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>Why is Bitcoin a good currency again? It isn't, but almost anything can work if the community of users is small enough. As for why it isn't, we need to step b

>Why is Bitcoin a good currency again? It isn't, but almost anything can work if the community of users is small enough. As for why it isn't, we need to step back a bit. In a barter economy an exchange occurs when two individuals each produce something which takes time/labor/capital and which the other person values more than what they're giving up. For example, if I grow an apple, and you grow an orange, and we trade, it is clear[1] that I value the orange more than the apple, and you value the apple more than the orange (otherwise we wouldn't have made the exchange). The value of those items is individually subjective[2], and the supply of those items is constrained by market forces (e.g., alternate uses of time, labor, and capital). A money economy emerges from a barter economy when individuals accept in exchange something they do not want for itself, but with the anticipation that they can use it for some future exchange. It is critical that the commodity in question be desirable eventually. If no one ever wants it, then it wouldn't emerge as money. (Important Aside: once a commodity begins to function as money, part of the demand for the commodity will be as money, thus there is positive feedback loop, but some non-money demand needs to exist to get the process running. This is why all functioning fiat currencies have their roots in a commodity money.) It's important to notice that commodity money has some inherent constraint on its creation (i.e., its supply curve is bounded by market forces), and that it satisfies the wants of others (i.e., there exists some demand curve). For example, the gold supply is constrained by the cost of mining/processing new gold, and the demand affected by its consumption into produced goods and demand to hold "cash balances" of gold. So far as I can tell, bitcoin is a scheme whose total supply is constrained only by an exogenous, artificial limit of 21M coins, and not by the demand for alternative uses of its factors of production[3]. There can be, at most, a marginal value[4] equal to the marginal cost of producing a coin, which appears to be nothing but otherwise-idle computer time and some electricity. But far more importantly, this is a scheme whereby artificial scarcity is created (e.g., it takes n hours to produce a coin) but no thing of value is produced. This would be akin to inventing a system of money involving sticks whittled into perfect cylinders. Sure it might take a long time to create one, and it might consume resources, but if the end result doesn't have any value to anyone, it isn't money, it's just waste. "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." [1] http://en.wikipedia.org/wiki/Revealed_preference http://en.wikipedia.org/wiki/Revealed_preference [2] http://en.wikipedia.org/wiki/Subjective_theory_of_value http://en.wikipedia.org/wiki/Subjective_theory_of_value [3] http://en.wikipedia.org/wiki/Factors_of_production http://en.wikipedia.org/wiki/Factors_of_production [4] http://en.wikipedia.org/wiki/Marginalism http://en.wikipedia.org/wiki/Marginalism

lambda 16y ago
Is a $20 bill something of value? No, it's merely somewhat hard to forge, and accepted as currency by lots of people. Or how about an entry in a ledger on some bank's computer? The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them, and people accept it as currency in exchange for good, because they expect that other people in the future will accept it in exchange for goods. Well, Bitcoin just gets rid of that central entity. It makes it hard to produce new units (and impossible after 21M have been produced). And it relies on the fact that people are willing to trade it for goods, services, and other currencies to give it value. Look, if I have 100 bitcoins right now, I could get $100 for it, or I could buy web hosting services, or I can buy specialty coffees, or a variety of other things. That seems like real value to me. Now, the total size of the bitcoin economy is pretty small at the moment, but it is growing. I don't see why people feel like other fiat currencies somehow have value but something like bitcoin cannot. They are both artificially scarce things that can be easily transferred with no intrinsic value.
- ataggart 16y ago
  >Is a $20 bill something of value? No, it's merely somewhat hard to forge, and accepted as currency by lots of people. I think perhaps you and I are using different definitions of "value". If someone is willing to accept something in exchange for something else, that act reveals that they value it, either for its use value or for its exchange value (i.e., as money). >The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them Why do you think that? It's certainly true that artificial scarcity raises prices (for money, in terms of all other goods), but that scarcity is not what is being subjectively valued. A $20 bill today is valued (as money) based on what it could buy yesterday. And yesterday's valuation (as money) was based on the day before that. Go back far enough and the money valuation will have spawned from the commodity valuation. Bitcoin is flawed in largely the same ways that fiat currencies are flawed, namely that the commodity has no use value demand, and the supply is not subject to market forces. The difference with fiat currencies is that they have quite a few things going for them that keep them around: taxes are demanded in them, a raft of laws eliminate competition, and a central bureaucracy actively manipulates the market.

lambda 16y ago

Is a $20 bill something of value? No, it's merely somewhat hard to forge, and accepted as currency by lots of people. Or how about an entry in a ledger on some bank's computer? The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them, and people accept it as currency in exchange for good, because they expect that other people in the future will accept it in exchange for goods. Well, Bitcoin just gets rid of that central entity. It makes it hard to produce new units (and impossible after 21M have been produced). And it relies on the fact that people are willing to trade it for goods, services, and other currencies to give it value. Look, if I have 100 bitcoins right now, I could get $100 for it, or I could buy web hosting services, or I can buy specialty coffees, or a variety of other things. That seems like real value to me. Now, the total size of the bitcoin economy is pretty small at the moment, but it is growing. I don't see why people feel like other fiat currencies somehow have value but something like bitcoin cannot. They are both artificially scarce things that can be easily transferred with no intrinsic value.

ataggart 16y ago
>Is a $20 bill something of value? No, it's merely somewhat hard to forge, and accepted as currency by lots of people. I think perhaps you and I are using different definitions of "value". If someone is willing to accept something in exchange for something else, that act reveals that they value it, either for its use value or for its exchange value (i.e., as money). >The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them Why do you think that? It's certainly true that artificial scarcity raises prices (for money, in terms of all other goods), but that scarcity is not what is being subjectively valued. A $20 bill today is valued (as money) based on what it could buy yesterday. And yesterday's valuation (as money) was based on the day before that. Go back far enough and the money valuation will have spawned from the commodity valuation. Bitcoin is flawed in largely the same ways that fiat currencies are flawed, namely that the commodity has no use value demand, and the supply is not subject to market forces. The difference with fiat currencies is that they have quite a few things going for them that keep them around: taxes are demanded in them, a raft of laws eliminate competition, and a central bureaucracy actively manipulates the market.