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Guest Post: Bitcoin: Money Of The Future Or Old-Fashioned Bubble?
Submitted by Patrik Korda via the Ludwig von Mises Institute,
Bitcoin has been all the rage lately. The stuff, or lack thereof, runs on peer-to-peer technology, is fully decentralized, has no patents, and is open source. Currently, there are almost 11 million bitcoin units in existence and the maximum amount of bitcoin units that will ever be created by the logic of its design are 21 million. For more details on how they work, see the recent Mises Daily “The Money-Ness of Bitcoins” by economist Nikolay Gertchev.
The Issue
While bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as litecoin, namecoin, and freicoin in place. This is a particularly valid point because bitcoin is a starfish, i.e., it is fully decentralized. As stated by Ori Brafman and Rod A. Beckstrom,
The starfish doesn’t have a head. Its central body isn’t even in charge. In fact, the major organs are replicated throughout each and every arm. If you cut the starfish in half, you’ll be in for a surprise: the animal won’t die, and pretty soon you’ll have two starfish to deal with.[1]
After the music-sharing service Napster went under, Niklas Zennström (the creator of Skype) stepped in with his creation called Kazaa, which had no central server that could be shut down. Eventually, such peer-to-peer programs became more numerous, to include Kazaa Lite, eDonkey, eMule, BitTorrent, etc. While this may be good news for people who like to download and share content for free, it certainly is not for people who are under the impression that bitcoin is a hedge against inflation. Those who compare bitcoin to a language neglect the fact that most people do not have an incentive to create a new language out of the blue. On the other hand, a great chunk of human history consists of people searching for the philosopher’s stone to magically produce gold. There can be no doubt that bitcoin has a built-in gold rush mechanism, which has already spilled over to litecoin and will be sure to spill over to subsequent knockoffs as well.[2]
Money
Does bitcoin jibe with the Austrian stand on money? The only way to find out is to read what the great Austrians had to say. Let’s start with Carl Menger. In Principles of Economics, Carl Menger made the point that money, a general medium of exchange, has always tended to be the most “saleable” (i.e., “marketable” or “liquid”) commodity of the time.
What is saleability? It is not simply value. One may have a Picasso at home, which will fetch quite a sum at a Sotheby’s auction during a boom, but a Picasso, like a poem by Friedrich Shiller, a work of Sanskrit, or a decades-old bottle of red wine can never be the most saleable good. As Menger put it, saleability is the
facility with which [a good] can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same. (...) Compare only the number of persons to whom bread and meat can be sold with the number to whom astronomical instruments can be sold.
Menger went on to point out that cattle were the most saleable commodity in the ancient world. This is perfectly understandable in a world where bare-bones subsistence is a reality for most people and the structure of production is virtually nonexistent. As society progressed, however, cattle became less and less marketable.
As civilization progressed, Menger states that,
… peoples who were led to adopt a copper standard as a result of the material circumstances under which their economy developed, passed on from the less precious metals to the more precious ones, from copper and iron to silver and gold, with the further development of civilization, and especially with the geographical extension of commerce.
Gold won out due to a variety of reasons, such as being durable, amalgamable, malleable, divisible, homogeneous, and rare. Yet, the ultimate reason that gold won out is because it was the most saleable of commodities. As Menger went on to write,
Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owner of [the] gold mine, provided the gypsy knows where to find the right market for his commodity. Gold nuggets can pass through any number of hands without any decrease whatsoever in marketability. But articles of clothing, bedding, prepared foods, etc., would be suspect and almost unsaleable, or at any rate of greatly depreciated value, in the hands of the gypsy, even if they had not been used by him, and even if he had, from the beginning, acquired them only with the intention of passing them on in exchange.
This leads us to another criticism of bitcoin: It can never be the most saleable good. The reasoning for this is quite simple. Until the majority of the 7 billion or so people that inhabit this planet have either a smart phone or frequent access to the internet, a digital currency is out of the question.
Gold, on the other hand, is easily recognizable, as opposed to silver that may be mistaken for other metals such as nickel. Moreover, it melts at a relatively low temperature and is a relatively soft metal, which provides superior amalgamation and partly explains why it historically won out over metals such as platinum. If one questions the role of gold in the present monetary system, one only has to walk down the street in a metropolitan area and see a ‘We Buy Gold’ sign. Moreover, central banks hold gold and lots of it. They do not hold cattle, wheat, soybeans, copper, silver, or bitcoins.
Menger also wrote,
I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost. [3]
While it may very well be true that some early adopters valued bitcoins with what Menger described as imaginary value, the point of the most saleable good bears repeating. Gold is and has been seen as an object of beauty since the dawn of civilization. Thus, the argument that bitcoins are in accord with the regression theorem because a handful of people consume them as they would a Picasso, is like saying paper money has value because John Law or Ben Bernanke really enjoy playing monopoly. In fact, we might as well say that alchemy works, considering that a significant amount of human history and energy was spent in attempting to find the philosopher’s stone. Some people may enjoy work just for the sake of working. Unfortunately, this is not a sufficient justification for slavery nor the labor theory of value.
Anonymity
With the imminent hyperinflation meme fading away and no longer holding much water, the new reason to hold bitcoins is the anonymity, nay, the freedom that it provides. Want to gamble online or buy something illegal? Bitcoins are the solution. It is a way of circumventing the authorities and uplifting free and voluntary trade, or so goes the story. Unfortunately for many of the misinformed, the reality is toto caelo. It would be best to take it from bitcoin developer Jeff Garzik himself. The fun starts at 3:20.
The ironic part about this is that anyone and everyone who has participated in illegal activity using bitcoins, presumably because they thought it was anonymous, now has a permanent record of every single one of their transactions contained on the public ledger. Those who think they are clever by using add-ons such as Tor are just as foolish as those who think prepaid cards or smart phones are anonymous. Imagine if bitcoins existed 50 years ago. Chances are, none of the last three presidents (including Barack Obama) would have run for office.
Bubble Time?
The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes. There is present a reflexive pattern of people buying because prices are rising, and prices rising because people are buying. The myopic are extrapolating the price trend of the past four months, which they deem is normal, and in so doing they exacerbate it to the upside, thus attracting even greater fools. The inflection point will come when the continuity of bullish thought is broken. One thing is for sure, the amount of suckers left who are willing to jump on the moving and ever-accelerating train is drawing thin, and so are their pockets.
When prices for any asset go parabolic, it does technical damage to a chart. It is sort of like someone deciding to go full speed in the middle of a marathon. Surely, one would look good for a few minutes. However, at a certain point one would inevitably collapse, with the possibilities of finishing the race being greatly diminished, let alone doing as well as they would have otherwise.
Gold went parabolic toward the second half of 2011 to $1,900/oz., which did a lot of technical damage to the charts that gold is just now beginning to shake off. Like Icarus, who had soared too high and melted the wax on his wings, parabolic moves always end in a correction, and if prolonged, a crash. Ironically, the best thing that can happen for bitcoin naysayers is if bitcoin skyrockets to $300/btc within a week.
There is nothing anti-Austrian about acknowledging that there exists in the market place a lot of naïve, irrational, and misinformed players. During the dotcom bubble, for example, a maintenance and building company called Temco Services almost tripled in a matter of minutes in 1998. The reason is because by 1998 every other layperson was involved in the market. Thus, the level of competence significantly dropped. The ticker symbol for Temco is TMCO, which was fairly close to that of Ticketmaster Online, which was TMCS. Ticketmaster Online (then TMCS) just happened to trade publicly for the first time on the day that Temco Services (TMCO) tripled. Rising asset prices create euphoria, and euphoria significantly drops the IQ of the participants.
Another reason why bitcoin is so susceptible to bubble behavior is because it is perceived as being something new. “New era” thinking always attracts lots of attention. The tulip was introduced to Europe by way of Turkey in the middle of the sixteenth century. (In fact, the word tulip came from the Turkish tulipan, which means turban.) The tulip was perceived as something new to Amsterdam, a country which at the time possessed an abundance of newly discovered gold and silver from the New World. Likewise, the Mississippi bubble, which was perpetrated by John Law, promised vast riches to be had from the New World. The manias in railways, the radio, the internet, you name it, most of them involved something new or something perceived to be new.
There is no doubt that bitcoin is a spontaneous answer to the monetary instability that we see all around us today. On one side of the pond people are worried about the glorified currency peg known as the Euro and on the other about the amount of damage that Bernanke is willing to inflict upon the world’s reserve currency. However, let us not become so enamored of an innovative stateless solution that we forget Austrian economics and hitch libertarianism’s wagon to something heading for a crash.
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Looks like $23 million has cashed out at MtGox last 24 hours and $96 million last 7 days and $212 million last 30 days.
http://bitcoincharts.com/markets/mtgoxUSD_trades.html
Not a huge amount of cash but pretty good for a currency only worth a few billion $.
This from a BTC'er I know. What tone?
"I was in a really bad mood that morning. I chewed the fuck out of somebody on the phone...can't remember who, probably had something to do with utilities...then I read FinCEN wants to charge money transmitter licenses to all miners, treating them as exchanges like Western Union. Those can range from $100K-$1m per year depending on the state you live in...which is fucking ridiculous. They can suck my cock...good luck figuring out who is who when it comes to BTC transactions. I aint paying that fucking bullshit."
"If Bitcoin is to be successful it needs to have a market cap of at least the size of something like Apple $400 billion or $30k a coin"
Hello? Wake up. Opportunity knocks.
BITcoiners: Benighted In Technology coiners
I wrote up a blog article and posted it on my blog but I am not posting here because I want to wait until my BTC miner friend gets a chance to comment just in case I fucked something up.
For those BTC'ers out there that think they have discovered something that is not subject to market forces or .gov regulation, I can only offer this Kenny Rogers song for you to contemplate. No one is saying anyone is right or wrong just listen to the simple lyrics and look at a three month Mt Gox chart.
http://www.youtube.com/watch?v=Jj4nJ1YEAp4
Hustlin' 'em, jus' hustlin'...
Apologies for not reading all the posts here but Bitcoin is perfect for gamblers, speculators and traders. That may be just one entity. Bitcoin isn't even stable enough for a simple exchange of payment for goods and services which is the primary function of money. Bitcoin isn't reliable as a store of value or wealth either. Maybe we live in and vitally depend on an electronic world but that only makes it more difficult to deal in Bitcoins. Here's what working against you : network messes and crashes; power failures; Bitcoin software screw-ups; no tech support; hackers both inside and outside the Bitcoin net, and last but MOST IMPORTANT, all the entities that view Bitcoin and all its analogues as a THREAT that they WILL NOT TOLERATE, and that includes every central banker in the universe. I'm not a gold bug but the messy swarm of internet people provides no stability, only chaos. Monetary stability and systems abhor chaos.
When I posted bit-coins...money for retards... I fully expected a majority of down-votes
but to my surprise,I received over 75% up-votes. My apologies to ZH readers. Sometimes
it seems that the most naive posters are the most vocal, but it appears that the majority of
readers on this site still put truth above political correctness.
I think for the moment bitcoins are still going to go up since there are a lot of people who now want to buy them because of all of the media attention, but dont know how to and it takes weeks to get verified on mt gox , so there is a huge pent up demand for it.
Price doubled in a week and volume is down 70%.
Do you know what a bubble is? We see this everyday in the stock "markets" and last I heard, BTC is NOT supported by HFT.
and I dont think this was the plan of the "New world order" they arent that smart. they didnt expect the internet and they didnt expect peer to peer currencies !! hahaha
Currency will see a reset, reform or renewal in this decade and before 2020.
Good luck to the holders of bitcoin trying to get any sort of recognition during and after the RESET when holders of gold can walk to any gold store and get new paper for their gold, silver etc.
PMs 1 / BTC 0
People who bought AAPL at $700 and swearing that AAPL will always be the most innovative company EVER, are buying BTC. People who drive a Prius or Leaf and thinking that their expensive fuel efficient vehicle actually does reduce an iota of carbons globally are buying BTC. People who are sitting on shit piles of cash and spend 1000s every day on caviar and hookers are buying BTC for fun.
It's irrational, it's exuberant, it's non-sensical and it's nothing different than playing "Farmville" and attending Star Trek "conventions".
In the real world none it matters. When reality brings America back to the hard cold facts on sustainability on this planet, then these same people will finally get a clue and start worrying about real issues and making real decisions.
but bitcoin will be used as a way to send money electronically without government interference. gold and silver cannot be wired.
Diana, dear. We're at the end of globalism. All that "wiring" of funds will be strictly controlled between banks and settlement banks and governments. You may email yourself BTC from somewhere else in the world but good luck trying to buy anything of real value like food, fuel or a doctor's visit from your BTC stash.
I'm not as pesimistic as you, I think they are losing control. the people (humanity ) is winning
and in cyprus you can probably find a lot of doctors willing to work for bitcoins. as in many countries soon when people cant get their money out of the banks
you will not be able to get new paper in exchange for your gold easily. Those in control of new paper will make it scarce in the beginning and will charge huge premium which will gradually decline. That is the usual way new powers introduce their money into the system
that BitCoin thingy looks like the Euro sign flipped around with a line across it and a couple little marks added.
I think the Bankers built BitCoin.
Kind of looks like a euro to me. +1
The real lesson of Bitcoin, which appears to get lost amongst everyone's biases, is that it reminds us what money really is. Just because one uses capital letters and says (something) IS money, doesn't make it so. Use Occam's Razor and what is left is that money IS faith. Money is simply what two parties agree is an intermediate store of value so that a transaction may be affected. In fact, only one side needs to believe in whatever is being used as money, since the buyer prefers the good or service for which he is trading (money) to the seller.
Bitcoin has believers. Those who use it believe it is a means of storing and transferring value. They may not be a large group, but since the number of bitcoins in existence is not large, and demand currently exceeds supply, the "value" is rising. Might it collapse? Sure. If faith drops, so will the price.
Believers in other forms of money can say Bitcoins or fiat is worthless, but so long as there is some group who believes otherwise, those statements are meaningless. People might have an opinion that either or both Bitcoin and fiat will eventually have zero value, but that doesn't make it a fact, and certainly does not make it an immediate fact, even if eventually might be correct.
Like Bitcoin, gold is limited. Gold has a group of people who believe it has some inherent value. Of course it has almost no inherent value. What gold has is faith. It also has historical precedent, but when the majority of believers are dead and gone, that precedent has less legitimacy. The number of people who believe in fiat today dwarfs the number of believers in gold. Almost seven billion people use the 180 forms of fiat in existence. Those who say every fiat in history goes to zero make a spurious argument. What they are really saying is that every fiat that has become worthless has become worthless. The other 180 might follow suit, but they haven't yet and may not in our lifetimes. To respond to the argument, "then why is gold trading five times higher than a decade ago?" is an argument with the equivalent weight of saying, "then why is bitcoin trading a hundred times higher than a few years ago?"
Everybody chooses his faith. Everybody who chooses makes a bet that his faith will be widely practiced while the chooser remains above ground. After that, it doesn't make a lick of difference. The '1913 dollar' argument is also spurious, since nobody gets paid in 1913 dollars. If one wishes to disparage fiat, the more accurate argument is to compare the buying power of the typical 1913 salary with the buying power of the typical 2013 salary. It's a decline, but nowhere near the 99.3% so often cited.
The "great Austrians", as the author writes of them, are not omniscient. The world changes, and they are all "too dead" to see it. Five hundred years ago, the common man didn't have much access to bank accounts, equity markets, mortgages...in fact most could not even own land. Monarchs, Emperors and Warlords controlled most assets. With the wider practice of democracy, combined with the development of a two-way banking system (deposits and loans), plus the Industrial Revolution that produced lots of goods and really exciting new ways to be a Monarch of sorts (running factories full of whirring machines and busy workers) two things happened: the first is that the common man acquired a greater percent of assets, relative to the elite, than at any time in history. The second is that the elite, prone to ennui once all their dreams come true, found other ways to amuse themselves between cradle to grave by owning productive assets. The old elite commanded armies; the new elite commands workers and factories and controls transportation systems, and lands that are arable, resource rich, or support real estate. For them, it's fun.
They don't need gold to acquire any of these things. They just need something to exchange that the selling party agrees has value. As Martin Armstrong writes, money need not be tangible. Money requires only faith. Bitcoin is telling that to anyone with an open mind and not a head full of preconceived notions. Bitcoin will continue to rise if its believers increase in number. It will decline if faith wavers. Gold will do the same. If and when the faith goes, any and all "money" can fall. Latching on to any over another is merely an expression of one's own faith, just as some swear by Jesus and others by Mohammed. Those who insist only gold is money had better hope the very large generational holders of the shiny metal do not decide that, like Warren Buffett, they prefer owning productive assets to an inert lump of metal. Indeed, just for kicks, consider the buying frenzy taking place amongst the elite scoffing up all kinds of land, companies, transport systems, rental properties...even toys. The "elite" have reversed a multi-century trend of wider productive asset ownership, and returning to the days of monarchs and emperors (in terms of relative ownership). If anyone cares to know why gold isn't $5000 an ounce despite the printing frenzy, part of the answer is right there: the elite love owning productive and entertaining "stuff".
What any of us want the world to be isn't what the world is. The world is under no obligation to behave according to any of our personal biases. When it comes to money, one's "logic" is merely the world one creates based on his false assumptions.
What if we run out of electricity or phone service? Then what will you need?
Without electricity and the internet how will anyone know what gold is worth?
Before electricity how did anyone know what Gold (a perfect weight and measure) was worth (Karats)?
Before Al Gore invented the internet not one person on the planet knew anything - FACT!
Civilisation began when Anon invented BitCoins - FACT!
Kony2012 wasn't AFRICOM aimed at gullible young facebook heads - FACT!
KonyCoins are the next big thing to hit in 2014 - FACT!
I guess you will count your gold coins in the dark.
a small group of people (a sect) got high on a new idea. Will we all get infected with it ? Who knows...
That's funny when the antidote to the infection costs you (because you waited, mired in doubt and indecision, and seeking group affirmation) a couple hundred bernanks.
http://www.youtube.com/watch?v=8QuSuKcrAeU
After years of disappointment with get rich quick schemes, I know I'm going to get rich with this scheme...and quick!
— Homer Simpson
Here is a thought experiement for "new currencies": Buy the Moon. Really. What if we all create a distributed registry of all the craters and auction them off with a value based on the crater area. Overlaps allowed, just to keep it simple. An open, distributed, consensual registry is much better than MERS. If a meteor creates a new crater, the first to spot it and register it owns it. This currency would be diluted extremely slowly given the rate of crater formation. Also, jurisdiction-wise, the Moon is off-planet, so it is not bound by any treaties on Earth.
For ease of trade, we take the best maps of the Moon and use software to put a coordinate point at the center of every crater so that each one essentially has a serial number (coordinate,radius).
Now the question: Aside from the computational "mining" of BitCoins, how is trading Moon craters any different?
How do you protect against a double spend of a moon crater? Bitcoin can protect against double spending.
Prevent double spending the same way BitCoin does.
Here's a good test. Let's see what happens when BTC hits the 200 euro mark. At current exchange rate that's $261. If it blasts through that then self-evident that ~700 million people have voted. And next stop will be $1000/BTC.
I've been issuing Buttcoins all my life and just flushing them away. Who knew people would buy them?
I hate the article and wrote a response
http://pastebin.com/V3fyEvK5
Comments welcome
I am not qualified to judge about bitcoins, but I can attest that the article does not exactly comply with scientific standards ...
Top reply. Nice one Terranstyler
'Ironically, the best thing that can happen for bitcoin naysayers is if bitcoin skyrockets to $300/btc within a week'
That would just inline with parabolic trajectory. If it was less than 300 I would be worried.
So you don't have online banking then?
So you don't have online banking or use ATM's then?
Has not happenend and I do not feel this is "working against me"
Great! Who needs it, I'll look after myself thanks.
Please provide proof? Even if there are, they haven't managed to do anything disruptive.
Whoopy fuckin do. I have been using bittorrent and piratebay etc. for nearly 10 years. Nobody is capable of shutting it down. BTC is the same.
P.S Bitcoin just hit $250.00
P.P.S I have updated my bitcoin dippy-twat list again from this deplorable article. You silly tulip and bubble mentioners are duly noted!
Errrrrrrrr has the author never sat on a train, or in a restaurant, or been anywhere in the whole fucking world? EVERYONE I know has a smartphone, and everyone who has more than $50 to his name, also has one and/or internet access. Is this guy blind or just being intentionally fucking stupid?
Cheers!
Fred
If you think this is bubble ask people on the street if they ever heard of bitcoin. 99.9% have no clue about it.
It still has potential to rise much more, it hasn't yet reached shoeshine boys.
If Bitcoin becomes a real harm for the goverment - it can be easily blocked.
"Here's how I would engineer the solution:
Either inflate or create a crisis involving the internet and encryption. For best results, involve some kiddie-porn loving Muslim terrorists who run a white slave ring and are about to impose Sharia law in Alabama.
Next, for the protection of all civilized people, pass some legislation stating that only certified vendors are allowed to use encryption. Of course they could sell you modified versions of your favorite software or plugins for said or whatever so with a little effort even Grandma could still do her banking or whatever. Naturally 'certification' requires that a usable key is available to our protectors in the government.
Now have all providers at suitable points mandated to run gear which would simply block any encrypted traffic which was not accessible. That is, not generated by software provided by certified vendors. These details are so technical that almost nobody should care or need to bother understanding them. Of course there will be various annoyances and teething problems and what-not, but since it is for the protection of all good freedom-loving people, that should be acceptable.
Anyone who has a problem with such a solution is probably doing something bad and is a threat to society. They may just be some leftist hippie type who value privacy on some weird philosophical grounds, but they'll just need to suck it up and get in tune with the 2000's and learn what it means to deal with the terrorism which is all around us everywhere we look."
Good luck with a new bubble!
I actually found this interesting and informative, with some new dimensions on the topic. The best thing about Bitcoin is that it’s getting people to reflect and think about the true nature of money in its various forms. Hopefully it’s getting them to realize that no form is perfect, and that the present leading forms are far, far away from perfect, unless you’re among the ones who control them.
On the down side, Bitcoin is going to support at least another 10,000 economist who make careers out of analyzing and discussing Bitcoin. I can hardly wait to see the look on Maria Bartiromo’s face when one of them shows up on CNBS and tries to explain it to her.
Gamblers will bet on anything. In a brokerage house where I once worked the brokers would bet on the high temperature of the day, as indicated by a digital sign on the Citibank branch office across the street. Being good brokers, they didn’t just settle for one bet. They made a two way market in the index and often traded their positions back and forth nine or ten times before the final outcome was known. Being good Wall Street brokers, they also knew the game was rigged. The thermometer was broken, and anytime the actual temperature exceeded about 95 degrees F, it then ramped up to about 115 degrees in a matter of seconds. A lot of summer interns lost a shitload of money in that market.