
Building a Better Bitcoin - Hoff
http://blogs.hbr.org/fox/2013/04/building-a-better-bitcoin.html
======
PnuklOEvolu
Articles like this demonstrate why most people don't get Bitcoin in the 1st
place. Let's ignore the factual inaccuracies like bitcoin production bottoming
out in 2040 (it's 2140, Justin, and that's a big difference) and focus on how
Justin doesn't get it.

Bitcoin is in use right now transferring money around the globe. If I buy 100$
worth of bitcoin (0.478 bitcoin at current prices) and immediately use it to
purchase anything, it has served its purpose as a value transfer medium. This
is regardless of tomorrow or yesterday's price. It is this efficacy that
people pay for when they buy bitcoins.

Bitcoin was not designed as a storage or investment medium it was designed to
facilitate the transfer of value. As long as it performs that function it will
continue to defy the misplaced expectations of those who refuse to go to the
effort of understanding it.

~~~
sks
I agree that Bitcoins were designed as an instrument to facilitate transfer of
value and not as store of wealth. But the example of a transaction you just
gave in your post is not how people spend currency. No one converts a currency
(100$) to another currency (0.478 Bitcoins) for immediate spending in the real
world. People generally minimize number of currency conversions (to save
transaction costs) and store the currency (wallets or banks) for some time
before spending it, and storing volatile currencies carries huge risk.

The current price explosion is not good for bitcoin if you look at it as a
currency. People who believe this is a bubble will just cash out of bitcoins
anticipating a fall and the (apparently) greater number of people thinking the
value will rise will just hold on to the coins. The only way this price
explosion can be helpful is in providing media exposure to bitcoins and cryto-
currencies. Only after we have sustained period of stable prices we can hope
of bitcoins becoming a major facilitator of transaction.

~~~
YokoZar
Storing volatile currencies creates risk, no doubt, but it also creates demand
independent of speculation.

Interestingly, this implies that more convenient bitcoin exchanges could
greatly lower the demand for bitcoin.

------
rjtavares
> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the
> purchasing power of the 1950 version. By contrast, bitcoins have been
> skyrocketing in value. This sounds like a good thing, but for a currency
> it's really not. An economy where bitcoins were the means of exchange would
> have experienced 98% deflation over the past year. No one would be able to
> repay any loans, or really do business at all. What we want out of a
> currency is not price appreciation but stability. Monetary economists differ
> on whether the optimal stability is inflation of 0% or in the low single
> digits. Nobody thinks 98% deflation is healthy, and all but a small minority
> seem to think any deflation at all is a bad thing.

This needs to be repeated until exhaustion.

~~~
snitko
What do you mean nobody? Austrian economists are a legitimate school of
economics and they are in favor of deflation. It was Austrians who were able
to predict most of the collapses we've seen over the century. When Keynesians
said it's impossible to have inflation and high rates of unemployment, it was
Austrians who said they were wrong, which was proved in the 1960-70s.

~~~
splat
Austrians are fine with price deflation, but not monetary deflation:

"If a man has been hurt by being run over by an automobile, it is no remedy to
let the car go back over him in the opposition direction." -- Ludwig von Mises
(<http://mises.org/mmmp/mmmp5.asp>)

~~~
hadronzoo
Just to clarify, Austrians define monetary deflation as a contraction in the
total supply of a given money. In this case, it would mean a decrease in the
total number of Bitcoins.

~~~
pixelcort
Supply contraction won't happen in Bitcoin until sometime before 2140, when
the number of coins lost to hard drive crashes or which are otherwise
difficult to spend start to outrun new coins minted.

------
Aloisius
I really wish these articles would just stay off HN. All they do is bring out
the armchair economists and the gold bugs.

------
rheide
A much better and less biased article than the 'Bitcon' one. It shows once
more that no one really knows what Bitcoin is and what's going to happen to
it.

If you must compare Bitcoin to gold, consider the current price of gold,
imagine that we didn't know it existed until yesterday and then suddenly it
appeared. Bitcoin currently fulfills a niche in the same way that gold did in
the past (and still does).

------
tocomment
Speaking of a better bitcoin, why can't the proof of work aspect be something
that's useful instead of a huge waste of electricity?

Perhaps solving hard problems like protien folding, or a big virtual CPU that
people can send processes to?

~~~
kiba
_Speaking of a better bitcoin, why can't the proof of work aspect be something
that's useful instead of a huge waste of electricity?_

It's not a huge waste of electricity. It provides security for the bitcoin
ecosystem.

~~~
betterunix
Only as long as nobody comes along with a tiny bit more computing power than
the rest of the Bitcoin system and decides to double spend their money.
Ultimately, you would need to use half of _all computing power in the world_
for Bitcoin for it to be secure.

~~~
jacoblyles
PPC coin is more secure against 51% attacks, because existing holders of coin
don't need large amount of computing power to generate proof-of-stake blocks.

To launch a 51% attack against PPC, you need 51% of the computing power and
_51% of the coin-age_ , coins times the amount of time that has past since
they were last spent.

~~~
betterunix
Is there a better technical paper about PPCoin than the 6 page whitepaper?

------
cs702
Quoting from the article: _"So ... bitcoins are without intrinsic value as
assets, yet they have risen too fast in value to be much use as a currency.
Kind of makes your head hurt, doesn't it? But it also sounds a bit like a
familiar commodity, gold, that's also been on a roll, with its dollar price
quintupling over the past decade. Gold has, over time, not been the greatest
of assets to invest in. It's not the greatest of currencies, either: Back when
the gold standard was widely adhered to, nations struggled regularly with
deflation. There's persuasive evidence that the primary cause of the Great
Depression was a refusal to unlink currencies from gold until too late. Still,
gold has held onto its purchasing power over time."_

I agree with the author: bitcoins are very similar to gold ("the people's
currency"), except they're digital and their supply is mathematically fixed.
So ... how much would a Bitcoin sell for if the world ever comes to value it
like gold?

Granted, that's a big _if_ , but let's entertain the thought for speculative
fun. All gold mined since the start of civilization is currently valued at
around $8.8 trillion.[1] Divide this figure by the maximum of 21 million
bitcoins that can ever be created, and the figure is over $400,000 per
Bitcoin. So the answer is, in the order of a few hundred dollars per milli-
Bitcoin.

For reference, all bitcoins in existence are currently valued at $0.002
trillion.[2]

\--

[1] <http://en.wikipedia.org/wiki/Gold#Production>

[2] <http://www.bitcoinwatch.com>

~~~
venomsnake
That is a bit misleading. A lot of gold is not on the markets for various
reasons -jewelry, hoarders, some electronics.

So you should count only liquid gold (hehe) ... the amount that you can
actually buy. I think it is much smaller than 8 trillion.

~~~
scottmp10
Many bitcoins have been lost permanently or are in cold storage. Only a small
percentage are available on exchanges.

------
ryusage
One thing that I haven't really seen addressed in these discussions is how
we're actually measuring the value of bitcoins. The focus is entirely on the
USD/BTC exchange rate, but is that really the proper measure of value to use
when discussing inflation or deflation? I'm not an economist by any means, so
I honestly don't know, but that seems a little wrong somehow.

In particular, when we say the USD is worth 10% of what it was 60 years ago,
we're not comparing that to any other currency. We're just saying that things
that were $1 USD back in the day tend to be $10 USD now. Then when we talk
about BTC being deflationary, we talk about 1 BTC a year ago being traded for
$200 USD now (or whatever it is). It seems a bit apples to oranges to me.

So here's a question: when BTC value in terms of USD spikes, does the price of
goods in BTC spike proportionally? If so, maybe that's a reasonable metric of
value for now. I haven't bought in to BTC yet, so I don't actually know the
answer. But in all these discussions about inflation or deflation and
instability in a hypothetical BTC economy, does it really make sense to still
talk about the USD/BTC rate?

------
qdog
Something with quickly fluctuating value may be useful for trading goods, but
very poor for paying wages IN OUR CURRENT ECONOMIC MODEL.

Borrowing in a deflating currency is very difficult, as your future earnings
are likely to decrease in number, not value. The lender has no reason to lend
if they can't get more from interest than what they expect from just holding
the bitcoins.

Some would welcome this model, where there is little or no investment lending,
and everything is bought only with readily available funds.

YC funding would probably be radically different. Buying a car, a house, or
anything else using credit would be extremely difficult, if not impossible for
most people.

While putting things you don't need on credit cards is only really good for
the credit card companies, borrowing to expand your business, reliable
transportation to work, or even reasonable housing is the grease in the
current world economy.

Our economic model is mostly a recent phenomenon, historically, deflation was
the norm. I don't think that going backwards is actually going to help anyone
except the enormously wealthy, who can easily hold onto the majority of their
wealth while it accrues value.

------
keltex
But what stops other people from making their own versions of bitcoin? Why
can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin?
What makes bitcoin special other than it's the first one that was created?

All other currencies have some sort of backing. Either a government or
something physical like Gold that can't be easily duplicated. That seems to me
the big difference between bitcoin and other assets.

~~~
kiba
_But what stops other people from making their own versions of bitcoin? Why
can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin?_

Absolutely nothing.

 _What makes bitcoin special other than it's the first one that was created?_

Nothing.

------
gesman
It's like building the better "Internet Explorer". Once it becomes de-facto
standard - the world will have no choice but to embrace it's global
penetration and live and work around it's limitations.

~~~
khuey
Except it's not entering a completely new market. There are around 200
existing currencies, and for bitcoin to become a de-facto standard it would
have to succeed where every one of those 200 currencies have failed.

~~~
jacoblyles
It has one big advantage going for it - it's not controlled by any government.
You expect the euro to be manipulated for the benefits of the Europeans, the
USD to be manipulated for the benefits of Americans, and the Yuan to be
manipulated for the benefits of the Chinese. But who manipulates the bitcoin?

------
dragontamer
Best article on Bitcoin so far.

------
ekianjo
I stopped reading when the article cited Gold as one of the roots of the Great
Depression. Ha! Yeah, sure.

~~~
trevelyan
This is a truth accepted by economists of basically all political persuasion
at this point. The best book on the subject is Barry Eichengreen's "Golden
Fetters", but you can get a faster sense of things by going to NBER
(nber.org), searching for "great depression" or "gold standard" and walking
through the results.

