(I’ll leave it to the reader to suggest which one of us makes a better argument. But I think I have the better argument.)
Gary argues that Bitcoins (BTC) aren’t money, and that they are speculative shares. Both of these statements are true, but neither of them is a weakness. They are strengths
I agree bit-coins aren’t money (a commodity). Nor are they are fiduciary media (redeemable). But they do qualify as a money substitute as either token money, or shares of a stock that is highly liquid (non-redeemable tokens).
1) GREY MARKET TOKEN MONEY
The very worst I can see, is that Bitcoins or some equivalent will evolve into a grey market money for grey market goods. This has already begun to occur.
2) LOW TRUST TRANSACTION MONEY
Their value is lower costs and protecting your credit card information. It lowers the consumer’s perception of risk. Bitcoins eliminate the problem of recurring charges from online transactions and subscriptions.
3) LOW FEE HIGH RISK TRANSACTION MONEY
As soon as someone creates an escrow service for more expensive grey market transactions, that will succeed. As such it is an exceptional currency for elites.
4) A MONEY SUBSTITUTE FOR LOW CONSUMER VALUE TO MONEY BROKERS
Bitcoins eliminate the problem of needing a ‘bank’ that can identify you by abstract means. In other words, it is an exceptional currency for the margins of society, just as credit cards are an exceptional currency for the upper quintiles, debit cards for the lower middle, and cash is for the lowest.
So at this point I felt I might take the issue up with North directly. I think he is distracted by the term ‘money’ when it comes to Bitcoin. And while he is CORRECT that the price of Bitcoins are speculative for INVESTORS in Bitcoins, he is incorrect that the price of Bitcoins are intolerable for CONSUMERS of Bitcoins when they are used as a means of clearance.
The speculative nature of bitcoins is the means of compensating investors in the infrastructure needed to process and prove bitcoin transactions. This is not a weakness. It is a virtue. It is a cashless means of compensating investors, and the act itself creates some demand. And we have seen that demand.
Once Bitcoins have had speculative bubbles burst a few times, the speculation will diminish as it has with other speculative commodities – altough because of low volume, volatility should continue. But holding Bitcoins for ten minutes while you make a purchase on your credit card, then use the Bitcoins for an online purchase is not going to impede the transactions. My self, I’d love to see a credit card service for doing just that, instantaneously charging my card, transferring the funds to someone else via bitcoins, or at least just resolving exchange between parties via bitcoins.
THEY ARE’T MONEY – BUT THEN LITTLE *IS*
Bitcoins are NOT MONEY. They are speculative shares of stock in a custom stock exchange, whose advocates seek those shares to be universally owned, and therefore usable as a money substitute.
Fact is we don’t know if it can work or not because this particular attempt at creating a money substitute has not been tried as a pre-purchase good, and similar efforts have been previously limited to evolutions on the wire transfer system – which is high cost and omnidirectional. I am arguing that like pornography built the Internet, the grey market will build Bitcoin or some equivalent.
And I think that it is very hard to argue against those facts simply because one is confused by the marketing use of the term ‘money’, and failing to see this particular media as non-redeemable token-money, or highly commoditized shares of stock.
We can think of any number of business models where the transaction costs are low, but lower transaction costs are meaningful (retail), and the grey market (online).
I think it is unwise to be fooled by the environmental legitimacy of the enduring credit system that is used to manage human beings. And wiser instead, to look at business models that serve different needs because of different transaction costs and therefore different purchasing power.
Something I found very obvious when we built software for check cashing services. Classes serve each other. They use the same money. But in different forms. With different transaction costs. Cash has a VERY HIGH transaction cost to the lower classes. It is easily stolen. It is nearly impossible to secure. And I suggested, for example, a payroll service in Bitcoin that would bypass the check cashing services, and therefore the need for the lower classes to have bank accounts. This eliminates the need for low income areas serving low income people, cash that can be stolen in robberies. It eliminates bank fees on checks, debit cards. It eliminates clearing times on funds.
In fact, on a moral basis, I’d push Bitcoins as a public service for the poor on that basis alone. Where the WEAKNESS of Bitcoin as a non-redeemable good is a benefit precisely because it is NOT redeemable: it helps transform cash into abstract property that cannot be easily stolen, as we have transformed MOST assets into abstract property that cannot be stolen, and which is one of the reasons for the decline in crime: you can’t steal what’s hard to steal.
SUCCESS ON THIS BASIS ALONE
I do not see Bitcoin fulfilling the libertarian fantasy of an alternative to fiat currency or hard currency at any particular point in the future. However, the low transaction costs of these goods for markets currently NOT served by the banking system, (or tolerated by regulation) is, as we have seen with online pornography and drug purchases, sufficient to drive demand for this product.
(But if and only if the user interface problem can be sufficiently solved to serve as I’ve stated above.)
I do not let my consensus with the Austrian trade cycle, and the Austrian recognition of opportunity costs, or my distaste for (hatred of) the immoral socialist, totalitarian state, interfere with my analytical reasoning.
We should not defend the ‘brand’ money, by reducing it to as an ideological term subject to sanctity and reverence. And we should not fail to understand the multitude of uses for the multitudes of mediums of exchange.
If you want to argue that Bitcoins are not money. That’s well and good. Because as a store of value they are as weak as a fiduciary media, without the benefit of being redeemable. They are in a speculative phase right now like any stock that is issued and has low volume. They are likely to crash.
CLOSING : NO REASON NOT TO SUCCEED
So if you are an investor in Bitcoin, then you may or may not succeed. I’m betting that people are not buying low and selling at the highs on the way up and taking advantage of the lack of transaction costs. We can’t do that with stocks because of high transaction costs. We can manipulate Bitcoin prices more easily for this reason. But investors will be ruined in waves, and that’s fine.
That has no bearing on the short term use of BTC. It only has bearing on its use as a store of value over longer periods of volatility. And even that volatility will be eliminated by more extensive use.
The grey market is sufficient incentive for BTC success.
(EDIT: ADDITIONAL POSTS:)
Well, I mean, no. lol
Because commodity money degrades to a still-consumable commodity that is still subject to pricing by market forces independent of its use as money. Bitcoins do not. BTC are issued as a fiduciary instrument, like notes or stocks, but they are not redeemable like notes. They are not a claim against assets like stocks. Instead, They are “token money”. A non-redeemable token used as a money substitute. They are just like the tickets you must buy at amusement parks in order to access rides, so that the vendors of the rides don’t misreport their income, and therefore their ‘tax’ by the amusement park holder. In this case, these tokens exist to PREVENT the use of the vendor ‘the state’ or the financial banking system from laying claim (rent, commission, or tax) on the financial transactions.
I mean. It’s not money proper. It’s token money. I use the word shares because they are issued like shares in exchange for work performed.
The fact that it’s open source doesn’t mean anything. It is still a private, unredeemable token money with an unarticulated, common law, unenforceable shareholder agreement.
The fact that it is marketed as ‘money’ can fall under three interpretations: (a) ignorance by the manufacturer, (b) fraud by the manufacturer, or (c) aspirational language commonly used in advertising, that the consumer is expected to be smart enough to understand. We do not consider aspirational language fraud, we consider it tolerable since it is difficult and expensive to police. Although the public, in general, objects to this use of language as obscurant and misleading.
BTC are not money. They are money substitutes. They can be used as a money substitute. The genius of BTC is that they are indexed to fiat currencies, and as such form clearing function without the necessity of reserve currencies, and un denominated, so that they appreciate as do stocks – at least in the early phases.
I see BTC as nothing more than a brilliant means of financing a new digital commerce network, and a network that insulated from regulatory capture, and limited monopoly rent-seeking and free riding (banking), and the rest of it is just advertising, and silliness.
Anything can be USED as a money substitute, and we use many money substitutes, whether natural or fiat.
But to state that something is in fact, money, is, by any rational measure, an act of fraud. This is why some libertarian theorists object to bitcoin. Because it is not money. And because libertarians and austrians are very particular about protecting the misuse and appropriation of the term money, since money is so terribly important for the retention of property rights.
I do not see how not being classified as ‘money proper’ and instead being classified as ‘a non-denominated token money’ which is a ‘money substitute’, and free of regulatory capture and rent seeking is damaging to bitcoin.
In fact, given what I have read, I think the misrepresentation of bitcoin as money has been the soure of most negative representation of it.
We forget that most economists do not understand the properties of money. And as far as I can tell, I haven’t found anyone else who understand it any better than I do. And given that it’s not particularly interesting to me, that means that it’s very very hard to say it’s sold honestly.
(EDIT : ADDITIONAL POST)
I don’t dispute the value of bitcoin or I wouldn’t invest in it. I simply state that it is not in fact ‘money proper’ as mises defined it. it is an exceptional innovation, brilliantly constructed, and brilliantly conceived. I can’t say enough good about it. But as a philosopher, I must hold to the truth, and the truth is that BTC are not money. They are a money substitute most closely analogous to undenominated token money (red, blue, green coins etc) that are purchased with some other form of money and can be used as a substitute for money, where they are accepted. Because they are undenominated, and their price determined by fiat money, they appreciate and depreciate independent of the price of fiat money.
I think something above that I said is pretty insightful. That is, that BTC is the OPPOSITE of rent-seeking fiat money. And I think that’s important. Because that’s why libertarians should like it.
2 hours ago · Like
Curt Doolittle @Roman. BTC’s need ‘the permission and sanction of the third party network’ to be put to use, and can only be used within the context of the third party network. And without the network they fail. The fact that this network is widely subsidized by the internet cost structure, and the voluntary participation of gamblers (miners) does not compensate for the fact that the BTC structure can disappear and BTC are unusable, whereas the state can disappear and fiat currency retains its utility. Maybe more so.
As such, if you could trade copies of software somehow. (We do use them that way when licensing permits) the software would still function on your computer even if the manufacturer went out of business. And if it didn’t, I think you could sue the corporation, and obtain rights to decrypt it or whatever.
This is not true of BTC.
BTC is most analogous to undenominated token money, fully dependent upon the token network (a third party), and usable as a money substitute. It cannot be used without the sanction of a third party, and does not persist without the third party. It is not redeemable, but is sellable. It most closely resembles token money, but it is not money proper.
Money must :
1) have a physical unit (a number, weight, or volume) so that it provides commensurability, and serve to function as a unit of account. in other words, goods must be expressed and expressible as units. This unitary number must be stable enough to use for the purpose of pricing. Otherwise it cannot not even function as a money substitute.
2) And it must persist. Existence is persistence. Only persistence satisfies the criteria of a store of value. It must persist in the absence of any external authority, or it is not an independent store of value.
3) It must serve as a medium of exchange between two parties without a proxy. If it requires a third party is is a fiduciary media. Fiduciary media can be redeemable or not. A note is redeemable, and a share of stock is not. It must be sold.
I haven’t compared BTC to credit money yet. Credit money consists largely of a vast network of notes, that at various stages can be converted into fiat money, and then into money proper.
a) a stock (now)
b) a non-denominated token money (future)
c) a money substitute (far future)
The reason I don’t think it’s a pyramid scheme, is becuause the point of selling the shares of stock (BTC) is to provide incentives to finance the development of the network, at which piont the digital token money can serve as a money substitute.
The reason I want to encourage bitcoin is because it has business value and it promises a rare opportunity to decrease dependence upon the state and the banking system, and their vast system of rents.
d on’t want anyone to think I am other than an advocate of bitcoin. On the other hand I sort of have this job I do, and my job is to figure this shit out so to speak.
BTC isn’t money. But then, that doesn’t mean it isn’t BETTER THAN MONEY in many cases. Money proper, is not an ultimate good.
2 hours ago · Like · 1
Curt Doolittle He does a good job of making one point:
1) eliminates labor in almost all financial transactions. And therefore all the rents on money between the banks and the state. Bureaucrats, Bankers, Lawyers, Accountants lose their jobs.
I agree with all of this. But this just means that BTC are BETTER than fiat money, in that BTC prevents rents and free riding. But these are moral, social, and business reasons. Money is still money. BTC may be better than money, but it isn’t money.
The sweet spot for BTC is that it’s when it is mature and less volatile so that BTC prices can form.
I have careful of confirmation bias. It’s unscientific. skeptical empiricism. I’m not a marxist. I can’t do advocacy for the purpose of creating reality by chanting. I’m a scientist. I have to deal in correspondence with reality.
There are places where one pays for things with cattle, sheep, goats, pigs, chicken or corn. Bt that’s barter.
(MORE ADDITIONAL POST)
You can’t print more bitcoins arbitrarily (as far as I understand). Although, as I understand it, it may be possible to decrease the weight and intentionally inflate the rate of BTC production. I don’t know the protections against that.
You cannot inflate hard money. That is why it is a store of value. That is why backed paper money (notes) currency are a store of value. And why unbacked, fiat CURRENCY (a money substitute) is not a store of value. or rather, is a weaker store of value. Because the rate at which fiat currency can be inserted into the market is somewhat limited without extreme externalities being caused.
Rapid inflation is caused by printing of money by the state to pay workers with money it doesn’t have, not the existence of any money in the first place. Money doesn’t expand naturally. It is printed and intentionally expanded so that wheelbarrows account for it. Russia did it. Germany did it. And so does everyone else now.
So, no, hard money is not based upon faith. Currency (notes) are based on faith that the money is held in reserve, and the note is redeemable. Fiat currency is based on the faith that the government will in fact mandate its use, and that it will not arbitrarily inflate the currency and destroy it’s ability to function as a store of value. Commercial notes are based upon the faith that the debtor will be capable of paying, and the notes redeemable. Shares are based upon faith that the company will continue to maintain a stable income such that the stock value will appreciate because demand will increase. Token money is based upon faith in the commercial network’s persistence and the demand for the use of that network.
What we get with BTC token money, is a discount on transaction costs, and a discount on rent seeking and free riding by third parties, who are eliminated from the process by digital media. Escrow is perhaps the best function that eliminates expensive third parties and legal fees.
Instead, what occurs is that the BTC network accumulates an inventory of unused BTC’s as a sort of store of wealth, and the money that once went to third parties stays in inventory instead.
I am not sure whether this was all in the design or whether it is a consequence of it. But it’s a genius of incentives management really. Everyone has incentives to make it all work. It’s wonderful.
I’m all for criticizing and analyzing but I’ think we know what the problems with BTC are, and that most of them should be solved,and paid for, by early entrants. And at the end, if they are successful, we will have a very nice utility that provides greater benefit to the bottom of society than the existing system does to the top.
( EDIT )
1) RE:”Certainly, it meets the colloquial definition which is simply “medium of exchange”. ”
The colloquial definition is “a store of value, a unit of account, and a medium of exchange”.
The necessary property of money is that it possess those three values in order to form prices, since prices are necessary for economic calculation, coordination, and incentives in a division of knowledge and labor. A goat is still a medium of exchange in much of africa. A goat does not meet the criteria of money. That is merely barter. The reason is that goats are not marginally divisible, nor are they universally desirable. Money must be both.
2) RE: MISES: ” arguments of considerable weight may be urged in favor of including all money substitutes without exception in the single concept of money. . . . Whether this is the most advisable course to pursue, whether perhaps some other procedure might not lead to a better understanding of our subject matter, must be left to the judgment of the reader.”
Since the reason to distinguish between monetary products is to prevent fraud, then the properties of different products are MORALLY REQUIRED and under the common law, legally required, and a violation of property rights and the NAP under fraud. I do not need to guarantee that an ounce of a precious metal is anything other than an ounce of whatever metal. I must increase my guarantees.
If you wish to call something money in oder to give it greater market legitimacy then I that is an act of loading : fraud. The test of whether you are committing fraud or not, is simply whether you are willing to let BTC stand on its actual properties, benefits and risks, or whether you must load BTC with the false attribute of ‘money’ in order to do so.
BTC is not a store of value, any more than a stock is. If you can list all the possible properties of a stock, and all the possible properties of money, then you will do what we do with any product comparison. That comparison will demonstrate that BTC is not a store of value, and that it is dependent on a third party,yet the third party cannot be forced to redeem it.
Again. If we call BTC money proper, rather than a money substitute, that is fraud. If BTC cannot survive on its own, and must be falsely labeled to survive in the market, then it is fraudulent marketing.
This is actually the criticism of BTC. I do not understand why calling it a money substitute, that in many ways is superior to other money substitutes because it has lower transaction costs, is not an adequate way of marketing it.
The fact that there is so much confusion over BTC is precisely because of this misrepresentation of BTC as money. It is not money. It is a money substitute. BTC are infinitely divisible shares of token money, that discount transaction costs. The various side effects of these infinitely divisible shares of token money are wonderful, in that they disempower the state, and the financial system, that is used as a supplement to law and religion as a means of controlling us. I like that.
But BTC are not money. Right now they are only token money. At some point they may be viable for their retention of PURCHASING POWER (store of value). At that point they will be a money substitute. But they are not yet. They are token money with an ambition to function as a money substitute.
It has nothing to do with the future, nothing to do with technology. It has everything to do with being a store of value, a medium of exchange and a unit of account, that facilitates intertemporal coordination across various structures of production via the pricing system, and which is independent of manipulation and therefor the source of fraud and distortion in the pricing system that is required for human cooperation.