2013-04-22 Free Banking: George Selgin: Bitcoin

[n8rwJeTt8TrrLKPa55eU]

Long essay basically addressing Bitcoin and the regression theorem and the question of moneyness.

Selgin is undoubtedly a smart guy and very knowledgeable about monetary history, but here he draws a mix of both right and wrong conclusions, I don't think he has researched things deeply enough and lacks a technical background (at one point he even mentions Mintchip as a viable competitor).

I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010.  It's like they don't want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty.

Just how did bitcoin manage to overcome what (for want of a better name) I'll call the "oyster" problem? My partial answer is that, at least for some time after they first became available in 2009, bitcoins possessed three qualities such as no other actual or potential exchange medium had yet managed to combine. First, the open-source software providing for them to be "mined" by persons commanding sufficient computer-power allows only for a strictly limited annual output, with steadily diminishing returns such as will make unit mining costs approach infinity as total output approaches 21 million coins (as it is scheduled to do in 2040). In short, with just over 11 million bitcoins outstanding so far, no amount of computer power or time will ever expand the quantity by more than another 10 million. No one, in other words, is able to make a bundle by striking bitcoins at libidum. The problem of securing trust that might confront a prospective issuer of private "fiat" money is thus averted. In this respect bitcoin is more like a commodity than a fiat money, which is why I prefer to label it a "synthetic" commodity.

The other features that made bitcoin unique are (1) the untraceable nature of transactions conducted using it and (2) the fact that, being a "digital" money, it can circulate electronically. Bitcoin, in short, was the first medium to allow for perfectly anonymous transactions, avoiding both a paper trail and face-to-face contact, and to do so with the same convenience as any other sort of "digital" payment. Bitcoin's inventors were thus able to take advantage of an unfilled niche. But filling it guaranteed nothing: the water was there for the horses to drink, but whether any would risk a first sip remained to be seen.

http://www.freebanking.org/2013/04/22/bitcoin/

[hazek]

I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010.  It's like they don't want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty.

Addendum (April 23): Over at Bitcoin Forum a commentator observes, regarding my post: "I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010. It's like they don't want to get their hands dirty interviewing people like NewLibertyStandard or Theymos who can give them proper first-hand accounts of how and why BTC/USD markets for hobby-driven technogeeks and ideologically-driven anacrholibertarians arose lockstep with increasing mining difficulty." While I can't pretend to be chaffing at the bit to converse with ideologically-driven libertarians, whether anarcho- or anacrho- or both, I will say that I don't see what the emergence of BTC/USD markets has to do with the "oyster" problem I pose. Sure, once bitcoins became desirable enough people wanted to be able to get hold of them without mining for them themselves, e.g., by purchasing them with dollars. Nothing puzzling about that. But the fact that entrepreneurs were quick to respond to that desire hardly explains why anyone was willing to be among the first persons, if not the very first person, either to devote effort to mining bitcoins or to offer to exchange valuable stuff, whether dollars, merchandise, or labor, for them. Should anyone at Bitcoin Forum wish to enlighten me and others on the matter, as I'm sure many can, I should be very grateful to him or her.

So go on, head on over there and give him your story.

[n8rwJeTt8TrrLKPa55eU]

Ok Hazek, I don't like registering and posting on other websites, but in this instance I've made an exception just for you

Hello George.  I'm the person who wrote that post on bitcointalk, someone suggested I follow up over here.

I myself arrived at Bitcoin after it was already over $1 and MtGox was established, so cannot give you a firsthand account of its early days or value bootstrapping.  However the beauty of Bitcoin, as another commenter pointed out, is that we are lucky to be observing the birth of a new kind of money within the immediate past.  We don't need to try to figure out what the Lydians or Ionians were thinking 2500 years ago.  In this case, we actually have written records on social media and, most importantly, most of the people involved since the get-go are still alive and many are still active in the Bitcoin community.  You and other researchers can go to the forum, register (anonymously if you wish), and directly ask those people about events in 2009, their own motivations, and the motivations of their peers.

More precisely, some very interesting people that you should talk to who should be able to give insight on the "oyster" question:
*Hal Finney: One of the first (or possibly even the first) users/miners after Satoshi, recipient of the first Bitcoin transaction. He currently has a rapidly-advancing degenerative, disabling disease but still manages to post occasionally.
*NewLibertyStandard: First person to make a BTC/USD market and publish exchange rates.  Ask him how he bootstrapped his valuation methodology given that no prior prices or transactions existed, and what reasons people gave for buying or selling coins from him.
*Theymos: Designated admin by Satoshi on bitcointalk, early user/miner, sold 15,000 BTC on Bitcoin Market for ~0.003 USD: the all-time low on any market. How did he arrive at "overvalued"?

Aside from direct interviews, reading the oldest threads on the forum also provides good information regarding the mindset of participants in 2009 and 2010.

Feel free to PM me on the forum if you need further assistance. BTW there is nothing to fear over there, most people (especially the three above) are polite and friendly, but if you don't want to deal with the occasional troll or mental patient you can just send private personal messages to any user instead of posting publicly.

PS: I very much enjoyed your research and talk on private coinage, and you do have a special distinction as the first economist I remember who took Bitcoin seriously.

[marcus_of_augustus]

That was a very worthwhile read. I'm liking the deliberate, measured, methodical approach George is taking to bitcoin as he has done this since day 1. His outside observer analysis is second to none at this stage, bitcoiners need to take very seriously his critiques. It is easy to be swept up when you are invested (I don't think George is from reading his stuff)

I'm not too concerned about the finer details of why someone first traded bitcoins for USD, or anything else for that matter, that is a point for historians now imo. The fact is they did, and it could easily happen again for any other market based Internet currency that wants to get boot-strapped onto the network. In fact, if a corporate body wanted to do it just using their branding and some kind of promotional "free money" give-away I'm pretty sure any competitive currency could be launched fairly easily.

Paradoxically, the very innovations that may eventually doom bitcoin also explain why it deserves to be regarded as one of the most promising developments in the history of money since the invention of ordinary coins. For, as I explain in my paper on "Synthetic Commodity Money," its otherwise modest achievement proves that, with the help of the right software, one might design an "ideal" money commodity, with a supply function guaranteed to achieve whatever criterion of macro-economic stability one likes--be it a constant nominal money stock growth rate, a stable general price level, or a stable level or growth rate of nominal GDP. No muss, no fuss, and, best of all, no FOMC. Admittedly, it's only a possibility. But what a possibility!

I liked particularly these points and thoughts on better Internet currencies and bitcoiners need to watch very closely for competitors that WILL arise that can fulfill other macro-economic properties better than bitcoin ... like one with an algorithmically ensured stable value (e.g. against a basket of real world goods, milk, bread, burgers, fuel, etc). This is a difficult problem to do with a decentralised, trust-noone currency since who's commodity ticker would you trust once they know it is being used to set the value of a currency? (take note Fed. Res,, CME, Comex think we haven't noticed?)

[lonelyminer (Peter Šurda)]

I don't understand why so many ivory tower academics speculate about why and how Bitcoin got its initial value, given that the transition and motivations are fully documented and readily available for anyone willing to read the posts and threads on this forum from late 2009 and early 2010.

They have been conditioned with a "theory" about how it might happen, so they are so blinded that they disregard empirical data. The analogy I use to demonstrate this methodological fallacy is "GPS cannot work because the earth is flat".