Thursday, 13 December 2012

Response to Hülsmann & Hoppe from PFS 2012 Q&A session day two

Professors Hülsmann and Hoppe answer a question from the audience about Bitcoin around 32 minutes into the video here:

This is a quick response to them.

Hülsmann argues:
"It's anticipated in the system that under some circumstances you can create more units. So somebody is authorised. Because if you don't, if you just keep the current supply, then you get a very very strong price deflation as soon as Bitcoins spread. So somebody must be authorised to create more I suppose. So somebody has the keys to the whole thing, so which reason do we have to trust those keymasters more then minters of gold coins?"
First of all, the production function of Bitcoin is defined as an approximately geometric convergent series. An attempt to produce Bitcoins without fitting into this schema does not, by definition, produce Bitcoins, similarly as creating an atom which does not have 79 protons in the nucleus does not, by definition, produce gold. One might be tricked into thinking that something which does not (entirely) consist of atoms with 79 protons in the nucleus is gold, because it is prohibitively expensive to verify the number of protons in all the atoms of a physical object the size used for transactions, but this is an empirical problem (and for gold could be solved by nanotechnology as Robert A. Freitas argues). From a practical point of view, this problem does not occur with Bitcoin, as the verification is done by computers and from the perspective of a Bitcoin user is automatic. The blockchain lists all the produced bitcoins and is publicly available for anyone to verify, again, by definition. An attempt to create Bitcoins outside of the specification would be akin to an attempt to inject new characters to the English alphabet, let's say the "ü". It's evident for anyone that is familiar with the English language that "ü" is outside of the specification and they do not need to worry that someone will fiendishly inject it into the alphabet, screwing up their command of English.

So noone is, by definition, allowed to create Bitcoins outside of specification. The only thing that can happen is a creation of an incompatible blockchain fork, i.e. the creation of a new wannabe currency.

Hülsmann also commits a non-sequitur fallacy. It does not follow that price deflation allows to create new Bitcoins. Maybe Hülsmann is used to how it works with gold and assumes that if the market price rises above production costs, this increases the production rate. But Bitcoin does not work like that. The global production rate is, apart from minor statistical fluctuations, predefined. An increase in the production intensity does not result in an increase of the amount of the bitcoins produced, rather it raises the production costs. The production function of Bitcoin is less elastic than that of gold. The result is that marginal production costs follow the market price. I want to do a proper analysis comparing the marginal production costs and the market price to demonstrate this, but for the time being, only visual comparison is available by checking out the graphs provided by and

Empirical data shows that since the emergence of price of Bitcoin until now, it has appreciated by a factor of about 17,600 (from about 1/1,309.03 USD to about 13.51 USD at the time of writing), without any problems in the production function. Just about two weeks ago, the first block reward adjustment occurred and everything worked according to the specification.

Hoppe argues:
"I always ask people 'Can you explain to me quickly what Bitcoins are?'. And then I typically get such complicated answers that I think 'who in the world would ever want to hold something that a decently intelligent person like myself cannot understand?'"
This sounds intuitive, but it actually is not necessarily true. For starters, at the most generic level, Bitcoin is just a clearing system controlled by cryptography, combined with an internal inelastic production function. It's as if gold miners through the act of mining gold also provided clearing functionality. And indeed, Bitcoin as specie provides many functions that historically required money substitutes, and from economic point of view this is the most relevant aspect. I don't think at that level it is too complicated to understand (maybe it's complicated to explain).

On the other hand, gold, for example, is defined by the number of protons in the atomic nucleus. But people did not even know about protons until about a hundred years ago. That did not prevent them from using gold as money. I bet that professor Hoppe does not understand the details of valence, chemical or nuclear reactions to a significant extent. If someone started explaining gold to him from this scientific point of view, he might be confused just as he is about Bitcoin.


  1. Also, I'm sure he does not understand the complications of TCP/IP, sockets, HTTP, SMTP protocols and other related tecnologies, but I bet he surfs the web and uses email just fine...

  2. This blog post:

    is relevant to the matter of Hoppe and Bitcoin, and the comment by James Bellington on that post sums it up perfectly. Hoppe and his fellow Austrians cannot be expected to understand everything that is thrown at them and they have quite alot put to them because they are famous in certain fields.

    Its best to use these people for what they are good at; theory, and then use that theory to build tools that they would never expect to emerge. Bitcoin does not need the blessing of the Austrian school or anyone else to succeed.

  3. Well i'm an Austrian Economist and i admire mr.Hullsman and mr.Hoppe, but i've a more favourable view over Bitcoins, they represent a private issued currency that emerges on the market-place and even if is not a metal standard, and some 'obscurities' persist (but i admit that some of them could be explained by more infos that i don't have at the moment) BTs is an intersting phenomenon that remenber me the Hayekian view over currency freedom.

    Also interesting is the possibility of 'forking' and the emersion of other currencies that compete with Bitcoins, then economics laws and preferencies will do the rest.

    Giuseppe D'Andrea

  4. Irdial and Giuseppe, I made a new blog post, hopefully it will clarify some things.

  5. Peter, glad to see this blog, and will definitely be keeping an eye out for future posts here. One wee bit of constructive criticism, however: your statement that Bitcoin has appreciated by a factor of 17,600 seems a little sloppy, since you are evidently measuring that in terms of the ever-debased USD instead of a tad more solid a yardstick such as XAU. At the very least, the statement should be qualified with "appreciated in terms of the USD".

    1. You are right Arto, the USD value fluctuations are ignored in my argument. I actually was interested in gold price as one of the variables during my research, but couldn't find data (price in USD) in a parseable form with sufficient granularity.

  6. pricedingold has bitcoin measured in gold.

    Btw nice post, I am basically Austrian but I think Hulsmann/Hoppe are making a big mistake dismissing Bitcoin so easily without having studied. This is right up their "private property exchange is good" alley.