

Bitcoin money ≠ the Gold Standard. - spenvo
http://www.bitcoinbulletin.com/2011/05/09/the-bitcoin-payment-system-isnt-like-the-gold-standard/

======
hasenj
I don't like how people get defensive around capitalism; "our ideas are not at
odds with capitalism", ok, so what if they were? If an idea is at odds with
capitalism, that doesn't necessarily make it a bad idea.

For instance, I think the idea of free software (RMS style) really _is_ at
odds with capitalism; but so what? This is not a good reason to agree or
disagree with the idea.

~~~
jsn
Free software isn't at odds with capitalism (you don't _have_ to extract
monetary profit from everything you do in capitalism). Neither is bitcoin.
Government-controlled paper money, on the other hand, definitely is at odds
with free market.

~~~
barrkel
Nobody wants a free market. That's a market that includes slaves, child
pornography, assassination contracts, etc.

At the level of globally integrated economies, I think the gold standard has
been pretty well proven to be disastrous. It especially doesn't deal well with
trade imbalances that unwind suddenly. The trouble you see in the Euro area
can be seen as a microcosm of what a gold standard is like; countries like
Greece, Ireland, Portugal, Spain don't control their money supply - more or
less, it's like gold - so they're caught in an extremely painful bind, when
what would be best for them is to devalue their currency some. Instead,
they're having to struggle under huge debt burdens, and some might have to
default, or leave the Euro (i.e. by analogy leave the gold standard).

~~~
olalonde
> Nobody wants a free market. That's a market that includes slaves, child
> pornography, assassination contracts, etc.

Those things are perfectly compatible with democracy but completely
incompatible with capitalism. An inherent idea to capitalism is the protection
of individual freedom which those things clearly violate in some way or
another. On the other hand, those things are perfectly compatible with
democracy given that 51% of the population are OK with it. In fact, what
nobody believes in is _democracy_ (that's why most democratic countries have a
constitution).

<http://www.youtube.com/watch?v=lMb_72hgkJk>

~~~
barrkel
Not treating people as property is a distortion of the free market. If people
aren't property, what incentive do companies have to invest in their
education? Rich people would be much more likely to pay for the education of
their slaves if they were assured of strong property rights over them. How can
you properly price human capital if there isn't a free market in it?

Etc., etc. Free markets are amoral machines that discover price levels
appropriate to supply and demand through transactions. They are not
intrinsically good or bad; it is in the transactions that make them up that
moral judgement comes in. But if the market is truly free, then there will be
no limit on the kinds of transactions.

~~~
olalonde
I've yet to hear of someone who felt as a criminal after quitting his job (or
after stealing himself from his employer as you put it).

~~~
barrkel
Gah! You've completely missed the point of my irony. There's scarcely any
point discoursing with you.

~~~
olalonde
Well, you're not talking about capitalism. Your whole reasoning is based on a
false premise, because _there are limits_ to the kind of transactions allowed
in a free market. In a free market, you are free to do whatever you want _as
long as it doesn't interfere with someone else's freedom_. Your freedom ends
where someone else's begins.

Hence, slavery not being compatible with capitalism is a fact, not a
distortion of the free market nor a mere opinion.

~~~
barrkel
We're talking about market freedom not individual freedom. You're confusing
the two. Companies owned by larger companies can still both operate in a free
market. It's no different in principle for people. And my irony was about
phrasing the ownership of people issue in free market terms to show how it is
distorting (and it straight out is), not to argue for it or that there aren't
other approaches to the same problems.

------
pradocchia
I haven't seen this mentioned yet, so I'll mention it here:

The production curve for bitcoin, that starts steep and eventually levels off
when total supply reaches 21M, is not at all like gold:

<http://www.goldsheetlinks.com/production2.htm>

At times gold production has exceeded population growth, at times it has
lagged behind, but it certainly has not leveled off.

Also recall that Friedman called for a fixed 3% growth in the money supply,
year on year, commensurate w/ long term rates of economic growth. So why would
Bitcoin use a curve that starts steep and levels off?

I have heard two claims from Gavin: 1) it represents the pattern of natural
resource extraction (easy it first, progressively harder until the marginal
cost exceeds the margin gain), and 2) it encourages early adopters.

Now, I might wish it weren't so, but we're really good at natural resource
extraction, and we get better over time, until demand falls. Plus, the general
thinking goes, money supply should ideally grow at a _constant_ rate, in line
w/ long term economic averages. Maybe the extended long term view would
restate that as a constant rate, relative to population growth. I don't know.
The system has to reach equilibrium eventually, but we're not there yet, and
for now the closest approximation is a constant percent, year-on-year.

So I'm afraid that reason (1), and Bitcoin resembling something fundamental in
nature and the economy, is just not true. At best, Bitcoin is an entirely
_new_ kind of monetary system, with properties that don't resemble the gold
standard or fiat currency, but will be beneficial in some fashion down the
road. And at worst, it's just a Ponzi scheme.

I haven't seen (1) addressed substantively, so for now I'm tending towards
bitcoin-as-ponzi-scheme.

~~~
weavejester
How exactly bitcoin resemble a Ponzi scheme? It kinda sounds like you mean
pyramid scheme, rather than Ponzi scheme. (Not that bitcoin is a pyramid
scheme either...)

~~~
pradocchia
In that Bitcoin presents itself as a viable alternative currency, and
encourages adoption by people looking for a safe haven from fiat currency.
Eventually, though, it could become clear that certain factors, possibly the
production function, _preclude_ it from long term viability. The value drops,
holding are wiped out, but not before the earliest adopters have already
secured their gains.

~~~
weavejester
It's only a Ponzi scheme if you're lying to investors about how much money you
have. If you invest in something and then it fails due to some unforeseen
factor, that's just bad luck (or bad planning), not a Ponzi scheme.

------
sharpneli
This current debacle shows that economists and hackers look at bitcoin from
completely different perspectives.

The rant was based mostly on issues of economy disregarding the technical side
completely. This response to the rant however disregards the economical side
of the rant almost entirely. It's sad to see two groups of smart individuals
talk completely past each other.

~~~
crocowhile
I don't think the guy who ranted about bitcoin using the gold standard is an
economist because from reading what he writes it's clear he had no clue of
what he was talking about.

------
chipsy
All economies are built on some combination of trust, fakery, coercion and
hard work. The underlying rationale of a currency backed by "real material" is
that it can be trusted to last. It can be trusted more than any government.
Governments can fall quickly.

Bitcoin hasn't proven itself to the degree of gold. It doesn't necessarily
have to, though. It just has to look _better_ than alternatives, within some
useful timeframe of economic activity(i.e. more than a year or two, but
probably less than a century). And, as the original author wrote, it might
fall apart suddenly, but then it is basically the same risk as a government-
backed currency.

~~~
barrkel
Gold isn't "real material" any more than paper. It's only has its value
because of supply and demand, just like fiat money. If someone finds a huge
lump of gold underneath the ground, or in some other possibly accessible
location, gold's value will dramatically drop. If a new industrial use for
gold is found, its value might dramatically rise (assuming the industrial use
returns higher value than current prices).

I think the chances of a flaw being found in the Bitcoin cipher system are a
lot higher than e.g. a sudden disintegration of trust in the US dollar.

~~~
dpatru
> Gold isn't "real material" any more than paper. It's only has its value
> because of supply and demand, just like fiat money.

If this is so, then why have plundering governments consistently sought to
replace gold with paper?

~~~
barrkel
Why have plundering governments plundered? The answer to your question is an
implicit assumption of your question.

As to governments replacing gold with paper, that seems to be correlated with
economic growth and modernity than anything else. A mercantile approach to
gold would be something like that followed by the Spanish with their South
American possessions, mining for gold, etc. It didn't serve them very well
because they didn't understand that it's not some magical property of the gold
that holds value.

------
gritzko
Technically, BitCoin is hardly scalable. As every participant needs to be
aware of every transaction, that gives O(N^2) computational/storage cost,
assuming N is participants and transactions~participants. May be cured by a
dedicated central server storing all the transactions, but then it is not P2P
anymore.

~~~
weavejester
> Technically, BitCoin is hardly scalable. As every participant needs to be
> aware of every transaction, that gives O(N^2) computational/storage cost,
> assuming N is participants and transactions~participants.

That's not true. The Bitcoin protocol defines a "simplified payment
verification" method that does not require clients to store the full block
chain.

The Bitcoin network _does_ need a sufficient number of full clients to ensure
that an attacker cannot get access to over 50% of the processing power in the
network, but the number of full clients could be much lower than the number of
simple clients.

If Bitcoin ever becomes a major economy, the full clients will be sitting in
data centers with lots of bandwidth, and most people will use simple clients.

~~~
gritzko
So, the claim of being P2P goes to the wind first :)

Second. When accepting a coin, a node needs to check the coin was not spent
since the last time it changed hands. If the buyer claims he got it 1 month
ago (and shows a proof), then the seller needs to check a month worth of
transactions, just in case it was double-spent. Note the terrible asymmetry of
the attacker's and the defender's _costs_.

Third. Today I had to reread the paper (by Nakamoto) and I am surprised
(again) by the level of wishfulness and naïveté. Sec 5 (page 3) says: "the
nodes that were working on the other branch will then switch to the longer
one". Does he realize that in a distributed system nodes might have totally
different opinions on the number and length of those branches? And that those
opinions might change. It is easy to imagine nodes hopping between branches
with no global agreement possible. His very way of thinking has zero intuition
about distributed/asynchronous systems, sorry.

Obviously, that may be cured by introducing well-provisioned central sites, as
you say. But then, all that crypto-trickery becomes entirely meaningless and
the system loses its raison d'être. Well-provisioned mutually-recognized
sites/banks may do it exactly the way they do it these days.

Sorry for the rant.

~~~
weavejester
" _So, the claim of being P2P goes to the wind first_ "

It depends on how pedantic you are about the term "P2P". I guess you could
argue that any P2P network that includes supernodes is not a true P2P network,
but in practise I've never heard that objection.

" _If the buyer claims he got it 1 month ago (and shows a proof), then the
seller needs to check a month worth of transactions, just in case it was
double-spent. Note the terrible asymmetry of the attacker's and the defender's
costs._ "

Not really. Finding out whether an address can spend a coin is just a
hashtable lookup. It's not like we have to use linked lists!

So the cost for the defender is trivial. An attacker, however, has to orphan
the current block chain, which requires controlling at least 50% of the
computational power in the Bitcoin network.

For instance, let's say Alice gives Bob 1 BTC. Bob waits for 6 confirmations
before accepting it as valid, which is the standard length the official
Bitcoin client uses. This means that there is a chain of 6 blocks verifying
the transaction; if Alice wants to double-spend, she needs to get rid of that
chain, which she can only do if she can produce a longer alternative block
chain. This means she has to produce blocks at a faster rate than everyone
else on the network, which requires that she possess over 50% of the
computational resources.

" _Does he realize that in a distributed system nodes might have totally
different opinions on the number and length of those branches? And that those
opinions might change. It is easy to imagine nodes hopping between branches
with no global agreement possible._ "

No, because clients always choose the longest block chain. It's possible that
for a little while the block chain will branch, but that situation is
inherently unstable; eventually one branch will produce a block faster than
the other, and everyone will switch to the winning branch.

~~~
gritzko
_Finding out whether an address can spend a coin is just a hashtable lookup._

Trying to follow your perspective. You likely assume that every node has a
dossier tracking every single coin. That dossier is summarized as a hash
table. Right?

 _there is a chain of 6 blocks verifying the transaction_

Does it mean a transaction needs 1 hour to settle or I'm confusing something
for something? (1 block is created in 10 minutes)

 _everyone will switch to the winning branch_

Well... suppose I'm an attacker who briefly mobilized some significant CPU
resources (a GPU cluster, a million zombie PCs). I make nodes face two chains
of equal length. Once new block arrives and nodes rush to the "winner" branch,
I help the other branch win, so they rush back. You see, it is far more
serious than "using it to defraud people by stealing back his payments" (Sec
6, last paragraph). The strategy of "alerts" (Sec 8) might be open to attacks
as well. "Bad" nodes might also do alerts. etc etc ...and that is just off the
top of my head.

In very general terms, I also don't like the approach on the following reason.
With strong crypto, I may encipher something, so even the biggest Google
cluster will not be sufficient to break it any time soon. So, it is
mathematically strong, in a sense. BitCoin weakens it to a majority vote in
terms of CPU cycles uselessly burnt. That appears really weird to me.

~~~
weavejester
" _Trying to follow your perspective. You likely assume that every node has a
dossier tracking every single coin. That dossier is summarized as a hash
table. Right?_ "

Now I've had chance to think about it, it's probably a tree rather than a hash
table, but the general idea is the same. There's no way you'd do a brute force
O(N) search if N is very large.

" _Does it mean a transaction needs 1 hour to settle or I'm confusing
something for something?_ "

Yes, but it depends on how important the transaction is to you. If you receive
the equivalent of $10, you may consider 1 confirmation enough, but if the
amount was $10,000, then you'd probably want to wait for 6 confirmations just
to make sure.

The Bitcoin client tends to err on the side of caution, and considers
transaction unconfirmed until they have 6 confirmations.

" _Well... suppose I'm an attacker who briefly mobilized some significant CPU
resources (a GPU cluster, a million zombie PCs)_ "

You'd need a lot of resources. The Bitcoin network currently runs at 17190
Tflops, which is about equivalent to 2.5 million desktop CPUs. If bitcoin ever
becomes a major currency, this value will be _much_ higher, and out of the
range of most botnets.

" _I make nodes face two chains of equal length. Once new block arrives and
nodes rush to the "winner" branch, I help the other branch win, so they rush
back._ "

What would be the point in doing that?

" _BitCoin weakens it to a majority vote in terms of CPU cycles uselessly
burnt._ "

What's the alternative? A centralized server is likely to be far more
vulnerable to attacks (just ask Sony!).

------
sgornick
Incidentally, Bitcoin will be discussed on Tuesday's This Week in Startups
@TWiStartups

<http://thisweekin.com/thisweekin-startups/>

"Oh yes, we'll talk about poker and #bitcoin on Tuesday's #TWIST. Guest Amir
Taaki has experience w/this business model."
<http://twitter.com/#!/TWistartups/status/66565296550457344>

I'm assuming the host will be @Jason Calicanis.

------
msy
I'd like to see some of the many bitcoin evangalists about the place convert
their life savings, serious cash, into BitCoins and keep it that way. Talk is
cheap, particularly when it's abstract economic theory.

Then I might think it's got something in it rather that looking like a
volatile ponzi scheme that geeks are keen because they think they're in early
and going to make mint.

~~~
hasenj
That's not a good idea. Being passionate about bitcoin doesn't imply you
should convert all your money to bitcoins. In fact I would never advice anyone
to invest too heavily in it: treat it like a side project, like an experiment.
Maybe accept it as a form of payment for some non-essential products or
services that you provide. Maybe try to make some trading with bitcoins. Try
to see if you can buy a pizza maybe with bitcoins.

But only on the side.

Not because it's a ponzi scheme, but because it's still in its early days.

> ponzi scheme that geeks are keen because they think they're in early and
> going to make mint.

I just learned about it yesterday, but I'm excited about it because it has the
potential to become a "Free" currency (free from the central control of a
powerful authority).

~~~
msy
Why not? If the crypto is bulletproof and the theory is sound shouldn't it be
the ultimate place to keep your money?

~~~
dfox
Because market value of BTC is not at all stable or proven as the market is
quite small. It is entirely imaginable that somebody will design similar, but
slightly better system (faster transactions, more efficient implementation,
whatever) that will cause most bitcoins traders to move there. Essentially,
system like this depends entirely on market, while nothing has "inherent
value", most physical things can be still exchanged for something (and
actually gain value) after market crashes, when this kind of virtual market is
abadoned, you are left with completely worthless big chunk of data.

~~~
msy
So if this is an unstable, unregulated market that shouldn't be used for
anything more serious than pizza at what point is that going to change? What
magical thing is going effect to change?

And if that thing doesn't exist, what is this apart from a more complicated
way to waste electricity than Seti@Home?

~~~
hasenj
The assumption/hope is that it will stabilize as it grows, but this will take
time. It's not gonna be a magical thing/moment.

------
Steko
The link ignores most of the arguments made in what it purports to reply to:

No response to the Great Depression argument. No response to the governments
will declare it illegal argument. No response to the offline argument. No
response to the potential hackability of bitcoins.

Other then that it's a slam dunk.

------
olalonde
I'm oversimplifying here, but it all boils down to Keynesian economics[1]
(steaming rant) vs Austrian economics[2] (this submission) if anyone wants to
dig deeper in the subject.

tl;dr: <http://www.youtube.com/watch?v=GTQnarzmTOc>

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

[2] <http://en.wikipedia.org/wiki/Austrian_school>

------
Myrth
If someone still didn't get it - the whole original post was a hilariously
executed troll. The author very clearly states this:

"See, a bitcoin rant is almost too over-the-top for me. Asking why I think
bitcoin won't work is like asking why the sky isn't red. I mean, wait, you
think it _is_ red? You actually took that seriously? Oh boy. Where do I even
start?"

"For the record, I'm stupid _and_ trolling. That's why it was hard to tell."

~~~
JunkDNA
I don't think that's true at all. The original post was a cogent, if brief,
explanation that about currency and the challenges for bitcoin. The last quote
is most certainly meant to be sarcastic. He most certainly is trying to tweak
people who are all worked up into a lather about bitcoin as a serious
replacement for currencies. Just because he's provocative, doesn't make him a
troll.

It appears a lot of HN readers like you took his comment too literally and
killed the post. It's a shame because he makes some good points worthy of
discussion. I'm not certain I agree with all of them, but there's certainly
plenty of substance there. In contrast, this "rebuttal" adds little.

------
contactdick
Just on a brief look at BitCoin the question I have is generating blocks of
bitcoins which requires computational power earns 50 bitcoins. Firstly that
seems fairly arbitrary but secondly, what would happen if the currency became
commonly used and a large company with a lot of computational power decided to
get involved i.e google / facebook / microsoft. Wouldn't they end up
monopolising a large portion of the bitcoins?

~~~
corin_
A good description of why that won't happen comes from a comment made on HN a
week ago by Construct.

 _"Meanwhile, hardware enthusiasts all over the internet are rushing to buy
GPUs to dedicate to mining. They don't seem to realize that the bitcoin system
automatically adjusts to keep the bitcoin generation rate constant at 50 BTC
per 10 minutes. As the mining market becomes flooded with new 'miners' the
difficulty will climb rapidly, until it becomes unprofitable to run a GPU if
you have to pay for electricity."_

<http://news.ycombinator.com/item?id=2501154>

~~~
contactdick
Sounds like it's already happening - to quote construct "Some quick research
shows a handful of big players in the mining market who have invested heavily
in high-end GPUs for dedicated bitcoin mining, some with over 50 GPUs running
24/7 for months now. These guys are bound to have huge quantities of bitcoin
they are eager to unload when the price is right. Meanwhile, news coverage is
driving exploding popularity, which appears to be pulling the exchange rate
sky high. On paper, many of these guys have become overnight millionaires just
by running a bunch of computers 24/7."

~~~
corin_
I believe the idea is that mining was a solution for launching BitCoin, and
that as BitCoin has become more popular, the value of mining has gone down,
meaning that at some point (I don't know if it's already happened or not),
mining won't be worth the returns.

~~~
lutorm
This is one thing that _does_ seem to make sense: If mining isn't worth the
return, then people will stop, and the returns will go up. It should adjust
itself to whatever return people think is necessary to bother.

------
vrsmn
the comments that guy made against bitcoin just smells like good and old FUD.

Linden dollars didn't tried to replace US Dollars.

------
nateberkopec
A gold standard is a tool used by a central banking authority to promote
stable prices.

A bitcoin is actually designed not to be controlled by a central monetary
authority.

So, of COURSE Bitcoins aren't the new gold standard. That's like comparing
apples to giraffes.

~~~
dpatru
The aim of both the gold standard and bitcoin are to limit the power of
governments and banks to defraud their citizens by forcing them to use fiat
money.

> gold standard is a tool used by a central banking authority to promote
> stable prices.

This is the wrong way to look at it. The reason for central banks is to allow
banks/governments to devalue/print money, i.e., to deviate from a gold
standard.

