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Open Letter to Peter Schiff by Erik Voorhees

Dear Peter,

It was a privilege and an honor to be a guest on your radio show today. I’ve been a fan of yours for more than five years; you were one of the reasons I discovered Austrian economics (and, in turn, Bitcoin), and your eloquent explanation of consumption vs. production in an economy has guided my outlook of the world ever since. So thank you sincerely for what you’ve taught me, and for the opportunity to appear on your show. It was a really special moment for me.

While we had some valuable discussion today, I felt a follow-up was appropriate to better articulate my points. You’re right to be highly skeptical of such a new technology and monetary system, but please take the time to ensure your skepticism doesn’t blind you from what I humbly suggest is one of the most important tools for human freedom ever conceived.

The Fundamentals

First, Bitcoin must always be considered as two things: the payment network (Bitcoin) and the currency units (bitcoins). Condemnations of the latter can often be resolved with an understanding of the former. Satoshi should have named them differently to avoid this initial confusion.

When you suggest that bitcoins have “zero intrinsic value,” you are only considering the currency unit itself and ignoring the payment network. While I prefer the term “utility” over “intrinsic value” (because all value is subjective to the valuer), I may indeed admit that bitcoins, as currency units all by themselves, have no fundamental utility and are completely uninteresting. But – and this absolutely critical – the payment network has vast utility.

In fact, this network is probably one of the most valuable and consequential technologies currently on the planet. Some of us realized this a few years ago. Others are realizing it now. Many more will realize it in the future. The Bitcoin network is, fundamentally, a ledger of title controlled by no man. Ponder that for a moment. The transmission of value and ownership has thus just been severed from the State, not by impotent voting, but by the technological achievement of man.

Now, during the show, you agreed that perhaps this payment network has utility. So, if the network (Bitcoin) has utility, and only one currency is accepted on this network (bitcoins), and those bitcoins are scarce, then should not those units themselves command a market price? Who knows what that price should be, but there should be a price, no?

Any good that is useful and scarce will have a price (consider that air is useful but not scarce, and fish with three eyes are scarce but not useful, thus no price for either of them). Because the Bitcoin network is useful, and because only scarce bitcoin currency units are permitted on this network, the bitcoins themselves have a price. Indeed, they must have a price until the network is no longer useful, or the coins are no longer scarce.

This is not magic. It is not a Ponzi scheme or elaborate fraud. It’s just the market pricing something that it finds useful. As the network grows in usage, its utility subsequently grows, and thus scarce bitcoins appreciate further. Those who grabbed coins in the early days benefit hugely, just as those prospectors grabbing nuggets of gold out of the California foot hills did in the early days of the gold rush. Gold is not a pyramid scheme merely because early acquirers profit from later subsequent adoption and demand.

The Utility of Bitcoin and Competitors

So to adequately claim that bitcoins ought to have no price (which is the implicit assumption from your claim on national television that Bitcoin is a Ponzi scheme), you must demonstrate that the Bitcoin network has no utility. As someone who has transferred $100,000 worth of value to another person instantly in another country (on a Sunday when banks were closed, no less), I am confident that you will not succeed in this demonstration.

I believe that you will understand and agree with my above arguments if you objectively ponder them for a while. Your contention then moves to the following: that if Bitcoin (the network) can be replicated by anyone, it isn’t actually scarce at all and thus even though the network is valuable, the price of individual coins will fall toward zero as the system is replicated over and over by competitors. You would explain that while bitcoins are limited to 21 million units, anyone can create a competing crypto-currency and thus the number of possible crypto-currency units are unlimited, thus not scarce, and thus not fundamentally worth anything.

You made this argument several times on the show today. It is a fair point for you to raise, but please allow me to counter it.

Bitcoin, after all, cannot really be copied. True, the open-source code can be copied and the copier could release CopyCoin (indeed this is happening all the time). But, the copier cannot copy the infrastructure. The protocol layer is easily copied. The infrastructure layer is not. On Day 1 of Bitcoin, it had no infrastructure layer. I can tell you, as an entrepreneur in this space for the past few years, Bitcoin’s infrastructure layer is now substantial. Indeed, I am sitting in my office, and looking at my employees building this very infrastructure as I write this. Their work, and that of many thousands of others around the world, is not so easily replicated.

Let’s use an analogy, which you so often convincingly do when describing the absurdity of Fed policy or the counter-productive nature of various government programs. I believe the following is a very fair analogy.

Consider that language itself is a protocol – a set of rules for conveying information. Consider then that one could copy the English language, and change parts of it, and release it as English 2.0. However, why would anyone use it? Even if it had marginal improvements over traditional English, where is the infrastructure? Where are the vast tomes of literature written in English 2.0? Where are the speakers and writers and scholars of this new language? Where are the libraries and Wikipedias full of English 2.0 articles? How many newspapers are written and conveyed in English 2.0? How many Peter Schiff podcasts are disseminated in this new alternative? That infrastructure wouldn’t exist, and neither therefore, would the users. This is merely the natural, spontaneous consequence of network effect, and it applies to English as a protocol for language just as it applies to Bitcoin as a protocol for money.

Now, does the network effect mean English, or Bitcoin, can never be replaced? No. But it does mean it’d be extremely difficult in either case.

But let’s remember something. Even if a superior crypto-currency overcomes Bitcoin in the open market (certainly possible), does that make Bitcoin a failure or Ponzi scheme? Does that negate the utility bestowed by Bitcoin while the market still favors it? Consider that one can benefit from the Bitcoin network with zero or very low exposure to the currency price long term. This means a payment made with Bitcoin last year still accomplished its objective – value moved freely, the users benefited, even if a year later the system falls apart and goes to zero. Thus, there is real utility today even if the system doesn’t work next year. The assumption that Bitcoin will be around for eternity is not a prerequisite for benefiting from its utility in the present.

Mutual Respect for Market-Based Money

I think you will discover, upon reflection, that your concerns about Bitcoin boil down to the thesis that Bitcoin is a volatile, highly speculative, and non-conservative asset class. In this, I wholeheartedly agree. But if your arguments are claiming that the payment network itself is some kind of fraud – a Ponzi scheme undeserved of respect or even consideration – then I must take issue with that. The Bitcoin network is an utterly revolutionary technology. It separates money from the state, in a way that gold, unfortunately, has been unable to do.

When fully understood, Bitcoin should bring tears to the eyes of anyone who fights against the tyranny and ignorance of coercive governments and their monetary witch doctors. This is why thousands of people around the world have dedicated their lives to this campaign. We are carrying out this experiment without anyone’s permission. We’ll either fail, or change the world in a way that was inconceivable before this technology existed.

I wholly support your idea to make a gold-backed digital currency. Please do it. I’d love to be your first customer, because I love gold. But being in this business, seeing how the payments and banking and regulatory world works, I can tell you that your initiative will likely fail, either by self-immolation (GoldMoney severing inter-account payments), or by governmental take down (e-gold).

A monetary/payment system that relies on gold backing is reliant on the backer. It relies on a centralized, trusted party, to warehouse the gold and provide convertibility. This is the counter-party risk eliminated by Bitcoin.

If there is a centralized backer for any payment system, then the system will have to follow all government laws, or be shut down. To follow the laws, personal customer information must be known, meaning privacy is impossible. Transfer limits and strict terms of use will be imposed, meaning financial freedom is impossible. And have fun with the compliance costs. Have you noticed international banks dropping American customers around the world? It is due to this unfortunate dynamic. And then, if the stars align, and the gold-backed currency manages to grow big and become a successful global payments network, it’s not unreasonable to assume that governments will take it down anyway, because it would compete with fiat – from which great swaths of their power originates.

You cannot compete with fiat by having a competitor that is vulnerable to the guns of government. Bitcoin may not be perfectly immune, but it is highly resistant. Censorship of e-gold was easy. Censorship of Bitcoin will be… entertaining.

Regardless, if you’re honestly interested in trying that experiment again, I will help you and support that effort, because I recognize the value of precious metals as commodities and as money. Until such a system actually exists, I am humbly asking you to support our efforts in kind, and am humbly suggesting to you that bitcoins, while non-physical, are indeed real and indeed have real value, because they are the one currency accepted on the most revolutionary payment network known to mankind. This is not theory – it’s actually working for millions of dollars of payments every day. We’ve moved beyond the Mises textbook. We’re running in the open market.

While Bitcoin is still a highly-volatile experiment, it deserves more respect than dismissal as a Ponzi scheme, and regardless of whether you think the current price of a bitcoin unit is justified, you must acknowledge that this technology, broadly speaking, has utility both for both economic exchange and, more importantly, individual freedom.

When my grandparents ask me how to protect their wealth, I don’t tell them to buy bitcoins. I tell them to buy precious metals. When they ask me how to transfer value across distance, I don’t tell them to ship gold. I tell them to use Bitcoin. My hope in writing this letter is simply this – that perhaps you’ll come to see Bitcoin and gold as beautiful compliments and important tools in the advancement of free-market money – one long-standing, conservative, and physical, the other new, technologically and politically disruptive, and digital. One will not replace the other, but I believe both will come to replace fiat, and good riddance to that stuff.

In Liberty, Erik Voorhees


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Firstly, in your mathematical example, you didn't define C. Unless you meant after the equation to put "C" instead of "V". If that is the case, I kind of follow what you're saying, but would largely disagree as it wouldn't be a 1:1 ratio of value from A:C.

That aside, you're looking at this in too complicated a manner. It is very simple. Complexity of a system does not change the principles of the system. Thusly, something that wouldn't be money in the most simple system where money has value (namely a society that is at the very infancy of requiring a medium of exchange), bitcoin would not be even close to considered money. This is also true of fiat currencies. However, it is not true of gold and or other commodities that have actual use. Thus, it doesn't even pass the sniff test. In saying this, it kind of reminds me of what people were saying during the tech bubble. Someone would push a stock that had no sales, no earnings, no profit, and if you questioned them about the validity of the offering, they would just say look, they're going to go public and you'll make money (even though this was just a mania and there was no logic behind it). The phrase "we lose money on every sale but we make it up on volume" is also another phrase that comes to mind. There is literally nothing that makes sense about a bitcoin being a currency. Once again, I'm not arguing that the network might have some value, and that bitcoins might have a value if they are the only means to utilize said network; however, this does not make bitcoins money.

Once again - simplicity. Gold was desired BEFORE its use as a medium of exchange. Whether or not you believe in the likelihood of humans to desire it in the future is your belief, but it has been the case for thousands of years. To believe that without the network available for the use of bitcoins on the network, people would have a desire to keep these bitcoins somewhere in their virtual network is just folly, and thus it doesn't pass the initial test of whether or not it is money. It needs to be desirable, and thus have intrinsic value. Please explain to me how on an island with 1000 people (assuming bitcoins and gold both have the same relative scarcity) how bitcoin could be used (or would be an effectively used) as a medium of exchange. How it plays out on a larger scale will then be simple mathematics. However, if it doesn't work on that simple, smaller scale, then I can't wrap my head around the increase of complexity of the system increasing bitcoins relative value as a medium of exchange or a store of value.

By the way, this is a sincere exchange, and like I said, I don't think I'm the end all be all on understanding this... but legitimately can't wrap my head around why/how bitcoin can be money. I am still waiting to have that "aha" moment, which is legitimately alluding me. The more I think about it though, the more I become assured that bitcoin can never be considered money the same way that fiat currency is not money by definition.

Yeah sorry I mistyped.

C is the subjective value of the money as a currency.
A is the subjective value of the money as an asset.

The point is when something becomes money the value of C is orders of magnitude greater than the subjective value of A. V approaches C when something is money. The money is almost never consumed as an asset when something is money.

While it is true that for gold A will never be zero, but it can be close.

The value of C is due to it's acceptance. If the governments allowed gold to be used and didn't impose all sorts of transaction costs, I suspect C would skyrocket. But they do. For now. So for now, gold is valued only for A and it's potential C.

With bitcoins it's difficult for them to impose transaction costs. So C is demonstrably huge right now.

I wouldn't be so down on btc if I were you. If central banks and their pawn governments succeed in wiping out crypto currencies gold will still be around.

If they do not succeed in wiping out btc, they may very well give up trying to prevent gold from being money. Central banks have been hedging their bets in buying and stealing gold. If they have most of it, they may well set gold free, maybe even make it fiat currency, and again goldbugs will profit.

I mean what can threaten btc? Gold. Who has gold? Them. (and a few goldbugs) Who has btc? Not them.

I think this works out for goldbugs no matter what. And btc hastens the time where gold is set free.


I'm not saying that I am not glad that bitcoin is doing what it is doing, and it is an option for people to use. I am simply saying that by definition, it is not money, the same as dollars are not money, and because of that, people should go into it with their eyes wide open.

It is true that people should hold dollars with the same peril, but they currently do not.

In the meantime, let us all hope that the free market alternatives to the greenback become many and effective.

Can you explain to me why the government will have trouble taxing and regulating bitcoin the same as they do gold? Do you not have to pay capital gains on bitcoin(s) if you make a "profit" by buying and selling them? Maybe I'm missing something there, but I would assume that all profit is taxable regardless... which is what helps the dollar keep its stranglehold as a medium of exchange (at least as it relates to gold currently).

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This top ranked book on Amazon answers many of these questions


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tasmlab's picture

Finally getting some glints of humility

I've studied bitcoin for about 10 hours now and still don't completely get it.

But one thing I've found consistently annoying has been the lack of humility on both sides of the debate as if anyone has perfect knowledge about what will happen in the future.

It's refreshing to see some bitcoin detractors admit they don't know what's going to happen in the future and say they will be cautious and some bitcoin promoters also admit they don't quite know how it is going to shake out.

Conversely, I'm very very skeptical of anyone who claims they know the absolute truth about this.


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If the Federal Reserve and

If the Federal Reserve and the IRS were both shut down, the US went back to a commodities-backed currency or brought back the gold standard and if transferring large amounts of cash were not monitored or restricted, then yes, Bitcoins would be far less valuable.


Important information concerning free market.

Vey interesting

I;ve avoided bitcoin because I know nothing about it. After reading this, I'm more interested.

"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe."-- Albert Einstein


He writes: Bitcoin, after all, cannot really be copied. True, the open-source code can be copied and the copier could release CopyCoin (indeed this is happening all the time). But, the copier cannot copy the infrastructure. The protocol layer is easily copied. The infrastructure layer is not.

I wonder what part of the bitcoin infrastructure he thinks is so hard for competitors to piggyback on? Let's review what the infrastructure consists of.

Managing the ledger (the blockchain) is done with a peer-to-peer (p2p) network. The technical aspects of this part of the infrastructure are almost trivially copied, because of how p2p networks work. It's not like, say, a social networking site (think: geocities) for which the infrastructure consists of huge server farms that cost a lot to build out, extensive bandwidth leases, etc. [[And, just as an aside here, even where the infrastructure is expensive to build, when the market is large the money will be there; there was a substantial barrier to entry for would-be geocities competitors, and the switching cost for geocities users was high, but you know what happened to them anyway. So the argument doesn't even work in that case. But now back to digital currencies.]]

The p2p network grows as the user base grows. That's part of the beauty of p2p networks. There's no further investment of money or programming effort or physical infrastructure or anything else, it just grows as the user base grows. If by "the infrastructure is not easily copied" he really means "market share is not easily taken from bitcoin" that's just groundless optimism. Market share is fickle.

Another part of the infrastructure would be the web sites for exchanges, the software for merchant solutions, the software to manage user's wallets, that sort of thing. But for all of that, the work of interacting with bitcoins is done by that p2p network we were just talking about. And since (so far, although I think this will change) most of the competing currencies either use the bitcoin blockchain definition exactly or something very close to it, if you have the software that can interact with the bitcoin p2p network it is really not a big deal to also interact with xcoin, ycoin and zcoin and whatever other blockchain-based currencies pop up later.

Even when there are new digital currencies that use something other than the bitcoin-style blockchain, the API (program interface) for interacting with those currencies is going to be similar to the API for using blockchain-based currencies. And by that time there will almost certainly be (if there isn't already) an open-source software library with an API that is currency-neutral, to make it easier for merchants and consumers to have software that supports bitcoin, litecoin, and whatever others are popular. When you're writing your killer app for digital currencies you'll link to an open-source library that lets you write your code without having to worry about the nitty-gritty details about the difference between xcoins and ycoins.

And while some of the infrastructure is being created by people with a vested interest in seeing bitcoin, and only bitcoin, succeed, in the long run there's more money to be made in supporting litecoin and all the other viable competitors too. If you're selling a merchant solution that only lets the merchant accept bitcoin, and I'm selling one that lets them accept bitcoin, litecoin and whatever others are popular, then all other things being equal whose solution are they going to buy?

What else is there in the infrastructure that he thinks will make it hard for competitors to follow the trail that bitcoin blazed? It's definitely true that, prior to bitcoin, none of that existed. But once it's in place for bitcoin then supporting new digital currencies, and allowing consumers to transfer funds easily between them, is inevitable and orders of magnitude simper than for lots of other new technologies where in spite of the barriers competition is fierce.

I made the analogy to cars as to why bitcoins price may drop

You can blow holes In it but I think there is some similarities:
If, Bitcoin’s advantages lie in using a crypto currency system one would think that the cost of using it would decrease over time, not increase exponentially. The argument that more people will be using Bitcoin and more convenience and security features will be added to the Bitcoin system to justify higher Bitcoin prices runs counter to market principles. With competition, prices should drop.

The price of cars did not go up exponentially as more roads and bridges were built, motels and restaurants were added to the sides of the highways and more people used automobiles as a mode of transportation. Competition ensured that Fords would not be the only cars on the road and that prices for cars would remain affordable. Similarly, there will be additional competing crypto currencies, many superior to Bitcoin, that will keep a lid on the price of Bitcoin.


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here's the debate

Audio only.......
Peter Schiff debate with Erik Voorhees on digital currency at SchiffRadio.com

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Interesting debate and letter by Erik

I think the intrinsic value debate while interesting is not what will make bitcoin viable or not.
You can argue that bitcoin has intrinsic value or that it doesn't
You can argue that intrinsic value matters or that it doesn't
You can argue that nothing has intrinsic value
The main stumbling block for bit coin is to overcome volatility.
Right now the investor interest in Bitcoin is its biggest threat as people are buying to hold bitcoin so they can sell them at a profit. There is nothing wrong with that but I think it makes up a too large portion of the transactions
The investor speculation damages the ability of the bitcoin price to stabilize so it can be used as a reliable currency.
Bitpay can help but a stable price would go a long way towards trust in use as a currency

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Here is the rebuttal to the "Too volatile" argument


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