What is at issue is whether Bitcoin is or will become a common medium of exchange. Houses have value, but they are not media of exchange.
And who is saying that the dollar will NOT eventually blow up & go the way of all fiat currencies? Has it not occurred to you that there are choices other than the dollar or bitcoin? I believe everyone here is desperately looking to get off the sinking dollar Titanic. The debate is whether Bitcoin is the best lifeboat among those standing by into which we can jump.
And regarding looking to Rothbard to understand things that didn't exist when he was alive, maybe you are not aware Rothbard did in fact analyze the feasibility of new forms of alternative monies. But even if he hadn't, isn't trying to thoughtfully apply the thinking of past brilliant economists to new forms of money the epitome of using one's brain and thinking for one's self, rather than reflexively leaping at the current hot commodity?
Go out on the street, right now, and ask 100 random people if they know what bitcoin is. Then ask those same people what the dollar is, what gold is, what silver is. I would even wager more people would know what "the Euro" is. I rest my case.
ReplyDeleteGo out on the street, right now, and ask 100 random people if they know what bitcoin is? Then ask those same people what the dollar is, what gold is, what silver is. I would even wager more people would know what "the Euro" is. I rest my case.
ReplyDeleteWhat you guys don't seem to grasp is that in the environment that we live in where there's massive QE and confiscation of wealth, bitcoin has value because of the fact that it is virtual, secure and can be transported across borders without the authorities being aware of it as well as being exchangeable by parties without government intervention and at very low transaction cost. That you've fail to grasp that basic fact is amazing!
ReplyDeleteIf the government gets involved in trying to regulate business using it as legal tender, that's not a bad thing. That's a good thing. And that you still think that by over the next 5-10 years we'll still be using and pricing things in dollar shows that you haven't grasped that people and states are moving away from the dollar. And when it's reaches a critical mass, the dollar will blow up. And the dollar will go the way of every massive devalued fiat currency. And Robert, bitcoin isn't volatile, the supply of bitcoin is reaching its limit and has been growing very very slowly towards that upper limit. It's the currencies it's being measured against (like the dollar being increased at more than $85 billion new dollars per month) that is volatile.
Can I suggest that rather than looking to M. Rothbard for how to understand things that didn't exist when he was alive, that you use your brain and think independently for yourself.