13 Dec 2013

If Bitcoin Is a Bubble, Is All Money Always In a Bubble?

Bitcoin 87 Comments

I by no means am an expert on Bitcoin. The more I hear the experts talk about it, the more I realize I don’t know. (And as an aside, when I hear a proponent of Bitcoin say on NPR, “This isn’t even version 1.0 yet,” it doesn’t make me want to rush out and embrace it.)

However, as I mentioned in this previous post, I am hearing a lot of self-described Misesians make arguments against Bitcoin that prove far too much. So in this post, I’m going to go over the following representative version of a very popular example of what I mean:

TYPICAL ARGUMENT AGAINST BITCOIN: Bitcoin is just a giant bubble; it’s tulip mania all over again. Since it’s essentially a private fiat currency, it has no fundamental value at all; any value it has is due to the speculative motive. People are only accepting it because they think they can unload it down the road to the bigger fool, for more money. This might last for a while, even years, but it’s built on sand and can collapse at any moment. In contrast, a commodity money like gold or silver is based on the fact that it’s genuinely useful in non-monetary outlets. So there is a floor holding up its exchange value.

OK, so the wording might vary from person to person, but during the last two years, I have definitely seen plenty of arguments similar to the above. Here’s my problem with it: This argument comes dangerously close to saying that all money, even commodity money, is always in a bubble, unless it ceases to be money.

It is standard Misesian monetary theory to say that a commodity (such as gold) gains in exchange value as it turns from a mere commodity into a medium of exchange and finally into money. This should be obvious: Originally, in a state of direct exchange, gold had a certain exchange value against other goods and services because of its direct uses (jewelry etc.). But then if people wanted to start holding it as a medium of exchange, this would increase the demand for gold, and hence drive up its “price” (i.e. how much it could fetch in the market in terms of other goods). Therefore, if a goldbug is arguing that having an exchange value above the “commodity value” (which in the case of Bitcoin is zero) makes something a bubble, then all money–including gold money–is always in a bubble.

Let me restate the argument like this: There are people claiming that Bitcoin’s non-monetary price is zero, and hence if it’s trading for anything at all, it is in a bubble. But by that logic, gold’s non-monetary price might be (say) $250, and so if it’s trading right now for $1,250, then $1,000 of that is clearly just due to a self-fulfilling prophecy, where people are willing to pay $1,250 for gold because they think that’s how much (at least) it will be worth in the future. If something were to shatter that expectation, then the price of gold would plummet back down to its fundamental value of $250. Thus, if we accept this line of reasoning, the only real difference between Bitcoin and gold is that Bitcoin has a floor of $0 while gold has a floor of (say) $250.

Last thing: One way out of this apparent bog is to make a distinction between holding commodity money for speculative purposes, versus holding it for exchange purposes. In other words, someone could accept a gold coin today not because he expects to unload it off on a “greater fool” tomorrow, but because he wants a more liquid form of wealth to make his purchases easier. (Indeed, we see that people hold paper money even knowing it will fall in purchasing power.) But if that’s the route one takes, then why can’t we say the same thing for Bitcoin? Sure, when it’s zooming up in price daily, people might be jumping on board primarily for speculative reasons, but in general how can we rule out a priori the possibility of a long-run equilibrium, in which Bitcoin is valuable precisely because it is a good medium of exchange that has an established purchasing power?

87 Responses to “If Bitcoin Is a Bubble, Is All Money Always In a Bubble?”

  1. Brent McCulloch says:

    Great work! Send it to Mr. Schiff 🙂

  2. Ken B says:

    Yes? I think that’s right.
    Money is “backed” by the belief people will take it. Fundamentally that’s all it’s really backed by. Or so I learned from David Friedman’s father. We call something a bubble when enough people expect it to collapse and so confidence is called into question.
    Some monies have enough history or men with guns to partly allay fears, but some haven’t. So that makes them look different from bubbles.

    • Ken B says:

      Briefer: a bubble is defined by being held up by confidence not by bursting.

      • Major_Freedom says:

        “We call something a bubble when enough people expect it to collapse and so confidence is called into question.”

        By that definition Ken B, your life is a bubble. I fully expect your life to eventually collapse, calling confidence in your sustainability into question. Most people, including you (until I brought this up) are right now probably not even thinking of the fact that your life is going to collapse.

        And yet there you are all naive and optimistic and everything, acting as if your life isn’t in what you call a bubble.


        A far better definition of a bubble is to characterize it in real terms, so that we can separate what we humans want, and what we humans are forced to accept as inevitable. To wit, a bubble occurs when too many real resources (and labor) are allocated to projects that, when compared to human actions, are not capable of satisfying human ends in a world of scarcity, and thus not enough real resources (and labor) are being allocated to projects that, when compared to human actions, are indeed capable of satisfying human ends in a world of scarcity.

        For example, tulip mania. Why was tulip mania a bubble? Because the price of tulip bulbs rose so rapidly and dramatically? I would say no. Why no? Because it is possible for humans to have discovered a huge gold deposit, which might have increased the prices of everything including tulip bulbs, but in a way that makes the relative prices of tulip bulbs encourage relative investment and production that COULD have “sustained” the high prices of both the bulbs and other commodities going forward.

        Why was the housing bubble a bubble? Because the prices of houses rose and then fell? I would say no again, since Bernanke COULD have printed so much more money than he did, that the prices off everything, including houses, would not have fallen post-2007. We might still be here, arguing there is a housing bubble, and the deflationistas would have still been sitting there calling us doomsayers.

        Here is a key point I think needs mentioning. Is it really correct to say that IF Bernanke printed a lot more money than he did, thus preventing the prices of everything, including houses, from falling, that BECAUSE of that money printing and price inflation, that there would not have been a bubble after all?

        If you believe that there would be no bubble because prices did not fall, then imagine that tomorrow Bernanke suddenly stopped inflating, and not only that, but he sold every security on the Fed’s balance sheet. If this is communicated as permanent, then spending would likely collapse, money would be hoarded beyond belief, and prices would have no way of going but down. There would be mass liquidation. Mega depression. Prices might end up falling 50% or more. Would it be correct to then argue that everything was in a bubble, because we saw the prices of everything collapse? Tricky question…

        The complexity arises because A. prices are so interconnected to real activity that it is almost impossible to separate, and B. we are unable to observe a free market in money, so we can’t know if prices are changing because of market forces (actual market preferences) or because of arbitrary central banker preferences (miscalculation).

        Something is fishy with the argument that bubbles are just price trends. We need something more than just price movements if we want to explain what’s going on.

        That something is, IMO, real resource and labor allocation, including real resource and labor allocation into money production itself. For most people, they consider fiat money production virtually costless, because a $50 bill only costs pennies to make. It’s even less for digital money. But wait! Henry Hazlitt just rolled in his grave. We aren’t considering the full costs (resource usage) in maintaining the central bank institution. A state is required! Last time I checked, the cost of the state is no less than $3 trillion a year. Police, DHS, Fed police, spying apparatus, drone killers, etc. What is $3 trillion? Only 20% of GDP, give or take. How many people “employed” as the state? 21 million or so?

        Is this not a massive, gigantic, partial relative overproduction in US dollar fiat money?

        Please note that I am taking the full costs of government into account because I argue it would be impossible for a government to exist whose ONLY activity is to enforce its own fiat dollars. That institution would likely be considered nothing but a criminal organization. Imagine if tomorrow the creator of Bitcoin, that Japanese guy, started to threaten everyone with kidnapping and prison if people did not pay him a portion of their salary in Bitcoins. Even Krugman would consider him naughty.

        So the government has to “offer” all other kinds of “goodies” to the populace, in order to convince them that they are not a criminal organization, but a socially beneficial one. So the people demand the government provide schools, hospitals, roads, welfare for the poor, and so on. So it is not incorrect to argue that the costs of maintaining the central bank, which requires a government, is the full cost of the entire government.

        If the enforcement of US dollars ceased, and the demand for US dollars initially rose in a panic, but then gradually decreased as more and more employers learned that they can attract more labor by offering free market currencies, and more and more wage earners learned that it is better to earn currencies that retain their value, all of which might take a while, perhaps a generation (after generations of fiat money corrupting both production and people’s minds), then would it not be correct to say that US dollars were the biggest, longest bubble in history? Yes, but not because the prices of dollars fell. That’s only a consequence. It’s because we realize that too many resources and labor went into the maintenance of US dollar hegemony

        NOW we can understand bubbles. Bubbles occur when too many resources get poured into certain projects, and not enough into other projects. The output of these malinvestments is not what we should be focusing on. We should not be focusing on dollars or dollar prices, but on the investment in dollars. We should be focusing on the dollar prices of houses, but the investment of resources and labor into housing.

        • Gamble says:

          Geesh Major I think I said it with less words…

          “Bubbles only exist with fiat.

          Sure markets have undervaluation, overvaluation and corrections but bubbles, in my mind, have always been a direct result of too many dollars chasing too few goods. The bubble is when a disproportionate amount of extra dollars end up at 1 product or sector.

          I guess what I am saying is that a bubble is nothing more than government induced misallocation in conjunction with too many fiat dollars chasing too few goods.

          We cant call every sharp correction a bubble. A bubble has to be something unique, unless we are agreeing that markets should not have ups and downs. No ups and downs sounds like a socialist paradise…”

        • Silas Barta says:

          Good point, Major_Freedom! You’ve forced me to re-think my conception of “sustainable” to handle the case of the human life cycle (seriously — I’d never considered it in that context)/

        • Harold says:

          “Here is a key point I think needs mentioning. Is it really correct to say that IF Bernanke printed a lot more money than he did, thus preventing the prices of everything, including houses, from falling, that BECAUSE of that money printing and price inflation, that there would not have been a bubble after all?”

          This is easily dealt with is we simply say prices compared to inflation. It is not because tulips went up in price, but because they went up in price compared to everything else that there was a bubble.

          If inflation was 50% and house prices increased by 5%, we could say there was a bubble.

          • Major_Freedom says:

            “but because they went up in price compared to everything else that there was a bubble.”

            What if individuals really value that good so much more than everything else, at the margin?

            “If inflation was 50% and house prices increased by 5%, we could say there was a bubble.”

            Think you intended to say 5% where you said 50% and vice versa.

            OK, suppose houses rose by 50%. Is it a “bubble” if individuals are really valuing houses that much more in real terms, given scarce resource choices?

    • Bob Murphy says:

      David Friedman’s father

      I see what you did there.

      • Ken B says:

        I avoided writing the tetragrammaton?

        If I have done something devilish let me know. Might want to do it again.

        • Bob Murphy says:

          Ken are you just playing dumb? In case you really don’t get it, I just mean: I purposely try not to mention that David is “Milton Friedman’s son” because I imagine that’s got to be annoying as hell for him. No matter what the guy does, that’s how people introduce him etc.

          So I thought it was funny that you didn’t even say “Milton” but instead referred to him as “David Friedman’s father.”

          • Ken B says:

            Oh no, I just did it because it felt right. I had no idea why but maybe that had some subconscious effect. Now you mention it I do remember you discusing that.

      • Michele Seven says:

        Lol I miss your humor, Bob.

    • Silas Barta says:

      “Backed by” has like 347 different meanings now.

  3. Carlos Novais says:

    Bitcoin is killing the state theory of money and others that link credit to the appearance of Money.

    The other interesting point is the discussion about fractional reserves.

    If a credit market appears in the bitcoin economy why would people accept “promise of payment of bitcoin” (fractional reserve titles) instead of bitcoin itself at par value?

    This is the main argument against fractional reserve titles. If they do circulate with full disclosure how come will people use it as an homogeneous tittle (and exchangeable at par value) equal to full bitcoins?

  4. luke says:

    Net producers decide what money is. We are consumers. They worry about where to store their excess production, we worry about consuming it. Until the oil states, sovereigns or central banks start recognizing bitcoin, it is pure speculation and a great example of the greater fool theory.

  5. Josh lee says:

    Coz gold prices are heavily manipulated and the economy is flooded with paper gold. Govt manipulation is another factor. In a free market, the price should be much more stable. Gold is money because someone will want it and there is a value. Bitcoin or other fiat currency is simply based on trust.

  6. Cernel Joson says:

    I remember reading a blog post by Mencius Moldbug that explicitly made the case that money is a bubble that doesn’t have to pop, with reference to Carl Menger’s “On the Origins of Money”. Menger points out the phenomenon of “anomalous” or monetary demand for certain goods, which Moldbug argues stems from peoples’ desire to save.

    Because certain goods retain or even appreciate in value over time relative to other goods, market participants pile into the assets that give the best return, which increases the anomalous demand, causing a feedback loop that causes the market to eventually settle on a single commodity to serve as a store of value and medium of exchange.

    What’s interesting about his post is that he argues that most or all bubbles are essentially driven by this monetary demand. So, for example, the housing bubble was not just the usual story about malinvestment, but also a failed attempt to “monetize” some other commodity due to the Fed’s inflation of the USD. As Austrians usually point out, the particular good in each bubble is influenced by a variety of factors, but in each case, unless the new commodity can successfully supplant the existing money, eventually that bubble will pop because there is only one good which can experience stable anomalous demand, and that’s money.

  7. Gamble says:

    Bubbles only exist with fiat.

    Sure markets have undervaluation, overvaluation and corrections but bubbles, in my mind, have always been a direct result of too many dollars chasing too few goods. The bubble is when a disproportionate amount of extra dollars end up at 1 product or sector.

    I guess what I am saying is that a bubble is nothing more than government induced misallocation in conjunction with too many fiat dollars chasing too few goods.

    We cant call every sharp correction a bubble. A bubble has to be something unique, unless we are agreeing that markets should not have ups and downs. No ups and downs sounds like a socialist paradise…

    • Major_Freedom says:

      “Bubbles only exist with fiat.”

      Disagree. Bubbles occurred under the gold standard, they were just far less numerous.

  8. Koen says:

    Moldbug has written extensively about money always being in a bubble (by which means that the demand for its moneyness depends entirely on people’s expectations about other people’s willigness to accept the asset as payment)




    I also wrote about it recently http://www.koenswinkels.com/1/post/2013/12/why-bitcoin-needs-neither-intrinsic-value-nor-government-support.html

    • Lucy in the sky w Dimon says:

      I am beyond delighted that someone else here has read Moldbug. What did you think of MoMT?

  9. Jeff Swanson says:

    It’s getting old, Bob. Running interference for a network token currency masquerading as money is just too much. Please stop saying that we need to understand coding to have a Misesian perspective on the unsustainability of centrally planned e-tokens. (Btw I understand coding.)

    • Bob Murphy says:


      Please stop saying that we need to understand coding to have a Misesian perspective…

      Actually Jeff, I’m trying to salvage the dignity of Misesian monetary theory. There are people saying stuff about Bitcoin that would just as well “prove” gold is unsustainable, a Ponzi scheme, etc. If nobody brought Mises into it, I probably wouldn’t have said much at all.

      • Robert Fellner says:

        You need to continue saying it. And it has nothing to do with Bitcoin. It has to do with sound economic analysis. As you correctly identify in this post and your comments afterwards, the “arguments” being made by people like Gary North and Peter Schiff are not only wrong – they directly contradict their own arguments in support of things like gold as money.

        When I saw people like Lew Rockwell favorably linking the utter nonsense being espoused by North, “Wenzel” (not sure what his real name is), and so forth, it was pretty horrifying. This guy is the Chair of the Mises Institute, after all. And I don’t feel particularly comfortable donating or supporting an institution that is unable to grasp basic, Misesian, principles.

      • Lucy in the sky w Dimon says:

        hi Bob, iirc, JP Koning has coherently made Regression Theorem compatible with BC.

        As in the reply to Peter: All speculation (buying something one does not intend to consume or use) is treating that thing as a Money. As MoMT posits, Money is not MoE, it is MoS. And it is technically possible (as a thought experiment with teleportation and no storage costs) that an economy does not have a MoE but does have a MoS, because saving/surplus is a fact of life for any half-sophisticated economy.

        I think I have sent you the articles by mail before.

    • Joe says:

      It’s not centrally planned. The amount of supply depends on how much mining is done. That’s it.

  10. skylien says:

    “Is All Money Always In a Bubble?”

    This is essentially how I see it. The reason for this is because many different media are all almost equally fit to do the same task of serving as medium of exchange. No matter if you take gold, silver, and platinum, or the USD, EUR and Yen, or BitCoin, LiteCoin and NameCoin etc…They are all theoretically nearly almost equally fit to do this task within each class (precious metals, government fiats, cryptos), a bit less so over different classes, but no one would deny that each theoretically could. They all compete for the same service, which needs a lot of trust, and trust can be a fleeting thing…

  11. Peter Ĺ urda says:

    The claim that all money is always in a bubble is the Moldbug Monetary Theory: http://unqualified-reservations.blogspot.co.at/2013/04/bitcoin-is-money-bitcoin-is-bubble.html Moldbug makes some very good arguments. The mainstream economists call the extra price that a good gets due to demand specific for its liquidity as “liquidity premium”.

    I have also thought about how to distinguish between speculative demand versus demand for liquidity and the more I think about it, the more difficult I find it. Maybe we can never be entirely sure, even a posteriori and even introspectively.

    I’m preparing a paper that I want to submit to AERC about bitcoin basics and this is one of the topics.

    • Lucy in the sky w Dimon says:

      From my understanding of MoMT, there is no way to tell the difference beforehand. All speculation (buying something one does not intend to consume or use) is treating that thing as a Money. As MoMT posits, Money is not MoE, it is MoS. And it is technically possible (as a thought experiment with teleportation and no storage costs) that an economy does not have a MoE but does have a MoS, because saving/surplus is a fact of life for any half-sophisticated economy.

      One can look at the motivations and incentives of the parties involved (like central banks) to see which Bubble they will try to prick and which they won’t. It is clear they will not try to prick the bubble in stocks or bonds, but will in BC and gold.

      • Peter Ĺ urda says:

        There is a motivational difference between buying something with the expectation to sell it at a higher price while waiting for the right time and place, and buying something with the expectation to use it to purchase something else when you need that something else. The first one is speculation, the second one medium of exchange. If a retailer buys clothes wholesale with the expectation on earning money while selling them at his shop, this is speculation but not a medium of exchange. So there is a conceptual difference. Menger got it right when he wrote that the main determinants of liquidity are the time and place that are available for selling.

        But I agree that empirically speculation vs MoE may not be distinguishable.

        • Lucy in the sky w Dimon says:

          Agree. Motivational difference, yes, but not any economic difference. The mkt participants only see the price-signal from the buy action and later from the sell action.

          I commented a bit on Bob’s economic differentiation of the two below. But I think the best thing to read on this would be Moldbug himself.

        • skylien says:

          “But I agree that empirically speculation vs MoE may not be distinguishable.”

          No only that, but the motivation can change. You may buy because of speculation, but since there is suddenly the possibility to pay directly with it, you ALSO use it as MoE.

          This would mean the other MoE that you would have used instead suddenly lost this value making it the bubble…

  12. Lucy in the sky w Dimon says:

    Bob: “One way out of this apparent bog is to make a distinction between holding commodity money for speculative purposes, versus holding it for exchange purposes.”

    There is no economic difference between the two activities.

    If someone is holding something to exchange it in the future (which is same as selling it, as one would do with a “speculation”), they have to choose what to hold. What item shd they choose? How do they decide? They dont want something which will lose in PP relative to something else they could have held. And if they are going through this thought process, other people are too, since almost everyone has savings/surplus.

    So, game theory kicks in and a theory of Money arises: Moldbug Monetary Theory, a superset of Mises’ work, in the sense that it is more rigorous (dont ban me! Try Moldbug’s Crash Course in Econs essay first).

    • Lucy in the sky w Dimon says:

      Forgot to add this gem from MoMT:

      Money is the sole bubble that need not pop (since an economy absolutely needs at least one MoS).

      But if it does, say dollars pop/hyperinflate cos Ben is being naughty, it is precisely equivalent to Mises’ “flight to value”. As in, people rush to get out of the Money commodity (gold, silver, dollars, BC) into some other commodity, making that the new Money. The prices of food etc go sky high in terms of the old Money commodity and way lower in terms of the new Money commodity.

  13. Jim O'Connor says:

    I’ve expressed something pretty much like the above argument Bob quoted, but without any claim to making any proof. I don’t claim to refute anything either. It is more of a question I have that gives me pause.

    This is an attempt at light, not heat.

    Is all money always in a bubble?
    When I think of bubble I think of something which has had its price manipulated by other than market forces. Gasoline and plywood aren’t in a bubble when their prices rise precipitously because of a hurricane. That is the price reflecting demand with a change in demand and availability reflecting economic reality/economic “truth”. Even if the price change is brief it isn’t a bubble, per se. In a bubble prices reflects systematic lies fed into the price system. Or am I being to ideological in this definition?

    So I don’t think that all money is in a bubble by definition of it being money, as this arises out of the “truth” of free exchange.

    Money is based on faith/expectation of at least short term stability or predictability. Slowly decreasing in value (Fed Reserve Notes) is less bad than zooming all over the place (gold recently, bitcoin, etc). We hold money to reduce risk. If holding money doesn’t reduce risk then holding money is counterproductive. If something has an alternate use I have an expectation that it will always be worth SOMETHING, so the risk in holding it longer is lower. I may only be able to get a ham sandwich for my one ounce gold coin, but it is better than using it to prop up an uneven table. What is the alternate use for a bitcoin? What distinguishes bitcoin from any newer crypto-currency which may come along? There is nothing about bitcoin which is intrinsically non-reproducible. Just as gold would be useless as a money if shiny, dense, non-reactive metals were common.

    My non-rigorous treatment here may be more noise than signal. Hopefully not.

  14. Major_Freedom says:

    Found a pretty good inforgraphic on the history of Bitcoin, for those who, like me, are not as well versed in it as we would like to be.


  15. Chris B says:

    I admit I don’t understand bitcoin or the appeal of it. I’m not that well-versed in it so please don’t pick a fight with me on the subject. I am neither pro or con bitcoin. I believe you can use whatever you like. What I don’t understand is why I would trade dollars, which are widely accepted and have anonymity, for bitcoins that are very volatile, may or may not have anonymity (depending on what you read), and could lose their value over night. I know I sound a little like Gary North here but I thought some of the points he made were valid. Bitcoins are not widely known by too many people outside our little economic/libertarian community. I’ve asked at least 20 of my friends, my parents, my kids, and they have no idea what they are. On the other hand all whom I’ve talked to know what gold is (just using gold as an example.) If I were to ask them what they would rather have I can guarantee almost all of them would choose cash (dollars) or gold/silver over bitcoin. So what is the real benefit of using bitcoin? I would hate to trade $1200 for bitcoins and have the value of a bitcoin be $600 tomorrow. And I know the dollar has lost such and such a % since the Fed, and gold has gone down in price, etc. But the swings in, say, gold haven’t been anything like bitcoin. As for anonymity, cash works just as well. Maybe not on the internet but if there were something I was purchasing that I wanted kept secret I would find someone close to me that I could use cash with. And lastly, if my bitcoins are stolen it seems like there is no recourse for this. Once they are gone they are gone. And from what I’ve read this seems to be occurring more and more. At least I have some recourse if my cash or gold is stolen. Maybe I’m just not getting the appeal or I’m missing something but it seems like too great of a risk to trade cash, gold, or whatever, that I worked hard for, for bitcoins. And yes, I understand subjective value, blah, blah, blah…but I hope you understand what I mean, Austrian economics aside (or Keynesian economics, Chicago school, etc.)

    • Major_Freedom says:

      Chris B:

      You’re presuming that Bitcoins are valued in dollars. That is dollar based thinking.

      If Bitcoins are money, you have to start valuing things in Bitcoins, the way you are currently valuing goods and Bitcoins in dollars.

      Thus, what if you started valuing goods in Bitcoins, and totally ignored dollars? Wouldn’t the exchange value of Bitcoins be a function of the supply of Bitcoins and the supply of goods and services? If you do that, who cares how many dollars there are, that is, who cares if the dollar to Bitcoin exchange rate fluctuates wildly? It would be life if the value of dollars to moon cheese fluctuated wildly in a world of dollar based money.

      • Tel says:

        If Bitcoins are money, you have to start valuing things in Bitcoins, the way you are currently valuing goods and Bitcoins in dollars.


        Anything can be valued in terms on anything.

        • Major_Freedom says:

          Sure, but when the context is valuation of goods in a monetary economy, it makes little sense for a potato farmer to fret over the fact that the value of potatoes has precipitously declined relative to the value of sundried tomatoes. It makes much more sense to fret over the fact that the value of potatoes has declined relative to dollars. Producers seek money profits and go bankrupt on the basis of lack of money profits, not sundried tomato profits and losses.

    • bloodyrich says:

      remember, while dollars are ‘anonymous’ you can’t use them online in that anonymous form. They must use non-anonymous 3rd parties. And if bitcoin was not at least partially anonymous, then how have any been stolen? Wouldn’t the blockchain show us ‘where’ & ‘who’ has the stolen BTC? The answer is it doesn’t What the block chain does allow, is if someone uses the same wallet address that they used for a transaction that has been identified with their person [i.e. when buying BTC using bank account], then all other transactions with that address will be identifiable to them also. The answer is to always use new addresses to send & receive. And the BTC can be sent through ‘paper wallets’ then to an anonymous online wallet for another layer away from their IP address. More private than visa or paypal.

  16. Smiling Dave says:

    I can’t speak for the rest of the internet, but here is the argument:
    1. Mises has proven that all money must start off with some commodity value.
    2. But bitcoin has no such value.
    3. Thus bitcoin can never be a money, and certainly is not now a money.
    That’s all there is to it.

    Now some people, when seeing this impeccable reasoning, start to wonder, “If it’s not money, and it has no other use, then why is anyone buying it at all?”

    To which the short reply is, it’s a mania, and a bubble.

    If Bob is asking, “But then all money that rises above its commodity price is a bubble, too.” The answer to that is very simple.

    No. Non sequitor. Mises Thm. distinguishes between rising from a non zero value, which is possible and indeed very likely, to rising from a zero value, which is a bubble.

    I know this is very subtle to some people. I mean, zero and a penny are almost the same, right? Why this big noise about zero being different? They have to study their Mises, and their math. And of course, visit my humble blog http://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

    • Matt M (Dude Where's My Freedom) says:

      Attempting to distinguish between various “types” of value is a dangerous game, even when Mises is the one attempting to play it. People want what they want, and the economist has no business passing judgment on those silly people who want bitcoins instead of gold. Don’t these idiots know that you can’t even build a statue out of bitcoins? Must be a bubble then, right?

      Sorry, but Austrian economics is (supposed to be) better than this. People want gold because it’s gold, and they want bitcoins because they’re bitcoins. Judging the motivations of *why* different people want different things is beyond the scope of economics.

      • Smiling Dave says:

        Thank you for that insightful reply. I’m still a bit confused about something, though.

        Could you kindly point out which line of Mises’s proof of his regression theorem is wrong, and why, like a teacher marking a geometry exercise, so I’ll know where exactly he blundered?

        Or is it enough to just declare what he did a dangerous game, and point out that people want what they want, and leave it at that? I am having a bit of a problem with that, because I can’t wrap my head around where exactly his mistake is.

        Thanking you in advance,

        • Ken B says:

          If you can, as several of us asked for repeatedly, break the alleged proof down into discrete, formal steps that would be a start.

          • Smiling Dave says:

            Already been done.. Just read the Bitcoin Takes a Beating article on my humble blog.

            • Keshav Srinivasan says:

              That post isn’t written in formal steps.

              • Ken B says:

                No it’s not.

                Oh boy, another 800 comment thread …

        • Matt M (Dude Where's My Freedom) says:

          No problem.

          Mises errored by attempting to distinguish between “commodity value” and any other kind of value. Not only is it not particularly relevant *why* someone wants a certain good, but it’s also something that we can’t directly know or observe, because it would require us to read minds and attempt to judge motivations, something Mises refuses to do in any other case.

          Exactly when did gold stop being valued as a commodity and start being valued for exchange? There was no instant moment. It’s a slow and gradual process. The same is true for Bitcoin. Saying that Bitcoin can’t be money because people value it *for the wrong reason* is judging values, which is not the task of an economist.

          If it looks like a duck, walks like a duck, and quacks like a duck, then it’s a duck, regardless of whether the owner of the duck thinks he’s getting a goose.

    • Lucy in the sky w Dimon says:

      From http://jpkoning.blogspot.sg/2012/10/bitcoin-steps-on-toes-of-few-popular.html

      “Bitcoin challenges Mises’s Regression theorem because bitcoin never had an initial non-monetary use. They are just bytes. You can’t eat them, wear them, or decorate with them.

      There are three ways you can proceed with this.

      1. Actually, bitcoin did have an initial non-monetary use so the regression theorem still applies. In its initial form bitcoin was valued as a sign of geekiness, a demonstration of one’s devotion to technology. Based on this initial non-monetary value, a Misesian progression could proceed. This explains why seemingly valueless bitcoin was eventually accepted in payment for a pizza and why it continues to be valued as money today.

      2. No, Bitcoin never had a non-monetary use. It’s intrinsically worthless. It’s a ponzi scheme. In the short term, people can irrationally bid up the price to some non-zero amount. But in the long term the logic of the regression theorem requires that the price of Bitcoin fall to zero.

      3. The regression theorem is wrong.”

      I think #1 is right. People valued BC initially cos of the cool/geek factor. That bootstrapped it to a non-zero value and then Mises’ analysis applies. So, #3 is wrong.

      #2 is just plain wrong, as one cannot normatively judge people’s valuation of some item as “not sane/rational”. It is subjective and a revealed preference, and is what it is.

      For more rigour still re BC/Money: http://unqualified-reservations.blogspot.sg/2009/07/urs-crash-course-in-sound-economics.html

      • Ken B says:

        You forgot one.

        4. It had inestimable value because it refuted Mises. This value meant the “regression theorem” still applied.

        • Bob Murphy says:

          OK I like that one Ken B. Not bad.

        • Lucy in the sky w Dimon says:

          Good one. Almost Hofstadter-like in its “strange-loopiness”. This would be a subset of #1 though =) As in, someone (who was probably a konniving Keynesian) immediately bought BC cos he thought that it disproved Mises and he had to have a piece of that action. Alas, he immediately gave BC its first mkt price and thus validated Mises, and also set BC onto its path to Money-ness. Irony, I think they call it.

          But seriously, to refine/qualify what someone said below, any new commodity (even the first time a sliver of gold was dug up) starts from a zero/undefined mkt price. It needs that First exchange in return for another good/service to set a mkt price, whence it can proceed and perhaps even become Money, if it has the right qualities for being Money. RT thus applies.

      • Smiling Dave says:

        1 is fine, except that it ignores one little detail that sends it crashing and burning. There has to be a large amount of geeks, enough to create a market for bitcoins to be used as a medal of geekiness. It has to be coveted, desired, sought after, by huge crowds who want it to decorate their laptops for the sole purpose of proving they are geeks. Which of course never happened, and never will.

        Without the hordes of geeks clamoring for bitcoin badges, the regression thm is not satisfied.

        Just do a search on my humble blog for the phrase “wide demand” to find quotes from Mises in HA saying this all explicitly.

        • Major_Freedom says:

          “There has to be a large amount of geeks, enough to create a market for bitcoins to be used as a medal of geekiness.”

          You say this like we’re still in a world where only hypothesis on the regression theorem applies. RIGHT NOW Bitcoins are being valued in exchanges….and yet Bitcoins are not universally accepted and are hence not money.

          You’re seeing the regression theorem unfold before your eyes, and yet you’re completely blind to it.

          • Smiling Dave says:

            Not sure what your first sentence means.

            As for right now, right now bitcoin hasn’t done anything worth talking about. Read on:

            I have explained my case in great detail. Look for Bitcoin All in One Place on my humble blog. You’ll see a list of articles examining bticoin from every angle. One of them discusses the “right now” of bitcoin, and why it’s meaningless. It even references Bob’s article on the subject. I think the phrase “No Doubt About It” is in the title.

            Search, oh seeker of knowledge, and thou shalt find it all before you in simple language.

            • Major_Freedom says:

              “As for right now, right now bitcoin hasn’t done anything worth talking about.”

              This is nothing but an “F U”. You’re not saying anything with this. You’re just voicing your displeasure.

              Regardless of whether you like it or not, Bitcoins are being exchanged for things other than Bitcoins. And, coupled with the fact that Bitcoins are not (yet?) universally accepted, means, at the very least, that Bitcoins are not “falsifying” the regression theorem (nor the Barter theory either).

              Your rhetoric is sloppy, imprecise, and rather offputting.

        • Lucy in the sky w Dimon says:

          SD, the RT implies differently. As an example: there can be just one person who valued a new commodity for some purpose, and established a mkt price for it, from which point the commodity spread into wider use, and then became Money eventually. Say gold was valued – by the first chap who found it – for its colour. He sold it onto someone who liked it for same or for its shininess and from there, there is a clear known progression onto Money-status.

          Speaking as a sorta geek, I can certainly imagine buying some BC for a few cents years ago to satisfy my early adopter, tech-loving instincts/preferences. Not all medals are outward-facing, as in reliant upon admiration/envy from a large (how is that defined objectively anyway?) group of other people. I would have been quite happy, nay ecstatic to be the first person to anonymously mine and sell a BC to someone else, thus establishing a non-zero market price for BC and setting the Pro/Regression in motion.


      • Major_Freedom says:


        That’s correct. But it’s even easier to see how Bitcoins satsify the regression theorem. Right now, Bitcoins are not money, because they are not universally accepted. And yet, right now as we speak, Bitcoins are being valued in exchanges. So no matter what happens going foward, Bitcoins becoming money or Bitcoins not becoming money, the regression theorem will either apply to Bitcoins as money, or Bitcoins will not become money and so the regression theorem doesn’t even have anything to say.

        I am actually surprised how many people are missing the “universally accepted” requirement for a thing to be a money.

        • Smiling Dave says:

          See above for the flaw in the “right now” argument.

          • Major_Freedom says:

            You did not point out any flaw above.

        • Matt M (Dude Where's My Freedom) says:

          Probably a semantics issue. I think if you want to get really technical about it, NO money is “universally” accepted. There will always be SOME holdouts who demand payment in alternative currencies, barter, etc…

          • Major_Freedom says:

            OK, fine, generally accepted then.

            You’re right, there is a fuzzy line that “universally” doesn’t do justice.

            But the number of people who would refuse free dollars no questions asked, are so minimal that FOR ALL INTENSE AND PURPOSES (did you cringe? lol, did that on purpose), might as well say universally and be a little lazy about it.

        • Lucy in the sky w Dimon says:

          hi MF, the example Koning gives provides a plausible and, very likely, the actual First use of BC, giving it a non-zero value to someone. And from there, RT applies cleanly. The first use is critical to establish, given that a new commodity cannot snowball into Money-status without one. Once a plausible one is found, RT withstands all critiques.

          Actually, there is a case to be made that the first exchange value placed on BC may have been by someone who essentially understood RT, and thus bought BC as a high-upside, extremely asymmetrical, positive black-swan bet on BC 1) replacing dollar and 2) beating out gold as the dollar’s replacement for the new global Money. That first purchase started the ball rolling on RT as applied to BC and here we are w BC at hundreds of dollars.

    • Ben B says:

      Don’t all goods “rise from a zero value”?

      • Smiling Dave says:

        The universe, at any given moment, can be split into three disjoint sets.

        First, money.

        Second, things that are not money, but are in wide demand, and people are actually willing to pay good money for them, because they are so useful for some non monetary use.

        Third, everything else.

        The things in the first group are already money.

        The things in the second have a chance of someday becoming money.

        The things in the third category have no chance, ceteris parebis, of ever becoming money.

        Bitcoin thus has no chance.

        Now if someday it does acquire some non monetary use, for example it turns out that a computer with a bitcoin in it will zap flies and mosquitoes, and people start coveting laptops with bitcoins on them to zap those mosquitoes, then bitcoins have a chance of becoming money. But as it stands, fugeddaboutit.

        • Ben B says:

          Those “things that are not money, but are in wide demand” would have at one point been “everything else”, right? So how did they go from “having no chance of ever becoming money” to having a chance of becoming money?

          • Matt M (Dude Where's My Freedom) says:

            And there exists the quite obvious possibility of something being both money, and in wide demand because people are willing to pay good money for them for a non-monetary use.

            Like say, gold and silver.

          • Smiling Dave says:

            At first, very few people wanted them for something. As time went on, more and more people wanted them for some non monetary use. Gold for jewelry, and so forth. Once a ton of people wanted the thing for a non monetary use, it moved from “everything else” to “potential money candidate”.

            • Major_Freedom says:

              Same thing is true for Bitcoins.

        • Ken B says:

          In which category do we put a large donut shaped rock at the bottom of the sea?

          • Smiling Dave says:

            Depends on the culture. If a lot of people want it to be known as their donut, it is in wide non monetary demand.

            As I said before, the geek badge is fine, if you have enough geeks. But you don’t.

            • Ken B says:

              Not quite right. It’s money. Look in Money Mischief by *ahem* David Friedman’s father.

      • Major_Freedom says:

        Personally, I prefer saying undefined, rather than zero.

      • Lucy in the sky w Dimon says:

        Any New commodity (say, the first time gold was dug up) arises from a zero price. As MF noted, undefined would be a better word for what you mean.

        All goods however do not start from a zero price. If the good or even a commodity already exists and has been exchanged in the mktplace even just once before, then the last price at which it was exchanged is the mkt price. The owner of the good can ask/hope for a higher price, but a mkt price does exist, which all other participants will def refer to when deciding whether the new price demanded is acceptable. Only if he sells the good does the mkt price change to the new one. An unconsummated “ask” or “bid” is not the same as the mkt price. That arises only from the last consummated mkt-exchange, and only changes at the next exchange.

    • Major_Freedom says:

      2. is clearly false, since there are individuals who are trading them for goods.

  17. Lucy in the sky w Dimon says:

    Following on from the Koning article quoted above showing how RT could apply to BC, I wanted to add that it IS possible for BC and other such currencies to violate RT though.

    That would happen if the people who bought it bought it cos they understood that it could potentially replace the dollar as money and absolutely no one bought it – ever – for any non-monetary uses (such as geek pride, curiosity etc).

    That a commodity has no non-monetary use before it starts getting used as Money is precisely what RT says cannot happen. Here, we are differentiating between how BC may have got started (as per Koning, which may not have violated RT) versus an alternate method by which it also could have started, which Does violate RT. That is, RT is not essential in the establishment of a Money by a free market.

    The relevant explanation: http://unqualified-reservations.blogspot.sg/2011/04/on-monetary-restandardization.html

  18. bloodyrich says:

    Paul Krugman hates bitcoin. Therefor it has value. case closed.

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