Bitcoin Takes a Beating

Have a look at this

The webpage is Libertarian news, with a picture of Murray Rothbard on the bannerhead.
And they let an article sneak in called “The Economics Of Bitcoin – How Bitcoins Act As Money.”

The article goes on to explain how bitcoins are as good as gold. Both gold and bitcoins are scarce, are fungible [one piece of gold is the same as another], are divisible into smaller pieces, and are recognizable. Plus bitcoin has all kinds of advantages gold doesn’t, which we won’t go into here.

Gold, the article tells us, has only one insignificant little detail of an advantage over bitcoin, hardly worth mentioning really. You can make jewelry out of gold. But so what, right? Let’s quote the article in full, emphasis mine:

It is important to note that anything which meets the criteria I just listed can act as a money.  People do not care in the slightest that gold can be turned into artistic jewelry pieces in their decision making process about why they are holding gold as a store of value.
The fact that gold can be turned into artistic pieces simply provides a reassuring alternative use for gold if people decided that gold is no longer of monetary value.  So this way I know that if people stop buying gold as a store of wealth, I’ll still be able to sell my gold to a jewelry shop at a tiny fraction of its current value if it came down to it.  But this reassurance that gold will always have some tiny fraction of value to jewelers in no way influences the reasons why people use gold as a money and why gold has a market determined value of nearly 1600 dollars today.
Because Bitcoins have no other use besides acting as trade facilitators, they have no such reassurances of minimal value – but this fact is totally irrelevant from a monetary perspective, just as it is totally irrelevant from the perspective of gold.
All that matters as far as the money market in Bitcoins is concerned is that they have all of the aforementioned properties that make gold a money – which they do.  Thus, Bitcoins can act in exactly the same capacity as a store of wealth as gold. 

Sounds very convincing no? After all, does anyone really think all that gold in Fort  Knox, if it is still there, will ever be turned into jewelry? The thought is ludicrous, right? So just because gold might be worth a few pennies as a trinket doesn’t really give it an advantage over bitcoins. Gold is valuable because it is money, not because it makes a good nose ring. That’s the article’s argument.

What woman would want this? Really.

But alas, dear reader, the article is either misinformed or trying to dupe you.
To understand why, let’s sit for a while at the feet of the master, Ludwig von Mises, with my snarky comments to make it palatable. This is from Human Action, Chapter 17.

As soon as an economic good is demanded not only by those who want to use it for consumption or production, but also by people who want to keep it as a medium of exchange and to give it away at need in a later act of exchange, the demand for it increases. A new employment for this good has emerged and creates an additional demand for it. As with every other economic good, such an additional demand brings about a rise in its value in exchange, i.e., in the quantity of other goods which are offered for its acquisition. The amount of other goods which can be obtained in giving away a medium of exchange, its “price” as expressed in terms of various goods and services, is in part determined by the demand of those who want to acquire it as a medium of exchange. If people stop using the good in question as a medium of exchange, this additional specific demand disappears and the “price” drops concomitantly.

We’ll use gold as an example of what he means. The caveman liked gold because it made pretty trinkets. This didn’t mean much, really, and he certainly would not pay $1,600 an ounce for it. But as time went on, and people started using gold as money, then that very fact that it was money made it more valuable. It’s the law of supply and demand at work. Increase the demand for gold, since more people want it now that it is used as money, and you increase its price.

Thus the demand for a medium of exchange is the composite of two partial demands: the demand displayed by the intention to use it in consumption and production and that displayed by the intention to use it as a medium of exchange.[7] With regard to modern metallic money one speaks of the industrial demand and of the monetary demand. The value in exchange (purchasing power) of a medium of exchange is the resultant of the cumulative effect of both partial demands.

In other words, the reason people want a gold coin, when it is used as money, and what determines what they are willing to give in exchange for a gold coin, is the two uses it has, as jewelry and as money.

Simple enough so far, and totally in agreement with the bitcoin article.

Now the extent of that part of the demand for a medium of exchange which is displayed on account of its service as a medium of exchange depends on its value in exchange. This fact raises difficulties which many economists considered insoluble so that they abstained from following farther along this line of reasoning. It is illogical, they said, to explain the purchasing power of money by reference to the demand for money, and the demand for money by reference to its purchasing power.

Translated into English, he is asking a simple question. Let’s put aside the jewelry aspect of gold, and concentrate only on its value as money. People want gold because it has purchasing power, and it has purchasing power because people want it. In a Logic classroom, that kind of thinking would get an F. It’s called circular reasoning, like the guy who drinks too much to forget his problems, and the problem he’s trying to forget is that he drinks too much.

So bottom line, if we knock off a dime for its value as jewelry, how on Earth did a gold coin ever get to have the ability to buy $1,600 worth of groceries? Because people want it so badly? Well, why do they want it so badly? Because it can buy $1,600 worth of groceries? Circular reasoning.

Mises did not originate the question, but he did come up with the answer.
Before we see what he says, let us take note that right here is where the bitcoin people want to end the discussion.

They will say, “Great question, Ludwig. Just have to chalk it up as one of life’s mysteries. But whatever the answer, that answer probably applies to bitcoins as much as to gold. Maybe both bitcoins and gold have no answer to that highly theoretical parlor game quiz, but who cares? Bottom line, gold works in the real world despite some ivory tower paradox, and bitcoins can, too.”

On to the answer. Mises leads us through the intricate looking reasoning step by step:
The difficulty is, however, merely apparent. The purchasing power [p. 409] which we explain by referring to the extent of specific demand is not the same purchasing power the height of which determines this specific demand. The problem is to conceive the determination of the purchasing power of the immediate future, of the impending moment. For the solution of this problem we refer to the purchasing power of the immediate past, of the moment just passed. These are two distinct magnitudes. It is erroneous to object to our theorem, which may be called the regression theorem, that it moves in a vicious circle.[8]

In English, people are willing to accept gold coins and give in exchange $1,600 worth of groceries today, because they saw that yesterday they could get $1,600 worth of goodies with a gold coin. People want gold today because yesterday they saw they can buy a lot of stuff with it.

This would apply to bitcoins as well, of course. People will pay $17 for a bitcoin today because they saw that yesterday they could spend it and get $17 worth of stuff.

But, say the critics, this is tantamount to merely pushing back the problem. For now one must still explain the determination of yesterday’s purchasing power. If one explains this in the same way by referring to the purchasing power of the day before yesterday and so on, one slips into a regressus in infinitum. This reasoning, they assert, is certainly not a complete and logically satisfactory solution of the problem involved. 

In other words, it’s worth $1.600 today because that’s what you could get with it yesterday. But what about yesterday? You can’t go back and back to the beginning of time, right?

What these critics fail to see is that the regression does not go back endlessly. It reaches a point at which the explanation is completed and no further question remains unanswered. If we trace the purchasing power of money back step by step, we finally arrive at the point at which the service of the good concerned as a medium of exchange begins. At this point yesterday’s exchange value is exclusively determined by the nonmonetary –industrial–demand which is displayed only by those who want to use this good for other employments than that of a medium of exchange.

In other words, if you go back far enough, you get to the day when gold was useful as jewellery only, worth say a dime. Until someone realized people are happy to take gold coins valued at a dime apiece. What have they got to lose? That’s what the gold is worth for jewellery, anyway. And from there, as gold coins became more popular as money, they started becoming worth more than a dime.

And this is where bitcoins achieve their fail. Unlike gold, no matter how far back you go, bitcoins were never worth anything intrinsically. There was never a reason for bitcoins to suddenly become worth a dime, or any other price. They are totally useless as jewellery, or anything else. So that there is no reason people should accept them as being worth a dime, much less $33.

One may ask, then how come they were traded on certain websites at $33 a bitcoin? P.T. Barnum provided the answer. There’s a sucker born every minute. A small handful of people decided to speculate in bitcoins and bought them at whatever silly price they thought was worth it. But bitcoins were never generally accepted at any price but zero. They have no reason to be.

The Brooklyn Bridge, on sale now.