
Bitcoin Is Fundamentally Flawed - itsprofitbaron
http://profitbaron.tumblr.com/post/47466001507/bitcoin-is-fundamentally-flawed
======
bcantrill
This fundamental flaw is absolutely glaring to anyone who has any
understanding of economic history -- and it's amazing to me how many
technologists willfully disregard several centuries of accumulated experience.
Because of their built-in deflationary spiral, Bitcoins can never meaningfully
be used as a medium of exchange: it will always be tempting to keep your
Bitcoins in your pocket and let them appreciate instead of using them for
needed goods and services. (And certainly, no one will take on debt
denominated in Bitcoins. Can you imagine if you had taken out a Bitcoin-
denominated mortgage a year ago?) All of this looks a lot like the 19th
century in terms of economics, which suffered from manic booms and absolutely
devastating depressions on a regular basis.[1] It took the mother of all
depressions -- a decade-long monster that casted a generations-long shadow --
to permanently shift thinking. While economists still debate the precise
causes of the Great Depression (and why so many attempts to right the economy
in the 1930s failed), there is broad consensus on one key element: deflation
is an economic carcinogen, and must be avoided at all costs. As such, Bitcoin
is macroeconomic cancer -- no matter how breathless its techno-utopian
proponents may be.

[1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics
and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1

~~~
crazygringo
According to Wikipedia [1]:

 _Whether deflationary spirals can actually occur is controversial._

Now I'm not an economist, but I have yet to see a solid, intuitive argument as
to why deflation is necessarily a bad thing for Bitcoin.

Suppose the value keeps going up, and a few years from now it's at $1,000 /
bitcoin -- lots of poeple have been buying bitcoins wherever they can, and not
spending them. Well, at _some_ point people will decide that the price is
ridiculous, because it's all based on speculation -- suppose it's $10,000 /
bitcoin. And it will either stop increasing in value, or crash a bit.

Well, I don't see how this has prevented it from acting as a currency at any
point in this, since it always has a value. There are _always_ going to be
_some_ people willing to trade _some_ bitcoins for _some_ price -- and that's
just the price, and whether you're dealing with whole bitcoins, or millionths
of bitcoins, I don't see what further consequences this has.

And when you're talking about the macro-economic level, running a whole
economy on bitcoins would be a separate issue, but there could be tools to
deal with that too. For example, not denominating debt or salaries or goods in
Bitcoins, but in a multiple of a consumer-price-index or something, that can
change relative to current Bitcoin values.

[1] <http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral>

~~~
itsprofitbaron
_I have yet to see a solid, intuitive argument as to why deflation is
necessarily a bad thing for Bitcoin_

So deflation is a general decline in prices which usually caused by the
reduction in the money or credit supply (in Bitcoin’s case it’s the Money
Supply). However if prices are falling through deflation then, you’re not
incentivised to spend because; you’re going to get a better deal tomorrow. Now
as currencies are supposed to be used as a medium of exchange to facilitate
transactions, spending is really important because it’s how the market
participants interact with one and other (and considering Bitcoin isn’t backed
by a commodity this is important). Once people are reluctant to spend then,
the economy will stay depressed because, people expect deflation AND deflation
will continue because the economy remains depressed.

In order for an economy to get out of the deflationary trap and to counter
deflation, fiat currencies can use monetary policy to increase the money
supply and deliberately induce rising prices, causing inflation. Raising the
prices is the essential foundation of an economic recovery because; businesses
can increase their profits which takes pressure off debtors etc and an example
of this is the fiscal stimulus used by the Obama Administration with the
American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only
produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from
2017) and this can create a liquidity trap because the injections of cash fail
to stimulate economic growth – as a result, if Bitcoin is in a recession and
is unable to stimulate economic growth it will eventually turn into deflation
& _deflation is only bad for people who cannot borrow more_ and unlike fiat
currencies who can borrow more, Bitcoin has a fixed supply (and isn't even
backed by a commodity) which means that, there could potentially be serious
issues for the economy’s wealth.

[1]
[http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...](http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009)

~~~
crazygringo
Thanks for writing all that up. What I still don't understand is,

> _Once people are reluctant to spend then, the economy will stay depressed
> because, people expect deflation AND deflation will continue because the
> economy remains depressed._

Well, if people are expecting deflation, then that expectation becomes built
into the value of the currency, such that there exists an equilibrium between
people expecting it to deflate further, and people expecting it do the
opposite, because it's already overly valuable.

I can't see how everyone would just hoard it until there's infinite demand and
zero supply, and a bitcoin has infinite value. There's always a semi-stable
price.

And like I said, I don't see how the standard macroeconomic arguments apply,
because right now bitcoin is just a currency "on the side", totally unable to
affect economies on a large scale. And if it ever _did_ reach that scale,
governments could do things like force contracts to be denominated in some
government-controlled ratio to bitcoins, so that the government would still be
able to "control" the money supply, and increase or decrease it as desired.
(That's just one crude example of how.)

Just because people are using bitcoins, doesn't mean that long-term contracts
have to be denominated in bitcoins.

So I guess this is what confuses me about people saying that bitcoin deflation
is bad. Deflation=bad arguments seem to rest on entire countries being solely
dependent on a single currency, which is not the case with bitcoin. And even
that _became_ the case, it would presumably take place in a whole new way. But
I still don't see anything _inherently_ wrong with a deflationary currency,
especially one used alongside "official" ones.

~~~
itsprofitbaron
So by the "economy" think of Bitcoin like they are a country (a _really_ small
one) and that’s the only currency for them and in some cases deflation can be
beneficial to some people in an economy. For instance as I was saying in the
previous comment it's beneficial for those with the cash and income streams as
they become more valuable as time goes on and its good for the debtor.

However, you are correct in that there is always going to be a semi-stable
price (or a price floor) when the money supply starts to help create inflation
and grow the economy again. In terms of how it’s bad for Bitcoin building on
the previous comment, let’s pretend that people have bought coins at $200 and
deflation kicks which means that, people either hoard it (to try and get
something cheaper tomorrow) OR once it hits a certain level everyone tries to
recover their losses and starts selling the coins which causes an economic
crash to a highly volatile market (a $500k trade can usually cause a lot of
issues) and the market will not level out until, there are enough buyers
interested to buy back into Bitcoin.

~~~
waps
Maybe I'm misunderstanding the argument, so can anyone please point out the
flaw in my dismissal of this argument ?

1) assuming bitcoin will deflate 2) this means that existing bitcoin holders
will be able to exchange their bitcoins for more $ than ever on mtgox/... 3)
the conclusion is that this will make people leave bitcoin

Needless to say, if this is the argument, that people will leave bitcoin
because they earn too much without doing anything, good luck with that one. So
where is the flaw in my thinking here ?

I would also like to point out that a deflationary system won out over a debt
based one many times in history. Saying it can't happen doesn't seem like it's
based on anything. The obvious big example would be the end of the (west)
Roman Empire, but there's dozens of examples in the last 2 centuries alone.
This is yet one more case of people in the west thinking that because it
hasn't happened in the west in the last 60 years, that it cannot happen (and
they simply don't know just how often it happened before that).

Debt based currencies are fundamentally pyramid schemes, slightly obscured by
the fact that the growth phase can last a very long time, but that doesn't
change anything, not really (except opening up the possibility of a person
being born into a pyramid scheme and aging and dying normally while the
pyramid scheme is still growing). This will not work for bitcoin because
bitcoin itself depends on infrastructure that depends on those existing
pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe
for gold ownership.

------
base698
This is the classic argument you hear a lot, particuarly from Keynsian
economists is: bitcoin is bad because it's deflationary like gold.

In the past when we were using gold, like during the Civil War, we couldn't
pay soldiers so we went to greenbacks (paper money like today). That allowed
the soldiers to get paid so we could continue to fight the war. Gold obviously
has a physical practical limit that can be traded and transfered. When a gram
becomes worth so much it buys a house that makes other purchases of food and
bills become impractical and people stop buying, and when building a billion
dollar construction project moving it and protecting it has another set of
problems and overhead. Bitcoin does not have the division problem--a single
coin can be divided into pieces 10^8 pieces as the code currently works. That
can also be changed in future versions to be divided even smaller. Ie, when
one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum.
So, we are then left with the argument, "Oh My God people won't buy because of
the psychology that 0.01 coin today that currently buys a pack of gum being
able to buy a car in the future." But, that's almost true now with savings and
stocks and people still spend their money today and go into debt. Everyone
knows if you save starting in your early 20s compounding interest it will be
worth a ton more in 10 years, 20 years, etc.

Loans clearly have issues in a deflationary system. If you loan someone $10
today and that's worth $100 tomorrow how do they ever have a chance to pay it
back? Payback would have to be on some growth rate where you owe "less" the
longer the life of the loan with some interest built in. Venture Capital also
would have issues, but if the rate of return on investments is greater than
growth of the currency price that wouldn't be an issue either and one would
expect it to stabilize over time.

Inflation is built into the current model to encourage investment and prevent
concentration of capital. Clearly, given the wealth divide that isn't working
(blame exploitation of 3rd world or robots).

~~~
seandougall
> Loans clearly have issues in a deflationary system.

I would think, even more than that, loans would have issues in an anonymous
system.

~~~
dragonwriter
> I would think, even more than that, loans would have issues in an anonymous
> system.

Not really; the fact that the currency is anonymous doesn't make the loans
anonymous. The lender cares that someone is on the hook for the payment being
made, they don't care if that person is the person to whom the cash loaned is
actually transferred or the person from whom the payments will, in fact, be
transferred.

Of course, to establish credit worthiness and get attractive loan terms when
the currency itself is anonymous -- whether its paper dollars or Bitcoins --
people are probably going to have to engage in transactions that are recorded
and verifiable by the people who they want to trust them (either directly or
through trusted third parties), mitigating the benefit of any anonymity
inherent in the underlying currency system.

And, loan terms aside, if you want to take out loans whose _enforcement_
relies on the compulsory powers of the states rather than the compulsory
powers of lenders who act outside of the rules imposed by the state, you
probably need to adopt some kind of protocol that allows you to prove in court
that a loan agreement was made with particular terms by a particular lender
and borrower and that repayments of specific amounts were made on that loan,
which, again, will require sacrificing some of the anonymity inherent in the
underlying monetary system.

------
gojomo
This is essentially the "it will become so valuable, no one will want it
anymore" argument.

There are uses of Bitcoin that are complementary to traditional currencies,
and can survive both volatility and a large level of hoarding.

One example: an enabler of quick, distant, irreversible transfer under
software mediation. That is, you get the transactional Bitcoin you need from a
trusted source, then engage in a transaction with a distant/less-trusted
source in a matter of minutes. Neither the overall _level_ nor _volatility_ of
Bitcoin's pricing level matters much in such a scenario, but it still enables
new kinds of transactions.

Also, for a post that includes 15 footnotes, one whopper of a claim goes
without support: "Bitcoin is not meant to be an investment it’s meant to be a
currency."

Sweeping claims about what Bitcoin or currencies are " _meant_ to be" need
more support and careful definition. Maybe, because Bitcoin is something new
that's only made possible by computers, networks, and cryptography, it doesn't
exactly fit into the classic categories and purposes.

~~~
hilko
Very well put. I think past experiences are definitely reason to be cautious,
but too often it seems that analysis neglects to even consider the fact that
there is no direct equivalent to Bitcoin.

It remains to be seen if Bitcoin is 'worth' its current valuation, but I think
it's obvious that it has and will continue to have uses in the future.

~~~
itsprofitbaron
There are direct equivalents to Bitcoin and I am interested in a global
virtual currency however, I don't believe that Bitcoin is going to be it.

I believe that Bitcoin's value is more of a _speculative digital asset_ rather
than a currency because, there are two reasons to own Bitcoin - either to
derive indirect utility through purchasing goods with Bitcoin in the future OR
the expectation that Bitcoin will rise in monetary value. Currently, Bitcoin
can be considered elastic (to some extent) although it’s subject to future
diminishing elasticity meaning that, in the long run there will be a finite
supply of Bitcoins and an inelastic supply (after all there are only 21M of
them).

However, a long-run inelastic and fixed supply currency is not useful for a
real world economy because, currencies are supposed to be used as a medium of
exchange to facilitate transactions which, allows the multiplier effect kick
in and increase the economies wealth. Whereas due to the deflationary spiral
you're incentivised to hoard Bitcoins & let them appreciate in value instead
which is the opposite effect of what a currency is meant to do.

------
zacharyvoase
Wow.

    
    
        Currencies are supposed to be used as a medium of exchange where, they
        facilitate transactions thus the multiplier effect kicks in and increases
        the economies wealth. An example of this, is fiscal stimulus used by the
        Obama Administration with the American Recovery and Reinvestment Act of
        2009[15] however, this is not happening with Bitcoin.
    

So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore
it will experience depressions and recessions, _unlike_ regular currencies? OH
WAIT.

~~~
pkulak
You're confusing two points just like the author. First you're saying that
controlling your currency doesn't help (hurts?). Look at how many recessions
the US had when it was pegged to gold vs now, then get back to me on that one.

But, that doesn't really matter because Bitcoin is _not_ a national currency.
It really is more like gold in that it's not really a currency in itself, but
a way to store/transfer other currencies. No one buys something with gold
without first doing the conversion to their local currency and I don't see
that ever changing with Bitcoin either. And, it doesn't have to.

~~~
gbaygon
I don't see the problem of buying thins with bitcoins directly, as long as the
merchants are willing to accept it. And it will happen when/if the market
stabilizes. Gold has a lot of disadvantages (fractionating, checking for
purity) that bitcoins doesn't.

------
jerf
Actually, nothing stops a government from using fiscal stimulus if BitCoin is
pervasively used. The US Government will, I'm sure, never accept taxes in
anything other than US Dollars (that being the fundamental base of value the
US Dollar is based on, and the subsequent avoidance of jail time due to not
paying taxes or otherwise satisfying Uncle Sam), and they will remain free to
helicopter-drop as many Dollars on the world as they like. If the BitCoin
economy subsequently devalues Dollars, well, that's just the expected
reaction. It's not as if there aren't commodities already out there doing just
that.

(Also, not all of us consider Keynesian stimulus to be some wildly successful
proved theory; I for one think you merely need to look out the window to see
the failures of the theory to match reality. But fortunately, Keynesian is
immune to criticism, because no matter how bad things get, Keynesian saved us
from it being _even worse_ , thus, no amount of failure can ever disprove the
system. Phew! That said, BitCoin isn't the ideal either.)

~~~
Aloisius
_Also, not all of us consider Keynesian stimulus to be some wildly successful
proved theory; I for one think you merely need to look out the window to see
the failures of the theory to match reality. But fortunately, Keynesian is
immune to criticism, because no matter how bad things get, Keynesian saved us
from it being even worse, thus, no amount of failure can ever disprove the
system. Phew! That said, BitCoin isn't the ideal either_

Please explain how looking out the window and gathering local anecdotal data
disproves a macroeconomic theory that in the short run, demand stimulates
economies?

~~~
jerf
For better or worse, I treat economics as a science, and judge an economic
theory on its ability to make accurate _predictions_ , not retrodictions. My
point about "looking out the window" is that while we've been operating on a
supposedly Keynesian theory in trying to repair our economy these past six
years, it has consipicuously, repeatedly, and grossly failed to correctly
predict the results of its own massive interventions. You don't need fancy
economic theories to see how it has failed, you need merely open your eyes and
look around. (And I include newspapers and television, etc, in the looking
around, so my point is that it is easy to see the failures, not that it's
failing literally right outside my window.) You need fancy economic theories
to explain how even though the results are awful, we're still doing the right
things even so.

Keynesians cover this by claiming it would have been even worse without the
near-continuous and now open-ended "stimulus". I don't believe them. Had they
said in advance that the current scenario was a significant possibility, I
would at least listen, but instead we've been in a world where "recovery is
just around the corner" for about four years now. It isn't, it hasn't been,
and it continues not to be. I find it a valid theory that Keynesianism is the
reason why, rather than the thing saving us. The fact that we're talking about
a "new normal" is also code for "Keynesianism is a failure of an economic
theory, but rather than give up the theory because we like it too much, we're
going to tell people to just get used to being poorer."

(Of course if you want to say that our politicians are only using the name of
Keynes for a cover while in fact not acting particularly Keynesian, well, I
beat you to it. Keynesianism isn't, really. But nobody seems to open with that
defense, only use it as a fallback when attacked. It's true enough in theory,
but a useless defense of the theory's current users, which are what I'm
actually critical of. The real Keynes is a great deal smarter than the psuedo-
Keynes being used to drive policy today, but also a great deal less
influential.)

~~~
L0j1k
Very well said.

------
SODaniel
While I don't disagree with the author I would say that the finite supply
shines a light on an even more direct problem.

What happens to 'lost' coins? The BTC supply is not only finite but in fact
dwindling over time, as inevitably the amount of currency is going to diminish
due to digital loss.

I have personally lost a few BTC due to computer crashes, wallet file lost
etc. (In the early days) and considering this the total supply of bitcoins
will be diminishing over time at (maybe already?) higher rate then they can be
mined.

I haven't taken the time to do ANY form of math on this but I can guarantee
that already 10.000s if not 100.000s BTC are lost forever due to people simply
not having access to them anymore and the data being destroyed.

Over years of loss this is probably more likely to kill the currency than
anything else in my opinion.

~~~
mtgx
Then Bitcoin increases in value, and you keep dividing a Bitcoin more. Nothing
really changes.

Does it really matter if you have 20 million Bitcoins that are worth $1
trillion or if you have 10 million Bitcoins that are worth as much? No, it
doesn't. The 21 million number was pretty arbitrarily chosen to begin with.

This would be a problem if say half of available Bitcoins would be wiped out
overnight - somehow. But the chances of that happening as getting lower and
lower as more people start using Bitcoins, and the value gets spread out
across many more people.

~~~
SODaniel
I agree that it's not a 'currency killer' in the short run BUT if we speculate
that BTC reaches mainstream popularity and a total market value in the
100-1000s of BILLION USD the fact that an 'unknown' amount is in circulation
makes for a very strange variable.

All of a sudden my old 1BTC wallet on my crashed laptop hard drive may be
worth 100s of days of mining network wide, and even the speculation that a
'previously unknown' wallet containing 100BTC (there are a LOT of those
sitting on old phones and hard drives already I promise) would have possibly
disastrous effect on currency value etc.

All I am saying is that there are a LOT of factors to consider and BTC loss
over time is a major one.

My argument being: A finite supply of a currency is one of the factors people
REALLY need to think about when it comes to BTC. And I guess I am saying that
it's a real problem vs. a currency with increasing difficulty and a non-finite
supply.

~~~
stevenrace
But isn't even _knowing_ some constraints about the money supply better than
not knowing anything at all?

For instance, the M3 supply of USD isn't even tracked by central banks (not
since 2006).

------
vimes656
I hear so many disparate opinions about Bitcoin economy that I don't consider
them anymore. The classic counter argument to this one is that hardware is
constantly improving and still people buy hardware even though everyone knows
that in 6 months with the same money you can buy something better. And another
one is that Bitcoin is so divisible that deflation is not a problem.

In the end, Economics involves the behavior of people acting on free will. How
anyone can attempt how people are going to behave with respect to something?
If anyone could predict what society is going to value in the future, or how
people will react to some new technology would he be writing blog posts about
what is going to fail? Has there been anything remotely similar to the Bitcoin
now in history?

I don't know whether deflation is good or bad but I consider the potential
advantages of a deflationary currency, if it works, worth trying it. Why not,
nobody is being forced to get into Bitcoins. If you don't like it, ignore it
and move along.

------
3am
The Bitcoin craze is without a doubt one of the most insane things I've lived
through. I feel badly for all the late arrivals who are (anecdotally) dipping
into long term savings and levering up to buy them.

The dynamic is identical to me between this, the NASDAQ at 5000, and the Case
Schiller index just under 190. Maybe some economists out there are trying to
be polite, but this is just nuts. Best regards to those involved, I hope I'm
wrong for your sakes. But if I can convince _one single person_ on HN from
wasting their savings on BC, then I'll feel like I've made a difference.

~~~
SODaniel
While I agree to an extent, the current $2 billion market cap is far to small
to compare with. When/if BTC reaches around $5,000 each ($50 billion or so
market cap) I will agree.

~~~
userulluipeste
What gives you the numbers you've written? I mean why $5000 and not orders of
magnitude more or less?

Also, if the currency trading means wealth transfer, just what will come to
mean the dollar as currency if it's going to be 5000 for one BTC?

------
gwern
Summary: deflationary spiral.

Good job repeating what's been said by like everyone since the start, and not
adding the slightest bit of new insight or information.

------
drewblaisdell
There are many legitimate arguments for the existence of flaws in Bitcoin that
could prevent it from becoming a legitimate currency. Unfortunately, this was
poorly written, poorly formatted, and has a set of premises that do not lead
to the conclusion in the sensationalist title.

------
pjdorrell
This is the "hyperdeflation" argument that we've already heard elsewhere. The
thing about deflation is that eventually it has to stop, because there is a
limit to how much value all the people of the world can hold in any currency.
People are buying bitcoins now and holding on to them, because they expect
Bitcoin to be a useable currency in the future. It will become a useable
currency when the deflation stops. (It is somewhat useable now for buying and
selling, but taking taking out a loan in bitcoins is extremely ill-advised.)

There may be some bouncing up and down before the value of bitcoins settles
down to a somewhat stable final value. But it will eventually reach some type
of equilibrium between the desire to hold it as a combination of desired
savings (no longer held in expectation of constant hyperdeflation) and desired
liquid "cash" holdings, and the desire to spend it, because sometimes there
are things you want to buy.

All this holds whether or not Bitcoin replaces all other currencies (which it
probably won't).

Whether of not Bitcoin hyperdeflation is bad for the world economy for some
Keynesian reason is separate from the question of whether Bitcoin will
continue to have value for its users.

------
bcoates
Two issues:

Firstly, the mining allocation rate isn't meaningfully part of the bitcoin
protocol; it's just a setting. Any portion of the network large enough to
survive as a detached economy can choose to change the (batty) monetary policy
whenever it likes.

Secondly, this probably won't be necessary, as nothing really prevents bitcoin
holders from forming banks and issuing inflationary/debased/pegged notes to
beat the price down to sanity, using the existing transaction ledger for
accounting.

~~~
basch
Exactly. Everyone seems to be missing the fact that "bitcoin" is a protocol
and the most prominent instance of its use.

Any government or group of people can go start their own blockchain.

~~~
pixelcort
Or even fork off the existing block chain at a pre-determined block.

This way, all existing owners of the parent crypto currency would have equal
coin-to-coin values in the new crypto currency as of a certain date.

I'm surprised I haven't heard of any existing alternate crypto currencies
intentionally forking off of the existing Bitcoin block chain. They all seem
to start off with their own new block chains.

------
TimSchumann
I'm going to try and be useful to this discussion, and I haven't seen anyone
mention this by name yet so, here goes...

The Law Of Diminishing Marginal Utility. It essentially states that the more
of something you have, the less additional value each subsequent unit brings
to your life relative to the last one you added. (Even billionaires stop with
a handful of houses)

The problem is the author implicitly tries to objectify the value of bitcoin,
when in fact the value is completely subjective, just as the value of anything
truly is.

One cannot take the subjectivity out of value as the author has tried to do
here by saying 'More = Good' Value, being subjective, comes in the form of
utility. I do not care what you call it, what it's priced in, or if you value
it but, if I were to acquire a voucher for unlimited free flights, lifetime
duration, transferable from myself to anyone of my choosing, on any airline, I
would value that voucher very highly. That being said, while I may keep the
next one for family, and several for friends, at some point I'm going to start
selling them to others for a metric boatload of money.

 _Please note none of this implies any kind of 'rational actor' theory or any
such thing. I see the law of diminishing marginal utility as just that, a law
of nature. Despite what people may say, their actions prove it to be so.

_ *Also I think the author is implying that people who act like the people
he's talking about in his post will take a pretty big haircut at some point in
this whole bitcoin experiment. I think that says more about the people than
the system at large.

------
johnny4000
This deflation argument seems to me it's an argument for the status quo, so if
you are say Warren Buffet it is a vary valid concern. If on the other hand you
just graduated undergrad and had a huge debt and your wage was actually set in
bitcoins this would be great for you because the cost of paying off your dept
would be from your bitcoin point of view spiraling to zero, as would the cost
of everything else. That sounds like a pretty awesome situation to be in.

Be wary of financial explanations, because in most cases when a business
person or economist says its good, they either mean its good for keeping
things stable, its good for the elite, or its good for the average person, all
of which might not be you. For example, you might see someone on CNBC saying
they need to make sure they don't have a disorderly default, but really if you
are in a position to take advantage of that temporary disorderly market you
could gain from that.

~~~
smacktoward
_"If on the other hand you just graduated undergrad and had a huge debt and
your wage was actually set in bitcoins this would be great for you because the
cost of paying off your dept would be from your bitcoin point of view
spiraling to zero, as would the cost of everything else. That sounds like a
pretty awesome situation to be in."_

It would be! Except for the part where that very spiral discourages employers
from paying wages in Bitcoin, since they'd make more money just holding on to
those Bitcoins and letting the spiral make them money than they ever could
paying workers with them. So those Bitcoin-paying jobs never leave the realm
of the theoretical.

------
tibbon
Yes, there will be (at some point) a downward force on the value of Bitcoin
due to hoarding. But that will not be the only force. At some point, it will
seem that its probably not going to rocket upward any more, and it might fall
a little and then people start actually using it. Also- its important to
remember that there are relatively few places to 'use' it now compared to most
other currencies. I cannot pay my rent, groceries, etc....

I think to trying to sort it into neat categories of 'investment' or
'currency' is a bit flawed. Its a bit of both. Gold (at least to some degree)
was used as a currency at various points in history, but now paying with gold
doubloons is difficult for most transactions. The hoarding of gold makes it
deflationary as well, but doesn't prevent it from being traded frequently as
well (well, at least futures of it on the exchanges).

Gold backed dollars at one point were theoretically limited in number as well.

Another claim against Bitcoin is the fact that it isn't "backed by anything",
but neither is gold. Its value is what we assign to it as a market. Aside from
industrial processes, the inherent value of gold or diamonds is very low.

I don't think Bitcoin is perfect. I'm glad I bought a handful a few months
ago. But some of the 'flaws' that people find aren't as much as flaws as
features. One of the things that I do love about Bitcoin is that it isn't a
theory- its happening. We could talk all day about the things that are
supposed to happen with it from a variety of perspectives, but the experiment
is being actively run in a real market which is challenging the perspectives
of 'what might happen if...' with what's actually happening.

If we were talking about USD as a new concept, we could write tomes on the
'flaws' of it as a currency. It has nothing backing it. It can be infinitely
created at will. A private entity (federal reserve) controls a huge amount of
policy. It can be lost, destroyed, stolen. Political forces of a single
government can have massive impact on it. It is hugely regulated, and can be
relatively easily tracked in its system. Yet, it largely works.

~~~
brazzy
> At some point, it will seem that its probably not going to rocket upward any
> more, and it might fall a little and then people start actually using it.

No; then people start selling their BTC in a panic, MtGox is overwhelmed and
stops working, and a lot of temporary millionaires start looking for work...

~~~
tibbon
That's the state of things now- but in a year? More exchanges could appear. I
don't see why they won't. Panic selling will only happen so many times before
people stop freaking out over little things.

~~~
betterunix
"More exchanges could appear. I don't see why they won't"

Regulations. The US government has already indicated its stance on what
regulations apply to Bitcoin, and other governments will likely follow suit if
it gains any more momentum.

"Panic selling will only happen so many times before people stop freaking out
over little things."

...or when Bitcoin fails, which is the overwhelmingly more likely outcome.

------
lojack
I still don't understand how people treating bitcoin as an investment rather
than a currency is a fundamental flaw in the algorithm.

~~~
itsprofitbaron
The reason I said that is because, there are two reasons to own Bitcoin -
either to derive indirect utility through purchasing goods with Bitcoin in the
future (therefore Bitcoins are being treated as if it’s a currency) OR the
expectation that Bitcoin will rise in monetary value which means that, Bitcoin
is a _speculative digital asset_ – however, it’s not tied to anything in the
way a stock or bond is for example. Currently, Bitcoin can be considered
elastic (to some extent) although it’s subject to future diminishing
elasticity meaning that, in the long run there will be a finite supply of
Bitcoins and an inelastic supply.

However, a long-run inelastic and fixed supply currency is not useful for a
real world economy which is why, Bitcoin is useful as a _speculative digital
asset_ rather than a currency.

~~~
richardw
Third use - transfer money easily across borders, for example a migrant worker
sending money to family. No red tape, no forex hassles, no worry about future
value (unless the value tanks while you're transferring, of course.)

~~~
dragonwriter
> Third use - transfer money easily across borders, for example a migrant
> worker sending money to family. No red tape, no forex hassles, no worry
> about future value (unless the value tanks while you're transferring, of
> course.)

The "no red tape, no forex hassles" are largely because of immaturity in the
regulation of "virtual currencies" that exist largely because most states
haven't gotten around to addressing them because of scale issues compared to
traditional soveriegn currencies.

This is already starting change.

~~~
richardw
The regulations will surely come. However, the ability to hold a private
wallet outside of a bank and transfer money to a point anywhere in the world,
makes regulations harder to police. Some wallets might be declared and known,
others might exist anywhere in the world and be held by anybody. For a law-
abiding citizen who trusts their government (the people you don't need to
police), all will be (probably) declared. I expect different behaviour from a
Russian holding money in a Cypriot bank or someone who pays taxes to a corrupt
regime.

Still, if someone is looking to preserve wealth, it would seem smarter to wait
and see if and where the price stabilises. Or if governments slam the door
shut on the currency.

------
bbbhn
Recessions and depressions happen to _economies_. To critique Bitcoin for its
potential to induce a recession or depression is ridiculous, because the USD
-- and its influence on the economy -- isn't going anywhere anytime soon.

~~~
dragonwriter
> Recessions and depressions happen to economies. To critique Bitcoin for its
> potential to induce a recession or depression is ridiculous, because the USD
> -- and its influence on the economy -- isn't going anywhere anytime soon.

Its not ridiculous when one of the arguments for adopting Bitcoin is how much
better it would be for our economy to be dependent on it than existing
soveriegn currencies. Certainly, one reasonable response to this is to argue
that the assumption that Bitcoin could displace those currencies is far-
fetched, but its also reasonable to accept, for the sake of argument, that it
could and then address whether or not it is desirable.

------
jnevelson
"Eventually the Bitcoin economy is going to run into the problem of its
algorithm and the Bitcoin-hoarding because; there will not be enough
currency."

There is an oscillation process at work here - as people hoard bitcoins, the
value of each individual bitcoin increases. People will then sell off their
bitcoins in exchange for a higher price than they initially payed for them,
thus increasing the money supply and allowing others to buy into the system.
Am I missing something here?

~~~
brazzy
Why would anyone sell when they see the price keep rising? Unless they fear it
will go down - and then everyone wants to sell and the bubble pops...

~~~
ph0rque
_Why would anyone sell when they see the price keep rising?_ Some will sell
when the total sum of their bitcoins is big enough for them to retire on.

------
jpalomaki
If the value of Bitcoins is bound to go up, no matter what, then why don't we
all exchange our dollars and euros to bitcoins and stop spending completely?

I think the mistake people make when comparing Bitcoin to historical
counterparts is that they don't realize that Bitcoins are easy to split up and
exchange. This is not the case with physical currencies. Splitting for example
copper coins is not very practical so it is much easier to run "out-of-money"
if the supply is limited.

------
jwr
I hope by the time we hit major problems with Bitcoin we will have several new
digital currencies to chose from. Nobody ever said there needs to be only one,
after all.

~~~
hilko
Or that enough services, project and uses have sprung up to keep Bitcoin
valuable enough to remain somewhat mainstream and not fade away.

------
Kapura
The fundamental flaw is not with bitcoin, but with people. At the beginning of
march, I told all of my friends that Bitcoin was worth more than it was
selling for, for many of the reasons listed in the post. It's essentially
inflation proof; supply of bitcoin is not going to outstrip demand. I
reasoned, then, that long term, the value is likely to go up. This is great if
you're planning on spending any bitcoins as currency on silkroad or any of the
numerous other websites that now accept some sort of payment in bitcoin: if
you know you're going to want to buy in the future, it makes sense (generally)
to buy into them now. This creates a broader base of unique users, giving more
validity to the currency.

However, people see that the value of something is going up, they think "IT
WILL ONLY GO UP" and then buy them with no intent to use them for a 'real'
transaction. That's the problem identified in the post. But hey, guess what:
Bubbles pop. At some point, the value of bitcoin will drop, and many of these
speculators will sell off. This will devalue the currency for the people who
wanted to use it for legitimate transactions, but sometimes you bite the bear,
and sometimes the bear bites you.

The important thing to remember is that this currency is not inherently
worthless. The housing bubble was catalysed by complex financial packages that
disguised the fact that they were garbage assets. The Dutch tulip craze[1] was
about fucking flowers. They were being purchased by people who had no desire
to plant and grow the flowers. But Bitcoin is different. As long as people
will still accept and trade in bitcoin, Bitcoin will never be as susceptible
to collapse as other historical bubbles.

Further, with bitcoin, all news is good news. Any press that gets more people
interested in bitcoin is good for the bitcoin economy in general. There will,
of course, be some speculators who jump on hoping for a big payout. But there
will be some people who look and see the inherent value of a decentralised
currency and begin to accept bitcoin.

A lot of people can peg their bitcoin prices to more stable currencies: 4chan
pass sells for $20 usd, but you can pay in bitcoin. I'm under the impression
that Silkroad vendors do something similar. This means that, regardless of the
current price of bitcoin, it's still useful for its intended goal.

[1]<http://en.wikipedia.org/wiki/Tulip_mania>

~~~
dragonwriter
> The important thing to remember is that this currency is not inherently
> worthless.

Yes, it is. Like all fiat currencies, Bitcoins (as distinct from the physical
artifacts in which some of them might be housed) have no inherent value, only
the value that results from the fact that some people are currently willing to
accept them for other things.

> As long as people will still accept and trade in bitcoin, Bitcoin will never
> be as susceptible to collapse as other historical bubbles.

"As long as people accept and trade in _X_ , _X_ will never be as susceptible
to collapse as other historic bubbles" is equally true for all possible values
of _X_. The difficulty is predicting when and to what degree people will stop
accepting _X_.

~~~
Zigurd
All cases I know of where a currency collapses, it does so because the supply
was inflated. Has a currency ever just collapsed without some dubious supply
policy causing the collapse?

~~~
dragonwriter
> Has a currency ever just collapsed without some dubious supply policy
> causing the collapse?

Private (and what might be called "sub-sovereign" public -- that is, where the
entity issuing either isn't sovereign or is notionally sovereign and yet still
subordinate to a higher sovereign) currencies have collapsed because of
sovereign action making issuance, use, etc. of the particular kind of currency
less attractive (including expressly limiting its issuance or use, or
prohibiting it outright.)

Sovereign currencies have collapsed as currencies (perhaps with individual
artifacts retaining value as collectibles) because of the collapse of the
issuing sovereign entity.

Gold _as currency_ (though it became even more sought after _as an investment_
) effectively fell apart globally largely due to deflations in the the late
19th century and early 20th century resulting from supply limits compared to
productivity.

I'm not sure if that counts as a yes or a no (each of those causes could be
considered "dubious supply policy" issues, just as the limit on the number of
BTC can), but it certainly means that _hyper-inflationary_ supply policy isn't
the only problem; supply _limits_ are a problem, as well.

------
GhotiFish
Has anyone worked out the math on the divisibility of bitcoin?

Here are some questions:

    
    
      Bitcoin gets world wide adoption. It's used in transactions by
      ~3 billion people (right now). 
      * What's the expected value of a bitcoin? 
        (how much BTC for a stick of gum?)
      * What is the average permanent loss rate of bitcoins now? 
        (when a bitcoin wallet is accidentally deleted, the coins are lost forever)
        What about in the future? Would it go up or down?
      * accounting for human growth, how many people will there be?
        (50 years down the road? 100?)
    

Answering all these questions, then the big one.

    
    
      * How long can bitcoin last until it the satoshi 
        (the minimum divisible unit of currency) 
        is greater than a stick of gum?
    

That's how long bitcoin could functionally last in society. It DOES have a
limit. I just want to know if it's an unreasonable huge limit.

Will it last a century? A Millennium? Until Sol becomes a red giant?

~~~
makira
The bitcoin protocol can be changed to add as many decimal points as needed.
It's not static. Whether a change is adopted depends on each person running a
node: it's decentralized.

------
return0
I was worried that they would expose a fundamental flaw in the encryption
algorithm, however the post goes on with irrelevant FUD. It s a lot less
flawed than even paper currency, and the fact that there haven't been any
forgeries is a testament to its success. The argument about identifying
transactions is a bit disconcerting, but how much of a real concern is it?
After all, even paper money has a trail of DNAs from the hands that touched
it.

As for the comparisons with other currencies and commodities, it has been
exhausted as a subject; money is a matter of trust after all.

The question is what are the actual security threats to bitcoin's p2p
infrastructure/integrity?

~~~
DanBC
> and the fact that there haven't been any forgeries is a testament to its
> success.

There has been a successful double spend.

~~~
return0
Is that something that can be fixed/improved?

~~~
pixelcort
There is a fix that will go live in the future at a predetermined date. All
users are being encouraged to update their clients or patch their clients'
config files before the impending deadline.

I'm not sure what will happen to clients that don't patch or update.

------
scotty79
Money is inflationary not because it is printed, but mostly because government
allows banks to lend for long years the money that the bank could need
tomorrow if the people whose money it is showed up at the said bank and
demanded it back.

There's nothing that could stop it for bitcoin. I can easily imagine that
inflationary pressure from growing body of bitcoin credit could overcome
bitcoin appreciation due to increase of humanity wealth.

Yes. Government won't be able to print money but banks will be still be able
to inflate money as today. Government will just have to tax the banks in
return for the privilege of operating this way.

~~~
itsprofitbaron
Inflation is considered a bad thing however, it doesn't necessarily mean that
it’s a bad thing - if it's anticipated or unanticipated and it’s the sign that
an economy is growing (although too little/much inflation can cause issues).

What I'm arguing about Bitcoin is a potential liquidity trap because these new
injections into the market may fail to stimulate economic growth (especially
as Bitcoins can only add 25 new Bitcoins to the market every 10 minutes which
is being halved every 4 years from 2017). I believe that, there is potential
for the Bitcoin economy to run into the problem of a limited money supply &
the Bitcoin-hoarding because; there will not be enough currency. Since a long-
run inelastic and fixed supply currency is not useful for a real world
economy, the result will be a recession and due to the limited money supply it
will evolve into a depression. This is the opposite of what happens with fiat
currencies as I highlighted with the American Recovery and Reinvestment Act of
2009[1] government spending and lending can have a positive impact on the
economy in particular through kick-starting the multiplier effect.

[1]
[http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...](http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009)

~~~
dragonwriter
> This is the opposite of what happens with fiat currencies as I highlighted
> with the American Recovery and Reinvestment Act of 2009[1] government
> spending and lending can have a positive impact on the economy in particular
> through kick-starting the multiplier effect.

Fiscal stimulus like ARRA isn't impossible in a Bitcoin economy. Monetary
stimulus such as that practiced by the Fed (QE, QE2) might be impossible in a
pure Bitcoin economy, but fiscal and monetary stimulus aren't the same thing.

(Actually, I think that monetary stimulus is possible in a Bitcoin economy via
a sufficient subset of the network reaching consensus on evolving the
protocol. Sure, the entity making the decision would be a different coalition
of bankers than those running an existing government central bank, but it
wouldn't be all that different fundamentally, still filtered by wealth and
involvement in the financial system, but even less accountable than government
central bankers are now. But much of the premise on which Bitcoin is sold is
that such a consensus to alter the money supply _would never actually occur_.)

------
Aloisius
Out of curiosity, is there any way to design a crypto-currency that is at
least marginally adaptive to deflation/inflation?

Like say, if the aggregate number of xcoins traded goes down, start allowing
more xcoins to be mined and vice-versa?

~~~
wmf
That is possible, but if the exchange rate is fairly stable you get much less
press coverage and much less adoption.

------
Houshalter
Bitcoin not inflating is a _good thing_ , or at least for everyone that uses
it. If some people do hoard bitcoins, that doesn't affect anyone else, and in
fact it will benefit everyone else in some sense. Everyone else's money will
_increase in value_.

Think about it this way. People spend hours arguing about this, but in reality
which would you actually want to use? The currency that will increase in value
if you don't spend it or the one that decreases? That is, can you make any
argument of why it would be rational for _you yourself_ to not use bitcoin,
all else equal?

------
vader1
The deflationary-spiral argument is pretty much as old as Bitcoin itself, and
in my opinion quite overrated.

Sure, the Euro and the Dollar themselves are inflationary currencies, but
because of interest your buying power increases when you keep your money
locked in a savings account rather than spend it today. Yet consumers spend
their money on trivial products every day rather than saving it to let their
wealth grow.

Sure, the current volatility is so extreme that it might induce hoarding, but
as the Bitcoin economy grows and matures this should eventually decline to
acceptable levels.

------
rocky1138
By 2140 we'll probably have a new currency that we can replace Bitcoin with.

~~~
ceejayoz
2140? I'd expect the "new hotness" in cryptocurrencies to hit in 2014, not
2140.

~~~
rocky1138
Probably true, but I just used the same number that was in the article.

------
chm
All I can say is that I've made 6$ on a 50$ investment in two days. That's
more than a 10% increase in two days.

Problem is, when do I withdraw?

This is just a (zero-sum) game, stop taking it so seriously.

~~~
return0
Wealth in general is a zero sum game too (a little is being created, but
mostly it just changes hands). I would instead say, stop taking all money
seriously.

------
mrmiller
One thing that struck me about this article is the poor use of punctuation. It
really damages the credibility of the author when their language is so choppy.
It might seem superficial, but this completely ruined the author's argument
for me. Just one example: "At the current rate, 25 Bitcoins are generated
every 10 minutes although; this will be continuously halved every four
years...". That semicolon is so wrong.

------
jondtaylor
"However, they are wrong because converting $100 into 10 x $10 bills or even
100 x $1 bills does not make you feel richer."

This was also quoted in a Forbes article but I don't get it. Can someone
explain what this means? What does lack liquidity or limited supply have to do
with feeling richer by funging your bills?

I'm not joking I seriously have no idea what this has to do with anything...

~~~
mpyne
I think the idea is that it's a classic supply/demand equation: With a fixed
supply of Bitcoin available to transact with, each individual Bitcoin will
become more expensive as demand goes up.

If you sub-divide Bitcoins further to purchase the same items then it's still
a deflation: What you used to be able to sell for 1 BTC now you can only get
0.1 BTC for. If all prices drop proportionally at the same time that's not
really so bad, but it _is_ bad for any kind of delayed payment agreements
(e.g. credit, loans, etc.) as your ability to repay, say, a 40 BTC loan
continually gets less and less.

If you don't sub-divide then you make it more and more difficult for currency
exchange to happen at all; i.e. the BTC becomes more valuable, which is also
deflationary.

In a deflationary economy it's better to hoard your money (which is growing in
value without action on your part), which reduces the pool of BTC available to
spend, which leads to more deflation, etc. etc.

Of course this is a disaster only if BTC becomes the only currency, but it
would seem to put a hamper on the idea that BTC could completely supplant our
current currencies. I'd certainly never take out a loan in BTC at this point;
even if the lender agreed to "deflate" the principal at a certain APR, the
volatility of the BTC value is too high to be sure I wouldn't get taken to the
cleaners on the loan.

~~~
thornkin
Why couldn't loans be made which devalue at a rate pegged to a basket of
goods? We track the rate of inflation today, we could just as easily track
deflation and loans could be pegged to that. Doesn't that solve the loan
problem?

~~~
mpyne
The way I see it, that's simply shifting the problem around. Before your loan
was based in BTC, now it's based in (essentially) "Number of equivalent
baskets of goods".

I don't think lenders would appreciate the volatility inherent in their
loaned-out money having value fixed to the amount of crop yield the farmers
can deliver this year, or the amount of oil extracted, etc. Similar logic
would apply for those trying to get a loan.

------
tomrod
Sure, this is a flaw if one only uses bitcoins.

As far as I know, there is nothing stopping alternate, new competitors using
the same algorithm.

So bitcoins run out and everyone hoards? Start a new currency. A smart
implementation can overcome the network effect/firstmover advantage of
bitcoin.

Then people trade between the currencies, and hoarding ceases to be as much of
a problem.

~~~
paulhodge
Or more likely.. the Bitcoin developers release a new version that allows for
more than 21m coins. I think a lot of people don't realize that Bitcoin is
still an actively developed beta-version software project. There are several
parts of the code that the devs are already thinking about changing (such as
the way that transaction fees are calculated, or increasing the number of
times you can subdivide one coin). If the 21m limit becomes crippling, I'm
sure they will change that too. Really, they can change anything they want as
long as they can convince 51% of pool owners to upgrade.

~~~
wmf
Can you imagine miners or MtGox voting to devalue their own holdings? I don't
think many people are in it for the revolution.

~~~
dragonwriter
> Can you imagine miners or MtGox voting to devalue their own holdings?

I can imagine, if Bitcoin was perceived as a serious currency, nation-states
and existing large and wealthy financial institutions investing large amounts
in becoming participants in the network.

Can I imagine those institutions acting with regard to Bitcoin the same as
they act with regard to traditional sovereign currencies? Easily.

------
jff
Bitcoin is certainly flawed for a number of reasons, but this article is quite
poorly-written; we'd have been better off with just the list of references.
Summary: Bitcoin is deflationary.

------
mp99e99
Since theoretically there is a fixed number of bitcoins, and once lost they
can't be retrieved, bitcoins should theoretically be worth infinity when the
last one is finally lost.

------
chrisrhoden
Watch this:

From now on, for the purposes of transactions, I am going to refer to
bitdollars. In any software using bitdollars, one bitdollar is equal to 0.001
bitcoins.

Nobody needs to feel less or more rich.

~~~
ph0rque
I prefer the term nanobitcoin. That way, the conversion to bitcoins is built-
in.

------
p6v53as
The article claims it is possible to know who makes transactions, but does not
explain it. Anyone have any more detail?

------
pg_bot
Why hasn't anyone forked bitcoin and started mining a new currency from
scratch?

~~~
fusiongyro
I'd expect it to work about as well as Ido, the better-than-Esperanto: not
well. The whole point of currency (and language) is exchange. As you limit
yourself to ever-smaller numbers of people in the search for more ideal
manners of exchange, the missed point becomes harder and harder to ignore.

~~~
krcz
I might try to learn Ido someday. I probably won't talk to anyone in it, but
it might be fun. It has one advantage over Esperanto: its vocabulary wasn't
chosen by one guy arbitrarily, but by a committee that analyzed various
European languages and tried to find common word roots. That way knowing Ido
might help me to dig some meaning from French, Spanish, Italian texts.

~~~
fusiongyro
I think Interlingua would be even more interesting to you then, since it was
designed to be comprehensible to ordinary speakers of French, Spanish and
Italian without any special knowledge. It's sort of like a modern idealized
Romance language. It would probably serve your purpose better than Ido.

------
ttrreeww
Sounds like sour grape to me...

