Erik Voorhees Responds to Peter Schiff’s Bitcoin Criticism in an Open Letter (This is Excellent)

Last week, Peter Schiff put out a video titled: Bitcoin vs. Gold, which quite frankly was horrible and one of the worst videos he has ever done. It added nothing the the debate that everyone involved in Bitcoin isn’t already completely cognizant of, but even beyond that, it framed the debate around Bitcoin in a totally unproductive and useless way. The reason I say this is because the debate is not Bitcoin vs. Gold, the debate is Bitcoin vs. Fiat Money. Gold is a store of value that has survived as such for thousands of years and and has also served as money for a decent part of human history. Gold will never be worth zero, Bitcoin could certainly trade back to near zero some day. We all know this.

So the key point from my end is, Bitcoin is not competing as a store of value versus gold, it is competing as a currency versus fiat money, and on that count it is superior in an extraordinary number of ways. His video was so awful that I challenged him to a debate on his radio show on Bitcoin via Twitter.


He never responded to me, but fortunately he did have Erik Voorhees on his show to discuss the topic. While I have not listened to the show because apparently you need to be a subscriber to Schiff’s radio show to hear it, Erik Voorhees wrote a follow up open letter to Schiff afterwards. All I can say is that this is one of the most eloquent, incisive and thoughtful articles in support of Bitcoin I have ever read.

I have republished the entire thing from Reddit below (emphasis added by me):

An Open Letter to Peter Schiff A follow-up to the discussion on the Peter Schiff Show, December 2, 2013 (this has been emailed to Peter just now)

Dear Peter,

It was a privilege and an honor to be a guest on your radio show today. I’ve been a fan of yours for more than five years; you were one of the reasons I discovered Austrian economics (and, in turn, Bitcoin), and your eloquent explanation of consumption vs. production in an economy has guided my outlook of the world ever since. So thank you sincerely for what you’ve taught me, and for the opportunity to appear on your show. It was a really special moment for me.

While we had some valuable discussion today, I felt a follow-up was appropriate to better articulate my points. You’re right to be highly skeptical of such a new technology and monetary system, but please take the time to ensure your skepticism doesn’t blind you from what I humbly suggest is one of the most important tools for human freedom ever conceived.

The Fundamentals

First, Bitcoin must always be considered as two things: the payment network (Bitcoin) and the currency units (bitcoins). Condemnations of the latter can often be resolved with an understanding of the former. Satoshi should have named them differently to avoid this initial confusion.

When you suggest that bitcoins have “zero intrinsic value,” you are only considering the currency unit itself and ignoring the payment network. While I prefer the term “utility” over “intrinsic value” (because all value is subjective to the valuer), I may indeed admit that bitcoins, as currency units all by themselves, have no fundamental utility and are completely uninteresting. But – and this absolutely critical – the payment network has vast utility.

In fact, this network is probably one of the most valuable and consequential technologies currently on the planet. Some of us realized this a few years ago. Others are realizing it now. Many more will realize it in the future. The Bitcoin network is, fundamentally, a ledger of title controlled by no man. Ponder that for a moment. The transmission of value and ownership has thus just been severed from the State, not by impotent voting, but by the technological achievement of man.

Now, during the show, you agreed that perhaps this payment network has utility. So, if the network (Bitcoin) has utility, and only one currency is accepted on this network (bitcoins), and those bitcoins are scarce, then should not those units themselves command a market price? Who knows what that price should be, but there should be a price, no?

Any good that is useful and scarce will have a price (consider that air is useful but not scarce, and fish with three eyes are scarce but not useful, thus no price for either of them). Because the Bitcoin network is useful, and because only scarce bitcoin currency units are permitted on this network, the bitcoins themselves have a price. Indeed, they must have a price until the network is no longer useful, or the coins are no longer scarce.

This is not magic. It is not a Ponzi scheme or elaborate fraud. It’s just the market pricing something that it finds useful. As the network grows in usage, its utility subsequently grows, and thus scarce bitcoins appreciate further. Those who grabbed coins in the early days benefit hugely, just as those prospectors grabbing nuggets of gold out of the California foot hills did in the early days of the gold rush. Gold is not a pyramid scheme merely because early acquirers profit from later subsequent adoption and demand.

The Utility of Bitcoin and Competitors

So to adequately claim that bitcoins ought to have no price (which is the implicit assumption from your claim on national television that Bitcoin is a Ponzi scheme), you must demonstrate that the Bitcoin network has no utility. As someone who has transferred $100,000 worth of value to another person instantly in another country (on a Sunday when banks were closed, no less), I am confident that you will not succeed in this demonstration.

I believe that you will understand and agree with my above arguments if you objectively ponder them for a while. Your contention then moves to the following: that if Bitcoin (the network) can be replicated by anyone, it isn’t actually scarce at all and thus even though the network is valuable, the price of individual coins will fall toward zero as the system is replicated over and over by competitors. You would explain that while bitcoins are limited to 21 million units, anyone can create a competing crypto-currency and thus the number of possible crypto-currency units are unlimited, thus not scarce, and thus not fundamentally worth anything.

You made this argument several times on the show today. It is a fair point for you to raise, but please allow me to counter it.

Bitcoin, after all, cannot really be copied. True, the open-source code can be copied and the copier could release CopyCoin (indeed this is happening all the time). But, the copier cannot copy the infrastructure. The protocol layer is easily copied. The infrastructure layer is not. On Day 1 of Bitcoin, it had no infrastructure layer. I can tell you, as an entrepreneur in this space for the past few years, Bitcoin’s infrastructure layer is now substantial. Indeed, I am sitting in my office, and looking at my employees building this very infrastructure as I write this. Their work, and that of many thousands of others around the world, is not so easily replicated.

Let’s use an analogy, which you so often convincingly do when describing the absurdity of Fed policy or the counter-productive nature of various government programs. I believe the following is a very fair analogy.

Consider that language itself is a protocol – a set of rules for conveying information. Consider then that one could copy the English language, and change parts of it, and release it as English 2.0. However, why would anyone use it? Even if it had marginal improvements over traditional English, where is the infrastructure? Where are the vast tomes of literature written in English 2.0? Where are the speakers and writers and scholars of this new language? Where are the libraries and Wikipedias full of English 2.0 articles? How many newspapers are written and conveyed in English 2.0? How many Peter Schiff podcasts are disseminated in this new alternative? That infrastructure wouldn’t exist, and neither therefore, would the users. This is merely the natural, spontaneous consequence of network effect, and it applies to English as a protocol for language just as it applies to Bitcoin as a protocol for money.

Now, does the network effect mean English, or Bitcoin, can never be replaced? No. But it does mean it’d be extremely difficult in either case.

But let’s remember something. Even if a superior crypto-currency overcomes Bitcoin in the open market (certainly possible), does that make Bitcoin a failure or Ponzi scheme? Does that negate the utility bestowed by Bitcoin while the market still favors it? Consider that one can benefit from the Bitcoin network with zero or very low exposure to the currency price long term. This means a payment made with Bitcoin last year still accomplished its objective – value moved freely, the users benefited, even if a year later the system falls apart and goes to zero. Thus, there is real utility today even if the system doesn’t work next year. The assumption that Bitcoin will be around for eternity is not a prerequisite for benefiting from its utility in the present.

Mutual Respect for Market-Based Money

I think you will discover, upon reflection, that your concerns about Bitcoin boil down to the thesis that Bitcoin is a volatile, highly speculative, and non-conservative asset class. In this, I wholeheartedly agree. But if your arguments are claiming that the payment network itself is some kind of fraud – a Ponzi scheme undeserved of respect or even consideration – then I must take issue with that. The Bitcoin network is an utterly revolutionary technology. It separates money from the state, in a way that gold, unfortunately, has been unable to do.

When fully understood, Bitcoin should bring tears to the eyes of anyone who fights against the tyranny and ignorance of coercive governments and their monetary witch doctors. This is why thousands of people around the world have dedicated their lives to this campaign. We are carrying out this experiment without anyone’s permission. We’ll either fail, or change the world in a way that was inconceivable before this technology existed.

I wholly support your idea to make a gold-backed digital currency. Please do it. I’d love to be your first customer, because I love gold. But being in this business, seeing how the payments and banking and regulatory world works, I can tell you that your initiative will likely fail, either by self-immolation (GoldMoney severing inter-account payments), or by governmental take down (e-gold).

A monetary/payment system that relies on gold backing is reliant on the backer. It relies on a centralized, trusted party, to warehouse the gold and provide convertibility. This is the counter-party risk eliminated by Bitcoin.

If there is a centralized backer for any payment system, then the system will have to follow all government laws, or be shut down. To follow the laws, personal customer information must be known, meaning privacy is impossible. Transfer limits and strict terms of use will be imposed, meaning financial freedom is impossible. And have fun with the compliance costs. Have you noticed international banks dropping American customers around the world? It is due to this unfortunate dynamic. And then, if the stars align, and the gold-backed currency manages to grow big and become a successful global payments network, it’s not unreasonable to assume that governments will take it down anyway, because it would compete with fiat – from which great swaths of their power originates.

You cannot compete with fiat by having a competitor that is vulnerable to the guns of government. Bitcoin may not be perfectly immune, but it is highly resistant. Censorship of e-gold was easy. Censorship of Bitcoin will be… entertaining.

Regardless, if you’re honestly interested in trying that experiment again, I will help you and support that effort, because I recognize the value of precious metals as commodities and as money. Until such a system actually exists, I am humbly asking you to support our efforts in kind, and am humbly suggesting to you that bitcoins, while non-physical, are indeed real and indeed have real value, because they are the one currency accepted on the most revolutionary payment network known to mankind. This is not theory – it’s actually working for millions of dollars of payments every day. We’ve moved beyond the Mises textbook. We’re running in the open market.

While Bitcoin is still a highly-volatile experiment, it deserves more respect than dismissal as a Ponzi scheme, and regardless of whether you think the current price of a bitcoin unit is justified, you must acknowledge that this technology, broadly speaking, has utility both for both economic exchange and, more importantly, individual freedom.

When my grandparents ask me how to protect their wealth, I don’t tell them to buy bitcoins. I tell them to buy precious metals. When they ask me how to transfer value across distance, I don’t tell them to ship gold. I tell them to use Bitcoin. My hope in writing this letter is simply this – that perhaps you’ll come to see Bitcoin and gold as beautiful compliments and important tools in the advancement of free-market money – one long-standing, conservative, and physical, the other new, technologically and politically disruptive, and digital. One will not replace the other, but I believe both will come to replace fiat, and good riddance to that stuff.

In Liberty, Erik Voorhees

What can I say Erik. Simply awesome work.

In Liberty,

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  1. Hell, I don’t understand either of you. Should I buy about 10K and sit on it until it is worth 10M. 10M of what?

  2. Superb, Mike. You’ve got a good eye.

  3. I didn’t see Erik discuss the issue of security such as what happens if your digital ‘wallet’/electronic backup gets wiped by some strong magnetic exposure/emp , etc ? And also what’s to stop cb’s from printing (moar) fiat & buying up fuckloads of btc’s , then manipulating the ‘market’ at their wil, causing huge volatility, kinda like what they do in the paper gold ‘market’ .? Those , IMHO , are a couple serious concerns. Mike K , any way you could address these 2 scenarios ?

    • Michael Krieger

      I’ve addressed these questions/comments in the past, but I will do it again. On the first issue of EMP attack or something like that. I guess you are assuming that the Internet will be shutdown for a decade or more and we have a mad max type scenario. If that is your assumption, then we see the world very differently. Sure, anything can happen in life but that is not my base case scenario. Even if I thought there was as high as a 25% chance of such a horrible outcome I would still put 1% of assets in Bitcoin. After all, why not, all you can lose is 1% and you can still do very well potentially and at the least participate in a non-banking, non-traditional financial system economy. Moreover, there are ways to protect your Bitcoins completely offline, such as using a paper wallet or even a brain wallet.

      As far as the attacks by a dying system buying up a lot of BTC and then dumping them on the market to create panic and volatility, sure I could see that. In fact, who’s to say they didn’t already do that this past spring. I guess my point is that to do that they’d have to buy a lot (or use whatever the FBI has taken from DPR) and then sell strategically. Without question this would cause panic and scare people for a time, but it would not destroy Bitcoin. As you mention, they can naked short all the paper PMs they want and create as much fiat as they want, so manipulating Bitcoin is actually far harder to do than to manipulate every other financial market or derivative on the planet. Once they have sold the BTC, they have to buy them again to dump them again. So while not perfect, it still is better.

      Bitcoin isn’t perfect and no one claims it is. I certainly haven’t made that claim. On the other hand, there’s nothing wrong with putting a small % of one’s assets in it as long as they wouldn’t flinch if one lost it. Even if you don’t want to do that because you don’t like the risk/reward, the idea behind a peer to peer currency and payment system that pretty much completely bypasses the traditional financial system once you own them, should at the least be supported.

      Michael Krieger

    • Thanx for the reply Mike !

  4. Jim no, stay away! Bitcoin is the devil incarnate. It is the Lord of the Lies made flesh.

    On the other hand, I bought $3k of Bitcoin at $100 in march and I’m sitting on $33k. Just sold $3k of it and bought silver and gold as a hedge so I’ve preserved my capital outlay in physical metals. But, I’m definitely keeping 90% of it in bitcoins.

    A word of advice (if you’re not a paid shill): stop whining about how you don’t understand, get off your lazy mewling ass and do some reasonable due diligence for your own self, if you really do care which I assume you do because you took the time and effort to post. Search and learn about it. Sorry, but it does actually take time and effort. Nobody is going to pour their own time and effort into answering a petulant and childish “Should I buy about 10K and sit on it until it is worth 10M. 10M of what?” question, especially me.

    Peter: yeh I agree Mike has a sharp eye. Thanks Mike. I find it interesting how Erik seems to be converging closer to Roger Ver in his black/white analysis and bottom-line conviction of this new paradigm, and now Weisenthal is converging as well. Quite interesting.

  5. What if there is joint government regulation that says if you run a business in our country you cannot accept bitcoin or perhaps we will tax bitcoin transactions at a much higher rate then if you accept fiat? Yes you are left with P2P but this would be extremely hurtful!

    • What if the government rounded up all the coin users in state. Put them in work camps, and later on liquidated them?

      Like Mike said, there’s the theoretical possibility, and then there is reality.

      Off topic…bring back the pladizow horns [zh].

    • If my aunt had nuts she’d be my uncle. BC is challenging a 100 yr old elite beast – taxation/regulation far more probable then internment camps!

    • What about the horns? Lol possible they return?

    • And first thing this morning on ZH:
      Bitcoin Tumbles After China Central Bank Bans Financial Companies From Using Digital Currency

  6. i’ve been watching schiff for years. he is usually on, but he was so obviously wrong here, and voorhees reddit post so clearly spot on, that i feel like schiff is NOT to be treated as the enemy here. just politely rebutted.

    clearly , schiff’s ‘opposition’ is irrelevant. there are legitimate issues however with bitcoin that are challenges that remain to be pursued.

    ultimately i believe the real 800 pound guerilla question with bitcoin in the u.s. is how will the bit community respond to u.s. fincen regulatory attack on bitcoin.

    i spoke to this man in person last night, he is a compliance expert on mone yservices.. i would reccomend you watch his 2 videos they are excellent.

    his name is juan llanos, and his regulatory blog is worth checking out. he is a bitcoin supporter but gives a vibe distinctly different from the younger crowd of bitcoin developers and supporters.

    this other blog is the only full time bitcoin media radio show outlet , running since this last summer

    i highly reccomend Andreas M. Antonopoulos
    he’s pretty amazing.

  7. this is the follow up by schiif and voorhess,

    a 2nd debate on the 2nd.

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