90% of money in the world don't really exist?

[russ_watters]

Ultimately, the value of *anything* in a market economy is determined by what people *think* the value is, whether there is something real behind it or not. The US government has a massive wealth with demonstrated staying-power, so people have faith in the stable value of its money - which therefore causes it to be stable.

Because Bitcoin is new and interesting and fun (novel), there must be a component of novelty in its value. The question is whether once that novelty wears-off if there's anything left to give it value.

Bitcoins have attributes that I think even the supporters should agree, do not have mass appeal. The fact that ordinary people like me and Evo are genuinely confused by the appeal is an indicator of limited mass appeal. It really smells like a fad or even a scam.

Another important issue that somehow I missed before is that the performance of Bitcoin has actually been a mutually exclusive attribute for different purposes. The most important attribute of currency is stability. The most important attribute of an investment is growth. These are mutually exclusive ideas that are nevertheless both being attributed to bitcoin. If bitcoin's value grows, that is a deterrent to using it as a currency. If its value stabilizes, that is a deterrent to using it as an investment. This tells me that its use lacks rationality. Again, that points to a fad.

 

[Ryan_m_b]

Whether or not bitcoin itself is a fad I think there is a variety of niche uses for such a currency, not all of them good
http://en.wikipedia.org/wiki/Silk_Road_(marketplace)#Auctions

 

[ImaLooser]

I think if BitCoin ever got out of the 'beanie-baby' stage and people started taking it seriously I'm fairly sure most governments would make it illegal and find ways to cripple the infrastructure supporting it so badly as to be almost unusable.

Mastercard and Visa would surely lean on Amazon and so forth to not accept it. But if it gets popular enough Amazon would rebel. Amazon doesn't like to pay Mastercard 3% on each transaction. If bitcoin is popular enough then Mastercard's threat loses its force, and would actually work against them.

Governments might not like the anonymity. But my guess is that governments have more important things to worry about than bitcoin.

 

[ImaLooser]

Here's what I don't understand: Are you less dubious about the faith and credit of a group of anonymous people on the internet?

They aren't anonymous. The whole point is that the algorithm is open, not secretive. There is no secret that can be lost.

 

[ImaLooser]

Barack Obama's ancestors were exposed to a fiat currency. The natives of Kenya were self-sufficient so they would not work for wages. The colonists imposed a tax on huts. The natives had to pay the tax in cash. To get the cash they had to work for the colonists.

Many times I read that the US dollar works the same way, but I always doubted that. Many corporations pay no tax, but this does not at all reduce their desire for dollars. The dollar's true value lies in being a convenient medium of exchange. The contribution of the US government is to supply a currency that is difficult for others to counterfeit and ability to prosecute those who do. I bet that it is legal to counterfeit bitcoin, so they have to depend on their algorithm and public trust in such.

That is, the tax angle may get the whole thing started, but if somehow magically Utopia arrived and we no longer had to pay taxes there would still be a demand for dollars. People would still need a medium of exchange.

It's hard to say what they full faith and credit of the US government means. I guess it means that they are trusted both to avoid inflation that rapidly degrades the value of the currency, and also not to default on its debts.

 

[mheslep]

Reference on the definition of a fiat currency:

Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money

That is, the US government can only produce more of the same on demand; there is no pot of gold or other alternative security behind the curtain. The US M2 money supply is around 10 trillion dollars and, for the last two year period, is continuing to grow faster than it ever has since 1980.

 

[BWV]

no money has any intrinsic value, its a fallacy to believe that gold or any other substance represents "real" money.

 

[Evo]

It's not money.

Bitcoin: Whatever It Is, It's Not Money!

The basic reason: it has no fixed value. It trades like a stock or commodity. In recent days it has been crashing after a spectacular rise in terms of dollars. Such volatility makes it useless as a means to do transactions. Money has only one purpose–it makes doing transactions, that is buying and selling products and services and securities, infinitely easier than barter. All the other purposes of money flow from this basic function.

http://www.forbes.com/sites/steveforbes/2013/04/16/bitcoin-whatever-it-is-its-not-money/

 

[ImaLooser]

no money has any intrinsic value, its a fallacy to believe that gold or any other substance represents "real" money.

Gold has very useful properties and is in demand as both an industrial and decorative material. Gold is very electrically conductive and is used as a ground plate in computer boards.

 

[ImaLooser]

It's not money.

Bitcoin: Whatever It Is, It's Not Money!

The basic reason: it has no fixed value. It trades like a stock or commodity. In recent days it has been crashing after a spectacular rise in terms of dollars. Such volatility makes it useless as a means to do transactions. Money has only one purpose–it makes doing transactions, that is buying and selling products and services and securities, infinitely easier than barter. All the other purposes of money flow from this basic function.

http://www.forbes.com/sites/steveforbes/2013/04/16/bitcoin-whatever-it-is-its-not-money/

To have a currency with a truly fixed value one would have to have a very controlled market in which the price of every commodity was fixed. Forbes appears to be arguing in favor of the economic system of the Soviet Union.

 

[ImaLooser]

Looking further at bitcoin I have to say that it is an ingenious thing. I'll assume that it is proof against counterfeiting. The big problem is this. The supply of money has to grow in such a way that the price is more or less stable. Recently this has been done by having it under the control of some sort of Alan Greenspan somewhere. The bitcoin people wanted to set up something that is self stabilizing and under no ones control.

What they do is very clever. The bitcoins can only be obtained by using large amounts of computer power, and this costs money. It is also a readily available technology that cannot be monopolized. So it "costs money to make money." The idea is that the market will reach a dynamic equilibrium. It is very much to be expected that this will take some time, maybe a year or two.

I really can't tell whether it will work or not. The supply always increases and never decreases, so the long term trend would seem to be a steady decline in value. This is a good thing as it discourages saving of bitcoin. I actually had this idea of a currency that intentionally and predictably declines in value, but never pursued it. Some guy in 1890 or so thought of it first. The basic problem is that money has two functions: as a medium of exchange and as a repository of value. They aren't all that compatible and this creates a basic tension. There is a lot to be said of splitting money into two forms. Bitcoin seems deliberately designed to be a good medium of exchange and poor repository of value. I approve. Traditional currencies can then concentrate on the repository of value function. Everyone will be better off.

What it more, it is the first non-national currency with no intrinsic value. That's great. It seems to me that they have taken a very abstract real world problem and come up with a clever real world solution.

 

[Jim Kata]

I can't wait till ten years from now when I can post "Bitcoin won, and you were wrong".

 

[ImaLooser]

Whoops! I was wrong. It gets harder and harder to create bitcoins as time goes by. So the value would tend increase over time, which I think is a bad idea. This encourages hoarding, speculators and market instability, which is exactly what I don't want. It's been around for three years or so and is still very unstable, which is a bad sign. On the other hand only one bug was found in the system which allowed counterfeiting, so that was a success.

 

[Ryan_m_b]

What it more, it is the first non-national currency with no intrinsic value. That's great. It seems to me that they have taken a very abstract real world problem and come up with a clever real world solution.

What do you mean by no intrinsic value? As in has no use other than as currency? There have been plenty of non-fiat currencies in the world before bitcoin where the physical currency had little or no use.

 

[ImaLooser]

What do you mean by no intrinsic value? As in has no use other than as currency? There have been plenty of non-fiat currencies in the world before bitcoin where the physical currency had little or no use.

Yes, but they were local, not global. (I didn't say that, but I had it in mind.) :-)

 

[BWV]

Gold has very useful properties and is in demand as both an industrial and decorative material. Gold is very electrically conductive and is used as a ground plate in computer boards.

yes but water is an even more useful substance than gold, but hardly works as a standard of money.

what you have listed is gold's barter value, not its intrinsic monetary value

 

[russ_watters]

They aren't anonymous. The whole point is that the algorithm is open, not secretive. There is no secret that can be lost.

The person who developed it is anonymous. That's enough to make me nervous.

It's hard to say what they full faith and credit of the US government means. I guess it means that they are trusted both to avoid inflation that rapidly degrades the value of the currency, and also not to default on its debts.

It is trusted to be big and politically/economically stable. Which includes not defaulting on its debts.

Gold has very useful properties and is in demand as both an industrial and decorative material. Gold is very electrically conductive and is used as a ground plate in computer boards.

Yes, but the vast majority of gold's value is:
1. Because it is pretty.
2. Because people trade it.

Kinda like a Beanie Baby. Most of gold's value is not due to its intrinsic usefulness. That's why it has been so volatile after being taken off the "dollar standard". I say it that way because at first while the gold standard kept the dollar relatively stable, after the dollar got big and stable on its own, the roles were reversed and it was the dollar that was keeping gold stable. Not anymore.

To have a currency with a truly fixed value one would have to have a very controlled market in which the price of every commodity was fixed. Forbes appears to be arguing in favor of the economic system of the Soviet Union.

No, they are arguing stability due to mass/inertia. I'm sure they know that to be truly completely stable it would need to be fixed, but as a rule more stable - by force of nature rather than government mandate - is better than less stable.

The bitcoin people wanted to set up something that is self stabilizing and under no ones control.

If that's true, then it has been a spectacular failure so far. Perhaps at some point after its fad value has disappeared it will stabilize, but so far it hasn't. As I and others have said, that makes it pretty much useless as a currency, who's critical feature is stability.

I really can't tell whether it will work or not. The supply always increases and never decreases, so the long term trend would seem to be a steady decline in value. This is a good thing as it discourages saving of bitcoin.

[separate post]
Whoops! I was wrong. It gets harder and harder to create bitcoins as time goes by. So the value would tend increase over time, which I think is a bad idea.

Yep. The adoption rate is still pretty low so if Bitcoin becomes more popular its value will skyrocket as it becomes scarce. That's kinda the whole reason for controlling the supply of money to match demand. It helps keep it stable. That's part of how the FED manages inflation. Since Bitcoin's market cap isn't managed, it will have trouble ever being stable.

Of course, if you are a hacker who designed it like an electronic pyramid scheme scam (as the inventor, I assume he had an easy time mining bitcoins while its popularity was low), it'll make you extremely rich.

 

[russ_watters]

What do you mean by no intrinsic value? As in has no use other than as currency? There have been plenty of non-fiat currencies in the world before bitcoin where the physical currency had little or no use.

I think that what IL really means is that bitcoin's value isn't tied to anything, real or illusory. The dollar is tied to the economic value of the United States, which isn't physical but is still real and has an impact on the dollar's value. Bitcoin's value is purely a matter of supply and demand. It has no other use and nothing external to provide value to it. In a pinch, you can burn a Beanie Baby to heat your house* so while its value isn't, strictly speaking, zero, it is pretty close.

*Of course, you could also burn dollar bills for heat too. While that may sound nonsensical, it has happened before in hyperinflation situations that physical currency has been reduced to its intrinsic value:

 

[russ_watters]

Reference on the definition of a fiat currency:
That is, the US government can only produce more of the same on demand; there is no pot of gold or other alternative security behind the curtain. The US M2 money supply is around 10 trillion dollars and, for the last two year period, is continuing to grow faster than it ever has since 1980.

It's a summary and I don't like how simplistic it is. It seems like they mix together the words "money" and "currency" as if they are the same thing, when I'm pretty sure they aren't. Part of the issue may be that "currency" is a form of "money" but "money" isn't necessarily in the form of "currency"...at least that's how I understand it.

 

[ImaLooser]

what you have listed is gold's barter value, not its intrinsic monetary value

The price fluctuates, but there is a floor price that it is very unlikely to drop past because it has intrinsic value. It won't go to zero.

No one can name a specific number for its intrinsic value, but so what? It has intrinsic value because it is useful. It's useful for making computer boards, jewelry, guitars, etc.

 

[ModusPwnd]

This talk of value being intrinsic or not is philosophically moot. There is no such thing as intrinsic value. Nothing is intrinsically valuable. Only by assuming that a function is valuable can you purport some kind of value to the object, of course it not an intrinsic value because it necessarily depends on your assumption.

I think the talk of bitcoins here and elsewhere misses a point, the black and grey market. That is what bitcoin is good for. The market certainly has its share of speculators. But the users of bitcoin are not speculators, they are using it for sales and purchases in black and grey markets. Talk of replacing dollars with bitcoins for everyday transactions is pretty silly. I would say its a strawman except for the fact that the most vocal bitcoin supporters do seem to think it should displace dollars. I dont, I'm not afriad of fiat currency. But I still like bitcoins and see a role for them as many others do. Like it or not, the black market is here to stay. It will likely outlast every nation on earth.