Hyper-monetization reloaded: Another round of bubble talk

‘Tis the season again when the Bitcoin exchange rate rises fast and “bubble” talk resumes among some journalistic and other Bitcoin skeptics. Around the height of the previous most dramatic Bitcoin exchange rate movements of March and April 2013, I posted an article called “Hyper-monetization: Questioning the ‘Bitcoin bubble’ bubble,” which was widely circulated at the time and still referenced now. What follows is a blend of brand-new material and thoroughly revised highlights from the earlier article.

The objective was, and is, not to give advice or make predictions, but to draw on theory to develop alternative perspectives on what exactly a “bubble” may or may not be in relation to the distinctive case of a brand-new rising-value medium of exchange. “Medium of exchange” is fancy economic jargon for something one can pay for goods and services with. I define a money as the common unit of pricing and accounting in a given context (see my “Bitcoin as medium of exchange now and unit of account later: The inverse of Koning’s medieval coins,” 14 September 2013).

Behind popular price-bubble discourse often lies a thinly or not-at-all veiled general debate on whether Bitcoin is a valid system. Some degree of bubble-talk functions as a pop proxy for this. In April, some Bitcoin critics were citing rapid price movements in support of the contention that Bitcoin, as such, was only a bubble. When this bubble popped, the story went, Bitcoin units would supposedly return to their “inherent” value, which they claimed to be…nothing.

Of course, Bitcoin failed to oblige them once again. Yet each time Bitcoin does not fulfill this pop empirical prediction, and instead eventually goes much higher in price later on, one nevertheless hears the same prediction repeated the next time around. In contrast, there are several ways to take a much longer-term view, one that is able to both account for price manias and also acknowledge the possibility that Bitcoin could be a valid system, and an ever more reliable one in the making.

Hyper-monetization reloaded

Many observers have likened the rise of Bitcoin to an asset bubble. Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different interpretive concept to apply in addition: hyper-monetization.

I came across the term hyper-deflation, intended in a positive sense of rapidly rising value, when Bitcoin’s exchange rate was climbing fast from the low thirties to the high thirties over a few days in early March 2013. While a few specialists of a certain persuasion understand “deflation” to be a great thing for ordinary people, the word still has major problems. It has several possible definitions. It can refer to price-level changes or to quantity of money changes, depending on who is talking or when. It is assigned a quite negative interpretation in most conventional economics circles. Finally, it has a general public-relations problem. It just sounds depressing as a word. Whatever its real net effects on society might be, “deflation” just sounds like a bad thing no matter what. Which child most wants a deflated balloon?

The word hyper-monetization occurred to me as a more positive alternative to hyper-deflation, one that also provides an antonym to the catastrophic hyper-inflations that have repeatedly killed off fiat paper monies throughout history. The exact opposite of the death of an old money at the debt-dripping hands of state/bank alliance managers would be the birth of a new medium of exchange at the creative hands of the market.

The term de-monetization denotes the more general concept of a widely used medium of exchange ceasing to function as one. A total hyper-inflationary collapse is one way this can happen. Another is bimetallist legal-tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another, say gold, or vice versa. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently “suspend redemption” of legal tender notes into the precious metals that had been promised in exchange for such notes (that is, note-issuer default is “legalized”). Paper and account entries then remain as money, while the metals that had formerly “backed” them are de-monetized and trade as commodity assets, bought and sold in terms of what replaced them in the actual role of money. The rhetorical line from some well-meaning sound-money promoters that “gold is money” is simply untrue, except, of course, in regard to those times and places where it actually was.

The opposite process, “monetization” in this sense, denotes something that was not a money beginning to function as one. When euros took over the jobs of various European national currencies, euros were monetized and the previous national currencies de-monetized. The French franc and Italian lira do not now function as monies; they are historical relics.

Something that gains its own exchange value from scratch on the open market contrasts sharply with any such forced legal conversions. When a freely chosen unit monetizes through market processes, and does so quite rapidly, it might then reasonably be described as being in a process of “hyper-monetization” (for a detailed treatment of origin-of-money issues, see my recent paper, “On the origins of Bitcoin: Stages of monetary evolution,” revised version, 3 November 2013, PDF).

A problem with the “bubble” bubble

Bitcoin’s high price volatility is unquestioned. However, it is unsurprising for at least two reasons. First, it is not widely understood as a technology and is in a very early stage of development. Second, its exchange value (market price) tends to react to news that highlights regime uncertainty. It should be noted that this is a type of “government failure” in that the scope and variability of policy uncertainty across multiple jurisdictions greatly increases market uncertainty.

Something else to consider in relation to the eternally-recurring “Bitcoin is a bubble” claim is that in a normal asset bubble, certain key factors differ. To whichever height the prices of typical bubble assets such as houses climb, a given house remains the same good in a physical sense as when it exchanged for less money. In the case of a monetization event, in contrast, the actual utility of the trading unit—which is mainly its utility as a trading unit—may actually rise. This is due to monetary network effects, named in reference to the value that comes from the extent of the network of people willing and able to deal in a particular trading unit.

To imagine how this special case of medium-of-exchange utility growth might differ from an ordinary asset bubble in, for example, housing, it would be as if not only the prices of houses were rising during a buying rush, but in addition, their actual sought-after qualities as physical houses were improving as well. Such fantastic houses might sprout new rooms with no one building them. New paint jobs might appear mysteriously overnight without any painters having visited.

For a medium of exchange, a rising general usability for facilitating the purchase of goods and services (separate from the relative value of each unit) is not directly tied to its exchange rate against other monetary units. Still, this aspect is likely to positively influence such exchange rates. Conversely, rising exchange rates, if they generate news and wider attention, can then lead to enhanced network effects through increased recognition, creating a network-growth cycle.

For those who have been following Bitcoin news closely, for months on end there have been seemingly daily announcements of new ways and places for consumers to spend bitcoins, new or improved wallet services to manage bitcoins, new or improved payment processor services to receive bitcoins, and new exchanges at which to buy and sell bitcoins—all on a global basis. Bitcoin payment processor BitPay announced in September that it had 10,000 merchant customers, up 10x from 1,000 a year earlier. In the past 12 months, the number of wallet accounts listed at the popular Blockchain.info My Wallet service has risen 13.9x from 38,460 to 534,575. These are just two specific services and do not reflect horizontal expansion in the number of competing services or the direct use of the Bitcoin network to facilitate transactions on the part of consumers and merchants using directly controlled software without intermediated assistance from service companies.

“Is” a bubble versus “is in” a bubble phase

Bitcoin does have its manias and crashes. The hyper-monetization concept seems useful especially in a longer-term perspective for addressing the view that Bitcoin is nothing more than a speculative bubble. The most insistent proponents of this view elaborate along these lines: “Bitcoin has no ‘intrinsic’ value and is therefore ultimately destined to fall to its ‘inherent’ value, which is zero.

However, claiming that Bitcoin is a bubble (total dismissal of the system as such) is quite different from claiming, perhaps helpfully, that Bitcoin’s exchange rate may be showing signs of being in a temporary bubble phase or mania at a given point in time. That said, every significant rise in price cannot just be reflexively attributed to a mania. There is certainly more to this story and there are many specific matters of degree and interpretation. Among these is recognizing that a young currency such as this would naturally vary in price quite a bit more as it is being discovered in waves than later after it has gained more widespread adoption.

At a theoretical level, unlike a simple asset bubble mania, the more people begin using or expanding their use of a particular medium of exchange, the more its actual utility rises, and the more valuable it actually is in this function from the point of view of its users. The exchange value of a medium of exchange unit is related to, among other things, each holder’s expectations of being able to use the unit in future exchanges. How many people will accept the unit, how readily, and for what?

At least when it comes to the aspect of monetary network-effect growth in any season, ‘tis the more the merrier.

Expanded "On the origins of Bitcoin" paper with empirical supplements, other revisions

This is the 0.2 upgrade to my paper, “On the origins of Bitcoin: Stages of monetary evolution,” first released on 23 October 2013.

This expanded and revised version replaces the previous one from 11 days ago, but I expect this current version in this format to now hold steady. If you have kindly included the older file in an online reference collection, please consider replacing it with this one.

The changes are summarized in an included initial note to readers of the previous version. The most notable single change is the addition of two new sections as empirical supplements. They provide interpretations of patterns of events by “Bitcoin Year” (Appendix A) and a single five-year price-formation chart (Appendix B). Discussions in the main text of the precise timing of the first clear pattern of medium-of-exchange use have been clarified somewhat on this basis.

Download PDF:

On the origins of Bitcoin: Stages of monetary evolution (03.11.2013, expanded and revised)

 

Strong positive response to "On the origins of Bitcoin"

The positive response to my recent paper, “On the origins of Bitcoin: Stages of monetary evolution” (23 October 2013), has been quite a surprise. Within the first hour, I had received word that the 30-page PDF had already been loaded onto an iPad in Texas and laser-printed in Brazil. Pretty soon, it had been posted on Reddit (r/bitcoin), where it was described as a “treatise.”

In less than the first two days, there have been nearly a thousand visitors to this link on my website. The paper has generated cascading retweets and tweets of recommendation and appreciation that total about 50, as far as I can estimate. Tuur Demeester, editor of the MacroTrends investment newsletter, has been tweeting quotes from it.

The highlight has to be a tweet from Jon Matonis, executive director of the Bitcoin Foundation, Forbes contributor, payments industry veteran, and long-time advocate for non-political currency options: “Konrad Graf earns his place in Bitcoin economic history.”

Well, with that, it must be time to call it a good week.

Update

Link updated from 23.10.2103 version to revised and expanded 03.11.2013 version

Download PDF: On the origins of Bitcoin: Stages of monetary evolution (03.11.2013)


"On the origins of Bitcoin," my new work on Bitcoin and monetary theory

Linked below is a new work I have just written on Bitcoin and monetary theory. It addresses in a more systematic way than I have before issues relating to the interpretation of the origins of Bitcoin in terms of the monetary regression theorem and the application of some central integral-theory principles to monetary theory.

Bitcoin has arisen as an entirely new and unexpected market phenomenon deserving of fresh treatments. Its arrival also provides opportunities to dig deeper into theoretical fundamentals themselves. While this work can be viewed as part of a much larger project in progress, I also have the sense that it can stand alone.

The title, On the origins of Bitcoin: Stages of monetary evolution, acknowledges the inspiration of the classic 1892 work, On the origins of money by Carl Menger, a landmark in the development of the market-evolution account of the origins of media of exchange and money. This “Austrian school” or “Vienna school” approach contrasts with what I dub the state-creatationism theory of the origin of money. It also contrasts with the tempting but unsatisfactory view that money is merely a “social illusion.”

In a nod to the software world out of which Bitcoin has arisen, I call it a first public beta, meaning that, while refinements are always possible and likely, I think the central intended functionality has been implemented. Revised versions and formats may follow.

Update

Link updated from 23.10.2103 version to revised and expanded 03.11.2013 version

Download PDF:On the origins of Bitcoin: Stages of monetary evolution (03.11.2013)

Bitcoin and social theory reflections: A review essay between Amsterdam and Atlanta

The German word Nachklang denotes what resonates after a sound has passed. It is the tune that still plays in one’s head after external sounds have faded. I have been listening to what stays with me in the few days after attending the Bitcoin Europe conference in Amsterdam September 26–28, prior to setting out toward the Crypto-Currency Conference in Atlanta, October 4–5.

Many conferences have a “keynote address.” I think Bitcoin Europe had more of a keynote moment on the final day that reflected the heart of the whole affair. This came when Bitcoin Magazine editor and software developer Mihai Alisie punctuated his moving presentation with, “Bitcoin is here to serve humanity, not to rule it.”

Now that resonates.

Takeaway themes included 1) the need to keep developing more intuitive client software, 2) the desperate need to help improve the global remittance market, which Bitcoin is technically capable of revolutionizing rather quickly, and 3) the need to implement multiple-signature transactions in client software. While that last item may seem obscure, we will return below to its potentially immense long-term implications.

The conference was heavy on entrepreneurs and programmers, often combined into the same persons. Bitcoinj developer and smart contracts enthusiast Mike Hearn could usually be spotted in the lobby talking with someone while looking over a screenful of code on his laptop. Massive effort, energy, and ingenuity is in play, with untold separate projects underway. One person after another I talked to, or who was presenting, was working on some project to develop new wallets, improve existing wallets, develop new exchanges, develop new ways to do exchanging, offer new ways to do remittances and loans, incubate startups, and generally make payments easier and more accessible and secure for wider audiences. That most definitely includes all those underserved, mis-served, or not served at all by the world’s existing constellation of financial institutions.

The tragedy of international remittances

A key concept was that Bitcoin is likely to start meeting needs and expanding most quickly right where existing “points of pain” are most intense. Sure, Bitcoin is better for online payments than credit cards in almost every way, but the epitome of a global point of pain is international remittances.

Immigrants working in wealthier countries trying to send some of their hard-earned wealth back home to relatives in poorer countries face truly dismal options. For every dollar, euro, or yen earned, some portion ends up making its way back home, but conventional remittance services charge shockingly high fees, trimming large percentages off of the fruits of labors undertaken mainly for families elsewhere.

One could call this a scandal, but the scandal is not so much the practices of the visible companies that do manage to provide this service at all, but the Byzantine regulatory mesh behind the scenes that makes it so difficult to do so efficiently. This regulatory overgrowth chokes off this market to the authentically open competition that could lead to lower costs and improved services rather quickly.

Into this fray, Bitcoin technically already enables international remittances with basically no charge for those few (for now) who are able to use it directly at both ends. “Send value anywhere in the world instantly in any amount and essentially for free” is a bold claim. No company can make it, but the decentralized Bitcoin network can and does deliver on it already.

Still, companies still have many roles yet to fill by leveraging the Bitcoin network and connecting people to it in ways they are not yet able to do for themselves. For almost all those who want to do international remittances today, some additional services are required. A remittance provider leveraging Bitcoin in the back office for transfers, while providing cash or local bank integration at one or both ends could offer the same or better service as Western Union’s or MoneyGram’s current offerings at vastly lower fees.

End users need not even necessarily know anything about Bitcoin or realize that it is involved in aspects of international transfers between local offices. They only need recognize that a much higher percentage of their purchasing power actually makes it back home, faster.

To illustrate, Daumantas Dvilinskas, CEO of TransferGo, based in Lithuania, talked about how his company is working to provide faster and less expensive international transfers. He quipped, “It takes three days to send money from the UK to Lithuania. People went to the moon in three days.” I live-tweeted this and Twitter user Jacob Norup Pedersen added, “it takes two weeks from Denmark to Morocco.”

The ecosystem metaphor

In reflecting on the sheer number of business ideas and variations being developed—even just those visible at this conference—I had the image of an exploding Cambrian ecosystem with a large number of candidates for longer-term survival. Many seem promising. In the end, only a few will multiply and advance toward wider adoption. Knowing which ones will be which is an extraordinary challenge. Complicating this further, the “DNA” from one project can easily hop to another in this primordial open-source soup, remixing again and again until successful combinations are found and then built on further. An abundance of candidate code segments and strategies is right there in the open to be borrowed. It is only the process of doing, trying, and offering that will end up delivering the many new conveniences that even today’s skeptics will most likely be taking for granted in daily life in the near future.

BitPay CEO Toni Gallippi, whom I met for the first time on the last day, was on hand representing what a wildly successful Bitcoin business can already look like, having gone from a thousand merchant accounts to 10,000 in the past year. Not coincidentally, his presentation and informal comments off-stage were positive and constructive and showed how his company makes life easier for both merchants and buyers compared to conventional payment options.

This goes right down to the details. Even the Bitcoin to fiat-money exchange rate that pops up when a customer pays a merchant through BitPay is likely to be more favorable than the rate they would get by selling Bitcoin on an exchange for cash. This is due to the company’s use of a custom bid and ask book that integrates live data from across the major exchanges.[1]

Regulation is a much broader social problem

The conference was a microcosm of the true market spirit. On balance, this crowd seemed to view existing regulatory structures—always beloved of industry incumbents as a way to protect themselves against disruptive start-ups at the general expense of consumers—as fairly pointless obstacles, unfavorable environmental features that would-be surviving organisms must simply be able to deal with.

Bitcoin core developer Jeff Garzik, who joined the “Borderless Solutions” panel on the final day, commented that Bitcoin just is a borderless solution by nature. The only need for “borderless solutions” per se, is for particular Bitcoin-related entrepreneurs to try to function amid the various and mixed obstacles left in place by legacy nation-state barriers.

Still, the official presence at the conference went a long way toward confirming an impression I have had for some time. Most governmental officials around the world want to figure out how to perform their various jobs, which mostly consist of applying existing legislation and administrative codes to rapidly evolving market phenomena. They are not generally out to make up additional onerous regulations just for the sake of being troublesome.

There is no need for them to do so. This is because shelves of thick volumes of legislation, administrative code, and case interpretation are already available to guide the obstruction of hapless innovators. Such things already exist and are not being conjured up anew just to harass Bitcoin enthusiasts. Ambiguity about which regulations are to apply in particular cases is also already part of the structural problematic of the legislative law approach itself. Whether this approach is just or helpful to society is a much larger topic (hint: I think it is clearly neither just nor helpful to society). Bitcoin just provides some fresh (and perhaps embarrassing) contrasts with existing systems and practices that work especially poorly.

Wieske Ebben, from the Dutch central bank, joined the panel on regulation. She (being among the approximately 2% of conference attendees who were female) clarified several times that one of the bank’s central concerns in its role as national financial regulator is to make sure new payment systems are trustworthy in the interest of consumers.

Although somewhat at the expense of Ms. Ebben, who seemed a little taken aback, Berlin’s iconic Bitcoin-kiez promoter Jörg Platzer drew a round of applause with a comment made from the seat next to her on the panel. He pointed out that word on the street has it that the public does not now consider central banks and large commercial banks themselves as icons and worthy arbiters of trustworthiness in society.

Yet this understandable focus on assuring trustworthiness is potentially quite a positive sign in light of the reality of Bitcoin (as opposed to the typical media hype). As Toni Gallippi pointed out later, many Bitcoin users believe it is among the most trustworthy and secure payment systems ever devised.

First of all, Bitcoin is immune to certain inherent weaknesses in credit cards that give rise to massive ongoing fraud and identity theft (even after decades of expensive efforts to combat such problems). A Bitcoin payment is pushed by the user, not pulled by the receiver using sensitive information. Receiver-pull methods require the transmission of sensitive financial data, making such data vulnerable to interception or hacking right out of company databases. With Bitcoin, only a cryptographically signed transaction is sent, and, unlike with credit cards, this contains no data that can be used to create additional fraudulent transactions later. With Bitcoin, identity theft cannot be used as a basis for spending other people’s money.

Moreover, Bitcoin cannot be counterfeited, a problem that continues to plague physical cash, despite a centuries-long technical battle between official money printers and counterfeit money printers, a battle that has led up to the most advanced modern papers, inks, plates, and embedded features on one side—and ongoing successful counterfeiting on the other. And as for the real traditionalists, it should be noted that metallic coins and bars, especially gold ones, were ever plagued by reductions and dilutions to weight or purity from both criminals and kings. In contrast, Bitcoin cannot be clipped, sweated, embedded with tungsten, or mixed with just a tad more copper or silver with each new minting.

Niels Ploeger, from the Amsterdam police department, was also on the regulatory panel and attended much of the rest of the conference as well. He explained that he was tasked with researching and better understanding Bitcoin to provide insights that could be useful in informing criminal investigation procedures.

One key point for investigators is that Bitcoin leaves a permanent and unforgeable record of all transactions, with amounts, accounts and time stamps down to the second. This should, in principle, be much more useful and easier to track than cash in the course of specific criminal investigations. Each bitcoin unit has a permanent, public trail behind it. Even if it does go through a mixing service at some point, this fact too can be surmised to some degree, along with the timing of the mixing.

It is true that particular addresses are not directly linked to particular human or organizational identities within the Bitcoin block chain. This is a critical feature, as the presence of such linkages on a public ledger would obviously eliminate the possibility of any user privacy for anyone for any purpose (btw, destroying all privacy is ever the dream of totalitarians).

Still, for those legitimately investigating specific crimes, block chain clues combined with other evidence can lead investigators to insights unavailable from cash. In addition, conventional banking and accounting systems, despite untold piles of regulatory paperwork, should also not simply be assumed to be immune from all manner of forgeries, frauds, and misrepresentations. Comparing one real system against the imagined perfections sometimes tacitly assumed of incumbent systems should be studiously avoided.

A point raised at another time during the conference was that for Bitcoin to succeed in an enterprise context, it will be important for organizations to be able to keep sensitive information private (for example, from competitors) and to make other information publicly verifiable (raising confidence that, for example, reserves or bonding funds are actually present in a specified account). This means that the entire range of user-defined privacy options Bitcoin offers, from 1) high anonymity (possible but somewhat difficult to actually achieve in practice) to 2) pseudonymity (traceable with some specific investigative effort; the most common case) to 3) globally public auditability (for charities or public agencies, for example), are all important, just in different applications.

A quick interlude on privacy, anonymity, and today’s DPR arrest

Just as I was about to finalize this essay, the arrest of Silk Road operator Dread Pirate Roberts was announced. While the complaint seems generally reasonable-looking in terms of the chain of evidence presented, it repeats the usual dubious claim that Bitcoin “was designed to be anonymous.” It was actually designed, which is a matter of public record, to enable people to transact securely, relatively free of fraud or censorship, at any distance, and without the need to rely on (and pay) third parties that may or may not be trustworthy (see Bitcoin: A Peer-to-Peer Electronic Cash System (2008) by Sataoshi Nakamoto).

It should be noted that assessment of the complaint’s merits on its own terms, which must, given its nature as a positive law document, tacitly assume that the existing state of laws is as it should be, must be separated from normative views on the logic or net value of drug criminalization. For example, relevant to such assessment would be evidence that prohibition laws have a dramatic, consistent, and well-documented role in increasing violence in society, including precisely that sort of blackmail and retaliatory violence also alluded to in the complaint, violence that is typical of the operations of any market that is forced underground, such as the gang activity during alcohol prohibition in an earlier phase of US history.

Despite repeating the usual false claim that Bitcoin is inherently anonymous, the complaint then surprisingly goes into several details, each of which contradicts this claim. It discusses the public nature of the block chain and cites detailed sales data obtained from examining specific addresses. It then explains all the additional measures that the site’s operator put into place—beyond simply specifying Bitcoin as a payment method—to try to make the transactions anonymous (which they already would have been to begin with if the misleading claim of inherent anonymity were true). In the event, the arrest was made largely on non-monetary lines of evidence, specifically items such as server trails and linkages among user names.

With all the repeated media-hype that the “main use” of Bitcoin is for illicit purchases (also a highly dubious and factually unsupported claim), it should be interesting to see how much the exchange value of Bitcoin reacts over the coming weeks and months—beyond the obvious short-term panic selling followed by opportunistic buying on the dip—to the shut down of the oft-referenced black marketplace.

To serve and to secure

The overwhelming spirit I sensed at the Bitcoin Europe conference was one of service to those who can benefit from these innovations next. Now that the relevant classes of geeks and early entrepreneurs get it, how can these new possibilities be brought rapidly to everyone else, starting with some of those who could benefit most?

While several speakers reiterated the lingering difficulties of “mom and dad” or “grandma” understanding and using Bitcoin, Willem van Rooyen of SC2BTC, who is working to integrate Bitcoin into eSports (high-skill online gaming matches as spectator entertainment), reported that his target customer demographic has no difficulty at all understanding and starting to use Bitcoin with existing solutions.

Yet the question remains: How can services be made that are easier for more people to benefit from and that will be more resilient and secure with minimal reliance on user savvy?

In this spirit, early entrepreneurs are working, each from slightly different angles, to bring the current and potential benefits of Bitcoin to more and more users around the world. They will do this no matter what obstacles may or may not be placed in their paths, because this is their dream, their vision, their mission, and their rightful role.

Bitcoin as foundation layer for new possibilities

I noticed a strong confluence between my most recent reading and some of the services and technologies featured at the conference. I have been researching and thinking about legal and economic theory and how they relate for some 25 years. It was in this context that I first began to take note of Bitcoin in mid-February of this year. Since then, I have been learning the essentials of the relevant principles in computer science and cryptography as fast as possible in order to make sense of Bitcoin by combining social theory and technical theory in appropriate ways. When it comes to Bitcoin, taking a strongly multi-disciplinary approach is not optional.

Bitcoin was a major breakthrough in the advancement of several much broader sets of ideas. It has created an infrastructure layer that can now greatly facilitate further developments based on those feed-in concepts. These include smart contracts, triple-entry bookkeeping, and additional applications for decentralized unforgeable ledgers such as securely recording titles to other kinds of property.

Michael Goldstein got me started recently going back and reading key works by Nick Szabo that substantially predate Bitcoin, but also contributed greatly to the intellectual milieu out of which it emerged. Michael, along with Daniel Krawisz, will be going into these concepts on October 5 in Atlanta on the “Cryptography and Contracts” panel, and I am greatly looking forward to hearing and discussing more.

As it was, next up in my queue prior to Bitcoin Europe was the seminal article, “Formalizing and Securing Relationships on Public Networks” (1997), which I assigned myself for the relevant flights. At the conference, then, it was striking when several different developers pleaded on stage for more end-user wallet software makers to add support for multi-signature transactions. The convergence is that it is just such transactions, already supported in the Bitcoin protocol, that can make possible not only increased layers of security, but also the next evolutions in smart contracting, including escrow and assurance contracts and the likes of decentralized peer-to-peer loans and verifiable-balance safe-keeping services.

Bitcoin’s functions as information-age payment method and unit of trade may only be the beginning. Deep transformations may also come in the fundamental ways that contracts and agreements come to be implemented, recorded, and performed.

As Szabo showed, the first phases of taking traditional accounting, fiscal controls, and contracting into the digital world mostly just copied traditional paper systems and digitized and networked them. That change had both advantages (speed and accuracy) and disadvantages (privacy and security) compared to the original paper-based systems. However, new technologies could also lead to new methods that were not possible at all on paper, but are enabled for the first time ever by advances in cryptography and related developments.

To get a better image for this distinction, imagine that when powered flight was first developed, pilots had only flown routes right above existing roads. This is better and faster than surface travel, but still not great. It is only when they start to do something that only the new technology allows at all—flying straight from point A to point B, that the more interesting possibilities actually begin to emerge.

Computerized accounting has, in this view, been using the new airplane simply to move much more quickly along above the same old surface routes. In contrast, brand new options built on decentralized financial cryptography, unforgeable hashed transaction chains, triple-entry accounting, and multi-signature and other smart contracting modalities—bigger idea sets that predated and contributed to the invention of Bitcoin—look a lot more like the beginnings of leaving the old surface routes and starting to fly as birds do.

The role of social theorists

It was a pleasure at this conference to finally meet Peter Šurda, a long-time Bitcoin researcher also influenced by the Austrian school approach to economics that began taking its modern forms at the University of Vienna in the 1870s. When I started researching Bitcoin, his was among the first names that began rising toward the top of the discussion forum soup as I began to think about the monetary nature of Bitcoin. He quickly made it into my initial “knows what he is talking about” short-list. Even better, it was a bit of a relief and encouragement to me working in early March to notice that he had independently arrived at some interpretations of the relationship between Bitcoin and traditional monetary classifications that were quite similar to the ones I was initially entertaining.

Peter also told a story about our meeting in his quick post of highlights from the conference. One of my favorite short books on monetary theory is The Ethics of Money Production (2008) by Jörg Guido Hülsmann. When I asked Peter if he had read it, he said, “yes, twice.” I laughed and said that I had also read it twice. What an unusual moment! The global population of people who have done this and attended a Bitcoin conference must still be rather small indeed.[2]

Another time, Peter and I were (half) joking about the proper role of economists in the cryptocurrency revolution. He said the first response of many economists to Bitcoin seems to be denial: Bitcoin is not real and it will fail shortly, just like other hair-brained funny-money schemes throughout history. We have seen plenty of that denial phase, mainly from people who do not seem to have investigated the technology all that much.

My informal empirical generalization is that knowledge of Bitcoin and fascination with or enthusiasm about Bitcoin tend to correlate strongly, as do technical ignorance of the subject and easy categorical dismissal. Notice that we expect matters to be exactly opposite to this when it comes to unsound schemes. In such cases, the more one investigates, the less there is to like, whereas most of the enthusiasts seem to have been swayed by hyped surface appearances, and may even be unwilling to actually look more deeply.

Opposite to denial, the main role of economists, and legal and other social theorists more generally, should be to carefully observe what is happening in the real world and seek to provide systematic theoretical interpretations. It is the entrepreneurs who rule (in service of consumers, who really rule through their buying choices). It is the economists who should be running along either behind or at best next to these real actors and trying to figure out what is happening in a theoretical or more systematic way, adding some insights when and if they can.

This is especially so when an economy is in the midst of an epoch-scale revolution (as in agricultural, industrial, informational). The Spanish late scholastics, observing economic transformations in trade and money, became among the first to start writing insightfully about specifically economic-theory and monetary-theory concepts some 500 years ago. Later, first-hand observers of, and participants in, the industrial revolution—most famously Smith, and more promisingly Say, Turgot, Bastiat, and others—began to make further advances (or sometimes regresses, but still) on top of their observations of new developments.

Economists do have their rightful places. This was evident during the conference, thankfully only a few times, when specialists in other fields edged over into the proper territory of economic theory and the average quality of their causal claims then declined precipitously compared to when they were discussing, say, business, contemporary positive law, or software. This is not a call to leave everything to specialists, but a call for everyone to take steps to advance and improve their own literacy in real economics. As Ludwig von Mises wrote near the end of his landmark Human Action: A Treatise on Economics ([1949] 1998, 875):

Economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.

Let theorists theorize and doers do

The world is upside-down to the extent that so-called economists occupy positions of administrative power and influence over their fellows to “guide economies,” a euphemism for micromanaging and telling entrepreneurs and consumers what to do and what not to do. The result is the mixed(-up) economy world we inhabit, a world that is perhaps most mixed up of all when it comes to conventional financial systems.

The world becomes reoriented when economists are positioned as observers and theoreticians, helping people understand how it is that the uniquely human capabilities of voluntary social cooperation and mutual service make society possible. Economists can help clarify the puzzle of the world in unique ways. They should observe and bring clarity to what is otherwise a mysterious chaos of real-world progress as it unfolds at the hands of consumers, investors, and entrepreneurs. Economics is supposed to be a science, not a presumptive license to micromanage and direct those who are busy doing the actual work.

For those who do chose to specialize in economics and other aspects of social theory, today offers some amazing opportunities to occupy front-row seats to epoch-scale transformations of the technologies of market exchange. Previous epochal economic revolutions happened over centuries and decades, recognizable mostly only in retrospect. This one appears to be happening over a few years, with increments measured in months, weeks, and even days.

At Bitcoin Europe, the entrepreneurs and developers were the stars. This is the world as it should be. In roles as theorists, a few of us were observing in awe, wonder, and curiosity, following a major social evolution live as it unfolds. In that particular role (playing other roles in addition might double as good research), we operate first from curiosity—to understand for ourselves—and only then to see if we can help make it easier for others to do the same.

Atlanta promises to offer a slightly different mix, still with discussions of entrepreneurship and concrete innovations, but with a little more direct material on economic and contract theory in addition. Some of the original visions that helped give rise to Bitcoin have much more unrealized promise to bring for the benefit of us all.

For all the signs put up in gloomy dismay at the course of the conventional financial world, which effectively say, “the end is near,” we who track promising new innovations need to keep putting up other signs, in different places, that add a counterpoint: “the beginning is here.”

 


[1] For a recent theoretical discussion on the respective roles of unit of pricing and medium of payment, see my 14 September 2013 article: “Bitcoin as medium of exchange now and unit of account later: The inverse of Koning’s medieval coins.”

[2] For those interested, my article, “The sound of one Bitcoin: Tangibility, scarcity, and a ‘hard-money’ checklist” (19 March 2013), makes a step-by-step theoretical case as to why a hard-money position is fully compatible with a strange new currency that has no physical existence! If that seems impossibly counter-intuitive, you might understand why I spent about 9,000 words taking an initial shot at doing this. I have made a few refinements since then, not yet published, but the fundamentals remain the same.

The labor, leisure, and happiness game: Psychology, praxeology, and ethics

[Revised for improved clarity and readability on 30 July 2018].

Philosophers, economists, and psychologists have sought to define the ultimate goal or “end” of human action. Is there something that can characterize, in general, what it is that people seek by acting?

Aristotelians, Objectivists, and other philosophical schools speak of ends in a moral “ought” context. That is the most common context in which such things have been spoken of throughout history. Schools of psychology have proposed central underlying motivations behind human behavior. These vary: power, sex, growth, insight, needs hierarchies, etc. Religious traditions each offer somewhat different accounts of the ultimate role or destiny of humankind, which has been divinely placed.

Against this backdrop, the arrival of Misesian action theory was revolutionary. It defined ends in a way that was free of moral, psychological, or spiritual qualifications. Ends were logically necessary characteristics of what action is. Any moral evaluation of particular ends or accounts of central psychological motivations or spiritual purposes were all separate and additional matters. A level exists at which action can be considered as such, separately from all such add-on differentiations.

The only surprising result would have been controversy not ensuring. Objectivists accused economists of the Austrian school of amoralism due to their anchorless “subjective” theory of value that provided no moral compass.

Well, yes. Providing a moral compass is not the purpose of the analysis. Action theory makes non-moral statements about action. These are must be statements rather than ethical ought statements or empirical maybe/let's check statements. All that Misesian action theory (praxeology) can legitimately claim on this matter is that action consists of employing means in the pursuit of ends—any ends.

Nevertheless, praxeological economists still attempted to comment on ultimate ends, the attempts reflecting their wider philosophical leanings. This crept in in discussions of “labor” and “leisure” in relation to “happiness” or other versions of a purported ultimate end.

Is there some universal end of all human action and if so what? Is it seeking happiness in general, happiness as “rationally understood,” or eudemonia (“human flourishing”)? Is it acting to remove states of dissatisfaction and uneasiness in search of an elusive ultimate state of rest (Ludwig von Mises)? Is it eliminating the root causes of recurring disappointment and suffering (Buddhism)? Or something else?

Each formulation seems to paint the relative value of “labor” and “leisure” in a different light. Yet this raises suspicions. One should not expect to find such differing implications from versions of a supposedly universal definition. Negative definitions of labor seem to favor rest, positive ones activity, and some spiritual ones equanimity regardless of particular conditions of activity versus rest.

This leaves another possibility. Is there any need for praxeology to carry a concept of one ultimate end at all? Actual actions are many and discrete, each consisting of specific means/ends structures in particular contexts. These many ends do not have to all be packageable under a single characterization. A bout of removing uneasiness, for example, could come right after a day of pursuing human flourishing (a Miseseso–Rothbardian tag team), all done by a Zen master unattached to the particular outcomes of any and all such ephemeral pursuits as labor and leisure.

Under what conditions do people actually find themselves either more or less happy? To look into this question, an important article by professor Roderick T. Long on Objectivist ethical theory and Austrian school subjective value theory, taken alongside two books on the psychology of happiness, shed light.

From Mises to Rothbard

In “Praxeology: Who Needs It?” (2005; PDF), Professor Long quotes Murray Rothbard on his differences with Ludwig von Mises’s “removing uneasiness” criteria. This is what Mises set out early in Human Action (1949) as the abstract general end of all action. Mises does also use striving for happiness on the same pages. However, he most often returns to the negative formulation of removing uneasiness. This shows up in his discussions of the relationships among labor, leisure, and (dis)satisfaction.

Long wrote: “Rothbard…describes how, in his economic treatise Man, Economy, and State (1962; MES), he took care to revise precisely this Misesian doctrine (310).” In correspondence quoted in Joseph Stromberg’s introduction to MES (p. xl), Rothbard had written:

The revision purged [Mises’s] original formulation of its definite philosophical pessimism, of the idea that human beings are constantly in a state of dissatisfaction and that man could only be happy in a state of inactive rest, such as in Paradise. Such a philosophical view is contrary to the natural state of man, which is at its happiest precisely when it is engaged in productive activity.

Long explained that:

Rothbard acknowledges the possibility of “satisfaction in the labor itself,” and so grounds the “disutility of labor” not in labor’s being inherently distasteful, but in the fact that “labor always involves the forgoing of leisure,” which is also a value…The fact that leisure has value for us explains why we prefer to economize on labor, thus allowing Rothbard to draw all the essential conclusions for which Mises thought he needed the mistaken Nirvana premise. (311)

Yet Rothbard’s view that people are happiest “precisely when…engaged in productive activity,” as opposed to when idle in paradise, is also an empirical psychological claim. As such, however, it does find support in psychological research on self-reported happiness. One qualification that will emerge, though, is that Rothbard's use of the word “productive” could lead to an unwarranted emphasis on the categorization of activity types, such as work versus hobby.

Get into the flow

Flow: The Psychology of Optimal Experience (1990) by Mihaly Csikszentmihalyi presents the results of research on tens of thousands of participants in different cultures. It found that higher degrees of self-reported happiness were associated with engagement in self-chosen, goal-directed activity structured with an optimal relationship between challenge and capability.

Self-reported happiness was higher the better persons were positioned to 1) select and revise their own goals and 2) dynamically adjust the balance between challenge and capability toward a moving zone the researchers labeled “flow.” Adjusting challenge can be relatively straightforward through choices of goal and performance criteria (quantity, quality, time, outcomes). Raising capabilities might involve taking the time to invest in capital (tools) or human capital (abilities) to increase effectiveness before further task engagement.

For example, cutting down a large tree with a dull hatchet could become frustrating. Taking the time to buy or borrow a chainsaw before cutting may turn into a more enjoyable overall experience. Moving right to managing a major logging operation with no experience in either managing or logging would most likely quickly lead to frustration, if not disaster.

In a hobby context, though hardly ever in a work context, one might lower capabilities in pursuit of the flow zone. Gamers, for example might sometimes choose to play with inferior in-game equipment, which would effectively raise their challenge level compared to selecting the best available equipment.

Golf, bowling, and some games have “handicap” scoring options. This reduces or evens out score gaps, enabling more skilled and less skilled players to more meaningfully compete in the same match, reducing boredom for the more skilled and frustration for the less skilled.

The flow research found that how activities were classified by type, such as labor, work, play, hobby, or leisure, did not impact the degree of happiness reported. Boredom, both at work and on vacation, showed up when capabilities were too far above challenges. One might look forward to finally having “nothing to do” on vacation—and then get bored with nothing to do. Frustration—both at work and in leisure or hobby activities—showed up when challenges were too far above capabilities. The challenge/capability balance influenced happiness. Categorizations of activities, such as labor versus leisure, did not.

Both at work and at leisure, research participants reported higher degrees of happiness when they had set their own goals. Even for goals that had originated elsewhere, such as with organizational leadership or a client, flow effects could still be found if the person made the decision to make those goals their own, as opposed to merely acquiescing and going along with orders.

The common element found to support higher degrees of self-reported happiness was each person having the final say on his or her own activities over both long-term strategic and short-term tactical scales. In my view, this recommends a set of social conditions that support individual-level autonomy, flexibility, and discretion. Individuals should be able to chose their own goals and how to pursue them. This includes minimizing the need to “apply for permission” before taking action, as well as maximizing individual discretion on which groups to join or leave. The only social institution capable of assuring such individual discretion and autonomy is one with consistent respect for rights of first appropriation and mutually consensual transfers of property.

The typical popular counter to such allegedly “atomistic” principles is that people are “social” creatures. However, this claim cannot justify the use of violence to orchestrate non-consensual relationships. It does not explain what is “social” about the advocacy and implementation of such violence. Actually being social entails not advocating, approving of, or implementing initiations of threats or violence.

Got game?

According to Reality is Broken: Why Games Make Us Better and How They Can Change the World (2011) by Jane McGonigal, good games are designed to capture the above dynamics by enabling the player to self-adjust challenge levels and cultivate rising capabilities as challenge levels rise. Even prior to this, the player first selects which game to play, when, and with whom. Gaming entails a wide range of autonomous dynamic decisions that influence the challenge/capability balance. What difficulty level does the player select? How long does the player work on a puzzle before turning to a help clue?

Games themselves are also designed to dynamically adjust this balance. Difficulty and strength of opponents typically rise as the player gains achievements, levels, rank, and equipment. Games also often provide adaptive feedback on progress toward clearly defined goals. These are each elements that modern game designers have raised to high levels.

The popularity of gaming helps illustrate the motivational power of each person being able to seek flow states through dynamic autonomous goal selection and challenge/capability balancing. McGonigal’s central theme is that games have come to be designed to tap into motivation in a way vastly superior to typical (de)motivational structures found in schools and corporations. Lessons for institutional improvement could be derived from the study of game design.

Moreover, if we are concerned with young people being obsessive about gaming and uninterested in school, we should naturally want to examine the extents to which goals are self-selected and the challenge/capability balance is adjustable individually in gaming versus school. The answer is near. Most good games offer high degrees of player autonomy and masterful challenge/capability balancing. Most schools are abysmal in both areas.

Promoting interest in "the real world" could therefore begin by increasing the range of autonomy that young people can practice in that real world, for example, by enabling them to engage in work again.

Why will kids work ingeniously and for unending hours for in-game gold? In gaming, they can work with whom they chose and keep the gold they earn. This contrasts with the more and more artificially constrained real world in modern interventionist economies, which increasingly outlaw young people from working at all. The message to young people is: if you want to work, earn, and create, it must be in the virtual world or not at all. The analysis of action from a praxeological standpoint applies just as well to in-game action as to out-of-game action.

Psychology, ethics, and praxeology: The distinctions revisited

The psychological research from Flow and the analysis of gaming can help remove extraneous implications from past attempts to formulate descriptions of the ultimate ends of action. Relationships among labor, leisure, and happiness do not exist. Happiness is influenced by self-chosen challenge/capability balance without regard to labels such as labor and leisure.

The distinctions between praxeology, ethical philosophy, and psychology should be clearly maintained, yet valid insights from each should not be ignored either. Praxeology says, “it is/must be so by definition.” Ethics says, “one should act this way rather than that way.” Psychology says, “we observe, notice, and hypothesize.”

Meanings of "rationality" also play into this topic and clarifying this is also helpful. Long clarified the nature of “rationality” as used in praxeology, including which claims praxeology can legitimately make regarding it. When a praxeologist claims that all action is rational, it is a claim that actors employ means to the attainment of ends. This only states an implication of what action is.

However, an ethicist’s or psychologist’s definition of “rational” must specify some narrower distinctions or be meaningless for their purposes. Those wearing psychologist or philosopher hats might well be interested in whether people deceive themselves in their judgments or make poor judgments. However, such distinctions must be left behind when donning the praxeologist’s peculiar new hat. Long writes:

In a sense, then, it is true that agents always act rationally; but the only sense of this claim to which Mises is [praxeologists are] entitled is that agents always act, not necessarily in a manner appropriate to their situation in all the ways they actually see it, or even in the most justified of the ways they actually see it, but rather in a manner appropriate to their situation in the way of actually seeing it that is constitutive of their action. (309–310).

This third formulation finally leaves no room for distinctions among “rational” (as contrasted with “irrational”) qualities of particular actions as judged by any narrower ethical or psychological criterion. Instead, the meaning of “rationality” for praxeologists is a universal-definitional one. As such, it is of no use to psychologists or ethicists who require narrower definitions to work with. Indeed, it is not especially useful to praxeologists at all and might be better abandoned as a relic from a time when this distinction was not yet clear enough.

This third formulation helps refine the lines between psychological interpretation, ethical advice and judgment (“this is rational, that is not”), and universalizable statements about action. Only the third formulation is undeniable for all cases of action without further inquiry into motivation, thought processes, or value scales. Only the third statement is/must be so as a logical implication of what action means. The rest is up to the other fields.

Bitcoin as medium of exchange now and unit of account later: The inverse of Koning's medieval coins

A new article by JP Koning at the Moneyness blog revisits the idea that two monetary functions can be separated: medium of exchange (that which is used to actually buy things) and unit of account (what prices are quoted in and accounts generally kept in). He does this through a historical account of the monetary milieu of some medieval European cities. This has direct implications for viewing contemporary monetary developments half a millennium later.

In “Separating the functions of money—The case of medieval coinage” (13 September 2013), Koning suggests that a common unit of account (the pound/shilling/pence system) for pricing existed alongside a plethora of actual coins of various and sundry sizes, qualities, and metals. Each had to be repeatedly assessed and reevaluated due to wear, fraud, and outright devaluation in terms of the common unit of pricing. This had to be done so that such objects could actually be applied toward paying in specific transactions. Meanwhile, he claims that actual coins corresponding to this unit of account may well have been rare or might not have existed at all at certain times, at least relative to the mass of actually circulating crudely formed hunks of various metals (crude as retroactively judged by subsequent industrial coinage standards).

This is a thought-provoking discussion and I am sure there is more to be assessed and debated about the historical details. Nevertheless, the basic theoretical idea is that the unit used for pricing and what people actually hand over in trade to pay asked prices do not necessarily have to be the same. This implies that the problem of barter comprises at least two distinct issues: 1) no common unit of pricing for cost accounting, economic calculation, and comparison shopping and 2) no commonly accepted unit to be employed in concrete acts of payment. Koning thus seems to present a transitional hybrid case in which (1) is more developed while (2) is still a work in progress, or has broken down.

As it turns out, we are now witnessing a rapidly evolving case of just such a separation of functions. The difference is that, for now, it is the exact inverse of Koning’s medieval coins.

The opposite of medieval

Those who pay in Bitcoin today overwhelmingly pay prices that are listed in the local fiat currencies of the politically-defined jurisdictions they find themselves trading within. There are already a few exceptions, such as the Trezor high-security hardware wallet (priced at 1 bitcoin) and some mining shares, but such examples remain rare.

In current Bitcoin transactions, despite pricing still being largely denominated in euros, dollars, and the like, the actual “coin” being tendered differs from the unit of account and pricing. This separation of functions is much easier, quicker, and more accurate today than it was in, for example, Basel, Switzerland 600 years ago, due to the combination of real-time global networking and public exchange markets for both Bitcoin (see the new CoinDesk Bitcoin Price Index) and other forex pairs. This means accounting and thinking about relative exchange values can easily be done for present convenience using existing pricing constellations.

According to Koning’s account of the medieval cases he describes (taken at face value for our purposes here), the unit of account itself may even have been virtual, while the actual media of exchange handed over in transactions were the various and sundry physical coins people had managed to acquire in their previous work and trading. In diametric contrast, with Bitcoin today, we have a “virtual” coin with global circulation that is mathematically perfect in its uniformity and fungibility. These ideally homogenous global “coins” now circulate next to a hodgepodge of national-monopoly units of account/payment which have all sorts of shifting real values. Specifically, almost all such “shifting” of paper currency values is downward, just at differing rates of descent.

The potential for role reversal and later convergence

If and as Bitcoin grows and its price volatility stabilizes with expanding adoption, market participants could in time come to use it as a global unit of account against which the various and sundry unstable fiat currencies continue their extended monetary Danse Macabre. Bitcoin-denominated prices could be paid in Bitcoin, of course, or they could also be paid in a local fiat money, if both traders agree. Fiat would substitute for the relatively stable Bitcoin at the current day’s exchange rate in a way precisely opposite to their current respective roles.

Beyond this, in a long-term Bitcoin success scenario, medium of exchange and unit of account functions would most likely tend to move further toward convergence—price in Bitcoin, pay in Bitcoin. This would tend to greatly enhance convenience for all the buyers and sellers of the world (meaning everyone). That is the sort of thing that the American founding generations of the late eighteenth century would have called “the common good.”

In a more recent Europe, as Philipp Bagus explains in The Tragedy of the Euro (2010), the monetary authorities of more inflationary national currencies were repeatedly embarrassed by the relative strength of the less inflationary deutschmark. They therefore sought a coordinated means of inflating through the euro system, so that rates of monetary depreciation could be “harmonized.”

Likewise, in a future world with a successful Bitcoin, the inflationary paper monies of the world (that is, all of them) may eventually become rather self-conscious if compared to a global rising-value currency. This time, however, the inflationists may have a harder time sparing themselves distress than they did in pressuring German politicians to end the deutschmark against the general sentiment of the German people.

This is because the Bitcoin “cat” is not only out of the bag; it has spawned a global tribe of at least 200,000 currently active network nodes located in nearly every corner of the earth, any one of which contains a complete copy of the block chain.

Much more difficult than herding politicians, is herding cats.

Recommended: Provocative and important new article on Bitcoin and altcoins

Daniel Krawisz has taken the time to do the cryptocurrency community a service and come down systematically, hard and at times hilariously on the many weak arguments in favor of various altcoins. In the process, his article reveals Bitcoin itself to be even stronger than it is often presented. He argues that the actual alleged threats to Bitcoin from the likes of double-spend attacks, 51% attacks and mining centralization are each much less realistic and significant in the real world than they are sometimes made out to be (although mining centralization is still something to keep an eye on).

His displayed combination of solid technical knowledge of the field with consistently sound economic reasoning is refreshing and valuable. This is more than a thorough critique of altcoins. It also functions as a fresh defense of Bitcoin against a number of typical technical and economic objections and concerns.

I had previously come to the working impression that if altcoins did gain any useful function, it would have to be in a niche application, or would simply be as a research platform to feed into Bitcoin development. Reading this article reinforced that view, and even suggests perhaps taking it further.

So go and read The Problem with Altcoins.

A banking risk premium: Mt. Gox XBT/USD spread over Bitstamp

The US dollar (USD) price of Bitcoin (XBT) on the Mt. Gox exchange has been rising steadily, but it has also been rising at rates far out of proportion to rallies at competing exchanges. It appears from various commentators and reports that the primary factor in this divergence may be difficulties and perceived risks users face in withdrawing USD from Mt. Gox (see for example, the recent post at Bitscan and this Reddit thread). George McHugh cited a recent wave of regulatory uncertainties in the United States in this connection. This includes the seizure (without warning, for a paperwork issue) earlier this year of US bank accounts associated with Mt. Gox business containing $2.9mn.

The following chart appears to illustrate this story by showing the gradually and then dramatically rising percentage spread between Mt. Gox and Bitstamp, the second largest Bitcoin exchange by volume, over the past six months (weekly weighted average data from Bitcoincharts).

According to user reports, whereas Bitstamp reliably and promptly processes both deposits and withdrawals of fiat currencies, Mt. Gox’s ability to do so, particularly with regard to US dollars, has become highly unreliable in the eyes of more and more market participants. The most reliable way to remove value from Mt. Gox is therefore perceived to be buying Bitcoin and withdrawing it, a simple, quick and fee-free procedure. This generates an on-exchange premium for Bitcoin and a steep discount for dollars due to the perceived relative risks and costs of taking delivery of the latter.

In well-functioning markets, such spreads would be crushed and equalized in short order through arbitrage actions. However, the general difficulties of using high-cost, slow and barely interoperable legacy banking systems across borders, as well as the perceived difficulties and risks at the Mt. Gox business in particular are combining to undermine otherwise glaring arbitrage opportunities. In contrast, the movement of XBT from one exchange to another is trivial—effectively costless, instantaneous and location-independent.

Tiger cub growing up? Bitcoin weekly average closing prices year over year

A young tiger already has some “tigerness.” Source: Sakurai Midori, Wikimedia Commons.

If the exchange value of Bitcoin is a volatile tiger cub at play, the beast has nevertheless been growing up year by year in the process. It was born sized about $0.05–$0.07 in July 2010. Now this youthful price tiger is three years old. Exchange data is available for 2011 and 2012, plus about half each of 2010 and 2013.

Short-term charts have their place. Chartists such as Rob Wilson at Bitscan brave the tough task of trying to provide parameters for those considering specific upcoming buying or selling decisions. However, a longer-term view should be assembled from vantage points that support a longer-term orientation. Moreover, understanding history ought to be done first and independently from attempting to look toward the future.

The way information appears or is remembered can create a range of impressions. The altitude from which one views the ground can change what one perceives: from ants to streets to towns to geological features to continents to small blue planets. It is useful to check in with the view from different altitudes and to consider which numbers are being used for statistical reference—and for what reason. Choice of statistics should be conscious and matched to its purpose.

Here is a chart of the all-time BTC/USD exchange rate on Mt. Gox presented differently than usual in several respects. First, it is built on weekly weighted-average exchange rates, which reflect not only moment-to-moment changes, but how much volume changed hands at which rate. Second, the dateline is not consecutive, but is for a single calendar year (2011 as calendar base). Each year has its own line with its respective weeks matched to the 2011 weeks within a couple of days. Third, a logarithmic scale is used.

This provides some impressions that may differ from those of typical narratives. First, weekly weighted averages de-emphasize outliers, particularly the dramatic features of rush-and-crash events so beloved of speculators, critics, and headline writers alike.

Second, in the much longer-term year-over-year view (comparing the lines to one another), Bitcoin’s exchange value has only risen, usually substantially, with a single large exception. This exception was due to the first great run-up of 2011, which started with Bitcoin breaking the psychological $1 “parity” barrier in April. Despite all the drama that followed, it never came close to falling through parity again—its next weekly weighted-average bottom was $2.36 in November. While 2012 appears relatively steady in this light, it was the cub’s earlier rambunctious leap and landing in 2011 that left behind this sole period of year-over-year decline, now visible as a mountain-shaped cross-over with the 2012 line.

But what about $266?!

The obligatory darling reference of just about any commentator on Bitcoin, but particularly journalists and critics, is the $266 high on April 10. But how significant is this number?

First of all, all trading at $266 was recorded within a one-minute period. That was also a minute measured on a malfunctioning exchange that had been pushed beyond its capabilities and was suffering increasingly long response and clearing delays.

Zooming out the perceptual scope step by step, trading proceeded at anywhere over $260 for 45 minutes; anywhere above $240 for six hours and anywhere over $200 for 30 hours on 9-10 April. These are actual trading prices.

The next way to widen the perceptual scope is with weighted averaging. Turning even to daily weighted-average data shows anything over $160 only for 8-11 April, a total of four days (yes, that is a 1 and not a 2 in that $160). Even the peak “266” day’s own daily weighted-average was $214. Returning to the weekly weighted average, the all-time peak weekly figure was just $138.

Here is the above chart switched to a linear scale.

This linear view does leave a more extreme impression of 2011 and 2013 than the logarithmic view, and the penny trade of 2010, with its weekly average peak of $0.28, disappears into the baseline, but it is still considerably less extreme-looking than a chart with $266 at the top. Instead, the all-time chart of weekly weighted-average prices tops out at the relatively mundane $138.

Still, all told, that little tiger does seem to be growing up. It grows larger each year. How cute and silly when a cub ambushes a rustling leaf and tumbles off the side of a fallen tree.

Yet grown-up versions of such creatures hunt down and eat large animals. As the years go by, dismiss this still playful creature lightly at your own risk.

Bitcoin, price denomination and fixed-rate fiat conversions

People are apparently still talking about the monetary regression theorem and its relationship to Bitcoin. There still seems to be a lot of confusion out there around both. Using a confused version of the regression theorem to criticize a confused version of what Bitcoin is does not seem like a promising recipe. I have been trying to focus on finishing up a longer work on Bitcoin and Austrian theory, but here for now are a few updated comments that came out of an online discussion today.

One newer point that has emerged in my work in progress is that the regression theorem is a theoretical explanation of how something that was at one time not money could ever become money in the first place. However, the theorem is not made to be a criterion of judgment for determining what is or is not money after the fact. Upon observing something actually functioning as a medium of exchange, the economist’s task is to explain how it came about. The role of the regression theorem was to explain specifically how something could have ever gotten started in a medium-of-exchange role to begin with. Judging and dismissing are unrelated to the function of the actual regression theorem. It is supposed to be explanatory and illuminating.

One area of confusion seems to surround the relationship between Bitcoin and fiat money, specifically the idea that Bitcoin has somehow emerged from fiat money, something like the way the euro got started on the backs or the various European national currencies. I addressed this briefly in my 27 February 2013 article, but here are some further observations.

Such transitional conversions are done with fixed exchange rates set by law. The new currency takes up its value from the old one in an administratively managed process. This applies to historical metallic coin monies giving rise to paper money certificates through a fixed conversion rate (later dropping the convertibility) and it applies to retiring paper monies being used to launch a new paper money, as in the case of the euro. However, the attempt to apply this translation/transition model to Bitcoin runs into serious trouble because no such transitional official fixed exchange rates have ever existed for Bitcoin. Quite the contrary. Governmental actors are only beginning to so much as roughly understand Bitcoin years after it already entered active use. It emerged on the market from scratch as its own good, certainly not from any official fiat.

It could be objected that regardless of origins, Bitcoin is only able to keep functioning through its relationship to fiat money and fiat money pricing. It is a mere strange shadow of the existing systems. Goods and services are priced in fiat money and a Bitcoin equivalent is paid. Bitcoins can be bought and sold referencing current market pricing on the most liquid exchange, Mt. Gox. In other words, this argument implies, Bitcoin could not function without these props.

This raises a number of interlocking issues. Bitcoin is now useful for many reasons, among them transferring value that may or may not have been obtained through the sale of fiat money and that might or might not end up being used to buy other fiat money in the future. On the other hand, while there are certainly active speculative traders on the exchanges, there are also folks buying Bitcoin with fiat money with no intention of selling it again into fiat money, but only of using it to buy goods and services in the more or less distant future. There are merchants using Bitpay so they never have to “touch” Bitcoin, but there are also merchants giving discounts for payment in Bitcoin, and accumulating the Bitcoin. There are consumers holding Bitcoin ready to use and other consumers that might only obtain specific amounts of Bitcoin for some specific purpose and then return to a zero balance. There could be some Bitcoin miners who mainly only ever sell Bitcoin for fiat money, but never buy any with fiat money. Everything is possible.

One point the Austrian school has long emphasized in monetary theory is that while money is special in certain ways, it is also a good itself, not a mere veiled marker or representation of other values. It is a type of good distinguished from other goods and services mainly by its higher marketability.

It is true that Bitcoin users have benefited greatly from the existence of market economies with functioning price structures. Pricing is still done for the most part in local fiat currencies and will probably continue to be unless and until Bitcoin becomes more stable in purchasing power than the fiat money that users are comparing it to, each in his own decision-making context. Automatic software price conversion makes it possible for the system to piggyback on existing and familiar price structures in each local area with immense convenience.

Yet I do not think there is any fundamental reason that Bitcoin-denominated pricing of goods and services could not evolve from scratch if it hypothetically had to. Fortunately, it does not have to. If no money existed at all, it would be necessary to get it going. We just have the convenience of already being able to rely on existing market prices for goods and services and the further convenience of being able to reference real-time market prices from organized exchanges. An argument could be made for just taking the easy road and using them. I think this is all just to the good of contextualized convenience and not so theoretically fundamental. Still, there are already Bitcoin-priced goods and services, particularly starting within the Bitcoin economy. For example, the Trezor Bitcoin hardware wallet is on pre-order for the price of 1 BTC.

The extent to which Bitcoin users reference fiat pricing in commerce is probably what has given rise to some  conflation with what I think is the quite different process by which one fiat money is converted into another by the official declaration of a fixed conversion price. Paper euros probably could never have taken off unless the official exchange rates with their predecessor currencies had been declared by law and the predecessor currencies had also been phased out by law. Without such official (“fiat”) declarations, printed euro notes would most likely either have been worthless or negatively valued due to the need to pay to store or dispose of them.

Bitcoin never had any official conversion price (or official anything), so how could it have gotten started? Bitcoin could never have begun to function in any other roles, such as transferring value derived from paper money over distance and converting into other paper money, if some initial users were not willing to trade any valuable goods or services for Bitcoin itself to begin with. After it began to be traded for other goods and services, one could observe it functioning in various, increasingly useful roles on that basis, some in interaction with existing monetary systems, but so long as its market price remained zero, it could not begin to serve in any such trading roles.

I think the initial-value question is probably much more narrow and technical than it is sometimes made out to be when the name of the regression theorem is invoked (the name; not necessarily the understanding). That question is how to explain a movement from a zero indirect-exchange value to non-zero indirect exchange value. Reaching non-zero from zero, especially in a digital computing context, is all that is needed for the rest to follow.

Anyone still talking about the regression theorem and Bitcoin might do well to focus on detailed historical research from the year 2009 and 2010 at the latest. After that, the deal was already done, leaving room only for efforts at explanation of what had happened. The rest was up to adoption, entrepreneurship and network-effect growth.

Now in audio on YouTube: Bitcoin and regression theorem article

I just got a message today from Graham Wright with a YouTube link. So I went over and there was my first article on Bitcoin, concerning the regression theorem, already done in a great audio version with accompanying slides. What a great surprise, one made possible by the magic of Creative Commons. Here it is!

 

Bitcoins per gold ounce weekly close YTD

With the dramatic movements of both gold and Bitcoin this year, I wondered how they would look directly in terms of one another. Not finding just what I was looking for online, I built a simple spreadsheet to chart the cost of an ounce of gold in terms of Bitcoin.

For the sake of simplification, I artificially assumed that the US dollar functioned as a neutral intermediary between the two during this timeframe. Because I pieced together existing data from two sources and then combined them, I also simplified by using just a simple weekly close for each. The Bitcoin data comes from Bitcoincharts.com and the gold data from Investing.com. This is what emerged:

The number of Bitcoins per gold ounce fell rapidly and steadily for 14 weeks from over 120 Bitcoins per ounce at the start of the year, hit hard ground at the beginning of April at 13 Bitcoins per ounce, and then trended at an average weekly close of 13 Bitcoins per ounce (with 10.6–16.0 extremes) in the 12 weeks since then. It might be interesting to try put together a similar chart with more detailed data than a simple weekly close. As usual, the past cannot predict the future, but from the standpoint of economic history, this seems like an interesting sequence of events.

Here is a closeup of just since April 1:

 

The m's and b's of millibitcoin redenomination

We could change where the display shows the decimal point. Same amount of money, just different convention for where the [commas and periods] go…moving the decimal place 3 places would mean if you had 1.00000 before, now it shows it as 1,000.00.

—“Satoshi Nakamoto,” February 10, 2010

In the Kingdom of Geekdom, my €2.60 espresso this morning might have cost 0.0283 BTC (at the 90-day weighted moving average of €92/BTC), perhaps pronounced “point zero two eight three bitcoins.”

Such a string of sounds could only happily emerge from the mouths of card-carrying Geekdom denizens channeling Mr. Spock himself, but it would be most unlikely to pass the lips, or be long tolerated by the ears, of the average Katie, Hans, Taiwo, or Eijiro on the streets of this planet.

And thus a resurgence of interest in changing the standard Bitcoin denomination from a bitcoin (1 BTC) to a millibitcoin (0.001 BTC) has taken shape on the Bitcoin Forum with an informal survey. The top responses to “Should we start using mBTC as the standard denomination?” are 53% for “Yes,” and 20% for “After the price is at $1,000, dollar parity for the mBTC.”

Maybe, but what do we say at checkout?

Designed for convenience at much lower value levels, the initial standard “bitcoin” unit, which equals 100 million satoshis, the more fundamental unit within the Bitcoin system, has grown to become far too valuable for most people’s ordinary way of thinking and speaking about prices. A bitcoin has traded over the past several weeks mainly in the $110–$130 range with the 90-day weighted moving average now just shy of $120. Unlike bitcoin exchange values from earlier years—a few cents and later a few dollars—most ordinary items now have to be bit-priced entirely within the decimal point range, although the luxury houses and cars at Bitpremier could just stay priced in bitcoins. A hypothetical rise to $1,000/BTC would greatly amplify this situation.

A redenomination would only impact the way price numbers are displayed and discussed and would make no fundamental changes to values held. A person with 1 bitcoin could just as well be said instead to have 100 centibitcoins or 1,000 millibitcoins.

In contrast, when political money managers talk of devaluation, redenomination, and most recently “easing,” such machinations actually do signal an active manipulation of purchasing power (always to its detriment). This current discussion simply seeks consensus on practical and linguistic conveniences by, for, and among the wholly self-selected community of participating Bitcoin developers, service providers, merchants, consumers, traders, and even observers.

Yet the difficulties of finding spoken language for naming this new unit, language capable of seeing wide global adoption in everyday use, have proven a lingering challenge. To address this topic, I will draw on conventional pricing usages in several different countries and languages in search of common patterns to use as criteria. I will then apply these criteria to existing proposals for a spoken-language name for the too technical “millibitcoins,” and then offer two suggestions, the second of which I have not yet seen proposed elsewhere.

Before moving on, let us be sure to put this whole “problem” in perspective. This is a “sound-currency problem,” in the sense of the “first-world problems” meme. A rising currency and falling prices of goods and services denominated in it are the kinds of “problems” most people ought to be happy to face. The long, sad history of declining political currency values has systematically punished savers and planners and rewarded debtors and those with less effective foresight, leading to shortening time horizons and eroding senses of personal responsibility.

Falling currency values leave families struggling to meet ever-rising prices for goods and services. By several estimates, the United States dollar, for example, has lost some 97%–98% of its value since its “management” was assigned to the Federal Reserve System in 1913 (I refer those who fear falling prices, the deflation-phobic, to my 29 March 2013, A short Bitcoin commentary on “Deflation and Liberty” and the works linked from it).

Speaking of prices

Since the Bitcoin network spans this entire planet, such linguistic research ought to begin by at least attempting to reference practices in several countries and major languages. I will select examples below from the US, Germany, and Japan, based simply on my own degree of direct familiarity with each (please add other instructive usage examples in the comments). The three numerical examples below are of roughly similar purchasing power in each zone, probably enough to buy another espresso.

The first thing I notice is that it is common to use two decimal places, “cents” after a main unit. Second, in shopping language, the unit names are often omitted altogether. Thus, in the US, a spoken “two-sixty” means two dollars and sixty cents ($2.60). In Germany, “zweisechzig” likewise means two euros and sixty cents (€2.60), or more formally “zwei euro sechzig” (but still most often omitting “zent”). Omitting the unit is facilitated in both cases in the same way: two individual numbers are spoken in sequence, the first specifying the whole unit; the second, hundredths of it.

In Japanese, ¥260 is “nihyaku rokujuu-en”. Here, there is no decimal point, but in effect “hyakuen” (¥100) takes the place of the base unit in the dollar and euro examples. The “yen” (actually pronounced “en”) is not omitted in speech, but it only takes a quick syllable to say it and units are not optional in general. The “hyaku,” also lightning fast to say in Japanese, already works to create a division in ¥260 between the two hundreds and the sixty. This makes it less functionally different from the English and German examples than it might at first appear.

Generally speaking, when the names of currency units are not contextually omitted in speech altogether, they can almost always be pronounced in just two syllables: dollars, euros, pesos, kronas, rubles, rupees…bitcoins. In contrast, “millibitcoin” or “mBTC” (pronouncing each letter) each take up a hefty four syllables and are as such unlikely to survive in non-technical spoken usage.

The bit is dead; long live the bit?

So, what might that unit be called in ordinary speech? Some commentators have identified a problem with “coin.” It is by nature indivisible. On the other hand, “the coin of the realm” does give a more uncountable sense of a money in use in a particular place.

Either way, this provides an easy opportunity to cut out a syllable, and with “coin” duly exiled, proposals for spoken options for millibitcoin have included “millibits,” “embits,” “mills,” “mill,” “millies,” and “bits.” Those thinking way ahead have already termed a microbitcoin (0.000001) a “Mike,” presumably the thin, but loving partner of the much heftier Millie.

“Millibits” came out ahead in an informal naming poll for millibitcoin way back on May 14, 2011. Unfortunately, at three syllables, it is still a mouthful for everyday speech, exceeding the conventional two syllable mainstream for currency unit names.

You want change? Anybody got some tools?

“Bits,” at just one syllable, already have a long and storied history in coinage. For centuries, the Spanish silver dollar was a preferred unit of global trade due to its relative freedom from debasement of silver content and its wide international adoption. The peso de a ocho coin was worth eight reales and became known as “pieces of eight” in English, giving pirate parrots something to prattle on about. It has also been said that certain coins were physically cut into eight pieces or “bits” as a way to improvise around small-change shortages using the resulting sharp metallic pie pieces. I am not sure of the ratio of fiction to fact on that one.

The resulting related use of “two bits” to mean a quarter dollar has only recently been fading out of informal use in the US after a long run. Unfortunately, fiat inflation eventually left a quarter dollar unable to buy much of anything and the meaning of “two-bit” declined with it, coming to characterize something of poor quality. A “two-bit coffee” might thus sound rather dilute to modern ears.

Could “bit” be brought back in a decimal-based, high-tech reincarnation? A millibitcoin (0.001 BTC) is now trading at about US $0.13. Twenty of these might buy that espresso at $2.60 and “twenty millibitcoins” (20 mBTC; 0.020 BTC) might be shortened in speech to “twenty bits.”

The centibit challenge and foodie what-ifs

If such bits stood for centibitcoins (0.01 BTC) instead of millibitcoins (0.001 BTC), that espresso might cost about “two bits” after all (assuming $130/BTC). With centibitcoins, a family sushi dinner that might add up to $65.95 would come to “fifty (bits) seventy-three,” or the waiter could say, “in Bitcoin, that’s fifty seventy-three.” That’s 50.73 centibitcoins versus 507.3 millibitcoins and 0.5073 bitcoins.

A centibitcoin redenomination could thus bring things into a familiar range for dollar and euro users right away. At around $130/BTC, a centibitcoin would trade for $1.30, €1.00, and ¥100. That seems intuitively perfect, but only under approximately current rates.

Bitcoin exchange values could stay level or fall. Expecting a long, level trend or modest decline would speak in favor of centibitcoins as the standard unit. If Bitcoin does continue to climb impressively, though, how long before its dollar exchange value adds another digit?

Let us say that the bulls have it and the exchange value of a bitcoin moves to $500 and then $1,000 over the next several years. How would these two alternative redenominations then play out with some everyday examples?

At $500 per bitcoin, a $2.60 espresso would cost 0.0052 bitcoins, 0.52 centibitcoins, and 5.20 millibitcoins. Millibitcoins would win according to the balance of the above criteria (“in Bitcoin, that’ll be five twenty”). The big sushi dinner would be 0.1319 bitcoins, 13.19 centibitcoins, and 131.90 millibitcoins. In this case, either one might look okay.

At $1,000 per bitcoin, the espresso would cost 0.0026 bitcoins, 0.26 centibitcoins, and 2.60 millibitcoins. Millie would win. The sushi would then come to 0.06595 bitcoins, 6.595 centibitcoins, and 65.95 millibitcoins, and millie would win again.

While a centibitcoin transition would make sense for now, an assumption of further exchange value growth would point in favor of the proposed millibitcoin unit. Either way, a redenomination could well be positive. A key challenge for Bitcoin entrepreneurs is helping to broaden adoption into more frequent everyday payments and purchases. Making Bitcoin units easier for contemporary people to talk about in everyday language and think about closer to everyday price numbers could well be helpful.

So how about just putting “m” and “B” together?

“Embies” (mB) is another option I have proposed based on pronouncing “m” and “b”. The B can also be written with the proposed Bitcoin currency symbol when it makes its way into standard character sets. Embie matches the conventional two-syllable criteria. It strikes me as easy to pronounce on a multilingual basis. It also seems friendly and familiar; it could be a pet’s name. I find it easier to say than the two-syllable “embits” candidate. Not all sets of two syllables are equally easy to pronounce.

Still, some people seem to hate it, while others like it. It may be that the name for BTC 0.001 that will prevail in the end has not yet been coined.

 

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Another bump on the road: Bitcoin and bubbles revisited

Japanese “bumpy road” sign for MtGox. 路面凹凸ありOverload, delays, and the temporary closure of the MtGox exchange seem to have been proximate triggers for a sharp Bitcoin correction on April 10–12 from dizzy highs.

As trading graphs fell freely, some Bitcoin critics appeared gleeful to believe that their prophecies of the Bitcoin phenomenon being nothing more than a delusional bubble might be coming true. Commenters promptly took to the internet to gloat at the short-term losses of naïve traders and bask in their own contrasting wisdom.

In this new context of short-term sentiment, it may be useful to revisit and refine my recent critique of the dismissal of Bitcoin as being nothing more than a bubble or even a sort of Ponzi scheme. In Hyper-monetization: Questioning the “Bitcoin bubble” bubble (6 April 2013), I offered an alternative to the popular interpretation of the long-term rise of Bitcoin’s exchange value relative to fiat money. This was especially intended to address the view that Bitcoin is nothing more than a bubble. The most insistent proponents of this view elaborate along these lines: “Bitcoin has no ‘intrinsic value’ and is therefore ultimately destined to fall to its ‘inherent’ value, which is zero, completely wiping out any true believers still left around for its inevitable and welcome extinction from the universe.” Or something like that.

“Is” versus “in”

A more subtle approach to calling a “Bitcoin bubble” is also available, and has long been advanced by several people with more nuanced understandings of the system. First, Gavin Andresen, lead developer of the open-source Bitcoin Project, wrote nearly three years ago in a short post Bubble and crashes (9 July 2010) that he expected multiple recurring bubbles over the course of several years.

Bitcoin will get mentioned someplace with lots of readers, a bunch of those readers will like the idea and try to buy Bitcoins, their price will rise, which will draw even more people to “invest”, which will drive the price up even more…until people decide that the price isn’t going to rise any more and everybody rushes to sell before the price drops. I predict there will be between one and five Bitcoin bubbles (price will double or more and then crash back down below the starting price) in the next four years…I think it will be impossible to tell if a bubble & crash is “natural” or “the men in black helicopters” manipulating the system.

Second, Rick Falkvinge, who had also called a short-term bubble and a correction to $60–$65, has long identified currency exchange services as a weak link in the wider Bitcoin “ecosystem.” See his 12 April post What we learn from this Bitcoin correction. A commenter on that post wrote, “I would not call an 80% move a correction…” to which Falkvinge replied, “It is not the downslope that is abnormal, it is the upslope. A value that reverts to where it was two weeks ago is normally a mild correction.”

Finally, Peter Šurda who steadily focuses on the importance of liquidity, infrastructure development, and scaling over price, re-summarized in a 12 April Facebook comment that:

My empirical research shows a correlation between media frenzy and price, and between liquidity and price volatility, while my theoretical research concludes that the price will fluctuate more rapidly than with more liquid media of exchange (i.e. what we are accustomed to as money, or even highly liquid goods such as stocks or commodities). The fluctuations will continue until Bitcoin’s liquidity increases significantly.

Such approaches have essentially been warning that, “Bitcoin may well be in a bubble phase,” adding, “one of several large ones, just as we expected to occur along the way.” As a commentary on the price trend in late March and early April, this appears to have been a valuable assessment. These observers recognized in advance that the price seemed to be rising at a pace unlikely to be sustainable, driven perhaps by events in Cyprus and then a flood of popular media attention.

In sum, saying that “Bitcoin is a bubble” (total dismissal of the system as such) and that “Bitcoin is (or was) in a bubble phase,” are quite different claims. Now that another correction has arrived, this distinction can come into better focus.

The Bitcoin system is not the same as the peripheral trading services

The core of the Bitcoin system itself, which few people seem to grasp is something entirely different from the more visible currency exchanges and their price charts, seem to have been relatively untroubled. This includes nodes, mining pools, the blockchain, wallets, and even informal and P2P markets. Besides MtGox, with its 12-hour mini-holiday, from what I noticed, only some of the exchanges and data chart services were heavily challenged and went offline intermittently. Bitcoincharts, for example, reported a 25x spike in concurrent online users from 2,000 to 50,000, requiring “tweaking the backend” systems in response.

The primary proximate cause of the crash, then, seems to have been the inability of a (currently) key exchange service provider to keep up with demand fed by sudden media attention and buy-in frenzy in the run-up, triggering a classic emotional wave of panic selling, most likely the corollary of the previous heat of emotional buying. The existing trading infrastructure (which is not the same as the Bitcoin system infrastructure) was not ready to scale to such a rapid demand spike. This sharp correction might be viewed in part as the rather ungentle method by which the market realigned itself with the current real-world state of scaling capabilities and business planning skills at exchanges that have been working to build themselves from the ground up.

Creation versus destruction

In the case of a classical terminal hyperinflationary event, the authorities orchestrating it are better equipped and prepared. Ink and paper are ready. Printing presses run and are up to their tasks. More importantly, printing plate engravers are standing ready to carve additional integers, a relatively simple task of creating higher and higher denominations of notes. The technical infrastructure is in place for state money monopolists to completely destroy the value of a paper currency, using “zeroes” to drive it all the way to “zero” and extinction.

Building a new kind of media of exchange for a community of all-volunteer users from scratch through peaceful cooperation, entrepreneurship, coordination, debate, and market ecosystem building would appear considerably more challenging than destroying a paper currency. After all, being constructive often seems more challenging than being destructive; it requires greater ingenuity and long-term persistence and perspective.

 

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Short-term Bitcoin exchange trends as Rorschach tests of economic views

What might Hermann Rorscach (8 November 1884 – 1 April 1922) see in all this?Whatever the current excitement on any given day about short-term Bitcoin price charts, what stands out for me as a watcher of the theoretical underpinnings of discourse on these events is how they bring various economic-theory concepts out into view as the people who have them in mind use them to interpret current events. As Keynes famously put it: “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.”

I try to stay at least 98% positive in general; critique can be more tempting than contribution. That said, sometimes understanding can be advanced by considering contrasting examples. Here are three.

Realized/unrealized gains/losses

First, it appears that the distinction between realized and unrealized gains and losses could be kept more firmly in mind by most. The take-home point is that for all those Bitcoin market participants (whether bull or bear) who did not actually trade today or recently, nothing much actually happened during the rapid headline price changes on the exchanges (of course, the changes might lead some to adjust their future plans according to their various forward-looking judgments). What these exchange prices actually indicate is merely the current record of transactions that are occurring on those exchanges. It is only the collection of such discrete “real time” recorded exchange events that provide the data for the construction of the lines on the trend graphs.

At times of temporary disruption of access to websites, low visibility prevails. Pre-placed automated orders execute and panicking short-termers flee. The price graphs (as they become accessible after the disruption) show the actual trades and volumes at particular times during this course of events. The price graph on a given exchange indicates actual marginal activity, at given moments, on that exchange. These exchange services are specific businesses; not magical, instant oracles of “price” in general or “value” in general. In the event, the top two exchanges, it appears from preliminary reports, were most likely under active manipulation in a possibly partly orchestrated move (and do not forget that this may well have included both upward and downward elements).

What a difference a few days can make.

A spiral into absurdity

Second, the good old “deflationary spiral” fallacy (maybe market observers will get a couple days off from hearing that one now?) apparently misses the significance of the fact that BOTH a buyer and a seller are required to form any given data input for market price graphs. With no transactions occurring, which is what is posited in this imaginary world of “no one will sell when it is so valuable,” there is no “price” at all. Thus, the market “price” could not be too high, because it would be non-existent under the stated assumption that no transactions were occurring. Reductio ad absurdum. These exchange prices form an up-to-date historical record at a given time of actual recent buying and selling on a given exchange.

Look for the verb

Finally, it has been a little surprising just how many Bitcoin critics employ the concept of “intrinsic value” in making the claim that Bitcoin does not have any. It was members of the Austrian school of economics, with the so-called subjectivist marginal revolution, that had seemingly put the final nail in the coffin of this ancient economic fallacy. Beginning in the 1870s, Austrian school scholars began to re-emphasize the view that value is ultimately the result of valuation, in reference to the verb to value, which is an act that can only be performed by living people (We now understand that some of the Late Scholastics of Salamanca also had this point reasonably clear several centuries earlier). After Carl Menger, this view gained steam with Eugen Böhm-Bawerk and unmistakable clarity with Ludwig von Mises’s 1912 Theory of Money and Credit and later works. This further application of the subjective theory of value clarified that the concept of “intrinsic value” is ultimately incoherent, not only with regard to goods in general, but to media of exchange as well. Mises was rather strict on this point in TMC, pp. 61–62:

Our terminology should [help to overcome] the naive and confused popular conception of value that sees in the precious metals something “intrinsically” valuable and in paper credit money something necessarily anomalous. Scientifically, this terminology is perfectly useless and a source of endless misunderstanding and misrepresentation.

 

Note: I discuss value theory in simple terms with illustrative examples in Resolving the paradox of value. For a more detailed discussion, see IN-DEPTH | The sound of one bitcoin: Tangibility, scarcity, and a “hard-money” checklist.

 

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

Hyper-monetization: Questioning the "Bitcoin bubble" bubble

What is the opposite of this? Sweeping up in 1946 after the hyperinflation of the Hungarian pengő. Source: Wikimedia Commons, Magyar Nemzeti Múzeum Történeti Fényképtára, Budapest.

What is the opposite of this? Sweeping up in 1946 after the hyperinflation of the Hungarian pengő. Source: Wikimedia Commons, Magyar Nemzeti Múzeum Történeti Fényképtára, Budapest.

Many observers have likened the rise of Bitcoin to an asset bubble. It is so customary today to use the “bubble” word in articles about Bitcoin that there may in fact be a sort of “bubble” bubble.

Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different possible interpretation of these events and a word to label them: hyper-monetization.

I first heard the term “hyper-deflation” (used in a positive sense) when Bitcoin was rising rapidly from the low thirties to the high thirties over a few days in early March (Yes, this was only a month ago). While a few specialists of a certain persuasion understand “deflation” to be a great thing for ordinary people (see, for example, my 30 March 2013 post, “A short Bitcoin commentary on Deflation and Liberty”), the word still has a public-relations problem. Along with some technical issues from its several possible definitions (price level changes versus quantity of money changes, for example), and negative interpretations in conventional economics circles, it just sounds depressing, regardless of the stated technical sense in which one attempts to use it.

The word “hyper-monetization” first occurred to me around that time as a more positive term, and perhaps a more accurate antonym for the catastrophic hyperinflations that have repeatedly killed off fiat paper monies throughout their history. A related term, “de-monetization,” denotes the process of a widely used medium of exchange ceasing to function as such.

A total hyperinflationary collapse is one way de-monetization can happen. Another type of historical example of de-monetization is “bimetallist” legal tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another metal, say gold. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently “suspend redemption” of their legal tender notes into the precious metals they had promised to deliver.

The opposite process of “monetization” denotes something that was not a money beginning to function as one. When euros took over the respective jobs of various European national currencies, euros monetized and the previous national currencies de-monetized. Now they are historical paper relics, but no longer function as monies.

In contrast to such a legal tender conversion/transition, however, something that gains exchange value from scratch on the open market (rather than taking up exchange value through a conversion)—and does so at a logarithmic pace—might then reasonably be described as being in a process of “hyper-monetization.”

The trouble with the “bubble” bubble

Bitcoin’s high historical and current price volatility is unquestioned. However, one problem with the “bubble” analysis is that in an asset bubble, certain fundamental matters are quite different. In a business cycle mania phase, prices of the most popular asset classes for that particular cycle are bid up as people pile their freshly printed fiat money and freshly produced fiat bank account digits into booming fields. Each party in this rush competes with all the others to acquire some of the bubbling assets. These people are misled by artificially low interest rates to bid up certain asset prices unsustainably, and this all eventually collapses, as described in Austrian business cycle theory.

However high the prices of bubble assets go, they do remain the same goods. In the case of a monetization event, though, the practical use-value of the trading unit (not only its price in terms of other goods or monies) actually does rise with the number of people using it and the depth of the market. To imagine how different this is from a classic asset bubble, it would be as if not only the price of bubble-era houses were rising, but also that their actual sought-after qualities as houses were improving spontaneously at the same time. Such houses might sprout new rooms with no one building them, with new paint jobs appearing mysteriously overnight without any painters having visited.

In this way, quite unlike the case of an asset bubble, the more people “pile into” a medium of exchange, the more valuable it actually is in its function as a medium of exchange from the point of view of its users. This is a separate matter from its price, as a few astute observers out there have so far already been noting.

This type of value has been likened to the use-value of a language rising the more people there are who can speak it. Another analogy would be to the use-value, from the point of view of each user, of a given social networking site rising the more people join it and the more they use it.

These are called network effects. In this case, the exchange value of the unit for each holder is directly related to each holder’s expectations of being able to use the unit in future exchanges (much like the value of knowing a language relates to one’s expectation of being able to communicate with it). This is in turn related to how many people accept the unit, how readily, and for what. It is important here to note, due to long-standing and common economic misconceptions, that the “future” in this sense is any future time—from five seconds from now to however many vaguely numbered years into the future a particular acting person might happen to have in mind.

When it comes to network-effect growth, the more the merrier. An analogy can be made not only to the rising stock price of a growing social networking site, but also, and more importantly, to the number of users of that site and how much it is used.

Check this box for a perspective shift

Yesterday, I saw a tweet from the insightful Bitcoin watcher Jonathan Waller. He wrote (enthusiastically, I think) that, “The bitcoin all-time chart is not even slightly sensible,” and linked to a chart [showing logorithmic growth shown on a linear scale].

This tweet got me thinking (yes, this is also a possible function of tweets). How can we make sense of this trend? Might taking some other perspective help?

This chart struck me as looking quite similar to a hyperinflation. However, instead of the exchange value of a trading unit plummeting toward the abyss as in an archetypal fiat paper-money collapse, Bitcoin has been doing the opposite.

Checking the log-scale box on the bitcoin price chart reveals a different picture. It shows a (so far) intuitively ascertainable long-term historical course with a large bump or two and some curves in the road. In this longer-term view, the exchange rate has been growing, not so much from one to two to three to four, as on a linear scale, but from 0.1 to 1 to 10 to 100. It has grown by several orders of magnitude during these couple of years.

Of course, the usual caveats must be quickly noted. “If present trends continue” can and often is infamously followed by them not doing so. But what might nevertheless be observed about this trend?

If one were somehow witnessing a phase in the first “hyper-monetization” in history, is this not more or less what one would expect to see?

Mark my words

The value of a paper money at the tail end of a hyperinflationary event is mainly the direct value of the physical paper (burning, wall-paper, etc.), but there is a more gradual build-up before the final collapse. The following chart is the price of Goldmarks in terms of Papiermarks from 1918–1923 in the Weimar Republic. This includes a steady logarithmic trend from 1918 to mid-1922. The exchange rate also moves from roughly 1 to 100 during those few years.

After that, however, the 1923 portion looks incomprehensible even on a log scale. As monetary authorities run the presses full speed and add new zeroes to denominations, a point is reached toward the end when the primary objective of market participants is to rid themselves of paper as quickly as possible before the last shred of exchange value evaporates.

The USD/BTC trend shows the price of Bitcoin against (also steadily depreciating) US dollars. This bears a certain similarity to the pre-1923 phases of the Weimar Papiermark/Goldmark chart. One difference is that the trend for Bitcoin from autumn-2010 to spring 2013 is the inverse of the trend for the ill-fated Papiermark from 1918 to mid-1922. In other words, for the years in question, the rise of Bitcoin’s relative exchange value shows a statistical pattern with similarities to the decline of the exchange value of the paper mark. Of course, the specific factors behind these events are quite different. In one case, the destruction was driven by ever increasing, arbitrary production of more units. In the other, the growth appears to be driven by voluntary adoption (with all its various motivations) and network effects.

If we were now actually witnessing early stages of an unprecedented hyper-monetization event, what might the top of such an event look like eventually? This is a fantastic and entirely speculative question and certainly invites the ever risky “if present trends continue” types of thinking. Looking toward the future should never be confused with looking into the past.

That said, during such a singularity-like event, were such a thing to be occurring, one might at some fairly early stage expect to see an Epic Rap Battles of History installment called, “Bitcoin vs. Fiat Money.” The key question would then soon become:

“Who won? You decide.”

 

For additional articles on this topic, visit my Bitcoin Theory page on this site.

[UPDATE: Seven months later, a new article including revised highlights of this article along with new material appeared: Hyper-monetization reloaded: Another round of bubble talk (7 November 2013).]

A short Bitcoin commentary on "Deflation and Liberty"

I just finished reading the monograph Deflation and Liberty (published 2008, but originally produced more than five years earlier) by Jörg Guido Hülsmann. I am a big fan of Hülsmann’s 2008 work The Ethics of Money Production (not to mention just about everything else he has written). However, I had understood the shorter work to have been a mere precursor to The Ethics of Money Production. Now that I have finally read it, though, my impression is that it is quite different in content and certainly warrants its own reading. Besides, I had to catch up with the indefatigable Mises Circle at UT group, which read and discussed Deflation and Liberty a few weeks ago.

Deflation and Liberty was written years before Bitcoin appeared, and even more years before Bitcoin began to rise to superstar status in recent weeks. My collection of quotations below read in a different light now that Bitcoin has risen as a “third way” in the exchange space.

Bitcoin is not technically deflationary under one definition because its supply is set to grow gradually up to a terminal limit (inflation and deflation in this sense refer to quantity of units rather than relative exchange value). The important point is that the Bitcoin supply is set to grow at a specific, pre-defined, and gradually declining rate that no particular person or group can manipulate. Its growth rate is fundamentally knowable and predictable by all market participants, and presumably less variable than even the total market supply of a given precious metal in any given year.

After the Bitcoin supply growth trend ends in about 2140, I understand new production ceases and its supply is to remain stable and then decline ever so slightly based on incidental micro events such as individual password misplacements. I therefore believe it is even now “deflationary,” not in the letter, but in much of the spirit in which Hülsmann used the term in this monograph. At any rate, it provides a diametric contrast with the familiar inflationary policies that take the form of arbitrary fiat increases in the money supply conducted for special-interest political ends.

In another sense of the word deflation, however, Bitcoin does qualify, for the moment at least. The general exchange rates of Bitcoin against all other goods and services will of course tend to decline so long as Bitcoin is gaining in exchange value; Bitcoin-denominated prices will tend to fall so long as its exchange value grows.

With this context in mind, let us see how Bitcoin stacks up in light of the following quotations, keeping in mind that no such thing as Bitcoin existed at the time this monograph was written. I will add some minimal commentary in brackets with emphasis in bold.

Selected quotations from Deflation and Liberty with commentary

p. 16 fn 8: Speaking of “an economy” we mean the group of persons using the same money.

[Bitcoin, though not yet technically a “money” by many definitions, is not geographically defined, but rather defined by the community of its actual users and producers on a global basis. Use and production is entirely voluntary and entry open. To join this community, one need merely aquire a free “wallet.”]

p. 30: In a truly free society, the production of money is a matter of private initiative. Money is produced and sold just as any other commodity or service. And this means in particular that in a free society the production of money is competitive. It is a matter of mining precious metals and of minting coins [and of mining Bitcoins], and both mining and minting are subject to the competition emanating from all other market participants.

[Bitcoin “miners” cobble together or buy their “rigs,” connect to the network, and set work in motion, all of their own volition.]

p. 31: The production of money in a free society is a matter of free association. Everybody from the miners to the owners of the mines, to the minters, and up to the customers who buy the minted coins, all of them benefit from the production of money. None of them violates the property rights of anybody else, because everybody is free to enter the mining and minting business, and nobody is obliged to buy the product.

[Bitcoin mining, exchanges, wallet services, users, etc. would all appear to qualify under this criterion of free association. No one is obliged to buy Bitcoins. Indeed, in perfect contrast, many people are currently scrambling to figure out how to acquire them.]

No game.p. 32: The producer of fiat money (in our days typically: paper money) sells a product that cannot withstand the competition of free-market monies such as gold and silver coins, and which the market participants only use because the use of all other monies is severely restricted or even outlawed. The most eloquent illustration of this fact is that paper money in all countries has been protected through legal tender laws. Paper money is inherently fiat money; it cannot thrive but when it is imposed by the state.

[Bitcoin is by no means imposed by the state. In diametric contrast, all that can be said of it on this count is that a few state agents are slowly starting to ascertain (and only roughly) what it is several years after its launch]

p. 35: It would not be uncharitable to characterize inflation as a large-scale rip-off, in favor of the politically well-connected few, and to the detriment of the politically destitute masses. [Fiat inflation] always goes in hand with the concentration of political power in the hands of those who are privileged to own a banking license and of those who control the production of the monopoly paper money. It promotes endless debts, puts society at the mercy of “monetary authorities” such as central banks, and to that extent entails moral corruption of society.

p. 39: That leaves barter as the only legal alternative to using paper money, and barter is so much less beneficial than monetary exchange that market participants typically prefer using even very inflationary monies rather than turning to barter.

[Bitcoin has now landed out of the cyber ether as a sort of “third alternative” to this scenario]

The considerable social advantages of deflation

p. 40: Deflation…abolishes the advantage that inflation-based debt finance enjoys, at the margin, over savings-based equity finance. And it therefore decentralizes financial decision-making and makes banks, firms, and individuals more prudent and self-reliant than they would have been under inflation. Most importantly, deflation eradicates the re-channeling of incomes that result from the monopoly privileges of central banks. It thus destroys the economic basis of the false elites and obliges them to become true elites rather quickly, or abdicate and make way for new entrepreneurs and other social leaders.

p. 41: Deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.

p. 43: The dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation—unless one equates the welfare of the nation with the welfare of its false elites.

[In conclusion], pp. 43–44: The purpose of these pages is not to appeal to the reason of our monetary authorities. There is absolutely no hope that the Federal Reserve or any other fiat money producer of the world will change their policies any time soon. But it is time that the friends of liberty change their minds on the crucial issue of deflation. False thinking on this point has given our governments undue leeway, of which they have made ample and bad use. Ultimately, we need to take control over the money supply out of the hands of our governments and make the production of money again subject to the principle of free association. The first step to endorsing and promoting this strategy is to realize that governments do not—indeed cannot—fulfill any positive role whatever through the control of our money.

 

For additional articles on this topic, visit my Bitcoin Theory page on this site.

 

IN-DEPTH | The sound of one bitcoin: Tangibility, scarcity, and a "hard-money" checklist

The first purpose of a scientific terminology is to facilitate the analysis of the problems involved.

—Ludwig von Mises on the role of monetary terminology

IMPORTANT UPDATE: What follows has been substantially updated, revised, and republished in other versions. The final version appeared in The Journal of Prices and Markets as, “Commodity, scarcity, and monetary value theory in light of bitcoin” (accepted 20 Oct 2014; published 24 Feb 2015; HTML, PDF). The arguments are substantively similar, but whereas the final version is more refined and academic in tone, the following was an initial overview treatment.

* * *

Tradable bitcoin units viewed as discrete objects of human action appear to be a new type of phenomenon, unprecedented. At times, they even appear to elude trusted monetary classification schemes. If such typologies were sound, however, they should not require correction so much as some careful revisiting within a new context of knowledge.

In this second installment on Bitcoin theory (following “Bitcoins, the regression theorem, and that curious but unthreatening empirical world” (27 February 2013), we seek to further clarify the economic nature of Bitcoin by closely reexamining the concepts of scarcity, goods, and tangibility. We distinguish what we will label economic-theory and property-theory senses of the word “scarcity” and attempt to more clearly differentiate scarcity from tangibility. This distinction helps overcome difficulties that have arisen in considering Bitcoin in relation to the monetary classification scheme pioneered in Ludwig von Mises’s The Theory of Money and Credit (TMC; original German 1912).

With these proposed building blocks in place, we examine bitcoin units viewed as scarce objects of human action using a typical set of criteria for explaining the historical-evolutionary strengths of metallic coins as media of exchange. How do tradable bitcoin units stack up directly on a list of “hard-money” criteria?

We also stress that the economic analysis of empirical cases must always be comparative. States of perfection, while useful in the advancement of pure theory, cannot legitimately be smuggled in to represent real empirical possibilities and serve as standards for comparison. How something compares to an imaginary state of perfection may help the theorist reason, but it is no cause to reject or prefer any real empirical option, which, whatever it may be, can never compete with any unrealizable, imaginary state.

The focus this time remains on the perspective of individual actors and discrete objects involved in action (which includes both tangible and intangible “objects”), with a central focus on economic theory. Planned future installments will then shift toward more system-level, market-level, and legal-theory perspectives. This step-by-step procedure reflects one aspect of an integral approach to the interplay of individual and system perspectives, as well as the parallel use of multiple, discrete fields, to enhance the totality of understanding.

Part I: Money Unveiled

“I can pay you in eggs or a bunch of these specially configured nested electron-shell wrapped neutron/proton bundles. Your choice, buddy.” Image source: Pumbaa (original work by Greg Robson), Wikimedia Commons.

The thing is…

In taking a strictly subjectivist position on the nature of goods, the fact that bitcoin units might be described as “merely” the current status of accounting entries in the ubiquitously duplicated block chain (and therefore not “really” goods at all in themselves), poses less of a difficulty than it might at first appear to. Of interest for action-based economic theory is the observation that large numbers of market actors on a global scale are nevertheless treating these units as a type of scarce economic good in general and as a medium of exchange in particular. By way of illustration, quipping that silver is “really” just one particular and generally pointless arrangement of sub-atomic particles is of no avail for praxeology, which is based on a strict dualist distinction between teleological concepts and the more objective, causal concepts of the natural sciences.

If no existing category or “box” on a given monetary classification proved sufficient to contain Bitcoin, a new category might have to be appended. In investigating a new case, terms and categories should facilitate understanding rather than hinder it. In developing his terminology in Chapter 3, “The Various Kinds of Money,” in TMC  (pp. 50–67), Mises sought to employ terms that would specifically facilitate economic analysis more effectively than the conventional and positive-law terms of the time (pp. 59–60). He notes on pp. 61–62 that:

Our terminology should prove more useful than that which is generally employed. It should express more clearly the peculiarities of the processes by which the different types of money are valued. [it should also help to overcome] the naive and confused popular conception of value that sees in the precious metals something “intrinsically” valuable and in paper credit money something necessarily anomalous. Scientifically, this terminology is perfectly useless and a source of endless misunderstanding and misrepresentation.

I do not believe that Mises’s classification scheme from TMC requires any fundamental revision to account for Bitcoin. We may only need to take a further step in the direction of a strictly dualistic action theory. This is the same direction of travel that gave rise to those classifications in the first place as Mises began to carry economic theory step by step further away from its objectivized past and toward its action-based future. Mises warned sternly in 1912 (p. 62) that:

The greatest mistake that can be made in economic investigation is to fix attention on mere appearances, and so to fail to perceive the fundamental difference between things whose externals alone are similar, or to discriminate between fundamentally similar things whose externals alone are different.

A fresh mystery from Vienna

Stephansdom in Vienna. Photo by Konrad S. Graf.

Among its many other contributions, Peter Šurda’s 2012 thesis, “Economics of Bitcoin: Is Bitcoin an alternative to fiat currencies and gold?” [90-page PDF; Vienna University of Economics and Business) carefully examined Bitcoin in terms of Mises’s monetary classification scheme from TMC. Up to a certain point, Šurda interpreted the situation in largely the same way as I have.

In a procedure reminiscent of the 1939 Agatha Christie novel And Then There Were None, he rejected, correctly I believe, one candidate after another as a place for Bitcoin within the TMC scheme (pp. 23–28). It is not any kind of money substitute (Bitcoin is not “redeemable” for any more fundamental unit). Even within Mises’s “money in the narrower sense” (senses other than money substitutes), Bitcoin is not credit money (no creditor/debtor relationship exists) and not fiat money (it lacks any legal-tender status or any other state-sponsored privileges, stamps, or certifications whatsoever to “prop it up”).

Somewhat disquietingly perhaps, Šurda and I had each arrived independently at just one final suspect. The only candidate that is even a remote possibility is: “commodity money.”

Yet surely this could not be quite right either. At this point, one might think it would have been easier to start by rejecting commodity money, and then try to make an analogy to some of the other categories. Commentators have tried to do this variously with fiat money and token money, for example. However, I do not think such claims hold up to scrutiny.

It is certainly quite odd in this context to begin trying to imagine Bitcoin as a “commodity.” True, in certain other contexts, “commodities” can have a quite broad meaning. In its broadest theoretical usage in purchasing-power theory, “commodities” are sometimes the euphemistic label for everything that is not money—all that against which money prices are paid. Nevertheless, for the most part, and certainly in this context, “commodity” takes its narrower and much more common meaning. It is a fungible physical material or product, such as metal, oil, grain, or these days interchangeable “commodity” memory chips or other general-purpose electronic components.

The opposite perspective: Vienna from high above in Stephansdom. Photo by Konrad S. Graf. 

In the face of this apparent impasse, Šurda’s thesis next proposed several considerations. First, since he had already argued that Bitcoin is not a “money” (yet), but a secondary medium of exchange (p. 22), it need not necessarily fit on a chart of “money” in any case. Yet he also recognized that to some degree this just kicks the can down the road a few more yards. What if Bitcoin did somehow grow to eventually qualify as “money,” even by his own chosen definition? To this he proposed some alternative terminology from several existing sources (p. 26), such as “quasi-commodity money.”

He offers additional detail on this issue is in his recent post, “The classification and future of Bitcoin” (12 March 2013), where he notes perhaps the most important point of all:

The issue…is not some abstract classification for its own sake. The purpose of the classification system provided by Mises is to assist in the economic analysis of trade, money supply, price building, liquidity and so on. From this perspective, if we insist that we must keep the number of categories the same that Mises used, the economically closest category of Bitcoin would be commodity money.

I think further clarification may still be possible from some different directions. I suggested in the previous installment of this series that substituting the more subjectivist word “good” for “commodity” may already be a useful step, at least from a meaning-content point of view. This time, we venture further into language and context.

As always, meaning must come first; words have to follow along as best they can. Concepts are one thing; the words used to signify them another. To me these are not just theoretical claims, but my lived experience working as a professional translator for many years (Japanese to English as it so happens). A good translator is constantly at play with the concepts and meanings that the various words are employed, at times somewhat imperfectly, to get across from mind to mind in given times and contexts. One of the first things it occurs to my translator self to do is to check into the source text and consider what, if anything, might be noticed there that may not occur to a reader of the resulting translation. It is also often helpful to consider the background context of debates in which words were employed.

TMC is a translation of Mises’ 1912 Theorie des Geldes und der Umlaufsmittel. “Commodity money” was the term used to translate Sachgeld. Although some issues have been found with the TMC translation, including most notably the title itself (see the recent centennial symposium volume,The Theory of Money and Fiduciary Media(2013), “commodity money” seems a perfectly reasonable translation in this case. To be clear, I am aware of no reason to think that Mises would have objected, or did object, to this choice. In Nationalökonomie, the 1940 German precursor to Human Action, many instances of Sachgeld are accompanied by the usual examples of gold and silver, which also serve as the stock examples of “commodity money” in Human Action in 1949.

Nevertheless, our purpose is not to toy with words, but to better understand their theoretical content and meaning, and specifically to look for some assistance on the challenge of reconciling Bitcoin with Mises’s original categories. Bitcoin is a novel enough development that it forces us to revisit in a new context of knowledge fundamental concepts that were arranged and labeled as they were in a previous context of knowledge.

In this process, one language might provide hints that another withholds. A word that was unobjectionable in the past might begin to suffer now for the first time from outmoded or non-essential connotations. Moreover, this is likely to occur somewhat more strongly with regard to the particular words and senses of words used in one language than with the corresponding words and senses of words used in another. It is in this spirit that some multilingual brainstorming might lead to a missing clue.

Lt. Cdr. Data sleuthing in Star Trek: The Next Generation.And indeed, the two-part compound construction of the German word Sachgeld suggests some related connotations that “commodity money” in English does not. Die Sache is a “thing,” in either a concrete or abstract sense. Alternative senses from this word and associated compounds readily include such abstract senses as “the matter at hand,” “the facts of the situation,” and “the main or most important point or issue.” A Sachbuch is a non-fiction book (not a “commodity book,” but a book about any non-fictional topic, a “factual book” as opposed to a fictional one). Sachgeld itself in modern dictionaries comes across as any “thing” (or even animal or person) that was historically used as a medium of exchange, or simply the earliest forms that money took historically (note that historically here also implies prior to the evolution of money substitutes).

It appears that Sachgeld, in its first, most literal possible sense, looks like “thing-money” or “fact-money.”

This may already be enough of a clue to begin threading a path through the “commodity” puzzle that Bitcoin, perhaps now for the first time ever, presents. One of our central underlying themes this time will be continuing to seek ways to disentangle the concept of tangibility from various other concepts relevant to monetary theory, especially scarcity. A “thing” is usually considered tangible, but unlike “commodity” in its relevant monetary meaning (a fungible physical material), “thing” more easily also covers abstract senses such as “matters at hand,” “conditions,” and so forth, as in, “The thing is…” or “How are things going?” or “It is a curious thing, this Bitcoin.”

At this stage, rather than creating an alternative category, or turning to a sub-category such as “quasi-commodity money,” it may only be necessary to revisit the original concept of Sachgeld such that it takes on a more abstract and subjective, and less concrete and objective, sense than it has ever been asked to. This would also seem to be in keeping with the overall long-term direction of development of the Austrian school of economics in distinguishing ever more carefully between action-based teleological concepts and objective characteristics of various means employed in acting.

It appears, then, that we might interpret the central economic meaning of Mises’s monetary category of Sachgeld as something like “thing-in-itself money,” or “money in itself,” or “money in fact,” and my re-reading of Chapter 3 of TMC does not appear to exclude this possibility. Much as a silver coin in the old days functioned directly as “money in itself,” and was not “backed by anything,” a bitcoin unit is likewise not “backed by anything.” Nor is it even a perfect or imperfect substitute for anything else. From the point of view of economic actors using it, a bitcoin unit is the tradable good itself. No intermediating substitutes stand between it and its user. And the mere existence of various service providers does not automatically imply that money substitutes are in play.

Paper fiat money is “backed” by such factors as user experience from the past, legal tender laws and user expectations of their continuation, and other powers suppressing certain forms of competition. But Bitcoin enjoys no such force of either habit or law. Moreover, a study of the Bitcoin system suggests no obvious need or function for such money substitutes as have historically grown up around metallic currencies. Not that they are impossible, just that they would not appear to add value. They could even subtract value by adding superfluous risk layers. Many of the advantages that typical money substitutes had in the past, such as freedom from the weight burdens and creeping heterogeneity of precious-metal coins from gradual wear, are already provided in Bitcoin from the point of view of users of “the thing itself” (a topic also addressed in more detail below).

Some knightly context

For an initial check on how well this proposed interpretation might mesh with the greater context in which TMC appeared and its major contributions, we rely on Professor Hülsmann’s definitive intellectual biography, Mises: The Last Knight of Liberalism (2007).

First, we find that Hülsmann noted on p. 215 (emphasis mine) that:

In dealing with the nature of money, Mises relied heavily on the work of Carl Menger. The founder of the Austrian School had shown that money is not to be defined by the physical characteristics of whatever good is used as money; rather, money is characterized by the fact that the good under consideration is (1) a commodity that is (2) used in indirect exchanges, and (3) bought and sold primarily for the purpose of such indirect exchanges.

The words “good” and “commodity” as we read this passage would normally seem to point to physical characteristics, and this was most likely also the intended meaning. But what if we try reading again with abstract senses for these words in mind? The substantive points in this paragraph are all about functional characteristics of money for actors. Look for the verbs: used as, bought, and sold. Moreover, “physical characteristics” are specifically singled out as factors on which money is “not to be defined.”

In quickly reviewing Mises’s typology of monetary objects (pp. 216–217), Hülsmann notes that:

[Mises] distinguished several types of “money in the narrower sense” from several types of “money surrogates” or substitutes. Money in the narrower sense is a good in its own right. In contrast, money substitutes were legal titles to money in the narrower sense. They were typically issued by banks and were redeemable in real money at the counters of the issuing bank.

Here we have the word “good” again. We also have “a good in its own right.” This seems reminiscent of our hyper-literal attempt at rendering Sachgeld as “thing-in-itself money,” or more simply “money in itself.” So far as I am aware, Bitcoin currently has no significant substitutes and virtually no issuers of any such substitutes. Perhaps with a few arcane or experimental exceptions, Bitcoin is so far traded directlyas itself at freely fluctuating rates against all other goods, services, and monies. While the construction of Bitcoin-denominated financial instruments is possible, most all of the actually traded forms of Bitcoin are direct instantiations of bitcoin units.

As Šurda explained (pp. 9–18), Bitcoin is already inherently “form-invariant,” much as language can come in spoken and written forms, but remains language. “Transfer of Balances (ToB)” methods convey Bitcoin units from one wallet to another, while “Transfer of Keys (ToK)” methods, suited for offline use, transfer physically instantiated wallets that contain specified Bitcoin balances (effectively denominations). The private key is physically contained inside a ToK object in the shape of a coin, smart card, etc. with structural and one-time-change physical security features such as holographic coverings and color-change chemistry. Critically, the current wallet balances on ToK objects can be verified if necessary using only the public key without the need to expose the physically concealed private key to any party. None of these ToK objects are Bitcoin substitutes; they are each native forms of Bitcoin itself.

The question of whether actual Bitcoin substitutes and associated practices entailed in the kind of “banking” we are accustomed to could evolve on top of Bitcoin is a separate and open one. Šurda has also just recently offered some further observations on this in an interview with Jon Matonis in American Banker, “How cryptocurrencies could upend Banks’ monetary role” (15 March 2013).

The key issue seems to me that Bitcoin both functions as a money in itself and delivers many of the benefits of historically evolved money substitutes, leaving little demand for them to grow up in relation to Bitcoin, at least in the same old ways. In a provocative take on the question of Bitcoin money substitutes, Pierre Rochard has suggested that this type of development might simply render the ongoing debate about banking reserve practices not so much resolved as obsolete (22 February 2013). People will of course attempt to construct all such familiar instruments, but whether they can add any value relative to native Bitcoin and attract any sustained and significant use remains to be seen.

Mises, in developing his own monetary theory in TMC, was also arguing against the assignment theory of money, which holds that money has no real value of its own to actors, but merely functions as a sort of neutral receipt that facilitates deposits and withdrawals on the “social warehouse” of goods. Money, in this view, is simply a “veil,” functioning as a sort of mere claim ticket exchangeable for other goods, but not a good in itself.

On p. 237, Hülsmann explains that:

Mises’s great achievement in his Theory of Money and Credit was in liberating us from the veil-of-money myth…Mises could even rely on Menger’s theory of cash holdings, which already contained, in nuce, the insight that money is itself an economic good and not just representative of other goods.

Böhm-Bawerk had put it this way in an early-1880s lecture (p. 235):

Money is by its nature a good like any other good; it is merely in greater demand and can circulate more widely than all other commodities. Money is no symbol or pledge; it is not the sign of a good, but bears its value in itself. It is itself really a good.

Hülsmann explains the role of Mises’s strict terminology in countering the prevailing assignment theory of money (p. 237):

To combine these elements into one coherent theory required a radical break with time-honored pillars of monetary economics, in particular, with the classical tradition of presenting money as a mere veil. Mises was fully conscious that this was the key to his theory, which is why, in an introductory chapter of his book [Chapter 3], he engaged in the somewhat tedious exercise of distinguishing various types of money proper (money in the narrower sense) from money substitutes. It was these substitutes in fact that were the sort of tokens or place holders that Wieser and the other champions of the assignment theory tacitly had in mind when they spoke of money…While it is true that the value of a money substitute corresponds exactly to the value of the underlying real good (for example, one ounce of gold), the value of the gold money itself does not correspond to anything; rather it is determined by the same general law of diminishing marginal value that determines the values of all goods.

This greater context clarifies that “money in the narrower sense” is a form of money valued directly without any intermediation of substitutes and without mere veiled representational reference to other goods. Money was not just a placeholder or accounting entry, a claim ticket for other goods. It was one good trading for other goods on the market. Moreover, Sachgeld, “money in itself,” was further differentiated from Mises’s other two monies “in the narrower sense” by not being a debt instrument (credit money) and also not depending on any official legal certification or special legal status (fiat money). The primary distinction of money in the narrower sense among all other goods was its wider relative marketability, as Böhm-Bawerk had explained.

This higher degree of marketability then gives rise to an increased value of money as a hedge against uncertainty. If no uncertainty existed, there would be no need to hold cash balances. As Hoppe explains in “‘The Yield from Money Held’ Reconsidered” (2009), in the real and always uncertain world, we do not know in advance exactly what we will want to buy and when, but we do know with much higher certainty that we will want to buy something sometime. The holding of cash balances can be understood as a forward-looking measure we take in relation to this degree of perceived uncertainty.

No coinbug likes inflation

Whatever the future brings, for today, at least, Bitcoin seems to behave very much like a “money in itself,” but one unlike any the world has ever seen. It is digital and it is apparently impossible for any party to manipulate its total supply. This is critical, because one of the central political-economic monetary issues is inflation, by which I mean specifically, the ability of money producers to manipulate the money supply for whatever reasons they might happen to have in mind or cite at a given time.

As Mises wrote in TMC (p. 428):

It is not just an accident that in our age inflation has become the accepted method of monetary management. Inflation is the fiscal complement of statism and arbitrary government.

He also explained the social-protective advantages of having precious-metal coins circulate physically (p. 450):

Gold must be in the cash holdings of everybody. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his pay check, and to spending gold coins when he buys in a store.

This might seem at first to be the definitive Misesian endorsement of circulating metallic coins. Yet as Hülsmann notes in this context, “Mises had not become a gold bug. He had no fetish about the yellow metal or any other metal” (Last Knight, p. 922). Hülsmann then points us to the reasons behind Mises’s proposal—to help counteract the advance of inflationary policies (TMC, pp. 451–52):

What is needed is to alarm the masses in time. The working man in cashing his pay check should learn that some foul trick has been played upon him. The President, Congress, and the Supreme Court have clearly proved their inability or unwillingness to protect the common man, the voter, from being victimized by inflationary machinations.

The function of securing a sound currency must pass into new hands, into those of the whole nation [world?]…Perpetual vigilance on the part of the citizens can achieve what a thousand laws and dozens of alphabetical bureaus with hordes of employees never have and never will achieve: the preservation of a sound currency.

At this point, much appears to hinge on the definitions of “good” and “commodity.” Must they necessarily maintain their historical associations with tangibility? It is therefore to tangibility, and in particular its relationship with scarcity, that we now turn. Against all the temptations to try to drop Bitcoin into one old basket or another, can Bitcoin nevertheless stubbornly hold out and demand recognition as something new in the world?

[Intermission]

Part II: The Sound of One Bitcoin

That intangible sense of scarcity

In further considering Bitcoin and monetary theory, the concepts of goods, scarcity, and tangibility must be carefully differentiated. Scarcity and tangibility were long inseparable in the form of monetary metals. They remain fused in most familiar goods.

But what if factors other than tangibility, per se, such as relative stability of total supply, durability, and divisibility, were the essential factors even in evolutions of metallic media of exchange? What if tangibility was something of a monetary “inactive ingredient,” a “material carrier” for those other qualities, which had actually always been the essential ones?

Digital goods have brought the separability of goods from tangibility front and center in the modern world. To apply these concepts now to the case of Bitcoin, we revisit their various senses and definitions, including some recent refinements.

Copying is not theft

Most digital goods, such as song or text files can, in principle, be copied ad infinitum even as any earlier copy from which other copies are made remains entirely unchanged.

This was the essence of the digital-information revolution. Unlimited numbers of people could use copies at the same time without direct mutual interference or degradation of the integrity of any earlier copies. A copy could be made without the original disappearing, as would be the case with theft or any other kind of transfer. Moreover, any copy could then become a new, equally serviceable “original” from which new copies were made from there. “Originals” would not even degrade with time or use, as is the case with analog reproduction methods, with their analog “master” copies.

The difference between copying and theft has been humorously and quickly illustrated in the “Copying is not theft” one-minute meme. Since a video may be worth 10,000 words, it might repay the time to view this now to see the essence of this distinction (literally one minute) before proceeding.

The advent of mass digital replication dealt a crushing blow, at least within the abstract realm of knowledge and patterns, to an age-old enemy—inherent or natural scarcity. In response, we have been witnessing a legal and technical scramble to create artificial scarcity to replace it. The major methods have been expanding and tightening legislation and enforcement and the application of digital rights management (DRM) technologies. This combination of developments brought the dusty old issue of “intellectual property” front and center. To make any sense of this odd scene in a principled way required a fresh look at basic social-theory definitions and concepts.

As one important step in this effort, Jeffrey Tucker and Stephan Kinsella in “Goods, scarce and non-scarce” (25 August 2010), focused on distinguishing perfectly copiable goods, such as ideas, methods, and most digital goods, labeling them as “non-scarce goods.” They quoted from Kinsella’s landmark “Against Intellectual Property” (2001), which addresses the relationship between tangibility, scarcity, and the core social function of property rights. Kinsella (p. 19) asked:

What is it about tangible goods that makes them sub­jects for property rights? Why are tangible goods property? A little reflection will show that it is these goods’ scarcity—the fact that there can be conflict over these goods by multiple human actors. The very possibility of conflict over a resource renders it scarce…the fundamental social and ethical function of property rights is to prevent interpersonal conflict over scarce resources.

This sense of “scarce” is a social-relational one. It refers to the physical impossibility of a rivalrous good being used for different purposes simultaneously by more than one party. For example, one person cannot, under any imaginable scenario, drive from Rome to Vienna while another drives from Sydney to Brisbane in the same car. This specific sense of scarcity derives from the property theory reasoning of Hans-Hermann Hoppe, who wrote in A Theory of Socialism and Capitalism (p. 235) that:

insofar as goods are superabundant (‘free’ goods), no conflict over the use of goods is possible and no action-coordination is needed…To develop the concept of property, it is necessary for goods to be scarce, so that conflicts over the use of these goods can possibly arise.

Care must be taken, as we shall see, because scarcity is sometimes used with a different meaning in economic theory. In that usage, “scarcity” is a necessary attribute of any economic good, by definition. Moreover, in popular colloquial usage, “scarce” has yet a third meaning of “in short supply” or “not enough to go around” relative to an assumed “normal” or ideal baseline situation, which is completely distinct again from either of the two foregoing technical meanings.

Tucker and Kinsella mentioned that tangibility is not inherently necessary for scarcity, citing airspace and radio waves as examples (one transmitter can interfere with another). Yet the practical conclusion seemed to be that tangibility and scarcity do coincide in almost all cases. All of the examples in an informal and illustrative chart of “scarce” goods (and non-goods) happened to also share the attribute of tangibility, while the non-scarce examples were all intangible. And indeed, this is almost always the case. Yet they left no doubt about the key point:

The term scarcity here…means that a condition of contestable control exists for anything that cannot be simultaneously owned: my ownership and control excludes your control.

While the meaning and purpose of their argument is clear in its context, in strictly economic theory terms, one must still act to obtain even a “free” or “non-scarce” copy of a good. One must still click on one free file icon rather than another, for example, displaying choice and preference through this action, and making the clicked-on file a means in action and the runner-up file an opportunity cost. As a result, great care must be taken with the overlapping and sometimes reversed senses of these two meanings of the word scarcity. For example, in the property theory sense, even a “non-good” can be scarce, which is impossible in the economic theory sense. Yet once again, Tucker and Kinsella took care to make their meaning clear:

Something can have zero price and still be scarce: a mud pie, soup with a fly in it, a computer that won’t boot. So long as no one wants these things, they are not economic goods. And yet, in their physical nature, they are scarce because if someone did want them, and they thus became goods, there could be contests over their possession and use. They would have to be allocated by either violence or market exchange based on property rights.

This subtle difference in the meaning of scarcity in economic theory and property theory reflects the respective clarification tasks at hand. Economic theory is in the first instance concerned with the nature of economizing action as such, which can only be taken by individual actors (“Crusoe”). Property theory is first of all concerned with individual action in its capacity as occurring in a social context of other similar actors (Crusoe plus Friday on up). This latter context gives rise to the binary descriptive possibilities of either cooperative (consenting) or conflicting (violent) relationships. One sense of scarcity is used for the purpose of considering Crusoe only, while the other sense of scarcity is used for the purpose of considering the possible classes of interactions between Crusoe and Friday.

Property rights are a fundamentally social phenomenon; they are irrelevant to the consideration of Crusoe alone. And this goes for the narrower sense of the word scarcity used in property-theory reasoning. With Crusoe and Friday situations onward, however, social action theory posits binary action possibilities of either cooperation or violent conflict. These encompass a descriptively possible totality of all possible human interactions (on this, see Murray Rothbard, Man, Economy, and State [MES, 1962] pp. 79–94, and Guido Hülsmann, “The a priori foundation of property economics(2004)). This particular set of binary classifications has been selected (either more or less consciously) by investigators as being valuable for helping to explain differential social phenomena.

Confusion in discussions of scarcity could also arise from the use of the term “free goods,” which Kinsella and Tucker also associated with non-scarce goods. In the strictly economic theory sense, “free” goods are not really “goods” at all, but the background conditions under which actions take place. They are not means in themselves within an (intentional) structure of action. Rothbard put in this way in MES (p. 8):

The means to satisfy man’s wants are called goods. These goods are all the objects of economizing action…The common distinction between “economic goods” and “free goods” (such as air) is erroneous…air is not a means, but a general condition of human welfare, and is not the object of action.

Air would not be a means for a jogger unless this particular jogger were an obsessive economist who had in mind “using” air as a “means” to go jogging. The air outside under normal circumstances is a background environmental condition, but not itself an object of action, and therefore not a good, unless its supply or quality is threatened. In strict dualist fashion, Mises emphasized how the concept of a means only arises in relation to the study of action (Human Action, pp. 92–93; my emphasis):

Means are not in the given universe; in this universe there exist only things…Parts of the external world become means only through the operation of the human mind and its offshoot, human action…It is human meaning and action which transform them into means.

Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.

Eugen Böhm von Bawerk’s image on 1984 “Austrian” fiat paper. Andrew Jackson sympathizes. Source: Berlin-George, Wikimedia Commons. Good for what?

A “good” is thus something that serves as a means within the structure of human action. Gael J. Campan argues that this was already explained in Eugen Böhm-Bawerk’s 1881 paper, “Whether Legal Rights and Relationships Are Economic Goods.” The first part of Campan’s article “Does Justice Qualify as an Economic Good?” (1999) explains the subjectivist conception of a “good” that Böhm-Bawerk advanced (my emphasis):

While scarcity is commonly referred to as an essential feature of an economic good, this must not be understood purely in a physical sense, i.e., a fewer number of items compared to the quantity of others. Indeed, if all means are scarce by definition, it is specifically because they are limited with respect to the actual ends that they are capable of satisfying…The characteristics of a good are not inherent in things and not a property of things, but merely a relationship between certain things and men.

The thing named a good must have useful properties, which is not to be understood in a strictly physical sense.

As quoted by Campan, p. 24, Böhm-Bawerk wrote (my emphasis; and try it once omitting “corporeal”):

Whatever importance we accord to the corporeal objects of the world of economic goods derives from the importance we attach to the satisfaction of our wants and the attainment of our purposes…It is the renditions of service rather than the goods themselves which, as a matter of principle, constitute the primary basic units of our economic transactions. And it is only from the renditions of service that the goods, secondarily, derive their own significance.

Define “scarce”

We have seen that scarcity in the property-theory sense pertains not to whether something is a good or not in this broader economic-theory sense, but rather to the native potential for rivalrousness of consumption and, specifically, to the presence or absence of the attributes of copiability and simultaneous shareability. Since the broader economic concept of scarcity is already contained within the definition of a “good,” the narrower property-theory sense appears more useful for the current explanatory tasks.

Building on this property-theory sense of scarcity from Hoppe, Kinsella, and Tucker, I propose defining a “non-scarce good” as: a good that is copiable with perfect remainder of the original and useable by multiple actors simultaneously without mutual interference.

Here the two travellers from our previous example,  each now with a car of his own, can simultaneously drive to Vienna and Brisbane, respectively, while each listens to identical digital copies of the same album by the same band (each driver incurring his own respective speeding citations). The variable cost of producing each additional playing of this same album is effectively zero (at any rate, quite unlike producing an additional “copy” of a car).

The point for right now is not to enter into the pros and cons of copyright legislation and entertainment business models (on which I recommend work done at C4SIF.org and Techdirt.com), but rather only to show the relevant descriptivedistinctions involved. A copy of a non-scarce good can be freely produced with no objective effect on previous copies, while a “copy” of a scarce good such as a car cannot be made in this way. Either control of the given instance of a car must be transferred (through sale, gift, or theft), or an entirely new instance of a car must be constructed from new and different scarce instances of the requisite materials and energy.

The point of Tucker and Kinsella’s article was to create a relevant binary classification along these lines (my emphasis):

One helpful way to understand this is to classify all goods as either finite and therefore normally scarce or nonfinite and therefore naturally nonscarce…It is scarce goods that serve as means for action, while nonscarce goods that can be copied without displacing the original are not means but guides for action.

…[A] recipe can be shared unto infinity. Once the information in the recipe and the techniques of making it are released, they are free goods, nonscarce goods, or nonfinite goods.

By contrast, according to my suggested definition of a non-scarce good above, the definition of a scarce good (in the property theory sense) would be the negation: a good that is not copiable with perfect remainder of the original and is not useable by multiple actors simultaneously without mutual interference. This proposed definition encompasses what most people think of colloquially as “goods” in general: groceries, clothes, and so forth.

In the modern age, such “non-scarce goods” have proliferated. As Tucker and Kinsella put it, “The range and importance of non-scarce goods has been vastly expanded by the existence of digital goods.” For the most part, non-scarce goods include all sorts of abstract goods such as ideas, text and music files, patterns, plans, recipes, methods, and so on. Specifically, it includes the meaning and content of all types of media and text, and other abstract and digital “things.”

Except…

In the case of Bitcoin, matters are different. Each bitcoin unit can exist in only one wallet at one time due to the Bitcoin protocol’s methods of ubiquitously recording transactions and preventing double-spending. It is critical to understand that these qualities of Bitcoin scarcity are not merely due to add-on “security measures.” They are not appended legal or technical “protections.” Rather they are integraland inseparable attributes of a system protocol of which a given bitcoin unit is one element.

As should be clear by now, it is not necessary to fuss over objectivistic considerations such as whether an abstract collection of digits in certain configurations can “really” be a “good” or not. Böhm-Bawerk’s insertion of the word “corporeality” into his 1881 sentence is not a separate criterion for something to serve as a means, a point we can much more easily see today than over 130 years ago. Böhm-Bawerk nevertheless clearly explained that one must observe what people are doing to understand what economic goods are, an insight that Mises would later take up and run with in his action-based reconstruction of economic theory.

Bitcoin has now brought authenticscarcity into the world of digital goods.

This is not the artificially imposed, legally constructed “scarcity” of “intellectual property” legislation, which was the target of Tucker and Kinsella’s important work. It is not even a type of tacked-on DRM system that attempts to use technical measures to create artificial scarcity out of informational objects that are in their nature not otherwise scarce. The Bitcoin system has set up a type of scarcity that is inherent to the nature of the good itself. This possibly unique achievement of an inherent scarcity within the digital realm is an essential part of the innovation that has made Bitcoin a new type of good.

A bitcoin unit viewed as an object of action also meets another essential criterion from Böhm-Bawerk—it can be controlled. As Campan explained (p. 24):

It is necessary that the thing in question be disposable or available to us. We must possess the full power of disposal over it if we are really to command its power to satisfy our wants…the possession of a good cannot simply be decreed: either you possess effective control over it or not.

The Bitcoin system achieves this through private key/public key encryption, which allows effective control of bitcoin units in a user’s wallet, provided said user maintains control of their private key and/or related passwords. Once a bitcoin unit is transferred from one wallet to another, it is no longer “in” the originating wallet, but only “in” the destination wallet.

Thus, in the property-theory sense of scarcity, a bitcoin unit qualifies, not as non-scarce like most other abstract or digital objects, but as scarce, since according to our proposed definition, it is “a good that is not copiable with perfect remainder of the original and is not useable by multiple actors simultaneously without mutual interference.”

Once a private key to a Bitcoin wallet is copied, more than one party can have the key at the same time, as with any other non-scarce good. However, even so, only one party can succeed in using this private key to make use of any given bitcoin unit associated with that wallet. Only one transaction with a given bitcoin unit can be confirmed in the block chain. Even though a private key or password can easily be copied if obtained, even in this case, only one person can end up succeeding in making use of a given bitcoin unit because of the system’s prevention of double-spending. A known compromised key pair (wallet) can be abandoned. Additional key pairs are free and plentiful.

What is the sound of one bitcoin?

Two hands clapping make a sound. What is the sound of one hand?

—Koan attributed to Zen Master Hakuin Ekaku 白隠 慧鶴 (1686–1768)

We have seen that the concept of scarcity in both economic-theory and property-theory senses is useful to understanding bitcoin units as objects of human action and that scarcity and tangibility are separable. But can the quality of tangibility, so essential to the familiar story of the evolution of precious metals as monies, just be unceremoniously dropped? It is said that an experienced examiner can distinguish the authenticity of a precious metal coin by dropping it and listening to its ring. But what is the sound of a bitcoin dropping?

It was tangibility in the monetary-evolution story that had seemingly held together all the numerous traditional monetary-commodity characteristics in the form of a nice solid coin of silver, gold, or copper. It appears that some observers steeped in that story, upon seeing that Bitcoin lacks tangibility, concluded that it must also lack the other associated monetary characteristics such as durability and relative stability of supply.

In this context, we find it insightful that Jon Matonis, a long-time observer of and writer on cryptocurrenices, recently said in a Reddit interview (19 March 2013) that one way to quickly understand Bitcoin better is that it is distinguished from gold in that “it depends on mathematical properties rather than chemical properties.”

A “hard-money” checklist check

With these considerations in mind, this paragraph from Professor Hülsmann from “How to Use Methodological Individualism” (27 July 2009) will be helpful. The essay was on a different theme, but the following paragraph from it contains a great deal of interest for our current topic all in one convenient place (my emphasis):

Media of exchange become ever more generally accepted to the extent that they are objectively more suitable than their competitors in arranging indirect exchanges. Silver is more suitable as a medium of exchange than cherry cakes because it is durable, divisible, malleable, homogeneous, and carries a great purchasing power per weight unit. Market participants are likely to recognize this relative superiority in a process of learning and imitation, and eventually most of them will use silver to carry out their transactions. Hence, one can explain why the technique of indirect exchange is adopted on an individual level; and one can explain why specific media of exchange become generally accepted and thus gradually turn into money.

There is much of relevance in that paragraph, but for now, I will only consider how bitcoins seem to fare against silver coins on those very characteristics (plus stock stability) on which silver coins beat cherry cakes:

Divisible, malleable, and scarce. Source: Mikela, Wikimedia Commons. Are bitcoin units

  1. Durable?Perfectly. Abstract digital objects do not change. However, this is subject to recording and replication, substrate non-destruction, private keys and passwords not being lost, etc.
  2. Divisible?Current theoretical maximum of 2.1 x 1015 units to be reached around 2140, with future extensions apparently also possible (finally enough tradable units for the “needs of trade”?).
  3. Malleable? Irrelevant; not tangible. However, analogs of this quality may be found in the variety of “transfer of keys” code-recording methods such as hologram- and color-change-protected code-bearing physical coins and cards.
  4. Homogeneous? Perfectly. More homogeneous than possible with any conceivable physical material because the homogeneity is mathematical (by definition) rather than physical (by empirical measurement relative to a definition).
  5. Purchasing power per weight? Infinite. Intangible code patterns lack the characteristic of weight altogether, rendering the slightest purchasing power infinite in per-weight terms.
  6. Now add: Relative stability of supply? Quantitative growth and terminal maximum quantity and timing are determined computationally; macro supply of bitcoin units (theoretically) not subject to human manipulation.

On this initial reading, it appears that Bitcoin obliterates metallic coins on factors 2–5, whereas factors 1 and 6 are open to contingencies and informed technical debates. Just as silver coins beat cherry cakes on these criteria (except malleability!), Bitcoin beats silver coins outright on four of six criteria. The other two criteria require further investigation, but Bitcoin also appears potentially competitive and possibly superior on these characteristics as well. These are questions for empirical observation, debate, prediction, and speculation about the specific course of the future, not for abstract theory as such.

This analysis of Bitcoin suggests several other points with regard to several of these characteristics.

First, purchasing power per weight was a major impetus in the evolution of paper and account entry substitutes for precious metal coin monies. Bitcoin’s purchasing power per weight is already infinite, and is therefore, quite literally, unbeatable on this factor. Another problem with metallic coins was gradual wear from circulation, which would eventually give rise to weight variations—a loss of homogeneity resulting from imperfect durability. Bitcoin does not share these particular defects with metallic coins that helped lead to market demand for substitutes.

Second, people tend to interpret the traditional hard-money characteristic of durability as a mainly material one. Tires, for example, are described as being more or less durable. On reflection, however, a temporal aspect is central to the concept of durability in that it refers to measurement of change over time in relation to use. To ask about durability is to ask the extent to which an object tends to change over time in certain of its properties under certain conditions. In the case of an abstract code relationship, the code need not change at all. Although its recording substrates might change, the code itself can be perfectly copied and copied again, and it is in this specific sense that its durability as a code sequence is theoretically infinite for any relevant purpose.

Third, regarding divisibility, whereas fiat money issuers stand ready to add as many integers (“zeroes”) to paper fiat notes as they like to facilitate the steady loss of value of fiat monetary units; the Bitcoin system is capable of supporting divisibility to as many decimal places as are demanded to facilitate a steady gain of value over time. This is a diametric contrast the further implications of which would be difficult to overstate.

Competing ways to approximate a golden spiral. Source: Silverhammermba, Wikimedia Commons. Comparative versus imaginary-perfection methods

The ultimate potential for manipulation of the total Bitcoin stock (factor 6 above) is a key question that is certainly a very technical one, possibly with philosophical aspects. Can it be established that future quantitative supply manipulation at the macro level cannot occur? Would that require “proving” a technical and empirical negative?

Whatever the factors and answers, it is important to apply the realistic comparative perspective of the true economist rather than the “imaginary-perfections” perspective of the false one. For example, with fiat monies, we know above all that large-scale, distortive, quantitative manipulation of the money supply can occur—andin all known cases actually does.

Even with metallic currencies, comparisons on hypotheticals would still have to be even-handed. The stock of precious metals adjusts slightly over time with mine output and other factors (though always with much less volatility than the stock of a fiat money). Nevertheless, at the extreme, can it be shown that cheap synthetic gold could not ever be produced (as the alchemists had forever dreamed), thereby collapsing the price of gold by inflating its supply? (as the alchemists may or may not have thought through far enough).

Gold can apparently already be synthesized in particle accelerators and nuclear reactors, just not cheaply. If one of the criteria required of a candidate for becoming a sound money is proof of a fantastically complex technical and empirical negative, then such must be required equally of all potential candidates. If, for example, it must be “proven” that no mass quantitative manipulation of Bitcoin could ever possibly take place under any imaginable conditions, then it must likewise be “proven” that no future cheap gold synthesis could ever possibly take place.

Empirical perfection never comes to pass. In all such matters, the comparative method must be recalled and put to use. Pros and cons of possible alternatives must be assessed. Critical comparisons against made-up and wholly unrealizable hypothetical states of empirical perfection must be identified and rejected.

Unfortunately, just such clouded thinking has been ingrained and normalized through the practice of assuming that state actors can successfully and perfectly accomplish whatever they like by enacting legislation and setting up a bureaucracy. This patently absurd dream is then compared (at best) to the forever imperfect efforts of the living human beings who by contrast inhabit the so-called “market” (which euphemistically seems to mean “reality”).

Human action is by nature always a choice among perceived possibilities. The Misesian tradition of economics is positioned as one part of the study of human action. The study of society is the study of acting persons joined in a grand, interacting process of trial and error writ large.

It is not the role of economic or legal theory to predict the future. However, they can and do have useful and unique contributions to make to basic understanding. These can in turn prove useful in such other fields as investing, forecasting, and business-model development that do attempt the always-speculative and risk-bearing task of peering ahead into the soon-to-become empirical future.

For additional articles on this topic, visit my Bitcoin Theory page on this site.

Individualism, collectivism, "mere" birds, and how to understand ice hockey

What is happening here? Source: 08-usa-rus-faceoff, Uncleweed, Wikimedia Commons. Conventional thinking has overemphasized and over-stretched the collective perspective. Meanwhile, I think certain approaches to libertarianism have over-emphasized an individual or individualist perspective—or at least have a bad reputation for seeming to. Calling this "atomized" individualism is certainly a rhetorical move on the part of collectivism, but it might also contain some useful lesson.

Over-emphasizing the individual perspective probably came as an understandable reaction to the absurd overreaching of collectivist thinking, in which the "mere" individual is to vanish in the great tide of the collective. Moreover, the undertone is usually not far away that if the "mere" individual does not cooperate, force will be applied. The great blind spot of collectivism is that such force can only ever actually be applied by other acting individuals wielding such force (whether they work for the state or such does not alter this fact).

In contrast to all of this, what is needed is the ability to use both individual and system perspectives as appropriate to understand reality. This seems to also be what the great economist, journalist, and moral philosopher Henry Hazlitt was on to when he wrote:

Society is not merely a collection of individuals. Their interrelations in society make them quite different from what they would be in isolation. Brass is not merely copper and zinc; it is a third thing. Water is not merely hydrogen and oxygen, but something quite different from either. What an individual would be like if he had lived completely isolated from birth (assuming he could have survived at all) we can hardly even imagine…We can hope to solve many social problems not by looking at them exclusively from either an "individualist" or a "collective" aspect, but by looking at each aspect alternately.

          — Henry Hazlitt, The Foundations of Morality (1964) p.167

Some images might help clarify what I am getting at by the need for access to both "aspects" or perspectives. Imagine a team sport match. Any sport will do. Maybe ice hockey. What is needed to watch and understand the game?

Seeing the whole field and the players, we are able to understand what is happening. Now if advanced video editing were used so that we could only see one of the players in the game but not any of the others, it would suddenly appear incomprehensible. What is that player doing? Why going this way and not that? Why crashing into the wall? This is an example of missing the collective or system perspective.

Alternatively, say we were watching unedited video of the game, but this time had no idea what the rules and objectives were. Here we would be missing the individual perspective. What is each player trying to do, why, and how? Again, the whole game would be incomprehensible in that case too, but for different reasons. Now there are just a bunch of armored people skating around with sticks! But why?

In order to understand the game, we require both an individual perspective and a system or collective perspective at the same time. The same goes for the real world in general.

One of a list of benefits of referencing an integral approach (see, for example, Ken Wilber's The Marriage of Sense and Soul (1999)), is that it reminds us that both individual and system perspectives are always available to be consulted, and ought to be. Both perspectives can be misinterpreted and misused, sure, but neither simply goes away.

The very idea of one of these aspects being valid to the exclusion of the other is absurd; they are sides of a coin. There exist no systems that are not made up of components. At the same time, components do not become something other than what they are by virtue of being part of a system. Birds flock—and remain birds all the while. We observe no flocks of "mere" birds, only flocks of regular birds. Likewise, components do not exist in isolation. One can ignore their context and interrelations (which Ayn Rand called "context dropping"), but this does not make such context and interrelations vanish from reality.

It seems that Hazlitt already hit the perfect note on this in 1964. We must "look at each aspect alternately." Upon running into an explanatory brick wall by focusing mainly on one perspective, one can try checking in with its partner perspective and see what dawns.