A Rebuttal To Bitcoin: Money of the Future or Old-Fashioned Bubble?

bitcoin-225At this point, I’m starting to become frustrated with the Mises Institute’s constant bashing of the Bitcoin currency by various authors who do not have a firm grip on just what Bitcoin actually is or what it represents.  The latest anti-Bitcoin article to grace the pages of Mises’ website was written by Patrik Korda, a market research analyst out of New York.  So let’s go through Mr. Korda’s article piece by piece to uncover some of the errors he is making in his analysis.

Korda writes, “While Bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as litecoin, namecoin, and freicoin in place.”  By this statement, it seems that Korda doesn’t understand that none of the digital currencies mentioned are in anyway interchangeable, that they all have different underlying economic structures, and none of them share a common ledger or network.  They are all totally independent digital currency systems.

So in essence, what we are seeing here is the market at work.  I personally think competition in currencies is a good thing.  The guys who created Litecoin think their system of money creation is better than the guys who came up with Bitcoin, so they are putting their currency out there in the hopes that people will chose it over other alternatives.  So far, the market seems to prefer Bitcoin by a large margin.  Korda seems to think this is a point against digital currency systems, while to me, this is an exceptionally strong point in favor of them.  Competition will only breed better currencies.

Korda goes on to say, “Those who compare bitcoin to a language neglect the fact that most people do not have an incentive to create a new language out of the blue. On the other hand, a great chunk of human history consists of people searching for the philosopher’s stone to magically produce gold.”  I would argue that people don’t have an incentive to change currency systems unless the one they are presently using is under attack by a gang of marauding counterfeiters and thieves.  Further, comparing Bitcoin to the magical production of gold is just plain silly.  There is nothing magical about resource intensive computational algorithms.  Bitcoins require real world resources to produce and they come into existence as a money in the same way gold nuggets do, people mine them up and trade with them.

Korda then goes into a lecture on Menger’s theory of money, concluding that, “[Bitcoin] can never be the most saleable good.”  As if Menger’s word is the Holy Gospel of economic law.  I’ve written quite extensively on Menger and Mises theory of money and how it relates to Bitcoin.  Personally, I fail to see any conflict with Menger’s interpretation of a most saleable good.  Korda makes the flawed assumption that, “Until the majority of the 7 billion or so people that inhabit this planet have either a smart phone or frequent access to the internet, a digital currency is out of the question.”  Perhaps Korda is unfamiliar with debit card technology. There is absolutely no reason why this technology could not be used to access Bitcoin accounts instead of Dollar accounts, and in fact, this is already possible to a certain extent. Korda may also be unaware that you can get Bitcoins in a physical package!  Since Bitcoin technology is still relatively new, it will take a bit for the retail side of things to catch up with the usability of our fiat money systems; however, it is clear that such point of sale technology is already in the works.

Korda also attacks the anonymity of Bitcoin transactions without doing any real research on the topic.  While it is true that every single Bitcoin transaction is logged in a public ledger, it is not true to say that Bitcoin transactions can not be made anonymously.  Clearly they can be, or else the Silk Road would have been shut down a long time ago.  I have yet to hear of a single instance of a seller on Silk Road being caught because they accepted Bitcoin payments.  The thing is, you can watch the transactions go through all day long on the block chain, but there is no way to know what is being traded for those Bitcoins or who is doing the trading, if people take a few simple steps to hide their identity.

Further, the Silk Road and exchanges like Mt. Gox use a mixing service.  Since Bitcoins are fungible, the coins people put into their remote accounts may or may not be the same coins they get when they change them in for dollars.  So you have mechanisms in place that make it incredibly difficult to determine just who is doing what.

In theory it is possible to determine a user’s identity through mechanisms like tying forum posts to IP addresses, and then matching those IP addresses to block chain transactions, but using a service like Tor would pretty much prevent that from working.  Further, even if an identity could be determined this way, it would barely be enough evidence to get a search warrant, let alone a conviction.  If a person had a wireless home network that was exposed to the public, anyone could have made that transaction.

It’s easy for Korda to prove me wrong on this point; all he has to do is cite a single example of the authorities busting someone by following their transactions through the Bitcoin network.  I’ve never heard of that happening.  I have heard of people getting busted for sending drugs through the mail, but that was because the packages were intercepted, not because authorities traced a Bitcoin transaction.

Korda continues his Bitcoin bashing with, “The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes. There is present a reflexive pattern of people buying because prices are rising, and prices rising because people are buying.”  I disagree with this analysis.  For starters, all of the asset bubbles we have seen in the past have been precipitated by artificially low interest rates and the use of debt leverage.  For some reason, I don’t think people are going into massive debt in order to buy Bitcoins.  Contrast that with student loans and home loans.  If you want to see a real bubble, look at the student debt market.  Bitcoin isn’t even in the same ballpark.

While it is entirely possible that Bitcoins may undergo a drastic drop in price, I don’t see this as something that would continue on indefinitely into the future (i.e. the bursting of a bubble.)  I think we may see dramatic drops in price if the government were to launch a full scale attack against the currency or if a major exchange were to be knocked off line.  However, I don’t see Bitcoins suddenly dropping in price for no reason and then descending into total worthlessness thereafter.  They have far too much value as a means of exchange for that to occur. Korda’s “bubble” analysis basically amounts to nothing more than conjecture on his part.  I’d like to see some evidence, other than sharply rising prices, as the basis for his claims.

I’d like to conclude my article by reiterating my previous analysis of Menger and Mises’ monetary theory.  I go into great detail about why Bitcoin meets Menger’s salability test and why Mises’ regression theorem appears to be wrong because it makes an incorrect assumption about how people come to value a medium of exchange.  A medium of exchange can be valued in its own right as a medium of exchange, even if it has no preexisting use.  Bitcoin has effectively proven this to be the case.

 

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  • orrery

    Glad to hear from you again Michael. I have been getting into Bitcoin as well but am equally interested to hear your thoughts on the Kilowatt Dollar idea. It seems the most recent advocate of the idea is James P. Rogers @ http://www.powercurrency.net/ who has also written a book on the subject. The idea was also favored by Dr. Buckminster Fuller in his book “The Operating Manual for Spaceship Earth”

  • http://www.facebook.com/apoplithorismosphobia Patrik Korda

    ‘Competition will only breed better
    currencies’

    In the case of money based on binary digits, I think competition will breed
    more currencies.

    ‘There is nothing magical about resource intensive computational algorithms.
    Bitcoins require real world resources to produce and they come into existence
    as a money in the same way gold nuggets do, people mine them up and trade with
    them’

    Menger dispelled the labor theory of value, perhaps you should give him a read
    one more time. As for the gold rush mechanism, consider this: bitcoins are up
    roughly 500% since March. Litecoins, on the other hand, are up well over
    5,000%. In the real world, alchemy does not work. On the internet, litecoins
    are the tip of the iceberg.

    ‘Personally, I fail to see any conflict with Menger’s interpretation of a
    most saleable good.’

    Binary digits, like air, cannot become a generally marketable commodity.

    ‘In theory it is possible to determine a user’s identity through mechanisms
    like tying forum posts to IP addresses, and then matching those IP addresses to
    block chain transactions, but using a service like Tor would pretty much
    prevent that from working. Further, even if an identity could be determined
    this way, it would barely be enough evidence to get a search warrant, let alone
    a conviction. If a person had a wireless home network that was exposed to the
    public, anyone could have made that transaction’

    I tend to side with bitcoin developer Jeff Garzik on this one, dumb kids
    hopping onto a new technology, his words, not mine. For more on the anonymity
    issue, please skip to 17:20

    ‘For starters, all of the asset bubbles
    we have seen in the past have been precipitated by artificially low interest
    rates and the use of debt leverage’

    Not sure if you know where the fed funds rate is, but we have negative interest
    rates today. Moreover, the only prerequisite for the ABCT is an increase in the
    supply of money and/or money substitutes. During the tulipmania, for example,
    there was a massive inflow of gold and silver from the New World.

    ‘Korda’s “bubble” analysis basically amounts to nothing more than conjecture on
    his part. I’d like to see some evidence, other than sharply rising prices, as
    the basis for his claims’

    There are plenty of other technical indicators that one may use. Moving
    averages, stochastics, but all standard measures bitcoin is grossly overbought.
    Moreover, this time is different arguments are a hallmark of bubbles, there is
    always an excuse for why prices are going parabolic.

    ‘I go into great detail about why Bitcoin meets Menger’s salability test and
    why Mises’ regression theorem appears to be wrong because it makes an incorrect
    assumption about how people come to value a medium of exchange’

    It’s quite convenient to throw out the stuff that doesn’t comply with the
    latest fad. Silver stackers would have been well advised in reading the TMC
    instead of listening to the likes of Max Keiser, and so would bitcoiners today.

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

      The sad part about your post is that you so vehemently believe you know what you are talking about.

      Your argument amounts to, “Bitcoins don’t agree with Menger’s theory, so therefore they must be a bad money.” That’s your entire argument against the currency. That is it. You drum up a bunch of nonsense about totally unrelated digital currencies to make what point? What economic point are you making? You don’t have one!

      Further, you correctly point out that the only prerequisite for the ABCT is an increase in the supply of money and/or money substitutes, BUT BITCOINS ARE NOT INFLATIONARY – so what point are you making here again? Just repeating what I said in my own post for the hell of it?

      And the part about “Moving averages, stochastics, but all standard measures bitcoin is grossly overbought.” made me LOL. You call yourself an Austrian and buy into that bullshit? Do you believe in astrology as well?

      And then you flippantly dismiss my arguements about Meger’s theory. No economic analysis provided, just some ad hom.

      Learn 2 argue.

      • http://www.facebook.com/apoplithorismosphobia Patrik Korda

        Michael,
        My argument boils down to bitcoin being a bubble. I used several metrics to come to that conclusion, including sentiment, moving averages, stochastics, volume, price movement, etc. The article had an Austrian spin to it because I feel a lot of quasi-Austrians are being sucked into this bubble by the likes of Max Keiser, as was the case with silver in 2011.

        Housing prices were high because the fed was printing money, until they weren’t.

        There is nothing wrong with technical analysis, as long as you used it the way it’s meant to be. Moreover, there is nothing anti-Austrian with tecnical analysis, just as there is nothing anti-Austrian about watching the weather channel.

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

          You make four arguments against the currency.

          1. “[Bitcoin] certainly is not for people who are under the impression that bitcoin is a hedge against inflation”

          Which is patently absurd. The currency is, if anything, hyper-deflationary.

          2. “Thus, the argument that bitcoins are in accord with the regression theorem because a handful of people consume them as they would a Picasso, is like saying paper money has value because John Law or Ben Bernanke really enjoy playing monopoly.”

          Which, even if correct, does not actually prove anything. In fact, I argue that they don’t meet with Mises regression theorem because the theorem is wrong. However, they do meet Menger’s salability test.

          3. “Those who think they are clever by using add-ons such as Tor are just as foolish as those who think prepaid cards or smart phones are anonymous.”

          Tor and Bitcoin seem to be doing the job quite well. If you can provide me one example of it failing to protect a person’s identity, I’ll shut up about it.

          4. “The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes.”

          For this point, you don’t offer anything of substance. You have no real arguments other than it sharply rising in price. That is not an argument.

          • http://www.facebook.com/apoplithorismosphobia Patrik Korda

            ‘Which is patently absurd. The currency is, if anything, hyper-deflationary’
            Nothing goes up forever, not even binary digits.
            ‘Which, even if correct, does not actually prove anything. In fact, I argue that they don’t meet with Mises regression theorem because the theorem is wrong’
            I have seen silverbugs throw Mises under the bus in 2011 towards the bubble peak as well when I would show them quotes of him stating that silver has been demonetized and is akin to fiduciary media.
            ‘However, they do meet Menger’s salability test’
            Binary digits may be pumped and dumped, so that their value temporarily rises. However, they can never be the most saleable good.

            ‘Tor and Bitcoin seem to be doing the job quite well. If you can provide me one example of it failing to protect a person’s identity, I’ll shut up about it’

            There have already been 7 people arrested for conducting illegal activities using bitcoins. I have the article saved at home. However, this won’t change anything whatsoever. The counter-argument will always be: they didn’t use it properly, bla bla.

            ‘For this point, you don’t offer anything of substance. You have no real arguments other than it sharply rising in price. That is not an argument’

            My article appeared on bullmarketthinking before it made it to mises.org. I used lots of technical analysis. In fact, the stuff is overbought by any standard metrics, stochastics, sentiment, moving averages, volume, you name it.

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

            Bitcoin will go up in value as long as gold keeps rising in value, for the same reasons. And I’m not throwing Mises under the bus, I’m saying his theory of how money comes into existence is wrong. That doesn’t mean I think all of his economic ideas are wrong. I’m also saying that whether Mises was right or wrong on his regression theorem has no bearing on Bitcoin’s viability as a currency system. It makes no difference at all.

            I already explained why they do meet the salability test, but apparently you are having trouble comprehending the notion of debit cards and bank accounts.

            I’m eager to read this article about 7 people being arrested for illegal activities involving Bitcoins. I think you are full of baloney. And that counter argument is completely valid. If I go and publish my wallet address along with my name somewhere, and then use that wallet for illegal purposes, I’m just asking to get myself arrested. It’s not designed to protect against stupid.

            Your article lacks ANY technical analysis – AT ALL. Show me the economic theory that explains why a sharp rise in prices automatically means this is a pump and dump scam that will go bust. Go ahead and link it to me. I’m eager to read this nonsense.

          • http://www.facebook.com/apoplithorismosphobia Patrik Korda

            The bitcoin chart site is ghetto as hell, so are most things associated with bitcoins. However, a few weeks ago, when the thing worked farily well and you could actually link to specific charts, you could see that stochastics was way overbought, it was way above it’s moving average, the price was going parabolic, it was getting mainstream coverage, the volume in currency was going through the roof, all typical signs that the masses were flocking into the slaughterhouse.

    • http://www.facebook.com/peter.surda Peter Šurda

      Patrik, I have a question. If the current price of Bitcoin is a bubble, and it pops, and it bottoms out, and Bitcoin adoption will still continue, and will remain the dominant cryptocurrency, will you admit that your arguments are just a bunch of made up nonsense?

      • http://www.facebook.com/apoplithorismosphobia Patrik Korda

        Peter,
        I do not know if facebook will be around in 10 years, let alone something like namecoin or bitcoin. My article was focused on the bubble at hand. I invest in things I know will be around in 10 years, like coal companies or coca-cola. My position in litecoin since March was more or less a speculation based on my parable, which has turned out great. Mind you, at the time I was told that litecoins would get no traction, none.

  • http://twitter.com/bitcoinmoney Bitcoin Money

    Litecoin is a proof-of-work based currency just like Bitcoin. That means it is vulnerable to a 51% attack just like Bitcoin. Even though the Bitcoin blockchain hard fork that occurred on March 11th 2013 occurred due to an alliance from friendly forces performing a 51% attack, the Bitcoin system failed by allowing double spend transactions to occur for transactions that had previously confirmed on the longest chain.

    If that had been done with malicious intent, the damages could have meant losses valued in the millions possibly.

    Now Litecoin’s protection from a 51% attack are just a tiny fraction of Bitcoin’s. Their pools aren’t as mature as Bitcoins are and those pools don’t have protections against DDoS attacks causing Litecoin to be even easier to p0wn in a brute-force attack. Since the technology to attack Litecoins is the same GPU hardware that Bitcoin miners will soon be abandoning (thanks to bitcoin-specific ASIC mining hardware), it would not be that surprising to see a single party have control of enough hashing capacity to take Litecoin out.

    That being said, multiple decentralized alternative give resiliency to the concept of digital currencies. Instead of there just being one path for flows of funds but instead there being several, including MTGox USDs, Litecoin LTCs, and Ripple XRPs, and contracts on Open Transactions, and FIAT.X shares on BitFunder, etc.

    In other words whack-a-mole for any place that friction is introduced.

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

      Yeah, I don’t see the forking of the block chain to be that big of a deal. None of the transactions previous to the fork were at risk, and everyone voluntarily agreed to downgrade their clients to fix the issue created by the new client, so it wasn’t an “attack” per-say. While it certainly wasn’t a great day for Bitcoin, I’m pretty damn confident they aren’t going to make that mistake twice.

      I agree with the Litecoin commentary though. I personally don’t like it.

  • Bob_Robert

    I would like to take issue with the seeming contradiction between Bitcoin and Mises’ regression theory.

    “Money” is a social function, a role. Currencies are used within the context of “money” to perform the transactions.

    The more accepted a currency is, the better its use as money, but even just pizza traded between two friends can be considered a currency so long as it is being used to perform the social function of money.

    Now that the social function “money” has been established, and people understand what a currency is and how to use it, it is no longer necessary for every currency to fit the regression theory perfectly. The “tally sticks” certainly didn’t, and neither has Bitcoin, even though the “demand as a sign of rebelliousness” is a cool way to try to make it so.

    • http://www.facebook.com/apoplithorismosphobia Patrik Korda

      Money is not merely a medium of exchange, but a generally accepted medium of exchange.

      • Bob_Robert

        I repeat: Money is a FUNCTION.

        Currencies are what is traded. The more generally accepted a particular currency is, the more useful it is in the FUNCTION “money”.

        Japanese Yen are excellent “money” in Japan. But not in Mexico.

        • http://www.facebook.com/apoplithorismosphobia Patrik Korda

          There is nothing controversial about defining money as a generally accepted medium of exchange.

          On the other hand:
          ‘Money is a FUNCTION’

          That is a vague and incomplete definition at best.

          • Bob_Robert

            Nice try. Let’s go through it again.

            Money is a social function. Without a society, without other people and markets, the function of money does not exist. Money is the process of indirect exchange.

            Currency is what is used AS money. There are many currencies, all of which fill the function of “money”. Huge rocks have been used in the function of money, as have shells, cattle, whatever. The forms change, the FUNCTION does not.

            Did those shells not exist before they were used as money? Did they vanish once their use as money ceased? No. The Rocks? No. The Cattle? No. Yet, if they were money then, how could they not be money now? They were currencies. That’s why the word “currency” exists separate from the word “money”.

  • Sean

    I was never around when gold became the common medium of exchange, but I would imagine that once individuals began to prefer gold for transactions, the demand for gold went up, perhaps parabolically, then tapered off. So my question to Patrik would be, is it possible that this parabolic move is a result of consumers demonstrating their preferences for a different medium of exchange?

    I would contend that we don’t know, and that only the market will be able to decide whether or not this is a flight from fiat currencies into another medium of exchange or its just another bubble.

  • Sean

    By consumers of course I mean users of currency.

  • http://www.facebook.com/anne.arquiste Anne Arquiste

    Mr. Korda and I currently have a bet to be resolved on October 31st. If the price of a bitcoin is under $200 I owe him $500, if however the price of bitcoin is over $200, he owes me 5.37 BTC. My bitcoin address is my profile pic, let’s see if he welches.

  • Arne

    Question:
    You know what’s the best thing about BitCoin?

    Answer:
    The opinions of economists, political scientists and other grand theorists DO NOT MATTER at all, because there is no central institution that can be captured by politicians and other “do-gooders” (thieves). Only the BitCoin market matters and all participants can just go about their business. So, the Draghis and Bernankes, Krugmans and Rogoffs, Keynesians and Austrians, Patricks and Michaels (pardon, don’t take personally) of this world actually have to get real jobs serving real people with tangible goods and services, like the rest of us. Finally.