"Most people are in arrested development and cannot use logic." Jacob.
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"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Friday, August 3, 2012

Bitcoin, all in one place.

I've written 8 times about bitcoin, and why it is doomed to never be a currency.

1. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html Explains Mises' Regression Theorem, and why bitcoins violate it.

2. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-and-bitclothing.html Explains that just as clothing made out of bitcoins is absurd, so is money made out of bitcoins.

3. http://smilingdavesblog.blogspot.com/2011/07/bitcoin-yet-again-in-simple-language.html Gets to the very essence, in a few short words, of why bitcoin will never be a currency. The comments here are especially enlightening.

4. http://smilingdavesblog.blogspot.com/2011/09/bitcoin-we-hardly-knew-yeh.html Graphs bitcoins decline from $30 to $5 in a few short months. Recently it has climbed back to about $10. Time will tell.

5.  http://smilingdavesblog.blogspot.com/2011/12/bitcoin-and-mises-regression-theorem.html Summarizes someones claim that bitcoin is compatible with Mises' Regression Theorem, and shows him wrong.

6. http://smilingdavesblog.blogspot.com/2011/12/was-mises-regression-theorem-mere.html Summarizes a claim that bitcoin is compatible with the regression theorem because the regression theorem is just summarizing history, and proves that claim wrong.

7. http://smilingdavesblog.blogspot.com/2011/12/one-more-detail-about-bitcoin.html Summarizes the claim that although Mises' theorem apparently shows bitcoin is not a currency, yet in reality bitcoin already is a currency as we speak. And so Mises' theorem is proven incorrect by the real world. Refutes this claim.

8. http://smilingdavesblog.blogspot.com/2012/07/bitcoin-and-intrinsic-value.html
Explains the concept of intrinsic value, its two meanings depending on the context in which it used, why bitcoin has no intrinsic value, and gives a vivid image of how to determine with ease whether something has intrinsic value.


  1. Intrinsic value? Is it all about that? The intrinsic value of gold is $10-11 dollars an ounce, but trades at $1700,00.

    1. It's not "all about" intrinsic value. But nothing can ever be a currency unless it starts off with intrinsic value. After that, it can acquire more value as a medium of exchange. Read the first article.

  2. Isn't it possible that Mises' Regression Theorem needs to be updated? He couldn't have conceived of something like a cryptographically secured, globally shared real-time ledger.

    And even if Bitcoin doesn't satisfy the Regression Theorem, does it matter? People are still using it as a store of value and a mechanism for transferring value.

    1. As the user rolante on Reddit mentions, the Regression Theorem applies only to moneyless economy and how they transition to a monetary economy. Thus, the Regression Theorem is irrelevant in the case of Bitcoin, because Bitcoin arose in a monetary economy.

    2. Anonymous,

      Cryptographically secured, globally shared real-time ledger only becomes relevant after it has intrinsic value. But it has no intrinsic value. Read the articles.


      rolante is mistaken. What is his proof, his reasoning? Which step of the proof of the regression theorem depends on a moneyless economy? Answer: none.

  3. Dave, no matter how much you want it to, theory does not drive reality. It's the other way around.

    1. I just read article 7. So you are saying that everything is okay, and now you ask for it to be accepted generally worldwide. What is the criteria for worldwide acceptance? Would it work if it's a widely accepted meta-currency? And when it happens, will regression theorem magically collapse? Isn't the fact that it is possible just enough? Isn't this science? If a group of people can do it, why not a wider group? What are the symmetry-breaking rules? Where is the proof of them?

      I think you are looking it the wrong way, and stubbornly insisting on an indefensible point.

    2. I didn't say world wide, and it's not me who is asking for anything. Every economist on the face of the Earth, Austrian or not, accepts "generally accepted" as the sin qua non of a currency. Look up Wikipedia on Money.

      Why are you asking me all these questions, and not any and every economics professor? But since you have graced this humble blog with your comment, I'll answer briefly.

      The criteria is that if your wife or gf makes a shopping list, you can easily buy everything on that list with bitcoins. If that happens, bitcoin will be a currency, and Mises' theorem will be disproven. The theory will not magically collapse then, but will be shown to be a mistake. Of course, that will never happen.

      Possible is not enough, because anything is possible. However, those that are incredibly unlikely, like the law of gravity not happening, science ignores. The theorem proves that bitcoins acceptance is like the law of gravity being defied.

      A group of people can do it because a small group can agree to risk all their money on something. We see that every day in Vegas. But a Vegas lifestyle of constant gambling is not viable for a large group for a long time, and they know it. Same with bitcoin.

      The truth is, even the small group who own bitcoins do not use it as money. 99.9% of their transactions are in dollars, or whatever the local currency is. I bet most of them just are speculating in bitcoin, meaning buying some now with intention to sell at a profit later.

      Not sure what you mean by symmetry breaking rules. The proof of Mises' theorem is in his book. The first link lays it all out in simple language, and the third one summarizes the essence of it.

    3. The fact that something is generally accepted doesn't mean it's true. Or false. So please... Also, the first sentence of the Wikipedia article clearly states that a specific socio-economic context is sufficient criterion, so maybe it's what I'm saying that is "generally accepted".

      I have asked economy assistants about it and they told me they found Bitcoin plausible. What I mostly got out of them was that there are a lot of questions about the nature of money, and not some strict doctrine they were submitting to. I don't have any professors on dial though.

      I think we can do without the appeal to authority.

      What I mean by symmetry breaking can be explained as an instance of the heap problem.

      Say, my girlfriend can buy only one thing in her shopping list with Bitcoin. We can safely say that Bitcoin isn't money and the regression theorem is safe. What about two things? According to you it still won't work until she can by everything on that list with Bitcoin. What if she can't buy everything on that list with USD though (e.g. some black market thing)? Ooops, now USD is not money anymore. Since this is already the case (I have bought things with Bitcoin that I can't buy with local currency), does this mean the regression theorem is proved wrong, or does it mean that USD is really not money?

      Second problem I'm having with this "it doesn't work until a certain point" thing is, the mental experiment of a "Bitcoin village". Somehow if the world around them disappears, Bitcoin becomes money. Otherwise it isn't. This shows to me that the definition itself isn't very versatile.

      Also, you haven't touched the notion of a meta-currency. Since there are pass-through systems that convert Bitcoin to a local currency during purchase, you can already buy everything on that list while storing your wealth in Bitcoin. I guess the answer would be "it doesn't count", and I could accept that.

    4. Generally accepted in this context does not mean generally believed to be true. It means most shopkeepers will accept payment in bitcoin, say, in exchange for the things they sell. Generally accepted as payment.

      Are your economy assistants familiar with Mises' Regression Theorem? [I doubt it]. Have you asked them why does it not apply to bitcoin?

      About appeal to authority. I hope you grasp that I am not appealing to authority. I am laying out a logical chain of reasoning. See the first link.

      The story about your gf being able to buy one or two or more things is interesting. It shows that economists do not know where exactly to draw the line between generally accepted and not generally accepted. They admit this. However, just because we do not know exactly where the line is, that does not mean we do not know when something is clearly on one side or the other of it.

      For instance, IQ tests cannot pinpoint with total accuracy who is smarter than who, if two people are within a few points of each other. But they still give valuable information. For example, if one fellow gets a zero score and another gets 150, then we know who is smarter.

      I don't understand about bitcoin village. Why do you think bitcoin will be money if the world around some village disappears? Remember, in the village itself, everyone does the vast majority of their shopping, by neccesity, without bitcoin.

      A definition does not have to be versatile. Why do you think it should be? Which word has a versatile definition?

      Not sure what you mean by a meta currency. If someone would legally obligate himself to exchange bitcoins at par for dollars, then bitcoin would be what is known as a money substitute, like bank checks are right now. But that doesn't exist. And again, those pass through systems are not connected to every store in some shopping mall, are they? One can still only buy a few trinkets with bitcoin.

    5. Well, you at least agree that "every economist on the face of the Earth" is pretty vague on details. Actually, I'm even less convinced than before that the general acceptance standard even means anything.

      For instance, regarding versatility of the definition; Silk Road by itself does $22 Million worth of sales a year. The totality of Bitcoin trade for goods is probably higher than the GDP of a small country, like Tuvalu. If you add financial sector, which regrettably is still the dominant use of Bitcoin, you would get an even higher number. All regardless of it fitting your definition, so yes, I think the definition is too rigid to be useful.

      Even worse, if it were a real village, or a small country, you would accept it as a currency. But because it is at the global scale, you can't. It could be half the world's commerce, but you still wouldn't accept it until one can directly spend it in the grocery shops.

      Regarding the meta-currency aspect; I think neither Bitcoin nor the pass-through systems are money substitutes. The more conventional ones, like debit cards, can be used just about anywhere. You load your account with Bitcoin and use the card to spend any currency. However, as I already agreed, this might not "count". Though you can see that the mechanism itself lets you store value as Bitcoin in order for your savings be protected from the effects of inflation (like gold), and also being able to move them easily (unlike gold) and yet still translate that value to local goods. So it seems debatable to me.

    6. Oh, the assistant professors I was talking about (of course) know Mises' theorem, though they don't seem to care. I'll pester them some more when I have time. ;)

    7. goks,

      It's not my definition. Mises used it. Wikipedia quotes mainstream economists who use it. No one has a different definition.

      Let's think about why that phrase was inserted, and what each part of it means, and why it is important when it comes to money.

      Medium of exchange means when I want to sell something [say a cow], I get dollars for it. I then use the dollars to get what I really want [A newspaper subscription, a refrigerator, and a bag of potato chips]. This is in contrast to barter, where I trade directly for what I want to use [say a horse for a cow]. In other words, I don't really want the dollars. I am taking them now because I plan to trade them in later.

      Obviously, for me to accept the dollars, I have to be confident that all the people I will deal with in the future will take my dollars in exchange for whatever they have to sell. Otherwise, I will have given away
      my cow and will get a pile of paper in return, with which I can't buy anything. Of course, I would never agree to such a thing.

      "All the people I will deal with in the future" equals "generally accepted". Now there may be one weirdo out there who will refuse dollars and insist on payment in gold, or old Batman comics, or whatever. But one such guy is not going to stop dollars from being money. Nor will two such guys. As long as it is "generally accepted", meaning by most people, a dollar is still considered as fitting the definition of money. How many people refusing will stop it from being considered money? That is not known, but it is also not important, since most things under consideration for money are at an extreme. They are either almost universally accepted, or almost universally refused.

      Same thing on the lower end. If one guy only is willing to accept old Batman comics in payment, that doesn't make them money yet. Same if only two guys. There have to be so many people willing to accept Batman comics that I can trade my cow for a pile of Batman comics and be confident I can then trade the comics to get anything I want.

      Now we understand how, even if 22 million dollars worth of bitcoin change hands every year, that has not made bitcoin into a medium of exchange. I cannot be sure that if I trade in my cow for bitcoins that I will be able to get my newspaper subscription, my fridge, and my bag of potato chips. [In fact, it's pretty certain that I cannot].

      The people of Tuvalu, by contrast, can use their Tuvalu dollars to get anything they want.

      I still don't understand your last paragraph. Sorry.

    8. Note the difference. 2 million dollars worth of Bitcoin change hands every day. 22 million dollars worth of Bitcoin is traded for *goods* every year on a single web store.

      I won't debate with you whether your interpretation of the regression theorem is correct since others have already done so, so I'll say "your definition" to refer to the definition you use. Plus, you are not innocently following a chain of thought based on Mises' regression theorem, you are extrapolating conclusions from it, like proposing that accepting Bitcoin as payment would be foolish.

      You also seem to miss the point with the "weirdo". I'm not talking about a single guy who doesn't accept dollars, I'm talking about a single sector not accepting dollars. Moving the analogy; if you are hoping to buy [insert illegal but harmless substance here] in Tuvalu, Tuvalu dollars won't help you, but you can get them via mail for Bitcoin, and get Bitcoin in exchange for an online translation, so on and so forth. In this case, if you don't consider Bitcoin a currency, tell me what it is. Plus, you probably can't buy, for the sake of argument, hosting for Tuvalu dollars either. You buy it with USD or BTC. So for that purpose, there is no difference between USD and BTC from your perspective, other than the fact that you can get BTC without an intermediary.

      Here, I'll repeat my frustration about your definition of money. It really doesn't matter for you how much commerce is going on through Bitcoin. You won't consider it as money even if a trillion dollars worth of trade is being made through it, until you can buy groceries with it from your chosen grocery store.

      So yes, the gist of my argument is, the definition you choose to use for money is useless. Therefore the conclusions you derive from this definition are baseless.

      Currency and money are much easily and simply defined (check out the wikipedia entries you refer to). The the regression theorem is an explanation of how a medium of exchange comes to exist. You are using an interpretation of an explanation as if it's a definition. Your interpretation might have been different if you had begun with reality, and Bitcoin could very well fit the regression theorem (though you'd have to try real hard).

      I don't know which part of my last paragraph you didn't understand. You store your wealth as Bitcoin and you spend it through a system which converts it to local currency on-the-fly. You can do it over a MasterCard. You can do it through other means. These solutions are available in the market right now.

      Does the mechanism really matter? Briefly, you can convert your BTC to the food in your local supermarket, using an intermediary. It obviously doesn't fit your model, and I don't know how you would even reason about it, so it's an open question.

    9. "22 million dollars worth of Bitcoin is traded for *goods* every year on a single web store."

      Even the owners of the Silk Road site use dollars for 99.9% of their transactions. The minute they get their bitcoins, they sell them on the spot for dollars, and then buy literally everything in dollars. And they only agree to sell for bitcoins because they think they can transfer into dollars. If they knew they were stuck with those bitcoins and had to live with them only, they would not sell a single grain of their drug for bitcoins.

      How would you personally feel if your boss paid you in bitcoins that were not redeemable for dollars, but had to be used to buy goods and services? I am sure you would look for a new job. And why? For the precise reason I am talking about, that bitcoin is not a generally accepted medium of exchange and you cannot get more than a few odds and ends with a bitcoin.

      "Plus, you are not innocently following a chain of thought based on Mises' regression theorem, you are extrapolating conclusions from it..."

      I am not extrapolating. I am drawing conclusions using the accepted rules of logic. This is known as "deduction", and can be refuted only by showing where the flaw is in my chain of reasoning. Please show me exactly where the mistake is. See this link to get an idea what I am talking about:

      "I'm talking about a single sector not accepting dollars." Which sector is that? Drug dealers? They would be happy to take cash, rest assured, if you showed up at their doorstep with a bag of money. Even their deals in bitcoin are not made with the goal of getting bitcoins, but of getting dollars.

      Contrast this with the Tuvalu dollar, which even if the average citizen had no way of changing it into a foreign currency, would be content, because they can buy everything with T. dollars. Various countries at certain times made it illegal to change local currency to foreign currency. Nothing happened, people continued life as usual. If this would happen to bitcoin, all trade in it would cease in an instant.

      You cannot buy drugs with T. dollars, not because the local dealers have contempt for the T. Dollar, but because the laws make it difficult to do business with them. Again, the minute the local Tuvalu dealer gets his bitcoin, he runs to change it into cash.

    10. [continued]

      "...if you don't consider Bitcoin a currency, tell me what it is." An item used by con men to trick gullible speculators.

      " Plus, you probably can't buy, for the sake of argument, hosting for Tuvalu dollars either. You buy it with USD or BTC." You are making up a situation that doesn't exist. Of course you can buy hosting with T. dollars in Tuvalu. And no host will accept bitcoins, they sneer at them, quite rightly.

      "Here, I'll repeat my frustration about your definition of money." It's not my definition. It's the standard definition used by all economists of every school. I explained why they chose that definition.

      "It really doesn't matter for you how much commerce is going on through Bitcoin. You won't consider it as money even if a trillion dollars worth of trade is being made through it, until you can buy groceries with it from your chosen grocery store."

      Not only groceries. Everything. That's what money is. And let's wait until there is a trillion dollars worth of business happening with bitcoin [= the impossible] before talking about it. Because a trillion bucks worth of business will probably only happen if it also becomes generally accepted to buy everything.

      "Currency and money are much easily and simply defined (check out the wikipedia entries you refer to)." They all insist on generally accepted.

      "The the regression theorem is an explanation of how a medium of exchange comes to exist." It is more than that. It also tells you the prerequisites something must fulfill to stand a chance of being money. See the sixth link.

      I don't understand the rest of your paragraph. The reality is that bitcoin is not a currency now [=not generally accepted, the universal definition of money, as wikipedia shows]. The R. Theorem proves that in addition it never will be. All this jives with reality.

      I still am not sure what you mean in the last part. Are you talking about someone taking their dollars and buying a bitcoin, transferring the bitcoin to someone else, then that someone changes it back to dollars and goes to the supermarket? Bitcoin was not used as a currency in that case. It was used as means of transportation for a real currency, dollars. Just like a Mastercard is not money, but a convenient way of moving the real money, dollars, from person to person.

    11. "You can't buy your groceries with it, so that's why accepting it as payment is stupid" is not deduction. You have to reveal the whole mechanism, and "it wouldn't work if people didn't exchange dollars for it" doesn't work, precisely because it applies to every other thing we call money. Believe it or not Mises haven't covered the realities with this case very well, so you have to make the connections yourself, and I didn't see it in your articles. I think most of your replies consist of hand waving, and aren't directed to the reasons I give a particular example but attack the example directly.

      Also, there are factual mistakes on your side, like hosting services not accepting BTC (lol, sneering at them?). There are tens of hosts that accept BTC with competitive prices, and it is a preferred payment method if you want to buy a VPN or a seed node, for obvious reasons. While doing that, you attack an example I specifically pointed out as "for the sake of argument" as fictional, but you are comfortable asserting that there are web servers in Tuvalu, that presumably are ready to serve at global scale.

      Of course, all hosting providers won't accept BTC, like all hosting providers don't accept USD. This follows another factual error I had already pointed out, that the common definition of money includes it being generally accepted. It is usually either pointed out that a context is applicable, or "generally accepted" means such a context is possible. At the very least, it's open to interpretation. Even if Bitcoin were my preferred currency to pay for only a specific genre of things for rational reasons (for instance, all things involving privacy of either me, the other party or both), I don't see the reason why I am supposed to call it "an item used by con men to trick gullible speculators" rather than a currency.

      Like I said, I fail to see why I wouldn't be able to redeem Bitcoin for USD? You are making up a situation that doesn't exist, and can never exist. It's not even necessarily a definitive case for Silk Road itself, since they presumably pay for hosting using Bitcoin. I think it's even idiotic to pay with USD for anonymous hosting, though you seem to think it makes a lot of sense to go to places with a bag of cash and pay face to face.

      "And let's wait until there is a trillion dollars worth of business happening with bitcoin [= the impossible] before talking about it. Because a trillion bucks worth of business will probably only happen if it also becomes generally accepted to buy everything."

      Trillion dollars doesn't really imply that. It could all circulate in financial sector, though you really need to think about the meta-currency aspect to grasp that. Either way, you won't define it as money even if volumes were that high. It's currently close to $1 billion a year, so I think it's pretty much possible without it being accepted in grocery stores.

      And, I come back to this pearl: "An item used by con men to trick gullible speculators."

      Well, I give up... Good luck paying for your VPN with PayPal.

    12. Good to see you again, goks.
      You wrote: "You can't buy your groceries with it, so that's why accepting it as payment is stupid" is not deduction.

      It's not just your groceries. It's 99% of the things you want. Like I say, would you [or anyone else] accept bitcoin as your paycheck right now, if it was not redeemable in dollars? Of course not. And why? Because you cannot buy anything with it but a few piddling items.

      I thought of another example to explain about bitcoin. Let's look at Las Vegas casino chips. More transactions [=bets] are made with them than bitcoin can dream about. But nobody would call them money. Nobody would accept them as sole payment for their labors, because the only thing you can do with them is gamble.

      I see that there is a hosting service or two that accepts bitcoin. You are right. More fool them. That won't last long.

      Glad you liked the pearl. No truer words...

    13. FWIW, I wouldn't accept a paycheck either if it was not redeemable for Euro, since I don't know anyone who'd accept dollars. Luckily, the notion is absurd.

    14. Which is what makes Euros your currency, not dollars. And which is why nobody's currency is bitcoins.

  4. I think I'm not getting something. Mises' Regression Theorem supports the value of bitcoins because the first bitcoins had real cost, in terms of capital equipment and electricity costs, to obtain. Those bitcoins were valued at fractions of a penny, but we've carried it forward to the current value.

    1. Do not confuse cost with value.

      Say it will cost $10,000 an ounce to find and collect whale dung, which cannot be used for anything. It's value would be zero, since it has no use and nobody wants it, despite the high cost of getting it.

    2. Whale dung is quite valuable in making perfume, however you can not sell it under whaling protection laws.

    3. All value is subjective, intrinsic or otherwise. You will always get paid or pay value for value, no matter what. If you want something you have to exhcange value for value period.

    4. True, but I'm not sure what that has to do with the article.

  5. This comment has been removed by a blog administrator.

  6. (double post from another your article)
    Hi, thanks for explaining, I did not see it that way previously. It is very well written.

    Just one Idea that i would like your opinion on. It can be difficult to take your gold and give it to someone else. Its heavy, its visible, someone else can intercept the delivery, government can come and take it from you, bla bla...
    Now I am definitely not smart enough to even express myself properly, but would it possible to see the value in Bitcoin in the way its protected in your wallet? What about the way how all nodes work together to deliver Bitcoin as securely as possible?
    I am just asking because I already saw people using they're "wealth" in Bitcoin in "jevelry" like style. For instance I saw a subscription like div (what u see on forums when person make a comment - under line is his subscription) that looked kinda nice and had automatically updated the value, how much of Bitcoins he has in related wallet.

    1. Have a look at the eighth link, about intrinsic value.

    2. http://smilingdavesblog.blogspot.com/2012/07/bitcoin-and-intrinsic-value.html

  7. Hi,

    You seem to make a big point of value for Bitcoin.

    You claim that since gold can be made into jewelry, it has intrinsic value, although... Could whale dung, as you mentioned before, be used in jewelry as well? The REASON people like gold jewelry is because it shows you have wealth. Why do rapper wear bling? To show off their success. When is the last time you saw a rapper wearing another rare earth metal? Or perhaps copper?

    The reason you can use gold as jewelry is because it has value.

    Now, for Bitcoin... There are some things that make it valuable. For one, if you NEED something to back it up, you can buy drugs with it! That's a, albeit illegal, backbone to the Bitcoin economy.

    Another thing that makes it valuable is that it's international payment processing with no fees. That makes it valuable to transfer wealth.

    Another thing is that you could keep Bitcoin as a collectable piece. It's the world's first cryptocurrency. It's definitely a stepping stone towards the next monetary system.

    The reason gold is so valuable is because it's a good way to store wealth. If everyone agreed that it was worthless, or that silver was more attractive, the prices would shift.

    In any case, Bitcoin is growing. I don't quite see it becoming an average currency used in daily transactions, but more like gold. An easy way to transfer large sums of value.

    1. You need to read the eighth link about intrinsic value.

  8. Your interpretation of the regression theorem seems to preclude any new form of money ever arising, except by government decree. If, by definition, money must be accepted by everyone before being money, then the first transaction with a new non-fiat money could never take place. At what point did a barter using gold suddenly morph into gold being used as money? It seems to me that this question is entirely academic and impossible to answer. Therefore it's useless to debate the merits of any potential new money based on your reasoning, since your reasoning precludes the possibility of any new non-fiat money ever coming into existence.

    Bitcoin has value. Whether this value is 'intrinsic' or not, according to an individual who, no matter how bright, died before the internet existed, is immaterial in practical terms. Nevertheless, consider the following illustration of what bitcoin's 'intrinsic' value might be:

    If a person in New York wants to send a gold bar to an individual in Madagascar, there is no way to do that using only the properties of the gold bar itself. The individual must employ another means, such as the postal service, to transport that gold bar to Madagascar. Once the gold bar arrives in Madagascar, there is no easy way to determine, using only the properties of the gold bar itself, whether or not the gold bar is legitimate. A gold assayer must be employed to run costly tests to determine that there is no tungsten, etc. Additionally, both the postal service and the assayer are third parties that must be trusted by both the sender and the receiver. The time required to accomplish the transport is 24 hours at the very least.

    Consider the same scenario, but using bitcoin instead of gold. In this scenario, bitcoin is not only the gold bar itself. Bitcoin is also the postal service, in other words the method of transfer between New York and Madagascar. Bitcoin is also the assayer, self-determining using verifiable mathematics that the bitcoin is legitimate. Since the bitcoin network is distributed and public key cryptography is used, there is no need for the sender or receiver to trust any third party. The time to accomplish the transport is mere seconds, one hour tops. The properties required to do this do not exist in any money / payment system / commodity except bitcoin, because no other money / payment system / commodity like bitcoin has ever existed before. No money / payment system / commodity like Bitcoin was possible before the internet, public key cryptography, distributed computing, and the idea of digital or virtual 'things'.

    Perhaps some will argue that bitcoin's transport and mathematical verification properties are tied to it's use as money, and therefore not 'intrinsic'. This is splitting hairs and ignores the obvious potential value of such properties, since these properties are not shared by any other money that has ever existed. THEREIN LIES THE VALUE. Whereas with gold a person can only transact with someone he can physically hand gold to, with bitcoin one can transact in a secure manner without regard for distance. Therefore I would argue that bitcoin has EXTRA-MONETARY properties when compared with existing monies, and the value arising from these properties could be considered 'intrinsic'. But again, whether a person considers this value to be 'intrinsic' or not is immaterial. The value exists for anyone with eyes open to see it.

    Mises was clearly an individual who was capable of thinking outside the box. Would Mises cling to established theory with religious devotion when new scenarios, new problems and new solutions presented themselves? There is no way to know what he would have thought of Bitcoin, but it's clear that his regression theorem did not imagine a world in which such a virtual and distributed money / payment system / commodity existed or could exist. If he were alive today, no doubt it would be fascinating to hear his thoughts on the subject.

    1. 1. " If, by definition, money must be accepted by everyone before being money..."

      No. It must have intrinsic value at first [see the eighth link]. From there it might or might not gradually be used in indirect exchange. If it does, and this use grows to the point where the object is generally accepted, it then fulfills the definition of money.

      In parts of Iraq, this is exactly what happened with bottled water, in exactly that sequence.

      My argument is that bitcoin has no intrinsic value [see eighth link] and thus will never be generally accepted. There are those who claim it is generally accepted as we speak, and I point out why they are wrong.

      2. So many argue that since Mises died before the internet, that therefore his theorem is wrong. And yet when pressed to show what line of his proof is voided because the internet now exists, they clam up.

      Think back to high school geometry. If someone would claim that the Pythagorean theorem is wrong because now we have internet, the teacher would ask him to show exactly which step in the proof of the theorem is flawed because now the internet exists.

      Maybe you can help us all out here.

      3."Perhaps some will argue that bitcoin's transport and mathematical verification properties are tied to it's use as money, and therefore not 'intrinsic'."

      Exactly. I'm glad you understood.

      "This is splitting hairs..." Do not confuse subtlety with hair splitting. Hair splitting is when one makes a distinction that is irrelevant to the discussion. For example, if one argues that Mises must be wrong because he is dead, or the internet did not exist in his lifetime, that is hair splitting.

      Reread the first and eighth articles to see why it is vital that a money start off with intrinsic value.

      4. Indeed we cannot know what Mises would have thought, since we cannot communicate with the dead. But we can read his theorem, follow the step by step proof he presents, and see if any part of it is or is not invalidated by new scenarios. That's what this article is about. Let's see the logic, a la a high school geometry class.

  9. You did not address my question about the point at which gold or bottles of water suddenly become money. When, exactly, does this this transaction stop being a barter and become a money transaction? There is no way, using your 'proofs', to identify this point. Therefore, although they may be useful to attempt to understand the past, economic theories such as this one cannot be compared to verifiable hard science like the Pythagorean Theorem and any such comparisons are invalid. What repeatable test can you perform on the last transaction where gold was used to barter and get a negative result, and on the first transaction where gold was used as money and get a positive result?

    Furthermore, your definition of 'generally accepted' appears to be arbitrary. How general does it have to be, and what scientific method do you use to arrive at your definition?

    Let me try to clarify my point about Mises writing before the advent of the internet. I am not saying that everything old is bad and obsolete, nor am I saying that Mises writings are valueless. Far from it. I am saying that the situation post-software and post-internet is genuinely different than the situation pre-software and pre-internet in the context of this discussion, and this should not be ignored. Here is why.

    Mises is not writing from a context in which there was a need to solve a double spending problem on a global internet. Since the internet did not exist, the problem did not exist, and it was not taken into consideration in his writings. The double-spending problem on the internet today cannot be solved by using any physical object as a means of exchange. Mises was not writing from a context in which a virtual object or thing, existing only in software, was possible. So naturally, since only physical objects existed
    at the time as far as means of exchange were concerned, he only took physical objects into consideration in his writings. It may be logical that a physical object must have some other intrinsic value before it can be used as money, as the regression theorem argues. Why is the situation different with virtual things, i.e. software? Because software is not a physical object. It's not like a cowry shell that you find on the beach or a rock that you dig out of the ground, as if you might have it lying around the house for some other reason before you decide to use it as a means of exchange. Software does not exist until someone writes it. Software, by it's very nature, ONLY exists to do the exact thing it was written to do. A software program written for the express purpose of being used as a secure method of payment on the internet obviously does not have any other use, because to build in another use would be pointless, inefficient, and counter-productive. To demand that the bitcoin software have some use other than money before it can be used as money is nonsensical, especially when willfully ignoring all of the extra-monetary properties that give it value over all other existing forms of transacting over the internet. It is not logical to expect the regression theorem to take into consideration a
    software that could simultaneously be a means of exchange AND a way to send payments over thousands of miles without a
    trusted third party, with all of these properties arising simultaneously by design, since such a beast did not and could not exist at the time of it's writing.

    1. See my reply above to goks about old Batman comics. It answers your first two paragraphs here as well.

      I'm glad we agree that age per se does not invalidate an argument.

      Your long observation about software, though interesting, does not contain info on which line exactly of Mises' proof is rendered invalid. To understand where I'm coming from, have a look at this short article:


  10. ...continued...

    Nevertheless, I will try to put it in the terms of the regression theorem. You quoted Mises: "If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday's exchange value is exclusively determined by the nonmonetary --industrial--demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange." Fine. You say bitcoin has no industrial demand and cannot be used for other employments than as a means of exchange. Wikipedia defines industry this way: "Industry is the production of an economic good or service within an economy." So why did the first person who paid dollars for bitcoins do it? Perhaps it was because he saw that bitcoin PERFORMS THE SERVICE of replacing a trusted third party, say Paypal, which would otherwise have to be EMPLOYED for its SERVICES. Is Paypal, in itself, money? No. Does Paypal perform a service? Yes. Therefore, since Paypal is not in itself money but performs a service, the services Paypal performs are extra-monetary. Can bitcoin be used to perform a similar service to that which Paypal performs? Yes. Therefore, bitcoin can be employed to perform an extra-monetary service and the and the value implied is 'intrinsic'.

    I understand the argument about a physical object having intrinsic, non-monetary value, but I do not believe this argument applies to software like bitcoin for the reasons stated above. Unlike gold or bottled water, Bitcoin's monetary and extra-monetary properties arose simultaneously by design and it's pointless to try to distinguish between them except in purely academic terms. This could not have happened before software. Gold or bottles of water cannot be used to transact securely over the internet with no trusted third party in a way that solves the double spending problem, but bitcoin can. So if we leave aside the question of whether or not the value is 'intrinsic', we are left with the reality that the value exists. Individuals who transact with bitcoin use it because of it's useful properties, because it has value as a secure means of exchange and payment system over the internet without having to trust any third party. In other words, it has arisen to fill demand. No other thing, whether you qualify it as a means of exchange, a payment system, a verification system, or all of the above, has all these properties and fills this demand. Whether this value is 'intrinsic' or not is a semantic distinction, and to re-iterate, is immaterial in practical terms.

    It is my opinion that invoking the theories of Mises as if he has specifically commented negatively about bitcoin is disingenuous. In
    1861, Thoreau apparently wrote "Thank God men cannot fly, and lay waste the sky as well as the earth." Should we take that to mean that if Thoreau were alive in 2012, he would continue to insist that man cannot fly? It seems likely that Thoreau would accept the reality that airplanes exist and man flies daily. Thoreau was not wrong - it's true man could not fly in 1861. But new technology changed that reality.

    1. Paypal is totally different from bitcoin, in that does not presume to be a medium of exchange. With Paypal, the medium of exchange is the dollar. Just as when a rider on the Pony Express brings silver dollars from one part of the country to another as payment for some purchase, the medium of exchange is not the horse, not the saddlebags, and not the shotgun, but the silver dollars, so too paypal performs the service the Pony Express rider performed in the past. Paypal rides the horse, delivering dollars; the medium of exchange is the dollars.

      Bitcoin wants to do much more. It not only delivers the medium of exchange, it has pretensions of BEING the medium of exchange. It is as if the Pony express rider came with no saddlebags, but presented himself as payment. And just as the rider is not a generally accepted medium of exchange, and unlikely to ever be, bitcoin too is not at this point generally accepted, and Mises has proven that it will never be.

      AS for your second paragraph, please point out which line in Mises' proof is rendered invalid by what you wrote.

      Thoreau did not present a proof, but made an observation which was later contradicted by reality. Mises, however, presented a logical proof, and logical proofs do not change because new technology exists, unless one can show exactly which line of the proof is now wrong because of the existence of the new technology. I await your presentation of which line. In the meantime, to see where I am coming from, you may want to look at this humble article: http://smilingdavesblog.blogspot.com/2012/08/why-so-many-do-not-understand-ae.html

  11. Bitcoin is an idea, like music. It's a method of measuring value without a parallel valued-medium in the physical world. So while some ideas are valueless (like this article or a song or anything that can be replicated endlessly), it still provides value to some individuals who "use" the data. In the same way, Bitcoin while not having intrinsic value, is still capable of providing value as a service to the participants in its trade.

    1. what line of the proof of the regression theorem is rendered invalid by your observation?

  12. Over $12 now, with transaction levels (tracking its use as a currency) exceeding previous highs nearly every day.
    - http://bit.ly/ROkd9y

    At what point can we call it a currency?

    1. It was $33 once. So what?

      Beanie baby's were once way more popular and expensive than bitcoin before dropping to zero.

      When you don't need dollars, but can buy anything you want with bitcoins [which will never happen], then it's a currency.

  13. Booyah! Bitcoin can now buy anything...


    1. Will follow its career with considerable interest.

      Note that "now" is a bit premature. The correct wording is "maybe in 6 to 8 weeks time".

  14. there is no question that e-currency return solutions for bitcoins are becoming more and more well-known. I have lately discovered another web page which is providing e-currency return solutions such as Provide Bitcoins as well as Exchange Bitcoins.

    1. Maybe, but that doesn't contradict my basic thesis.

      BTW my blog has moved to smilingdavesblog.wordpress.com

  15. bitcoins are an awesome way to generate revenue on initial investment !

    1. For now.

      BTW my blog has moved to smilingdavesblog.wordpress.com

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