The Economics Of Bitcoin – Doug Casey Gets It Wrong

Doug Casey of Casey Research recently conducted an interview where he spoke about Bitcoins to Louis James, Editor of the International Speculator.  In the interview, Casey makes a few claims that had me yelling at my computer screen.  It is important to remember that Casey has a vested interest in promoting a gold standard.  His company, Casey Research, specializes in precious metals.  So his analysis of any currency system that is not predicated on metals is obviously going to be somewhat biased.

This particular claim by Casey rubbed me the wrong way:

L: Do they have value in themselves?

Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.

So Doug, what you are saying is that if gold could not be turned into jewelry, it would not be a money?  What industrial uses does gold have outside of being ornamental?  Sure it has some minor industrial uses such as plating for electronics or a few other obscure things such as radiation shielding on astronaut helmets, but other than that, the vast majority of gold that is actually used in some physical way is nothing more than pretty trinkets.  The trinkets themselves are totally useless as far as improving the conditions of humanity are concerned.

Of course, the answer to my question “what uses does gold have besides being ornamental?” is obvious to Doug, and everyone else, its primary use is to act as a store of wealth and as a trade facilitator.  The market has a need for a trade facilitator which allows the division of labor to take place.  The market has a need for a medium to store wealth.  These market driven needs impart value to gold faaaaaar above what it would normally be valued at for industrial or ornamental uses alone.

Gold is not worth $1600 an ounce today because it can be turned into pretty trinkets or plate astronaut helmets.

The market imparts value to gold because of its properties of divisibility, fungibility, scarcity, and recognizability.  These properties allow gold to act as a store of wealth.  The market also imparts an additional tiny fraction of value to gold due to its industrial and ornamental uses, but these uses are secondary, not primary.  I would argue that gold would still be worth at least $1500 an ounce today even if it had absolutely no uses outside of acting as a money.

Doug goes on to say,

Their main value seems to have been as a speculative medium. Worse, actually, in that they are – or were – based on finding a “greater fool” to pass them on to, for something of value.

Since I’m sure we can all agree that gold is not worth $1600 an ounce today because it can be turned into pretty jewelry, I have to ask why Doug’s statement shouldn’t also apply to gold?  Isn’t the current price of nearly $1600 an ounce due to speculation about the dollar’s solvency?  If gold is not valued at $1600 for its industrial or ornamental purposes, then what is driving its price so high?

Let me put this another way; if people had total faith in the dollar and the dollar was not being inflated, would gold still be valued at $1600 dollars an ounce?  Of course, the answer would be a resounding NO.  It would be NO because if people had total confidence in the dollar they would not bother looking for alternative mediums to act as a store of wealth.  Thus, we can say Doug’s claims about Bitcoins being nothing more than a “speculative medium” also apply to gold in the same sense.

Casey is essentially making the claim that because Bitcoins have no uses outside of acting as a money, they are inherently worthless.  I have argued against this in previous articles and I will repeat myself here.  This is a fallacious argument.  To claim Bitcoins are nothing is like claiming your operating system is nothing, therefore it is worth nothing.  Clearly an inordinate amount of time and resources went into the development of your computer’s operating system.  The time and resources that went into the development of the software constitutes “something”, which is obviously more than nothing.  Software can have inherent properties that give it value in and of itself. In the case of Bitcoins, they are imbued with value by the free market because of the properties they have that allow them to act as a store of wealth and as a trade facilitator.  Those properties which allow Bitcoins to act in this specific capacity are exactly the same properties that gold has which allow gold to act as a store of wealth and as a trade facilitator.  Again, even if gold had absolutely no other uses besides sitting in bank vaults as ingots, gold would still be a money.

The next item I would like to address:

L: …the whole concept of barter is trading in goods and services directly, not via media of exchange.

Doug: Well, barter chits were supposed to encourage trade among those who used them. And they were also a tax dodge, since no official money changed hands. That was a major incentive for using them. But they all dried up and blew away, and the people who wound up holding them had nothing. Sort of like when the Argentine peso collapsed ten years ago. The provinces decided to set up their own currencies, but they weren’t backed by anything either, and they all dried up and blew away as well, leaving those who held them holding an empty bag.

The Argentine peso collapsed because it was inflated to the moon by a corrupt government.  Comparing Bitcoins, which can not be arbitrarily inflated and are not controlled by any government, to the Argentine peso is ridiculous.  I have to assume this is purely Casey’s bias rearing its ugly head.  It is a straw man conjured up to demonize Bitcoins as somehow being vulnerable to the same fate.

Also, as far as I know, the barter clubs that Casey is referring to are still in business.  See here, here, and even from Lew Rockwell’s own website here.  In fact every report I’ve read on them says they are gaining traction.  I haven’t seen an article saying club chits had suddenly become worthless.  I suppose there may have been a few clubs that folded and went out of business, but that is the market making a determination about a specific club, not the chit system in general.   Just like any market driven currency, the chits have value because the market says they have value.

Casey goes on to make much ado about GoldMoney, which he claims meets all the same functional requirements as Bitcoins.  I disagree.  GoldMoney, like e-gold, has a central point of control that can be corrupted or shut down.  The gold holdings can be confiscated and the gold transactions are not anonymous.  Bitcoins have no central control and are virtually impossible to shut down in the same way BitTorrents are virtually impossible to shut down.  Further, Bitcoin wallets can be encrypted, duplicated, and hidden to the point where they are virtually impossible to confiscate.  Further, GoldMoney doesn’t act like a currency in the fact that you can’t directly send your gold holdings to a retailer for goods.

In summary, Casey’s arguments against Bitcoin are weak or misleading.  His arguments, in many respects, can be applied to gold as well.  Casey should rethink his logic before making public pronouncements about the efficacy of Bitcoins as a currency.

 

Disclosure:

I hold Bitcoins as well as silver.  My silver holdings currently outweigh my Bitcoin holdings by a large margin, so in theory I’m shooting myself in the foot with my silver holdings by writing this.  I personally think there is room for both Bitcoins and metals in this world.  I foresee a day when metals are used like cash for physical transactions and Bitcoins (or another market driven electronic currency like it) are used like check-cards for electronic purchases, with currency exchanges facilitating conversion between the two.

Related articles:

How To Use Bitcoin – The Most Important Creation In The History Of Man

Libertarian Goldbugs Hating On Bitcoin – Free Market Money

The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation

The Economics Of Bitcoin – How Bitcoins Act As Money

Against The Gold Standard

 

  • http://profiles.google.com/justindkeith Justin Keith

    Agreed entirely. I’d like to point out that nothing has inherent value. Things can be valued for certain ends, but value is always created by people. Bitcoins, gold, whatever, are valuable because people value them.

  • http://www.libertariannews.org/ Michael Suede

    I would like to thank my readers who have recently made Bitcoin contributions.

    It is very nice to know I am appreciated.

  • http://twitter.com/VirtuesXVyses Virtues & Vyses

    You’re spot on.  Casey is biased because he’s already ‘all-in’ gold, if you will.  Bitcoin could become a viable currency with enough support and psychological weight in people’s minds.  It just isn’t there yet.  Its not a fiat currency either, since it cannot simply be printed ad nauseam by a central bank. 

  • http://lloyd-void-jr.myopenid.com/ Lloyd Void jr.

    Bitcoin has value. It solves the Byzantine General’s problem for distributed systems. Since Bitcoin transactions consists of arbitrary scripts, they can be used for secure contracts and more.

    I’d also like to point out that Bitcoin is backed by centuries of mathematical progress.

    • Anonymous

      I wrote about BitCoin’s value being Decentralization (by solving the Byzantine Generals’ Problem) here: http://paulbohm.com/bitcoin-decentralization/

      Hope you enjoy the article!

      • http://www.libertariannews.org/ Michael Suede

        Thanks Paul.  I do like it.

  • http://twitter.com/DollarVigilante Jeff Berwick

    Some great commentary on The Dollar Vigilante website today also in response to Doug Casey’s comments: http://www.dollarvigilante.com/blog/2011/6/23/a-wild-few-weeks-for-bitcoin.html

    • http://www.libertariannews.org/ Michael Suede

      Thanks for the link.

      I like them enough to add them to the front page.

  • Lonejack

    “It is important to remember that Casey has a vested interest in promoting a gold standard.”

    Not true. We may disagree with Casey’s specific criticisms, but your statement quoted above misrepresents Casey’s position. Casey does not “promote” a gold standard.  For the record, he has often stated that he does favor any standard, other than what arises naturally from markets free from coercion or government intervention. He explicitly mentioned near the beginning of the interview that Bitcoin’s mere entry into competition against government fiat was encouraging and affirmed his long-term view that technology would play a major role in restoring freedom, autonomy, and financial privacy to the markets. And he argued that Bitcoin met Aristotle’s criteria for good money on most, though not all, counts.

    It is true that nothing, including precious metals, has “intrinsic” value. Value for anything is imputed inasmuch as value is a phenomenon of the human psyche and expressed via human behavior. However, It is also true that throughout recorded history, more people have more often and in more places imputed more value to gold and silver as monetary vehicles than any other medium of exchange, store of wealth, or unit of account.

    Regards. 

    • http://www.libertariannews.org/ Michael Suede

      Casey might not be a hard core gold standard advocate, but the fact remains he has a vested interest in precious metals.  

      He ultimately used faulty logic in his analysis of bitcoins and he further promoted his own investment interests during the interview.

      I’m not saying Casey is a hack and that everything he says is garbage – I  LIKE Doug Casey as a person and I think the vast majority of what he says (99.99999999%) of it is great stuff.

      I’m simply pointing out that there exists a bias here that can’t be ignored.

  • Etienne

    Some of the barter clubs in Argentina actually failed because someone injected large amounts of counterfeit barter money into them. They were sabotaged.

  • Etienne

    BTW I hold silver as well ;)

  • http://twitter.com/DollarVigilante Jeff Berwick

    I don’t think you are shooting yourself in the ‘silver’ foot by recommending bitcoins!  I can see value for both precious metals and bitcoins AND other alternative free-market monies in the future… Personally, I am not comfortable putting a lot of my assets into bitcoin at this time for 2 reasons 1. it is yet unproven as being widely accepted and 2. who knows, the govt could manage to essentially shut down the internet (they would love to do this).  So I hold precious metals… now, of course, with precious metals, they could be stolen/confiscated/taxed etc as well… nothing is perfect… that’s why there is lots of room for alternative free market monies

    • http://www.libertariannews.org/ Michael Suede

      I actually somewhat agree with you Jeff.

      Bitcoins are not an investment panacea, but if they gain more traction and survive more trial-by-fire, the rewards of the technology to humanity may prove to be incalculable.

      It just bothers me when I see good people like Doug putting out bad information about the economic efficacy of the Bitcoin monetary system.

      • Hiro

        Doug is cool, just misguided. For now. Give him a few months and he will be using Bitcoin to buy and sell gold, then for other things and something will “snap” and he will get it and will be one of its most outspoken proponents and users regardless of what “definition” it fits. Lets see how he and the world uses it, that will speak for itself, without giving it a name.

      • DrGizmo

        you are so right, recommend you make the offer, it is a tough sale to guys with Austrian thinking, but I think they just do not understand the concept, there are so many good things about it, The best for them should be the p to p, the individual transaction, perfectly Austrian I think,  that a side the power of the BTC or currency like it are so many, but I think my favorite is the way it can create a new economy for the lovers and users of the web, it can be the tipping point of monetizing the information of the web… a tip jar economy, the second thing, I like  is a NO debt currency … it can get us out of the mess we are in… I do not think I did this to my self…I might allowed it to happen but this is not my plan for the future.

        BTC has no debt assoc with it because the is no central bank to put it into debt… what a beautiful thing, it will never have debt, it will never inflate, appreciate yes, but not inflation,  ever a debt free global currency, as you apply put the best thing in human history … it well could be … keep up the fire..
         … your logic is sound and reasons are clear… we must educate the masses…

        I would like to see Ron Paul accept BTC as his only currency that would make statement to the central bankers, a guy get elected and did not use one FED $ doing it … who does he owe allegiance to then what special interest groups? anonymous ? something to ponder…

  • Bitman

    What Doug said right. I don’t see any flaw in his argument. Fiat currency (as a medium of exchange), like bitcoin, is based on confidence of the people using it. Unlike the US$, Bitcoin is  not backed by another valuable or credible thing. US$, though not backed by gold (as in a gold standard) is guaranteed by the government, which is good enough. 

    • http://www.libertariannews.org/ Michael Suede

      If you don’t see a flaw in his arguments its probably because you didn’t read the article above.

      • Bitman

        OK, I just read the article. The basic economic concept is still intact and I agreed with him 100 % and make no apology for it. 

        But what I can surmise in the interview is that he tried to promote GoldMoney which to me is nothing similar to Bitcoin. HE IS JUST A GOLD TRADER and wants you to pay HIM in FIAT CURRENCY for the gold you purchase from him. WHAT a hypocrisy for promoters of GOLD STANDARD. They should have asked for DIAMONDs instead of US$ in payments. For this reason, I am always weary of proponents of the Gold Standards.

        I would be more confident in the Government guaranteeing the value of my Fiat Currency than BUYING GOLD from GOLDMONEY and leaving it at their warehouse. 

        • Bitman

          Following on my previous post, I think I need to explain myself for the following statement :

          “I would be more confident in the Government guaranteeing the value of my Fiat Currency than BUYING GOLD from GOLDMONEY and leaving it at their warehouse”.

          I make this statement on the premise that I “trust” no one apart from the government. (If you don’t trust the government who else can you trust. Just leave the country and go somewhere else. If you can’t leave, vote for change. If nothing changes do something to change it. Ultimately, accept and embrace it).

          Now, if I buy gold from GoldMoney, I would want to take delivery. I hope you do so too.

          I just hate the idea of GoldMoney promoting the HOLDINGS concept (aka known WAREHOUSING).Ya, I know all the advantages associated with it. BUT all need to know the weaknesses associated with it. One of it is ABUSE by the promoters through LEVERAGING (some thing similar to Fractional Banking).

          Assume a gold trader has 100 kg of gold. He sold 50 kg to 50 buyers (each 1 kg worth). But 10 buyers take delivery of their 10 kg. The warehouse is left with a balance of 90 kg.
          Now, the trader sells the rest of HIS stock of 50 kg to another 50 buyers and 10 of them takes physical delivery of the gold, the warehouse would have left with gold balance (or reserve) of 80 kg (sitting there doing nothing). Can you see the temptation for abuse? The trader can resell the 80 kg of gold and make more money. He may be an honest trader and he will meet any request for physical delivery. This may hold true if only 20% (10 out of 50 buyers) takes delivery. The trader took the calculated risk and leverage the holdings and makes more money for himself. He has succeeded in “Printing” more GOLD.

          Forget about the promise or claims about security audits, checks and balances. Trust is not easy to earn.

  • Robert Honer

    I agree.  I’ve heard other people make Doug’s argument as well, and it confuses me because it seems like they’re missing the obvious.  Or maybe we are :-O

  • Felipe

    Bitcoin has the most solid back value of all: cryptography

    • noone

      It is spooky that the supporters of bitcoin are woefully ignorant of what ultimately “backs” bitcoin:  it is processing power, and nothing else.  Nakamoto was explicitly clear in his paper;  I recommend you read it, and carefully.

      • http://www.libertariannews.org/ Michael Suede

        It’s spooky that people think gold is backed by something other than gold.

        • noone

          Gold is backed by gold.  However, to say this, we have to understand that by the first instance of the word “gold” we refer to element number 79 on the periodic table, and the second instance, we refer to the aura of trust that has developed around the stuff.  The latter can not be dismissed as easily as you apparently think, otherwise, no one would be using gold for anything except electrical contacts and aqua regia videos on YouTube.

  • Ikti

    First let’s define what does it mean that commodity has intristic value:
    X has intristic value when it is valuable even when you cannot use it as a currency, medium of exchenge, store of value, etc. As money in short.
    By this definition gold has intristic value and bitcoins don’t. What is so controversial about this statement?

  • Andy

    Stupid article and completely wring.. learn about bitcoin before you post an article like… you will be laughed at in the future

  • Pingback: The Economics Of Bitcoin – Doug Casey Gets It Wrong | Bitcoin News

  • Gary D. Barnett

    Michael,

    I don’t agree with your argument. 

    While nothing may have intrinsic value, every ounce of gold I hold is worth immediately $1,500.00. Gold, as well as silver and other materials, has been proven for many thousands of years as money. Value has always been evident in the free market worldwide for these commodities.

    I’m not knocking your Bitcoin, but it was never proven in the past, nor is it proven now. It had no value whatsoever until it was arbitrarily created. By who? Certainly not the general market. There is nothing backing these bits, and they were literally created out of thin air. Who established the value of this medium? On its own is it worth anything? I think not.

    My belief is that all money should come from a free and open market. No government interference should be evident. Bitcoin may well become useful internationally, and may become real at some point in the future should it have real and broad based value. At this stage, I would be very fearful of it for many reasons, not the least of which is that it is backed by nothing of value. Also, the government could shut down all Bitcoin use at any time it desired just as it did to e-gold.

    All in all, much scrutiny should be evident concerning something so new and unproven. I would only wish Bitcoin well, but more proven evidence of value and marketability must be forthcoming if this is to be taken seriously. 

    It is certainly a breath of fresh air to see the excitement surrounding this issue, and it is encouraging to see that many out there are thinking about and doing something about the scam we call money in this country.

    My best,

    Gary D. Barnett
    President/Barnett Financial Services, Inc.
    Lewistown, Montana

    • http://www.libertariannews.org/ Michael Suede

      Gary, I’m having an extremely hard time following your arguments.

      Bitcoins are entirely a free market creation.  All of the value they have expressly comes from the free market.  There are no government entities forcing people to use Bitcoins.  There are no government entities forcing people to pay taxes in Bitcoins.  There are no government entities that control the distribution or creation of Bitcoins.  

      While there is nothing backing these bits, there is nothing backing gold either.  Bitcoins are bitcoins and gold is gold.  Bitcoins are not a representation of a commodity like a gold-backed dollar, they are a commodity. 

      • Gary D. Barnett

        Michael,

        I can accept that Bitcoins are a free market creation, but comparing a bit on a computer with hard gold makes no logical sense to me. Since I believe that anything that people want to exchange for things of value is money, then anything can be money; including Bitcoins. But all money is not the same. You say that “Bitcoins are a commodity”? 

        Currently, Bitcoins carry much risk. Politicians, very prominent politicians, are already attempting to draft legislation to control and/or monitor this electronic currency. There are multiple stories about this recently. Actually, the DEA and two powerful senators are already working on going after the Bitcoin market. They will use any method at their disposal  to destroy the secrecy of these transactions. If successful, what will happen to all those Bitcoin holders?

        Don’t get me wrong, I like the idea and applaud the lack of transparency available to the governments. In fact, I think that a wonderful thing. But I can carry an ounce of gold or silver in my pocket, and trade it anywhere in the world. In addition, no one can take that gold or silver from me unless by force, and that would be no easy task. In the case of Bitcoin, all the government has to do is make it illegal, literally shut it down on the system, or any number of other interventions they have available. That doesn’t make me feel warm and fuzzy. 

        Again, I am excited that it is working as well as it is, but I would want much more confirmation of safety and liquidity given the forces against it already. I  only wish for the best for all those who transact business this way.

        • http://www.libertariannews.org/ Michael Suede

          Well every commodity comes with market risk.  If I buy corn today, it might fall in price tomorrow, etc.. etc..

          Of course Bitcoins are riskier than corn, I’m not denying that.  However, I am saying that Casey’s criticisms are not valid arguments against buying Bitcoins.  If Casey had said “look, I think they are an economically valid currency, but there’s just too much risk for me to recommend investing in them”, I would be totally cool with that.  However, that is not what Casey said. 

          As for the DEA and senators, they will have about as much luck shutting down Bitcoin as they have had shutting down Bit Torrents.  It ain’t gonna happen.  The best they can do is go after the currency exchanges.  But those are located outside the US, so they don’t have jurisdiction to do it.  

          • noone

            “As for the DEA and senators, they will have about as much luck shutting
            down Bitcoin as they have had shutting down Bit Torrents.  It ain’t
            gonna happen.”

            Looks like you too need to read Nakamoto’s paper as well.  Though I strongly encourage you to ready it completely, here is an executive summary:  bitcoin only works if the majority of the processing power is honest.

            Nakamoto is absolutely explicit on this point.

            Right now, this power is distributed over a few thousand gamers, running machinery they cobble together at their local computer store.  Very few of these people really have much of an idea about what they are building and running;  they are just following the script laid down at bitcoin.org or related wiki’s.

            I would be astounded if, at the outer edges, more than 15 million dollars in hardware is invested in the network.

            Yes, an absolutely insignificant 15 million bucks.

            Against an agency that can drop half a billion in ordnance in a single day over Libya.  Just for a piddly pool of black goo in the ground!  We can further expect that this agency will deploy non-trivial smarts to the problem as well.  (Have you read the bitcoin source?!)

            So on that front alone, bitcoin, today and for the forseeable future,  is in serious danger.  It probably needs 2-3 orders of magnitude of computational investment if it wanted to withstand an attack like this.  Just where that investment is going to come from is an open question.

            It certainly will not come from the local computer store … which leads to the other threat to bitcoin.

            Though it would be easy for even a small State to dominate the network, any kind of concentration of ownership of the processing power is a bad thing for bitcoin.  If, then, bitcoin survives, it is beyond doubt that most of the hardware that runs the network will be subject to the normal economies of scale, along which comes a very small set of owners.

            Think “single point of failure”:  extortion, buy-out, whatever.  Since we are talking about a currency, even a small amount of dishonesty in the network will go a very long way to eroding trust.

            Finally, speaking of buy-outs, tomorrow the USG could offer $300 million for all bitcoins and just shred the lot.  At the rate they are printing paper, who would notice?  How many of the basement gamers have the libertarian ideals and would refuse all that filthy paper?

          • http://www.libertariannews.org/ Michael Suede

            While I agree that the State poses a non-trival threat to Bitcoins, what I’m getting at is even if the State bought out all the bitcoins or attacked the network and took it over, users would simply create a new branch of currency off of a new project.

            The State would eventually exhaust itself trying to stamp out all the various flavors that would spring up.

            People want it, therefore they will have it.

            The State has employed trillions of dollars to stop the sale of drugs, and it has simply driven the cost of drugs higher.

          • Gary Barnett

            I certainly hope you are not naive enough to believe that the government “has employed trillions of dollars to stop the sale of drugs?” The exact opposite is the case. The entire drug war exists only to increase the use of drugs, therefore increasing the very lucrative prison bureaucracy. Drugs are a multi-hundred billion dollar business, and the CIA funds itself with the drug trade, which it could not do in a free market. It is also a way for government to gain that much more control of the populace. 

            If less drug use were the desired end, then full and total legalization would have been the method used. To believe that government actually wants to stifle drug use is ludicrous on its face. Actually, it is idiotic!

            I know this is off subject, but I could not allow your statements to go unanswered.

          • http://www.libertariannews.org/ Michael Suede

            Gary, in case you missed it, I have a link to CIA Drugs website in the sidebar of this page.

            Clearly I am aware of what the government is up to with the drug war.

            However, that does not mean they are not spending trillions of dollars trying to stop the sale of illegal drugs – which is explicitly what I said they were doing.

            They obviously don’t want the black market sale of drugs to stop, but they do want to create a black market in the first place.  Which is exactly what would happen if they outlawed Bitcoins. They could make all the laws they want, but they will never get rid of them entirely.

          • Gary Barnett

            Thanks Michael,

            It looks like we’re not that far apart at all.

            Thanks, and great luck to you!

          • Bitcoin

            So they buy out Bitcoin 1.0 ( or compromise the network, not so anonymously, and are exposed for what they did to a free market of digital goods trading – which would be seen as a criminal act).  But then mankind still have a need for decentrally produced digital goods of cryptographically secure value, and Bitcoin 2.0 is started.  And Bitcoin 2.0 gets bought out.  And then Bitcoin 3.0 is started.  And so on and on Bitcoin x.0 is started … all having value because it gets bought out…

      • noone

        “While there is nothing backing these bits, there is nothing backing gold either.”

        There is N thousand years of experience with gold.

        If that can be glibly dismissed, then why can’t bitcoins?

        • http://www.libertariannews.org/ Michael Suede

          How long gold has been around only defines it as being less risky of an investment.  That does not change the fact that it isn’t “backed” by anything.  It is what it is, just like Bitcoins.  You can’t “back” a commodity with another commodity.

          • noone

            “You can’t “back” a commodity with another commodity.”

            But bitcoin is doing exactly that:  it is backed by the commodity called “processing power”.

          • Bitcoin

            Bitcoin uses “processing power” and human effort to produce something useful.  A unique digital good with ownership properties enabling the owner with all kinds of cryptographic uses – for example the most common use of a global digital accounting system measuring value.  Other uses for Bitcoin in the cryptography field might also be secure private communication with anyone your wallet.dat file was shared with (even if the wallet.dat file only has one 0.00000001 btc key in it).  Another use for Bitcoin in the cryptography field might also be secure web service sign in – if your wallet.dat file is shared with the web service provider (even with only one 0.00000001 btc in it).

            Bitcoin is not a script currency which has only value based on the reputation of the one making the backing promise and not full intrinsic value matching the cost of the effort of production.

            Bitcoin is a useful digital good commodity with ownership properties (giving ownership entitlement to all who have access to the relevant private keys which is paired with public keys in the bitcoin blockchain), used as a currency, which has a value roughly matching its cost of production from raw 1′s and 0′s.

  • Diogenes_

    re:
    Since I’m sure we can all agree that gold is not worth $1600 an ounce today because it can be turned into pretty jewelry,

     I don’t agree with that. One of the biggest demands for gold comes from India, where it’s All turned into Jewelry.  The ‘prettiness’ and value of gold are in fact not separable.

    Money: durable, divisible, convenient, consistent, and have value in itself.

     The value of Gold is social value, a value proven by literally the whole history of humanity. Humans throughout history have consistently loved gold. It is unique in having a shining,sparkling like luster while at the same time being the most workable material for jewelry. The crowns of kings were made of gold. The wealth of emperors was gold. Wedding rings are made of gold. Whole Indian dowries are made of Gold. Famous entertainers and athletes sport gold teeth and chains. The fact is, the social value of Gold is simply beyond question.

     When Vietnam collapsed to the communists, refugees fled holding gold coins. They sold these gold coins in the countries they fled too and thus recreated their spending ability. When you hold a gold coin, you are holding money backed by millenia of social proof that you can spend anywhere in the world. And most importantly for this conversation, you don’t need even a single computer, let alone a functioning network of computers and users, to be able to spend Gold. All you need is the gold itself, because Gold has been accepted worldwide as money for all of history.

     Gold money keeps it’s Gold in vaults in Switzerland and GoldMoney account holders legally own that Gold under the laws of both Switzerland and Jersey. Do you think Switzerland, which the Nazi’s declined to invade due to legions of Swiss snipers with rifles in their homes, is less secure than a computer network that crashed last week Before the NSA, let alone the Pentagon, launched any kind of major action against it???

     Bitcoin Is a great, ambitious, but ultimately limited in scope Hacker project to help bring freedom from fiat money. The lessons from Bitcoin are very important for future projects, such as in the areas of anonymity and money transfer. However Bitcoin by itself does not adequately meet the value criterion of being money, because it requires a complex system to exist at all, and the specific rare knowledge to understand the situation of Bitcoins.

     Bitcoins also don’t meet the durability criterion of being money, because that system is too inherently vulnerable. A gold coin in your pocket will not crash or be detected by a distant hacker. When you hand that gold coin to someone else in exchange for food or a car repair, you can do that with a handshake which will be invisible to anyone else. Gold coins will not be effected by power outages, natural disasters, war, travel to anywhere, being stored for 100 years, not having a computer, being faked by future hackers or any other factor.

      The most ignorant, none computer literate, none English speaking, peasant  or king anywhere in the world will instantly recognize the value of the gold coin in Your hand. Few understand the ‘value’ of a Bitcoin. 

    • http://www.libertariannews.org/ Michael Suede

      I would say a USB thumb drive is nearly as durable as a gold coin.  Clearly gold is marginally more durable, but the marginal durability of gold over Bitcoins is not sufficient (IMHO) to make Bitcoins an economically invalid currency.

      As for your assertion that gold is worth 1600 an ounce because people in India like gold jewelry, the question I have for you is, are they buying the jewelry for its aesthetic value or for a combination of aesthetics and investment value?

      If a person buys a gold ring with the expectation that, in the future, the ring will be worth more than they bought it for, are they really buying the ring for aesthetics or for its monetary investment value?

      Consider that people could buy gold plated jewelry for a tiny fraction of the cost of full gold jewelry and receive exactly the same aesthetic value.

      Given that this is the case, and given that people in general are not prone to making irrational decisions, we can say that people buy gold jewelry not for its aesthetics, but primarily as a store of wealth.

      • Diogenes_

         Gold is an element, that can not be destroyed by water, heat, cold, fire or mechanical force. Thumb drives or their information are destroyed by all of those, manufacturing defects, software chicanery, and over use. The US passed a law recently requiring all new US smart phones from 2013 on to contain a special chip provided by the government. Similar measures are possible with cell phones thumb drives by governments world wide. Many Vietnamese fled in boats and through humid jungles. Electronic equipment doesn’t fair well in such circumstances. Gold also is immune to an internet kill switch and radio jamming. Gold is durable in and of itself, Bitcoin is not.

         Gold is valued by the Indian people because they recognize and admire it’s socially inherent and historical desirability. The ‘artistic’ and financial appeal of Gold are not separable. Wearing a gold plated piece of Jewelry is seen as socially much less desirable by most people in the US and India. Having solid gold  Jewelry is part of it’s ‘aesthetic’ appeal. Why do US men give women Real diamond rings for an engagement ring instead of a lookalike stone? That isn’t done as an investment, few people plan on selling engagement rings in the future, it’s done as a statement of social value. Aesthetic value, ‘investment’ value and Jewelry value are all inseparable, because they all derive directly from social value. Indian people don’t sell their dowry Gold except in a significant emergency. Dowry Gold is kept as a long term insurance savings account. An item that has social value because of it’s pure aesthetic appeal is the most natural type of money, as long as it also meets the other factors of a desirable type of money. Gold is Not an investment, it’s money.  Buying Gold with dollars Might result in more dollars in the future, but that’s a speculation on dollars.

         Casey was right to criticize Bitcoin, because the Bitcoin evangelists were touting Bitcoin as a type of money. Casey is an investment advisor, and investment advisors earn their living by being skeptical about investments and financial instruments such as money and money transfer systems. Investment advisors who buy into financial instruments that lose wealth will soon be out of business. Bitcoin evangelists claim that Bitcoin is so reliable that it is in fact money. That is not the case, and the events of last weekend make that obvious. Gold, which is real money, has never had nor can it have any kind of mechanical problem which makes it lose value world wide. The only thing that could cause that would be a worldwide social rebuke of Gold by the earth’s population, which has never happened in history and is pretty much unimaginable.

         Bitcoin May have some use of a money transfer system in certain circumstances, and I hope it does succeed in that, but that is not the same as actually being Real money suitable for saving.

        • http://www.libertariannews.org/ Michael Suede

          Buddy, if the government is shutting down the web with kill switches, we have bigger problems on our hands than the fact that bitcoins need a network to spend them on.

          As far as the durability of gold over bitcoins is concerned, I already explained why this isn’t sufficient reason to say bitcoins are inferior to gold.

          Consider that when gold is represented by paper cash, if the cash is lost, it is the same as if a person lost the gold associated with it.  Since gold can not be divided easily to facilitate transactions directly with gold, it is almost assured that transactions will take place in some kind of cash representation.

          Thus, your durability argument is moot since cash is far more vulnerable to destruction than bitcoins are.  Bitcoin wallets can be backed up to remote servers, backed up to cell phones, backed up to thumb drives, all at the same time so that if one is lost, the others would still be accessible.

          Consider for example how I have secured my coins:

          I have double drives on my local PC, so I have duplicate copy of my wallet in an encrypted file on each drive.  I also store an encrypted file on my Gmail account and on a thumb drive.

          I keep the bulk of my coins in these replicated files.

          It would literally take an act of god for all of those copies to be simultaneously destroyed.

          Contrast that with gold backed cash or a gold coin.

          Further, consider that my spending wallet resides on a wallet site. So I don’t have to keep a copy of the file on my cell phone directly, I simply use my phone’s web browser to send coins from a website.

          • Diogenese_

            re: Buddy, if the government is shutting down the web with kill
            switches, we have bigger problems on our hands than the fact that
            bitcoins need a network to spend them on.

             A money retaining value in extreme circumstances defines what a reliable, strong and Real money is. DHS recently shutdown hundreds of url’s with no warning or appeal. A Canadian law is in the works to mandate logging of all ISP activity. The kill switch can easily be envisioned to be applied selectively, as has already happened to hundreds of domain names.

             Concerning your notably strange claim for an Austrian that Gold transactions are ‘assured’ to actually be done in paper instead, I’m not sure where to start, but here goes: I have never met a goldbug who didn’t go into gold for the very reason of avoiding ever using paper. The University of Texas recently took physical delivery of 1 billion in Gold for the very purpose of reducing it’s reliance on paper. Ron Paul talks constantly about the need to get rid of legal tender laws and use Gold as money. Using Gold as money means Gold coins and bars, Gold, not paper.

            Judging from your article on the ‘Gold Standard’, it seems that your mixing up the ‘Gold Standard’ government regulation of Gold prices period with the actual use of Gold as money. The ‘Gold Standard’ was just a coercive step in between real Gold money and fiat money with no Gold redeemability of any type.  The Gold coins that FDR confiscated up until that time were used as money for their Gold value, not their government regulated price value-as was the case afterwards.

             Gold is easily divisible, one of the aspects of real money. A .999 gold coin  can be melted and reformed or even chiseled easily into two pieces. This is because Gold is a soft metal. The smallest Gold coin is a 1/20 Canadian maple, which is about 2/3 dime sized, and worth around $75 in trade for dollars. Small cash transactions would be done in silver, as they have been for most of history, including the US.

             Software-information systems like Bitcoin can be backed up in many ways, just like the electronic ledgers in fiat banks are daily. Both of those systems depend on external human managed work and effort to function, and Both are in a constant natural hacker arms race. Recently Bitcoin crashed in value world wide by orders of magnitude because of failures in that human managed work. That has never happened to Gold, ever. Nor can it because Gold is not dependent on any type of external work or electronic support system.

             You have asserted that Gold is only or even close to exclusively purchased primarily for it’s investment value. Do you think solid gold wedding rings are purchased only for investment value? Why not just buy plated rings? Did you buy your wife a plated wedding ring, or if not tell her ‘I bought this solid Gold wedding ring primarily as an investment’ ? Do you think the many people who wear solid Gold chains, bracelets, rings, watches and earings at nightclubs and countless other social events bought them primarily for their investment value? Walk up to the next person you see wearing a Gold chain or ring and ask them ‘is that plated and did you buy it for investment value’ and see what the reaction is.

             Finally, since you claim to be an Austrian, it’s worth noting that Mises solved the question of ‘how does money originate’ by explaining that money originates as a commodity that is bartered for consumptive purposes. He further explained that all money types that are contrived into temporary use by other than a bartered consumptive commodity are doomed to eventual natural failure. Bitcoin has no natural consumptive use outside of Both the software system and political environment it operates in. If legal tender, drug and tax laws didn’t exist, there would be no reason to use Bitcoin, because the services of Gold Money transfer agents such as e-gold would than be legal and tolerated in the US.

          • http://www.libertariannews.org/ Michael Suede

            Holding gold as a secure store of wealth wouldn’t change with a Bitcoin monetary system.  We are talking about monetary systems here, not wealth storage.  There is a difference.

            In order for gold to be useful in a modern monetary system it must be represented by notes or tokens otherwise electronic transactions would be impossible.  Thus, all of your arguments along that line of thinking are moot.

            Hackers could just as easily attack electronic gold accounts or normal bank ledgers. This is a problem all currencies have to deal with.

          • Diogenese_

             If a money does not store wealth, is it useful? Is it really money?

             I disagree that physical money is not useful if not represented by a paper note or token. Physical Silver and Gold transactions still take place around the world, such as in India, Hong Kong, between some banks, in Utah, in NH, and between Liberty minded individuals. Transactions can take place over the phone, and for large transactions that often is how they take place. Transactions are fundamentally based on trust between the two parties. Commodity transactions often take place between farmers and others outside of a note or electronic system. In fact many ‘preppers’ and others believe that this is the preferable type of transaction.

             Hackers can not just as easily attack electronic Gold accounts, because for example in the Bullion vault system one can only extract electronic tokens through the Bank account one funded the Bullion vault account with, and that can’t be changed. A physical item like Gold simply can not be as instantly and irrevocably moved around as electronic tokens. A hackers attempted electronic transaction of some type might be possible, but the physical transfer of Gold will take at least one day, and is highly likely to be found and reversed within that time. The only way that Hackers could be sure to get none reversible money out of the leading Gold account systems, is to hack multiple banks, gold accounts and vault accounting systems simultaneously, and show up at the Swiss vaults and try to trick them into handing over the physical Gold. Good luck doing that.

             It addition, Gold is not required by it’s nature to be in an electronic controlled Banking system. One can keep Gold coins in a vault or buried, and remove coins and take them to western union or similar as needed when transferring needs arise. Gold Money and other account systems could easily add this type of feature also if customers asked for it-the simple requirement to only authorize transfers by phoning the customer and asking for a password recorded only in a paper book, or through use of a written one time pad for unbreakable none electronic security.

             Thus if hacking became an issue, the customer would use 2 accounts on 2 separate systems, one a savings account with a one time pad, and the other a ‘checking’ account which he would occasionally transfer small sums of money too. Thus Gold can and already does readily exist in plentiful use in both transactions and ‘storage only’ outside of being linked with the tool of electronic accounting systems.

    • Pagoo

      Gold and Silver are shiny. Bitcoins arent. Nuff Said!

  • David

    I too would like to chastise Doug Casey for his bias against views he disagrees with. However, I would like to point out that the author of this post is biased in favor of the views he agrees with.

    Actually, let’s stop crying “bias” when we think a person has set forth a faulty argument unless the evidence of bias is clear. Let’s just call people “wrong” instead. I guess I’m biased against arbitrary charges of bias. I think they’re wrong.

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  • Aridzonan13

    Both Gold and BitCoin have a serious enemy, the Fed.  The Fed and it’s cohorts, the Pin Striped Bandits on Wall St., have the right to produce money out of thin air.  They also have the MIC to force the rest of the world to use it as currency.  I call this entity FedGov.Inc. FedGov.Inc manipulates metals prices and I’m sure is planning a huge blow to BitCoin and other digital currencies. The dollar is everyone’s enemy and it’s not going to share it’s address space without a fight. Competitors beware.  With metals, taxes and confiscation are the tried and true method. With BitCoin, a virus, trojan could wipe out a great deal of digital wealth on many a Window’s PC.  They would have to roll up their sleeves to wipe out BitCoin on a Linux / Apple platforms.  But, be advised, they have an unlimited budget.  It would be prudent for the BitCoin community to do a large scale recovery exercise in preparation for just such an attack. 

  • http://www.facebook.com/people/Matt-Mitchell/1053071836 Matt Mitchell

    “I foresee a day when metals are used like cash for physical transactions and Bitcoins (or another market driven electronic currency like it) are used like check-cards for electronic purchases, with currency exchanges facilitating conversion between the two.”

    Indeed that makes sense. Bitcoin is in early days. I think it has room to grow into a new digital era of money, as long as governments don’t get in the way totally.

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  • eulb

    Gold is pretty, tangible and scarce.You can not create it.This is why it has value.
    I really don’t know much about bitcoins but i think they are not pretty, you can’t touch them and are no limit to their creation.This is why i think they aren’t worth shit.

    • http://www.libertariannews.org/ Michael Suede

      There is a limit to their creation, which is why they are worth a hundred bucks a pop right now.

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