

What Bitcoin Is Teaching Us - bcl
http://lfb.org/today/what-bitcoin-is-teaching-us/

======
Aqueous
Yes, let's go back to the glory days of the deflationary late-19th century.

The reason the Keynesians like currency that slowly decreases in value is
because it brought about the longest sustained period of economic growth in
human history, without which we would not even have Bitcoin to celebrate right
now (the widely adopted technology that makes it possible to implement being a
result of aforementioned growth.)

If everyone hoards, and never spends, then the economy stalls and then
recedes. What's good for us as individuals is terrible for us as a whole.

That said, I think BitCoin is very interesting, and if some sort of shorting
is introduced to cause a downward pressure on prices then the price could very
well stabilize. A stable, slightly deflationary currency is just about as good
as a stable, slightly inflationary currency.

~~~
gyom
> it brought about the longest sustained period of economic growth in human
> history, without which we would not even have Bitcoin to celebrate right now

The industrial revolution happened while on the gold standard (with just a few
short periods where it didn't apply, as I understand). Steam power, railroads,
electrification, refrigeration, anaesthesia, early automobiles and so on.

I'm very fond of the computers that we have now (yay 20th century !), but it's
a bit hard to brush aside the 19th century just like that. There's insane
economic growth that happened in that period.

~~~
Bognar
It's almost as if technological advancement isn't tied to a certain type of
currency.

~~~
api
It's almost as if currency is just a medium of exchange.

------
willholloway
I find the Ron Paul/Austrian school camp's complaints that central banking
causes bubbles hilarious because their most notable achievements so far have
been the creation of two asset bubbles.

Since 2008 they have been claiming that monetary policy will usher in hyper
inflation and they created a gold/silver asset price bubble. Now the same
ideology is being used to create a bitcoin bubble.

Even more hilarious is their assertion that a crypto-currency like bitcoin is
scarce and limited in supply.

Clone the bitcoin github repo, find and replace bitcoin with HollowayCoin,
edit a couple lines of code to create a new genesis block and boom I just made
my own crypto currency with all the benefits of bitcoin.

New crypto coins will become important because the block chain won't scale,
and new block chains will need to be created. These alt coins are already
being traded for btc on a couple exchanges.

These crypto-currencies serve a purpose, but there is no need for them to
trade at $230 per coin.

~~~
Spooky23
Even funnier is claiming that the gold/silver standards resulted in more
stable financial systems. Inflation, deflation, and starvation of capital were
huge problems before we switched to debt-based currencies.

They also equate "no central banking" with commodity-based currency. The
United State's 19th century experiments with disbanding central banking wasn't
exactly an economic revolution.

~~~
3pt14159
The point is not that gold and silve were stable, but that they have been
_more_ stable and have kept more value than fiat/debt-based currencies.

~~~
Spooky23
They absolutely were not.

Look at a graph of UK inflation in the 19th century.
[http://www.bankofengland.co.uk/education/Pages/inflation/tim...](http://www.bankofengland.co.uk/education/Pages/inflation/timeline/chart.aspx)

The market value of a hunk of gold has done ok over the centuries, but it's
value at any point in time as a currency goes all over that place. This makes
it difficult to get capital -- who wants to lend money when you have no idea
what money will be worth?

~~~
3pt14159
Your evidence is faulty for these reasons:

1\. You are choosing a specific currency.

2\. You are choosing a specific time period.

3\. The time period you choose from already had world wide debt based
currencies.

4\. The UK already had a central bank.

5\. The UK already had a reserve rate that was < 100%, and a practical reserve
rate that was less than the prescribed one due to fraud by the banks.

I do afford you that gold is volatile, that is true, but it is especially
volatile these days _because_ of its role in the economy. People view gold as
the "oh shit, the government is going to default" or the "oh shit, I need to
smuggle my wealth out of this country before they confiscate it" currency.
Both of those properties make it very volatile to political and economic news.

The point is that for every USD or CAD you bring forward, I can bring forward
one of these: <http://instagram.com/p/X7pWUKIHK5/>

History is riddled with the collapse of currencies (and, hence, economies as
there is a sudden shift of wealth away from those that saved it).

The point of currencies is not to have them be good for the economy. The point
of currencies is to be a store of value and a divisible good for exchange. I
agree that gold has flaws, I also agree that bitcoin has flaws, but they do
have some advantages as well, and I would argue that in gold or silver's case
stability is one of them.

~~~
Spooky23
I deliberately chose the largest economy in the world at the time. Comparing
US currency today vs. US currency in 1800 isn't a meaningful comparison.

How far back do you want me to go? The Romans? Oh wait, they played around
with coinage as well.

------
zeteo
Bitcoin has already taught us that even smart people are not immune to
drinking the Kool-Aid. The tech community is quickly separating into two camps
that are becoming unintelligible to each other. For some, this article is an
amazing piece full of profound insights that justify their decision to buy
Bitcoins. For others, it piles weak arguments on top of an assumption that the
recent rise in Bitcoin value will continue forever.

~~~
wamatt
Two issues:

1)Having insights and owning bitcoins can be mutually independent variables.

In other words, it's entirely possibly you have it completely backward, and
that upon arriving at a lengthy deliberation, some rational actors, _are
therefore choosing to take a position._

2) _> "that the recent rise in Bitcoin value will continue forever."_

That's a pretty decent sized strawman you've rustled up. Most people in that
camp are not arguing that bitcoin will rise forever.

The discussion is about the shape of the graph. I believe both an s-curve
(slow adoption, exponential growth, maturity) and [perhaps multiple] sawtooth
(crash scenario) are plausible.

~~~
jbooth
It seems to me, with a finite supply and limited usage, it has to either keep
increasing forever or crash, right?

Finite supply and an uptake in usage as an actual currency (aka something
different than what 90% of the players seem to be doing) would mean an
increase in demand causing prices to continue to rise with adoption (which
could spell some problems with adoption, but not necessarily insurmountable
ones).

Meanwhile, if adoption as an actual currency never takes off, then eventually
the whole thing's gotta fall over, right? So it's either continual price rises
or a big crash? What are the other scenarios?

All of this talk about the nature of currencies when it's clear that 90% of
the activity is treating it as a speculative asset seems silly to me. Either
it transitions to a currency (which is more about usage than price), or it
doesn't and eventually crashes.

------
melvinmt
The author mistakenly attributes the deflating aspects of a controlled limited
supply of Bitcoins (by design) as the cause of the recent surge in valuation
while it's really just speculation at this point. Even worse, he's urging
everyone to hoard their bitcoins and not spend them because he believes t1
will always be higher than t0. When you undermine the only true value of a
currency (which is trading) you might as well place your bets in a Las Vegas
casino and get some free drinks while you're at it because the thin line
between speculating and gambling has been crossed at this point.

------
tomku
Bitcoin seems to be teaching people exactly what they wanted to believe in the
first place, what a coincidence!

~~~
billiam
This is the only comment that matters here. FWIW, at my SW company which is
filled with brilliant people I spend most of my day patiently explaining that
monetary systems are always about power, not technological innovation, and
Bitcoin will demonstrate that brutally, sooner or later.

I think debates like this mostly illustrate how shockingly poorly engineers
are educated in subjects like history and basic economics.

~~~
tomku
Engineers have a tendency to view everything as an engineering problem, when
most of the "really hard" problems are about people, interactions and
relationships. When all you have is a hammer, everything looks like a nail -
and we have an entire culture of hammer designers churning out the most
effective hammers in history.

------
prairiedock
"it does what currency should do, which is increase in value over time."

What utter rubbish. Bitcoin may or may not survive (as a volatile commodity,
like gold), but you buy it now at your peril. It is backed by nothing, and
generates no earnings. It started at $.10, and to $.10 it might well return.

~~~
nwzpaperman
What is gold, silver or fiat currency backed by?

Commodity demand for gold is only about 12%.

[http://www.gold.org/investment/why_how_and_where/why_invest/...](http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/)

~~~
sfjailbird
What is Google public stock backed by? It buys no influence and yields no
dividend, and Larry and Sergei have said it will stay that way, yet investors
are happy to pay $800 for a symbolic piece (costing 25 times the share of
earnings it represents, useless as that is without dividends).

~~~
dhosek
Which is one reason that I'm not buying stock. Of course even Groupon stock
might when the company fails still yield some Aeron chairs and cubicle
dividers. There is a something behind any (non-scam) stock. The same cannot be
said about Bitcoin. If I had a bitcoin I would sell it as quickly as I could.

------
ChikkaChiChi
Bitcoin is, at most, a payment service similar to Paypal. It is not a true
currency nor will it ever be one. All anyone cares about is how it relates to
the USD.

All government backed currencies at least start on the gold standard. After
sufficient time and economic development, some countries (like the US) can
move off the gold standard and lend and borrow on reputation alone.

Bitcoin was started by people who do not appear to exist, the "money" was
printed by a select group of early adopters who still control vast portions of
its economy, and with nobody to regulate or monitor the exchanges, the recent
inflation can all be some part of manipulative collusion.

WoW Gold and Team Fortress 2 Apple Earbuds seem to have a more stable and
trustworthy currency than Bitcoin.

Yes, I wish I could predict the spike and have cashed out, but I'm not losing
sleep over avoiding an investment that doesn't feel right in the least.

------
dsjoerg
I wonder what Tucker will say Bitcoin is teaching us if it falls to $40.

Bitcoin is very interesting and agree with Ezra Klein's piece on it. However,
the importance of Bitcoin is not in its exchange rate to other currencies, but
in all its other unique properties.

Tucker puts far too much weight on what is quite likely a speculative bubble,
which will be to the ultimate detriment of Bitcoin's long-term future.

------
aidenn0
Inflation is a tax on held currency. You may think a tax on wealth is good or
bad, but from a policy position I don't see a compelling reason to argue about
it in any other terms.

This means that inflation encourages people to hold their wealth in assets
other than currency.

Considering that wealth aggregates at the top, the effect of inflation is
greatest on the wealthiest.

This also means that if you have $100 worth of assets held in a currency that
is expected to depreciate and $100 worth of assets in a currency that is
expected to appreciate, then you will spend the former rather than the latter.

Hence the argument that deflationary currencies are worse than inflationary
currencies as a unit of exchange.

------
johnyzee
This article is quite opinionated, but one thing I liked:

 _This brings us to another lesson that Bitcoin has taught us. Money is like
any other good in society in that it can be produced and managed entirely by
the free market. This is the reverse of what scholarly opinion has said for
more than 100 years._

~~~
T-hawk
That's always been true. Scrip has existed forever.
<http://en.wikipedia.org/wiki/Scrip> Any private party can issue a form of
currency. Its value is limited by trust in that private party to keep the
supply stable and uncounterfeitable (not double spendable), and the
expectation that merchants will accept it for goods and services.

What Bitcoin introduces is a money supply with that question of trust removed,
with enforcement by mathematical means. This only became possible recently of
course, with the advent of enormous computational processing power and
interconnectivity. The latter part of adoption by merchants seems to have very
recently reached critical mass by way of networking effects. So Bitcoin could
indeed be on the rise to become the world's monetary system.

At this point, Bitcoin's biggest danger is not obscurity and oblivion or a
free market crash, it's regulation or illegalization from governments that may
be hostile to the existence and usage of a currency system they don't and
can't control. The US and EU governments are the entities with possible power
to kill Bitcoin, because they possess legalized force outside of the Bitcoin
protocol and ecosystem.

~~~
betterunix
"What Bitcoin introduces is a money supply with that question of trust
removed, with enforcement by mathematical means"

Except that there is no formal definition of the security for Bitcoin, so
there is no meaningful "enforcement." Formal definitions of security for
digital cash systems cannot be applied to Bitcoin _because_ of the lack of a
central authority. The security of Bitcoin is extremely vague, based on hand-
waving arguments about computational power that are extremely difficult to
analyze.

Even if somehow we overlook that lack of rigor, "enforcement" is not accurate.
There is a known, polynomial time, practical attack that allows Bitcoin money
to be double-spent. That does not sound like "enforcement by mathematical
means" to me, at least not if the "mathematics" you are referring to are
cryptography, game theory, or related fields (and I am not sure what other
mathematics would even be used to enforce rules).

~~~
wnight
Double-spending bitcoins is hard, counterfeiting and general fraud are easy
enough crooks can do them.

Also, this is a ridiculous argument because all fist currencies are being
manipulated now to avoid a default-inspired crash. Your cash _is_ rotting in
your pocket, and your investments aren't making back inflation let alone a
profit.

~~~
betterunix
"Double-spending bitcoins is hard"

1\. That is not well-defined. What does double-spending even mean for Bitcoin?
Previous security definitions for digital cash define double spending in terms
of a central bank that issues the money.

2\. Even with the vague idea of what double-spending means for Bitcoin, your
statement is false under the definition of "hard" that cryptographers
typically use. There is a known polynomial-time algorithm for double spending
Bitcoin that was described in the original Bitcoin whitepaper. That attack is
_practical_ and there are already concerns about one "mining pool" that has
almost enough computational power to pull it off (and if they are willing to
accept a small probability of failure, they _already_ have that much power).

~~~
wnight
Yawn. Fraud is easy, no matter how you define it, stealing a few bitcoins on
the other hand merely takes a finite amount of resources.

You're essentially a troll. What you say is true but double spending a few
coins (your maximum return is 2x) would take hundreds of thousands of dollars
and a lot of luck. Duplicating paper money requires an inkjet printer with
good registration and the common sense to separate the eruion constellations
into separate layers. It's not rocket surgery, and once the source file is
made it can be replicated at any copy shop. Its vanishingly unlikely you
haven't accepted a counterfeit bill, and its vanishingly unlikely a bitcoin
could be double-spent beyond seven blocks.

Give it up. Bitcoins may not be a sound investment but they're _far_ more
secure than cash for both parties.

------
skastel
Is anyone else as annoyed at the moralizing tone of this article?

"With paper money, governments and central banks are in a position to punish
holding money. Because it can be created without limit, discipline vanishes.
Individuals, families, businesses, and government can ramp up spending without
limit and avoid the consequences of their behavior."

Punishing the "sinners" for not keeping their currency and spending it in
order to support the economy as a whole seems to be a primary goal of those
that want commodity currency.

"You can try this experiment at home. Let’s say you have a problem teenager
who lives like everyone else, throwing around cash and seeing no point
whatsoever in saving money. Send that kid a Bitcoin and see what happens, even
without hectoring instructions."

Yes, give them a Bitcoin and they'll be saved, praise our lord and savior
Bitcoin! Unless that teenager wants a skateboard today, not two skateboards in
2 months. Maybe they want to buy a meal b/c they are hungry?

Finally don't reference the Gilded Age as a model of good monetary policy, two
major depressions and a thin veneer of success for a wealthy minority
shouldn't be the zenith of monetary policy.

------
crabasa
It seems that the author thinks Bitcoin is going to steadily appreciate
indefinitely, which is obviously not the case. Give a kid a BC at $140 and
you'll have a furious kid when it crashes to $15.

Somewhat off-topic: isn't BC just digital gold? Is there any reason to think
of it any differently?

~~~
Spooky23
The difference is that gold is a tangible, immutable substance that doesn't
decay much. It doesn't go anywhere.

I bought a bunch of bitcoin early, and sold it for a handy profit at $10. The
ones I kept aside (about 20) were lost on a PC whose hard disk crashed. My
understanding is that these coins are forever lost.

~~~
cdh
You may have lost bitcoins, but you did so before you knew they'd be worth
hundreds of dollars. I'd expect that in the future, people will be much more
careful to backup (or print out) their private keys.

In any case, the ones you lost just increased the value of all the other
bitcoins still in use. Since each unit is theoretically divisible into
infinitely smaller units at some point in the future, people will just trade
smaller amounts for larger values. That's a feature, not a bug!

A lot of people are claiming that deflation is a death sentence for a currency
like this. Something they overlook is that new coins will continue to be
created for many years still, and that all it takes is a new version of the
protocol to 'fix' any fatal flaws in the current system. If the majority of
users have a financial interest in defending the value of their coins, it
seems logical to me that they are likely to act rationally to achieve that if
a threat were to emerge.

But then, who knows.

------
not_that_noob
Ridiculous. Bitcoin - as cool as it is and as much as I admire the cleverness
of the system - is a FAILED currency. What it MIGHT turn out to be is a store
of value once the speculation cools - but that is still a few years away.

If a currency encourages saving and discourages spending, it brings the
economy to a screeching halt. This is why Bitcoin fails as a currency. It is
also the reason why it will never be accepted commonly as a currency.

However, because the supply will be (artificially) limited in time as all
Bitcoins are mined, there is a case to be made that it might emerge like gold
as a decentralized store of value. It's anonymous and infinitely portable.

So time will tell.

------
dkhenry
Yes please Ignore the deflationary spiral that its currently undergoing. It
amazes me that people are buying into a system which actively discourages
people from using it as a way to exchange good and services.

~~~
gwern
A deflationary spiral is not a price increase, large or small. It is
_supposed_ to be when price increases, large or small, shrinks actual economic
activity, causing more price increases, more shrinkage, etc.

Has this actually happened? This shouldn't be a hard question to answer if the
Bitcoin economy is indeed "currently undergoing" a deflationary spiral.

~~~
jbooth
It doesn't seem that it's happening or even can happen, because there really
isn't much of a bitcoin economy. The speculation on the currency absolutely
dwarfs any usage of it as a currency. Nobody on earth uses it for more than 1%
of their purchases.

So anyone who wants to use it as a justification for some reactionary ron paul
economics is really not observing what's going on. Is claiming you made money
on gold as an investment really an argument for gold-backed currency?

~~~
dkhenry
Because of the nature of bit coin its impossible to determine how much of the
current activity is actual commerce and how much of it is speculative trading.

The truth is the system is set up to encourage deflation and there is nothing
to prevent it from happening on a large scale. The huge price increase seen
over the last few weeks is not because there is an explosion in commerce using
BitCoin. Its because people are viewing BitCoin as a investment vehicle and
they are hording it.

As to your point about there not being an economy, thats exactly the point
their currency is worthless not because people won't give you stuff for it,
but because in terms of its ability to foster an exchang3e of goods and
services it is actively discouraging you from using it ( why buy something
today for 1 BTC when next week it will be 0.5 BTC ) The fixed nature of
introducing new currency into the market only exasperates this problem as the
hard limit on all bit coins that can ever be mined makes it so eventually even
that small control over deflation will be non existent and increase the
deflation.

~~~
jbooth
I'm not really disagreeing with you on the facts as regard asset price, I'm
saying that calling it 'deflation' is a misnomer because it's being treated
much more like an asset than as a currency.

I do think it's basically a ponzi scheme.

I guess we need a separate term for 'rapidly appreciating value relative to
other currencies which makes it prohibitive to create an economy based on this
currency in the first place', where deflation occurs to an existing economy
based on a currency.

~~~
dkhenry
Maybe we can call it a Tusser Economy

------
shousper
What happens when we don't need to exchange BTC for another currency anymore?
Or will BTC be forever inherently dependant on the existence of a government
controlled currency? How would we price things in BTC like groceries or
salaries? Would that be always changing because the value of BTC would be
forever going up? I'm probably talking beyond our lifetime here..

------
easy_rider
i just wished i'd hit the buy button when they were $20. I didn't believe in
them then, I don't believe in them now, but I sure as hell believe I would
have cashed in some nice short term earnings from the bubble :)

------
noclique
Mr Tucker is truly a treasure. If anyone is not familiar with him or the
ideas, check out mises.org

------
gesman
Well said!

