
Understanding Bitcoin - rockyleal
http://www.aljazeera.com/indepth/opinion/2012/05/20125309437931677.html
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rauljara
Despite being no fan of bit coin, and despite this article basically defending
bit coin, I still think this is an excellent article. I really liked the way
it doesn't make the debate as "fiat" vs. non-fiat (as though fiat were a dirty
term) but as centralized, opaque fiat vs. decentralized transparent fiat. I've
also never read as clear an explanation of bit coin creating currency without
creating debt. It's definitely given me something to think about.

Two critiques of the article, however, would be the complete failure to
mention the deflationary risks of bit coin. You may agree or disagree with
whether that's a problem, but it is one of the biggest, most consistent
criticisms of bit coin out there, and it seems a tiny bit negligent not to at
least mention it.

Also, the article mentions countries using bit coin as reserve currency to
shield them from currency fluctuations. Which would be great if bit coin were
super stable, but bit coin has already had a few big crashes. In theory, the
predictable nature of bit coin should lead to stability, but in practice, it's
behaved more like a tech stock, where no one's sure what it's eventual market
value will be. Maybe it will become stable, but I think it's a little early to
make plans as though it will.

Still, one doesn't have to agree with an article to get a lot of value out if
it. Go Al-Jazeera for providing the most thought provoking article on bit coin
I've read.

~~~
jerguismi
> Two critiques of the article, however, would be the complete failure to
> mention the deflationary risks of bit coin. You may agree or disagree with
> whether that's a problem, but it is one of the biggest, most consistent
> criticisms of bit coin out there, and it seems a tiny bit negligent not to
> at least mention it.

One point to consider is, that there is a free competition between different
cryptocurrencies. There already exists some more inflationary bitcoin clones,
and probably more will come. The markets will choose the currency, which they
think is the best for them.

~~~
natrius
_"The markets will choose the currency, which they think is the best for
them."_

This is true, but that doesn't mean the currency will _actually_ be better for
them. Deflationary currencies are attractive to sellers and employees. They
will choose them if given the option. The ill economic effects of deflationary
currencies have been demonstrated.

Your phrasing seems to indicate that you believe that market-based outcomes
are always ideal outcomes. I think that is incorrect.

~~~
wmf
I think it's even worse than that. Bitcoin is likely to beat out other
cryptocurrencies out of simple path dependence.

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morsch
So one of his arguments is as follows:

A) Debt necessarily creates a society with certain undesirable
characteristics.

B) Our monetary system is based on the creation of debt, as new money is
created exactly when someone borrows, ie. gets into debt.

C) Bitcoin does not involve debt when it created; when you "create" BTC, no
debt is involved. Of course you do devaluate the entire currency when you
create additional BTC, but the same is true when M2 is increased in
fractional-reserve banking.

Did I get the argument right?

I'm sure many people disagree with A (which I have only paraphrased _very_
broadly since it seems hopeless to represent it in a few sentences here). B
seems to be a widespread characterization of fractional reserve banking, and
fairly accurate to me (but all of this bewilders me) -- is it controversial? C
seems interesting; although of course this raises the question whether there
aren't other alternatives that could replace/complement our monetary system
(and he does discuss some in an article he links to).

~~~
troyastorino
I'm somewhat confused about B. The monetary base is indeed expanded through
the issuance of debt in fractional reserve banking, but when the Fed pursues
expansionary monetary policies to keep the interest rates low doesn't that
increase the money supply without the creation of debt? Or is the effect on
the money supply of the expansionary policies of centrals bank small in
comparison to the effect of leverage ratios of fractional reserve banks?

~~~
Tycho
I think one of the main methods of monetary expansionists policies is inducing
the major banks to engage in 'more fractional' fractional banking.

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javert
The article's claim the non-bitcoin money/economic system is fundamentally
"based on" debt is just silly.

Think about it: governments create money "by fiat" and then pay people with it
and collect it from people. FIat money is not debt. My having dollars doesn't
mean I am in debt, nor does it mean anyone is in debt to me.

Credit and debt are fundemantal to economics, and will exist in any economy.
(As they should - without loans and other forms of debt, people would not be
able to get the capital they need to do things they need to do to get more
capital. They are basically _good things._ )

By the way, there are alreay people lending bitcoins and thus there are
already people who owe debts expressed in bitcoins. There are already bitcoin
banks, bonds, options, stocks, and insurance (and probably other things). As a
bitcoin user, I've seen this firsthand.

~~~
javert
By the way, if someone wants to explain the author's perspective on the
current economy being fundamentally based on debt, I'd like to hear that. I
don't really understand his perspective.

~~~
morsch
I think the point is not that the _economy_ is based on debt, but the monetary
system, namely fractional reserve banking, is based on debt. Of course the
monetary system is the basic infrastructure of our economy, so it's not
exactly wrong to expand the argument.

Money as Debt is an entertaining 45 minute video on the topic. It's considered
to be somewhat partisan, though, and I'm not that it's entertaining for
everybody.

<http://vimeo.com/2244372> <http://en.wikipedia.org/wiki/Money_as_Debt>

------
TrevorJ
for some more interesting reading check out Hawala:
<http://en.wikipedia.org/wiki/Hawala>

It is an informal value transfer system used primarily in the Middle East and
Africa.

~~~
hasenj
As a person of middle eastern origin, I don't understand what the big deal is
..

Is there really no such thing in the west? Isn't "Western Union" essentially
the same?

~~~
DanBC
People of some religions (notably Islam) have trouble with traditional money
and banking services because _riba_ is forbidden.

(<http://en.wikipedia.org/wiki/Islamic_banking>)

------
mtgx
If Bitcoin is a FIAT currency using that logic, then gold should be FIAT, too.
Bitcoin is a lot more like gold than it is like the dollar.

~~~
kylebrown
Fiat is money without intrinsic value or deriving its value from law. For
bitcoin, that law is code (ht Lessig).

~~~
icebraining
Bitcoin doesn't derive its value from the code.

~~~
Groxx
Ehhh... that could be debated. Without the code (by which I refer to the
algorithm) ensuring that certain behaviors are guaranteed, it won't have any
value because it could be gamed into extinction. The code is the only thing
that _allows_ it to have value - essentially every currency only _has_ value
because people will trade it for goods.

------
xd
My understanding of bitcoin is that it is a currency based on "mining" virtual
worth. So people with "real" money and free time; mine the resources. So the
wealth goes to those with the "real" money and time. Is that right?

------
qqyy
It's interesting that many outside of tech circles seem to be fascinated with
Bitcoin. I have no opinion on alternative currency, but I have an issues with
Bitcoin as an approach to alternative currency: it's a power hog. To use the
politically correct terminology, it's not "green". Not even close. While it
has its appeal to nerds because it uses the computer, it is an ecologically
unsound idea when you consider "scaling up". How much energy does it take to
produce paper currency? How much to generate "bitcoins"?

Given the world's energy situation, it's neither a smart nor a feasible
"implementation" of alternative currency.

~~~
icebraining
Bitcoin could use a Raspberry Pi to generate all the coins. The only reason
it's a power hog is because many people want to generate them, and it
automatically adjusts to an higher difficulty in order to maintain the same
rate of supply.

So if energy is scarce, then it becomes more expensive, so it's less
profitable to run miners, so some people stop mining and Bitcoin automatically
takes less energy to generate coins.

------
temp191
what happens to your bitcoins if the algorythm gets cracked?

~~~
TY
The _algorithm_ is already "cracked", bitcoin has been open source from the
very beginning.

~~~
lmm
What? We're talking about cracking the cryptography: suppose someone had e.g.
a preimage attack on the algorithm used to hash the blockchain. (I suspect the
answer is: all your bitcoins become worthless. But all the dollars in your
bank account are gone too, because your internet banking is secured using the
same algorithms).

~~~
tedunangst
If someone announced a flaw in sha2, but didn't release details, the banks
could migrate their security away from it. But the bottom would completely
fall out of the bitcoin market because nobody wants to be holding when the
other shoe lands.

Maybe bitcoin could be upgraded to sha3, but it would probably require action
on the part of every owner. Anyone who fails to upgrade in time would find
their bitcoins have evaporated. Makes it hard to react in a short time frame,
whereas a bank could, in the worst case, pull the plug and ban online
transactions until they've upgraded.

~~~
javert
Can't say for sure but I think the bitcoin community would come to a majority
consensus on the last block in the blockchain before the attacks started, and
at which point the new crypto algorithm must be used.

~~~
ewillbefull
I'm not sure they would force new transactions to use the new hashing
algorithm. Bitcoin uses scripts (a little state machine) to embed verification
behaviors directly into the blockchain. You could only introduce the new
hashing algorithm to the protocol, and by natural incentive to upgrade (more
security), expect more transaction outputs to use it. I'm not sure the Bitcoin
developers would force clients to ignore certain hashing algorithms -- scripts
can be very dynamic and the smaller the hashes are, the cheaper they are to
add to the blockchain.

