

BitCoin Under Fire - tgrass
http://marginalrevolution.com/marginalrevolution/2011/04/jerry-brito-defends-bitcoin.html

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Tichy
I don't understand what he is saying. Aren't dollars just worthless pieces of
paper? They are only worth something because people accept them as payment.
Obviously at the moment investing in BitCoins is rather speculative, but so is
investing in other currencies (and dollars don't have the best reputation
anymore, either).

If he converts everything into dollars and dollars are being devalued, he
loses. Is he saying that dollars are the only solid currency in the world, and
everybody should convert all their assets into dollars as fast as possible?

~~~
jeromec
_Aren't dollars just worthless pieces of paper?_

Apparently not. Try spending dollars in a store (both in the U.S. and many
places besides) and see if it works.

 _They are only worth something because people accept them as payment._

Including the U.S. government as payment for debt. If the most powerful
government in the world says dollars have value, it's not so easy to lose all
of that value, even without it being a backed currency.

 _Is he saying that dollars are the only solid currency in the world, and
everybody should convert all their assets into dollars as fast as possible?_

Most of the world uses non-backed fiat currency now, not just the U.S. People
do convert their assets into and out of dollars (and other currencies) all the
time.

~~~
Tichy
"Including the U.S. government as payment for debt."

So what exactly can I get from the US government in exchange for dollars? (I
am not a US citizen).

~~~
jeromec
If you're not a US citizen dollars are not meant to be held as a store of
value and trade (although some outside the US actually do use them this way).

However, to answer your question directly you can get interest from the US
government in exchange for dollars by buying US Treasury bonds.

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ericb
I'm having trouble seeing how his argument doesn't apply to every other
currency that exists, and feel like he's ignoring that if you want to pull
money out of the cayman islands to spend locally, there is likely to be some
hassle, delay, or loss of anonymity involved. Surely an economist understands
opportunity cost? Is there more to his argument that I'm not seeing?

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hugh3
It's not the best-written criticism (incidentally, why was the title changed
for submission?) but it has a point. Right now, Bitcoins ain't worth jack-shit
as a currency in any denomination larger than "a few".

If I have a hundred thousand dollars, I can buy a Porsche. If I have a hundred
thousand bitcoins, I can't buy anything, because I doubt I'll find a buyer for
a hundred thousand bitcoins.

I'd be interested to know: what's the largest bitcoin-to-dollar (or bitcoin-
to-real-goods) transaction that has ever taken place?

~~~
baberuth
About 25k BTC trade daily on MtGox, and that is thought to represent roughly
1/3 of USD-BTC FX transactions daily.

Keep in mind thats BTC-USD trades, not "notional value spent".

Apparent largest transaction was 400k bitcoins:
<http://www.bitcoin.org/smf/index.php?topic=1346.0>

It would be difficult to transact 100k BTC with one counterparty, but could be
reasonably accomplished in a few days via electronic exchanges (mtgox).

~~~
nhaehnle
It would be interesting to know how much of this 25k/day trade is simply a
kind of steady-state speculation, including attempts to exploit arbitrage. If
somebody really wanted to change 100k BTC to $, it would likely have a
disastrous impact on exchange rates.

The trade of US$ in the currency markets is on the order of several
_trillions_ per day. Now imagine what would happen if somebody truly wanted to
exchange a few trillion US$ for Euros, and keep those Euros...

~~~
nikete
The global currency post market turnover is ~1.4 trillion according to the
BIS, note this includes many currency pairs that dont involve USD; a trillon a
day is an upper bound on the daily USD market.

China effectively traded around 0.2 trillion USD for yuan and kept the USD
last quarter, the impact is not that big.

More generally looking at the volume transacted does not tell you much about
the depth of the market; you need to look at the order book for that. Looking
at the bitcoin market there are several lots of over 25k sitting within 20
cents on each side of the bid-ask, this means it is extremely likely one could
carry out a directional 100k trade with relatively small market impact if
spread out over a few days.

~~~
nhaehnle
Thank you for the data on the Bitcoin market, that is indeed informative.

As for China though, I would like to point out that those trades must be seen
in relation to the massive net flow of goods from China to the US (and other
parts of the world). The trade you claimed is actually bigger than Chinese net
exports for that quarter (which I find somewhat surprising, I have to admit,
but probably that just balances out with what was happening in the past), but
it's in the same order of magnitude.

If China did _not_ do such trades regularly, the Yuan would be expected to
appreciate in a noticeable way, making current trade arrangements more
difficult to maintain. Essentially, if China did not make such trades, it
would be forced to restructure its economy towards domestic consumption, and
it would force the rest of the world to start producing more of their own
stuff again, or swallow the price increases.

So to claim that the impact of those trades is not big is problematic.

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Groxx
Bitcoins are attractive because they are intrinsically stable. Diamonds will
become worthless if we find a way to make them cheaply, the Picasso may turn
out to be a fake, and the Cayman islands might suddenly decide to print a few
trillion dollars. All of which means _your_ net worth is subject to the
availability, accuracy, and governmental decisions of whatever your storage
medium is.

Bitcoin doesn't have this vulnerability, unless the majority decides it does.
There cannot be rapid inflation due to "printing" bitcoins, unless the
majority decides to allow it. The system cannot declare bankruptcy, because
it's not backed by anything which can determine its intrinsic value.

It's a foreign currency that no single _anything_ controls. It can wax and
wane in value compared to other currencies, as any value-exchange system can,
but if it becomes "the" currency, it'll be the first stable, totally-trustable
currency _ever_ , because transactions and amounts cannot be faked. Assuming
quantum computers can't be made cheap enough to allow attacking the system to
be valuable, as it relies on public key cryptography and difficult hashing
functions (not sure how quantum computing effects hashing functions).

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baberuth
Can someone explain the velocity of money argument to me?

The blog post seems to be: 1\. If btc are liquid, everyone will want to move
btc wealth out to some other store of wealth and btc will fail. 2\. If btc are
illiquid, then it fails by definition. Currently btc are at this stage.

Here's why I don't get it: 1\. If they ARE liquid and its easy to convert btc
value to other value, why would everyone want to move value out of btc? seems
like people would want to move value IN to btc because of the other benefits
(anonymity, instantaneous transaction). Regardless, it doesn't follow that
easy value conversion predicates value drain. 2\. "Bitcoin seems to be at this
stage [of being unable to convert Bitcoin assets into other, non-Bitcoin
assets easily now]" -- this seems to be false. There's a highly liquid market
for BTC-USD (21k btc have traded so far today). Yes, its not easy to transact
500k, but thats true for most new assets including exchange listed backed
equities.

~~~
tgrass
<http://en.wikipedia.org/wiki/Equation_of_exchange>

~~~
baberuth
sorry, I wasn't clear. I wasn't asking WHAT velocity of money is, I was asking
someone to explain the author's velocity of money argument. i.e. transfering
wealth out of btc accelerates the velocity.

q, m, v, and p remain relatively constant in that transaction unless the
liquidity event causes a persistent decrease in the price level (no evidence
that the current BTC market could support it, but also c.f. above my comments
about immature markets and liquidity).

~~~
tgrass
My reading of his argument is that bitcoins primary function will be as a
medium of exchange, not as a store of value. Thus when any indiviudal has a
significant amount of bitcoins, he will convert them to an asset class that
does store value.

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archgoon
Okay, if I'm understanding how transactions work, all transactions are public,
as they need to be validated by the P2P network.

This seems to be a significant disadvantage, to say dollars, where no record
of a transaction exists.

Am I missing something (that's what I'm assuming)? Or is having a list of all
transactions viewed as a strength?

~~~
Tichy
If you can hide your IP address (a big if if you ask me), you can still remain
anonymous. The transactions are public with their public keys, nobody needs to
know your private keys and hence what transactions belong to you.

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aj700
As I understand it bitcoin has no seignorage. The issuers of bitcoin do not
gain anything the way governments do.

Seignorage is the difference between the cost of production - for paper money
it's very low - and the value that is bought with the money.

In the case of bitcoin, they are about the same and any difference doesn't go
to the designers or to the issuing network. The network is "paid" in cpu
cycles (electricity) and spits out roughly the same value in bitcoins. But
giving more power to the network doesn't make them come out any faster. In
short, unlike governments who use inflation of fiat money as a very regressive
wealth tax of last resort, the runners of bitcoin aren't getting rich off
this.

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tgrass
Cohen's GMU colleague Russ Roberts interviewed BitCoin's Andresen a few weeks
back. Roberts, normally hyper-critical, was ecstatic over it. A great podcast:
<http://goo.gl/mNcQW>

~~~
Groxx
Gavin didn't do a very good job explaining things in that one, unfortunately.
I recently found the Omega Tau podcast covering Bitcoin, and he does much,
much better: [http://omegataupodcast.net/2011/03/59-bitcoin-a-digital-
dece...](http://omegataupodcast.net/2011/03/59-bitcoin-a-digital-
decentralized-currency/)

~~~
tgrass
Excellent. Agreed, he seemed to want to cater to Roberts' economics strengths,
though if I recall, Roberts was trying to tease out some of the technical
issues.

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DennisP
BitCoin has been criticized for its built-in deflation, but that does give a
reason to use it as a store of value.

