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http://www.technologyreview.com/computing/38392/

This is indeed a fascinating and educational story about the bitcoin phenomenon. What it says to me, in essence, is that bitcoin cannot ever be a "real" currency, only a curiosity and a speculative instrument (or in this case, "a pyramid scheme for geeks").

Why not? Because bitcoin is not a universally accepted currency. Why can't it become one? Because it's not a universally accepted currency. Yes, it's a chicken/egg problem--and there is absolutely no way this can be broken unless all other currencies collapse.

You see, vendors are not speculators by trade: are not going to want to trade real goods for this commodity unless they are relatively sure of it's current and future value, within a narrow band. The width of that band is set by alternatives aka the US dollar, etc. As such, if a vendor imagines the value band of the US dollar to be "+/- 5%", every other currency must beat that. So yes, if we were in the 1400s and there were many crazy currencies floating around, then bitcoin would be able to play because all of the other currencies might be in the same boat. In today's world, however, a currency that has fluctuated in value by 100's of percent in a year cannot possibly compete.

What is incredibly interesting to me about this is that it also demonstrates the problems with trying to substitute any currency (or really any THING) with the world's current currencies.

To put it another way, why don't vendors these days simply accept gold as payment? Why can't you go to Amazon.com and buy a plasma TV with an ounce or two of gold? Why wouldn't Amazon do that?

Well in a sense they could since Amazon's system is nicely computerized: it could give you an instant translation from gold to US dollars and give you the price in gold. As long as the volatility wasn't so extreme, and you were willing to pay a fee for what volatility there was, then they could make it work.

However if you're paying attention, you'd notice that doesn't solve anything at all. Gold in this case is not a "currency" it is merely a commodity that has a price, that price being denominated in US dollars or some other relatively stable currency. In other words, the price of the Plasma TV in this case would be in US dollars, not gold, silver, oil, bitcoin or Lindins, or whatever.

So the conclusion is this: only currencies are currency, everything else are commodities priced in terms of widely accepted currencies. The enormous volatility of both gold and bitcoin preclude either of them from being viable substitutes for any "real" currency. The only way we would ever get to a "gold standard" in the USA is if they US dollar turned into toilet paper and the world needed an alternative. Until then the dollar will do just fine, and calls for a gold standard is akin to asking the fire department to douse your home in water when it's not, in fact, on fire.

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Why not? Because bitcoin is not a universally accepted currency. Why can't it become one? Because it's not a universally accepted currency. Yes, it's a chicken/egg problem--and there is absolutely no way this can be broken unless all other currencies collapse.

Well, that would be not merely a chicken and egg problem, but circular reasoning, which is invalid. The reason why Bitcoin can't become a universal medium of exchange is because it is an abstract unit created solely for exchange, therefore it has no prior value as a salable good. Its value, in short, will always be tied to the value of something else, namely what actually is a money (in this case, USD.) See here.

Likewise, the USD had its value previously determined in terms of specific weights of gold and silver. The fact that it constitutes paper and credit money not connected to any commodity is due to legal privileges. In that sense, we can't say that fiat paper is somehow inherently a "real" money, whilst gold is not. It is not gold that is volatile. Gold is just gold. It is the value of the paper money exchanging for it that is volatile. The prices paid for fiat paper money can shrink to zero, whereas the price of commodity money will always be positive as long as it attracts a non-monetary demand, and this is one of the reasons why people guy gold.

Since market participants must be able to evaluate the use of a medium of exchange in terms of its original non-monetary use, it follows that no money can be expected to remain in circulation on the unhampered market simply because it has been in circulation up to now. The ultimate source of its value must be something else than the mere fact that, so far, people have been willing to accept it. Thus, in a truly free market, paper money without legal privileges could not withstand the competition of commodity monies. The more farsighted and prudent market participants would get rid of their paper money first, and the others would follow in due course.

But it's right that Bitcoin and gold are "in the same boat" in that both are "natural moneys" created on the market, and not coercive or fiat moneys, despite some of the Bitcoin people apparently referring to it as non-governmental fiat money.

The only way we would ever get to a "gold standard" in the USA is if they US dollar turned into toilet paper and the world needed an alternative. Until then the dollar will do just fine, and calls for a gold standard is akin to asking the fire department to douse your home in water when it's not, in fact, on fire.

But that clearly isn't the only way to ever get to any conceivable gold standard, nor the only reason one might call for one, so this metaphor doesn't work.

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(...)

It is not gold that is volatile. Gold is just gold. It is the value of the paper money exchanging for it that is volatile.

In 2000, you would need to bring about 73 ounces of gold to the Toyota dealer if you wanted to walk away with a brand new Camry. Today you would only need to bring 14 ounces. I could go on and on with examples. Compared to the average price of a diverse basket of useful goods, gold has been absurdly volatile whereas the US dollar has been relatively stable.

Or are you saying that everything in existence is volatile and gold is "just gold"? That sounds a lot like you are ascribing magic powers to this metal.

Since market participants must be able to evaluate the use of a medium of exchange in terms of its original non-monetary use, it follows that no money can be expected to remain in circulation on the unhampered market simply because it has been in circulation up to now.

What planet do these "market participants" live on and why would we care about them?

By that logic, Walmart should cease their acceptance of US dollars (and every other major currency on the globe) starting tomorrow. Do you suppose they are going to do this? Really? Why not? Are they stupid? Is the whole world stupid?

Here on Earth, people evaluate a currency based on its ability to be a stable instrument of trade. Period. End of story.

Based on the above, Gold has done a terrible job, and US dollars have done a perfectly fine job.

Is it possible all of this can change, and we could elect crazy people and they could legally turn our currency into toilet paper? Sure. Anything's "possible". However there's no evidence, of anything of the kind happening any time soon. There's no smoke, let alone fire. In the past the markets have been great firemen, instantly reacting to potential issues with currencies. There are no such alarms going on with the US dollar. Quite the opposite.

Despite the oppressive regime we (often correctly) complain about here, everyone in the USA is perfectly free to trade in whatever form they choose. If the US dollar is so terrible, and gold is the benchmark of value, then why doesn't Amazon.com take gold coins in trade for goods? Why isn't the free market making a choice here?

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In 2000, you would need to bring about 73 ounces of gold to the Toyota dealer if you wanted to walk away with a brand new Camry. Today you would only need to bring 14 ounces.

You don't see anything wrong with this argument?

Compared to the average price of a diverse basket of useful goods, gold has been absurdly volatile whereas the US dollar has been relatively stable.

Here's a diverse basket of useful goods for which that statement isn't true: oil, silver and Tibetan medicinal plants. You're welcome to research that, I'm confident you'll find that gold is much less volatile than the dollar, compared to those.

With a little looking into I could also name a diverse basket for which lettuce is the most stable currency on the planet. Hand picked baskets, no matter how diverse, don't make for valid arguments.

[

]Or are you saying that everything in existence is volatile and gold is "just gold"?

I'm not sure what he's saying (although I know that the statement "gold is just gold" does not mean all those things you're saying it means), but I here's what I'm saying:

In a free economy, the market value of gold is less volatile and more predictable than most things, because both the supply and the demand of it are quite stable and predictable.

With state issued currency, supply can (and is being) manipulated, and with most other goods (like oil, iron, etc.) demand can change quickly with technological advancements or just changes in consumers' preferences. If you believe that supply and demand dictate the market value of goods, then this simple inference should be pretty difficult to not understand.

In an economy that's subject to the whims of fiscal policy makers, gold does tend to shift its value somewhat, because it is used as a safe haven from inflation, etc. Any time the policy makers screw up, the value of gold goes up. But a quick math (the kind you learn when you study supply and demand in Economics) will tell you that, as long as this practice doesn't become more widespread than it is now, gold should still remain more stable that the inflated currencies which are driving people to it.

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Here's a diverse basket of useful goods for which that statement isn't true: oil, silver and Tibetan medicinal plants. You're welcome to research that, I'm confident you'll find that gold is much less volatile than the dollar, compared to those.

With a little looking into I could also name a diverse basket for which lettuce is the most stable currency on the planet. Hand picked baskets, no matter how diverse, don't make for valid arguments.

What a dishonest argument. Clearly a Toyota Camry (and every other new car) is not "anecdotal", and I think it's pretty clear to ANYBODY living here in the USA for the last 10 years that the average things you buy have NOT fluctuated by 500% like gold has.

In a free economy, the market value of gold is less volatile and more predictable than most things, because both the supply and the demand of it are quite stable and predictable.

With state issued currency, supply can (and is being) manipulated, (...)

Of course. Why didn't I think of that (slap's head): the price of gold is being secretly manipulated by the US government! That explains why it's gone up by 500% in 10 years when the price of everything else has stayed relatively stable! It's all part of their evil plan to do (um, something).

Well that explains it all.

So, these, um, Secret yellow Metal Market Manipulators (SyMMMs?): are they working with the Illuminati or the CIA? Or both? Inquiring minds want to know.

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Of course. Why didn't I think of that (slap's head): the price of gold is being secretly manipulated by the US government! That explains why it's gone up by 500% in 10 years when the price of everything else has stayed relatively stable! It's all part of their evil plan to do (um, something).

... I suggest you re-read the post you responded to. 'State issued currency' in the paragraph you reply to obviously does not refer to gold. It refers to dollars, the supply of which is purposefully 'manipulated' by the Federal Reserve in an attempt to engage in economic planning. This is not a claim about some nefarious government conspiracy, but a simple statement about what the Federal Reserve does on a daily basis, which is to influence the money supply.

Edited by Dante

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... I suggest you re-read the post you responded to. 'State issued currency' in the paragraph you reply to obviously does not refer to gold. It refers to dollars, the supply of which is purposefully 'manipulated' by the Federal Reserve in an attempt to engage in economic planning. This is not a claim about some nefarious government conspiracy, but a simple statement about what the Federal Reserve does on a daily basis, which is to influence the money supply.

No, I read that post several times before I posted, and I actually do NOT think he meant to say that, and I think my interpretation was correct, although I do admit that there is ambiguity here. However, if your interpretation is correct, then the answer was completely non-responsive, so that would also make no sense.

So perhaps he can clarify...

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... in 10 years when the price of everything else has stayed relatively stable

Relative to gold, prices are stable. But consider what this means.

From 2001 to 2011 gold went from about $300 to about $1800 – a factor of 5 difference.

In the same period prices have increased somewhat over 25% – a factor of 1.25 difference. (Try these inflation calculators, which I don’t think are far off: http://www.westegg.com/inflation/ and http://146.142.4.24/cgi-bin/cpicalc.pl )

This is a major decrease in purchasing power. While you weren’t looking about a fourth of your savings melted away.

It doesn’t matter if this shrinking money is stable relative to anything. In absolute terms it’s pretty unstable, and to the holder’s disadvantage.

For now gold is unstable to your advantage. This may indeed be a bubble, and then two questions come to mind:

1. How long before the bubble bursts?

2. How big will it be right after it does?

Of course we can’t know the answers for sure but obviously there’s money to be had if you can:

• Buy at a price below the post-burst price, then

• Sell soon before the burst.

Another point: I’ve heard of people making money on the very volatility of the gold market. I don’t understand how it works. Commodities speculation isn’t my field despite the above remarks, which are pretty obvious.

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Relative to gold, prices are stable. But consider what this means.

From 2001 to 2011 gold went from about $300 to about $1800 – a factor of 5 difference.

In the same period prices have increased somewhat over 25% – a factor of 1.25 difference. (Try these inflation calculators, which I don’t think are far off: http://www.westegg.com/inflation/ and http://146.142.4.24/cgi-bin/cpicalc.pl )

This is a major decrease in purchasing power. While you weren’t looking about a fourth of your savings melted away.

It doesn’t matter if this shrinking money is stable relative to anything. In absolute terms it’s pretty unstable, and to the holder’s disadvantage.

Well, how big of a deal this is depends on the context. In the context of being a long-term saver, this is a "problem" in that holding US dollars was a bad long-term investment.

In the context of being a viable and efficient trade mechanism, this sort of level of volatility is virtually irrelevant.

A currency can certainly get to the point where it's inflation destroys its ability to trade (and to be sure, the market quickly responds in these countries by shifting to alternatives), but this inflation rate is nowhere near that.

For now gold is unstable to your advantage. This may indeed be a bubble, and then two questions come to mind:

1. How long before the bubble bursts?

2. How big will it be right after it does?

Of course we can’t know the answers for sure but obviously there’s money to be had if you can:

• Buy at a price below the post-burst price, then

• Sell soon before the burst.

Another point: I’ve heard of people making money on the very volatility of the gold market. I don’t understand how it works. Commodities speculation isn’t my field despite the above remarks, which are pretty obvious.

What you are talking about is basically derivatives (probably combined with hedging). Gold, like any other instrument, can be used to create a derivative.

Which is to say that speculators have all kinds of choices when they speculate with gold--and it's clear to me that the price is being driven upwards by them right now. There will become a point when the speculators--the smart ones on Wall Street, not the ding-dongs who watch Glenn Beck commercials--decide it's time to pull the plug on the market, and they will create instruments that profit from Gold's fall. Then it will, and the geniuses at Goldman will once again have the last laugh.

And none of this will have anything to do with inflation, monetary policy, fiscal policy, economics, etc. etc.

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[Mod's note: merged with an earlier thread. - sN]

 

For those who do not know, BitCoin is a 'digital currency' which is 'backed' by nothing except a totally decentralised peer2peer network. There is no government to back the currency, nor any gold, nor any company acting as an authority (in fact, the inventor is unknown). What it offers is near 100% confidence that a transaction cannot be reversed and that there can be no 'double spending' or counterfeiting of bit-coins.

You can read the technical details in the original paper http://bitcoin.org/bitcoin.pdf. Note that although a Japanese man is listed as the author, it's a pseudonym. As I understand it, each bit-coin has an anonymous 'transaction chain' associated with it, which every computer on the peer2peer network keeps track of (and anyone can join the network if they install the software). This transaction history consists of complex mathematical calculations mapping one transaction to the next, and to fake that transaction history would be computationally impractical. The currency also has a built-in plan to expand the money supply for the sake of circulation, but it also has a built in maximum number of bit coins which will eventually be reached. The peer2peer network functions because people can use their computers to support the transaction processing/computation, and in turn they are rewarded with new bit-coins, or with transaction fees.

So anyway, this completely removes any government's ability to control the money supply, and will eventually stop inflation. That may not seem too radical to some, but you could argue that those things very much underpin or current economic system and have a huge effect on how we are governed and how free we are to pursue individual goals on a mass scale. The internet brought decentralisation to computing and has transformed many things, but a decentralised currency could have even more profound effects.

It's also interesting to think what other things we could change with a 'peer2peer' approach.

Edited by softwareNerd
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So anyway, this completely removes any government's ability to control the money supply, and will eventually stop inflation. .

According to wikipedia:

By June 2011, the market had priced 1 BTC at more than twenty-nine USD. By October 2011, the price had fallen to less than three USD.[1]

Is that true, and if so, why is that?

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The dollar will never be replaced so long as legal tender laws require it to be accepted as legal tender in the U.S.

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The exchange rate value of BitCoin did collapse a while ago, after speculators had driven it very high. The currency is still in its infancy so it's understandably volatile.

Eventually, when the computational bit-coin limit is reached, there will be literally zero monetary inflation. Economies and currencies are always affected by outside forces though, so there could still be 'price inflation' as they call it, and variances in exchange rate.

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Well, Bitcoin presupposes a cashless society--which I believe is relatively near upon us, and very much changes the way we think about currency. I think that Technology in this context reduces the importance of currency altogether, for that matter.

Why? On another thread I posited this: what if Amazon.com took every currency as payment (they already take many in some countries)? Amazon and every online vendor has the ability to price any given widget, in real time, in any currency. It can be connected to a real-time currency market and be given a real-time exchange rate.

Your bank account? Why, necessarily, is it denominated in dollars? Those "dollars" are, from an investment standpoint, really just an instrument, just like Euros or AAPL shares or bits of Gold or barrels of oil or acres of land in Manhattan or whatever. Still more complicated, an instrument could be an amalgamation of instruments, maybe some of which hedge each other--and then you can slice units of that amalgamation up virtually and call it currency. A bank of the (near) future could hold your "money" in the form of some amalgamation instead of a particular currency.

If a reasonably large and advanced country cratered its currency right, I'm pretty sure the populace would be able to switch out of the country's own currency so fast it would hardly have any real effects (countries in years past did this in slow motion, typically going to Dollars in times of crisis, but now with technology it could literally happen overnight or sooner).

If we added Bitcoin to the mix of currencies, I'm not sure that would really change much in this scenario--it would just be one more instrument with a value that floats relative to other instruments.

Anyhow, I'm not exactly sure where I'm going with all of this, beside the fact that currencies in this day and age are an interesting subject, and I do think technology is going to make us re-think concepts like "inflation" (and thus re-think the political implications).

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Your bank account? Why, necessarily, is it denominated in dollars? Those "dollars" are, from an investment standpoint, really just an instrument, just like Euros or AAPL shares or bits of Gold or barrels of oil or acres of land in Manhattan or whatever....

If a reasonably large and advanced country cratered its currency right, I'm pretty sure the populace would be able to switch out of the country's own currency so fast it would hardly have any real effects (countries in years past did this in slow motion, typically going to Dollars in times of crisis, but now with technology it could literally happen overnight or sooner).

The difference is that dollars must be accepted in the U.S. by legislative fiat, and as a result of this it has also become our unit of account. There is more to currency than simply a medium of exchange; it is used as the base unit for essential business functions like accounting. This is why playing with the value of the dollar has devastating real effects.

This hypothetical switching off the dollar process you describe would be a disaster for all dollar-holders except for the first few, especially if it happened overnight. The more people tried to move off the dollar, the more worthless it would become, and the vast majority of dollar holders would be left with bank accounts not worth enough to buy even 5 euros on the forex market by the time they tried to do so.

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The difference is that dollars must be accepted in the U.S. by legislative fiat, and as a result of this it has also become our unit of account. There is more to currency than simply a medium of exchange; it is used as the base unit for essential business functions like accounting. This is why playing with the value of the dollar has devastating real effects.

This hypothetical switching off the dollar process you describe would be a disaster for all dollar-holders except for the first few, especially if it happened overnight. The more people tried to move off the dollar, the more worthless it would become, and the vast majority of dollar holders would be left with bank accounts not worth enough to buy even 5 euros on the forex market by the time they tried to do so.

I guess we're musing that we could change the unit of account based on some amalgamation (since we're talking about Bitcoin, which is still fairly theoretical, we might as well muse about changing the nature of the dollar in the same way).

As for dollar-holders, I think what I'm saying is, don't be a dollar holder unless: 1) you think it's a good investment; or 2) you need to make a payment in dollars.

I suppose an easier way to think of this (less theoretical, more here and now) is, what if you held ALL of our money in, say, Australian dollars, but lived here in the US? When you got paid in USD you would immediately move it to AUD and store it in your bank account. When you had to pay in USD, you'd do the opposite instantaneously.

By the way, this is NOT that "theoretical" in people in countries that have experienced their own currency melting down have done exactly this (somebody once told me a real story of buying groceries during a meltdown, wherein they called their banker when the bill came and moved the exact amount that country's currency into their checking account to pay the bill).

Now, as for there "not being enough to move off of", clearly you don't need to pick another currency per se. At that point, your savings is just an investment portfolio. It could be Gold, or AAPL or Euros, or Oil or some infinite combination of all of the instruments in the world (which is basically what my friend above was doing in his story).

Technology makes all of this "instant" and "seamless"... It's pretty easy to imagine a Visa card that did the above in a matter of milliseconds (which is what happens already when you buy something in another currency).

I still don't know where all of this is going :-). Fun conversation though.

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I generally approve of the goal of bitcoin but it has some technical problems, for example: the increased time it takes to verify a transaction as the number of transactions increases (the few transactions I've made took hours to fully verify), and the risk if one (evil) organization grows to represent over 50% of the network resources, which would theoretically permit bogus transactions to be successfully verified.

Edited by brian0918

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[Mod's note: merged with an earlier thread. - sN]

 

 

What would be Rand's position on the Bitcoin? Would she argue that money has to be a tangible good, or would she respect the currency due to its advantages in comparison with gold, such as very simple transactions and ease of transportation, anonymity, almost impossible to confiscate, etc.?

Edited by softwareNerd
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Who knows what she would think about it, but certainly it's possible to both believe BTC isn't money, but at the same time it has its appeal to customers as a way to transfer money quickly and anonymously and outside of the financial system. For these advantages, it's possible she might have hailed it as a great innovation.

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Pros:

1. a predictable money supply; more predictable than even gold.

2. politically, it might be less feasible to impose abusive government regulations, due to the fact that any meaningful regulation would require international agreement between many nations. But, if it grows large enough, politicians will find a way to agree on some controls, not to mention taxes.

Cons:

1. small size of the money supply makes the value of bitcoins easy to manipulate

2. it's vulnerable to hacking (for purposes of theft or fraud); more so than fiat currency transactions, and certainly more so than gold transactions

3. it's probably anonymous right now, but that's only because government agencies haven't taken enough of an interest; but, if any government wished to, they could start collecting information on transactions, same as they do on bank transactions

4. same with confiscation: it's just as easy to confiscate as electronic fiat currency, and easier to confiscate than cash or gold; it isn't being confiscated right now, because it doesn't have enough value to draw the attention of governments;

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I'd be most worried about the hacking potential. All it takes is one news story that a large hacking attack has taken place, and people will sell like crazy, sending the price plummeting.

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Rand knew very little about economics, finance and investing and never claimed otherwise.  She was a very conservative investor herself.  Thus I doubt that she'd have much to say one way or another on the question except maybe "ask an expert."

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