> introduces itself on the Wiki with the concept of money-as-IOU
That's what money is. You don't eat a coin or bill, it's an "IOU some future tangible good or service".
Think about it, you either have barter -- no money concept involved. Or you have money-facilitated trade -- then the money (whether coins or bills or seashells) is always a "debt" of sorts for deferred/future "trade settlement". That IOU characteristic automatically happens to whatever emerges (or is decreed) as the unit-of-account+medium-of-exchange of the day. And that's fine, this and only this allows trade beyond immediate barter.
You are oversimplifying. You can either have a currency with intrinsic value or a fiat currency.
The USD is a fiat currency, it only has value because the US government says it has value. Fiat currencies are very close to debt basises.
Non-fiat currencies like Bitcoin are a little different, since there is actual value to a Bitcoin. It is similar to how gold and silver were once used.
The benefit of fiat currencies is they can't be used for other things affecting the monetary supply, they are always in circulation (pretty much, obviously there are exceptions).
Bitcoin is in a weird spot, it is a non-fiat currency without having to worry about the destruction aspects, as Bitcoins can't be destroyed. There is the whole getting lost thing, but that is unavoidable without implementing a use or lose it scheme (which some altcoins are trying).
There is no way in which Dollars are a fiat currency that bitcoin is not a fiat currency.
Bitcoin has most of the features of a central bank in that it regulates the amount of money in circulation and has policy limits on who can create money and how. Unfortunately it's policies are fixed at birth and cannot be changed without unanimous consent of those participating in it's accounting system ( unanimous consent being a synonym for nearly impossible ) and the enforcement is done by protocol and public accounting; rather than by the fact that your local "insurance company with an army" will accept it as a valid form of payment.
If the US government said that it was creating a new currency and USD were no longer the official currency, what would happen to the USD?
And to be fair to the USD, Bitcoins regulations are laughable simplistic compared to a "real" currency, especially since it is so heavily biased towards deflation.
I do not mean to say that Bitcoin is unsound or poorly designed, just saying that the intrinsic tools available cannot compare given the scope of the initial creation.
USD would keep going for a long time even if the US government disappeared.
Bitcoins do not have value. I've seen two arguments for it, and I'll counter both.
1. 'value because mining, network uses' Bitcoins are not mining, they are a reward for doing it. If nobody wants to trade for bitcoins, they have no more use than yesterday's lotto numbers.
2. 'bitcoins have qualities that make them good for trading' You cannot apply those qualities to anything other than the bitcoins themselves, so they become null in the scenario where nobody actually wants to trade for bitcoins. This is not intrinsic value.
USD is used outside the US plenty. A lot of its value is simply people preferring to use it, the same kind of potential value that bitcoin has. And that value works with or without cryptography and math and code, so I find crypto-fiat a silly term. All it needs is a ledger, and crypto is merely one (rather secure) method of creating one.
Doubtful, USD is used elsewhere because it is the currency of the largest trader in the world. Especially considering the fact that most USD isn't physical, how would you trust digital dollars without the accounting system in place today?
Gold also has no intrinsic value. Sure it has some industrial applications, but everyone is getting around fine with very small amounts of it. But no one doubts that gold has value.
Market value is determined by demand, not who backs it.
Thank you for answering dualogy's remark pretty well.
There is another reason why Bitcoin is in a weird spot, though. Bitcoin is neither anybody's IOU nor does it have an intrinsic, physically-based value similar to gold. It is perhaps the only example of a currency (or near-currency) that arose purely from something else entirely, and I'm not quite sure what that "something else" even is.
Industrial, physical uses of gold account for a very small fraction of its price. Gold coins originated as IOUs of some King. Bitcoins are nothing more than decentralized IOUs for the "real money" traded at bitcoin exchanges.
I agree that the physical use of gold does not explain its price by itself. Two things though: First of all, the physical use of gold is undeniable, and it's plausible that a sort of "bubble" -- perhaps not quite the right term given how stable that bubble is -- bootstrapped from this physical value.
Second, from what I understand, the first gold coins that were intended as currency were made of gold precisely because gold was already valued for other reasons. I do know that historically speaking, the value of gold coins was usually unrelated to the price of their gold contents, so it is true that they played the role of an IOU. However, (a) there is a reason why governments chose gold rather than a different material (psychology based on the pre-existing value of gold), and (b) throughout the ages, gold was also used as a payment-commodity in trade.
That latter use is probably overstated by the goldbugs, but it would be wrong to dismiss it entirely.
> I agree that the physical use of gold does not explain its price by itself.
Gold was around production costs ($250) before the "general commodity bull-run 2001-2011" and is now back at around production costs (nowadays roughly around $11xx - $12xx, many opinions about this and different ways to quantify but production costs are in this range these days, no longer in the low hundreds as 12 years ago).
Gold is very similar to Bitcoins because production is hard. The government can't create it any cheaper than anyone else. This rarity is what helps stabilize its ability to hold value.
Gold coins are not the same, and are similar to IOUs as you mention. But gold does not base its value off the fact that at one point it was used as a currency.
That is a completely different thing from how a fiat currency works. Controlled money supplies add and remove money via direct or indirect controls to provide value to society as a whole.
The word 'fiat' as related to currency, is often unhelpful and confusing. It should, in my opinion, only be used to refer to the aspect of some currency which is that it (sometimes) has government backing (ie that currency is declared to be legal tender for all debts by 'government fiat').
The whole money-as-IOU vs money-like-gold distinction is another thing again.
So, I think original reply has a very good point. There are two types of currency being talked about and bitcoin is very much in the money-like-gold camp whereas this proposal is very much a money-as-iou concept. Personally I think this idea of combining the two is really exciting and something I've been working on - like modern banking is to gold, I think money-as-iou built on top of bitcoin is a very exciting prospect.
In my way of looking at things there is fiat money then there is debt based and market based money, or as I like to call them 'two sided' and 'one sided' currency.
Bitcoin is a 'one sided' currency like gold (or tulips during the tulip mania) in that there is only one person involved in creating its value. Originally it's mined, but it's valuable because there are people who will buy it today because they estimate there will be people who want to buy it tomorrow. That is, there is market today, because there is an estimate of a market for it tomorrow (and a guarantee of limited supply). People buy bitcoins (or gold or tulips) today either because they are speculating on it's future value or because they find it useful to convert there thing of value (let's say it's tee shirts they are selling online) temporarily into gold or bitcoins because the instrument in question is more easily transferred, combined and stored than the thing they have of value (tee shirts). However, their intention in either case was to sell it back into the market later on. As the Austrian economists would say there is a market value for cash in your wallet because its easier to carry around this cash and turn it into bread at the corner store than try to convince the shop owner to accept an hour of your labor (or part ownership in your house). The point being that nothing intrinsically 'backs' the currency other than the ongoing existence of a market place [1] and corresponding estimate of that ongoing existence.
'Two sided' money or debt based currency systems require at least two people to create them, They are 'valuable' regardless of the market mood in future, because at some point a promise was made to redeem that instrument for something ostensibly of value in future. To the extent that the person (or person(s)) making that promise continue to be 'in good standing' the instrument in question continues to have value. They also have value, like one sided systems, because of simple market place estimates. Two sided or debt based currency systems include mutual credit systems (such as LETs or 'commercial barter'), the original ripple system, and also, in a much more complicated way, most of the value in our modern commercial money system. You can distinguish a debt based system different from 'one sided' system in that, nominally at least, the instrument of credit is destroyed once it returns back to the person who created it, so the amount of currency in circulation can expand or contract depending on the amount of promises made.
With modern money (what people sometimes, unhelpfully call 'fiat' money [2]) our commercial banks create more money by expanding their balance sheet. When they do this, a new deposit is created at the same time as a corresponding promise in the form of a loan the bank makes to a person (who promises to pay back the loan by doing things for the instrument in question, aka 'money' and then returning that money to the bank). When the person or company eventually pays back that loan (or they default) the corresponding deposits on the other side of the balance sheet are also extinguished. In this way the money supply can both expand or contract. (Unlike gold or bitcoin).
In practice, of course, it only ever expands. Two sided aka modern money is more flexible than one side money (aka money-like-gold, aka bitcoin) in that the supply, or more usually, the rate of creation of supply can be controlled by adjusting the interest rates on loans (and hence the willingness of people to take up new loans and thus expand the money supply). On the other hand some claim it is more open to corruption (or just short term thinking) leading to oversupply and hence inflation (or loss of value) in the longer term.
All of which is to say the grandparent post really has a very good point. This proposal is about money-as-IOU which is really quite the opposite of the bitcoin money-like-gold concept. That said, the combination of the two is very exciting in my opinion (which is why I've been working on http://thankful.as and have been excited about ripple since as an idea since I first heard about it)
Phew.
[1]
Of course Gold (unlike bitcoin) does have a small 'intrinsic' value as adornment or in industrial processes, but IMHO this is largely irrelevant as to what is the reason for its value as a currency, and why I believe bitcoin has as much staying power as gold. (ie lots).
[2]
Gold has also, on occasion, been stamped with the picture of the king, signifying that it is acceptable within that kingdom in payment of taxes. This 'stamping' is functionally very similar to the 'fiat' laws we have in place today regarding the value of cash.
Interestinyly whenever gold was stamped, the gold traded for a higher value the metal value of raw gold of the same weight, though only within the kingdom in question, not internationally. Of course, from the King's perspective the neat thing about this was that the king could redeem value today by buying (or just taking) raw gold and then stamping it with their picture. Essentially they receiving value today from the future value of taxes that would be paid in that coin. This may be one reason why monarchs would so often call in all the gold in their kingdom, stamp it, and then send it back out again.
Incidentally, by continuing the analogy of gold and bitcoin, the government could also, today, retrieve value from their future taxes by stamping certain parts of the bitcoin chain with a cryptographic stamp indicating that they would be willing to accept those particular bitcoins as legal tender for taxes in future.. thus allowing them to buy bitcoins at price x, stamp them and then sell them for price y, higher than x. (Where market economics would suggest that the carrying capacity of (y-x)*n for the n bitcoins they do this to would be about equal to the future value of all taxes that people want to pay in bitcoins.)
I 100% agree on the value of the grandparent post, which is why I commented when I felt his point was being diluted.
I would also agree that Bitcoin has a good chance as a commodity (I just don't have the right risk factors to invest) the only frustrating thing about Bitcoin is so many people talking about how Bitcoin needs to become a major currency.
The only thing negative I would say about your post is that you have to be really careful talking about inflation and deflation. Inflation is often put in a negative light because it discourages saving, but deflation discourages spending, which is much more dangerous. Which is why I don't have any faith that Bitcoin itself will become a currency, the deflationary problem is built in and part of the core.
... is false. Both represent the bearer trusting their economic society to pay back the debt for the original goods or labour for which the bearer exchanged for its acquisition, at some point in the future.
That's what money is. You don't eat a coin or bill, it's an "IOU some future tangible good or service".
Think about it, you either have barter -- no money concept involved. Or you have money-facilitated trade -- then the money (whether coins or bills or seashells) is always a "debt" of sorts for deferred/future "trade settlement". That IOU characteristic automatically happens to whatever emerges (or is decreed) as the unit-of-account+medium-of-exchange of the day. And that's fine, this and only this allows trade beyond immediate barter.