
The Quora post that killed Bitcoins. Please discuss if his arguments are valid. - andreasklinger
http://b.qr.ae/jRRsvb 
======
acslater00
Hi, I'm Adam, I wrote this answer on Quora. Against my better judgement, I'm
going to wade in here and make a couple of clarifying points.

1 - Scam. I regret using the word "scam" in my answer, because I think it
overshadows the broader point I was making about Bitcoin's severe structural
design flaws. After watching the community react to this debate, I'm pretty
confident that the average bitcoin supporter is not intentionally defrauding
people. Consider my inflammatory rhetoric redacted and apologized for.

2 - Volatility. Since April 1, the average change (up or down) of the
bitcoin/dollar exchange rate has been just under 8%. That's unprecedented.
It's a clean order of magnitude more volatile than the stock market, which is
considered a "volatile", "risky" class of asset. It's two orders of magnitude
more volatile than a legitimate currency pair like the Dollar/Euro. Now, it's
all fun and games while the exchange rate is basically trending up, but if
that trend reverses look out below.

3 - Liquidity. All of that volatility comes on an average bitcoin volume of
something like 20,000 per day. If I put in an order for $15,000 worth of
Bitcoin right now, I'm pretty sure I could move the market between 5% and 10%
to the upside. It's probably even worse to the downside. Call me a skeptic,
but with that kind of easy price manipulation, I'm not quite ready to
denominate my paycheck in Bitcoins quite yet.

4 - What It Means. A number of people criticized me for not understanding that
Bitcoin is designed to be complementary to traditional currencies, and that
analyzing it as an alternative is invalid. A number of different people
criticized me for not understanding that Bitcoin is a different kind of
currency, which will inevitably replace traditional fiat money, and that
analyzing it as a component of the fiat currency system is invalid.

The Bitcoin community is diverse, and no one really knows what this is
supposed to be yet. That's totally fine with me. I can assure you I don't have
any skin in this game. My money is in LinkedIn stock.* But I've studied world
currencies extensively (and trust me, a normal currency debate is not this
lively). So, I don't know what Bitcoin will end up as, but I know two things
with certainty:

a) that it's unstable as a currency

b) that it's currently behaving as a speculative vehicle in an aggressive
bubble

* That was a joke

~~~
achompas
Thanks for posting here and on Quora. As someone with an economics background,
it's nice to hear a sane explanation based on fundamental theory.

I'm just surprised people aren't considering Bitcoins from a supply-demand
standpoint. Why purchase Bitcoins in the long run unless you're laundering
money or hiding from the government?

~~~
adrianmsmith
It's extremely difficult and expensive to transfer money from one country to
another.

I live in Europe and you can transfer EUR money from one country to another
for free; that's progress. But from the UK (in the EU but doesn't use the EUR
currency) my bank only allows me to transfer £5k (US$8k) per day to other
European countries, and each time I do it they charge me £25 for the privilege
(US$40). I had a tax bill recently in Austria (where I live) due to assets
held in the UK, I owed £20k. (I have no problem with having to pay the tax.)
That took 4 long phone calls over consecutive (business) days to transfer that
money, and cost me £100 in total. Imagine if my assets in the UK, and thus my
tax owed in Austria, had been 10x as large, or 100x as large.

I have no interest in dealing drugs or hiding income from the taxman. But
using banks make things incredibly difficult, and charge huge fees for their
trouble. It's time banks got "disrupted".

~~~
daemin
I would think that those limits would be mandated by government and only
implemented by the banks. There are various limits about trasnferring in
excess of $10,000 of cash across national boundaries, and also to/from cash.

~~~
SatvikBeri
AFAIK the limits are imposed by government, but the fees are totally up to
banks.

------
cturner
Trollish headline.

One fair non-structural criticism, a weak, temporary criticism and two things
billed as criticisms that aren't.

1) Early adopters. I couldn't find a point here. I think he's saying that it's
unfair that some people get in early. But in the current system, it's unfair
that government (through tax law and control of force) mandates that you use a
form of money that doesn't function well as a store of value. Bitcoin wins
here - it has a bootstrap disadvantage, and I'd expect that to diffuse.

2) Deflation. There's a creed in mainstream economics that deflation is bad,
repeated here. "if your money is getting predictably more valuable, why would
you want to spend it?" It's just false. Would you buy a computer today if you
can buy a more powerful one by waiting until tomorrow? People do.
Mainstreamers like the leaves-on-the-fire effect of inflation and also like to
overlook the fact that stimlus impairs cyclic corrections and detracts from
the role of money as a store of value.

3) Convertability. It's valid to criticise the use of bitcoins on this basis,
but it's not a systemic problem. If we had a period of high inflation, it's
reasonable to expect people would trust finite-supply bitcoins over an
unending supply of newly-minted, inflating notes.

4) "When Something Goes Wrong, It Will Die." I found the logic here non-
sequiter. Bitcoin will be tested but from what we know about it at the moment,
it looks solid.

~~~
barrkel
1) Bitcoin has a bootstrap _advantage_ , not disadvantage; like all Ponzi
schemes, it has the potential to return real profit to early adopters.

2) Deflation for a primary store of value in an economy is definitely a bad
thing; not least, because it does weird things like causing the value of debts
to increase over time, potentially to the point of requiring negative
interest; and think about what that would mean - the bank pays you to borrow
money from it. Bitcoin probably isn't going to become that, though, so I think
it is less of a cause for concern.

3) Convertibility is a systemic problem because it's a confidence game. If the
value of bitcoin is on a downward spiral rather than an upward spiral, then
you would expect fewer buyers, and those buyers would pay less for declining
assets. Paying less in turn sets the market value lower; it becomes cyclical.

And that's where (4) comes in. The reason "when something goes wrong, it will
die" is a valid point is because of contagion and panic selling, and the
reduction in the number of buyers in the market. It makes perfect sense to me,
because it's the exact reverse analogue of why bitcoin has a built-in
bootstrap advantage.

I'm getting the impression that people who like Bitcoins are the same kind of
people who think gold has an intrinsic worth as a currency, rather than a
commodity; in other words, they don't understand that the value of money is a
product of supply and demand, no matter whether fiat or specie. Don't forget
that 80% of gold production is used in jewellery and industry, rather than
bullion etc. What fiat money has going for it is a degree of control to get
out of systemic problems.

~~~
pizza
_1) Bitcoin has a bootstrap advantage, not disadvantage; like all Ponzi
schemes, it has the potential to return real profit to early adopters._

Can't the same be said for people who bought Apple or Google stocks early on?

~~~
barrkel
Ownership of a stock is a claim on the net value and future profit of the
company. In a theoretically efficient market with perfect information, stock
price would be fixed; its value would be the same as the net present value of
all income streams associated with that stock. But we don't have perfect
information, especially about the future; so a certain amount of the stock
price is formed from expectations about future profit.

It is of course possible that there can be a bubble of expectations in a kind
of echo chamber that cause a stock to act like a Ponzi scheme, but ultimately
over time there must be returns. The return can be as a stock price rise (but
that can't go on forever) or dividends; if the cost[1] of the money invested
in the stock doesn't match the return over time, then people will sell the
stock and it will fall in price. If too much of the stock price is formed from
aspirational expectations of the future (i.e. a bubble), then the price fall
may be drastic.

[1] Money has a cost; for example, compared with the interest rate on a risk-
free government bond. If an investment isn't making at least that much, it's
losing money.

~~~
smokeyj
>> Can't the same be said for people who bought Apple or Google stocks early
on?

> Ownership of a stock is a claim on the net value and future profit of the
> company.

Ownership of currency is a claim on the net value and future profit of the
currency. How does this address OP?

~~~
barrkel
In principle, you're right, currency is just traded like anything else; but
the fundamentals are different. A company is (presumably) engaged in
profitable production (the future profit, i.e. it does something) and is
composed of various capital assets (the net value, i.e. it has something). A
currency has neither attributes; its claim on future production and assets is
only valid in so far as people have confidence in it and will take it in
exchange for other things. A share, meanwhile, is a direct claim on things
themselves.

~~~
smokeyj
I understand currency and shares are not the same thing, I don't understand
this addresses OP.

> A share, meanwhile, is a direct claim on things themselves. What if you buy
> a share of an ETF?

~~~
tg3
A share of an ETF is a claim on a financial asset that is backed by claims in
other financial assets, usually stocks. So while it is one level higher than
directly owning securities, it is still a claim on productive economic assets.

~~~
smokeyj
For the sake of preventing a tautological melt-down could you define
"securities"?

------
mycroftiv
The current design of Bitcoin is obviously not correct for the long term, and
I am sure it will be supplanted by more evolved crypto-currency systems. There
is absolutely nothing preventing people from taking the open-source code and
creating an alternative "Bittoken" currency which changes problematic design
elements such as the minting/issuance model.

Given the rewards that have already accrued to Bitcoin early adopters, I am
surprised other competing cryptocurrency networks have not yet already been
created. Lots of people who wish they had started mining coins back in the
days before GPU mining would be eager to get in on the ground floor of an
alternative.

Most problems with the critiques of Bitcoin like those in the linked Quora
post is that they are debunking a straw man - the idea that Bitcoin is
intended as a universal replacement for all other currency systems. By those
standards of course it will fail. Looked at in another way, think of Bitcoin
as something more like MMORPG loot. If people are willing to spend vast
amounts of "real money" on items for their WoW character, spending that money
on Bitcoins instead makes it seem like a sane investment rather than just
flushing it away.

I've mentioned before that I think governmental action to criminalize Bitcoin
and analogous technology is an even more serious threat to long-term value. If
there is one thing that really might make the world's governments team up to
completely ban strong encryption, it is a potential threat to governmental
control over taxation and currencies.

~~~
achompas
_Looked at in another way, think of Bitcoin as something more like MMORPG
loot. If people are willing to spend vast amounts of "real money" on items for
their WoW character, spending that money on Bitcoins instead makes it seem
like a sane investment rather than just flushing it away._

What is the intrinsic value of Bitcoins, then? That people are willing to
spend money on Bitcoins?

As an investment vehicle these are terrible. Commodities (diamonds, zinc,
gold, wheat, oil, etc.) will always be demanded as factors of industrial
production or farming. Equities generate real-world wealth for investors in
the form of dividends. Both are demanded because they generate _real value_
for investors.

Bitcoins have no intrinsic value. If you're in to make a quick buck, that's
fine--this is a big arbitrage opportunity. But for any decently-sized time T,
Bitcoins --> $0 as t --> T.

~~~
mcantelon
>Bitcoins have no intrinsic value.

Part of the value is in their utility as an anonymous currency: try taxing the
guy that's paid in Bitcoins.

Another part is the integrity of the currency: the currency is backed by math,
rather than men, and not subject to hyperinflation resulting from corruption
(i.e. the US Fed can create money out of thin air, but there is no authority
that can create Bitcoins out of thin air: they must be mined).

~~~
achompas
I didn't downvote you, (I don't think I'm allowed to!) but the "US Fed" (the
Federal Reserve) does not simply add $X million to the money supply--it
actually purchases Treasury bills on the open market. The net transaction is
$0 (an exchange of currency for T-bills of equal value), but the market now
contains more paper money.

Meanwhile, I've already discussed Bitcoin's potential as an alternative
currency (or lack thereof) in other comments. If people demand Bitcoins as a
"tax haven" from the government, then Bitcoins aren't long for this world.

~~~
mcantelon
>The net transaction is $0 (an exchange of currency for T-bills of equal
value), but the market now contains more paper money.

Whatever the mechanism, fiat currencies are subject to inflation through the
pressure of an ever-increasing money supply.

>If people demand Bitcoins as a "tax haven" from the government, then Bitcoins
aren't long for this world.

It'll be interesting to see how the state tackles this. It'll be easy to drive
it underground, but preventing its use will be another matter. Bitcoin
transactions through a VPN seem hard to prevent.

~~~
achompas
_Whatever the mechanism, fiat currencies are subject to inflation through the
pressure of an ever-increasing money supply._

As they should be, given that populations increase.

Anyway, even if Bitcoins go underground, they'd have to be priced such that
they'd be cheaper than other money laundering channels. Due to their finite
supply, though, money laundering through Bitcoins will get very expensive. So
their utility re: taxes will be squashed by either the government or the black
market.

~~~
sigil
> As they should be, given that populations increase.

Is the U.S. Population increasing like this? [1] That's what the U.S. monetary
supply looks like.

More correctly, fiat money supply should ideally match total economic output,
not population. But the GDP graph also doesn't look anything like that
monetary supply graph.

Given this, the BitCoin phenomenon is understandable: savers are looking for a
currency that's not subject to manipulation and is most of all _predictable_
in terms of supply. Whether or not it succeeds, I'm glad there's the pressure
of a competing, not-centrally-manipulated currency.

[1]
[http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D...](http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS)

~~~
achompas
_But the GDP graph also doesn't look anything like that monetary supply
graph._

Huh? [0]

[0] [http://www.google.com/publicdata?ds=wb-
wdi&met_y=ny_gdp_...](http://www.google.com/publicdata?ds=wb-
wdi&met_y=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=us+gdp+chart)

~~~
sigil
Compare those two graphs from say 2006 on. I am mystified that you would look
at a graph with a giant, dominant spike, and conclude my point was about the
shape before the spike.

Edits: To make it clear I'm not arguing with the statement that money supply
has tracked GDP fairly well until recently. Or that GDP has trended up
exponentially.

~~~
achompas
Oh I get it: this is one of those "man, the Fed is messing up" rants!

Yeah, I won't take part except to say (a) you're sampling 4 years of
incredibly volatile economic activity, and (b) the other, uh, 96 years exhibit
a pretty strong exponential trend.

~~~
sigil
> Oh I get it: this is one of those "man, the Fed is messing up" rants!

Imagining a rant, and a classification for the discussion, is not helpful.
Your two points (a) and (b) I agree with.

~~~
achompas
Sorry, I completely misunderstood you. Apologies for that...

------
nl
His arguments are valid to some extent. They may not be fatal though. Taking
each one in turn:

1) Seeding Initial Wealth

This isn't really a problem. It's not very _fair_ , but I don't think he
argues that is actually a problem.

2) Built in Deflation

This is a big, big problem. It seems the creators of Bitcoin have a
philosophical disagreement with conventional economic theories that state that
increases in money supply (and some limited inflation) are outcomes of a
healthy economy. Unconventional thinking is fine, but the outcomes he predicts
here are real problems.

3) Lack of Convertibility

Yes, there is a problem here. It could actually be worse than the author
suggests, because if state actors move against Bitcoin they could easily
introduce high penalties for Bitcoin conversion. Even without that state
actors, the dependability and predictability of convertibility is currently
unacceptable.

At the same time, it's possible this could be overcome. It is basically a
matter of _trust_ , and modern fiat currencies all rely on trust. Usually that
is trust in a government (or system of governments in the case of the euro),
but it isn't inconceivable that "the internet" could be as trustworthy as a
government. People trust billions of dollars or transactions to operating
systems and databases that were built by "the internet", so it is possible
this could be the same.

4) When Something Goes Wrong, It Will Die

This is the trust issue again.

However, there is one additional point - if someone wanted to deliberately
attack the currency it would be fairly easy to buy a large number of Bitcoins,
then deliberately destroy them. Once that occurs, they disappear from
circulation, which causes instant deflation.

~~~
dedward
#1) This happens historically with many curencies. Making things more
attractive to early adopters (but nto TOO attractive) gives this momontum to
take off.

#2) Deflation is bad with real currencies because real currencies are tied to
real economies and key things like food bein grown, healthcare, etc - and they
are run on debt. In deflation, things get cheaper. Money buys more. But people
only need so many cards, so many houses, so many rolls of toilet paper - so
produces get net less money for their product over time. You now have to sell
twice as many shoes to keep up payroll. BTC could be fine because in this - as
it's position of a value store is somewhat different - it's not attached to
anyone or anything, and it works digitally in the true sense of a crypto
currency. The fact that it has an exchange rate demonstrates that it is
working.

Convertibility: This is the same with every other form of electronic-transfer
today. State actors telly ou how much, when, where, and what kind you are and
are not allowed to do. Some states forbid their citizens from removing
currency from the country period. They still "work"

4) This is the same as any other e-commerce provider out there (e-gold, etc) -
except in those cases we feel we have someone to sue or whatever. But we're
not just talking electronic payment methods - we're talking about an actual
crypto currency. If the algorithm turns out to be flawed, yes, it will
collapse totally. Thankfully it's open and transparent - and hopefully
strongenough. If someoen wanted to damage any currency, tehy could buy up tons
of it (with real money! and zap it from circulation. All that buying might
drive the price up as well. If they then destroy it - right on, they've driven
the price ven higher.

Again, the deflation would only be a problem if people start denominating
debts in bitcoins - rather than at market rates set against other currencies
they actually get paid in, which seems to be where this will go. If it turns
out to be managed and run the way it's planned out - I'd have no problem
telling someone "Yup, you can pay me $x USD in BTC calculated at the average
closing rate over the last week" or whatever was a mutually agreeable term.

Also - as I haven't read the whole protoocl (but mean to) - if someone
deliberately destroyed them - hwo would that affect value - they'd have to let
everyone know, right? How do you prove you destroyed them?

~~~
nl
I think agree with everything you said, except that you didn't spell out the
negative impacts deflation has.

If people stop spending (which is what deflation implies - as people keep
their money to hold onto its increasing value) then the economy slows, and
growth stops or becomes negative.

If we look at the Bitcoin economy, the same thing _could_ happen. There are
ways around that (eg, an increasing exchange rate that could occur naturally),
but it is a valid problem.

 _deflation would only be a problem if people start denominating debts in
bitcoins_ \- isn't this the idea of any currency?

(Edit: BTW, I didn't downvote you - I think your points are valid, and I hate
how people just downvote things rather than discuss them)

------
dogas
I think the other article (<http://apenwarr.ca/log/?m=201105>) written about
bitcoin failing is more detailed and contains potentially more plausible ways
of how bitcoin can fail. The openwarr article refers to potential failures
with the SHA256 backbone of bitcoins.

"With bitcoin, a single failure of the cryptosystem could result in an utter
collapse of the entire financial network. Unlimited inflation. Fake
transactions. People not getting paid when they thought they were getting
paid. And the perpetrators of the attack would make so much money, so fast,
that they could apply their fraud at Internet Scale on Internet Time.)"

IANA cryptography expert. Is this feasible in the way the author predicts?
Could SHA256 be cracked quickly, a la MD5? My gut is that it won't be able to,
but I can't back up my argument.

~~~
sbierwagen
This is more along the lines of "SHA256 has not been _proven_ to be secure,
therefore, it may be cracked." It would require novel discoveries in
mathematics to do so.

~~~
bad_user
Actually many cryptographic algorithms that got defeated, haven't been
defeated with " _new discoveries in mathematics_ ". Also, you can't really
_prove_ that such an algorithm is secure. You can only prove that it exhibits
certain properties that make it more secure versus other algorithms.

Judging by how cryptographic methods got defeated in the past, I think it's
safe to assume that it's only a matter of time.

~~~
sbierwagen

      Also, you can't really prove that such an algorithm is secure.
    

Incorrect. One Time Pad encryption is provably secure. (Proven by Claude
Shannon, no less; as in, the guy who invented information theory.) It is
impossible to decrypt if you do not have the key.

~~~
tptacek
One time pads strain the definition of "encryption" and are by convention a
bozo filter for people talking about crypto. For instance, downthread, you
have someone saying that an all-zeroes OTP key would in theory be fine.

In reality, all OTPs do is shift forward in time a relationship that must
still be secured through some other means.

So, from now on, when we talk about the feasibility of breaking crypto, let's
implicitly constrain "crypto" to "crypto that people can use in practice".

~~~
foxhill
i think you've misunderstood what i was saying. the OTP is definitely not a
practical method of encryption, obviously.

and no, OTPs do not require that the that any secure relationship be formed
_forward_ in time.

in fact, restricting "crypto" to "crypto that people can use in practise"
doesn't rule out the OTP - it was used with great success in both world wars,
owing to the fact that agents were able to share keys before the fact, use
them once, and then discard them.

finally, at no point would i ever suggest using the OTP as a means of
encryption in place of a public key system, especially one with a key of 0s.
why you suggest such a thing is beyond me.

------
ap22213
I would love to see a currency like this work, and I would be interested in
using one, but the major issue for bitcoin, for me, is that deflation is built
into its core. Inflation is a good thing.

Inflation encourages holders of capital to use it to invest in other things.
That is, inflation encourages productivity. The inflation has to be relatively
low, of course. Probably low enough to allow someone to retire without worry.

~~~
tomjen3
An inflationist currency is great if you are deep in debt or like cheap
consumer credit.

Deflation (or really constant value) means that those who save, build things
and invest wisely will benefit.

And no, I am not going to starve today, so that I can get marginally more
bread a year from now.

~~~
ap22213
I don't know. Maybe.

It seems like it would just create aristocracy. If I inherit a large sum of
money, I have incentive to ensure that my large sum of money increases (or at
least doesn't decrease) in value in the easiest, least risky way possible. If
my wealth was in bitcoin, I wouldn't have to do much, except ensure that more
people join bitcoin and that the bitcoin didn't disappear. Otherwise, I would
just play warcraft all day, procreate, and then die and split my wealth
amongst my children to continue the cycle.

If my wealth was in an inflationary currency, I would have much more incentive
to take on risk. Perhaps through that risk taking, I end up losing my wealth,
and others gain. Or, perhaps I gain more wealth. At least I have incentive to
take productive action.

~~~
njs12345
Of course, most forms of wealth people have aren't inflationary anyway - the
very wealthy tend to have little in terms of actual liquid currency and more
stock and property. It has been argued
(<http://en.wikipedia.org/wiki/Inflation_tax>) that inflation can be thought
of as a regressive tax for this reason.

~~~
ap22213
Exactly. As nl stated [1], bitcoin would turn the currency into an investment.
The very wealthy who would otherwise hold stock and property would instead
have incentive to just hold the bitcoin currency.

[1] <http://news.ycombinator.com/item?id=2611613>

~~~
njs12345
My point was more of an observation about the aristocracy point. Often the
rich do still take significant risks with their wealth even though the effects
of inflation are negligible on them.

I'm unsure about the deflationary aspect of bitcoin - in my opinion the degree
to which it is problematic depends on the rate of depreciation compared to
other assets. It seems more of a problem if you wanted to use bitcoin to
replace a sovereign currency, rather than use it as a currency on a smaller
scale intended for grey market/black market transactions. I think the
appreciation of the currency over time was probably intended to ensure it
originally took off by providing an incentive for early adopters; its dubious
legal status probably means it's a poor long term investment choice anyway.

To some extent this discussion is entirely academic anyway - bitcoin is being
used as a currency right now (see the Silk Road Market), so in that sense it's
already succeeded..

------
lorax
Talk about an overly dramatic headline, the "post that killed Bitcoins"? but
the submitter isn't even sure if the arguments are valid? (And has hacker news
turned into bitcoin news? it seems like there are several bitcoin links a day)

~~~
jacques_chester
HN goes in cycles. (This is a trivial observation, since pretty much
_everything_ goes in cycles).

* Subject X is broached in an exciting blog post.

* The submission receives massive upvotes and hundreds of comments.

* Subject X simmers. Soon various HN link-targets (AVC, that Steve fellow, TechCrunch, the other guy here called Jacques) begin weighing in, netting their initial submitters still hundreds more karma.

* Before long, karma farming means that the front page is overrun with links to posts covering Subject X from every conceivable angle. "Why Subject X is the Future". "Why Subject X is a fad". "Launch a Subject X statup right now!". "Subject X is retarded, here's why".

* Then, one day, somebody posts about Subject Y.

~~~
hugh3
In this particular case, the whole process is made easier by the fact that
bitcoin enthusiasts form a self-organizing PR machine.

------
Vivtek
It's a pyramid scheme, just dressed up in high-tech, vaguely libertarian
clothing. That's why sensible governments (not the "bank lobby") are starting
to ban it - it's inherently a bad idea (unless you're an early adopter - just
like any pyramid scheme).

Bitcoins are _no different_ from tulip bulbs.

~~~
antiscam
Yes, exactly.

The Bitcoin marketers do something that's increasingly transparent: they
(intentionally?) confuse the hypothetical with the real. A system based on the
Bitcoin technology could theoretically be something more than a scam. But the
right response to that is "so what?" because in practice, the present system
is exactly a scam. It's exactly, as you say, the same as tulip bulbs.

There's a simple reason for this. There are only three kinds of people who buy
Bitcoins at present: (1) idealists, ideologues, and experimenters; (2)
criminals; and (3) speculators.

The first category is simple; it consists of the libertarian and anarchist
extremists who simply like the idea of Bitcoin; they perceive it as
threatening governments, fulfilling some fuzzy vision they have in their heads
of following in John Galt's footsteps, fostering delusional hopes of a new
world order. Read the Bitcoin forums to get a sense of these people; they're
crazy enough that you worry about their psychological health, saying things
like "I wouldn't pay taxes even if that would be the only way to get a
starving welfare baby food" and "I reject all human morality and law." This
fringe group is small, however, and marginal, and fortunately they don't have
a lot of money. And this group has pretty much been exhausted; how many
technologically savvy anarcho-extremists are there who haven't already gotten
involved with Bitcoin, and how much money will the remainder contribute? (This
category also includes what I call "experimenters" -- people who put in $20 to
see how the technology works, etc. That's not objectionable, but it's not a
big group either.)

The second group are people who want to buy illegal things, launder money, and
avoid taxes. You get people like Jon Matonis suggesting that Bitcoins would be
useful to make tax-free payments, even though of course the laws in almost all
countries don't agree. You presumably get child pornographers on Tor and so
forth. This group will hopefully invite regulation, and also, since they're
just trading with Bitcoins, they won't do much to increase their value long-
term.

The third group are simply people who want to buy it at $X and sell it at
$X+n, hoping to convince someone else to pay the $n.

That's literally all there is. Nobody needs Bitcoin for trade. There's nothing
legal (and indeed there's probably even nothing illegal) you can buy with
Bitcoins that you can't buy with established currency. Maybe there are a
handful of things it'll be useful for in a hypothetical future, like making
donations to Wikileaks for those so inclined, but even that can't be done now.
Even the EFF doesn't want it.

And the system is promoted without any regard for its weaknesses. Bitcoin
transaction fees are expensive when making transfers internal to the system
(it recently cost me $3 to transfer $1000 internal to the Bitcoin system as an
experiment). In converting currency and making trades, the fees and spreads
are typically exorbitant, and you face unreliability, potentially dishonest
trading partners, and wildly fluctuating exchange rates. The environmental
cost is mounting and needs to be paid for by dwindling subsidies for block
generation and, eventually, increased transaction fees. The system is facing
talk of increasing regulation, fortunately.

So I have no problem calling people who talk as if the price of a Bitcoin will
forever rise -- much less forever rise exponentially -- "scam artists." That's
exactly what they are.

~~~
anonymoushn
_(it recently cost me $3 to transfer $1000 internal to the Bitcoin system as
an experiment)_

If you were to instead use a credit card or a wire transfer, someone (not
necessarily you) would almost certainly be charged between 5 and 15 times as
much for the transaction.

~~~
antiscam
And with a check or an American-style ACH payment (or British-style BACS
payment), nothing at all. And both ACH and BACS provide many more services and
essentially no practical downsides compared to Bitcoin. (Most people go
through life never needing to make a payment anonymously.)

The thing is, people on the Bitcoin forums talk as if they have no idea how to
set up a decent bank account. It's not hard. I do a substantial amount of
banking and can't remember the last time I paid a bank fee. (Obviously you're
correct that merchants do pay credit-card fees and thus that some of the
prices I pay are affected by merchant fees, but I get services for that too.)

------
vladd
Bitcoin is a marketing-based currency in the sense that it has no real value
besides the fact that it was the first currency with cryptographic properties
that gained widespread adoption: if someone would take the code and fork it
into an alternative ("Webcoins"), the intrinsec value of a Webcoin would be
zero (unless it also found a way to gain market share or early adopters).

That's very similar with a Ponzi scheme, where you need early adopters to pour
money in, so you can have a positive cashflow on which to iterate with other
customers. But otherwise you don't have an underlying asset to sustain the
value.

~~~
powertower
> that gained widespread adoption

No. What it has gained is: speculation.

~~~
hugh3
Exactly. If I asked the first thousand people I passed on the street what a
bitcoin was, I doubt any of 'em would be able to tell me.

------
richcollins
_Question: if your money is getting predictably more valuable, why would you
want to spend it? Answer: marginally speaking, you wouldn't._

This argument never made any sense to me. You can't eat money, watch it for
entertainment ... etc. You might be more inclined to save money that you would
otherwise have spent carelessly to avoid its loss of value, but how is this a
bad thing? Wouldn't our economy be _stronger_ if the effort we spent was on
making things people actually want / need instead of making things people
kinda want because their money is burning a hole in their pocket?

------
wintersFright
As an zeroHedge reading, armchair economist i think there are a lot of flaws
in that guys argument

"Bitcoin does not have a central bank capable of printing and lending
bitcoins"

>>I rather think thats the point. Lending is inflationary.

"Built in Deflation"

>> God knows how the computer industry makes money when if i hold my $$$ just
a little longer, i can buy an even better machine.

"For Bitcoin to work as a currency, it would have to act as a predictable
store of value"

>>No, currency does not have to store value. The USD is a terrible store of
value. Gold is a store of value. Govt paper is not.

" That's called a bank run, and for obvious reasons we want to avoid them."

>> um - I'm not an expert on bitcoin but there are no banks i thought. your
money is in your e-wallet. you dont need a bank to keep your money away from
theives. there are no banks with fractional reserve lending that are fragile
to a run on deposits

This guy is dunning kruger at its best.

~~~
faski99
"God knows how the computer industry makes money when if i hold my $$$ just a
little longer, i can buy an even better machine"

Not really. Because if you expect the value of your cash to rise, you would
probably hold onto your cash. The liquidity of the system would drop as people
hoard their cash (what happened during the Great Depression), depressing an
economy.

"bank run"

He's talking about the need to inject cash into the system during economic
shocks (the reason for the Fed injecting money into the system). This, again,
happened during the Great Depression, as perfectly sound and profitable banks
toppled left and right because of the bank runs, taking down the rest of the
economy.

~~~
geen7ea
I think you are missing his point about the computer industry. If you wait,
you can buy a better computer for the same amount of money as you would
originally have. Alternatively, you could buy the same computer for less
money. This is the equivalent of your money going up in value (as in you have
more buying power). His argument is that if we use the author's logic, people
would want to wait to get a new computer instead of buying one now. This is
obviously not the case and so his argument is flawed. I agree with the poster
and disagree with the author; the poster found the perfect analogy.

~~~
dedward
It's not flawed,it's just to narrow in scope.

Deflation, when things are worth less over time, means producers have to sell
MORE to make payroll, pay their bills, pay their debts - which haven't changed
in value. It's great for people flush with cash - and horrible for anyone in
debt.

The computer industry has planned obsolescence. None of them are buying 10
years worth of parts for today's computers at projected market rates, because
that would be a pile of stuff they'd ahve to eventaully sell at a loss.

It's not so simple as simple analogies....

BTC is designed to be, in the true sense of the word, a trustworthy way to
move value from point A to point B -and there is avery strong network effect
required to make it work (or any similar currency). At a point where I know I
can go somewhere, locally, and exchange my bitcoin for local currency (and
some posted market rates) - I will probably start accepting using it for a few
things.

The concept has merit.

------
rglover
The problem that Bitcoins will have in gaining traction is inherent in this
post. Experienced economists and financial experts will stomp it into the
ground. Granted, this post made a lot of strong points, however, it was a bit
of a witch hunt at the same time. To call Bitcoins a scam outright is the sign
of a person who may not have tried putting money into the system to see how it
actually works. As with anything new that might present problems, I guess
you'll just need to practice caution. Bitcoin isn't dead because of this,
though.

~~~
useflyer
Economist/founder here. And somebody who has not yet commented on bitcoins.
Watching otherwise intelligent people adopt these is hilarious. I won't speak
to the tech side (I'm sure its strong). Bitcoins are, in fact, an outright
disaster/scam.

1 - as highlighted by the author: bitcoins are equity positive in their
creation. we can trade with seashells as the medium (painted red so
distinguish them as special currency, of course), but every time somebody goes
to the beach with a bucket of paint, they get rich. money creation in its
traditional sense (generally, except countries with serious issues) does not
create equity, it only increases liquidity. major difference. tomorrow we
could all adopt a new currency, but we would generally have to back it with
something else of value (sort of authors point #2, weakly explained). bitcoins
are the creation of 'free money' out of thin air. we can assign it value (if
we dupe others into taking it for goods/services), but its value-less 2 - the
computing power devoted to this game is completely wasted. look at this from
30,000 feet -- all of these smart people with smart computers are crunching
numbers on a frivolous exercise and not for something productive. total
deadweight loss

bitcoins are the equivalent of beanie babies. you could buy a car with those,
and they became currency, albeit very briefly. but the inherent value is that
of a stuffed doll. bitcoins have a negative inherent value

~~~
Kadin
> all of these smart people with smart computers are crunching numbers on a
> frivolous exercise and not for something productive. total deadweight loss

That's true of gold mining as well, insofar as the price of gold is
significantly higher due to speculation and its use as a currency and store of
value than it would just for industrial uses (see comparisons to ruthenium).
This increase in price drives a whole lot of mining that wouldn't otherwise
occur.

But the whole reason for allowing Bitcoin "mining," I think, is because it
provides an incentive to early adopters, solving what would otherwise be a
chicken-and-egg problem that might be extremely difficult. Other digital
currencies (e.g. Flooz) used various marketing gimmicks to spur adoption, but
Bitcoin's method is much cheaper.

------
njharman
Not a fan of bit coin. Convertibility is the only issue in author's diatribe.
Author has not understood several concepts re bit coin.

Bc is not a normal currency, it's not reserve currency. It's much more like a
stock that's tradable without exchange. Limited quantity, market set price,

Mining is not free. When something succeeds early adopters always mKe out big.
It's their payoff for risk.

------
mchusma
I think each of these arguments do not hold up. Most people have already
discussed but I will summarize.

Severe Problem Number 1: Seeding Initial Wealth This problem is similar to
Gold Miners or anyone initially to an asset class. You already retracted your
scam comment, so thanks. Remember, governments are currently seeding banks and
itself with wealth through inflation. Its a different set of winners based
upon market forces.

Severe Problem Number 2: Built in Deflation

The money supply is actually inflating (slowly). People will make educated,
market based choices about how to act with their money once the currency
settles down. That will likely be assigning higher value over time to Bitcoin.
The Euro or Dollar have the opposite, and many would argue much worse problem:
you don't want to hold them because the issuing government slowly saps value
through effectively built in inflation.

Severe Problem Number 3: Lack of Convertibility Try trading government
currency in a collapse situation, you will encounter problems. Right now,
Bitcoins are roughly as easy to convert as any other currency. Bitcoins are
inheritly no more or less convertable except for the lack of current market
makers (a good point you brought up).

Severe Problem Number 4: When Something Goes Wrong, It Will Die Look at
Zimbabwe to see an example of governmental currency collapse. Any currency can
die. People used seashells at one point, they died. I'm not sure Lyra or
Franks are worth anything today.

Bottom line: Yes, Bitcoin can fail (so can any other currency). It is earlier
than other currencies in its lifecycle, so has a different set of risks. Is
there speculation going on right now, almost surely. Bitcoins appeal to people
because it is not government based, electronic, and low cost. Many of the
problems you note are just different problems than existing currency, for
better or worse.

------
jasonkolb
Some of the primary arguments he uses against Bitcoin are actually its
strengths. Fundamentally, Bitcoins will be in higher demand than dollars
because their value will continue to rise instead of fall. This means that
goods and services as priced in bitcoins will be discounted compared to
dollars, driving their adoption. You can see this same dynamic at work in
black markets around the world where the USD is the de facto currency vs the
highly unstable local currency.

It's all about the "reserve currency", which is the currency that sellers
around the world prefer to receive. If bitcoins are more attractive to sellers
because of built-in deflation then they'll not only accept them but offer
their products at a discount to get them. All of this creates an ecosystem and
drives adoption, it does not make the currency a scam as he implies.

~~~
madamepsychosis
Correct me if I'm wrong, but it seems to me that at some point Bitcoin will
stop its deflation. Once Bitcoin has mainstream success, if that ever happens,
the value of a Bitcoin will stop growing and people will start spending
Bitcoin. At some point, the value of a Bitcoin lost through hoarding will
equal the value gained by new adapters.

~~~
anonymoushn
In the eventual steady state (assuming Bitcoin becomes popular and the number
of coins created through mining becomes small compared to the number of
existing coins), Bitcoin should constantly experience deflation as the world
population continues to grow and per-capita productivity continues to
increase.

~~~
prodigal_erik
By design, the rate of coin creation must asymptotically approach zero as the
supply approaches 21 million. And every lost wallet of addresses (failed
backup-restore, Scrooge McDuck died without writing down his password,
whatever) will take coins out of circulation, causing some additional
deflation.

------
jcr
> When the federal reserve "prints money", it doesn't just mail million-dollar
> checks to random Americans. It does one of two things. It either (a)
> purchases some other asset [generally US treasury bonds] on the free market,
> thereby injecting more cash into the system than there had been before, or
> (b), loans money to a bank, who will then loan it to other people who will
> then spend it.

The part (a) about "purchases" is not specifically incorrect, but it is
misleading and shows the author may not completely understand how things work.
Typically the federal reserve _SELLS_ treasury bonds. They are sold for less
than face value with a promise to pay the full value on the redemption date.
The difference, of course, is the yield, or more commonly the "interest"
earned by holding the bond to maturity.

~~~
tatsuke95
No, money is created when the Fed purchases an asset.

Generally, they do so through a repo, whereby they sell an asset with the
intention of buying it back with interest on a very short term.

~~~
jcr
Thanks. I think I'm hung up on the term "creating." What I described is
typical fed borrowing through selling bonds.

------
hippich
Not sure how it killed bitcoins, but while most of authors points are valid,
conclusion - is not.

People get in to this "Ponzi schema" exactly for reasons pointed by author -
deflation currency, unable to track down, limited supply, free/crazy market
value. They look for such currency. Why it could not co-exists with rest fiat,
gold, game currencies?

If bitcoins will pass test of time, eventually its exchange rate to major
currencies will settle down. But for now when accepting payment in bitcoins in
my store I immediately convert these to dollars on mtgox.com, since I do not
know will tomorrow exchange rate be +50% or -50% =) and I need to pay my
supplier in dollars, not bitcoins.

------
Vlasta
Deflation is the big big big problem.

The only bigger problem is that many people in the bitcoin community refuse to
consider deflation a problem - some even deny it is happening.

The consequence is that bitcoins are good for investors and speculators, but
bad for actual sellers and buyers. People just hoard bitcoins, and sellers are
constantly lowering their prices every day while no one buys from them,
because who would buy in a deflation?

Bitcoin bubble will burst unless they manage to give incentive to actual
sellers and buyers.

I am a fan of digital currency and currently accept bitcoins, but I am
considering to stop doing that, unless bitcoin changes from investing
commodity to a real currency.

------
pathjumper
None of his arguments are invalid save the "early adopter wins" scenario.

On every other count he either misunderstands current banking systems,
bitcoin, presents a pseudo-argument, or some combination of all three.
Honestly, except for the early adopter winning part, the whole thing reads
like a shill post designed to do nothing but defame bitcoin. He even calls it
a scam. By that measure The Fed is the biggest scam that ever invented if you
look at who receives the "printed money" first. They are the "early adopters"
in his "bitcoin is a scam" analogy. And they are still in power. So does that
really make it any worse?

------
socrates1024
The most important lesson to learn from the Bitcoin experiment is that 'money
== speech' on a fundamental, cryptographic level.

Anonymous speech (i.e. using public keys) enables anonymous trades with other
people.

Transactions are signed and can't be forged, just like publishing a blog post
signed with your public key.

And a distributed network can be strong, just like bittorrent or Tor.

Regardless of whether the current implementation and economy surrounding
Bitcoin succeeds (I think it will), this is without a doubt how our future
information-enlightened society will develop

------
peteretep
These points are weak - there are other weaknesses of BitCoin, but these
aren't really them. Almost every issue he raises attacks BitCoin as a medium
of exchange (which it doesn't need to be) rather than as a medium for storing
value. Taking them one at a time:

> Severe Problem Number 1: Seeding Initial Wealth

He doesn't really explain why this 'problem' is a bad thing. There is a
limited supply, and there needs to be a distribution system. While this one
may not be perfect, it doesn't cause any systemic weakness in the system.
Early adopters will do well, yes.

But the degree to which people mine or buy bitcoins now is the degree to which
they think they'll be valuable in the future - bitcoins already have a price.
People who have mined them will sell them to you. Nothing stops you purchasing
bitcoins now if you believe the price will go up. This is how markets work.
Hearing someone complain about it is like hearing someone complain that people
who buy assets cheaply on the stockmarket will make a significant return.

> Severe Problem Number 2: Built in Deflation

A bad thing if you're trying to replace a country's currency system with it,
and excellent thing if you see them as a store of value. This is the same as
people complaining that any other asset deflates over time.

> Severe Problem Number 3: Lack of Convertibility

This is the closest point he has to being right. Lack of convertibility is a
current problem, but economics should solve that. All you need in order to
convert your bitcoins is a person who is willing to trade. To have an
efficient market, you need an exchange. Here's the crux: bitcoins have a value
as long as someone is willing to buy them off you.

His key point here seems to be that 'no one is completely invested in the
long-term success of the system' - yes. This is also true of your MSFT shares.
No-one is guaranteeing that they will be worth anything in the long run.

> Severe Problem Number 4: When Something Goes Wrong, It Will Die

Perhaps. I went for dinner with some Fx quants last night. One of them brought
up this point, and then they all laughed and said "And that's when you invest
heavily in it". All assets change their prices based on bad news - most
recover again and people who doubled-down at that point make money.

~~~
cube13
Re: Deflation

>A bad thing if you're trying to replace a country's currency system with it,
and excellent thing if you see them as a store of value. This is the same as
people complaining that any other asset deflates over time.

Currencies aren't investments. They have little to no inherent worth. They're
the medium used to make investments, and the medium that investments pay out
to the investors. If you're approaching Bitcoins as an investment asset,
you're missing the entire point of creating a new currency.

Assets, on the other hand, have inherent worth. Gold is used for jewelery and
in electronics. Fine art's worth is it's existence itself. BTC does not have
any worth past the confidence in the other currencies used to exchange for
them.

The fundamental problem with deflationary currencies is that there is no risk
in keeping it around, which removes a lot of the incentives for investing.
People are encouraged to not use BTC because they will appreciate more doing
nothing than actively going out and investing it. Instead, they'll hoard it
until the point where it becomes too expensive for people to buy. At that
point, there will be a run on the exchanges, which will kill the entire worth
of the economy around it.

------
jongraehl
All that matters it the ratio of nominal risk-free return to inflation. I
guess nobody offers depositors of bitcoins a risk-free return in bitcoins.

If there's a positive risk-free interest rate available to depositors, and
inflation is less than X, then you effectively have deflation already. TIPS
sometimes offer this for $USD (depending on demand and whether the measure of
inflation they're indexed to is fair). Nominal price stability is a
psychological benefit only (albeit important).

------
motters
I agree that deflation is probably the biggest criticism of Bitcoin. The
finite supply means that there's more of a temptation to sit on your heap of
gold rather than to participate in transactions. This could lead to the
currency becoming increasingly static and difficult to obtain over time. A
better system would be to have a modest but constant rate of inflation, such
that there is an incentive not to stash your cash for too long.

------
pnathan
I think his arguments sum up to, "It's not a government currency", and
represent a fear of the unknown.

Further, after I spent some time reading economics books, economics sounds
nothing so much like some people with suits on giving opinions, and then
having their opinions proved wrong, _then_ claiming that people should still
listen to them.

------
richcollins
_But Bitcoin is not designed to be a functioning currency, it's designed to
enrich early adopters. Again, that is why it is a scam. Period._

How is this different from our current currencies, which first go to banks
that then use fractional reserve to lend out money that they don't have. At
least with Bitcoin _anyone_ can mine them.

------
seles
Everyone keeps debating whether or not the built in deflation is good or bad.
But... how does bitcoin have built in deflation? It only has a decreasing rate
of inflation, which can't go negative (since bitcoins aren't destroyed). So
assuming the demand for bitcoins becomes constant, their value will be
constant.

------
tariqk
[http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-
id...](http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-
idea/answer/Sean-Lynch-18469)

Jury's still out, but that's okay. All we need to do now is wait.

------
adrianwaj
I found that post painful to read (I disagreed on all headline points,) but I
see bitcoin as the start of a new financial reality. I hope bitcoin becomes a
new core currency: to me it is like ogg, rather than a bank produced
equivalent, which would be like mp3.

Money is fully moving into the digital age, as has media with mp3 and mpeg. It
is the medium that will shape its container.

\- early adopters can help create or adapt financial institutions

\- exchanges are and will go open source

\- when something goes wrong the network will adapt. Bitcoin has financially
supported developers

\- I think all it takes is 1 large company and 1 country to support the
existence of bitcoin on a global scale as a test case whilst the rest live in
fear

Check out slide 4 of <http://www.slideshare.net/15Mb/ages-of-money> that is
the best way to think about bitcoin in my view: money 5.0.

~~~
inoop
To me Bitcoin is more like Gnutella. Massively overhyped and fundamentally
flawed.

~~~
greyman
It takes just a few keystrokes to type "fundamentally flawed", but people
seems to not agree whether that's really the case. So why do you think it is
flawed?

~~~
inoop
I don't know shit about economics, so I can't say anything useful about that
aspect of Bitcoin. I do know a little about distributed systems and p2p
however. Disclaimer: Bitcoin is a bit of black magic so I'm not going to claim
I know every detail about it. I did read the original paper, so I'll focus on
what I got from reading it.

First of all, Bitcoin replicates work over all nodes. This means you need a
global broadcast mechanism to inform all nodes of transactions and new blocks.
For transaction broadcast, you'll need O(m*n) messages with m the number of
transactions and n the number of nodes. This is scalability problem number
one.

Then you have the blocks. Each represents a transaction history of a given
period of time (magic number is 10 minutes iirc). When the number of
transactions/second (tps) goes up, so does the size of the blocks. The
calculations found here: <https://en.bitcoin.it/wiki/Scalability> give >1GB
per block for 2000tps, which is what VISA is doing right now. If you're
connected to k peers, that means you're going to need kGB of bandwidth per 10
minutes. Network-wide, regardless of your topology, you'll still need at least
nGB of global traffic every ten minutes. When you have a thousand nodes, you
have 1TB of data flying around the internet every 10 minutes, and that's on
top of the global transaction broadcast traffic.

Now remember that if Bitcoin wants to replace the US dollar they'll have to
scale way beyond 2000tps (for example, when China and India join the party),
but let's say 2000tps is the goal. The only way that's going to function is to
have a two-tier system with big clusters on top and people like you and I
below that, just to move that much data around. Introducing supernodes in a
p2p system is a cheap way of buying some scalability, but it doesn't solve the
fundamental problem, all it does is buy you some time before the entire thing
keels over.

Then there's the computational effort. The idea of calculating useless hashes
is meant to keep botnets from taking over the majority vote. One CPU cycle is
one vote, rather than one IP is one vote. To take Moore's law into account,
the system automatically adjusts the difficulty to keep everything chugging
along in an orderly fashion. This is a nice idea, but a botnet can still ddos
a node, at which point it doesn't matter how much video cards that node has.
As long as those nodes are on the internet they are still vulnerable. This is
happening right now btw, most miners are mining in so-called pools, and taking
out an entire pool by ddossing it means you can increase your own chances of
mining coins. This is why the pools are having trouble staying up.

Another attack vector is ddossing the entire network by sending a single
bitcoin back and forth between two addresses. Transaction fees can help a bit
here, but if someone is willing to spend some money to dramatically raise the
TPS count for just a short time you're already in a lot of trouble.

~~~
adrianwaj
Thank you very much. I posted your remarks into technical discussion, where
someone was postulating ideas about addressing scalability by somehow making
blocks smaller, and applying a divide and conquer strategy.

<http://forum.bitcoin.org/index.php?topic=11189>

------
mrerrormessage
As I write this, the value of bitcoin is at an all-time high. I dispute that
this article has actually "killed" bitcoins.

------
TerraHertz
I've only recently begun paying attention to Bitcoin, and am still evaluating.
Have yet to read the technical details, for instance. So I have nothing to say
on the validity of the technology. However I can offer some comments from a
political perspective.

I find the timing of Bitcoin's appearance rather interesting. Here we are,
entering into a whole mess of interconnected monetary crises - * Crisis of
confidence in the ubiquitous fiat currency systems, with ALL the world's
currencies in an inflationary race to the bottom. A race that will very likely
blow up into hyperinflation on the way to demonetization, followed by some as-
yet unknown replacement monetary system. * Crisis of legitimacy of the US
Federal Reserve Bank. Which is neither federal, or a reserve, or really even a
bank. It's actually a cartel of private bankers; many would say a criminal
cartel. * An ongoing raging battle between fiat currency in general (unbacked
by anything other than 'faith') vs traditional stores of wealth - gold and
silver. The forward trenches of this battle lie in the bullion vaults of COMEX
and the LBMA, and the bullion holdings of the SLV and GLD funds. Right now,
the Silver Liberation Army fights to expose the current economic order as the
paper illusion it certainly is. When COMEX inevitably defaults (because they
have less than one hundredth the actual metal they should have to back all the
paper silver and gold they have sold over the years to suppress precious
metals prices), then silver and gold will suddenly resume their rightfull
place as the only reliable, inviolable store of value. And thus actual
currency, or backing for currency.

Now, there's a method for manipulation of mass psychology called 'well
poisoning'. It goes like this. If you are in a position of power and control,
and you become aware of a concept or information that if it became widely
accepted could threaten your position, you 'poison the well' from which that
concept could rise into public awareness. You do this by introducing very
similar concepts, but all with fatal attachments or flaws. This conditions
people to automatically reject anything in that whole class of concepts. For
example, if you know someone has gone to Kenya and obtained a copy of a
genuine birth certificate of interest, you whip up a series of obviously faked
'Kenyan birth certificates' and saturate the opposition media with them.
Result: no one wants to look at any more damned fake birth certificates,
especially not one that's being offered on ebay. Heck, a while later you can
even officially release your own grossly fake certificate, and still no one
pays attention!

So, supposing you are the rulers of the global fiat monetary/banking system,
and being able to print as much of that virtual funny money as you like is
working very nicely for you. Then a small problem arises, as the fundamental
systemic instability of 'never enough money to pay it all back plus interest'
has unprotected sex with assorted hideous creatures from the banking black
lagoon (derivatives, credit default swaps, collateralised debt obligations,
mortgage/title/MERS nightmare.) All of a sudden you are up to your ears in
Hellspawn like massive naked short positions on precious metals, PIIGS running
wild and Vikings seeking banker blood, mark-to-market guillotines, the head of
the august International Maid Fxckers organization casting aspersions about
the gold in Fort Knox (or not), and your global reserve currency about to go
pooof!

What to do, what to do?

Worst of all, there's this damned idea of a non-fiat currency raising its head
again. Curses, you thought you had that one permanently dead, thanks to that
fast deal you did back in 1913, after a private chat among friends on Jekyll
Island. And why _shouldn't_ your banks create the national currency and lend
it at interest to governments and the peasants? Stupid idea that
Constitutional rubbish, about the government issuing silver money, interest
free. Ugh! Where's the profit in that? Not to mention the inability to steal
virtually everything over time via inflation and unpayable compounding
interest on the entire monetary base.

However... you and your banking mates haven't quite finished God's Work of
stealing absolutely all assets from everyone else. Needs a bit more time. But
here's this bloody idea of a specie-based currency popping up again all over.
States declaring silver coins valid as money, what next FFS! Time for some
well poisoning! And fast!

What you (as an Elite banker) want to do, is set up something that is going to
badly burn all the early adopters of alternate currency. Something that will
make them wish they'd never seen or heard or even dreamed of anything but nice
safe paper dollars. Distract them asap from any thoughts of buying (shudder)
actual physical silver and gold. Definitely you want to minimize the numbers
of these ... financial terrorists ... who end up holding an ounce of physical
silver or gold in their hand for the first time and having that no-return
moment of 'AH HA!' where they suddenly, at gut level understand what _real_
money is.

Also preferably something that will brand them on the forehead as currency
outlaws, all the better to round them up and send to the camps if it comes to
that.

Enter, stage left... Bitcoin. Riding in to save the day.

I don't think so.

There are a few other concerns I have, besides the awfully suspicious
coincidence of timing. Firstly, there's this thing about digital patterns and
copyright, intellectual property rights and so on. I'm solidly in the camp
that says you can't own information, and efforts to legally enforce ownership
of information are fundamentally incompatible with deep principles of the
Universe. Data is like Time, Matter, Energy and Space - it's a component of
reality, with its own unalterable properties. One of those properties is that
it can be duplicated indefinitely, without data loss. It can also be very
easily destroyed, leaving nothing. It's a huge topic of course, with sub-
issues like secrets, lies vs truth, cryptography, the difference between data
and knowledge, the philosophy of data/knowledge sharing and its social
benefits, etc.

But as it relates to Bitcoin, I find myself very, very uncomfortable with the
concept of founding a medium of exchange on pure data - both infinitely
copyable, and utterly ephemeral. Regardless of the soundness of the
cryptographic methods, it sounds to me like asking for trouble. And that
trouble might possibly have been intended from the start. It might hurt, a
lot. Particularly if it's the fiat-banker ancien régime holding the other end
of the cane, and it's you with your Patriot Act pants around your ankles.

Then there's a few more practical matters, that one shouldn't overlook these
days.

* How do you bury Bitcoins in your backyard or out in the bush somewhere? (Silver & gold - no problem.)

* More to the point, even if you can somehow bury them, how will they be any use when someone digs them up in 10, 50 or 200 years? (Silver and gold - no problem!)

* When the police, BATF and FBI break down your door without a warrant, trash your place and take your computer, do your Bitcoins go with it? Ditto for burglars without badges and guns. (Silver and gold - at least you have some chance of hiding them.)

* TSA, airports, laptops and latex gloves. Where do Bitcoins go in this scene?

* Is it possible to melt down Bitcoins and cast bullets from them, and does Bitcoin ammo work against zombies, vampires and other flesh eating ravenous menaces?

* That '21 million Bitcoins max' figure. What?! Regardless of how that limit is set, and how dollar-Bitcoin exchange rates are determined, that figure tells me this was never intended to be a real currency, not even for one small nation. Less than one Bitcoin per person? Huh? Bitcoin was clearly designed as a 'crippleware demo', as opposed to a workable system. But a demo of what? Of pain-bringing, I suspect. (Silver and gold - there's enough to serve as a global currency. That there are two kinds, with about a 17:1 natural abundance ratio helps a lot too.)

* Quantum computers. Are now commercially available. How will this affect Bitcoin?

* Wishful thinking. Yes, we the people of the world do desperately need some medium of exchange that isn't owned by the banker and government flesh eating monsters. It would be great if it had all the good features of Bitcoin - electronic, anonymous, untraceable, unstoppable, untaxable transactions.

This doesn't mean we should leap joyfully at Bitcoin. Take a very close look,
for strings, hooks, bear traps, punji-pits, etc. It's a mean world, and there
are powerful, wiley forces who'll do anything, ANYTHING to preserve the
existing fiat banking system a while longer.

~~~
glenra
> Less than one Bitcoin per person?

There is no necessary relationship between the number of people using the
currency and the number of units available, given that units are divisible.
But if it makes you happy, define one "New Bitcoin" as 1/1000th of an original
Bitcoin. Now there's enough to go around, and you can get 20 for free from the
faucet!

See also: Rai stones. <http://en.wikipedia.org/wiki/Rai_stones>

> TSA, airports, laptops and latex gloves. Where do Bitcoins go in this scene?

That's a huge win for Bitcoins. Store yours in the cloud and you can transfer
arbitrary amounts of cash across national boundaries without paying tax,
filing paperwork or risking seizure. Try transferring the same amount by
carrying out bills or coins and you'll see your stuff silently stolen from
your checked luggage or noisily seized either by TSA or customs agents.

> How do you bury Bitcoins in your backyard or out in the bush somewhere?

Back 'em up in the cloud somewhere instead.

> When the police, BATF and FBI break down your door without a warrant, trash
> your place and take your computer, do your Bitcoins go with it?

If you don't use passwords and don't keep offsite backups, yes. How is this
_worse_ than if the authorities steal your cash or silver and freeze your bank
account?

~~~
TerraHertz
Yeah, I've since found out about the 'divisible' aspect. Don't understand it
yet. In particular, how different people can own fragments of one
cryptographic unit, without there being any central coordination point.

As for storing in the cloud, uh, no thanks. Recent cloud upset providing an
entirely expected illustration of the 'nothing can possiblie go wrong!'
principle. Not to mention the mooted Internet Kill Switch being also a Cloud
Switch. Power failures, major disasters... involving the Cloud is just making
Bitcoin even more fragile.

I'm glad you mentioned backups. Because I forgot that. The issue being how
many people actually do have adequate backup. I know mine is far too weak, and
I wouldn't like to have my financial assets depend on it.

------
Dove
That's an excessively linkbaitish title. Please use original titles.

------
weinerk
Since this post - the value of Bitcoin went from aprox $2 to over $10
:-)))))))))

proof: <https://mtgox.com/trade/megaChart>

~~~
jacques_chester
Since that idiot last poo-pooed tulips I've made an absolutely massive return.
My retirement is assured!

I'm thinking about buying shares in the South Sea Company next.

~~~
anonymoushn
It is worrying to me that the public exchanges have so few bids and offers
most of the time, and that it is extremely common for people to deal in these
things privately to avoid moving the price.

~~~
Kadin
This is an issue right now because it's much easier to go long on BTC than it
is to go short.

Since virtually everyone in the market is long BTC, they desperately want the
price to go up, rather than down. This creates an incentive to do OTC (some
might say "under" the counter) trades rather than go through MtGox,
particularly if the true market rate is less than what MtGox is showing.

However, if it was easier to go short BTC then you'd have people who wouldn't
be afraid (and would in fact very much like!) to see the market price go down,
and would be more than happy to see declining prices show up in the public
order book.

There's a lot of strange behavior in the BTC market and I think a lot of it is
because you can't trade it like most currencies or even commodities. You can't
easily go short, you can't trade futures, etc. Allegedly MtGox and others are
working on those issues, but it's hard to do significant margin and futures
trading where everyone is anonymous.

But the sooner they make other forms of trading available, the sooner I think
we'll see the unrealistic bullishness calm down.

~~~
vessenes
Bitcoin Options market API just launched: <https://bitoption.org>

------
marckremers
All that article did for me was make me want to become an early adopter and
download bitcoin mining apps.

------
ignifero
Treating bitcoin as a currency is kind of wrong. It's a commodity with limited
and predictable supply, like gold for example. You wouldn't call it a pyramid
scheme, just like you wouldn't the gold market a pyramid scheme. His points
against its use as currency are sound.

~~~
paulgb
It's a commodity designed to only be useful as a unit of trade. How does this
differ from a fiat currency?

~~~
ignifero
By definition fiat currency relies on governent regulation (and an internet
protocol cannot be considered representative government, unless you create a
committee to oversee the protocol, in which case we're back where we started).

------
dynosaur
To be honest, Cohen sounds envious of the early adopters.

------
jparicka
Qoura clearly inviding ycombinator....... sick!

------
foxhill
having just read the article, it's apparent that the author has misunderstood,
or entirely does not understand the principles behind what's going on.

the number of new bitcoins, for instance, that are allocated for a time
period, is fixed, and from what i understand, is allocated to users by the
proportion of time spent "mining". ie, 10x more mining on everyone's part does
not mean 10x more coins mined.

secondly, the idea that a currency with a finite supply is a bad thing, is
just rubbish. gold backed and silver backed currencies have all existed at one
time or an other. some would argue that they have more benefits than fiat
currency.

his final point is almost entirely non-sensical, and is related to the part
before. during the bank bailouts in the financial crisis (which again, some
would argue we are still in the midsts of), the bailouts created money out of
air - devaluing the currency for everyone, increasing inflation, and THEN
passed the debt to tax payers. how this is construed as a benefit for citizens
of respective governments is beyond me. during recessions, the poor get poorer
and the richer get richer. money doesn't disappear, it gravitates to those
that already have it.

his 3rd point is the only one that comes close to making sense, alas, it's not
really an issue. people are their own converters. how much someone will pay
for something is entirely up to them, and whilst i don't see there ever being
an extra column in XE.com, that's really neither here nor there.

------
pbhjpbhj
I'm wondering if this is an attempt to force down the bitcoin trading price -
not necessarily by the author but possibly by the publicists.

Force down price, buy up bitcoins, profit. It's like playing at being a city
trading firm.

~~~
pbhjpbhj
HN has gone to the dogs I think.

What in my idle wondering was so deserving of down voting?

It should be impossible to downvote below 0 without an upvoted response.

------
spot
When he showed the graph of the number of tweets vs the number of bitcoins he
lost me. This is an apples and oranges comparison.
[http://bitcoinreport.blogspot.com/2011/01/bitcoin-
transactio...](http://bitcoinreport.blogspot.com/2011/01/bitcoin-transactions-
per-day-and-other.html)

It's just FUD.

~~~
larelli
What he wanted to point to with the twitter stats is the concept of
exponential growth of economic (and most other complex) systems.

~~~
spot
and if you look at the transaction graph for bitcoin it could just as easily
be the start of the twitter graph.

~~~
3am
He's talking about the amount of currency in circulation, not the aggregate
transaction volume. And BitCoin cannot follow the Twitter graph, because the
money supply growth is controlled algorithmically. You are incorrectly
interpreting the graph (which, to be fair, is a bad analogy).

~~~
spot
right it's a bad analogy (apples to oranges) that's what i said.

------
doctororange
Wow. Have to disagree with every one of his points. Total link bait here - I
really doubt the success or failure of bitcoin will depend much on what one
guy on the internet reckons.

I love that his final argument is just "Something will go wrong - I dunno
what, but something will." Mm. Top notch.

