Wednesday, January 1, 2014

Just Another Post on Bitcoin...


Also available at mises.ca

At the risk of starting a war in the comments section, here are my 0.00000002 bitcoins on Bitcoin. Bitcoin’s value comes from what people are willing to assign to it. To be something other than mere fiat, it must have arisen on the market naturally. Bitcoin hasn’t violated Mises’ regression theorem because it is still undergoing this process. Whether it completes the theorem and becomes a money depends on several factors. I argue that Bitcoin itself is superior to the dollar and may even outshine gold. “Mining bitcoins” is simply crunching computer code. This requires exerting mental and physical energy, not to mention the electricity required to run the computer and keep the internet on. Crypto-mining requires the actor sacrifice his or her time for an end, implying opportunity cost and time preference. So there’s no free lunch here. Producing a bitcoin, whatever its price, has its cost.



 
The first phase in becoming a money consists of computer programs being exchanged for direct uses. This has been evident since the 1980′s and has only exploded as technology increases the capacity of computers. What can we do with larger capacity? Crunch more numbers. Computers have entire languages of code to understand. And computer programs are not a homogeneous blob. They consist of complementary factors of production – Java, C++, Xhtml, etc. Programming these languages make the computer something more than a large calculator. A consumer good is produced. These goods are valued on the margin. These goods have a market price and can – theoretically – become a money.
 
Could the internet – a medium – essentially act as a medium of exchange? Why not? The internet allows for communication in all forms of media; it communicates information – and this could include price signals. A computer program could be built to mimic sound money. This program could replace the dysfunctional price system of the US dollar reserve. Bitcoin could be the good that does this (but personally, I’ve got my bets on Dogecoin).
 
Regardless, US laws remain restrictive. Meanwhile Canadian entrepreneurs are creating Bitcoin debit cards and allowing Bitcoin ATMs into their cities. Many of Vancouver’s cultural caf├ęs and establishments are accepting bitcoins. This is promising. An issue that transcends all political values: dissatisfaction with the US dollar. But don’t get too excited yet. Higher order goods would have to be priced in bitcoin in order to “complete” the regression theorem. This is the second phase and it isn’t such a far out possibility considering Bitcoin’s soundness and its growing acceptability among numbers of people.
 
But there are many factors that may influence Bitcoin’s failure. Government taxation, regulation and internet censorship to name a few. There is also the difficulty in trusting Bitcoin. It lacks the history gold and silver share. Its price is still highly volatile. But consider Bitcoin’s soundness. Compared to precious metals, its portability is next to none. Bitcoins are also completely uniform; there is no way to debase them. It is also divisible down to 0.00000001 of a bitcoin. Its durability may depend on the device where you hold your Bitcoin wallet, but that wallet can be stored on any other digital device. Bitcoin wallets are also encrypted.
 
The Bitcoin mania, as I see it, is merely a symptom of the age of Quantitative Easing. Nothing is immune from sky-rocketing prices and unexpected crashes. This includes a popular cryptocurrency. Bitcoin is sound. Whether or not it completes the regression theorem does not undermine its theoretical possibility. Economics is not psychology. There are a number of reasons why Bitcoin may fail but for all intents and purposes, it is a sound currency.

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