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Bitcoin and Bitclothing

Not everyone seems to get what the problem is with bitcoin.
Imagine if instead of trying to be money, the bitcoin people had decided that their digital thingies should be considered clothing, Bit Clothes.

They would extoll the many advantages of Bit Clothing. Never needs washing, one size fits all, no more clunky suitcases or lack of closet space, never wears out, etc etc.

You see the flaw. Yes, Bit Clothes have all those advantages, but they do not have the first essential of clothing. They do not envelop the body. They aren’t clothes at all.

People don’t get what the problem is with bitcoins because they do not grasp what the first essential of being money is. Part of the reason for this is that we have been using paper for money for many decades now. Paper money is intrinsically useless, so people think why can’t anything, however useless, be money, just like paper is?

The answer is simple. Imagine if some cosmic ray fired by aliens from outer space wiped out all dollar bills, all paper money all over the world. And the govts all said they are retiring from the money business. Folks, from now on, you are on your own. 

In short, there is no official currency anymore. What will people use for money? Would they use Monopoly money? Would the local printer just print up some artistic paper money and expect people to use that? What would you accept in exchange for your goods and services?

Historically, and it makes sense, too, people have only accepted as money [if not forced by govts otherwise] something of value to them. Something they could use, or knew many other people wanted to use. Why should I accept payment in colored pieces of paper when I can hold out for something worthwhile? And if I do accept some colored paper in payment for my work, how do I know someone else will want to accept it from me? Maybe I will be stuck with the colored paper, and not be able to get anything for it.

That’s what money has to be to work. As clothes are not clothes unless they envelop the body, so too money is not money unless it gives me something when I have it.

And even when the govt imposes paper money on a suffering populace, the principle remains true. The paper money gives me something in that I can use it to pay taxes, and cannot use anything else. Yes, it’s a sad day when that’s all we can say about the benefit of a currency, but that’s how it is.

We see now why bitcoins are not money. What can I do with a bitcoin? Eat it? Drink it? What has it given me now that I have one? Answer: Nothing.

Now people may say, “Who cares if a bitcoin is useful for anything in and of itself? What counts is that you can buy stuff in the stores with it.” And they are right. But the question is, what will make the storekeeper accept it? Common sense says people will only accept bitcoins as money [besides a few suckers and fools] if they feel it gave them something, as we explained.

Of course, we are making a big assumption here. That the masses will not be stupid. We may be overestimating them. But so far, in all recorded history,ancient and modern, they have never been that foolish as to accept something totally useless as money.

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8 Comments

  1. Anonymous says:

    The value of a Bitcoin is derived from it's scarcity. It isn't very easy to acquire them without bartering with other tokens of value – like the dollar.

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  2. Smiling Dave says:

    "The value of a Bitcoin is derived from it's scarcity."Yes, scarcity increases the value of something, but only if it is in demand, meaning has some use to people. Turds from some species of animal on the endangered list is rare, but useless, and so has no value.It's called the law of supply and demand. Low supply will increase the price, but there has to be a demand to make it worth something in the first place. If the demand is zero, the price is going to be zero no matter what the supply.Right now there is some demand for bitcoins, from the pool of the misinformed. They are going to win a financial Darwin award.

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  3. bitbutter says:

    The article relies on an important assumption that is not obviously true, and not supported in the text: In order to be money, a good must have non-trade related uses. I invite Smiling Dave to try to substantiate this claim.My responses to particular parts of the article follow:"Imagine if instead of trying to be money, the bitcoin people had decided that their digital thingies should be considered clothing, Bit Clothes."Bitcoin already is money, at least in the sense of a medium of exchange. If you have a different definition in mind perhaps you could spell it out, and if necessary, indicate why Bitcoin holders should care about this alternative definition?"Historically, and it makes sense, too, people have only accepted as money [if not forced by govts otherwise] something of value to them. "Bitcoins are of value to people because of specific characteristics that make them very convenient for trading. I suspect you mean that money has traditionally been goods that have been valued for non-trade related reasons. I agree that historically this has been the case, but if you want to claim that money _can only_ be goods that have non trade value, you'll have to explain why you believe that, it's not obvious."Why should I accept payment in colored pieces of paper when I can hold out for something worthwhile?"Coloured paper may be valuable to you if you expect to be able to trade it in the future."And if I do accept some colored paper in payment for my work, how do I know someone else will want to accept it from me?"You can never be certain about that, with whatever good you're using for money. But you can make an inference based on the qualities that coloured paper has, about whether people will continue to accept it in the future, just like you can with gold, or Bitcoin.Unlike gold, the price of Bitcoin could fall to zero if there was a loss of confidence it its future tradeability. In the event of a loss of confidence in gold, gold holders could likely still sell their gold to certain buyers (for a fraction of its current price). It's not clear why you, and others, apparently that this one marginal advantage enjoyed by gold (a better assurance of a minimum sale price) should be considered the dividing line between money and non-money."That's what money has to be to work. As clothes are not clothes unless they envelop the body, so too money is not money unless it gives me something when I have it."Money gives me the possibility of trade it when I have it. True for gold and true for Bitcoin."We see now why bitcoins are not money. What can I do with a bitcoin? Eat it? Drink it? What has it given me now that I have one? Answer: Nothing."Sorry, 'we' don't yet see why your claim that Bitcoin is not money is true.What can you do with Bitcoin? You can trade it of course (but you know that). Your haven't yet supported your implicit claim that money must have non-trade uses. I believe you're either you're wrong about that (I'll wait for your defense to be sure), or that you're defining money in amn obscure way that's irrelevant to the reasons people may want to hold Bitcoin."what will make the storekeeper accept it? Common sense says people will only accept bitcoins as money [besides a few suckers and fools] if they feel it gave them something, as we explained."And happily, Bitcoin does give the accepting storekeeper something, as already explained: the expected possibility of future trade. Which is exactly the reason that most people hold most monies for most of the time!"Right now there is some demand for bitcoins, from the pool of the misinformed. They are going to win a financial Darwin award."Can you describe evidence that would persuade you that your current belief that bitcoin holders are making a mistake, is itself mistaken? (or if this is unfalsifiable, is there any reason a person should pay heed to this forecast?)

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  4. Smiling Dave says:

    TY bitbutter for leaving your astute comments. 1. I'll start with the last point you raise,how can I be proven right or wrong. Very simple. If a community of, say 5 million people use bitcoins for trade for about twenty years, with one bitcoin being worth even a tenth of what it is now in purchasing power, I will gladly admit my error. In other words, I'm predicting the total collapse of bitcoins way before then, if it ever gets such mass circulation in the first place.Now twenty years may sound like an unreasonable or even an evasive number. But let us remember that Beanie Babies lasted for about ten years, selling for as much as $400 apiece at their peak, before they collapsed into worthlessness. 2. You state your case very clearly, and summarize mine well.You say that money is merely a medium of exchange, which bitcoin already is, and why should anyone care about my alternate definition of money?To which I reply that bitcoins are not a medium of exchange yet, except for a very small group of people. 99.99% of humanity will not accept payment in bitcoin. After all, if a prostitute finds someone willing to accept her favors in exchange for rent, that does not make her favors a medium of exchange. We need large numbers of people willing to accept bitcoins to consider them a medium of exchange.As for who cares about my personal definition of money, I was writing not about what the definition of money is, but about about what feature or features will convince masses of people to accept something as money [in the sense of a medium of exchange]. Indeed I meant what you wrote, that in order to be accepted as a medium of exchange, a thing has to have non trade value. I am glad that we agree that historically it has always been as I said. You merely question why it has to keep on being like that. Times change, you argue, the world modernizes, new ideas and actiuons enter the universe. It is up to me to show, you assert, not only that money has always had non trade value, but why it must always have non trade value, for all moneys that ever will exist from now to eternity.And I agree with you that such is the rather daunting burden of proof placed on my humble shoulders.But I've already done so, dear bitbutter, in my blog right here: http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.htmlIt is clear from your comment about the difference between gold and bitcoin being negligible that you did not read that post yet. So in order for us to be on the same page, I ask that you read that other post and then we can continue.

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  5. bitbutter says:

    Thanks for the clear replies and the link."If a community of, say 5 million people use bitcoins for trade for about twenty years, with one bitcoin being worth even a tenth of what it is now in purchasing power, I will gladly admit my error. In other words, I'm predicting the total collapse of bitcoins way before then"That's fair.About bitcoin being money:"To which I reply that bitcoins are not a medium of exchange yet, except for a very small group of people. 99.99% of humanity will not accept payment in bitcoin."True. But this isn't a persuasive way to bar Bitcoin from being money. Gold was once used by fewer humans than bitcoin is currently used by. To exclude bitcoin from being money on the grounds that not enough people currently use it sounds like it would have to involve arbitrary line-drawing about 1. What proportion of holders is enough, and 2. About which sample group we're allowed to consider (For example: bit coin has relatively very high adoption among cryptography-studying computer nerds for instance, quite possibly higher than gold).I'm going to continue calling Bitcoin money for the rest of my comment(s), for ease of typing.About the regression theorum objection:1. Mises' regression theorum seems to be a solution to the problem of how a money _can_ arise (and explanation of how specific historical moneys arose). Why is the theorum useful or relevant when we're considering an observed money that has already arisen? (or if we do insist on only using the label 'money' for those goods who's trade value grew from non-trade uses, again why should we even care whether X is money or not?)2. Not that I believe it matters either way, but the claim that Bitcoin doesn't cohere with the regression theorum is too strong. It's possible (and had been argued) that the earliest adopters held bitcoin as a kind of 'nerd badge of honour', analogous to a decoration, for prestige rather than for trade-related uses.

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  6. Smiling Dave says:

    1. I guess we now see clearly where the parting of the ways begins. You think the amount of people currently using bitcoin qualifies it to be called a medium of exchange, i.e. money, and I think there are too few to give it that name. That's fine. Do we have another disagreement, with you arguing that there is nothing to stop bitcoin from gaining mass acceptance, and me claiming it is doomed to be limited in amount of people using it? [My argument being that money on such a scale has to have non trade value]. Or do you agree with me?2. The Regression theorem is relevant because it tells us that any money arising in any other way is doomed to collapse before it has mass appeal for a long time. In other words, it hasn't really arisen; it only seems to have arisen. Pretty soon, it will collapse like the Beanie Babies did.Let me explain what I mean with an analogy. Austrian economics says that the only way a country gets wealthier is by increasing production. The only way it can increase production is by investing in tools of production. The only way it can have money and resources to invest in tools of production is by underconsumption. Let's grant all this for the moment, call it the Underconsumption Theorem, and assume it logically unassailable. Now suppose someone comes along and says he found a way to get rich without decreasing consumption, mainly by printing lots of money. He would argue that the Underconsumption Theorem may explain historically how nations got wealthier, and it gives one of many ways a nation can get richer, but not the only way. It is not useful or relevant when we're considering an observed economy that has already gotten richer without all that hard work, just by printing oodles of money.What would an Austrian say to that? By my deductive logic, that is impossible. Therefore it must be a temporary phenomenon caused by fleeting forces and will not last long. It is a boom that will be followed by a bust.That's the analogy. The thinking about bitcoin is similar. The original q that led to the regression theorem, that of circular reasoning, remains unanswered by bitcoin. Why do people accept a bitcoin in lieu of $17? Because you can buy $17 worth of stuff with a bitcoin. Why can you buy $17 worth of stuff with it? Because people accept it in leiu of $17. But that is circular reasoning. Meaning there is no true reason a bitcoin is worth $17. Conclusion: Only the suckers will ever pay $17 for a bit coin [insert any amount here, really. The logic applies to ten cents as well as $17].Now historically we know that great masses have been suckered into doing some really foolish things, overpaying enormous sums for trifles. But we also know that they lose their shirts eventually when the mania ends, and the trifle starts selling for its intrinsic value, meaning close to zero. The regression theorem tells us that is the future of bitcoin.3. So bitcoin originally had some non trade value to a very small group of people. In other words the answer to the original q, why will people pay a dime for a bitcoin is "because it is a mark of prestige". I admit not having the knowledge to tackle this aspect of the question.

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  7. bitbutter says:

    "You think the amount of people currently using bitcoin qualifies it to be called a medium of exchange, i.e. money, and I think there are too few to give it that name."I don't have much of a stake in the answer either way. If we say there aren't currently enough people using BTC for it to already be called money (I think that's a hard case to make, see the mention of arbitrary line-drawing in my previous comment), then there's still no necessary barrier imo, to its potential future adoption by enough people to start calling it money (wherever we draw the 'enough people' line). That's the more substantive disagreement, that you believe it's necessarily of limited appeal/use/viability and i see no such necessary barrier to success (meaning widespread adoption and long term existence and value)."The Regression theorem is relevant because it tells us that any money arising in any other way is doomed to collapse before it has mass appeal for a long time"I from what I've read on the subject, not an awful lot, but a bit more than what you quoted in the post you linked to, I don't understand how the regression theorum, if true, rules out the viability of a money that arises without starting off as being valued for non-trade relate uses. I don't see a praxeological chain of reasoning showing why Bitcoin can't be a successful money so far. Perhaps you could explain that part and I might try to counter it.

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  8. Smiling Dave says:

    1. Like I said in an earlier comment, the original q the regression theorem asks shows no one will accept bit coin as money. The regression theorem goes on to explain why this q does not apply to all currencies, and gives an answer that does not apply to bitcoins. Hence bitcoins are vulnerable to the original q.More on the regression theorem and its relation to bitcoin here:http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html2. In actuality, there are zero people using bitcoin as money. Take a look at the q and the two verified answers in this thread: http://mises.org/Community/forums/t/25387.aspx

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