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Comment by vrotaru | Hacker News Reader

It is a privately created fiat currency, bundled together with an anonymity scheme for transactions. The anonymity scheme means there is some reason to grant one-time seigniorage to the original currency issuers. Eventually the anonymity scheme, in some form or another, will be available without the fiat currency. At that point, or more likely before then, the fiat currency will fall to near-zero in value

Mr. Cowen is somehow overlooking the relative scarcity factor. Speaking strictly about bitcoins and dollars, we know how much bitcoins will be there in the next 100 years, and we have no idea how many dollars will be the in 2113?

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Mr. Cowen is somehow overlooking the relative scarcity factor.

But you can create an arbitrarily high number of bitcoin-like electronic currency units, simply by taking the exact bitcoin implementation and changing the genesis block. Bam, Patiocoins, with guaranteed scarcity, anonymity, and a new goldrush phase -- so if you got dumped rather than pumped, you have a new opportunity to start at the top of the pyramid scheme this time.

The equilibrium is that sooner or later expected returns on starting a new distributed pump-and-dump dwarf expected returns of getting in late on bitcoins. And then poof.

Couldn't I make the same argument for choosing another precious metal other than gold and convincing the world treat that as money. It seems to me that the only argument against it is that historically it hasn't happened. (except for cigarettes, Yap Rai, silver, platinum, and others I'm probably forgetting.)

It's somewhat arbitrary which precious metal we use, but it's not entirely arbitrary.

There's the usual reasons we use e.g. gold for money. It's fungible, ductile, rare and essentially impossible to forge. That rules out cigarettes and Yap rai as stable currencies.

As far as gold vs. silver vs. platinum, the inflation rate (i.e. the rate at which new metal comes out of the ground) is also important. Gold inflates slower than silver, simply because there's more silver in the ground.

As far as gold vs. platinum, it's important to look at what happens if the world decided to move to gold or platinum as a currency. Gold is already used as a store of value, while platinum isn't. If everyone moved to gold as currency, it would become far more valued. If the same happened to platinum, its value would go stratospheric. There are essentially no platinum reserves (compared to gold), so its price would be even more volatile, and its price would spike far more than gold.

Platinum is also much more concentrated, geographically. There are like 5 working platinum mines in the world, and like 4 of them are in South Africa. South Africa has more of the world's platinum than the middle east has of the world's oil supply.

Those objections are not insurmountable, but human civilizations have been using gold & silver as currency for thousands of years, but the same is not true of platinum. Don't underestimate inertia.

In this podcast, http://www.npr.org/blogs/money/2011/02/07/131363098/the-tues... the NPR Planet Money team go through all the elements with a chemical engineering professor, who concludes that it has to be gold.

Well yes, http://en.wikipedia.org/wiki/Bimetallism

Currency has, in fact, never been a wholly stable affair. Before paper money, allowing non-gold monies was a way of inducing inflation. But silver or platinum or cigarettes are clearly exact matches for gold while Patiocoins could automatically be that (and Patio is "famous" - that should be enough for a few people).

So this should only reinforce the point that money and currency can't just exist as a "natural" abstraction generated by an algorithm but rather must depend on social conditions (any society's currency system is transparently dependent on the overall configuration of that society's member's beliefs about the world).

But you can create an arbitrarily high number of bitcoin-like electronic currency units, simply by taking the exact bitcoin implementation and changing the genesis block

Yes, you can. If your X-coins will be in some respect better than the original ones they may even supplant bitcoins. But you'll have to put of effect in order to convince people to use them. With uncertain results. Currently bitcoin has network effects working for bitcoin and against other crypthographic/p2p currencies. To change that will require a major effort.

The history of bimetallism (gold & silver) is relevant in this respect. The final result is that your are better using the medium of exchange the majority using, so usually there only one money left.

The disconnect here may be that he isn't dignifying the notion that scarcity automatically connotes value, in the sense that for instance my toenails are also more scarce than dollars, and always will be, but are not more valuable than them.

he isn't dignifying the notion that scarcity automatically connotes value

Sure. But if we are speaking about competing mediums (media?) of exchanges, scarcity matters. Not the only factor that matters, but one of.

That's nonresponsive to Cowen's point, which is that as soon as Bitcoin stops being an efficient way to conduct anonymous transactions (and "probably before then"), Bitcoin's scarce fiat currency will be worth near zero.

You say, "yeah, sure, but scarcity matters". Well, actually, Cowen says it doesn't in this case.

Well, actually, Cowen says it doesn't in this case.

Can I (bit)coin the Tyler Cowen fallacy?

So Tyler Cowen says it doesn't matter? Frankly, I have a hard time trying to remember when it was last time that I heeded to TC financial (or other) advice. Maybe, when that moment will come people will just not bother asking TC what they should do.

You are refuting a straw man appeal to authority instead of the actual argument, which is so short it fits in just a couple of sentences and is included in its entirety upthread.

You sound very insecure about your point of view.

Your/TC argument above mistakes a handy feature of bitcoin protocols for the whole thing, and then argues than as soon as that feature will be replicated everything will be lost.

Well, good luck with that.

US Dollars are backed by the US government who requires that taxes be paid in them, and pays them out to employees.

This is what makes dollars valuable. Their scarcity is far less relevant.

Bitcoin needs to be backed by some kind of utility to have value. Scarcity alone is not enough.

US Dollars are backed by the US government who requires that taxes be paid in them, and pays them out to employees.

That's a lot of trade outside of US which is done in USD and not in local currencies. Are you going to argue that USD is not used as medium of exchange outside of US because you cannot pay taxes with them?

No, that's not his argument at all. You can't pay taxes in Bitcoins in any industrialized economy in the world. Nobody is arguing that the Euro has no value, just that Bitcoin won't.

Bitcoins may have value for the anonymization, the lack of fees, and the ease of micropayments. It's not essential that a fiat currency is backed by a government, it's just the easiest way to create a fiat currency. Bitcoin right now is essentially backed by those merchants who accept it in exchange for goods and conventional currency. Bitcoins have value RIGHT NOW due to this backing, at least partially. Their long-term value is less clear, of course.

Efficient transactions schemes are not necessarily good stores of value, as Cowen points out; more importantly, if that's primarily where Bitcoin's value is derived from, Bitcoin will be worth zero when a better transaction scheme arrives.

Efficient transactions schemes are not necessarily good stores of value

Yes, but universally accepted scarce tokens are good stores of values. And currently dollars and euro, and almost every other currency are just that. Universally accepted scarce tokens.

And bitcoins are both an efficient transaction scheme and a scarce tokens. And, by design, a lot more scarce. Of course, it has not yet bootstrapped itself, but I see that as a possibility. And damn convenient possibility, too.

Dollars are backed by the full faith and credit of the United States Government, which is why they are universally accepted, and which is why US Treasuries establish the risk-free rate.

Bitcoins are accepted by online gamblers in much the same fashion as casino chips, by ideologues offering marginal services as political statements, and (allegedly) by criminal enterprises.

If bitcoins are mostly interesting to you as a way of reasoning through how economies would work in a world without established governments and economies, that's fine, but could you just say that? Because it's hard to pick out which of your arguments are pie-eyed what-if's.

You can't pay taxes in Bitcoins in any industrialized economy in the world.

Taxes is not what a money makes. Colonials, Greebacks, French Assignats. They all were used to pay taxes. On the other side the Somali shilling is (still) used as money. The russian (tsarist) ruble was used as money during 1918-1920 Civil war. Hell, shells were used as used as money.

As for taxes in bitcoins, it can be just of matter of time. You know the tune: Cheaper to tax than to fight

Your argument then is that despite the fact that the participants of the largest economy on Earth are effectively forced at gunpoint to use US dollars, dollars aren't necessarily any more valuable than cryptographically random numbers, because other currencies have in the past stopped circulating.

Yes, and no. Yes, because, the taxes are not the magic wand that your paint them to be. No, because, I will not recommend anyone to put all their savings in bitcoins.

Also, define valuable, and we'll talk. I can easily foresee situations (even now) when bitcoins are valuable to me than dollars.

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