I don't dispute any of that, but in an ideal Bitcoin economy people wouldn't need to convert to USD. Obviously the Bitcoin economy isn't at that point yet and people need the USD to peg "value" to what a Bitcoin is. But eventually, if Bitcoin becomes more widely accepted, shouldn't the economy settle on to what 1BTC is "worth" regardless of what other currencies are doing?
It's the ability to move between USD that allows us to discover the true value of a bitcoin.
Quick example - in Argentina currently, the government is desperate to keep foreign currency reserves in USD, so they've banned most means of converting ARS to USD. This has created a dual exchange rate where the official value is 5:1 USD, but the "alternative" rate is 8:1 USD. The difficulty of conversion is causing the value of pesos to fall by nearly 40%. The "true" value of the peso is probably somewhere between those two numbers but the market's ability to discover its true price is being distorted.
If a currency as "big" as a member of the G20 ($450 billion GDB) can get massive distortions from closing just some of the easy conversion points, it could destroy bitcoin if the US Government made it difficult to convert into and out of USD.
Further, it seems to indicate that BTC would need to be incredibly liquid before converting to USD wouldn't matter that much.
"in an ideal Bitcoin economy people wouldn't need to convert to USD"
So how do you think they will pay their taxes? How do you think businesses will repay their loans? Do you really think the US government will accept Bitcoin tax payments, or that banks would be stupid enough to issue loans in a deflationary currency that conveys no legal protections?
Bitcoin's only real value in its ability to ultimately be sold for a fiat currency.
"Bitcoin's only real value in its ability to ultimately be sold for a fiat currency"
You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want, for things of actual value. So if bitcoin is not directly exchangeable for dollars but it is exchangeable for other things, it doesn't ultimately matter. The no arbitrage conditions of financial markets guarantees that even if bitcoin is not tradeable for dollars directly, it will preserve its value if it is easily tradeable for something of actual value.
"You have that backwards, a fiat currency's only real value is in its ability to ultimately be exchanged for goods and services that you need or want"
The value of fiat currencies lies in their ability to pay taxes, and in general the legal structure that surrounds them. The USD would be worthless if you could not at least use it to pay your taxes in the United States.
Your entire theory is predicated on the idea that currencies are valuable simply because they exist. Supply is not sufficient to create value; demand must exist also, and your theory does not make it clear why anyone would demand any particular currency. Why is CAN not used in the United States? Why are Euros not used in Japan? Why would the citizens of the United States almost all use USD, when so many other currencies exist? Why don't people just use monopoly money?
Take the exchanges away, and you take away the demand for Bitcoin. With the exception of a few cryptoanarchists, the demand for Bitcoin is really the demand for secure and anonymous electronic payments. Claiming that Bitcoin can exist in a vacuum is like claiming that Paypal can exist in a vacuum -- in other words, it is delusional, because people are engaging in electronic transactions for the purpose of spending and receiving their nation's currency.
Not necessarily taxes, it's "legal tender" to settle all debts, public (taxes) or private (any private contract). You can pay any debt in the equivalent amount of USD. If I owe you bitcoins I can choose to pay you in USD and you have to accept it.
Agree with Gormo here -- I spent some time looking into this on the occasion of a previous Bitcoin thread.
If you have incurred a debt, and have not previously negotiated around the specifics of that debt, than the creditor must accept payment in dollars.
However, if there is no debt, for instance if you're walking up to a cash register in a store to buy a candy bar, there is no requirement that they accept any particular form of payment, at least not in the USA -- other countries, like Canada, seem to have stricter interpretations of "legal tender"
And, within limits, any two business entities can contract to trade just about anything for anything else. If you want to get paid in Twinkies in return for making someone a web site, that's up to you. Employee salaries are a different matter -- the way I read the law, you have to pay minimum wage in USD.
> If I owe you bitcoins I can choose to pay you in USD and you have to accept it.
That's not true at all. Legal tender laws mean that an offer of US dollars is legally recognized as an offer to fulfill a debt obligation; i.e. if the issue ended up in litigation, the court would treat your offer of dollars as a settlement of the debt.
But that doesn't mean that anyone is actually obligated to accept your offer of dollars, or that the agreement that generated the debt wouldn't give you a strong incentive to pay in BTC as opposed to USD.
Is this not taking a literal interpretation of his words a bit too far? Is your scenario really that because someone can stick their hands in their pockets and refuse to take the US dollars (and then a court declares that the debt has been paid), they didn't actually HAVE to accept US dollars because they can just stick their hands in their pockets? By that reasoning, I don't HAVE to not murder people, you can't make me, it's just that the courts will put me away for life. The whole conversation becomes meaningless.
Well, no; the point is that the legal tender status of US dollars is only relevant if and when an outstanding debt becomes the subject of litigation. How often does that happpen?
Further, an agreement could say something to the effect of "borrower will repay lender the sum of $1000, or 50 BTC", stipulating an effective exchange rate that makes repayment in dollars entirely unrealistic.
Its real value is being a medium of exchange. For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN.
There are many, many ways people who wish to deal in bitcoins can find a way to convert them into USD. Even if that means buying prooducts from overseas using bitcoin, importing them, then selling the products on ebay for USD.
I am afraid this is incorrect. The problem is, you seem to have a very basic, early 19th century, Jean-Baptiste Say style concept of money. This early school was, too, of the opinion that money's only role in the economy is as a medium of exchange, barely abstracting how the underlying economy is just the exchange of commodities. Thus Say's law as corollary.
But this analysis misses the time dimension of money: lending, borrowing and interest [1]. Keynes knew that, and before him Marx, and I bet someone before him too. And in this aspect, I find Bitcoin to be an irreversibly brain-damaged, if interesting, experiment. I look at it and see a massively deflationary currency, dependant on a empirical rule of thumb (Moore's Law), that is even today failing to accommodate the mildest exponential growth. When your currency gains value by the hour, actually borrowing and trading and doing capitalist things are losers' propositions.
Don't get me wrong, I see value in an automated currency that can provide at least an amount of anonymity [2]. In my opinion, Bitcoin is just not it. When your economic theory is still getting an erection over the gold standard, like some 19th century robber baron, you know you just don't have the economic chops to do it. No sane modern-capitalist economy can be given birth by faulty economics.
[1] Unless of course you belong to the school of the Austrians, like whomever wrote the "deflationary currency" joke of an entry in Bitcoin's Wikipedia. For you all evil's root is either the government or fractional reserve banking, so I'm obviously wrong.
[2] Maybe with a fixed 4% inflation rate, like Milton Friedman suggested. It could also be a fiat currency, and simultaneously decentralized and anonymous, if we could take the principles of the free-banking era, see why they failed (because they failed by themselves, no amount of austrian self-bullshitting will change that) and fix them. Who knows, I'm not an economist.
> this analysis misses the time dimension of money: lending, borrowing and interest [1]. Keynes knew that, and before him Marx, and I bet someone before him too. And in this aspect, I find Bitcoin to be an irreversibly brain-damaged, if interesting, experiment
So we went straight from an analysis (what was it btw?) "missing the time dimension of money" - according to you - to Bitcoin being a brain-damaged experiment. What exactly was the logic there?
> a massively deflationary currency .. that is even today failing to accommodate the mildest exponential growth
How does a currency "accommodate exponential growth", and why should it? Are you saying Bitcoin can't be used for lending etc because it's "deflationary"? Don't you think it would be possible for lenders to estimate the risk involved in using (deflationary?) Bitcoins, and then pricing their loans accordingly?
> When your currency gains value by the hour, actually borrowing and trading and doing capitalist things are losers' propositions.
I can't see a problem with a currency gaining value by the hour. If you hold a currency that keeps gaining value, then your purchasing power keeps increasing. Why is that a bad thing? Everyone would be happy to trade in such a currency.
If it were losing value by the hour, well then, yes, people would be reluctant to trade in it.
> When your economic theory is still getting an erection over the gold standard, like some 19th century robber baron, you know you just don't have the economic chops to do it.
Care to tell us what's wrong with the gold standard, and why is anyone who supports it a robber baron?
> For you all evil's root is either the government or fractional reserve banking, so I'm obviously wrong.
Care to explain why the government and fractional reserve banking are good for us all, then?
> I can't see a problem with a currency gaining value by the hour. If you hold a currency that keeps gaining value, then your purchasing power keeps increasing. Why is that a bad thing?
It is bad for several reasons. The easiest to grasp is that people tend to keep their money in their hands (hoarding) if that money is acquiring value by itself. If people don't spend their money, or lend it, the economy suffers.
> If it were losing value by the hour, well then, yes, people would be reluctant to trade in it.
If they have a choice of many currencies, yes, that can be a problem. But with legal tender the contrary is true: When there is high inflation people will spend all their money as soon as possible, before it loses value. Too much inflation is bad too, but some inflation is good.
> Care to tell us what's wrong with the gold standard
With the gold standard the supply of money is completely independent of the need for money. The discovery of a great source of gold will bring inflation; an expansion of the economy without a corresponding increase of the money supply will bring deflation. The same would be true with bitcoin and bitcoin mining.
> Having a deflationary currency is pro-citizen, it is pro-poor, and pro-middle class.
How so??? With a deflationary currency rich people just need to keep their money at home (not even the bank) and they become richer in real terms. Indebted people see their deflationary-currency-denominated debt become more and more difficult to repay. Home owners see the resale price of their home come down. Poor people have less opportunities to work because people don't need to invest their money to keep their real value. How can all this be pro-citizen?
>> I can't see a problem with a currency gaining value by the hour. If you hold a currency that keeps gaining value, then your purchasing power keeps increasing. Why is that a bad thing?
> It is bad for several reasons. The easiest to grasp is that people tend to keep their money in their hands (hoarding) if that money is acquiring value by itself. If people don't spend their money, or lend it, the economy suffers.
What I have never understood about this argument is people can't eat money, they can't sleep under it, they can't do any number of things with it. What they can do is buy things, like food, which allow them to do the things they desire. Having a deflationary currency is pro-citizen, it is pro-poor, and pro-middle class.
These classes are primarily uninterested in "investing." What they are interested in is saving. Saving to go to college, to buy better accommodations, to go on a vacation, to stop working two jobs, etc... They have no interest in complex inflation protection vehicles.
You may say: you are being silly, you don't understand how the financial system works! Maybe I don't, but neither does a large percentage of the population. Shouldn't our default policy always be about protecting those most vulnerable? Those most likely to be exploited? Are we doing that now? Would a deflationary economic system be to their benefit? I think so and so did the creator of bitcoin.
Having a deflationary currency is pro-citizen, it is pro-poor, and pro-middle class.
People who have a high amount of debt relative to income (generally the poor, the middle class, governments) benefit from inflation, not deflation, as they can spend full value money today and pay it back with diminished value money later.
Your concept of the poor as savers benefitting from deflation because they save money and stick it in the bank directly conflicts with the core definition of "poor".
> People who have a high amount of debt relative to income (generally the poor, the middle class, governments) benefit from inflation, not deflation, as they can spend full value money today and pay it back with diminished value money later.
But they keep having to pay more for Stuff. In other words, their purchasing power keeps decreasing, unless their wages rise to compensage for inflation. Deflation "means" an increase in purchasing power, which means getting more stuff for your money, which is.. good? What's not to like?
Well, why are we in this current situation? Because at the margin at very low income levels it makes more sense to borrow than save. However, in a deflationary system it makes more sense to save than borrow. QED
You make it look like poor people are not saving because of ill will. In my experience, poor people don't save because they don't have any discretionary income, as in, you need to eat, have a shelter and clothes, and your income barely meets those needs.
Even when there is surplus income in an inflationary system it makes zero sense to save it outside of an inflation protected vehicle. It makes more sense to simply spend it and borrow when you are short. This isn't "ill will." It is a natural consequence of inflation.
It only makes sense to save when there is enough income that the risk of losing savings from a) bad investment or b) inflation is lower than the expected payoff.
You're right, it doesn't make sense to keep $BIG_BUCKS lying around on an account somewhere, losing value to inflation. It's a better idea to seek a return on that kind of money.
But saving makes sense even just to prepare for unexpected expenses. We're not talking about hundreds of thousands of dollars here, in most cases, it's not even tens. Barely scraping by might be a bit of an alien concept to someone pulling in $250K/year from programming.
> If people don't spend their money, or lend it, the economy suffers.
Do you think people buy stuff because their currency is steadily losing value, or might it be because they need or want stuff?
> When there is high inflation people will spend all their money as soon as possible, before it loses value. Too much inflation is bad too, but some inflation is good.
Your average Joe off the street has no clue about what inflation means or what the current official (understated) rate is. You're talking about a situation where it's obvious to everyone that they just should not hold on to the currency they have. Think hyperinflation.
> With the gold standard the supply of money is completely independent of the need for money.
The need for money? Well, if gold is money, then you don't "need money" because you already have it. There's no need to worry about your money having lots of purchasing power either, that's just a good thing.
> The discovery of a great source of gold will bring inflation;
And conjuring up trillions of quatloos out of thin air will not?
You're saying that the money supply increasing without a corresponding increase in economic activity will cause your currency's purchasing power to dwindle? Well yeah, that's about right. But what exactly is supposed to be the problem you're talking about here?
> an expansion of the economy without a corresponding increase of the money supply will bring deflation.
Yyyep. Again, what's the problem?
> The same would be true with bitcoin and bitcoin mining.
> Do you think people buy stuff because their currency is steadily losing value, or might it be because they need or want stuff?
So you think that people don't think twice about buying the newest PC or phone, knowing that they will be able to buy it in 6 months at a lower price? Ora that buying a home now can be bad or good, depending if prices are going up or down? I don't know your average Joe, but my average Jane knows perfectly well what inflation (or deflation) is :)
People buy stuff _because_ they need or want it, but they buy it _when_ they think it's a good time to buy it. Evaluating "a good time to buy" depends on many subjective factors, and (perceived) inflation is an important one.
> People buy stuff _because_ they need or want it, but they buy it _when_ they think it's a good time to buy it.
If you need a computer right now, you'll buy it now. But overall, people only really need a handful of things, like sustenance, shelter, healthcare etc. No one needs some cheap trinkets from China or whatever. We're just trained to covet Stuff.
Economic theories or policies can't be based on the expectation that people are some kind of spending-automatons that will spendspendspend all the money they have, forever and ever, because inflation encourages them to.
A wise little worker ant will set aside quite a large percentage of his income, just in case a serious need for money arises.
The wise little worker ant doesn't have money, and he doesn't even know what money is. He will stash a quite large percentage of this harvested food (his production) until the stash is enough for the coming winter, for him and for the other non-worker ants.
The wise little worker person, on the other hand, will produce a production P, and get in return some money. Part of that money he will use for consumption C, and part of it he will set aside for savings S. But what he sets aside is NOT production, as in the case of the ant, it is just money - that is, unless the wise little worker person isn't so wise and actually stashes food or car parts or something like that.
The percentage of his production that he is not consuming (after having bartered it through the mean of money) is either going to the consumption C of somebody else, to the accumulation of capital (ie investment goods, thus investment I) or to the actual stashes of our world - stocks S.
If you think not in terms of money, but in terms of actual goods, you should agree that P = C + I + S (everything that is produced either goes to consumption, investment (capital) or stocks).
Now, what happens if C goes globally down, because everybody becomes a wise little worker person? In the immediate, S goes up - the "wise little worker ant" effect, if you will. But soon after, companies that create consumption goods reduce production - because nobody needs big stocks of consumption goods. Now, that could be compensated by increased production by companies that create investment goods - but who is going to request those investment goods, if it looks like people globally want to consume less?
So, what will actually happen is that C goes down, I stays the same or goes down, and after a little time P goes down. And our wise little worker person will lose his job, because less production + increased productivity (technology) = less jobs.
Now, notice that this works on a global scale. On a local scale, it can happen that C + I + S > P - this is for example currently true for the US, and in the long run US citizens will have to decrease their consumption, because that is overconsumption is only compensated by a billion wise little worker ants somewhere else who are actually lending part of their production to the US, in exchange of fiat money. But the decrease of consumption in the US has to be compensated by an increase elsewhere - otherwise, our wise little worker people will discover that ant-economy doesn't work for them.
In case you weren't aware of this already, our economies are imploding behind the scenes, and completely unsustainable.
> In the immediate, S goes up - the "wise little worker ant" effect, if you will. But soon after, companies that create consumption goods reduce production - because nobody needs big stocks of consumption goods.
Again, people will - and should - buy things they need. They may also buy some things they want, if they can afford them. If people stop buying Company X's products, then it will decrease capacity, and possibly go bankrupt, etc. There's nothing wrong with that.
You may decide to start producing and selling buckets of feces, but even though selling three hundred million of them at 50 dollars each would have a positive effect on the economy, it doesn't mean buying one would make any sense for anyone.
Our economies can't keep "growing" exponentially for all eternity, and that's alright. Nothing has been fixed since 2008, and the Status Quo's attempts at whipping up another housing bubble and getting us spending-automatons to spendspendspend are increasingly ineffective.
Ok - if you subscribe to the "happy degrowth" theory, that changes everything. But that has nothing to do with fiat money or gold standards; on the contrary, I would argue that fiat (ie, government controlled) money would make it much easier to make a transition to that new way of life.
But the transition to a happy degrowth FOR SURE can't happen with simple market mechanisms. At least you need to limit the working hours. At worst you need a completely controlled economy. Technological innovation + free market + degrowth = massive and unsustainable unemployment, that's for sure.
An economy that depends on endless, exponential growth not to implode is clearly not sustainable, regardless of what snarky terms you might come up with to ostensibly describe my position.
"So you think that people don't think twice about buying the newest PC or phone, knowing that they will be able to buy it in 6 months at a lower price?"
That seems like a poor example since the cost of technology is constantly decreasing.
People still buy stuff even though they could wait because they need (or want) it.
My point is exactly that people buy things because they need or want it, but, when prices are expected to fall, they wait longer ("when") than when prices are expected to increase or be stable - not that they don't buy at all.
Waiting longer means a decrease in consumption, and less (aggregate) consumption means less (aggregate) production, which also means less total jobs even if productivity is stable (not to mention if it is increasing, as it is because of technological innovation).
I can't see a problem with a currency gaining value by the hour. If you hold a currency that keeps gaining value, then your purchasing power keeps increasing. Why is that a bad thing? Everyone would be happy to trade in such a currency.
Everyone would be happy to sell in such a currency, but why on Earth would anyone want to buy with such a currency? The only currency that is good for both sides of the equation is the one that is stable in value.
Also (to tie to a comment above this one) a currency which is gaining value quickly is highly regressive to the poor. The poor have to spend their limited means in such a currency - they have to spend substantial fractions of their working capital on consumables.
Conversely, the rich don't. In fact, above a key level depending on how quickly it gains value, the rich functionally never lose any money - they can hold such levels of it that the amount they spend on food is rapidly eclipsed by the increase in value in their wealth.
Of course, this sounds good and is somewhat true with normal currency via investment but there's the rub: with a deflationary currency you don't have to invest. You don't have to put your money in the bank, or loan it out or indeed engage in any type of productive activity to get wealthier. The poor are doomed to work all their lives because they can't get above the magic level of wealth where they don't have to, meanwhile those with the piles of wealth dispense tiny fractions to them to buy necessities. It entrenches a stratified society in a way an inflationary system does not (which is not to say that inflationary money puts us all in the free and clear, but it's better).
> The poor are doomed to work all their lives because they can't get above the magic level of wealth where they don't have to, meanwhile those with the piles of wealth dispense tiny fractions to them to buy necessities.
A historical example of how bad a too-valuable currency can be was the situation surrounding the Free Silver Movement, a Populist-Progressive plan to make the gold-based late-19th-Century American currency inflationary by increasing the amount of cheaper silver in circulation. This was popular because it would help deeply indebted farmers pay back their loans. William Jennings Bryan made a wonderful speech, the Cross Of Gold speech, on the issue: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold."
In the extreme limiting case, the money economy based on the deflationary currency freezes to death: The rich are left holding money nobody else wants when the majority of society goes to some other currency that actually meets their needs.
In the non-Bitcoin world, the majority usually moves to another currency (a 'hard currency' like USD or Euros) when the local currency is hyper-inflationary toilet paper, but hyper-deflationary Super-Gold (Super-Duper-Super-Gold!) is, as has been explained, just as bad, and so would provoke the same reaction.
Value is the result of supply and demand. What is the demand for a medium of exchange? Why not just use monopoly money, or acorns, or lumps of clay?
For that matter, why do US citizens not use CAN instead of USD? What drives the citizens of a country to use the currency issued or authorized by that country's government?
"For example selling X widgets for Y bitcoins and exchange those for Z months use of a VPN."
Yeah, and what do you think the VPN provider is paying its bills with? When the government says, "Pay us the tax on your energy use," what does the VPN provider reply with? "Here are some Bitcoins?" Unless the government is accepting Bitcoin for tax payments -- which would effectively turn Bitcoin into a fiat currency -- your service provider is either going to need a way to convert their Bitcoin currency into some other currency, or they will require that you pay them with something other than Bitcoin.
1. Your economics are wrong. Value is not the market price. Value is subjective; the value of something to a given person is the maximum price the person is willing to pay. Value is not the same for each person.
2. BTC's unique feature is the instantaneity and anonymity of transactions.
That's the problem with HN. It is clear when someone's arguments have no foundation in modern economic theory and practice, yet these arguments get thrown around with a false sense of certitude. I cited the textbook definition for "value," and yet you argue that it's dependent on supply and demand, which ignored the fact that the definition of value that I cited is precisely what makes up demand.
Person A is willing to pay $200 for a watch. Yet the market price of that watch is $20. Just because that person saved $180 does not mean that value of the watch to person A suddenly and magically fell by $180. Clearly this person found $200 worth of utility in that watch, or else s/he wouldn't have been willing to pay for it at that price.
> "Instant" in the "10-30 minutes" sense, and anonymous in the "you can be tracked" sense...
"I cited the textbook definition for "value," and yet you argue that it's dependent on supply and demand, which ignored the fact that the definition of value that I cited is precisely what makes up demand."
If your textbook is telling you that value is equivalent to demand, perhaps you need a new textbook. It is easy to illustrate the effect supply has on value with the following thought experiment:
If I told you that I was charging $10 to step inside my house and breath some air, would you be willing to pay? Now imagine a world where breathable air is a scarce resource, and there are no other sources of breathable air for miles around my house; would you be willing to pay in that case?
You cannot seriously bandy about the concepts of supply, demand, and market (equilibrium) price, concepts which form parts of basic economic theory, and then throw out the standard economic definition of value.
> perhaps you need a new textbook.
That clause is utterly devoid of any logical content.
Your thought experiment demonstrates nothing except the basic concept of "people will buy whatever is cheapest." Let's say fresh air is worth $1 million to me. If you were charging $10, I would not pay because I can get it for free and gain a "consumer surplus" of $1 million. That does not change the fact that I would be willing to pay $1 million if air were a scarce resource.
"You cannot seriously bandy about the concepts of supply, demand, and market (equilibrium) price, concepts which form parts of basic economic theory, and then throw out the standard economic definition of value."
Your claim that value is nothing more than "demand" is not universally accepted among economists. I did not throw out any definitions; all I did was point out that value is affected by both supply and demand, which is a straightforward neoclassical interpretation.
Firstly, that eHow article you cite is hardly reputable, and it basically contradicts itself. It states that in neoclassical economics, value is a function of supply AND demand, yet it goes on to state that value = utility. That value=utility argument is what is I am trying to say. Utility has nothing to do with supply.
The other article only prove my point. Neoclassical economics is the "mainstream," "standard" economic theory, for both conservative and liberal economists alike. It mentions classical economics only for the sake of historical context (it was prevalent in the 19th century but is now outdated).
You don't even properly state my argument. I never said value = demand. I said value is what makes up demand. That is an important distinction, and it is one that makes sense (if you don't value something, you don't demand it. If you value something, you do demand it.)
Lastly, you ignored my response to your thought experiment.
The maximum price that people are willing to pay isn't "dependent on" demand, it is demand. In particular, it has nothing to do with supply; if something is available for much less than the maximum price someone is willing to pay, then that just means that they get it for a lot less, it doesn't change how much they are willing to pay in principle.
(There are a few subtleties here, such as that willingness to pay should be measured in terms of opportunity costs rather than dollars, but all this stuff can be found in an economics textbook.)
I think bitcoins real value to people is it's a P2P solution to the double spend problem.
"monopoly money, or acorns, or lumps of clay" can be created almost indefinitely. Of course BTC can too, but must be done by forming consensus amongst the majority of the P2P systems. Lumps of clay you don't need consensus. Just more clay.
"What drives the citizens of a country to use the currency issued or authorized by that country's government?"
Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law.
""monopoly money, or acorns, or lumps of clay" can be created almost indefinitely"
Make an acorn for yourself in that case. Acorns are pretty similar to Bitcoin in that regard: you need Oak trees to produce acorns, just like you need CPU time to produce Bitcoin.
"Legal Tender law. If a debt is offered to be paid in 'legal tender' and the debtee refuses to accept it, the debtor can have the court discharge the debt under the law."
Not all countries have such laws. There is, however, another important category of law that gives fiat currencies their value: taxes. The fact that law-abiding citizens must pay their government periodically creates a large demand for whatever the government accepts as a tax payment. Typically, governments accept a currency they issue, or else they authorize the use of some other currency.
People accept a medium of exchange in exchange for their goods and services because they trust that they can later exchange it for something they want.
The "demand" for a medium of exchange lies in direct bartering being inconvenient, because whoever wants something you have, might not have something you want, right then and there. In this case, instead of a trade not happening, you can just accept a medium of exchange, and use it later to get what you want.
> Why not just use monopoly money, or acorns, or lumps of clay?
If people knew they could exchange lumps of clay for goods and services, they would accept them as payment for goods and services.
> What drives the citizens of a country to use the currency issued or authorized by that country's government?
Actually, it's value as a medium of exchange is limited, as the creators of Bitcoin have placed arbitrary limits on their creation; limits put in place to prop up Bitcoins' ability to be used as a store of value.
Given that it's not a currency according to the government, you probably don't need to pay taxes when you earn a profit in it. When you receive goods and services in exchange for it, you may need to take those as income (since you didn't pay for them) and pay real taxes on the dollar value of that.
There are probably ways bitcoin could survive without being convertible, but there would be major inefficiencies.
In general, currencies must be convertible to other currencies to be widely accepted. You can't deposit foreign currencies that are not convertible because there is no value to a bank.
Unclear whether the virtual currency itself would be considered of value by the government. If not, the person paying in bitcoin would probably have to pay income tax on the fair value of the goods or services.
Sure, but frankly I don't think the United States Department of the Treasury or any federal judge cares about the ideal Bitcoin economy. This letter addresses the real economy we live in today and for the foreseeable future, and it gives enforcement agencies a very bright green light to seize assets and put people in jail.
You will ALWAYS have to convert your Bitcoins to dollars if make any income in Bitcoins, as you cannot pay your taxes with Bitcoins (nor should you, but that's another matter entirely).
You definitely do owe taxes even is your whole income is in bitcoins and there is no official way to tie bitcoin to usd.
First, you'll have to pay taxes based on the USD value of the goods/services/whatever for which you got that bitcoin income.
Second, you'll have to justify how you got to that value.
Third, if IRS doesn't like your justification and think that you're underestimating the income, they'll charge you a fine for the difference if they think it's a mistake; or prosecute you with tax evasion if they think that it was intentional.
After all that you'll pray for Feds to issue official guidelines on how to tie bitcoin value to USD, since it will make all of this simpler and safer for you.
My point was - if US government will make hard or impossible converting bitcoin into usd, they can't claim you owe them any taxes if sole income you get is in bitcoins. Or they have to accept it in bitcoins.
As an analogy - let's say you made business where whole income is produced via bartering and in goods, not currencies. Let's imagine that us government made some law which prevents you from exchanging these goods to USD which is the only tax payment option. How you can pay taxes and from what amount?
They can make you pay because they're the government. They would make you pay taxes on the fair market value of the goods. http://www.irs.gov/taxtopics/tc420.html The prohibition of exchange most likely would not enter into it, because that would be a completely separate law from the tax code..
There was a recent case involving the imposition of inheritance taxes on artwork that, because it contains bald eagle feathers, cannot be sold to pay the taxes. So theoretically the result of that case could give us some idea of how the courts would treat a situation where someone solely had bitcoin income but no way to exchange it. Plus, there is a certain amount of US-centric moaning in this thread (and I am not criticizing eurleif). Just because the US says "no" doesn't mean that another country won't say "yes." And in that case bitcoin can be converted to that country's currency and then back to USD.
Of course there's a way to give the item value - pass it to someone who is willing to pay for it with dollars. Likewise, the value of your bartered goods can be calculated on a dollar basis by examining what other people for the same goods. Really, how dumb do people think the IRS are? These are like middle school pranks for getting out of doing your homework.
I am sure this isn't their first time round the block either when it comes to pulling appart schemes to transfer wealth in something other than dollars.
> Of course there's a way to give the item value - pass it to someone who is willing to pay for it with dollars.
The previous posts said there would be no possible way to transfer the item into dollars. By definition, that makes the value equal to zero dollars. There is no transaction that can possibly made to demonstrate the fair market value being any greater. Of course the IRS will find some loophole to fabricate some value above zero, but that doesn't change the real market value.
It's a false premise. If the goods are worth accumulating then they're fungible. Bnning teh exchange of something as a means of sidestepping currency transaction rules does not destroy inherent value.
Suppose, for example, you have a scheme where people use goats as currency. The goats are all kept on a big farm somewhere, and when one person wants to transfer money to someone else who is a member of the scheme the farm operator updates the notional total of goats owned by each party. If there are enough members in the pool to provide a variety of goods and services to each other, it could be a tax avoidance scheme. You could proscribe that trade, while estimating liability by looking at the number of goats owned by the individual members and/or the $ value of goods and services exchanged, even if it were impractical to realize that money by selling the goats (because they all had a disease or because the nominal value had become wildly inflated compared to the going rate in agricultural markets).
That's your problem, under current law. Just like it's your problem if you don't declare illegally obtained income and pay taxes on that: that means you can be tried for tax evasion on that income.
No one ever claimed tax law is fair or sane (though in fact levying taxes on all income no matter what form is in fact somewhat sane as a starting point if you're going to tax income at all).
That, my friend, is your problem, and I don't mean that facetiously. You owe U.S. taxes (sales, income, property) in U.S. dollars, regardless of what medium you choose to accept payment in. They don't have to accept the payment in BTC, the law is very specific that the only currency that they must accept is USD.
And, to be very clear, the government is not, in any way, saying thst you can't trade your BTC for dollars. What they ARE saying is that you might have to disclose your identity in return to make that exchange ...
> You owe U.S. taxes (sales, income, property) in U.S. dollars
To pick a nit, sales and property taxes aren't, strictly speaking, U.S. taxes, and the actual taxing authorities - usually municipal governments - could theoretically accept payment via some alternate means.
Of course they are - simply if you can prove the deals, then usually you can convict them of harsher crimes and ignore the tax issue.
However, if their defense proves that the stuff they sold was legal (as some new party drugs might be temporarily), then they can still be prosecuted for tax evasion. And, of course, there is the historical case of Al Capone.
"if US government will make hard or impossible converting bitcoin into usd, they can't claim you owe them any taxes if sole income you get is in bitcoins"
This is as brilliant an idea as the bank robber who thought covering himself in lemon juice made him invisible to security cameras.
That's not true. You're taxed on the value of your income, regardless of the form it takes; the IRS will treat the market dollar value of the BitCoins at the time you acquired them as the dollar value of your income. If someone gave you a free house worth $200,000, or forgave you of a debt of the same amount, that'd be equivalent to earning $200,000 in cash income for tax purposes.
> in an ideal Bitcoin economy people wouldn't need to convert to USD
You're describing a situation in which the economy is split into two parts: a dollar economy and a Bitcoin economy. (I will assume that the Feds will come down hard on any "hacks" that make it easy to convert between the two without a license, like they did on offshore gambling sites and AllofMp3.) Experience proves that kind of situation just isn't tenable. Cuba and North Korea just about manage it, but only because there are lots of other barriers separating the two economies.
And anyway, we're talking about the here and now. Do you think the Bitcoin speculators and Silk Road traders are in it for the lols? Dream on.
What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world.
For time eternal, government has risen among traders to enforce commercial rules.
Currency is like electrical current. It flows and the total currency system--all users--seeks equilibrium on it's own. When you've got currency you have to fend against spouses, family, friends, external competitors, the state, lawyers and nature itself to maintain your position.
> What no one, the bitcoin community included, anticipates is hundreds and thousands of competing cryptocurrencies around the world.
No one anticipates it because it makes no sense. Nobody _wants_ hundreds of thousands of cryptocurrencies: Metcalfe's law and the inherent costs of currency fluctuation risk tell us that the number of cryptocurrencies will remain small.
