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Archivos en la Categoría: Bitcoin

Response to Doug Casey on Bitcoin and Currencies

This is a response to Doug Casey interview on Bitcoins and currencies.   I´ll try to follow the same order of the interview and try to reply his comments whenever I disagree with him.

  1. On his first answer, he talks about a disastrous hack against Bitcoins.  Well, it was not Bitcoins who was hacked, it was a particular private website where bitcoins can be exchanged for dollars.  Bitcoins architecture was absolutely not compromised.  As any other currency Bitcoins may be victim of theft, and that´s because they are valuable!!.   Besides it is zillions of times cheaper triying to steal Bitcoins than trying to compromise its architecture, the same way that is much easier to steal gold than trying to syntethize it, or even mine it.
  2. Regarding Bitcoins price unstability, well to make a fair comparison to gold we would have to know how much gold fluctuated when it first begun to be used as a medium exchange.   The market does not discover the price of any good inmediatly, it is a process that takes time.
  3. Regarding durability.  Bitcoins are scarce information, represented by bits.  But the very nature of the bitcoins is cryptographic information, just as the economic nature of an mp3 file is the music (information) it contains, not the bits that represent that information.   Information is definetly durable as long as civilization endures.  Of course gold will outlive humankind, but trying to guess the value of anything after humankind is destroyed, is obviously pointless.  Durability of  Bitcoins versus gold is only relevant if civilization collapses very badly (nuclear disaster, strong political totalitarism or similar).  Only in that case physical gold is superior to Bitcoins.
  4. When the hackers stole bitcoins at Mtgox, they sold them “any price” and price reached $0,01, but those trades where inmediately canceled.
  5. “Bitcoins are ledger entries”.  Absolutely not.  They are cryptographic information bundled in a computer file. They are divisible because their design allows them to be.
  6.  Do bitcoins have value themselves?  Here is the big issue. No economic good has value by itself or intrinsic value.  As Carl Menger demonstrated all values are subjective and always depend on the perceived utility of the economic good.   Bitcoins render utility as a medium of exchange because they have good monetary properties (durable, relatively scarce,  difficult to fake, divisible, easy  to identify, easy to transport, etc.).   This is not counting other utilities that the market might discover for Bitcoins (i.e. Namecoins). Besides, what would be the value of gold if for whatever reason it becomes completely useless as medium of exchange or store of value?  Maybe a 20% or 10% of its current value? Is that satisfactory?  But, what kind of event would make gold lose its utility as a medium of exchange? Wouldn´t it be because one or some of its monetary properties (scarcity, durability, divisibility, etc.) fails?
  7. egold is a form of regular credit, you depend on some entity honoring its liabilities or its custodian services.  Bitcoins, just as gold or silver physical bullion, are not anyone else´s liability.  You own them, with egold you have a claim for gold.  It is not the same thing. Here the main difference is that gold is tangible while Bitcoins are not.  That´s why physical gold can´t be transferred electronically and then you need to use claims or ledger entries to achieve maximum portability.   But careful, being intangible does not mean less valuable.  Software or trademarks are intangible and they can be very valuable.
  8. Regarding government shutdown, that´s definetly an important threat for Bitcoins. But shutting down Bitcoin is much more difficult than shutting down e-gold, becuase of its completely decentraliced architecture.   What the governments can perfectly do is to declare it illegal, as Roosevelt did with gold in the 30’s.  Trying to shut down Bitcoins would be a very similar story to that of emule, bitorrent and the like.  For the moment governments have proven impotent with those systems.  In fact, these p2p systems have forced a deep change on the music industry.  Will the monetary industry follow the same pace?  It seems to me that the monetary battle will be much harder.

Finally both interviewer and interviewed make an assesment about the value of dollars in the future.   Well, their assesment might be right in the long term, but I think they are not considering that the main currency of the world is not dollars but credit used as medium of exchange, and that credit is denominated mainly in dollars.

This is an important difference because one of the very possible outcomes of this crisid is a great credit crunch or margin call, and paradoxically that would make the value of the dollar to skyrocket before collapsing, because if all debts are denominated in dollars, people will need to sell evertything (including gold and silver) to get dollars to pay those debts, and neither the governement or the Fed will get indebted ad infinitum to allow that old debts are paid with newly issued debt (this might look as an endless game, but it is not, just watch Greece, Ireland, Iceland, Argentina or Portugal).

Indeed, both the Government and the Fed  are very close to their leverage limit, and if they get too indebted, they will also be called for margin by the market.

Manuel Polavieja.

Bitcoins and Mises´s Regression Theorem (II)

This is a short update of a previous post about Mises´s Regression Theorem. Mises wrote the following on his Theory of Money and Credit (chapter 8 ):

“Before an economic good begins to function as money it must already possess exchange value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange value has ceased to exist. Its value then is based entirely on its function as common medium of exchange

The bolded part of the paragraph is critical for the consistency of his Regression theorem.   It is not sustainable theoretically to require that a good must have a previous utility before becoming money and at the same time stating that this condition does not have to remain.

He also wrote in Human Action (Chapter 17 section 4 – “The determination of purchasing power of money”):

Neither a buyer nor a seller could judge the value of a monetary unit if he had no information about its exchange value–its purchasing power–in the immediate past.”

Then, how can a buyer or a seller capabale to judge the value of any good if he had no information of its exchange value –its purchasing power– in the inmediate past?  Why is the utility as a medium of exchange so special that the market is unable to assess it at all?

The market is perfectly capable of discovering any good´s value based on its utility, including monetary utility.  Regression Theorem is supposed to solve a circularity in the sense that people grant value to a good as a medium of exchange because of its purchasing power.   But currency does not have value because of its purchasing power — all economic goods have purchasing power–, but because of its monetary utility (scarcity, divisibility, difficult to fake, etc.) that makes it suitable as a medium of exchange.

If the following statment is inconsistent:  Bread is useful as food because is valuable as food.

So is this one:   Currency X is useful as a medium of exchange because it has value.

The fact is that all economic goods have value because of its utility:

  • Bread has value because it is useful as food.
  • Currency has value because it is useful as a medium of exchange.

Manuel Polavieja

Response to Michael Suede “Against the gold standard”

BitcoinThis article is a response to Michael Suede´s Artcile “Against the gold standard“.

First of all, I would like to state that I am a BitCoin supporter and I also think that gold is and has been the best money around until some other thing is discovered.   Regarding the gold standard , I have a problem with the word “standard” as I think that money should be provided by the free market and not being subject to any other standard or regulation appart from law (civil and trade laws) that would apply equally when providing and exchanging any other goods and services.

That being said, I think it is important to remark the economical nature of Gold and Bitcoins: Both of them are present goods. The fact that gold is tangible and BitCoins are intangible might be a relevant issue, but it is not something new at all.  Software or trademarks are also present goods and they are not tangible.  The most important thing about present goods regarding monetary utility is that they are not anyone else´s liability.

Since I believe Bitcoins are  present goods, and considering the Theory of Economic Time (TTE) from the austrian economist Carlos Bondone, they would qualify as money.  Conversely, currencies that are not present goods can only be credit.   I totally agree whith Michael Suede on his previous article about Bitcoins when he says “In summary, Bitcoins are money because of the properties they have“.   An explanation of why agree with him within the TTE theoretical framework can be found here.    Austrians say that Bitcoins don´t qualify as money because they don´t comply with the Regression Theorem of Money from Mises, which is true, but the problem is that the Regression Theorem is a very unfortunate interpretation from Mises of Menger´s origin of money.   Monetary utility, which is the need for liquidity, is valuable enough by itself, no need a link to anything else to have value.

I understand that Mises could not tolerate that fiat currencies (in fact credit currencies just as he realized) could be used the same way as commodity money, which was the “true money” on Mises perspective.  But that was because he did not separate the concepts medium of exchange (currency) and present good used as medium of exchange (money).   Currencies that are not present goods, can only be credit, and credit might be a currency, but it will never be money (understood as a present good) .  A sound monetary theory has to be unmistakable clear on this: money ≠credit.

Now, regarding counterfeiting and fraud, I do not agree with Michael.  From a theoretical point of view, fraud, theft and counterfeiting are not very relevant, specially when we talk about money or currency.  Because all kinds of currency will always be subject to these risks, including Bitcoins.  Also, any bearer currency such as Bitcoins or physical gold coins, are inherently sensitive to theft.

I also disagree with Michael regarding clearing services (i.e. limiting all transcations to P2P).  I think it will be very hard for Bitcoins to have a wide success with no clearing services at all.  Even transactions involving electronic currencies can be complex and expensive processes, which could certainly be simplified by clearing services.  That would be financial institutions’  role, and I think that it could be perfectly done if all indebtness priveleges they currently have are removed.   Bitcoins could be an excellent pressure to change these laws since they are best suited to work without these institutions, but I have no doubt that Bitcoins would perform better with those sound clearing services.

Also, not all the people have enough knowledge to handle all system security needed to protect bitcoins, and would prefer to ask for a custody service, even giving up anonimity but on the other hand improving security.  A free market surely would cover all needs, and I think this need for security and the aforementioned need for clearing services will always exist.

Manuel Polavieja

Bitcoins and Mises´s Regression Theorem

BitcoinI am writing this post in english because I think it might be interesting to a lot of bitcoin supporters.

One of the main bitcoins flaws that austrian economists denounce is that BitCoins don´t have a non-monetary utility, therefore BitCoins don´t have any non-monetary value.    Since Mises stated this requirement on his Regression Theorem, all austrians think that this is a necessary precondition for money.

Menger observed that in a free market usually the most marketeable commodity becomes money, but he never stated that was a mandatory requirement for money.  Mises Regression Theorem was a very unfortunate interpretation of Menger’s observations.

Well, from a theoretical point of view we must consider the Regression Theorem as unnecessary because monetary utility is valuable enough by itself.  The need for liquidity is the need for certainty on future exchanges, and certainty is impossible to accomplish completely.  That´s why anything that might provide us liquidity on the near or far future is valuable.  So there is no need for previous industrial utility for a good to become money and the use of BitCoins is a categorical demonstration.

The economist Carlos Bondone demonstrates how the Regression Theorem is unnecessary to explain the value of currency, pages 111 through 114 of his book Theory of Economic Relativity. Carlos Bondone provides a simpler, clearer and stronger monetary theory, following Menger´s principles which Mises, Rothbard, and Hayek did not.  This is a brief summary:

Currency:  Indirect medium of exchange and unit of account.  Currency Types:

  • Money: Present good used as currency (wheat, gold, silver, deposit certificates of gold or silver, etc.).
  • Credit currency:  Any currency that is not money, it can only be credit.  Then there are the following types of credit currencies:
    • Regular Credit currency:  When the present good that cancels the debt is specified, ans so is its quality, quantity and due date.  This is the case for real bills or old bank bills that where redeemable for gold or silver.
    • Irregular Credit Currency:  When the present good that cancels the debt is not specifed or its quality or its quantity or its due date.  This is the case for fiat currencies such as dollars or euros.

As I see it, BitCoins do qualify as money when they are used as currency — which they actually are — because they are present goods, the same way that software or an mp3 file are also a present goods.   And they are useful as currency because they have good properties as a medium of exchange:  They are scarce, homogeneus, difficult to fake, easy to identify (this could be improved),  easy to transport, divisible, etc.  The perceived utilitiy of these properties is what makes Bitcoins valuable.    Purchasing power is a consequence of utility, not the opposite.

It would make the BitCoins value more stable if they could be used for a non monetary purpose.  Maybe some cryptographic application?  I think that it would be a good idea for the BitCoin community to research for a non monetary utility for the BitCoins.

As long as BitCoins don´t have a non monetary utility, Mises followers are correct when they say that if BitCoins loses its currency status, then their value would drop to zero, the question is, how much value would also lose silver or gold if they were not used as currency or store of value anymore?    BitCoins are not risk-free, as nothing in life is risk-free.  It´s a matter of choice.

Manuel Polavieja.

Bitcoins and Mises Regression Theorem (II) –>

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