Bitcoins revisited....

I posted on the topic of bitcoins a while back and know all my criticisms and skepticisms regarding them as a money or a currency.

This posting is targeted specifically against the position that bitcoins have value for various reasons.

Let me argue against those reasons here:

1. Bitcoins have value because...the technology use to build them and the infrastructure cost money and resources.

This uses the Labor theory of value for which the very same libertarians argue against when discussing general economics with statists.  The fallacy here is that labor and resources falls in the "necessary but insufficient" category.  It's a common arguing technique that if you can demonstrate necessity for A to make B valid that somehow A alone can prove B.  Labor and resources can be wasted and so the argument is insufficient to prove anything.

2. Bitcoins have value because...other people want them.

This is an admission that bitcoins are a con game.  Con game meaning "confidence game."  Confidence being the key word, what happens when confidence goes away?  There is nothing there.  Unlike other asset classes that were pumped up by confidence like stocks and real estate, there is no non-zero price bitcoins can evaluate to when confidence goes away.  When the stock market crashed in early 2000, the speculators all left and stock prices dropped back to levels that more accurately reflected the valuation of the company.  Same thing with real estate.  There is a base market value of wood, bricks, siding, glass and land.  There's no base value for bitcoins except for zero.

3. Bitcoins have value because...the network effects allow bitcoins to be exchanged.

This is basically a hybrid of the prior two points.  Consider the telephone.  Imagine for a moment nobody knew what a telephone did at the time it was invented.  Now imagine as the inventor, you are trying to get people to adopt the telephone.  What would you say to a potential customer?  Would you say, the value of a telephone is the network of people who will use the telephone?  Of course not.  The value of a telephone is the ability to transmit your voice across very long distances.  Yes, other people would need a telephone to receive the transmission.  But the value is in efficiencies in communication versus sending a letter or shouting.  The fact it generates a network is purely secondary as more people find value in its efficiency.  The point is - the selling point of the telephone is the efficiency of communication over existing technologies, not that other people will have telephones.  You certainly don't say that when you're trying to sell the first few telephones!

4.  Bitcoins have value because...it's anonymous, untraceable, low overhead and other bitcoin properties.

This is probably the only partially valid argument.  Anything can be valued for its properties but again, that is required but insufficient.  Anything can have properties like a broken piece of glass.  But that broken piece of glass is of very little value because I can't do anything with it.  Sure, if a burglar ties me up and I find that broken piece of glass, then it has tremendous value.  However, it's the properties that allow something to have utility that brings that something value.  So while bitcoins have properties, it has yet to be demonstrated that those properties bring about any utility because of my earlier points.  Sure, can someone say they really value a broken piece of glass?  I suppose so.  That's why I can sort of concede this only on the grounds you can't prove a negative.


I certainly understand the appeal for bitcoins but they're not going to be the future of money.  The defenders are very smart people who want it to work but like their Keynesian counterparts, they use a lot of technical terms and fallacious analogies to tape together a flawed argument while ignoring the cracks.

Economies need money to flow.  It certainly isn't flowing since people are hoarding them.  What that means is bitcoins are experiencing extreme deflation right now.  Exactly how can the money be adopted by the market if the few are hoarding them?  The masses are simply not going to enter into the bitcoin money system to allow a huge wealth transfer to the early adopters.  Ain't gonna happen.