Monday, November 11, 2013

I Finally Figured Out Bitcoin

Economists,
Lieutenants,
Agents in the Field,

lend me your ears!

For I have finally figured out bitcoin!  And truthfully, this is one of my best mental achievements.  And hopefully, through my ability to write clearly and explain things, I may be able to explain bitcoin to us all.

I had listened to this podcast of Stefan Molyneux on bitcoin.  It was very good, but did not fully answer my question, "why does a bitcoin have any value?"  However, what the podcast did do is bring my perception or "observation" up high enough that I could finally see and conclude how bitcoin does actually have value.

To understand why bitcoin has value, you first need to think about why currencies exist in the first place.

The answer from an economics 202 class is "to avoid barter."

Barter is horribly inefficient.  If you are a cow herder and want a pint of ale, well, you're out of luck.  Because you can't trade a whole cow for a measly pint of ale.  Nor can you slice off pieces of beef from the live cow to make the trade more fair.  Therefore, if any kind of economic trade and progress is to be made, you need a currency.

Historically, this has meant anything from gold and silver to salt and sea shells.  But regardless of what item inevitably becomes an local economy's currency, they all have some key traits and qualities in common.

Divisibility - You can divide gold, silver or salt into measurable quantities.  Pounds, ounces, grams, etc.  This allows you to scale the currency to the value of the item you wish to purchase.

Durability - The currency cannot rot or decay over time.  Milk is a bad currency because in 3 years time it will be quite gross.  Gold in 3 years time will still be gold.

Store of Value - The currency must also maintain its value and purchasing power over time.  If you're like Venezuela and constantly printing off more commie paper money, it will lose its value.  But with a limited supply (gold, silver, diamonds, etc.) you can assume that currency will still have roughly the same amount of purchasing power as it did.

Finally,

Intrinsic Value - The currency must have some kind of real value.  Gold can be used for jewelry.  Silver can be used in electronics.  Copper can be used in plumbing.  Salt can be used in cooking. In other words, people will take it as a currency, because even if they don't use it themselves, they know somebody who will.  It does have an intrinsic value unto itself.

And it is here (intrinsic value) where most people get lost on bitcoin.

Bitcoin meets all the OTHER characteristics and traits of a good currency.  It's divisible.  It's durable (infinitely as it is digital).  And it will not decay (again, binary doesn't decay). 

But precisely what practical, real world application does it have?  You can't use it in electronics. You can't make jewelry (aka - buying sex) with it.  So why does it have any intrinsic value at all?

The answer lies in comparing a currency's "intrinsic value" versus its value as a currency.

For example look at what has served as the primary currency throughout most of human history - gold.

Why does gold have intrinsic value?

Economists will answer, "because you can use it in jewelry" which is the polite person's way of saying, "men can buy sex with it."

But does that make any sense?  That ONE thing you can do with gold, "make jewelry" is why it served as the standard currency for thousands of years across the planet?  What you'll soon realize is that, yes, while gold can be used to make jewelry it serves a much more important function to society as a currency.  In other words, an item's value as a currency is really not dependent on its intrinsic value.  It just needs SOME intrinsic value to get people to have faith in it and start trading it.

Salt can be used to flavor and store food.  Was that grounds enough to make it the Mali Empire's default currency?

Silver can be used to make jewelry and some industrial items.  Was that grounds enough to make it the currency of the wild west?

Large clam shells could make some funky and uncomfortable bras in ancient Polynesia.  Was that grounds enough to make it the default currency in the south Pacific?

Apparently so, because it DID HAPPEN.  But not because of jewelry making potential or food storage potential.  That was just "enough" intrinsic value to suffice.  It was because those items provided more value to the economy as a currency than it did some as jewelry making materials or food flavoring.  And to prove it an interesting comparison would be to compare the amount of gold (or silver) actually being used as jewelry versus that of currency, bullion or investment. I'd surmise over time, 90% of silver and gold has been used as a currency and NOT tiaras. 

Understanding that a currency derives most of its value from its NON-intrinsic value traits, and only needs a "little" intrinsic value, this then puts the focus on how bitcoin derives it's "little" but necessary intrinsic value.

The answer is simple - scarcity.

Consider diamonds.

Why do they have value?

Taking the jewelry and industrial drilling uses of it away, why do they have value?

The answer is, they don't.  They serve no purpose.  At least from a PRACTICAL or PURPOSEFUL perspective.

But because they are so rare people will scramble for them.  But understand what we're talking about when we talk about "scarcity" or "rarity."  It is in relation to other things.

On this planet there is 9 quadrillion megatons of dirt and maybe 100,000 pounds of diamonds.   Both dirt and diamonds have no real practical use or value, but diamonds are considered infinitely more valuable.  Ergo, when we talk about scarcity, is merely a RATIO between two items that determine whether it is valuable or not.  It is simply the ratio of the supply of one thing on the planet (copper) versus that of another (platinum).

And this is why bitcoin has that wee bit of necessary intrinsic value.  It is very much like diamonds in that is has no practical use, but it is scarce.  Matter of fact, diamonds, gold, silver, rare earth, etc., are constantly being dug up out of the ground.  The makers of bitcoin have limited their supply to 21 million units forever, making it even more scarce.

In the end, bitcoin is really nothing more than a private sector currency akin to digital diamonds.  And it is my opinion, you have a currency that is better than any official government fiat currency out there as it cannot be hyper-inflated away by a central bank.  However, there are some drawbacks to bitcoin.

One, it is completely dependent upon the internet working.  Any post apocalyptic event that shuts it down or turns off the electricity, and it's about as valuable as those gold ETF's you have.  Two, it is not yet universally accepted by people.  This may change over time, but it is a distinct (though growing) minority who use bitcoin.  Three, it is such a threat to other established currencies I have no doubt in my mind governments will do everything they can to put the kibosh on it.  Fourth, it can be undermined by another digital and more preferable currency.

Regardless, whether bitcoin ends up becoming a universally accepted currency is another matter.  the key economic lesson to take from this is what drives the value of a currency is not so much its intrinsic value as much as it is the amount of value society puts on it as a tool for exchange.

(if you liked this post and it finally explained that NAGGING question, "how does Bitcoin have any value" please consider buying some of my books- Worthless, Enjoy the Decline, How to Privatize Governments, and Boris the Shitting Buffalo)

51 comments:

Pax Empyrean said...

This reads similar to Gold and Economic Freedom until you hit the part where you talk about "intrinsic value" when Greenspan would have mentioned that a currency needs to be a luxury good. Similar, but not quite the same point.

http://www.321gold.com/fed/greenspan/1966.html

I don't believe in intrinsic value. Value is always and everywhere subjective. Saying that gold is intrinsically valuable because men can buy sex with it just pushes the question back a step anyway; why do *women* want it, then? Anything that is accepted as a medium of exchange is valuable in its role as a medium of exchange, even if it's just a slip of paper with numbers printed on it in fancy ink.

El Borak said...

"Taking the jewelry and industrial drilling uses of it away, why do [diamonds] have value?"

Oh, captain, my captain, the problem is that you simply cannot take the uses away, any more than you can take the shine or divisibility from gold and ask, "what use does it have?" Diamonds have value because they have attributes that people covet - in other words, they have practical use.

"[bitcoin] is very much like diamonds in that is has no practical use, but it is scarce."

No, it is unlike diamonds, which have practical use. It is very much like Elvis' toenails, which have no practical use, there will never be more of them, and people want them because they are a novelty.

Boom said...

One key thing about bitcoins that most people don't know is that in order to "mine them," you must use a significant amount of computing power. Mining for bitcoins is a lot like solving mathematical puzzles with a computer, so each bitcoin really represents an expenditure of computing power.

Anonymous said...

Youre absolutely right about intrinsic value. A currency need not have any. In fact, it would be a horrible waste of resources if it did have intrinsic vakue,

Where i disagree with you is on inflation. The inflation fighting aspect of gold is that it is scarce, but the money supply must grow to reflect new value added to the economy. Theres not enough gold in the world to make that happen with the explosion of production in the past few centuries. Whoever controls the bitcoin supply controls inflation. Aside from seniorage, they can just print bitcoins for themselves.

Government wont give up its monopoly on currency. It bitcoin ever took off, government would invade.

Anonymous said...

Bitcoins do have utility e.g.: they are by far the cheapest method of "wire transferring" currency...free; and as a payment system it is effectively free and the seller is protected against charge backs.

The system is highly distributed so it is only dependent on the availability of the entire Internet -- not your part of it. A really nice feature is that your bitcoin wallet works offline so even if your Internet access is impeded you can still accept bitcoins.

Anonymous said...

The cost of "mining" in Bitcoins is the cost of verifying previous transactions; its value is derived from ensuring its veracity and stability.

Thon Brocket said...

Bitcoin's property of (almost) instant, (almost) cost-free, direct (no third-party involved) value-transfer over unlimited distance confers great intrinsic value on it, right there. It's digital copper.

Western Union, Moneygram, even Paypal may all be looking down the barrel of a Kodak moment because of Bitcoin's unique intrinsic utility in value-transfer.

Christopher Ivey said...

Here's why I'm sure Bitcoin is a scam:

1) it is an arbitrary fiat currency, based on something that is neither tangible nor transparent.

2) you could argue that nations trade in fiat currencies all the time, but what they are really trading on is trust in their economies and institutions. Who the hell is Bitcoin? If it was Google Bitcoin or Microsoft Bitcoin, we could at least evaluate the health of the issuing organization. This is the brain-child of a single eccentric, which puts it in the same space - in terms of public trust - as inventors of perpetual motion, free energy, and antigravity machines.

3) here's the biggie - it's based on escalating scarcity: the computational effort required to "mine" each coin increases on a logarithmic scale - which means that the first in get the most - kind of like a pyramid scheme; which is what I believe this is.

4) there's no transparency: a somewhat shadowy private entity controls the currency, it's distribution, it's value, and it's availability, (and please, don't give me any blather about how it's "peer to peer"). Since the issuers have declared themselves independent of governments, people who invest in Bitcoin need to realize that this means they're also independent of scrutiny and public accountability.

5) the people who most frequently use Bitcoin as currency are criminals and perverts. This is the number one currency for helping to wash drug money and for exchanging child pornography. With these folks, the ultimate value is what they trade, and the intrinsic value of any currency they use to facilitate trade is irrelevant. This is never a good sign.

6) if everyone is talking excitedly about the next big thing, financially speaking, but no one can articulate its value to your satisfaction in one sentence, either you're an idiot, or else it's probably a scam. You can decide for yourself which is most likely. For precedence, see tulips, South Sea Trading Company, etc.

Rick said...

"Government wont give up its monopoly on currency."

If only the government would actually use its monopoly on currency and print its own money rather than buy, at interest, printed money from a private bank (the Federal Reserve).

HSNormal said...

Captain, this is the best-written post from you of the hundreds I've seen. Trust this portends good things in the future.

Looking forward to similar improvements of logic and intellectual rigor in your podcasts.

Paul, Dammit! said...

I'm going to question El Borak's next-to-last sentence. Bitcoins do have several VERY specific practical uses, vis a vis being a difficult-to-track currency for online transactions. This IS their intrinsic value, and with wide-distributtion of multiple-sources of bitcoin transfers, it becomes possible to safely cross borders without tax consequences... I think. Please correct me if I'm wrong, but the recent Silk Road shutdown wasn't caused by bitcoin tracking, but plain old good detective work.

In this case, if my suppositions are correct, it's OK to have both intrinsic and extrinsic value as a substitute for secondary purposes for bitcoins as a traded commodity.
Or did I miss something?

Jeff said...

Christopher Ivey, it's funny that people that are "sure" Bitcoin is a scam. You say it has a 'lack of transparency,' when this is the opposite. Please have a look at the publicly available blockchain.

Dan said...

Gold has a lot of intrinsic value. It is used in electronics and airbags. It can also be used in the same way as other metals. A long time ago people would use it for eating utensils and preferred its aesthetics over other materials. If they wanted sex they would buy actual women.

Andrew said...

Nice straightforward monologue one a very fuzzy subject. Good job on this post CC.

Sigivald said...

The currency must have some kind of real value.

Not remotely necessary.

See Rothbard on what makes money money rather than just a commodity.

(Now, it's true that practical monies start out, historically, as commodities, because making the jump from "something you can use or someone else can use" to "something which is valuable entirely [or so close to entirely as makes no difference] as a medium of exchange" isn't easy.

But there is no requirement that a medium of exchange have any use-value in itself; the only requirement is that other people desire it for exchange as well - that's what money means, a medium of exchange qua exchange.

The key for a (legitimately) paranoid Austrian is that the money entity be non-inflatable, which is what the Austrians were all about avoiding; Mises' Theory of Money and Credit can be read, in terms of policy prescription, as a reaction to inflationary policy and trying to convince States and readers that it's worse than what it claims to fix. Which is absolutely true.

Fiat money actually works fine - if you can credibly say it won't be inflated (or will be inflated at a known and limited rate; known and specific inflation is easily priced-for in the money itself and its own value.)

And if you ever reneg on that promise [Zimbabwe, Weimar] your money almost instantly becomes worthless, and nobody will invest in anything returning it.)

PM Siesta said...

Bitcoin is interesting to me, but the biggest problem I've seen with it, as mentioned, is that it exorbitantly rewarded early holders and adopters of bitcoins, like a pyramid scheme. There are stories of early holders now discovering "million dollar files" on their computer, of old bitcoins. I would never buy a bitcoin at current prices - to the big profit of those hoarders. Just as I would never have bought say JDSU stock at $1100 per share in 2000. Their FAQ entry on this point is unsatisfactory: http://bitcoin.org/en/faq#doesnt-bitcoin-unfairly-benefit-early-adopters

Anonymous said...

ok captain I understand your curiosity, but for many of us non programmers, its very hard to verify it's flaws. I believe bitcoin is a start to decentralise currencies but not the final coin. How can I paid you right now using bitcoins if I dont have any ? Its too complicated the mining process and I dont have money to convert in bitcoins. Plus that the first ones who started to use it have a huge advantage. Its not worth it my time. Time is money, we learnt from americans.


http://money.cnn.com/2013/11/04/technology/bitcoin-flaw/index.html

Anonymous said...

Great sci-fi novel Cryptonomicon by Neal Stephenson (written in the mid 90th, by the way) foresees electronic currency exactly like bitcoin, and explains how it works. It starts with reasoning about barter much like Cap's one here, but diverges on intrinsic value, and, imo, provides much better explanation. Modern currencies like US Dollar have no intrinsic value whatsoever, but it's irrelevant. The thing that matters is people are willing to accept $ as payment for their goods and services because they believe they would be able to buy relevant amount goods and services with those $ for themselves. It's all matter of trust. Close friends who trust each other can use simple I.O.U. as currency between themselves, millions of people trust in $ because they trust US goverment. The only thing that is needed for bitcoin is people who trust in it - accept it as payment. It works on positive feedback principle - the more people trust in any given currency, the more people will trust it.

May I add, this also an explanation why people who call paper money a scam is wrong. Money is not a physical object, it's an idea. The world-wide gentleman agreement. Or, in Ayn Rand's words, manifestation of humanity's willingness to deal with each other honestly and to mutual gain.

Blanket said...

Instead of thinking of Bitcoin as a currency, it's interesting to think of it as a decentralized accounting system.

To add a transaction to the register, a computer has to perform a lot of intense mathematical calculations. As a reward for performing these calculations, the user that adds a transaction to the register gets some bitcoins himself. Transactions are added to the register in units called "blocks", and this process is referred to as "mining".

For example, here is the very first block in the register. The guy that added it (presumably the bitcoin creator himself) received 50 BTC for his effort. That 50 BTC was created out of thin air, and if you click through the links you can see where that 50 BTC went. The bitcoin you bought on Mt Gox yesterday may have derived from that original block, and because of the public nature of the register, you can find out.

The neat thing about this, and other early blocks, is that the block contains no actual transactions. A lot of bitcoins were created early on with no purpose except to pad the bit-pockets of the early adopters. And at 50 BTC (approx. $19,000 USD by today's rate) a block, that's a lot of coin.

Fast forward to today. The last block as of this posting, #269089, included 316 transactions. The reward has diminished from 50 BTC to 25 BTC, and thousands of computers compete to mine blocks to add to the register, to get that reward.

Does bitcoin have intrinsic value? Well, does a double-entry bookkeeping system have intrinsic value?

EarlW said...

You forgot the most important criteria.
Someone else who has something of value that you want must be willing to use Bitcoins in an exchange.

If you can't use it in an exchange, it's useless.

As Bitcoin grows in popularity, it will increase in value because more people will recognize its utility.

At the same time, various governments will do their best to eliminate it.

Mt. Ivey: You are so wrong.
1) Arbitrary compared to american dollars which are constantly being reduced in value by a government that prints billions out of thin air?

2) Eccentric? It's an algorithm designed to ultimately limit the number of Bitcoins that can exist. Nobody is 'selling' it or making promises.

3) don't know enough to comment.

4) Transparency. Yes, the Fed also has transparency, right?

5) Perverts and criminals and ignorant commenters also use cash. Number one currency for washing drug money? Give. Me. A Break.

6) People still buy diamonds whose supply is controlled by one or two companies.

If you cannot see how a currency that is not controlled by a criminal government is useful, then you shouldn't be reading this blog.

Dwight House said...

Good, but a couple of points.

1. There are a lot more uses for gold and diamonds than you are giving credit for:

Gold is also used in electronics, medicine, in tooth fillings, various scientific applications (gold cannot be tasted, even by refined taste testers), and for decorative effect beyond jewelry such as gold goblets and covering just about anything in gold leaf.

Diamonds are also used in optics, electronics, heat and scratch resistant applications, and it's my hope that diamonds will be the future of optical CPU chips. Today's electronic-based silicone chips are limited by the speed of electricity transmission, rather than limited by the speed of light.

2. Bitcoin, unlike any other currency, has a mathematical guarantee of scarcity.

Bitcoin does not have a government promise of scarcity. Governments break promises at the drop of any hat.

Bitcoin does not have a physical scarcity like gold or diamonds. Gold, and even diamonds, could theoretically become plentiful if the right meteorites land. We also have the technology (today) to generate flawless diamonds chemically identical to natural diamonds (not cubic zirconium).

3. The value comes from the fact that once a society accepts that it wants a currency, they will desire one, creating the demand. Bitcoin simply provides an optimum currency model for most needs of currency.

4. The internet was originally designed for the exact purpose of withstanding several nuclear strikes. Several other countries, while experiencing political turmoil, 'shut down' internet and cell phone services. Nevertheless, the internet continued to be used because people were relatively easily able to circumvent traditional digital transmission systems and patch the internet with HAM radio and that sort of thing:
http://www.huffingtonpost.com/2011/01/29/egyptians-connecting-to-t_n_815852.html#s232600title=Creative_Radio

5. With all of the NSA spying on citizens, and most other countries in the world doing similar, there is renewed interest in citizen-driven networks. Within a year, if not already, products will be available that act like an internet modem, except that it uses local, ad hoc, wireless connections to people around you, circumventing the traditional internet lines altogether.

C.J. Caswell said...

I said much of this months ago:

http://praxamericana.blogspot.com/2013/05/a-briefing-on-bitcoin.html

And you can just state the obvious: there's no such thing as intrinsic value. Value is inherently subjective. What gives bitcoin its value is quite clear: other people will take it in lieu of goods and services.

Anonymous said...

I suggest that your drawbacks of bitcoin reflect another criteria for a currency: portability. Gold and diamonds typically possess, in very small physical quantities, a value that makes them easily portable.

Bitcoin's portability is entirely dependent upon third parties maintaining, and allowing access to, the means of transporting the currency.

Anonymous said...

Look at Betacoin - it will rise!
http://betacoin.org

Anonymous said...

First there was fractional reserve banking...

Then there was fractional reserve speed dating (as exposed by the Captain some time ago)...

And now... Fractional Reserve Adultery:

"Dating website for cheaters is sued for $20M by former employee who claims she had to type 1,000 'fake profiles' to lure in male customers"

http://www.dailymail.co.uk/femail/article-2500478/Dating-website-cheaters-sued-20M-employee-claims-type-1-000-fake-profiles-lure-male-customers.html

Granted, there's a certain poetic justice, that adulterers got cheated. But still...

TJ said...

You are getting your uses of value mixed up. An intrinsic value is applicable to the true value of a company, vs it's market cap, what people are currently paying for a company. When talking about money (warehouse receipts backed by precious metals, fiat, digital), it has little use but a lot of exchange value. When talking about a commodity (water), it has a lot of use value but little exchange value. This is really what you are dealing with when talking about any currency vs commodity.

Anonymous said...

Bitcoin is a bubble...

There's the story of a guy who bought $25 in 2010 or so, not long ago and had enough money to buy housing in an expensive city and still has money left over. Of course who knows when the bubble will burst.

If you could've bought Apple stock 10 years ago, fabulous. But now? Where will it go????

Anonymous said...

Can I use bitcoin to buy your books?

Wayne Earl said...

I understand bitcoin's value, and have done so sence it's inception. what this post clarifies for me is "why people think that hoarding gold makes sense". The logic is shaky" but there is some thought to it.

However, if the point of currentcy is to avoid barter, then gold is still worthless to hoard, because in a SHTF collapse scenario, it will be barter that will rule the day. this is true even more so in a non-collapse scenario, as black markets will arise out of hyperinflated markets using state currency. better to store survival goods that have additional barter value then gold, IMO.

Eric Hennigan said...

Well gee, Captain, I could have told you that Bitcoin's intrinsic value is for convenient exchange.


Because the intrinsic value of bitcoin is actually less than that of a piece of paper, I think bitcoin makes for a better money! I mean better in the sense that, when bitcoin can be traded for other goods/services, it does so purely because of its value as an exchange medium. That is, the price of a bitcoin is more purely function of its exchange prospects, than for any other currency in history. For econometricians, bitcoin operates as a better measuring tool:

1. The total supply is public knowledge.
2. The rate of mining (expansion of money supply) is public knowledge.
3. The entire transaction history is public knowledge and provides a wealth of computable information about velocity, network connectivity, etc.

...

Although bitcoin fails on the Intrinsic Value aspect of Aristotle’s attributes, it does possess what I’ll refer to as Extrinsic Value, giving it a mechanism for adoption. That is, in the same way that taxation and legal tender laws coerce the use of fiat currency, the desire to escape that same coercion motivates the use of crypto-currency. Bitcoin has secured a niche market in delivery of goods that government’s dislike, but which a laissez-faire market happily trades.


The commodity money myth

Anonymous said...

Denninger did an excellent analysis of bitcoin several months ago. And subsequent events have not yet proved him wrong. It's a bit long so I won't repeat here, but he believes bitcoin has a number of flaws in it that make it unacceptable for him to use. At this point in time, I tend to agree with him, it ain't all that...

Link here:
http://market-ticker.org/akcs-www?singlepost=3171400

regards,
RA

Mark Mitchell said...

BTC looks like it has a lot of upside for a functioning global economy, and as it is divisible (mu-BTC, anyone?) could supplant our effectively worthless fiat systems fast when the network effect takes hold. Any reason why the founders of a sound (non-inflatable) global digital currency shouldn't be well compensated for early adoption?
If I was the Rothschilds I'd be very very concerned. Why? Even if 99% of BTC was "confiscated" like Ulbricht's haul, the divisibility of BTC means the other 210K BTC's have the same divisibility, integrity-checking, they just moved up two magnitudes of order in scarcity and retain the utility as a means of exchange. So the only weak point is in their acceptance. A battle between the businesses (who want sound money and frictionless exchange) and the Banks, (who want money on Ctrl+P and a cut of everything) is going to come.

Anonymous said...

This is all very nice but it does nothing to answer the question "Should I invest in Bitcoins?" If I treat them as a high risk form of FOREX, isn't it the same as buying/sell gold? Is it a good investment right now or not?

Anonymous said...

1) Not entirely true. Because bitcoin is effectively numbers, they can still be traded without the internet. In fact you could print them onto physical paper and trade them that way. The transaction becomes too complicated a math problem for the average person to do with their hands, but realistically all you need is a computer and the transaction can still take place, it'll just take a lot longer to confirm your transaction with others. Literally, bitcoin or some other form of digital currency could exist with jump drives and smart phones. Digital currency isn't going to die if just the internet goes down, it would have to be a near ELE to kill it.

2) This is fact. However, there are many many many governments who poorly manipulate their fiat currencies for the benefit of their elite. All it takes is enough of the population of these countries to see the value in bitcoin (no hyperinflation), and suddenly you've got a worldwide currency that everyone accepts.

3) Most definitely, the political-elite are trying to find ways to kill digital currencies. The problem here is that it's a P2P network, unless they literally want to unplug the internet, they cannot kill it.

4) This is probably the most interesting aspect. Now that digital currencies exist, which one is "best" ?? Unless you're a best-in-the-world mathematician, economist, and historian, this question is probably a crapshoot.

Karl said...

Agree with you Captain - the govt(s) will shut it down when it becomes a threat.

Any idea why they chose gold as the bitcoin logo color?

sth_txs said...

One thing Bitcoin showed that there is a demand for a private way or currency or whatever you want to call it to do business without the government butting in.

The government's crackdown and propaganda on Bitcoin and other private money like Liberty Dollar clearly shows we are a not a free people and it is all about control to the detriment of majority.

Kristophr said...

"money" is something with intrinsic value, like gold, or silver.

"currency" is a claim ticket for something with intrinsic value, like pre-federal reserve dollars.

Post-federal reserve dollars are fiat ( command ) currency, like Soviet Union rubles. All fiat currencies eventually go to zero value. All of them.

Bit-coins are unique in that they cannot be created out of thin air like fiat currency.

But because they are not intrinsically valuable, they are not money, and because they are not claim tickets for real money, they are not currency. And since no government requires their use, they are not fiat currency.

Bitcoins are like alpacas, llamas, nutrias, and Dutch tulips. They are a fad. When everyone who was convinced to want them has them, their value will crash.

Anonymous said...

One value unstated but inferred in this thread is that of bypassing the onerous practices of the current banking systems especially as pertaining to business and industry loans and microloans in emerging economies. For so long, the IMF et al, has used crushing debt to keep many countries in Eurpe, Africa and Asia in state of perpetual colonialism. Bitcoin and crypto-C in general could literally smash that model by providing frictionless currency for development and subsequent purchasing power with any/other forms of currency. Note that there is a race for resources in Africa in particular and it's heating up because China is playing hard and fast. China is also (with some initial hiccups) betting rather largely on BTC., Baidu's acceptance of same being only the start. I can see some of those BTC finding their way to Africa to pay for resources. Africa, South America (huge on BTC) and all emerging economies will set the value of Btcoin. The US and most fo Europe are about to get left in the dust. Oh, Russia likes BTC also, as many of you know. BTC oligarchs...? ;)

Also, someone here said that Google and Microsoft-branded BTC would provide a value-base for crypto. I AGREE, and I suggest to you all that we are entering an age of branded currency like that before the standardization of US money, UK pounds or the like. The idea of tacking BTC to share price is a tempting one as it seems cyclic in it's ability to increase shareholder value AND be spent of affiliate goods. So, even if sales are down, if the branded BTC is being spent on, say, sneakers or other tangentally-related affiliate products other than the company's, the currency is hel dup and the share prices are not adversely affected. I'm interested in anyone's thoughts on same.

Anonymous said...

Is HTTP valuable? Is TCP/IP? Protocols allow for infrastructure to be built on top of them. All Bitcoin is, is a protocol. And with protocols, the first mover usually wins. That's why the Friendsters, MySpaces, Facebooks of the world (even that's tough to replicate) can come and go. But how many HTTPS are there? How many TCP/IP? More reading: http://www.usv.com/posts/bitcoin-as-protocol

The second question is, is decentralization valuable?

Food for thought.

Anonymous said...

Another weakness: some entity could destroy or cripple bitcoin with a virus.

Anonymous said...

Here is a critique of Denninger's post on Bitcoin by an equally competent writer named Jon Matonis:

http://www.financialsense.com/contributors/jon-matonis/bitcoin-obliterates-state-theory-of-money&quot

Anonymous said...

"Intrinsic Value - The currency must have some kind of real value."

The Austrian school of economics, the school most vaunted by Libertarians, stipulates that there is no such thing as intrinsic value. Even with Gold and salt.

Value is always subjective and always relative. What intrinsic value did the salvaged gold brought to the castaways of the Nuestra Seňora de la Concepción ?

Christopher Ivey said...

In order to work, a currency has to be broadly acceptable to people, which means that it has to represent value in simple terms of human effort.

Gold makes great money.

It's almost perfectly fungible, and it's incorruptible. People say it has little intrinsic value, but that's not entirely true: anyone who has ever had the chance to handle a 40 Kg bar of gold will tell you how startlingly heavy, incorruptible, beautiful and desirable it is. It has a natural attraction for humans, plus it's incredibly difficult to produce - so it's easy to understand the correlation of value to human effort.

Money is a physical expression of toil. Every ounce of gold represents a full day's worth of human toil (to say nothing of all of the apparatus required), and the fact that all this effort distilled into something that's physically beautiful makes it easy to understand why it was adopted as a currency.

Paper money only works because people trust the state that issues it. Like gold, paper money is representative of toil, only in this case it is backed (theoretically) by collective value of an entire nation's GDP. This is why it's such a terrible betrayal when the government of a state abuses its currency.

In both cases, these things work as money because their value is relatable to human effort. The phrase "a dollar a day" didn't come from thin air, since when the currency was conceived the intention was that the dollar should represent that amount of value.

I've come to believe that this is perhaps the most important quality of money.

Ideally, money should be:

- intrinsically valuable
- immutable and permanent
- anonymous
- fungible
- easily understood in terms of ordinary human effort. eg: an ounce of gold takes a full person-day of effort to produce.

if it's intrinsically desirable, that's just a bonus.

Bitcoin smells to me like a private credit exchange built on top of a pyramid scam. There's no human effort in the system, and the top-down control of inflation and scarcity, (set in advance like the parameters in a computer game) disconnect it entirely from any economic reality.

Honest to God, I have no idea who's trading it and why. If I was an economist, this would really freak me out.

As it is, all I can say is "buy gold (and silver) instead".

Bitcoin might enjoy a healthy life as an anonymizing exchange platform, but I don't think any smart people will "hold" it as a currency.

Kristophr said...

Anonymous:

You are quibbling over minutia. I'm not impressed.


Gold is still valuable enough to most people for the "intrinsic" claim to be only a slight exaggeration. Yes, their are still tribals living in the middle of nowhere who still consider it a pretty yellow ornament metal. These folks are kinda rare these days.

Castaways still value gold ... they just value food and rescue more in their current situation.

Anonymous said...

You almost got it. It's not just scarcity.

Bitcoin can be moved freely.

Scarce. Fast and Free Moving.

Anonymous said...

Frederick Soddy said it best: "Money now is the nothing you get for something before you can get anything."

Unknown said...

Although a simple question, "What gives Bitcoin value?", the answer is not as simple as the question. What gives Bitcoin it’s value, can best be answer by the formula

PB = (SW + TX) / BC

The value of a Bitcoin is derived from the total value of the Bitcoin used for storage of wealth (SW) plus the total amount of the Bitcoin required for concurrently transacting in it (TX). The sum of these two numbers divided by the amount of Bitcoins in circulation (BC) (currently 12.2 million, ultimately 21 million), will give you the price of Bitcoin (PB).

There are estimates of the total amount of gold in existence (mined) in the $10-13 Trillion range. If $1 Trillion (10%) of the amount of wealth that would have gone into gold, instead lands in Bitcoin, that would increase the price of Bitcoin to ($1Trillion + TX) / 12.2 million, or by $83,000 per Bitcoin. Remember, this leaves out the TX component, which will further increase the price of Bitcoin. Over time, funds will shift from other asset classes being used for wealth storage to Bitcoin.

There are many advantages to storing wealth in Bitcoin as opposed to specifically gold, for example, as you can divide Bitcoin into very tiny pieces (difficult with gold) and you can send Bitcoin to someone on the other side of the planet within minutes (impossible with physical gold). These use cases illustrate why Bitcoin is a good alternative for gold (and other assets) for storage of wealth.

From a transaction perspective, as more citizens, businesses, and governments transact in Bitcoin, the amount of ‘wealth’ that must be placed into Bitcoin must be large enough to allow these transactions to happen.

For example, if it becomes common place for real-estate purchase payments to be processed via Bitcoin, then the amount of value in Bitcoin required to allow this to happen will need to be as large as the current working set of real estate transactions in progress. This logic applies to online sales and brick and mortar sales. If, on a daily basis, $250 Billion is required to allow all Bitcoin transactions to occur, the Bitcoin price only in terms of TX requirements, is $20,500.

The price of Bitcoin (PB) = (SW + TX) / BC. SW and TX will both change as time passes. In geek terms, SW, TX, and BC are functions of time f(t). Therefore to more accurately predict the price of Bitcoin, you need to estimate these two components for a given time, and then divide by the number of Bitcoins in circulation. BC can easily be obtained from many websites and is updated live.

Bitcoin works well as a storage of value and for financial transactions, therefore it will often be used as a substitute for both currency as well as common wealth storage assets (e.g., gold). Bitcoins utility (global register – the block chain) is what makes this possible. The worth of Bitcoin comes into play because of this utility, wealth storage and transactions will happen ontop of this platform. And using the formula above, the price of Bitcoin (PB) can be computed by estimates of these two quantities.

Unknown said...

Although a simple question, "What gives Bitcoin value?", the answer is not as simple as the question. What gives Bitcoin it’s value, can best be answer by the formula

PB = (SW + TX) / BC

The value of a Bitcoin is derived from the total value of the Bitcoin used for storage of wealth (SW) plus the total amount of the Bitcoin required for concurrently transacting in it (TX). The sum of these two numbers divided by the amount of Bitcoins in circulation (BC) (currently 12.2 million, ultimately 21 million), will give you the price of Bitcoin (PB).

There are estimates of the total amount of gold in existence (mined) in the $10-13 Trillion range. If $1 Trillion (10%) of the amount of wealth that would have gone into gold, instead lands in Bitcoin, that would increase the price of Bitcoin to ($1Trillion + TX) / 12.2 million, or by $83,000 per Bitcoin. Remember, this leaves out the TX component, which will further increase the price of Bitcoin. Over time, funds will shift from other asset classes being used for wealth storage to Bitcoin.

There are many advantages to storing wealth in Bitcoin as opposed to specifically gold, for example, as you can divide Bitcoin into very tiny pieces (difficult with gold) and you can send Bitcoin to someone on the other side of the planet within minutes (impossible with physical gold). These use cases illustrate why Bitcoin is a good alternative for gold (and other assets) for storage of wealth.

From a transaction perspective, as more citizens, businesses, and governments transact in Bitcoin, the amount of ‘wealth’ that must be placed into Bitcoin must be large enough to allow these transactions to happen.

For example, if it becomes common place for real-estate purchase payments to be processed via Bitcoin, then the amount of value in Bitcoin required to allow this to happen will need to be as large as the current working set of real estate transactions in progress. This logic applies to online sales and brick and mortar sales. If, on a daily basis, $250 Billion is required to allow all Bitcoin transactions to occur, the Bitcoin price only in terms of TX requirements, is $20,500.

The price of Bitcoin (PB) = (SW + TX) / BC. SW and TX will both change as time passes. In geek terms, SW, TX, and BC are functions of time f(t). Therefore to more accurately predict the price of Bitcoin, you need to estimate these two components for a given time, and then divide by the number of Bitcoins in circulation. BC can easily be obtained from many websites and is updated live.

Bitcoin works well as a storage of value and for financial transactions, therefore it will often be used as a substitute for both currency as well as common wealth storage assets (e.g., gold). Bitcoins utility (global register – the block chain) is what makes this possible. The worth of Bitcoin comes into play because of this utility, wealth storage and transactions will happen ontop of this platform. And using the formula above, the price of Bitcoin (PB) can be computed by estimates of these two quantities.

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fkthepleece said...

I'm a little bit surprised to see so many intelligent people comment on bitcoin and not one single comment has hit the mark. #1 Bitcoin is here to stay regardless of future or current competition. #2 Governments are unable to do away with Bitcoin even if they wanted to. #3 21 million bitcoins is the total number of bitcoins that will ever exist. So once the fluctuating value subsides Bitcoin will maintain a relatively stable value. #4 This value will slow down it's growth as high risk investors subside but the value will continue upward IF (likely) people and merchants continue to accept bitcoin. The number one value addition to Bitcoin will come when people are confident enough in the coin to HOLD them the same as they would hold any other currency and merchants are not afraid to accept them as the ONLY form of payment. #5 What if all 21m bitcoins were in existence and held by 21m people. 1 each. Each of them makeing purchases from one another in one form or another. Ask yourself what would cause the value to fluctuate at all in relation to any other currency? Nothing would, other than some trying to hog up and hold all the bitcoins. The value in relation to a dollar would increase ever so greatly based upon the amount of bitcoin earners winning the horders game. Then they could lend bitcoins to those without and charge an interest etc. All of that is just fine as long as the people spending bitcoins are also earning there income in bitcoins. If they earn $1000 a week in USD cash and a bitcoin value went from $500 to
$1000 they'd be screwed. If they earned 2 bitcoins per week when cash lost half its value they would be OK. SO as we see in this example Bitcoin is here to stay and the IRS has "rightfully" classified it as property.
Bitcoin can go nowhere but up. And believe it or not a transaction has the ability to carry an advertrisement or subscription etc along the block chain. Look out Google. lol

Addison Conroy said...

You could make all the connections through bitcoins anonymously. This is the earth of
technology. The technology even prepared the matters of financial transactions extremely
simple throughout online matters. You can buy bitcoin from diverse online financial agency
too. Here it must be mentioned that this bitcoin dealings are rather similar to the credit or
debit card point saving system. While purchase bitcoins from an online organization, it is
your responsibility to do meet the total details of that. Compare the business rates among
multiple company before opt for one. Make certain that the agency actually exists and doing
the business productively for fairly a time.