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  • batshwing batshwing Jun 3, 2011 10:37 PM Flag

    Creation of a currency

    Why is this a fiat currency? It does not come into existence through an act of borrowing, right?

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    • >Why is this a fiat currency?

      I am glad you caught that. Here are some passages from Wikipedia:

      - Fiat money is money that has value only because of government regulation or law.

      - money without intrinsic value.

      - While specie-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of specie, fiat money's value is unrelated to the value of any physical quantity.

      -A feature of all fiat money is its acceptability to the government for payment of taxes and charges.

      Bitcoins don't have intrinsic value, but they are not legal tender either. So, I think the author of the article equates fiat money with money that is not backed by an agreed upon physical entity.

      I would say that it's not the physical entity that we are interested in, but the labor required to produce that physical entity. However, there is no way to conveniently "store" labor for trade in the future, so physical entities (like gold) act as a proxy.

      The interesting feature of the Bitcoin seems to be that no human is involved in determining its supply. This is left to a computer algorithm. The algorithm, I guess, is not open to tinkering. Its parameters must have been set at the beginning. I have not read anything else about the Bitcoin, so I need to do that before I continue with the discussion.

      The experiment is very interesting and we may learn a lot from it. For example, this passage is of interest to me:

      "Forster began charging 75 Bitcoins for each pair in February and has since had to lower the price to 5 due to extreme appreciation in the currency's value. "I wish I had kept all of them," says Forster, who traded his Bitcoins on the way up for cash and web services."

      VM

      • 1 Reply to vonmiser
      • It is interesting that my first gut reaction after reading it was that it's a Ponzi Pyramid scheme even though Bitcoin supply is limited throught he mining computer algorythm which is like a synthetic commodity analogy to real commodities. This also reminded me of another synthetic commodity, carbon credits, which is of course based on a government decreed debt of CO2 emission, while Bitcoins are not.

        So let me put this to you three (I hope others will join too) as a question: What is the actual difference then between Bitcoins' value as money versus gold if we assume that neither's supply can be expanded at will and neither is based on borrowing.

        Was my gut reaction wrong?

    • I hope a discussion on this topic unfolds, it would be enjoyable to read! If I can dig up something I will add.

 
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