The Bitcoin Fallacy

[BCB]

From an Interview with Doug Jackson, founder of e-gold. Interviewed by Mark Herpel.

http://themonetaryfuture.blogspot.com/2012/01/final-days-of-e-gold-interview-with.html

(Q) A new open source decentralized digital currency called Bitcion has become very popular. (http://www.bitcoin.org) Do you know about Bitcoin and what is your opinion on this new project?

(A) Bitcoin, like several other so-called “virtual currencies”, embodies a familiar fallacy, the idea of “numbers that are money” where the liability nature of an issued medium is overlooked. Let’s suppose the cool kids issue some jazzy bits and a system to convey quantities of these “whatevers” from payers to recipients. To the promoters and other monetary logic-challenged people (press, general public) the cleverness of the technology supporting the bits and their transmission makes it self-evident that the system constitutes a monetary  advance, the currency of the future. With regard to value, it is asserted that by arbitrarily limiting the number of these whatevers spent into circulation – abstaining from “over issue” – that inflation” and loss of purchasing power are prevented.

Let’s say they spend a million of these whatevers into circulation. Perhaps an exchange market even emerges. The public sends real money to the exchangers. As long as demand is such as to support growth in circulation the exchangers have incoming real money, some of which can be paid out to the occasional customers who want to sell their whatevers. At some point though aggregate demand for whatevers declines and the exchangers are deluged with whatevers from people wanting to exchange them for real money. Their trading balances are now chock full of whatevers but running low on real money. At some point the exchangers – possibly the only entities that
have been holding value (in the form of trading balances of real money) to offset the whatevers – repudiate pending exchanges [that had been locked/committed at now inconvenient-to-honor exchange rates] and everyone is shocked.

OK, now let’s contrast with an issuer of real money. The techie parts for moving the bits may be roughly similar. But these bits are recognized by their issuers as constituting the embodiment of liabilities, obligations against which they must hold an equal portfolio of suitable assets, set aside expressly for their redemption. The difference between “virtual” and real money becomes evident if and when demand for the real money declines. No problema. Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation.

The only floor on which the value of any currency rests is the balance sheet of its issuer. A virtual currency may have some market value  based on its acceptance by its issuer (or affiliates) for desirable goods and services they themselves offer. That however is too flimsy a basis for any knowledgeable third party to regard their balance of a virtual currency as much of a store of value.

People who fall for the numbers-that-are-money fallacy tend to also say things “after all, the Fed creates money out of thin air” - which is simply incorrect. The Fed creates money by buying up (and holding) the ever-mounting debts of the US Treasury, and, these days, the mortgage backed and other securities that were recently regarded as so scary as to call into question the solvency of the banks that had been holding them.

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[TraderTimm]

So at some point, everyone is supposed to sell Bitcoin for whatever they can get in sovereign currency, regardless of what they originally paid for it in the first place.

Sorry, markets don't behave that way, and especially in markets that have appreciated several thousand percent in regard to the US Dollar and other currencies.

We have a massive cost-basis advantage that doesn't just "go away". In fact, as they continue to debase currencies around the world via central-bank chicanery, they only cause people to transfer their devaluing currency into "whatevers" because they're worth more than the paper-token money sloshing around the world.

The whole idea that the bitcoin ecosystem is "fragile" because prices could get "too low" versus other currencies is a bunch of unvarnished bullshit. If that was the case, then we would have all jumped ship when it got down to $2 bucks after hitting the highs near $31.

[crumbs]

From an Interview with Doug Jackson, founder of e-gold. Interviewed by Mark Herpel.
...

This is simply a typical argument against fiat on this forum, only flipped on its head.  The same willful blindness to own conflicts and inherent weakneses, the same convenient, overbroad strokes making opponent seem absurd, the contrived pseudo-playful verbiage ("so-called 'virtual currency,'" "Jazzy bits," "fallacy"  --rly, dood?).
TL;DR: Yeah, money is ridiculous when you don't get it.  Both fiat & bitcoin.

[benjamindees]

the exchangers – possibly the only entities that have been holding value (in the form of trading balances of real money) to offset the whatevers

This is, admittedly, a decent explanation of how the value of Bitcoin can fluctuate wildly.  Though it has more to do with the existence of exchanges, and close ties to the fiat money system, than with any inherent flaw in Bitcoin itself.  But what it doesn't do, is even come close to proving that Bitcoin can ever go to zero, unlike oh, say, e-gold. 

[cbeast]

OK, now let’s contrast with an issuer of real money. The techie parts for moving the bits may be roughly similar. But these bits are recognized by their issuers as constituting the embodiment of liabilities, obligations against which they must hold an equal portfolio of suitable assets, set aside expressly for their redemption.

And yet these liabilities and obligations are highly volatile and often become worthless.

A difference of opinion does not a fallacy make.

[vqp]

The article is from 2012. I would like to know his opinion now.

[teukon]

It seems that Douglas Jackson has a very poor understanding of Bitcoin.

He's made the assumption that a currency must have an issuer.  He also assumes that the difference between "real" and "virtual" money is in the attitude of the issuer towards the financial liability of issuance.

Many here would argue that the difference between "real" and "virtual" money is in the existence of an issuer, where gold and bitcoin have a real value that derive from their properties, not an artificial one based on promises.

[fixxi.net]

People who fall for the numbers-that-are-money fallacy tend to also say things “after all, the Fed creates money out of thin air” - which is simply incorrect. The Fed creates money by buying up (and holding) the ever-mounting debts of the US Treasury, and, these days, the mortgage backed and other securities that were recently regarded as so scary as to call into question the solvency of the banks that had been holding them.

Has somebody torn this poster into pieces yet ? Sentences like that must be punished with the most severe force of the truth.

Yes they print money out of thin air. Yes they are in a master - slave relationship with us. Yes more and more people are aware of it all. Yes we are the 99 %. Yes they are just average psychotic selfish crazies.

[superduh]

nicely worded piece of crap opinion. at least he sounds sophisticated by the way he writes.

[Carlton Banks]

So he's saying that money is valuable by virtue of consensus belief, and that floating point numbers aren't valuable in their own right? What would we do without these sages saving us all from ourselves. Waste of a couple of minutes, yet again

[leemar]

"Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation"

What does this mean?

[cr1776]

>"The Fed creates money by buying up (and holding) the ever-mounting debts of the US Treasury"

Buys it using what?  That's right, money created out of thin air.

[crumbs]

"Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation"

What does this mean?

He tries to dumb-down really complex & murky concepts.
"Ready to ... buy back" [the currency] with what?  More of the same currency?  At what rate? Who, exactly, is the issuer -- central bank or "the government" or the nation as a whole?

I'm sure the guy understands fiat money better than that, so to me he comes off as being flip.

[leemar]

"Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation"

What does this mean?

He tries to dumb-down really complex & murky concepts.
"Ready to ... buy back" [the currency] with what?  More of the same currency?  At what rate? Who, exactly, is the issuer -- central bank or "the government" or the nation as a whole?

I'm sure the guy understands fiat money better than that, so to me he comes off as being flip.

Thought so.

Whether it’s block-chain numbers, central bank numbers, wiskey, cigarettes or large stones, anything can be used as currency.  The aggregate value of that will be underpinned by confidence in it, and its utility.  There is an understandable disdain for Fiat on this forum, which I think actually works pretty well.   I just believe Bitcoin is a superior form of money, but time will tell.

[Boussac]

As a supporter of e-gold the guy must have fallen victim of a true fallacy: gold is a collateral and the bitcoin network is not .
Gold is a collateral because it has industrial applications in jewelry ? Bitcoins do have industrial applications in the field of payment processing.
The bitcoin network is scalable either through its own versionning or through altcoins networks if needed.

Well, for anyone who can think things through, an internet overlay network like bitcoin is made of computers and telecom equipment run by people.
In what way is it different form a large corporation processing electronic payments (like Visa, Mastercard, Western Union,etc)?
It's mostly about the legal structure since they are all made out of the same (computers, telcos, people).
Bitcoin is community run with people joing and leaving in a frictionless, informal process while large corporation have contracts and regulatory compliance that create frictions, inertia and costs.
Bitcoin is new because it is P2P but also because the units of accounts are shares of the network at the same time.

These two aspects (collateral and units of accounts=stocks) are most often overlooked or misunderstood by critics.

[BCB]

Bitcoin too has regulatory costs which creates tremendous friction here in the US and for any legitimate company that wants to do business with US customers.

[Carlton Banks]

Bitcoin too has regulatory costs which creates tremendous vacillating friction here in the US and for any legitimate company that wants to do business with US customers.

This is true in one specific use case: selling on an exchange and withdrawing the USD to your bank account. Guess how many other use cases there are? I'll give you a clue (you're in desperate need, it's only fair), it's more than one. >1.

[BCB]

Bitcoin too has regulatory costs which creates tremendous vacillating friction here in the US and for any legitimate company that wants to do business with US customers.

This is true in one specific use case: selling on an exchange and withdrawing the USD to your bank account. Guess how many other use cases there are? I'll give you a clue (you're in desperate need, it's only fair), it's more than one. >1.

Instead of asking everyone to guess why don't you enumerate your use cases.

[xxjs]

Is it millibitcoin?  Millibits? Millis? Centis? No - it is whatevers

[Carlton Banks]

Bitcoin too has regulatory costs which creates tremendous vacillating friction here in the US and for any legitimate company that wants to do business with US customers.

This is true in one specific use case: selling on an exchange and withdrawing the USD to your bank account. Guess how many other use cases there are? I'll give you a clue (you're in desperate need, it's only fair), it's more than one. >1.

Instead of asking everyone to guess why don't you enumerate your use cases.

Are you really so ignorant that cashing crytpocurrency out of exchanges is the only use-case imaginable? Or is this some subtle "ignorance trolling"? I'm beginning to suspect the latter, you clearly have some semblance of a presenting a logical argument, and yet no ability to research the gaps in your awareness that are consistently being pointed out to you by the majority of this community.

If not trolling, seek help

[Piper67]

The article is from 2012. I would like to know his opinion now.

He's not available for comment, he's having tea and cookies with the Wired writer who pronounced Bitcoin dead back in 2011 

[BCB]

Bitcoin too has regulatory costs which creates tremendous vacillating friction here in the US and for any legitimate company that wants to do business with US customers.

This is true in one specific use case: selling on an exchange and withdrawing the USD to your bank account. Guess how many other use cases there are? I'll give you a clue (you're in desperate need, it's only fair), it's more than one. >1.

Instead of asking everyone to guess why don't you enumerate your use cases.

Are you really so ignorant that cashing crytpocurrency out of exchanges is the only use-case imaginable? Or is this some subtle "ignorance trolling"? I'm beginning to suspect the latter, you clearly have some semblance of a presenting a logical argument, and yet no ability to research the gaps in your awareness that are consistently being pointed out to you by the majority of this community.

If not trolling, seek help

Carlton

Personal attacks do not make a good debate. I'm not going to advance your opinion for you. You make counterpoints but don't provide any support. You ask the reader to "guess."  So again Ill ask you to enumerate your use cases.

[TippingPoint]

Carlton

Calling someone ignorant (when they are clearly intelligent) is not productive.

[Carlton Banks]

Carlton

Calling someone ignorant (when they are clearly intelligent) is not productive.

I respect your output Tipping Point, but be advised that I am referring to it's specific ignorance of Bitcoin's uses, and not it's general awareness of worldly matters. This is not ambiguous in the context.

Remember that it is quite possible to be simultaneously ignorant and intelligent, as ignorance is only a lack of awareness or of information, while intelligence is the innate or learned ability to form cognescent thought patterns. They are not synonymous, and therefore I will call a spade a spade. If it consistently behaves ignorantly, ignorant is not an inappropriate observation.

[TippingPoint]

OK

Do what you have to do.

[BCB]

Ok. I am ignorant. Enlighten me. Assume I've never used bitcoin before. So enumerate the use cases. If you feel this exercise is beneath you then well just move on.   

My intention is clarity and understanding.

If you assume the I know (or should know a thing) then I assume I know what you assume I know then where is the real communication. Where is the understanding. Having strong opinions (or differences of opinions) is fine. That is why I engage here.  I'm truly interested in understanding the logic and the reasoning behind those opinions. But we get nowhere when you treat this inquiry with contempt. Why do you bother responding. Clearly you have an opinion and it matters to you. I'm just asking you to share it.

[johnyj]

From an Interview with Doug Jackson, founder of e-gold. Interviewed by Mark Herpel.

http://themonetaryfuture.blogspot.com/2012/01/final-days-of-e-gold-interview-with.html

Let’s say they spend a million of these whatevers into circulation. Perhaps an exchange market even emerges. The public sends real money to the exchangers. As long as demand is such as to support growth in circulation the exchangers have incoming real money, some of which can be paid out to the occasional customers who want to sell their whatevers. At some point though aggregate demand for whatevers declines and the exchangers are deluged with whatevers from people wanting to exchange them for real money. Their trading balances are now chock full of whatevers but running low on real money. At some point the exchangers – possibly the only entities that
have been holding value (in the form of trading balances of real money) to offset the whatevers – repudiate pending exchanges [that had been locked/committed at now inconvenient-to-honor exchange rates] and everyone is shocked.

What is that "real money" that he refers to? Is it fiat money? Value is decided by supply and demand, if there is no demand, even the gold will lose its value, but demand only comes from properties that can satisfy people's desire, there is no fundamental differences between many kind of currency

OK, now let’s contrast with an issuer of real money. The techie parts for moving the bits may be roughly similar. But these bits are recognized by their issuers as constituting the embodiment of liabilities, obligations against which they must hold an equal portfolio of suitable assets, set aside expressly for their redemption. The difference between “virtual” and real money becomes evident if and when demand for the real money declines. No problema. Issuers of real money, by virtue of these holdings of current assets, some or
all of which are highly liquid, stand ready at all times to buy back (if need be) every unit of their monetary liabilities they have spent into circulation.

This concept only applies to issuing money with a hard asset backing, typically gold. But what decide gold's value? It's still supply and demand to its root

People who fall for the numbers-that-are-money fallacy tend to also say things “after all, the Fed creates money out of thin air” - which is simply incorrect. The Fed creates money by buying up (and holding) the ever-mounting debts of the US Treasury, and, these days, the mortgage backed and other securities that were recently regarded as so scary as to call into question the solvency of the banks that had been holding them.

FED first create money, and then buy government bonds and MBS. You can also first create bitcoin, and then buy government bonds and MBS. You can also mine gold and buy government bonds and MBS. No difference at all