Regression theorem & Bitcoin revisited

[hazek]

This is a discussion I had on another forum:

Him:

Bitcoin violates the regression theorem. Bitcoin is purely synthetic, it was never tied to any consumer good, nor was it derived from any other currency that was tied to a consumer good.

Me:

You are misinformed. I think it's best you read http://wiki.mises.org/wiki/Regression_theorem yourself cause it seems like you don't understand what it means.

Him:

Nope.

Why are people willing to accept money as payment for goods today: i.e. why does it have purchasing power? Because those people expect it will have purchasing power tomorrow, and this expectation is grounded in their knowledge that money had purchasing power yesterday. So why did it have purchasing power yesterday...and so we begin the regress. But it's not an infinite regress, it concludes when the answer to the question "why does money have purchasing power today" is "because this 'money' is a consumer good, something valued in its own right."

But, as I said, bitcoin is not a consumer good, nor does it have any connection (present or historical) to any consumer good.

Me:

Ok seems like you get the regression theorem but you are misapplying it to Bitcoin.

I don't know if you know this but back in early 2010 when 1 bitcoin was theoretically valued a fraction of a fraction of a cent (this was just an approximation of how much it cost to produce it, no actual trades happened that would set this price) something strange happened. Some guy decided to put up a forum ad asking to exchange 10.000 BTC for 2 pizzas. And then something "stupid" happened, someone said yes and they carried out this transaction.

But what exactly did happen there? There was this guy with two perfectly good pizzas and he decided to exchange them for 10000 bitcoins?! Now why would he do that if not because he personally saw "something valuable in their own right" in them? And I argue that's exactly what he saw back then. To him bitcoins were a digital token, digital jewellery like gold earrings.

And then something even more stupid happened, there were more and more people who showed up wanted to "wear" this digital "jewellery". Now why is that, why would all these people show up and want to own these tokens worth practically nothing?? Was it just because it was a novelty? Was it because they were speculating they might get filthy rich one day if Bitcoin happened to catch on. Remember there was no trading back then and the currency was used by so few in effect it was dead so any expectation of a higher exchange rate were a lot less likely than merely a long shot.

But it doesn't matter why more and more people showed up wanting to hold them and exchange something of value for them. The important fact is they did and this is what drew the initial demand. Bitcoins, to them, for what ever reason were valuable in their own right.

And voila, regression theorem satisfied.

Did I get any of the facts wrong? Is my reasoning flawed?

[1713995952]

1713995952

[mcgravier]

Saying that Bitcoin cant work, because it does not fulfill regression theorm is like saying that vaccines cant work because they are not the result of natural evolution. The thing is that humans are beings of intelligence and reason - we are not bound to one natural path of evoution, we can push it forward, go right, left... or sometimes backward. Reality will validate our choice, the same way market will validate existance of bitcoin.

[xxjs]

Maybe at the time the regression therem was worked out, there had only been examples of paper money developing from commodity money.

Maybe when the population of the world had seen paper money working, it was possible to start a new money system without intrinsic value, but not before that time.

Wasn't the Deutche Mark restarted after the crash without intrinsic value?

It is possible that bitcoins have a miniscule intrinsic value, especially in the beginning when this was something new and could be used to brag. If it hasn't, it seems to be possible to create some by making noise on the internet.

[xxjs]

Conclusion: The regression theorem is useful in explaining todays prices, or the value of money: It is based on yesterdays value.

But regressing all the way back to the start of the money system: Either there has to be intrinsic value to the money, or not. No conclusion.

[xcsler]

Internet classroom circa 2075 (USD/BTC exchange rate = infinity):
'Lil Jimmy (via Skype): Mrs. Paul, why are bitcoins money?
Mrs. Paul: Excellent question Jimmy! When I was your age the only real money we had was gold!
Gold was money because of its intrinsic characteristics of scarcity, fungibility, divisibility, portability and durability.
Over the course of time, the free market recognized that these were the characteristics that made for the best money.
Then in the year 2009 a new commodity was discovered by the great Satoshi. An element known as the "Bitcoin Protocol". This element had all the same characteristics as gold except that it was electronic and not tangible much like your Facebook friends. In fact, it was even better than gold in some respects. I mean can you imagine paying someone with gold on the internet? Or carrying around little bags of gold in your pockets to pay for a pizza? (class laughs). The funny thing is that initially most of the people couldn't even recognize that Satoshi had discovered a new type of money. In fact, just like gold, it took years before people really started using bitcoins as money! Can you imagine that Jimmy? I know it seems crazy but that's how it all happened.
'Lil Jimmy: Mrs. Paul?
Mrs. Paul: Yes Jimmy.
'Lil Jimmy: What the @#$% is fungibility?
Mrs. Paul: Oh Jimmy!

[xxjs]

Funny story, but this part

Gold was money because of its intrinsic characteristics of scarcity, fungibility, divisibility, portability and durability.

Intrinsic value is the value apart from its moneyness: Nice to look at, electric conductivity, can make really thin sheets.

[MJGrae]

Did I get any of the facts wrong? Is my reasoning flawed?

I don't see any facts that are wrong. In fact if he really wants to argue the idea that there is supposedly nothing backing bitcoins, you can pull the Ace and say that the original value of a bitcoin was equal to the electricity (electrons, copper wire degraded, silicon & chipsets depreciation) that went into the creation of it. On top of that, because of those qualities and the fact that they were packaged into a nice little electronic token gave a slight buffer not to the intrinsic value but to the perceived value which, again, can be traced back to what the perceived value of other commodity currencies were at their own times.

I think you're spot on.

[xxjs]

Did I get any of the facts wrong? Is my reasoning flawed?

I don't see any facts that are wrong. In fact if he really wants to argue the idea that there is supposedly nothing backing bitcoins, you can pull the Ace and say that the original value of a bitcoin was equal to the electricity (electrons, copper wire degraded, silicon & chipsets depreciation) that went into the creation of it. On top of that, because of those qualities and the fact that they were packaged into a nice little electronic token gave a slight buffer not to the intrinsic value but to the perceived value which, again, can be traced back to what the perceived value of other commodity currencies were at their own times.

I think you're spot on.

The electricity that went into creating the block could not be intrinsic value of bitcoins - because you can not take the electricity out again.

[MJGrae]

Did I get any of the facts wrong? Is my reasoning flawed?

I don't see any facts that are wrong. In fact if he really wants to argue the idea that there is supposedly nothing backing bitcoins, you can pull the Ace and say that the original value of a bitcoin was equal to the electricity (electrons, copper wire degraded, silicon & chipsets depreciation) that went into the creation of it. On top of that, because of those qualities and the fact that they were packaged into a nice little electronic token gave a slight buffer not to the intrinsic value but to the perceived value which, again, can be traced back to what the perceived value of other commodity currencies were at their own times.

I think you're spot on.

The electricity that went into creating the block could not be intrinsic value of bitcoins - because you can not take the electricity out again.

But couldn't you say that the resources were exhausted and therefore the remnant of them is the coin? I'm not referring in this case to an exchange, but that the bitcoin itself is an extension of the very things it consumed in being created.

Though I suppose on second thought that isn't a very good parallel, since we do not think of dollars as having any value for the paper they are printed on (though we theoretically could).

[FreeMoney]

Did I get any of the facts wrong? Is my reasoning flawed?

I don't see any facts that are wrong. In fact if he really wants to argue the idea that there is supposedly nothing backing bitcoins, you can pull the Ace and say that the original value of a bitcoin was equal to the electricity (electrons, copper wire degraded, silicon & chipsets depreciation) that went into the creation of it. On top of that, because of those qualities and the fact that they were packaged into a nice little electronic token gave a slight buffer not to the intrinsic value but to the perceived value which, again, can be traced back to what the perceived value of other commodity currencies were at their own times.

I think you're spot on.

The cost to make something does not give it value.

My idea of bitcoin and the regression theorem is that maybe it applies maybe it's too much of a stretch, but it doesn't matter. Like the vaccine/evolution comment implies, just because there is a known route to something doesn't mean everything needs to take that route in order to work.

[FreeMoney]

Did I get any of the facts wrong? Is my reasoning flawed?

I don't see any facts that are wrong. In fact if he really wants to argue the idea that there is supposedly nothing backing bitcoins, you can pull the Ace and say that the original value of a bitcoin was equal to the electricity (electrons, copper wire degraded, silicon & chipsets depreciation) that went into the creation of it. On top of that, because of those qualities and the fact that they were packaged into a nice little electronic token gave a slight buffer not to the intrinsic value but to the perceived value which, again, can be traced back to what the perceived value of other commodity currencies were at their own times.

I think you're spot on.

The electricity that went into creating the block could not be intrinsic value of bitcoins - because you can not take the electricity out again.

But couldn't you say that the resources were exhausted and therefore the remnant of them is the coin? I'm not referring in this case to an exchange, but that the bitcoin itself is an extension of the very things it consumed in being created.

Though I suppose on second thought that isn't a very good parallel, since we do not think of dollars as having any value for the paper they are printed on (though we theoretically could).

Consider the value of the ashes of beautiful furniture.

[MJGrae]

The cost to make something does not give it value.

My idea of bitcoin and the regression theorem is that maybe it applies maybe it's too much of a stretch, but it doesn't matter. Like the vaccine/evolution comment implies, just because there is a known route to something doesn't mean everything needs to take that route in order to work.
[/quote]

Oh I know and I agree with you. I was just trying, and failing, at playing devil's advocate. Next time, Gadget.. Next time.

[Grant]

Did I get any of the facts wrong? Is my reasoning flawed?

I think your reasoning was very solid.

But i'd probably shoot straight at the core of monetary utility.

Gold has zero internet utility (even with the best compression methods it cannot be transfered over IP). While "cryptography+communication" does, so much that without it we couldn't have the kind of internet we have, and that's what gives bitcoin a physical backing.

Which seems to have been his final argument (which btw is invalid, something becomes money once 1 or more people accept it as valuable):

That is, even if it does have value as a consumer good to some people, it's not enough people for it become money.

[kjj]

Regression is useful when you are trying to understand how we got from barter with useful objects to where we are today.

Now that we are here, it hardly seems necessary to theorize on why we would want to switch from less useful monopoly money to more useful monopoly money.

[Walter Rothbard]

This is a discussion I had on another forum:

Him:

Bitcoin violates the regression theorem. Bitcoin is purely synthetic, it was never tied to any consumer good, nor was it derived from any other currency that was tied to a consumer good.

Me:

You are misinformed. I think it's best you read http://wiki.mises.org/wiki/Regression_theorem yourself cause it seems like you don't understand what it means.

Him:

Nope.

Why are people willing to accept money as payment for goods today: i.e. why does it have purchasing power? Because those people expect it will have purchasing power tomorrow, and this expectation is grounded in their knowledge that money had purchasing power yesterday. So why did it have purchasing power yesterday...and so we begin the regress. But it's not an infinite regress, it concludes when the answer to the question "why does money have purchasing power today" is "because this 'money' is a consumer good, something valued in its own right."

But, as I said, bitcoin is not a consumer good, nor does it have any connection (present or historical) to any consumer good.

Me:

Ok seems like you get the regression theorem but you are misapplying it to Bitcoin.

I don't know if you know this but back in early 2010 when 1 bitcoin was theoretically valued a fraction of a fraction of a cent (this was just an approximation of how much it cost to produce it, no actual trades happened that would set this price) something strange happened. Some guy decided to put up a forum ad asking to exchange 10.000 BTC for 2 pizzas. And then something "stupid" happened, someone said yes and they carried out this transaction.

But what exactly did happen there? There was this guy with two perfectly good pizzas and he decided to exchange them for 10000 bitcoins?! Now why would he do that if not because he personally saw "something valuable in their own right" in them? And I argue that's exactly what he saw back then. To him bitcoins were a digital token, digital jewellery like gold earrings.

And then something even more stupid happened, there were more and more people who showed up wanted to "wear" this digital "jewellery". Now why is that, why would all these people show up and want to own these tokens worth practically nothing?? Was it just because it was a novelty? Was it because they were speculating they might get filthy rich one day if Bitcoin happened to catch on. Remember there was no trading back then and the currency was used by so few in effect it was dead so any expectation of a higher exchange rate were a lot less likely than merely a long shot.

But it doesn't matter why more and more people showed up wanting to hold them and exchange something of value for them. The important fact is they did and this is what drew the initial demand. Bitcoins, to them, for what ever reason were valuable in their own right.

And voila, regression theorem satisfied.

Did I get any of the facts wrong? Is my reasoning flawed?

Thank you for this explanation.  I think your reasoning is correct, and this is a good way to explain it.

I would also argue that prior to being exchanged for goods and other currencies, bitcoins were valued for interest sake alone.  I know that when I first started investigating bitcoin, I was concerned that they didn't appear to have a prior value on the market, until I realized that I was so interested in them I was interested in purchasing them merely to try them out.  That proved they had value as entertainment, education, etc.  I'm not sure if that's materially different from your "jewelry" analogy.

Today it's clear bitcoins have value in a number of cases, international currency transactions being one prime example.  Now that they do have value, they satisfy the regression theorem.

[asdf]

There is no such thing as "intrinsic" value. Value is subjective, no debate.

Bitcoin is valued as a medium of exchange. You can't make zero fee online transactions that aren't tied to your real-life identity with any other exchange medium. This has value!

I think the regression theorem doesn't account for the fact that the "initial demand" of a currency can indeed be as a currency. People need to trade and trade is more efficient with a medium of exchange. The market values currency itself as currency.

[sgbett]

Commodities have certain properties. They are physical tangible good that cannot be replicated. They have some value to people (some say intrinsic value, i agree with the previous poster that says no such thing as intrinsic value - without a person to assign value, then something has no value!).They can be created, discovered or brought into existence in some way, and they can be destroyed, lost etc mostly the commodity exists in a quantifiable way and the quantity of a commodity is subject to the physical laws of nature. Gold must be mined, oil must be drilled etc

Bitcoin satisfies the conditions of a commodity, save one - it is not a physical tangible good. It's virtual existence though is governed by probability, its very unlikely that any virtual bitcoin can be 'duplicated', the so called double spend. Unless the encryption scheme is broken somehow. As it stands the probability of this is low enough that we accept that bitcoins cannot be replicated.

I think then, the value of bitcoin is that it is a scarce commodity. A commodity that does not require physical storage space, requires negligible effort to trade (think in terms of energy to ship from A to B). A commodity that can be traded almost anonymously, almost instantly, internationally, and in spite of governmental trade restrictions. No other tangible, traceable, valuable commodity can come close to bitcoin in this respect. I think that gives it enormous value. It's value is mitigated by risks. The risk it will be broken, the risk it will be criminalised etc

Bitcoins have value because they are a commodity not a currency. They have value in spite of the USD exchange rate, and not because of it. Thats how I see it!

[xcsler]

Good stuff sgbett!

[MJGrae]

Commodities have certain properties. They are physical tangible good that cannot be replicated. They have some value to people (some say intrinsic value, i agree with the previous poster that says no such thing as intrinsic value - without a person to assign value, then something has no value!).They can be created, discovered or brought into existence in some way, and they can be destroyed, lost etc mostly the commodity exists in a quantifiable way and the quantity of a commodity is subject to the physical laws of nature. Gold must be mined, oil must be drilled etc

Bitcoin satisfies the conditions of a commodity, save one - it is not a physical tangible good. It's virtual existence though is governed by probability, its very unlikely that any virtual bitcoin can be 'duplicated', the so called double spend. Unless the encryption scheme is broken somehow. As it stands the probability of this is low enough that we accept that bitcoins cannot be replicated.

I think then, the value of bitcoin is that it is a scarce commodity. A commodity that does not require physical storage space, requires negligible effort to trade (think in terms of energy to ship from A to B). A commodity that can be traded almost anonymously, almost instantly, internationally, and in spite of governmental trade restrictions. No other tangible, traceable, valuable commodity can come close to bitcoin in this respect. I think that gives it enormous value. It's value is mitigated by risks. The risk it will be broken, the risk it will be criminalised etc

Bitcoins have value because they are a commodity not a currency. They have value in spite of the USD exchange rate, and not because of it. Thats how I see it!

This is actually basically what I've been saying in a couple of other threads. I view bitcoins more as a commodity than a typical modern day currency, but since they are currently in the process of being used more and more for trade, they are moving into the commodity currency territory, as far as I'm concerned. Gold did the same thing, way back when.

[phatsphere]

The cost to make something does not give it value.

I haven't read all the stuff here, but just about that: I would argue, that in the case of gold, bitcoin & co, it boils down to reduction of entropy. for gold, you have to find and combine all the tiny bits (atoms) to bigger chunks. That reduces the scattering, i.e. entropy. this needs energy! bitcoin: the low hash value is one of the purest forms of entropy reduction you can get. also needs energy.

so, only the cost of making something doesn't count, but it counts if its goal is to make something "special" or "unique".