Why can money be made of bits

[jtimon]

Bitcoins have value and Nielsio (the "Don't by bitcoins" guy) is wrong. I think we all agree.
But why is he wrong?
For the inspiration of the title you can read this:

http://www.community-exchange.org/docs/Gesell/en/neo/part3/4.htm

If you don't know Nielsio, these two links can help you:

https://www.bitcoin.org/smf/index.php?topic=6311.0

http://mises.org/Community/forums/p/24195/416494.aspx

I can add more answers if you want. Maybe some answers can be re-written too.

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[error]

The correct answer isn't in the poll:

Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

[jtimon]

The correct answer isn't in the poll:

Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

All answers assume bitcoins are scarce and use "nice crypto".

[jtimon]

The correct answer isn't in the poll:

Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

+1

If you want to propose some other answer, I can add it to the pool. But I think it should be an answer that is not already implicit in all the others.

[error]

The correct answer isn't in the poll:

Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

All answers assume bitcoins are scarce and use "nice crypto".

Perhaps it should be made explicit, then. After all, the poll question isn't explicitly about Bitcoin either!

[jtimon]

The correct answer isn't in the poll:

Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

All answers assume bitcoins are scarce and use "nice crypto".

Perhaps it should be made explicit, then. After all, the poll question isn't explicitly about Bitcoin either!

Ok, give me your answer and I'll add it.
But...

Peter: Why can money be made of bits?
Jones: Among other things, money must be scarce. (Failure to use something scarce results in economic collapse.) Bitcoin uses some nice crypto to ensure scarcity.

It doesn't sound like an answer to me. If you want that answer I'll just add it.

[goatpig]

based on the intrinsic properties

I thought that was explicit enough.

[error]

based on the intrinsic properties

I thought that was explicit enough.

I am merely pointing out that both the poll question and the answers are poorly worded. For instance, in the example you quoted, what are the "intrinsic properties" of "it"? More to the point, what IS the "it" being referred to? You assume it's Bitcoin, but it may not be.

[jtimon]

based on the intrinsic properties

I thought that was explicit enough.

I am merely pointing out that both the poll question and the answers are poorly worded. For instance, in the example you quoted, what are the "intrinsic properties" of "it"? More to the point, what IS the "it" being referred to? You assume it's Bitcoin, but it may not be.

I took the second answer from dvide:

http://mises.org/Community/forums/p/24195/416494.aspx#416494

"So I don't think it is necessary for people to value it for some consumption use initially, because you can infact rationally value it as a potential future medium of exchange based on the intrinsic properties that lend it to be good at that very task. In history, Gold is the really the only item that has all of those neccessery intrinsic properties for a currency together in one. The fact that Gold has consumption uses too no doubt helped to bootstrap its use as an established currency, but I think it would have been an inevitable development in human history regardless of that..."

We can change it if people who voted it wants to. In fact, I find it too long.
Anything you can teach me about English will be welcomed since it isn't my mother language.
The question maybe shouldn't be a question but simply a title (as in Gesell's book). I assume the translator from German did well its job.

[goatpig]

based on the intrinsic properties

I thought that was explicit enough.

I am merely pointing out that both the poll question and the answers are poorly worded. For instance, in the example you quoted, what are the "intrinsic properties" of "it"? More to the point, what IS the "it" being referred to? You assume it's Bitcoin, but it may not be.

The whole sentence stroke me as "do you value Bitcoin because of it's properties, which make it a proper currency".

[jtimon]

The debate I wanted to open is if money whether needs an "intrinsic value", an "initial use" other than medium of exchange, a "backing by the issuer" or not.

[jtimon]

Ahh, I understand the poll was edited.

Yes, the last answer was just added now.
But people can change their answer if they wish.

[abyssobenthonic]

Once something is monetized the intrinsic value becomes unimportant (except to the extent that it's effectively a put option against the prospect of demonetization: if gold is demonetized, the gold that one has is still worth something because it's useful for electrical contacts etc.; if USD is demonetized, it's still useful as a sort of USG/Fed brownie point).  Bitcoins fundamentally lack intrinsic value, but to the extent that people are willing to use it as a store of value and means of exchange it has value.

[FreeMoney]

I've been calling bitcoins scarce too, but I realized every resource is scarce to some degree. The difference is that with most things when you get more demand price goes up until the amount supplied is adjusted and then price returns to roughly the cost of production. With bitcoins there is no outlet the supply is inelastic, that's the key. You don't want to store value in carrots or tulips because if you are right and price goes the inevitable increase in supply will bring it back down, guaranteed. Sure you can make money with the right timing and this helps smooth prices too. With bitcoin this does not happen. Well, actually it kind of does. But the cost of production tends toward infinity.

Anyway, my point is just that everything is scarce, but the supply of bitcoins is also inelastic.

[dvide]

Hi, I'm the author of that post on Mises. Sorry for the verbosity of it.

I think the idea of 'intrinsic value' can be rejected out of hand, because it's basically the idea that the value of a good is objective and not subjective. Marx attempted to explain how we decide upon prices with his labour theory of value (which is no longer taken seriously since the idea of marginal utility is understood). The idea is that the labour costs that go into producing something gives the product its intrinsic value, and this is how we should price goods. But we know that a mud pie is not as valuable to people as an apple pie, no matter if the same costs are spent to produce it.

We also know that if I produce 50 refrigerators and I only have use for one of them in my personal kitchen at any given time, the other 49 refrigerators are less valuable to me even though they are completely identical to the first. The idea of intrinsic value has to be wrong. So why do people specialize in creating refrigerators to sell? Because there are other people out there who do not yet have a refrigerator and want one for their kitchen. To those people, they would value 1 of my 49 refrigerators just as much as I valued my first refrigerator. So to the refrigerator producer, all of his refrigerators are considered to him to be less valuable than the money he charges for it. To the people who buy the refrigerators, they consider the refrigerator they purchase to be more valuable than their money. This is why we see specialization of labour and this leads to trade for win-win scenarios.

When people talk about gold having intrinsic value, it's more accurate to say it has intrinsic properties that people value. Its ability to conduct electricity is useful for electronic applications. The fact that it is intersubjectively perceived as being pretty means that people value it as jewellery. But it has no intrinsic value. Nothing does. Carrots do not either (not that Neilso said that). This is why it's confusing when dealing with Bitcoin, because the same people who attack government money for not having 'intrinsic value' (because it's just paper) are also going to attack Bitcoin for the same reason. Like paper money, Bitcoin also does not have a consumption use case.

But the fact that paper money isn't useful for any consumption use cases isn't the reason for why government fiat money is damaging. It's because government fiat money doesn't have the intrinsic properties that are required of a good currency, like Gold. Bitcoin doesn't suffer from this problem. Unlike Gold and Bitcoin, fiat currency is centrally controlled and can be printed at will by the government for almost zero cost to them. It is only the use of force by establishing legal tender laws (which basically means that the government will only accept the payment of taxes denominated in their fiat currency) that gives fiat currency its overwhelming demand in our economy. Legal tender laws also provide a means to enforce in the courts that government fiat money has to be accepted for general payment of rents and debts.

It's clear why the government wants to control the money supply centrally. When the government expands the money supply they (and their privileged buddies) get to spend the full value of it before inflation proliferates into the rest of the economy. It is essentially a hidden tax. Like a counterfeiter, they are essentially stealing value from everybody else's savings and they can do it in such an indirect way that they don't have to cut spending. They can still promise all of the free goodies to the public that get them elected without having to do the unpopular action of raising taxes to pay for it all.

It's the initiation of force that crowds out other competing currencies, and perpetuates its use in our economy. But it's completely unsustainable in the long run. The bubble will burst because we cannot keep inflating forever. It only serves to damage productive efforts, which means there won't be anything left to tax. Let alone all of the debt by deficit financing, which is just like printing money in its effects because they might have to monetize the debt (print money to pay it off) or default on it someday, and either way it is economic ruin. We don't have anywhere near the productive capacity required to pay it off, let alone provide for all of the obligations made by governments.

So government money leads to ruin because it's not a scarce good and it's centrally controlled. It has none of the intrinsic properties that lend it to be good at being money. The demand for it is backed up by the threat and use of physical force by the government, and the cost of applying this force is offloaded to everybody in society through taxes. All of these reasons have nothing to do with the fact that paper money has no consumption use case.

[jtimon]

What I meant but intrinsic value was not an objective value (because value is always relative) but the intrinsic value used in numismatics.
The gold/silver/copper a coin contains, the utility of a bill as a fire starter, etc.
Actually I recently discovered a "consumption use case" (a use different than exchange of value) for bitcoins:

http://bitcointalk.org/index.php?topic=7231.0

My point is that that no "intrinsic value"/"consumption use case" is necessary for money.
This is what Gesell means in this hilarious statement:

<
we deny that it is the promise of conversion that gives life to banknotes and ordinary papermoney. We assert that forces must exist elsewhere in commerce which play the part at present erroneously assigned to the metal reserve (so-called covering), or to the promise of conversion. These forces, hidden for the moment, which turn a promise to pay (banknote) into capital, and force the creditor to pay interest to the debtor, are, we maintain, strong enough by themselves to assure the functioning of money in the market. Relying on these facts we assert that money can be made out of paper which, without any kind of promise of conversion, without resting on any particular commodity (gold, for example), bears only the following inscription:

 "One Dollar" (or "Mark", "Shilling", "Franc", etc.)

 or "This Piece of Paper is in itself one Dollar."
 or "This Piece of Paper is in commerce, in State-Treasuries and in Courts of Justice legal tender for 100 Dollars."
 or, to express my meaning, if not more clearly, at least more drastically:

 "He who presents this Piece of Paper for redemption at the Bank of Issue will receive 100 Lashes (negative promise of payment).

 In the markets and shops of the country, however, the holder will receive in goods as much as demand and supply allow him; that is, as much as, by bargaining, he can make his own."
>

Nevertheless, I disagree with Gesell in "The choice is, therefore, either State money or no money. Freedom of enterprise in the manufacture of money is an impossibility." We all know the abuses that can be perpetrated through State money and Bitcoin is a living proof that money outside any state is possible. We should either reject that statement or change our definition of state to accept it.