Home » Uncategorized » Why Bitcoins Are Doomed.

Why Bitcoins Are Doomed.

The Freeman has an article about how wonderful bitcoin is, listing the many advantages it has over every other type of currency.

We disagree. Imagine if instead of money, the bitcoin people had decided that their digital thingies should be clothing, BitClothes.

They would sing the praises of BitClothing. Never needs washing, one size fits all, no more clunky suitcases or lack of closet space, never wears out, etc.

Yes, BitClothes have all those advantages, but they aren’t clothes at all.

Bitcoins lack the first essential of being money. Here’s Ludwig von Mises:

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. 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.

We’ll use gold as an example. 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, that 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. 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.

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. 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.

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. That’s called circular reasoning.

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?

Mises did not originate the question, but he did come up with the answer:

The difficulty is, however, merely apparent. The purchasing power 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.

People want gold today because yesterday they saw they can buy a lot with it.

But, say the critics, this is tantamount to merely pushing back the problem. One must still explain the determination of yesterday’s purchasing power. If one explains this 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?

The regression does not go back endlessly. 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 demand 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. 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 fail. 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 $266.

More on bitcoin here.

Advertisements

8 Comments

  1. JFF says:

    Whenever presented with this, Bitcoiners will always say, “well, Bitcoins were designed specifically as a medium of exchange and that’s why people wanted them before we all starting using them a medium of exchange.”

    So basically, Bitcoin’s pre-money use was as a medium of exchange so now they are used as a medium of exchange because they were desirable…as…a…medium of exchange.

    What?

    Like

  2. Smiling Dave says:

    Indeed, JFF. I’ve seen that fallacy stated as follows: Bitcoin has intrinsic value, as money. That’s saying it has non-monetary use, as money.

    A closely related fallacy is saying bitcoin’s initial value, unrelated to its use as money, is its value as a speculation. People bought it because they thought it would go up in price. The possibility of getting rich if you buy some is its initial non monetary value.

    Which totally misunderstands the nature of speculation. A speculator thinks the current market price of something is less than it will be in the future. Today bitcoins sell for a dollar; a year from now they will sell for ten. But the question is, why should a bitcoin sell for ten dollars a year from now? What usefulness will it have then that it doesn’t have now? A year from now it still has no non monetary use.

    People are very excited about this speculation answer. They think they have solved the riddle of bitcoin. Heaven help us.

    Like

  3. lio67 says:

    Off topic: I wonder what smiling dave has to tell about market monetarism and NGDP targeting. I have not yet seen anything about it in this blog. I think this is a hot topic!

    Like

  4. sad_bitcoin_face says:

    Hey Dave,

    I understand bitcoins can’t be used for clothing or a commodity of its own…

    what if we consider ‘a process/service’ as an object that people value.
    The process being ‘acting as medium’.

    May be we have moved up in consumption hierarchy where processes could be considered as objects nevertheless felt with hands, which is not seen in cave man era. Our modern computer era allows to abstract services into digital representation.

    Now let see ‘bitcoin as process’ and its scarce…

    are bitcoins still doomed?

    Like

  5. Smiling Dave says:

    Thank you for your comment, sad.
    Being a process/service is fine, but it has to be a process/service which is not money.
    Mises Regression Theorem proves that every money has to start out as having value not-as-a-money.
    You might want to look at https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/ where I have a comprehensive discussion about bitcoin.

    Like

  6. sad_bitcoin_face says:

    “but it has to be a process/service which is not money.”

    oops… I see it now ! Thanks Dave!

    May be adding a spread sheet program inside bitcoin could help I guess… 🙂
    Okay jokes apart… it feels sad to see such an awesome thing being doomed 😦

    Do you have any suggestions/tweaks with respect to bitcoin fans and bitcoin
    to escape the deadly grips of Mises Regression Theorem (MRT)?

    bitcoin + MRT = bitcoin fail
    bitcoin + MRT + x = success

    is there anything that can replace the ‘x’ in the above equation?

    Like

  7. Smiling Dave says:

    The x has to have a minus sign in front of it. And minus x will mean “not be a money”.
    If bitcoin would just be a way to tranfer dollars securely and secretly, that would be fine.
    For example, you might log into a bitcoin website, pay a small fee, and the website will send the money to someone you name, finding a way to keep it all secret.
    Thus, you would transfer $100.25 to the website, and they would transfer $100 to the person you name.
    There may be legal problems. But I’m speaking theoretically. The principle is that bitcoin cannot start off as being money. Eliminate that from the equation, if it can be done, and all is well.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: