Bitcoin, gold and the demise of fiat money

Falling 100-dollar bills

Image by Idea go

I am intrigued by the Bitcoin experiment – the attempt to launch a virtual currency as an alternative to the current global patchwork of local state fiat monies. Bitcoin has recently been hotly debated in the online community and among libertarians, and has now aroused the interest of the mainstream media and the political establishment.  Bitcoin’s challenges seem to be mainly operational – related to computer and internet security and cryptography, which is of paramount importance to the Bitcoin project. These are areas in which I am no expert by any stretch of the imagination. But many of Bitcoin’s monetary properties strike me indeed as highly interesting and commendable, and I am somewhat surprised by the indifference or even hostility Bitcoin has encountered from many free-market ‘Austrians’.

I cannot presently see it challenge gold, and after some recent setbacks – again, mainly of an operational nature – I am not even sure it will survive, but in terms of pure monetary economics it has considerable advantages over state fiat money, many characteristics of gold – and potentially even some unique advantages. The concepts and ideas behind Bitcoin cannot easily be dismissed.

Before I try and evaluate Bitcoin, let’s put this story into the broader context. Please bear with me for a moment as all of the following does indeed relate to the Bitcoin project.

The decline of state paper money

We are presently living in the twilight of the fiat money era. The twentieth century was the century of statism, of big state ideologies, such as communism, socialism, fascism, and, since the end of World War 2 and certainly since the fall of communism in 1989, of global social democracy — the combination of nominal capitalism (nominally private ownership of the means of production and moderately free trade) combined with a highly interventionist state apparatus legitimized by the concept of majority rule.

All the big state ideologies of the first half of the twentieth century (and I include here the ‘fascism lite’ of 1930s New Deal America) were hostile to gold. If the state was to create a better world and fulfil the historic mission of the class, the race, or the nation, its activities couldn’t be restricted with the straitjacket of a gold standard. The Bolsheviks confiscated all gold after the revolution, so did Roosevelt during the depression in 1933. Maybe nothing signifies the end of the classical liberal era of the nineteenth century more than the demonetization of gold, and the Nazi economist Werner Daitz was not just speaking for his fascist masters but reflected widespread ideology when he declared:

“In future, gold will play no role as a basis for the European currencies, because a currency does not depend on what it is covered by, but rather it is dependent on the value which is given it by the state, or in this case by the economic order which is controlled by the state.”

The modern social democratic state has largely maintained the concept of complete state control over money via its territorial monopoly on paper money creation. Historically, state paper money was introduced – openly and unashamedly – as a tool to fund the state, predominantly for the purpose of warfare. Of course, the modern client state has to argue somewhat differently. Conveniently, modern macroeconomics has, in the twentieth century, come up with a number of ultimately dubious theories for how the national economy – obviously a political fiction – can be made to perform better through the clever manipulation of the national money supply and the administrative setting of national interest rates by the central bank, in which the national monopoly power of money creation is vested. Bizarrely, in the latter part of the twentieth century, even self-styled “free market” economists have found ways to make peace with the concept of state money (Milton Friedman).

This system is not only suboptimal it is in fact unsustainable – even if those who are in charge of the fiat money franchise do exactly as they say they would. The system’s Achilles heel is the very elasticity of the money supply that today’s mainstream doesn’t tire of touting as its main advantage: “No dreadful deflation and we can always ‘stimulate’ the economy!”

The fallout from decades of ongoing and essentially unconstrained paper money production is now accumulating all around us – unsustainable debt levels, overleveraged and weak banks, and distorted asset prices globally. The crisis is at the moment still unfolding in slow motion, although I reckon things are about to accelerate soon.

goldGold – the eternal money

What comes after the collapse?

My short answer is, I don’t know.

It is one thing to show conclusively that something cannot work and must collapse, but it is logically quite a different thing to predict what will come after the collapse.

Gold has been a monetary asset throughout practically all of human civilisation, in all cultures, and is presently still regarded the number one monetary asset the world over.

Importantly, the supply of gold is essentially inelastic. Nobody can quickly and cheaply expand the supply of gold. Again, contrary to currently widespread fallacies, this is a distinct advantage for gold’s use as a monetary asset, not a disadvantage.

But, I am often being asked, are alternatives feasible? Well, who is to say that human ingenuity will not come up with new ideas and revolutionary solutions? However, gold – a commodity of limited and essentially inflexible supply – can deliver all that a medium of exchange ever can deliver. I see little need to come up with something new.

Enter Bitcoin.

The Cyber-money promise

“I’ve seen the future and it will be
I’ve seen the future and it works”

The Future, by Prince

Bitcoin is a digitally created, completely decentralized currency that only exists in cyberspace, created and sustained by the computers connected on the world-wide-web to form the Bitcoin network. It is a peer-to-peer payment system that allows digitally signed transactions. It does not have a centralized issuer and there is no central authority controlling it.

Allegedly, Bitcoin transactions cannot be traced and accounts cannot be frozen. The system cannot be shut down or destroyed. (Again my knowledge of computer technology and cryptography is too limited to pass judgement on any of these claims.)

Significantly, according to this Wiki entry, “there is a limited controlled expansion of the monetary base hardcoded in the Bitcoin software, but it is predictable and known to all parties in advance.” At each moment, every user is able to not only see how many Bitcoins he or she owns but also how many Bitcoins are in existence in total. Ultimately, only 21 million currency units can be created.

The process of Bitcoin creation is called “mining” (hear, hear!), and is conducted by computers supporting the Bitcoin network. As I understand it, Bitcoin mining involves considerable computing power and is supposedly designed in such a way, that the supply of Bitcoins only increases moderately over time, until it reaches a limit – the said 21 million units determined by the underlying algorithm – at which point the supply of Bitcoin is essentially fixed. Of course, as with gold or paper money, most people who use Bitcoins are never involved in “mining” it but get hold of it by trading with others.

The appeal of Bitcoin and its advantages over paper money are instantly apparent. Bitcoin is inelastic money and as such closer to gold. There is no central authority that issues it according to political expedience or, if we are willing to be more charitable, to what its economic advisors tell it is in the “national interest”. It cannot be used to bail out the banks, fund the government, raise money for a war, defraud the savers and protect the debtors. It cannot be used to create asset bubbles and artificial growth spurts that make the politicians look good for a while but end in painful recessions. Again, just like gold. If widely accepted as a medium of exchange – and that’s a big ‘if’ – it could become a store of value, unlike state paper money, which is always and everywhere a political tool and is issued for the purpose of ongoing debasement – with grave consequences for the entire economy.

And just like gold, Bitcoin is international money. It can facilitate transactions between two parties in entirely different political jurisdictions. Few people today appreciate just how anachronistic local state fiat monies are in a world of increasingly global trade. Just look at state paper money notes with their national symbols printed on them, usually living monarchs or dead presidents. Paper money is tied to the state but economic relationships increasingly transcend borders.

Today we have, of course, the foreign exchange market to deal with the inefficiency of the global patchwork of territorial state monies as well as we can. But the fx market – big, liquid and impressive as it may appear to most observers – is a makeshift, a second best solution to cope with the inefficiencies of monetary nationalism. If you earn money in the UK but want to spend it in the United States, you still have to find somebody to take the opposite side of that transaction – the fx market helps you find that somebody. Nevertheless, local money monopolies re-introduce an element of barter into the global money economy -suboptimal indeed.

What is the “Austrian” position?

There has been criticism of Bitcoin from an unusual corner. Some “austro-libertarians” have dismissed it on the basis that it could not be proper money because it was not backed by something of intrinsic non-monetary value (see here and here). I think this notion is based on a misunderstanding of Austrian monetary theory.

Carl Menger (Image mises.org)

Carl Menger (Image mises.org)

Carl Menger, the founding father of the Austrian School of Economics, explained 140 years ago that in the transition from a barter economy to a money-economy a good can only attain the status of medium of exchange if it has previously – prior to its very first use as money – already obtained some value on the basis of its status as a commodity. In other words, money couldn’t have come into existence by the state (or anybody else for that matter) declaring otherwise worthless pieces of paper (or bits on a computer hard-drive) money.

However, once the good (whatever it is) has attained the status of monetary asset and is accepted as such by the trading public, its price (or the purchasing power of this money) is then mainly determined by the demand for money, and no longer by its remaining use in industry. The gold price has skyrocket in recent years not because of any rising demand for gold in industrial application but because of its use as a monetary asset. I expect the gold price to go much higher as our paper money system approaches disintegration and collapse. Gold has value as a monetary asset and a store of value simply because others consider it a monetary asset and a store of value. If it were to lose that status its price would plummet, and it would then be of little consolation that the price wouldn’t go to zero because there would still be some demand for gold as a pure industrial commodity.

Value is bestowed on a monetary asset by the trading public that use it as money, not by its alternative employment in industry or, as Daitz and other statists thought, by the state.

To put it differently, our paper money system is not doomed to failure because paper money or electronic money is not backed by anything of “real” value – a redundant term in Austrian economics anyway – but because it will ultimately get over-issued and the public will lose confidence in it. Those in charge of the present paper money franchise are already boxed in a corner. They do not want to allow a painful cleansing of the accumulated dislocations, which means they have to keep creating ever more money. The endgame is fast approaching.

The problem I see with Bitcoin is on the operational level. Whether it is really as secure, indestructible and untraceable as promised is simply very difficult to ascertain for anybody who is not an expert in computing and cryptography. By contrast, gold is an established store of value, has a long history as a monetary asset, and it has the advantage that I can touch it and lock it away in my safe.

However, here is precisely an aspect of Bitcoin that is so intriguing: The big concern for those who protect themselves from the approaching currency disaster by buying gold is that governments will confiscate gold, ban its use or tax it heavily. The history of state paper money has – sadly – also been the history of government interference with the gold market. The state has a strong interest in defending its paper money monopoly – a source of considerable power for as long as it lasts (which usually is not very long). Few people are aware that Roosevelt confiscated all privately held gold in the United States by executive order in 1933, and that restrictions on private ownership existed for all Americans until 1974! Questions such as how to store your gold, in which country to hold it (as a rule, usually not your home country), and in which form, are paramount among gold investors.

Gold coins in 2011

Image by Danilo Rizzuti

As the present crisis intensifies and morphs into a full-fledged paper money crisis, state interventions into financial markets will greatly intensify. With its paper money monopoly disintegrating, the state will increasingly resemble a fatally wounded man, becoming desperate and aggressive. Interference with the gold market and capital controls are highly likely. The writing is on the wall everywhere.

Against this bleak prospect, the Bitcoin promise – if, in fact, it can be kept – that an international financial system is feasible that allows parties to interact freely and voluntarily without state oversight, intervention and the threat of confiscation through taxation and inflation, is indeed significant.

I do not presently own any Bitcoin, nor have I ever owned any. I am invested in gold, which I consider the essential self-defense asset and the price of which I expect to go much higher when measured in state paper money. But I will continue to monitor the Bitcoin experiment with interest and a considerable degree of sympathy.

In the meantime, the debasement of paper money continues.

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Comments

  1. says

    I think that’s a fair write up; I agree that criticism of Bitcoin from so-called “Austrians” on the regression theorem is entirely misplaced.

    Another aspect of Bitcoin I find interesting, and which you haven’t mentioned here, is the necessary exchange mechanisms that will have to be created in order to move between Bitcoin on the web and some other currency in the physical world; currently, such exchanges are conducted with the U.S. dollar online. In the event of a fiat money collapse, there will be local demand for a physical currency to fullfill the function of mediating face-to-face transactions in small, physical goods or services. Much as I would like, I am not going to get the mango farmers in the hills of Tainan county to go online and accept Bitcoins!

    This limitation of Bitcoin (or perhaps Bitcoin 2.0, if and when the security issues are resolved) seems to me to reintroduce an element of insecure barter until a new, local currency is established and suitable exchange institutions created. Perhaps these exchange institutions will be targeted as the new loci of government control.

    This aspect of the future of Bitcoin seems to me crucial if it is to succeed.

    Although I haven’t bought any Bitcoins yet myself, I very much hope it survives what will surely be the ongoing attempts to sabotage it over the next year or so.

  2. Zog says

    Thank you, Detlev. A very succinct and accurate analysis, in my opinion.

    As you say, lets observe what happens with interest.

  3. nazgulnarsil says

    One of the few levelheaded responses I have seen. My main bullish sentiment stems from bitcoin giving me a capability I never had before. As long as my encrypted wallet exists somewhere in the world, such as on an email account, I can walk across national borders with nothing on me and retrieve my wealth from anywhere in the world with an internet connection. This will turn out to be important in a world of increasing capital controls as governments try to reign in the ever more mobile nature of money and business.

  4. says

    Malware targets Bitcoin

    Among other problems with malware, this:-

    ‘Some BitCoins users get in the business of “mining,” or generating more of the currency to increase the pool of available funds. Understandably, this is intentionally a complex process in order to prevent people from flooding the market with BitCoins and devaluing it. The mining is done with a specific application that runs mathematically intensive operations that require a lot of time and computer processing resources.

    Gostev analyzed Trojan.NSIS.Miner.a, which was “spreading” among Russian users. The Trojan is a malicious module packaged with the legitimate BitCoin Miner tool. Miner.a installs itself onto the compromised machine and launches the mining tool without the user’s knowledge. After the coins are generated, the idea is to transfer the newly minted coins to the attacker’s wallet. ‘

  5. Bitman says

    Modern monetary economics is dependent upon Fiat Currency all over the world. Whether the the financial system that promote its circulation is backed by anything of intrinsic value (such as Gold, Silver or other precious metal of stones)does not impact its acceptance as a medium of exchange. Its confidence by the populace stems from the fact that the paper its printed on is not easily counterfeited by anybody. No doubt money can be created or destroy by the legitimate authority (issuer), the creation or destruction of that additional money is meant to control (stabilized) the financial system in order to promote economic growth and it is generally assumed that those entrusted with such responsibility will not abuse the system for their own self interest. Many problems associated with such a system are the result of conflict of interests among the custodians. A well run monetary system with Fiat Currency backed by the national government is good enough. There are many such examples of nations with such system (eg, Singapore, Australia etc). The two major root causes of the failure of the system are due to corruptions and excessive speculation.

    As for the US$, the additional cause of its monetary ills (besides corruptions and excessive speculation) is the result of its status as a world reserve currency. And many Americans think that their domestic economy problems can be solved by linking their financial system to the gold standard. It may work, in my opinion, if the US Government de-coupled its domestic economy from the world’s economy (i.e. withdraw its currency as a world reserve currency). BTW, the IMF as experimented with that idea when they introduced the SDR. Thus far its success has not been determined yet.

    Bitcoin 3.0 may be their answer ;)

  6. MoonShadow says

    Well balanced article. Post a Bitcoin donation address, and I shall remedy your lack of owned bitcoin! Personally, I have about an even split in physical silver rounds and bitcoins in my ‘oh noes’ fund. The bitcoins for what they can do for me so long as I have Internet & cell service, and the silver in case the lights go out. Even the most devout Bitcoin advocate knows that this is a risky experiment, and only fools ever go all in.

  7. says

    I invested all my money on Bitcoins. I’m a computer expert and I can see how Bitcoins are secure.

    Recent security issues related to bitcoins have been caused by other links in the chain. A person storing bitcoins in a Windows computer that is vulnerable to malware infection, not taking enough precautions to protect his wallet is looking for trouble. Mt. Gox, the largest Bitcoin exchange, got hacked through a third party auditor with an unsecured computer.

    These are not failures of Bitcoin, but of general computer security. Think of security as being as strong as the weakest link of the chain.

    Eventually there needs to be specialized computer hardware to store Bitcoin wallets. This hypothetical device will allow for easier access to wallets and better security. As demand for Bitcoin increases, we shall see these things pop up.

    Greetings.

  8. says

    Hello,

    Very interesting article. I completely agree with you. Bitcoins is interesting experiment not only from the practical point of view, but also from the theoretical point of view.

    The austrian economist Carlos Bondone, who returns to Menger principles, not considering the deviations from Mises and Hayek, has demonstrated that the Regression Theorem is not necessary and it is an unfortunate return to the theory of objective value. And Bitcoins are the empirical demonstration that he is right.

    Here I wrote a short post about Bitcoins, Regresstion Theorem and Carlos Bondone Monetary Theory:

    http://eleconomistaprudente.wordpress.com/2011/06/06/bitcoins-and-mises%c2%b4s-regression-theorem/

  9. TraderTimm says

    Enjoyed the article, bitcoin is certainly a force to be reckoned with. Already in its infancy, it has shown remarkable resilience in the face of events that would wreck most technologies.

    I’ve made a few promotional spots, Creative Commons Licensed, to highlight some of the advantages of bitcoins. You can find them here:

    http://www.youtube.com/user/BitcoinAds

    Feel free to remix/edit/whatever.

  10. Guest says

    From the article:

    “What is the “Austrian” position?

    There has been criticism of Bitcoin from an unusual corner. Some “austro-libertarians” have dismissed it on the basis that it could not be proper money because it was not backed by something of intrinsic non-monetary value (see here and here). I think this notion is based on a misunderstanding of Austrian monetary theory.

    Carl Menger, the founding father of the Austrian School of Economics, explained 140 years ago that in the transition from a barter economy to a money-economy a good can only attain the status of medium of exchange if it has previously – prior to its very first use as money – already obtained some value on the basis of its status as a commodity. In other words, money couldn’t have come into existence by the state (or anybody else for that matter) declaring otherwise worthless pieces of paper (or bits on a computer hard-drive) money.”

    JUST LIKE GOLD IS NOT ANY KIND OF DUST – BITCOINS IS NOT ANY KIND OF BITS. Gold is special dust due to scarcity of the gold subset in the dust domain. Bitcoins is special combination of bits due to the scarcity of the Bitcoin subset in the random bit domain. Just like the effort involved to freely prospect, excavate and extract gold from freely available earth – there is an effort involved in calculating a very scarce pair of mathematical values adhering to a certain set of rules from all the available combinations of 0′s and 1′s of which it is a subset (compared to all the available dust from which gold elements need to be extracted).

  11. Guest says

    Bitcoin would have numerous commodity applications in cryptography. Bitcoin is actually a VERY valuable cryptographic commodity, employing an extensive capital network of computing power, human effort and maintenance/running costs. Message incryption, identification and message signing would be just a few applications that could be mentioned as commodity uses of Bitcoin cryptographic key pairs. Bitcoin is VERY strong cryptography. The Bitcoin network currently signs cryptography keys calculated at ~12 THash/sec. An average laptop will sign at ~600 kHash/sec. So the Bitcoin network signs 50 new bitcoins every 10 minutes at a security requiring the calculation power of 20 million laptops to defraud this security.

  12. Guest says

    All you need to claim ownership of this valuable commodity is a simple wallet.dat file, possible to be as small as ~32kb (able to fit on your mobile phone sim card). This wallet.dat file can be uploaded to an online databank (for example, a web crypto data bank, retrievable from anywhere in the world where you can communicate with the server), or be kept on any digital media (cd, usb flash drive, etc., etc.) stored in your locker/vault/etc., etc. It can also be printed out and mailed via traditional trusted courier, if you would prefer this route.

    Just like any commodity – protection against theft can not be understated.

  13. Stuart Rose says

    I am also quite new to bitcoin and very interested. I noticed while researching online wallet providers that they operate in essentially the same way as a bank, and could theoretically operate on a fractional reserve basis. Although due to the external constraints such providers couldn’t actually increase the supply of BTC.

  14. Ali B says

    Bitcoin is a very interesting concept but fundamentally is not and cannot be as good as Gold because it has the following vulnerabilities:
    1. Software bugs: No matter how good the designers of the Bitcoin software are it is very likely that there are software bugs. The more something is complex the higher the probability of something going wrong. That’s basic reliability theory.
    2. Cryptography strength: Modern cryptography systems rely on the assumption that an attacker would need a very long time (decades, hundreds of years … depending on the available hardware and the strength of the crypto system) to decrypt a message. However, this could change if there are new advances in technology (such as quantum computers) or new mathematical discoveries (like new theorems, new algorithms, …).
    3. Bitcoin depends on the Internet and/or computer: No internet, no computers no Bitcoin.

    • Guest says

      Bitcoin evolves with technology. There was a significant jump in Bitcoin network calculation capability for example, when graphics card algorithms were written to start creating Bitcoins. If quantum computers come into widespread use – they will be used to create Bitcoins – causing Bitcoin difficulty to jump again. If a new very efficient algorithm is discovered to further the cause of cryptography – it will again cause a jump in Bitcoin difficulty creation when utilised. The system is self correcting – rewarding the most economic employment of resources – in correlation with the underlying free market principles.

    • Guest says

      Bitcoin will not replace gold in the physical world – but as a digital cryptographic asset, it is very useful for communication network transfer (which can not be done with gold or other physical assets).

    • says

      Hello Ali B.

      Bitcoins are not gold and will never be. Gold and bitcoins have different properties and the market will demand them according to its properties, probably gold will still be a good store of value while Bitcoins are best suited as medium of exchange.

      1. The current monetary system which is based on ledger entries managed by software and computers is doing well in that sense (despite other important non-technological problems such as inflation). There is no reason to think that bitcoin´s software is more vulnerable than any other.

      2. As “Guest” says, as more processing power joins the network, the level of difficulty increases. That´s a built in self-regulation. That wouldn´t be a problem either when al 21 million Bitcoins are finally generated.

      3. Gold depends on metallurgic and other industrial technology. And gold transactions under a gold standard would also require computers and networks. Unless you want a total metallic monetary system (with no banks no wire transfers, no clearing), I mean, all transactions had to be performed throguh the delivery of physical silver or gold coins or bullion. Obviously, such a system would be very expensive and inefficient.

  15. says

    A lot of Austrians missinterpret Carl Menger when they say that he required that before any good can become money, it must have a non monetary utility previously. That´s just not true.

    Menger observed that in a free market usually the most marketeable commodity becomes money, but that does not imply that this is a mandatory requirement. That mandatory requirement was stated by Mises in his unfortunate Regression Theorem.

    Besides, Carl Menger would have never accepted a concept such “Intrinsic Value”. That´s an absolute aberration within the framework of the Theory of Subjetice Value, which Menger was the most important exponent. Value only exists on human mind and depends on the perceived utility of the economic good. In the case of medium of exchange, its value depends on the perceived properties as a medium of exchange (scarce, difficult to face, easy to transport, etc…).

    • says

      I reread Carl Menger and I think your criticism is justified. The way I paraphrased Menger in my article is somewhat unfortunate. Menger analyzed the process by which the social institution of money came about historically, which is via a spontaneous process. Trading individuals realized that it was in their interest to accept certain, very marketable commodities in exchange for goods not because their had demand for the use-value of these commodities but because they could easily trade them again for other goods. Naturally, in this process the money commodity was previously a regular commodity. Menger stresses that money came into existence without a legislative act, without a broad societal agreement, and without the state introducing or maintaining a monetary order. Menger obviously argued against the state theory of money. He does, however, not establish any unchanging laws as to what can or cannot become money in general.

      I agree with you on “intrinsic value” — and I think I made that point in my article.

      Be that as it may, I think we both agree that there is nothing in Austrian theory of the Mengerian tradition that would tell us that Bitcoin couldn’t be a form of global money.

  16. says

    Hi Detlev,

    Defenetely I agree with you. Maybe the tone of my comment was that of a critic, but it is targeted to austrians that in my opinion missunderstand Menger Monetary Theory.

    Bitcoins reveals an extremely deep problem on austrian monetary theory. Menger only developed the first layer of monetary theory, he didn´t treat credit (maybe he didn´t have time). And credit is a very important form of currency. Unfortunately, neither Mises, Hayek or Rothbard did follow Menger´s principle correctly.

    The Austrian economist Carlos Bondone has developed a new monetary theory, starting from Menger. I think his contribution means a great scientific advance.

  17. says

    If I read history correctly only about 10% of people gave up their gold. And they did not march from house to house in any draconian fashion. Probably their confiscation put a kabash on the gold market at best.

  18. George Thorogood says

    As far as using bitcoin in real life goes, there are people producing “bitbills.” They’re sealed cards that contain the necessary keys to access a single bitcoin. You can exchange them as you would other physical currencies (if you can find someone to accept them, anyway). As long as the card remains sealed, you can be sure that the bitcoins it represents are intact. There are some problems like forgery or trusting the issuer, but there are ways to make physical bitcoins.

  19. David Goldstone says

    There are numerous reasons why the whole bitcoin project will probably fail. But my goodness, the upside is almost incomprehensibly large. So far, about 7 million bitcoins have been “mined”, with a total US$ value of ~ 50 million. But if bitcoins ever became a serious competitor to fiat currencies, that figure could multiply by a factor of 100 or even a 1000. Well worth a punt I would have thought ……

  20. Skillip says

    I’m not clear on how bitcoin isn’t worthless fiat. I see that it has advantages over central bank fiat- thats great! However, doesn’t every currency ultimately reduce to the utility value of the medium on which it is printed? A 1oz gold coin with a #1 stamped into it is no different that a 1oz gold coin with a #20 stamped into it. A bitcoin isn’t stamped on anything.

    Also I understand that bitcoin mining requires a large amount of computing power which is increased exponentially to maintain a consistent pace. To me this is no different that the treasury taking measures to decrease the efficiency of printing money as a way limit inflation… Can’t help but feel all of that computing power could go to a much more productive use.

    Am I wrong?

  21. Don says

    Detlev:
    I had, until an hour ago, been totally unfamiliar with Bitcoin. Your article in Whiskey and Gunpowder led me here. I have not been schooled in economics or computer science; I just want to thank you for an amazingly interesting article, and I want to thank all of those who replied above.

    The information you have provided is nothing less than excellent….Bravo!

    I do have one question. How would governments be funded (hopefully minimally) with the use of Bitcoin?

  22. Ricardo Santos says

    Of course you do realize that Bitcoin is also a fiat currency. You are just interchanging one fiat currency controlled by centralized bank, for another controlled by the Bitcoin brokers.

    Unless money is pegged to a physical resource, the outcome is the same. Someone will be in a position of creating money out of thin air, devaluating everyones money in the process. Bitcoin just changes who this someone is, it does not change the problem. It just changes the players.

  23. William Greenall says

    Interesting article, and good point made by user Manuel Polavieja – certainly the idea of intrinsic value is not the case here. However, there is one important point that i have not seen made in several discussions I have read on this subject that I think needs to be addressed.

    Certainly I am not trying to question the uses that bitcoin as a system could and does have, and certainly just as you say the technological side is beyond my own level of understanding. Let us however assume for a moment that these problems have been solved, and look at a more basic, economic problem.

    The value of the system as a whole, the use of bitcoins in their capacity as a medium of exchange and their advantages over the system of money we now have are undisputable. These however do not make the bitcoin units themselves valuable. It is very important to understand that the reasons why it makes good money (ie, its being a marketable commodity) are not the reasons why it IS money, and this is something forgotten in discussions of gold – scarcity in itself is not good enough to make a money (and all the other physical properties of gold), but in order for a commodity to become money it must also have something that gold had on that infamous “first day” in Mises’ regression theorem that bitcoin does not; and that is a matrix of barter prices.

    The value of gold in its industrial use will (until we work out how to transmute elements!) probably always be minimal relative to its value as a store of wealth or as money, but before it became money it was this industrial use (as jewellery etc.) that gave it a complex of “prices” useful for barter – a weight of gold could be exchanged for a kilo of butter, or a horse, or a wagon or the services of an artisan or whatever, just as the butter could be exchanged for any other of these things.

    This matrix of prices makes gold (or any other commodity that has been used as money in the past) different to bitcoin, because 1 bitcoin has no use OTHER THAN the use as a “currency”. This is, to clarify, not to deny the uses that “bitcoin” on the whole would have, but the bitcoin as a unit is only useful (outside the use as a currency) as much as any other very long number (which is the format a bitcoin takes, as far as i have understood) is useful, and in fact very long numbers, being infinitely copiable, and abundant in the economic sense of the word, are not the subjects of human economization. Therefore, the bitcoin cannot have any barter “prices” that would allow it to be used later as a medium of exchange.

    I appreciate the perhaps prohibitive length of this post, but would be interested to see the views of other readers of your column, as well as your own.

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