In a previous post, I explained that proof of work does absolutely not back Bitcoin value. Recently I’ve been debating in twitter about Bitcoin scarcity being a consequence of its costs of production, which I strongly disagree and I’ll briefly explain why. First, I’ll set forth my understanding of scarcity: “A scarce good is a good that has more quantity demanded than quantity supplied”(source wikipedia).
New bitcoin units come into existence through a special transaction in each block called “coinbase” that miners include in the block to collect their reward consisting of transaction fees and the block subsidy (new coins…
From a very interesting twitter discussion about Money being a “record keeping device” or not, I learnt about this paper from David Andolfatto. The objective of this post is to briefly share my comments about David’s paper.
The most important comment I have is about David’s concept of “intrinsic value”. I am not going to take the nitpicking path of saying that all value is subjective and all that… I assume that David is more than well aware of that so I am departing from his concept of “intrinsic value”.
I think it is confusing and not a useful concept…
I am quoting the word “intrinsic” because I don’t think it is an appropiate term to refer to value as I explained here. That being said, in this post I’ll stick to the definition of intrinsic value normally used in finance.
Bitcoin is a medium of indirect exchange, whether its current or potential use is for short term (payments) or for long term (store of value), but in both cases it is a medium of indirect exchange for different holding periods. Therefore, Bitcoin is a tool for exchange, and all tools derive its value from the costs they save. …
Originally published at http://eleconomistaprudente.com/ on December 2011
Paul Krugman wrote an article in the New York Times dennouncing Peter Schiff’s predictions about inflation in 2009. I normally disagree on Paul Krugman’s views 90% of the time. But in this case, I regret to say that his complains are justified.
First of all, Schiff amazingly disregards the possibility of deflation, which is one of the most possible outcomes of any credit bubble.
Second, Schiff assumes that the Fed is issuing money, but this is not true, they are issuing credit that we use as currency. This differentiation between money and credit…
Bitcoin aspires to be to money what the decimal numeric system is to arithmetics. Bitcoin, the monetary unit, is not different in essence to the set of ten numerals of the decimal number system (0, 1, 2, 3, 4, 5, 6, 7, 8 and 9), that is, a fixed set of ownable elements that anyone is free to use. It is crucial to take into account the concepts “ownable”, “fixed” and “free to use” (free in the sense of open), because these characteristics are incompatible with being managed by a third party. …
In some discussions I´ve held with followers of the Austrian school of economics, I have been told that the flaws I point in Mises Monetary Theory are not relevant or that I just nit-pick Mises wording in order to “score points” in favor of Mengerian Carlos Bondone Monetary Theory, but that no real world implications arise from my critiques.
First, my interest of course is not scoring any points but to understand and explain the reality. All theories explain reality in some way or another, but the simpler and more general the theory, it is superior. …
One of the more serious problems that current economic theories have is the inability to clearly differentiate between currency, money and credit. Most theories claim that Money is the general accepted means of exchange, and in plain language it seems just a semantic issue. We usually exchange the words currency and money the same way we use to ask “How much do you weight?” instead of “What is your mass?”. And that’s more than ok for day to day unformal communication.
However, if we want to be scientifically rigorous, physics provides us with the appropriate concepts and one thing is…
Folowing my previous post about Bitcoin not being fiat currency, I would like to address this issue from the perspective of L.M. Mises. For this purpose, let’s extract his definition of fiat from his book Theory of Money and Credit — Chapter III section 3 (emphasis is mine):
We may give the name of commodity money to that sort of money that is at the same time a commercial commodity; and that of fiat money to money that comprises things with a special legal qualification. …
In this article we are going to explore why the emergence of Bitcoin is inevitable once a public decentralized immutable ledger has been invented. For that purpose, we have to understand first that the Bitcoin system is composed by two main entities, a ledger and a monetary unit:
- The ledger, commonly known as blockchain, is not only a data structure but also a set of very specific rules which ensure a high degree of immutability (please see update below about immutability). The term blockchain only makes sense when attached to its consensus rules which together ensemble that high degree of…
The answer to this question is a big and resounding No. I have read several arguments using proof of work (PoW) to justify Bitcoin value, and this is wrong as the Theory of Subjetive Value demonstrates: No matter the costs of any good, the market will assess its value depending on its utility. A useless thing won’t have any value, no matter how costly it was to produce the thing.
Terms such as “accumulated energy”, “energy density”, “accumulated work” have no causal relationship with Bitcoin’s value.
Proof of work is a mechanism to ensure that all added transactions to the…
