Friday, September 29, 2017

Bitcoin's Paradox of Scarcity

For a medium of exchange scarcity is essential: There have to be meaningful limits on its supply (or on the growth in its supply) and it has to be impossible to spend one and the same unit of the medium of exchange in more than one place simultaneously.

In the case of a commodity money such as gold these requirements are satisfied as a result of the physical nature of the commodity: the potential supply of gold is limited by the total amount of mined or mineable gold in existence and by the cost of mining gold; moreover, if you give a gold coin to one person you cannot simultaneously give it to another person.

In the case of fiat money governments typically have a monopoly on its creation (although in the exercise of this monopoly they partner with and/or can delegate some of this creative power to central banks and commercial banks) so that everybody else can't go around creating new units of the fiat money at will.

And the problem of double spending is taken care of by either banks (if you use your bank account to pay somebody the bank makes sure that you don't spend the same money somewhere else at the same time) or the physical good itself (you can't give a coin or a bank note to one person and to another person at the same time).

Bitcoins, on the other hand, are wholly virtual and immaterial. Moreover, the bitcoin network is maintained in a decentralized way. So how can bitcoins still be scarce and rivalrous goods?




Wednesday, September 20, 2017

Bitcoin's First Use as a Medium of Exchange?

Every May 22 bitcoin enthusiasts celebrate Bitcoin Pizza Day. In 2010, back when hardly anyone had heard of bitcoin, Laszlo Hanyecz used his bitcoins to buy two Papa John's pizzas. Hanyecz sent 10,000 BTC to a fellow BitcoinTalk forum user, jercos [sic], who bought the two pizzas from Papa John's using his credit card and had them delivered to Hanyecz's house. 

This Bitcoins-for-Pizzas transaction is often regarded as the first real-world bitcoin transaction or purchase, the first transaction in which bitcoin was actually used as a medium of exchange. Wired wrote:
Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction
 And economic researcher Peter Surda had this to say:
This example of a trade of Bitcoins for a pizza is indirect exchange and therefore, from that time on, Bitcoin has been a medium of exchange.
The odd thing, however, is that even though bitcoin is currently a medium of exchange and even though the Bitcoins-for-Pizzas transaction was an example of indirect exchange, in the transaction bitcoin was not actually used as the medium of exchange.


Saturday, September 9, 2017

Toward a Fairer, More Transparent and Less Wasteful ICO Model

Initial Coin Offerings are all the rage these days. Projects in the cryptofinance space offer tokens for sale that will have to be used to buy goods or services in the application once it launches. Investors buy these tokens because they think they will increase in value in the future.

ICOs allow projects to raise money for development & marketing, to reward creators, and they are a way of distributing the tokens among future users of the app that also incentivizes these users to promote the app: the more users there are in the future the more the tokens will be worth, after all.

As Reuben Bramanathan and Vitalik Buterin have described, there are several forms these ICOs can take, each with their own advantages and disadvantages. In this post I first describe how introducing two elements – a lottery & a refund – may offer a solution to one of the problems they both discuss. Then I explain objections to that solution and a way of addressing these objections.


Wednesday, June 7, 2017

Bitcoin, Culture and Value

What good are bitcoins if you can’t show them off? I can’t wear a bitcoin chain around my neck or a bitcoin watch on my wrist. Nor can I hang a bitcoin on the wall. And because bitcoins are highly divisible and fungible they make for poor collectibles. I can’t possibly complete my bitcoin collection or impress people with the story of a specific bitcoin’s particular place in history or what makes it different from the other bitcoins out there.

These limitations are one reason why bitcoin is a peculiar store of value.

We typically think gold is expensive because people value it as jewelry, that original works of art are valued for their beauty and their place in history or the oeuvre of an artist. People collect old coins because they find them beautiful or fascinating and because they are driven by the human instinct to collect things that are rare and meaningful in some way.

It seems to be the aesthetic, historical, cultural features of these kinds of objects, together with their rarity and the human drive to collect that give them their value. But bitcoin doesn’t seem to have such qualities. Nor are bitcoins backed by governments or central banks who can create a demand for them the way they do with regular money. Bitcoins also don't provide returns in the way stocks do.

So if not through these properties, institutions or returns, how could bitcoins have become so valuable? Is bitcoin just in a big bubble that will inevitably pop?

In this article I first argue - much in agreement with Moldbug's Bubble Theory of Money - that while it is true that bitcoin is in a big speculative bubble, it is a sustainable one.

And secondly, contrary to how we usually think about them, most of the value of the objects I mentioned above - gold, fine wines, works of art etc - is also bubbly. 

Bitcoin is special only in that it is an extreme case of the same bubble mechanism. While much of the price of original works of art, fine wines and gold can be explained by this bubble-blowing mechanism these objects do also have some consumption value. Bitcoin's value on the other hand is nothing but bubble. The same principle holds for other cryptocurrencies such as Ethereum.


Thursday, May 21, 2015

The Regression Theorem Is Neither A Priori Nor True

The regression theorem is one of the most celebrated contributions of the Austrian School of Economics. This is not surprising given what the theorem achieved in the eyes of many of its proponents:
  1. The theorem showed for the first time how to use marginal utility analysis to explain the determination of the price of money. This integrated monetary economics with general economic theory, which in turn paved the way for some of the most important future contributions by the Austrian School, particularly in the area of business cycle theory.
  2. The theorem showed that indirect exchange and money could only have originated out of market exchange and could not have been the creation of the state.
  3. The theorem is a part of praxeology, which means 1) that it is an priori claim that is deduced from undeniably true axioms, and 2) that it is not possible to imagine, let alone observe, situations or events that contradict the theorem.
In this article I argue, however, that there are two main problems with the regression theorem: It is neither a priori nor true.

Saturday, December 20, 2014

Bitcoin Is Not Like Yap Stone Money

For centuries the people on the island of Yap in the South Pacific used a currency that was both useless and inconvenient, which was probably part of the reason that they didn't even care whether they actually received the currency when somebody paid them in it.

Put like this, Yap money sure sounds weird, yet some economists and bitcoin experts claim that there are deep similarities between this primitive money on the one hand and the most innovative and hi-tech money that we know of, bitcoin, on the other.

To understand why this need not in fact be an unreasonable claim we need to have a closer look at the key features of Yap money that I hinted at above. 

To understand why the claim nonetheless is probably inaccurate it is necessary to show that there is surprisingly little evidence to think that Yap money in fact functioned the way economists think it did.


Yap Stone Money

Tuesday, July 15, 2014

Bitcoin's Store of Value Paradox

Can bitcoin succeed as a store of value even if it does not succeed as a medium of exchange?

In the early stages of bitcoin adoption that we are in now, bitcoin only has a very limited use as a medium of exchange, especially when you compare it to the dollar or the euro. The expectation, however, is that this will change, that bitcoin eventually becomes widely used as a medium of exchange in the future. If it does, then demand for bitcoin and hence the price of bitcoin will be much higher than they currently are.

There have been several estimates and studies that tried to determine how much 1 bitcoin could be worth in the future and it is not uncommon for these studies to say that a $100,000 bitcoin or even a $1,000,000 bitcoin are very well possible if bitcoin were to become widely used as a medium of exchange. And it is the possibility of this big future price increase that is what is behind the current price.

Now what would happen if it becomes clear that bitcoins will not become a widely used medium of exchange in the future? The obvious answer would seem to be that the price would crash.

But once we look more closely at the logic that explains the value of bitcoin, this suddenly does not seem so obvious anymore.

Friday, May 30, 2014

Podcast #1: Bitcoin and the Origins and Nature of Money

This week I had a conversation with Vijay Boyapati about how the emergence of Bitcoin has revealed some serious problems in the traditional Austrian account of the origins and nature of money.

Topics include: how Menger and the Austrians failed to understand the bubbliness of money; how speculation rather than use as a medium of exchange is what bootstraps bitcoin; what bitcoin can or cannot tell us about the origins of money; how money is actually better off without 'intrinsic value'; how the success of gold shows that bitcoin can have a future; how bitcoin isn't quite money yet and what this means; and much much more.