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Bitcoin is fiat money, too (economist.com)
308 points by davidw on Sept 22, 2017 | hide | past | web | favorite | 340 comments

Interestingly the economist misses the traditional definition of Fiat: a currency whose value is determined by the Fiat of a state. Whether or not Bitcoin exhibits similar trends as currency that isn't backed by the state is immaterial to the ethical appeal (to some) of a medium of exchange where participation is voluntary and consensual.

"Code is governance" -- the article does support the idea of cryptocurrency as fiat money because the laws, in this case, are the code. The developers and miners, no matter their good intentions, do hold power over the currency that everyday investors do not have. No matter how egalitarian the distributed ledger set up looks on paper, we'd be remiss to think the power structures behind cryptocurrencies are so radically different from the fiat currencies developed in the past and used at present. With time, especially if the cryptocurrency bubble pops, we'll be sure to see those structures made more explicit than they seem now.

Yes, that's the distinction. With Bitcoin, a codebase prevails if it attracts enough miners, merchants and users. Those parties in aggregate have "fiat power".

It's arguable that fiat power for each state similarly reflects preferences of banks, merchants and users. However, some of us doubt that money policy typically favors users.

With government fiat, forking isn't really possible, without a revolution, no matter how unhappy users are. But with Bitcoin etc, that is possible.

It's a common misconception that miners drive Bitcoin policy. In my opinion, miners are parasitic. When I first started using Bitcoin, there were virtually no professional miners. Users did all of the mining, locally. So difficulty was very low. Now, with so many professional miners, difficulty is very high. However, blocks get solved in 10 minutes on average, just as they did in the beginning.

Anyway, it's true that Bitcoin is a fiat currency. But governments aren't in control, and that's a good thing.

So you're telling me that government money, where everyone gets a say in policy through republican institutions, is worse than a system where the most wealthy users get more control of the currency. Um, okay. I guess the oligarchy is more explicit in the cryptocurrency.

If you really think you have a say in monetary policy, I suggest you read Barofsky's Bailout.

You have a say in it in principle. In contrast, you have in principle no say what others do with their private property. That's the difference, and it's an important one.

It's interesting how so many people want government to be run like a business while hating it most when it runs like a business. Business is opaque, secretive, with no oversight and loyalty only to the bottom line. Well run government institutions are none of these things.

You can't control what miners do, sure. But you can fork code that changes the game for them.

Contrary to all the noise, Bitcoin does not need commercial miners. They are parasites. Allowing them to dominate mining was a serious bug. It's users who should be mining.

I mined a little in the early days, but it kept my CPU pinned into the red and frankly all the people online patting themselves on the back on the size of their mining operation were offputting. I'm interested in cryptocurrencies because of their potential to liberate the mass of people from financial bullying by governments and corporations, not as a speculative vehicle to easy riches.

This will seem pointlessly ideological to most people, but I'm struck by the fact that the bitcoin blockchain is held up as 'proof of work.' There's no work involved besides that to understand the system initially and any code contributions made to the source tree. The actual calculation is carried out by machine. So mining is basically a game for capitalists to invest in industrial hash table production. People who learn about it later and comprehend it in full but don't have any large sums of capital to invest in mining equipment or as a speculative investment don't really derive much benefit from it.

Don't get the idea that I consider it a bad thing because of this - its mere existence speaks to the fact that we've run out of accessible natural frontiers where the curious might stumble upon a fortune, and so we are forced to invent them.

It's not about need. If it is profitable to mine, professional miners will exist. You can't create an incentive structure and then call it a "bug" when somebody optimizes for it.

So you can create a disincentive for non-user mining.

What would be the downside?

This is supposed to be a distributed system.

What kind of discouragement do you have in mind?

One could limit share of hash power. Perhaps by IP address. Or through blockchain links to previously-solved blocks.

The Tor Network, for example, has mechanisms for excluding bad participants. There's the bad exit flag, for relays that snoop traffic. Relays that harvest onion hostnames get banned. So do relays that attempt traffic analysis.

There's even a policy of discouraging new relays in commonly-used AS. There's no exclusion mechanism. But I don't see why there couldn't be, if there were too much concentration.

Edit: See https://trac.torproject.org/projects/tor/wiki/doc/ReportingB...

Although I still see it as a difference, I think it's good to remember you DO have a say in 'private property' .... there's nothing magical or natural about private property. Private property is whatever society/the government says it is.

It’s not really government money though, is it? It’s bank money.

I don't think that it's necessarily the wealthiest users. There could be a fork with lots of interest, no particularly wealthy users, and no non-user miners. One could probably impose the "no non-user miners" rule in code.

But even then, I prefer it, because with enough interest, it can always be forked. And that's much easier than changing governmental monitary policy. That is clearly dominated by the wealthy.

Just download a mining program and run it on your computer. Voilà, you now have "a say" that is exactly equivalent to your say in the policy of republican institutions.

Don't be silly, that's like saying that incorporating a one-person business automatically puts you on-par with the lobbying power of major industries.

No, it's as silly as suggesting that a single voter has any say what so ever in the policies of republican institutions.

1 vote for a poor person = 1 vote for a rich person (ideally). In mining, the more mining power you have, the more "say" you have. One stays constant, the other scales. Don't you think that is an important distinction?

In a way it's a pretty naive view. The rich person will have more influence over other people that will give him effectively more than 1 vote.

OP's point is the big mining rig will have more influence than the numpty rig one boots up on their laptop.

Sure, each has one vote.

But it's not your one vote that makes any difference, It's how many votes you can influence. And that's all about privilege and money. Campaign funding. Lobbying.

So you're saying, cryptocurrency and fiat currency are the same, because you don't have a meaningful say in either one, unless you have a lot of money. Yes. True.

>where everyone gets a say in policy through republican institutions

You clearly have no idea how money is "created" or how the Federal Reserve works.

In the specific case of the united states, the money is controlled by the Federal Reserve which is a private bank.

Most private banks aren't established by an act of Congress and run by people appointed by the President and approved by the Senate.

No, but in order to get access to the Fed, the bank link systems and so on and so forth, they need to get government approval.

In order to be bailed out, which is a necessity, they even need contacts as high up as the president.

And even that is ignoring the long history of the government making specific laws specifically to benefit or destroy a single bank.

Nope, no government role here at all. This division simply results in privatizing the profits, nationalizing the losses in trade for having politicians name the owners.

it is if you want to be a reserve bank of course, which is why anyone wants to have a bank in the first place.

> the Federal Reserve which is a private bank

Not true. Literally by design actually. This is a common misconception about Central Banks and it's one the US system makes worse by being explicitly public but functioning extraordinarily similarly to a private company.

This particular structure was actually a compromise between various other possible implementations.

But seriously, it's not a private bank. Repeating that just makes you looking like you get your information from websites that put their titles in all-caps and have dodgy grammar.

Your assertion depends on what you mean by "government". There are groups of people who are in control. The ability to fork peacefully is not unique to Bitcoin--see the governments of the UK, Canada, and Australia. And given high enough stakes, there's no reason to believe that the interested parties in the Bitcoin blockchain would not resort to violence to protect their interests from forkers who would impact their profits.

Forking is totally possible for states. Different factions are constantly vying for power and many revolutions are quiet shifts that occur behind the scenes. This is very true in complex democratic republics but is even still true in monarchies and dictatorships. Monarchs have power by consent of a whole hierarchy of people and they are subject to overthrow or silent sidelining.

Gold is still the closest thing to a true non-fiat money but even gold has a value based on a consensus and any monetary form of gold will typically come as some kind of coinage for convenience and quick assessment. You can't eat gold.

Money is a social construct.

You could argue that crypto currency promises a form of fiat that is more transparent, auditable, accurate, and open in general but IMHO that remains to be seen in practice. The shitshow that is most exchanges and the majority of flimsy ICOs is not encouraging. All economic systems have corruption and dumb sheep like speculation but this is ridiculous.

Ethereum's upcoming Proof of Stake mechanism is supposed to put more power into the hands of investors compared to miners.

That doesn't really help. Early adopters get huge sums of ETH compared to those who join after the price rises. The distribution of coins is massively unequal.

In the short term, yes. Not in the long run as early investors sell their coins.

This is a big misunderstanding of bitcoin, and if you believe it I can understand why you might think bitcoin is not special.

The truth is that the everyday user gets full control over the law of their currency simply by running a full node. Your node will reject any transactions that do not comply with the rules of your node.

The soveirgnty of bitcoin comes from knowing that the devs can't force an update upon you or the network, if you do not consent you can always reject the change.

Without massive investments in ASIC's you have effectively zero influence. Until you have 51% of the hash power you can't make any changes as you simply get ignored unless you follow the exact same rules as the majority.

> Until you have 51% of the hash power you can't make any changes as you simply get ignored unless you follow the exact same rules as the majority

This is exactly their point. This applies to everyone and all organizational entities.

Well, "whoever is in power makes the rules" applies to everyone and all organizational entities, too. In this case, we're talking hash power, but same thing, isn't it?

A huge amount of hashpower was behind the desire for bitcoin cash, and that didn't work out.

Think some underestimate firstmover advantage and end-user inertia.

Actually, even with 51% of hashpower, you cannot force all the other nodes to forward or propagate your invalid blocks if you decide to start changing the rules.

This is a common misconception about bitcoin. Every single node on the network validates every single block, not just miners.

Thank you. I see this argument pop up on HN all the time and can't understand why it's so common. You'd think if a 51% attack were such a threat to Bitcoin it would have at least been attempted by now, after so many years.

Why do you think that?

Being able to fake blocks isn't significantly more useful than being able to double spend. I don't see why that would be the tipping point.

The reason you don't see these attacks is that they are difficult and very expensive and they would ruin the value of the coin so you can't even profit off it.

That is precisely my point

The point is not that you can set rules, it's that you can prevent other people from changing the rules without your consent, even if they are the majority.

You still have freedom to pick the rules to a small degree though - you choose which blockchain to use. Don't like bitcoin? Try bitcoin cash/ethereum/ethereum classic/litecoin/dogecoin/Monero/siacoin/decred/etc etc.

A common misconception is that miners can pick the rules, but they can't. They can only choose to enforce additional rules (which is powerful), they can't ever violate the original rules.

Wouldn't you be creating your own fork? A fork of one where peers would then reject every message from you?

No man is an island, unless he wants to completely devalue his bitcoin.

They wouldn’t reject messages from you so long as they are valid on their nodes.

Right and thus consensus exists. And that consensus consolidates to a single set of rules (and any major deviations result in forks).

A 51% plutocracy is still a form of state governance that qualifies as fiat money and effectively can destroy the value of your coins if you resist.

It is really no different than the government fining you for disobedience.

There are philosophical theoretical arguments against this, not pragmatic ones.

A 51% attack means a lot of bad things can happen to bitcoin. Its value would probably crash if an individual got 51% of the power just because it is no longer truly decentralized, even if they don't abuse that power.

Bitcoin was made with the idea that a 51% attack would be unlikely and unfeasible; as long as that holds, I'm not sure what value your comparison has. You might as well make a comparison to any other possible disaster. ("A solar flare is a form of state governance that will destroy the value of your coins...")

The top four pools have ~55% of the total hashing power. They could orchestrate a 51% attack with a conference call. As we've seen with the BTH/SegWit2X fiasco, Bitcoin is anything but democratic or decentralised. A cartel is every bit as dangerous as a monopoly.

And what exactly do you think a 51% attack can do? I'll tell you what: censor transactions and make double-spends.

Not exactly end of Bitcoin danger, is it?

If someone had unrestricted ability to double-spend, getting around any attempted countermeasures, they would be able to turn every exchange into a money printing machine. It's hard for me to see how it wouldn't be the end of Bitcoin.

> A 51% attack means a lot of bad things can happen to bitcoin. Its value would probably crash if an individual got 51% of the power just because it is no longer truly decentralized, even if they don't abuse that power.

That already has happened which is why people forked. You can live in denial of that fact if you wish but a minority "lost" the "vote" and forked Bitcoin.


The BTH/SegWit2X fiasco shows Bitcoin isn't "more" decentralized than an oligopoly, an oligarchy, or a plutocracy.

> Bitcoin was made with the idea that a 51% attack would be unlikely and unfeasible; as long as that holds, I'm not sure what value your comparison has. You might as well make a comparison to any other possible disaster. ("A solar flare is a form of state governance that will destroy the value of your coins...")

The fact pro-bitcoin people swear up and down that isn't the case doesn't change the fact that they are effectively the Bitcoin state and that 2-3 of them + a number of smaller people can effectively "vote" to pass "laws" that are enforced against your BTC regardless of your wishes.

Simply because they don't outright steal your BTC doesn't change the fact you have to comply to retain the value of your BTC.

What does bitcoin cash have to do with a 51% attack? Forks are a different type of thing than 51% attacks.

Why would someone destroy all the value of their money and all the money power to mine just to troll?

Sure a government might do that, but they could point a gun to every full node owners head and tell them to stop it just like China did. It would also be much cheaper.

Step 1: purchase, borrow, or steal enough hash power to reach 51% for a short while

Step 2: use this power to force enough transactions to make yourself rich enough to keep 51% power indefinitely

Step 3: profit

51% hash power lets you doublespend coins. It does not let you steal from wallets or change the block reward rules.

Which is sufficient to allow you to do what I suggested. Spend coin once on paying for everything, and again on yourself to keep all the money to spend again later.

So you become like a government, able to print more currency at will?

According to this definition, is there any possible form of widely-used money that isn’t fiat money?

> According to this definition, is there any possible form of widely-used money that isn’t fiat money?

There used to be 100+ years ago such as gold and silver coins where if you were able to remove them from Country A to Country B, then Country A could no longer enforce such financial penalties against you. This is what many of the cryptocoins _wanted_ to be.

It needs to be a hard currency that leaves you immune to monetary policy and fines unless you are physically within the jurisdiction of the country.

Is Bitcoin actually a medium of exchange? It seems to be functioning more as an investment to be hoarded rather than spent.

Right, the same people telling you it's going to $100K are the ones saying this is a digital currency that should be spent. Well, I sure ain't about to spend $100K to buy 2 MacBook Pros.

Even if you think Bitcoin is going to $highNumber, then using Bitcoin to make purchases isn't any more painful than using dollars: the dollars could have been spent on purchasing more bitcoin instead of the other purchase.

And that’s why the fed ensures we have a mildly inflationary currency. If it deflated spending would drop, cutting the velocity of money, and cutting out economic growth.

"If it deflated spending would drop"

That statements not a given. If it were so, people would not use credit cards.

That’s interesting, I’ve never thought about credit cards as a sort of deflationary virtual currency.

You're discounting the technology sector and nearly the entire 19th century.

Those two positions are obviously congruent.

In the scenario where you believe bitcoin will be worth $100,000 and you have $7,000 or 2BTC, you decide to buy a computer for $3,500. If the remainder of your value is in dollars, you will have $3,500 in value. If the remainder of your value is in bitcoin, you will have $100,000.

The depreciating asset you've invested in here is the macbook, not bitcoins.

I have a 1.4 bitcoin T-shirt. I don't regret it one bit.

> I have a 1.4 bitcoin T-shirt.

Is that you?


Those two groups may have overlap, but they’re not identical groups.

So, it's gold? I don't know if I've ever seen someone buy a Starbucks with a Kruggerand.

Gold is hoarded and traded much like bitcoin, from what I've seen.

The device you're using to read this comment couldn't function without gold. It's an incredibly useful element. Investment and speculation might have inflated the value of gold, but industrial demand sets a price floor.

Si is also incredibly useful but requires industrial processing to turn into something useful from an industrial standpoint.

Au is indeed useful, but not so much as nearly indicated by its current pricing. There's a _long_ history of human predilection for gold-as-a-magical-substance versus gold-as-an-industrially-useful-element.

Gold has rarely been used in retail transactions. Generally that's been limited to silver, copper, bronze, or even iron coins, or other materials.

Not exclusively, but for the large part.

If you look at historical English prices, prior to the 19th century, the penny was 1/240 a pound, and the farthing ("four-thing" -- one fourth a penny) was 1/960 a pound. Call it 1/1000th.

A labourer's wage might be 20 pound/yr. It's more useful to think of the farthing as roughly equivalent, at least in work-time, to a dollar, and 20 pound as $20,000.

A pound, then, was a lot of money. And even it was (in English currency) silver. Gold were guineas: 1 pound 10 shilling.

Sure, some people treat it as an investment that can be hoarded, but that doesn't change the fact that it can be exchanged. Your narrow definition of medium of exchange sort of excludes any deflationary currency that someone may hold on to as an investment.

It could even be expanded to include inflationary currency in a country where hyperinflation is occurring. People will hold on to USD or some other currency as an investment because it'll be worth significantly more tomorrow than whatever currency the supermarket down the street accepts.

By that logic any tradable thing can be a 'medium of exchange'. Sure, people will hold a stable currency when their own is sinking, but deliberately designing a currency for deflation is stupid.

I understand your point, but I'm not sure I agree that being deflationary or being primarily used as an investment precludes it from being used as a medium of exchange.

I do think there are some aspects of bitcoin that limit its use as a medium of exchange (transaction times, current lack of stability), but I don't think its the deflationary part.

Well in a sense it's quite freudian: you gotta feel the (unrealised value of the) bitcoin leaving you for it to be universally recognised as "having value"

It could even be expanded to include inflationary currency in a country where hyperinflation is occurring. People will hold on to USD or some other currency as an investment because it'll be worth significantly more tomorrow than whatever currency the supermarket down the street accepts.

This doesn't really feel the same. You might use USD to store value because you know that it's value isn't going to fluctuate like crazy from month to month or year to year. So if you can afford to feed yourself today, you can still feed yourself tomorrow. You're still spending your money.

No one I know with Bitcoin spends it, with the exception of a novelty purchase of beer. And why would you, in 4 years the value of bitcoin increased over 10 fold. You'd be stupid to ever spend it while this trend continues.

> You might use USD to store value because you know that it's value isn't going to fluctuate like crazy from month to month or year to year.

Noted, and I tend to agree with you on that point.

> You'd be stupid to ever spend it while this trend continues.

For sake of argument, assuming you know this trend will continue you'd be stupid to not put all of your money into it. At which point, you'll ultimately need to spend it to get things you need (whether you're spending it on purchasing other currencies, or spending on the actual goods). Unfortunately, we don't know the trend will continue or if it'll reverse or if it'll level off.

Except on drugs which is essentially the entire monetary velocity of bitcoin.

A medium of exchange is usually an asset that can be exchanged for any other asset. It's not that bitcoin can't be a medium of exchange, it just isn't one yet.

I wonder if part of this is due to dust. My understanding is that at these prices you don't really want to split a coin for a $.25. As a result it's poor for micro payments and daily macro payments alike.

Dogecoin was created explicitly to have a low value suitable for micropayments & tipping. It hasn't really worked out much better for Dogecoin...interest in it seems to have waned a long time ago.

My bet is that it hasn't caught on as a medium of exchange simply because that's not really a major pain point. Cryptocurrency's competition as payment isn't $USD; it's Visa, Mastercard, Discover, Stripe, Square, and other payment processors. People bitch about these companies, but they usually bitch about them from a concentration-of-power-and-fees standpoint (which Bitcoin doesn't actually solve, once you consider the costs of the commercial Bitcoin exchanges), not a convenience one. When it comes to convenience, whipping out a wallet-sized piece of plastic or your cell phone is a lot better than waiting 12 minutes for a transaction to settle on the blockchain.

Dogecoin is for fun. Much block-chain. Wow.

It died off because _some people_ tried to turn it into a real thing for micro transactions, etc.

I think dogecoin failed to go anywhere at least partly because it was a literal memecoin.

Certainly made it hard for me to take it seriously as a semi-layman at the time.

Interestingly that would seem to further the author's point a bit. You didn't think dogecoin was legitimate because it was named after a meme. So that made you less likely to trust the code/governance?

> […] it was named after a meme.

> So that made you less likely to trust the code/governance?

Well... yeah! What's your point? That projects deserve trust based on their branding? I'm not convinced until there's peer approval, especially not if it's piggybacking on something "trendy".

I do agree though it's a shame it got subverted from the ultra low value p2p tipping platform it was becoming. Feels like it's just litecoin left as credible alternative in that area.

And there are huge energy costs in performing a transaction... 197 KWh @ $0.10 per KWh = nearly $20 of electricity for 1 transaction.

It's not very useful as a medium of exchange right now since it requires 197 KWh of energy to confirm a single transaction!


Is it true that the number of Bitcoins in existence is limited?

I don't think the point eluded the author, at all. The article pretty clearly talks about financial innovation throughout history and then how it got coopted by states. The author seems pretty familiar with the history of finance and economics, actually.

A state doesn't really have control over the value of its currency. It may control how much of it exists in circulation. Likewise, the Bitcoin software tightly controls how much Bitcoin is in circulation. Both limits are done by fiat. Whether the institution doing the fiat is what you personally would recognize as a "state" seems to be a pretty arbitrary distinction. "States" are not the end-all be-all of institutions with power over individuals.

A state controls the money supply by granting itself a monopoly on money production (i.e. it outlaws the production of "counterfeit" money). Bitcoin uses a different strategy — while anyone is allowed to make bitcoins, the increasing production costs ensure there will only be a limited supply. At leasts that's my understanding of how bitcoin works. At any rate, none of this has anything to do with being fiat money. Fiat money means that the money is backed by "trust", i.e. people accept it as currency because they trust that others will also accept it.

"A state doesn't really have control over the value of its currency."

That's a wildly inaccurate statement. A fixed exchange rate, such as that imposed on the Chinese Yuan is a complete refutation of your claim.

Will it still be voluntary and consensual if the day comes where stores post signs: "Payment accepted in bitcoin only"?

In the US anyway, that would be illegal. Dollars must be accepted for all debts, public and private.

There's no debt if they refuse to sell you anything.

If the stores are not forced to use Bitcoin and are still allowed to accept other forms of payment but simply choose not to, then yeah, it's voluntary.

Go find someone who's willing to take whatever you're trying to use instead, why should other people have to take your form of payment against their will?

I think the point of the article is that most "fiat" money doesn't really match that definition.

Fundamentally, Bitcoin is software eating the Fed-Bank-Retail ecosystem. The Fed governance is replaced by code. The banking utility is replaced by miners.

I think the march of bitcoin is actually a better example of how AI is taking over the world. People in AI are fascinated by AGI - but the bitcoin ecosystem is actually a real world example of how AI will take over the world.

Specifically, the march of AI won't happen at 'edge' nodes, it won't be incremental, it won't happen by replacing humans with machines. The march of AI will start at the core, at a rethink of the fundamental infrastructure that powers an industry making it more amenable to machines and 'hostile' to most humans.

People underestimate the amount of resources required to articulate monetary policy by a central bank. Bitcoin can already do that much better than maybe 70% of the worlds central banks. India, China and US can think about banning/regulating bitcoin. But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

Bitcoin is here to stay. And it cant be stopped.

> But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

I doubt this would do any good for them.

* Their currency would be totally exposed to 3rd parties.

* They would loose the control over the rates, which are an important tool to attract investments, if are stable and controlled well.

* AFAIK some Chinese private companies control large part of the mining network. Basically the central bank would be in private, and foreign hands.

* The slow transactions would make it totally infeasable for use in everyday life, especially as people there have limited access to necessary technologies (stable network connections all round the countries, stable electric power everywhere), so daily transactions of the ordinary people would either fall back to barters, or use some fiat paper money, eg. USDs.

I totally don't get how could you reach tis conclusion, your whole post is a SV bubble wishful thinking with some trendy bullshit, eg. software eating the FED, fed is replaced by code. Bitcoin does better than centralbanks. If some currency looses 30% of its value a single day, that is not a sign of health, and this happended the very week with bitcoin. Actually Bitcoin does its job worse than an african dictatorship's currency, if its job is being a fiat currency, which is useful for the people in daily life.

I doubt its job is that, so it may do its job well, but for this task it is unsuitable.

Everything that you mentioned is most likely a shortcoming of the current version of Bitcoin. That being said, it is not a big leap of faith that each of these will be rectified in due course. If not with updates to Bitcoin, then with another coin.

My post wasnt just about Bitcoin specifically, but around the entire blockchain ecosystem.

You specifically talked about "already" and "bitcoin":

> But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

Also: The concern about infeasability in everyday life is network based and not a shortcoming of bitcoin. So it's not dependent on the coin you are using.

All other points seem to be inherent to public blockchains, so it is quite the leap of faith to believe they are fixed in any public blockchain cryptocurrency.

>"People underestimate the amount of resources required to articulate monetary policy by a central bank. Bitcoin can already do that much better than maybe 70% of the worlds central banks."

Bitcoin only has totally clear monetary policy because it's increase of the money supply is entirely predetermined: It is created at an ever decreasing rate approaching a limit.

The result of this certainty in monetary policy is a currency that is naturally deflationary (literally by definition). This makes Bitcoin perfect as digital gold but shit as a functional unit of currency. You don't want to spend an asset that will naturally appreciate in value, discouraging using it.

You could have a cryptocurrency that generally trends at the same inflation rate as regular currencies: 2-3% annual and use that to pay the miners (or just give everyone a wealth endowment through giving any current owners a 1% increase in their current wallets and use the other 1-3% for the miners) and you would have a currency that could stay price stable with out Fiat currencies instead of always increasing in price like BTC has (at least over a sufficient moving average to reduce the volatility from speculation).

That's like saying the decreasing price of hard disk space discourages people from purchasing it.

Knowing that there will be better hard drives in the future for less money has some effect on your willingness to purchase. Expectations of the future matter. The US Treasury is getting considerably less revenue right now from capital gains than usual because tons of financial entities are holding off on realizing returns from their investments now and are holding them until possible tax reform in the hopes of paying future taxes and thus getting greater returns.

In your example, HDD space is purely a good to be consumed though and not a currency (or an investment beyond an actual capital investment because it does work for data storage). Thus, if you need to store data, you will buy storage simply because you need it then. But you can't sell that storage in the future for a positive return, so the incentive I'm talking about doesn't really exist in the example you used.

You can make a positive return in terms of hard disk space. Refrain from swapping USD for hard disk space, and you can get more hard disk space in the future. This applies to all sorts of goods, like TV's, music players, etc. The value of USD is increasing against these goods, yet people still make the trade of USD for goods. I suppose if we increase the inflation of USD such that the price of hard disk space increases in USD terms, then people will be more inclined to swap USD for hard disk space sooner, and it will be a boon for the hard disk industry. But is that real economic growth? It smells more like malinvestment to me. One could even make the argument deflation is good for the environment, people are only inclined to consume that which is necessary, and the structure of the economy's physical capital will be realigned to support that pattern of consumption instead.

Production can't easily saved in grain silos, so money must be used to buy it, or it should be lent to someone that will use that production productively. If no one needs to buy hard drives ATM, then the hard drive company goes under and there is no better next generation.

Money is a means of allocating production. If it is just stored under a mattress, it isn't being useful and production is being wasted. We capture the negative effects of that waste with inflation.

Deflationn is basically a death spiral for an economy, as everyone consumes only essentials because everything will be cheaper tomorrow; lots of production is wasted because it can't be saved easily for tomorrow, people are laid off, companies go out of business, it sucks. Wars have even been started over silver and gold's deflationary tendencies (e.g. See the opium wars).

Don't confuse inflation with hyperinflation, the latter of which just destroys trust in the currency and makes it useless to save at all, causing runs on all production and starving investment. A bit of inflation is all that is needed to put money's use into a positive state without flipping in the other direction.

If you believe that we should have UBI (and it seems like many here do), deflation is the exact opposite of it -- it slowly concentrates wealth with those who already have it, and all they have to do is hold the currency.

Whereas inflation at least basically forces the wealthy to invest in real assets or else slowly transfer the value of the cash towards debtors.

Currency isn't wealth - wealth is real estate, stock, furniture, computers. Deflation makes it easier for wage earner savers to increase their tangible wealth. The economic data matches this - economy was a lot more equal on the gold standard until 1971, and have become a lot less equal once a policy of inflation is implemented. Are we going to act on theories that match the data or does not match the data? With deflation, UBI income will increase in value over time, the deflation occurring from technological change accruing to UBI receivers.

> Currency isn't wealth - wealth is real estate, stock, furniture, computers. Deflation makes it easier for wage earner savers to increase their tangible wealth.

Yes, we agree on that. However, I think we need to also acknowledge that 1) a large proportion of wage earners have very few, or negative net assets, so deflation actually hurts them and 2) even though deflation helps savers, the biggest savers in the economy are actually the rich. Deflation helps savers, but the people with 80%+ of nominal assets are the already-wealthy.

In fact, the most common form of household wealth is a house, where you own a real asset and owe a nominal debt.

Under inflation, your house value grows at inflation while your debt remains constant, so this even benefits the saver. Under deflation the opposite happens.

> Are we going to act on theories that match the data or does not match the data?

You need more data. The developed world has been on the gold standard since the late 19th century through to the 1970s. During that time the US has seen:

- the Robber Baron age and the Long Depression (where the rich got much richer)

- the roaring 20s, when wealth was more distributed

- the subsequent crash and the Great Depression, where the entire world was in misery (but inequality was very high)

- WW2 and the post-war era, which saw large decreases in wealth inequality

Seems a bit silly to say that 'the gold standard was responsible for lowering wealth inequality', given the huge swings back and forth in inequality while we were on the gold standard over 100+ years.

"Knowing that there will be better hard drives in the future for less money has some effect on your willingness to purchase."

It'd probably be surprising to know how many businesses have been killed by intentionally or inadvertently releasing information about an upcoming product.

At a certain point, it does

Do you think people were queuing to buy the iPhone 7 once Apple announced the September event? No, because there's a new model and old models would become cheaper

Let's say you need to store an extra 1Tb per year, for the next 5 years. Do you think it's better to buy 5 1TB HDs now or one every year? (disregarding backups/raid/etc, this is an economics question, not a storage question)

The answer is obvious

I don't get why people are obsessed with inflation. It is not the only thing that is required to stimulate an economy. On the other hand for majority of developing nations, it is a sink hole that eats their earnings alive. You can still use a deflationary currency just like an inflationary one. Just use satoshis to track bitcoin increments. I'm sure if Zimbabwe was using bitcoin, they wouldn't have ended up in the shit hole they were a few years back.

Think about it: for every dollar you earn, the government can print its own one dollar to basically halve your earnings. Why would anyone want such a thing. With bitcoin, you don't need to invest in stocks/real estate and other inflation resistant things to beat inflation. You can hold your earnings in it and you are already beating inflation.

Significant inflation is obviously a bad thing. Zimbabwe or Venezuela prime examples. But being deflationary where the currency increases in value obviously causes a disincentive for spending that currency. You are encouraged to buy and hold it because it will be worth more in the future relative to the cost of goods, services, and other fist currencies.

Even just minor deflation is disastrous for economies because if there is 3% deflation, you could get 100% of what was generally typical GDP growth for developed countries without spending any money to produce anything. This encourages everyone to be risk averse towards spending money on anything at all.

Thus, monetary policy over the past century has settled on a steady but small amount of inflation as the ideal policy for balancing economic growth and unemployment.

> You are encouraged to buy and hold it because it will be worth more in the future relative to the cost of goods, services, and other fist currencies.

A currency being inflationary shouldn't really affect spending because lots of different investments already exist, so you can make money holding them instead of the dollar. The dollar being inflationary (or shouldn't, for rational actors) incentivizes trading it for something else, but not necessarily increase spending in unnecessary, depreciating, products.

> lots of different investments already exist, so you can make money holding them instead of the dollar

That's true, but someone has to end up holding the nominal assets.

Like yes, a saver can trade all their fiat currency for real assets by buying a house or stocks, but then the person who sold them those stocks would get hit by inflation. At the end of the day, if the 'real assets' in the economy are worth say $10 trillion and there is $1 trillion of currency in circulation, then whoever is holding those dollars will pay for the inflation.

Btw, the most common nominally-denominated asset is debt. Savers who hold debt (Treasuries, mortgages, etc.) get hit the most by inflation.

Even just minor deflation is disastrous for economies because if there is 3% deflation, you could get 100% of what was generally typical GDP growth for developed countries without spending any money to produce anything. This encourages everyone to be risk averse towards spending money on anything at all.

What are some real world examples of this?

Japan's the classic one - they've been stuck in a deflationary trap since 1990:


The Great Depression in the U.S. as well.

There's a possible counterexample with the Long Depression in the U.S:


Here, prices fell slowly: 1-2%/year, caused by sharply rising productivity. The period was also called the Gilded Age, and it was a mixed bag economically. On one hand, the structure of American society dramatically changed through massive technological advance, consumer goods became abundant, and businesses who adopted those techniques became fabulously wealthy. OTOH, many small farmers went bankrupt and were forced to sell off their land to service debts they couldn't pay with money that was now more valuable than when they took out the debt. Ditto lower-class laborers, who were squeezed into tenements with dozens of families living together as their wages remained stagnant for a generation but their employers became fabulously wealthy and bought up much of the prime real estate.

The Long Depression is largely forgotten today (unless you're an economic history geek), but it was a prime impetus for the monetarist school of thought. The whole idea that the government needs to continually print money to catch up with rising productivity and availability of goods is largely based on the experience of the U.S. in the Long Depression, when they didn't print money.

Also, there's a good amount of evidence that our current period of history resembles the Long Depression a lot more than either the Great Depression or 1970s stagflation, and will play out in similar ways. I'd personally put us around the mid-1890s in terms of historical parallels.

The late Roman republic also fell into a deflationary spiral, as the currency was repeatedly debased by successive governments desperate to fund the military.

This triggered massive hoarding of currency, despite harsh legal measures that tried to outlaw it. Everyone had an incentive to hoard the old, higher silver coins while shunning the new debased coins being issued [1]. 'Bad money drives out good' [2].

Eventually, the majority of the Roman economy became demonetized, and people had to resort to barter again. Welcome to the feudal ages.

[1] http://money.visualcapitalist.com/currency-and-the-collapse-...

[2] https://en.wikipedia.org/wiki/Gresham%27s_law

* Note that there is a confusion of terminology here -- things look inflationary if you are counting the number of coins it takes to buy something, but highly deflationary if you measure the amount of silver to buy the same item, as silver was sucked out of the economy and then hoarded.

From a certain perspective, both factors actually came together to destroy the late Roman monetary system -- the real 'store of value', silver, was removed from the system and hoarded because it was deflationary. And hyper-inflation in the fiat currency simultaneously made the coins totally worthless and therefore unsuitable for doing transactions.

> People underestimate the amount of resources required to articulate monetary policy by a central bank. Bitcoin can already do that much better than maybe 70% of the worlds central banks. India, China and US can think about banning/regulating bitcoin. But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

Could you elaborate how you think bitcoin monetary policy is better than 70% of world's central banks? To me, one of the most important tasks of monetary policy is to have a stable value of a currency (not against other currencies but against stuff people actually buy). And with that measure, I have difficulties identifying one single central banks that is worse than bitcoin within the last few years. (Maybe Zimbabwe or Venezuela?) But 70%? No way.

(Note that bitcoin also fundamentally lacks a mechanism for price stability, not that anyone actually owning bitcoin would that want.)

And Africa ditching national currencies for bitcoin? How do you propose that an illiterate farmer in rural nambia is going to use bitcoin? Even if you figure that out, do you think that the african governments - crappy as they may be - are that stupid that they don't figure out that instead of paying the seignorage to bunch of bitcoin nerds who currently own the currency, they can make their own fork and pocket the seignorage themselves?

Bitcoin has no future as an usable, official currency anywhere. That should be obvious.

> But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

This may be technically true, but probably won't happen anyhow. There's a reason that those currencies are terrible, and that reason is that a person or people in power benefit from the seigniorage that is the cause of the currency inflation.

Nobody in Africa is seriously using bitcoin to do business.

None of the BTC startups, even the remittance ones, want to touch that market with a ten foot pole (Despite their slide decks shouting from the rooftops about banking the unbanked.)

Maybe it's because BTC doesn't actually solve any of their problems.

Bitcoin can easily be stopped by governments, at least in countries that are not failed states. All they have to do is declare it illegal, and enforce the law.

It would be trivial for them to shut down exchanges. Without that, it would hard, and expensive, to convert to fiat.

Legit businesses would not accept Bitcoin. The only uses would be black market, and I doubt they would continue using bitcoin on the darknet markets. Without the ability to easily convert to the currency of the country you live in, Bitcoin would have little to no value.

The black and grey markets represent nearly 1/3 of the world's economy. They cannot be shut down. The war on drugs is an excellent example of this.

Yes comrade we want to bring equality and low fees to poor nations which are oppresed by capitalistic banks! March of new era will bring better future for everyone. They want to stop our revolution, China with JP Morgan as they stand for old order. We have to get rid of those monopolistic pigs. /s

I hope those bitcoin guys won't get guns to actually execute people who are not buying.

> But there are countries in Africa who can already do better by simply leapfrogging to bitcoin and ditching their national currencies.

They already leapfrogged them a decade ago with m-pesa.

> making it more amenable to machines and 'hostile' to most humans.

Why AI takeover is always considered against humans? Why can't it co-exist with humans?

It's just that it's unlikely an AI will have the same goals as you or me. Their goals might be to make, say, paperclips: https://wiki.lesswrong.com/wiki/Paperclip_maximizer

I think it can, just like how we "co-exist" with wild cats. If they don't bother us too much we let them live, but humans always have priority.

I wonder if bitcoin with AI will give embed AI with survival function?

AI? Bitcoin has nothing even remotely to do with AI - on the contrary, most support for Bitcoin is based on the idea that a totally pre-determined algorithmic management of currencies would be beneficial to the economy. So, what AI are you talking about?

please don't focus only on technical details. digital currencies, btc in particular, are breaking the bank's monopoly of creating money. that's the real revolution. states and banks get into the topic of such technologies not because its better but because they see what may happen and they want to control the outcome.

there's high potential for people gaining freedom from the west's monetary system. but i'm very pessimistic about us getting this right and not loose "control" to state and corporate powers exactly like we did with the internet.

it's great that no government is doing the fiat. That by itself is reason enough.

Let me rephrase this for you: It's great that some Chinese private entrepreneurs (connected with the intelligence services or not) are doing the fiat. That by itself is reason enough.

Bitcoin is not fiat.

Fiat means "by decree" or "by authority". Fiat money is money that is decreed into existence by some authority, that is, the government. This is done through legal tender laws.

Bitcoin is not created by the enactment of some law by some authority. Fiat does not mean "by consensus", or "by mathematics". Saying code is decree, and therefor fiat, is sloppy thinking.

Bitcoin may have much in common with fiat, but that does not mean that it is fiat. It is, by definition, not fiat.

What gives Bitcoin value is not government decree, but its utility [1]. And that is somewhat paradoxical, because the more people hoard it the less utility it has. And the more its used to buy and sell goods, the more utility it has, and the more value it has.

[1] https://fee.org/articles/what-gave-bitcoin-its-value/

I agree in regards to not fiat. How about the apparent utility it has as a store of wealth? If I was ultra rich I would store maybe 1% of my wealth in Bitcoin as a way to diversify my portfolio. Similar to gold, except for more wildly unpredicatable future financial scenarios.

Oh, the pedantry. Clearly the point is that it behaves _just like_ fiat in the specific ways mentioned.

It's -- you know -- an element of literary style.

Had a chat with a high ranking public tax official last week who said that the age of secret offshore bank accounts is over - mass leaks resulting from bounties mean that any rogue employee with a USB of account information can get a 7 figure payout from major goverments. So where to now for high net worth people/families? I would absolutely be piling my wealth into anonymous cryptocurrencies - zcash, monero, and well tumbled bitcoin. People will always want to hide assets, and this is the most reliable way in an age of mass hacks and leaks. I'm really keen to hear any pushback on this, because I can't think of any.

All the information was always out there not hard to find. Actual safety does not come from hiding and encrypting what you are doing. Safety comes from having support by the right people. For instance if you are really rich and cheat the tax man there is no problem if the tax office and the news papers don't think about you. Nobody will look.

If you don't believe it just check out the cases that were brought to light. You will find that they are very obvious and not super secret. You will find that someone in a similar position but different company/government actually profits from this "discovery". And you will find that not all cases get punished, just this one case. (think 2008 here, where they literally jailed a single banker and that was it)

Hidden in plain sight, ignored by people who want or need you to succeed. That's how this game works.

No it's not. I can't believe the comments coming out the woodwork every time a thread reaches the front page trying to hype and build a case for bitcoin. It's unbelievable. The government and IRS have no problem going after people trying to hide large sums of money and there are far better ways than putting your money in something that's a wildly fluctuating gamble at this point.

They can renounce their citizenship to the United States and then use any one of a number of different countries to do their banking. Citizens of other countries aren't subjected to the same laws and banks aren't pressured to report on them due to US influence.

An example would be Lebanon. Everyone except US citizens gets pretty good banking privacy protections. Due to US pressure, Lebanon carved out an exception to those protections, just for US citizens. There aren't exceptions for any other countries, as far as I know.

As they are high net worth families, getting citizenship in a new country won't be difficult.

Can you spend most of your time in USA if you are not a citizen? Who wants to live in lebanon?

Visas are usually easy to get and there are counties other than the US and aren't Lebanon. Also, Lebanon isn't really all that terrible and you don't need to live there. You can be a citizen of Zimbabwe, if you want. The point is to not have the US government forcing disclosure, per the OP's question.

Roger Ver, who ironically for this thread is a crypto currency investor, renounced his US citizenship to avoid paying taxes and was repeatedly denied entry into the US afterwards. He will most likely never be able to visit his family in the US again.

This doesn't appear to be true.

> In 2015, he was denied a visa to reenter the United States by the U.S. Embassy in Barbados, which claimed that he had not sufficiently proven ties outside of the United States that would motivate him to leave at the end of his visit, causing fears he might become an illegal immigrant.[8][7][9] Later in the same year his visa was approved by the U.S. Embassy in Tokyo, and he visited the United States in June 2016 to speak at a conference in Denver, Colorado.[10][6]

One good anecdote deserves another. One of my friends from my military days was jaded and renounced his citizenship. He was here to visit last winter. He spent about a month with us.

If you're rich enough, you can fly your family and friends out to any tropical paradise whenever you want. No need for you to visit the US unless you have a strong emotional attachment to some specific location.

if you are rich enough you can also just pay taxes and keep a passport that allows visafree travel mostly anywhere and not have to force people to fly to a different country to see you.

Its a fun thought experiment for sure but ultimately if you're at the level of wealth that running from the taxman gets you huge gains, either you have other problems (like being some sort of druglord) or you have enough money to also just pay taxes

Sure, if I had to choose between maintaining a complicated tax avoidance scheme for the rest of my life and just paying taxes, I would probably just pay my taxes and sleep easy.

But it seems that a lot of people disagree. Either you and I are massively underestimating the benefits of tax avoidance, or these people have some sort of knee-jerk reaction to the very concept of taxation that makes them try to avoid taxes even if it involves a lot of hassle. The latter would not be surprising for a diehard libertarian.

If you have enough money to pay a tax-hiding-specialist, then it's no longer a hassle, it's just another person you pay to take care of your stuff - perhaps analogous to a nanny or butler.

You are talking as if every country will accept you with open arms to become their citizen.

If you have that much money, pretty much every country in the world will take you. In many countries, they openly state that you can buy citizenship or resident status. The US will grant you LTR just for investing as little as $500,000. If you don't want to invest it into a business, you can put $1,000,000 into an American bank.

Other countries are much the same, only usually a bit less money. Canada, for example, will fast track you to LTR, and a path not naturalization, for just depositing $30,000 CAN.

Yeah, if you've got money, like the OP said, then you're going to be able to live pretty much anywhere you want. They use more polite legal language, but you can buy citizenship pretty easily. It's not even all that expensive, depending on where you want to live.

The problem is getting the money out. Two issues : fundamentally you suddenly have a large amount of unexplained wealth, if you imagine that state authorities will shrug, smile and nod good luck to you think again. It is possible to use the money as a supplement to a middle class lifestyle and to find ways to get it laundered, but the first tactic is disappointing for people who wanted hot and cold running champaign on their yacht, and the second is very expensive and risky. The second big issue is that no amount of tumbling is really going to launder bitcoin, yes, you mixed it up with other people's tokens, but $4m came into the tumbler and $3m left in your direction, no court will fall for this... Just as if you put $4m in a bank account and then walked away with $3m from a different account at the same bank, the money followed you.

I remember reading somewhere that Bitcoin isn't really anonymous. I think it was fundamental to how it works to have all transactions public and on the network.

Also, it seems like a bad idea to stash much of your wealth in a system is so vulnerable to theft. All it takes is for someone to have a momentary lapse in security or put a decimal in the wrong place or some other human error and then all that wealth is gone forever.

Split your holdings into 20 portions. Invest in a range of high quality currencies and for each holding have several portions each secured with a different method. Eg. have some on a hardware wallet, some with multisig paper wallets, some buried somewhere, some with family. Generally you won't lose any. If you do lose any you are pretty well hedged.

Pretty well hedged? Is that supposed to be easy for the average person? This just one of the many reasons Bitcoin isn't taken seriously for widespread adoption.

I think in the future instead of having a accountant/lawyer assisting with private/offshore banking, you will have a crypto security consultant showing you the best way to secure your own funds.

I think you're drinking a little too much from the kool-aid faucet. You're still going to need an accountant and lawyer, because you do live in the real, physical world.

>> Had a chat with a high ranking public tax official last week who said that the age of secret offshore bank accounts is over

....and what prompted the conversation : ) ?

The problem is that crypto can be good for a % of your illegal money, since it's relatively unproven. Any exchange that doesn't share the info will be taken down ala BTC-E (my bet is that IRS /FBI has their client list and transaction history already) so it's very very hard to spend /cash out.

If it gets our hand, of course then govts we'll declare war on cryptocurrencies

Pushback being a massive hack, hardfork, or massive devaluation? It is much easier to hide assets in plain sight imo.

This is ridiculous. If any of these crypto currencies became a significant way to hide wealth from the government, all the government has to do is make the crypto currency illegal to use or hold. If the US did this, it could easily pop the speculative bubble in crypto coins, and your wealth would vanish.

Good luck making it illegal to remember a 20-word string.

US was able to force FATCA on other countries, creating a similar law crypto will kill all crypto<->fiat exchanges that don't follow anti-money laundering laws.

I think you are spot on. Cryptocurrencies that fully obfuscate amounts sent, sources, and destinations, are perfectly ideal to hide assets. I think most people, even the tech crowd on HN, are unaware of their advanced capabilities.

If some of the most sophisticated operators were caught (vis-a-vis DPR (Silkroad)), why would "regular" families of wealth take a chance with crypto? I would humbly submit that regular tax evasion via LLC's, trusts and other holdings are much easier.

ICOs are the hyper speculative .com penny stocks of this particular economic cycle/bubble. A few may rise from the ashes of an eventual burst, and the general idea may be have some validity to it, but most cryptocurrencies are a sham and are going nowhere.

That's true for startups too (admittedly the ratio is probably less stark)

The ratio is probably identical from the time we've spent with startups. Comes down to your measure of success.

Bitcoin and other cryptocurrencies seem to be embraced by libertarians who are very idealistic and have quite a shallow understanding of economics, software, and the world at large. But I repeat myself.

I think the distinct holders can be classified as such: 1) Libertarian idealists who don't recognize they've already lost control. 2) Money launderers and their developing world mining networks. 3) Speculators (including VC backed firms) 4) Hype followers 5) The few, poor, misguided fools who think it's money.

«The few, poor, misguided fools who think it's money.»

I find the opposite: people who don't "get" Bitcoin tend to not know what makes money actually money, and don't know how the current monetary system works (eg. still believe dollars are backed by gold).

Unless Bitcoin has a fundamental evolution, it cannot be a replacement for fiat currency.

I'm super excited about the crypto currency space but I firmly believe we're in the "Diamond Rio" phase of a new technology and not yet to the "iPhone" and "Android" phases.

Bitcoin does not need to, will probably not, and was never intended to completely replace fiat currency. As a cryptocurrency aficionado I think it can achieve great success and high adoption while coexisting with fiat currency.

I don't need to pay my cup of coffee in bitcoins, but Bitcoin is very useful for plenty of other use cases.

Like buying drugs, money laundering, and hoarding. So far only one of those is legal.

Bitcoin has a lot of legit use cases: https://news.ycombinator.com/item?id=15228983

I find the claim of being able to cheaply and quickly transfer large amounts of money to be comical. The argument breaks down to, traditional transfer methods take too long, so let’s add two layers of traditional transfer methods on top of a bitcoin transfer. Then we just ignore the bid/ask spread and the transfer time on either side.

You are not thinking outside of the box: the advantages of Bitcoin multiply when you stay in bitcoins without converting to/from fiat currency.

For example my brother in France owns some bitcoins. One day he sent me, who live in the US, some bitcoins. I was able to spend them instantly (~10 minutes) on NewEgg to buy computer hardware. None of us had to convert to/from fiat. The fees were small and the transfer was incredibly fast compared to a regular bank wire.

Until you live in a bitcoim currency zone then you are just investing in a foreign currency.

You still need actual money to pay taxes and that's all a state needs to ensure it can provision the public purpose.

I think you're risking an ad hominem argument.

I'm sure that has enough truth in it. But you can characterize bankers in a similarly negative way -- particularly in light of recent economic engineering. But we all buy in to the concept of money (excuse the pun).

I've found the exact opposite to be true of a majority of cryptocurrency advocates, which makes is all that more disturbing. It's just impossible to say what the real value and future of cryptocurrencies really is.

> embraced by libertarians who are very idealistic and have quite a shallow understanding of economics, software, and the world at large

Sure, but they tend to know a lot about currency.

Anyone who thinks gold is money doesn't know very much about currency

Anything that is tradable in lieu of production is a currency. There are plenty of things far more obtuse than gold that can be and are used as currencies. Prisoners have been found to use cigarettes as currency. Hell, tide detergent can be used as a currency[0].

As something that is nearly universally traded for local fiat, gold is far more of a currency than most countries’ currencies. Only a handful of countries have currencies that are more universally accepted.

[0] http://nymag.com/news/features/tide-detergent-drugs-2013-1/

"Bankers talk about “governance”, ways to ensure private banks and central bankers make sound decisions—so they create just enough money make commerce easier, but not so much that the system collapses through inflation or panics."

Many people don't know that central bankers literally, not figuratively, mean CREATE money out of nothing.

Someone has always been able to "create money out of nothing." At some point there was no money; some time later there was. Someone or some group of people had to create the first money. People have actually "initialized" money many times throughout history e.g. when starting a country.

As long as you can separate "money" from its representation, there is nothing particularly problematic about some people being able to create money, at least some of the time. In fact it is necessary to provide money with liquidity as the economy grows and money is needed for more and more things (liquidity problems have triggered or worsened economic crises several times in history, especially when countries were trying to base their money on weights of metals).

Actually, only since August 15, 1971 here in the USA. Not "always."

Sounds like you are referring to the gold standard. A few things:

1. The dollar itself was created two centuries before the US left the gold standard. "Created" being the operative word. Created by Congress because America needed its own national currency.

2. Anyone who dug some gold up in their backyard was creating money when we were on the gold standard.

3. In 1862 paper money became legal tender in the USA without any guaranteed convertibility to any metal; that remained the situation until 1879. I.e. the government simply created money.

4. On January 31, 1934, the US dollar was devalued from $20.67 per gold ounce to $34. In other words money was created by an act of Congress.

Or to sum all that up for you: at a minimum Congress has always had the power to create money. All the metallic standards ever conceived of have been arbitrarily decided and governments have always had the ability to change the standard at will to create more money.

Actually, since 1777. For as long as the government is able to print paper currency instead of using metal coinage, it is able to make up as much money as it wants. Since not everyone is going to demand conversion to bullion, it generally doesn't matter--this is the principle behind fractional-reserve banking as well. If the government is caught out on printing too much money, then either the paper currency is accepted at less than face value (as happened to the original Continental Currency), or the government decides to suspend conversion (as most recently happened in 1971, but also in 1933).


Before 1971 dollars were backed by Gold, now they are backed by US Tbills (and some real-estate since 2008).

It's not that different.

Gold and US TBills are both valuable assets.

No, he is right.

What the OP meant by creating money out of nothing was fiat currency, which we do have now.

If you decide to use a commodity also as money, that's fundamentally different, and econ textbooks can confirm this for you.

T-Bills are backed by fiat currency, not by a commodity.

The Fed, and also the banks through fractional reserve banking, genuinely do create "money out of nothing."

Check out A Monetary History of the US by Milton Friedman and Anna Schwarz. Here you will find a Nobel Prize winning econonist who wanted to dramatically reign in, or even end, the Fed and get rid of fractional reserve banking.

"T-Bills are backed by fiat currency, not by a commodity."



TBills just bonds. They are 'backed' by the US Governments credibility to pay back the loan.

USD is generally backed by an asset - fractional reserving not withstanding.

Think about it again. You said T-Bills back currency today like gold used to, but that's not true. T-Bills are just notes to pay back more dollars. So it is dollars backed by dollars if you really are honest about your statement that USD is backed by an asset.

Everybody creates money out of nothing all the time. That's what business credit is for example. We just swap promises around.

Not to mention that the value of a currency, like everything else, is driven by supply and demand; so in the face of fluctuating demand, adjusting the supply is necessary to ensure the currency measures a consistent amount of wealth, and doesn't inflate/crash.

"mean CREATE money out of nothing."

No, this is not true.

Central banks do 'create' money, but they trade it on the market for real assets.

The Fed creates dollars and exchanges them for an equal amount of US Tbills (bought at market rates). $1 created = $1 in Tbills on their balance sheet.

They're not just creating money and keeping it, or giving it away.

The practice of 'fractional lending' by retail/commercial banks amplifies this, but as far as central banks go - every dollar they 'create' is essentially backed by an asset that they keep on the books for that dollar.

The idea is to manage how much currency is in circulation at any given time, so that inflation (and employment) hover at certain target.

If politicians were 'printing money' to pay national debts, or buy stuff or whatever - that would be straight forward dilution.

What the Fed does is not dilution, and it's not a bad thing, it's a good thing.

Same for ECB.

There is as much money in circulation as is required to clear the promises between people that are worth doing.

At the summit of the tree the assets are just 'other assets'. An accounting fiction.

The state can purchase whatever is for sale in the token it controls. And it can make sure there are things available for sale by imposing a liability on you in that token you cannot avoid.

The value then depends upon how much stuff the state extracts for the public purpose in return for its token. And the belief in the coercive power that gives that process weight.

"Distilled to its roots, the Fed has been manufacturing “savings” from thin air for the better part of a decade. When the financial crisis hit in 2008, American savings were depleted, so the Fed had to step in to produce savings (to finance huge government deficits). Now the Fed is attempting to remove that “savings” at a time when:

1) The private sector is experiencing falling savings. 2) The government is likely on the precipice of expanding its dis-saving in the form of greater deficits.


Not to state the obvious, but all else equal, if the Fed started shedding assets at $30 billion a month (or $360 billion a year), it would exhaust the entire stock of private savings. This doesn’t allow for larger government deficits. Given the current savings level, it is mathematically impossible for the Fed to shed assets at $50 billion/month. By 2019, as we are farther out from peak net savings rates set in 2015, it is likely the stock of private savings is smaller still, and hence the ability for the Fed to shed assets at a rate of $50 billion/month is utterly impossible. Net savings have fallen in the last 2 years from a peak of just over $700 billion to the current $355 billion. Will savings halve again in the next two years? If so, there is no mathematical way in the world the Fed can shed assets at the rate it outlined yesterday."

Source: http://blog.knowledgeleaderscapital.com/?p=13520

I tend to side with the uneducated who think the FED prints money out of thin air because it is closer to the truth of the matter of where real economic value exists moreso than the anachronistic mechanics of FED policy three card monte. When all is said and done, the FED took on toxic assets it will not be able to unload into a weak economy. The only hope it has is to sell the assets at face value in exchange for inflated dollars or hope the economy booms beyond everyone's expectations in the next two years. Sure hope the latter happens because otherwise the FED has done nothing but defer the pain of 2007 into the catastrophe of 2020.

Why can't the fed just hold onto said toxic assets indefinitely?

In order to "hold onto the assets" the FED actually has to buy US Treasuries when its current treasury holdings mature. The way the FED sells assets is to simply allow the treasuries to mature without buying any to replace it. The implication is that by choosing to buy or not buy treasuries, the FED can help control the US treasury interest rates which either help boost or slow down the economy as needed. The issue with holding and never selling is perpetually low interest rates which encourages people to borrow more since it is cheaper to do so (in theory stimulating growth, but in reality inflating asset prices when it goes on too long). If the FED doesn't unload its treasury holdings, interest rates stay low and capital will continue to take bigger risks to find higher yield, plus an unsustainable asset price inflation as it remains cheap to borrow money to buy assets like houses which then go up in value which creates even more demand through more cheap credit.

I'm already over simplifying, but here is a less abstract illustration: Imagine you lose your job and you need some money to get back on your feet. You borrow against a line of credit to cover living expenses. You find another job but it doesn't pay enough to cover your standard of living, so you keep the line of credit open and just make the minimum payments. You are the US economy and the line of credit is the FED right now. If the line of credit is not paid off, if you lose your job again, there will be nothing to borrow against or even make the minimum payments. The smart thing to do is pay off the credit card balance so you can use it again if you're in trouble. The problem is you can't do that unless you cut back on spending... and this is why the FED always points out that the control of the situation is not with the FED but with congress, they need to cut spending... <insert laugh track>

And I didn't even address your exact point. This is just the "non-toxic treasuries". The toxic stuff is non performing home loans. Imagine trying to sell those back to someone! Are you willing to buy them?

More info here: https://www.newyorkfed.org/markets/mbs_faq.html

Look, this is what the Fed is:

A private bank. It prints a dollar and either: (1)buys a T-Bill with it through the FOMC, or (2) lends it out through the discount window (only to big banks, not to Americans directlt), or since 2008, buys "toxic assets" with it.

How many dollars are printed is decided by unelected technocrats with no public transparency, oversight or accountability.

What the Fed also does is insure the banks because they are for some ungodly reason allowed to lend out over 10x more money than they have (to increase the money supply, econ textbooks say).

There are a lot of people who have said something between 'the Fed is a welfare system for the rich that steals from the poor' to 'it should be ended,' including Bernie Sanders, Milton Friedman, Aaron Schwartz.

In fact during the Civil War Lincoln actually ignored the banks who were all betting against him. He used the a constitutional right to print money through congress and it worked.

In academia, the groupthink around the Fed is strong. Think stronger than Challenger Disaster groupthink. And they're almost all in favor of it.

«The Fed creates dollars»

Exactly what the parent said.

The fact it is used to buy TBills is irrelevant: the Fed creates money out of thin air. Period.

I think the reason the system has evolved this way is because politically it is hard for the treasury to "print" money, even though they have the legal right to.

Having the Fed inject money into the system is a dodge, but effectively the same thing. It gets the treasury off the hook, because they can say they are "borrowing" rather than "printing" money.

It's unclear to me why this bothers people so much?

Replace TBills with gold - is it still being created out of thin air?

The point is it’s backed by an asset

Did the fed dig out the gold nugget? If not, there is now more dollars chasing the same amount of goods.

Yes it's still backed but less than before, i.e., devalued.

"Yes it's still backed but less than before, i.e., devalued."


1 Trillion in Assets = 1 Trillion in Currency.

1 Trillion + 1 dollar in Assets = 1 Trillion + 1 Dollar in currency.

No dilution by the Fed.

(Fractional lending notwithstanding - that's another can of worms)

You do realize that you are backing a dollar with a dollar?

But you cannot eat a dollar or play games on a dollar or drive with it. In and of itself a dollar is just a piece of paper and has an intrinsic value of say 1ct.

So adding a paper note to the economy increases the backing by 1ct and the currency by 1$. Adding an iPhone increases the assets by say 100$ (just made that up by taking 500$ cost - 400$ used materials) and leaves the currency as it is.

Hmm, now that I think of it: Are you maybe talking about accounting?

"The fact it is used to buy TBills is irrelevant:"

Heyzeus its extremely relevant.

HNers are having conspiracy issues with this.

* Obviously if there is going to be more money in circulation, it needs be 'created' somehow *

But that it is traded for a specific asset, which is kept on a balance sheet - and the 'reverse' can be done to pull the currency out of circulation - is * hugely relevant *.

So can I. I just give you a piece of paper that says I owe you $1000, which you can use to buy things. $1000 was created out of nothing.

I don't know about nothing.. I think paper and ink were used.

Fiat has a feudal age connotation to it. The USD is not fiat as you are able to do FX trading easily and more importantly, it's backed by the goods and services available in the United States or denominated in USD (eg. oil).

So it's value is very much perception based. Being the world's premier currency it's pretty damn safe, but if there was a widespread loss of confidence in the U.S. for whatever reason, the wealth of the U.S. relative to other countries could crater as a result.

This is why a couple years ago when the Republicans were messing with not extending the debt ceiling was playing with fire. In my opinion it was the dumbest thing I've ever seen in modern politics, and think of the competition for that statement. I imagine that the root cause of that foolishness is that some of the Republican politicians think of a country's debt like it's a household debt, when they are nothing alike.

How does Bitcoin work offline? Let's say the world goes to hell (assume internet has been taken offline) and we need to trade using a form of trusted currency.

Just curious...

>How does Bitcoin work offline?

Depends on the stage of evolution of Bitcoin you're in.

Early Stage: two parties can still trade transactions offline but there's a risk of being double spent against (not completely trustless but not fully trusted).

Second early stage option is: A solution that attempts to prove that private keys to the bitcoin hasn't even been accessed before: https://opendime.com/

Late Stage: Assume Lightning Network connectivity. Since the payment channels in the LN prevent you from double spending coins (attempting to assign UTXO to a different party than your counter party), all you really need to do is issue a channel update and issue a preimage to a hash time locked contract HTLC

How much physical cash would you have access to if banking/financial networks were no longer accessible?

Shit, my bank is down a couple of hours each week for routine maintenance during which I can't even check my balance.

About as much as your IRA, money in your checking account, etc.

AKA, orders of magnitude less than a can of beans.

How does Dollar work offline? How much do you have in your pants? Because if the world goes offline, Banks would not have all the "money" necessary to give it back to people.

No different from the situation 500 years ago where a fire could destroy important records and leave countries in chaos. All banks need to do is keep track of how much money is in everyone's accounts and allow people to transfer money somehow. They do not need to be able to "give it back to people." Fiat money could exist on pen-and-paper ledgers too; in fact that was exactly what the earliest known money was (well, stylus-and-clay as neither pens nor paper had been invented yet).

If for some reason all our computers simultaneously failed without any warning, it would obviously be chaos, but at the end of the day the banks would be in a much better position to recover than anything like Bitcoin. Banks only use computer networks because they are more efficient than the alternatives; Bitcoin requires everyone to be online and does not have any alternatives. The worst thing that would happen if all computers failed simultaneously is that the banks would lose track of everyone's accounts -- a general amnesty for debtors and a big loss for people without debts -- and in the aftermath the banks would just start from scratch using older technologies.

I'm not sure banks would have an easier time recovering. Bitcoin's entire blockchain history, and therefore the balance of every wallet is replicated on thousands of hard disks in every country of the world. It's the ultimate backup strategy. We could make transactions by hand, based on this information, if we needed to.

I don't know but we've had centuries of dollars before online existed.

That is to say; not well. But considerably better than Bitcoin.

It doesn't work at all without the peer network. However, you might be able to construct an "IOU" of sorts by creating a signed transaction offline, to be fed to the network later. (I'm not 100% sure whether anti-replay features make this impractical.)

Offline signing is common, so theoretically you could print the transactions and private-key to the account/utxo on paper and use them as physical promissory/bearer notes.

Unfortunately though, it's the network that verifies the absence of double spends, so there's no guarantee of uniqueness.

With the no internet, and limited interbank settlement, I would still bet on the value of crypto over the fiat inflation that would be used to facilitate credit-worthiness.

Crypto would only retain its value in such a situation if a significant market system, in real goods, had been developed around it. Meaning you could exchange your crypto for the things you need. (Meaning the seller would have confidence they could do the same.)

It seems like this could work, hypothetically, but given the need we have for the currency of our country, it's hard for me to imagine that crypto would hold its value in the face of some kind of massive computer failure.

Ah, I hadn't thought of that. You still couldn't double-spend on the network, but you could double-spend the offline IOUs :)

> However, you might be able to construct an "IOU" of sorts by creating a signed transaction offline, to be fed to the network later.

And if you grant the holder of that IOU the sole right to print and distribute notes representing subdivisions of that debt, you’ll find yourself back at cash!

Each such IOU would be tied to a single specific bitcoin. That's not very much like cash, unless your definition is loose enough to call every stock, bond, and collectible in the world cash.

Mostly great article. There’s probably a lot of economic history that applies to cryptocurrency.

The fiat part of the title is just FUD. With the same argument, gold bullion would be fiat because a majority of humans could decide they don’t like its shine. Silly Economist.

>it has always been tempting for private finance to create too much money. There is no evidence that money born on a distributed ledger will be clean of this sin.

That's not true for Bitcoin, disregarding the various other coins. The supply is effectively capped and it is economically much more similar to gold where in the long term the price roughly equals the mining cost to fiat money where that doesn't apply.

For use as a normal currency bitcoin is probably creating too little money. For normal currency you want the value to be roughly constant not to double quite often.

Nowhere in the article does it really support the title. I guess they're referring mainly to the Ethereum fork?

Even if you accept the proposition, it's still an improvement in that if you don't like the governance (feels too "fiat" for you, or whatever), you can instantly convert to any number of other cryptocurrencies, including many that define themselves essentially in opposition to the reasoning behind the Ethereum fork.

The author kind of addresses this:

You could argue that markets are already deciding which new currencies provide sound money. And in doing so you would join the banking school of 19th-century England, or the people who loosened financial regulation in the late 1990s in America.

I don't know about 19th century English banking, but I don't see how anything in the late 90s or what followed constitutes "the market deciding what provides sound money". The Asian currency crisis maybe? But that was caused by bad "fiat" policies, especially pegs, and lack of transparency (SK banks holding assets rendered bad by the crisis in other countries, for example, and speculators exploiting this yet-to-be-widespread knowledge).

> you can instantly convert to any number of other cryptocurrencies

Assuming someone has built an "instant" method of exchange, and that it is always available, then I guess this is true.

If you mean you don't count existing exchanges, which is fair, there are decentralized exchanges coming very soon (0xproject.com among others) as well as atomic swaps: https://twitter.com/SatoshiLite/status/910534107058233344

I mean, even if good exchanges exist they can never really guarantee instantaneous transfer from one to another because there's really no way to guarantee demand for a cryptocurrency. Hundreds of them have cropped up that you probably couldn't pay someone to take now, and a rush on one of the big ones isn't even inconceivable.

The failure of, say, the Bolivar does not disprove the value of some other currency.

But yeah, I guess if you're the last guy trying to get out of e-Bolivars you're pretty screwed.

Interesting, thanks for the links. I did indeed mean that I don't count existing exchanges, but will need to investigate the decentralized concept.

Can you actually spend Bitcoin in physical stores outside of the Bay Area? Bitcoin just seems like an investment vehicle/security rather than a currency. How many people actually use Bitcoin for buying toilet paper?

I can speak for Seattle/WA state-- it is very common to find BTC ATM's in recreational weed shops. The main driver of this seems to be that the stores have a near impossible chance of being banked and deal in cash only.

The crypto ATM's allow you to purchase with a CC and in turn pay the store for product, all while avoiding cash. To the store this is a much safer alternative.

For the crypto anarchists watching the big banks/fed opening up about their feelings and fears about crypto, it seems like they are pushing a near billion dollar industry to find ways to accept payment outside of the beloved USD.

There is plenty of Bitcoin debit cards, which will sell Bitcoin proportionally to the amount of USD/EUR/whatever you purchased for. One of them being TenX.com.

This allows you to spend at any store which accepts cards in general.

That said, there are stores which accepts plain Bitcoin. As one anecdata, the electronics chain webhallen.com in Sweden accepts pure Bitcoin-transactions.

Do you remember the multi-million dollar pizza? Today, nobody wants to be the thousand dollar toilet paper guy. I believe most people buy it as an investment, with no intention to every make an actual purchase with it. What gives it value then? What will happen with the price when there are no new people who wants to buy bitcoin?

Bitflyer (Japan) has partnerships with bic camera (electronics store like best buy) to offer Bitcoin payments. Though I believe you cannot use it for over $1000 purchases

Same number of people watching netflix in 90's over the internet :)

Incidentally I just wrote up some thoughts today on what Bitcoin is: https://grisha.org/blog/2017/09/22/bitcoin-value/

In some way it is fiat, Satoshi's fiat, but that's not the same as USD. The most puzzling thing is how things like Bitcoin get priced, since it's just a number, but I haven't finished my research on it yet.

In my opinion, you got it exactly right, simply by sticking to "it is a ledger." The value (not price) of BTC is wholly in the authenticity of who has what, and that this is backed by distributed consensus rather than states. BTC demonstrates that the truth about "who has what" is more important than what the "what" actually is. I think the "what" is simply currency, or the debt-based value you wrote about. People buy into it by converting other valued currency, or by doing work, same as ever.

As to the USD price, I am less sure. My weak working hypothesis is that it is driven by adoption + projected future adoption. That is, how much people value it means how much they value being in on this particular ledger.

Personally I would argue that the price of Bitcoin is driven by the same supply-demand relationship as anything else. Supply is obvious. I personally think the demand for Bitcoin is driven by its use to make payments in fiat currencies; most of the people who "accept Bitcoin" do so through a service that immediately converts it to a fiat currency, and more people are paying with Bitcoin than are participating in mining (i.e. they just buy the Bitcoin). Even on the black market this is how people are using Bitcoin: drug dealers still need to pay their rent, and their landlords almost certainly do not accept Bitcoin; drug users need to have the money to buy their drugs and whoever is paying them is almost certainly not doing so with Bitcoin.

(Why are those things almost certain? Consider the scale at which Bitcoin operates; then take a look at ACH, Swift, Visa, Mastercard, etc. We are talking about orders of magnitude in difference. For all its gains over the past few years Bitcoin remains a tiny niche.)

In other words, don't view Bitcoin as money; view it as a system for transferring money and converting between different countries' money.

This isnt directly related to the article, but I have two questions about ICO coins I was hoping someone here could answer. I read that recently a group raised millions of dollars in less than a minute to fund the creation of a new web browser.

1. How are coins valued when the underlying company is building a product it will never be able to, or never intends to monetize (eg if Wikipedia had an ICO).

2. If another company acquires this browser company, what happens to the coins?

The coins themselves are valued based on what people are willing to pay for them. In contrast, when a story claims "a company raised millions of dollars" it is typically talking about the currency Ether that was PAID to the company in exchange for the tokens. That is also worth what people are willing to pay for it, but because Ether has been around longer it has more of an established value.

If the company is acquired, a number of things could happen. It's important to note that for the most part, the company doesn't control the coins. They simply publish a contract that provides for the tokens to function, but normally the administrative capacities of such a contract are limited once the sale is over. When administrative capacities do exist, they are typically controlled by one or more people controlling a particular private key. The owner of that private key will have control of the contract, so in order for a company transfer to transfer control, that private key would have to also transfer. (they'd probably want to redeploy the contract under a different key anyways since there would be no guarantee the old owner didn't still have a copy of the old key.)

Ok thanks for the responses.

Say people paid a company called Microhard $30 million in Ether during their ICO for Microhard coins. Can Ether be readily be exchanged for $30 million USD?

Assuming it can, and Microsoft acquires Microhard, and has no interest in crypto doesnt this leave a coin on the market with a name of a business that doesn’t even exist?

>Say people paid a company called Microhard $30 million in Ether during their ICO for Microhard coins. Can Ether be readily be exchanged for $30 million USD?

The trade volume of Ethereum was about $400,000,000 in the last 24 hours[1], so likely yes. Bitcoin and Ethereum are the two most popular cryptocurrencies.

>Assuming it can, and Microsoft acquires Microhard, and has no interest in crypto doesnt this leave a coin on the market with a name of a business that doesn’t even exist?

Yeah. That coin's value will probably drop fast given that its value was probably based on the anticipated value of it once its supporting product existed.

[1] https://coinmarketcap.com/

1) The organization selling the coins more or less says "hey who wants to buy these for $1 each" and somewhere between zero and lots of people buy them. Once I buy one, I can sell it to anyone else for any price. Then the invisible hand does its thing 2) Well the coins themselves can't really be changed. Any actually enforcable obligation on the purchased company wrt to those tokens would ostensibly be acquired as well

I think the big risk with lots of ICOs these days is even if some discerning investors pass, there are still lots of folks buying in as described in #1. And a lot of times it's really unclear what leaglly enforcable obligations actually exist wrt #2.

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