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  • vonmiser vonmiser Jun 4, 2011 2:25 AM Flag

    Creation of a currency

    >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

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    • 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?

      • 3 Replies to batshwing
      • From your above post it appears that fiat implies no intrinsic value which is what gold critics hastily and quite ignorantly, I should like to say, allege just the same. Yet both, Bitcoins and gold require a lot of energy to produce (judging from the article). So let me refine the question even further:

        What is the difference in the value to serve as money between gold and Bitcoins, if both are limited in supply, both cannot be created at will, and both require a lot of energy to "mine" into existence?

        Would Adam Smith (see chapter IV, Wealth of Nations) and Benjamin Franklin approve of Bitcoins?

      • http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_S/threadview?bn=72878&tid=312327&mid=312327

        the only difference between this and gold is the digi aspect (security, ie counterfeiting, etc) and it's constant need for powered up devices.

        a geo commodity or digi commodity (like domain names) is irrelevant to the value. it's not possible to print it or create it out of thin air sans counterfeit risk so it can't be a ponzi.

        the integration between the two golds, geo and digi would be an interesting mix.

      • >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.

        These assumptions are in practice unenforceable, but for the sake of the discussion here are some differences:

        - Gold can be carried on the person and does not require a computer, electricity, software, etc. Bitcoins require serious and widespread technology.

        - Physical gold is obviously not a practical/efficient solution in everyday normal global trade; It may need to be transported to complete a trade. It needs to be available in almost infinitesimally small "coins" (imagine buying a piece of chewing gum with a tiny gold coin).

        - Gold can be stolen with no recourse to the victim. Bitcoins are (I think) accounted for by the algorithm. I don't know how easy it would be recover a theft.

        Gold's advantage is in its simplicity. It is only one step removed from what it represents, namely the value of some unit of labor. Since any proxy derives its usefulness from the degree of trust it carries, it's really hard to beat gold as a difficult-to-corrupt currency.

        - Labor is direct money, if you can trade it "on the spot" (no time delay between the exchange of services).

        - Gold is a proxy when the transaction is not completed momentarily. It's one step removed from the labor. This is very good, but the first signs of risk appear. What if someone discovers a huge amount of gold in their backyard, so much of it that they could double the world's supply?

        - Paper backed by gold is two steps removed from labor. Now, you also have to trust the entity which manages the supply of paper money and which stores the gold used for the backing.

        - Fiat money is backed by a promise of future labor, in the case of the U.S. some of that would be the labor of people who aren't born yet.

        Ultimately, gold is better w.r.t. the trust issue. The interesting thing about Bitcoins is that only the algorithm can change the supply. Also, I assume that the algorithm is not a secret.

        I don't see the Ponzi scheme yet. We need to define the essential characteristics of a Ponzi before I can comment on that.

        The interesting thing about that story for me was the emergence of Gresham's law. The guy selling socks was lamenting that he traded his Bitcoins for some services. This ties into our previous discussion of money supply growth.

 
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