Thursday, April 18, 2013

A few more thoughts about Bitcoin and numeric values

Sorry to keep harping on this one topic, but I was reading the "Myths" page on the Bitcoin wiki and something struck me as kind of funny and strange.

Bitcoin has been compared to the gold standard, because the coins "exist" (so to speak) in limited supply. Indeed, believers in Bitcoin and believers in precious metal currencies seem to be the same people in a lot of cases.

But here's the interesting part: some of the arguments for Bitcoin openly undermine and negate the arguments for using gold and silver as currency. Check this out.

Myth: Bitcoins are worthless because they aren't backed by anything
Response: One could argue that gold isn't backed by anything either. Bitcoins have properties resulting from the system's design that allows them to be subjectively valued by individuals.
Myth: Bitcoins have no intrinsic value (unlike some other things)
Response: It is true that bitcoins have no intrinsic value, in the numismatic sense, in other words, value in any realm outside of being used as a medium of exchange.
However, while some tangible commodities do have intrinsic value, that value is generally much less than its trading price. Consider for example that gold, if it were not used as an inflation-proof store of value, but rather only for its industrial uses, would certainly not be worth what it is today, since the industrial requirements for gold are far smaller than the available supply thereof.
Think about that. They're marketed to the same group of people, but the arguments are at odds with each other. Many gold bugs seem to be under the impression that the reason gold is a good idea is because it has "intrinsic value"; Bitcoin advocates are under no such illusion. They're just saying it's valuable because it is in limited supply
Here's something else to consider as well. When you consider that bitcoins are divisible into parts of 10^-8, the argument that the supply is "limited" becomes much more shaky. For all practical purposes, bitcoins aren't integers; they are floating point numbers. The divisions of real numbers are infinite. 10^-8 is not infinitely small, but think about it: the United States GDP is about 15 trillion dollars. There are, in principle, an upper limit of 21 million bitcoins in the world, or 2.1*10^6. If 10^-8 of a bitcoin is the smallest "unit" possible, then the entire GDP could be completely expressed in bitcoins with each btc being worth half a penny.

When you think of it as a real number instead of an integer, the case for the supply being "limited" becomes pretty shaky. You could have just ONE btc in the world, but if the division of a btc is sufficiently fine, you could still make transactions with it; a loaf of bread might be worth 10^-12 btc, or whatever.

It seems to me that the supply of btc is not really fixed in any meaningful way. The dollar value of the money changes according to market value. Just in the last few years a btc has been worth $1 at one time and $200 at another time. You can't chop a gold coin into a hundred million pieces, but you can do that with a bitcoin.

1 comment:

  1. You can chop gold into an infinite number of pieces by printing paper currency equivalent to some "share" of a gold bar if you will. One hundred million pieces of paper is one hundred millionth of a piece of gold.

    The real gravity of the gold comparison is precisely what you mention here, but that you do not seem to fully grasp. If money supply is fixed, then a growing economy (i.e. more goods and services) will require steadily falling prices. So, as you note, you'd have to continue subdividing bitcoins. But that's deflation! And deflation wreaks serious havoc on an economy. Most notably, in a deflationary world, it makes sense to hold on to your currency rather than spend it or invest it because it will be worth more tomorrow than it is today. That's the deflationary death spiral, and it is just as serious a threat on gold as btc.