Best comment from the show's host:
"I hope some of my colleagues will find this of interest."
A decentralized, global currency is truly a foreign concept to economists.
In the early 1990s there were many who immediately realized the potential of this thing called the world wide web. But there were only a few who were articulate in delivering the message: "I hope you will pay attention, THIS IS KIND OF A BIG DEAL".
Technically, I think BitCoin is extremely cool. However, I can't help but be skeptical of many of its apparent consequences:
During the financial crisis, many on the left expressed concern about a deflationary spiral. I don't claim any economic expertise, but the concern seemed valid. Bitcoin, by slowly reducing the speed at which currency is produced, effectively ensures long term deflation. Couldn't this have all kinds of bad consequences for the economy?
I favor ideas like "campaign finance reform". I also am not a fan of various forms of fraud, bribery, and organized crime. Of course these things all exist now, but bitcoin would seem to make them scale much more smoothly. I don't want government to micromanage the economy, but I also want it to be able to create and enforce laws that help correct problems caused by extreme economic freedom.
I also think taxes are needed. I think a bitcoin-driven economy is one that is hard to tax because it's hard to prove that person X has, or has received, some amount of money. Even sales tax seems difficult to collect. Is there some form of tax that would still work?
Also, will lenders be wary of bitcoin since they have little recourse to collect money from someone? Will something like credit cards still work? Will investors be scared to invest in startups since it becomes harder to trace where money is going?
I'm not trying to debate the free market with the libertarians out there. I'm curious if someone can explain why my concerns are invalid, due to my misunderstanding of the economic consequences of bitcoin.
Think of the BitCoins as something like gold - gold is also a finite resource and gets incrementally more difficult to mine, yet no deflationary spiral has set in (afaik). You can also trade gold and cash in dark channels and evade taxes, but you don't have to.
Gold isn't currently the currency (in most places), so I'm not sure what you mean here. If you listen to the podcast, the right-leaning (but generally fair) host makes a convincing explanation why there would be deflation under bitcoin. Also, gold and deflation are part of a popular story for explaining the great depression. I say all of this not to debate any of these points, but to point out that there is a case to be made that bitcoin would deflate over time and that it might have negative consequences.
I think bitcoin is somewhat different than gold because it is more decentralized (in practice) than having a national currency backed by gold. For example, it may scale more cleanly than gold and cash for corrupt uses, since bank accounts and the sources of money can be more readily hidden. I'm skeptical that this is a good thing.
During all 19th century gold and silver were the main currency. Economy was on the rise (industrial revolution) but there wasn't any problem with deflation nature of gold.
Why would the price have been so steady? Was the supply of gold increasing at just the right rate to keep it steady (unlikely) or was the economy so much less efficient at the time that prices didn't tend to fluctuate as they should (my guess). Perhaps the government played a role by owning a massive amount of gold? I don't think any of these explanations would apply to bitcoin (or gold, now).
Is there a better explanation? (and does it also apply to bitcoin?)
> However, in preindustrial England, and indeed in many preindustrial economies, inflation rates were low by modern standards. Figure 8.7 shows the English inflation rate from 1200 to 2000 over successive forty-year intervals. Before 1914 inflation rates rarely exceeded 2 percent per year, even in the period known as the Price Revolution, when the influx of silver from the New World helped drive up prices. In a country such as England, which had a highly regarded currency in the preindustrial era, the crown did not avail itself of the inflation tax, despite the close restrictions Parliament placed on its other tax revenues. Only in the twentieth century did significant inflation appear in England. By the late twentieth century annual inflation averaged 4–8 percent per year. Thus there has been a decline, not an improvement, in the quality of monetary management in England since the Industrial Revolution.
>
> ...Thus in Roman Egypt wheat prices roughly doubled between the beginning of the first century AD and the middle of the third.[12] But that reflects an inflation rate of less than 0.3 percent per year.
I submit that it is unlikely that any of your explanations would operate over most of England's post-Invasion history and also in Roman Egypt a millennium before.
I couldn't find the data right now, but if i'm not mistaken, long term there was deflation, not inflation (though there were fluctuation due to wars and influx of precious metals from New World).
Wasn't the (or a) problem with the great depression that they started to decouple money from gold? Although I guess there is any number of theories about what caused the great depression.
In a bitcoin system, fractional reserve banking flat out will NOT work so you can completely forget about all of macroeconomics done in the last 300 years.
Instead it works like an economy that is not merely a gold standard but an economy where gold tokens are actually traded physically and are the only currency that is permitted. An example of this would be the economy of the Byzantine empire which was very stable and lasted over 1000 years. It was constructed in such a way as a reaction in part to the relentless debasement of the western roman empire's currency, which many believed was a central cause of its decline.
Fractional reserve banking works, up to a certain multiplier (you can loan out every bitcoin you take in; if you can find people willing to accept "certificates valid for 1 bitcoin", you can loan out as many as you want).
Certificates valid for one bitcoin are not bitcoins though. There is no reason to keep your money with a bank for safekeeping as their is for physical gold which is how the whole fractional reserve system got started. The goldsmith would give you receipts valid for your gold so you could safekeep it with him. Also, there is no government to print up fiat to bail out the banking system, so when loans default investors lose their money permanently.
People forget that there was deflation during the Roaring Twenties, and several economic booms before that.
I think there are two kinds of deflation. One is just the currency getting more valuable. The other is deflation due to everyone having to stop and pay down their debts. The latter is horrible because the deflation makes the debt harder to pay off. The former is no big deal.
Some economists talk about the "spiral" caused by people putting off purchases, since they can get more for their money later. Those economists have yet to explain why people keep buying so many computers, cellphones, and flat screen TVs. If people don't actually put off their purchases in the expectation of lower prices, the spiral argument fails.
Finally, it's important to remember that bitcoins are not legal tender, and quite likely never will be. Deflation of one currency in the context of multiple competing currencies is going to have much less of an overall economic effect.
> I also think taxes are needed. I think a bitcoin-driven economy is one that is hard to tax because it's hard to prove that person X has, or has received, some amount of money. Even sales tax seems difficult to collect. Is there some form of tax that would still work?
The cypherpunks would tend to disagree with you. Remember, taxes aren't inherent to any system of monetary value, they're just laws that say "pay us x or go to jail".
Point two:
"During the financial crisis, many on the left expressed concern about a deflationary spiral. I don't claim any economic expertise, but the concern seemed valid."
Deflationary spirals are an economic theory, and have never yet been seen in the wild.
The only "problems caused by extreme economic freedom" are the groans and reactions of centralized monetary control as liberty is restored to the people.
> the supply of currency (...) is controlled by a small handful of early adopters who therefore control the price.
Careful now, this is a big simplification.
The supply is only partly controlled by the current adopters. Each adopter is free to throw more and better silicon & software onto the computations, to get better chances of finding a new hash.
However, the overall pace is moderated by the so-called `difficulty factor', shared by all peers. Which is adjusted periodically so the generation of subsequent hashes doesn't progress too fast -- where `fast or too fast' is about building community of users.
> The network tries to create 6 blocks per hour. Every 2016 blocks (about two weeks), all Bitcoin clients compare the actual number created with this goal and modify the target by the percentage that it varied. This increases (or decreases) the difficulty of generating blocks.
The supply is moderated by big cooperative pools that spread out the block generation workload in return for spreading out the rewards.
http://deepbit.net/stats.php is a fairly large pool that wins pretty often, and a hobbyist crunching on spare GPUs will see a better return through a pool than trying to get lucky on their own.
There is a kind of self-regulation mechanism in bitcoin. It limits the ability of adopters to heavily imbalance the system. Also, that's quite unlike the currencies issued by countries ;-)
This is great. I emailed Roberts (and NPR's Planet Money while I was at it) back in the beginning of March saying an episode on Bitcoin could be fascinating. I didn't receive a reply so I figured it wouldn't happen.
As pointed out in this thread, that's not a bitcoin address. That's just a GPG key fingerprint. Nothing to do with bitcoin itself. Terribly sorry for the foobar.
The original post:
> It's a bitcoin address, used for both sending and receiving. If you want to trade with a person, you enter that address as receiver's address in a transaction.
Nb., each bitcoin user can freely generate several addresses to protect privacy; up to and including using one-off addresses (i.e., address for just one transaction).
It's my PGP key fingerprint. Copy the last two blocks and you've got my key ID - with that, my key is fetchable from public keyservers and has my email address on it.
Some of us who mine Bitcoins need to sell some either to recoup our investments in hardware to generate them (repaying debt), or to purchase more hardware (reinvesting the profits).
Because Bitcoin transactions are not able to be reversed, buying them is notoriously difficult online, as fraudsters like to buy them with stolen credit cards. (Of course, this means that almost nobody sells Bitcoins for PayPal/credit cards/etc. due to chargeback risk.)
It's much better to deal with someone you know, or, failing that, someone with existing reputation. I was hoping to make life easier for fellow HN scenesters.
A decentralized, global currency is truly a foreign concept to economists.
In the early 1990s there were many who immediately realized the potential of this thing called the world wide web. But there were only a few who were articulate in delivering the message: "I hope you will pay attention, THIS IS KIND OF A BIG DEAL".