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Mises Institute weighs in on Bitcoin.

I found this article to be very helpful and figured I'd pass it along:

The Moneyness of Bitcoins
Mises Daily: Thursday, April 04, 2013 by Nikolay Gertchev

creativecommons.org

Bitcoins have been much in the news lately. Against the background of renewed concerns about the integrity of the euro zone and the imposition of capital controls in Cyprus, the price of a bitcoin has tripled over the last month and reached more than $141 for 1 BTC. Are we witnessing the spontaneous emergence of an alternative virtual medium of exchange, as some would put it? This article offers an answer to this question by considering three aspects of the economy of bitcoins: their production process, their demand factors, and their capacity to compete with physical media of exchange.

The Production of Bitcoins

A bitcoin is a unit of a nonmaterial virtual currency, also called crypto-currency, by the same name. They are stored in anonymous “electronic wallets,” described by a series of about 33 letters and numbers. Bitcoins can travel from a wallet to a wallet, by means of an online peer-to-peer network transaction. Any inter-wallet transfer is registered in the code of the bitcoin, so that the record of its entire transaction history clearly identifies its owner at any single moment, thereby preventing potential ownership conflicts. Bitcoins can be further divided into increments as small as one 100 millionth of a bitcoin. The current outstanding volume of bitcoins is above 10 million and is projected to reach 21 million in the year 2140.

This brings us to the truly fascinating production process of the bitcoins. They are “mined” based on a pre-defined mathematical algorithm, and come in a bundle, currently of 25 units, as a reward for carrying out a large number of computational operations that aim at discovering the solution to what could be described as a randomized mathematical puzzle. The role of the algorithm is to ensure a declining progression of the overall stock of bitcoins, by halving the reward every four years. Thus, somewhere in the beginning of 2017, the reward bundle will consist of 12.5 units only. Also, the more bitcoins are produced, the harder are the randomized mathematical puzzles to be solved.

Bitcoins come about as the uncertain pay-off for an energy—and hardware—-consuming process that is extended through time. The per-time pay-off varies, based on the efficiency and sophistication of the more-or-less specific hardware used for the mining. Individual miners have started to pool their efforts, and this cooperation has tremendously reduced the uncertainty that each individual miner bears.

Due to this costly production process, bitcoins, although virtual, are constrained by scarcity. While a bitcoin has no material shape or content, the algorithm that generates it has been designed to replicate the competitive production of a scarce good. First, entry in the business of producing bitcoins is open to anybody. Second, the production process is capital and labor intensive, extended through time, and also uncertain. Third, production is subject to decreasing returns, thereby conforming to the generalized scarcity faced by acting individuals in the better-known physical world. Thus, bitcoins turn out to be the exact opposite of the “Linden dollars” of the Second Life “virtual world.” The latter are produced by a monopolist central authority, out of thin air, and without any other limitation but the very discretion of that same monopolist authority.

However, it is not their costs of production that bestow on bitcoins the status of an economic good. After all, scarcity is not rooted in the absolute quantitative limitation of something; it comes from the insufficiency of the stock of that something, perceived as useful in some regard, relative to the individuals’ needs. Hence, we must ask ourselves how bitcoins have come to be valued at all. This leads us to an analysis of their demand.

The Demand for Bitcoins

At their inception, bitcoins were created and first held within a “crypto-punk” community. It could then be safely assumed that they served the purpose of conveying a specific antiestablishment worldview. The first demand factor, initially for producing bitcoins, and then unavoidably but only indirectly for holding them, was rooted in their capacity to project a certain point of view. In a sense, bitcoins were comparable to an artistic medium of expression, such as music, literature, and painting.

Thanks to that initial source of value, bitcoins had a reference point that positioned them relative to other goods and services. From there onward, the technological features that characterize them led to an expansion of their demand. Bitcoins are imperishable. Storage and protection against theft or accidental loss come at a very low cost, as these are accessory services rendered by standard antivirus and back-up software. Marginal transaction costs are also practically zero, once the fixed cost of establishing and maintaining a network connection has been accounted for. All these aspects are common to real wealth assets. Thus, the second demand factor for bitcoins is explained by their capacity to store wealth at a low cost. From the status of a good which, as a “worldview-conveyor,” was largely used for personal enjoyment (and hence consumption), bitcoins evolved into an investment good that has become attractive well beyond its original crypto-punk community.

The growing investment demand also spurred the development of intermediary dealers in bitcoins. There are a number of exchanges where bitcoins can be bought and sold against currencies. Specialized online storage, presumably with increased security, has also been made available. Intermediation, though open to free entry, is likely to remain rather monopolistic, given the very low margins associated with transacting in and with bitcoins.

This latter aspect, namely the intrinsically low transaction fee, contributes to a third demand factor for bitcoins, namely as a means of payment. A number of online vendors, who are mostly specialized in web-related services and online sales of rather exotic items, accept final payment in bitcoins, not the least because of the guarantee for almost absolute anonymity. This last component of the demand for bitcoins is still nascent. After all, a very limited set of items can be purchased with bitcoins, and sellers still price their goods in dollars, euros, etc. The price is then converted into bitcoins, according to the prevailing exchange rate, at the final stage of finalizing the payment method of the transaction. Thus, while bitcoins do appear to serve as a means of payment, they are definitely not used yet for business calculation. This is most certainly attributable to their still very limited demand to hold as a means of exchange. Nevertheless, couldn’t they become full-fledged money in the foreseeable future?

Bitcoins as Money

Prima facie, bitcoins possess all the qualities required from a money (a generally-used medium of exchange). They are perfectly homogeneous, easily cognizable, conveniently divisible, storable at practically no cost, and imperishable. Also, they seem to be fully shielded from counterfeiting. In addition, because they exist as a consumption and investment good, they are appraised on their own, thereby satisfying the Misesian regression criterion for the free-market inception of a medium of exchange. However, in order to become a viable alternative to existing monies, bitcoins must generate a sufficiently large demand so that their usage becomes generalized. Without the certainty that they can be transacted for any other good in the economy, a demand to hold them as money could not develop. It is with respect to their capacity to become and remain commonly used that bitcoins suffer from a relative disadvantage.

Indeed, bitcoins are embodied in a specific and highly capital-intensive technology. They can become convenient enough for standard personalized transactions only if both parties of the exchange possess the necessary technology that gives access to bitcoins. Bitcoins can do the job already for internet-based impersonalized purchases, because the marginal cost of the exchange technology they go along with is already almost zero for those who possess it. However, the transposition of that technology in the physical world of common face-to-face shopping (getting a haircut, buying a sandwich, or purchasing vegetables at the local grocery shop) would imply extra costs. True, these costs would decrease progressively as portable smartphones with permanent internet access become more widely used, not only by buyers, but also by sellers. The key point, however, is that bitcoins could become a generalized medium of exchange only through the accessory use of other, specific and physical, goods in an economy that has reached a very high level of technological development. This is a tremendous disadvantage, for at least two reasons.

First, at any given moment, the level of technological development is not uniform for all individuals within the same (national) economy. While some have access to the latest technology in a given field of activity, others prefer to stick to older versions. This is definitely due to the cost of replacing existing capital goods, but also to individual preferences, and sometimes to personal wealth. Consequently, bitcoins could become money only at the point when the technology that embodies them becomes commonly used. We are not there yet.

Second, an economy in which the medium of exchange is dependent so much upon the widespread use of a specific technology would be extremely vulnerable. Technologies are not given; they are the result of individual choices with respect to capital accumulation and allocation that must be made time and again, and are subject to reversal. Then, if the medium-of-exchange-linked technology is abandoned, because for instance no sufficient savings are available any longer, the economy will have to find another medium of exchange. This transition phase might then involve significant disruptions in the structure of production. A technology-linked medium of exchange does not provide enough flexibility to economic relations and might be viewed as complicating, rather than facilitating, some actions, such as shifting from one technology to another. This is a significant drawback of any virtual currency.

In trying to understand whether the increased popularity of bitcoins is reflecting the emergence of a new money, we have actually come to a fundamental distinction between virtual and material media of exchange. The latter are technology-independent and matter-embodied; the former are technology-embodied and matter independent. This distinction is not trivial as it emphasizes the great advantage that material money offers: it is good enough for anybody and at any time, and is independent from individual choices with respect to investment, allocation and maintenance of capital. Virtual monies could be programmed to reproduce some aspects of material, whether commodity or fiat, monies. However, they will always be dependent on specific capital investment decisions. The latter reduce their degree of commonality as well as of adaptability to changing economic conditions.

In conclusion, virtual monies, of which bitcoins seem to be the most perfected specimen up to date, do not allow acting individuals to manage the uncertainty of the future as well as material monies do. They could serve to intermediate exchanges among those who invest in the technology that creates them, stores them, and transfers them. Nevertheless, they could never achieve that degree of universality and flexibility that material monies carry with them by nature. Thus, on the free market, commodity monies, and presumably gold and silver, still have a great comparative advantage.

Comment on this article.

Nikolay Gertchev holds a Ph.D. in economics from the University of Paris 2 Panthéon-Assas and currently lives in Belgium, where he works for an international organisation. Send him mail. See Nikolay Gertchev's article archives.

You can subscribe to future articles by Nikolay Gertchev via this RSS feed.

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I can't and won't touch bitcoin

until I can pay my mortgage and other bills with it.

Do you own silver and gold?

Do you own silver and gold? can you pay your mortgage with it?

I don't own silver unfortunately :(

I have some gold, but not enough to call a substantial investment.
It is important to have a physical item of value.
I know at any time I can get dollars, yen, pesos or any other currency I might need.
I can't say the same for bitcoin.
Maybe in the future, but right now I don't trust it.

It reeks of a bunch of college kids who don't want to do any type of work that inconveniences them. So the pop on their mining computers, and watch all the dumb bastards send them money. I actually am interested in building a mining rig of my own, with a couple of friends and family.

I need to see major corporations accepting bitcoin before I can climb aboard.

Don't Trust the Media:

IF YOU ALL THOUGHT THE SMEAR CAMPAIGN AGAINST DOCTOR PAUL WAS BAD... WAIT TO SEE HOW BAD THEY ARE GOING TO FIGHT AGAINST A CURRENCY LIKE BITCOIN THAT DIRECTLY ATTACKS THEIR FINANCIAL STRONGHOLD.

CURRENT: 142.50001
HIGHEST: 144.94
LOWEST: 130.24303

End the FED- Hoard Gold/Lead/Silver/Bitcoins (and support the bitcoin economy- at least learn about it)

"We’ve moved beyond the Mises textbook. We’re running in the open market." - Erik Voorhees

Reminds me of the dot com bubble

Everybody wants in! I can definitely see the value in bitcoin. But going from 20$ per bitcoin to 140$ per bitcoin in a couple weeks reminds me of how everybody wanted a piece of the pets.com.

NOPE NOPE NOPE!!

This is the REAL DEAL!!!!
Give some guy the cash you earned working and you get some kind of digital monopoly money, that you can't use anywhere important.
Don't worry though, you can give back your monopoly money for a potential profit. As long as someone will buy them.

I believe these price increases are manufactured to benefit the top of the pyramid.

Like I said once before, if the dollars they received were being destroyed, only then would I believe in its potential to change the world.

Here is a good interview from Jeffrey Tucker:

http://www.dailypaul.com/280612/peter-surda-on-the-bitcoin-r...

My friend sent me this post he made yesterday:

"Many of the people I have spoken to about bitcoins recently have said things I found quite disturbing. I had a friend beg me to sell him bitcoins. I had another friend tell me that she completely agreed with me that litecoins are crap, but asked if she should buy some anyway just to make a quick buck. I've seen people trying to get bitcoins who really haven't the slightest idea about them. I know this is anecdotal evidence, but I think they reflect the mood right now. These are exactly the kinds of things you would expect at the very height of a mania.

Right now, either you feel extatically happy about buying bitcoins a few weeks ago or desperate and tortured about having missed the opportunity. Either way, you're in real danger of being overcome by emotions and making bad decisions. Really please try to calm down and think rationally. I don't think there is any real evidence right now that bitcoins are about to take over the world. They've made enormous strides recently, but the bitcoin economy certainly has not grown enough to justify a 10-fold increase in price over the past two months."

- I agree with him in that many people are manic right now and are wanting to jump into bitcoin without really understanding it. It takes time to understand bitcoin. At the same time I see those who are manic, while ignorant, as relying on people that have done "their home work" for their answers.

In a sense, This is why I'm fond the skepticism here at the D.P. - Let's keep it critical... and I hope it stays that way.

"We’ve moved beyond the Mises textbook. We’re running in the open market." - Erik Voorhees

Market Mania

Could the Bitcoin phenomenon be another tulip bulb bubble?

Ed Rombach

No.

do research on bitcoin and you will find out why.

"We’ve moved beyond the Mises textbook. We’re running in the open market." - Erik Voorhees

I WANT to like bitcoins, I just can't quite get there.

Maybe it is a case of "once bit twice shy." Seriously, this little "cartoon" plays in my brain: Start with the word "bitcoin." Take the "b" and flip it over. Grab the spots from both "i's", squish them down on top of the first "i" then loop the whole thing into a circle. Take the stick leftover on the last "i" and curl it to the right until it connects to the "n." What do you have? "dotcom." OH, I remember that! That is where my "carefully invested and professionally managed" life savings went down the toilet. I was not even trying to get "something for nothing" - I was letting the pro's handle my money while I handled eyes, very responsible of me.... If I really understood it, maybe I would like it. Or maybe I DO understand it, and if so, I just can't get on board. For me, the primary function of money is to store wealth. While I am healthy enough to earn, I want to save against the day when I am too ill to earn. I do not see where bitcoin is a "store of wealth" - no matter how many other cool tricks it has up its sleeve, that is the function I need.

This is the article that got my posting privileges revoked:
http://bklim.newsvine.com/_news/2013/05/12/18212165-dr-stan-...

So I never understood this

So I never understood this argument, or the constant talking of the ".com bubble". From what I can see, a lot of people made a lot of money online and they still can, it massively leveled the playing field. People who lost money were making poor investments, people who played it right have successful online businesses making more money with lower overhead than anyone in the prior history of the world.

Freedom in our lifetime! - fiol.us

Not trying to be flippant here

How old are you? They did a number on the "boomers."
First the media started telling us all we needed to have a least a million dollars by the time we retire or we would blow through it before we died. I had always saved my money in a bank, in a savings account, and I paid into the savings-based retirement plan at work. That was were most of my "nest egg" was. I never had much to save, and it did not take a genius to figure out I was never getting to a million bucks.
Next, this great new "benefit" suddenly became available in the work place: "Matching IRA contributions." If I just signed on to this new account, the "stock market professionals" would manage my money for me, and they have charts and graphs to compare the stock market versus standard savings - only as examples of course - but the potential to make up for "lost time" on my retirement funds was clearly possible. Besides, it was like a 4% raise, if I maxed out my contribution. (I made sure to point that out to all my staff, I was SO excited about this "opportunity.")
OK, the "big thing" of my life is the internet. It did not exist (at least not outside the military) when I was in school. I could tell it was an amazing tool with incredible potential, when the "professionals" who were managing my retirement account "for me" started advising we invest in the internet, a WHOLE lot of us butchers, bakers and candlestick makers said "Well, you're the professional. OK."
They used our own money to inflate these stock prices, to justify taking more of our money to inflate the prices, and then one day the piper came calling. Most of these "great internet investments" were nonsense, and most of the professionals who traded in their stocks KNEW that, but most of the money used to inflate the price was the money from people who were guilty of trusting the professionals their employer hired to manage the account. We had no idea exactly what we were invested in, other than "the internet."
Those of us who were raised when policemen really were trying to protect us, and when our employers really did think of us as family were taken advantage of by the same sharks that are trashing the economy today. They work in cycles, and if you think they do not have a plan to separate the next generation from the fruits of their labors, you will be taken advantage of, too.

This is the article that got my posting privileges revoked:
http://bklim.newsvine.com/_news/2013/05/12/18212165-dr-stan-...

I think at this point it is

I think at this point it is more appropriate to use bitcoin as a temporary store of wealth combined with more traditional stores like physical PM's. So I put some money into bitcoins and some into PM's and some I even put in the bank. The money I put into bitcoin has outperformed the others by an incredible margin. Or rather, it would if I cashed it out. I have been studying bitcoin for months because I really want to understand it and I am impressed by a few things likethe fact that it can't be counterfeited and is not susceptible to the same type of manipulations we are used to seeing in dollars and PM's. But I am not putting anything into it that I couldnt afford to lose tomorrow, which is the same rule I use for PM's and bank deposits so if one goes to zero, hopefully one of the others will go to the moon. Long story short, I love it and I think the potential is huge for it to disrupt the central banks of the world and I'm all about that. I even talked my retired mother into purchasing 6 bitcoins last week and she has almost doubled her money already.

Yeah, I don't have any money I can afford to lose tomorrow.

That is exactly my point. I do not feel that way about PMs, a steady "buy when I can" kept my money safe until I needed it for the farm, and when I needed to cash it in, I did so with no hassle and with a tidy profit. If I ever get back to where I can save again, I will stick with something I can USE, myself, for things as important as medicine and conducting energy: silver. It gets to the heart of the issue of "intrinsic value." No one can show me one thing that I can do with a bitcoin on my own. Its value is entirely dependent upon the agreement of others that the value is there. My silver makes colloidal silver whether you agree or not.

This is the article that got my posting privileges revoked:
http://bklim.newsvine.com/_news/2013/05/12/18212165-dr-stan-...

I agree with you. I would

I agree with you. I would never sell one ounce of silver to purchase bitcoin. Can you imaagine how bad colloidal bitcoin would taste?! LOL. We are on the same side of this issue, sort of. I don't think I'll be converting my life savings to bitcoin any time soon but bitcoin exists, I understand it, and I will continue to support it in the hopes that it leads to bigger and better things (like a return to sound money). Bitcoin has the power to educate people as to what money and currency really are at a fundamental level and that is a good thing. Does anyone know Dr. Paul's opinion of bitcoin? I bet he likes it because it gives people a choice. I do not consider it an investment, though, and up to this point I haven't even spent any of it yet.

Yep

Same brain, different body.

:-)

2014 Liberty Candidate Thread: http://www.dailypaul.com/287246/2014-liberty-candidate-thread

2016 Potential Presidential Candidates: http://alturl.com/mt7tq

"What if the American people learn the truth" - Ron Paul

Derivatives....

Bitcoin futures & options anyone?

Ed Rombach

Yes Please

...and leveraged forex would be nice as well. I have not seen any trustworthy looking brokers yet.


Alexandre Stavisky from Zero

Alexandre Stavisky from Zero Hedge Writes;

"Central Banks are combined with the enforcement arms of all gov'ts. They can devalue, inflate, deflate, confiscate, kill, murder, declare uncitizens. They don't really worry about blowback. They know there is no recourse to their tyranny. The silly Amerigo experiment which gave the illusion of escape from the house of Coburg-Saxe, Windsor, Hanover, etc. was just a ruse. Write whatever you want upon the sacred documents, what reality is, is diKtat. Maybe since the old world was ruled with the Great-greats of Victoria, the new world was left as the playground of purse pretenders. Red Field had no crown, so why not in a federal field.

Those emblems of social contracts, rights of men, economic self-determinism, liberty, inviolable personal property, bills of rights, and constitutions which check the large ugly powers were but means to spur economic new world men to provide for the extracting powers. Serfs under illusion of liberty perform so much better.

In this New economic world, no individual can impose the smallest check upon the imperious will of the fiat controllers. The complete powers of darkness are arrayed against. Ultimately all live by daily dispensation of a whimsical sovereign. This sovereign will strip you of all property, happiness, and liberty with caprice aforethought. That you exist whatsoever is but to maintain the morale of the other Rubes. When (and it will certainly come to pass) they decide that your every particle, including privilege of life, no longer serve their interests and the expansion of their state--You will be erased. So much fertilizer.

In this new world, easy, serene platititudes of divine right to life, liberty, pursuits of individual happiness are deeply subordinate to those dark riders who live upon your exertions. Indeed, every token of economic life is daily manipulated to the advantage of evildoers and the disadvantage of the honorable laborers. Bonds, forex, currency, stocks, commodities, wage rates, product prices--all moved to satisfy the whim of central planners whose repression and impositions are daily small deaths. Greater death, misery, and woe follow when the surplus of good men are exhausted.

And yet we persist in the hope of kingdom come."

Could you provide a link

to this piece on ZeroHedge please? I did a search on their site but couldn't find where this excerpt came from. Thanks in advance.

Bit Coin? No Thanks... Switch to Biturds!!!

Instead of "mining" Bit Coin, Anarchists should invest their time and productive labor creating something of value; Biturd.

This is how it works:

For every one of my steaming turds an Anarchist eats, I will create one digital "Biturd".

The newly created currency will be born from their labor and I'll put that freshly created Biturd in their digital wallet. Chaching! Who doesn't like to profit from their labor? I know I do, and now an Anarchist can too.

Think Bitcoin, but only better.

Biturds will have all the same properties as BitCoin, but no more of that ridiculous Bitcoin mining. Why invest in a scam born from nothing when you can know each Biturd was created by productive human labor. What better investment is there than to feed Anarchists human waste?

Let's be honest, mining Bitcoins is ripe for fraud and abuse, and you can't really be sure if there was any productive labor involved, but with Biturd, you can be sure that some Anarchist had to work for it.

It's just good monetary policy.

Biturds can only be created so fast. Even in my wildest dreams, I could only create about 15 or 20 Biturds a day, so you can rest assured that Biturds will be a better investment and store of value. I can only feed these Anarchists so fast, so I say: "Get em while their hot! Down with BitCon, and start feeding your new addiction: Biturd."

BitTurds....i am laughing so hard!

Really, i needed to laugh to tears, thanks, my move to this will be sluggish, yet, i believe the economy needs a good cleansing!

sydney walsh

BitTurds? You're right. It works better.

Or how about ByteTurds?

Mises Institute Does Not Weigh In...

The Mises Institute does not weigh in for silly things. If you have so far been calling bitcoin "a video game currency..."

I am pretty sure the Mises Institute never did an article on "World of Warcraft Gold." This is not the MSM either.

Bitcoins seem to me as nearly

Bitcoins seem to me as nearly unregulated video game money. A federally-unregulated virtual fiat currency.

That's the point.

That's the point. I don't want their regulation. We can do it ourselves.

Bitcoin Ponzi Scheme

http://youtu.be/0UKC7iaBKvs - Bitcoin Ponzi scheme

For a look into the process of creation of Bitcoins, talks about the advantage early adopters of Bitcoins have, and about who is author of the Bitcoin algorithm.

It convinced me to stay away from Bitcoins.

What do you think?

He sees Bitcoin as a threat

He sees Bitcoin as a threat to his silver business. Why bash it so much? Its not one or the other, you can have both. Its the attack phase after the laugh at you phase. :p

BTW a ponzi scheme is when someone promises you a return on your investment. There is noone promising you anything, actually some of us will say you might lose your ass and get absolutely nothing. This is an experiment.

Well your an Idiot if one video swayed your opinion

and convinced you to miss out on huge returns...priced in Silver Gold or dollars.

Thank God Im not some zombie sheep who just follows the herd. When Chris Duane started putting out those vids about Bitcoin I knew it was total propoganda.

Why? because I did my research and came to understand what Bitcoins was and how it operates.

You know the Trivium method Chris Duane preaches about? Yea, I used it and therefore was not swayed by his manipulative unfounded blatently dihonest propaganda campaign against Bitcoins. At this point I have lost all respect for Chris Duane and really question his Character.

Listen to all and Follow None... Stop being a sheep, your shepard is leading you to the slaughter.