
Fool's Gold 2.0: The siren song of Bitcoin - thinkcomp
http://www.aarongreenspan.com/writing/essay.html?id=97
======
humbledrone
Yet another failure to understand the purpose of mining. The energy is NOT
being wasted. In fact, the energy spent mining is the exact thing that makes
the Bitcoin network function. The energy is being converted into trust. The
more energy that is spent on mining, the more difficult it will be for a well-
capitalized entity to perform an attack on the network.

Aaron Greenspan, repeat after me: Mining energy is not wasted. Mining energy
is not wasted. Mining energy is not wasted.

Now, it _is_ an open question as to whether the cost of running the Bitcoin
network is worthwhile. However, for the moment, it clearly is. The fact that
some miners can turn even a small profit on the Bitcoins they're rewarded with
demonstrates that the utility they provide has positive market value.

Of course at some point it may be that it costs substantially more to mine new
Bitcoins than they are worth on the market. If this happens soon, Bitcoin will
likely fail. If it happens later, it's possible that transaction fees could
prop up the network, but that's purely speculative.

Another thing to consider when assessing the energy efficiency of the Bitcoin
network is how it compares to the efficiency of existing currencies. Cash has
a physical component and must be manufactured. Electronic fiat is backed by
huge, complex, and expensive networks. Visa's datacenters are not free. Keep
in mind that credit card transactions typically have a transaction cost of 3%,
which in some way represents the cost of operating the Visa network. 3% is
kind of a staggeringly huge number, and off the cuff I expect that's actually
quite a bit higher than the total Bitcoin network cost to volume ratio...

~~~
cma
This isn't a judgment on bitcoin, but on your logic:

The fact that some farmers can turn even a small profit on the tulips they're
rewarded with demonstrates that the utility they provide has positive market
value.

~~~
humbledrone
Well, what other measure would you use? The markets did, rather quickly,
correct themselves with regards to tulips. There was a brief window of mania,
but for the last several hundred years the tulip market seems to have been
pretty reasonable.

It's just not possible at this time to know whether Bitcoin provides enough
value to succeed in the long term. But to survive in the long term, it has to
survive in the short term, and our best measure of short term utility is the
market.

Again, if the market crashed far below the mining costs, then I would view
that as a demonstration of the lack of Bitcoin's utility. And that very well
could happen! But it hasn't yet.

~~~
skylan_q
_Well, what other measure would you use?_

There is no other way to calculate whether something is done at an economic
loss or profit than by the loss/profit mechanism of the economy.

 _Again, if the market crashed far below the mining costs, then I would view
that as a demonstration of the lack of Bitcoin 's utility._

Keywords being "far below". In cases where gold was the unit of money, there
would be times where mining gold was economically unprofitable. As a result,
more goods started chasing a fixed supply of money, bringing up the price of
money making it more profitable to mine gold.

~~~
LekkoscPiwa
FYI: price of gold currently is at its mining cost.

And Greenspan would still call it a "bubble"

When he is personally responsible for creating dot-com bubble _and_ the
housing bubble. Who would ever listen to this clown anyway?

~~~
zmk_
You are confusing Aaron with Alan. And Alan Greenspan was one of the first to
point out the dotcom bubble (he coined the term irrational exuberance).

------
pfraze
He's trying to tie the value of bitcoin to the forced syncing process -
"bitcoin represents spent electricity." That's just not right. In reality,
bitcoin represents agreement by parties to honor debts in its ledger.
Bitcoin's backing is the information system, not the resources that go into
it. The value is tied to people's faith in the currency and ledger system.

EDIT - other criticisms:

\- He criticizes energy waste, but doesn't compare it to the energy use of
existing financial systems.

\- He points at the risk of owning wallets without recognizing that this
should be a diminishing risk as better software develops.

~~~
thinkcomp
I never actually wrote the phrase you have above in quotes. Regardless,
tracking debts and using resources are not mutually exclusive as you suggest.

~~~
pfraze
I wasnt trying to quote directly, but to clarify, Greenspan (you?) wrote:

 _At its core, Bitcoin is a proxy for another commodity we are all familiar
with: electricity_

You're right that tracking debts (or, to be more correct per cpervica's
comment, tracking balances) and using resources are not mutually exclusive,
but I don't think that resource usage is the scarce resource that bitcoin
represents, as Greenspan (you?) suggests. I think the scarce resource is a set
of values contained in the bitcoin ledger, and the mining needed to change
their ownership is (as the second question puts it) an externality.

~~~
thinkcomp
(I am Aaron.)

I disagree.

------
beambot
> _Yet this is exactly how Bitcoin works: you are rewarded with new coins once
> your computer has consumed a certain amount of electricity (measured by the
> complexity of computing hashes of data, which takes time). Worse yet, the
> amount of electricity required to be wasted to earn a reward predictably
> increases, which means that the more Bitcoins one wants, the more one has to
> waste._

Couldn't the same be said of gold? Mining and extraction are resource (energy)
intensive and yield a result (gold) that is less than it's practical intrinsic
value (eg. for industrial purposes).

~~~
ChuckMcM
Of course it could. Except there aren't any industrial uses for BitCoin yet
:-) Understand that Aaron has a vested interest here (the whole FastCash
thing) and so any chance he gets to complain about BitCoin, he does.

Nothing he says in the article is false, except that it is also not "correct."
True anything can be used as a marker for value, from notched sticks in
Egyptian times, to rocks on an island, to BitCoin. As long as a community
exists which agree on their relative value, the marker continues to work as a
marker. And the more difficult it is to counterfeit, the better marker it is.
So far BitCoin meets that criteria and so it is not 'fools gold.'

He also missed the part where someone cracks your 256 bit key to your wallet
and steals all your BitCoin. There is an interesting cryptography
problem/question which looks at the cost of mining new BitCoins in comparison
to the cost of attempting to guess BitCoin wallet keys.

~~~
Phlarp
>There is an interesting cryptography problem/question which looks at the cost
of mining new BitCoins in comparison to the cost of attempting to guess
BitCoin wallet keys.

[http://directory.io/1](http://directory.io/1)

------
tlrobinson
_Says the guy with a potentially competing product (FaceCash) and also happens
to be suing Coinbase and CoinLab, among others._

~~~
fragsworth
Until recently, I have never seen such extraordinary bias in written work in
my life. Almost every time you see someone writing about Bitcoin, they are
one-sided to the point of absurdity.

The relentlessly negative articles (like this Aaron Greenspan piece) gives me
the impression that the author has a spiteful resentment of those who bought
early, and wants to see it crash to $0 so he can be right in the end and tell
everyone "I told you so".

On the other hand, many unquestioningly positive writings (which we also see
plenty of) are hugely influenced by the fact that the authors invested in
Bitcoin and want to see it rise.

------
codex
The author has a huge conflict of interest: FaceCash. Therefore, his opinions
are nearly worthless.

~~~
tzs
People with a conflict of interest are often the best to criticize something,
as they have a bigger incentive to do a good and thorough job. Treating them
with heightened skepticism is good, but dismissing them out of hand is bogus.

~~~
aric
...and often the worst.

Greenspan's criticism of Bitcoin is reminiscent of the same pontification he
had about Facebook. It competed with his houseSYSTEM. Later, in an open letter
for publicity, he advised Zuckerberg to either keep Facebook a closed network,
exclusive only to students and faculty of an educational industry (.edu
addresses), or to sell to Yahoo at their bid. That's interesting. Then he
hawked CommonRoom. I had a level of disgust over Facebook's cavalier attitude
with privacy and security that Greenspan seemed to have shared. Competition?
Great. Bring on the competition. Criticism? Yes. Let's hear everything.
However, the way it was presented as a whole didn't command credibility.

I stopped reading his criticism of Bitcoin when it was clear he didn't
understand Bitcoin. "Processing" might be a more digestible term to him,
rather than "mining." There are valid criticisms of Bitcoin. This has been the
case for 5 years. So too, there are valid criticisms about _anything_. Bitcoin
was never intended to be everything to everyone. It will likely remain
relegated to a subset of people. Knowing the state of security and the virus-
prone systems of today, I wouldn't _want_ the average person to use bitcoin
beyond light money. It's risky. Beyond this, bitcoin's positives are entirely
purposeful to enough people to trump its negatives. Being different _and_
useful is rare. Being both and decentralized is a true marvel. Fool's Gold
2.0? Nothing is fake about bitcoin. Bitcoin never claims to be _what you want
it to be_.

------
timberlane
It seems that most comments posts are either pro bit-coin or anti bit-coin,
but both sides seems to make wrong arguments based on a flawed thinking of
mining.

A fixed amount of bit coins are mined (on average) per unit time. Thus, how
much work it takes to mine a coin depends solely on the number of miners. Econ
101 theory tells us that the aggregate costs of the miners will equal their
aggregate rewards. So, the total cost of mining (hardware, electricity,
people's time who work on it) will equal the reward.

That's all that's happening with mining. No for either side to complicate it
and make it seem like more is there.

------
mappum
The author seems pretty hung up on the fact that mining consumes electricity,
but let's look at the numbers.

Miners consume an estimated 108,619 megawatt hours per day (according to
[https://blockchain.info/stats](https://blockchain.info/stats)). This is
actually a very high estimate as most miners have switched to ASICs and are
consuming orders of magnitude less power, but let's use it anyway. This would
add up to about $16m spent per day on electricity.

In 2011, the United States alone consumed 367 million gallons of gasoline
daily (according to
[http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10](http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10)).
At an average gas price of $3.576 / gallon
([http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_a.htm](http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_a.htm)),
this would be $1.3b spent per day on gas.

Pretty much everything on Earth is going to consume power, but I don't think
Bitcoin mining consumes enough to worry about.

~~~
makomk
Of course, if Bitcoin was widely adopted, the price would go up, meaning that
far more people would mine it and far more energy would be used in mining. The
only reason energy consumption from mining is that low right now is because
Bitcoin is incredibly niche.

------
Estragon
Actually, I agree with him, but it's funny how these articles always pile on
when the price is crashing.

~~~
NotOscarWilde
By funny, you mean intentional, right? I am fairly sure there are parties
trying to upvote and/or post these articles to get BTC price up or down,
whatever their need is. Currently, it's clearly "down" so they can buy again.

~~~
thinkcomp
I actually had no idea that the price was crashing until after I posted it.
I've been writing it for a few days. And I have no stake one way or the other.

