At 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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