Ponzi Logic: Debunking Gary North

Many people have asked me to respond to Gary North’s article on Bitcoin but I’m pretty much over giving detailed responses to people who haven’t done basic homework on the topic. Still, I was thrilled to receive this nice point-by-point rebuttal, which I publish here:

Ponzi Logic: 

Debunking Gary North’s “Bitcoins: The Second Biggest Ponzi Scheme in History

by John Mather

 

Gary North is no stranger to predictions.  Perhaps his most famous one is his widely publicized prediction that Y2K would end civilization as we know it.  In his Bitcoin article, North makes another technology related prediction:  after Social Security, Bitcoin will go down as the biggest Ponzi scheme in history.  North’s article is riddled with false premises and faulty logic demonstrating that he does not understand Bitcoin.

North is widely recognized as an expert on Austrian economics, and I make no claim to the contrary.  North purports to base his critique of Bitcoin on Austrian economic theory.  However, his arguments are so weak that he makes Austrian economics look bad, to the point that someone unfamiliar with Austrian theory could finish his article doubting the validity of Austrian theory.  One reader who linked North’s article on a message board even commented that the article made him want to stop referring to himself as Austrian.

This article attempts to rectify this unfortunate situation by calling out the faults in North’s arguments and showing how his arguments diverge from Austrian economics.

Is Bitcoin a Ponzi Scheme?

Given that the market of freely choosing individuals has placed a value on Bitcoin, the burden of proof is on North to show that Bitcoin is a Ponzi scheme.  However, the Ponzi scheme Wikipedia entry shows that the very definition of a Ponzi scheme does not apply to Bitcoin.

There are several key differences between a Ponzi scheme and Bitcoin.  First, Ponzi scheme vehicles are inherently fraudulent.  When running a Ponzi scheme, the promoters lie to participants and conceal key information about the where their funds go.  Bernie Madoff, who claimed his firm’s consistently high returns were based on investments which he in fact never made, is a prime example.  The issuance by Allen Stanford of phony certificates of deposit to unwitting customers is another example.  In contrast, Bitcoin is not based on fraud or deception.  Bitcoin is an open book, literally.  The open source model Bitcoin employs means that it cannot claim to be one thing while in fact being another.  Anyone is free to inspect the Bitcoin code base to determine for himself what it is or is not.  This difference alone starkly distinguishes Bitcoin from a Ponzi scheme.

The second key difference between Bitcoin and a Ponzi scheme is revealed in Wikipedia’s differentiation of a Ponzi scheme from a pyramid scheme.  A Ponzi scheme requires an operator.  “In a Ponzi scheme, the schemer acts as a ‘hub’ for the victims, interacting with all of them directly.”  Bitcoin is not run by anyone.  It is a decentralized system – in Hayekian terms, a spontaneous order.  Anyone can mine, buy, or sell bitcoins.  And unlike Charles Ponzi, Bitcoin has no promoter acting as a hub. The creator(s) of Bitcoin are anonymous.  (Note: Bitcoin is capitalized when referring to the software and network as a whole, and uncapitalized when referring to individual currency units.)

The third difference is this: “A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors….”  Bitcoin is the opposite of esoteric.  It is open source, and all are free to use it at their own chosen level of participation.  Computer programmers can read and even modify the source code.  Crytographers can study, and even try to crack, the mathematics of the system.  And everyone, techie and non-techie alike, can buy and sell BTC (the abbreviation for bitcoins) without understanding Bitcoin’s inner workings.

There is a single trait that Bitcoin can be said to have in common with highly successful Ponzi schemes:  a dramatic appreciation in price.  But if that trait is all that’s required to make something a Ponzi scheme, then countless stocks which have soared from a penny per share at corporate founding to hundreds of dollars per share would be considered Ponzi schemes.

North’s Ponzi Logic

Now that the fundamental premise of North’s article has been dispatched, let us address several statements North makes which contain faulty logic or false assumptions.

1)  North says Bitcoin is made “out of nothing.”  This is a specious argument.  The fact is that the Bitcoin currency and payment network is comprised of computer code.  Is the web browser you’re using to read this article made out of nothing?  That Bitcoin is not a physical good doesn’t mean it is made out of nothing.  Billions of people, including North, assign economic value to all sorts of things which have no physical form.  The most obvious example aside from the computer code of companies like Google or Apple is the vast supply of US dollars, the majority of which exist only in digital form.

2)  North writes, “Something that was valuable for its own sake, most likely gold or silver….”  Nothing is valuable for its own sake.  All value is assigned.  This is Subjective Theory of Value 101.  North doubtless knows this, but it appears he’s attempting to imply gold and silver possess some sort of intrinsic value.  It may feel good to believe (especially if you own gold and silver), but it’s just not true.  Gold and silver have many uses, for example in electronics or silver in water filtration.  But most of the value of gold in particular is due to its marketability, meaning, the acceptability of gold by other market participants.  This acceptability is a mutually reinforcing process by which people are more willing to accept gold because others are more willing to accept it.  The existence of a mutually reinforcing cycle of demand is known as a network effect.  Some examples of other network effect markets are cell phones, fax machines, web browsers and web servers, cars/roads/gas stations, and fiat money.

The difference between network effect goods and direct use goods is that, for example, the enjoyment of a steak dinner does not depend on its acceptability or adoption by others.  A direct use good directly meets an individual’s needs, while a network effect good derives a significant part of its value from the network.  Most goods we use today have some combination of both.

It should be clear from the arguments made above that network effects alone are not sufficient to identify a good as part of a Ponzi scheme.   Most network effect goods are not based on fraud, and most of them do not have a central operator who extracts profit out of the system.  Successful network effect goods achieve their success by market adoption based on consumer choice.

Anyone who wishes to show that a good is a Ponzi scheme must demonstrate how it differs from a market network effect good.  As the Austrian economist Karl Menger argued, money itself replaced non-money as a market network effect good.  Gold and silver emerged due to a combination of traits which are desirable to have in a money commodity, namely scarcity, portability, uniformity, divisibility, and durability.  Other commodities which have historically served as money, such as salt or cigarettes in prisons, only possess a subset of these traits.

Network effects can come and go.  An example is the adoption of fashion.  A particular look can go in and out of style either very quickly or over a much longer time frame.  During the time that a fashion is popular, many clothing and shoe retailers can increasingly profit by serving consumer tastes.  When that look goes out of style, garment producers must shift to producing something else or go out of business.  Is fashion a Ponzi scheme, or simply a market following shifting consumer tastes?  Almost nothing is permanent in the market.  Any time a once-popular good falls out of favor, does that mean it was a fraud?

3)  North writes, “But Bitcoins are unique. The money was siphoned off from the beginning.”  By calling it money, North is contradicting himself.  And unique?  With every fiat currency, the state siphons off a portion of the money it prints.  It’s standard operating procedure.

With market money, early adopters have always profited from their foresight.  The creator(s) of Bitcoin may be sitting on lots of them; I don’t know.  But there’s nothing unique about that.  Early adopters also take on a lot of risk.  The founder of every multi-billion dollar company had mountains of stock at the company’s inception.  That doesn’t mean money was siphoned off.  What is unique about Bitcoin compared to all fiat currencies is that there is a hard limit on how many currency units can be created/mined.  Fiat money can be replicated instantly without limit on central bank computers.

4)  North observes, “Money develops out of market exchanges.”  Yes, and that’s what is happening with Bitcoin.  People began using it from the beginning knowing it was not money by the Austrian definition as the most widely demanded commodity.  Yet they kept using it for market exchanges.  They could do so because Bitcoin is also a payment system which allows secure peer-to-peer transactions with no third party fees.  That feature in and of itself has great utility.  If Bitcoin becomes money by the Austrian definition, it will be because it developed out of countless market exchanges.

5)  When North proclaims, “Bitcoins cannot serve the consumer. There is nothing to consume,” he makes an absurd statement.   As if a customer cannot be served without consumption!  When was the last time North consumed a gold coin?  Never, because gold is not consumed.  Even if it’s made into jewelry, it can be refashioned into coins or any other form.  A commodity doesn’t need to be consumable in order for it to be a useful currency.  While it’s true that market forms of money in the pre-digital age originated from consumption goods, billions of people today have only known money in their lives as completely unbacked fiat.

6)  North continues with more nonsensical statements:  “But the fundamental characteristic of money is its relatively stable purchasing power.”  Stable purchasing power is desirable in a money, but it is most certainly not the fundamental characteristic of money.   Rather, the fundamental characteristic of money is that it is the most widely demanded commodity in a given economy.

North keeps pointing to the US dollar as money, yet even the US government’s inflation calculator (which statistically “adjusts” the real figures lower) shows that since 1988, the US dollar has lost half its purchasing power.  In my grandmother’s lifetime, the US dollar has lost over 96% of its purchasing power.  Several goods over those periods have had more stability in their exchange power for other goods than the US dollar.  If stable purchasing power were the fundamental characteristic of money, then the US dollar would no longer be money.

North frequently in his writings points to gold and silver as the most desirable money commodities.  Yet the price of gold went from $35 to $1,910/oz.  Perhaps upside volatility is acceptable to North, with the exception of Bitcoin of course.

7)  North goes on to set up a straw man argument, framing Bitcoin not as an open source international currency and payment system, but rather as a mania-driven, pump-and-dump investment.  He writes, “Whenever somebody tries to sell you an investment that is based on the economic analysis of a market – an analysis that cannot possibly be true – do not buy the investment. ”  Now that his monetary theory arguments regarding Bitcoin have failed, he points to the rapid price increase in Bitcoin as evidence that Bitcoin itself must therefore be fraudulent.  Perhaps Bitcoin is in a bubble and the price will crash.  Maybe it will be overtaken by another crypto-currency some day.  Perhaps the rapid price increase is pointing at an acute worldwide demand for a secure, borderless, person-to-person, expense-free form of payment.  The fact is nobody knows why the price of Bitcoin is what it is right now, or what it will be in the future.  For North to claim he does, and importantly, for him to use Austrian economics as the basis for his claim, is unfounded and misleading.

As noted above, most of the valuation of money comes from its marketability, which is what makes it money, so there is a circular and network effect component inherent in money.  When a good is adopted as money, its value goes up because it is adopted as money.   And unlike yielding assets, there is no way to say that it is over-valued because you can’t calculate a yield.  You don’t have to believe that Bitcoin is a good investment in order to use it for exchange.  Many people use US dollars every day knowing that their purchasing power will very likely continue to dwindle.

8)  A final piece of Northian Ponzi logic masquerading as sound argument:  “The mania has destroyed Bitcoins’ use as money. Bitcoins are too volatile in price ever to serve as a currency.  Which is money: dollars or Bitcoins? The answer is obvious: dollars.”  So to follow his line of thinking, US dollars are money.  Agreed.  Yet every single fiat currency throughout history that has hyperinflated into oblivion was money by North’s standard before its hyperinflation.  Going from money-status to worthlessness is the most extreme case of volatility – terminal volatility so to speak.  Bitcoin has not done that – quite the opposite – making North’s argument contradictory.  Once the US dollar has lost 99% of its purchasing power (rather than the 96+% my grandmother has suffered), will it still be money?  Further, if one defines a currency as a medium of exchange, we see that Bitcoin is used many thousands of times per day in exchange for thousands of different products and services.  So in that regard it already has been and continues to “serve as a currency.”

It is true that if the exchange rate of Bitcoin continues to be highly volatile indefinitely, bitcoins will be ill-suited as a currency over the long term.  But Bitcoin is still in its infancy.  During the adoption phase of any good as money, the purchasing power rapidly increases from its initial value as a non-monetary good as more and more people adopt it.  If we are in the adoption phase of Bitcoin as money, it would be normal for its purchasing power to rapidly increase.

It is also true that in bubbles, the purchasing power of an asset rapidly increases, so increasing price alone does not tell us whether we are in the adoption phase or a bubble.  Bubbles can be characterized by yielding assets, such as equities, stocks, bonds, and real estate, selling at very low yields and high valuations.  But money inherently has no yield; the investment of money has a yield.  Only time will tell if Bitcoin is currently in a bubble or undergoing adoption as money.  If it were to, say, triple from here and then stabilize, clearly this period would not be viewed in retrospect as a bubble.

Bitcoin vs Gold & Silver

Now that it’s obvious Bitcoin is not a Ponzi scheme, we can shift our focus to seeing that Bitcoin stacks up well against gold and silver as a network effect good.  We return to the desirable traits of a money  commodity:  relative scarcity, portability, uniformity, divisibility, and durability.

Scarcity:  Gold and silver are scarce. They have become increasingly difficult to find and extract.  There are trace amounts of gold in all of the earth’s crust and in sea water, but there is no extant technology that can cost-effectively extract it.  It may surprise some that aluminum used to be more highly valued than gold, but technological innovations in the 19th century made aluminum extraction more economic.  Bitcoin is inherently scarce by virtue of the underlying cryptographic math which sets a hard limit of 21 million bitcoins.  As the total already-mined supply increases toward the limit, additional bitcoins can only be mined with ever-increasing difficulty.  In this respect, Bitcoin is different than gold and silver which, while difficult to produce, do not have a known cap on their production.  There is no guarantee, for example, that large undiscovered deposits of the metals could not exist.

Portability:  Compared to some other highly valued commodities, gold and silver are quite portable, but when viewed as a money commodity, they are very heavy to transport in any sizable sum.  That makes them extremely inconvenient as currency, which is why commodity-backed paper money came into use.  Bitcoin wins hands down of course, as the only weight a person must bear is to carry the device the bitcoins are stored on, such as a mobile phone.  And, unlike metals, bitcoins can be transported over any computer network.

Uniformity: Bitcoin is superior to gold and silver because both metals are easily adulterated.  One of the ways gold and silver coins were inflated in the past is by debasing them with more common metals.  The Roman denarius initially was almost pure silver, but subsequent regimes continually debased the denarius until it only contained 2% silver.  A metallurgist can for a fee tell you with a high degree of confidence if a coin or bar contains the purported concentration of gold or silver.  A layperson cannot.  In comparison bitcoins are completely uniform, and there is no mechanism by which they can be adulterated in the way precious metals can. 

Divisibility:  Gold and silver are both highly divisible, but only with specialized skills and equipment.  You can’t readily lop off 1/3rd of a gold coin to pay for an airline ticket, or buy supper for 1.65 silver coins.  Bitcoin wins again, hands down, as it is instantly and exactly divisible down to 0.00000001 of a bitcoin (called a “satoshi”).

Durability:  It would seem at first glance that gold and silver would win hands down, but I submit that Bitcoin actually wins.  It’s easy to dent and scratch gold, yet to its credit gold is practically indestructable.  But if a gold coin gets badly banged up or bent, a vendor would likely hesitate to accept it.  Sure an expert can assay the metal content of the damaged coin for a fee, so it is durable in that sense.  But Bitcoin has a different, and arguably more practical, sort of durability.  Namely, you can make any number of perfect backups of your bitcoins.  While a USB thumb drive containing one’s Bitcoin wallet is susceptible to breakage, that wallet can be stored on any number of other digital storage devices.  This provides for a kind of durability that gold and silver cannot offer.  You can have your bitcoins with you on a mobile device, on a thumb drive in a secure spot at home, even perhaps stored in another state or country in case of local disaster.

Another trait provided by Bitcoin not typically addressed in traditional monetary theory is security.  Bitcoin wallets are encrypted.  If your storage device is stolen, as long as you have a backup of your wallet, you still have your bitcoins to spend.  The same cannot be said of gold or silver.  They are, unfortunately, easily stolen or confiscated.  And if you’re not where your gold and silver are stored when you need them, you’re out of luck.  To be fair, it’s worth mentioning that bitcoins are not categorically immune to digital theft, so depending on the situation, your money is always at some kind of risk.

I have focused on gold and silver because of their historical importance as money, because North focuses on them in his writings, and because the Austrian school has a lot to say about them.  If I had to choose a commodity money, it certainly would be gold and silver for the reasons outlined above.  My purpose was not to suggest that they are unsuitable as money, but rather to show that Bitcoin shares, and in some cases exceeds, the traits which make gold and silver good forms of money.

The big weakness with Bitcoin is also its strength: it requires electric power and a computer network in order to function.  In a catastrophe such as a natural disaster, bitcoins would be of no use.  This is an important consideration, and in an all-out crisis where power grids shut down indefinitely, paper money will likely rapidly become unusable as well.  Having gold and silver on hand would clearly be the desirable choice in this scenario, but food, alcohol, medical supplies, and means of self-defense would probably be of equal or greater priority.  In other words, in a dire catastrophic situation, barter is likely to take over, and since very few people have gold and silver coins on hand, they will not serve as money.

Conclusion

If Bitcoin can never be money for the reasons North argues, how is it that the US dollar has been money for so long while violating North’s own self-imposed standards?  Legal tender laws aren’t a valid answer because legal tender laws have not stopped other fiat currencies from becoming worthless.

The more people who transact with Bitcoin without any coercion or legal compulsion, the more it functions as a free market money.  Because Bitcoin is not tied to any political region, it does not need to surpass the usage frequency of the US dollar to be considered money.  This, too, is another straw man argument North foists on the reader.  It is also a false dilemma.  You can exchange Bitcoin for countless other fiat currencies.  Perhaps North doesn’t consider the currencies of dozens of small countries to be money.  When a greater number of international transactions happen per day in Bitcoin than, say, in Bolivian bolivianos or Bahraini dirhams or Bermudian dollars or Bhutanese ngultrums, will North continue to deny that Bitcoin is a legitimate currency, yet defend the monetary status of those?

North was spectacularly wrong about his technological prediction that Y2K would be the downfall of civilization.  Nobody knows if his prediction that Bitcoin is destined for worthlessness will come to pass.  But if it does, the cause of Bitcoin’s downfall won’t be because of the empty arguments North has made against it.

________________________John Mather is a fan of technology, gold and silver, Bitcoin, and Austrian economics. 

Email him at john.mather182 [at] gmail.com

42 comments… add one

  • That it is made “out of nothing” is Bitcoin’s strength, not a weakness. Bitcoin’s principal innovation is that it combines the power of information with the scarcity of physical goods. Its intrinsic value is that it delivers scarce value electronically.

    Reply
    • Yes, just like fiat currency.

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  • Thank you Jeff for sharing this great rebuttal with us. It is sad to see some Austrians outright reject bitcoin for bogus reasons or for lack of understanding of how bitcoins even work. Peter Schiff is another one who has unfortunately rejected bitcoins for no good reason. It would be great if we could get someone like John Mathis on the Peter Schiff show to educate Peter on the subject of bitcoins.

    Reply
    • Fellow Austrian here.

      I reject bitcoins for good reason. They are mathematically beautiful, but I want nothing of them as a currency.

      There may be a limited number of bitcoins, but there is an unlimited number of altcoins.

      Reply
  • Double spending of coins and the encryption worry me. If the encryption were ever cracked the value would go to 0. It still wouldn’t be a ponzi scheme though.

    Reply
    • if the encryption is broken all other IT infrastructure depending on the same math would be compromised including VPNs and access control. That includes our current FIAT banking system. Bitcoin at that point is the least of your worries. As for double spending, that is something the Bitcoin network addresses by mining and having a minimum of 6 or 8 confirmations. Having that addressed is a minimum requirement for any crypto currency

      Reply
  • It is unfortunate that someone as prominent in the libertarian movement as Mr. Tucker would chose to attack other libertarians for their accurate points on Bitcoin.

    Mr. Mather begins his piece by pointing out North’s inaccurate prediction regarding Y2K. Fair enough, but in this context the claim is that a false prediction nullifies anything else to be said by North regardless of its validity, not exactly a cogent argument.

    The bottom line is that Bitcoin does NOT in fact solve the problems its supporters claim it will because the problem IS the overreaching state not gold or paper claims to that gold used for economic transactions.

    In his conclusion Mather admits Bitcoin is worthless when he states “You can exchange Bitcion for countless OTHER fiat currencies.” He admits Bitcoin is a fiat currency and therefore worthless.

    Reply
    • Bitcoin is fiat currency, just like every other currency currently circulating. Took me a bit to get over that, which is why I bought at $11 instead of $1. It would be nice to have the perfect monetary system of 100% precious metal reserve money. When you’re exchanging face-to-face, gold and silver coins work perfectly for that. However, more and more of our life is happening across the internet, and you cannot send physical coins over the internet. Thus, you need some kind of digital currency. A digital currency backed by physical metal would work great…except, the government would come in and shut it down and seize the metal. How many times has that happened, already?

      People are looking for an inherent value from Bitcoin. Well, here’s some for you: the government can’t seize it or inflate it. That right there is inherent value.

      The US dollar is fiat currency, too. Since it’s worthless, I suggest you send me all the US dollars you have….

      Reply
    • Tim C nailed it: “the problem IS the overreaching state not gold or paper claims to that gold used for economic transactions”

      I am flabbergasted that some libertarians don’t see that the state is a major problem in currency transactions…

      Perhaps BitCoin itself is stateless, but that does not mean states can’t kidnap and throw PEOPLE in prison! Let’s face it – states are not based on justice or fairness, they are based on power. Power will react to threats to their power, and a computer is no threat to someone with missiles, bombers, drones, and soldiers at the ready.

      Reply
      • Clarification: DISSIDENT PEOPLE are threats to power. Power will react to that!

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  • I was shocked to read Gary North’s vitriolic attack of Bitcoin. I have read many of Gary’s articles and see him as a knowledgeable economist and theologian. I’m no expert in economics, even though I am enrolled in Tom Woods’s Liberty Classroom, but the use of the term “Ponzi scheme” seemed to be out of place. Furthermore, to compare Bitcoin to Social Security is like comparing Jello to Apples WTF, Gary?!

    We who call ourselves libertarian need to be called on our shit. If we stop doing this, we will be overrun by the neocon hordes. Thanks Jeffery.

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  • The argument about the durability of bitcoin is interesting because usually people say you can backup your bitcoin on a thumb drive, but you just backup the secret keys.

    This is wrong in my opinion.

    Your bitcoins are in the blockchain; no one can destroy your money if a copy of the blockchain survive. The durability of Bitcoin is the durability of tens of thousands live copies of the blockchain. Until a copy survive, your bitcoin survive.

    The government can destroy the value of the coins in one possession, if they destroy the keys, but the value move to other coin owners. But they can not destroy the value of the coins owned by all owners, because they can not erase the blockchain or forge it.

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  • I see upside and downside of Bitcoin just like I do for Gold/Silver. I’ve thought a lot about this topic and do adhere to the Austrian school of economics in the Mises/Rothbard tradition.

    But, I think Gary North’s critique really misses the mark and it is a poorly written piece. Bitcoin isn’t a perfect money and it does lack the nature of a pure free-market money with a tether to some form of physical commodity that can be used in direct use for non-money purposes.

    I do think the best case for Bitcoin (and other forms of crypto-currency) is that it is a brilliant fiduciary media that can weaken the government monopoly of the issuance of the money supply. In this sense, the “network effect” service and the ecosystem around Bitcoin has obvious benefits that cannot be overlooked. Where the certainty/future of using Bitcoin and it’s lifecycle is unknown, the life-span of government issued fiat-money does have certainty – it will eventually and necessarily fail like all other fiat currencies before it.

    The question does remain whether Bitcoin can survive apart from a world-wide monetary system separate government’s control over the supply of money & credit instruments. But, we do not live in that world – we live in a world of government intervention. I simply see Bitcoin as an agorist counterweight to subverting government intervention in monetary affairs. How this can be considered a Ponzi scheme by Gary North or anyone else is beyond me.

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    • “a brilliant fiduciary media that can weaken the government monopoly of the issuance of the money supply”

      And you don’t think that governments will attack people who engage in this practice why?

      BitCoins are a brilliant idea, but last I checked, beatings, imprisonment, and executions are not pleasant. Tell me how BitCoin protects against these things.

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      • Steve, I have no doubt that governments will do whatever it takes to diminish competition against it’s monopoly control of money. I do not think this is a controversial claim, do you?

        Bitcoin is that it is completely voluntary to use and no one has to use it if they do not want to do so. Something we know praxeologically is that voluntary exchange between two parties is positive-sum (win-win). If something exists to allow voluntary exchange to occur on a large scale with certain safeguards to prevent aggression against those who do exchange, how can this be a bad thing?

        The Bitcoin infrastructure and ecosystem has many advantages and from what I can tell it is not something that Government can “shut down.” Can it make ad-hoc laws saying “though shalt not trade in Bitcoin”? Yes, they are called Legal Tender Laws and have been around for millenia. But, making laws is one thing. Enforcing or executing law is another.

        Governments can try and squash a black market, but that doesn’t mean it can wave a magic wand and make it go away. Another one will pop up and people will migrate to the best means of facilitating voluntary exchange. The same goes for Bitcoin.

        From what I know about Bitcoin (and I do not pretend to be an expert but rather a novice), the Bitcoin ecosystem and infrastructure allows people to trade in relative obscurity. How can that be bad? Does the State have the monopoly of force to do whatever it wants (or tries) against peaceful people? Sure it does. But, is it limited in what it can do. Yes, and that is my point.

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  • Great rebuttal, Jeffery! Very well done. A nice addition to these points, though, would be expounding on Bitcoin as a protocol as well as a network and money. If you’re not yet familiar with them, check out the Bitcoin wiki’s article on Bitcoin contracts. Want a trustless escrow service? It’s built into Bitcoin. Want an unalterable timestamped record of property transfer or other contract? It’s built into Bitcoin.

    Bitcoin is the Internet Protocol of money services.

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  • “First, Ponzi scheme vehicles are inherently fraudulent. ” Bictoin is fraudulent it is sold as the future of currency.. it is sold as digital money or crypto currency it is not currency and if it is not currency than it is beanie babies for the internet ! it is a mania it is baseball cards , dot com stocks and tulip bulb mania.
    Scarcity,Portability,Uniformity,Divisibility,Durability you left out the most important one. Definability!! that is the difference between gold and bitcoin!

    Watch my debate Jeff… https://www.youtube.com/watch?v=cV-32qmLG64#t=997 “Is bitcoin currency?”

    Reply
  • Crytographers can study, and even try to crack, the mathematics of the system.

    The author tosses off this statement as if it helps prove that Bitcoin is good. But obviously IF someone figures out how to crack Bitcoin, that person can then create as many coins as he pleases, which will soon make Bitcoin worthless.

    The author also fails to mention that a determined government crackdown on Bitcoin (after outlawing it) could make continued use of it difficult and highly risky.

    Still, overall, I find this article well-written and solid in its critique of Gary North’s screed.

    Reply
    • > Crytographers can study, and even try to crack, the mathematics of the system.
      > The author tosses off this statement as if it helps prove that Bitcoin is good.

      It’s the open source nature of the system… The fear of having the crypto broken is equivalent in fearing gold will lose it’s value because alchemists will find a way of creating gold out of lead

      Reply
  • Bitcoins are artificial. If governments went away (which is the typical assumption) then people can choose what ever form of money they want. They can now but governments will simply tax trade in their currency. For example they will tax any gain on bitcoins. So, people still need dollars thus creating a demand for government currency which renders the discussion mute.

    Besides, why would one sell bitcoins for dollars if dollars are becoming worthless? In the absence of government people can produce anything they want as long as they have the resources and ability. If they don’t have the resources, they would have to make something or export a particular resource to someone who does have bitcoms. But this assumes that bitcoms can be traded for real goods and services. However, most people would trade locally with people that they know and with things in their possession.

    In the absence of fiat currency, money decentralizes. Most big companies would not be able to exist as cost would catch up to them and they would find that their cost are too high.. There is a natural limitation of the land which means that there is a limitation on money.

    In a decentralized economy, small businesses rule. Fiat money is only a wealth concentration tool. It’s purpose is to centralize wealth in the hands of a few which otherwise would be very difficult and short lived. IN this article bitcoins are presumed to take the place of fiat currency as a single currency.It presume that it will be the money of choice. But money is only a key to markets. But this cannot be the case as money will be redefined and decentralized locally. It really depends on who is producing and what they accept for trade. The key is individual production and free trade, not bitcoins or any other form of money. In a free society if the accepted form of money becomes scares, people will simply choose another. There would be no lock an key on bitcoins or anything else.

    Most small businesses would produce products locally, not nationally and sell (trade) things with people they know. IN the past, Gold and silver allowed people to trade over great distances with people they didn’t know. Physical forms of money are really a form of credit between people who did not know each other.

    It worked because people could take gold and silver and trade them for goods that the local economies could produce. Of course this was because most had restricted liberty and free trade for mercantilism. But today communication negates this. People are able to produce a lot of things locally if allowed. This is why governments are losing their grip: communication.

    People would need to know that they can trade their bitcom for something real and desired in “foreign markets”. But with the free flow of information and technology, why use bitcoms? If people can produce things themselves or find people locally that can do it, then why can they not define their own money? Why use bitcoms. If the rest of the world falls apart who will people import from?

    Reply
  • Bitcoins are artificial. If governments went away (which is the typical assumption) then people can choose what ever form of money they want. They can now but governments will simply tax trade in their currency. For example they will tax any gain on bitcoins. So, people still need dollars thus creating a demand for government currency which renders the discussion mute.

    Besides, why would one sell bitcoins for dollars if dollars are becoming worthless? In the absence of government people can produce anything they want as long as they have the resources and ability. If they don’t have the resources, they would have to make something or export a particular resource to someone who does have bitcoms. But this assumes that bitcoms can be traded for real goods and services. However, most people would trade locally with people that they know and with things in their possession.

    In the absence of fiat currency, money decentralizes. Most big companies would not be able to exist as cost would catch up to them and they would find that their cost are too high.. There is a natural limitation of the land which means that there is a limitation on money.

    In a decentralized economy, small businesses rule. Fiat money is only a wealth concentration tool. It’s purpose is to centralize wealth in the hands of a few which otherwise would be very difficult and short lived. IN this article bitcoins are presumed to take the place of fiat currency as a single currency.It presume that it will be the money of choice. But money is only a key to markets. But this cannot be the case as money will be redefined and decentralized locally. It really depends on who is producing and what they accept for trade. The key is individual production and free trade, not bitcoins or any other form of money. In a free society if the accepted form of money becomes scares, people will simply choose another. There would be no lock an key on bitcoins or anything else.

    Most small businesses would produce products locally, not nationally and sell (trade) things with people they know. IN the past, Gold and silver allowed people to trade over great distances with people they didn’t know. Physical forms of money are really a form of credit between people who did not know each other.

    It worked because people could take gold and silver and trade them for goods that the local economies could produce. Of course this was because most had restricted liberty and free trade for mercantilism. But today communication negates this. People are able to produce a lot of things locally if allowed. This is why governments are losing their grip: communication.

    People would need to know that they can trade their bitcoins for something real and desired in “foreign markets”. But with the free flow of information and technology, why use bitcoms? If people can produce things themselves or find people locally that can do it, then why can they not define their own money? Why use bitcoins. If the rest of the world falls apart who will people import from?

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  • Here’s Gary North’s response to this post if any are interested:

    http://www.garynorth.com/public/11843.cfm

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  • This renuttal does make some excellent points, but it also suffers from almost as many irrelevant and illogical points as does the original North article. Here are just a few that I noted while reading before I ran out of time applied t0 this purpose:

    Gold and silver have many uses, for example in electronics or silver in water filtration. But most of the value of gold in particular is due to its marketability, meaning, the acceptability of gold by other market participants.

    This is incorrect. I used to be bothered by the fact that the major value of gold was not its use for directly contributing to goods and services needed for living, but rather its use as a type of currency and a temporary non-fiatable reasonably stable store of value (relative to such products and services of daily life). However, in fact most of the gold mined every year goes to produce jewelry or other ornaments in India, which for the people there are products important for daily life..

    The creator(s) of Bitcoin may be sitting on lots of them; I don’t know. But there’s nothing unique about that. Early adopters also take on a lot of risk.

    Except that in this case, as opposed to the vast majority of risk capital investments where early investor could lose everything to the cost of the necessary R&D, there was virtually no such risk to these Bitcoin creator(s). In fact, it is their creation out of pure software (albeit highly inventive), which suggests a possible Ponzi- or pyramid-like origin and purpose.

    What is unique about Bitcoin compared to all fiat currencies is that there is a hard limit on how many currency units can be created/mined.

    This also has the perhaps negative effect that if bitcoin were to become the world’s major currency, it would constantly increase in value as world population and asset value increased. So simply saving some bitcoin for a number of years would enable them to purchase more of similar goods and services as each year went by – not necessarily a bad thing, but it nccds to be considered. This is as oppossed to gold which being constantly mined has the potential to keep up with the expansion of world population and assets.

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  • And North responds: shttp://www.garynorth.com/public/11843.cfm. Jeffrey I think you did well, and this debate has been fascinating, but North put you right back in your place on this one.

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    • Jeffrey didn’t respond to Dr. North. Some other guy did, so there’s no need to congratulate Jeffrey.

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  • About the Y2K thing, you linked to an article at wired.com that mocked Gary North for his prediction.

    You forget that the entire computing technology industry warned everyone of exactly the same thing Gary North warned about. Star Trek was one of the first to throw a snide remark about it. All these people were cautious before the year turned at the time.

    The fact is that up to that time it was the ONLY Information Technology project that got the funding, manpower, and resources it needed to be ready on time. Tightwad budgets in fact were in part the reason that it was a disaster that threatened for real.

    I was the only programmer at one small company and had to make coding changes, compiles, testing, and moves to production, involving more than 600 database tables, 1200 “views”, some 1800 programs, and recompiles to even more programs.

    The truth is, the only reason anybody can invoke “Chicken Little” on this one is that the computing industry and I.T. departments everywhere did their job with full backing and cooperation from the management, because the warnings were real.

    SHAME on Wired for this article, the “geek” mag should show more honesty and integrity on the subject. Gary North is quoted in the article as pointing this out. Wired took glee in debunking North’s doomsday predictions, but all Austrian economists know the dollar crash will be catastrophic, to put it mildly. As seen with recent natural disasters, even factoring out the way government always makes it worse, the free market cannot teleport food to remote locations.

    And don’t count your future years yet. Nuclear war threats are not gone, and neither have other threats, including false flags, vaccine-vector threats to health, and so on.

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  • I guess I should mention that my changes saw January 1, 2000 with almost no hitch. The only thing I missed was one “hard-coded” number 19 on one printed report that did not have anything to do with the database. Ask any coder; no glitch but this one among all those changes.

    Most other places had similar experiences. Quit changing specs so much on your developers, give them a reasonable date, and watch things happen!

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  • I’m considering giving up my libertarian idealism. Even so many libertarians, who are supposed to be smart, are complete morons as the discussion around Bitcoin shows. Like any statist liberal or neocon, they foolishly and desperately keep holding on to their preconceived notions. A fine rebuttal by John Mather, but Gary North responds with more idiocy. The large part of the comment section on a libertarian blog no less is absolutely pathetic. Not everyone thinks like this, but it’s only a small minority. Is ‘intelligent’ life doomed to repeat the endless cycle of war , genocide, poverty, etc. until the last star in the universe extinguishes? Will we ever be smart?

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    • “Is ‘intelligent’ life doomed to repeat the endless cycle of war , genocide, poverty, etc. until the last star in the universe extinguishes? Will we ever be smart?”

      I believe it will take a few hundred more years at the rate we’re going.

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      • “I believe it will take a few hundred more years at the rate we’re going.”

        Steve, did you mean stop the endless cycle through peace or complete self-destruction? :)

        Bitcoin has re-ignited the debate about what money actually is – and as you can see even the experts don’t agree…

        At the heart of human failing is selfishness and nowhere is this more evident than how humans interact with that poorly defined thing called money. Bitcoin ( and many other financial systems) have gone to great lengths to create intrinsic safeguards against what essentially amounts to selfishness. (almost all crime is a selfish act at the end of the day)

        For instance, we could fix our global population growth problem in a heartbeat by insisting that every man have a vasectomy are fathering two children. But we would never agree to it because its a infringement of our civil liberties. How selfish is that when you consider what civil liberties could be forfeited by our great-grand children living on a polluted planet with another 15 billion others (according to UN prediction, assuming we don’t self destruct beforehand)

        A bit off topic I know but I couldn’t resist a response to this comment….

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    • The evolution of the masses is compulsorily slow otherwise would not masses, the problem is that there is “someone” who works to slow down more and takes advantage ……

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  • I’m considering giving up my libertarian idealism. Even so many libertarians, who are supposed to be smart, are complete morons as the discussion around Bitcoin shows. Like any statist liberal or neocon, they foolishly and desperately keep holding on to their preconceived notions. A fine rebuttal by John Mather, but Gary North responds with more idiocy. The large part of the comment section on a libertarian blog no less is absolutely pathetic. Not everyone thinks this way, but it’s only a small minority. Is ‘intelligent’ life doomed to repeat the endless cycle of war , genocide, poverty, etc. until the last star in the universe extinguishes? Will we ever be smart?

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  • Most people don’t seem to understand exponential growth. Suppose the bitcoin rises to $10 million per bitcoin in a massive, worldwide tulip mania-style bubble. This is a real possibility. (Even if only 1% of the world economy moves to bitcoin, that’s at least $1 million per bitcoin). Then suppose it drops 99% like many bitcoin critics claim.

    So what? Now, the price is at $100 thousand per bitcoin. It’s just simple math.

    After that 99% crash, the bitcoin has a real possibility of stabilizing into a real alternative to the fiat currencies.

    A lot of people will get burned in the bubble, sure. You don’t know exactly where the top is going to be, which is why you shouldn’t put your life savings into these things.

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    • please don’t try to associate the Tulip Mania with Bitcoin, the reason why the Tulip Mania ended in a drama was because everybody and his dog jumped into the tulip production and the market got flooded. Bitcoin difficulty adjusts to this is not possible, there will never be a way so the market gets flooded with infinite amounts of BTC. Just a side note on history ;-)

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      • Thanks William, you make a very good point. I stand corrected.

        Readers: Please remove “tulip mania-style” from my post.

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  • North writes, “Something that was valuable for its own sake, most likely gold or silver….” Nothing is valuable for its own sake. All value is assigned. This is Subjective Theory of Value 101. North doubtless knows this, but it appears he’s attempting to imply gold and silver possess some sort of intrinsic value.

    Wow, Mather, just wow. Gary North has never said that gold has intrinsic value. To the contrary, he has always argued that it doesn’t have intrinsic value. Gary North’s first article on this was written in 1969, called “The Fallacy of Intrinsic Value”.

    But after this paragraph you go on … and on … and on … about the nature of value as if he had claimed that gold has intrinsic value. Talk about strawman argument.

    And by the way, the economist is Karl Menger, not Carl. Carl was his son.

    Now, Mather: can you go to a store and buy a loaf of bread with bitcoins? Can you go to a store and buy anything with bitcoins? No? As long as the average guy doesn’t use bitcoins for purchases, it will fail in its competition with the dollar. The dollar is the currency used for on-the-ground trade in the strongest economy in the world. Bitcoins aren’t accepted in a single store in this nation, or any other nation. Who do you think will win?

    Bitcoins are enjoying their biggest surge right now because of hype. Problem is … you can’t do much with them. Except hopefully trade them in for dollars, real money. Which is what most people interested in bitcoins hope to do. Because they need to eat, pay rent, buy clothes, buy gas, pay off loans, etc. All done in dollars, not bitcoins. Once the hype is over, this fact remains.

    Question: Who here would bet his future on bitcoins? Who here would place 90 percent of his wealth in bitcoins as opposed to dollars? No one? Didn’t think so either. Until Mather puts his money where his mouth is, and changes most of his dollars to bitcoins, he is a hypocrite when he says he is sure bitcoins will successfully compete with dollars.

    And Mather: you also misrepresent Gary North’s definition of a Ponzi scheme. You instead use … Wikipedia’s definition of a Ponzi scheme, and then proceed to attack Gary North as if he had used that definition, which you know he doesn’t. Bad form, Mather. Real bad form.

    Gary North’s response to Mather’s Tucker-ordered hatchet job:

    http://www.garynorth.com/public/11843.cfm

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  • Maher starts with a personal attack:

    Perhaps his most famous one is his widely publicized prediction that Y2K would end civilization as we know it.

    Mr North made other valid predictions, e.g. a very early one on the housing bubble. This does nothing to strengthen or weaken his argument on Bitcoins. Maher next goes on with an appeal to emotion:

    One reader who linked North’s article on a message board even commented that the article made him want to stop referring to himself as Austrian.

    It does not matter what some other unnamed reader thought. Maher should trust in our own cognitive faculties. He does so by finally presenting arguments:

    There are several key differences between a Ponzi scheme and Bitcoin. First, Ponzi scheme vehicles are inherently fraudulent.

    Mr North makes a prediction about Bitcoin’ future based on its promise – a stable means of exchange – and its reality: large value flucations. He does not make predictions based on the intention of Bitcoin’s creators. But Maher continues:

    The second key difference between Bitcoin and a Ponzi scheme is revealed in Wikipedia’s differentiation of a Ponzi scheme from a pyramid scheme. A Ponzi scheme requires an operator.

    I do not see Maher disputing Mr North’s conclusion but rather his choice of words. Maher’s next argument is semantic as well:

    The third difference is this: “A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors….” Bitcoin is the opposite of esoteric. It is open source.

    This again is beside the point. For the average buyers and sellers, Bitcoin will remain as esoteric as the general theory of relativity. Maher then declares:

    Now that the fundamental premise of North’s article has been dispatched, …

    No, it hasn’t. The fundamental premise is that a supposed medium of exchange with such unstable value will not be used as currency. This premise has not yet been mentioned, let alone dispatched. Maher goes on:

    North says Bitcoin is made “out of nothing.” (…) The fact is that the Bitcoin currency and payment network is comprised of computer code.

    In other words, it is not backed up by any tangible asset, which is what Mr North saying. Maher then finally gets more serious:

    North writes, “Something that was valuable for its own sake, most likely gold or silver….” Nothing is valuable for its own sake. All value is assigned. (…) The existence of a mutually reinforcing cycle of demand is known as a network effect.

    As Maher mentions Austrian Theory, he will be able to answer WHO assigns value to an asset and HOW. The asnwer is IIRC the individual assigns value to an asset depending on its usefulness to help him achieve his goals. As Mr North IMHO correctly points out, this is done among others by looking at the asset’s past value in that respect. Bitcoin’s claim is that it vakue is in its echange capability. But as Mr North points out, Bitcoin has rather more been used as a speculative asset.

    North writes, ‘But Bitcoins are unique. The money was siphoned off from the beginning.’ By calling it money, North is contradicting himself. And unique? With every fiat currency, the state siphons off a portion of the money it prints.

    I found Mr North’s remark not hard to understand: the Dollars coming in in exchange for bitcoins are what he calls money and those were immediately collected and not invested.

    North observes, “Money develops out of market exchanges.” Yes, and that’s what is happening with Bitcoin.

    Bitcoin is being acquired for Dollars, as Mr North describes, not to exchange it for goods but to exchange it for more Dollars in the future. That may be a “market exchange” insofar as it isn’t coerced, but not in the nature of a currency. Maher then jumps to another semantic argument:

    When North proclaims, “Bitcoins cannot serve the consumer. There is nothing to consume,” he makes an absurd statement. As if a customer cannot be served without consumption! When was the last time North consumed a gold coin? Never, because gold is not consumed.

    “To consume” an asset in economic terms means “to exclude others from using” the asset. Of course Mr North isn’t eating his gold, as little as he is eating his house. But he is served in his goals by both gold and his house and he is excluding others from using both. Bitcoins have no such asset value. They are, as Maher himself pointed out earlier, a mere fiat currency. Due to its unstable value, it isn’t a particularly useful one.

    North continues with more nonsensical statements: “But the fundamental characteristic of money is its relatively stable purchasing power.” Stable purchasing power is desirable in a money, but it is most certainly not the fundamental characteristic of money. Rather, the fundamental characteristic of money is that it is the most widely demanded commodity in a given economy.

    A currency that becomes unstable soon ceases to be widely demanded, as history has amply shown.

    North keeps pointing to the US dollar as money, yet even the US government’s inflation calculator (…) shows that since 1988, the US dollar has lost half its purchasing power.

    Bitcoin in its short history was much less stable than the Dollar, which makes the Dollar more useful than Bitcoin.

    Perhaps upside volatility is acceptable to North, with the exception of Bitcoin of course.

    Nowhere does Mr North make this claim. And to Maher’s enlightment: An asset that constantly gains value will be hoarded, not exchanged and thus loses its usefulness as a currency.

    North goes on to set up a straw man argument, framing Bitcoin not as an open source international currency and payment system, but rather as a mania-driven, pump-and-dump investment.

    I see no reason why the one (open source) precludes the other (mania-driven) and Maher fails to show so.

    Perhaps Bitcoin is in a bubble and the price will crash. Maybe it will be overtaken by another crypto-currency some day. Perhaps the rapid price increase is pointing at an acute worldwide demand for a secure, borderless, person-to-person, expense-free form of payment. The fact is nobody knows why the price of Bitcoin is what it is right now (…)

    In other words: Maher cannot explain Bitcoin’s current high value with any fundamentals. So, it walks like a mania-driven boom.

    A final piece of Northian Ponzi logic masquerading as sound argument: “The mania has destroyed Bitcoins’ use as money. Bitcoins are too volatile in price ever to serve as a currency. Which is money: dollars or Bitcoins? The answer is obvious: dollars.” (…) Going from money-status to worthlessness is the most extreme case of volatility – terminal volatility so to speak.

    The Dollar has remained in use as a currency because its loss in value is still quite moderate and because of legal tender laws. See below for more detail.

    Bitcoin has not done that – quite the opposite – making North’s argument contradictory.

    I do not see a contradiction. Mr North does not compare Bitcoin to a failed currency, but to an asset within a mania-driven boom.

    During the adoption phase of any good as money, the purchasing power rapidly increases from its initial value as a non-monetary good as more and more people adopt it. If we are in the adoption phase of Bitcoin as money, it would be normal for its purchasing power to rapidly increase.

    In other words: But for explaining it with Bitcoin’s infancy, Maher acknowledges Bitcoin’s rapid price increase. So, it quacks like a mania-driven boom.

    If Bitcoin can never be money for the reasons North argues, how is it that the US dollar has been money for so long while violating North’s own self-imposed standards? Legal tender laws aren’t a valid answer because legal tender laws have not stopped other fiat currencies from becoming worthless.

    Mr North’s standard is the Austrian standard: An asset becomes money if it is found to serve the individuals’ need for exchange better than any other asset. Despite inflation, the Dollar is still the best of all other alternatives – including Bitcoin. Due to its rapid price increase Bitcoin, as Mr North argues, is less useful to exchange goods than to hoard it in hope of a high return later. Nowhere has Maher addressed this point. Rather, he finishes in a tone that sounds eerily familiar:

    North was spectacularly wrong about his technological prediction that Y2K would be the downfall of civilization. Nobody knows if his prediction that Bitcoin is destined for worthlessness will come to pass. But if it does, the cause of Bitcoin’s downfall won’t be because of the empty arguments North has made against it.

    I have seen a couple of bubbles: The tiger-state bubble, the dot-com bubble, the British property and US housing bubbles. One feature they shared became obvious when one challenged their defenders: These started with fallacies and ended with getting personal. In this respect as well, Bitcoin flies like a mania-driven boom.

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  • The long-term stability argument against the dollar is an empty one for a currencies usefulness. For a currency to be useful as a medium of exchange is must maintain its relative value from the moment a producer agrees to produce a good at a set price or wage until the moment that earned income is spent. Generally days, weeks or a few months.. NOT years, certainly not decades. Money is not hoarded as a “long-term store of value” any more, it is spent quickly or exchanged for assets that are expected to appreciate faster than the currencies devaluation. Bitcoins stability can be measures in minutes to seconds and as such is completely useless for such exchanges.

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  • I read the Article:
    Bitcoins: The Second Biggest Ponzi Scheme in History

    I do not agree with the author… ( Mr North)
    I will not call him names.
    I believe he does not understand Bitcoin.. and what has happened over the 1st 4 years of Bitcoin….you cannot think linear when bitcoins distribution is Logarithmic
    Do your own due Diligence…
    I believe Digital currency (CryptoCurrency) has a place in this world…

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  • Lindsay Lilburn, selfishness is never off-topic to which I would add the quest for power.
    Here we have an example of how the ego creates unnecessary conflict. It is not important to the intention of a statement but as it is received, the claim that Mr. North had a wrong prediction was taken from him as a personal attack.
    I write from Italy ‘and I ended up here because I had read perhaps the most important lesson in real politics I’ve ever heard or read written by Mr. North : http://www.garynorth.com/public/10459.cfm
    These are also aware that other issues from my point of view, highly questionable.
    I also remember that eminent experts at the time of the birth of cars and computers and other things now common use of made ​​predictions that later proved ridiculous.
    In this period I’m working on bitcoin and reading the statement of Mr. North here I am.
    This situation has produced a nice explanation of bitcoin compared to fiat currencies, which from my point of view they are a nice scam now. From the response of Mr. North we find that bitcoin is not a ponzi scheme but to limit a system Supermoney. The thing had to stop here, the rest are useless polemics and rhetoric. I do not understand where the problem is, would a unit like the other currencies but when the man puts his hand disasters arise as always.
    There are other things highlighted to analyze, but I will talk about in the next post which deals with the same subject, the answer to the answer …..
    We should never forget, and then, that we live in kleptocracies !

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