Blood money, digital fool’s gold, and the second law of thermodynamics

September 25, 2016 § 110 Comments

The subject of money is pervaded by all sorts of unreal mysticisms.  If you want to better understand economic reality it is important to hunt down these unreal mysticisms in your mind and kill them.

All economic exchange is barter.  If you get nothing else out of this post, take this one concept to the bank.  All exchange is barter.

Attempts to segregate property bartered in marketplaces into ‘money’ versus ‘other property’ is one of those fuzzy social conventions which is fine as long as it isn’t taken too seriously.  Taking ‘money’ as something categorically distinct from property in general distorts and obscures reality.  Any property at all might be used as money (sunk in exchange); and even property conventionally thought of as “money” — coins, bills, and the like — can be displayed or put to other uses than exchange.  This was all perfectly obvious to Aquinas, but modern people are frequently incapable of seeing the obvious when it comes to the subject of money.

We typically think of money as a special kind of thing which can be easily transferred and exchanged. That is fine as long as the term “money” denotes property with the further connotation that the property is easily transferred and exchanged.  Money can be thought of as a kind of property fuzzily distinguishable from other kinds of property by its ease of exchange.  But it becomes insanity when “money” is viewed as categorically distinct from property in general.

The term “money”, then, does not really describe a specific thing or class of things.  It describes a role that some property takes on, some of the time, in economic life.  Some property is more suitable in this role than other property.  If you transfer or spend some property – exchange it for different property – that property takes on the economic role we call “money”.

The property actually exchanged in barter falls into one of two categories: securities and non-securities.  (As it happens, securities are for the most part very easily transferred and exchanged versus most non-security property).

Securities derive their value from the property they impair and the rights involving that property which they assert, as opposed to ‘the paper they are written on’.  Yes, ‘the paper it is written on’ can be a kind of property in itself, or a sort of meta-property.  But you can’t drive your car’s pink slip to work.

Non-security property derives its value from its own objective attributes[1].

Bitcoins and other cryptocurrencies are not a security. They are like virtual gold, except that unlike actual gold they have no useful objective properties at all other than the value intrinsic to authenticated records of wasted computation. Bitcoins are a kind of digital fool’s gold, entitling the owner to nothing other than the pleasure and bragging rights of virtually possessing them, rather like the high scores on your favorite video game.

Now it is true – because human beings are both ignorant and irrational much of the time – that you can often trade worthless things for valuable things under the ‘greater fool’ theory, based on fad and fashion and deluded/false economic theories and the like. Whether someone wants to apply the label ‘money’ to the worthless things traded to ‘greater fools’ is neither here nor there when what we are after is an accurate understanding of reality: it doesn’t turn those actually worthless things into actually valuable things.

Like the market price of gold, the market price of bitcoin is radically distorted when measured against its objective attributes qua property. The difference in the case of bitcoin is that the market price has even less reality baked into it: at least gold actually has objective attributes which anchor its economic value in reality, and has been used as a raw material for making artifacts for thousands of years.  Cryptocurrencies are not an escape from the moral and ontological anti-realism of modern finance: they are its apotheosis.

This brings us to the subject of workers and wages. All exchange is barter, and the exchange of work for pay is no exception.

As I explain in the Usury FAQ and elsewhere, a worker is owed wages not simply for time elapsed but for what he, through his own powers exercised under agreement with his employer, makes actual. Because we are finite beings and can only do so many things in our lifetimes, one might poetically refer to wages as representative of human life. It is true enough that cheating workers out of their just wages is wickedness several times over, an unholy combination of robbery, dishonesty, fraud, taking advantage of the good will and often inferior position of one’s fellow man, and destroying his chance to do something different with his finite time alive in this world. (A sudden calamity preventing payment of wages is a different story of course).

But poetry about money representing human life probably obscures more than it reveals here. Burning cash or destroying other kinds of property isn’t murder.

Consider a car mechanic. He works on your car for agreed rates. Until you pay him he retains (whatever the positive law may assert) the moral equivalent of a “mechanic’s lien” against your car, the property into which he put his labor.

Consider a barber who just cut your hair. The tacit agreement is that you have money in your pocket to pay him. If you don’t, then see Question 49 of the usury FAQ for the different kinds of scenarios.

Examples can be multiplied, but note that none of this imparts mystical spiritual human qualities to some particular kind of financial security (e.g. fiat dollars), or to some other etherial being labeled “money”.

Setting aside assertions of the positive law (taxes, etc), there is no moral requirement for a worker to barter for fiat dollars in exchange for his work. Any property – or even trading one kind of work for another – will do. The idea that there is something super special about certain securities labeled ‘money’ that make them ‘wages’ and thus ‘a fungible representation of human life’ is really just errant nonsense, if it is taken literally.

Finally, we come to the idea that inflation or deflation in the market price of currencies versus other kinds of property is a moral travesty, a sin against workers, an offense against the common man: in short that people (as long as they are not wealthy) are morally entitled to have the purchasing power of their property preserved over time as long as that property is of the mystical class ‘money’. This atrocious idea really needs to be hanged in the city square where everyone can see, its broken and destroyed body beaten and desecrated to make it clear how utterly stupid and destructive it is.  (It does not follow that ‘currency debasement’ is never immoral, of course).

In general people who think that they are entitled to the magical preservation of the buying power of their own property against the relentless tide of the second law of thermodynamics are in the grip of usurious entitlement. Someone ought to slap them out of it, for the sake of both the common good and their own good.


[1] This of course is not (and is not intended to be) a complete characterization of, or even a particularly adequate partial characterization of, economic value.  It is merely an observation that any attempt to characterize the economic value of property accurately must take into consideration the objective attributes of that property. In general, economic value cannot be reduced to nothing but subjective human preferences as expressed in current market prices.

§ 110 Responses to Blood money, digital fool’s gold, and the second law of thermodynamics

  • Josh says:

    But what if the objective attributes of a piece of property are co text depends dependent. Copper is more useful in a society that has indoor plumbing. A blu ray player is objectively more valuable than an hd DVD player, not because of its own characteristics, but because in a spontaneous convergence to a Nash equilibrium, all the movie companies decided to put out their movies on blu ray. There similarly exists a tendency for people to barter in a particular piece of property. This again the result of a Nash equilibrium which does not require anyone to behave irrationally. Whatever the piece of property tends to be valued for its use in exchange. Even though these characteristics are situationally dependent, it is still being valued for its objective characteristics, i.e. It’s characteristics that make it a good item for people to use as a means of exchange and hoarding for future exchange. This is what everyone means by “money” even if they can’t articulate it. It’s a natural phenomenon like government, or marriage. I have no particular love for Bitcoin and I am in agreement with essentially everything else you said.

  • Zippy says:

    That property has greater or lesser utility based on context is uncontroversial.

  • Josh, note that according to Aquinas (Summa Theological, II-II, 77.1) the just price of a thing depends not on its usefulness to the buyer, but on the cost of its production or the harm which would occur to the seller by its loss.

  • vishmehr24 says:

    Is second law of thermodynamics applicable in economics? Can it be stated in economic terms?

  • Josh says:

    zippy,

    Why can’t piece of property have utility as money depending on context thus justifying the higher price in a way that doesn’t depend on “greater fools” or irrationality?

  • Zippy says:

    Josh:
    Because money gets whatever value it has – whatever anchor in reality it has – from either its non-money utility or by reference to property other than itself. The former is true of precious metals, and the latter is true of currency and bank deposits.

    The idea that money is valuable for its utility as money, without reference to any other property, is obviously circular.

  • fjwawak says:

    The term “money”, then, does not really describe a specific thing or class of things. It describes a role that some property takes on, some of the time, in economic life.

    For me that has clarified the question of money even more.

  • ignacy says:

    Zippy,

    You state that:

    All exchange is barter.

    True, all transactions are essentially exchanges of one good for another, and I’m agnostic on the distinct ontological status of money qua money, but monetary transactions have a some additional practical qualities that are different than those which are most commonly referred to as barter. The first one is that in monetary transactions there is a unit of account, or numeraire, involved, which is most often absent in a barter transaction. This unit of account usually serves as a measure of value. Secondly, monetary transactions involve a medium of exchange, which is not valued for its intrinsic qualities, but precisely for its ability to account for value and for further exchange.

    Because money gets whatever value it has – whatever anchor in reality it has – from either its non-money utility or by reference to property other than itself.

    What about liquidity premium, then? Obviously, more liquid asset will have a higher price than less liquid one, e.g. on-the-run 30-year Treasuries vs. off-the-run Treasuries spread is not explained by difference in accrued interest. I presume you are aware of the significance of such effects, but I don’t really understand why you insist that only intrinsic value (or, to put it in another way, the value which would remain if all markets were immediately closed afterwards) should be taken into account, while clearly something being money does imply some additional utility, namely the ability to engage in future transactions more swiftly.

    The idea that money is valuable for its utility as money, without reference to any other property, is obviously circular.

    It isn’t. If I evaluate an asset for its utility as money, I base my evaluation on the estimation of its future money-like qualities (and these estimations are usually based on past performance and past qualities of that asset). So there is neither synchronicity nor circularity in valuing money based on its liquidity or breadth of liquidity effects. True, to gain liquidity, an asset hase to have non-monetary utilities somewhere at the beginning, but this doesn’t imply that that asset derives its current value solely from that.

    What’s more, it may need to have only the resemblance of value – e.g. it may be pumped, mass-distributed or so, just as it was in the case of Bitcoin, which definitely was only a set of cryptographically authenticated records of wasted computation circa 2009, but now it is worth much more than that. If you start a blockchain, with the same mechanisms, or even fork the Bitcoin blockchain, it will be worth zero, but it doesn’t prove the zero value of Bitcoins, which now comes from the significant network effects combined with monstrous hashing power, amounting to the Bitcoin’s blockchain records being extremely credible.

    Finally, contrary to your theory, stated elsewhere, which says that the value of fiat dollars as money comes from them being tax vouchers, I have never seen taking that into account when assessing fundamental value of currency (e.g. by FX markets analysts). I’m sure that some value comes from this ‘tax voucher’ fact, but it’s far from clear that it is the only source.

    Moreover, there is at least one example of currency, which although started as a ‘tax vouchers’, was subsequently disowned but nevertheless functioned as medium of exchange. This was Iraqi’s so-called “Swiss” dinar. To quote,

    Despite having been forsworn by the CBI, Swiss dinars did not become valueless. Along with US dollars, they continued to be used as a medium of exchange in northern Iraq. The fact that Swiss dinars were fixed in supply — the Kurdish government did not attempt to print new notes — helped sustain their price. Through the 1990s and early 2000s, the value of the Swiss dinar actually increased.

    Again, I find it hard to believe that you, given your financial knowledge, are unaware of at least some of the arguments I listed above (which are attempts to state more or less the same viewed from different angles), so there may be some fundamental misunderstanding going on.

    P.S. Apologies for double-posting, the lack of preview significantly impairs my ability to post well-edited comments.

  • Zippy says:

    ignacy:

    The first one is that in monetary transactions there is a unit of account, or numeraire, involved, which is absent in a barter transaction.

    Quantity isn’t absent in barter transactions. 5 shares of Google for one motorcycle is no less quantitative than a barrel of apples for a half barrel of oranges, or 5 dollars for one Starbucks latte.

    This unit of account usually serves as a measure of value. Secondly, monetary transactions involve a medium of exchange, which is not valued for its intrinsic qualities, but precisely for its ability to account for value and for further exchange.

    That is the mythology. It is arguable though that the less people think about the measure itself as money (thereby distorting the measure itself through their collective illusions), the more accurate the measure. I’ve mentioned the Big Mac Index before, for example.

    What about liquidity premium, then? Obviously, more liquid asset will have a higher price than less liquid one, …

    Sure. I’ve discussed that before, when I described why PC tyranny is good for big business and bad for small ongoing concerns, because it creates liquidity in ‘human resources’.

    I don’t really understand why you insist that only intrinsic value (or, to put it in another way, the value which would remain if all markets were immediately closed afterwards) should be taken into account

    I don’t insist on that. I insist that all of the value of bitcoin and the like is fashionable bubble hype layered over authenticated records of wasted computation.

    True, to gain liquidity, an asset has to have non-monetary utilities somewhere at the beginning, but this doesn’t imply that that asset derives its current value solely from that.

    Right. Different kinds of property have varying degrees of liquidity[1] and therefore perform the ‘money’ function more or less often, better or worse, etc. Securities by their nature tend to be used as money more often than fixed property precisely because of liquidity.

    It is true that ignorant people will sometimes continue to trade in something even after that something has become objectively worthless, or when it has always been worthless from the beginning. This is the ‘greater fool’ effect.

    [1] UPDATE: And uniformity for that matter, two apples being more alike than two motorcycles, deposits at different banks with $100 face value being even more alike still, and two shares of GOOG or two $100 deposit accounts at the same bank being about as close to identical as particulars can be.

  • Zippy says:

    ignacy:

    P.S. Apologies for double-posting, the lack of preview significantly impairs my ability to post well-edited comments.

    No problem. I responded to the first one, so hopefully I didn’t miss anything crucial.

  • ignacy says:

    Zippy,

    It is true that ignorant people will sometimes continue to trade in something even after than something has become objectively worthless, or when it has always been worthless from the beginning. This is the ‘greater fool’ effect.

    I think that I begin to understand what you mean. To paraphrase your argument, you state that indeed there may be some liquidity premium on otherwise intrinsically valuable asset (and the more uniform or fungible asset, the greater the premium can be), but one this liquidity premium is attached to to completely worthless assets (or significantly exceeds its intrinsic value), then it becomes the ‘greater fool’ effect.

    Assuming that I paraphrased you correctly, this implies that the difference becomes merely in degree, not in kind. This may also ignore the fact that our estimations of the liquidity premium may be incorrect in plus as well as in minus, and that liquidity effect may be so stable and strong that even when the underlying asset to which it is attached is intrinsically worthless, the trading in that asset does not resemble the ‘greater fool’ trading commonly observed during bubbles.

    I chose to say that an asset may be ‘intrinsically’ (rather than ‘objectively’) valuable, as I aim to point that liquidity premium, although extrinsic to the asset’s qualities, is real and no less objective than, say, asset’s convertibility (or lack thereof). It will certainly depend on the asset’s intrinsic properties, but ultimately depend on the market (or ‘network’) in which it is traded (that is, on quality of that market, quality of participants, market makers etc.), which is the source of its liquidity.

    To continue my paraphrase of your words, you would probably reply: “sure, the market may be very good and liquid, but if it’s trading in something worthless, then it is a clear sign of irrationality of its participants”. To that I respond that it may be also a sign that the asset traded isn’t really worthless and you may be mistaken in your assessments.

    Bringing this back to Bitcoin, an asset may be worthless at the beginning (or in Bitcoin’s case, very close to worthless), but it doesn’t mean that it is worthless now. Blockchain filled with records from about 7 years and backed by enormous computational power is different than the just-started blockchain. The difference is in degree, sure, but it is plausible that even an empty blockchain has tiny albeit non-zero value, just as, say SWIFT network setup is worth something even if no bank actually uses it.

  • Zippy says:

    ignacy:

    Assuming that I paraphrased you correctly, this implies that the difference becomes merely in degree, not in kind.

    Sure. The colloquialism ‘bubble’ doesn’t imply that the property traded doesn’t exist at all. It implies that the property traded is priced far out of proportion to its actual worth. (This presupposes metaphysically that there can be a difference between the current market price of some property and the actual worth of that property. I presume that nobody is going to deny the occurrence of asset bubbles).

    … liquidity effect may be so stable and strong that even when the underlying asset to which it is attached is intrinsically worthless, the trading in that asset does not resemble the ‘greater fool’ trading commonly observed during bubbles.

    Until it pops, sure. Investors in ponzi schemes and the like have to assume that they will get their money out before the music stops, and it is notoriously difficult to predict just when bubbles will pop.

    This of course raises both ethical and financial issues. The fact that someone is willing to buy something from you for a price does not in itself justify selling it to him at that price.

    To that I respond that it may be also a sign that the asset traded isn’t really worthless and you may be mistaken in your assessments.

    Being human, I can always be mistaken about pretty much anything. But I would counter that the fact that some people happen to be buying and selling authenticated records of wasted computation for a particular price is as likely to constitute evidence of their financial stupidity as it is to constitute evidence that the combination of ARWC’s intrinsic value with a liquidity multiplier is in fact worth what they think it is worth.

    Blockchain filled with records from about 7 years and backed by enormous computational power is different than the just-started blockchain.

    Sure. It is an authenticated record of a great deal of electricity converted into heat by overclocked silicon.

  • ignacy says:

    This presupposes metaphysically that there can be a difference between the current market price of some property and the actual worth of that property. I presume that nobody is going to deny the occurrence of asset bubbles

    Obviously I do not deny the existence of asset bubbles, but “nobody” is a too strong qualifier.

    Sure. It is an authenticated record of a great deal of electricity converted into heat by overclocked silicon.

    I should have stressed that by enormous computational power I mean current (and estimated) computational power which guarantees that the subsequent new records in the ledger will be very credible and irreversible.

    Until it pops, sure. Investors in ponzi schemes and the like have to assume that they will get their money out before the music stops, and it is notoriously difficult to predict just when bubbles will pop.

    Still, we have to be somehow able to make a difference between unstable level of the liquidity premium (aka ‘bubble’) and a stable (or long-term, or fundamental, or objective) level.

    This of course raises both ethical and financial issues. The fact that someone is willing to buy something from you for a price does not in itself justify selling it to him at that price.

    True enough. That’s why I try to dig into this ‘liquidity’ question in general and Bitcoin in particular. Perhaps you could, by the way, share your thoughts on just price theory/theories?

    To restate my position:
    1) it is possible that an asset has an objectively justified liquidity premium,
    2) to say that an asset price is irrationally high (or that there is a bubble), is to say that it is beyond its intrinsic value as well as its stable level of liquidity premium,
    3) Bitcoin may or may not be a bubble (personally, I believe it isn’t now – though it used to be multiple times – given that its price behavior is manifestly different than bubbles known to me), but its intrinsic value is higher than zero and its fundamental level of liquidity premium is also higher than zero.

  • Zippy says:

    ignacy:

    Obviously I do not deny the existence of asset bubbles, but “nobody” is a too strong qualifier.

    I should have said ‘nobody sane’.

    I should have stressed that by enormous computational power I mean current (and estimated) computational power which guarantees that the subsequent new records in the ledger will be very credible and irreversible.

    As far as I know, bitcoin does not represent legal title to a distributed data center nor legal entitlement to the continued operation of any specific hardware owned by others.

    Various people own their various systems independent of their ownership of bitcoins, and it is a basic error to conflate the two.

    Still, we have to be somehow able to make a difference between unstable level of the liquidity premium (aka ‘bubble’) and a stable (or long-term, or fundamental, or objective) level.

    One of my own heuristics is that when the property in question is worthless in itself, any liquidity multiplier is just multiplication by zero. Property that is essentially trash in itself selling for non-trash prices confirms an irrational liquidity premium.

    Perhaps you could, by the way, share your thoughts on just price theory/theories?

    As far as I can tell our situation is the following:

    A) There is such a thing as both just and unjust pricing in particular cases.

    B) A general theory which provides a sufficient description of when prices are just or unjust in general does not exist.

    I can give examples of just and unjust pricing, much as I can give examples of cats and dogs. So the distinctions are real. But see (B), and this post.

    1) it is possible that an asset has an objectively justified liquidity premium, …

    Agreed.

    2) to say that an asset price is irrationally high (or that there is a bubble), is to say that it is beyond its intrinsic value as well as its stable level of liquidity premium,…

    That depends in part on what you mean by “stable”, I suppose. Though I probably shouldn’t even grant that much.

    Human beings have a thoroughly demonstrated capacity to persist in irrationality for quite a long time, generations even, both as individuals and as communities. So the simple fact that an insane idea persists over some period of time (e.g. the pricing of bitcoins by the self-selected group of people who trade in them) does not mean it is not insane. See (e.g.) Islam, liberalism, etc.

    In general the idea that stability in price confirms objectively rational economic valuation is just wrong, as far as I can tell. Keynes (IIRC) was quite right that the market can stay irrational for a lot longer than one can stay solvent, and that in the long run we are all dead; though I almost certainly disagree with the bulk of the prescriptive conclusions he draws from those observations.

  • vishmehr24 says:

    Zippy,
    If paper money is a security–and represents claims on the real property-as it is indeed declared on the paper itself-then govt printing more paper money leading to the diluation of the claim is a fraud.
    Now, the principle is that the lender should be made whole. But how could he be, if one insists that one would replay 100 paper dollars borrowed in 1980 with exactly 100 paper dollars in 2016?

    Your oft-repeated complaint of “usorious mindset” is revealing. Does the sin of usury not exist in the world today that you have to talk not about the actual usuers but merely about the usorious mindset (which is no sin).
    In your pictures, the borrowers commiit no sin, being just victims. And the lenders are institutions hence no person is actually guilty of the sin of usury. Then why should Church spend its breath on a sin that no one committs?

    Your attack on the usourius mindset itself is strawmannning. These people are not after preservation of their property but against the depradations of a self-aggrandizing govt that has not their best interests in mind.

  • Zippy says:

    vishmehr24:

    … then govt printing more paper money leading to the diluation of the claim is a fraud.

    I’ve explained many times why that is not (necessarily) the case: why it depends upon what the printed money is used to buy.
    Does Google always and necessarily commit fraud or do other wrong when it issues new shares of Google stock?

    Does the sin of usury not exist in the world today that you have to talk not about the actual usuers but merely about the usorious mindset (which is no sin).

    There is plenty of actual usury in the world today, as I have explained many times. There are also many people who feel entitled to the preservation of the purchasing power (based on some unspecified measure) of their property, and are filled with high dudgeon that the purchasing power of their property (as long as it is ‘money’) often erodes.

    Finally, the principle in mutuum lending is that it should only be done as charity or friendship: it is a gift, not a financial investment. ‘Friendship’ as financial entitlement which hedges against inflation or other property value fluctuations is no friendship at all.

  • Zippy says:

    If you want to hedge against inflation you should do so by purchasing property, not by making mutuum loans. The idea that you ought to be able to hedge against inflation by making mutuum loans arises from a usurious mentality: it is one step prior to actually committing usury, that is, actually making an interest bearing mutuum loan.

    Consider divorce. The idea that you ought to be able to divorce if you are unhappy is a “divorce mentality”. And the idea that you are entitled to interest on mutuum loans – for any reason at all other than borrower fraud or other crimes committed by the borrower – is a “usurious mentality”.

  • vishmehr24 says:

    Zippy,
    “Does Google always and necessarily commit fraud or do other wrong when it issues new shares of Google stock?”

    It has no bearing on whether Govt committts a fraud by printing money.
    For one thing, nobody is obliged to buy Google stock but people are obliged to use Govt money. And that Govt money is simply not analogous to Google stock and that govt is analogous to Google is simply an inadequate view of Govt.

  • Zippy says:

    vishmehr24:
    I’m not seeing any evidence that you understand what you are criticizing.

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  • […] A ‘gold standard’ dollar is the same kind of thing.  It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed to the sovereign, in particular tax liabilities[2].  The difference is that the gold standard irrationally presupposes that a substantial portion of the sovereign balance sheet must or should be made up of gold — an otherwise not very noteworthy kind of property, property which while fairly durable sits unproductively in a vault where it destroys economic value in the demands that it places on its defense and maintenance against the universal tide of entropy. […]

  • TomD says:

    Note that the inherent valuelessness of ARWC doesn’t mean that value cannot be imparted; if the sovereign announced that he would accept ARWC for taxes, it would become a form of digital paper; digital fiat.

  • Zippy says:

    TomD:

    I suppose the sovereign could in theory agree to accept counterfeit securities produced by private parties through a digital ‘mining’ operation. But why would the sovereign want to do that? Why would a company agree to honor stock certificates issued by private unaffiliated individuals, through whatever process?

    I expect that counterfeiting (and this would be a species of counterfeiting) is intrinsically unjust, even when the wronged party agrees to it, for reasons similar to why usury is intrinsically unjust. Impairing the sovereign balance sheet in return for nothing whatsoever is a different species of selling what does not exist.

  • TomD says:

    I think there might be cases where the sovereign could do it (impair the sovereign balance sheet) to respond to an injustice – it’d be convoluted but something like the citizenry being obsessed with bitcoins so the sovereign decides to backstop them to some point, just as a sovereign can decide to redeem a counterfeit bill that a poor man received; it’s an act of charity. Perhaps even something like TARP was similar.

    Still highly unlikely, though. Much more likely would be a country creating it’s own blockchain currency, pre-mining it 100%, and then using it as digital cash – boom: non-counterfeitable digital currency!

  • ignacy says:

    Zippy:

    Imagine a physical commodity like gold, but not shiny enough and with little industrial uses – shells, maybe? For some reason it gained liquidity so great (compared to its intrinsic value) that people use it as a medium of exchange in paralell to sovereign-issued tax vouchers. They of course quote prices in sovereign currency and the exchange rate between shells and money of course is flexible.

    Imagine the sovereign wishes to print his own tax vouchers on those shells, seeing how liquid they are. Thus, he fixes the exchange rate and the shells become money. The process is analogous to printing tax vouchers on gold coins save the quantitative difference in proportion of intrinsic value to liquidity premium, so I don’t see why this unjust or even intrinsically unjust.

    Now, assume sovereign begins to accept shells in settlement of tax liabilities at the market value of the shell (or at some discount of it). Itdoesn’t seem intrinsically unjust as well, since the shells can be liquidated at market price instantly, not impairing the balance sheets.

    And I don’t see how any counterfeiting could take place in the process of people trying to search for the shells on their own in both scenarios (even gold mining was not banned in the times of the gold standard).

    Tl;dr I don’t think how the argument against ARWC does not generalize into the argument against commodity money in general (not that I’m advocating commodity money).

  • Zippy says:

    ignacy:

    Tl;dr I don’t think how the argument against ARWC does not generalize into the argument against commodity money in general (not that I’m advocating commodity money).

    If the term “commodity” is used in such a way as to disconnect its price entirely from objective reality, then sure.

    But it seems that acting on a disordered preference, and encouraging others to do so, are genera of intrinsic immorality.

  • TomD says:

    The argument that ARWC uses insane amounts of energy has to be weighed, too. Even things that are not intrinsically immoral can become immoral if paying the cost would be bad stewardship.

  • ignacy says:

    Zippy:

    I have already stated that argument here, but maybe it is worth presenting again, in a different light.

    Blockchain-based proof-of-work crypto assets (or ARPCs, Authenticated Records of Past Computation – I conceded the “W” too quickly) have objective properties that make very convenient medium of exchange. To function as a medium of exchange, a commodity does not have to have significant intrinsic value in comparison to its liquidity premium. The important thing is the short-term stability (or predictability) of the liquidity premium.

    Criticizing this concept of stable liquidity premium, you pointed to persistent irrationalities like islam. I suppose we could run this analogy for a while. Learning the tenets of Islam and reading the Quran may be necessary (or at least beneficial) for interacting with Muslims. One does not have to believe what Islam says (i.e. make use of intrinsic value of Islam) in order to use its metaphors or Quran stories or so in social interactions (transactional value).

    TomD:

    Regarding the electricity costs, actually were these lower, the network transactions would be much less secure. In fact, if bitcoin mining consumed 51% of total world energy, then the transactions would be perfectly immutable 🙂

  • Zippy says:

    ignacy:

    To function as a medium of exchange, a commodity does not have to have significant intrinsic value in comparison to its liquidity premium.

    I understand the argument; I just don’t buy it.

    It is not morally licit to sell a commodity (or any property) for an unjust price in the first place. That a particular market may support (in a particular place at a particular point in time) selling intrinsically worthless trash in exchange for actual property with actual use value doesn’t justify doing so any more than conversion to Islam is justified by concomitant social status in a particular place and time.

    Property has value because it is useful. If X has literally no use value other than the subjective willingness of some group of other people to give you their actually valuable actual property and labor in exchange for X, then it is unjust to give them X in exchange for something which has actual use value. Their willingness to make the exchange doesn’t make the exchange just, and the fact that they are likely to find a buyer themselves (unless the bubble pops) doesn’t make the exchange just.

    In general, purely subjective theories of just price are wrong.

    If blockchain based electronic ledger entries were used to record and authenticate actual securities backed by actual property it would be a different story, but we aren’t talking about blockchain authenticated securities here: we are talking about literally empty blockchain ledger entries with no referent content whatsoever.

  • KevinD says:

    “Regarding the electricity costs, actually were these lower, the network transactions would be much less secure. In fact, if bitcoin mining consumed 51% of total world energy, then the transactions would be perfectly immutable”

    If I’m trying to keep a secret, murdering everyone who knows it, myself included, guarantees that it’s kept. The efficacy of a method does not excuse evils done making it so efficacious (such as murder or bad stewardship).

  • Mike T says:

    It’s all moot anyway about Bitcoin because China just became the first wealthy country to remind cryptonerds that a $5 wrench beats 4096bit encryption every time.

  • Mike T says:

    The only thing worse than using unsanctioned crypto in North Korea is using it and forgetting your key.

  • ignacy says:

    I’d like to make it clear that I do not advocate subjective just price theories or subjective value theories (at least intentionally).

    I claim that transactional utility is objective on its own, liquidity premium is real and so on. I also claim that liquidity premium is valuable in itself, not merely as multiplication of intrinsic value (perhaps this is the central disagreement between us).

    Naturally, I also believe that market price can be too high relative to it’s liquidity premium.

  • Zippy says:

    ignacy:

    … liquidity premium is valuable in itself, not merely as multiplication of intrinsic value (perhaps this is the central disagreement between us).

    Yes I definitely disagree with that. Liquidity (ease of sale in some marketplace) is not essential to property in itself: it is accidental to property. Liquidity is a feature of markets, not of property.

  • TomD says:

    Liquidity can be a huge multiplier, but it can’t multiply zero to any effective value.

  • ignacy says:

    Yes, l agree that liquidity is accidental to the property and is the feature of the market.

    In this sense, there is a (decentralized) Bitcoin market, first bootstrapped by satoshi and early adopters, now ran by core Dev team, miners and other stakeholders. Bitcoin is a token to trade on this market. For a while, there were mainly illicit goods offered there but now these are about 5% of all activities only. Even the fact that criminals accept BTC should ring the bell that Bitcoin is not worthless. BTC markets enable trade that would not be possible without it.

    However, of you don’t buy the argument in this form, consider Ethereum, blockchain proof-of-work crypto asset that has real world utility (namely as a fuel for running dispersed apps). Does this in your view suffice to have something to be multiplied by liquidity?

  • TomD says:

    A worthless thing can have value (something with no inherent worth can be barterable) – such as evil (arsonists valuing arson, or usurists valuing usury).

    The reason criminal activity only applies to 5% of the blockchain now is that it’s become quite the “investment”. Ethereum does seem to have a purpose in that it has made ponzi schemes and scams purely transparent. Zippy’d probably have a heart attack if he read up on how people are treating ICOs as “venture capital.” Or maybe not, he’s used to pure anti-realism.

    Using bitcoin as a medium of exchange where both parties get out of it as fast as possible might be moral; but trying to convince people to “hold” bitcoin itself because it’ll be worth more in the future, that’s frightening to me (I think there are similar arguments to be made about some other famous commodities, too). One of the subtle errors of our generation is the ease of investment in unsuitable investments.

  • ignacy says:

    I want to make it clear that I’m not advocating holding Bitcoin not advocating Ethereum usage (I know that currently it’s basically a scam enabler, however interesting the concept of smart contracts – that gives it it’s objective use value – are in theory). I am trying to prove a general point regarding theory of money and markets and put my ideas to test in front of minds better than mine.

    Happily seeing TomD concession about possible legitimacy of using BTC as medium of exchange, let me ask if the same applies to holding BTC as a form of cash balance i.e liquidity reserve?

  • ignacy says:

    I wrote:

    Yes, l agree that liquidity is accidental to the property and is the feature of the market.

    To be more precise, I believe there are goods essential to the markets, namely the goods which serve as the established medium of exchange (the goods that are used to settle the transaction fees) and that serve as unit of account for such purpose. I see Bitcoin as such a good, that’s why I think that it can enjoy the licety of the market’s liquidity premium.

  • Zippy says:

    Ignacy:

    Again I think treating exchangeability / liquidity in itself as something intrinsically valuable is just false. If bitcoins have objective value it cannot be because of their liquidity simpliciter. Liquidity in a particular market for a particular good adds value to that already valuable good, but there is no distinct value-essence in liquidity per se.

    So selling bitcoins is, I propose, a different species of selling what does not exist and is thus intrinsically immoral. If rent on a personal IOU is unjust because it is charging rent for the use of non-property, then exacting a price in actual property for bitcoin is similarly unjust because it is selling non-property.

    A liquidity premium charged against non-property is no more justifiable than a rental fee for the use of non-property.

  • ignacy says:

    Actually, Bitcoin has objective use value as an immutable time-stamping service for documents, messages etc. It is obviously not significant compared to it’s price, but the zero intrinsic value argument I believe falls.

    Also, to illustrate my point about market goods essential for markets consider market for widgets not available anywhere else, which issues non redeemable tokens as means to pay for goods and pay for transaction fees. Does your reasoning apply here as well?

  • donnie says:

    Liquidity in a particular market for a particular good adds value to that already valuable good, but there is no distinct value-essence in liquidity per se.

    Zippy, could you expand on why this is true in your view?

    For people living in developing countries, it would seem the liquidity of a cryptocurrency like is Bitcoin is certainly worth something in and of itself. In a place where sovereign-issued fiat dollars are worth next to nothing, the liquidity of something like Bitcoin provides those people with an opportunity to perform transactions (including cross-border transactions) and generate a livelihood for themselves.

    It would seem to me that in places where the sovereign has failed in its duty to provide a stable fiat currency, the liquidity of a cryptocurrency becomes objectively valuable for those trading within that sovereign’s markets. I don’t suppose you would agree with that but I am interested to know why.

  • Zippy says:

    ignacy:

    Bitcoin has objective use value as an immutable time-stamping service for documents, messages etc.

    Not qua Bitcoin it doesn’t. Digital authentication is useful independent of bitcoin. (See my discussion of alternative uses of pornography below).

    … consider market for widgets not available anywhere else, which issues non redeemable tokens as means to pay for goods and pay for transaction fees. Does your reasoning apply here as well?

    If I understand the scenario you propose, the tokens are a security issued by the owner of the marketplace — much like fiat dollars or coupons issued by Disneyland for use in Disneyland.

    Bitcoins aren’t a security.

    donnie:

    Liquidity in a particular market for a particular good adds value to that already valuable good, but there is no distinct value-essence in liquidity per se.

    … could you expand on why this is true in your view?

    Sure.

    There is always an inextricably objective value to any actual property. In some cases that value is negative, which is to say that the property ought to be destroyed: this is the case for pornography, for example.

    Now the fact that pornography might be very liquid in a particular marketplace — in prison for example — and therefore useful as currency, does not justify giving it to someone else in exchange for something actually valuable.

    Now it is also possible that pornography might be repurposed to some other use in special circumstances (e.g. see Ignacy’s claim that bitcoin is useful as digital authentication). Maybe inmates are passing important messages hidden in Playboy magazines.

    But this doesn’t justify the claim that pornography is valuable because it has liquidity or because it has alternative uses, and the same thing applies to Bitcoin. The primary use of bitcoin is to trade worthless authenticated records of wasted computation — empty digital ledger entries with no referent security property — for real valuable goods and services.

    My argument is that this usage is immoral, as a species of selling what does not exist.

    In fact I would argue that it is also immoral because it is scandalous, inasmuch as its use spreads and perpetuates metaphysical anti-realism about property and economic value.

    It would seem to me that in places where the sovereign has failed in its duty to provide a stable fiat currency, the liquidity of a cryptocurrency becomes objectively valuable for those trading within that sovereign’s markets. I don’t suppose you would agree with that but I am interested to know why.

    Because the fact that someone is willing to buy something from you is not in itself sufficient justification for you to sell it to him. For the sale to be just the item you sell must be actually worth what you charge for it.

  • ignacy says:

    Zippy:

    Not qua Bitcoin it doesn’t. Digital authentication is useful independent of bitcoin. (See my discussion of alternative uses of pornography below).

    I’m not speaking of digital signatures or authentication. I’m speaking of time-stamping with specific block height in an immutable and trustless (or, precisely speaking, with a distributed trust) way. This is a unique feature of external-cost-based proof-of-work blockchain, of which Bitcoin is first and most known example. Note that the strength of this feature is not replicable by running your own separate blockchain not forking Bitcoin, since it is the hashpower that was “wasted” is the measure of the credibility of the specific timestamp.

    Actually, this discussion seems very beneficial regardless of our substantial disagreement, since your take on the subject is extremely insightful.

    I’m now starting to think that the above-mentioned feature is not just a byproduct, but was essential to launching of Bitcoin and its usefulness in transactions. After all, the most valuable data to be immutably time-stamped are the transactions themselves.

    Regarding the Bitcoin as a not security (I agree):
    What if coupons to Bitcoin land are issued in a distributed way? Do these securities have to point to specific balance sheet? In my example irredeemable tokens were not claims to the balance sheet, but only bearer options to transacting in the market. I see almost complete analogy here (the unique good sold in the market is the time-stamping feature apart from other goods offered for BTC), save the distributed issuer thing.

  • ignacy says:

    Regarding the Bitcoin as a not security (I agree):

    Actually, I don’t know if I agree, and my previous comment probably reflects that. It was more like consciousness stream than definite statement 🙂

  • Zippy says:

    ignacy:

    Note that the strength of this feature is not replicable by running your own separate blockchain not forking Bitcoin, since it is the hashpower that was “wasted” is the measure of the credibility of the specific timestamp.

    All that that implies though is that it might be morally licit to fork bitcoin and use the fork for that purpose independently of bitcoin, for a fair price. It doesn’t imply that using bitcoin as it is designed and intended to be used is morally licit.

  • Zippy says:

    As a parallel observation, the fact that it might be licit to (say) burn pornography for heat in a cold winter, and even to trade pornography as fuel in exchange for food in a cold winter, doesn’t imply that pornography is licit qua its designed and intended purpose.

    More generally the fact that we can imagine alternative uses for a thing does not justify the production and trade in a thing for its particular intended purpose. That sort of casuistry is completely invalid from the get-go, and any argument which rests on that sort of casuistry is thus invalid.

    And your argument supporting the liciety of trading bitcoins for valuable goods and services at its current price rests on just this “alternative use” fallacy.

  • Mike T says:

    I’m not speaking of digital signatures or authentication. I’m speaking of time-stamping with specific block height in an immutable and trustless (or, precisely speaking, with a distributed trust) way. This is a unique feature of external-cost-based proof-of-work blockchain, of which Bitcoin is first and most known example. Note that the strength of this feature is not replicable by running your own separate blockchain not forking Bitcoin, since it is the hashpower that was “wasted” is the measure of the credibility of the specific timestamp.

    True, but it is not very scalable which is why its primary value would be authenticating particularly important messages.

    What people seem to be missing about blockchain is that it is fundamentally just a type of database. A really cool, really libertarian database. That’s what a distributed ledger really is. It’s an immutable database that doesn’t require trust.

    Consequently, this is why I think a lot of people obsessed with BitCoin are running into irrational exuberance. When you don’t know much of anything about the underlying tech, it’s all magic which breeds magical thinking. Hence my comment above about China. There are a lot of cryptonerds in Asia who may soon discover that the PRC has seized all of the records at the exchanges and is positioning itself to cost-effectively beat a 4096bit algorithm with a $5 wrench. Sure, they’ll never be able to build a big social graph, but they’ll be able to build something out of that data and again, they have plenty of $5 wrenches and men to wield them.

  • ignacy says:

    Zippy:

    All that that implies though is that it might be morally licit to fork bitcoin and use the fork for that purpose independently of bitcoin, for a fair price. It doesn’t imply that using bitcoin as it is designed and intended to be used is morally licit.

    False, if you form Bitcoin you’ll get just an empty, near-worthless blockchain. You need the Bitcoin hashpower to have comparably credible time-stamping.

    And your argument supporting the liciety of trading bitcoins for valuable goods and services at its current price rests on just this “alternative use” fallacy.

    No, the fact that my argument seems like casuistry is the effect of me building it in the course of our discussion, amplified by my lack of arguing skills. I Intuit that trading Bitcoin is categorically different thing than trading worthless assets or duping people into Ponzi and dig out why only later on.

    The full argument is as follows:

    1. Bitcoin is has intrinsic value, which allowed it to be bootstrapped and allowed to build a market around it.
    2. On that market, its value is multiplied significantly due to its attractive moneylike qualities, similarly to e.g. shell money
    3. The Bitcoin value is not (manifestly, like orders of magnitude) above it’s justified liquidity premium since there is positive feedback loop between its intrinsic value and its transactional utility. This is because price growth entices new miners which in turn make the blockchain more secure.

    Mike T:

    What people seem to be missing about blockchain is that it is fundamentally just a type of database. A really cool, really libertarian database. That’s what a distributed ledger really is. It’s an immutable database that doesn’t require trust.

    Indeed, blockchain in itself is just a database. I’m not discussing blockchain, I’m discussing proof-of-work blockchain in general and Bitcoin in particular. It is true that it has much libertarian hype around it, which I don’t buy. It is not true that it is trustless, it just allows for better trust allocation (it’s not possible to conduct social interaction without trust, the question is whom to trust and Bitcoin helps with that).

  • Zippy says:

    ignacy:

    If the primary, intended, common use of bitcoin were to timestamp and authenticate (reliably record in a ledger) a transaction in other goods — where each party traded something other than bitcoin itself — then the argument that bitcoins have value might have legs. As it is the argument goes nowhere, since that just isn’t the use case for bitcoin (just as the use case of pornography is not to be prison currency).

    A computer system which reliably and transparently keeps track of transactions in other goods is valuable.

    But that (again) isn’t what bitcoin is. Bitcoin is a distributed ledger system which reliably and transparently tracks the trading of nothing at all other than the ledger entry itself in exchange for real goods and services.

    Nobody sane would confuse the title to a car for the car itself; nor would a sane person confuse titles to nothing at all with a title to a car.

    But when it comes to bitcoin metaphysical anti-realism makes many people insane: it makes folks believe that faux-titles to no actual car, electronic monopoly money with no entitlement to settle public debts, that ledger entries with no accompanying legal title to any property or service whatsoever, have the financial characteristics and value of real titles or real (sovereign or other balance sheet backed) currency.

    People who pay thousands of dollars for an electronic ledger entry entitling the ‘owner’ to nothing whatsoever are acting irrationally. And people who do so in the hope of later selling that entitlement-to-nothing to some other person, in exchange for actually valuable property, act immorally.

    The essence of bitcoins is to be an electronic ledger entry with no accompanying entitlement at all. It is – much like a personal IOU – neither a security nor a commodity.

  • donnie says:

    If the primary, intended, common use of bitcoin were to timestamp and authenticate (reliably record in a ledger) a transaction in other goods — where each party traded something other than bitcoin itself — then the argument that bitcoins have value might have legs.

    But the primary, intended, common use of US fiat dollars is not to pay taxes, it’s to facilitate the exchange of goods and services. Yet US fiat dollars still gain inherent value by virtue of the fact that they are necessary to pay taxes in the US. Couldn’t cryptocurrencies gain inherent value by virtue of the fact that they are needed for something else that is valuable, even if that use isn’t their primary intended purpose?

    (just as the use case of pornography is not to be prison currency).

    I don’t grasp the similarities with using porn as prison currency. Creating/viewing/owning pornography is intrinsically immoral. Presumably mining/owning a bitcoin would not be intrinsically immoral even if it were useless.

    What about a prison that enforced a harsh no smoking policy, yet prisoners still used cigarettes as currency. The cigarettes have no value to the prisoners except in their capacity to facilitate exchange of goods and services within the prison. Would that be immoral?

  • Mike T says:

    If it weren’t for the exchanges, BTC would have never gotten anywhere. The only reason the vast majority of users put any real stock in it is because they can use dollars, Euros, etc. to buy it and then cash out back into those currencies later.

    Aside from the liberal bias, this is a decent article on some of the pitfalls of blockchain WRT the libertarian dreams about it. TL;DR like a lot of things, those with the money to throw at something like BTC turn out to be the ones that can control its future.

    A similar issue arose with TOR; turns out that if you can afford to drop millions of dollars on AWS you can build enough TOR exit nodes that you can effectively surveil a large percentage of TOR’s traffic which is something the FBI realized to their great joy.

  • TomD says:

    If bitcoin has “inherent value” then all the shitcoins would have inherent value, too. But if the “inherent value” of bitcoin depends on the hashpower, then it’s not inherent (and that hashpower will disappear or switch to another coin when it makes more money).

    But it does leave us with the ability to charge usury denominated in bitcoins, which is like selling what is not squared. Ain’t capitalism grand?.

  • Zippy says:

    donnie:

    But the primary, intended, common use of US fiat dollars is not to pay taxes, it’s to facilitate the exchange of goods and services. Yet US fiat dollars still gain inherent value by virtue of the fact that they are necessary to pay taxes in the US.

    I don’t think you have an adequate grasp of what fiat dollars are as a security. The primary use of US fiat dollars is exchange in US markets, backed by the balance sheet of the US government. I would just suggest that you take the time to more fully understand this post.

  • Mike T says:

    TomD,

    But if the “inherent value” of bitcoin depends on the hashpower, then it’s not inherent (and that hashpower will disappear or switch to another coin when it makes more money).

    The hashpower cannot be separated from user involvement with BitCoin, so I don’t think that is a valid counter-argument because that would apply to any currency or pseudo-currency. Even with sovereign-issued currency, the tax power can only confer value to the extent the public actually submits to the tax power and chooses to use the currency.

    I don’t know if you’re aware of this, but the official currency of Ecuador is the USD. If a revolutionary government came in tomorrow and tried to create a new “Ecuadorian Peso,” most of the public would snicker and keep on using the USD and the new Peso would be worthless because user involvement is just not there.

  • Zippy says:

    If we assume that the Ecuadorian government had the power to enforce its laws it could require taxes to be paid in EP, pay government employees in EP, and take various other actions which would limit the ability of non-EP users to participate fully in Ecuadorian markets — smugglers and other criminals notwithstanding.

    A weak government with a weak balance sheet has less capacity to do this than a strong government with a strong balance sheet; but having juridical control over an economic territory isn’t nothing. Pass a law such that property above a threshold value purchased inside the territory with non-EP automatically titles to the state, with a commission for whistleblowers. Said differently, legal transfer of title requires the use of EP for the transaction, otherwise legal title is forfeit. Etc, etc.

    tl;dr: anarchocapitalism is retarded and seems plausible only when viewing the world of authority through a particular very narrow lens.

  • Zippy says:

    I wrote:

    The essence of bitcoins is to be an electronic ledger entry with no accompanying entitlement at all. It is – much like a personal IOU – neither a security nor a commodity.

    A bitcoin, as a ledger entry representing no entitlement at all, has if anything even less reality than a personal IOU. A personal IOU represents a non-alienable chattel enslavement claim against the person who made the promise: Shylock’s pound of flesh. A bitcoin represents an attempt to make an ontological economic unit out of a modality of a personal IOU (ledger entry of a debt) after taking away the person: a pound of flesh minus the flesh.

  • Mike T says:

    If we assume that the Ecuadorian government had the power to enforce its laws

    And that can be a big assumption about the “intrinsic value” of a currency.

    tl;dr: anarchocapitalism is retarded and seems plausible only when viewing the world of authority through a particular very narrow lens.

    What I said was not a defense of anarchocapitalism. It was a response to TomD that all currency requires enough of a society to back that which gives its alleged “intrinsic value.” In the case of BTC that is participation in the hashing; for sovereign-issued currency that is enough people living in obedience to the sovereign that those things are enforceable.

    Currency itself is not a store of value, as you have said. It requires social mechanisms to make it useful because unlike the actual property it has no intrinsic value or utility.

    but having juridical control over an economic territory isn’t nothing

    On a scale of Somalia in 1993 to Victorian Britain, the value of that power to the currency depends almost entirely on the people being governed.

  • Zippy says:

    Mike T:

    Yes, the more ungovernable a people are, etc. Big deal. Who in their right mind would want to be responsible for the common good of a worthless rebellious people?

  • Mike T says:

    for the common good of a worthless rebellious people?

    Like most of Africa? *badum tssh*

  • Aethelfrith says:

    Is anything ever made of the fact that Bitcoin is almost exclusively used to purchase illegal shit?

    I said “almost” because the other use is to deprive idiots of their money through a unidirectional currency exchange.

  • TomD says:

    But it’s not really, anymore (illegal shitbuying has easier coins now) – it’s mainly used to sell to others later. Browse the appropriate subreddits.

    Unless you count things like currency evasion (you can buy electricity with yuan in China, mine bitcoins, and sell them for dollars to idiots in the USA).

  • Mike T says:

    Some sobering stats on the amount of resources required to make BTC work. It’s clearly not a scalable model short of us unlocking the secrets of nuclear fusion.

  • ignacy says:

    Zippy:

    The essence of bitcoins is to be an electronic ledger entry with no accompanying entitlement at all. It is – much like a personal IOU – neither a security nor a commodity.

    In the previous iteration of our discussion I thought that we at least agree that Bitcoin is a digital commodity and we are debating what its worth – intrinsic or market-based – is.

    While I came up with the exact reason it has an intrinsic value as a digital commodity, you came up with the conclusion that it is nothing at all, unique in its nothingness.

    I see now near-complete analogy with other purely commodity media of exchange (shell money etc.). Why do you discard such analogies?

    TomD:

    If bitcoin has “inherent value” then all the shitcoins would have inherent value, too. But if the “inherent value” of bitcoin depends on the hashpower, then it’s not inherent (and that hashpower will disappear or switch to another coin when it makes more money).

    Nope, much like shells that through the work of many people can be combined into, say, beautiful decoration into which only species of the same shells may fit are by that virtue worth more than shells out there, which at point 0 would have similar value. Path dependence and all that. Network effects may affect both liquidity premium and intrinsic value.

    Mike T:

    If it weren’t for the exchanges, BTC would have never gotten anywhere. The only reason the vast majority of users put any real stock in it is because they can use dollars, Euros, etc. to buy it and then cash out back into those currencies later.

    Hm, if you want to say that absent actual exchange, it wouldn’t have any liquidity as medium of exchange, then well…

    Some sobering stats on the amount of resources required to make BTC work. It’s clearly not a scalable model short of us unlocking the secrets of nuclear fusion.

    I don’t advocate Bitcoin as a small-scale medium of exchange. It’s however extraordinarily useful financial settlement asset.

  • Mike T says:

    That was a statement about how many users can use it before it consumes all energy on Earth.

  • Zippy says:

    ignacy:

    The “bitcoin is a commodity like gold” argument depends on (among other things) there being no difference between a real object in the owner’s possession and a recorded electronic ledger entry, on a public ledger, which refers to no property nor to any rights to property at all.

  • ignacy says:

    It does not have to refer to anything, since it being a ledger is more metaphorical than actual reality (in the same way Bitcoin is not a currency). Bitcoin is a digital commodity, database with transferable and scarce entries that have objective utility, in a manner e.g. a social media account is (even more so).

  • Zippy says:

    ignacy:

    Bitcoin is a digital commodity …

    The word ‘commodity’ is being used equivocally. A bitcoin is simply an entry in a database (it is not the database itself, the hardware/network on which the database runs, etc — a bitcoin itself is an entry in the database).

    If someone writes your name in a ledger, is the fact that your name is written in the ledger — not the ledger itself, mind you, but the mere fact that your name is written in it, with no property entitlement whatsoever associated with that fact — a commodity?

    Bitcoin is neither a commodity (the possession of which is exclusive by nature and which can be possessed, repossessed, etc) nor is it a security.

  • Mike T says:

    BitCoin is just a digital currency implementation of blockchain. The use cases it is usable for are a subset of the use cases for blockchains. Your state government could build a blockchain system for validating title transfers, and then it would be true that the units have intrinsic value because they’d be title claims. BitCoin is the crypto equivalent of a bunch of people agreeing to trade in Confederate money and then cashing out back into USD.

  • Zippy says:

    Social media accounts are database entries with access rights provided by an institution. “Ownership” of a social media account is based on a security — an explicit agreement between the social media company and the user (whose personal life the social media company exploits for gain).

    There is no agreement with any party, no security (in this sense) whatsoever, in bitcoin. A bitcoin represents/entails a promise of nothing by no one to no one. Therefore it is not (like intellectual property, social media accounts, etc) a security.

  • Mike T says:

    The word ‘commodity’ is being used equivocally. A bitcoin is simply an entry in a database (it is not the database itself, the hardware/network on which the database runs, etc — a bitcoin itself is an entry in the database).

    Yeah, well my row has 100 in the balance column and yours only has 25. My 32bit integer is bigger than yours, even though they both point to nothing and take the same space (including padding) in the table file.

  • Zippy says:

    Mike T:

    BitCoin is the crypto equivalent of a bunch of people agreeing to trade in Confederate money and then cashing out back into USD.

    Yes, but not under any binding agreement. There is instantaneous agreement in each transaction, of course, as is true of every voluntary transaction. But that is the only sort of agreement — the bitcoin itself represents no binding agreement on the part of any party whatsoever.

  • Mike T says:

    I think you’d need to have two blockchains: one for currency account and one for ownership claims because the requirements would be fairly at odds with each other in a single implementation.

  • ignacy says:

    I agree that social media example is a bad one and your explanation is correct.

    However, Mike T’s confederate dollars analogy is almost exact one I made with Iraqi Swiss dinars or shell money.

    The word ‘commodity’ is being used equivocally. A bitcoin is simply an entry in a database (it is not the database itself, the hardware/network on which the database runs, etc — a bitcoin itself is an entry in the database).

    If someone writes your name in a ledger, is the fact that your name is written in the ledger — not the ledger itself, mind you, but the mere fact that your name is written in it, with no property entitlement whatsoever associated with that fact — a commodity?

    In the same way the term ‘ledger’ is used equivocally.
    The fact that the entry in the database is transferable without permission of a central authority, is scarce (i.e. if I have it, someone will cease to have it, and he cannot copy it, unlike e.g. software) and it has an objective utility makes it analogous to commodity much more than to a ledger which – as you correctly indicate – has to point to something else than itself to be a ledger at all.

    As a side note, bitcoin itself was modeled as digital gold, and term ‘distributed ledger’ originated when people started playing with applications of blockchain technology to storing information about other assets. Yes, blockchain may be a ledger, but in case of Bitcoin it is not.

  • Zippy says:

    Blockchain and its potential uses as technology is entirely distinct from bitcoin specifically. Bitcoin is ‘currency’ only in the sense that people are really transacting using it; but it is (by design) neither commodity nor security.

  • Zippy says:

    ignacy:

    The fact that the entry in the database is transferable without permission of a central authority, is scarce (i.e. if I have it, someone will cease to have it, and he cannot copy it, unlike e.g. software) and it has an objective utility …

    Bitcoins have no independent objective utility, not even the utility of shells or gold from which artifacts may be made. They aren’t independent objects at all: they are computer data stored on distributed hardware — distributed hardware to which they represent no title at all.

    In the same way the term ‘ledger’ is used equivocally.

    Bitcoin both is and is not a ledger, not because of equivocation on my part but by design. It is a ledger in the sense that each bitcoin is nothing more than an entry in an accounting database. It is not a ledger in the sense that these entries (individual bitcoins) do not represent anything but themselves. Bitcoin was designed by financial anti-realists who don’t understand currency or finance for the purpose of engaging in extralegal transactions, and is currently used by financial anti-realists who don’t understand currency or finance for the purpose of making immoral transactions.

  • ignacy says:

    Bitcoins have no independent objective utility, not even the utility of shells or gold from which artifacts may be made. They aren’t independent objects at all: they are computer data stored on distributed hardware — distributed hardware to which they represent no title at all.

    Having bitcoins is prerequisite to store data in the OP_RETURN message of the Bitcoin blockchain transaction and to pay miner fees for that.

    Bitcoin was designed by financial anti-realists who don’t understand currency or finance for the purpose of engaging in extralegal transactions, and is currently used by financial anti-realists who don’t understand currency or finance for the purpose of making immoral transactions.

    I agree that people who created it mistakenly thought that in order to make a currency it is sufficient that it is difficult to counterfeit (a.k.a. double-spend) and that it is scarce/has limited supply. Their errors didn’t prevent making Bitcoin useful and seeing the value in it as a very liquid settlement asset doesn’t make one financial anti-realist.

  • Mike T says:

    Their errors didn’t prevent making Bitcoin useful and seeing the value in it as a very liquid settlement asset doesn’t make one financial anti-realist.

    And the point that Zippy and I have been trying to get across to you is that what they did was prove the value of blockchains. 99% of the “interesting stuff” associated with BitCoin is going to be implemented with purpose-built new blockchains that cater to the needs of a particular category of users.

  • Zippy says:

    ignacy:

    Having bitcoins is prerequisite to store data in the OP_RETURN message of the Bitcoin blockchain transaction and to pay miner fees for that.

    Not “pay miner fees”, which begs a whole host of questions.

    At present you need the private key to an existing ledger entry in order to create new ledger entries in the distributed database, unless a hack is discovered.

  • Zippy says:

    Relevant:

    https://seekingalpha.com/amp/article/4122536-bitcoin-bubble-6000-pokemon-card

    (Someone has been reading here).

    The “finite supply by design” nature of bitcoin also means that the incentives for contributing the necessary compute resources to run the network have a hard limit. So a peer to peer network which produces a finite number of virtual pokemon cards (even stipulating their “value”) requires a large open-ended stream of resources simply to stay in existence. Bitcoin has to eat forever to stay in existence, but by design it has a food budget that runs out at 21 million “coins”.

    Also relevant:

    https://zippycatholic.wordpress.com/2016/02/06/wealth-preservation-is-not-free/

  • Mike T says:

    More stats. I think a very solid “immoral use of resources” case can be made against using blockchain for things other than stuff like title management to real estate.

  • TomD says:

    Proof of trusted stake would work almost as well (but you’d have to trust real people/institutions) and use a billionth of the energy.

  • Mike T says:

    In order for BTC to supplant even just Visa or American Express, it would have to reach equivalent transactions per day. It would consume most of North America’s daily production of electricity to do that, I bet.

    Also, riffing on something a commenter said in that /. post, it’s funny how all of the energy conscious folks in SV are going crazy over blockchains. It makes sense though because there is a systematic hypocrisy in SV, Hollywood, etc. whereby you can pretty much guess their sins or fears of what they’re actually doing by what they’re saying. Look at Hollywood and big publishing: there is approaching a 1:1 ratio between “men who profess passionate horror at sexual violence and harassment” and “men who are guilty of sexual violence and harassment.” The “energy conscious” often support things like BTC. Heck, Apple makes the most beautiful yet ultra-classist, anti-environment products in the industry. (A $2800 laptop that has few major components that are fixable, let alone even an easily replaced and recycled battery).

  • […] guesstimate about certain historical circumstantial changes in relative prices (measures of who in fact bartered what in exchange for what) for certain goods and services (and only those goods and services, […]

  • donnie says:

    I don’t think you have an adequate grasp of what fiat dollars are as a security. The primary use of US fiat dollars is exchange in US markets, backed by the balance sheet of the US government. I would just suggest that you take the time to more fully understand this post.

    So I’ve been mulling over that post for a while now. I think the thing that I don’t understand is the fact that in all most of your examples (car title, house title, bank deposits, stock, etc.) the underlying security property is clear (a car, a house, cash up to a certain amount, company profits, etc.). But with a sovereign dollar, the underlying security property is less clear. The dollar entitles me to make a transaction in the marketplace of the sovereign. But the marketplace isn’t the underlying security property so… what is? Obviously the ability to exchange in the sovereign’s marketplace is a valuable ability, but that’s not the same thing as actually holding title to actual property. Where is the underlying property that I’m not seeing?

  • Zippy says:

    donnie:

    But the marketplace isn’t the underlying security property …

    Yes it is. The sovereign “owns” the marketplace which he governs in the pertinent sense. This is proven by the fact that you must pay him to transact.

  • Rhetocrates says:

    Donnie,

    You can also consider the underlying property as tax remittances. Fiat dollars are ‘legal tender for all debts, public and private’ which means (along with other things) that the sovereign will accept them as payment for tax obligations placed on you by the sovereign.

  • Zippy says:

    Rhetocrates:

    You can also consider the underlying property as tax remittances…

    Yes but what entitles the sovereign to those remittances/rents/theloneum in the first place?

    His ownership of marketplaces which operate in his territory under his law, protection, and guarantee.

  • TomD says:

    Interestingly enough, the first US greenbacks said this:

    This Note is Legal Tender for All Debts Public and Private Except Duties On Imports And Interest On The Public Debt; And Is Redeemable In Payment Of All Loans Made To The United States.

    As “duties on imports” were basically the only taxes the federal government collected at the time, it was not rents for participation in the sovereign’s marketplace.

  • Rhetocrates says:

    Yes. I didn’t intend that to be taken as instead of ownership of the marketplace, but simply as a different way of conceptualizing sovereign ownership of the marketplace. Good to tie it together explictly, though.

  • Rhetocrates says:

    Though, also just for clarity, ownership of the marketplace can simply reduce to ownership of the territory of which you make use. You don’t have to be explicitly exchanging anything with anyone else.

  • donnie says:

    Yes it is. The sovereign “owns” the marketplace which he governs in the pertinent sense. This is proven by the fact that you must pay him to transact.

    I get that the sovereign owns the marketplace. But the sovereign is not me, so I don’t own the marketplace. I own the sovereign’s dollar, which entitles me to exchange within the sovereign’s marketplace. But it’s not like owning the dollar grants me a share of ownership in the marketplace, merely access to the marketplace. Having the potential to obtain property is not the same thing as actually owning property. Am I wrong?

  • Zippy says:

    donnie:

    But it’s not like owning the dollar grants me a share of ownership in the marketplace, merely access to the marketplace.

    Correct.

    Having the potential to obtain property is not the same thing as actually owning property.

    Having a ticket which entitles you to see The Nutcracker at the Kennedy Center on Friday evening isn’t the same thing as owning (or co-owning) the Kennedy Center.

    But the ticket itself is indeed property: it is a security which entitles you to certain specified use of certain specified property. And in fact there is a secondary market for tickets, in which they are traded for other goods. I just sold some tickets myself for a show we could not attend because of a conflict.

    Fiat currency is similar to theater tickets. It entitles the bearer to certain use of certain property under certain conditions, and as a ubiquitous security it is also traded for other goods (though these days there is less and less actual fiat currency used for this purpose and more bank deposits – ledgered claims against bank balance sheets – used for this purpose).

  • donnie says:

    Fiat currency is similar to theater tickets. It entitles the bearer to certain use of certain property under certain conditions, and as a ubiquitous security it is also traded for other goods

    This is what I find so confusing: you’ve pointed out that owning a fiat dollar entitles me to access certain property (i.e. the marketplace which is the property of the sovereign), and I can also trade it for other goods. However, the only reason why I would value access to the sovereign’s marketplace is so that I can trade the fiat dollar for goods in that marketplace. So, the point appears circular to me. The dollar is valuable because it entitles me to trade for goods in the sovereign’s marketplace with that same dollar. It is hard for me to see any source of underlying value in this scenario.

    The way I see it, owning a fiat dollar is like having a ticket to get into a theater where there are no seats and there is no performance. Instead, all the theater-goers bring goods to the theater and offer to exchange these goods with you in return for your theater ticket. They in turn will use your theater ticket to obtain other goods offered by other theater goers, who in turn will use the theater ticket they receive to obtain other goods offered by other theater goers, who in turn will use the theater ticket to obtain other goods…. and somehow during this process the theater ticket becomes a ubiquitous security of exchange that is traded for goods outside of the theater.

    I’m struggling to understand how the theater ticket derives its value from anything in this situation.

  • Zippy says:

    donnie:

    However, the only reason why I would value access to the sovereign’s marketplace is so that I can trade the fiat dollar for goods in that marketplace.

    No, the reason you value access to the sovereign’s marketplace is that it enables you to trade labor and/or property for food, shelter, etc. Even when you trade those things directly you incur tax liabilities under the law — so you need “tickets”, fiat dollars, to pay the tax.

    It is hard for me to say what the intuitive barrier is for you, but I don’t see the word “tax” appear anywhere in your analogizing, nor do you consider government spending (on salaries, etc). Yes, instead of a theater it is a marketplace. The ticket is something you have to give to the owner of the marketplace when you make a transaction in the marketplace.

    That there is a lively secondary market in the tickets themselves within the marketplace is true, but that fact appears to be interfering with your understanding.

    People who work for the sovereign or sell things to the sovereign receive tickets (which the sovereign issues) as compensation. They go out in the sovereign market and barter those tickets for goods and services. Other people who do not work for the sovereign need those tickets to pay for their transactions (taxes), so the tickets have value to everyone in the market.

    And yes, even people outside the sovereign market (e.g. Europe, Japan) will barter in USA Market tickets, because it is valuable to them to be able to trade in US markets.

    You can’t ignore taxation and government spending and expect to grasp the situation.

  • TomD says:

    Another way to look at it – if the Government tomorrow said that you need to provide an authenticated purple cat to them on April 15th if you have a job, you’d have to find some way to get an authenticated purple cat. If the only way to get one was to give the Government a car tire, you’d go looking for a car tire. But if the Government gave you two authenticated purple cats for your tire, you could trade one to someone else for a bit less than a car tire, and so forth.

    But the only reason you went looking for one in the first place was that the Government required you to have one (just like many people didn’t have social security numbers until the Government required them, though those aren’t tradable).

  • donnie says:

    You can’t ignore taxation and government spending and expect to grasp the situation.

    Ah, well, that’s what I wasn’t paying any attention to. You may want to consider turning your last comment into it’s own post (maybe even a perma-post) since I think it’s the best summation of why fiat dollars have objective intrinsic value that you’ve put forward thus far.

  • Rhetocrates says:

    Amusingly, if we go with the theories laid out here about the nature of just commerce, this man is less unjust than authentic bitcoin sellers, because he’s selling a real object, merely misrepresented.

  • Rhetocrates says:

    Oh ew, I didn’t realize WordPress would directly embed the image. I’m sorry.

  • Mike T says:

    That’s fake news, fyi. Though true to form these days… fake, but accurate.

  • Antoine says:

    Hi Zippy. You wrote:

    In general people who think that they are entitled to the magical preservation of the buying power of their own property against the relentless tide of the second law of thermodynamics are in the grip of usurious entitlement. Someone ought to slap them out of it, for the sake of both the common good and their own good.

    Would that apply to Aristotle? (Nicomachean Ethics, Book V, Lecture 9.)

    For future exchanges money is as it were a guarantee that a man, who has no present need, will be helped when he is in want later on. The man who offers currency should receive what he needs. However, currency suffers like other things, for it is not always of the same value; although it tends to be more stable than other things.

    Or Aquinas? (Commenting upon the same passage.)

    The particular virtue of currency must be that when a man presents it he immediately receives what he needs. However, it is true that currency also suffers the same as other things, viz., that it does not always obtain for a man what he wants because it cannot always be equal or of the same value. Nevertheless it ought to be so established that it retains the same value more permanently than other things.

    Since these thinkers aren’t exactly proponents of usury, it doesn’t seem reasonable to connect a desire for the stability of the purchasing power of money with usurious thinking (or liberalism, for that matter).

  • Zippy says:

    Antoine:

    It is simply true that property used as currency “tends to be more stable than [some] other things”. Property with wildly fluctuating market price (like bitcoin) tends not to be used as currency for that very reason.

    But neither quote even addresses (much less refutes) my criticism of the entitlement that modern people feel, when it comes to government issued securities, to be made financially immune to the second law of thermodynamics over long periods of time.

  • TomD says:

    In fact, both quotes acknowledge and admit Zippy’s point – that even currency is subject to the ravages of time, but that it should be less subject to it than other things.

    So both Aristotle and Aquinas would say that if you figured out a moral way for currency to be a more durable store of value, it should be used.

  • Bitcoin isn’t a good investment, but I’m not seeing the argument for it being immoral. Selling gold isn’t immoral, and the same principles would seem to apply here (gold having industrial use is besides the point, since that isn’t why it has the value it does).

  • Zippy says:

    ArkansasReactionary:

    I wouldn’t say that I am myself fully committed to the idea that selling bitcoin is immoral; though it certainly “smells” like selling glass beads to Indians for a million acres of land.

    The argument would be a just price argument.

    If bitcoin has zero or negative intrinsic value (like, say, digital pornography) then at least under most circumstances it would be immoral to sell it; and it would always be immoral to sell it to buyers whom we know intend to use it for its intended purposes.

    I’ll state the argument a bit more formally in a new post.

  • […] is also a digital product which promotes vice, a false picture of reality, and other disorders in relation to the truth about the […]

  • Antoine says:

    My understanding of the two quotes I posted above is the same as TomD’s, i.e., the value of currency fluctuates of necessity but a more durable store of value should be preferred. However, I’d understood Zippy’s criticism to be aimed not only against the absolute position — as in, even a slightest fluctuation can never be admitted — which is manifestly absurd (well, perhaps not, which may be why Zippy’s been putting so much emphasis on it) but also against the moderate position as exemplified by the quotes. I was obviously wrong in that regard.

    I’m wondering though how much of the “modern entitlement” stems from observations that the stability / permanence to be reasonably expected of a currency now apparently extends over increasingly shorter periods of time. The “entitlement” would then be just a reaction to the situation and would naturally involve looking for alternative solutions (however wrong-headed) and even suspicions that actually immoral currency debasement is taking place.

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