I think a lot of the "analysis" done on bitcoin here is used or thought from a conventional economics standpoint, which is not applicable.

Bitcoin is not a currency like any other that is used in a country, were people are basically forced to use exclusively. No-one that uses bitcoins lives with their bitcoins, or is forced to have them. So applying the theory that works on the former to the latter is just too frail. Inflation and deflation are very related to the goods your purchase that are at your reach. Argentina has 25% inflation rate, US what, less than 4% in average in the last 10 years?
Of course inflation has a direct impact when we talk about the currency im forced to use to pay rent, but what does it mean to have internet-inflation?

This is a really difficult economical-theoretical problem that im absolutely sure not even top-notch economists are sure about (which one could argue they are never sure of anything at all to begin with).

What is concrete is that it has a very practical use. Paypal has a very high comission for such a virtual transaction, either for profit or to cover legal costs or whatever, almost 5% is really a lot for money transfers. It means that out of 20 websites, paypal cashes in all the money one of those makes, even if all crash and burn.

Bitcoin, or other virtual currency, could reduce that commission to pennies and that alone is worth considering. If Bitcoin replaced online payments it could absolutely destroy really large online banking companies, so there is definite economical stakes in it.

Also i notice a lot of the arguments against bitcoin are really just as valid for any currency. That its purely fiat (all non-gold standard currencies are purely fiat, what else is there?). Goverment backing could be good or bad: the debt US got to bail out banks was really huge which in turn means people payed for it, which in turn probably hit the currency really hard.
And currency speculation happens in all currencies. Even US, Euro, etc. There is an entire stock-like market for it, and the players are really huge.

It seems to me that the issue is how safe is as a currency, and that will change on how widely adopted it is. It is not more stable than it was 2 years ago. If in 2 more yerars, it grows 5-fold, then it will be used more and more to purchase goods and it could become very reliable, and stable across world economies , which is another interesting thing.

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I meant the latter.

A society of uploaded minds would pretty much have to use bitcoin for the purpose we use gold. We probably have some time before that becomes an urgent problem but the algorithm bitcoin uses is a really essential component for socities of that nature.

In the near term, Bitcoin could also work as a medium of exchange between nations that don't accept each other's currency, but that's a solution in search of a problem.

I like the idea of bitcoin just sort of holding steady in the background, ready to come into actual use if a major world currency fails. I think the odds of that are pretty low (probably less than 1% per year), but it would be a major disaster and a backup plan is prudent. Well-managed national currencies are likely much better than bitcoin, but poorly managed ones are probably much worse. I trust the current system to keep working for the next years and decades, but not indefinitely.

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It means that people charge n% more for goods relative to what they charged last year. Of course n will be different depending on the goods.

I am speculating here, because I can't say I have the finger on all of what economists are talking about, but all the bitcoin discussion I've read has come from non-economists. Economists are generally fine with the idea of "fiat currency" (in my experience, using the term 'fiat' is a marker of discourse outside of mainstream economics. Of course, economists consider current currencies 'fiat', but it's as significant a fact to them as that cars have wheels. Insisting on talking about "fiat currency" is like insisting on mentioning "binary based computers" in a discussion about software).

This is true if bitcoin is widely adopted. Otherwise, it's not, since you have to move money in and out of bitcoins frequently, and that's expensive. Until you're paid in bitcoins and can pay your rent in bitcoins, there's not much of an advantage.

Two points: "probably"? Did it, or didn't it? (Never mind that the best thing that could happen to the US is for the dollar to lose a good bit of value, since that would push up exports).

Second, as the price of gold shows, alternatives are subject to much worse speculation.

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Like, they'll use bitcoin for jewelry and wiring components in electronics?



I agree that there is some chance of a major world currency failing, but presumably dollars or euros are the first choice as a fallback currency (and indeed, dollars already serve as an auxiliary currency in some distressed states). A crisis that took out the dollar, the euro, but left the bitcoin standing tall and proud would have to be a pretty unusual sort of crisis.

I'm honestly confused and fascinated by how so many people seem to be able to seriously entertain the idea of using an intrinsically worthless object as money. Sure, there's some historical precedent, like that Somalian currency which some Bitcoin FAQ cites, but would you consider Somalian money a stable investment?

The idea seems to be flawed and silly on a much more fundamental level than where bitcoin discussions take place on. Inflationary, deflationary - what does it even matter? A single run on the bitcoin banks and the value will fall catastrophically and never rise again, because worthless things are worthless and the market does occasionally correct prices.

(To preempt objections like "but gold also has no intrinsic value" or "but US dollars also have no intrinsic value" - sure they do. Gold is pretty, and US dollars can be used to pay US taxes. Their actual market value is higher than just that, but ultimately demand depends on the non-zero intrinsic value.)

(To preempt objections like "bitcoin has the intrinsic value of being a viable digital monetary exchange mechanism" - sure, it does, As do dozens of competing cryptosystems, none of which are worth much at the moment. Or you think bitcoin is special because it's more popular than they are? Wait until bitcoin has to compete with digital currency systems from Amazon, Microsoft, and the US government.)

Banking with bitcoin is a little weird if you think about it. The current system of highly leveraged banks definitely doesn't seem like it would work. But it's also not necessary, as you don't need a bank to facilitate purchases. Probably there would be some sort of investing in places that lend money, but it would be more like buying stock than keeping money in the bank. I suppose you might *pay* interest to have a bank keep your funds safe if you don't feel technologically capable to store them securely.

In response to jts, I seem to recall that most of gold's value is not from its industrial or even jewelry uses. E.g. Platinum is much more intrinsically valuable. My point was that ems (short for "uploaded mind" if you haven't seen it before) running at computer clock speeds instead of human ones would find it very awkward to trade precious metals.

And you're right, it would take a unique crises to make bitcoin take over a major currency. Certainly the vast majority of what the average libertarian bitcoin supporter desires would be disastrous if it actually occurred. Also, the people that think bitcoin will let them escape taxes are just being silly.

(in case it's not clear, I'm not really for or against it; I think it's a really interesting concept and I like to think about it. The algorithm is really important, as it solves an outstanding problem. Bitcoin is just the first and possibly not the best implementation.)

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Why not? I think you may be engaging in a bit of equivocation of the monetary base (the pictures of dead presidents, as they exist in bank vaults, wallets, tills, coffee cans, and so on) and the money supply, which consists largely of promises to pay people. Personally, I can't recall the last time I bought something with the monetary base - usually I pay for goods by having my bank promise to give my vendor's bank cash. If people stopped accepting dollars and demanded payment in bitcoin, this would not cause a problem for the banking system. If they stopped excepting promises of payment and started demanding direct payment in actual units of the monetary base, that would cause severe problems for the macroeconomy and the banking system, whether what they were demanding was dollar bills, gold, bitcoin, or whatever else.

This is part of the problem - the people who are pushing bitcoin have never really seemed clear on whether it is meant primarily to be an liquid store of value (part of the monetary base, like a twenty dollar bill), a payment mechanism (like the electronic transfer systems currently used by all the major banks and payment companies), or a speculative asset (like a condo or a ton of copper). I think the people who are excited about bitcoin are mainly people who don't understand what the point of having money is.



Shouldn't it be ums, then? I don't think that people trade metals much for monetary purposes any more, and even at human speeds it was awkward back when they did. You might enjoy reading "Lords of Finance" - once upon a time, most of the gold in the world sat in vaults in London and New York, and when one country ran a trade deficit, the gold would be moved from one corner of the vault to another corner with a tiny tractor.

Gold is constantly being put to work for industrial and aesthetic purposes. I can't tell you much about its merits vis a vis platinum, but at the current market prices people buy both gold and platinum for industrial uses, so it's difficult to say that one is "better" than the other. (Is steel better than copper? For some things, surely; but people are willing to buy and use both, for different things.)

Certainly if all the gold that were being held in central bank vaults, in deposit boxes, and in libertarian bunkers in Montana were disgorged onto the world market all at once, the price of gold would fall a great deal. But there's still a world market for gold that is influence by gold producers and gold consumers, in addition to gold speculators.

http://www.bloomberg.com/news/2012-05-0 ... -user.html
Something tells me that China isn't putting as much investments into bitcoin as into gold.

Alternatively, there is also electronic payment based on physically stored gold.
http://www.goldmoney.com/online-payments.html

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Bitcoin is all three (with the third being a temporary attribute).

Bitcoin payments are like exchanging gold coins, not like having your bank promise to pay their bank.

Anyway, past my bedtime.

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I believe most trades of gold in 2012 do not involve actual movement of gold. Some bank just changes the name attached to the gold in the vault.

God I'm up past my bedtime. Back to work.

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Occupy Babel!

By and large, you want people to be able to pay each other with promises rather than little bits of the monetary base. Replacing transactional credit with an alternate form of money would be a step backwards. (Like, a huge step backwards. Some historians think there was transactional credit long before there was money.) Even when money meant coins minted out of 22k gold, most gold-denominated transactions were done on credit of one form or another.

The monetary base, a system of payments, and a speculative investment are three different things. They have different purposes. I mean, it is true that I have given friends liquor to repay debts; and some people buy liquor and age it as an investment; and there have been societies that found liquor to be the most liquid store of value, and used it as their money. But the fact that booze can be used for all three purposes doesn't mean that it is good for all them; indeed, there's no reason to think that those three functions could be performed well by any one object.

So yes, I understand that bitcoin is trying to play all three roles right now. And it's doing none of them well, as best I can tell, which is why I suggested that bitcoin's backers don't really know what they're up to.

Sorry if I seem fanatical about the monetary questions that bitcoin raises. But it's disturbing how little time people devote to understanding money and monetary policy, compared to other totally trivial aspects of the economy, so I try to do my part to clear things up on the rare occasions when people want to discuss it.

Look at bitcoin bubble in june 2011 :

http://bitcoincharts.com/charts/mtgoxUS ... 1g10zm2g25

Actually, the value is stable.... for how long?

Money is funny (and little understood)

a) What is exchanged may, but need not, have intrinsic value. Not at all difficult to give examples of various things that are/were used for money that had no intrinsic value.

b) The rules for what money can be used for can be very complex. Even can have multiple sorts of money active in different "markets" and not exchangable between types.

c) Fiat has less to do with it than you might think. What counts most is the willingness of people to use and accept it. Governments, etc. get most of their say when they are on one side of the transaction* but little say when they are not.

d) In societies that have "lending" the amount of money in existence/circulation isn't necessarily the same as the amount of physical money and that is true even if the money is hard (eg: gold). What matters then is the amount the lenders are required to keep in reserve and whether they are willing to lend.


* We will pay you with this sort or we will only accept that sort for taxes, etc. For example, I'm in Western Massacusetts and "Shay's Rebellion" was because they were paying in X (soft) but only accepting Y (hard).

Yeah, I'm not arguing against that (I give 85% chance it's true). Certainly I trust mainstream economists more than libertarian economists.

(That number is so low because I don't trust economists all that much in general; it's hard to do proper experiments.)

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Can you give a few?

USD the point that it can be used to pay Us taxes is irrelevant because its value would have to fall to zero before its value to pay taxes = the value that it was valued at.

But what if the value that it was valued at was valued at the value for which the value was valued? Would that be relevant?

You are serious, aren't you?

I guess one of the most spectacular would be the traditional money of Yap. These are large stone disks, the hole through the middle believed to be to make moving by inserting a log easier (then lots of people on the log). But this money isn't normally moved about. Stays put and people just remember who owns what fraction of which stones.

That part of the world also has one of the more unsual systems for the exchange of goods between islands. Not a "market" as we think of one since the transactions are more like "presents" exchanged by guest and host who have a traditional visiting arrangement. Nevertheless "kula" works to move goods from there plentiful to where scarce.

Seriously -- folks who want to discuss what "money" is or isn't in general should study anthropology where economics and trade are discussed. Sometimes "money" might have as its only/main purpose the equivalent of "revenue stamps" (needed to make something official -- like certain formal announcements that needed "wampam" given) or other ceremonial/symbolic purposes (potlatch "coppers" weren't used in trade).

Wikipedia suggests that the stones were like gold - their intrinsic value was beauty: "Historically the Yapese valued the disks because the material looks like quartz, and these were the shiniest objects around."

It is perhaps not very rational to ascribe value to shiny things but that's just how humans work. This is intrinsic value.

Any other examples?

I'm going to assume you are joking, if you are serious, I please ignore the following and explain because I don't really understand.

It's great that you can make a joke about how I expressed my thoughts but that doesn't make you right, I just makes you look like you are not making an effort to understand, and are subscribing to the popular internet culture of "I don't have to make a logical argument as long as I can be sarcastic and rude". I expressed a serious argument and if you can't respond reasonably that means that is it a good argument, not that it is laughable. If perhaps what you meant is "I don't understand", then I'll explain.

The value of the USD is not based off its use for paying taxes, because if it were, then the value of the USD would fall, which would cause the exchange rates to fall, which would mean that you would need more USDs to pay of the same amount of tax on another currency, which would in turn cause the value of the USD to fall, perpetuating the cycle so that the value of the USD would become 0.

Edit:


Also, If they weren't moved around, then you could enjoy their beauty regardless of who owned them, so owning then had no inherent value