Medium of Exchange vs Store of Value - and effect on BTC worth

[Impaler]

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

Sure. Government backing is not secure.

Edit: Not even being flippant. This time. It really isn't.

Ok, a real response (albeit far too brief, forcing me to guess at your actual meaning), it sounds like your admitting that BTC is un-backed, but are arguing government backing is so poor that it is equivalent to no backing at all.  If that's your position then I think that's absurd, government backing even if it is not perfect is far superior to what BTC has.

If your a Gold-bug and define backing only as PEGGING to precious metal then sure that ceased a generation ago.  But the other two huge factors I pointed out, Legal-Tender status and payment of Taxes are not remotely in doubt and no one can make an argument for how thouse backings are going to go away.  Even in a government default, it is the BONDS of a government which are not payed, the state continues to enforce legal-tender laws and continues to accept payment of taxes in it's national currency.  BTC dose not have any chance of attaining these two qualities and will continue to be un-backed.

[deisik]

At the level where it matters for the question discussed (i.e. subjective utility), there is not much difference between these two concepts. Actually, at this level security becomes what gives the currency some value (indeed this is not enough) because it all finally boils down to trust. As a counter-argument, I can just as well say that backing up by gold is simply preventing government from abusing their power. And security all of a sudden now begins to play in the same field...

Simple mental exercise, suppose you have to pick up between two currencies. One can be counterfeited more easily that the other, otherwise they are on a par. Which currency would you choose?

Their is a lot of difference, something can not be an effective store-of-value if it lacks EITHER.  For a person to store value a person needs to do two things, they need to RETAIN an asset and the asset needs to RETAIN purchasing power.  If I had an object with perfect ability to retain purchasing power but it could be stolen very easily it would be a poor store-of-value, alternatively something that's very hard to steal but which has unstable in purchasing power would likewise be bad.  My total risk of loss is Retention Risk (losing the asset) + Valuation Risk (asset loses value).  So any logical and subjective personal assessment of an assets store-of-value is going to need to take both risks into account.

So, in short, you didn't actually say anything that would support your position. Retention of purchasing power (that is what matters here) ultimately depends on what the majority think about something as a store-of-value, whether it is worth being used as that (there is no god out there). And security of a currency does add to this subjective judgment in a positive way, whether you like it or not (see example in my previous post)...

[Ibian]

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

Sure. Government backing is not secure.

Edit: Not even being flippant. This time. It really isn't.

Ok, a real response (albeit far too brief, forcing me to guess at your actual meaning), it sounds like your admitting that BTC is un-backed, but are arguing government backing is so poor that it is equivalent to no backing at all.  If that's your position then I think that's absurd, government backing even if it is not perfect is far superior to what BTC has.

If your a Gold-bug and define backing only as PEGGING to precious metal then sure that ceased a generation ago.  But the other two huge factors I pointed out, Legal-Tender status and payment of Taxes are not remotely in doubt and no one can make an argument for how thouse backings are going to go away.  Even in a government default, it is the BONDS of a government which are not payed, the state continues to enforce legal-tender laws and continues to accept payment of taxes in it's national currency.  BTC dose not have any chance of attaining these two qualities and will continue to be un-backed.

I don't CARE for your definition of backing. It's not important. I can buy stuff from private people with bitcoins if they are willing to accept them, and for anything else I can simply exchange them to fiat. It doesn't matter.

[godislove]

Bitcoin is protocol for storing and transmitting "value" instead of "information" like the TCP/IP protocol. They are essentially opposites because bitcoins are unique and un-copyable whereas internet bits were meant to be shared (copied, at least to browsers).  Bitcoin does not define the value it stores and transmits any more than the internet defines the information value of its bits.  Bit the bitcoin protocol has scripting and n of m features that no one is using right now that allows "value" to be defined by time, other coins, other transactions, are any other data that the script can get access to. The script can be married to the coin so that it can't be removed by future owners, increasing or decreasing the dollar value of the coin, if you can find buyers of an "enslaved" (scripted with inheritance) bitcoin.  I'm trying to think of ways to add value to my coins by adding scripts to the them.

[godislove]

You guys are thinking too small.

If the bitcoin protocol becomes to "value" what the internet protocol is to "data", then the "M2" supply of all currencies in the world is the final value.  That would be about $20 trillion.  $1 million per coin if all of them are used like cash is today.  But most of them are being used like an asset, being hoarded, that maintains value, while all that cash out there today is depreciating and needed for near term transactions.  So not all 20 million coins are going to be available for "M2" uses, maybe 1/4.  That gives $4 million per coin.  I am not trying to be funny or overly optimistic.  The question is this: is this first-to-market player sufficiently good?  By convention it may be crucial that the world adopt a single cryptocurrency in the same way it adopted the internet.  There are other network protocols out there and they get used, but they continue to get taken over by TCP/IP.

[npl]

You confuse BACKING with SECURITY, Backing a Currency means giving it value, government legal tender laws and the ability to pay your taxes in a currency BACK the currency, or in the past pegging the currency unit to quantity of precious metal.  Security is preventing a currency from being stolen or counterfeited and governments also generally provide Security both by making paper bills hard to counterfeit and punishing thieves.

The BTC computer network provides SECURITY only, it keeps BTC from being counterfeited, and it kind-of prevents bogus transactions by cryptographic signatures, while turning a blind eye to scams, hacked wallets and black-markets.  But all of these things are just guaranteeing your continued ownership of BTCs not that the coins will be WORTH anything.  BTC is secured but not backed.

At the level where it matters for the question discussed (i.e. subjective utility), there is not much difference between these two concepts. Actually, at this level security becomes what gives the currency some value (indeed this is not enough) because it all finally boils down to trust. As a counter-argument, I can just as well say that backing up by gold is simply preventing government from abusing their power. And security all of a sudden now begins to play in the same field...

Simple mental exercise, suppose you have to pick up between two currencies. One can be counterfeited more easily that the other, otherwise they are on a par. Which currency would you choose?

Their is a lot of difference, something can not be an effective store-of-value if it lacks EITHER.  For a person to store value a person needs to do two things, they need to RETAIN an asset and the asset needs to RETAIN purchasing power.  If I had an object with perfect ability to retain purchasing power but it could be stolen very easily it would be a poor store-of-value, alternatively something that's very hard to steal but which has unstable in purchasing power would likewise be bad.  My total risk of loss is Retention Risk (losing the asset) + Valuation Risk (asset loses value).  So any logical and subjective personal assessment of an assets store-of-value is going to need to take both risks into account.

Actually stores of value need neither, though our disagreement may be at least partly down to semantics.

A store of value does not have to be inherently secure. Rather the political, legal and economic structure must be such that it would not be trivial to take away your property by force. Actually BTC is the only store of value that has built in security features - but as you pointed out these are not sufficient.

A store of value does not have to be backed by anything to retain purchasing power. The only thing that needs to 'back' it is the expectation that the public perception of its value will persist. 

[natd]

We each hold our own coins. Not some bank. Anyone who lets others handle their money these days, especially governments or banks, are fools and deserve what they get.

Then go tell everyone to stop trading on Mt.Gox and all other exchanges, they are doing exactly that, holding other peoples coins.  Now would you PLEASE address my point on Backing vs Security.

Lol good point. Bitcoin is as safe as its exchanges can be. The weaker link rule.

[johnyj]

Any currency must first qualified as a store of value (during a long period), and then can become a medium of exchange, without the first property, the second property just don't work

Although fiat money lose its value every year, it is still regarded as a store of value, since the speed of its depreciation is much slower than most of the other goods

For bitcoin, since the supply is fixed and the demand is rising, it will appreciate forever, this will greatly reduce its use as a medium of exchange, it will certainly become a digital asset

But this kind of asset is highly secure and mobile, never existed in human history, even a Swiss bank account can not compare

[wo4baba]

when we talk about back-up, let me ask who has ever seen God, no one, but in dollar we put In God We Trust, moreover, we donate real wealth to church for the sake of God, what's happening here?
Faith! It never appear in financial world during human's history. Bitcoin faith = transparency, freedom, fairness, millions of man hours spent by believers are the backup of this currency for the better future of human being. The true deflation will eventually unlock the entire potentials of human being, because people are able to choose what they love to do, this concur to the productivity trend as well but unfortunately distorted by current vested ruling classes.

[Impaler]

Actually stores of value need neither, though our disagreement may be at least partly down to semantics.

A store of value does not have to be inherently secure. Rather the political, legal and economic structure must be such that it would not be trivial to take away your property by force. Actually BTC is the only store of value that has built in security features - but as you pointed out these are not sufficient.

A store of value does not have to be backed by anything to retain purchasing power. The only thing that needs to 'back' it is the expectation that the public perception of its value will persist. 

NEITHER?  Are you serious?  You think an asset can be an effective store-of-value if it lacks both Security AND Stable value?  Are you arguing that store-of-value is based on NOTHING BUT AN INABILITY TO GROW THE SUPPLY, cause that's what it sounds like.

Lets compare, Crypto-currency is a Fiat currency protocol that provides excellent counterfeit protection and modest protection against identity theft (private key signed transaction, but constantly hacked), and has no backing.  The strength of these features is depended on the size of a distributed computer network and BTC has the strongest network.

National Currency is another Fiat currency protocol that provides strong counterfeit protection, strong identity theft protection, modest fraud protection and  modest theft protection.  And it is backed by legal-tender status and by the collection of taxes.  The strength of these features is based on the size and power a Nation-State and the United States is the strongest State.

So your arguing that throwing away all protection of fraud and theft, AND all backing to get slightly better counterfeit protection will actually give a stronger store-of-value.  This is absurd the huge gaps in BTC's security and lack of backing make it a terrible store-of-value compared to the money of a nation-state.  People need to stop confusing speculative GAIN with store-of-value, easy-come easy-go, a store-of-value dose not FALL OR RISE rapidly, store-of-value = stable value.

And your final comment about 'backing' something by the public expectation of value is simply laughable, no one with a clue as to the meaning of the word 'backing' would call fickle public expectation a backing, that is the exact OPPOSITE of a backing.  Without a backing public expectation is like a ball at the top of a hill, as soon as it begins to roll it accelerates as BTC has consistently done.  Something with a backing is like a ball in a valley, when it moves it's pushed back towards equilibrium.
 

[Impaler]

Any currency must first qualified as a store of value (during a long period), and then can become a medium of exchange, without the first property, the second property just don't work

Although fiat money lose its value every year, it is still regarded as a store of value, since the speed of its depreciation is much slower than most of the other goods

For bitcoin, since the supply is fixed and the demand is rising, it will appreciate forever, this will greatly reduce its use as a medium of exchange, it will certainly become a digital asset

But this kind of asset is highly secure and mobile, never existed in human history, even a Swiss bank account can not compare

johnyj:  If you were to cease posting entirely on this forum it would raise the collective level of our discussions more then any single person doing so.

[npl]

Actually stores of value need neither, though our disagreement may be at least partly down to semantics.

A store of value does not have to be inherently secure. Rather the political, legal and economic structure must be such that it would not be trivial to take away your property by force. Actually BTC is the only store of value that has built in security features - but as you pointed out these are not sufficient.

A store of value does not have to be backed by anything to retain purchasing power. The only thing that needs to 'back' it is the expectation that the public perception of its value will persist.  

NEITHER?  Are you serious?  You think an asset can be an effective store-of-value if it lacks both Security AND Stable value?  Are you arguing that store-of-value is based on NOTHING BUT AN INABILITY TO GROW THE SUPPLY, cause that's what it sounds like.

Lets compare, Crypto-currency is a Fiat currency protocol that provides excellent counterfeit protection and modest protection against identity theft (private key signed transaction, but constantly hacked), and has no backing.  The strength of these features is depended on the size of a distributed computer network and BTC has the strongest network.

National Currency is another Fiat currency protocol that provides strong counterfeit protection, strong identity theft protection, modest fraud protection and  modest theft protection.  And it is backed by legal-tender status and by the collection of taxes.  The strength of these features is based on the size and power a Nation-State and the United States is the strongest State.

So your arguing that throwing away all protection of fraud and theft, AND all backing to get slightly better counterfeit protection will actually give a stronger store-of-value.  This is absurd the huge gaps in BTC's security and lack of backing make it a terrible store-of-value compared to the money of a nation-state.  People need to stop confusing speculative GAIN with store-of-value, easy-come easy-go, a store-of-value dose not FALL OR RISE rapidly, store-of-value = stable value.

And your final comment about 'backing' something by the public expectation of value is simply laughable, no one with a clue as to the meaning of the word 'backing' would call fickle public expectation a backing, that is the exact OPPOSITE of a backing.  Without a backing public expectation is like a ball at the top of a hill, as soon as it begins to roll it accelerates as BTC has consistently done.  Something with a backing is like a ball in a valley, when it moves it's pushed back towards equilibrium.
 

Chill out. Read what I wrote closely. Only then reply.


the security features you are describing are not inherent to the currency itself but depend on the issuer (except for counterfeit protection which is not related to security per se, though it is certainly an important, crucial feature of stores of value). That was the point I was making.

I put 'backing' in quotes to signify that this is not really to be considered as a backing feature. Anyone with reading comprehension skills above 10th grade should understand that.

[Impaler]

the security features you are describing are not inherent to the currency itself but depend on the issuer (except for counterfeit protection which is not related to security per se, though it is certainly an important, crucial feature of stores of value). That was the point I was making.

I put 'backing' in quotes to signify that this is not really to be considered as a backing feature. Anyone with reading comprehension skills above 10th grade should understand that.

So your trying to throw the power of the nation-state out the window and just looking at a Dollar as a piece of printed paper?  If you want to make that comparison then BitCoin is a file in your computer and nothing more.  If your going to compare the raw OBJECTS of the currencies then do that (and if you did paper is more durable then a computer file), but if you want to compare SYSTEMS and PROTOCOLS with each other then you need to look at the full Protocol and the full issuing agent, in the Case of BTC it's every mining computer and node in the world that is the issuing and security providing entity, in the case of a National currency it is ALL the currency protecting and security activity conducted not just physical printing security features.  Every national currency is protected by a well established set of legal and political practices, that are as much a part of thouse currencies as the BTC protocol is a part of it.

[npl]

So your arguing that throwing away all protection of fraud and theft, AND all backing to get slightly better counterfeit protection will actually give a stronger store-of-value.  

...

So your trying to throw the power of the nation-state out the window and just looking at a Dollar as a piece of printed paper?

No, I was not saying that at all. The power of a nation state is a strong criteria to consider for stores of value, yet it is not the only one.

 If you think the only possible stores of value are backed currencies then your definition is at odds with any reasonable one. Alternative stores of value (anything from precious metals, to fine art, to wine) are neither inherently secure nor backed by anything - but they do benefit from, and are conditioned on, the presence of a legal system that protects ownership rights - i.e. the power of the nation state, as you said. BTC is an effort to devise a store of value that is not conditioned on external legal protections - and I agree with you that this attempt is not successful - at least not yet.

I agree that a desirable feature of a good store of value is long term price stability - and some of these alternative SOV have been just that.

[Impaler]

anything from precious metals, to fine art, to wine) are neither inherently secure nor backed by anything.

I never said for a moment that ONLY currency has store-of-value, I've simply been contrasting cryptographic Fiat with National Fiat.

All the things you mention are REAL assets, NOT forms of FIAT, they are not what anyone in this thread has been talking about untill now.  I even offhandedly said earlier that pegging a unit of Fiat currency to a precious metal was one (archaic) form of backing so I would obviously consider the darn metal itself to be a store-of-value.  I'm arguing that FIAT currency needs backing for it to be a store-of-value, as without that you simply do not have any stable basis for a value and thus a poor store-of-value.

[deisik]

So your arguing that throwing away all protection of fraud and theft, AND all backing to get slightly better counterfeit protection will actually give a stronger store-of-value.  This is absurd the huge gaps in BTC's security and lack of backing make it a terrible store-of-value compared to the money of a nation-state

What you say here can formally be reduced to a set of qualities that contribute to the strength of a store-of-value making it either stronger or weaker (for the absence of some of these qualities). Apparently, the importance of each of these factors would be different in various conditions, i.e. their contribution to the overall strength of the store-of-value may vary. You are probably right on dollar vs Bitcoin comparison, but you would be on a shaky ground if you just tried to compare, say, counterfeit protection against legal status of a currency without taking into account the actual support they provide to this store-of-value. For example, Zimbabwean dollars had a legal tender status, but did this help them much? Would they be any better than Bitcoin which lacks such status?

[deisik]

And your final comment about 'backing' something by the public expectation of value is simply laughable, no one with a clue as to the meaning of the word 'backing' would call fickle public expectation a backing, that is the exact OPPOSITE of a backing.  Without a backing public expectation is like a ball at the top of a hill, as soon as it begins to roll it accelerates as BTC has consistently done.  Something with a backing is like a ball in a valley, when it moves it's pushed back towards equilibrium.

His logic is a bit perverted here, but still is pretty clear and correct though its premises may be wrong. As I got it, backing up of a store-of-value is not important in itself, it is the ultimate result it produces that actually matters, i.e "the expectation that the public perception of its value will persist". If we can get there without anything that would help retain purchasing power and the public perception does actually persist, then, yes, he is correct

Whether it is possible in reality or not is another question...

[npl]

It all hinges on how you define good store of value.

If you just look at the textbook definition of store of value: "Any form of commodity, asset, or money that has value and can be stored and retrieved over time, and be predictably useful when retrieved" -  then currencies are good stores of value, so long as there is a system in place (legal, political economic) that enshrines property rights.

But if you define a good store of value as a commodity, asset or money that, in addition to the above, is expected to retain its purchasing power in the long run - then fiat currencies are not good stores of value.

[Ibian]

no backing

You keep saying that. It's just not how reality works. Bitcoin is backed by consensus among every bitcoin holder that it is worth investing fiat in. By the will of the people. The strength of the network and the lack of centralization is what allows us to enforce this will upon those who would take it down. In contrast, fiat is backed by states that confiscate peoples fiat at will.

Practical application trumps abstract theory every time.

[deisik]

no backing

You keep saying that. It's just not how reality works. Bitcoin is backed by consensus among every bitcoin holder that it is worth investing fiat in. By the will of the people. The strength of the network and the lack of centralization is what allows us to enforce this will upon those who would take it down. In contrast, fiat is backed by states that confiscate peoples fiat at will.

Practical application trumps abstract theory every time.

Impaler was absolutely wrong about security of Bitcoin adding nothing to its strength as a store of value for rather evident reasons which I have shown (it works the same way as taxes and legalization of money do), but this doesn't make your argument more valid. What you say here is a consequence of the factors that back up Bitcoin, but this is not what gives it strength or backs it up by itself. In fact, I have already explained this in one of my previous posts in this thread...