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  • The Slow Death Of Bitcoin And Gold [View article]
    The functions of store of value, unit of account and standard of deferred payment are emergent functions of liquidity. The argument of Robert is backwards, he starts from a textbook descriptions of money and attempts to evaluate Bitcoin based on that. But "money" is merely a relatively advanced step in an evolution of media of exchange. A potential money must pass through stages of lower liquidity before it can be called money.

    It's kind of like saying that a phoetus cannot speak or get a job, therefore it is not a good example of a human being. A phoetus might die or get born and eventually grow up, but this won't be decided by its ability to speak or work measured while it is still in a womb.
    Jun 27, 2013. 12:43 PM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    I think you're mixing the individual functions of money. A medium of exchange does not need a stable value (within reasonable limits), you can hedge for exchange rate fluctuations. So this is not, per se, a problem. If Bitcoin reaches higher level of liquidity, it will also have a more stable price, and be more suitable for a store of value and unit of account, and people will be more likely to use it that way. If it doesn't reach higher levels of liquidity, its price will remain volatile, it won't be suitable for a store of value and a unit of account, and people would be less likely to use it that way.
    Apr 12, 2013. 10:12 AM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Noone knows the rights to the internet or the english language and still it can readily beat competitors. Linux is also doing pretty well. Indeed, proprietary network standards lost against internet. Open source does not mean that you can't make money off it. Indeed that's one of the absurdities claimed by pro-IP lobbyists.

    The transactors already have to pay fees, whether it's to the miners or to the exchanges. It does not require an oligopoly, indeed, an oligopoly is more likely to charge too much and provide too small a service.

    According to (if memory serves right) Eric Schmid, google wanted to launch something like Bitcoin, but decided not to do it due to regulatory issues.

    Anyone can make a unix clone, but you'll find it hard for it to complete against the already present competitors.
    Apr 11, 2013. 09:56 AM | 1 Like Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Lawrence, re:

    "I want to understand why the system cannot be duplicated overnight by a commercial venture that can bring a competitive edge unavailable to the bitcoin system."

    We cannot exclude this possibility, but it appears unlikely. Bitcoin is decentralised, open source, and has a growing ecosystem of services built on top of it. It's becoming more and more difficult to displace it with a competitor, similarly as it is becoming more and more difficult to displace the internet with the competitor.
    Apr 10, 2013. 10:45 AM | 1 Like Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]

    the Austrians, at least the gold branch, would argue that because the credit does not act as money, that's a benefit. I still don't understand where your problem is. If you're looking for liquidity, that does not require that credit acts as money. If credit acts as money, then saving does not require refraining from consumption, because the additional money is both credit and money. If I deposit money into the bank and the bank expands credit, I can still spend my deposit money. So from my perspective, I both saved and consumed. Obviously, in reality it's impossible, but our perception is distorted and this creates false signals.
    Apr 10, 2013. 09:59 AM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]

    if you want to use it as money, you sell it at secondary markets, and get your money. Liquidity can have forms other than money. I don't understand what the problem is. Savings is compensated by refraining from consumption.
    Apr 9, 2013. 09:52 AM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]

    I still don't understand your argument, my apologies. Anyone can issue credit denominated in BTC and backed by whatever they want. It can even be a negotiable instrument. In the future, you might even be able to construct something like letter of credit directly as a script inside the blockchain. Such an instrument might even be liquid. And since LoC is not a part of the money supply anyway, there isn't even the issue of the money supply. There's no fundamental or even a practical issue here.

    However, BTC-denominated credit issued by the bank probably won't be accepted as money by the general populace, because it doesn't decrease transaction costs over the monetary base (BTC). This is unusual, because we're accustomed to debit cards or wire transfers as decreasing transaction costs over cash. That is why we treat them as equivalent. In the absence of this decrease of transaction costs, the instrument is merely liquid credit, but not money. But this does not affect the "richness" of the economy. Increasing the money supply does not increase the availability of resources, it just may confuse us into thinking that there are more resources available than there really are, creating boom&bust cycles.

    In other words, in a BTC economy, you can't monetise debt directly, you need to do it indirectly. Credit instruments will be traded on secondary markets, and not used in direct payment. So when monetising debt, you need to sell the instrument you issue on this secondary market, instead of it being used to increase the money supply / reserves / whatever. This separates the perception of money vs. credit.

    So where's the problem?
    Apr 9, 2013. 03:22 AM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    You can still mine profitably with a 100 USD second hand GPU, and at the current prices, make a daily profit of about 3.55 USD if you sell your Bitcoins right away. There are no legal barriers to entry into Bitcoin mining, no need to sign a contract with anyone, the equipment is widely available and the high level technical specification for the protocol is publicly known, so you can design and build your own from scratch if you want to. Bitcoin is one of the most transparent distributed systems in the whole history.

    I wonder what kind of research you did.
    Apr 8, 2013. 07:51 PM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Hi Lawrence,

    I don't understand your argument. In a BTC economy, if you want to save, you use a service (for simplicity, let's call it a bank) and make your Bitcoins available for loans, for an interest. In return you get a bearer instrument with transformed maturity and conditions for redemption. So far, it works exactly as we're used to.

    Now, the difference is that most likely the general populace won't accept this bearer instrument as money, because it doesn't have lower transaction costs than Bitcoin itself. It could still be highly liquid though. If you want to use it for payments, in most cases you'd have to redeem it prematurely or sell it on specialised markets (probably with some penalty/discount, but not necessarily). This might sound tedious but it's really not, your mobile phone can do this automatically so you don't even notice that you're trading as well as paying.

    The result is an inelastic money supply as well as maturity transformation.

    So where's the issue?

    I recommend reading my master's thesis (you can google for it), or if you wait a while you can read an upcoming book about the topic.
    Apr 8, 2013. 07:32 PM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Oh and one more thing, it's not about regulation, it's about transaction costs. No matter how much people would trust the regulator, they still most likely wouldn't treat BTC substitutes as money because it would increase their transaction costs.
    Apr 8, 2013. 12:15 PM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]

    nobody and anybody has the ability to change the parameters. Every participant in the network needs to decide for themselves which parameters they accept and which they reject. If they don't all agree, this will result in a hard fork, two incompatible networks, B1 and B2.

    With respect to credit, you are conflating maturity transformation with a payment mechanism, or, in the words of Ludwig von Mises, commodity credit with circulation credit. That credit acts as a money itself is merely an empirical quirk, it is not necessary for an economy. Most economists are confused by this, and made up theories based on this, and then they are confused again during the bust phase of the business cycle where credit deflates, and cry for a fix. But this is just akin to astrology. An economy does not need an elastic money supply, and it does not need credit to act as money. Indeed, the Austrian school argues that that's the source of problems.

    Credit does not need to be money. Let's take company shares for example. They are a financial instrument that pays dividends, but they are not money. Another example are money market mutual fund shares. Similarly, in a fully monetised Bitcoin economy, there would be interest bearing financial instruments that allow people to save and transform maturity, but they probably wouldn't be treated by the general populace as money.

    In other words, in such an economy, if you want to invest, you might have to forego being able to use that saved sum as money. It still might be highly liquid, so you should be able to sell it on open market, at a minor discount maybe, if you need to consume. If you want to save, you have to forego spending.

    I think you might be mistaking liquidity for money supply. There's nothing wrong with liquidity, but it does not follow that this requires an increase in the money supply. Liquid goods which are not money readily exist.
    Apr 8, 2013. 12:11 PM | Likes Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Saying that Bitcoin is fishy because we don't know who developed it is nonsensical. Bitcoin is a fully transparent system with multiple open source implementations. The argument is like saying that because we don't know who invented the English language, there is something fishy about it. Or, that if we find out something controversial in the lives of Newton or Leibnitz, that is a valid reason to reject the use of calculus.

    I've heard this argument before, and I am writing a blog post about it, it just gets me agitated when I read nonsense.
    Apr 8, 2013. 06:59 AM | 1 Like Like |Link to Comment
  • Bitcoin: Buyer Beware, This Is A Classic Bubble And Possible Fraud [View article]
    Lawrence, think about it as language. It's merely a standard. Who has the authority to change the English language? Noone and everyone. Everyone makes their own choices. If you invent new words, you need to persuade others to use them, otherwise you're talking to yourself.
    Apr 8, 2013. 06:59 AM | Likes Like |Link to Comment
  • Bitcoin Bubble 2.0 [View instapost]
    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.
    Mar 24, 2013. 11:25 PM | Likes Like |Link to Comment
  • Bitcoin Bubble 2.0 [View instapost]
    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.
    Mar 19, 2013. 06:31 AM | Likes Like |Link to Comment