Jeffrey Tucker: What Gave Bitcoin Its Value?

This article was written in 2014.

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Many people who have never used bitcoin look at it with confusion. Why does this magic Internet money have any value at all? It’s just some computer thing that someone made up.

Consider the criticism of goldbugs, who have, for decades, pushed the idea that sound money must be backed by something real, hard, and independently valuable.

Bitcoin doesn’t qualify, right?

Maybe it does. Let’s take a closer look.

Bitcoin first emerged as a possible competitor to national, government-managed money nearly six years ago. Satoshi Nakamoto’s white paper was released October 31, 2008. The structure and language of this paper sent the message: This currency is for computer technicians, not economists nor political pundits. The paper’s circulation was limited; novices who read it were mystified.

But the lack of interest didn’t stop history from moving forward. Two months later, those who were paying attention saw the emergence of the “Genesis Block,” the first group of bitcoins generated through Nakamoto’s concept of a distributed ledger that lived on any computer node in the world that wanted to host it.

Here we are six years later and a single bitcoin trades at $500 and has been as high as $1,200 per coin.The currency is accepted by many thousands of institutions, both online and offline. Its payment system is very popular in poor countries without vast banking infrastructures but also in developed countries. And major institutions—including the Federal Reserve, the OECD, the World Bank, and major investment houses—are paying respectful attention.

Enthusiasts, who are found in every country, say that its exchange value will soar in the future because its supply is strictly limited and it provides a system vastly superior to government money. Bitcoin is transferred between individuals without a third party. It is nearly costless to exchange. It has a predictable supply. It is durable, fungible, and divisible: all crucial features of money. It creates a monetary system that doesn’t depend on trust and identity, much less on central banks and government. It is a new system for the digital age.

Hard lessons for hard money

To those educated in the “hard money” tradition, the whole idea has been a serious challenge. Speaking for myself, I had been reading about bitcoin for two years before I came anywhere close to understanding it. There was just something about the whole idea that bugged me. You can’t make money out of nothing, much less out of computer code. Why does it have value then? There must be something amiss. This is not how we expected money to be reformed.

There’s the problem: our expectations. We should have been paying closer attention to Ludwig von Mises’ theory of money’s origins—not to what we think he wrote, but to what he actually did write.

In 1912, Mises released The Theory of Money and Credit. It was a huge hit in Europe when it came out in German, and it was translated into English. While covering every aspect of money, his core contribution was in tracing the value and price of money—and not just money itself—to its origins. That is, he explained how money gets its price in terms of the goods and services it obtains. He later called this process the “regression theorem,” and as it turns out, bitcoin satisfies every condition of the theorem.

Mises’ teacher, Carl Menger, demonstrated that money itself originates from the market—not from the State and not from social contract. It emerges gradually as monetary entrepreneurs seek out an ideal form of commodity for indirect exchange. Instead of merely bartering with each other, people acquire a good not to consume, but to trade. That good becomes money, the most marketable commodity.

But Mises added that the value of money traces backward in time to its value as a bartered commodity. Mises said that this is the only way money can have value.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity…. If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money…. Before it was usual to acquire goods in the market, not for personal consumption, but simply in order to exchange them again for the goods that were really wanted, each individual commodity was only accredited with that value given by the subjective valuations based on its direct utility.

Mises’ explanation solved a major problem that had long mystified economists. It is a narrative of conjectural history, and yet it makes perfect sense. Would salt have become money had it otherwise been completely useless? Would beaver pelts have obtained monetary value had they not been useful for clothing? Would silver or gold have had money value if they had no value as commodities first? The answer in all cases of monetary history is clearly no. The initial value of money, before it becomes widely traded as money, originates in its direct utility. It’s an explanation that is demonstrated through historical reconstruction. That’s Mises’ regression theorem.

Bitcoin’s use value

At first glance, bitcoin would seem to be an exception. You can’t use a bitcoin for anything other than money. It can’t be worn as jewelry. You can’t make a machine out of it. You can’t eat it or even decorate with it. Its value is only realized as a unit that facilitates indirect exchange. And yet, bitcoin already is money. It’s used every day. You can see the exchanges in real time. It’s not a myth. It’s the real deal.

It might seem like we have to choose. Is Mises wrong? Maybe we have to toss out his whole theory. Or maybe his point was purely historical and doesn’t apply in the future of a digital age. Or maybe his regression theorem is proof that bitcoin is just an empty mania with no staying power, because it can’t be reduced to its value as a useful commodity.

And yet, you don’t have to resort to complicated monetary theory in order to understand the sense of alarm surrounding bitcoin. Many people, as I did, just have a feeling of uneasiness about a money that has no basis in anything physical. Sure, you can print out a bitcoin on a piece of paper, but having a paper with a QR code or a public key is not enough to relieve that sense of unease.

How can we resolve this problem? In my own mind, I toyed with the issue for more than a year. It puzzled me. I wondered if Mises’ insight applied only in a predigital age. I followed the speculations online that the value of bitcoin would be zero but for the national currencies into which is converted. Perhaps the demand for bitcoin overcame the demands of Mises’ scenario because of a desperate need for something other than the dollar.

As time passed—and I read the work of Konrad Graf, Peter Surda, and Daniel Krawisz—finally the resolution came. I will cut to the chase and reveal it: Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.

We are all used to thinking of currency as separate from payment systems. This thinking is a reflection of the technological limitations of history. There is the dollar and there are credit cards. There is the euro and there is PayPal. There is the yen and there are wire services. In each case, money transfer relies on third-party service providers. In order to use them, you need to establish what is called a “trust relationship” with them, which is to say that the institution arranging the deal has to believe that you are going to pay.

This wedge between money and payment has always been with us, except for the case of physical proximity.

This wedge between money and payment has always been with us, except for the case of physical proximity. If I give you a dollar for your pizza slice, there is no third party. But payment systems, third parties, and trust relationships become necessary once you leave geographic proximity. That’s when companies like Visa and institutions like banks become indispensable. They are the application that makes the monetary software do what you want it to do.

The hitch is that the payment systems we have today are not available to just anyone. In fact, a vast majority of humanity does not have access to such tools, which is a major reason for poverty in the world. The financially disenfranchised are confined to only local trade and cannot extend their trading relationships with the world.

A major, if not a primary, purpose of developing Bitcoin was to solve this problem. The protocol set out to weave together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself. This connection is what makes bitcoin different from any existing national currency, and, really, any currency in history.

Let Nakamoto speak from the introductory abstract to his white paper. Observe how central the payment system is to the monetary system he created:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

What’s very striking about this paragraph is that there is not even one mention of the currency unit itself. There is only the mention of the problem of double-spending (which is to say, the problem of inflationary money creation). The innovation here, even according to the words of its inventor, is the payment network, not the coin. The coin or digital unit only expresses the value of the network. It is an accounting tool that absorbs and carries the value of the network through time and space.

This network is called the blockchain. It’s a ledger that lives in the digital cloud, a distributed network, and it can be observed in operation by anyone at any time. It is carefully monitored by all users. It allows the transference of secure and non-repeatable bits of information from one person to any other person anywhere in the world, and these information bits are secured by a digital form of property title. This is what Nakamoto called “digital signatures.” His invention of the cloud-based ledger allows property rights to be verified without having to depend on some third-party trust agency.

The blockchain solved what has come to be known as the Byzantine generals’ problem. This is the problem of coordinating action over a large geographic range in the presence of potentially malicious actors. Because generals separated by space have to rely on messengers and this reliance takes time and trust, no general can be absolutely sure that the other general has received and confirmed the message, much less its accuracy.

Putting a ledger, to which everyone has access, on the Internet overcomes this problem. The ledger records the amounts, the times, and the public addresses of every transaction. The information is shared across the globe and always gets updated. The ledger guarantees the integrity of the system and allows the currency unit to become a digital form of property with a title.

Once you understand this, you can see that the value proposition of bitcoin is bound up with its attached payment network. Here is where you find the use value to which Mises refers. It is not embedded in the currency unit but rather in the brilliant and innovative payment system on which bitcoin lives. If it were possible for the blockchain to be somehow separated from bitcoin (and, really, this is not possible), the value of the currency would instantly fall to zero.

Proof of concept

Now, to further understand how Mises’ theory fits with bitcoin, you have to understand one other point concerning the history of the cryptocurrency. On the day of its release (January 9, 2009), the value of bitcoin was exactly zero. And so it remained for 10 months after its release. All the while, transactions were taking place, but it had no posted value above zero for this entire time.

The first posted price of bitcoin appeared on October 5, 2009. On this exchange, $1 equaled 1,309.03 Bitcoin (which many considered overpriced at the time). In other words, the first valuation of bitcoin was little more than one-tenth of a penny. Yes, if you had bought $100 worth of bitcoin in those days, and not sold them in some panic, you would be a half-billionaire today.

So here is the question: What happened between January 9 and October 5, 2009, to cause bitcoin to obtain a market value? The answer is that traders, enthusiasts, entrepreneurs, and others were trying out the blockchain. They wanted to know if it worked. Did it transfer the units without double-spending? Did a system that depended on voluntary CPU power actually suffice to verify and confirm transactions? Do the rewarded bitcoins land in the right spot as payment for verification services? Most of all, did this new system actually work to do the seemingly impossible—that is, to move secure bits of title-based information through geographic space, not by using on some third party but rather peer-to-peer?

It took 10 months to build confidence. It took another 18 months before bitcoin reached parity with the U.S. dollar. This history is essential to understand, especially if you are relying on a theory of money’s origins that speculates about the pre-history of money, as Mises’ regression theorem does. Bitcoin was not always a money with value. It was once a pure accounting unit attached to a ledger. This ledger obtained what Mises called “use value.” All conditions of the theorem are thereby satisfied.

Final accounting

To review, if anyone says that bitcoin is based on nothing but thin air, that it cannot be a money because it has no real history as a genuine commodity, and whether the person saying this is a novice or a highly trained economist, you need to bring up two central points. One, bitcoin is not a stand-alone currency but a unit of accounting attached to an innovative payment network. Two, this network and therefore bitcoin only obtained its market value through real-time testing in a market environment.

In other words, once you account for the razzle-dazzle technical features, bitcoin emerged exactly like every other currency, from salt to gold, did. People found the payment system useful, and the attached accounting was portable, divisible, fungible, durable, and scarce.

Money was born. This money has all the best features of money from history but adds a weightless and spaceless payment network that enables the entire world to trade without having to rely on third parties. 

But notice something extremely important here. The blockchain is not only about money. It is about any information transfers that require security, confirmations, and total assurance of authenticity. This pertains to contracts and transactions of all sorts, all performed peer-to-peer. Think of a world without third parties, including the most dangerous third party ever conceived of by man: the State itself. Imagine that future and you begin to grasp the fullness of the implications of our future.

Mises would be amazed and surprised at bitcoin. But he might also feel a sense of pride that his monetary theory of more than 100 years ago has been confirmed and given new life in the 21st century.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, economics adviser to FreeSociety.com, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

This article was originally published on FEE.org. Read the original article.

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30 Responses to Jeffrey Tucker: What Gave Bitcoin Its Value?

  1. Entropy

    So, I can wander in to a subway and by a roll with this stuff? Buy some handmade clothes at the Sunday markets? Piss it up against the wall and a backyard two up meeting?

    Get back to me when it can do those kind of things just as easily and transparently as a dollar coin, let alone the weekly grocery shop. I might get interested then.

    I am not even sure it is yet useful as the basis of a late night piss up argument, at which point bitcoin truly will have value.

  2. JC

    Jeffrey, Here’s my problem with Bitcoin.

    I can understand how gold could be used as a currency. I can also understand another of Mises’ description of money. Money is the commodity in most demand. Everything you say about Mises’ claims about money etc I agree with.

    Here’s my point though. Fiat currency isn’t questioned because the state is behind the one principal that makes it counts….and that’s legal tender status. Fiat can be used to discharge debts.

    Now take this a little further. What if the state, in this case the US and the large econo0mies simply banned Bitcoin use in transactions. What then? Ultimately the currency adopted is the one that can be forced by the point of a gun. The point of a gun can also be used to ban something that poses a danger to the state.

    One last thing, Bitcoin is far, far too volatile to be be used widely as a transactionall currency. Moreover, the value of Bitcoin is measured against the US dollar and it’s value against goods and services indirectly backed up against its value against the US Dollar. Speak to me when it’s the reverse.

    You point out that poor countries are using Bitcoin. No shit, seeing their domestic currencies are a pile is dung and also manipulated to cause the most amount of grief to their citizens.. see Venezuela and several African countries.

    I’m open minded though. Let me know when I can use Bitcoin to buy a pack of cigs at the local convenience store., Until then, it’s an over bid gamers currency.

  3. JC

    Here’s the other thing that ought to make people wary.

    Bitcoin is currently trading at around $5700 (There we go again measuring its value against the greenback).

    When the thing was worth a couple of cents, no one gave a shit about it. It was basically ignored or viewed with amused curiosity. Now that its bid up to $5700 everyone is talking about its mystical and curative properties. One Bitcoin cures most hard lump cancers.
    Generally this is a classic top.

  4. Bruce of Newcastle

    Interesting comparison gold vs bitcoin.
    Both are a limited supply commodity.
    Both are regarded as valuable for no other reason than everyone agrees that they are valuable.
    Gold is anonymous.
    Bitcoin is not.

    You can hide your gold, but you can’t hide your bitcoin.
    If I was a government I’d very much prefer the latter to the former.

  5. JC

    Bruce

    Bitcoin is as concealable as gold. Like gold needing to be stored, bitcoin needs a stored pass key, which needs to be stored. In fact a column of numbers and letters written somewhere is easier to hide than a brick of gold or coins etc.

    There are also uses for gold. Gold used for jewellery and as you know, it’s about the best conductor of electricity.

  6. Bruce of Newcastle

    Bitcoin is as concealable as gold.

    Um, JC, no it isn’t.
    You see, you have to buy and sell bitcoin. Every time you buy and sell it the funds come from a bank account. That data is available to the government.

    By contrast I can go to the ATM, take out some currency and go to a trader and buy some gold. No one except the trader knows that I have done so and the trader won’t know who I am unless he takes my picture and does some serious sleuthing. The gold I buy is not registered. I could melt it down, cast it into a different shape and sell it with little problem. If I mix batches I can even stymie sophisticated isotopic abundance tracking.

    In theory it is becoming possible to do direct transactions in bitcoin, but even there the transaction will be subject to monitoring and taxation. Confidentiality won’t survive the desire of the government to verify and track the parties to each transaction. That as you recall was the issue with the CBA and AUSTRAC.

  7. Confused Old Misfit

    Couple of things, BoN: I thought that one of the benefits of Bitcoin was the blockchain transaction record which took the banks out of the loop?

    Other than the blockchain system’s security features it seems to me that Bitcoin trading is akin trading in Unicorn farts.

  8. Speedbox

    When the thing was worth a couple of cents, no one gave a shit about it. It was basically ignored or viewed with amused curiosity.

    Same could be said for Facebook (and others).

    Get back to me when it can do those kind of things just as easily and transparently as a dollar coin, let alone the weekly grocery shop.

    The thing is, that Bitcoin can be used to purchase numerous goods and services. Ok, not as widely (yet) as traditional fiat money but we are witnessing the evolution of money. For the time being, you can’t “bank” Bitcoin with your traditional bank and neither can you pay your taxes but, are you betting that will remain the case forever?

    Bitcoin is far, far too volatile to be be used widely as a transactional currency.

    Sure, even the most skilled traders are under pressure to trade in the unregulated rodeos that are the crypto exchanges but, people do. Every minute of every day.

    A few other snippets…….

    > The Ontario Securities Commission (OSC) has given its blessing to an initial coin offering set to launch at the start of next month.

    > Aswath Damodaran, a professor of finance at the NYU’s Stern School of Business, has expressed his belief that Bitcoin is a currency rather than an asset.

    > The U.S. federal agencies responsible for coining and printing currency should consider the future impact of cryptocurrencies, according to a report by U.S. Treasury Inspector General Eric Thorson.

    > A blockchain startup funded by the venture arm of Jaguar Land Rover has raised roughly $6 million in an initial coin offering (ICO).

    My point of listing those few snippets is that cryptos, and the underlying technology of the blockchain, are going from obscurity to greater recognition each day. Not all of that attention is positive (I could list an equal number of negative stories) and Governments will inevitably step in to enforce regulation.

    Forget what is, or is not, happening in Australia – we are a backwater – but on the global stage, the use of cryptos to purchase goods or services, or the application of blockchain technology is growing rapidly whilst exchange liquidity also increases daily. Are there crooks in the market – yep. Is it risky to invest – yep, can be. Could I lose some/all of my money – yes, but I think the likelihood continues to diminish and in fact, the value of my investment has increased substantially.

    IMO, we are witnessing the birth of a new methodology for transacting between individuals and, individuals with business and Government. Along the way, the opportunities for making money, including investing in those listed companies that are at the cutting edge of harnessing blockchain technology, is substantial.

    Only time will tell whether I am right or not.

  9. JC

    Same could be said for Facebook (and others).

    Not true. Facebook’s IPO came out at around (just under) 40 bucks a share giving the firm a market cap of around $115 billion. That’s not chump change. Moreover Facebook and others have a business purpose in order to turn a buck. You are applying the wrong metrics and wrong analogy.

    The tulip mania would be more appropriate to Bitcoin.

  10. JC

    Sure, even the most skilled traders are under pressure to trade in the unregulated rodeos that are the crypto exchanges but, people do. Every minute of every day.

    Major fiat currencies aren’t washing around at the same vol level as Bitcoin. Bitcoin is on a whole different plane.

    A blockchain startup funded by the venture arm of Jaguar Land Rover has raised roughly $6 million in an initial coin offering (ICO).

    Blockchain and bitcoin aren’t the same thing. blockchain could advance while Bitcoin crashes.

  11. Speedbox

    Blockchain and bitcoin aren’t the same thing. blockchain could advance while Bitcoin crashes.

    Yes, quite true, but I think Bitcoin and a few others, will be with us for a very long time. Blockchain is certainly a separate issue – that toothpaste has left the tube and nothing will get it back in. It is simply too “valuable” and far-reaching and will revolutionize payment/contract confirmation methodology.

    Major fiat currencies aren’t washing around at the same vol level as Bitcoin. Bitcoin is on a whole different plane.

    I don’t understand your comment. The daily trading in the entire crypto market generally amounts to a few billion (<$US10BN). Peanuts compared to daily FX . If you mean volatility, hell yes I agree. By the way, I don't "day trade" cryptos – I have a fairly robust risk appetite but I'll be buggered if I will jump into that pool.

    Maybe Facebook was not the best comparison (because it is a business) but my point was that it was a curiosity to begin with.

  12. Bruce of Newcastle

    Couple of things, BoN: I thought that one of the benefits of Bitcoin was the blockchain transaction record which took the banks out of the loop?

    COM – Once you’re in the bitcoin system yes.

    I believe it may be possible to buy bitcoin direct using physical currency, eg in Venezuela, but that won’t continue for long. Governments everywhere hate anonymity. For that reason they like to ban gold ownership and we’re in an age where they are actively pushing cash out of the system. Bitcoin will not stay confidential for the same reason.

  13. Joe

    And the biggest use for Bitcoin at the moment and I suspect why it has such and inflated price, MONEY LAUNDERING.

  14. Arnost

    Get back to me when it can do those kind of things just as easily and transparently as a dollar coin, let alone the weekly grocery shop.

    Whenever I want to get someone enthused about Bitcoin I spin this scenario:

    Today, one of retailers’ biggest issues is that they have people walking into their premises and trying out clothes, shoes, and otherwise pawing goods WITHOUT buying… They make a choice and buy cheaper on the internet.

    This is reality. Let’s accept this stop whining and fighting this. To succeed retailers need to change their business models to accept reality, actually facilitate it, and profit from it.

    Scenario… A customer walks into a store and decides on a product. They can accept delivery to their home 24 hours later or walk out with the product at a premium price. Given a large %percentage of overhead $cost for a retailer is floor space, the reduced need for on-hand inventory (keep only one size of each item rather than a couple of dozen each) is a direct bottom line cost reduction or can be used as a competitive pricing advantage to win more business.. The items can be warehoused in a cheaper location and delivered using the growing fleets of couriers. Should the customer chose to walk out with a given size, the retailer can just in time request the warehouse to deliver that item ASAP to the shop. The delivery / courier process is there!

    But what about International / Internet competition. Easy peasy!

    With blockchain and cryptocurrency the customer may be offered further savings if, once they agree on a size, to buy from overseas / internet and accept delivery in a week or two. If they so choose then the new world internet / blockchain of everything will kick in. Click here. The offer to buy will be put on an eMarket Place where the online retailers may bid to sell their item. The product my come with authentication that it is a genuine item and not a cheap copy… Once a the sale is won, freight forwarders and insurers may bid for their part of the transaction. Domestically the deliverX / Aust Post / Uber? type entities may bid to get the item to its destination. All this will be done in real time and automatically. A total cost may be on the widget in the store for the customer to accept in a matter of seconds. Click here.

    And I can keep on going for the process is not finished there – say you agree to have it delivered to a drop box at your shopping centre – that you can on time access via RFID and code sent to your phone. And maybe the local Woollies / Coles are in the loop and they identify that you made an order to have your weekly online shopping delivered, then because your order is more than $50 they will pick up your goods and deliver free of charge… Click here. You want to get it assembled? Click here. You want it registered for warranty? Click here.

    And the kicker is that the retailer that initiated this gets a % wig of every transaction financial or otherwise… Because without them this chain would never start!

    The banks are in a panic in that there is no need for them in the above process. The cut that they would otherwise take for transaction fees, guarantees, performance bonds, letters of credit etc has evaporated if done by Bitcoin, Etherium or any other combination of cryptocurrencies. They are scared as everyone other than them – and especially the ultimate customer – benefits…

  15. Arnost

    And the biggest use for Bitcoin at the moment and I suspect why it has such and inflated price, MONEY LAUNDERING.

    What if people see the use of it in say the above scenarios… And they realise that the total maximum amount of Bitcoins is only 21 million…!

  16. Bruce of Newcastle

    And the biggest use for Bitcoin at the moment and I suspect why it has such and inflated price, MONEY LAUNDERING.

    Bitcoin took off around the time of that big ransomware attack by the Norks. You had to get your computer unlocked by payment in bitcoin. Suddenly demand for the stuff skyrocketed…

    You can see why the Norks would like it. Assuming they still have a lot of those proceeds they’re sitting on a massive capital gain.

  17. Speedbox

    To buy your Bitcoin anonymously is actually quite difficult or, more accurately, it is difficult in Australia, the US, Canada and many other countries. You could get your mate to buy coins and transfer them to you, but the original record of purchase by your good mate (from the original exchange) will exist as the fiat money for the purchase would have to be transferred into their crypto account (unless your mate was generous and supplied you from his holding).

    Anyway, assuming your mate has purchased and transferred the Bitcoin to your electronic wallet, it is possible for you to buy things anonymously notwithstanding that the blockchain will have a record of the transaction (just not who you are, where you are or what you bought) between your electronic wallet and the vendor. In this sense it is no different to a cash sale.

    Similarly, in most countries, it is not possible to “cash out” your coins without establishing an account with the exchange. Therefore, you would need to enlist the help of another mate to exchange your cryptos back to fiat money after transferring those cryptos to him.

    So, having said all that, it is possible to transfer money anonymously around the globe using cryptos and I have no doubt that the criminals have worked out other ways of doing so.

    But, you can assured that the hand of Government has already been felt by most of the exchanges around the world. Interestingly, some countries are (reportedly) looking to establish themselves as global crypto centres where the purchase of cryptos (even at initial exchange level) will remain anonymous – in return for a “turnover tax” on the exchanges. But, as BoN has pointed out, the risks associated with dealing in those countries are substantial.

  18. Speedbox

    And they realise that the total maximum amount of Bitcoins is only 21 million…!

    Yes, but a single Bitcoin is divisible by 10 million. In other words, right now, you can buy a coffee from a trendy store in the West End of Brisbane for 0.00052044 Bitcoin (about $4). Or, you could go and buy a car for 5.20436907 Bitcoin (about $40,000) based on the current exchange price of Bitcoin.

    When you buy your coffee or car, the actual number of Bitcoins will fluctuate depending on the prevailing exchange rate at the time. This, of course, goes to the issue of the volatility of the exchange rates at present – but that is a bigger discussion for another day.

  19. Tel

    Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.

    I accept the utility value of Bitcoin as a payment system, but is this really unusual?

    Gold coins are both a payment system and a money, especially if they are standardized and stamped with a mark so as to make them easy to assay. That facilitation of fast counting and assay is the whole reason people started hammering coins in the first place, and what makes them better than chop gold.

    You could argue that as trade has moved from local to international, and people wanted something better suited to long distance, maybe Bitcoin is a better payment system than meeting someone in person and putting coins into their hand… but that’s merely and argument over the details, rather than any fundamentally different principle.

    I should also point out that exchanging gold coins has the special property of being able to maintain present status of accounts while also erasing history. That really is a fundamentally different feature in a payment system, in as much as Bitcoin does preserve history. Whether that’s an advantage or disadvantage depends very much on perspective.

  20. Tel

    Anyway, assuming your mate has purchased and transferred the Bitcoin to your electronic wallet, it is possible for you to buy things anonymously notwithstanding that the blockchain will have a record of the transaction (just not who you are, where you are or what you bought) between your electronic wallet and the vendor. In this sense it is no different to a cash sale.

    Totally different.

    A cash sale permanently erases any connection between you and the vendor, in a way that is unrecoverable (presuming the vendor doesn’t know you too well and didn’t take a photo or anything). Bitcoin merely obfuscates that connection between you and the vendor, and keep the record for a long long time so it might at any future stage become recoverable.

  21. Tel

    And the biggest use for Bitcoin at the moment and I suspect why it has such and inflated price, MONEY LAUNDERING.

    Stealth is of value to criminals, and also of value to people who have (for whatever reason) earned the displeasure of those more powerful than themselves. We can discuss the find difference between these two categories of people.

  22. RobK

    If any participating nodes store this data and replicates give weight to authenticity then eventually won’t the system bog itself under the weight of it’s own data?…..corrupt and valid data.

  23. C.L.

    Probaby a dumb question but …
    Who decides whether to make more bitcoins?

  24. Nerblnob

    I still don’t get it.

    But this has been the most illuminating article and discussion I’ve read so far.

  25. tgs

    Probaby a dumb question but …
    Who decides whether to make more bitcoins?

    Pretty sure no one can, the limited supply is hardcoded into the mining algorithm thingy. If that could be comprised to increase the supply then the fundamental raison d’etre for Bitcoin would fall apart as it would no longer be secure.

  26. Speedbox

    Who decides whether to make more bitcoins?

    Can’t be done. The number of Bitcoins is fixed and cannot be increased.

  27. Speedbox

    Bitcoin merely obfuscates that connection between you and the vendor, and keep the record for a long long time so it might at any future stage become recoverable.

    Yes, in much the same way as an elementary cash register receipt confirms a sale took place, but no more.

  28. C.L.

    It’s not a currency, then; it’s a digital tulip.

  29. Speedbox

    There are none so blind as those who will not see.

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