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The Quora post that killed Bitcoins. Please discuss if his arguments are valid.
243 points by andreasklinger on June 2, 2011 | hide | past | web | favorite | 309 comments



Hi, I'm Adam, I wrote this answer on Quora. Against my better judgement, I'm going to wade in here and make a couple of clarifying points.

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

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

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

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

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

a) that it's unstable as a currency

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

* That was a joke


If you follow the Bitcoin forums carefully, it's actually not at all clear they aren't trying to defraud people. The behavioral patterns are very similar to a pump-and-dump scheme: many people have a large number of coins (usually acquired at a low price through early mining) and are aggressively and inaccurately promoting Bitcoins to people whose money they will be taking. Bitcoin as a technology has the potential in concept to be more than a scam, but the way it is being used appears, for all practical purposes, to be indistinguishable from a scam. Like Groupon, it gives people the appearance of a vested interest and turns them into marketers.

Even if not a scam, your conclusion that it's currently entirely speculative is inescapable.


I'm not sure you can start a new currency from scratch, and succeed, without extreme volatility. If it increased in value by a steady five percent a year it'd still be worthless in twenty years. The low volume is a function of it being new, not of it being a bad idea.

Aside from that, I thought this was an excellent rebuttal: http://www.reddit.com/r/NonAustrianEconomics/comments/hputj/...


Hi Adam, I'm Carl Lumma. I usually upvote your posts on Quora but I didn't upvote this one because of "scam" and also because you gave more reasons than necessary. "Built-in deflation" is alone the reason bitcoin cannot work as a currency (at least, not without a prevailing currency to act as a 'heat sink'). This can be remedied of course by the practice of holding bitcoins on deposit in exchange for demand receipts, which can then be printed and sold without restricting the withdrawal of deposits. And I suspect that, with continued popularity, institutions will start doing this.


Why is built-in deflation necessarily a problem?

If the real economy continues to generate investment opportunities, wouldn't the deflation rate just supplement that? Sure, you could put money in your mattress for 5%, but if you can invest for a nominal 10% and thus yield a real 15%, why would you choose the mattress?


If this is an average loan, all 15% of its real return must be captured by deflation since the money supply cannot increase 10%.

But then the mattress rate is also 15%.

Of course some loans are better than average, and some are worse. The "deflationary spiral" takes out the worse ones first. That lowers the average and takes out the next tier, until the average is zero. Actually it goes below zero, to the average rate of real depreciation (e.g. termite damage to houses). Well, that's the bottom equilibrium anyway.


And also what is the difference between this scenario and a scenario where you can get a saving account that has a higher rate than inflation ?


Fair enough.


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

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


Some people think wikileaks is a good idea. Paypal and other processors have blocked donations to wikileaks, even though it's legal to donate to them.

Some people like to play poker online. The same entities have been prohibited by the government from processing transfers to poker sites.

From a startup perspective, the "terms of service" for Paypal, Amazon payments, and others are full of applications you can't use them for, even though many of them are legal. On top of that, Paypal is notorious for locking accounts if they decide they don't like you.

Currency used to be neutral. Now it's not. So people have invented a new one that is.


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

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

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


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


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


> Why purchase Bitcoins in the long run unless you're laundering money or hiding from the government?

That's kind of odd to say-- couldn't you say the same thing about doing cash-only transactions?

There's also the hope that you can "hide" from corporations/bad-people and make transactions that don't require you to provide information that can be used for identity theft, marketing, etc. Just typing in a unique 1-time deposit number has a lot of appeal for stream-lining transactions and making people feel more comfortable performing electronic purchases. I'd love people to get addicted to that kind of high-privacy transaction and push more innovation for traditional currencies/startups to help with that.

In the modern world, every purchase of anything not bought at a yard sale is a privacy and identity concern-- I'm eager to see alternatives that find new ways to avoid that.


That's kind of odd to say-- couldn't you say the same thing about doing cash-only transactions?

Yeah, I added that modifier after thinking some more. People are really interested in bitcoins as a "private" currency, and cash would accomplish the same thing. Large cash transactions raise flags, though.

Still, bitcoins are a bad alternative to popular currency for a number of reasons Adam mentions. An e-currency without a finite supply would be an interesting exercise.


Money supply need not be infinite. Prices will adjust as demand for the unit arises. Essentially, you are doing the same as "creating" more units, without eroding peoples real savings.

The entire system could thrive on one bitcoin.


Money supply needs to be a flow, instead of a stock, so that it can adapt efficiently to supply and demand and change with population and economic output.

The entire system could thrive on one bitcoin.

No, it couldn't. One bitcoin could not sustain a currency market, and a one-bitcoin market would value that bitcoin at highly variable prices.


But you can have half of a bitcoin. In fact, they're divisible to 8 decimal places—so, in reality, when you have "1 bitcoin", you actually have ~10 million atomic units of tradable currency. It just comes "pre-redenominated," because it currently lacks value, and may be redenominated downward (making the unit "bitcents" or somesuch) as the exchange rate increases.


1 Bitcoin can be divided into .00000001-sized pieces and traded separately. You couldn't run out if you wanted.


To answer your question, it would be nice to be able to buy and sell things online without a central authority like PayPal.


Tyler Cowen argued this quite lucidly at http://marginalrevolution.com/marginalrevolution/2011/04/jer... .


I second the comment about the explanation. It was the best explanation of Bitcoins I've seen (even if it's trying to show that's it's flawed.)


Frankly, because other currencies are devaluing so Bitcoin is acting as a store of wealth. Over the next 50 years, USD isn't going up unless there is a short-term panic.

I bought $30 of Bitcoin just a month or so ago. Obviously they've done very well so far and I'll just leave them indefinitely to see where it goes. Yup, that increases deflation. Nice, for a change!


I don't necessarily disagree with your points nor think that Bitcoin will ever be much of a monetary force but most of your arguments simply have to do with Bitcoin being new. If everything was required to surmount your hurdles from the outset we'd never get anywhere.


I don't know why, but I'm suddenly remembering 1637, the Netherlands and some exotic tulip. Don't get me wrong, I think this is a wonderful technological breakthrough! But unless the flaws pointed out by the author are remedied, this will end in tears. Of course with bitcoins being the phenomenon they are right now, I don't expect many to agree with me :D


I think everyone is missing the biggest factors here - faith and integration. The way something becomes currency, is that people believe it will still have value in the future, and it becomes widely accepted for goods and services. These are, by far, the two largest factors that could drive even a digital currency into use, by themselves. This is why Bitcoin is so risky - nobody knows if the general public (albeit the entire public) will eventually accept Bitcoins for their product. I'm pretty sure that if certain companies had not started accepting them as valid currency, the Bitcoin would already be worthless. But because companies, which are large groups of people, believed enough that the Bitcoin would be worth something between the time that it was received for a product and then spent again, Bitcoins survived and even increased in value. Since there is no way to know if people will want to use these other than to throw currency to the wall and see what sticks, it is extremely risky. I would NOT recommend anyone pay for Bitcoins with an already-tested currency such as cash or credit. If you are, however, interested in acquiring a few of these Bitcoins, try getting free ones for online services, such as "mining", completing surveys, answering captcha's, etc.


Regarding your third point, the order book for the most popular Bitcoin exchange (Mt. Gox) is available [1]. Looking at the data, it seems there's actually quite a bit of liquidity bidding 7-10 USD and asking 10-13 USD per Bitcoin. It's only about 10,000 or 20,000 Bitcoin of depth on each side, so you can estimate the impact of buying or selling 15,000 USD worth of Bitcoin on the market. Of course, it might move less if you 1) consider using a dark pool of liquidity for a "large" trade, 2) add one or more limit orders to the order book (instead of using market orders), and 3) consider the fact that the order book gets "replenished" as trades come in.

[1] http://mtgox.com/code/data/getDepth.php


Unfortunately, Mt. Gox faces no regulation, so their data should be treated like the data from an offshore online poker company (many of which scammed users in underhanded ways even when they stood to gain significantly from their legitimate transaction fees). There would be almost no indication to the public until it were too late if Mt. Gox were actually directly a Ponzi scheme, even if the rest of the Bitcoin system were honest (which it is not).

I'd also be afraid of having my assets frozen if I transferred money to and from Mt. Gox or the other exchanges. To use Britcoin, for example, you need to send and receive money from an individual developer -- that is, from his individual account. There's not necessarily protection for his transferees if it turns out that he, willingly or not, was engaging in money laundering.

One additional thing that bothers me about the Bitcoin "community" at present is that they are engaged in an active and deceptive attempt to sanitize their public image. For example, in a Gawker story about drugs, Jeff Garzik, a core developer, inaccurately commented that Bitcoin could not be used to purchase anything anonymously. He surely knows that it wouldn't be difficult to do so; he appears simply to have been underplaying a regulatory risk that the currency faces in order to get part of the public on his side.

Bitcoin == marketing. It has very good marketing on its side, even if the marketing is in some sense "open source" and communal. In that sense, it's very interesting sociologically. But it's, at core, a deception in practice.


Thanks so very much for the clarification and the tempering of your response-- that "scam" wording was the only thing that gave me hesitation on whether you were objectively reviewing it from an economic standpoint. I'm pretty sure there are a lot of idealists behind it, but I haven't (yet) seen anyone excited about the currency that wanted to defraud anyone.

Bitcoins are quite likely a mistaken long-term investment, but it doesn't seem like its proponents are trying to trick anyone about the core ideas.

I'm just hopeful that it encourages more creativity in the space of private online transactions, digital currency advances, etc.


There is a currency that has been created in an attempt to have a vehicle currency that is not tied to any one currency. With the US dollar being the vehicle currency of today it ties the US economy with the global economies must to tightly. It's finding a floating exchange rate that isn't closely tired to any one currency. As seen after Bretton-Woods global economies ties to one currency is not optimal. Creating this new currency is the hard part.


What's the difference between the Bitcoin Concept if you leave out the computer algorithm solution to inflation and the unregulated exchanges that buy and sell their own created stock in privately held company's like Twitter and Facebook that has boomed in the last year or so? This will help me understand some of the concepts with this whole e-fiat money. Thanks.


I think that all we should do is wait and see. This is all very interesting and unpredictable. It is at least a good experiment. If you are going put money into the system, well it is at your own risk. Nobody who does not sign up is at any risk.


Trollish headline.

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

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

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

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

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


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

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

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

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

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


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

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


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

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

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


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

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

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


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


Currency can have its own features that make it worthwhile. No matter what happens with btc's popularity, as long as I have one other party to trade with, some features will be available to me through btc that are not available through normally denominated national currencies. Can't I buy btc because I think these are valuable features and their desirability will drive interest and users, just like I would buy Google because the desirability of its features drives interest and users?


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

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


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


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


I've found your economic explanations a breath of fresh air in this thread. Thanks.


Set A may be a strict subset of set B, but that doesn't mean the elements in B are in A as well.

Alternatively: the profits generated by Apple and Google would argue otherwise.


> Deflation for a primary store of value in an economy is definitely a bad thing

How can having your assets increase in value be harmful? Traders already account for many stock variables, why would deflation be any different?

> and think about what that would mean - the bank pays you to borrow money from it.

Oh no, not that :P

> "when something goes wrong, it will die"

Sort of like hyper inflation?

> they don't understand that the value of money is a product of supply and demand

They also understand when supply is in control by a few bankers, so is the demand. Who do you trust to ensure supply isn't ramped up: your friendly banker, or math? This isn't hypothetical either http://en.wikipedia.org/wiki/Hyperinflation


Suppose you need capital to commence on some enterprise. You'd like to borrow against and/or sell a share of future income. How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?

In an inflationary scenario, money is declining in value. People with a lot of it are actively looking for ways to put it to work, otherwise they'll end up poorer. But if the money is not losing value over time, and is in fact appreciating, what incentive do they have to put their capital to work? They need much larger returns on investment to make up for the loss of their existing risk-free return.

[1] For bank, read anyone who could lend to or finance you.


> How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?

Why do people invest in stocks when they can play it safe in a bond market? They have a different appetite for risk.

I do see your point, a constantly inflating money supply encourages people to invest. The flip side to that is, are the investments worth it? Inflation is an artificial incentive to invest, which some believe is the cause of bubbles. Remember all those stupid investments in the dot-com bubble? Some believe it's because money was too cheap.


I think this is obvious -- a bank will lend you money if you can offer returns in excess of the risk-free rate of return, balanced by the perceived risk and collateral for the loan.

Similarly, an individual will deposit money in a bank rather than keep it under their mattress only if the bank offers returns in excess of what it gets sitting in the mattress.

Since at the moment there is no FBDIC, as an individual you must also balance the risk of depositing in the bank against the return they offer.


But in a hyper-deflationary environment, which seems bound to happen with a currency with a fixed supply in a growing economy, almost no investment could provide returns in excess of the risk-free rate.


"How can having your assets increase in value be harmful?"

Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).


By assets increasing in value I was referring to currency, not the cost of commodities.

In your story, I would attribute the $25 a loaf bread to the credit panic, not the resultant of a consumers increase in purchasing power -- such as the expected deflation in BitCoins.


1) Early adopters. I couldn't find a point here.

The point is that it's a scam. It's designed with enriching the people who made it up in mind. The only difference between this and my "Hey let's all use these pieces of paper that I printed as money" scheme is that these guys actually got it off the ground by allowing the first few adopters to also print their own money in significant quantities.

2) Deflation. There's a creed in mainstream economics that deflation is bad, repeated here. "if your money is getting predictably more valuable, why would you want to spend it?" It's just false. Would you buy a computer today if you can buy a more powerful one by waiting until tomorrow?

Computers, yes. Food, yes. Other stuff I actually need right now, yes. But I sure as hell am not gonna invest in your startup... or in any other business for that matter, so that's just wiped out half the economy. I'm also not gonna buy a house, I'm gonna rent... but who'd be dumb enough to be my landlord?

Really, the faith which some folks seem to have in this particular bubble-in-value-of-intrinsically-valueless-asset is scary.


I have no idea if it is solid or not but statements like:

"Bitcoin will be tested but from what we know about it at the moment, it looks solid."

worry me. Its easy to make things for ideal conditions. If bitcoin becaomes mainstream the stresses will be incredible. Where there is money to be made there are smart people looking for an angle and leverage. Even governments suffer:

http://en.wikipedia.org/wiki/Black_Wednesday

This is an experimental mechanism. It is not based on main stream economics and it has no government or bank protecting it with regulation or defending it. The originators may have hit upon something new that is solid and can stand on its own two feet or they may have initiated the construction of a tower of cards.

Even if you are a full on supporter of bitcoin you would be mad to assume that it doesn't have a fatal flaw at this stage.


Re: Deflation

You're thinking too small. Think of holders of vast wealth, who in an inflationary system, are forced to invest their money and earn a significant return in order simply to maintain the value of their wealth. In a deflationary system, they are no longer at risk of losing wealth by letting their money sit in a bank, and so the least risky course of action for them is to simply hold on to their money. This means that the markets for things like angel investing and venture capital, among others, dry up as holders of significant wealth are no longer incentivized to invest their money.

An inflationary currency is what gives us our social mobility. Without it, holders of wealth don't make risky investments, meaning socially mobile entrepreneurs don't get funding to allow them to join higher social classes, wealthy investors no longer lose their shirts and move down the social ladder, and the society at large becomes entrenched in its current economic makeup.

I would not like to live in a society with deflationary monetary policy; money is meant to be spent and made to work for you, not hoarded.


>Deflation. There's a creed in mainstream economics that deflation is bad, repeated here. "if your money is getting predictably more valuable, why would you want to spend it?" It's just false. Would you buy a computer today if you can buy a more powerful one by waiting until tomorrow? People do.

s/spend/invest/. I mean, why would anyone spend money on food? There's no storable value! I can dream up silly situations too, y'know.

Meanwhile, there's a bit more to modern economic theory than a single pithy quote. Like, when deflation actually happens, you get this:

http://en.wikipedia.org/wiki/Deflation#Historical_examples

And this is deflation over a short scale. Bitcoin will experience constant, effectively unstoppable deflation every day after 2020.

>Mainstreamers like the leaves-on-the-fire effect of inflation and also like to overlook the fact that stimlus impairs cyclic corrections

Got some numbers on that? I seem to recall basically no problems occurring during periods when inflation rates are 0-10%.

>and detracts from the role of money as a store of value.

Money isn't supposed to be a store of value; the object of money is to facilitate exchange, not to inhibit it. Investments are a store of value. If you want to store value, invest in the S&P 500.

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

SHA256 will -never- be broken, that's for sure!

>If we had a period of high inflation, it's reasonable to expect people would trust finite-supply bitcoins over an unending supply of newly-minted, inflating notes.

The medium that is more easily exchanged will be exchanged. Ever wonder why e-gold never took off, even before governments tried to stop it?

Mind you, I really, really want Bitcoin to succeed. I don't like the Federal Reserve and it bothers me that the federal government has control over the money system. However, I'm not going to disregard science to make myself feel better.


This is deflation caused by central bank (due to contraction of credit).

There was a deflation during all 19th century, when gold were money, without any ill consequence. And it was a century of growth due to industrial revolution.


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

Actually, all of Adam's criticisms deal with the supply and demand of currencies, and they are pretty strong and damning as a result. In sum, the supply of Bitcoins is finite (despite a growing population) and the demand for Bitcoins depends on (a) confidence in Bitcoins as a currency and (b) consumers' ability to convert between Bitcoins and fiat money with little friction.

(1) Adam's point is not the unfairness of early adoption, but that early adopters control all the rents. Today's miners will control currency as it appreciates, but after a point (say, the supply of mine-able Bitcoins is exhausted) there is zero reason to demand Bitcoins unless they supplant paper money (very, very unlikely).

(2) I'm weak on my deflation theory, but I don't think the computer-purchasing analogy is 100% right. Instead of buying the computer with paper money, consider buying the computer with gold bullions during the commodity boom. Why buy that Macbook Pro with x bullions today if you can buy it with x-y bullions tomorrow? Adam isn't arguing that "deflation is bad," but rather that the supply of Bitcoins as currency will dry up as their value appreciates.

(4) You can't hand-wave this away. Consumers have confidence in US dollars because the Federal Reserve and U.S. government can step in during a crisis and back people's assets. There is no similar guarantee for Bitcoins once something goes wrong.

(3) Why is convertibility not a systemic problem? Lack of convertibility falls out of all the previous points! Why accept bitcoins for cash if (a) they're not backed by a central authority, (b) almost no one else accepts them as money, or (c) they will be obscenely expensive once the supply dries up?

I can't believe Bitcoins have gotten this far. They're a currency accepted by almost no one as payment, guaranteed by no governing body, and artificially supplied as precious commodities without the benefits of said commodities (Bitcoin engagement ring? 24K Bitcoin watch?). They're a great theoretical exercise, but their real-world value will trend to $0 in the long run.

EDIT: barrkel gets to the point when he/she says "the value of money is a product of supply and demand, no matter whether fiat or specie." The fundamentals of Bitcoins are such that (a) supply will artificially dry up and (b) unlike precious metals/commodities, there will be little demand for Bitcoins aside from use as a currency (or a Ponzi scheme).


They're a currency accepted by almost no one as payment

Just a point of interest -- the list of sites that accept Bitcoin (http://en.bitcoin.it/wiki/Trade) is actually pretty long. I read it as a pretty good coverage of everyday commodities, actually. You can't pay for food, rent, or doctor bills with it, but you can buy a lot of other stuff.

I guess you could characterize that as almost no one, but you'd have to mean an insignificant fraction of the larger economy. If you mean useless for buying actual stuff with--and you seem to--you're demonstrably wrong.


No, I definitely meant "an insignificant fraction." Thanks for the link.


Instead of buying the computer with paper money, consider buying the computer with gold bullions during the commodity boom. Why buy that Macbook Pro with x bullions today if you can buy it with x-y bullions tomorrow?

People have different time preferences. Some value Macbook today high enough to pay y more bullions than they would if they waited till tomorrow. There're many currencies that depreciate faster than the dollar, but it does not stop people stuck with those currencies from buying Macbooks -- even though they could theoretically change their money to dollars (or invest in gold) and wait.

Adam isn't arguing that "deflation is bad," but rather that the supply of Bitcoins as currency will dry up as their value appreciates.

There actually is a possible problem with Bitcoins "drying up" connected with its deflationary nature, but it is not the one mentioned by Adam. AFAIK there's a limitation on the minimal amount of Bitcoin transaction. That means that as Bitcoins appreciate in value at some point it may be impossible to set and pay small enough prices -- and such transactions will require alternative payment methods.

This is a pretty much technical problem with the current Bitcoin implementation. It might be perfectly possible to design a deflationary crypto money system without this flaw.


in the current system, it's unfair that government (through tax law and control of force) mandates that you use a form of money that doesn't function well as a store of value

The governors of the Federal Reserve are appointed by the President and confirmed by Congress, and politicians, for all their numerous faults, understand that if the economy goes in the crapper it hurts their chances of getting re-elected. So there is democratic accountability, albeit democracy on a long fuse, that discourages the Fed from doing something stupid with the dollar.

Bitcoin’s early adopters, by contrast, are only special because they got on the bandwagon first. They don’t have any special talents that they are being rewarded for, and they aren’t accountable to anyone.


The Fed does not have accountability to anyone as seen in their resistance to being audited. After they are confirmed they can do what they want, as a board, without any direct accountability.


Dude, your #4 is exactly what Goldman-Sachs said about real estate derivatives. That wasn't that long ago.


The problem of deflation is worse. There is a finite supply of btc. Read that again. Finite. in fifty years, our whenever the mills run dry, are we just going to stop increasing population? Are we going to stop creating more things of value? Of course not. So what happens then? We have to start dealing in ever-decreasing payments. They will decrease as fast as the sum of things which can be paid for in btc grows, which is damn fast. Nobody will be able to afford to spend money.


I think your reasoning about 4 is wrong. It does not look solid: in the long run, the security of all crypto goes to zero. There's a very real possibility that the current system will in time be replaced by something which is intended to be better, or to fix a to-be-found flaw, but which is itself flawed in a much worse fashion. In fact, that's quite likely: under the circumstances which such a change would need to be made, there'd be a panic and quite a pressure to get it done quickly.

That being said, I don't agree with the article's conclusion, either. If/when something goes wrong, it's a completely open question whether or not the reaction will be catastrophic.


> in the long run, the security of all crypto goes to zero.

Perhaps that's true, but then the only thing to do is prepare a viable upgrade path that could be executed as soon as it's evident that the crypto won't hold up. Bitcoin has that with its genesis block forking ability. As long as the network doesn't become too fragmented with forks, it'll be fine.


> It's just false.

No, you just misunderstand the actual statements.

Deflationary currency doesn't mean that people don't buy anything. It means that the supply and demand curves shift, reducing (but not completely eliminating) investment and consumption. The magnitudes of the shifts vary depending on the product being discussed, but the direction of the shifts is the same in every case.


Your other points I can't comment on, but the deflation argument is absolute bunk in terms of small, non-durable goods (groceries, electronics, etc), but when it comes to houses and other big purchases (cars, etc.), it absolutely will affect purchasing. You can already see evidence of this now. Houses are at the lowest point in prices that they have been in decades, but people still aren't buying, and they won't until there's some indication that they won't ever be this cheap.


There's lots of factors why people might not be buying houses that have nothing to do with inflation: (1) it's not rational to buy a house when your abillity to meet payments looks undercertain; (2) it's harder to get loans; (3) there's been lots of media about people getting burnt; (4) we've exited the house-buying-mania bubble; (5) related t ofirst point butdifferent, you have much better labour flexibility by renting which is important in hard times.

    You can already see evidence of this now. Houses are at
    the lowest point in prices that they have been in
    decades, but people still aren't buying, and they won't
    until there's some indication that they won't ever be
    this cheap.
"been in decades" - this would be true of Buffalo and Detroit, but certainly not of San francisco, New York, London, Perth, Sydney, Toronto, Calgary or other places I have an idea about.

I think first world property prices are still ridiculous.

It's madness to push people to leverage up in order to get into property just so they can store value. I'm not a hedge fund. I don't want to be compelled to behave like one to look after my savings. Now that the music has stopped, people are wising up that housing is not even reliable as a store of value irrespective of their sacrifices.


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

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

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

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


"There is absolutely nothing preventing people from taking the open-source code and creating an alternative "Bittoken" currency which changes problematic design elements such as the minting/issuance model."

Broadly speaking, the more desirable properties you try to obtain at once, the more you constrain the design, and it is absolutely possible to constrain the design to the point where there are zero solutions. Arrow's theorem shows an example of that in a voting context. You can not have all of the five desirable properties laid out in the theorem, and it isn't a matter of finding a clever algorithmic solution; they are actually contradictory. You have to loosen the requirements somehow.

There is no guarantee that any given set of desirable properties has a solution. There is no guarantee that BitCoin is even close to having a solution, there's no guarantee that it is merely one requirement over the line, it may well contain multiple contradictions. There's no guarantee that there is anything more optimal than government fiat money.

I'm in favor of experimentation to find out, in general. But it should be pointed out that there is not necessarily going to be a solution at all, and I certainly would say it's not going to be easy to just "take BitCoin and fix the problems" or any variant thereof. There is something stopping people from just "creating an alternative", it's going to be freaking hard, and again, I don't just mean hard in the way that creating an open source operating system from the efforts of thousands of not-centrally managed programmers is, I mean, potentially hard in the way that proving P != NP is, really, actually, hard. Starting from BitCoin isn't necessarily even starting from a useful base.


>Most problems with the critiques of Bitcoin like those in the linked Quora post is that they are debunking a straw man - the idea that Bitcoin is intended as a universal replacement for all other currency systems. By those standards of course it will fail.

Bitcoin is supposed to be a currency. That means that it's supposed to be effectively the same thing as USD or the Euro. It's not supposed to replace any other currency, it just needs to be able to do everything that any other currency can(except pay taxes). The problem is that it doesn't do that right now, and I don't see any way of making it actually work. To actually be a useful currency, people need to be able use it on everything, otherwise it's just a proxy for a "real" currency with an added gambling element.

Right now, it's basically the same thing as paypal or Google Checkout-something that people use to buy things online. By that standard, it's not even decentralized anymore, because everyone gets their BTC from MtGox, and they have to keep logs of all their transactions.


I think the most interesting aspect of this whole thing is, like you mention, how new bitcoin-like currencies are perceived, valued, and participated in. Will everyone start jumping into new bitcoin-like currencies in hope of massive bitcoin-style investment gains? Will massive bitcoin miners attack new currencies networks with their computing power to protect their or others' investments in bitcoin? Will new bitcoin currencies be like social networks where only one dominates at a time for many years?

What would happen if a new gold-like element was discovered? "Red Gold" that had almost all the attributes of gold but it had a somewhat redish color and was actually a different element and it was proven to be of about the same scarcity worldwide. Would that halve the price of gold and would everyone jump onto red gold immediately or would it be shunned as not the real thing and be mostly worthless?

I'd be interested to know others' insights on this.


"Red gold" would be exactly as valuable as gold is in the same way that gold is; that is, if everybody agreed that red gold was valuable, then it would be valuable. If they didn't, then it wouldn't. Scarcity doesn't give rise to value. You also need demand.

In so far as red gold acted in the same way as gold for jewellery and industrial uses, it would probably decrease the value of gold to some proportion, and set a base level on this red gold production. But this is like asking why diamonds are valuable, or designer clothes, or expensive watches. In many cases, it's a combination of marketing, status display effects (ostentatious useless consumption), artificial restriction on supply, and market fixing (e.g. arranging to buy watches on secondary markets at headline prices for PR purposes). They too are confidence games, and if the confidence goes due to a bad association with the brand, the price will fall through the floor. All that is left is productive uses like industry.


I've heard that unlike say steel, the majority of gold ever mined is still in circulation, and by circulation I mean locked vaults. A few large organizations control the vast majority of it, and this is especially true since governments have not needed to hold gold for years. The reason for the scarcity of gold, and it's value, is that this gold is not for sale. One gold owning organization could make a great deal in other currencies by attacking the gold market, much as quantum fund used it's sterling holdings to attack the British currency with great success.

Lots of people seem to think gold is 'safer' than paper currencies, while it seems the same. Am I missing something important here?


Google around. General consensus seems to be that 75-80% of gold production goes to jewellery, and there's some fraction going to industry too. As the most ductile element, it's used in microelectronics, though of course in small quantities.

http://symmetricinfo.org/category/goldprices/ estimates 50% of gold stock is in jewellery, 12% in industry. Of course, some fraction of that jewellery is bought because people believe that the gold will be a store of value, not just because of how it works; though I wouldn't expect selling jewellery for its gold content to give particularly good returns.


I've heard that unlike say steel, the majority of gold ever mined is still in circulation, and by circulation I mean locked vaults

Quite possible.

A few large organizations control the vast majority of it, and this is especially true since governments have not needed to hold gold for years

Say what? A few large organizations, who are not governments, hold the vast majority of the world's gold? Are we into conspiracy-theory talk here?

Lots of people seem to think gold is 'safer' than paper currencies, while it seems the same

"Safe" depends on what you mean. For instance, you could say "US dollars have a 99% chance of retaining at least 80% of their value in five years, and a 99.9% chance of retaining at least 10% of their value in five years. Gold has only a 80% chance of retaining at least 80% of its value in five years, but a much higher 99.999% chance of retaining at least 10% of its value in five years".

Gold gives you much more volatility in the short term, but acts as a hedge against the collapse of any particular currency.

I wouldn't buy it though. I'd buy land (with houses on it), which acts as a hedge and pays you income.


Of course, your ability to continue to own that land is also dependent on the continued existence of a government that remains able and willing to enforce the laws of property ownership and does not decide to raise property tax rates to confiscatory levels.


Just to add to your point about marketing being important to assess something's value, take black pearls. They used to be worthless and producers couldn't sell them at bargain prices. But then one jeweler placed them next to sapphires and other precious gems on display and they became a quite expensive item.

I'll add a link to this story if I can dig one up.


There is such "gold" - Ruthenium.

It's not valued above industrial value.


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

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

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

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


>Bitcoins have no intrinsic value.

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

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


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

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


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

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

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

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


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

As they should be, given that populations increase.

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


I think this is a very important thing that people don't understand. Static money supply in a world where as you point it out population increases means deflation. And increasing popluation is only one example of the need for inflation. We create wealth all the time, people in other countries are buying their first car etc... the more goods are purchases and sold the more money you need. At least that's what I understand from my couple Economics classes.


Bitcoins are divisible, so everyone's share gets smaller


> As they should be, given that populations increase.

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

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

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

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


Actually money supply should ideally match total demand for money. Real economic output is not super relevant.


Milton Friedman disagrees and measures inflation relative to output in his book on monetary phenomena [1]. Since you're an economist (right?) I'd be interested in why you think he's got the wrong measure.

[1] http://books.google.com/books?id=ZNAhXe2pz1cC&lpg=PA196&...


I'm not disagreeing with Milton Friedman at all.

Read the sentence "Prices might even fall gradually as higher incomes led people to want to hold a large fraction of their wealth in the form of money." Inflation is a Money Supply / Money Demand phenomenon. In the long term, Money Demand tracks real output, but in the short term (such as the recession we're currently in) you can see major swings in demand that counteract what would normally be a quite inflationary money printing exercise.


So you agree that in the long term, money supply should closely follow real output. It's only in the short term that the Fed is allowed to untether them for the purposes of intervention. Let's not forget that the Fed's monetary policy in the 2000's helped create this situation: economic intervention necessitates further economic interventions. It's no wonder people are heading for the exits via BitCoin.


But the GDP graph also doesn't look anything like that monetary supply graph.

Huh? [0]

[0] http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_...


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

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


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

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


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

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


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


> The net transaction is $0 (an exchange of currency for T-bills of equal value)

That is only true if T-bills are generated slower than the rise of other money instruments. In the last few years, that has not been the case (and evidence for that is seen in the tanking dollar value compared to any other currency, including gold).


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

Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products.

If you can't use bitcoins for food, housing, netaccess, or energy....


>Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products.

Or just collect the taxes at the point where it's converted from BTC to a real, government-backed currency. It's simpler, because there needs to be a paper trail there.


>Easy - I collect taxes at the point where physical goods are exchanged for bitcoins or are used to deliver products.

The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this.


> The state does this, but people already get around this by conducting cash transactions. Bitcoin creates another option for this.

Govts tolerate a certain amount of black market because it costs too much to reduce the black market to 0. However, that toleration goes away when govts are seriously hurting for revenue.


"try taxing the guy that's paid in Bitcoins"

...try hiring the guy who is willing to be paid in Bitcoins.


Easy. Lock the guy in prison till be pays you what you think you are owed.


The taxation of non-cash income has been a settled issue for decades (in the US).

They would tax Bitcoin receipts the same way they tax service-for-service or service-for-property exchanges. The government will calculate the fair market value of the services/property received at $X dollars (based on facts and circumstances such as the amount exchanged in similar cash-based transactions), deem the taxpayer to have received $X in income, and impose a tax of $Y on that deemed income.


You forgot the part where the gov doesn't know how much Bitcoin you received.


Until you convert to a currency that enables you to drink alcohol..


> Bitcoins have no intrinsic value.

Gold has very little - it is used in jewelery, CDR coating, teeth and a few other industries -- but you can't live in it, nor can you eat it. Beans have more intrinsic value than gold of the same weight....

Yet, no one doubts gold as a currency.

The main, strike that, ONLY, relevant feature of a currency is the willingness of others to exchange stuff for it. At this point in time, bitcoin possesses this feature.


Can you exchange your bitcoins for gold or beans? Because right now, bitcoin purchasing power amounts to a hill of beans.

Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market.

Beans are also commodities, but they are plentiful. Bean demand is easily met, so they're not priced very highly.

Bitcoins are not production inputs, so their only value is (ostensibly) as an alternative fiat money or value store. Unlike country-backed fiat money, you cannot exchange bitcoins for goods, so the only demand for bitcoins comes from people "investing" in them. If you want to play the bitcoin market, that's fine--in that case, you're generating wealth for yourself. Not value.


> Can you exchange your bitcoins for gold or beans?

At this point in time, you can. Next week, that might not be true. But the same could be said of the currency of Belarus, which was devalued 50% overnight last week (the USD in 1931 suffered the same fate after physical gold was confiscated). Which is all that is required to make it a currency.

> Gold is a commodity, not a currency. It is a scarce commodity that is highly demanded as a part of luxury goods. Thus, it commands a high price on the open market.

:) That's a game of semantics. Gold's current price has little to do with its luxury good status, and everything to do with its scarcity and historical claim to fame as a currency. That was historically gold's role in the last 3000 years or so, and it hasn't been dethroned yet.

> Unlike country-backed fiat money, you cannot exchange bitcoins for goods

But you can. And people around the world are not accepting USD as much as they used to 20 years ago - in the past, in most middle eastern and south american countries, you were able to pay with US dollars everywhere. That is no longer true. Does that make the fiat US dollar less of a currency?

You can play semantics all you want, but gold and to some extent silver are used as currencies.


First: I admit I wasn't aware that retailers accepted bitcoins when I posted that comment. I've discovered otherwise now, so the "hill of beans" comment is wrong. Sorry.

:) That's a game of semantics. Gold's current price has little to do with its luxury good status, and everything to do with its scarcity and historical claim to fame as a currency.

"Semantics" have nothing to do with it. Commodities [0] != currencies [1], whether you're familiar with the definitions or not. One exists as a medium of exchange, while the other is a good with no differentiation between sources. Currencies are differentiated by the trustworthiness of the governments that issue them (you'd probably accept a US dollar today before accepting a German papiermark [2] in 1924).

Also, gold's price is a function of the market's supply and demand for gold as either (a) an investment vehicle or (b) an input in the production of goods. Investors don't give a damn that the US dollar was pegged to gold 200+ years ago--they're simply investing in it to make money.

The idea that gold is "currency" is ridiculous. Name a first-world country where gold is widely accepted as currency. Some places in some parts of the world might accept gold, but it's not backed by a central body nor does it carry a relatively stable value (unlike fiat money).

[0] http://en.wikipedia.org/wiki/Commodity

[1] http://en.wikipedia.org/wiki/Currency

[2] http://en.wikipedia.org/wiki/German_papiermark


> "Semantics" have nothing to do with it. Commodities [0] != currencies [1]

Semantics have everything to do with it, as I will demonstrate below.

> One exists as a medium of exchange, while the other is a good with no differentiation between sources.

Well, as long as the USD is not fake, you don't care what the source is :) Similarly, for non-fake gold.

> Currencies are differentiated by the trustworthiness of the governments that issue them.

Today, that is true. However, the Chumash people had a currency that -- like bitcoin -- was not centrally managed, and reflected work put into something, rather than any fiat or backing store of value. http://en.wikipedia.org/wiki/Chumash_people#Culture - I can't remember where I read a more detailed account. Basically, you could sit on the beach all day and make money -- and it took slightly longer than the equivalent exchange rate would get you in food (so you could hunt/gather food, or make money, with comparable time expenditure, and exchange them). The whole system broke down when European drills (as manufacturing tools) were introduced and made money making simple.

> First: I admit I wasn't aware that retailers accepted bitcoins when I posted that comment. I've discovered otherwise now, so the "hill of beans" comment is wrong. Sorry.

So - let's get back to semantics: do you agree bitcoin is currency? (exists as a medium of exchange), or commodity? (a good with no differentiation between sources) because it has both properties, thus showing that the definitions are not mutually exclusive. A USD is currency but not commodity; Beans are commodity but not currency. Gold, Chumash beads and bitcoin are both.

> Name a first-world country where gold is widely accepted as currency.

In NYC where I live, hundreds of stores will accept your gold in exchange for other merchandise (at a bad exchange rate for you...). You can identify them by the sign "We buy gold". You must have seen them in other places too.

> but it's not backed by a central body

True, but ....

> nor does it carry a relatively stable value (unlike fiat money)

Wrong, and if you truly believe that you might be beyond help. The US devalued the USD by 50% in 1931. Belarus did it to their fiat currency last week. Between 2002 and 2006, the EUR/USD exchange rate went from 0.8 to 1.5 (almost 100%) - "stable"?

In fact, up until 1971, the backing for the USD (and most other currencies) was gold - it only became a true fiat currency in 1971! Before that, it was a claim on some amount of gold in fort knox, and value was derived from that.


But you can exchange your bitcoins for goods: http://www.theatlantic.com/technology/archive/2011/06/libert...


Modern (post gold standard) currencies have no intrinsic value either. Their only value is that people think they have value.


No, modern currencies are backed by the full faith and credit of nations, and while reasonable people can disagree about the value of the US credit rating, no reasonable person thinks it is zero.

People need to start naming the dubious syllogisms bitbugs deploy in discussions like this.


Bitcoin is, in a way, backed by the value that it brings as a currency-- privacy and anonymity. We can argue whether that value is $10 per BTC, but I also don't think any reasonable person thinks that it is zero.


No, in fact, plenty of reasonable people do believe it is zero, and you cannot nerd your way out of that fact.


But that's not reasonable. Its just ignoring the privacy/anonymity value of BTC. Again, we can argue about the monetary value as compared to dollars, (especially given the tradeoffs-- i.e., convertibility to established currency, places to spend, etc) but that's real, practical value. You can't simply ignore it.


Sure it's reasonable. I think bitcoins have zero value. I recognize that there may be people out there who are willing to pay real dollars for it right now, but I think that in the long run, no such people will exist. Hence, I place its value at zero.


Bitcoins don't have to be tradable to dollars to represent nonzero value. Their utility is in and of itself valuable. It might not have value to you, but that's different than suggesting that it has no value at all.


I fail to see how their "anonymity" has value when it cannot be exchanged for real currency.


Currency is a placeholder for value. So long as I can exchange bitcoins for value, they will function as a currency. The design of bitcoin makes it very difficult for governments to make such a scenario impossible (or even difficult). For that reason alone, bitcoins will remain valuable, if for nothing other than goods or services that governments don't like.


People who participate in illegal trade (such as drugs, guns, prostitution, etc.) still need most of their purchases to be in the legal economy. Hence, illegal trade still uses real currency.


I couldn't care less about the privacy/anonymity of BTC if the market falls out and my BTC wallet ~ $0. At that point no government will come to my aid because, hey, I invested in something that has no value.


As I mentioned above, Bitcoins value relative to the dollar is irrelevant, because its value is found in its utility. So long as there are goods and services to purchase with Bitcoin (and it seems very difficult for a government to stop such services from existing), the utility of the currency remains valuable, regardless of its exchange rate to the dollar.

EDIT: The fact that government would have a very difficult time shutting down the Bitcoin economy is yet another example of its utility and value.


Utility for what. If things have real, actual value, then they can be exchanged for dollars, even if it's only on the black market. We don't mean there has to be an official exchange rate between bitcoins and dollars. We mean there has to be someone willing to say "I'll give you X USD for Y bitcoins" even if that's just under the table. If no one is willing to do that, then bitcoins have no value.

What I, and others, are saying is that in the future, no such people will exist. Our prediction is that the current bitcoin economy is transient and will eventually vanish. Hence, we say bitcoins have no value. It's similar to saying that a particular stock has no value if you think that that particular company will collapse.


*there has to be someone willing to say "I'll give you X USD for Y bitcoins"

Not really. They have to be willing to say "I'll give you X thing that you value in exchange for Y bitcoins." The entire point is that the design of bitcoin makes that scenario likely to always be true precisely because it is nearly impossible to stop. As I said above, the very fact that it represents a system that is very difficult for state actors to attack ensures that it will almost certainly be used for exchanging goods and services that governments would rather not exist. Not a terribly noble future, perhaps, but certainly one that ensures bitcoins have value.


If people are willing to trade goods for it, then someone will be willing to trade dollars for it (or yen, euros, or any established currency).

For a reason that I am unaware of, you seem to think that just because something can be traded it will be traded. That's not true. People tend to only trade things that are readily exchangeable in the larger economy - things that have value.


Well it's more than people--my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence.


> my government believes the US dollar has value too, and it's willing to insure my bank accounts as a result. That's a hell of a vote of confidence.

Really? When dollars were "silver certificates" the bank's willingness to let you come collect your silver was a real vote of confidence in the currency. But nowadays if they "insure your bank account" they only pay you back in dollars. They're insuring that its value doesn't drop in dollars. How does that constitute a vote of confidence in the currency itself? I'd say it's only a vote of confidence in (a) the bank, (b) the government's ability to print more money, (c) the government's ability to tax.


There are several confusions in your short post.

First, assuming you're talking about the US, your bank accounts are insured by the FDIC, and the FDIC is not part of or formally backed by the US government. There are lots of people who believe that if the FDIC were in danger of bankruptcy, the US government would step in to support it — as it did with Fannie Mae and Freddie Mac — but until the government actually promises to do that, you can't call it a "vote of confidence".

Second, the US government's dollar position is short, not long — its dollar-denominated debts are greater than its dollar-denominated assets. In financial terms, a short position is a way to bet against the value of the underlying commodity. The US government is currently about $7 million million dollars "short".

An illustration may help to clarify. Suppose you are a private in the Zimbabwean military in September 2007. Suppose your monthly pay is about US$180, but you are paid in Zimbabwean dollars, so your pay packet is actually Z$5.4 million for the month. The Zimbabwean dollar has been hyperinflating, and you expect it to continue to lose value. You don't currently need to pay any expenses. Consider the following options:

A. Keep the Z$5.4 million in cash.

B. Immediately buy other commodities with it; for example, buy 300 kilograms of rice and store it in Tupperware in the pantry.

C. Immediately buy other commodities with it, and also borrow an additional Z$10 million some poor sucker is willing to lend you at an extortionate 20% APR, and use that to buy rice too.

Option "A" is maintaining a "long" position in the Zimbabwean dollar. This amounts to a bet that the Z$ will retain its value. If you had taken this option, you would have lost 90% of your salary within a few weeks.

Option "B" is maintaining no position in the Zimbabwean dollar. It doesn't matter what the Zimbabwean dollar does thereafter; you still have the same amount of rice. (Practically speaking, in situations like this, there tend to be price controls on most things you can buy with the collapsing currency.)

Option "C" is maintaining a "short" position in the Zimbabwean dollar. If you had somehow found such a sucker, then within a few weeks, you could have paid them back by selling off a tiny percentage of the rice you bought, as the Zimbabwean dollar continued to inflate.

This is the position the US government has taken relative to the US dollar.

There are, of course, other reasons to take long or short positions on commodities other than speculation on their future value.

Third, even if we accept the premise that the implicit guarantee of the US government to keep the FDIC afloat amounts to "the US government is willing to insure my bank accounts", that is simply a further short position. FDIC insurance is for dollar-denominated accounts up to a fixed dollar limit. Whoever is on the hook to underwrite that insurance in the end, they'll have an easier time paying out their claims if the US dollar loses value. If your bank account has $78000 in it and the currency loses ¾ of its value (which happened here in 2001), the FDIC bailout only has to come up with the current equivalent of $19500 to pay you back.

Fourth, the government is not "more than people". It's just people.


Thanks for the great explanation on the US government's dollar position. I also thought about my comment some more later, and realized that inflation really devalues the FDIC's deposit insurance.

I'll take issue with the government being "just people," but that's just a nit in a great post.


An excellent explanation. Sadly, I can only upvote it once.


Agree 100% with your last paragraph. The bank lobby, effectively an arm of the Federal Reserve system, is not going to stand by and watch any alternative currency gain traction. My guess is that they'll try to paint any legitimate alternative--Bitcoin or some successor--as a tool for terrorism and try to get it banished from the face of the earth that way.


> There is absolutely nothing preventing people from taking the open-source code and creating an alternative "Bittoken" currency which changes problematic design elements such as the minting/issuance model.

Yes there is. The protocol is not documented at all. That's one of the reason I'm a little hesitant to touch it.


What's wrong with the protocol documentation on the wiki?

https://en.bitcoin.it/wiki/Protocol_specification


Try implementing that!


Is there anything in the specification that's you think is ambiguous or hard to understand?

There's also the source code to bitcoinj, which is a very well-commented implementation of the protocol.


Ok, my question was really as to how they even discover each other but some more perusing of that site shows that they connect to a IRC channel.

I thought there was no centralized point-of-failure?


The IRC channel just provides an initial set of peers. There's a hard-coded list of peers it falls back on if the IRC channel fails. I believe there's been some discussion about diversifying the initial peer discovery further.


What? There are already multiple independent implementations...


There are, but they are derived from the official client if I understand correctly.


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

1) Seeding Initial Wealth

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

2) Built in Deflation

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

3) Lack of Convertibility

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

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

4) When Something Goes Wrong, It Will Die

This is the trust issue again.

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


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

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

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

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

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

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


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

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

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

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

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


Why is deflation a problem? Keep in mind that it's just one currency out of many worldwide. If inflation is required in the service of a country, nothing stops them from inflating. Same with point 4 - instant deflation would just raise the value of existing bitcoins, unless it affected the confidence levels in the currency. What would happen if somebody smoked half the gold world-wide? Deflation of gold, which most gold investors would love.


Yes, you are right about deflation increasing the value of Bitcoins. That might make them a great investment.

But Bitcoins are supposed to be a currency, not an investment. A currency needs to be used to transfer value, not sit around appreciating.

If people sit on their Bitcoins as an investment then it will fail, because no one will ever accept it as a currency.


Ideally (from a consumer's standpoint), a currency should be relatively stable. I should be able to either buy things with it, or just keep it for the time when I need to buy something.

I don't think deflation in itself is a problem, but the current rate of deflation of BC does worry me. I wonder whether this might be caused by a relative lack of way to spend it.


The current rate is insane, yes, but it's almost solely because there's been so much attention around it lately. People want to get in on it, but don't have mining rigs handy, so they buy from an ever-decreasing supply of sellers who were around earlier. The rate will slow down significantly if it gets a lot bigger, until it's just a trickle.


In the short term, over the next year or so, there isn't going to be a deflation problem with Bitcoins; there will be significant inflation. The BTC supply is set to increase something like 30% next year.

Right now the value of BTC has been going up (relative to USD) hand over fist due to increased demand. But eventually -- and I think it's going to be pretty quickly -- the buying spree is going to end and the miners are still going to be churning out new Bitcoins.

It's going to feel more like holding Zimbabwe dollars than Krugerrands for a while, I suspect.

Long term, yes, Bitcoins are designed to deflate. If they remain popular past c.2020, prices will gradually decrease and smaller and smaller fractions of Bitcoins will need to be used for transactions. (Actually the number of Bitcoins in existence will probably go down slowly over time, as people lose Bitcoin wallets and thus take the BTC out of circulation forever. There are 9000+ BTC "lost" this way at present.)


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

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

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


That's not a "potentially more plausible" way for it to fail. It's merely a theoretical vulnerability. The bursting of a bubble in the price of a worthless asset, though -- that's, historically-speaking, a dead certainty.

Come on, people. This isn't the first asset bubble in history (though it may be the most cleverly-designed). We all know how it ends. People keep paying ever-higher prices for the asset, hoping it will go up. And it does for a while. Then one day, the price of the asset stops going up, people realise they don't want to own this asset now it's stopped going up, the value collapses, ka-pow, it returns to a more natural value.

For a real estate bubble, this may mean a halving in prices, because the natural value of real estate is quite high. For bitcoins, the natural value is zero.


While attacks against the basic building blocks of cryptosystems (like the SHA256 hash or AES block cipher) are rare, the protocols built upon those blocks can be independently vulnerable.

Take the Needham-Schroeder public key protocol from 1979, for example. http://en.wikipedia.org/wiki/Needham-Schroeder_protocol#The_... . It's simple and "obviously" foolproof, but a vulnerability was published in 1995, 16 years later.

Right now, we don't know if the bitcoin protocol has such a flaw. However, if it turns out to have an exploitable flaw, the entire bitcoin network will have to switch to a new protocol, which I haven't heard described as something they have a concrete plan for.


Such switch happened once.

It was found, that due to overflow, someone issued a lot of bitcoins to themselves in the block. During several hours was released a new client, which ignored flawed blockchain. When most people moved to a new client, the new blockchain overcame the exploited one.

Though it was when bitcoin wasn't popular.


I was (and still am) a bitcoin user during this period, it was managed relatively easily and quickly; major miners updated their clients and within a few hours, the competing blockchain had died off.

This would likely be even easier to accomplish today; as things currently stand, all mining pools and groups have a vested interest in maintaining the integrity of the blockchain.


I'm definitely not a crypto expert, but the way I read it was simply that if sha256 gets defeated, bitcoin is screwed.

I don't so why it couldn't be defeated, most of the other crypto systems which were going to last us for centuries got defeated..


It's not can it be broken, but when. It took 13 years for MD5 to be thoroughly broken. There are already theoretical attacks on SHA-256, which is one of the reasons there is currently a competition for SHA-3. If Bitcoin is to be a currency, it needs to have long-term stability, which is not helped by basing itself on crypto-systems that will be broken eventually.


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

IANA cryptography expert either, but my understanding is that the biggest threat to SHA is quantum computing.

http://en.wikipedia.org/wiki/Grover%27s_algorithm

http://en.wikipedia.org/wiki/Quantum_computer


I am not an expert either, but I can't see what Grover's algorithm has to do with quantum computers. When you look at the known algorithms for them, quantum computers seem pretty useless... It's not hashes that fear quantum computers but existing public key crypto.


Inverting a function in O(N^0.5) is useless?


Double the hash length (use SHA-512 rather than SHA-256) and you're done, no?


If SHA-256 gets completely broken, then yes. However, such instant breakdown may not happen in practice:

* weaknesses found usually still require some computation time, which may be prohibitively expensive. Reducing 2^128 to something like 2^90 is terrible disaster from crypto perspective (and buyer confidence), but won't open floodgates for fake coins (if faking a coin costs thousands times more than mining/buying, then nobody will bother on large scale).

* attacks typically have certain limitation, e.g. only generate collisions, but not preimage, or apply only to certain types/lenghts of data. Hash could be totally broken for one set of cases (MD5 digital signatures are useless) and at the same time still hold strong for other (MD5-hashed salted passwords are safe, as best known preimage attack is 2^123), so even if some terrible flaw in SHA256 is found, it may not be applicable to the way Bitcoin uses the hash.


It doesn't even need to be a real problem - just one that the investor perceive as a problem. And given that the tech is pretty complex and beyond the understanding of a lot of people using bitcoin then that risk is even greater.

And as with any investment scheme the potential for manipulation by rumour is also very real. There is a lot of regulation around more mainstream investment and money mechanisms to stop this (and it still happens) - bitcoin, which has no centralised "defender", will be just as prone to it.

I would imagine that now a wider audience is becoming aware of bitcoin we will start seeing this kind of thing in the next few months (and possibly are already doing)


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


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

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


It's not impossible to prove cryptographic algorithms are secure. It's just really, really, really difficult. So difficult it's not even proven that one way functions exist in the first place! (For context: if one way functions exist, then P!=NP).

Proving cryptographic algorithms are secure involves proving statements over all turing machines. For example, one definition of a 'secure' pseudo random number generator is one such that no turing machine can distinguish its output from 'true' random (with 2/3 certainty) in polynomial time.

However, we do know a really-really-probably secure one way function. If there are any one way functions, then it is secure. It just isn't really practical. http://en.wikipedia.org/wiki/One-way_function#Universal_one-...


  Also, you can't really prove that such an algorithm is secure.
Incorrect. One Time Pad encryption is provably secure. (Proven by Claude Shannon, no less; as in, the guy who invented information theory.) It is impossible to decrypt if you do not have the key.


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

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

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


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

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

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

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


...subject to your key being safe, produced from a good source of entropy and never used anywhere else. Is this provable?


keeping the key safe, yes, using the key once, yes, but need not be random at all (with in reason - a key of 0s is feasible, under the pretense that the cipher text, which would be equal to the plain text, is the cipher text for any message with the same length, for some key)

the key space being the same size as the message space, and cipher text space means that all messages of equal length are possible, with no way of knowing which one is the correct one. i suppose, a theoretical attack would be to be to enumerate all messages in the english language, XOR them with the cipher text, and see which resulting keys come close the properties of the PRNG used..

even non-determinism can't help you here, i'm afraid.


I leave the reason that this is among the funnier HN crypto comments ever as an exercise to the reader. And, of course it happened on a Bitcoin thread.


never once tried to argue that it is a practical approach...

additionally, attempting to exhibit intellectual superiority by making someone look stupid, isn't infuriating, it's just sad.

i wouldn't conduct myself like that in public or on the internet. it's a shame that anyone thinks it's acceptable.


As someone says, one-time pads are impossible to decrypt without they key. But you can guess the key or use some other brute force mechanism.

My guess, SHA-256 will fall to a quantum computing algo in a few years.


As someone says, one-time pads are impossible to decrypt without they key. But you can guess the key or use some other brute force mechanism.

Actually, you can't even reliably brute force a one time pad. The key is always the same length as the message. All plausible messages of length N are equally valid solutions for a brute forcing algorithm.


>All plausible messages of length N are equally valid solutions for a brute forcing algorithm.

Assuming there is no out-of-band information to use to attack the ciphertext then yes I agree is unlikely to find a unique solution.

Aside: I'd never considered that key length was dictated by the term "one-time pad".


You could be using a One Time Pad for key management. This is certainly feasible now, since a couple of Gigabytes of data is now considered a manageable amount.


Hashing algorithms aren't generally as well understood as reversible encryption algorithms. It's entirely possible that these novel discoveries are just around the corner.

And when that happens...


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

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


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

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

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


I don't know. Maybe.

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

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


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


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

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


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

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

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


That proves the point. They have to invest their wealth in stock, real estate etc. instead of putting it in a chest/thumb drive and burying it on a lonely island in order to keep it.


... which is surely a very good thing? If cash paid a better return than most investments then we wouldn't have anyone to invest in things.


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

That only works if a majority of your assets or earnings are in bitcoins (e.g. you have to convert them in order to live), or if bitcoins are exchangeable for necessities. If the article's author is correct (and he is imo) and it's more sensible to look at Bitcoin as a commodity, not a currency, then i think your assertion is a red herring.


In order for one person to be able to save (or invest), someone else has to be willing to borrow (or sell stock).


"That is, inflation encourages productivity."

Wrong. Inflation encourages to invest in commodities or real estates. Watch for increasing price of metals, agriculture products. The primary cause of real estate bubble in US was cheap money.


I don't understand. If a man can earn an expected 3% interest (in real terms) by buying a certain investment, is he less likely to buy it in a deflationary environment than in an inflationary environment?


Yes, because in a deflationary environment, just sitting on the money is an investment in itself.

Let's say you have an amount of money which buys you today 1 house. If within 1 month, with the same amount of money, you'll be able to buy 1.04 houses, nobody will invest in any business which increases real (non-money denominated) assets at anything lower than 4% per month.

Or, to look at it from another angle: the central bank cannot set a negative interest rate, that is, take interest just for keeping the money in the account (people will keep it under the mattress instead). So the deflation rate is the minimum interest rate that the businesses must achieve in order to be economically viable and attract funds (otherwise investors sit on the money). The greater the deflation rate, the more bankruptcies it causes.


> If within 1 month, with the same amount of money, you'll be able to buy 1.04 houses

I think 60% annualized deflation is significantly more than the deflation we would expect in the eventual steady state of Bitcoin. And if I was experiencing 37.5% annualized inflation (the opposite of 60% deflation), I don't think that would be particularly good either.

If you meant, by bringing up a central bank, to refer primarily to monetary systems based on a central bank, I don't believe that a government (a small subset of the population which is allowed to murder and kidnap and rob everyone else, and which is necessary for a central bank to exist) is a prerequisite for trade denominated in a common currency, so I'm not sure that the way our current monetary policy works is entirely relevant. The Dallas fed wrote an interesting piece on changing policy to allow for negative nominal interest rates (http://dallasfed.org/research/indepth/2003/id0304.pdf), but I think we will have to settle for negative real interest rates for the near future.

Discounting the central bank bit, I'm first unsure that the bulk of business has to be financed through debt, and second unsure that a deflationary environment can continue to exist given a huge loss of productivity. I would expect, if thousands upon thousands of businesses suddenly closed their doors to sit on cash, that the resulting shortage of necessary goods and services would put a quick end to the deflation. This would be extremely painful and inefficient in the case of a large deflation, but any global currency of bounded quantity should eventually only deflate as rapidly as human productivity increases.


In that case ("in real terms") there is no difference. That's not the problem.

The real problem is if someone is more or less likely to buy something in currency denominated terms if it is a deflationary or inflationary environment.

If people don't spend then you tend to end up in a low (or negative) growth environment, which can lead to high unemployment and a falling standard of living.


Why do we expect real ROI to vary significantly based on whether the currency is inflating by 2% or deflating by 2% y/o/y? I would expect if I were a lender, and inflation increased, I would price that in to my new transactions, and I would think if I were a business, I would be impacted much more by my ability to convert real time and real resources into real value than by the number of loaves of bread I could buy if I spent all my cash reserves on them.


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


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

* Subject X is broached in an exciting blog post.

* The submission receives massive upvotes and hundreds of comments.

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

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

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


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


HN has turned into bitcoin news because bitcoin speculators (enthusiasts if you'd prefer) are constantly spamming social media and other outlets to drive the price up. Hopefully sometime soon HN editors will see their way to giving it a manual penalty similar to politics, or re-evaluate the definition of a voting ring to include this minority spamming and voting.


Half of the bitcoin articles seem to be rather negative, though. If it were just speculators posting, you'd expect to see more positive articles.


It's a PR campaign.


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

Bitcoins are no different from tulip bulbs.


Why is it inherently a bad idea? Why is it a pyramid scheme?


Because Bitcoins are being suggested as an alternative to fiat money. However, given their current rate of appreciation, Bitcoins are actually an investment, not a currency.

What is their inherent value, then? Commodities (whether precious or industrial) can be used in production or for luxury goods. Equities generate profits, which are subsequently shared with investors. What do Bitcoins do? Nothing.


What do Bitcoins do? Nothing.

That's not true. Bitcoins can be securely transferred between accounts without the need for a centralized broker. That's not "nothing".


That's not the value of the bitcoin, it's the value of the cryptographic code which has been open sourced. Anybody can fork it and create its own "Webcoin", but there's no intrinsic value in any forked instance coin, beyond the publicity that allows early adopters to cash in.


Cash, delivered in person, does the same thing.


Which has an obvious disadvantage over bitcoins: it has to be delivered in person.


So their unique value comes from private transactions...but there's only a finite supply of bitcoins? How many of these transactions can actually occur in 2013-2014, when every bitcoin has been mined and their value is skyrocketing?


The amount of transactions that can take place is unlimited, and even though there is a maximum of 2.1 million coins, each coin is divisible to 8 decimal places, giving 2.1 quadrillion units of currency.

Also, mining won't be completed this century, although the rate at which coins are generated decreases over time.


Bitcoin looks nothing like a pyramid scheme. There is a relationship between the value of a bitcoin and the demand, but that's true for any product.


Bitcoin looks exactly like a pyramid scheme from a money-transfer point of view. Money gets shifted from gullible suckers to the folks who invent the scheme, until one day you run out of people willing to sign on for the scheme, at which point everything collapses and the late adopters are left holding the bag.

It's kinda sad. I think when it happens I'll make like edw519 and self-publish a book "The Best Of Hugh3" in which I publish all my "told you so" comments. And hey, maybe just to be charitable I'll sell copies for a million bitcoins each!


You don't appear to understand how Bitcoin works. Money does not shift from new investors to the creators of Bitcoin. I'm not quite sure what confusion of ideas lead you to believe this.


0) Bitcoins were easiest to mine at the beginning => the creators & early adopters have a large number of bitcoins

1) New investors demanding a finite supply of bitcoins are increasing the exchange rate of bitcoins/dollar.

2) Early holders of large volumes of bitcoins can therefore cash in their bitcoins for a great deal of real money from new investors desiring to enter the market.

ergo, money shifts from new investors to the creators. (If the creators are smart enough to cash out. Which it seems they are, as Satoshi has disappeared. http://en.wikipedia.org/wiki/Satoshi_Nakamoto)


What you describe is a free market trading a limited resource; not a pyramid scheme.

In a pyramid scheme the wealth always flows up to the creator of the scheme, but the creators of Bitcoin can only make money by selling their own bitcoins - they don't get a cut when anybody else does.


> Money does not shift from new investors to the creators of Bitcoin. I'm not quite sure what confusion of ideas lead you to believe this.

Please explain how new investors obtain bitcoins, if not from the original members of the system (some of the early users have 1% of the total bitcoins, I recall hearing). Yes, there's mining, but that's not an effective way to transform money into bitcoins - I mean, say that I wanted 1000 bitcoins. Building an expensive new computer to mine and waiting for them to magically appear is not how I would go about it.


People obtain bitcoins by buying them from other people, who are typically miners or people who bought a lot of bitcoins early and want to cash out a proportion of their worth.

However, the people responsible for creating the bitcoin protocol only benefit financially if they sell their own bitcoins, or if an increase in demand raises the price bitcoins are trading at.

The Bitcoin economy is a free market; people can buy and sell bitcoins and will, and any profits they might make are entirely governed by supply and demand.


Yes, exactly.

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

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

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

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

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

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

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

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


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

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


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

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


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

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


>But otherwise you don't have an underlying asset to sustain the value.

That's the biggest problem with Bitcoin, I think.

Now, if I could purchase more goods and services with Bitcoins, this might mitigate the risk of using it. But as of now, not many retailers accept it.

As a result, the Bitcoin market is being driven solely by speculation.


> that gained widespread adoption

No. What it has gained is: speculation.


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


It seems like this in particular applies to most government-issued currencies as well (except that they have very good marketing and market share). Each currency itself has no intrinsic value and depends on "marketing" (reputation of the government minting it) and market share (number of places accepting it). If people lose faith that a government will do a good job managing its currency or even think that the government will disappear soon, the worth of the currency (in terms of what people will give you for it) will probably fall.


A government collects taxes from all the businesses and people in a given country, which is huge in terms of being able to provide value. Bitcoin has no such thing.


Having access to more wealth gives people more faith that the government will be around a long time, will not do crazy things with the currency. That's not the same thing as the currency having more intrinsic value. (Also, it would not seem to make sense to talk about backing a currency with taxes denominated in that same currency, would it? But I'm unclear what you meant by "provide value".)

(What I've heard about bitcoin makes me a bit skeptical, but I want to be skeptical for the right reasons.)


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

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


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

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

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

"Built in Deflation"

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

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

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

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

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

This guy is dunning kruger at its best.


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

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

"bank run"

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


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


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

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

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

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

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

The concept has merit.


> Because if you expect the value of your cash to rise, you would probably hold onto your cash.

Right, that's why the computer industry doesn't make any money.

> This, again, happened during the Great Depression

Yes. A large part of what made the Great Depression last much longer than the Depression of 1920-1921 was that insolvent businesses were given money instead of being allowed to fail. One might compare this to recent events, and have a look at the present employment rate of the U.S. population: http://market-ticker.org/akcs-www?get_gallerynr=1631


> Because if you expect the value of your cash to rise, you would probably hold onto your cash.

So why don't you? By that logic, you don't own a computer. There has not been a single minute for the past thirty years when it was not an invariant that if you wait a little longer, you can get a better computer, or more lately, mobile phone or *pad-device for the same (or, not rarely, less). Yet, these items sell like hotcakes.

When deflation is temporary, yes, then it's true - but when the deflation is constant, it's not.


The computer argument is completely misguided.

People buy a computer when the utility they will derive from it outweighs the monetary cost. They know they may get a better deal in the future, but immediate needs may outweigh potential future savings.


And why wouldn't that argument work for all other goods, too, rendering the deflation argument misguided?


Because most goods don't have the extreme pressure of Moore's law.


Bitcoin is being criticized for having built in deflation (not incidental deflation), thus comparing it to a category of goods (computers) that is also exposed to almost algorithmic deflation is relevant.

So, given the built in deflation of Bitcoins, if you have some Bitcoins and need or want product X, why is knowing that you can have two X in a year, or four X in two, if you just hold on to your coins, going to keep you from getting your X now?

Isn't that too, as you state, a question of whether "the utility they will derive from it outweighs the monetary cost" ?


The USD is a terrible store of value. Gold is a store of value. Govt paper is not.

What makes gold a "store of value"?


Totally agree. His arguments struck me as complete nonsense with a superficial veneer of plausibility to the economics outsider.

The best flaw in the bitcoin model (I've not studied it too thoroughly) is acceptance testing. You give me a bitcoin: how do I know to accept it as payment? This may not be a problem if suitable proxies are made (like with credit cards).


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


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

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

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


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

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

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


To call Bitcoins a scam outright is the sign of a person who may not have tried putting money into the system to see how it actually works.

lol. (I don't usually say "lol" but it seems appropriat here.) So the only people worth listening to on the subject of bitcoin are people who own bitcoin and hence have an incentive to further talk it up?

Is it really a "scam"? Yes and no. It's not an outright scam in that the inventors really hope it will work (and that making themselves short-term rich off other people's money is just a side effect).

Smart psychics are a scam -- they know they're lying to people and they're taking their money by selling 'em something worthless. Bitcoin is more like a dumb psychic, one that doesn't know she's peddling bullshit.

On the other hand, from the point of the view of the person who has given up real money for the insight that they will meet a tall dark stranger, the intentions of the originator don't matter.


So the only people worth listening to on the subject of bitcoin are people who own bitcoin and hence have an incentive to further talk it up?

Not at all. I personally agree with the author that the whole idea is flawed. With any new system, there needs to exist some sort of vetting process, though. What I'm referring to here is whether or not the author of the post vetted the system. In other words, went through the process of using bitcoins to match their conclusions. A good analogy might be the sample table at the grocery store. If you're skeptical about how something might taste, you try it and give your opinion. Here, it's almost like looking at the food, deciding not to eat it all and then telling people it's complete shit without having ever tasted it. In regard to using the system first, I'm not suggesting that the user put in a large sum of money, but enough to see how it works and what the outcome of that experiment was. I'm not dismissing the points here, but I've always respected the opinion of those who try what their reviewing/opining about first. I don't think that's unreasonable at all.


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

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

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


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

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

Severe Problem Number 2: Built in Deflation

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

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

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

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


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

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


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


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


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

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