ECB paper on Bitcoin and virtual currencies

[Roger_Murdock]

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I think that's right. Money is information, but in order to serve that function, it needs to be reliably scarce. Using a commodity for money was simply one way of making sure that requirement was met. With fiat, you have to trust that the issuer will not simply decide to debase the currency. They can do so because the value of the new money they create far exceeds its marginal cost of production. But that's also why Bitcoin is more like commodity money than fiat. Its value, assuming competing suppliers, is equal to its marginal cost of production, and that's why some have called it "quasi-commodity money."

Edit: One of the reasons that Bitcoin is better than commodity money is because it is pure information. The rate of new coin creation is fixed ahead of time and known to all participants. And new coin creation is also a temporary phenomenon. If you are using gold as money, and a huge new discovery of gold is made or there's a massive breakthrough in mining technology, that's not actually a good thing from a systemic perspective. It's great that more gold is available for industrial uses, but from a monetary perspective, the information conveyed by money has become less reliable.

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[BCB]

Guys Guys, you're making my head spin.

I LOVE the debate/conversation going on in these threads and buy no means want to discourage it.

But I think we should begin to simply distill what we can all agree on (if that is even possible).  There are some terrific nugget in this thread and we should try to pull them out and put them to good use:

What is Bitcoin.
What makes Bitcoin unique.
What makes Bitoin different.
What the ECB paper got right about Bitcoin.
What the ECB Paper got wrong about Bitcoin.

I think the economic theory had to be distilled to simple parable statements.

What is the one-minute distillation of this thread?

Any takers.

[molecular]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

[molecular]

What is the one-minute distillation of this thread?

Any takers.

"Bitcoin community at large is still oblivious of the fact they are actualy testing and improving our proposed one world currency system."  

"Bitcoin can be a real danger if it grows and we don't really know what to do about it once it does."

[Mageant]

What is the one-minute distillation of this thread?

Any takers.

"Bitcoin community at large is still oblivious of the fact they are actualy testing and improving our proposed one world currency system."  

"Bitcoin can be a real danger if it grows and we don't really know what to do about it once it does."

IMHO the only things they could do (and what has been going on) is spreading FUD, blocking exchanges and outright hack/DDOS-attacks.
They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

[Roger_Murdock]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

I disagree. If you have bitcoins, that shows that you did give value to society either by securing the Bitcoin network or by exchanging other goods and services for coins. I think your issue is whether you gave "enough" value to justify the potentially-huge appreciation in value you may reap if your coins become more valuable. I think so. We're taking a big risk on an untested but potentially world changing technology. If there were no chance of a big payoff, there'd be no way to bootstrap Bitcoin to the level it needs to be successful.

But no, the fiat printers didn't give value. And that's why the system is breaking down. They're only able to receive value because of a government granted monopoly backed by the threat of force. Bitcoin is voluntary and that's why the information it provides about value is more reliable.

[justusranvier]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

[paraipan]

...

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

I will be interested to know more about it, please explain

[evoorhees]

Just a random thought.  As others have pointed out, the three categories of "virtual currency" the ECB identifies in its paper are interesting in an academic sense, but from a practical perspective, it almost seems silly to talk about them together.  It's sort of like doing a report on the threat posed by various lizards and discussing the following:

1. pet iguanas (like WoW gold and other "Type 1" currencies, these guys are cute and essentially harmless);
2. pet crocodiles (like Linden dollars and other "Type 2" currencies, these guys could be dangerous if you let them grow large enough and didn't keep them contained, but the threat is certainly a manageable one);
3. Godzilla (Japanese-in-origin Godzilla is the "King of Monsters" and Japanese-in-origin Bitcoin is the King of Cryptocurrencies; Godzilla had the power to destroy entire cities and Bitcoin has the power to destroy an entire financial system; Godzilla started out as a villain -- and that's certainly how the establishment views Bitcoin now -- but he became a hero and defender of the people; Bitcoin is the people's currency and a powerful tool for protecting their freedom, and I think it will become increasingly recognized as such as time passes)

LOL +100 on this point!

The fact that all the currencies are "virtual" does not make them fundamentally similar in any way. It's absolutely silly to discuss WoW gold, Facebook Credits, and Bitcoin in the same vein. There is more similarity between USD and WoW gold than between BTC and WoW gold (central issuer, can be created out of thin air, etc)

[justusranvier]

I will be interested to know more about it, please explain

Newly-mined currency doesn't represent "value that you have given to society, that you have not yet redeemed". Currency that is accumulated via trade does represent unredeemed value.

Minting currency is necessary just because it has to come into existence somehow, and since Bitcoin is fully transparent about how this process people are willing to use it.

But in the long term it doesn't matter because the volume of trade taking place is already much larger than the amount of new coins being introduced and the creation of new bitcoins will become exponentially less significant over time.

[Luno]

If Bitcoin officially in the EU is judged a currency, all kinds of regulation will apply to Bitcoin businesses. As of now they can in their tax returns legally claim that they are trading a digital commodity. If that is going to change they'll need a licence to operate.

[evoorhees]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

Bitcoin is absolutely a commodity.

From Wikipedia:

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[3] A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[4] Petroleum and copper are examples of such commodities.[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

Bitcoin is a commodity because it is a fungible good without qualitative differentiation. Just like gold. Just like rice. Just like oil.

The fact that this commodity's primary use is "as money" does not remove the label of commodity from it. The commodity gold is used as money and jewelry. The commodity rice is used as food. The commodity oil is used as energy and for manufacturing. The commodity bitcoin is used as money.

We could call bitcoin a "purely digital commodity," but it is nevertheless a commodity and this shouldn't be contentious.

[molecular]

I noticed that the ECB never referred to Bitcoin as a commodity or as commodity money.  I think that is significant, legally.

They acknowledge the philosophy was inspired by the gold standard but their charts exclude gold. If you put gold in the charts and remove SLL it would provide a more constructive comparison (USD vs BTC vs GOLD)

I've never understood the notion of bitcoin as a commodity.

Money, in the abstract sense, is value that you have given to society, that you have not yet redeemed.  It is a token of a half-completed trade.  Bitcoin is an excellent implementation of that abstract idea.

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society. The same goes for fiat: what value has the ECB/FED/govt given to society that justifies them being able to redeem the enormous sums they print up?

With fiat, money is debt. With bitcoin it's a commodity ("some finitely available thing", at least). Your abstract idea of bookkeeping who owes what or is owed by "society" is pretty,.. well: abstract and not very applicable anywhere I'm looking. Bitcoin is an excellent implementation of something different. It can't be an implementation of what you talk about, because bitcoin has no concept of "value being give to society".

I think you might be talking about karma. :-)

I disagree. If you have bitcoins, that shows that you did give value to society either by securing the Bitcoin network or by exchanging other goods and services for coins. I think your issue is whether you gave "enough" value to justify the potentially-huge appreciation in value you may reap if your coins become more valuable. I think so. We're taking a big risk on an untested but potentially world changing technology. If there were no chance of a big payoff, there'd be no way to bootstrap Bitcoin to the level it needs to be successful.

But no, the fiat printers didn't give value. And that's why the system is breaking down. They're only able to receive value because of a government granted monopoly backed by the threat of force. Bitcoin is voluntary and that's why the information it provides about value is more reliable.

ok, maybe bitcoin fulfills your abstract money concept of "accounting of value one gave to society". It may even do so in some kind of a fair way.

Let me argue however your original question why some (or in this case I) think bitcoin can be viewed as a commodity money:

The feature about "commodity" that is relevant for a money is its "rarity". Bitcoin has that feature and can therefore be called a commodity money when talking about types of money.

I can argue tangibility in a similar way: The feature of "tangibility" that is relevant for a money is the ability for someone to deny access to the "object" (no third party risk). Bitcoin has that feature and can therefore be called "tangible" when talking about money.

Does this help you understand why maybe some say bitcoin is a commodity money?

It's quite a stretch that goes against everyday use of the terms, but I think it is very useful to categorize Bitcoin as a tangible commodity money for marketing purposes... and it's not wrong, is it?

[molecular]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

It's true that I was talking about the "bootstrapping phase". However: that phase might last quite a few generations or longer.

on other thing: you say: "the amount of coins being traded on a regular basis is many times the supply of new coins being minted". well, the same coins are being traded back and forth many times on the exchanges. Most of the volume is just playing games with bots.

I don't think the coins are well-distributed currently and they probably wont be any time soon. Strong believers are holding a tight grab on the bucketloads they have rightfully acquired. I don't, however, think that this is a problem.

[justusranvier]

It's true that I was talking about the "bootstrapping phase". However: that phase might last quite a few generations or longer.

How would that happen?

[Roger_Murdock]

molecular: I don't disagree with any of that.   And based on evoorhees' definition of a commodity, it may even be more technically correct to say that Bitcoin is "commodity money" rather than "quasi-commodity money." It seems like it's really just a question of being clear in the definition you're using. But whatever Bitcoin is, I like it!

[molecular]

I don't see how bitcoin fulfills this. Not that the early adopters and inventors of bitcoin don't "deserve" the many coins they have, but they have not received that as compensation for having given anything to society.

The means by which the initial supply of bitcoins is generated is an implementation detail that is only temporarily signifigant.

The post you replied to is descring steady-state behavior and you're talking about the one-time startup behavior.

Right now it's possible to get bitcoins without adding trade value, but only because it's necessary to create the initial supply somehow. Even now, though, the amount of coins being traded on a regular basis is many times the supply of new coins being minted, and mining is only going to get less signifigant over time.

[paraipan]

I will be interested to know more about it, please explain

Newly-mined currency doesn't represent "value ...

[Bart31]

They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

I do not think they can forbid Bitcoin, because all the negative things (money laundry, drugs, illegal payments, criminal activities) also apply to CASH. They haven't forbidden cash money right?

[molecular]

They could try to forbid Bitcoin outright, but if they did that it would go underground and stop nothing, which would expose their own impotence.

I do not think they can forbid Bitcoin, because all the negative things (money laundry, drugs, illegal payments, criminal activities) also apply to CASH. They haven't forbidden cash money right?

I'm pretty sure they would like to, though.

Maybe that's why they mentioned this fact about cash in the paper.