
Transaction Costs and Tethers: Why I’m a Crypto Skeptic - zonotope
https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html
======
keymone
> So that’s why I’m a crypto skeptic. Could I be wrong? Of course. But if you
> want to argue that I’m wrong, please answer the question, what problem does
> cryptocurrency solve?

Secure, trustless, decentralized consensus. Or in practical terms - a ledger
database that everyone can write into without having to trust third parties to
maintain correctness.

It’s strange author doesn’t seem to attribute any value to solution to that
problem.

It’s also strange author doesn’t know it has very strong link to reality -
security of the system is proportional to hasrate.

Seems like just another case of a guy arguing without having understanding on
the topic?

~~~
gthaman
> Seems like just another case of a guy arguing without having understanding
> on the topic?

At best he is ignorant, at worst he is perpetuating the current monetary
system(s) which is in a macroprudential[1] policy mode - not good - as many of
us can see around us daily.

Aside from the truth of there being more money owed with interest (as a debt)
than current money in circulation with which to pay that debt off (results in
either #1 forced defaults on loans at some time in the future or #2 a feedback
cycle with bursts of new loans created to pay off the previous debts without
the forced defaults of #1) the current dollar system and all modern currencies
are directly harmful to the population and indirectly harmful in a number of
ways. I cant stay on here all night but seek elucidation elsewhere if you are
interested. Macro voices the podcast does a pretty good job.

I don't think all the kings horses and all the kings men will be able to stop
bitcoin from success or the dollar from failure but what always astonishes me
are the endless arguments for inflation being good for the economy when its
basically how the government pays off its outrageous debt by stealing from the
elderly, disabled and anyone with a fixed income. And its not just the
benefactors of the system, there are volunteer robot numskulls repeating this
hypothetical garbage every day on the internet about inflation when really it
just allows the government to sustain itself by getting senior citizens to eat
dog food.

People need to stop letting themselves be tricked into exchanging their time,
youth, skills and labor for tokens that are guaranteed to be devalued, its
been over 100 years now and none of us know anything different. :(

[1]
[https://en.wikipedia.org/wiki/Macroprudential_regulation](https://en.wikipedia.org/wiki/Macroprudential_regulation)

~~~
nivertech
The solution to the problem you described is financial literacy, not
decentralized MLMs.

Nothing stopping people parking their savings (if any) in mutual funds,
Bitcoin HODLing is not the only choice for protection against inflation.

I would argue that it's not even protection, b/c nothing guaranties that
artificially-limited supply model will work in the long term.

------
darawk
> And these costs aren’t incidental, something that can be innovated away. As
> Brunnermeier and Abadi point out, the high costs — making it expensive to
> create a new Bitcoin, or transfer an existing one — are essential to the
> project of creating confidence in a decentralized system.

No they aren't. See: Proof of stake, Lightning network.

> Bitcoin is real without knowing who issued it, so you need the digital
> equivalent of biting a gold coin to be sure it’s the real deal, and the
> costs of producing something that satisfies that test have to be high enough
> to discourage fraud.

This is a pretty wildly inaccurate analogy of why the Bitcoin network uses
mining.

> Bear in mind that conventional money generally does its job quite well.
> Transaction costs are low.

To pay in cash, yes. To pay digitally? You're paying high credit card fees.
So, no, not really.

> The purchasing power of a dollar a year from now is highly predictable –
> orders of magnitude more predictable than that of a Bitcoin.

Disingenuous argument. If the US dollar were invented 10 years ago, it'd be
highly volatile today too. The fact that Bitcoin is volatile today is only
relevant if you are going to argue that that volatility is _inherent_ to
cryptocurrencies. An argument which may be valid, but that Paul fails to make.

> Using a bank account means trusting a bank, but by and large banks justify
> that trust, far more so than the firms that hold cryptocurrency tokens.

Because using a cryptocurrency does not require trusting _anyone_.

> But gold does have real-world uses, both for jewelry and for things like
> filling teeth, that provide a weak but real tether to the real economy.

You mean the way darknet markets provide a weak but real tether to the real
economy? You literally _just_ enumerated Bitcoin's tether's to the real
economy. Also, the idea that the gold market is in any way meaningfully
tethered to its industrial usage is a complete joke.

There are really great arguments against Bitcoin and crypto-currencies. All of
which Paul Krugman completely fails to make in this piece. The best of which
he's positioned to make, too! Bitcoin is a deflationary asset - that's a real
problem for anything trying to be a currency. That's a great case against it,
and one close to Krugman's heart.

This article is seriously disappointing.

~~~
magnetic
> To pay in cash, yes. To pay digitally? You're paying high credit card fees.
> So, no, not really.

I wonder what high credit card fees you are talking about. As a _consumer_ , I
pay none of them. In fact, I get money back every time I purchase something
with my credit card (in addition to getting a bunch of other benefits, like
purchase protection, extended insurance/warranty, ability to charge back,
etc).

As far as I know, none of this is available in the cryptocurrency world, and
more importantly, all of the cryptocurrencies that I know of do charge a
transaction fee, which cannot compete with $0 flat (not to mention cash back).

Crypto currencies have interesting features, but low transaction fees vs CC
isn't one of them.

~~~
darawk
> I wonder what high credit card fees you are talking about. As a consumer, I
> pay none of them.

That's not how economics works. You are still paying.

~~~
wlesieutre
Do you though? Except for gas, everything I buy costs the same whether I pay
cash or credit. If a store started accepting bitcoins, I doubt they're going
to recalculate the price to be lower than the cash price because you don't
have a credit card transaction fee.

~~~
darawk
We collectively pay, as a society. Credit card fees are a tax on commerce.

~~~
pbreit
Except that the bulk of the fees to the merchant are paid back out to
cardholders in the form of rewards and cashback. So it's closer to a wash.

~~~
darawk
Visa still managed to make $15 billion in gross profit last year. Seems pretty
significant to me.

~~~
pbreit
On $7.4 trillion in volume. So about 0.2%.

~~~
darawk
I'd call that a lot.

------
pdonis
Of course Krugman can't see what problem cryptocurrencies are supposed to
solve. That's because the problem they are supposed to solve--government
manipulation of money--is not something he sees as a problem.

~~~
tcbawo
It's fine for currencies with responsible governance. In some countries like
Venezuela, cryptocoins would be useful. But oppressive regimes with currency
controls are also likely to control access to the internet and/or block chain
networks. So, in practice does it make up for an irresponsible central bank?
Hard to say.

~~~
api
My problem is with how new money is distributed. It's given to banks to lend
at interest rates higher than they borrow it from the fed.

I'd love to borrow money at nearly 0% interest and then turn around and lend
it at 5% or even 15% interest. That'd be awesome.

How people can not see this as an elitist plutocratic system is beyond me. Of
course the systems it replaced were also elitist and plutocratic and so far
cryptocurrency appears to be turning out that way as well, so this remains an
unsolved problem.

~~~
pishpash
That's not how it works. The 5% or 15% is the cost of risk over the risk free
rate that they are getting it at. If there is sufficient interbank competition
this is a market determined rate.

A central bank injects the money via the banking system because they cannot
give it to arbitrary winners and losers, they are not in a position to price
granular risk, and that is the normal function of a working banking system.

~~~
pdonis
_> A central bank injects the money via the banking system because they cannot
give it to arbitrary winners and losers_

No, a central bank injects the money via the banking system as a hidden
subsidy to banks and other financial institutions.

If a central bank really wanted to make printing money neutral (i.e., not
picking any winners or losers), it would use newly printed money to increase
every single person's dollar holdings by the same percentage.

~~~
api
AFIAK that kind of "money from helicopters" approach is something I've heard
discussed by progressive economists, but until quite recently it was not
technically feasible to do this fairly. It would still be pretty hard to
implement.

~~~
pishpash
The money from helicopters approach is better done on the fiscal side. Except
the guy in the US who wanted to do it was cock-blocked by his opponents for 6
years and in the EU they are handcuffed by various laws. Still, by comparison
of US vs. EU, even dumping the money into the banking system vs. austerity was
the better way to go. The EU wasted 2-3 years.

------
UncleEntity
> If you like, fiat currencies have underlying value because men with guns say
> they do. And this means that their value isn’t a bubble that can collapse if
> people lose faith.

Until the value does collapse that is, just look at <how many?> examples of
hyperinflation in my lifetime.

~~~
kybernetikos
Depending on your age and what exactly you count, probably around 5ish.

~~~
PhantomGremlin
_Depending on your age and what exactly you count, probably around 5ish._

Maybe he's from Brazil? Maybe he's 76+ years old? If so, then I think there
were 5 "ish" 1000x devaluations in that single country in his lifetime.

I never lived in Brazil but knew people who did. Some quick checking Wiki for
dates, I probably missed some devaluations?:

    
    
       1942 cruzeiro replaces real at 1000x
    
       1967 new cruzeiro replaces old at 1000x
    
       1986 cruzado replaces second cruzeiro at 1000x
    
       1989 cruzado novo replaces cruzado at 1000x
    
       1993 cruzeiro real replaces cruzado at 1000x
    

Pick another random country in Latin America and you probably see the same
thing.

------
montalbano
Nick Szabo, who some people thought might be Satoshi, wrote an interesting
essay/paper on "micropayments and mental transaction costs" for those
interested:

[https://nakamotoinstitute.org/static/docs/micropayments-
and-...](https://nakamotoinstitute.org/static/docs/micropayments-and-mental-
transaction-costs.pdf)

------
bittcto
Krugman, in a real way, is why Bitcoin exists.

He literally advocated a housing bubble. (Broken Window fallacy)

The housing bubble collapsed causing bailouts of banks.

Bitcoin is a direct response to this nationalization of private losses. Not to
mention the century of financial corruption that preceded it.

Satoshi was not coy.

The genesis block contains the text: “Chancellor on brink of second bailout
for banks”.

Of course Krugman is a “skeptic”.

Bitcoin repudiates his entire career, ideology and work, and is having a
significant positive impact in the world.

Unlike Krugman.

Every year bitcoin continues it gets stronger, it rewards supporters and
forces the corrupt banking system Krugman endorses into the light a bit more.

Krugman and other nocoiners hate bitcoin?

Bitcoin don’t care.

This is what you have to understand about bitcoin:

Bitcoin doesn’t have to care.

It’s the first real tool of individual financial sovereignty.

------
394549
I'm not a crypto skeptic: things like encryption, one-way hashing, etc. are
extremely important, fundamental technologies with loads of math and
experience behind them. They work, and should be used widely.

Crypto-currencies are a totally different story. For one, many of them are
scammy rich quick schemes that have used greed to influence the technically
unsaavy to corrupt the English language.

------
safgasCVS
In science if a theory doesn't work in practice then the theory is wrong.

In economics if reality does not conform to theory then it's reality thats at
fault

No I'm not saying bitcoin is the future but millions of users are freely
choosing to use this system seems to count for nothing against some
theoretical failings in Krugman's eyes.

~~~
skookum
There aren't millions of users freely choosing to use this system. There are
millions of speculators hoping that some day billions of users will freely
choose to use this system and that <insert giant leap of logic> these
particular instances of this system won't be replicated ad infinitum and
somehow all economic activity on the planet will settle on these initial
implementations.

~~~
safgasCVS
I won't speak for all users but I've used it to accept payment for selling
used stuff on gumtree (very handy for this). It's also very useful for sending
money overseas which I've also done. I don't think I'm a special case which is
why I wouldn't miss the forest for the speculators and dismiss the motivations
of millions.

I also live in a country that wants to pursue land expropriation without
compensation based on skin colour. Having a bank account that no one but me
can access is quite appealing right now.

So I'm not using it to spite your worldview - it's been genuinely useful

------
api
There are good reasons to be skeptical of some things in the cryptocurrency
world, but whenever I see people high in the existing financial system talking
this way about it I can't help but think of RIAA executives in the late 1990s
arguing that the Internet should be shut down.

------
douglaswlance
Crypto skeptics always discount the value of the network.

>If speculators were to have a collective moment of doubt, suddenly fearing
that Bitcoins were worthless, well, Bitcoins would become worthless.

It wouldn't though. The bitcoin network itself has a non-zero value.

~~~
afrisch
What's the value of the bitcoin network itself (its computing power?), and how
does the holding of bitcoins give any right on this value?

~~~
pitaj
Value is subjective. But you could say that the Bitcoin network has a price:
the sum of the price of the miner hardware and electricity usage.

~~~
afrisch
Yes, well, I can imagine that under the assumption that people loose "faith"
in Bitcoin, it's still possible to assign a "value" to the Bitcoin network,
e.g. the hardware that makes it (miners and nodes) -- I wouldn't count the
electricity usage as part of its __value __, though. But the point is that
holding units of Bitcoin, i.e. knowing the secrets that allow spending them,
does not give any rights on those hardware assets, so the value of the network
cannot provide a lower bound to the value of Bitcoin units, in the same way
that industrial or jewelry usages of gold does give it a lower valuation
bound.

------
dalbasal
This is kind of a disingenuous story. Coins were not particularly burdensome,
relative to paper. Gold is light. Anyway, people always used credit mostly.

A phoenician ship at a minoan harbor didn't need to buy gold in order to trade
purple dyes for bronze ingots and olive oil. They used hardor-credit or
_something_. It was probably "gold backed" too, in the sense that it was
denominated in gold or silver even if no metals were present.

Money and credit are intertwined. We can always make money by loaning it to
eachother.

I think both the crypto-libertarian sm and Krugman's veiled response to it
miss that point. Also, neither have much to do with cryptocurrency's success
or lack thereof.

------
johndevor
>But if you want to argue that I’m wrong, please answer the question, what
problem does cryptocurrency solve? Don’t just try to shout down the skeptics
with a mixture of technobabble and libertarian derp.

"Technobabble" and "libertarian derp" are pejoratives clearly designed to shut
down the conversation in certain places. He can use those terms to disregard
basically any argument, as Bitcoin is both technical and libertarian in
nature.

------
21
Obligatory quote from the same author made in 1998:

> _The growth of the Internet will slow drastically, as the flaw in
> ‘Metcalfe’s law’ — which states that the number of potential connections in
> a network is proportional to the square of the number of participants —
> becomes apparent: most people have nothing to say to each other! By 2005 or
> so, it will become clear that the Internet’s impact on the economy has been
> no greater than the fax machine’s_

EDIT: Really? Downvoted for stating a true context fact?

~~~
CPLX
I dunno. I think it's fair to say he had a point about people running out of
things to say to each other. His main mistake seems to have been not to
realize that people would carry on doing it anyways.

~~~
21
> I think it's fair to say he had a point about people running out of things
> to say to each other

Reddit, Facebook, Snapchat, Instagram, Whatsapp even HN disagree.

