It is intended. I, too, dislike the manner of creating links as keys into a hash of memory resident continuations for exactly this reason. It's just not a good way to structure things. It can be made to work, obviously, but it's far from an ideal setup.
I believe the smalltalk-based "seaside" server works analogously.
In fairness, it doesn't tend to bother often, most of my ( and presumably most of all ) traffic being directed to the harder links, none of which use the "fnid" keys. The continuations appear to be used for links that are hiding information ( indexes into current ranking, user-ids for flagging, etc ). It just stings when you click something after coming back to a page and it throws it back in your face.
I don't want to come off as a troll or anything, but how do you expect us to deal with all the parens in the language you built this site in? It's like, all parens.
... which is a really terrible way to run something effectively. Basically, it means it'll fail whenever it suddenly needs something predictable but previously unneeded.
I think we just have different expectations. I see HN as a YC-hosted water cooler - nothing more. It's not important to me that it be bug-free or fast or even up all the time. YMMV.
... which will drive away everyone overly impressed by flashy features and/or who like to whine about every little unimportant thing, like a social news site being down briefly, or not being able to see karma scores. Working as intended probably.
In the last couple of months, Bitcoin has passed the phase of "BC is nature's way of teaching economics to nerds" and entered the phase of "BC is natures's way of teaching political power to nerds"
Reading through the recent Treasury Department guidance this morning, it looked to me like the U.S. is initially attacking where hard currency comes in and leaves the system -- no matter where in the world that takes place (plug: http://freedom-or-safety.com/blog/the-other-bitcoin-shoe-dro... )
I imagine they'll leave that decision out there for a while -- months or years -- before they start heavy enforcement. But enforcement is coming. And reading through the AJ link, it looks like BC is beginning to integrate quite nicely into the EU banking system.
So now I have an anonymous virtual currency -- that governments can track the movement of. Which might require special licensing, permits, and insurance to broker. Perhaps I'm missing the point here?
We're getting to the point where the big boys step in, and my bet is that it's not going to be comfortable for the people who started the whole thing. I expect more "integration" into the traditional banking system, at least until there's no value-add between cash and BC, and then we've reached our starting point. BC becomes nothing more than "collecting sharp sticks" in such a fashion as to be closely monitored by world governments.
I think the main value of Bitcoin is that it's a perfectly hard currency, not that's it's anonymous (or not). Monetary dilution is alarmingly easy with today's fiat currencies, and replacing them with Bitcoin would fix that basic flaw. (Disclosure: I currently hold Bitcoins.)
I think one of the core assumptions underlying people who adopt Bitcoin is "Inflation is bad". I'm no economist, but I don't think this is always the case. Currencies being able to rise and fall relative to each other allows governments to stimulate the domestic economy by increasing the value of exports, or cool down an overheating economy by doing the reverse.
Meanwhile, there are some other basic features of the currency which seem undesirable to me. In particular, the built-in (and ever-increasing) scarcity of coins means that the value of the currency will always, continuously, rise. That seems great, except that an economy built entirely on Bitcoins would therefore have an economic disincentive to investment -- if you can make 5% return by just sitting on your coins, why would you invest in a new business and create jobs and risk getting less than that?
Bitcoins do seem pretty attractive on an individual level, but at the macro scale they worry me, and I'd love to hear somebody with an economics background chime in on these points.
Virtually no mainstream economist advocates a perfectly hard currency. This is either an indictment of hard currencies, or an indictment of mainstream economists. You can probably guess how I feel.
Unfortunately, discussions on this subject can rapidly become arbitrarily politically incorrect. If you're interested, I'd be happy to send you a link to a very non-mainstream source (but would rather not post it here). My email address is in my profile.
Anonymity isn't the only value of Bitcoin. There's also the matter of exchanging money electronically without paying fees to banks, Visa, or Mastercard. Regulation might make transacting Bitcoin more expensive but still leave it cheaper than traditional approaches.
I'm not a fan of Bitcoin personally (too much speculation for me to be comfortable using it as a medium of exchange, much less a store of value) but I think people underestimate how badly we're getting screwed by the current payment oligopoly.
So then it truly becomes just another collector's item, but one where when you "cash out" it's all automatically reported?
Why not just trade in something else like gold or coins, where you can buy and sell without having a state security system looking over your shoulder?
I frankly don't know if I'm a fan or not. I haven't been, but the movement seems persistent, and I admire that. I also admire the concept of trying to use technology to free us from ever-more-oppressive governments. However I'm cautious: BC is "version 1.0". Might take until version 3 or so to get the bugs worked out.
I just hate seeing a lot of really smart people work hard to end up in the same spot they started from.
In principle if bitcoin takes off you could hold a bitcoin account and purchase things in bitcoin directly, making some of your transactions not subject to the "cash out" overlooking.
This is exactly why I don't like the transaction fee model of funding mining in the long-term, and would prefer a coin with a slowly-growing uncapped money supply.
While I don't think it will ever see the support that bitcoin enjoys (or even litecoin for that matter) the model you are describing is provided by another alt coin call PPCoin (http://www.ppcoin.org/static/ppcoin-paper.pdf).
Bitcoin is not anonymous. All the transactions take place between cryptographic pseudonyms (the ECDSA keys used to sign transactions). Just how much information you can infer from the resulting anonymous social graph is unclear, but it's probably a fair amount.
That would still be progress, and the fact that bitcoin's value is dictated by democratic fiat rather than governmental fiat is still very powerful and a major differentiator. It is more similar to gold than cash in that respect.
>In the last couple of months, Bitcoin has passed the phase of "BC is nature's way of teaching economics to nerds"
>and entered the phase of "BC is natures's way of teaching political power to nerds"
That is one of the best quotes I've read on bitcoin.
The western world is waking up to distrusting their governments. In a low-tech way, most 3rd world countries have been there for decades. Squirreling away savings is a behavior enforced upon citizens with acquisitive governments (hello Cyprus!).
The world is changing, and bitcoin is there to help.
I've always liked the idea behind bitcoin (decentralized cryptocurrency), but I think ultimately it will serve the role of "specie gold" with something more useful on top for transactions -- either book-entry accounting at a wallet provider, or ideally some kind of blinded token system.
Bitcoin has numerous inherent deficiencies as a transaction system. It's also not a great store of value -- you ultimately want something equivalent to debt or equity in productive enterprises, rather than a commodity, to hold the majority of wealth -- that's the whole point of fractional reserve banking or mutual funds/investment accounts.
It may or may not be an ideal unit of account. Right now, USD is undeniably the default unit of account, and even bitcoin vendors tend to price in USD (with the runners up being EUR, JPY, etc.; other fiat nation-state currencies).
So, some kind of blinded token system where issuers of blinded tokens hold public amounts of bitcoin, and where the tokens are redeemable upon demand for bitcoin ("specie") would work a lot better than trying to shoehorn transactions into bitcoin directly.
I think ultimately it will serve the role of "specie gold"
I agree with this. (I don't understand the blinded token idea.)
I think it is quite easy to imagine that banking services are build on top of BTC. These would be account receivables against banks, much like current accounts and CDs in USD or EUR work today.
The transaction features of bitcoin are amazing, in my opinion, if you compare them with gold bullion. Granted it can take up to hours for a payment to become fully confirmed, but this is the cryptographic specie being transfered from one individual party to the other. It is a lot more direct on this account than even a fast bank transfer, because in that you still only have a receivable against your bank, much like equivalent ones in todays credit system denominating in USD, etc.
Plus you have the safety that no-one can inflate much value out of the currency, because it is specie-based. At least not for a very long time.
(Unless the "closing of the bitcoin window" trick is pulled again. "Closing of the gold window" was the language the was used euphemistically, when redeemability of USD into gold was ended in 1973.)
If you wanted instant transactions, that is just as easy as today, with a lot more pressure on banks to make transfers real-time, because one main business model would be to beat transaction speed. And that has an upper bound of max. a few hours in plain BTC.
Blinded tokens are basically a form of public key operation where an issuer of currency (mint or issuer) signs a unique "coin" (random string) essentially through a sealed envelope with carbon paper. The end user can remove the envelope and the coin then isn't linkable by the issuer of currency to the original signing transaction, except that he can check that the signature is valid. So there's real, cryptographic anonymity.
The system has a central entity issuing the currency initially AND reissuing it on every change of ownership (to make sure your trading counterparty didn't keep a copy). But, this can be a purely automatic action, and there are technical ways to keep it operational even if there is serious effort put into shutting it down (it doesn't have to be an identifiable business entity, it could be a bot which sees coins posted to a pool somewhere, operates on them, and returns them; or goes over a tor hidden service, or whatever.
The advantage is you have real anonymity on each transaction and you can issue arbitrary currencies (e.g. I could do an rdl-issued-USD currency, which is $10k in tokens issued against a pile of $100 bills I have proven I control on camera, and where there are multiple independent audits to prove I still have the $10k. Or a corporate/personal debt or equity currency, like offering 1% of a startup...you can do arbitrary instruments, just like paper; all this does is make it easy to exchange shares of those agreements.)
The interesting thing to me is currency's role in providing certainty. In this case, about the total amount of something, and whether what you're encountering is a valid instance of it. Check out some examples and how Bitcoin compares:
Gold has chemical properties that ensure its finite scarcity (though supplies can fluctuate) and allow you to identify it as ture gold (through, e.g. density measurements).
Gold-backed paper currency has a scarcity determined by the trustworthiness of its issuer and a validity linked to the difficulty of its reproduction.
Fiat paper currency has a feature of allowing a fractional reserve system, which allows a central body to control its scarcity (and perceptions thereof), with validity again linked to difficulty of reproduction.
Open-source cryptographic currencies have a well-defined scarcity and easily verifiable validity.
Cryptography provides certainty better than a physical alternative like gold or paper, but governments traditionally have had control over currency and don't have control over Bitcoin. I think it's unlikely they'll give this up without a fight. I'm not sure that the token system you propose really gives them back that control unless it supports fiat: the arbitrary issuance or discontinuation of currency. But, the idea of Bitcoin as specie is a great one. If it is adopted it as such it becomes open to confiscation like FDR did with gold in 1933, which is an interesting prospect:
http://en.wikipedia.org/wiki/Executive_Order_6102
I wonder confiscation is even possible? If it's not this is a seriously revolutionary tech: property without government.
Fiat paper currency and fractional reserve are basically independent concepts. Fractional reserve is practiced by the banks, and was done under gold-backed currency just as much as today. A really interesting thing is the period of "Free Banking"[0] -- in Scotland in the 1700s/1800s where banks were essentially unregulated; State banks in the US were loosely regulated in much of the 1800s as well.
All that's required to do fractional reserve is the ability to distinguish "money on account" from notes. Either issue private notes, or maintain ledgers of balances.
You could conceivably have a 100% reserved bank (doing bailment of physical fiat notes -- a $100 note in the vault for every $100 in a savings account balance) even under fiat currency. Or you could have something with only one entity allowed to increase the money supply (deposit with the central bank, but a 100% central bank reserve requirement, but the central bank allowed to do loans).
You're right that I conflated the two above but the relevant feature of each is that they're a form of money creation. With a fractional reserve, the amount of money created (through leveraging the reserve) is inversely related to the size of the reserve. With fiat currency the 'reserve' the government has is nonexistent, allowing for unlimited money creation. The government or a bank's ability to engage in money creation are both limited by the certainty that those using the currency have in its future value. If a bank loses it, we get a run. If a government loses it, we get hyperinflation.
Thanks for the distinction between the two concepts though. You're exactly right and gave a great explanation of them. I'll take a look at the free banking period. It does sound very interesting. Talking about the money and valuation sometimes it seems like all we have to measure things with is a rubber ruler, especially when the amount and value of currencies can be manipulated.
I totally agree with your first statement, that a more useful virtual currency will spring up on top of Bitcoin for immediate transactions (I actually have a good idea of what it will be). Yet I totally disagree with your second premise. I think Bitcoin is a fine store of wealth. Fractional reserve banking and a debt-based economy is what many of us are trying to get away from. And I can definitely see Bitcoin as a long-term store of wealth and an easy way to make deposits into other, more convenient virtual currencies that are springing up.
Bitcoin is no better than gold as a store of wealth, and it's widely understood in economics that "cash under a mattress" or "bank deposits not loaned out" are unproductive. It's reasonable for a very conservative individual to hold a lot of unproductive assets like that, but if everyone did for all of their assets, the economy would collapse, or at least be far smaller.
The current method for handling immediate transactions is a Green Address (https://en.bitcoin.it/wiki/Green_address). Basically using a third party that both people trust for sending coins so if you as a seller receive coins from this address you know they weren't double spent and can accept the coins right away.
There is a really cool project called Ripple that's designed to do exactly what you suggest: build a P2P transaction system where Bitcoin or USD or whatever you want is the "specie gold." It's basically a distributed banking system which IMO is an awesome concept. I don't know if this is going to take off but I hope something like it does.
There are a lot of technical reasons I dislike Ripple and would prefer to just have a bunch of separate "mint operators" (technical organizations who run servers) and "currency issuers" (financial entities) and "exchanges" (which do instant currency conversion and publish exchange ratios), all using a common protocol, but not one based on consensus across multiple parties for each entity, but fully independent entities implementing their own governance and controls.
rdl-USD-001 is a "brand", and if it has weak security or weak financial backing, it trades at a huge discount vs. jvm-USD-001. There's no need for either to be "the official USD". You might create "hn USD" which is an index fund of hn particiant-issued USD obligations. There's no reason for everyone to use the same currencies for store of value, and with exchanges, you can convert to a common currency for transfers. I'd probably choose to display all my prices and account for my personal wealth in units close to USD, but someone else might pick EUR or BTC. Separating the 3 roles of money is the key element here.
Ripple essentially tries to be a multi-currency bitcoin. It also has no anonymity.
Those are good points. I agree that it's essential to have a way for ripple issues to trade at discounts (another way of saying this is that "Trust" should be continuous rather than binary and it should be dynamically set by markets if possible). It would also be nice for issuance to bear interest as well.
However I think that ripple would still have a place in such a system. Anyone could start a trading site using the ripple protocol that allows ripples to be exchanged at relative discounts. The Ripple protocol does treat, say, jvm-USD as different from rdl-USD; when you do a transaction you have to choose the issuer. The nice thing about having a universal P2P protocol is that there could be more than one trading site using the same protocols, and wallets would be seamlessly transferable across them. The P2P network provides the assurance that the issued notes don't rely on a 3rd party.
As I said above, I don't really care if it's Ripple or something else but I think this is a really powerful idea, and I would definitely want it to work the way you're suggesting.
The Ripple protocol can't be anonymous because it's a ledger; I'm pretty sure you need to give up at least one of anonymous, decentralized, secure-in-software-only.
Bitcoin is decentralized and secure-in-software, as is ripple.
Blinded tokens are decentralized and secure in software.
Cash (physical notes) are decentralized (per-issuer, like USG vs. JPN)/anonymous. You could do a trusted computing/smartcard protocol which was decentralized and anonymous, too. In both cases the level of security is down to physical counterfeiting or reverse engineering of circuits, which is a much weaker guarantee than cryptography.
I don't think there's a tractable software-only, distributed, anonymous system. The only way I could think of doing it is some kind of proof of work where the work required (storage or CPU) was something >50% of all resources in the world. Bitcoin has it easier because it's able to keep a record.
You can approximate software-only-secure, anonymous, and decentralized by having lots of distinct software-secure, anonymous systems more easily than you can approximate the trinity from other systems, I think. Even if you use a mix, vpn, etc to anonymize yourself with bitcoin, it leaks enough information to make someone identifiable.
Many in the bitcoin industry /community think that fractial reserve banking was a bad idea, and there would have never been the recent banking trouble if all the USD could be converted into gold (just ignore the banking problem when there was a gold based currency and ignore other countries that had banking problems).
There's potentially an argument for a currency itself to not have investment/fractional reserve features, but there is really no viable argument against investment assets existing independent of the currency at all (but denominated in that currency, potentially).
Also no sound financial argument for anyone (except those with short term needs or exceptional risk aversion) to store the majority of his wealth in a non-appreciating asset (like currency, even fiat USD) vs. income-bearing assets.
My problem with BTC (and I say this as a supporter) comes from a pg essay - you make what you measure. The BTC community measures BTC/USD exchange rate so it ends up optimizing for that, but I can't understand how focusing on that is a good thing. It already produced one massive crash and we're in the middle of another one.
The actual number (BTC/USD) is mostly irrelevant, but volatility is quite bad for people who actually want to perform transactions with BTC. I hope BTC is able to get over this and continue growing.
It already produced one massive crash and we're in the middle of another one.
Why do you believe a crash is forthcoming?
The actual number (BTC/USD) is mostly irrelevant,
Why do you believe it is irrelevant? The market capitalization is only 500 million dollars. Can you imagine operating an entire economy with only 500 million dollars? It's a proxy for adoption, although that is muddled by price speculation and so on.
but volatility is quite bad for people who actually want to perform transactions with BTC. I hope BTC is able to get over this and continue growing.
The bitcoin economy is very tiny. Google probably makes more money than the entire bitcoin economy in a year several times over. Of course, it's going to be volatile. That's because we are growing. It would be a more legit concern if that the economy is worth 100 billion dollars or a trillion dollars.
1. Because it has jumped 3x in 2 months. Either the bitcoin economy has exploded over the last 2 months or speculators are feeding the hype machine. I see no evidence for former, but plenty of the latter.
2. It is irrelevant because you can use any sub unit down to satoshis to transact. If you want to use BTC as a currency and perform transactions, the exchange rate number is irrelevant, because it doesn't matter if a widget costs 1BTC and the rate is 1 BTC/USD or if the widget costs 1 satoshi and the rate is 10,000,000 USD/BTC. If you're a currency speculator OTOH, yes the rate matters immensely. Which goes back to my point - is BTC there to provide an alternate currency and associated economy, or just an easy way to gamble?
3. You're using the terms "market capitalization" and "economy" interchangeably. The economy implies the size of goods and services produced in the BTC universe - this number is important but seems largely ignored by the BTC community (in fact, it seems to not exist). Market Cap here means # of bitcoins multiplied by the USD exchange rate. This number is closely followed by the BTC community, but is large meaningless. It has spiked 3x in two months, but what has happened to the BTC economy itself? It seems to have grown, but can anyone say definitively?
1. Or – third possibility — many people have recently raised their expectation of the future value of the Bitcoin economy. If you're familiar with stock trading, this is analogous to having a high P/E ratio.
There is a lot of uncertainty here. Intelligent, rational people disagree wildly on the future of Bitcoin. There are all kinds of risks: legal, technical, and competitive.
If the exchange rate crashes, and takes a long time to recover, you'll feel justified in calling all buyers "speculators feeding the hype machine", when in actuality many of them were simply wrong, or early.
2. False dichotomy. Some people are speculating. Others are using it to exchange value. Inventions don't need teleologies.
Your concern, if I'm understanding you, is that speculators are harming Bitcoin's potential as an alternative to the current economy. I wouldn't worry about that. The exchange rate is either going to $0 or $1000+, and the behavior of the community short-term isn't going to affect that.
I just read though your link and I hate to break it to you but bit-coins are the opposite of antonymous every account and every transaction is public. Also, from a technical standpoint it's horrible for fast transactions like a store or vending machine, so either it needs to be fixed, another layer built over it which makes it no more useful than cash, or some other digital currency is going to take over.
It is designed to be attack resistant. Having to validate transactions across many nodes in the network, and having to maintain a valid transaction history amongst the network, makes it really hard to be fraudulent. You can register as many sources as you want in wallets, and you can give away your wallet.dat, so in practice wallets are tied even less to people than IPs are.
1. Then you are not looking very hard. All the numbers indicate that there is increased spending and increased economic activity: http://news.ycombinator.com/item?id=5296889
There is of course hype but the past few months do represent real growth: see [here](http://blockchain.info/charts/n-unique-addresses). Now obviously that's a very gameable graph but there is little incentive to do so (and I was trying to pick something that would remove services like SatoshiDice from the equation since that heavily skews transaction count etc.
There's the fact that the Euro is in trouble. There's the fact that provable odds gambling has been implemented (a powerful factor in the US). There's the fact that ASICs are coming out. There's the fact that it's becoming countercultural and hip to accept them (see Mega and Reddit) There's the fact that every time the price goes up more mainstream articles are exposing people to it's concepts, driving demand by more. Now it could well be bubble mark II and I DEFINITELY expect a correction: it's a volatile market. But there's certainly some massive growth underneath the massive speculation.
I could be wrong, but this looks like an ASIC fueled bubble to me.
Avalon, the first ASIC producer to market, require payment in bitcoin. I believe BFL require payment in bitcoin for orders outside of the US.
This created demand for bitcoin, which raised the price against the dollar. Others saw the rise and were encouraged to buy in or order ASICS, rinse and repeat.
As far as I know the only service that is turning over serious numbers is Silk Road. I guess you could also count Satoshi Dice, but I am sceptical about their long term future.
Due to the nature of bitcoin, it's entirely possible that the black market and wealth transfer functions of bitcoin have grown to support the current value, but the arrival of ASICS is too big of a coincidence for me.
People buy BTC to buy ASICs, but then the ASIC vendor immediately sells the BTC to cover their costs. It should have no net effect on the exchange rate.
The volatility of bitcoin prices is a huge strike against using bitcoin as a unit of account, and makes it complicated to use as a store of value, but that really doesn't matter much if you're just trying to use it as a medium of exchange.
I haven't thought about this as much as you, but I see the recent increase in Bitcoin's value related to the recent rise of gold value - people are starting to lose faith in the USD and wanting to put their money somewhere else. Gold has been sharply increasing in value since 2001: http://i.imgur.com/PTyNacP.png
I do remember that there was a Bitcoin crash around November 2011, though, so maybe you are right that it will happen again.
Arguably Bitcoin may have never been adopted at all if not for the enrichment of early adopters. As much as I dislike bubbles there is a real benefit to creating them.
It's unrealistic to expect that a thing could grow from a project on a hobbyist's computer to a major international currency without some volatility along the way.
I think Bitcoin could have been designed to be less volatile (by making the mining reward based on some closed loop), but that change would also likely enrich early adopters less which might have caused Bitcoin to never take off.
Eventually the mining reward will be almost completely be based on transactions fees. That should make for different dynamics, than mining being paid almost exclusively from new coins.
You could take a Bitcoin-denominated loan and convert the principal into another currency or commodity that you believe will outperform Bitcoin over the period of the loan.
> The BTC community measures BTC/USD exchange rate so it ends up optimizing for that
First, I wouldn't call bitcoin user base community. It is like saying the dollar user community.
Secondly, it is definitely not true that everyone in the bitcoin userbase focuses on the exchange rate. There are lots of people with different and varying goals.
First, I wouldn't call bitcoin user base community. It is like saying the dollar user community.
Bitcoin users meetups, non-profit organizations dedicated to supporting bitcoin, bitcoin related community, miner consenus and voting, are not evidence of a "bitcoin userbase community"?
What would you call a group of people that have banded together, all owning stock in a very specific company, trying to increase usage of that company so it can remain in business and their stock values can remain where they are or grow?
"First, I wouldn't call bitcoin user base community. It is like saying the dollar user community."
The dollar is not modeled to meet a specific philosphy or technical implementation nor does it have the same degree of novelty. There most certainly is an enthusiast community for Bitcoin.
One of the neat things about mining is if you have enough hashing power to execute a 51% attack, you also have enough hashing power to mine a shitton of Bitcoin (50% * 6 blocks/hour * 24 hours * 25 BTC/block * 57 $/BTC = $100,000 per day), which might be more profitable (51% attacks only allow you to double spend what you have, not steal arbitrary Bitcoin), and is certainly far easier and less risky.
I'd be more concerned about governments or corporations who want to sabotage Bitcoin, or bugs in the software like we saw last week with the blockchain fork.
Right now it would only take a couple million dollars worth of ASICs to overwhelm the current hash rate. That should change as more ASIC manufacturers start shipping.
I think you underestimate the volatility of bitcoin. Right now there's not enough you can do with them in their native form, and converting them to cash would make make the price crash. I also doubt there's any exchange with enough funds to actually support such a conversion.
I don't underestimate the volatility... I watch the price very carefully, and understand how volatile it is. Bitcoins are converted to USD and back to BTC every day. If you were to try to sell ALL the bitcoins in one day that would clear out the order books, and would likely cause a crash and then rally, much like we saw when there was a bug in the blockchain. The price dropped to $37, and quickly went back to the original price due to the demand.
I was surprised the other day when I was testing the bitcoin integration for a project of mine (here's a how-to: http://techblog.bozho.net/?p=1114), that the price is so high. I bought my bitcoin a couple of months ago at 10 times lower prices, and it was a pleasant surprise.
Personally I deride it because solves the wrong problem. I just don't see how it can be an efficient long term medium of exchange with the built in deflation. As far as I see it, the hype around bitcoin is built around the broken idea that the main purpose of money is as a store of value. But it is not - the main purposes are to act as medium of exchanges and as the unit of account.
I'm a lot more intrigued by Ripple I feel they try to solve the correct problem, though there are some issues left. The most glaring one being that it lacks a unit of account of it's own but instead pickyback on a different unit of account. It is also a harder to explain, especially to people that believe in hard money since it is basicly a stripped down fiat system.
What we need is a currency that automatically implements NGDP level targeting a la Scott Sumner, and does so even as it's adopted in a more widespread fashion. Right now Bitcoin is a beautifully elegant transaction settlement mechanism married to a horrible, horrible crackpot goldbug theory of how money works as a store of value.
You cannot make loans denominated in Bitcoin (because the price is going up too fast to ever be paid back, and if it ever stops going up, people will be dumping it too fast for an interest rate) so there's no basic demand for the currency at a given price level (to pay back loans). People who want to use the beautiful transaction-settlement mechanism do not have any motive to thereby hold coins, and that means everyone holding the coins is doing so in an expectation that somebody else will buy them at a higher price. Bitcoin is pure instability, pure feedback (in either direction) of the velocity of money into the inverse price of money. I wish I had time to write an article about what an awful, terrible, no good, very bad idea it would be to try running a planet on Bitcoin.
If anyone does have a good idea how to implement NGDP level targeting in an e-currency, please say so or write me at yudkowsky at gmail. In fact, just write me if you can figure out how to measure NGDP in an e-currency in a way that can't be hacked and can distinguish more widespread adoption from increasing RGDP.
RGDP is such a subjective term that it's going to be impossible to design a decentralized currency that targets it. Maybe there's a more objective highly-correlate proxy that would work.
Then there's the problem that bitcoin is an international currency and GDP is a measure of national economies. As far as I know, Sumner does not have a theory for optimal monetary policy for a currency shared by a coalition of nations (i.e. the EU). The management of the Euro roughly stabilizes NGDP in Germany, but not in Italy and Spain which is the source of the current crisis in Europe.
On the other hand, an old-fashioned monetarist coin (constant rate of increase - "Friedman Coin") would be easy to implement and a lot better than a fixed supply coin. I'll leave others to figure out the "Sumner Coin".
You're not trying to detect RGDP. You're trying to detect NGDP, but in a way that isn't fooled by more widespread adoption of the currency.
Who gets the extra Friedman coins? Also if you don't have a central bank stabilizing the supply of money via interest rates in response to velocity changes things can go to crap very quickly a la the Great Depression.
The problem with NGDP is the D. As far as I know, there is nobody (including Sumner) that believes the total nominal transaction volume of an arbitrary subgroup of international users should grow at some low constant rate over time.
Remember that MV = PY, Money Supply times Velocity equals Price Level times Real GDP. PY is nominal GDP, Y is real GDP. AFAIK, Sumner's followers argue that M should grow so that PY grows at some constant rate. V is assumed to be endogenous.
Now think of two countries with similar sized economies that share a currency. Imagine country 1 had Y growth of 3% and country 2 had Y growth of -1%. How should M change? As far as I know, this is virgin territory. Also, country 1 and 2 are basically Germany and Greece.
NGDP is easy to calculate for the users of bitcoin as every transaction is encoded in the blockchain. Of course, you are right that there is a difficulty because of a rapid unstable increase in V due to adoption, the NGDP of the Coin economy is measuring the economic activity of its users + some amount of canibalization of the legacy dollar economy. If you are looking for the "right" answer, I think it will elude you. But I have a "good enough" proposal for a Sumner Coin - start with the BTC reward scheme, and after PY stabilizes (i.e. changes less than 10% per month), use that as the base for PY and then set block rewards to grow PY by a constant amount. V is public so it is easy to calculate the appropriate M.
The Friedman coin is much simpler, since you are pegging M to a growth rate and not PY. Of course, the miners get the extra coins.
Both models decrease first mover advantage and relieve the need for transaction fees for stability of long-term mining. And for both models I would recommend an initial deflationary period to sweeten the pot for early adopters.
You're comparing the Bitcoin monetary policy to what you think will be the ideal automatic monetary policy.
But it's more interesting how the Bitcoin monetary policy compares to the current real-world human-controlled monetary policies of government money - which in the cases of most countries is definitely pure instability and filled with error.
The Bitcoin monetary policy doesn't have to be perfect to be an improvement, because the status quo is very imperfect.
I'll give you 1 BTC on April 1st, 2013. You can repay me 1.5 BTC on April 1st, 2014, adjusted for deflation or inflation according to mtgoxUSD × CPI, as the case may be.
Problem solved. I give you spending power today, you give me more spending power later on, and we conduct the transaction in Bitcoins.
In the future, we will have our choice of price indexes that are denominated in Bitcoins directly.
I refuse. I think Bitcoins might appreciate more than that, and I don't want to take on the risk.
On a planet with a growing economy and a growing population, Bitcoins will always be appreciating faster than material investments can grow. If you can plant 100 seeds to get back 103 seeds (3% material interest) and also the planetary population is growing at 2%, that's 5% interest on Bitcoins. Except then people try to hold more Bitcoins since they grow faster than seeds, which makes Bitcoins appreciate even faster... but even before taking that into account, you still wouldn't be able to grow enough seeds fast enough to pay back a loan in BTC, if the planetary economy used Bitcoin.
The deflationary process makes things much worse; the more people try to hold Bitcoins, the fewer circulate and the lower the velocity, increasing the apparent price of Bitcoins. This process continues until instability in the price of Bitcoins as people occasionally dump their hoards is so great that Bitcoins stop appreciating. Then fewer people want to hold Bitcoins and they dump their Bitcoins and the velocity goes up and the price goes down and the bubble pops.
(The reason this doesn't happen with existing central bank currencies is that central banks regulate interest rates to stabilize the supply of money and hence its price in response to velocity changes, or at least they're supposed to. The reason this doesn't happen with equities is that they have an intrinsic rate of return due to dividends or stock buybacks; real estate has intrinsic rent; bonds have returns denominated in stabilized money.)
So like I said, Bitcoin is a horrible crackpot theory of money as a store of value, married to a beautiful transaction settlement mechanism.
Why do you refuse? Here, I'll lower my rate to 1.05x. If CPI remains stable and mtgoxUSD goes up by 1.06x between now and next year then you'll owe me less BTC than what I gave you. If mtgoxUSD goes down then you'll owe me more than 1.05 BTC but it'll be that much easier for you to buy them.
I am happy to offer you the loan, because Bitcoin prices are volatile and there is no guarantee if I keep my Bitcoin in storage that it will still be worth much one year from now. There have been many crashes. But if you agree to repay me an amount equivalent to 1.05x my current spending power then I know whatever you pay me I'll be in a better position than I am today in terms of my ability to pay my rent.
Such a loan offers me a drastically different risk profile than holding Bitcoins. If BTC were as guaranteed to increase as you say then they would cost more.
Oh, sorry, I didn't understand your original proposal.
This is a loan denominated in dollars, it's just being transaction-settled via Bitcoin. The medium of account is dollars and the medium of exchange is Bitcoin. This is pretty much exactly the original point I was talking about. :)
Well, it's not really denominated in dollars, it's denominated in the CPI. You could also have a Bitcoin Price Index that tracked how much spending power Bitcoins had and denominate your loan in that.
I sincerely doubt this will happen, but lets run with the scenario. In a totally deflationary world, more people try to hold bitcoins, I agree. The complementary effect is that the value of real goods, land and labour is reducing.
People earn to consume. The bitcoin rich, if they apply the Kelly criterion to their own portfolios, will diversify into whatever assets will provide them a regular real dividend. That is, farms yielding grain, orchard yielding fruit, NG wells yielding NG, wind farms yielding electricity. They will not be buying any investment for the purpose of money, but for the purpose of CONSUMPTION.
There lies the negative feedback that will stabilize any new currency as it conquers the world.
The way I would see a hypothetical solution work is to target price stability directly through some kind of supply/demand mechanism - that is, add a way to create currency units at a few percent above some target rate and a way to destroy them at a few percent below it. Somehow integrating computer power rental into the network is as close as I can think of, although that does give you a very high inflation rate of Moore's law. Another possibility might be velocity - look at the average age of unspent outputs (or, better yet, something like the sum of the inverse of the age over all coins, so lost coins automatically approach value zero) and add more currency units if it looks like things are going too slowly, but you would have to think long and hard to ensure that that's not gamable. It's an interesting unsolved problem, I admit.
Can you make loans denominated in gold? I think you can. The volatility of bitcoin will settle down eventually. It's essentially the 19th century international gold standard for the 21st century.
> Can you make loans denominated in gold? I think you can.
Nobody does. Now why is that?
Friedman understood perfectly well that failure to increase the money supply in response to decreasing velocity was responsible for the Great Depression. He's sort of famous for that part, if I understand economic history correctly, it's why Bernanke apologized to Friedman's memory on behalf of the Fed. It seems odd to call them 'Friedman coins' when they depreciate automatically, but don't adjust to velocity and especially to changes in fractional reserve lending.
Probably executive order 6102 in 1933. By the time the government allowed private ownership of monetary gold again, it had fallen out of use as currency.
There's nothing stopping you from devising a coin with a different mining schedule. I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth. Both of them have an initial deflationary period to encourage adoption. Working title is "Friedman Coin".
This solves the problem of decreasing mining incentives and the possibility of a too-big windfall for early adopters. It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem.
"I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth."
Such a coin has been created. Freicoin is a bitcoin-variant that devalues at a constant rate. It hasn't caught on, probably because people prefer currency that doesn't lose its value.
"It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem."
He owns 2-3% of all the money at one point in time. He can only spend that money once. Money circulates, and can only give value to its user when they circulate it.
Given a given unit of money will circulate indefinitely, the relative economic power of a holder of a particular percentage of the money supply at a particular point of time will decrease over time as a percentage of total economic power exercised throughout the currency's existence.
You should really look into the history of altcoins because I'm positive one with a constant mining release schedule has been done. One issue with some of them has been premining but if it wasn't premined and was reasonably well-known at launch it probably stands as a good test of whether something like it will ever work. Funnily enough the altcoin that has done the best has changed very few parameters.
You are correct, the HYPE around Bitcoin is built around a broken idea, but Bitcoin is built around a good idea. Indeed, the main purpose of Bitcoin is in fact to be a medium of exchange and as a unit of account. Bitcoin will be highly profitable for those who treat it as a store of value, until the market gets saturated, but the fact that they treat it as a store of value and hype it up will only expedite the market saturation process.
When that happens, then Bitcoin will maintain a steady price and it will serve its purpose as an efficient medium of exchange on the Internet without the need of a central authority. Until, of course, something better comes and replaces it.
Deflation is easily negated by the natural rate of inflation, which will always occur simply because of supply/demand economics. Natural inflation is actually healthy for the economy. Artificial inflation forces people, businesses and governments to depend on lending a lot more than on the money they earned. Note that lending will still continue with natural inflation, but the interest rates won't have to be kept artificially low (like they are now).
This being the theory that "no one is going to spend Bitcoin if it keeps increasing in value, since they will sit on it instead, for the future gains. Therefore the currency is deflationary."
Amazing how this rationalization, given to slaves to justify their slavery, ends up being touted by the slaves themselves.
Technically the same is true of the U.S. dollar: If you put your dollar in a savings account, instead of spending it, you will earn interest. Therefore you will have more money in the future, from the interest earned, if you don't spend that dollar now. Therefore the dollar is also "deflationary."
That's not correct with regards to the dollar. It's inflationary because the purchasing power of those dollars in the bank decreases more rapidly than you accrue interest on them.
The current US inflation rate is around 2%, so unless you're making more than 2% interest on your money every year, your purchasing power is going down. For point of reference, yield on a 1yr treasury bill is around 0.14%.
Bitcoin is deflationary because, once the coin limit is hit, the number of available coins will decrease over time simply due to coins being lost. As the currency contracts, the purchasing power of a coin goes up over time.
In a world where BTC had an inflation rate of -2%, 1 BTC now would buy what 0.98BTC will buy in a year. Any investments you make now need to yield in excess of 2% per annum for you to be better off. In an inflationary world, an investment only needs to beat the T-Bill rate for you to gain (or least be less worse off), which allows for less risky investments.
A gradual rate of deflation didn't stop world markets when they used an international gold standard.
Very few people forgo buying something they need because they could get 2% one year later if they hold on to the currency.
I think deflation IS economically inefficient, but the negative effect of slight deflation has been exaggerated in the popular economic literature.
For a peer-to-peer currency network, a fixed money supply could even be beneficial by creating an incentive for bitcoin holders to invest in the technology.
Bitcoin is working, has created the most powerful distributed supercomputer in the world, and is processing an increasing number of instant global transactions every month.
It works in practice, as a medium of exchange, and that is a better argument for it working as a currency than theories about how deflation affects economies.
The problem is that the time period of the world that had a gold standard had several instances where the world markets did stop. Both the Great Depression and the Long Depression happened in the period in question, and that that is more depression than either before or after the gold standard.
The Great Depression was not during the international gold standard period. By the time it rolled around, central banks controlled the money supply of every advanced economy, and in the midst of the Depression, the U.S. government further left gold-redeemable currency by enacting Executive Order 6102, which ordered all private citizens to turn in their gold, criminalized private gold possession, and made dollars irredeemable in gold.
But let's grant that the Great Depression, along with the Long Depression, was during the gold standard's reign. That's two serious economic contractions interspersing mostly long periods of expansion. Compared to the last several decades, which has been marked by several 'lost decades' for the Middle Class, the gold standard era doesn't look bad.
Bitcoin doesn't have built-in deflation; it has built-in hardness: a(n eventual) strictly fixed supply. Deflation comes from currency concentration; inflation comes from currency dilution. Bitcoin has neither.
Quick background for those unfamiliar with the issue - Bitcoin was built to be a currency, to be used to trade for goods and services. However, a significant portion of BTC is being hoarded and not traded, thus leading some (like Nobel Prize laureate Paul Krugman) to argue that it's not a currency at all, and any value is purely speculative. For the record, I don't agree with Krugman's argument.
I also wonder what percentage of the "hoarded currency" is actually currency that has been destroyed and if it will have any long term consequences. For example, in the early days of Bitcoin I mined a few blocks with an old laptop. The computer eventually died without any backup of my wallet thereby destroying the those Bitcoins. There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply.
I'm in the same boat. I played around with BitCoin in the early days and never really cared for the coins I earned. I wiped the machine I used and only recently realized they were gone forever. Apparently I just flushed a few hundred bucks, meh.
> There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply.
Yeah, this is the big problem with the papers or blog posts pointing out how many coins are not moving around and then insinuating that Bitcoin is a scam or that it will soon be destroyed as an old miner dumps a few hundred thousand coins: for most of them, the parsimonious explanation for them not moving is simply that they've been lost. But there's no way to prove this! Did Satoshi wipe his hard drive when he moved on to other 'projects'? We have no way of knowing.
(There apparently are ways to verifiably destroy bitcoins - send them to impossible addresses or something like that - but I haven't heard that anyone has bothered doing that and this wouldn't apply to people losing coins accidentally or apathetically.)
If a few blocks is 3 or 4, you might want to keep that HD around. Could be worth sending it to a professional data recovery firm and having the platters removed etc.
Blockchain.info has this chart that tracks the number of bitcoins traded on known exchanges vs the number of bitcoins exchanged in all other transactions.
This chart gives a somewhat measure of if the hoarding has gone up or not. It gives us a good idea about bitcoin speculation.
The lower the number on this chart, the less the speculation. Recently, the number has almost always been under 20. This number was at 225 during the July 2011 bitcoin bubble.
So while we would think that more people would be hoarding bitcoins, the data shows thats not necessarily true.
Combining this chart with the number of bitcoin transactions per day chart gives us a good indication that the price is increasing because more people are hearing about bitcoins and using it. (Number of transactions per day have gone up from 6,000 a year ago to 70,000 today.)
I personally think economists don't have that good models on deflatory currencies. Since pretty much all currencies are designed to be inflationary, it's easy to fall into the trap of thinking only inflation can make currencies work. The best thing is to wait and see the empirical data.
My bet is that some people will hoarde money, but it doesn't really matter. There will always be people who will use bitcoins for real economic activity, and 'speculators' will keep the value inline with other currencies. Prices will be adjusted for deflation just like they're adjusted for inflation.
Saying that the rational action is to hoarde the money until it rises in value is like saying that the rational action when buying computers is to wait an infinite amount of time, since you're always going to get a better computer by waiting 6 months.
Some early adopters would be filthy rich. Not so different from other filthy rich people. Hoarding would be more profitable than investing. Would everyone stop investing, would the currency just keep on deflating? Forever?
When a really rich person doesn't have to do anything at all to keep getting richer, what will he do? If he hoards until he dies, how will that affect the economy?
Someone should call the banks and warn them their depositors' accounts are worthless then.
I think the argument is a sufficiently deflationary currency creates an investor's dream: once you get enough of it, you can spend just what you need and what you have left gains value just sitting there. You don't have to work anymore or invest in anything besides the currency itself. If that becomes the most profitable investment strategy, it's in each individual's best interest to hoard money, but if enough people do that the economy collapses.
If one person "cheats" the system by hoarding money and gets to spend less and less of it every day because it's actively gaining value, that person gets something out of the deflation. If everyone tries it, the system's in deep trouble.
That seems to be the argument, anyway.
What would actually happen? I don't know… I'm a programmer, not an economist.
My thoughts are that we need a new crypto currency without the deflationary flaw of bitcoin. The rate of new coins mined should increase as time goes on in a controlled fashion.
A crypto currency with managed inflation wouldn't make early adopters as wealthy, but it would be a better medium of exchange.
I don't know that you can call deflation an inherent flaw. In most econometric schools of thought, the debate between deflation and inflation boils down to expectations, making predictability more important than either tendency. IE Actors knowing what to expect from the money supply, eliminates some of the uncertainty that drives volatility. Predictability gives actors the opportunity to properly hedge protecting against the negatives normally attributed to both inflationary and deflationary currencies.
With central banks, it just became accepted that when dealing with unpredictable economies, the tendency to inflate was less dangerous than the tendency to deflate and thus why most banks will err on that side when making policy decisions. There are some great historical examples where banks organized mass deflation (I can't find one right now, but the one in my mind involved the entire country dropping zeroes from the end of their notes) and by making the change predictable, they were able to avoid many of the harmful effects.
Are you sure there are examples of actual successful deflations, where debts, payments, wages, etc denominated in the form of money deflating increased in value? I know of successful cases central banks have brought inflation under control or one currency was replaced with another that was much more valuable. But human nominal loss aversion[1] usually causes big problems during deflation in any modern economy. Maybe you could have pulled it off back in the day when 90% of the population were independent agents in the market, but not today where 90% are employees of firms with contractual wages.
I don't see how a currency like BTC would deflate, ever, besides runs on the market. At least if BTC became a real market force. Right now, almost all BTC transactions are between currencies like USD, so it is functioning more like stock than real money.
If it were legitimately used in widespread transactions, the currencies market wouldn't impact the valuation as much, and without that turbulance, since BTC's can't "disappear" under your couch, and you have a mathematically fixed growth rate up through 2140, the currency shouldn't deflate. Just as a frequently cited example, the US had a crisis in the 70's not because pegging the dollar to gold was bad, but because the real gold reserves were covering vastly less of the actual dollars in the market drastically due to money printing.
BTC doesn't have those issues - they are fixed in circulation, have a predictable rate of disbursement that will slow to nothing in 2140, and at that point the exchange rates for goods with BTC would only fluctuate its fixed value against other currencies or against goods scarcity. I wouldn't imagine, if it actually became a well grounded currency, significant swathes of the market making a run on it and depreciating its value as badly by that point. It lets you keep currency speculation, though, without the rampant inflationary effects of quantitative easing and money printing at whims.
There have been a few already made, check out the Alternative Cryptocurrencies forum on bitcointalk.
The problem with a coin like this is initial adoption (which is required to create the network effect that makes the coin useful). Why would anyone put serious money into a currency that is guaranteed to lose value forever through inflation and with no useful network?
The only reason inflation works for a currency like USD is because there are already billions of users locked in by the extremely large network effect, and similar inflation on any viable alternatives like the EUR.
Look at inflating currencies with smaller networks (south america) and how hard it is to keep people from getting rid of that money, usually it requires government (violent) intervention.
Because money is a medium of exchange, and has no inherent value. Hoarding cash is equivalent to destroying production-- by then time you try to spend it, there won't be anything left to buy. Inflation encourages people to be active in the system, exchanging to produce real value, not staring a the charts of growth of imaginary wealth that means only as much as a video game high score board.
That sounds awfully counter-intuitive. Before there'd be nothing left to buy, the prices of things to buy would go up (i.e. inflation), which would discourage further hoarding.
Yes. Finally, someone levelheaded. Every bitcoin supporter I've ever spoken to has basically dismissed deflation as a non-issue. It is important, and if the bitcoin economy grows, the deflationary effects are only going to become more visible.
I have never met a single person who was able to convincingly raise at least a little bit of suspicion about deflation in me. Why is deflation bad? Because people stop spending? Can't you see how ludicrous this explanation is?
If the real rate return of investments over any period of time is on average less than simply hoarding the currency (an inevitable consequence of a permanently deflationary economy) your economy is screwed up.
Bitcoin and its users have no duty to any existing "economy", and certainly don't amount to one themselves. If one's holdings of bitcoin appreciate with respect to some other commodity, eventually the wealth effect will make investment and other spending in that second commodity attractive. No one is in any sense stuck in a "bitcoin economy".
Your above points are correct; depreciation in general is a bad thing but for a "parallel currency" aiming for a particular niche like Bitcoin it's probably not an issue, especially because holding Bitcoins is definitely not without risk.
(In the unlikely event that Bitcoins ever became widely popular with speculators, then governments will tax or restrict domestic purchasers or exchanges for Bitcoins (they can't and won't be especially efficient at doing this; the US/EU don't need to be to severely damage the exchange value of a Bitcoin.).
Ok, let's say everybody in the world uses Bitcoin. Nobody invests. If that's the case, then the amount of goods and services in the economy remains constant, which means the price of Bitcoin doesn't rise. How do I make money then without investing and creating more value?
In that scenario, once you've adjusted for the risk associated with investment you'd give up all hope of "making money" - with no aggregate monetary growth(1) it would be like "investing" in a game of poker (sure, you might back the surprise winner but...). It's amazing how much less risk averse you are if you lose ~2% per annum from sitting on cash and you can make money from a slightly-worse-than-average investment portfolio (and there's a 2% return for an average investment)
Arcane hypothetical edge cases are unhelpful for exposition. It's easier to look at the conventional alternative: everybody in the world uses a means of payment which diminishes in value at a slow but stable rate. Now the average person that invests in production gains, and the average person holding cash is incentivised to convert that cash into something they want or funding the production of something others want. Isn't this better?
(1)strictly speaking we're better off looking at money as a flow, in which case the velocity of circulation comes into place, but a fixed money supply certainly wouldn't induce that to increase....
with no aggregate monetary growth it would be like "investing" in a game of poker.
This statement is wrong, because you measure profits in money rather than value. With bitcoin the amount of money in the economy stays the same, true. However the value of each unit grows as soon as you invest and produce something useful that people want. This means, you may receive back even less than you invested in absolute units of money, but more in value.
As I had replied to Eliezer, investing in a deflationary world will be tilted towards capital that yields a regular stream of real dividends: actual goods, not money. That is, there will be fewer corporations that will be expected to give money as a yield and more consumer cooperatives that will yield goods and services. Farms that yield food, NG well and that yields NG, a power plant and get a yield of electricity and so on.
Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.
Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
Actually, deflation is bad for both lenders and borrowers, since it increases the likelihood of default. Let's put it this way: if you knew that it would be hard for me to repay a loan during an economic boom, and even harder during a recession, would you want to lend money to me? Deflation actively discourages lending, by creating an incentive to hold money.
It is easy to think that lending is a bad thing, but let's put it this way: it is because we are able to take out loans (of various kinds) to start businesses that non-wealthy non-aristocrats are able to participate in the market. Too much credit is a bad thing, but too little credit denies capital to anyone who is not already wealthy.
You have a point, however I would like to note that Bitcoin is not actually a deflationary currency as I explained in this comment: https://news.ycombinator.com/item?id=5403360
The bigger issue we should be focusing on is not deflation or inflation but rather who controls it. If it is controlled by one player (government) then it ultimately decides who benefits and who loses from it. It is a much more honest situation when market controls it. Once there are too many people taking loans and going bankrupt, then investors stop investing until a point is reached at which it is more profitable to invest than to hoard again.
In any case, the extent to which people are denied access to capital is almost exactly the same as the extent to which they benefit from hoarding.The distribution of capital changes, rewarding less opportunistic and more hardworking people during deflation. Ironically, it's exactly the opposite of what governments in almost any country tell people.
Finally, I would like to add that even though capital is important, it is not the only component responsible for creating value and wealth. Thus, economy would reward not only people capable of obtaining capital, but also those who have great ideas and skills to implement those ideas.
It is deflationary.
I have 1€, I can buy one loaf of bread with it today.
One year from now:
Inflation - I can buy 0.5 loafs of bread.
Deflation - I can buy 2 loafs of bread.
Have any loans ever been denominated in bitcoin? Given the disadvantages of a bitcoin loan, some of which you cite, when should we expect such to occur? Is there any reason to believe bitcoin could affect the supply or demand of loans denominated in other currencies?
I am not aware of any major Bitcoin lending, nor would I expect to see any major Bitcoin lending at any point. The reason is simple: Bitcoin is not a legal tender anywhere, nor does it enjoy any legal status as a currency anywhere. Courts deal in fiat currencies, and both lenders and borrowers need to deal with the court system in case of default; until courts start dealing in Bitcoin, issuing a Bitcoin loan will only add complication to such proceedings.
In my view, Bitcoin will ultimately be little more than another way to make electronic payments. Merchants will accept Bitcoin only to immediately trade the Bitcoin units for some fiat currency on a Bitcoin exchange. Bitcoin exchanges will basically be payment processors. This, of course, assumes that technical problems do not destabilize everyone's trust in Bitcoin as a secure payment system (and given that it fails to meet the formal definition of security used by cryptographers, I suspect that this is bound to happen).
All of this makes sense, which leads me to think that when you said "deflation is bad" above you meant it in a very general sense rather than as a criticism of bitcoin. After all if there will never be significant loans in bitcoin it can't very well be implicated in a breakdown of the lending system. Sorry for misunderstanding.
Yes. Ripple[1] has allowed for the use of bitcoins to denominate loan-like credit extended between people for quite some time[2]. You just have to be careful.
By the way I back my ripple credit entirely with bitcoin -- if you can make a payment go through the network to me, you are entitled to it.
It's too late for an "alternative" now. Regardless of your views on the impact of deflation in an overall society, a deflationary currency is always going to be a better store of value and a more attractive option for a consumer. The wheels are set in motion with Bitcoin whether we like it or not (personally I'm unconvinced that deflation causes as many problems as people claim, especially with infinite divisibility).
What happens when someone retires at the same time and tries to cash in their hoard of btc to buy stuff that no one is producing (since they also retired)? Liquidity shock. Years of deflation instantly give way to hyperinflation.
That's not easy to fix with more lucrative mining. Suppose your economy is growing at 3% real rate per annum. Now suppose that you try to have 3% more Bitcoins per annum, produced by mining. People will compete for these Bitcoins until the competition stops being profitable, i.e., until price exceeds profit. Then 3% of all your planetary resources are being burned on wasted computing power that competes to mine Bitcoins.
having a secure system with the properties of bitcoin is worth some amount of money compared to money wasted on frictional costs in the current financial system.
Setting fire to 3% of gross planetary product doesn't seem like it should be the best solution. Current financial wastage is more than this, sure, but who says that Bitcoin fixes all problems and they never come back?
It doesn't, but fortunately it only burns as much electricity as makes sense given the size of the bitcoin infrastructure which depends on how the market prices the bitcoin infrastructure. Bitcoin only needs to replace a small amount of inefficiency (in the grand scheme of the global financial market) to be worth it.
If you avoid drinking the kool-aid you don't regard bitcoin as a replacement for current methods of exchange. It only really serves one of the three functions of money very well.
The initial deflationary period is important for adoption. But in the long run, increasing scarcity of coin could jeopardize the health of the miners. Bitcoin has a transaction fee structure to handle this, but taxing transactions is hardly the way to get people to adopt your currency. Also, BTC and other fixed-supply coins suffer from early-adopter windfall effects. The early miners of bitcoin may own a significant fraction of the economy.
I'm devising a "Friedman Coin" or "Free Coin" to fix these issues. If you're interested, drop me a line.
I think there is a precedent here: deflation, which is the classical way of describing a currency whose spending power is increasing. I'm not well versed in the history of currencies, but that's one place I'd investigate to see how the "buy and hold" efforts will play out (the modern version of filling a mattress with money).
> Bitcoin was built to be a currency, to be used to trade for goods and services. However, a significant portion of BTC is being hoarded and not traded
This could easily be an instance of http://en.wikipedia.org/wiki/Gresham%27s_law in action, whereby BTC is considered "good money" by its holders and USD (etc.) considered "bad". i.e. When you take your sack of coins to the market, you spend the shaved and nicked coins first, reserving the finest coins for some more important transaction.
> thus leading some (like Nobel Prize laureate Paul Krugman) to argue that it's not a currency at all, and any value is purely speculative
This doesn't necessarily follow, if you understand Gresham's law. i.e. it's not a question of what is or isn't currency, but rather which form of currency is held more dear. This is, of course, a form of "speculation", in the broadest sense of the term.
Yes, I agree that the strict interpretation of Gresham's law is not exactly applicable here, since there is no enforced BTC-USD rate. But the broader sense can still inform, along the lines of Rolnick and Weber:
> They also focused mainly on the interaction between different metallic monies, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of.
People take risks according to their preferences and perception of risks and chances. So, if they are willing to invest and hold bitcoins, they will be holding some amount which balances chances and risks accordings to their perception - this can be as little as 10 $ or tens of thousands of dollars.
Behaving rationally, they do not take efforts and go lengths to buy bitcoins, only to spend them for something they can buy otherwise more easily and with less hassle.
But, Bitcoins also have advantages in costs, speed, safety and privacy. For example, due to creditcard costs for backcharges etc., goods paid in bitcoins could be 5 % cheaper. Because margins in online trade are small and costs matter, this is a very significant advantage. Also, time matters.
Once these savings are larger than the cost and effort needed for refilling their bitcoin wallet, people will use them for sure.
"Bitcoins also have advantages in costs, speed, safety and privacy"
I think "cost" is the only place Bitcoin is actually a winner. Banks can clear transactions far more rapidly than Bitcoin will. Bitcoin does not meet the formal definition of security and there is a known polynomial time attack on Bitcoin (this is another way of saying "broken crypto"). Bitcoin has been repeatedly shown to not offer the anonymity or privacy that people think it offers.
I am a big fan of digital cash. The problem is that Bitcoin is not a secure digital cash system, and it should not be advertised as such.
Banks cannot clear transactions more rapidly than Bitcoin.
Waiting a few seconds and confirming that most nodes on the network have received the bitcoin transaction is safe enough for most transactions (those involving values less than $100) to be considered cleared.
Waiting 1 hour makes transactions with values in the tens of thousands of dollars safe to consider cleared.
These transactions can be done 24 hours a day, 7 days a week.
In contrast, bank transactions can only be cleared during bank operating hours. For international wire transfers, it's usually necessary to physically visit a bank branch too.
When the average wait time of waiting for banks to open and the time it takes to physically arrive at a bank teller's counter is added up, it's much longer than the maximum 1 hour one would wait for a very large bitcoin transaction to clear.
The actual transfer of funds sent in an international wire transfer usually takes several hours or days too, so it can be reversed without the cooperation of the receiving bank long after the funds have been credited to the receiving party's account, within that window of time.
The time it takes for a transfer of funds from the sending bank to the receiving bank to cleared is analogous to the one hour wait for six confirmations that one would wait for extremely large bitcoin transactions, so really, even under the worst conditions (when banks are open and the person is already physically at the bank branch and when six confirmations are needed for a very large bitcoin transaction), Bitcoin is much faster than traditional banking.
" Bitcoin does not meet the formal definition of security and there is a known polynomial time attack on Bitcoin"
When you discover a way to create a provably safe decentralized digital currency, please let us know. Bitcoin is the best that is possible given the features it has.
The description dances around the issue, but what they are basically saying is this: the work needed to successfully attack Bitcoin is proportional to the total work done by all Bitcoin participants. That is an amount of work that is polynomial in the parameters of the system.
Seems odd to describe this as a polynomial-time attack, and I would argue incorrect to describe the result as "broken crypto", as this has little to do with the cryptographic components of Bitcoin, and is more a fundamental design limitation.
As a workaround, merchants will just demand more confirmations for higher-valued transactions, like waiting for a check to clear. Checks and physical cash also wouldn't meet your definition of formal security, but seem to work in practice.
"Seems odd to describe this as a polynomial-time attack"
Is there some part that does not run in polynomial time in the parameters of the system?
"I would argue incorrect to describe the result as "broken crypto", as this has little to do with the cryptographic components of Bitcoin, and is more a fundamental design limitation."
Cryptography is not limited to hash functions and digital signatures (the two primary cryptographic primitives used in Bitcoin). The "broken crypto" refers to the fact that Bitcoin fails to meet the security definition for digital cash, a type of cryptosystem. Moreover, Bitcoin is not secure as a multiparty computation protocol (also a kind of crypto) against malicious parties, as the attacker's work is polynomial in the system's parameters.
One should not make the mistake of trying to separate the security of cryptographic building blocks from the security of a system as a whole. My "pet" example of this fallacy is "robust" encryption. In a nutshell, an encryption system is "robust" if only the intended recipient can receive a valid message. Using PGP to sign and then encrypt a message is not robust, even though the signature system, hash functions, and ciphers in PGP are secure as signature systems, hash functions, and ciphers. The reason is pretty clear: if you send a signed+encrypted message to me, I can decrypt it, encrypt the signed message for someone else, and then send them a valid message.
For most PGP users, robustness is not an important security property; usually, the recipient's name or some other identifying detail will be clearly written in the message. On the other hand, for Bitcoin, the protection against double spending is absolutely necessary; a polynomial time double spending attack on Bitcoin is very bad.
"As a workaround, merchants will just demand more confirmations for higher-valued transactions"
Which only forces the attacker to make a polynomial increase in their work. An attacker only needs to do as much work as the sum of the work done by all other participants in the system to remove any workaround. Right now, that is well within the reach of governments, banks, and perhaps the larger criminal enterprises of this world.
"Checks and physical cash also wouldn't meet your definition of formal security, but seem to work in practice."
It would not be the first time someone has proposed that digital cash go beyond what is possible with physical cash (see Page 2, Property (e)):
To get the other side of the issue, you have to go back to the 1930s and read F.A Hayek's critique of "The Paradox of Savings" ( http://mises.org/daily/2804 ). Hayek, incidentally, was an advocate of competing currencies.
Bitcoin's got a few things right - open API, solid crypto. I can understand how you see these things within Bitcoin and view it as a paradigm shift. However, they're not competitive advantages: anyone can pick them up. If Bitcoin really takes off the old finance hands can tack these on and they'll have everything that made Bitcoin great plus their network effect.
n.b. I consider Bitcoin's decentralization to be flawed (it'll only decrease over time) and thus it doesn't count as a feature.
Bitcoin does not have "solid crypto" -- it does not meet the formal definition of security, and there are known polynomial-time attacks on the system. The Chaum-style digital cash systems of the late 80s and early 90s were "solid crypto," in the sense that their security could be proved in mathematical arguments.
Formal definitions of security depend on the security goals of the system. Bitcoin may utilize secure hash functions, secure signature systems, and secure ciphers -- but Bitcoin is not a hash function, a signature system, or a cipher. The security goals of Bitcoin are: (1) it should be hard to counterfeit the currency and (2) it should be hard to double-spend the currency. The meaning of the word "hard" is what matters here: formally, "hard" is captured by complexity theory, and means that no polynomial time algorithm exists for the problem e.g. for (1), there should be no polynomial time algorithm that can counterfeit the currency.
If you want an example of this approach to digital cash security (scroll down to the bottom of page 15 and see Definition 3):
I wonder whether it makes sense to define a weaker class of "economically secure" digital cash systems, where it is merely uneconomic to counterfeit and double-spend the currency.
Of course this means that such a digital cash system may be vulnerable to non-economically motivated attackers, and I suspect it is also a class that is harder to precisely define.
This is the argument for btc - even though you could try to fake the transaction chain, you are fighting a losing battle against the active market the second you try to generate one, and the longer chain always wins, and it only takes a bad transaction record to be parsed for your chain to be rejected. And controlling the transaction chain is everything in BTC. It relies on the coefficient of the polynomial of running the hashes to generate coins to add to the chain and the transactions taking place therein to get so large that it is infeasible to contribute the computational power necessary to catch up, and it would just be better to mine bitcoins with that computational power anyway.
Using the word "infeasible" like this is probably a bad idea, since in the crypto world it refers to problems that cannot be solved in polynomial time. Also, do not assume that controlling the transaction chain is "everything;" there may be some other part of the protocol that can be attacked, even if it is non-obvious.
I always tell financially conservative people they can buy US$1 worth of Bitcoins just so they can learn how it works. I think many newcomers believe Bitcoins are indivisible.
I think this partly stems from the term "Bitcoin" itself, since coins are not divisible (having moved beyond pieces of eight long ago). But there are no coins in Bitcoin! It's all just txouts and txins.
You can think of it as a magically valuable liquid flowing down a system of ever-growing pipes representing the blockchain where the transactions are linking points and txins and txouts are pipes with their cross-section areas corresponding to their respective values. Once you think about it, the analogy fits perfectly.
I apologize, it looks like coinbase servers hit a snag today and they aren't generating transactions in a timely manner. Hopefully they will fix this soon! They are a good service, but haven't figured out the load problems yet.
Hedge vs. what? The collapse of the entire world financial system and its replacement by .... bitcoin?
To be serious: obviously bitcoin can be used as in any investment strategy, including "conservative" ones. You seem to be arguing that a bitcoin position must be part of one, which is kinda insane.
I see it the other way around. For Coinbase to succeed, Bitcoin necessarily needs to succeed. If Bitcoin succeeds the price of Bitcoin will increase by many orders of magnitude.
Right now I'd put Bitcoin's odds of success on par with an early stage startup.
I'm saying it's quite possible the coins themselves would be a better investment at this point.
Casino chips aren't going to significantly increase in value. If Bitcoin succeeds then Bitcoins will. If Bitcoin doesn't succeed, then neither will the "banks".
But building a decent and trusted infrastructure of "banks" will improve Bitcoin's chances of success. Just holding a given quantity of coins on your laptop will not.
It's amazing what you can do with a digital-native currency. Creating accounts on the fly is as easy as sending an http request to the bitcoind client.
Despite it rising who in the right mind would hold bit-coins besides for speculation? The exchange rates are so variable. As a very risky investment great idea but day to day currency? I suppose it isn't a bad way to pay people abroad and avoid foreign transactions.
If you're looking for growth, it's better than the stock market where the deep pockets have already gotten in early and eaten up all the speculative value in promising ventures.
It's a cryptocurrency system that lets you store ANY currency that someone, somewhere is willing to support through it. So far it's just USD, AUD, EUR, CHF, BTC and a few others, but gold and silver are definitely going to appear soon.
Sounds like a few steps faster than the inevitable death of a gold standard: Gold coins, then bank storage, then gold lending, then gold certificate use, then lending of certificates, then certificates are declared paper money, then overprinted, then gold backing removed…
inevitably, if a competing currency pisses off the governemnt, it will be shutdown if it is centralized. it isn't really possible to do decentralized gold-backed currency (except perhaps, ripple may solve this).
I find it fascinating watching people's reactions to bitcoin. As near as I can tell from an informal eyeballing, the antipathy to bitcoin is correlated to how mainstream the person is.
I don't think I'm mainstream at all (anti-social, anti-copyright, my preferred political parties can never seem to get elected, ...) but I can't get behind Bitcoin for a few reasons... The biggest being the pyramid-scheme-like distribution of coins slanted towards early adopters. I want an un-regulatable digital currency too, but I can't get excited about trading one financial plutocracy for another when money is tantamount to voting power. Money is just an IOU; money doesn't need to be scarce (like gold), just enforceable (legal tender). If Bitcoin's enforcebility depends on it's exchange with other currencies that have the power/threat of governments and militaries behind them, what ground has been gained?
I have heard from people who have heard, that the government of China is through proxies aggresively buying large amounts of Bitcoins for future strategic advantage.
I am not sure at all how accurate those reports are, it is probably just hearsay.
https://news.ycombinator.com/item?id=5369899
How is it possible for the same link to be submitted in such a short time again?
Old link: http://www.aljazeera.com/indepth/opinion/2013/03/20133913253... New link: http://www.aljazeera.com/indepth/opinion/2013/03/20133913253...