Blog author: jballor
Thursday, April 11, 2013
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Bitcoin-coinsWe’ve had some intriguing discussion about Bitcoin at the Acton Institute offices today. It is certainly a phenomenon worth greater attention, and something of significant cultural, social and economic import. But I’m not buying Bitcoin, at least not yet.

My initial skepticism is in part due to my lack of familiarity with the details of the currency and its formation. I certainly need to learn more.

But also in large part my skepticism is due to my doubt about the productiveness of the effort that generates the currency. Is it merely fiat money without the pretensions? Is it the logic of subjective value-theory brought to the final conclusion? I worry that the computing power expended to mine BitCoins is vacuous and parasitic at its core. It does not represent a good or service that has been provided for or contributed to anyone.

A Bitcoin has value simply because people have decided it has value. People “mine” Bitcoins because, as Whately would note, “they fetch a high price.”

But what does a Bitcoin block represent in terms of actual human utility? I worry too that this is a system that relies parasitically on real-world resources, e.g. coal which provides a large part of the electricity, which is used to run computers so that they can then in turn “mine” something entirely virtual.

What is Bitcoin teaching us, really?

If you’ve had experience with Bitcoin or thoughts about the phenomenon, please share them in the comments below.


  • daprofessa

    LOL “A Bitcoin has value simply because people have decided it has value” hmm kind of like the us dollar?

    • http://Culture11.com Joe Carter

      All money has value simply because people have decided it has value (gold is just a metal that humans have imbued with extra significance). But I think what Jordan means is that Bitcoin has value simply because a small group of people have decided that they will treat it like money without anything backing it up (either a tangible item of value or the power of a government).

      • daprofessa

        Gold has tons of uses actually: http://geology.com/minerals/gold/uses-of-gold.shtml. In contrast, pieces of green paper do not.

        “Bitcoin has value simply because a small group of people have decided that they will treat it like money without anything backing it up”
        This is exactly how the US dollar works too. The government is a relatively small group of people and what gives the currency power is the people that trade it and in turn decide it has worth. Paper money is worthless, a good example post WWI in Germany when people just burned the money because inflation made it worthless and it was the most use they could get out of it.

        On that note, money was intended to be an intermediate to represent the exchange of energy that is necessary to create something. That energy could be mechanical, human, electric etc. The problem with ALL currencies like Bitcoin, Euro, USD, etc. is that they do not have any real uses, they just are numbers, which is why they are so easily manipulated. Something tangible like gold is worth the energy inside of it divide by how much there is available for use.

        • http://www.facebook.com/philkim72 Phillip Kim

          you are wrong. the origins of fiat currency are “bills of credit” issued by governments. there were issued to satisfy government obligations with the promise that those bills could be used to satisfy tax obligations by the holder in the future. EVERYONE has tax obligations, so these bills could be used as a medium of exchange and store of value. Paper currency, while they may seem worthless to someone who doesn’t understand fiat money, can be submitted to the issuer (the government) to get something of value in return (the satisfaction of tax obligations). that’s why fiat money requires the full faith and power of a government with taxing powers. otherwise, currencies that are backed by precious metals (like when we were on the gold standard) have value. however, bitcoins have zero value, because you cannot take the bitcoins and submit them to the issuer of those bitcoins and get something of value. for example, if i owned all the bitcoins in the world, what is my recourse, i.e. what can i get in return? they are more akin to stock in a company, but in this case, the company has no tangible assets or ability to generate cashflow. Bitcoins are worth approximately ZERO.

  • SWolf

    “I worry that the computing power expended to mine BitCoins is vacuous and parasitic at its core. It does not represent a good or service that has been provided for or contributed to anyone.”

    Huh? The computing power is positively miniscule compared the the resources expended to run any governmental bank, or even having people exchange a tangible currency like gold. The algorithms are designed so eventually income will never be lost due to inflation. How many currencies can say that?

    “A Bitcoin has value simply because people have decided it has value. People “mine” BitCoins because, as Whately would note, “they fetch a high price.””

    Like every other currency out there. The only difference is the power of the people backing it up. The principle is completely the same.

    If you want a currency backed by something tangible, fine, just don’t say it’s a bad idea while you have other fiat currencies, like US Dollars, in your possession.

    “My initial skepticism is in part due to my lack of familiarity with the details of the currency and its formation. I certainly need to learn more.”

    I admire your honesty, but next time do the research…. THEN write the article.

    • http://www.jordanballor.com/ Jordan Ballor

      In terms of comparing resources expended, you may be right. Another comparison discussed was a kind of Keynesian “digging holes and filling them back up again.” Is computer automated Bitcoin mining better, worse, or qualitatively different? If it is pointless work, then it is better to have non-humans (e.g. computers) do the work. But why tie a currency to pointless work? Couldn’t it be tied to some other purpose which might also benefit some benefit, like some particularly knotty mathetmatical or statistical calculations that require large-scale computational power? Are we sure that the computing power expended isn’t already being used by someone for some other as yet unknown purpose? Maybe it’s all just a scheme so someone can start selling already-designed custom Bitcoin miners and have a corner on the market for them. I’m not sure, but it’s worth thinking about, which is why I wrote the post. This all gets at the question of trust.

      I do not deny that the principle of value behind Bitcoin is “completely the same” as with “other fiat currencies, like US Dollars.” That’s precisely why I wondered if Bitcoin is “fiat money without the pretensions.” If true, that’s in part why it is so interesting as an object of study, both in terms of itself as well as in terms of human behavior surrounding the phenomenon. Certainly Bitcoin is rooted in a system of trust, but it also says as much or more about distrust of other options, e.g. the currency backed by central bank policies.

      “…just don’t say it’s a bad idea while you have other fiat currencies, like US Dollars, in your possession.”

      I fail to see why owning or not owning Bitcoin, USD, Euros, or Pogs should qualify or disqualify someone from wondering and raising questions about Bitcoin.

      As to the question of what Bitcoin is teaching us, certainly Tucker is right about some of the implications of anti-inflationary currency value. But what might extreme instability teach? What might “earning” a Bitcoin by having a computer do some otherwise pointless calculations teach us about the “value” of money?

      • SWolf

        “Couldn’t it be tied to some other purpose which might also benefit, like some particularly knotty mathematical or statistical calculations that require large-scale computational power?”

        This issue is it needs to be

        1)Computationally difficult

        2)The difficulty is predictable.

        The formal is simple, the latter not so much. since they reward based on computational difficulty, they need to know on the outside the amount of computational power it will take. Most practical problems don’t have such an easy metric to do so, and there would be significantly more overhead to make it work. Not perfect, but I can understand the philosophy behind it.

        “Maybe it’s all just a scheme so someone can start selling already-designed custom Bitcoin miners and have a corner on the market for them. I’m not sure, but it’s worth thinking about, which is why I wrote the post. This all gets at the question of trust.”

        I see it was a “first-adopter” advantage. People who are willing to take risks in a new platform deserve to be rewarded with mining rewards. If bitcoin fails, their efforts are for naught. There has to be an incentive.

        Also, the code is all open-source. It would be hard to introduce a back-door into the currency, as it’s been peer-reviewed by thousands of people. They found one exploit that has now been fixed. Everyone has to play by the rules.

        “I fail to see why owning or not owning Bitcoin, USD, Euros, or Pogs should qualify or disqualify someone from wondering and raising questions about Bitcoin.”

        That was snarky, I apologize.

        “Certainly Bitcoin is rooted in a system of trust, but it also says as much or more about distrust of other options, e.g. the currency backed by central bank policies.”

        Agreed. Ultimately it’s about the amount of trust people are willing to give to the authority that control the currency. People are more willing to trust an algorithm than people.

        “What might “earning” a Bitcoin by having a computer do some otherwise pointless calculations teach us about the “value” of money?”

        You’ll probably disagree, but material value is determined by it’s value to individuals in a market. They can be manipulated by various reasons, but whether it’s gold, dollars, euros, etc. The money has value because people believe it has value, because it’s accepted as something with value. For currency, the value is usually based on trust, or force. The more a currency is accepted, the more valuable it becomes because of it’s general usefulness as a method of exchange. If a methodology allows a currency to gain traction, be accepted, and used widely, more power to it. It’s actually theoretically better for a free market than the US Dollar, since force doesn’t back up the bitcoin in any way.

        • http://www.jordanballor.com/ Jordan Ballor

          As for what computational problems to tackle, it seems to me there there could just be a queue of projects that are lined up and solved over a period of time, relatively larger or smaller. Obviously they would have to be framed in a way that is consistent and applicable, but there have to be concrete problems or calculations that a broad-based P2P network like the Bitcoin community could be leveraged to solve.

          As for the trust for the creator and first adopter advantage, I do find it hard to believe that there isn’t some built in advantage for the creator(s) that isn’t explicit. It could be a wide variety of things, and what it actually is, I have no idea. Maybe the Bitcoin community is actually decrypting launch codes or something at least potentially nefarious…that’s where the matter of trust comes in.

          People may be more willing to trust an algorithm than people, but people designed the algorithm, and given the complexity of it the implications may not be obvious.

          As for “earning” Bitcoins and the lessons, I mean that specifically with regard to Tucker’s points. I don’t disagree with Whately’s refutation of a pure labor theory of value. My question has to do with the implications (moral, social, or otherwise) of valuing the pointless work a computer is doing; it might as well just be playing Tic Tac Toe against itself for all the practical good its computational effort is accomplishing (or so we are led to believe). It’s true that when you have to expend effort to gain something, you tend to value it more, or at least count the cost a bit more closely. With that in mind, I’m not sure why a teenager would value a computer-generated Bitcoin more carefully than a dollar earned by cutting the neighbor’s grass.

          Money is a very complex phenomenon, and maybe virtual currency like Bitcoin is simply money in its purest, most unadulterated form. Or maybe it is just nominalism run amok. I’m wondering about all the implications of what that might mean, and I’m not entirely sanguine about it. I’m also not dismissing it out of hand.

      • http://www.vilepickle.com David

        “Are we sure that the computing power expended isn’t already being used by someone for some other as yet unknown purpose?” I’d say we’re sure. The code is open source so any sort of foul play would have been discovered by now. There are in fact many “alt” coins available because Bitcoin is open source. e.g: http://dustcoin.com/mining

      • http://www.vilepickle.com David

        “Are we sure that the computing power expended isn’t already being used by someone for some other as yet unknown purpose?” I’d say we’re sure. The code is open source so any sort of foul play would have been discovered by now. There are in fact many “alt” coins available because Bitcoin is open source. e.g: http://dustcoin.com/mining

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  • Ricky Bobby

    Feeless, immediate transfer of value from one party to another anywhere in the world is a service.

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