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  • Bitcoin Bubble 2.0 45 comments
    Mar 5, 2013 11:23 AM

    'It is also important to make certain that our efforts are directed at the decisive core of the problem and not on distracting side issues. The more complex the difficulties we face, the more important it becomes to bear this in mind, for it is human nature to try to evade what we cannot cope with'
    - Bernard Baruch, My Own Story

    A conversation with a typical bitcoiner usually leads into a whole series of ignoratio elenchi after ignoratio elenchi revolving around technological jargon. Thus, I think it would be useful to start this article off with a parable set in the past. Suppose that during the 1970's, when consumer price inflation was an actual problem, someone went ahead and developed an alternative currency. Of course, there were no computers in the average household, no internet, and no peer-to-peer during that stagflation.

    Coinstamp Parable

    An entrepreneur named Wei Boyang sets up to take advantage of the situation. His proposal is to print a total of 1,000,000 units of what he calls coinstamps. He goes through great measures to insure that there would be no coinstamp counterfeits in the future, using various methods such as signing each stamp, classified materials, codes, et cetera. For the sake of argument, the coinstamp truly is counterfeit-proof. The only entity that could create more coinstamps is Wei Boyang. However, Boyang just happens to be a really nice guy, and having read Lord Acton, he even goes so far as to cut off his hand in order to make sure he cannot make more coinstamps.

    Some may cry aloud that coinstamps have no intrinsic value or that they are not backed by anything. Wei Boyang, having also read his Carl Menger, points out that there is no such thing as intrinsic value. Value, explains Boyang, is a subjective phenomenon. Moreover, Boyang argues that it is actually a good thing that coinstamps are not backed by any commodity. If they were backed by something, such as platinum, then the underlying asset could easily be seized. Moreover, since there is no underlying asset to coinstamps, there are no storage fees and transfers are far cheaper than they would otherwise have been.

    With inflation approaching double-digits, people who are worried about gold or silver confiscation start to pile into coinstamps. Similarly, investors who are worried about holding the least bad fiat currencies such as the Swiss Franc or the Deutsche Mark due to potential inflation in order to help exporters, also start to pile in. Coinstamps truly seem to be a stroke of genius. People start using them as a means of payment worldwide, even for long-distance transactions. The Federal government is unable to do anything meaningful about coinstamps because it does not have the resources to check every envelope that happens to be mailed. Moreover, since the stamps are so light and thin, lots of people mail them discreetly inside of other items, just to be on the safe side.

    By all measures, coinstamp seems to be a hit. Through various ingenious methods, Wei Boyang helps prevent counterfeiting of the stamps. Moreover, Boyang ends up being labeled a domestic terrorist and arrested, which has the unintended consequence of increasing the popularity and awareness of coinstamps, leading people start piling in big time. There is but one problem, other fellows such as Jean de Meung, Johann Georg Faust, and Tycho Brahe also get in the game. While they are unsuccessful at counterfeiting coinstamps, they are successful at copying the protocol and making their own version. Although different in name, the knockoffs are virtually the same in substance. Jean de Meung makes meungstamps, making only 1,000 units, with his own fingerprints on every meungstamp as one of the security measures. Subsequently, he burns off his fingertips as part of a rigorous public relations campaign. With coinstamps trading at $750/cs, the new protocols start to gain traction. Since Wei Boyang wants nothing to do with the government, he has no patents on his invention. The fact that he was first to develop the alternative currency makes no difference to those flocking into the more affordable protocols. The lack of a moat on the scheme eventually sends the entire house of cards collapsing.

    Back to Reality

    While bitcoins cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as namecoin*, freicoin*, and litecoin* in place. This is a particularly valid point because bitcoin is a starfish i.e., it is fully decentralized. As put by Ori Brafman and Rod A. Beckstrom, 'The starfish doesn't have a head. Its central body isn't even in charge. In fact, the major organs are replicated throughout each and every arm. If you cut the starfish in half, you'll be in for a surprise: the animal won't die, and pretty soon you'll have two starfish to deal with'*. After Napster went under, Niklas Zennström (the creator of Skype) stepped in with his creation called Kazaa, which had no central server that could be shut down. Eventually, the peer-to-peer programs got more and more numerous, including Kazaa Lite, eDonkey, eMule, BitTorrent, et cetera. While this may be good news for people who like to download and share content for free, it certainly is not for people who are under the impression that bitcoin is a hedge against inflation.

    Money

    Does bitcoin jive with the Austrian stand on money? The only way to find out is to read what the Austrians had to say. Let's start with Carl Menger. In Principles of Economics, Carl Menger made the point that money, a medium of exchange, has always tended to be the most saleable commodity of the time. Menger wrote, 'In the earliest periods of economic development, cattle seem to have been the most saleable commodity among most peoples of the ancient world'. This is perfectly understandable in a world where barebone subsistence is a reality for most people and the structure of production is virtually nonexistent. As society progressed, however, cattle became less and less marketable. Menger goes on to write, 'With the progress of civilization, therefore, cattle lost to a great extent the broad range of marketability they had previously had with respect to the number of persons to whom, and with respect to the time period within which, they could be sold economically…They ceased to be the most saleable of commodities, the economic form of money, and finally ceased to be money at all'

    As civilization progressed, Menger states that 'peoples who were led to adopt a copper standard as a result of the material circumstances under which their economy developed, passed on from the less precious metals to the more precious ones, from copper and iron to silver and gold, with the further development of civilization, and especially with the geographical extension of commerce' Gold won out due to a variety of reasons, such as being durable, amalgamable, malleable, divisible, homogeneous, and rare. Yet, the primary reason that gold won out is because it was the most saleable of commodities. As Menger goes on to write, 'Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owner of gold mine, provided the gypsy knows where to find the right market for his commodity. Gold nuggets can pass through any number of hands without any decrease whatsoever in marketability. But articles of clothing, bedding, prepared foods, etc., would be suspect and almost unsaleable, or at any rate of greatly depreciated value, in the hands of the gypsy, even if they had not been used by him, and even if he had, from the beginning, acquired them only with the intention of passing them on in exchange'

    This point about marketability bears elaboration. One may have a Picasso at home, which will fetch quite a sum at a Sotheby's auction during a boom, but a Picasso, like a poem by Friedrich Shiller, a work of Sanskrit, or a multi-decade old bottle of red wine can never be the most saleable good. As Menger put it, 'Compare only the number of persons to whom bread and meat can be sold with the number to whom astronomical instruments can be sold'. This leads us to another criticism of bitcoin: It can never be the most saleable good. The reasoning for this is quite simple, until the majority of the 7 billion or so people that inhabit this planet have either a smartphone or frequent access to the internet, a digital currency is out of the question. Gold, on the other hand, is easily recognizable, as opposed to silver that may be mistaken for other metals such as nickel. Moreover, it melts at a relatively low temperature and is a relatively soft metal, which provides superior amalgamation and explains partly why it historically won out to metals such as platinum. If one questions the role of gold in the present monetary system, one only has to walk down the street and see a 'We Buy Gold' sign. Moreover, central banks hold gold and lots of it, they do not hold cattle, wheat, soybeans, copper, silver, or bitcoins.

    Menger also went on to write, 'I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost'*. This, of course, leads us to that pesky thing called the regression theorem. In an article entitled 'Bitcoins, the regression theorem, and that curious but unthreatening empirical world' author Konrad S. Graf* attempts to reconcile the regression theorem with bitcoins. He states,

    'First, one element to consider for intangible objects such as bitcoins are various "inherent" direct-consumption values that may be primarily psychological or sociological in character. Consider, for example, the geek value hackers find in creating and attempting to crack encryption codes of any kind: "Dude, look at this code; I bet you can't crack it," may indeed be more highly valued to some people in some contexts than certain "real" economic objects or specific quantities of fiat money. Regardless of any potential future indirect-exchange value, one can imagine such persons expending hundreds of hours of effort in creating and breaking encryption codes, just because they like to. This may be true, separate from any degree of dependence on any particular expectations of future exchange values of code objects'

    While it may very well be true that some early adopters valued bitcoins with what Menger described as imaginary value, the point of the most saleable good bears repeating. Gold is and has been seen as an object of beauty since the dawn of civilization. Thus, the argument that bitcoins are in accord with the regression theorem because a handful of people consume them as they would a Picasso is like saying paper money has value because John Law or Ben Bernanke really enjoy playing monopoly. In fact, we might as well say that Alchemy works, considering a significant amount of human history and energy was spent in attempting to find the philosopher's stone. Some people may enjoy work just for the sake of working. Unfortunately, this is not a sufficient justification for slavery nor the labor theory of value.

    So where does bitcoin stand when it comes to the Austrian framework of money? For this we have to turn to The Theory of Money and Credit by Ludwig von Mises. Mises never claimed that only gold or silver are money. On the contrary, he stated that 'the market enables any commodity to be turned into money and money into any commodity'. Furthermore, Mises went so far as to say that silver was no longer a monetary metal, which explains why the gold/silver price ratio has tilted significantly towards gold from the late 19th century onwards, in having written 'If any kind of money is deprived of its monetary characteristics, then naturally it also loses the special value that depends on its use as a common medium of exchange, and only retains that value which depends upon its other employment. In the course of history this has always occurred when a good has been excluded from the constantly narrowing circle of common media of exchange. Generally speaking, we do not know much about this process, which to a large extent took place in times about which our information is scanty. But recent times have provided an outstanding example: the almost complete demonetization of silver. Silver, which previously was widely used as money, has been almost entirely expelled from this position, and there can be no doubt that at a time not very far off, perhaps even in a few years only, it will have played out its part as money altogether'. He further went on to crystallize this point by classifying silver as fiduciary media, having written, 'Of no greater relevance is the circumstance that the fiduciary media were in the one case predominantly bank notes and cheques and are in the other case predominantly silver coins. The silver rupee is in truth nothing but a metallic note, for the conversion of which its issuer, the State, is responsible'. Those who rushed into silver in 2011 would have been well advised to have read the TMC, and so would bitcoiners.

    Ludwig von Mises claimed that there were three main types of money: (1) commodity money, (2) fiat money, and (3) credit money. What is important when it comes to commodity money are the technological aspects. With fiat money, the important aspect is the stamp that (initially at least) represented a fixed weight of commodity money. Credit money, on the other hand, is a claim falling due in the future (IOU) used as a medium of exchange. We can safely assert that bitcoin is not a credit money. Nor is bitcoin a fiat money since there is not a sovereign proclaiming it to be a fixed amount of anything. So is bitcoin a commodity money? The answer is no.

    Bitcoiners would have one believe that bitcoin is a digital manifestation of the gold standard, and thus should be considered a commodity money since it is technologically similar. The problem with this reasoning has already been touched upon: bitcoins can be hyperinflated in substance. In the real world, a Niklas Zennström cannot come along and create underground reserves ex nihilo of what in substance would be the equivalent of gold, except that it be blue and called jold. On the other hand, the amount of potential flavors of bitcoin on the cloud is theoretically restricted to the amount of aggregate geobytes available on the various smartphones, tablets, notebooks, and all other electronics capable of using peer-to-peer.

    If bitcoins are not commodity, fiat, nor credit money, then what are they? Has Ludwig von Mises missed something? The answer, once again, is no. The aforementioned types of money are a narrow subset of the broad money scheme that Ludwig von Mises had formulated. There were, aside from the three types of money already mentioned, so-called money-substitutes. Within money-substitutes are two categories, (1) money-certificates, and (2) fiduciary media. Money-certificates are self-explanatory, examples of which include countless paper notes that promise to pay the bearer x amount of gold on demand. The relevant thing to bear in mind as far as this article is concerned is that bitcoins are not money-certificates.

    Thus, we are left with only one remaining option: fiduciary media. Within fiduciary media, there are (1) uncovered bank deposits and notes, or (2) token money. The former stuff is what has periodically led to booms and busts as well as countless bank runs. However, bitcoins are definitely not uncovered bank deposits or notes. Thus, we have an answer before us: bitcoins are fiduciary media, or more specifically token money. From a monetary standpoint, as devised and formulated by Ludwig von Mises, they are on a par with the stuff you find at Chuck E. Cheese's.

    (click to enlarge)

    Anonymity

    With the imminent hyperinflation meme fading away and no longer holding much water, the new reason to hold bitcoins is the anonymity, nay, the freedom that it provides. Want to gamble online or buy something illegal? Bitcoins are the solution. It is a way of circumventing the Kremlin and uplifting free and voluntary trade, or so goes the story. Unfortunately for many of the misinformed, the reality is toto caelo. This article is too short and not intended to get into the details. Thus, it would be best to take it from bitcoin developer Jeff Garzik himself.

    The fun starts at 3:20

    The ironic part about this is that anyone and everyone who has participated in illegal activity using bitcoins, presumably because they thought it was anonymous, now has a permanent record of every single one of their transactions contained on the public ledger. Imagine if bitcoins existed 50 years ago. Chances are, none of the last three Presidents (including Barack Obama) would have ran for office.

    Bubble Time?

    The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes. There is present a reflexive pattern of people buying because prices are rising, and prices rising because people are buying. The myopic are extrapolating the price trend of the past three months, which they deem is normal, and in so doing they exacerbate it to the upside, thus attracting even greater fools. The inflection point will come when the continuity of bullish thought is broken, which could be anywhere between $49/bc to $69/bc. One thing is for sure, the amount of suckers left who are willing to jump on the moving and ever accelerating train is drawing thin, and so are their pockets.

    When prices for any asset go parabolic, it does technical damage to a chart. It is sort of like someone deciding to go full speed in the middle of a marathon. Surely, one would look good for a few minutes. However, at a certain point one would inevitably collapse, with the possibilities of finishing the race being greatly diminished, let alone doing as well as they would have otherwise. Like Icarus, who had soared too high and melted the wax on his wings, parabolic moves always end in a crash. Ironically, the best thing that can happen for bitcoin naysayers is if bitcoin skyrockets to $100/bc within a week.

    There is nothing anti-Austrian about acknowledging that there exist in the market place a lot of naïve, irrational, and misinformed players. During the dotcom bubble, for example, a maintenance and building company called Temco Services almost tripled in a matter of minutes in 1998. The reason is because by 1998 every other layperson was involved in the market. Thus, the level of competence significantly dropped. The ticker symbol for Temco is TMCO, which was fairly close to that of Ticketmaster Online, which was TMCS. Ticketmaster Online (then TMCS) just happened to trade publicly for the first time on the day that Temco Services (OTCPK:TMCO) tripled. Rising asset prices create euphoria, and euphoria significantly drops the IQ of the participants.

    So why is it that people are attracted by rising prices and shy away from falling prices, when in fact the rational thing to do would be to buy low and sell high? The answer is that we are wired that way. As put by Jason Zweig, 'Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria'*. The process also works in reverse, which explains why most people are turned off by falling prices. A loss fires up the amygdala, which is the part of the brain that processes fear and anxiety. If one were to look at the Google Trends chart* of bitcoin and the USD price chart at mtgox* (formerly magic the gathering online exchange), the data is nearly identical with the google trend following the price. The bottom line is that people are attracted to bitcoin because the price is rising.

    Another reason why bitcoin is so susceptible to becoming a bubble is because it is perceived as being something new. New Era thinking always attracts lots of attention. The tulip was introduced to Europe by way of Turkey in the middle of the sixteenth century. In fact, the word tulip came from the Turkish tulipan, which means turban. Aside from being something new to Amsterdam, a country which at the time possessed an abundance of newly discovered gold and silver from the New World, the tulip also had an intriguing element to it. The plain tulip may turn into a precious Semper Augustus, the most precious tulip of them all. The reason is that the various color schemes of tulips were caused by a virus that attacked the bulb. Likewise, the Mississippi bubble, which was perpetrated by John Law, promised vast richest to be had from the New World. The manias in railways, the radio, the internet, you name it, most of them involved something new or something perceived to be new.

    Summary:
    » Bitcoins can be hyperinflated in substance
    » Bitcoins can never be the most saleable good
    » Bitcoins cannot account for the regression theorem
    » Bitcoins are the equivalent of token money
    » Bitcoins are the opposite of anonymous
    » The USD price of a bitcoin has been rising in an unsustainable fashion, the only thing missing being a blow-off top

    * namecoin.info/

    * freicoin.org/

    * litecoin.org/

    * The Starfish and the Spider was originally published in 2006

    * Underline added by the present writer

    * http://konradsgraf.squarespace.com/blog1/2013/2/27/in-depth-bitcoins-the-regression-theorem-and-that-curious-bu.html

    * The Intelligent Investor by Benjamin Graham, Commentaries by Jason Zweig

    * http://www.google.com/trends/explore#q=bitcoin

    * http://bitcoincharts.com/charts/mtgoxUSD#tgCzm1g10zm2g25zi1gSStochzvzcv

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am short bitcoins via icbit.se

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Comments (45)
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  • jsmith8766
    , contributor
    Comment (1) | Send Message
     
    One slight problem with your thesis: Almost all of the copies you talk about have already been attempted and have completely failed. The only real survivor is litecoin, which has some interesting advantages over bitcoin. The other 10 or so copies have all disappeared or are worth nearly zero.

     

    So im afraid your argument is good in theory but has failed in the real world.
    6 Mar 2013, 05:32 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » I wasn't trying to make the case that competitors will or will not be successful. I merely stated that bitcoins can in fact be copied ad infinitum, whether or not the copies will be successful is unknowable. The only reason people consider litecoin interesting is because the price has been going up and they hope it will skyrocket as well.
    6 Mar 2013, 10:10 AM Reply Like
  • dude6935
    , contributor
    Comment (1) | Send Message
     
    Bitcoins cannot be hyper-inflated. Nor can close substitutes to bitcoins. Period. It takes electricity to make bitcoins. Ever more electricity as more bitcoins are mined. The same is true of any would-be substitutes. You can't make them for free, or even close to free. They cost of production approaches the value of the bitcoins themselves.
    6 Mar 2013, 05:36 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » Look at litecoins, which can be mined using consumer technology. There is no stopping someone from copying the protocol and allowing people to mine on their smartphone. The whole mining aspect is designed to create a goldrush. Unfortunately, time will show that people were in fact chasing after air.
    6 Mar 2013, 10:10 AM Reply Like
  • btcbtc
    , contributor
    Comment (1) | Send Message
     
    And you Patrik, what are you chasing with this article, mind telling us?
    7 Mar 2013, 06:27 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » I work for the international banking cartel, we are trying to suppress bitcoins.
    7 Mar 2013, 05:13 PM Reply Like
  • Mashuri
    , contributor
    Comments (55) | Send Message
     
    You got Peter Surda's attention. Let's see if your pride overrides your logic: http://bit.ly/12uqNsb
    6 Mar 2013, 01:25 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » The great Peter Surda. I will write up a response tonight.
    7 Mar 2013, 06:14 AM Reply Like
  • Mashuri
    , contributor
    Comments (55) | Send Message
     
    I hope it's clearer than the responses you've been writing on his blog post.
    7 Mar 2013, 12:38 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » Feel free to jump in if you have something relevant to say or would like to point something out. The truth is not a popularity contest.
    7 Mar 2013, 05:16 PM Reply Like
  • TDaltonC
    , contributor
    Comments (3) | Send Message
     
    ". . . until the majority of the 7 billion or so people that inhabit this planet have either a smartphone or frequent access to the internet, a digital currency is out of the question." Not so. I can only drive my car where there are roads. But that's ok because most places I want to go have roads. So long as most of the places I wont to spend BitCoin have internet access, then that's good enough for me.

     

    As a side note though, it won't be too long until most of the 7 billion do. There are a lot of hand-me-down iPhones out there.
    8 Mar 2013, 01:00 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » I can only spend bitcoins wherever they are accepted. With my amex, I can buy anything across the world with no transaction costs, just shipping, handling, and the price of the actual product. With bitcoins, on the other hand, I first have to exchange actual money in order to acquire them, which entails a transaction cost, and then I have a limited choice of qualitatively and quantitatively inferior products to choose from.
    8 Mar 2013, 09:07 AM Reply Like
  • Alanx
    , contributor
    Comments (11) | Send Message
     
    American Express charges the highest transaction fees of the major credit cards (VISA/Mastercard/American Express). That is why you often cannot use your Amex with some venders.
    19 Mar 2013, 04:39 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » Amex doesn't just provide credit, which by the way bitcoin does not. Amex also provides debit.
    19 Mar 2013, 09:06 AM Reply Like
  • PeterLondon
    , contributor
    Comments (4) | Send Message
     
    There is a transaction cost with Amex - several in fact: vendors are charged for credit card machine rental and/or processing software and associated phone lines and calls; vendors are charged a sales percentage - on the gross price, including sales tax - of up to 5% (especially on small, high-value goods); vendors have to factor-in chargebacks; vendors often do not get their money quickly from Amex and so interest is lost. And who pays for all this in the end? You, the customer.

     

    But wait! That's not all! You the customer will also be charged: say you are in the USA and purchasing from a EURO country. Now, Amex will convert your dollars into euros at a really bad rate, then they will charge you a fee on top of that.

     

    Software for smart phones has recently been released that will instantly purchase Bitcoins for you from an exchange and the MARKET rate, and that exchange will charge NO FEES. Then at the other end, when the vendor receives the Bitcoins, they can have sw that instantly converts the Bitcoins into their local currency, again, at the market rate with no fees.

     

    And as we speak, p2p exchange sw is being developed that will make this whole process even more liquid and with vast market depth.

     

    Of course, as Bitcoin get bigger and bigger, both buyer and vendor may well opt to just trade in, and keep their Bitcoins.

     

    And soon, vendors will have a "Buy with Bitcoin" button, offering say a 2% discount. Who is not going to want to click that button?

     

    Here are some other inventions, that initially, you had a very limited number of other parties you could transact with:

     

    Cheques
    Radio communication
    Telegrams
    Telephones
    Bank wire
    Credit cards
    Email
    SMS
    Mobile phone payment (massive in Africa)
    Twitter

     

    ...hmmm, I wonder what ever happened to all those useless inventions?
    24 Mar 2013, 10:07 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘There is a transaction cost with Amex - several in fact: vendors are charged for credit card machine rental and/or processing software and associated phone lines and calls; vendors are charged a sales percentage - on the gross price, including sales tax - of up to 5% (especially on small, high-value goods); vendors have to factor-in chargebacks; vendors often do not get their money quickly from Amex and so interest is lost. And who pays for all this in the end? You, the customer’

     

    You are comparing credit with bitcoins, apples and oranges. Bitcoins are more akin to debit, in which case there are virtually no transaction costs whether you are banking with visa, mastercard, or amex.

     

    ‘But wait! That's not all! You the customer will also be charged: say you are in the USA and purchasing from a EURO country. Now, Amex will convert your dollars into euros at a really bad rate, then they will charge you a fee on top of that’

     

    I have studied abroad in Europe for a few years. I used both jpmorgan and bank of america to convert dollars to euros without any transaction fees. I would have dollars deposited into my accounts every few weeks and take them out as euros without any fees whatsoever. It all comes down to proper communication with your banks and doing a little homework.

     

    ‘Software for smart phones has recently been released that will instantly purchase Bitcoins for you from an exchange and the MARKET rate, and that exchange will charge NO FEES. Then at the other end, when the vendor receives the Bitcoins, they can have sw that instantly converts the Bitcoins into their local currency, again, at the market rate with no fees’

     

    The average amount of time it takes for a bitcoin transaction to occur is 8 minutes. Instant transactions with zero conversion fees? I’ll believe it when I see it. Admittedly, I have not used bitcoins since having sold near the top of the first bubble. However, from a purely logical perspective, the statement above makes no sense. I understand that bitcoins are thin air, but magic the gathering online exchange will still require some money for converting fiat into thin air and thin air back into fiat.

     

    ‘And as we speak, p2p exchange sw is being developed that will make this whole process even more liquid and with vast market depth’

     

    More p2p software is being developed? You bet. I know for a fact that several bitcoin knockoffs are coming on stream pretty soon, with quite a lot of pr money behind them. Wait for the Mike Maloneys, Max Keisers, and other pump and dumpers to start proclaiming icoins, coinbits, or whatever to be the answer.

     

    ‘And soon, vendors will have a "Buy with Bitcoin" button, offering say a 2% discount. Who is not going to want to click that button?’

     

    The vast majority of people who buy and sell online, whom do not have world of warcraft money or bitcoins. Think of it from a normal and sane perspective. Imagine if Amazon gave you the option to buy things with renminbi. Surely to the average American this would seem absurd. Yet, it is far less absurd than paying with bitcoins.

     

    ‘hmmm, I wonder what ever happened to all those useless inventions?’

     

    Being able to digitally transact has actually been around for a while, so has peer to peer networking. The difference with bitcoin is that you are transacting binary digits (thin air in less polite circles), as opposed to fiat.
    24 Mar 2013, 11:36 PM Reply Like
  • PeterLondon
    , contributor
    Comments (4) | Send Message
     
    Patrik, you are clearly a very bright guy, but you should grasp the fact that most things in life have an upside and a downside. Bitcoin is no different, and you do yourself a disservice if you try and negate every aspect of Bitcoin, rather than claiming (possibly correctly) that the negatives outweigh the positives, and that it will not survive.

     

    Bitcoin has a part to play in the local and global payment system - it fills a gap and reduces certain transaction costs substantially. It's not going to replace Amex, Visa, the Fed or the Dollar! Yes, there are folks around claiming that, but they are just being silly.

     

    Bitcoin vs debit cards: yes, you are correct to a degree, in that debit card processing fees can be a lot lower. But the merchant will still be hit with a bank and a gateway fee. This can be up to 75 cents per transaction, and this mounts-up, especially with smaller transactions. But of course, many credit card users use their cards in effect like a debit card and pay them off in full each month, and really don't grasp the fees the merchant (and thus themselves) are being charged. Then there is of course PayPal and the huge fees they charge, even if there is a bank account/debit card funding the PayPal account.

     

    USD to EUR conversion fees: Oh dear Patrik! Maybe your lovely, caring bank did not charge you a fee; but did you even study the exchange rate they gave you? Did you compare that with the mid-market commercial rate? I think you would find a rather large disparity. And in any case, I was talking about the cost of exchanging currencies AND sending the monies to a foreign country and a separate person. Just moving your own USD to your own, linked EUR account in Europe, may not have incurred such large fees - but you will still have got a really bad rate. I'm not sure how "homework" and "communication" would have helped that situation much. And perhaps as a student, you were having fees waived?

     

    Smartphone SW: You need to do your "homework". Your USD would be held in an account, and the conversion to Bitcoins would be done at the current market rate. Europe's largest Bitcoin exchange charges NO fees for trades, just deposits and withdrawals. As the market expands, even these costs will go down. If you are not standing in a shop wanting to take a $5,000 laptop with you right then, then the 8 minute confirmation time is of no consequence (say if you are ordering a product to be shipped from Europe).

     

    p2p exchange sw: You have misunderstood, this has nothing to do with other virtual currencies.

     

    Thinking from a "normal and sane perspective": new technologies and concepts take time to expand into the general population, and often have false starts and early models that don't survive.

     

    "The vast majority of people who buy and sell online, whom do not have world of warcraft money or bitcoins": Not so long ago no one would have had a clue if you had told them about the "internet" and buying things "online" - they would have thought you were being silly, and it would never catch-on. I know because I started selling computers back in the 1980's and use to show email and the internet to customers, and they all told me it would never catch on.

     

    And how do folks pay online now? With something called a "credit card" or "debit card" - both unknown a few decades ago; or maybe a payment service called "PayPal" - unknown a few years ago.

     

    "with bitcoin is that you are transacting binary digits (thin air in less polite circles), as opposed to fiat": This reminds me of the unofficial motto of the French civil service: "It's all very well it working in practice, but unfortunately, it will never work in theory".

     

    ...and yes, I have that the right way round!
    26 Mar 2013, 06:42 AM Reply Like
  • PeterLondon
    , contributor
    Comments (4) | Send Message
     
    Interesting developments with BitPay:

     

    http://bit.ly/16Vclc7
    26 Mar 2013, 06:43 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Patrik, you are clearly a very bright guy, but you should grasp the fact that most things in life have an upside and a downside. Bitcoin is no different, and you do yourself a disservice if you try and negate every aspect of Bitcoin, rather than claiming (possibly correctly) that the negatives outweigh the positives, and that it will not survive’

     

    The interview with Jeff Garzik I posted in the article is very telling, I recommend everyone watch it a few times. I see bitcoin as a lose-lose proposition going forward. During the first bubble, Garzik made the point regarding the skyrocketing price that (1) bitcoin was either a bubble and was bound to collapse, or (2) it was coming up to the level where it would trade as a worldwide digital currency. We know in retrospect that the first time around it was in fact a bubble.

     

    Suppose that I am wrong and this second time bitcoin is not in a bubble but is in fact coming up to the level where it will trade as a worldwide digital currency. Why is this bad? The simple and realistic answer was pointed out by Garzik in that very same interview. With mainstream acceptance comes lots of regulation, registration of all exchanges as ‘money service businesses’, and the long-arm of the government. The average consumer is not a libertarian, and will not use the stuff until there are lots of rules, transparency, and regulations attached to bitcoins. Jeff Garzik understood this all too well, and wasn’t shy about pointing it out.

     

    ‘Bitcoin has a part to play in the local and global payment system - it fills a gap and reduces certain transaction costs substantially. It's not going to replace Amex, Visa, the Fed or the Dollar! Yes, there are folks around claiming that, but they are just being silly’

     

    Here I can’t help but agree. The gap is part of the reason why I classified bitcoins as token money.
    Per Ludwig von Mises:
    “Nevertheless, one thing can safely be asserted: that token coinage is always the result of attempts to remedy deficiencies in the existing monetary system”

     

    ‘Bitcoin vs debit cards: yes, you are correct to a degree, in that debit card processing fees can be a lot lower. But the merchant will still be hit with a bank and a gateway fee. This can be up to 75 cents per transaction, and this mounts-up, especially with smaller transactions. But of course, many credit card users use their cards in effect like a debit card and pay them off in full each month, and really don't grasp the fees the merchant (and thus themselves) are being charged. Then there is of course PayPal and the huge fees they charge, even if there is a bank account/debit card funding the PayPal account’

     

    All of these transaction costs that deal with insurance, fraud, and regulation will inevitably come to bitcoins if in fact they become mainstream.

     

    ‘USD to EUR conversion fees: Oh dear Patrik! Maybe your lovely, caring bank did not charge you a fee; but did you even study the exchange rate they gave you? Did you compare that with the mid-market commercial rate?’

     

    Yes in fact I have, primarily because the exchange rate was quite wild at times. I remember the exchange rate went to as high as 1.5 and as low as 1.1 at times. I got to transfer at spot. Once again, it comes down to proper communication with your banks, which typically have lots of corporate programs available for all sorts of customers, the problem being that the customers themselves are typically too lazy to look into these things.

     

    ‘Thinking from a "normal and sane perspective": new technologies and concepts take time to expand into the general population, and often have false starts and early models that don't survive’

     

    Another reason why I think bitcoin is bound to fail. There are always, and I mean always, unforeseen complications. The most recent as far as bitcoin is concerned are the so-called forks. One example that I love to use, but that is unfortunately often neglected, is prosper.com. Lots of people lost lots of money in that investment primarily due to unforeseen complications. I believe that digital token money may very well have a big future, but I hardly doubt they will be bitcoins. Contrary to the network effect, the fact that bitcoins were first is a detriment.
    26 Mar 2013, 08:56 AM Reply Like
  • TDaltonC
    , contributor
    Comments (3) | Send Message
     
    I still don't see the difference between BitCoin and any modern fiat currency. They have value because people believe that they have value.
    8 Mar 2013, 01:00 AM Reply Like
  • TDaltonC
    , contributor
    Comments (3) | Send Message
     
    Mining more LiteCoin doesn't inflate BitCoin for the same reason that printing more Yen doesn't inflate the US Dollar. LiteCoin and BitCoin have a free floating exchange rate. Making more of one doesn't affect the value of the other; it just changes their relative exchange rate.
    8 Mar 2013, 01:00 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » Fiat currencies have a geographical territory, a tax farm, and a bond market attached to them. P2P Token money, on the other hand, is more akin to the Napster, Kazaa, and BitTorrent examples I used.

     

    The argument always boils down to: Yes, knocksoffs can be made but they will not be a detriment because of x,y, and z. I merely pointed out that knockoffs can in fact be made. In the real word, alchemy does not work.
    8 Mar 2013, 09:06 AM Reply Like
  • PutinReloaded
    , contributor
    Comment (1) | Send Message
     
    The most cool headed and substantiated debunking of Bitcoin as currency and store of value. Bookmarked. Thank you for this invaluable piece.

     

    The token nature of Bitcoin explains why the demand is so dependent on the availability of a "casino window" (exchange) for converting back and forth between tokens and real money. The DOS attack two days ago is a perfect example of token behaviour.
    8 Mar 2013, 07:47 PM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    Patrik's classification is erroneous. Bitcoin does not fit into the definition of token money, because it is not a money substitute, in either of the two definitions used by Mises, Rothbard or Salerno. It is neither a claim, nor a nearly perfect economic substitute for some other currency.

     

    In fact, back in January I asked professor Salerno if casino chips were a part of the money supply (i.e. if they were a money substitute), and he said (exact transcribed quote):

     

    "They're absolutely not a part of the money supply. If the casino goes out of business, they don't redeem your chips. You can't use the chips outside the casino. You may be able to use them in limited places outside the casino, so they may be a medium of exchange, I'm not denying that. People in Las Vegas are willing to accept the chips at par value, and that might not even be the case, they're willing to give you the full amount for the chips. It's only limited in any case. It could be a local medium of exchange, I'm not denying that. But that is not a part of the money supply. Not for people in Iowa, if you try to sell them the chips, they would not accept them, or if they did, they would really only accept them at 50% of their face value, so that is not a part of the money supply".

     

    So all the objections that I explained in my blog post are presented here. Bitcoin is neither a claim (because there is noone who is legally obligated to redeem them), nor a perfect substitute (at par value) with another medium of exchange, because it is subject to independent valuation.

     

    Whatever contributions Patrik had to the debate, the attempt to classify Bitcoin from he Austrian point of view is not one of them. He did not correctly explain either the classification tree presented by Mises, nor did he take into account the distinction between a medium of exchange and money.
    11 Mar 2013, 09:52 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Patrik's classification is erroneous. Bitcoin does not fit into the definition of token money, because it is not a money substitute, in either of the two definitions used by Mises, Rothbard or Salerno. It is neither a claim, nor a nearly perfect economic substitute for some other currency’

     

    Bitcoins are certainly not money-certificates, but that doesn’t mean they aren’t fiduciary media. There are reasons why money-substitutes are separated into two categories.

     

    ‘In fact, back in January I asked professor Salerno if casino chips were a part of the money supply (i.e. if they were a money substitute), and he said (exact transcribed quote)’

     

    Poker chips are tokens. There is a difference between tokens per se and token money.

     

    ‘So all the objections that I explained in my blog post are presented here. Bitcoin is neither a claim (because there is noone who is legally obligated to redeem them), nor a perfect substitute (at par value) with another medium of exchange, because it is subject to independent valuation’

     

    Legal obligation entails fiat money. Therefore, I didn’t designate bitcoins as fiat money. Moreover, a fixed exchange rate is not a prerequisite for token money. It just so happened that most token money has historically had a fixed exchange rate, just as most fiat money has been paper. However, paper is not a prerequisite for fiat money. For example, the dollar is partly made of cotton and there are numerous fiat money made of plastic.

     

    ‘He did not correctly explain either the classification tree presented by Mises, nor did he take into account the distinction between a medium of exchange and money’

     

    Unfortunately, Ludwig von Mises was not some dyslexic retailer like Mike Maloney. Money is a synonym for a medium of exchange. All subsequent characteristics of money flow from the fact that it is a medium of exchange. Mises criticized the notion that we must add other characteristics to a medium of exchange in order for it to be classified as money (the standard additions being a unit of account, a store of value, and a means of deferred payment). In the words of LvM,

     

    “Many investigators imagine that insufficient attention is devoted to the remarkable part played by money in economic life if it is merely credited with the function of being a medium of exchange; they do not think that due regard has been paid to the significance of money until they have enumerated half a dozen further 'functions' - as if, in an economic order founded on the exchange of goods, there could be a more important function than that of the common medium of exchange.”

     

    He further wrote,

     

    “After Menger's review of the question, further discussion of the connexion between the secondary functions of money and its basic function should be unnecessary. Nevertheless, certain tendencies in recent literature on money make it appear advisable to examine briefly these secondary functions - some of them are co-ordinated with the basic function by many writers - and to show once more that all of them can be deduced from the function of money as common medium of exchange.”

     

    My two questions for you:
    (1) Did Ludwig von Mises consider the regression theorem as valid?
    (2) Bearing in mind the regression theorem, where would you place bitcoins in the money formulation devised by Ludwig von Mises?
    12 Mar 2013, 06:04 AM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    > Legal obligation entails fiat money.
    This is misleading. Fiat money includes some legal obligations, but they do not concern redemption. Nobody is obligated to redeem fiat money in anything.

     

    > Moreover, a fixed exchange rate is not a prerequisite for token
    > money.
    A fixed exchange rate is a prerequisite for all money substitutes, including token money. I quoted Salerno explicitly saying that decoupled exchange rate is a reason the reason for rejecting classification as money substitutes, and you still insist. If you don't believe me, ask any Austrian economist, or google for "money substitute par value". You'll see quotes from Rothbard, Salerno and Pollaro, among other things.

     

    > It just so happened that most token money has historically had a
    > fixed exchange rate, just as most fiat money has been paper.
    I recommend you check out this youtube video of Malavika Nair criticising Selgin's "Good Money": http://bit.ly/12MLBLP .

     

    The point you are missing here is that money substitutes must be an offshoot, a derivative, a claim, a copy (take your pick, whichever term you consider the most understandable), of the underlying money in the narrower sense. There is a causal relationship between them. If the relationship loosens (e.g. the price decouples), they become something else than money substitute. But Bitcoin never had this relationship in the first place. So not only isn't Bitcoin a money substitute, it never was one.

     

    According to your logic, secondary media of exchange are also token money, because it can be exchanged against fiat. Here the grave issues with your argument becomes even more apparent. And it becomes even more apparent because you dodge the question *who* is obligated to redeem Bitcoins, i.e. *who* the claim is against. If there is no such person, then it (at least in the Misesian classification) cannot be a money substitute.

     

    > Money is a synonym for a medium of exchange.
    Wrong. There is a whole section in ToMC dealing with secondary media of exchange, explaining the difference between money and less liquid media of exchange. It also includes examples of such media of exchange.

     

    > All subsequent characteristics of money flow from the fact that it
    > is a medium of exchange.
    This is difficult to address as it can have several different meanings. But based on your further quotes (the first of which, by the way, I also quote in my thesis), you miss the actual distinction between money and medium of exchange. Money is generally accepted. Other media of exchange are not.

     

    > Did Ludwig von Mises consider the regression theorem as valid?
    Of course, otherwise he wouldn't have said that "it must happen this way" (I'm paraphrasing, Graf has the exact quote in his article and so do I in my thesis). But the question remains, what is the actual meaning of the regression theorem? Because there I hear contemporary bloggers ascribing things to it which Mises never said.

     

    > Bearing in mind the regression theorem, where would you place
    > bitcoins in the money formulation devised by Ludwig von Mises?
    The classification of money is an entirely different issue from the regression theorem. Mixing them is one of very common errors that the critics of Bitcoin make.

     

    As I explained before, if you take the formulations literally, it can't be classified. But that's not a big deal, because there are other media of exchange that can't be classified either. One are the so called "complementary currencies" (they are derivative media of exchange, but not claims, for example WIR), and the old Somali shilling (it used to be fiat money, but not anymore).

     

    I'm working on a new post on my blog where I go into more depth. In the meantime I recommend you read my thesis, in particular chapter 3 which handled the theory.
    12 Mar 2013, 04:11 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Fiat money includes some legal obligations, but they do not concern redemption. Nobody is obligated to redeem fiat money in anything.’

     

    Fiat money, by definition, comes out of the legal process i.e., by decree. This is precisely why bitcoins cannot be classified as fiat money.

     

    ‘A fixed exchange rate is a prerequisite for all money substitutes, including token money.’

     

    Fiduciary media and money-certificates have often been devalued, this is blatantly wrong from a historical point of view. Feel free to show me a source where either Mises or Menger state that token money must have a fixed exchange rate. This would be the equivalent of saying that fiat money must be made of paper, which is also incorrect.

     

    ‘I quoted Salerno explicitly saying that decoupled exchange rate is a reason the reason for rejecting classification as money substitutes, and you still insist’

     

    You quoted Salerno referring to tokens. Once again, there is a difference between tokens per se and token money, just as there is a difference between certificates per se and money-certificates.

     

    ‘I recommend you check out this youtube video of Malavika Nair criticising Selgin's "Good Money": http://bit.ly/12MLBLP

     

    Malavika Nair may very well be right. If in fact the new copper money was valued for its metal content as opposed to redeemability, then it would be considered a commodity money. However, this is not relevant to bitcoins. No one values bitcoins for their content as a commodity, which boils down to binary digits. Moreover, she mentions nothing in the audio which suggests that token money must have a fixed-exchange rate.

     

    ‘The point you are missing here is that money substitutes must be an offshoot, a derivative, a claim, a copy (take your pick, whichever term you consider the most understandable), of the underlying money in the narrower sense. There is a causal relationship between them’

     

    The underlying money, for which bitcoins are substitutes, are the various fiat currencies that are exchanged at the magic the gathering online exchange.

     

    ‘If the relationship loosens (e.g. the price decouples), they become something else than money substitute’

     

    I thought you said prices are irrelevant. In any case, the record of monetary history is one of money-substitutes fluctuating relative to money itself.

     

    ‘According to your logic, secondary media of exchange are also token money, because it can be exchanged against fiat’

     

    There are plenty of goods and services which can be exchanged for fiat, this does not make them token money. The key here is not that they are exchangeable with fiat, but that they act as a substitute for it.

     

    ‘Wrong. There is a whole section in ToMC dealing with secondary media of exchange, explaining the difference between money and less liquid media of exchange. It also includes examples of such media of exchange’

     

    Per Ludwig von Mises: “Money is nothing but a medium of exchange and it completely fulfils its function when the exchange of goods and services is carried on more easily with its help than would be possible by means of barter”

     

    ‘Because there I hear contemporary bloggers ascribing things to it which Mises never said’

     

    Mises did not invent nor in any way refine the regression theorem, he merely considered is as self-evidently correct.

     

    Per Carl Menger: “I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost”

     

    ‘The classification of money is an entirely different issue from the regression theorem. Mixing them is one of very common errors that the critics of Bitcoin make’

     

    The regression theorem directly impacts the classification of money. If one is willing to throw it by the wayside, which a lot of quasi-Austrians have, then it becomes almost intuitive to classify bitcoins as a commodity money.

     

    ‘As I explained before, if you take the formulations literally, it can't be classified’

     

    So what would be the correct course of action? Shall we put next to commodity, credit, and fiat money yet another form of money? What will we call this new type of money? How about we call it ‘ex nihilo money’, or ‘thin air money’, or ‘monopoly money’. What do you think should be the proper name?

     

    Personally, I am far too humble to go around saying that men who have spent a lot more time thinking about this sort of thing are either wrong or their theory is incomplete, which is a polite way of saying wrong. Thus, I placed bitcoins on the only applicable place in the Misesian formulation: fiduciary media. From an economic standpoint, there is no doubt that the various merchants who accept them treat them as such. In other words, there is no doubt that they take bitcoins solely because they know they can get dollars (fiat) for them.
    13 Mar 2013, 05:15 AM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    I'm sorry Patrik but you're mixing things into incoherent positions.

     

    Kindly consult the second post that I made on my blog with respect to our debate.

     

    > Fiat money, by definition, comes out of the legal process i.e., by
    > decree. This is precisely why bitcoins cannot be classified as fiat
    > money.
    You're dodging. I said that the definition of money substitutes requires a legal relationship. You used the word "legal" in a different context. Your sentence is a non-sequitur.

     

    > Fiduciary media and money-certificates have often been
    > devalued, this is blatantly wrong from a historical point of view.
    The issuer can't really "devalue" a fiduciary medium, because the exchange rate between the fiduciary medium and the underlying monetary base is either fixed by decree, or determined by the market. When a fiduciary medium trades at a discount, the Austrians generally don't tend to count it as a money substitute, or if, then only at the discounted rate. A money substitute that appreciates against the monetary base is from the Misesian point of view impossible. It can be either equal or (in the extreme case) discounted.

     

    > Feel free to show me a source where either Mises or Menger
    > state that token money must have a fixed exchange rate.
    Kindly consult my second blog post. That is one of the defining factors of a money substitute.

     

    > You quoted Salerno referring to tokens.
    I quoted him to show the reasoning he was using. He looked at the definition of the money substitute, and attempted to demonstrate that casino chips do not fit the definition.

     

    > However, this is not relevant to bitcoins.
    It is relevant to refute your reasoning. Malavika Nair explained that the appreciation of the copper coins against the monetary base (pound) is a reason why they don't fit the definition of a fiduciary medium.

     

    > The underlying money, for which bitcoins are substitutes, are the
    > various fiat currencies that are exchanged at the magic the
    > gathering online exchange.
    By your logic then, all secondary media of exchange are money substitutes too, because they trade against fiat money on specialised markets.

     

    > I thought you said prices are irrelevant.
    Non-sequitur. They are not relevant for the future of Bitcoin. For the classification, they are relevant.

     

    > There are plenty of goods and services which can be exchanged
    > for fiat, this does not make them token money.
    You contradict yourself.

     

    > The key here is not that they are exchangeable with fiat, but that
    > they act as a substitute for it.
    From the perspective of the classification system of Mises, the substitute refers to perfect substitute. Again, if your argument was valid, foreign fiat money is also a money substitute.

     

    > Money is nothing but a medium of exchange
    This is not an expression of equivalence, but that of a superset.
    18 Mar 2013, 06:12 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘A money substitute that appreciates against the monetary base is from the Misesian point of view impossible. It can be either equal or (in the extreme case) discounted’

     

    Nonsense. Mises often spoke of money-certificates trading at a premium to the bullion they represented for a variety of reasons, such as convenience. Moreover, the 19th century may be considered as a century where the British pound rose relative to its underlying asset: gold. The British pound used to be the world’s reserve currency, as the US dollar is today, and this is despite Great Britain having a relatively miniscule amount of gold reserves.

     

    ‘I quoted him to show the reasoning he was using. He looked at the definition of the money substitute, and attempted to demonstrate that casino chips do not fit the definition’

     

    Once again, there is a difference between tokens per se and token money, just as there is a difference between certificates per se and money-certificates.

     

    ‘It is relevant to refute your reasoning. Malavika Nair explained that the appreciation of the copper coins against the monetary base (pound) is a reason why they don't fit the definition of a fiduciary medium’

     

    The example that she refers to is the same as the example of the Somali shilling i.e., the money was in the process of transforming into a commodity money. In the Somali example, counterfeits were made left and right to the point where the shillings reached the value of the paper they were printed on. The example Malavika Nair cited is very much the same process.

     

    ‘Non-sequitur. They are not relevant for the future of Bitcoin. For the classification, they are relevant’

     

    That’s like saying the price of the euro vis-à-vis the dollar or vis-à-vis the yen is not relevant towards its future as a major currency, plain ignorance. The data is quite clear on the matter, interest follows price.

     

    http://bit.ly/YDfRAt

     

    Falling prices = falling interest and vice versa. This is a matter of fact, not an opinion.

     

    ‘From the perspective of the classification system of Mises, the substitute refers to perfect substitute. Again, if your argument was valid, foreign fiat money is also a money substitute’

     

    Depending on the geography. Remember, fiat money typically has a territorial monopoly of violence and a tax farm attached to it. Only the US dollar acts as a realistic substitute for all other fiat currencies due to its international reserve status. The euro was close to becoming a parallel reserve currency, but the eurocrats blew their chance. The proof is in the pudding.

     

    http://bit.ly/WAv1el
    18 Mar 2013, 10:50 PM Reply Like
  • BTC/LTC
    , contributor
    Comment (1) | Send Message
     
    Anyway the question was: is BTC in a bubble ... the answer is YES.

     

    other secondary questions were:

     

    - is bitcoin really decentralized ? to answer that you can reformulate the question: "did the blockchain issue this week solved itself or did a handful of developper have to intervene?"

     

    - Bitcoin is replicable in substance. The only serious contender at the moment is LTC. some bitcoin advocates are very fiercely opposed to it because they are speculators. otherwise why not praise litecoin usere for using cryptocurrency? In fact you notice that some btc user hate ltc as much as central planners would hate gold or crypto currencies ....

     

    - Do people support the medium of exchange quality of btc or are they attracted to the price? What happen to this price if the US government shuts down mtgox and btc-e ... what would happen if the G20 governments took a concerted action to outlaw any fiat/crypto currencies exchangers and any online shop using btc/ltc???
    14 Mar 2013, 12:57 PM Reply Like
  • npcompletion
    , contributor
    Comment (1) | Send Message
     
    "From an economic standpoint, there is no doubt that the various merchants who accept them treat them as such. In other words, there is no doubt that they take bitcoins solely because they know they can get dollars (fiat) for them. "

     

    How is this any different from gold today? Even though I think of gold as money, the fact remains you cannot actually treat is as pure money i.e. cash, due to legal tender laws.

     

    "With bitcoins, on the other hand, I first have to exchange actual money in order to acquire them, which entails a transaction cost, and then I have a limited choice of qualitatively and quantitatively inferior products to choose from."
    - You can mine bitcoins yourself
    - You can exchange them freely with fiat currencies with anyone; unlike cash, or gold (see below)
    - "qualitatively and quantitatively inferior products to choose from."
    I will avoid spamming this blog with links to all sorts of things you can buy with bitcoin, but that's a wrong assumption. Sheer quantity? Yes, there's less selection, but it's constantly growing. In fact, the amount has taken a huge leap recently with Bitpay's service for Amazon.

     

    Qualitatively? Quite the opposite. First, the quality of goods for the same types of items in fiat money markets remains the same. There are the same commercial, if not mundane, items: from food ( http://bit.ly/YBLdHA ), to electronics ( http://bit.ly/16DROZq )

     

    But there are certain goods and services available through bitcoin are qualitatively superior, when it takes advantage of bitcoins unique attributes. Online and electronic services where privacy matters e.g. secure web hosting and VPN. In addition, there are those whose point is moot, when payment processors decide to interfere. Erotic art or services? Controversial items? "Hate" speech? Guns? Drugs? Political leaks (e.g. wikileaks)? Online hosting/storage services? All have been and are *increasingly* subject to censorship by Papal, MC/Visa.

     

    " No one values bitcoins for their content as a commodity, which boils down to binary digits."

     

    This is not true at all. In fact, it's the opposite of why and how bitcoin became popular. Bitcoin IS commodity money AND fits into the regression theorem precisely because of its unique properties.

     

    A fitting commodity analogy of bitcoin are hammers--hammers of disintermediation i.e. special hammers used to break virtual barriers. Or more generally, commodity tools of crypto-anarchic utility. People trade these virtual hammers, using them as a medium of exchange in certain instances, precisely because of barriers that keep popping up.

     

    Paypal can come up with their own inelastic, scarce eCash equivalent, but it won't have the same commodity factor as bitcoin due to availability and utility: monopoly control of the paypal media and the media being highly vulnerable to interference by the state.

     

    I buy gold and silver. But gold and PMs are even much more problematic, as they've lost their "commodity" properties due to state interference in mining, state interference in exchanges. Don't like how the exchange rate/price of gold is determined on the futures market? Think the rules are unfair? Yeah, well too bad, you are at the complete mercy of COMEX/LBMA and their manipulators, you CANNOT set up your own exchange, else the CFTC will come shut you down.

     

    The more the state interferes, the people want to disintermediate, the more privacy people want, the more bitcoin or cryptocurrencies gains status as money.

     

    A study last year:
    http://onforb.es/YBLdaK
    "Black Market Drug Site 'Silk Road' Booming: $22 Million In Annual Sales"

     

    And more recently:
    http://bit.ly/16DRN7P
    "Mega Sidesteps US State Censorship With Bitcoin"

     

    http://bit.ly/YBLg68
    "Bank of America Holding AR-15 Manufacturer's Deposits"
    -- this is why Cody Wilson, in setting up http://www.defcad.com accepts bitcoins and encourages people to use bitcoins, after he was also the subject of various censorship/private sanctions.

     

    http://bit.ly/16DRN7R
    "Dragon's Tale is the first massively multiplayer role-playing casino."
    -- and all other pure bitcoin based gambling sites e.g. Satoshidice and Bitzino

     

    http://stripcoin.com
    Self explanatory ;)

     

    http://ars.to/YBLg6e
    "WordPress now accepting payment in Bitcoin"
    " .... “PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions,” wrote Andy Skelton, a WordPress developer, in a blog post. “Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.”

     

    http://bit.ly/16DROZs
    "Argentines escaping currency controls with Bitcoins"
    " .... My friend Sir Charles at PricedinGold.com wrote me this morning from Argentina’s Salta province (near Doug Casey’s lovely property in Cafayate) and told me that TEA Turismo, a local tour operator and rental car agency there has started accepting BITCOINS. "

     

    What other non-crypto, non-political medium of exchange could be used to accomplish the above without interference?
    The more people see value in this, the more bitcoin and crypto-currencies in general become money
    18 Mar 2013, 05:50 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘How is this any different from gold today? Even though I think of gold as money, the fact remains you cannot actually treat is as pure money i.e. cash, due to legal tender laws’

     

    Gold is the most liquid form of money on the planet. Central banks are the largest holders and buyers of gold; they do not own wheat, copper, silver, or bitcoins. If you go to the Diamond District here in NYC, you will see that any one of the several merchants will be eager to buy your gold at 2-3% below spot. The reason is quite simple: they immediately sell the gold to large commercial or central banks for spot and pocket the difference. I have it on good authority that the gold being bought up is melted down and turned into bullion bars, which end up at the various central banks around the world. In short, there is nothing magical or intrinsic about gold. Rather, its present institutional role serves as a monetary anchor. It is no coincidence that the US, IMF (US), Germany, France, and Italy are the largest holders of gold on the planet.

     

    ‘You can mine bitcoins yourself’

     

    That would have been a smart move over 2 years ago. At this point you are chasing profits that have already been made. This is precisely why the goldrush mechanism that bitcoins stimulate is likely to bring about knockoffs. In fact, it’s already happening in litecoin: http://bit.ly/YOx6C1

     

    FYI, I participated in the first bitcoin bubble. I honestly did not expect a second one to form, which just goes to show how immature and irrational the bitcoin market is.

     

    ‘In fact, the amount has taken a huge leap recently with Bitpay's service for Amazon’

     

    Ironically, Amazon itself is a bubble company. The market cap of Amazon is close to 120 billion, and yet the company has only made 1.5 billion in profits since inception almost 20 years ago. The valuations, by any standard metric, are in the stratosphere. Amazon, and more specifically Amazon shareholders, have some very tough years ahead of them.

     

    ‘Qualitatively? Quite the opposite. First, the quality of goods for the same types of items in fiat money markets remains the same. There are the same commercial, if not mundane, items: from food ( http://bit.ly/YBLdHA ), to electronics ( http://bit.ly/16DROZq )’

     

    The same? Can I shop at Bergdorf Goodman with bitcoins? Can I get a decent pair of headphones with bitcoins? Can I order from any restaurant near my house with bitcoins?

     

    For the sake of argument, suppose I could get literally everything with bitcoins as I can with my plastic. It still wouldn’t make sense to convert my dollars into bitcoins in order to make a transaction that can otherwise be made.

     

    ‘But there are certain goods and services available through bitcoin are qualitatively superior, when it takes advantage of bitcoins unique attributes. Online and electronic services where privacy matters e.g. secure web hosting and VPN. In addition, there are those whose point is moot, when payment processors decide to interfere. Erotic art or services? Controversial items? "Hate" speech? Guns? Drugs? Political leaks (e.g. wikileaks)? Online hosting/storage services? All have been and are *increasingly* subject to censorship by Papal, MC/Visa’

     

    This comes down to the anonymous issue. I tend to agree with developer Jeff Garzik, bitcoin was made to be the exact opposite of anonymous. Either the developers were complete idiots and created the opposite of what they intended, or most bitcoiners are idiots. You can imagine which side I take.

     

    ‘This is not true at all. In fact, it's the opposite of why and how bitcoin became popular. Bitcoin IS commodity money AND fits into the regression theorem precisely because of its unique properties’

     

    Binary digits.

     

    ‘Paypal can come up with their own inelastic, scarce eCash equivalent, but it won't have the same commodity factor as bitcoin due to availability and utility: monopoly control of the paypal media and the media being highly vulnerable to interference by the state’

     

    Once again, feel free to watch Jeff Garzik proactively call for regulation and working with the government. There’s nothing uncle Sam loves more than a permanent record, which is exactly what every bitcoin transaction is.

     

    ‘I buy gold and silver. But gold and PMs are even much more problematic, as they've lost their "commodity" properties due to state interference in mining, state interference in exchanges. Don't like how the exchange rate/price of gold is determined on the futures market? Think the rules are unfair? Yeah, well too bad, you are at the complete mercy of COMEX/LBMA and their manipulators, you CANNOT set up your own exchange, else the CFTC will come shut you down’

     

    Ironically, GATA has been pounding the table during a decade of rising gold prices. Moreover, gold is, has been, and will continue to be a proxy for oil. Oil truly is the one commodity that is too large for any government to manipulate.

     

    http://bit.ly/YOx9h7

     

    In short, I don’t buy the manipulation nonsense. I also suggest you read the magic the gathering online exchange privacy policy.

     

    http://bit.ly/148qTWv

     

    A lot of the points you bring up have already been addressed. Unfortunately, I get the feeling that you came here without fully reading the article and/or the comments. If you wish to confirm your biases, by all means there are plenty of places on the internet with a quire waiting for a preacher.
    18 Mar 2013, 10:27 PM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    And since Patrik doesn't see why people should use Bitcoin, it is becoming more and more obvious, just coincidentally due to this weekend's news:

     

    http://bit.ly/YBMtKK

     

    And before I hear that gold and silver are a better choice than Bitcoin, kindly note that in order to be practically usable in a complex economy, you need banks (= a middleman with full control over your money) to use gold/silver anyway, both for clearing and for facilitating credit, so the approach is a fail.
    18 Mar 2013, 06:08 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘And before I hear that gold and silver are a better choice than Bitcoin, kindly note that in order to be practically usable in a complex economy, you need banks (= a middleman with full control over your money) to use gold/silver anyway, both for clearing and for facilitating credit, so the approach is a fail’

     

    I’ve seen a lot of money disappear from fools who bought bitcoins during the run-up in 2011. Ironically, they were worried about inflation eroding their purchasing power. Instead of losing 2% per annum, some of them lost 50% in a matter of weeks. But hey, prices don’t matter. My take is quite simple: if someone cannot think of a more creative and less childish way of avoiding confiscation than piling into bitcoins, which are making all-time highs, then they deserve to lose their money. Buy high, sell low, that’s the way of the crowd.
    18 Mar 2013, 11:02 PM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    I'm sorry Patrik, but you're dodging questions. Your argument is falling apart, so you're just stalling.

     

    I provided clear quotations that show both that the fixed exchange ratio is a part of the definition of the money substitute, as well as examples where the absence of a fixed exchange ratio was a sufficient reason to deny that classification. Yet you, oblivious to what is happening, stick to your argument.

     

    You utterly failed to grasp the purpose of Part 1 Chap 3 of Theory of Money and Credit, where Mises clearly explains that his goal is to explain the exchange ratios among goods. Money substitutes, as defined by Mises, are claims, and this determines their exchange ratio with respect to other goods:

     

    > The present discussion aims at tracing the laws that determine the
    > exchange ratio between money and other economic goods. This
    > and nothing else is the task of the economic theory of money. Now
    > our terminology must be suited to our problem.
    ...
    > They themselves are not valued directly, but indirectly; their value
    > is derived from that of the economic goods to which they refer.

     

    You fail to address the distinction between media of exchange and money, the distinction between money in the narrower sense and the money substitutes, you fail to address the issue of comparative advantage under network effect, and you fail to address the methodological flaws in your application of the regression theorem. You insist that price matters, but then randomly jump between context.

     

    I'm sorry but I can't take you seriously anymore.
    19 Mar 2013, 06:31 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » 'You fail to address the distinction between media of exchange and money, the distinction between money in the narrower sense and the money substitutes, you fail to address the issue of comparative advantage under network effect, and you fail to address the methodological flaws in your application of the regression theorem. You insist that price matters, but then randomly jump between context.'

     

    Per Ludwig von Mises: “Money is nothing but a medium of exchange and it completely fulfils its function when the exchange of goods and services is carried on more easily with its help than would be possible by means of barter”

     

    I did address the issue of the network effect several times. I think it is nonsense. Not too long ago newegg was a top dog, today it is considered an obscure website visited by people looking for pc hardware. Today, amazon is considered infallible, but time will once again show how naive people are. These things fall in and out of favor all the time. I don't expect facebook to be around in its present form in 5 years, it will go the way of myspace and xanga before it, let alone expecting bitcoins to be used in 5 years. It's a fad.
    19 Mar 2013, 09:08 AM Reply Like
  • PeterSurda
    , contributor
    Comments (20) | Send Message
     
    Again, the quote by Mises does not indicate equivalence, but subset/superset relationship. There are media of exchange that are not money.

     

    You didn't address my second article where I explained the mechanics of network effect competition. To you, it happens arbitrarily, whereas I argue that there are understandable mechanics in it. If a lagger wants to overtake the leader, it needs a significant comparative advantage, plus there is friction. You have provided no explanation of a mechanism of how competition under network effect occurs, and I debunked your P2P example.

     

    You also miss that this applies on multiple levels. There isn't only competition among cryptocurrencies, but also among media of exchange in general. For the same reason why Bitcoin will probably for the foreseeable future remain leader among cryptocurrencies, it can also outcompete other media of exchange, e.g. fiat money and precious metals. Similarly as BluRay didn't only replace HD-DVD, but it also, on the broader level, pushes out older technologies, such as DVD or VHS. VHS can't outcompete BluRay, so it can be similarly argued that gold can't outcompete Bitcoin.

     

    I recommend you read my thesis where I deal with competition among media of exchange.

     

    I'm writing a third blog post now, dealing with the money substitute issue, that's a more complex one.
    24 Mar 2013, 11:25 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Again, the quote by Mises does not indicate equivalence, but subset/superset relationship. There are media of exchange that are not money’

     

    I understand that there is a difference between a medium of exchange and a commonly used medium of exchange. However, this is but an easy way of avoiding and postponing the issue at hand i.e., the classification of bitcoin into money per the formulation of LvM. Suppose that bitcoin does in fact become a commonly used medium of exchange, which is what every bitcoiner ultimately wants, then we are back to square one in having to classify it.

     

    ‘You didn't address my second article where I explained the mechanics of network effect competition. To you, it happens arbitrarily, whereas I argue that there are understandable mechanics in it. If a lagger wants to overtake the leader, it needs a significant comparative advantage, plus there is friction. You have provided no explanation of a mechanism of how competition under network effect occurs, and I debunked your P2P example’

     

    I did address the network effect several times. My conclusion is that the network effect is nowhere near as strong as you would like to think. Social networking is a perfect example, with xanga, myspace, etc. showing a lifecycle of approximately 5 years. Did myspace take over xanga because it offered something similar? It was virtually an identical platform with a very similar code. Moreover, I tend to believe in the subjective theory of value. In other words, there is no objective reason why this happened. One can point to x and y, but at the end of the day the shift took place because preferences were changed. There are numerous reasons why I think knockoffs will come to fruition, the primary of which being that bitcoin has a built-in gold rush mechanism. Anyone who participated in the first run-up or watched grown men turn their basement into a video card warehouse will understand this. FYI, we are already seeing this in Litecoin, which is up 6-fold in this month alone. Litecoin is just the tip of the iceberg.

     

    ‘You also miss that this applies on multiple levels. There isn't only competition among cryptocurrencies, but also among media of exchange in general. For the same reason why Bitcoin will probably for the foreseeable future remain leader among cryptocurrencies, it can also outcompete other media of exchange, e.g. fiat money and precious metals. Similarly as BluRay didn't only replace HD-DVD, but it also, on the broader level, pushes out older technologies, such as DVD or VHS. VHS can't outcompete BluRay, so it can be similarly argued that gold can't outcompete Bitcoin’

     

    Comparing gold to VHS is a bit naïve. Unlike the hard sciences, which are cumulative, finance is and will always be cyclical. The proof is in the pudding, central banks are the largest holders and buyers of gold. They do not own silver, bitcoins, copper, wheat, magic the gathering cards, or world of warcraft money. Gold is still very much a monetary metal and will increasingly reassert itself. Moreover, let us not forget that one of the primary arguments for fractional-reserve banking as well as paper money is a reduction in costs.
    26 Mar 2013, 06:38 AM Reply Like
  • Nonesense
    , contributor
    Comments (5) | Send Message
     
    Bitcoin is probably experiencing a major bubble right now, however your essential point is incorrect.

     

    Bitcoin can not be "copied in substance" because merchants will not accept those copies. Nobody is going to accept "goldbit" or some other new currency. It takes a long time for merchants (Silk Road included) to build up trust and decide to accept alternative currencies, and to believe the currency is going to hold value. Since no merchants accept the new currency, it's worthless, so its conversion to bitcoin or fiat currency will be negligible, so no merchants will accept it.... It's extremely difficult for a currency to bootstrap, and bitcoin seems to have managed this.

     

    The fact that you can buy real goods or fiat currency with bitcoin give it its value. Other currencies may emerge, but simply being another token currency does not give it value. It takes a long time for people to start perceiving value.

     

    A new country issuing a new currency is in a similar boat, so they enforce the currency's acceptance. Without that step, any new currency would fail immediately, regardless of what government was issuing it.
    21 Mar 2013, 01:46 AM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Bitcoin can not be "copied in substance" because merchants will not accept those copies’

     

    I was not trying to argue whether or not the copies will be accepted per se, but that copies which are technologically identical can in fact be made ad infinitum. This is not the case with silver, or copper, or gold. One cannot simply spring black silver into existence out of thin air, which would have the same exact properties but would differ in color.

     

    ‘Nobody is going to accept "goldbit" or some other new currency. It takes a long time for merchants (Silk Road included) to build up trust and decide to accept alternative currencies, and to believe the currency is going to hold value’

     

    I can’t help but agree. The knockoffs will not gain traction overnight, it will be a process that will take some time. This was certainly the case as Kazaa replaced Napster, and Kazaa Lite replaced Kazaa, and subsequently eMule, eDonkey, as well as BitTorrent. This argument about knockoffs was more or less to show that bitcoins will not survive in the long run. The actual price bubble is the argument against bitcoins in the short run.
    24 Mar 2013, 03:04 PM Reply Like
  • Seraiah
    , contributor
    Comment (1) | Send Message
     
    Nonsense. The userbase, services, and terahashes of mining power cannot be easily duplicated, and none of the aforementioned have any incentive to change unless the currency in question is superior.
    22 Mar 2013, 03:15 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » ‘Nonsense. The userbase, services, and terahashes of mining power cannot be easily duplicated, and none of the aforementioned have any incentive to change unless the currency in question is superior’

     

    Bitcoins and the subsequent knockoffs that will inevitably follow have a gold-rush mechanism built into them. The reason why people had an incentive to buy a bunch of GPU’s and flood their basements with mining rigs was because they knew that they could acquire bitcoins for cheap (pennies) and potentially sell them at a much higher price. We are seeing this same process unfolding with Litecoins in the past month (up 500%) and will definitely see it in subsequent knockoffs as well.

     

    Moreover, the core of the bitcoin protocol is not how much computing power it takes to mine the stuff, which is arbitrary. In fact, I’m betting on the subsequent knockoffs allowing people to mine on their smartphones, tablets, and other consumer products with relative ease and low GPU requirements. We are already seeing this trend with Litecoins.

     

    ‘It is not in the interest of anyone involved to change currencies unless that currency is superior’

     

    Fads don’t replace other fads because of superiority. On the contrary, fads fall in and out of favor just by their very nature. My bet is that sooner or later people will realize that the bitcoin developers are in fact proactively working with the government. This will present an opportunity for knockoffs to present themselves as more anonymous, decentralized, anti-government, and all that jazz.
    24 Mar 2013, 03:05 PM Reply Like
  • donmcint
    , contributor
    Comments (68) | Send Message
     
    Hello Patrick, regardless of the predictions in this article I see you were short Bitcoin as of this writing. I hope you covered soon enough in order not to lose so much! The price of Bitcoins hasn't been below the closing price of the date of this article.

     

    Another rule you should follow is that if you short your potential gains are limited and you potential losses are unlimited. This is one of the reason I am also attracted to investments that go up rather than down. I also think this is a reason many people don't bet downwards, but always upwards.

     

    I think even it is something that might be replaced in the future as some other form of money, for the time being it is going up and the whole Bitcoin ecosystem is very broad and complex to discount it this soon.

     

    I think it has a long way to go before we see a possible top or even a future failure of Bitcoin as money.

     

    I would say, for now, Bitcoin is money.
    26 Oct 2013, 05:59 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » 'Hello Patrick, regardless of the predictions in this article I see you were short Bitcoin as of this writing. I hope you covered soon enough in order not to lose so much!'

     

    Hey Donald, I managed to short bitcoin from $49/btc until $36/btc during the so-called fork. Subsequently, I bought litecoin during the month of March for a pretty hefty gain per my theory of the goldrush mechanism which I described in this article. Consider that litecoin went up over 6,000% during March while bitcoin went up less than 500%. Just to make it clear, I am not some sort of litecoin fan, it was a trade.

     

    'I would say, for now, Bitcoin is money'

     

    Money, by definition, is a generally accepted medium of exchange. Bitcoin is not generally accepted nor does it function primarily as a medium of exchange. Rather, its primary role is as a perceived asset which people think must and will inevitably go up in value. In any case, I think my position towards bitcoin has been grossly misinterpreted. I am in a sense more bullish than even the most religious bitcoiners out there when it comes to digital currencies. Thus, to think that only bitcoin will be around because of some magical network effect is the height of delusion. Remember why litecoin went up in a major way during March, it was the goldrush mechanism.

     

    As for whether or not this article was correct, all you have to do is type bitcoin into google trends. I called the second bubble before it even started expanding. Next stop: Tesla stock. And no, I don't hate batteries.
    28 Oct 2013, 06:44 PM Reply Like
  • Patrik Korda
    , contributor
    Comments (35) | Send Message
     
    Author’s reply » YTD Update:

     

    Not only did we see bitcoin bubble 2.0 pop, but we also saw the inflation and bursting of bitcoin bubble 3.0 in 2013. Google Trends does a rather excellent job of showing off the three bubbles.
    http://bit.ly/YDfRAt

     

    I was going to write an article about 3.0, however I think the likes of Peter Schiff and Robert Shiller did a pretty good job of covering it. Bubbles aside, I also think my “hyperinflation in substance” argument is unfolding as was anticipated. Consider that when this article was published, there were just a handful of digital currencies out there. Today, there are over 145 of them.
    http://bit.ly/1jR8oeD

     

    As much as I would like to say “three strikes, you’re out” my faith in humanity is not that strong. I suspect we will see at least two more bubbles before people come to understand that digital currencies imply aggregate hyperinflation. Moreover, I expect the proper altcoins to continue to outperform bitcoin itself. Consider that bitcoin went up 5,952% in 2013. Litecoin, on the other hand, went up 33,214% in 2013. Not only do I expect this “hyperinflation in substance” to continue, but I fully expect the market capitalization of all the other digital currencies to surpass that of bitcoin this year. In fact, I would not at all be surprised if bitcoin was surpassed by a single digital currency this year. The most likely candidate at this point seems to be XRP. I have used the bursting of bitcoin bubble 3.0 to stock up on XRP (cost average $0.0137) and am also keeping an eye out on zerocoin, which has the potential to go up dramatically for ideological reasons, although economically it is an inferior product.

     

    There were a number of arguments charged against my article. I will address the most common one, which revolved around the regression theorem (RT). I think people are looking far too deep into the RT and are overcomplicating things. The RT is tautological in nature. The RT states that a commodity money must first be used as an industrial commodity. However, it does not mean that money itself must first be an industrial commodity. For example, credit money empirically predates commodity money. Thus, instead of trying to perform all sorts of mental gymnastics and coming up with nonsensical arguments, it is far more rational to simply accept the fact that bitcoins were never industrial commodities. In retrospect, I probably should have omitted the entire classification issue, as it draws attention away from the primary arguments made in the article. Nevertheless, it has proven to be quite entertaining to see the sort of nonsense that people have come up with to “prove” that bitcoin is in accordance with the RT.
    5 Mar, 07:38 AM Reply Like
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