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Bitcoin and the Goldbugs

author: Vitalik Buterin
published: 2011-06-14 10:24:18 UTC

Despite the fact that Bitcoin advocacy, just like gold advocacy, is founded on libertarian and Austrian economic principles, there is much hostility among proponents of gold as a currency against Bitcoin. The criticisms that the gold proponents make, however, often result from a misinterpretation of economic principles such as the subjective theory of value, and what a currency is. Let us examine some of the arguments that are made against Bitcoin:

I’m afraid that those people are losing sight of how a real medium of exchange arises in a free market. A medium of exchange arises from something that had a material use/value in the market prior to becoming a medium of exchange, i.e., it was also a good being bartered for other goods and services. Over the centuries, gold and silver won out as the two most preferred mediums of exchange, with gold holding the number one position due to it being more scarce than silver.

This seems to be a "it shouldn't have happened therefore it didn't" fallacy: other currencies arise because they were originally valuable, and their use as a currency developed from there, but Bitcoin already has a value and use as a currency without this bootstrapping mechanism. Once a currency acquires a value, there is no logical reason why the history of the currency's development should have any bearing on its present state.

But behind this is a deeper misunderstanding of how currency works. Allow me to quote one of my previous articles on the subject:

When a merchant buys 5 BTC worth of food from one vendor, buying into the scheme, and then sells 5 BTC worth of his product to someone else, cashing out, the merchant still benefits, since he values food, which he cannot produce himself, more than his product, of which he has an excess. Even if the value of Bitcoin falls by 2% between the two exchanges, the merchant most likely still values 4.9 BTC worth of food more than 5 BTC worth of his own product, and thus has a net profit despite the 2% loss. Thus, the Bitcoin "Ponzi scheme" can keep on circulating around forever, and, unlike a speculative bubble, can even survive if Bitcoin falls in value.

A currency is similar to a pyramid scheme - its value is based on the expectation of it having a value in the future, but it can last forever since it relies on trade and not expansion to generate wealth. The value of a currency does not depend on its value as a good, it depends only on its value as a currency itself, in a circular loop. It does not matter what kickstarted the loop, it matters that the loop exists in the present. A currency thus does not need to be intrinsically valuable. In fact, according to the subjective theory of value, the concept of intrinsic value is meaningless: as Wikipedia describes it, "it leads to the conclusion that there is no proper price of a good or service other than the rate at which it trades in a free market." This is where arguments such as the idea that Bitcoin's value is zero since "it is just bits on a computer" fall apart: these bits have value because people are willing to pay for them. The "supply" part of the demand and supply equation is also important: Bitcoins maintain their value due to scarcity; no person or organization has the power to print bitcoins at will. This is the advantage of gold over fiat currency: fiat currency is dismissed as "valueless" because its supply is whatever the US Federal Reserve wants it to be.

Now, onto another criticism:

And what's with the "fixed" amount of Bitcoins? Who determined the "proper" amount? A computer programmer? Only the free market can voluntarily determine how much of a real medium of exchange is needed in the marketplace over time.

Here, in fact, the author has it backwards: this is not Bitcoin's weakness but is in fact its greatest advantage. There being 21 million bitcoins in circulation and there being 4000 bitcoins in circulation is in fact, due to infinite divisibility, the exact same thing. It is only a matter of notation where the decimal place goes. Thus, the number 21 million is nothing more than a convention; if the free market wants there to be 21 billion coins, there will be 21 billion coins; they will simply be called "millibitcoins" (or, as is now preferred, "millis") instead of "bitcoins". Also, gold has the exact same problem and the exact same solution. As Rothbard stated, "Any quantity of money in society is 'optimal'". However, with gold, there are two problems:

First, gold has a natural price floor. If the free market decides that there is too much gold, the value of gold decreases, but the value of gold can only decrease to a certain point: if gold's currency value falls below gold's use value, then gold as a currency will be used with an artificially increased price, and the free market would not be able to determine gold's proper value as a currency. If the price of gold as a currency goes too high, however, there is another problem: as the price of gold goes higher and higher, more and more industrial uses of gold become impractical, so use of gold is harmful to some sectors of the economy. Bitcoin is a pure currency, so it does not "get in the way" of any industry by having a high currency value.

Second, gold mining is much more irregular than Bitcoin mining. In the 17th century, the conquests of Spanish America brought back considerable amounts of gold, causing a spike in price inflation. There is thus no guarantee that there would be a specific amount of gold in the future. With Bitcoin, on the other hand, it is known that there will be a certain number of them on a certain day with near-total accuracy.

There are many criticisms that attack Bitcoin without realizing that they apply in an essentially unaltered form to gold as well. Consider this one:

I just read their FAQ. Still find it absurd that the whole bitcoin movement believes the best person to provide money is the one that can program the best hash algorithm solver and has the fastest computer.

Attacking gold, one can "still find it absurd that the best person to provide money is the one that can provide the best mining equipment and has the largest mine." There are many objections to Bitcoin mining; if any have any validity at all, they apply to gold miners just as much as bitcoin miners.

Bitcoin and gold are two currencies with different strengths that do not have to compete, and can even work together, in a free society. Gold is a convenient currency for physical transactions, and, because it has remained valuable for thousands of years, is a great store of value, but Bitcoin is far more convenient for online transactions and has other benefits like the possibility of anonymity. There is no need for hostility between the two, and many commenters on the linked article against Bitcoin realize that Bitcoin, if it succeeds, can be just as legitimate a currency as gold is. It is better if gold and Bitcoin proponents work together against the real enemy, government-enforced fiat currency.

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