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What are cryptocurrencies? (ontological perspective)


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This post is not about valuation of cryptocurrencies nor whether they are investable assets or not. My intention is to define what cryptocurrencies are, not by explaining the underlying technologies, but by categorizing its nature based on a philosophical / ontological perspective. My hope is that this will clarify some of the misunderstandings and how they get compared to things like fiat money, gold, etc.

 

First thing we have to discuss is how social reality is constructed. I’m going to use the framework mainly established by John Searle (for details, see his work “The Construction of Social Reality”). Searle argues two categories of reality - first, we have observer-independent reality, such as molecules, mountains, gold, etc. that exists independent of our perception or interpretation, and hence whether humans exist or not. Then there is observer-relative reality, such as baseball games, money, marriage, etc, which only exist because we exist, i.e., they are social reality constructed by us.

 

Searle then explains how such social reality is created, essentially originating from observer-independent reality. He proposes a logical formula, “X counts as Y in C”, that is some entity X functions as Y in the context C. He argues that this formula can be used recursively to identify the “root” material entities that any social construct is based on. For example, “a paper with some specific ink pattern counts as money in a particular country’s economic system”. Or, “a lump of gold counts as a store of value in human societies”. Again, Searle argues that all forms of social reality are constructed out of some material entities. In this sense, he’s a devout naturalist.

 

Now, Barry Smith (a famous ontologist) rebuts Searle’s argument. He argues that many interesting social constructs are “free-standing Y terms”, which do not specifically dependent on material entities. A prime example of this is money. Money nowadays is mostly in the form of computerized bank accounts, and so Searle would have to argue that some blips in a bank’s database count as money. However, you cannot go to stores and buy goods with these blips. Blips are simply representation of money, and you would need to find another form of bearer that is accepted by the store. In this sense, money is an entity that is generically dependent on some bearer (paper bills, commodities, blips in a bank’s database, etc.), and can be carried by other forms in different times. Money does not dependent on a specific material entity for it to exist. In fact, in some ancient villages money may have existed as speech or memory in people's minds, so they do not even have to inhere on physical things. This is true to many financial concepts such as debts, contracts, price, or a store of value.

 

So let’s go back to the statement “a lump of gold counts as a store of value in human societies”. Following the Smith’s theory, the notion “store of value” is a generically dependent entity that can be carried by any particular X entity (including non-physical). And we know this is true - gold, paintings, wines, and horses could all be used as a store of value. What should be clear from this is that gold specifically has no special intrinsic properties that warrant it to be a store of value. The dependency is only one way. The only reason why gold is a bearer of a store of value is because of our history of social acts that led up to gold being accepted as a store of value, nothing more. Same argument can be made with all forms of money and other social constructs.

 

You may ask then, but gold has some intrinsic properties that are valued by our society, e.g., its shininess or ductility or conductivity, and these properties are what make gold function as a store of value. Certainly, those factors make gold desirable, but those properties are neither necessary nor sufficient conditions for gold being a store of value. Many other things with much more usefulness than gold do not count as a store of value; and, some things that seemingly have no utility such as baseball cards can be a store of value. Again, the store of value is a socially constructed notion that is free-standing and only generically (and often temporarily) dependent on some bearer entity.

 

So finally, what are cryptocurrencies? From a pure brute facts standpoint, they are just blips existing on a network of computers. But can they serve as money or a store of value? Based on the ontological argument above, there is nothing that would prevent them from becoming one. From this perspective, there is no difference between a cryptocurrency and gold / money in terms of its potential to serve as a store of value. If a series of our social acts constitute enough confidence / agreement among us, it could eventually become a stable store of value.

 

Now I have no idea whether cryptocurrencies will become one, nor what are the chances, but I hope I made a convincing case that it is a fallacy to dismiss them because they do not have the intrinsic properties of gold or fiat money, nor because they are not based on some physical material entity.

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What exactly do you mean by "store of value"? 

 

I understand the phrase to refer to something that does not depreciate in value over time.  But you say a horse could be a store of value.  The average lifespan of a horse is 25-30 years, and a 20 year old horse isn't as valuable as a 3 year old horse.  So, a horse clearly depreciates over time.  So, you must mean something else by the phrase "store of value."

 

Also, is it correct to say that "What should be clear from this is that gold specifically has no special intrinsic properties that warrant it to be a store of value. The dependency is only one way. The only reason why gold is a bearer of a store of value is because of our history of social acts that led up to gold being accepted as a store of value, nothing more"?

 

Doesn't, for example, gold's relative resistance to corrosion and many other chemical reactions (i.e., it's "special intrinsic properties") make it uniquely suited to be a store of value?

 

EDIT:  The point I'm pushing back on is idea that the fact that a tangible object has become a "store of value" in a human society has nothing to do with its physical properties.  But that does not mean that an intangible object couldn't also become a store of value -- i.e., valuable across generations -- if there were sufficient social acts to make it so.  But I suspect those social acts would only occur if the intangible had certain useful characteristics. 

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What exactly do you mean by "store of value"? 

 

I understand the phrase to refer to something that does not depreciate in value over time.  But you say a horse could be a store of value.  The average lifespan of a horse is 25-30 years, and a 20 year old horse isn't as valuable as a 3 year old horse.  So, a horse clearly depreciates over time.  So, you must mean something else by the phrase "store of value."

 

Also, is it correct to say that "What should be clear from this is that gold specifically has no special intrinsic properties that warrant it to be a store of value. The dependency is only one way. The only reason why gold is a bearer of a store of value is because of our history of social acts that led up to gold being accepted as a store of value, nothing more"?

 

Doesn't, for example, gold's relative resistance to corrosion and many other chemical reactions (i.e., it's "special intrinsic properties") make it uniquely suited to be a store of value?

 

A horse was a bad example. https://en.wikipedia.org/wiki/Store_of_value#Other_Stores_of_Value

 

As for your second question - why aren't other rocks (e.g., granite) used as a store of value?

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As for your second question - why aren't other rocks (e.g., granite) used as a store of value?

 

This is a great question.  I'm not a chemist, but I understand that, in addition to its relative rarity on Earth, gold has other useful properties, such as the ease with which it can be minted.  I doubt granite has any of those characteristics.

 

But your general point is well taken:  Why gold rather some other relatively rare element or substance with useful properties (assuming there is one)?  I suspect the answer is a combination of gold's physical properties and the social acts you mention, but I don't know.

 

This relates to a question posted on one of the various crypto threads:  Is bitcoin actually rare if you can create something that essentially identical and call it bitcoin2, and then bitcoin3 and bitcoin4 and so on?  The only response I saw to this was that human society likely needs only one digital store of value, and if I recall correctly the author of the opinion referred to the long history of gold as a store of value in human societies.  The point, I take it, is that once something with the sufficient characteristics (tangible or intangible) becomes entrenched through social acts, it will remain the store of value until something with substantially better characteristics comes along. 

 

EDIT:  I also note that on the crypto threads the bitcoin advocates are touting its "special intrinsic properties" as the reason they are backing bitcoin over other alternatives. 

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Gold is rare (relatively speaking) especially compared with granite. Gold is non-reactive to the normal human evironments, people don’t often accidentally drop their gold in cyanide solutions. Gold is maluable and easily shaped, divided, combined, etc. You’d never easily cut a granite coin into pieces of eight to give change.  Also gold is uniform, unlike rocks or minerals such as granite or diamonds any oz of gold is indistinguishable from any other oz of gold so every oz of gold is worth exactly the same as any other.

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Gold is rare (relatively speaking) especially compared with granite. Gold is non-reactive to the normal human evironments, people don’t often accidentally drop their gold in cyanide solutions. Gold is maluable and easily shaped, divided, combined, etc. You’d never easily cut a granite coin into pieces of eight to give change.  Also gold is uniform, unlike rocks or minerals such as granite or diamonds any oz of gold is indistinguishable from any other oz of gold so every oz of gold is worth exactly the same as any other.

 

Yes, exactly. 

 

And based on your posts in other threads, I take it that you believe that bitcoin has its own "intrinsic properties" that are also particularly suited for being a store of value, though those properties happen to be quite different than gold's properties. 

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Gold is rare (relatively speaking) especially compared with granite. Gold is non-reactive to the normal human evironments, people don’t often accidentally drop their gold in cyanide solutions. Gold is maluable and easily shaped, divided, combined, etc. You’d never easily cut a granite coin into pieces of eight to give change.  Also gold is uniform, unlike rocks or minerals such as granite or diamonds any oz of gold is indistinguishable from any other oz of gold so every oz of gold is worth exactly the same as any other.

 

Yes, exactly. 

 

And based on your posts in other threads, I take it that you believe that bitcoin has its own "intrinsic properties" that are also particularly suited for being a store of value, though those properties happen to be quite different than gold's properties. 

 

Bitcoin is rare (relatively speaking) especially compared with granite. Bitcoin is non-reactive to the normal human evironments, people don’t often accidentally drop their Bitcoin in cyanide solutions. Bitcoin is easily divided, combined, etc it is divisible to 8 decimal places, much more divisible than gold is (in a practical everyday usable sense). Also Bitcoin is uniform, unlike rocks or minerals such as granite or diamonds any unit of Bitcoin is indistinguishable from any other unit of Bitcoin so every unit of Bitcoin is worth exactly the same as any other.

 

All of the features that make gold a good store of value are also properties of Bitcoin. But Bitcoin has features that make it better than gold. I can send any amount of Bitcoin relatively quickly and cheaply to anywhere on earth.  I’ll send $100M in Bitcoin to China and you send $100M in gold to China I guarantee that the Bitcoin will be much easier and cheaper to send.  Also Bitcoin is easier to hide, travel with,  and protect.  I can memorize 12 English words and travel with my entire net worth in my head.  You could not as easily travel discreetly with your entire net worth in gold on your person.

If the government outlaws gold again it might find your gold, but if my Bitcoin is hidden in my head they would have to kidnap and torture me to get it out of me.

 

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This relates to a question posted on one of the various crypto threads:  Is bitcoin actually rare if you can create something that essentially identical and call it bitcoin2, and then bitcoin3 and bitcoin4 and so on?  The only response I saw to this was that human society likely needs only one digital store of value, and if I recall correctly the author of the opinion referred to the long history of gold as a store of value in human societies.  The point, I take it, is that once something with the sufficient characteristics (tangible or intangible) becomes entrenched through social acts, it will remain the store of value until something with substantially better characteristics comes along

 

What happens when all of the bitcoin becomes worth $7 trillion like gold?  Then why not own bitcoin2, which is completely identical to bitcoin, also is limited to 21MM coins, but is priced at $1 instead of $333,333?  $1 has upside to $333,333, $333,333 only has downside.  That's your substantially better characteristic.  Once the $1 goes to $10 on that logic and makes the news, everyone says "here we go again!  this is the next bitcoin!" and loads up on bitcoin2. 

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This relates to a question posted on one of the various crypto threads:  Is bitcoin actually rare if you can create something that essentially identical and call it bitcoin2, and then bitcoin3 and bitcoin4 and so on?  The only response I saw to this was that human society likely needs only one digital store of value, and if I recall correctly the author of the opinion referred to the long history of gold as a store of value in human societies.  The point, I take it, is that once something with the sufficient characteristics (tangible or intangible) becomes entrenched through social acts, it will remain the store of value until something with substantially better characteristics comes along

 

What happens when all of the bitcoin becomes worth $7 trillion like gold?  Then why not own bitcoin2, which is completely identical to bitcoin, also is limited to 21MM coins, but is priced at $1 instead of $333,333?  $1 has upside to $333,333, $333,333 only has downside.  That's your substantially better characteristic.  Once the $1 goes to $10 on that logic and makes the news, everyone says "here we go again!  this is the next bitcoin!" and loads up on bitcoin2. 

 

The thing is that gold is what it is and can’t be improved, but if there was some substantial improvement that could be made to Bitcoin, that if it wasn’t done some other coin would take its place, I have no doubt that the improvement would be made. If it is worth $7T there would be far to much to lose to just let some upstart displace it because of some nifty feature or two.

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No dog in this fight but the crypto thread is so porminent now that you can't ignore it. 

 

1. Will Crypto still have value if it can't be converted into USD?  Will people still accept crypto in exchange for goods or service if ultimately the current world power refuse to convert it into fiat currency?

2. It seems like central banks and frankly the US government have a lot of motive/incentives to ban crypto.  US citizens benefits tremendously from being the reserve currency.  It means that international capital finds its way to the US as a store of value.  From an incentive perspective, it seems like the US government have all the motive in the world to outlaw or minimize the value of crypto at some point.

3. Limited supply of specific cryptos is somewhat flawed because new ICOs are constant.  Larsen, the founder of Ripple, is more wealthy than the Google founders and Larry Ellison.  It kind of blows my mind a bit when a founder of a company in 2012 can be wealthier than Google and Oracle founders.  I don't think the latter guys are slouches. 

4. I've heard people say that they will use crypto to buy RE and frankly there's a whole ecosystem that will be built out to service the people who made their wealth from crypto.  Circling back to point 1) will people still accept Bitcoin or Ripple as payment if it can't be converted into USD? 

 

Just some rambling - I'm not smart enough for this stuff.

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I think it's going to be hard to ban cryptocurrencies as such without major restrictions in the internet we are used to.

 

Easy convertibility is another story. Probably not going to be black or white, but it seems likely to become harder. Another reason for governments to restrict use.

 

I think people to an extent will accept crypto as payment even it somehow would be 100% non-convertible. It seems useful as a market for people connected people trading resources such as cpu power, storage space, bandwith, information and why not skills ala Elance.

 

It seems similar to most platforms business models: it's worthless before the first users, not that great in the beginning but then reaches a tipping point where incremental users make it more and more useful. Losing convertibility I don't think is going to happen completely (after all you can go from USD to other currencies and all other currencies would need to lose convertibility as well).  But even if it does it might not be enough of a push down to go below the tipping point of usability to keep growing. -- Price wise though for recent investors it would suck with a serious government shutdown.

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I think it's going to be hard to ban cryptocurrencies as such without major restrictions in the internet we are used to.

 

I've heard this stated before, but have you really spent time trying to think how you would ban cryptocurrencies?  It would require no changes to the internet.

 

How about a law that says transacting in bitcoin is illegal and any merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to imprisonment for up to 50 years?  And any corporate merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to penalties equal to the last five years GAAP net income?

 

How easy would it be to enforce this law?  There are something like 50 retailers that account for 95% of US retail.  You just task one guy with going on their websites every day and trying to pay with bitcoin, if he can, they broke the law.  You would just police the merchant, not the customer.  You could also make it illegal to provide an exchange of bitcoin for USD.  Isn't that an activity that can be easily tracked?

 

Those are extremes, but it wouldn't be difficult to create incentives to avoid the use of bitcoin.  Governments can put people in prison, and people generally don't like prison...

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I think it's going to be hard to ban cryptocurrencies as such without major restrictions in the internet we are used to.

 

I've heard this stated before, but have you really spent time trying to think how you would ban cryptocurrencies?  It would require no changes to the internet.

 

How about a law that says transacting in bitcoin is illegal and any merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to imprisonment for up to 50 years?  And any corporate merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to penalties equal to the last five years GAAP net income?

 

How easy would it be to enforce this law?  There are something like 50 retailers that account for 95% of US retail.  You just task one guy with going on their websites every day and trying to pay with bitcoin, if he can, they broke the law.  You would just police the merchant, not the customer.  You could also make it illegal to provide an exchange of bitcoin for USD.  Isn't that an activity that can be easily tracked?

 

Those are extremes, but it wouldn't be difficult to create incentives to avoid the use of bitcoin.  Governments can put people in prison, and people generally don't like prison...

 

Yes, governments are the enemies of mankind and often do nasty things.  The US government once banned gold.  It won't stop Bitcoin, just like the US government's gold ban didn't make gold worthless, but it will certainly slow down its growth and adoption in the US.  Not every government is going to ban bitcoin.

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I think it's going to be hard to ban cryptocurrencies as such without major restrictions in the internet we are used to.

 

I've heard this stated before, but have you really spent time trying to think how you would ban cryptocurrencies?  It would require no changes to the internet.

 

How about a law that says transacting in bitcoin is illegal and any merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to imprisonment for up to 50 years?  And any corporate merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to penalties equal to the last five years GAAP net income?

 

How easy would it be to enforce this law?  There are something like 50 retailers that account for 95% of US retail.  You just task one guy with going on their websites every day and trying to pay with bitcoin, if he can, they broke the law.  You would just police the merchant, not the customer.  You could also make it illegal to provide an exchange of bitcoin for USD.  Isn't that an activity that can be easily tracked?

 

Those are extremes, but it wouldn't be difficult to create incentives to avoid the use of bitcoin.  Governments can put people in prison, and people generally don't like prison...

 

Yes, governments are the enemies of mankind and often do nasty things.  The US government once banned gold.  It won't stop Bitcoin, just like the US government's gold ban didn't make gold worthless, but it will certainly slow down its growth and adoption in the US.  Not every government is going to ban bitcoin.

 

The "gold ban" was not a "ban," it was a ban on holding more than $2,000 of gold in todays value. 

 

Also, that is so much more difficult to enforce.  How can you know if someone is "holding" gold?  Or if someone is using gold for that matter?  It is VERY easy to know if a merchant is accepting bitcoin as payment.   

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I think it's going to be hard to ban cryptocurrencies as such without major restrictions in the internet we are used to.

 

I've heard this stated before, but have you really spent time trying to think how you would ban cryptocurrencies?  It would require no changes to the internet.

 

How about a law that says transacting in bitcoin is illegal and any merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to imprisonment for up to 50 years?  And any corporate merchant caught accepting, or attempting to accept (i.e. a pay with bitcoin option), bitcoin as compensation will be subject to penalties equal to the last five years GAAP net income?

 

How easy would it be to enforce this law?  There are something like 50 retailers that account for 95% of US retail.  You just task one guy with going on their websites every day and trying to pay with bitcoin, if he can, they broke the law.  You would just police the merchant, not the customer.  You could also make it illegal to provide an exchange of bitcoin for USD.  Isn't that an activity that can be easily tracked?

 

Those are extremes, but it wouldn't be difficult to create incentives to avoid the use of bitcoin.  Governments can put people in prison, and people generally don't like prison...

 

All evidence we have to to date shows the US government is being open minded and as rational as we could hope with respect to bitcoin.  This can change and it's one of the key risks - but my sense is they do not view this as a threat to USD.

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I thought about this issue a bit more and identified perhaps an interesting example to think about.

 

Compare a digital watch to a mechanical watch. As far as functionalities and utilities go, a digital watch is much more valuable than a mechanical watch. Digital watches are much more accurate, easy to manufacture, less likely to break, no need to maintain, more energy efficient, etc., compared to mechanical watches. Yet, mechanical watches in general demand much higher prices, and some of them are even considered as a store of value (e.g., Paul Newman's Daytona sold for $17.8m last year).

 

You may say then, it is the rarity of some mechanical watches (especially the Paul Newman watch) that make them a good store of value. Those that are numbered and limited are good examples of this case. However, we need to be clear about this notion of rarity. Suppose a Chinese manfacturer makes exact replicas of the Paul Newman watch, including its serial number, and even its wear and tear. They make millions of them. From the pure materialst's point of view, the original watch is no longer rare.

 

Unless of course, Rolex and the owner of the original watch uses their copyright and intellectual property laws to claim that only the original watch is "the Paul Newman watch", hence making it rare. Such acts are the social acts that constitute social constructs such as "a store of value" as I described in the original post. And the legal system and societal context that allow Rolex to protect the value of the original watch are all results of social acts.

 

Forget about the IP aspect for now and just focus on the objects on hand. Assume that we have many replicas but we can still identify the original watch. In this scenario, regardless of IP laws, people would still value the original watch much more than replicas. Why is it so? It is because of the history behind this watch - the fact that it was owned and worn by Paul Newman, the marketing strategy employed by Rolex, our obsession over such luxury / unique items, etc. Without this history - even if the watch had all the best intrinsic properties that a watch could have - the watch would not have the same function as a store of value. (In some sense, it is rare because of its history.)

 

I believe this theory also applies to gold. Or bitcoin. Surely, gold has a certain set of nice intrinsic properties, which led to social acts that made it being accepted as a store of value. But again, those properties themselves are not necessary nor sufficient conditions. It is the history of gold that makes gold accepted as a store of value in our society.

 

Extending this theory, one could argue that it is the history of bitcoin - the invention of a unique cryptography technology by Satoshi Nakamoto, its resonance with decentralization / libertarian values, our growing skepticism about central banking (especially after 2008), etc. - that is transforming bitcoin as a store of value. Sure, its intrinsic properties are, I think, requirements for these stories to be true / accepted by people, but IMO its unique history itself plays a much more crucial factor. And, that is also the reason why bitcoin2 may not become accepted as a store of value, even its intrinsic properties may be better than bitcoin, much like how some rare earth metal other than gold, with better intrinsic properties, may not become a better store of value in our society.

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