Bitcoin as a rival digital commodity good: A supplementary comment

Japanese commodity money before the eight century. Source: Wikimedia Commons, PHGCOM.One of the challenges of interpreting bitcoin has been whether it can be classified under certain existing conceptual rubrics such as “money” or “commodity” for purposes of economic analysis. Could it be some strange new kind of “commodity money”? Most people immediately and intuitively dismiss this as a possibility because it is not a physical “thing,” which they feel is a defining characteristic of commodity-ness.

Resort to a word such as “token” seems a convenient escape valve from this situation. However, this could also be misleading. A token in a “token money” context derives its value from having a fixed exchange rate against something else—a 100 pennies for a dollar, a plastic chip for a euro, etc. Bitcoin, in contrast, is traded directly as itself, with utterly no sign of any fixed exchange or substitution rates (see my Bitcoin, price denomination and fixed-rate fiat conversions” 22 July 2013).

My newest paper, “Commodity, scarcity, and monetary value theory in light of Bitcoin” in The Journal of Prices & Markets (Winter 2015) explores some of these issues in detail from a formal conceptual standpoint to check such immediate and intuitive responses. The paper takes the time to define and then apply core economic-theory concepts, including goods, scarcity, and rivalry, as well as classical lists of “commodity money” characteristics, to understanding bitcoin in terms of monetary theory.

True, commodities are usually tightly associated with materiality. However, an economic-theory sense of commodity ought to be differentiable from a physical-descriptive sense. Economics begins with the study of choice and action, as distinct from issues addressed in physical sciences. It may be that the presence of materialness in commodities has just been assumed due to the nature of the available historical examples.

For a supplemental “reality check” beyond the obscure economics library, I thought to simply go and read the Wikipedia article on “Commodity.” This should be reasonably unlikely to represent any arcane or partisan definitions from one school of economics rather than another, and should first of all represent a general-purpose range of typical current understandings of the term.

I extracted some economic-theory elements from the entry, omitting illustrative examples. The examples are mostly material items, but this is to be expected due to the overwhelmingly pre-bitcoin scope of economic history so far. Indeed, part of my argument is that bitcoin may be the first rival digital commodity good (defined in the paper), which would mean precisely that it is unprecedented, a new type of example. Between the few excerpts below, I relate these presumably mainstream characterizations of commodity-ness to bitcoin.

Extracts from Wikipedia entry on “Commodity”

The exact definition of the term commodity is specifically used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market. A commodity has full or partial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. As the saying goes, “From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.”

No one generally considers which mining pool mined the block that a bitcoin originated in when deciding whether to accept payment. 50 Cent, for example, is unlikely to refuse bitcoin payments for his albums from anyone using coins mined by pools other than 50 BTC.

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent.

Multiple producers: All the various Bitcoin miners produce interchangeable new coins.

One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets.

There are numerous bitcoin spot markets and even some derivatives markets.

Commoditization occurs as a goods or services market loses differentiation across its supply base. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and DRAM chips. There is a spectrum of commoditization, rather than a binary distinction of “commodity versus differentiable product”. Few products have complete undifferentiability.

Coin tracking is sometimes cited as a risk for weakening the completeness of bitcoin fungibility, so while fungibility largely holds, there is some risk of entering onto a “spectrum of commoditization” in which some differentiation could creep in under certain circumstances.

Overall, I thought the entry was surprisingly clear in defining commodity in terms of economic rather than material concepts. While most of the examples of commodity were material, the economic meaning was conceptually independent of materiality. As should be expected, the discussion was about economic issues such as quality differentiation, pricing, market organization, and trading patterns—not chemistry. If we are using a term in economic analysis, a strictly economic definition should be most suitable.

 

Jeff Volek presents research indicating low-carb also best way to improve lipid profiles

Ultra-low-carb eating has appeared for about a century already to be the most effective treatment for both overweight and diabetes (both linked to the more general metabolic syndrome), beating all drugs and other interventions by wide margins (on this, see Taubes’ groundbreaking Good Calories, Bad Calories). However, the establishment has resisted or ignored (if not memory-holed) this information for general application primarily based on separate claims about lipid profile risk and heart disease. The conventional view has been that these risks outweigh the benefits, so other treatments are likely to be better on balance.

Turning this view completely on its head, in this 1 July 2014 conference presentation, cholesterol researcher Jeff Volek explains how his and related carefully controlled research over the past two decades indicates that ultra-low-carb eating appears to also be the best known intervention for improving lipid profile markers, properly interpreted. He focuses particularly on issues with the measurement, context, and interpretation of LDL-C, and by the end appears to have left the strong conventional view concerning low-carb and lipid profiles in the dustbin of failed scientific claims.

[Gets going at about 1.05.]

See my Evolutionary Health page for more perspective and selected references.

Sidechained bitcoin substitutes: A monetary commentary

Abstract

A 22 October 2014 white paper on cryptocurrency sidechains formalizes and advances the innovative sidechain concept and examines pros and cons in terms of both technical and economic factors. The current reply focuses on likely general factors in market valuations of bitcoin-pegged units on sidechains. This is an important topic for clarification as people begin to imagine and work to develop practical uses for sidechains. Assuming that the two-way peg will necessarily assure a matching, or even consistently discounted, market price relative to bitcoin could prove unrealistic. A scenario of independent floating market prices among sidecoins could prevail, with implications for the scope and types of sidechain applications.

Download the seven-page PDF of “Sidechained bitcoin substitutes: A monetary commentary.”

 

Bitcoin: Magic, fraud, or 'sufficiently advanced technology'?

Arthur C. Clarke’s third law famously states: “Any sufficiently advanced technology is indistinguishable from magic.” What Bitcoin makes possible can at first seem almost magical, or just impossible (and therefore most likely fraudulent or otherwise doomed). The following describes the basic technical elements behind Bitcoin and how it brings them together in new ways to make seeming magic possible in the real world.

Clarke’s second law states: “The only way of discovering the limits of the possible is to venture a little way past them into the impossible.” And this, we can see in retrospect, is basically what Bitcoin creator Satoshi Nakamoto did. Few at the time, even among top experts in relevant fields, thought it could really ever work.

It works.

One reason many people have a hard time understanding Bitcoin is that it uses several major streams of technology and method, each of which is quite recent in historical perspective. The main raw ingredients include: an open-source free software model, peer-to-peer networking, digital signatures, and hashing algorithms. The very first pioneering developments in each of these areas occurred almost entirely within the 1970s through the 1990s. Effectively no such things existed prior to about 40 years ago, a microsecond in historical time, but a geological age in digital-revolution time.

Some representative milestone beginnings in each area were: for open-source software, the GNU project (1983) and the Linux project (1991); for peer-to-peer networking, ARPANET (1979) and Napster (1999); for digital signatures, Diffie–Hellman theory (1976) and the first RSA test concept (1978); and for hashing algorithms, the earliest ideas (around 1953) and key advances from Merkle–Damgård (1979). Bitcoin combines some of the best later developments in each of these areas to make new things possible.

Since few people in the general population understand much about any of these essential components, understanding Bitcoin as an innovation that combines them in new and surprising ways, surprising even to experts within each of those specialized fields, is naturally a challenge without at least a little study. Not only do most people not understand how the Bitcoin puzzle fits together technically, they do not even understand any of the puzzle pieces! The intent here is not to enter into much detail on the content of any of these technical fields, but rather to provide just enough detail to achieve a quick increase in the general level of public understanding.

What Bitcoin is about in one word: Verification

It may help to focus to begin with not on the details of each field, but at how each part contributes strategically to Bitcoin’s central function. This is to create and maintain a single unforgeable record that shows the assignment of every bitcoin unit to addresses. This record is structured in the form of a linked chain of blocks of transactions. The Bitcoin protocol, network, and all of its parts maintain and update this blockchain in a way that anyone can verify. Bitcoin revises the Russian proverb, “doveryai, no proveryai,” “Trust, but verify,” to just “verify.”

If a single word could describe what the Bitcoin network does, it would be verification. For a borderless global currency, relying on trust would be the ultimate bad idea. Previous monetary systems have all let users down just where they had little alternative but to rely on some trusted third party.

First, the core Bitcoin software is open source and free. Anyone can use it, examine it, propose changes, or start a new branch under a different name. Indeed, a large number of Bitcoin variations with minor differences have already existed for some time. The open source approach can be especially good for security, because more sets of eyes are more likely to find weaknesses and see improvement paths.

Open source also tends to promote a natural-order meritocracy. Contributors who tend to display the best judgment also tend to have more of their contributions reflected over time. Unending forum discussions and controversies are a feature rather than a bug. They focus attention on problems—both real and imagined—which helps better assure that whatever is implemented has been looked at and tested from diverse angles.

Many computers worldwide run software that implements the Bitcoin protocol. A protocol is something roughly like a spoken language. Participants must speak that language and not some other, and they must speak it well enough to get their messages across and understand others. New protocols can be made up, but just as with making up new languages, it is usually rather unproductive. Such things only take off and become useful if enough others see a sufficient advantage to actually participate.

Second, as a peer-to-peer network, there is no center. Anyone can download core Bitcoin software and start a new node. This node will discover and start communicating with other nodes or “peers.” No node has any special authority or position. Each connects with at least eight peers, but sometimes many more. Some faster and always-on nodes relay more information and have more connections, but this conveys no special status. Any node can connect or drop out any time and join again later. A user does not have to run a full node just to use bitcoin for ordinary purposes.

It is common to say that Bitcoin is “decentralized” or doesn’t have a center. But then, Where is it? Thousands of active peering nodes are spread over most countries of the world and each one carries an up to date full copy of the entire blockchain.

Some nodes not only relay valid transactions and blocks, but also join the process of discovering and adding new blocks to the chain. Such “mining” activities both secure the final verification of transactions and assign first possession of new bitcoin to participating nodes as a reward. Understanding basically how mining works requires a look at the distinct functions of several different types of cryptography.

Bitcoin cryptography dehomogenized

Bitcoin relies on two different types of cryptography that few people understand. Both are counter-intuitive in what they make possible. When most people hear “cryptography,” they think of keeping data private and secure through encryption. File encryption can be used to help secure individual bitcoin wallet files, just as it can be used for the password protection of any other files. This is called symmetric key cryptography, which means the same key is used to encrypt and decrypt (AES256 is common in this role). Encryption may also be used for secure communication among users about transactions, as with any other kind of secure traffic. This is called asymmetric key cryptography, which means a public key encrypts a message and its matching private key decrypts it at the other end.

However, all of this is peripheral. Nothing inside the core Bitcoin protocol and network is encrypted. Instead, two quite different types of cryptography are used. They are not for keeping secrets, but for making sure the truth is being told. Bitcoin is a robust global system of truth verification. It is in this sense the opposite of the “memory hole” from George Orwell’s 1984; it is a remembering chain.

The first type of cryptography within Bitcoin is used to create a message digest, or informally a “hash.” Bitcoin uses hashing at many different levels (the most central one is an SHA256 hash run twice). The second type is used to create and verify digital signatures. This uses pairs of signing keys and verification keys (ECDSA sepc256k1 for signatures).

The keys to the kingdom

Despite intuitive appearances to users, bitcoin wallets do not contain any bitcoin! They only contain pairs of keys and addresses that enable digital signatures and verifications. Wallet software searches the blockchain for references to the addresses it contains and uses all the related transaction history there to arrive at a live balance to show the user. Some of the seemingly magical things that one can do with bitcoin, such as store access to the same units in different places, result from the fact that the user only deals with keys while the actual bitcoin “exists,” so to speak, only in the context of the blockchain record, not in wallets. It is only multiple copies of the keys that can be stored in different places at the same time. Still, the effective possession of the coins, that is, the ability to make use of them, stays with whoever has the corresponding signing keys.

While software designers are working hard to put complex strings of numbers in the background of user interfaces and replace or supplement them with more intuitive usernames and so forth, our purpose here is precisely to touch on some technical details of how the system works, so here is a real example of a set of bitcoin keys. This is a real signing key (do not use!):

5JWJASjTYCS9N2niU8X9W8DNVVSYdRvYywNsEzhHJozErBqMC3H

From this, a unique verification (public) key is cryptographically generated (compressed version):

03F33DECCF1FCDEE4007A0B8C71F18A8C916974D1BA2D81F1639D95B1314515BFC

This verification key is then hashed into a public address to which bitcoin can be sent. In this case:

12ctspmoULfwmeva9aZCmLFMkEssZ5CM3x

Because this particular signing key has been made public, it has been rendered permanently insecure—sacrificed for the cause of Bitcoin education.

Making a hash of it

Hashing plays a role quite different from digital signatures. It proves that a message has not been altered. Running a hash of the same message always produces the same result. If a hash does not match a previous one, it is a warning that the current version of the message does not match the original.

To illustrate, here is a message from Murray Rothbard. He wrote in Man, Economy, and State that:

“It must be reiterated here that value scales do not exist in a void apart from the concrete choices of action.” —Murray Rothbard, 1962

And here is the SHA256 digest of this message and attribution (the same algorithm that Bitcoin uses):

68ea16d5ddbbd5c9129710e4c816bebe83c8cf7d52647416302d590290ce2ba8

Any message of any size can go into a hash function. The algorithm breaks it down, mixes the parts, and otherwise “digests” it, until it produces a fixed-length result called “a digest,” which for SHA256 takes the above form, but is in each case different in content.

There are some critical properties of a good hash algorithm. First, the same message always produces the same digest. Second, it only works in one direction. Nothing about the message that went in can be reconstructed from the digest that came out. Even the tiniest change produces a completely different digest, with no relationship between the change in input and the change in output. This is called “the avalanche effect.” Third, the chances of producing the same digest from an altered message are miniscule. This is called “collision resistance.” It is impossible to craft an altered message that produces the same digest as the original unaltered message.

To demonstrate, here is the same quote without the two quotation marks.

It must be reiterated here that value scales do not exist in a void apart from the concrete choices of action. —Murray Rothbard, 1962

Which produces this digest:

0a7a163d989cf1987e1025d859ce797e060f939e2c9505b54b33fe25a9e860ff

Compare it with the previous digest:

68ea16d5ddbbd5c9129710e4c816bebe83c8cf7d52647416302d590290ce2ba8

The tiniest change in the message, removing the two quotation marks, produced a completely different digest that has no relationship whatsoever to the previous digest. In sum, a digest gives a quick yes or no answer to a single question: Is the message still exactly the same as it was before? If the message differs, the digest cannot indicate how or by how much, only that it either has changed at all or has not.

How could such a seemingly blunt instrument be useful? Bitcoin is one application in which hashing has proven very useful indeed. In Bitcoin, hashing is used in the lynchpin role of making it impossible to alter transactions and records once they have been recorded. Once the hashes are hashed together within the blockchain, record forgery anywhere is impossible.

Transactions and how miners compete to discover blocks

Wallet software is used to create transactions. These include the amount to be sent, sending and receiving addresses, and some other information, which is all hashed together. This hash is signed with any required signing keys to create a unique digital signature valid only for this transaction and no other. All of this is broadcast to the network as unencrypted, public information. What makes this possible is that the signature and the verification key do not reveal the signing key.

To keep someone from trying to spend the same unit twice and commit a kind of fraud called double-spending, nodes check new transactions against the blockchain and against other new transactions to make sure the same units are not being referenced more than once.

Each miner collects valid new transactions and incorporates them into a candidate in the competition to publish the next recognized block on the chain. Each miner hashes all the new transactions together. This produces a single hash (“mrkl_root”) that makes the records of every other transaction in a block interdependent.

Each hash for any candidate block differs from every other candidate block, not least because the miner includes his own unique mining address so he can collect the rewards if his candidate block does happen to become recognized as next in the chain.

Whose candidate block becomes the winner?

For the competing miners to recognize a block as the next valid one, the winning miner has to generate a certain hash of his candidate block’s header that meets a stringent condition. All of the other miners can immediately check this answer and recognize it as being correct or not.

However, even though it is a correct solution, it works only for the miner who found it for his own block. No one else can just take another’s correct answer and use it to promote his own candidate block as the real winner instead. This is why the correct answer can be freely published without being misappropriated by others. This unique qualifying hash is called a “proof of work.”

The nature and uses of message digests are counter-intuitive at first, but they are indispensable elements in what makes Bitcoin possible.

An example of a mined block

Here is an example of some key data from an actual block.

“hash”:”0000000000000000163440df04bc24eccb48a9d46c64dce3be979e2e6a35aa13”,

“prev_block”:”00000000000000001b84f85fca41040c558f26f5c225b430eaad05b7cc72668d”,

“mrkl_root”:”83d3359adae0a0e7d211d983ab3805dd05883353a1d84957823389f0cbbba1ad”,

“nonce”:3013750715,

The top line (“hash”) was the actual successful block header hash for this block. It starts with a large number of zeros because a winning hash has to be below the value set in the current difficulty level. The only way to find a winner is to keep trying over and over again.

This process is often described in the popular press as “solving a complex math problem,” but this is somewhat misleading. It is rather an extremely simple and brutally stupid task, one only computers could tolerate. The hash function must simply be run over and over millions and billions of times until a qualifying answer happens to finally be found somewhere on the network. The chances of a given miner finding such a hash for his own candidate block on any given try are miniscule, but somewhere in the network, one is found at a target average of about every 10 minutes. The winner collects the block reward—currently 25 new bitcoins—and any fees for included transactions.

How is the reward collected?

The candidate blocks are already set up in advance so that rewards are controlled by the winning miner’s own unique mining address. This is possible because the miner already included this address in his own unique candidate block before it became a winner. The reward address was already incorporated in the block data to begin with. Altering the reward address in any way would invalidate the winning hash and with it that entire candidate block.

In addition, a miner can only spend rewards from blocks that actually become part of the main chain, because only those blocks can be referenced in future transactions. This design fully specifies the initial control of all first appropriations of new bitcoins. Exactly who wins each next block is random. To raise the probability of winning, a miner can only try to contribute a greater share of the current total network hashing capacity in competition with all of the others trying to do the same.

As shown above with the Rothbard quote, a completely different hash comes out even after the slightest change to the message. This is why the protocol includes a place for a number that is started at zero and changed by one for each new hash try (“nonce”). Only this tiny alteration, even if the rest of the candidate block data is unchanged, generates a completely different hash each time in search of a winner. In the example above, it looks like this miner found a winning hash for this block at some point after the three billionth attempt (“nonce”:3013750715), and this was just for that one miner or mining pool, not including the similar parallel but unsuccessful attempts of all the other miners, and all this just for the competition for this one block.

The key point to understand is that finding a hash under the difficulty level is extremely competitive and difficult, but verifying afterwards that one has been found is trivial. The rest of the miners do so and move right along. They use the newly discovered hash of the previous block header (“prev_block”) as one of the inputs for their next crop of block candidates (which assures the vertical integrity of the single chain of blocks) and the race continues based on the remaining pool of unconfirmed transactions.

A powerful, self-financing, verification network

The Bitcoin mining network is, as of late September 2014, running at about 250 petahashes per second and rising at a logarithmic pace that will soon make this figure look small (rate tracked here). This means that about 250 quadrillion hashes are currently being tried across the network every second all the time. This is the world’s most powerful distributed computing network, by far, and has already been steadily extending this lead for quite some time.

Block rewards and transaction fees help promote the production and maintenance of this entire network in a decentralized way. Since block generation is random and distributed on average in proportion to hashing power contribution, it helps incentivize all contributors all the time. Many miners participate in cooperative mining pools so that at least some rewards arrive on a fairly regular basis.

The network is designed to be entirely self-financed by participants from the beginning indefinitely into the future. Early on, new coin rewards are larger and transaction-fee revenue smaller. Finally, only transaction-fee revenue is to remain, with a long and gradual transition phase built in.

If Bitcoin does remain successful over the longer term, by the time transaction-fee revenue predominates, there would likely be many orders of magnitude more transactions per block by which to multiply the average competitive fee per transaction.

This has been a summary look at a few of the key technical elements of Bitcoin. Hashing algorithms and digital signatures are especially counter-intuitive and relatively new inventions, but knowing what they make possible is essential for understanding how Bitcoin works. Each of Bitcoin’s major elements contribute to the central functions of verification, unforgeable record-keeping, and fraud prevention. These technical underpinnings and the functions they support sound about as far from the systematic deceptions of a fraud such as a Ponzi scheme as it would be possible to get.

Adapted and revised from Bitcoin Decrypted Part II: Technical Aspects and cross-posted to actiontheory.liberty.me.

 

A tale of bitcoins and $500 suits: Will a rising-value currency not be used?

A common objection to bitcoin is that as its value rises, and especially if it is generally expected to keep rising due to its restricted and inelastic production characteristics, “people will never spend bitcoins; they will just hold onto them waiting for the value to go up, and therefore bitcoin cannot succeed as a currency.”

This fallacy commits a number of errors of economic reasoning. For example, it takes one factor, a presumed desire to save bitcoin in the expectation that its exchange value will rise still higher in the future, and treats it as the only factor, even though many others are also in play. It also assumes that all people are the same all the time and that their value scales never change. It treats a person’s entire holding of bitcoin as an indivisible block, or “hoard” (Smaug’s?), ignoring the possibility of marginal decisions about the use of smaller amounts relative to a total balance and specific decision contexts.

Playing directly opposite this supposedly monolithic motivation to hold for the indefinite future is the shift in valuations of a good relative to the value of a given bitcoin holding. As the exchange value per unit rises, the total exchange value of any given holding rises with it. To illustrate how this factor goes directly against the deflationary disuse story, here is a tale of bitcoins and $500 suits.

If Hayek has 100 bitcoins when the bitcoin price is $5, buying one $500 suit would leave him with one suit and no bitcoin. However, the same purchase with bitcoin at $50 would leave him with one suit plus a remaining balance of $4,500 worth of bitcoin. At $500 per bitcoin, he could get the suit and still keep a bitcoin balance worth $49,500. And so the story goes. Finally, at $5,000 per bitcoin, he could buy that same suit and still retain $499,500 worth of bitcoin.

The trade-off Hayek faces between the suit and the proportion of a given bitcoin holding that must be traded to obtain it varies with exchange value. As bitcoin’s exchange value rises (supposedly its fatal flaw as a currency), the cost of the same one suit as a percentage of Hayek’s total bitcoin holding declines, in the foregoing example, from 100% to 10% to 1% to 0.1%, as a direct implication. The choice between buying a suit with 100% of one’s bitcoin balance or with 0.1% of that same bitcoin balance is most dissimilar and it should be clear which of these two conditions is more likely to “stimulate” a retail purchase.

As the value of bitcoin rises, the position of one suit relative to a given unit of bitcoin on a given person’s value scale will tend to change in such a way that the same holder of 100 bitcoins might be increasingly likely, not less, to purchase a suit. This does not mean that other countervailing factors, such as a desire to delay spending in anticipation of a higher future exchange value are not also present. It means that the most oft-cited factor is not the only one and moreover that other important factors point in exactly the opposite direction of the deflationary disuse thesis.

Cross-posted at actiontheory.liberty.me.

"Bitcoin 2014 Panel: History of Money & Lessons for Digital Currencies Today" with time-based outline

Following the Economic Theory of Bitcoin panel on 17 May 2014 at the Bitcoin Foundation Conference in Amsterdam, I also participated in this one-hour panel addressing the history of money and lessons for digital currencies today (my own contributions start at 41:40). The varied topics included lessons from the history of the Netherlands, problems with the deflationary spiral argument, parallels to the early history of the oil industry, competition and types of centralization, historical circulation of multiple monetary metals and relevance for altcoins, and the role and operation of central banks relative to market competition and centralization versus decentralization.

Moderator: Ludwig Siegele (Online Business and Finance Editor, The Economist)

Speakers: Tuur Demeester (Founder, Adamant Research), Konrad Graf (Author & Investment Research Translator), Simon Lelieveldt (Regulatory Consultant, SL Consultancy), Erik Voorhees (Co-Founder, Coinapult)

1) Introductions

00:00–05:50 Introductions by each panelist

2) History of money in Amsterdam (Lelieveldt)

06:10–10:58 Lelieveldt: Amsterdam monetary history; water and community power more outside usual royal vested interests. Amsterdam Exchange Bank cleaned up confusion of many coins in circulation. Guilder was a unit of account without existing as a physical coin anymore, making it a virtual unit of account at the time. Human mind can adapt to and use many different things as currency.

3) Putting the “deflationary spiral” to rest (Voorhees)

10:58–19:07 Hyperdeflationary bitcoin economy hasn’t fallen apart. Opposite: more bitcoins spent when value is rising (wealth effect). Academics cite deflationary spiral as truism, but bitcoin shifts the burden of proof back onto supporters of the idea. Calling the gold standard “rigid” was a justification for control. Increasing the number of monetary units about as useful as increasing the length of an inch.

4) Parallels from history of the oil industry (Demeester)

19:07–28:18 Invitation to academics to launch altcoins representing their favorite monetary policy. Nothing else as disruptive as bitcoin in the history of money, but parallels with history of oil. Not approved by intellectuals or establishment. New innovations raise customer expectations. Academics may avoid taking bitcoin seriously for fear of ostracism from old paradigm.

5) Centralization, impact of licensing on competition, wealth transfer (general)

28:18–41:40 Multiple panelists and audience: Don’t waste time thinking about what (you think) bankers and others think. Oil and the internet were both fragmented originally, but centralization followed. What about bitcoin? Distinction between market-based centralization and coercive, legally privileged centralization. Wealth transfer, innovation, and social opinion.

6) Was the “gold standard” really the free market money of the old days? (Graf)

41:40–49:52 “Money production” an industry that can be examined ethically. Mining a specific service performed with compensation, but literally creating money “out of thin air” an illicit wealth transfer. Gold arrived at leading position through multiple government interventions. Litecoin as silver a weak metaphor. Question simplistic summary images as representations of actual history. [Here is a more detailed write-up on this topic that I posted after the conference: Gold standards, optionality, and parallel metallic- and crypto-coin circulations (21 May 2014)].

7) Q & A and discussion (general)

49:52–62:00 Central banks and money creation. Money another good in the economy or separate? Bankruptcy helpfully eliminates damaging institutions. New money creation leads to visible effects, but unhelpful for society overall; transfers wealth from some people to others. Trigger events for financial collapse? Dominoes collapse starting with weaker economies, periphery. Watch for rising interest rates.

“Bitcoin 2014 Panel: Economic Theory of Bitcoin” with time-based outline

It was an honor to be among the participants in this panel on 17 May 2014 at the Bitcoin Foundation Conference in Amsterdam. We addressed several issues that tend to recur in discussions of economic theory and bitcoin. The main topics were the regression theorem and bitcoin; bitcoin and the role of units of account and pricing; multiple value standards and the economics of altcoins relative to bitcoin; fractional-reserve banking, lending, and direct versus other-party control; and deflation and fixed versus elastic money supplies. I have added a time-based outline after the embedded video below to facilitate noting and locating particular topics.

Moderator: Jon Matonis (Executive Director, Bitcoin Foundation)

Speakers: Konrad Graf (Author & Investment Research Translator), Robert Sams (Founder, Cryptonomics), Peter Surda (Economist, Economicsofbitcoin.com, Robin Teigland (Associate Professor, Stockholm School of Economics)

1) Introductions, opening comments, and overview

00:00–03:05 Matonis: Introduction of panelists

03:05–07:57 Brief openings by each panelist

07:57–09:06 Economics profession and bitcoin

09:06–11:41 Matonis: Overview of topics

2) Regression theorem and bitcoin

11:41–12:12 Matonis: Introduction of topic

12:12–18:32 Surda: Liquidity, organized markets

18:32–23:16 Graf: Technical versus economic; theory versus history layers

23:16–23:50 Sams: Doubts this is relevant to bitcoin

3) Unit of account, price display, and price intuition

23:50–25:02 Matonis: Introduction of topic

25:02–27:00 Teigland: Depends on who; networks, sub-communities, generation change

27:00–27:23 Matonis: Can bitcoin overcome the existing network effect?

27:23–28:01 Surda: Uncharted area, dollar likely to remain unless deep negative event for it

4) Multiple value standards, room for 300 crytocurrencies

28:01–28:49 Matonis: Introduction of topic

28:49–31:01 Sams: Need distinct specializations; mining costs limit

31:01–32:48 Graf: Strong tendency toward one unit; only other very strong factors could counter

5) Fractional-reserve banking and bitcoin

32:48–33:41 Matonis: Introduction of topic

33:41–38:08 Surda: Money substitutes, transaction costs, price differentials, “reserve” standards

38:08–39:57 Teigland: Other non-traditional financing systems, crowdfunding, P2P lending

39:57–41:34 Sams: FRB based on an illusion, one that cannot be created with bitcoin

41:34–44:12 Graf: Bitcoin allows opt-out from all “trusted” 3rd, 4th, 5th parties. Vote with your mouse.

44:12–46:47 Sams: Who owns what? a pervasive issue; first bitcoin lending likely dollar denominated

6) Deflation, only 21 million units, number of decimal points

46:47–48:37 Matonis: Introduction of topic

48:37–49:46 Teigland: People adapt over time to situations

49:46–53:38 Sams: Deflation arguments misplaced; overheld, underused; other crypto money supplies possible

53:38–55:36 Surda: No need to change the quantity of money, but more to investigate

55:36–58:29 Graf: “Rising-value currency;” any quantity of money will do for society as a whole

58:29–59:26 Sams: Elastic supply could help stabilize exchange rate relative to fixed supply

59:26–59:46 Surda: Unit of account function depends on liquidity not volatility

7) Q&A

59:46–60:55 Q1: Banks allowed to create money; unfair playing field?

60:55–62:28 A1: Sams: 100% reserve banking; taking away private money creation privilege

62:28–62:56 A1b: Teigland: Local alternatives, experimentation

62:56–63:19 Q2: Isn’t buying and holding bitcoins already an investment in all of bitcoin?

63:19–64:06 A2: Sams: To some extent, but could be more with different money supply rule

64:06–65:00 Q3: Fixed rate of supply ignores recent lessons of monetary theory

65:00–65:27 A3: Matonis: Already addressed; Surda: May need to unlearn some of those lessons :-)

Gold standards, optionality, and parallel metallic- and crypto-coin circulations

Source: Biswarup Ganguly, Wikimedia Commons. Copper coin, 1782-1799 CE, Tipu Sultan ReignWhen one hears the words “gold standard,” it is usually either from people who think it was a horrible thing or people who think it was a wonderful thing. However, many in both groups seem to agree that “the” gold standard represents the free market money of the good old days, or the bad old days, or perhaps even the future.

However, the inclusion of the word “standard” could already serve as a warning that this may have been just another convoluted sequence of confused government programs. Looking into this more closely may suggest lessons for cryptocurrencies today.

Several different international monetary orders from 1871–1971 were based on gold: the classical gold standard, the gold exchange standard, and the Bretton Woods system. Yet these came only after a long series of previous legal interventions in money of various types. When such legal measures were absent or weaker, things tended to differ. Professor Guido Hülsmann characterizes it broadly this way on p. 46 of The Ethics of Money Production:

In the Middle Ages, gold, silver, and copper coins, as well as alloys thereof, circulated in overlapping exchange networks. At most times and places in the history of Western Europe, silver coins were most widespread and dominant in daily payments, whereas gold coins were used for larger payments, and copper coins in very small transactions. In ancient times too, this was the normal state of affairs.

One dramatic way that monetary metals were driven out of circulation was the policy of bimetallism. People we might today call “regulators” legally fixed the exchange rate between silver coins and gold coins to make the market more “regular.” The actual result was the rapid loss of a major component of the money supply from circulation. Hülsmann on p. 130:

One famous case in which bimetallism entailed fiat inflation-deflation was the British currency reform of 1717, when Isaac Newton was Master of the Mint. Newton proposed a fiat exchange rate between the (gold) guinea and the (silver) shilling very much equal to the going market rate. Yet parliament, ostensibly to “round up” the exchange rate of gold, decreed a fiat exchange rate that was significantly higher than the market rate. And then some well-positioned men helped the British citizens to replace their silver currency with a gold currency.

Hülsmann then cites similar cases in the US in 1792 and 1834. Not only did price fixing not make the market more “regular” as intended, it caused severe disruptions, with many losers, some winners, and a certain period of monopoly metal circulation.

The parallel circulation of metals may in this way have represented relatively more of a “free market money” situation than government orchestrated gold standards that arrived only after long sequences of legal manipulations—and which just happened to also channel the majority of gold into the vaults of monetary-system orchestrators.

Lessons for parallel cryptocoin circulations?

Such parallel circulation has been used as an analogy to promote parallel cryptocurrencies in a complementary monetary role. How well does this analogy hold up?

Each metal filled a different market role from the others, with some overlap. Likewise, each altcoin advertises different features. How significant will users perceive such differences to be?

The main difference between copper, silver, and gold was a large distinction in a practical characteristic, one unmistakeably clear and important to the end user—exchange value per unit of weight. A single gold coin could do the work of a handful of silver ones or a hefty pile of copper ones, whereas buying a few potatoes with gold instead of copper would have been quite a technical challenge in the opposite way.

However, this particular factor—probably the most important one from the case of metals—does not apply to cryptocurrencies, which can be divided and combined freely and have no weight. Perhaps some other factors will prove significant enough to create a similar degree of differentiation, but the final say goes to the market test, not the engineering imagination. Another significant difference among cryptocurrencies is the amount of hashing power protecting each chain. This is a factor, in contast, for which minimal significant parallel exists in the case of monetary metals (the closest thing would probably be relative differences in forgeability).

In considering a given cryptocoin from a monetary viewpoint, it is important to investigate and consider its actual patterns of use. Having the word “coin” in the name does not make it a monetary unit. What does? One sign is the extent and scale to which users are holding a unit so as to buy goods and services with it. This might contrast, for example, with an income purpose (buying and selling the asset against another monetary unit in pursuit of monetary gains), or social-signaling purposes such as giving out microtips to online commenters. Each altcoin or appcoin might fill different roles and provide different kinds of value to users, perhaps within particular sub-cultures, or perhaps in the context of particular services. Coins can apparently fill some of these functions without having to gain much traction in a more general monetary role.

In contrast to this, a central function of holding cash and other liquid balances is to address the uncertainty of the future and this is a general function—the more general, the better fulfilled. For example, we may know that we will want to buy some things in the future, but not necessarily know exactly which things, when, where, and at precisely what prices. Cash balances, due to their flexibility, enable us to adjust to such constellations of uncertainties. In this sense, a unit that is more widely accepted is likely to come in handy in a wider range of such future situations than one that is less widely accepted (there are also other factors to consider besides generality of acceptance, such as whether the units are expected to tend to gain or lose value while being held in balances).

I suspect that only significant traction in such a general monetary use, such as bitcoin has begun to gain, could sustain a large increase in a given unit’s purchasing power over the longer term through the network-effect process I have termed hyper-monetization.

There is a strong tendency in a trading network toward the use of a single monetary unit. This theoretical insight has sometimes been extended to the historical claim that this is the natural role of gold, or the forward-looking claim that gold should fill this role in an ideal future. However, other factors also push back in the opposite direction toward parallel circulations and multiple options. Such factors could be natural, such as we saw with large practical differences among different monetary metals, or political, such as the legal favoring of some monies in combination with the geographic sectioning off of the total trading universe.

One option is not really an option

Finally, adaptive systems and species that survive for a very long time tend to have some redundancies in critical systems. There is no single more critical system for the functioning of civilization than indirect exchange using money and other monetary units. A repeated theme in the history of money, however, has been actions by rulers that have the effect, whether intended or not in any given case, of removing alternatives and opt-out paths for money users, leaving them highly vulnerable to whatever happens with the remaining monopoly unit.

If a society has a single dominant monetary unit for whatever reason, it would seem favorable from this larger vulnerability assessment or antifragility perspective for its members to have other viable options at least waiting in the wings in parallel operation. Use of a single money certainly has strong advantages, but while network effects and broadness of acceptance are very large factors, they should not be mistaken for being the only ones.

In particular, use of one unit with no alternatives available does not address the need for adaptation to unexpected events. The complete absence of freely chooseable and ready alternatives makes a society more vulnerable to the effects of large-scale shocks. Points often lost on central planners of all schools are that redundancies and parallel options tend to have unexpected very long-term survival value, that more options are often better than fewer, and that having only one “option” is similar to having no option at all.

Recommended related books:

Jörg Guido Hülsmann, The Ethics of Money Production (2008)

Nassim Nicholas Taleb, Antifragile: Things that Gain from Disorder (2012)

The helpful fable of the "bitcoin": Duality models revisited

Bitcoin is many things, all referenced under the same word. Confusion about its nature and valuation naturally arises from insufficient differentiation of these facets, combined with a general human tendency toward “either/or” thinking. Often, the situation is more “both/and,” which becomes clearer after looking through first impressions and simple or even misleading analogies.

A short section of Francis Pouliot’s 17 May 2014 post on the Bitcoin Foundation of Canada blog caught my attention: “The currency and the network, although conceptually different things, cannot be separated. Bitcoin the network is valuable in itself because of its characteristics and, because you need to obtain bitcoins in order to use it, so is Bitcoin the currency.”

This reflects the kind of unit/system duality approach that I have found helpful, and it started me considering some further implications (I discussed the application of unit/system duality and economic/technological duality concepts to Bitcoin in “On the origins of Bitcoin” (3 November 2013)).

Discrete tradable bitcoin units are one of the integral aspects of the Bitcoin network, which in turn is a live instantiation of the Bitcoin protocol (language/convention/consensus system). The value of the units is what enables the distributed financing of the entire network; the existence of this network enables the existence, security, and value of the units.

Along another conceptual axis, economic theory supports the interpretive understanding of what people do. What things are is addressed in this case as what I call the technological layer. These layers interact, but the methods appropriate to studying them differ. One is the domain of action theory, with concepts such as ends, means, and preference; the other, in this case, of computer science, networking, and cryptography.

Still, the technological layer of Bitcoin (the system) can give hints toward economic theory interpretations of the value of bitcoin (the tradable units). Additional economic insights might at times be inspired by checking back to see what is “really” going on in the technological layer, and then clarifying the relationships between the layers.

The helpful fable of the “bitcoin”

In applying economic-theory concepts to interpreting actions, the interpreter references the more specific constructs that the people in question use in their own acts. In this case, among Bitcoin users, this construct is the operative image of “bitcoins” or other such units as interchangeable, tradable digital objects.

Yet when dialing the technology layer up into a higher presence in awareness and overlaying it on the action-interpretation layer, “bitcoins” begin to look like something of a made-up image, albeit one that enables people to interact with the technology layer in a meaningful way. The image makes it intuitive for people to use the system to accomplish their own objectives—to create, hold, and adjust balances and to buy and sell products, services, or monies out of such balances.

The tradable units on the network are not bitcoins, and are in a sense not even satoshis (100,000,000 to a bitcoin). Satoshis are an abstract unit of account within the network, whereas the elements held and traded are “unspent outputs” of all possible sizes denominated in this abstract unit (or more convenient multiples thereof). Satoshis are not now generally useful in the form of a single unspent output of one satoshi. Unspent outputs, each defined in part as some number of satoshis, are assigned to an address in a state from which they can be reassigned to other addresses (including to change addresses as needed), provided the specified signatures and other transaction data are relayed to the network.

All of this can work for a general population of end users because none of them needs to understand any of it to use the network for their own purposes. Even those who do understand such details do not have to think in such literal terms when interacting with the network in the role of end user themselves. The fable of the existence of “bitcoins” helps facilitate the human-network interaction at a practical level.

So long as the practical effect of such an image fills this role without causing errors or deceptions, it is a purely pragmatic and instrumental issue. For example, it does not matter at this level if a car’s steering wheel turns the wheels on the road mechanically or sends electronic control signals to electric motors that actually steer the vehicle—provided that the practical result in either case is that the vehicle actually turns as intended in response to the human-generated directional signals.

A dualistic valuation

In this way, combining the unit/system duality and economic/technological duality approaches can lead to additional insights about the way people value Bitcoin/bitcoin. The network is only in a loose metaphorical sense valued “as a whole.” The principle practical way for users to value it is via their own possession of and ability to transfer specific tradable units. Such units are an integral characteristic of the system. Viewed together as a social phenomenon, this could suggest the superficial appearance of a mass user valuation of the system in general. However, an idealistic “in general” valuation or mere widespread sentiments of technological appreciation could not support a functioning monetary system; only individual user valuations of discrete units can do that, and it is from there no surprise that this is precisely what Bitcoin “the system” enables.

Unspent outputs denominated in satoshis and multiples of them form a key part of the end-user interface of the protocol/network. Users value these and incorporate them into their respective structures of action. The units (or rather, the interface construction of the units) cannot function as they do in this role without the system; nor can the system exist as it does—or be entirely self-financed in a distributed way as it is—without the scarce and discretely valued tradable digital objects denominated in the system’s own abstract accounting unit.

Bitcoin weekly weighted average price, July 2010 through April 2014

Here is an update through April 2014 of a chart I published at several different points last year. It takes several measures to enable a longer-term overview next to the more typical focus on short-term trends. Notes on the reasoning behind these measures are included after the chart.

Notes: The log scale enables comparisons that reflect percentage changes across large differences in relative scale. Whereas a doubling from $1 to $2 would disappear next to a doubling from $100 to $200 on a single linear chart, this chart is able to better show both doublings at a similar relative scale of effect in its own context.

Second, weekly weighted averaging helps show price trend by general significance. This gives less weight than a daily high/low scale to headline-catching numbers that, as a practical matter, only impacted a relatively low volume during the most extreme moments of a mania peak or panic bottom, and dispite their general relative irrelevance, become the eternal darlings of all headline writers.

Third, the year-over-year comparison format shows that at least up to the present, the price has been significantly higher YoY throughout its entire history, with one famous exception, which resulted from an extreme upward and then less extreme downward price movement in 2011.

While the earliest price information begins to appear in late 2009, it is relatively sketchy and it is unclear how many trades actually took place at those published prices, so this version begins with the opening of the Mt. Gox exchange in July 2010 at $0.05. I switch to Bitstamp for the beginning of 2013 onward to factor out the impact of withdrawl irregularities that began to impact Mt. Gox data already in spring of 2013 and later worsened.

New paper: "Revisiting conceptions of commodity and scarcity in light of Bitcoin"

I have written a paper on Bitcoin in relation to fundamental theoretical concepts from economic theory, particularly “commodity,” as in the category of “commodity money,” the multiple meanings of “scarcity,” and “goods.” “Revisiting conceptions of commodity and scarcity in light of Bitcoin” (17 March 2014) [PDF] [ePub] is 21 pages of text, plus references.

This is a completely revised, updated, and reformatted version of an extended post that appeared almost exactly one year ago on 19 March 2013, entitled, “The sound of one Bitcoin.” That post was more in the style of a detective story, cataloging my personal step-by-step process in my first weeks of initially trying to make sense out of Bitcoin in terms of the economic theory that I had long studied.

A friend who knew I have been working on this revision asked recently if it was was mainly a refinement or if there were drastic changes from the original. I replied that while the basic ideas were the same, there were…drastic refinements. There are also connections to work that I have done in the intervening year since the original version came out.

Download here: [PDF] [ePub].

Another layer of distinction behind Tucker’s humanitarians and brutalists

Jeffrey Tucker’s article “Against Libertarian Brutalism” (12 March 2014) describes two broadly drawn ideal types within the libertarian movement. After briefly presenting and discussing these, I will suggest what I think is a more fundamental distinction that might help illuminate the background to the perception of these proposed ideal types.

Tucker’s “humanitarians” are said to be drawn to and consider liberty in a positive context of its role in promoting individual and social flourishing and prosperity. This is above all a constructive and forward-looking appeal to the best of human social possibilities, promoting creative cooperation over both ad-hoc violence and systematic control.

The “brutalists,” in contrast, are said to emphasize a strict application of a few core principles and self-consciously eschew nuances of context, application, and image marketing. Moreover, brutalists are said to not only support, but even proudly embrace, the rights of persons to engage in what are today broadly considered negative and even reprehensible pursuits, such as for example, refusing to associate with certain types or classes of persons based on various demographic characteristics. The brutalist, in this view, not only embraces individual rights because they promote positive social values, but because they can be used to defend the rights of individuals to make what are today generally considered highly backward social choices.

With this stylized typology in mind, it is first of all fascinating to observe that the general public perception and straw-man concept of libertarianism is precisely this “brutalist” picture. In this popular image of libertarianism, it is a position that promotes a few simplistic and unrealistic ideas over any and all other competing values, perhaps due to some mysterious sociopathic refusal to integrate with ordinary society. And yet, it is also true that certain ways of presenting and discussing libertarian positions do help contribute heartily to this “brutalist” image in the popular imagination. Some statements in this genre are positively cringe-worthy by almost any standard.

While the humanitarian versus brutalist model may be of some help in advancing this conversation, I think another way of framing the background could bring additional clarity. I have come to believe that a great weakness in the heart of libertarianism has been the failure to differentiate legal from ethical issues with sufficient and systematic clarity. What are actually strictly legal-theory questions have been at times vaguely identified as “moral” or “ethical” questions when they are nothing of the kind. One origin of this has been the desire to distinguish “ethical” matters of ought from strictly economic-theory treatments of social issues. Yet not all that is non-economic is necessarily ethical in nature. In fact, much of the non-economic in social discourse is specifically legal rather than “ethical.”

The core of the libertarian position on political philosophy is a position on property theory, a topic belonging squarely within the domain of legal theory. Those who have sought to defend libertarian positions on property theory have at times seemingly fallen into the trap of downplaying the importance of authentically moral and ethical issues. The trap is sprung because proponents of alternative positions on property theory (various forms of forced redistribution) often use ethical rhetoric in their attempts to justify their various proposals for institutionalized takings.

In a developing body of work beginning in 2011 that I have labeled under the heading of action-based jurisprudence, I have sought to more carefully differentiate the realms of legal theory and legal practice both from each other and from the realms of ethical and moral theory and practice. One of the simplest ways to get across the kinds of distinctions proposed is to say that legal theory defines what “theft,” for example, is, whereas ethical theory provides advice on, among many other things, whether or not one ought to steal. That is, legal theory is fundamentally a cognitive discipline, whereas it is ethical theory (and aspects of legal practice; what should be done?) that are disciplines properly dealing with oughts and shoulds.

On this basis, the following picture emerges in terms of Tucker’s ideal types: the “humanitarian” libertarians are not willing to neglect or play down the legitimate importance of complex moral questions next to (fundamentally property-theory based) libertarianism. The “brutalists,” meanwhile, on a favorable interpretation, are concerned that misplaced attention to moral and ethical concerns could be used (and very often is used) to justify systematic violations of legal principles, principles that are among the defining characteristics of civilization as such.

My suggested path toward a resolution of this dichotomy has several steps. First, all parties should seek to clearly differentiate a separate scope for legal theory and for ethical theory. They are two quite distinct fields, the confusion of which has led to unending injustice and immorality on a society-wide basis. Second, embrace the insights that are to be gained from each of these quite distinct fields, and apply them each in suitable ways. Either/or must give way to yes/and when it comes to working with multiple fields, each one of which has valuable and distinct insights on offer.

Legal theory provides the definitions of property boundaries, the outermost boundaries within which ethical social action can possibly take place without becoming legal infringement in the process. Within this widest scope for possibly ethical actions, various specific ethical conceptions then seek to inform and advise actors as to which among the many possible ways to live within the sphere of the legal are also morally desirable and laudable in addition to merely not being acts of aggression in the property-theory sense.

Newsweek uncovers its own lack of integrity in alleged “Satoshi Nakamoto” discovery reporting

Newsweek just released a story, “The Face Behind Bitcoin” (6 March 2014), claiming to have found Satoshi Nakamoto, the creator of Bitcoin. I remain doubtful. Whether they have or not, though, I think their story reflects a lack of professional integrity, which is why I am not personally even including a link to it.

The person they targeted clearly did not want to be identified, but the magazine nevertheless published photographs not only of the person, but also of where he lives, along with the identities and locations of his major family members. The same story could have been published with less identifying and location information out of respect for the obvious wishes of the primary person involved (as in: he called the police when the reporter showed up uninvited at his house).

Now as to whether this story is to be believed, the article does come off as convincing at first read, but on reflection, here are some reasons I have doubts.

Many of the points made about the person targeted in the article do match up to elements of what is known about Satoshi Nakamoto, the creator of Bitcoin. There is, however, one very large problem. Given all of the alleged sophistication and use of untraceable emails, why would such a person use a real name? It is possible, but would be a spectacular contradiction to everything else that is known about Bitcoin’s Nakamoto, and for that matter, the person targeted in the article.

The article is a collection of circumstantial evidence, an ex post effort to line up characteristics and dates. However, one should ask: Which characteristics and dates that did not match the story’s objective were omitted or went unnoticed? What is the total statistical set of persons in the world who would match up on characteristics and dates in a similar way?

Meanwhile, zero direct evidence of this man’s involvement in Bitcoin was presented, only multiple coincidences of interests and skills. Nevertheless, the article is written and titled as an unqualified direct truth claim: “this is.”

So far as I can see, every piece of evidence presented also matches the thesis that this is not the creator of Bitcoin. Moreover, the real-name relationship to the person targeted in the article tends to support the thesis that this is not him, rather than that it is him. Are we to believe that “the” Satoshi Nakamoto, out of an unending list of possible pseudonyms, would have instead used a real name right along with the rest of his consistently tight operational anonymity?

Either way, what there is overwhelming evidence for is that those responsible for this article, in pursuit of traffic and their print magazine relaunch, have displayed abysmal judgment and a lack of professional integrity by giving away specific location and identifying photographic information about this man, regardless of whether he was the inventor of Bitcoin or not.

MtGox fiasco highlights advantages of Bitcoin and damage from regulation

The bankruptcy of a centralized Bitcoin exchange, such as the MtGox collapse, is a prime example of the type of “trusted third party” risk to which Bitcoin itself was designed to provide an alternative. Although the original Bitcoin white paper particularly pointed out problems with people having to trust some third party to conduct financial transfers, an exchange facilitating impersonal market trading is also a type of trusted third party.

Customers of such exchanges do not maintain direct control of their bitcoins, but instead exchange these for entries in a customer account on an internal corporate system. Customers then rely on the particular quality and reliability of the internal management, data, and auditing systems of their chosen exchange to the extent and duration to which they leave balances there.

Bitcoin was designed to be a new type of solution to the kind of counterparty trust/risk problem that the MtGox news brings to light, although the same issues are all too familiar to students of the long history of fractional-reserve bank runs and systemic financial crises (importantly, this one is not systemic, but company specific). One objective of Bitcoin’s design was to reduce or eliminate the need for end users to rely on any such centrally managed (or mismanaged) credits—whether centrally issued monetary units themselves (first from banks of issue and later from central banks) or the particular internal accounting entries of specific service providers.

Users who directly control the keys to their own bitcoins, such as by using paper wallets, client software, and to a large degree also legitimately client-side encrypted web wallets, carry no trusted-counterparty risk (but still risk of user error and theft). However, if users do not hold bitcoins in some such direct way, they do not hold them at all. Rather, they hold a claim on a specific exchange company or secure-storage service.

MtGox customers were holding what were essentially Goxcoins, that is, MtGox-brand bitcoin credits (and/or MtGox-brand fiat account credits). They were not holding bitcoins. Such services can and should be sound of practice and strong of reputation, as appears to be the case with a number of other existing services. For example, Bitstamp-brand bitcoin account credits and Coinbase-brand bitcoin account credits have attracted none of the fear and discounting of MtGox-brand bitcoin account credits. All of them have the same status from a purely economic-theory point of view and none of them equate to the direct holding of bitcoin itself. However, their qualitative differences, from brand to brand, on the market have become increasingly vast.

One key innovation of Bitcoin was eliminating from within its own design any single point of failure from centralization in the core protocol and network. This has eliminated for users the need to rely on what I call a “trusted fourth party” that is, a centralized currency-unit issuer. However, next to broad Bitcoin-community enthusiasm about the potentials for decentralized designs, this does not necessarily imply a need to eliminate any and all points of centralization, such as the ordinary business design of competitive third-party services, whether centralized or decentralized. (De)centralization is negative when misapplied and (de)centralization is positive when well applied.

That said, Bitcoin does raise the competitive bar for financial service providers in original ways. It gives users an unprecedented opt-out path from the third-party financial services market as a whole. From a user standpoint, Bitcoin eliminates the need to necessarily rely on any third party whatsoever to aid in conducting one’s financial affairs. One who does not find some third-party service helpful can choose instead be one’s “own bank.”

I contrast, the traditional banking system’s only true opt-out path for end users is to be “unbanked” and thereby excluded from significant opportunities to engage with extended commercial society. With no true opt-out path for customers, but only a choice of fundamentally similar Bank A and Bank B, banking systems became increasingly cartelized over the course of centuries in the pursuit of coordinated inflation at the long-term expense of end users. Bitcoin has now provided end users exactly such an alternative to the familiar array of cartelized non-choices in financial services. It has also provided an opt-out path from the need to use reliably value-losing fourth-party-issued currency units.

A cause of certain irregularities

As MtGox has shown (to varying degrees for years and only now to its clearest extreme), particular third-party service providers can be unsound in their business practices. What is somewhat more mysterious is that such entities could continue to exist despite a long-standing negative business reputation, as well as the parallel presence of at least some apparently sounder alternatives.

One major factor in this is the high degree of regulatory risk and uncertainty in financial services in many countries. This has held back—by years—the entry of additional and higher-grade competitors, including not only start-ups, but potential new service offerings from existing firms. Many firms that could have easily started offering more professional Bitcoin services much sooner, did not do so due to risk avoidance in the face of a pervasive climate of regulatory fear and uncertainty.

Such companies—the market entry of which no one ever witnessed because it did not happen (Bastiat: “that which is not seen”)—had an abundance of just that expertise in systems, internal controls, and financial management in which MtGox seems to have been painfully deficient. In any less hampered market than financial services, such a company as MtGox should have easily been outcompeted and/or acquired by superior entrants long before reaching such a significant scale and being in a position to be a conduit for as much damage to its customers as it has.

“Regulation,” far from being a comfortable universal-savior solution, is in this way squarely to blame as a major factor in setting up the competitively hobbled business climate that helped enable such a weak firm to remain in business far past its expiration date. That stronger firms are now growing and new ones appearing is a positive development for the Bitcoin ecosystem. That more and stronger new entrants were missing in action starting at least two years ago owes a great deal to the artificial ex ante political blockades to social progress collectively known as “regulation.” The up and down tides of market sentiment regarding the range of potential regulatory actions have also played a major role in amplifying bitcoin price volatility. This component of volatility is then naively blamed on “bitcoin” instead of on the irrational and unpredictable regulatory climate, market expectations about which shift with every passing “official” mumbling, musing, or rumor from anywhere in the world (though much less now than in the past).

Constructive work is underway to apply the conceptual and technical solutions that Bitcoin has brought into the world to the specific business of exchanging global bitcoin for various local monies. These include a range of decentralized exchange protocols, and methods of using the blockchain to confirm customer reserves. Contracting for independent third-party audits would also seem a reasonable business measure for participants in a competitive exchange landscape. Offering such audits could be another un- or under-tapped potential business opportunity. Once again in this case, progress has been impeded by regulatory fears that have helped prevent relevant established professionals from getting involved much sooner just where most needed—in an entirely new world-changing start-up industry.

As the less content-oriented among media participants scramble to conflate as thoroughly as possible the emerging disasters of the MtGox company with their own vaguely formed fantasy images to which they attach the word “Bitcoin,” I take note that the really existing Bitcoin was designed as an innovative solution to the centuries-long institutional problems of users having little choice but to trust some “trusted third party” in their financial affairs. What has been dubbed “Empty Gox” is only the latest particular manifestation of this long-running problem, to which Bitcoin itself has arrived on the historical scene as a significant new class of solution.

 

Suggested reading: “Bitcoin: A Peer-to-Peer Electronic Cash System,” Satoshi Nakamoto (Oct. 31, 2008) [PDF]

Summary update on Bitcoin transaction malleability adjustments

Here is a quick summary of the current state of the response to transaction-malleability attacks on some exchanges, based on what I have gathered mainly from Github, Reddit, and Twitter discussions. One note on terminology at the outset, transaction-ID malleability would probably make this easier to understand for the general public at first glance—the substantive content of transactions cannot be alterned at all through this issue.

The MtGox exchange was still hardest hit in its particular implementation, but more importantly, it is mainly suffering in addition due to a general lack of market confidence in its business and solvency, which has built up over a very long period. The “price” it currently displays is not really a “Bitcoin price,” but mainly a market risk assessment of the likely state of the exchange’s own solvency. The current issue and MtGox’s response have come as a “last straw” for the market’s view of this company. This business-specific factor has also amplified the wider public impression of how significant the actual general technical issue itself is (this is typical for Bitcoin news, but still).

That said, MtGox’s infamous Monday press release blaming the Bitcoin protocol for its own woes was not entirely fanciful after all, and some wider adjustments are being made to tighten up this issue at some other exchanges and even in the reference implementation itself. These code adjustments in response to transaction ID malliators (those taking advantage of the situation to reissue transactions with altered transaction IDs) are taking shape and are in the process of being approved and implemented.

What we are apparently getting is a new “normalized transaction ID” field in transactions. This reflects the substantive content of the transaction itself and is therefore immune to the malliation to which the standard ID is subject prior to confirmation. To clarify for those who have not followed this closely, this issue has never had any direct effect on the content of transactions, that is, on who gets what. The exploit is only a way to fool some wallets into not seeing that a confirmed transaction has in fact been confirmed.

The work underway is precisely to fix these particular implementations so that they correctly perceive that confirmed transactions actually have appeared on the blockchain. These implementations had been relying on the initial standard transaction ID for this function. Not everyone understood that during a window after initial submission to the network and before confirmation, a transaction could be copied and the copy reissued with an altered transaction ID by changing the format of the signature.

Reference wallet features to make use of this new normalised ID are well in process. These include detecting copies of the “same” (in terms of hard content) transactions with differing standard transaction IDs. This is called “Walletconflict detection.” “Conflicted” transactions, that is, versions of a transaction that did not confirm due to ID malleation, are to be reported as “confirmations: -1 and category: ‘conflicted.’” This status is based on detection of multiple transactions with the same (new) normalised transaction ID as one another (only one such transaction can ever be confirmed, but this new feature brings any ID-malleation attempts to the ‘attention’ of the wallet software by showing all malleated and non-malleated versions that carry the same content).

The Bitstamp exchange announced Friday morning (in Europe) that its system adjustment, built with support from core developers, had passed internal testing and that it is likely to resume withdrawals later in the day.

There is more to be done to support more complex and as yet rarely used Bitcoin features in terms of the standard transaction ID issue, as this ID is what is used in inputs to future transactions. This is complex, because the malleability of the standard ID could also have positive uses in the future in facilitating certain types of complex transactions. The current adjustments with the addition of the normalized transaction ID and related code should be a sufficient immediate adaptation to the issue.

Legal and economic perspectives in the action-based analysis of Bitcoin

Well before getting “distracted” by the theoretical interpretation of Bitcoin for most of 2013 and probably well beyond, one of my central projects, still ongoing, has been to explicitly apply the action-based methodology of Ludwig von Mises and Hans-Hermann Hoppe to the philosophy of law. This is a project that had already been greatly advanced by the work of Stephan Kinsella, in my view, and I have tried to make this approach even more explicit and systematic, naming it action-based jurisprudence. This has led to some additional clarifications, foremost, what I consider a clearer differentiation between the respective natures and roles of legal theory and ethics, as well as clearer divisions between legal theory, legal practice, and (forthcoming) criminology.

I recently came across some interesting comments that reminded me of how this background influenced the way I approached understanding Bitcoin right from the beginning. Jorge Casanova in a thread in Spanish, referenced my 2011 paper, “Action-Based Jurisprudence” (links to that and related work here) and makes some good points, tying this to larger themes. The key insight is that phenomena under investigation are wholes and it is our own methods that illuminate different aspects of them (rather than the aspects being as separable as they might casually appear from attempting to reference only one field). He also cites, as I did, the example of money, which cannot be understood well without applying both economic and legal concepts (whether done explicitly or unconsciously):

[Google translated]: “There is a nature of money as a whole, with economic and legal implications, but inseparable from each other since the phenomenon (the money, or the bank if any) is absolutely inseparable from its legal and economic nature as a whole.”

A couple of years after writing that first action-based jurisprudence paper, I have just recently used legal status as the basis for proposing a new approach to monetary typology that can account for Bitcoin, which appeared for the first time in the video “Bitcoin Decrypted” Part III (December 2013). In this model, the most relevant thing about the category of “commodity money” is that it is a market good that requires no particular legal status that differs from that of any other good. Other types of monetary objects often rely on some form of legal status to prop them up, and this usually entails some degree of artificial legal privilege.

Another important factor in “commodity” is that a commodity good is one that is interchangeable with other units and is basically as easy to either buy or sell at the going market price. This is distinguished from other items, foremost specialty items, for which the relative positions of buyers and sellers differs widely. For most—non-commodity—goods, it is easy to go to a store and buy something, but much harder to turn around and sell it again. New cars, for example, famously take on a substantial price discount as soon as they are “driven off the lot.” On a commodity market, however, the relative positions of buyers and sellers are much closer in terms of the relationship between price spreads and relative ability to have transactions executed in a timely way.

In contrast to these two factors (a legal one and an economic one), it seems to have become more typically understood that the important thing about “commodity” in monetary thought is its apparent reference to the tangibility or materiality of historical commodity monies. However, I argue that this is turning out to be an incidental historical characteristic, rather than a theoretically fundamental one (See On the origins of Bitcoin: Stages of monetary evolution” (PDF, 3 November 2013 revised edition).

It is interesting to note in this connection that tangibility is a type of physical characteristic. As such, it requires neither economic theory nor legal theory to define it. It can be defined in terms of the natural sciences, referencing certain physically measurable properties, or their absence.

Legal status, in contrast, must be understood on the back of some kind of legal theory, while degree of liquidity/marketability/saleability is an economic-theory conception. In sum, these two factors, legal status and liquidity, both properly belong to the (“praxeological” or action-based) social sciences, whereas questions of tangibility or materiality (or the identification of one metal as contrasted with another) are first of all natural-science questions. In the same sense, the identification of cryptographic properties such as those of cryptocurrencies is first of all a mathematical and cryptographic issue, likewise not a social-science issue, per se (only secondarily, in that acting people are reflecting such elements in their actions and value scales).

 

What follows is the original comment in Spanish for those who can read it or run it through an online translation widget, which seems to create something at least vaguely comprehensible in the case of Spanish to English (as opposed to the hilarity that ensues from Japanese to English machine translation):

No hay tal cosa como la economía por un lado y el derecho (o en un sentido más amplio el entorno institucional) por el otro. De hecho, resulta muy ilustrativo el sensacional trabajo de Konrad S Graf titulado “Action-Based Jurisprudence: Praxeological Legal Theory in Relation to Economic Theory, Ethics and Legal Practice” publicado en Libertarian Papers (Vol. 3, 2011)… y cuya primera parte me parece uno de los más brillantes razonamientos sobre teoría legal praxeológica que he leído hasta la fecha. En resumidas cuentas, Graf señala que la praxeología se divide en tres “niveles” (raíz, tronco y ramas, usando la metáfora de un árbol) y que las dos ramas fundamentales (cada una con varios elementos) son la teoría económica y la teoría legal, y señala además que hay determinados fenómenos (el primero de los cuales es el dinero y banca) que no pueden entenderse sin aplicar simultáneamente las implicaciones de ambas ramas, la económica y la legal. No es posible, al tratar el fenómeno monetario hablar de una naturaleza económica del dinero y de una naturaleza legal (o institucional) del mismo, ni tan siquiera en términos analíticos y teóricos. Existe una naturaleza del dinero como un todo, con implicaciones económicas y legales, pero indisociables entre sí pues el fenómeno (el dinero, o la banca en su caso) es absolutamente inseparable de su naturaleza jurídico-económica como un todo. Desde el momento mismo en que la praxeología no es solamente ciencia económica, sino que es ciencia de la acción humana en general (y a partir de los trabajos que venimos desarrollando personas como Josema C España y un servidor, estamos cada vez más cerca de hablar de todo un paradigma de filosofía primera incluso, lo que va aún más allá del método de una serie de ciencias en particular) no es posible disociar un elemento puramente económico del más general elemento de acción humana.

Hyper-monetization reloaded: Another round of bubble talk

‘Tis the season again when the Bitcoin exchange rate rises fast and “bubble” talk resumes among some journalistic and other Bitcoin skeptics. Around the height of the previous most dramatic Bitcoin exchange rate movements of March and April 2013, I posted an article called “Hyper-monetization: Questioning the ‘Bitcoin bubble’ bubble,” which was widely circulated at the time and still referenced now. What follows is a blend of brand-new material and thoroughly revised highlights from the earlier article.

The objective was, and is, not to give advice or make predictions, but to draw on theory to develop alternative perspectives on what exactly a “bubble” may or may not be in relation to the distinctive case of a brand-new rising-value medium of exchange. “Medium of exchange” is fancy economic jargon for something one can pay for goods and services with. I define a money as the common unit of pricing and accounting in a given context (see my “Bitcoin as medium of exchange now and unit of account later: The inverse of Koning’s medieval coins,” 14 September 2013).

Behind popular price-bubble discourse often lies a thinly or not-at-all veiled general debate on whether Bitcoin is a valid system. Some degree of bubble-talk functions as a pop proxy for this. In April, some Bitcoin critics were citing rapid price movements in support of the contention that Bitcoin, as such, was only a bubble. When this bubble popped, the story went, Bitcoin units would supposedly return to their “inherent” value, which they claimed to be…nothing.

Of course, Bitcoin failed to oblige them once again. Yet each time Bitcoin does not fulfill this pop empirical prediction, and instead eventually goes much higher in price later on, one nevertheless hears the same prediction repeated the next time around. In contrast, there are several ways to take a much longer-term view, one that is able to both account for price manias and also acknowledge the possibility that Bitcoin could be a valid system, and an ever more reliable one in the making.

Hyper-monetization reloaded

Many observers have likened the rise of Bitcoin to an asset bubble. Another less common word introduced in this context is hyper-deflation. Some say such a thing is horrible, others that it is great. I suggest a quite different interpretive concept to apply in addition: hyper-monetization.

I came across the term hyper-deflation, intended in a positive sense of rapidly rising value, when Bitcoin’s exchange rate was climbing fast from the low thirties to the high thirties over a few days in early March 2013. While a few specialists of a certain persuasion understand “deflation” to be a great thing for ordinary people, the word still has major problems. It has several possible definitions. It can refer to price-level changes or to quantity of money changes, depending on who is talking or when. It is assigned a quite negative interpretation in most conventional economics circles. Finally, it has a general public-relations problem. It just sounds depressing as a word. Whatever its real net effects on society might be, “deflation” just sounds like a bad thing no matter what. Which child most wants a deflated balloon?

The word hyper-monetization occurred to me as a more positive alternative to hyper-deflation, one that also provides an antonym to the catastrophic hyper-inflations that have repeatedly killed off fiat paper monies throughout history. The exact opposite of the death of an old money at the debt-dripping hands of state/bank alliance managers would be the birth of a new medium of exchange at the creative hands of the market.

The term de-monetization denotes the more general concept of a widely used medium of exchange ceasing to function as one. A total hyper-inflationary collapse is one way this can happen. Another is bimetallist legal-tender price-fixing schemes driving one precious metal, say silver, out of circulation in favor of another, say gold, or vice versa. Yet another historical example is when a pure fiat paper standard is created after monetary authorities permanently “suspend redemption” of legal tender notes into the precious metals that had been promised in exchange for such notes (that is, note-issuer default is “legalized”). Paper and account entries then remain as money, while the metals that had formerly “backed” them are de-monetized and trade as commodity assets, bought and sold in terms of what replaced them in the actual role of money. The rhetorical line from some well-meaning sound-money promoters that “gold is money” is simply untrue, except, of course, in regard to those times and places where it actually was.

The opposite process, “monetization” in this sense, denotes something that was not a money beginning to function as one. When euros took over the jobs of various European national currencies, euros were monetized and the previous national currencies de-monetized. The French franc and Italian lira do not now function as monies; they are historical relics.

Something that gains its own exchange value from scratch on the open market contrasts sharply with any such forced legal conversions. When a freely chosen unit monetizes through market processes, and does so quite rapidly, it might then reasonably be described as being in a process of “hyper-monetization” (for a detailed treatment of origin-of-money issues, see my recent paper, “On the origins of Bitcoin: Stages of monetary evolution,” revised version, 3 November 2013, PDF).

A problem with the “bubble” bubble

Bitcoin’s high price volatility is unquestioned. However, it is unsurprising for at least two reasons. First, it is not widely understood as a technology and is in a very early stage of development. Second, its exchange value (market price) tends to react to news that highlights regime uncertainty. It should be noted that this is a type of “government failure” in that the scope and variability of policy uncertainty across multiple jurisdictions greatly increases market uncertainty.

Something else to consider in relation to the eternally-recurring “Bitcoin is a bubble” claim is that in a normal asset bubble, certain key factors differ. To whichever height the prices of typical bubble assets such as houses climb, a given house remains the same good in a physical sense as when it exchanged for less money. In the case of a monetization event, in contrast, the actual utility of the trading unit—which is mainly its utility as a trading unit—may actually rise. This is due to monetary network effects, named in reference to the value that comes from the extent of the network of people willing and able to deal in a particular trading unit.

To imagine how this special case of medium-of-exchange utility growth might differ from an ordinary asset bubble in, for example, housing, it would be as if not only the prices of houses were rising during a buying rush, but in addition, their actual sought-after qualities as physical houses were improving as well. Such fantastic houses might sprout new rooms with no one building them. New paint jobs might appear mysteriously overnight without any painters having visited.

For a medium of exchange, a rising general usability for facilitating the purchase of goods and services (separate from the relative value of each unit) is not directly tied to its exchange rate against other monetary units. Still, this aspect is likely to positively influence such exchange rates. Conversely, rising exchange rates, if they generate news and wider attention, can then lead to enhanced network effects through increased recognition, creating a network-growth cycle.

For those who have been following Bitcoin news closely, for months on end there have been seemingly daily announcements of new ways and places for consumers to spend bitcoins, new or improved wallet services to manage bitcoins, new or improved payment processor services to receive bitcoins, and new exchanges at which to buy and sell bitcoins—all on a global basis. Bitcoin payment processor BitPay announced in September that it had 10,000 merchant customers, up 10x from 1,000 a year earlier. In the past 12 months, the number of wallet accounts listed at the popular Blockchain.info My Wallet service has risen 13.9x from 38,460 to 534,575. These are just two specific services and do not reflect horizontal expansion in the number of competing services or the direct use of the Bitcoin network to facilitate transactions on the part of consumers and merchants using directly controlled software without intermediated assistance from service companies.

“Is” a bubble versus “is in” a bubble phase

Bitcoin does have its manias and crashes. The hyper-monetization concept seems useful especially in a longer-term perspective for addressing the view that Bitcoin is nothing more than a speculative bubble. The most insistent proponents of this view elaborate along these lines: “Bitcoin has no ‘intrinsic’ value and is therefore ultimately destined to fall to its ‘inherent’ value, which is zero.

However, claiming that Bitcoin is a bubble (total dismissal of the system as such) is quite different from claiming, perhaps helpfully, that Bitcoin’s exchange rate may be showing signs of being in a temporary bubble phase or mania at a given point in time. That said, every significant rise in price cannot just be reflexively attributed to a mania. There is certainly more to this story and there are many specific matters of degree and interpretation. Among these is recognizing that a young currency such as this would naturally vary in price quite a bit more as it is being discovered in waves than later after it has gained more widespread adoption.

At a theoretical level, unlike a simple asset bubble mania, the more people begin using or expanding their use of a particular medium of exchange, the more its actual utility rises, and the more valuable it actually is in this function from the point of view of its users. The exchange value of a medium of exchange unit is related to, among other things, each holder’s expectations of being able to use the unit in future exchanges. How many people will accept the unit, how readily, and for what?

At least when it comes to the aspect of monetary network-effect growth in any season, ‘tis the more the merrier.

Expanded "On the origins of Bitcoin" paper with empirical supplements, other revisions

This is the 0.2 upgrade to my paper, “On the origins of Bitcoin: Stages of monetary evolution,” first released on 23 October 2013.

This expanded and revised version replaces the previous one from 11 days ago, but I expect this current version in this format to now hold steady. If you have kindly included the older file in an online reference collection, please consider replacing it with this one.

The changes are summarized in an included initial note to readers of the previous version. The most notable single change is the addition of two new sections as empirical supplements. They provide interpretations of patterns of events by “Bitcoin Year” (Appendix A) and a single five-year price-formation chart (Appendix B). Discussions in the main text of the precise timing of the first clear pattern of medium-of-exchange use have been clarified somewhat on this basis.

Download PDF:

On the origins of Bitcoin: Stages of monetary evolution (03.11.2013, expanded and revised)

 

Strong positive response to "On the origins of Bitcoin"

The positive response to my recent paper, “On the origins of Bitcoin: Stages of monetary evolution” (23 October 2013), has been quite a surprise. Within the first hour, I had received word that the 30-page PDF had already been loaded onto an iPad in Texas and laser-printed in Brazil. Pretty soon, it had been posted on Reddit (r/bitcoin), where it was described as a “treatise.”

In less than the first two days, there have been nearly a thousand visitors to this link on my website. The paper has generated cascading retweets and tweets of recommendation and appreciation that total about 50, as far as I can estimate. Tuur Demeester, editor of the MacroTrends investment newsletter, has been tweeting quotes from it.

The highlight has to be a tweet from Jon Matonis, executive director of the Bitcoin Foundation, Forbes contributor, payments industry veteran, and long-time advocate for non-political currency options: “Konrad Graf earns his place in Bitcoin economic history.”

Well, with that, it must be time to call it a good week.

Update

Link updated from 23.10.2103 version to revised and expanded 03.11.2013 version

Download PDF: On the origins of Bitcoin: Stages of monetary evolution (03.11.2013)


"On the origins of Bitcoin," my new work on Bitcoin and monetary theory

Linked below is a new work I have just written on Bitcoin and monetary theory. It addresses in a more systematic way than I have before issues relating to the interpretation of the origins of Bitcoin in terms of the monetary regression theorem and the application of some central integral-theory principles to monetary theory.

Bitcoin has arisen as an entirely new and unexpected market phenomenon deserving of fresh treatments. Its arrival also provides opportunities to dig deeper into theoretical fundamentals themselves. While this work can be viewed as part of a much larger project in progress, I also have the sense that it can stand alone.

The title, On the origins of Bitcoin: Stages of monetary evolution, acknowledges the inspiration of the classic 1892 work, On the origins of money by Carl Menger, a landmark in the development of the market-evolution account of the origins of media of exchange and money. This “Austrian school” or “Vienna school” approach contrasts with what I dub the state-creatationism theory of the origin of money. It also contrasts with the tempting but unsatisfactory view that money is merely a “social illusion.”

In a nod to the software world out of which Bitcoin has arisen, I call it a first public beta, meaning that, while refinements are always possible and likely, I think the central intended functionality has been implemented. Revised versions and formats may follow.

Update

Link updated from 23.10.2103 version to revised and expanded 03.11.2013 version

Download PDF:On the origins of Bitcoin: Stages of monetary evolution (03.11.2013)