
The Bitcoin Central Bank’s perfect monetary policy - mike_esspe
http://themisescircle.org/blog/2013/12/15/the-bitcoin-central-banks-perfect-monetary-policy/
======
crystaln
I'm a fan of bitcoin in many ways, but this is fanboy fiction with no
understanding of money.

> Fractional reserve banking entails the creation of new money that is
> fungible with already preexisting money, i.e. it can be used interchangeably
> within the currency’s payment systems. This is impossible with Bitcoin.

Not true. Currency can easily be issued against bitcoin. When USD was backed
by gold, there was plenty of fractional reserve banking and no-one could issue
more gold. In fact, there is already debt-based money backed by BTC issued on
the Ripple network.

EDIT: I should add, that fractional reserve banking does not mean infinite
money supply. Depending on the amount of reserves required (by customers,
government, etc.), as long is it's greater than 0%, there is a limit on the
supply. E.g. if the reserve is 20%, only 80 BTC can be loaned against 100, and
only 64 against wherever the 80 is deposited, and on-and-on until it
approaches 0. Fractional reserve is not necessarily a bad method to allow for
risk assessed expansion and contraction of money supply.

> ...blah blah... make it certain that ... Bitcoin will be adopted as the
> global currency

Oh really? It's certain that the globe will adopt a currency because of it's
asymptotic money supply and proof of work algorithm? That makes no sense at
all.

The world will adopt bitcoin because it's an efficient means of exchange and
safe as a value store / investment from dilution by central banks.

Also, the "security" row in the currency comparison chart is misguided.
Bitcoin is far less secure than bank maintained fiat currency networks,
because in the latter, fraudulent transactions and electronic theft are
generally reversible.

~~~
eof
You've actually got it wrong.

Debt-based "ripple" bitcoin (or any other similar system) is not fully
interchangeable; you can use BTC IOUs within ripple and pass them around, but
you cannot send an IOU across the bitcoin network. This is different than with
fractional reserve; where 'created' money can be withdrawn, spent, and
intermingled without any differentiation.. I can spend a fractionally-reserve
created dollar at walgreens as easily as a bona-fide fed printed dollar bill.

You cannot send a Ripple BTC to my bitcoin-qt wallet, nor will
bitpay/coinbase/blockchain or any other blockchain-audited wallet accept a
btc-iou.

edit: i basically agree with your other point that the the stated reasons in
OP are not the reasons bitcoin will likely undergo s-curve adoption

~~~
crystaln
You're right that BTC IOUs on Ripple are not fully interchangeable with BTC.
However, neither was gold interchangeable with USD, yet each gold note was
redeemable for gold. This did in may ways restrict the level of fractional
reserve banking, and certainly the direct issuance of money. (Many suspect
that the US did not have nearly enough gold to redeem all its currency, and
that this was a primary motivation for leaving the gold standard.)

The process of redemption of BTC IOUs for actual BTCs on the Ripple network
resembles the process of redemption of gold-backed USD for gold. Similar to
gold being transmitted over a different network than gold-backed USD (the
former being physical,) BTC backed notes would be transmitted over a different
network - something like Ripple.

Fractional reserve banking can also be practiced directly with BTC, simply by
lending against deposits.

(explained here:
[http://www.cnbc.com/id/101048897](http://www.cnbc.com/id/101048897))

~~~
dnautics
"Many suspect that the US did not have nearly enough gold..."

That's an understatement! It was the national policy of an entire country i.e.
France (well I guess not all their citizens directly practiced this suspicion)
to withdraw its gold reserves in the US for precisely this reason, until nixon
closed the window in 1970.

~~~
gaadd33
How did Nixon taking the dollar off the gold standard change where France
keeps it's gold reserves? Do you mean their standard policy was to convert all
dollars received into gold?

Doesn't pretty much every major country still keep some fraction of its gold
reserves in the basement of the NY Federal Reserve?

------
jacques_chester
The von Mises Institute interpretation of economics, which is actually a
Rothbardian interpretation, dislikes inflation. A lot. They miss gold.

The problem is that gold is not like bitcoin, and bitcoin not like gold.

Suppose we all switch immediately to a gold standard. When the value of the
currency rises too high, more people will go and mine it. When the value of
the currency falls, fewer people will mine it. So in actual fact a gold
standard resembles the behaviour of an Australian-style (yes, _Australian_ )
monetary policy, which is having money supply governed by a central bank who
have an explicit inflation target.

Meanwhile, the supply of bitcoins is fixed. For all time. And they are
destructible in a way that gold is not.

Bitcoins will always be irreversibly leaking from global supply. People throw
their harddrives away. Delete the files accidentally. A high energy particle
strikes some cheap RAM and flips a bit, rendering a bitcoin worthless, and so
on.

While in theory the supply of bitcoin is meant to reach a fixed limit, over
the long run it will peak and thereafter always be shrinking.

Not expanding. Not even holding constant. _Shrinking_.

 _Nobody 's_ economics says that a shrinking monetary base is a good idea.

~~~
miles
_Meanwhile, the supply of bitcoins is fixed. For all time. And they are
destructible in a way that gold is not._

But they are divisible in a way which gold (or even dollars) are not:
[https://en.bitcoin.it/wiki/FAQ#How_divisible_are_bitcoins.3F](https://en.bitcoin.it/wiki/FAQ#How_divisible_are_bitcoins.3F)

" _A bitcoin can be divided down to 8 decimal places. Therefore, 0.00000001
BTC is the smallest amount that can be handled in a transaction. If necessary,
the protocol and related software can be modified to handle even smaller
amounts._ "

~~~
jellicle
You think gold can't be divided into arbitrarily small units? Really? The
smallest unit of gold is (179/(6*10^23)) grams. That's pretty small.

Dividing bitcoins into small micro-denominations does not solve the problems
of deflation in the same way that adding zeros to Zimbabwean currency doesn't
solve the problems of inflation.

~~~
codehalo
Arbitrarily small. Can it be divided down to (179/(6*10^24)) grams? And can
you do international online micro transactions with it?

------
dsjoerg
The paragraph that starts "First, it is rational for economic agents to hold
as many bitcoins as they can afford to lose" is so poorly argued that I
decided the rest of the article wasn't worth reading.

There are several steps missing between the statement "Bitcoin will go up in
value" and "I should invest all my investable assets in it". One big missing
step is, what is the optimal way for one to allocate one's portfolio, given
some set of expectations, uncertainties and correlations?

There's been a lot of work in this area (optimal portfolio construction), some
of it very good. My favorite starting point for this field is the Kelly
Criterion.
[https://en.wikipedia.org/wiki/Kelly_criterion](https://en.wikipedia.org/wiki/Kelly_criterion)

While I sympathize with the article's enthusiasm for Bitcoin, I wish people
would shut up when they have no idea what they're talking about.

EDIT: if you want to get deep in the weeds you can read more about Modern
Portfolio Theory here:
[https://en.wikipedia.org/wiki/Modern_portfolio_theory](https://en.wikipedia.org/wiki/Modern_portfolio_theory).
I don't endorse every idea you'll find there, but they are all better than the
notion that you should invest 100% of your investable portfolio in whatever
asset has the strongest forecast, as the OP apparently believes one should.

~~~
VienneseCPA
You really should have read what's in the parentheses immediately after that:
"without materially impairing their ability to consume or invest".

In other words, don't invest all your money in it.

I wish people would continue reading instead of stopping at arbitrary points
to rant.

~~~
Tycho
I'm not 100% sure but I think that part in parentheses was added after the OP
made his original post.

------
moocowduckquack
All of this makes me wonder how long currencies themselves will last.
Effectively a monetised market is using currency exchange to compute a
function where the currency serves as a variable to store the current state of
the computation.

From this perspective, money is one of the first distributed computation
networks, however given the mass of networked computation available there may
be other ways of solving the distribution problem that have even less friction
than a currency.

~~~
gnaritas
If we use it as a means of exchange, whatever it is, we're going to call it
currency.

~~~
moocowduckquack
There are markets and systems of debt arrangements that predate currencies.
Exchange is not predicated on the use of currency as a technology. Currencies
have held sway for a very long time however because they are an exceedingly
simple and elegant solution for a fiendishly complex problem.

These days however we have a global network of universal turing machines
attached to an increasingly large array of robots, and so things that are not
algorithmically possible to do in a monetary system are now completely
feasable and some of them may have considerably less friction.

------
miles
The full reserve nature of Bitcoin is often overlooked (or misunderstood -
more below):

" _The [Bitcoin network] enforces the strictest deposit regulations in the
world by requiring full reserves for all accounts. This is the digital
equivalent of the Chicago Plan or the Austrian 100% reserve gold standard.
Under this regulatory regime, money is not destroyed when bank debts are
repaid, so increased money hoarding does not cause liquidity traps, instead it
increases real interest rates and lowers consumer prices. This is a self-
stabilizing cycle as higher interest rates incentivize hoarders to invest,
while deflation increases consumption due to the wealth-effect on hoarders.
The BCB prevents lending out of deposits so that it can properly target money
supply and avoid the destabilizing effects of commingling the credit and
payment systems._ "

Others have argued[1] that fractional reserve Bitcoin banks can exist, but the
point is that the Bitcoin protocol itself is full reserve. Yes, intermediaries
may try to convince consumers to entrust their Bitcoin wallets with them, but
that hasn't gone so well[2]; Bitcoin "banks" that fool around with fractional
reserves are playing with fire.

UPDATE: Coinkite, which describes itself as a "Cryptobank", addresses[3] the
need to have verifiable, full reserves: " _You should also be wary of bitcoin
startups which claim some percentage of your coins will be in cold storage. If
you do not know the details of the public keys used, it will be impossible to
know if this is true, or if they are using those amounts as play money. With
Coinkite, you can audit where all your funds are at any time._ "

[1] _Of course you can have fractional reserve Bitcoin banks_
[http://www.cnbc.com/id/101048897](http://www.cnbc.com/id/101048897)

[2] _List of Bitcoin Heists_
[https://bitcointalk.org/index.php?topic=83794.0](https://bitcointalk.org/index.php?topic=83794.0)

[3] _Coinkite FAQ_
[https://coinkite.com/faq/money](https://coinkite.com/faq/money)

~~~
wmf
Maybe it's to Bitcoin's benefit that people don't appreciate the ramifications
of full reserve. I suspect most people who have grown up with Keynesianism,
credit cards, and "free checking" will have no desire to adopt full-reserve
banking with its resultant lower velocity of money. Looking at Coinkite
specifically, their fees seem crazy high and it seems inevitable (within the
market for lemons that is the Bitcoin ecosystem) that a scammy fractional-
reserve competitor (perhaps developed by a 17-year-old) will come along with a
slick Web site and lower fees.

------
negamax
Novice question : Can in say 10-15 years, Bitcoin's crypto standards be
bypassed using raw computing power? How about 20 years?

~~~
jacques_chester
Without meaningful breakthroughs in attacks on the underlying cryptographic
primitives, probably not.

If it's to be broken, it will most likely be due to someone finding a flaw in
the way those primitives are assembled. In the nearer term, the main risk is
people finding attacks on the implementation (in practice nobody uses 3rd
party implementations).

~~~
fragsworth
Even if a serious flaw in the current encryption algorithm is found, it's
feasible to create a new encryption algorithm and support both,
simultaneously, allowing people to transfer their coins over to the new one.

If some quantum computing mechanism is developed that negates all cryptography
entirely, then we will probably be living in a world with unlimited computing
power and the robots will have taken over anyway.

