I’ve written many times about bitcoin, and why it is doomed to never be a currency. Here’s a list of the major articles.
Numbers 1, 9 and 10 might be the first places to look.
0. https://smilingdavesblog.wordpress.com/2013/10/18/why-greshams-law-means-the-death-of-bitcoin/
Using a simple economic principle accepted by all schools of economics, we show that bitcoin will never be used to buy things. People will either hoard it, or not touch it with a ten foot pole. In either case, it will die.
1. https://smilingdavesblog.wordpress.com/2011/06/22/bitcoin-takes-a-beating/
Explains Mises’ Regression Theorem, and why bitcoins violate it.
2. https://smilingdavesblog.wordpress.com/2011/06/bitcoin-and-bitclothing.html
Explains that just as clothing made out of bitcoins is absurd, so is money made out of bitcoins.
3. https://smilingdavesblog.wordpress.com/2011/07/bitcoin-yet-again-in-simple-language.html
Gets to the very essence, in a few short words, of why bitcoin will never be a currency. The comments here are especially enlightening.
4. https://smilingdavesblog.wordpress.com/2011/09/bitcoin-we-hardly-knew-yeh.html
Graphs bitcoins decline from $30 to $5 in a few short months. Recently it has climbed back to about $10. Time will tell.
5. https://smilingdavesblog.wordpress.com/2011/12/bitcoin-and-mises-regression-theorem.html
Summarizes someones claim that bitcoin is compatible with Mises’ Regression Theorem, because it had an exchange rate from the get go, and shows him wrong.
6. https://smilingdavesblog.wordpress.com/2011/12/was-mises-regression-theorem-a-mere.html
Summarizes a claim that bitcoin is compatible with the regression theorem because the regression theorem is just summarizing history, and proves that claim wrong.
7. https://smilingdavesblog.wordpress.com/2011/12/one-more-detail-about-bitcoin.html
Summarizes the claim that although Mises’ theorem apparently shows bitcoin is not a currency, yet in reality bitcoin already is a currency as we speak. And so Mises’ theorem is proven incorrect by the real world. Refutes this claim.
8. https://smilingdavesblog.wordpress.com/2012/07/bitcoin-and-intrinsic-value.html
Explains the concept of intrinsic value, its two meanings depending on the context in which it used, why bitcoin has no intrinsic value, and gives a vivid image of how to determine with ease whether something has intrinsic value.
The second link has great stuff, including an answer to the claim that bitcoin is no different from fiat money, right? See also links 16 and 18 below for more about fiat money and bitcoin.
9. https://smilingdavesblog.wordpress.com/2012/10/07/bitcoin-and-the-numbers-game/
In which the regression theorem is explained yet again, taking into account some lame arguments of the unwashed, such as that the theorem only applies in a barter economy, and that the whole theorem is vague because it does not nail down any numbers.
In which we talk about the history of currencies similar to bitcoin, which were all flops eventually, but in some cases lasted almost 20 years before dying. We also explain why bitcoin has never been used as a medium of exchange, not even once, despite the existence of mtgox and all the other bitcoin hangouts.
11. https://smilingdavesblog.wordpress.com/2013/04/06/four-facts-that-destroy-bitcoin/
Discusses an article on fool.com that reveals four facts that totally destroy all the bitcoin myths.
Explains with a homely story why the mtgox prices for bitcoin are phony, and do not contradict the regression theorem.
Replies to Bob Murphy’s article that supposedly proves bitcoin is a medium of exchange as we speak. Mentions an important idea of Frank Shostak’s to refute said Bob Murphy. Mocks the practice of using opinion polls of professional economists to decide economic truth.
This basically links to youtube and quotes a mises daily article, where proof positive is given that using bitcoin exposes you, rather than hides you.
As bitcoin developer Jeff Garzik himself put it, anyone who thinks bitcoin gives you anonymity is “a dumb kid who didn’t think this through.”
15. https://smilingdavesblog.wordpress.com/2013/10/15/about-a-medium-of-exchange-having-to-be-in-wide-use/
Proves with explicit quotes from Mises, that Mises certainly meant by “medium of exchange” something in wide use and in great demand.
16. https://smilingdavesblog.wordpress.com/2013/10/16/the-kickstart-fallacy/
Discusses the idea that all bitcoin needs is a kick start, and then all will be well.
17. https://smilingdavesblog.wordpress.com/2013/10/24/proof-positive-that-bitcoin-is-a-bubble/
and https://smilingdavesblog.wordpress.com/2014/10/03/smilling-dave-was-wrong-about-bitcoin/
The first explains that because of its unique features the price of bitcoin is not determined by the laws of supply and demand, but exclusively by the needs of bitcoin hoarders for cash. In other words, a classic bubble, as explained in detail in the article.
The second explains why the first article was wrong in predicting bitcoins constant rise until a deadly crash, namely, because it assumed people besides the Silk Roaders were actually buying things with bitcoin, when this is not the case.
18. https://smilingdavesblog.wordpress.com/2014/03/15/deep-stuff-about-fiat-money/
Explains deep stuff about fiat money, with some repercussions for bitcoin.
An advanced article, proving that bitcoin is not even an economic good, and thus cannot possibly be money or a medium of exchange.
20. https://smilingdavesblog.wordpress.com/2014/02/17/bitcoin-as-postage-stamp/
Where we refute the argument that bitcoin satisfies the Regression Theorem because it is intrinsically valuable as a means to transport money.
Smiling Dave on Austrian Economics. 
No, he isn’t quite making an argument about bitcoins being money. He’s merely pointing out that the regression part of mises’ argument is not a basis for rejecting bitcoins as money.
I’m going to leave that text behind now and enter some thoughts of my own. I believe there is one crucial misunderstanding you have about the Bitcoin community.
The core of Bitcoin community is not formed by people who’ve been misled to believe that bitcoins have value. It’s formed by people who understand very well that bitcoins do not have intrinsic value. These people also understand that without help, bitcoins will stay worthless.
At the same time, these very same people see tremendeous value for the society (and themselves) should something like Bitcoin effectively become money. Therefore, these people have decided to do what they can to establish a value for bitcoins so they can be used as a medium of exchange.
In other words. While it’s common to say that bitcoins are not backed by anything, I call bullshit on that claim. It’s backed by the increasing number of people who have decided to do their part in helping bitcoins become a medium of exchange worthy of being called money.
This does not mean that everyone who is involved with Bitcoin is doing this. I do believe, though, that the bottom of $2 on November 2011 can be used to calculate some kind of an estimate of the level of dedicated grass roots backing Bitcoin had at that time.
This is not merely a currency and a payment system. It’s a social movement aiming to change the world. Each through their individual declaration of value for bitcoins. This is the real reason Mises’ theorem is not sufficient to explain the rise of Bitcoin. Mises’ theorem does not account for social movements doing the unexpected in direct contradiction with the theories about how individual rational agents will act.
Final note. This does not mean that Bitcoin is guaranteed to become widely used medium of exchange. It’s a young technology and should thus still be viewed with uncertainty about it’s long term viability. So, for this reason, if you’d wish to participate in the social movement, don’t invest more than you can afford to lose.
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He hasn’t shown that at all. The regression theorem says anything without intrinsic value will never be money. So he either has to show it has intrinsic value [which of course he cannot do], or show a flaw in Mises proof [which of course he cannot do, either]. All he did was plant a red herring, saying bitcoin had/has exchange value.
As for your own thoughts, I am glad to see my humble blog become a marketplace of ideas.
I’m not quite sure what you mean by “backed”. A money is backed by, say, gold, means somebody out there, say the US govt when we had a gold standard, is willing and able to give gold in exchange for that money. Is the community of backers willing to be serfs of the bitcoin owners, exchanging their very bodies to someone who presents them with a bitcoin?
Maybe you mean they are eager to see bitcoin succeed for altruistic reasons, and will buy up bitcoins to keep the market price high if they see it dropping too low. Like when it went down to 2 cents [not two dollars, see http://www.bbc.co.uk/news/technology-13857192%5D.
Somehow I am sceptical. I don’t think these people exist, and if they do, that they can afford to keep up their charity for long.
Once again, could you kindly show me which line of his proof is refuted by the existence of social movements doing the unexpected?
I have heard over and over that the regression theorem is either wrong or does not apply to bitcoin because of reason X, Y, or Z. I always ask the same question, mainly show me please the exact line in the proof that is shown incorrect by X, Y or Z. [Like one is expected to do in a high school geometry class, the only place most people have exposure to logical thinking.] Oddly enough, I have never gotten a single reply to this question. Everyone falls silent.
Maybe you could step forward and be the first.
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I’m having a little trouble taking you seriously with this 2 cents bullshit. What the article describes is the mayhem that resulted from an exchange being careless with their security procedures. No real trades can be considered to have happened at 2 cents. Why this is not obvious from reading the article is beyond me.
Additional confirmation that those trades weren’t real is that the drop didn’t register at all in the other exchanges. Also, when Mtgox resumed trading 6 days later, the price level stabilized to the pre-security problems level within hours.
During the 5 months after this, the price visited the $2 bottom that was the result of real trading. Since then the price has recovered again. It’s currently trading at around $12 per bitcoin.
Ok, enough of that. Now, to answer the question of what I mean by backing Bitcoin. It means to treat bitcoins as valuable. To be willing to accept them as payment for goods and services. To hold them, or buy more of them when the price dips. To preferentially bring your business to those accepting bitcoins. Basically to treat them as money.
As for these people existing… I can really only point you towards bitcointalk.org forum for evidence.
As for calling this charity… It’s only charity if you believe bitcoins are worth nothing. None of the core supporters think about it that way.
Now, to get back to Mises’ Regression Theorem. I assume article 1 contains the text of the theorem. So, here’s my take on it.
I see no claims by Mises that the process he describes is the only way for a medium of exchange to come into being. What I see is an analysis of the value of the mediums of exchange he knew about. So, I’ll describe how the process can be finished for Bitcoin without requiring an intrinsic value.
The reason Mises requires the concept of intrinsic value (or industrial value, as it stand in the text of your article) is to make the regression finite and thus arrive at an explanation for the value without an infinite regression. In fact, I believe the case can be made that Mises’ proof just requires an initial value that is not the result of regression.
Therefore, all I need to do is to show that such an initial value existed. So, here’s a link to an old thread on bitcointalk.org documenting the first publicly known transaction where bitcoins were traded for a physical good. https://bitcointalk.org/index.php?topic=137.msg1184#msg1184
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OK, so 2 cents might have been a blip. I’ll go along with that.
I hope we agree that you are using “backed” in a nonstandard sense. Cheerleading and taking one for the team is usually insufficient when the discussion is about a backing for a currency.
The other articles deal with your last claim, that one guy trading one bitcoin is meaningful.
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I did not claim that one guy trading one bitcoin is meaningful. I merely showed that the regression is easily satisfied.
Yes, I agree the way I’m using the word “backed” is nonstandard. However, the issue is not so much of quality but of quantity. I agree that one person “backing” Bitcoin is not quite enough in itself. However, by doing so that person can convince others to do the same.
My claim is that this is enough to start the regression and eventually result in Bitcoin becoming generally accepted.
However, this in itself is not enough. For this to happen, Bitcoin will need some advantage over other mediums of exchange. Convincing others to move to Bitcoin when they have equally good or better mediums of exchange already is not going to work.
Thankfully, Bitcoin already provides advantages. There’s, however, plenty of information available about these, so I’ll skip listing them here. Here’s a partial list that avoids some of the obviously false ones: http://bitcoinmedia.com/bulleted-advantages/
There are also uses that are being worked on but that are not yet possible. One example is colored bitcoins. For example, you could use Bitcoin transactions as a generalized tool for tracking who owns what. This could be used to build a decentralized stock exchange. https://bitcointalk.org/index.php?topic=106373.0
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Joel, I wrote a new article explaining the regression theorem that, if carefully read, shows that backing of the sort you describe is not enough to “start the regression”, as you put it.
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Discussions of “intrinsic” value are gobbledey-gook. PQ=MV determines the value of bitcoin. It is a fundamental value.
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Nice list of unproven assertions. Maybe you were taught stuff like this at school and are now blindly applying it. But it’s not too late. Think things through, my son.
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Why do users of bitcoin depend on misleading terminology?
– “Bitcoins” are not coins and are not money. They are blockchains in the public ledger of the blockchain network.
– Bilcoins are called a new “digital currency” by the MSM but are not currency. This blog describes WHY they are not currency (money).
– Bitcoin “ATM’s” are not ATMs (Automated Teller Machines) but are in actuality bitcoin dispensers. They take money and dispense bitcoins onto a smartphone. That’s it. This in no way resembles the activity of a real ATM tranaction in which a person’s deposit account is converted to cash and vise versa. It should be called a “Blockchain Vending Machine” because that’s what it is.
Why can’t bitcoin users simply use words that actually describe the thing they are receiving in exchange for money? Why cloak the truth in misleading terminology?
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Very good point, Anon. Something Orwellian about it.
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[…] appear that, of all regression-based criticisms of Bitcoin, blogger “Smiling Dave” has put forth the most convincing arguments, arguments that I failed to specifically address in my last post. Thus, I would think it is worth […]
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Here is my response to some of Dave’s arguments..
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FYI,
Next week I will be boarding a plane with a ticket I bought with bitcoin.
I will leave the airport in a rental car I paid for in bitcoin.
I will be driving to a hotel room I paid for in bitcoin.
Yup, bitcoin is not a currency. You sir, are a rocket scientist! I wonder why you are blogging in secrecy instead of publicly blogging under your real name. What are you hiding from anyways? How can anyone take you seriously if you won’t even tell us who you are? I have important opinions! (but you cannot know who I am!).
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They had two fatal flaws. Added nothing of substance, and I didn’t like your attitude.
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Imagine you sent it to an ill tempered stranger who has the power of instant life and death over you. How would you phrase your comments then?
Not that I have that power, of course, but keeping that in mind will ensure you stay within the bounds.
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One person buying one ticket is nothing. Do a search for “wide demand”. In particular, read The Kickstart Fallacy.
The truth of an idea is independent of its author.
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[…] have written many times about why bitcoin violates the regression theorem, about why it violates Their’s Law, why it […]
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[…] Enjoy all my articles about bitcoin here. […]
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[…] SD: Those graphs just show bitcoin is dying, but do not explain why it was doomed from the get go. For that, mosey on over to https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/ […]
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[…] Bitcoin, all in one place. […]
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hi Dave,
I’m mostly replying on your piggyback articles (havent read those one yet)… you make two mistakes when you analize bitcoin as many other people are doing, even Austrian economists.
1. Bitcoin is not a currency or money in the sense it is widly understood.
Bitcoin is the technology of the blockchain (solution to double spending problem).
So its price in fiat is of secondary importance at best. It is astounding to me that knowledgable people like Schiff and you can’t grasp beyond monetary value.
So what is it then if it is not a full blown currency ?!
It is a means of transfering value cheaply, it is a means of making contracts w/o intermediary, it is programmable will, it is currency …. and so on ..
So the currency part of the equation is not the most important one in the long run … it is what is popular now for ppl to talk about.
2. Second it may contradict regression theorem but it does not contradict Subjective theory of value (and Austrian economics).
At the end of the day majority of the population use electronic money every day … they know what it is and how to use it, that’s why there is no need for bitcoin to start from scratch… Subjectivly people are willing to treat it as currency as the 5-10 billion market cap shows up, as the time passes valuability of bitcoin/block-chain will mostly piggyback on its non-currency use.
As the Devil will say : If you ask me to pick between Regression-theorem and Subjective-valuation, I will pick the latter any day.
It may not be the bitcoin at the end, but it will be block-chain techology that will partly serve as one and/or many aspects of money – saving, exchange, unit-of-account + many more.
PS>
Btw nice blog :).. but learn more what bitcoin is and what is not.
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I’ve dealt with both those points in my articles. I dealt with the transporting value fallacy here: https://smilingdavesblog.wordpress.com/2014/12/30/bitcoin-as-a-transporter-of-money/ , as well as in an article linked to on the Bitcoin All in One Place page, one about bitocin being a postage stamp.
The second fallacy, that bitcoin is fine since all value is subjective, I dealt with in the article Bitcoin and Intrinsic Value. The gist of the fallacy is this. Say that I write a review of a laptop and say it will never sell because it cannot connect to the internet, gives the user an electric shock every time he touches the keyboard, and so forth. Along comes someone and reminds me that all value is subjective, so such a laptop will sell just fine. Can you spot the flaw in his argument? All value is subjective, yes, but we know what people subjectively value in a laptop, namely, that they can actually use it for something. Mises’s Regression Theorem, and trust me, he understood subjectivity better than both of us, explains what criteria money has to pass in order for people to subjectively value it as money. And bitcoin does not pass. It fails.
Bottom line, read the articles. Digest them, savor them, ponder them, and thou shalt receive the gift of knowledge.
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What my argument is Bitcoin does not have to be money to survive … but it will always have some residual monetary value, because minority/enough of people will value it as money.
I listed several things bitcoin is valuable beside being a transporter of money.
The most important of which is removing the need of third party acting as a “trust” between two entities/ppl in contacts of any sort.
In the example of the laptop you are implying that hundred of thousand of people subjective valuation is incorect because you think so !? They somehow got the tulip-mania. The thing is bitcoin as I already explained is valuable for many more reasons than just mania.
Did you spot the flaw in your agrument.
It is like TCP/IP for the Internet .. you don’t pay for ip-packets, but you pay your service provider to support the network.
The same thing will happen with bitcoin/blockchain for miners to continue to have the blockchain-network running in the worst case scenario.
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To survive as what?
How do you know enough people will value it as money? Are you a prophet?
All the ideas you have for using bitcoin are very nice, but right now nobody wants it for those things. How do you know they ever will?
The example of the laptop implies that the hundreds of thousands, if there are so many, are indeed mistaken and have tulip mania. [They are paying for their foolishness right now, as bitcoin has lost 75% of its value, with no end in sight.] Not because I think so, but because bitcoin does not satisfy criteria for money. As for the other uses, those exist in your mind as good ideas, perhaps, but right now bitcoin is right unsuitable for all those things.
There is no flaw in my argument.
The service provider gives me something useful, what does having a bitcoin give me, or anyone else, right now?
You are saying, really, that bitcoin can be changed into something else and used for something else other than money. Like saying the laptops that do not work can be melted down and turned into flower pots. But how is that relevant to the laptops right now?
Is English your first language?
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