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Bitcoin will prosper until governments or banks decide to crush it (gigaom.com)
35 points by iProject on July 13, 2013 | hide | past | web | favorite | 35 comments



I'm trying to think of some <Foo> that doesn't work in the pattern of "<Foo> will prosper until governments or banks decide to crush it".

Excepting the trivial cases of things that won't prosper regardless, I'm not coming up with anything. :)

Some of the assumptions in the article seem pretty weak to me: E.g. "Anonymity threatens control" uh, cash is a lot more anonymous than Bitcoin. The structure of cash's anonymity limitations are somewhat different than Bitcoin's but it's hard to argue that Bitcoin is too different on that point. ... and it's not just cash, any other valuable commodity is fairly anonymous, and easily argued as more so than Bitcoin— yet, as far as I am aware, there is no great effort afoot to outlaw coal.


> I'm trying to think of some <Foo> that doesn't work in the pattern of "<Foo> will prosper until governments or banks decide to crush it".

How about agriculture? Governments can't destroy that, because everyone would starve, then they wouldn't be a government any more.

Or the internet -- a government can't ban that, if they want to be richer than North Korea (which most do).


It's effectively illegal to transport large amounts of cash in the US. As in cops will confiscate it and you have no recourse unless the "preponderance of the evedence" suggests it has no link to any crime.


Governments have already begun to crack down on the use of cash.

Examples:

Italy http://www.businessweek.com/magazine/italys-cap-on-cash-paym...

Spain http://www.bloomberg.com/news/2012-04-11/spain-to-limit-cash...

USA (Louisiana) http://www.klfy.com/story/15717759/second-hand-dealer-law

There are more examples beyond this, but there may indeed be a trend emerging.

You also risk having cash stolen by border agents when crossing international borders. Many countries expect you to declare whether or not you are carrying more than a certain amount.


Exactly. This is my favorite abuse of this power:

http://en.wikipedia.org/wiki/United_States_v._$124,700_in_U....


Wow, that looks like a title you'd see on /r/nottheonion


The dissenting opinion is a worth a read.


It is immune to the inflation that plagues all fiat currencies

Funny thing is, most actual economists would say that the inflexibility of Bitcoin is a disadvantage.

Discussions of Bitcoin are dominated by people for whom certain rules about money (such as: "it must be a forever fixed amount") are basically articles of faith. Outside of this comparatively small population, people primarily care about other things, such as good economic growth, full employment, social equity in the sense of equality, and all sorts of things.

Having a forever fixed supply of money tends to be detrimental for those things.


I know the arguments that say inflation is required to encourage people to usefully apply their money, but I haven't seen enough to convince me that this is true.

Part of the difficulty I have with accepting the "inflation is good" argument is that I can see how economic policies result in inflation and it strikes me as a survival trait amongst economists to declare a consequence of their advice as a positive event.

Bitcoin may be an interesting test of that hypothesis.

It wouldn't be the first time that the consensus of an entire field was wrong prior to a significant counterexample appearing.


It's not so much that inflation is good (though it does tend to be as long as it's, say, single digit), it's that a fixed money supply is really, really bad.

Unfortunately, the type of people for whom a fixed money supply is an article of faith don't even see the distinction. They basically argue as if the definition of inflation were an increase in the money supply, which just doesn't make sense.

If you want to get an idea for why a fixed money supply is bad, a good exercise is to look at the actual money supply data on a daily basis. You'll see that it fluctuates quite strongly in certain rhythms, especially weekly and monthly. This is clearly related to thinks like paydays, and it reflects the fact that flexible finance allows the economy to function more efficiently. With a fixed money supply, this would not be possible.

Another, perhaps even stronger, point is that the monetarist experiment of the 1970s and 80s failed badly, in the following sense. The attempt to control the money supply by central banks resulted in wildly fluctuating short-term interest rates, which made it very difficult for the real economy to plan properly, leading to inefficiencies. As a result, central banks gave up targeting the money supply as a policy variable; they now target the interest rate as a policy variable, and allow the money supply to grow and shrink as needed to hit the interest rate target.

So, in this sense, Bitcoin is simply not needed as a test of a hypothesis, because the test has already happened!

It is only the (sometimes genuine, sometimes willful) ignorance of a small group of quasi-religiously motivated people that makes it look as if a test were still needed.

In a way, this is a fight between two systems: A decentralized, market-based systems, where money is created and destroyed decentrally, mostly by financial institutions on the one side; and on the other side, a system where the money supply is controlled by a central entity (either the central bank or, in Bitcoin's case, the Bitcoin developers).

It really shouldn't be surprising that centralized decision-making can be much worse.


It's not so much that inflation is good, than deflation is really bad. Deflation manifests as unemployment and idle resources, and created a vicious cycle.


  most actual economists
Economists haven't had a great track record recently. Computer scientists have. Maybe the economists should take a few lessons from the people who've not just predicted the future, but invented it? Here's a trifecta of Goolsbee, Bernanke, and Krugman on their pre-crisis predictions.

http://www.nytimes.com/2007/03/29/business/29scene.html?_r=0

  ‘Irresponsible’ Mortgages Have Opened Doors to Many of the 
  Excluded

  By AUSTAN GOOLSBEE
  Published: March 29, 2007
  
  Congress is contemplating a serious tightening of 
  regulations to make the new forms of lending more 
  difficult. New research from some of the leading housing 
  economists in the country, however, examines the long 
  history of mortgage market innovations and suggests that 
  regulators should be mindful of the potential downside in 
  tightening too much. ...
 
  These economists followed thousands of people over their   
  lives and examined the evidence for whether mortgage 
  markets have become more efficient over time. Lost in the 
  current discussion about borrowers’ income levels in the 
  subprime market is the fact that someone with a low income 
  now but who stands to earn much more in the future would, 
  in a perfect market, be able to borrow from a bank to buy a 
  house. That is how economists view the efficiency of a 
  capital market: people’s decisions unrestricted by the 
  amount of money they have right now.

  And this study shows that measured this way, the mortgage 
  market has become more perfect, not more irresponsible. 
http://www.federalreserve.gov/boarddocs/speeches/2004/200402...

  Remarks by Governor Ben S. Bernanke 
  At the meetings of the Eastern Economic Association, 
  Washington, DC 
  February 20, 2004

  The Great Moderation

  One of the most striking features of the economic 
  landscape over the past twenty years or so has been a 
  substantial decline in macroeconomic volatility. ...

  My view is that improvements in monetary policy, though 
  certainly not the only factor, have probably been an 
  important source of the Great Moderation. 
http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the...

  What you can criticize economists for – and indeed, what I 
  sometimes berate myself for – is failing even to see that 
  something like this crisis was a fairly likely event. In 
  retrospect, it shouldn’t have been hard to notice the rise 
  of shadow banking, banking that is carried out by non- 
  depository institutions such as investment banks financing 
  themselves through repo. And it shouldn’t have been hard to 
  realize that an institution using overnight borrowing to 
  invest in longer-term and somewhat illiquid assets was 
  inherently vulnerable to something functionally equivalent 
  to a classic bank run – and, furthermore, that the 
  institutions doing this were neither backed by deposit 
  insurance nor effectively regulated. Economists, of all 
  people, should have been on guard for the fallacy of 
  misplaced concreteness, should have realized that not 
  everything that functions like a bank and creates bank-type 
  systemic risks looks like a traditional bank, a big marble 
  building with rows of tellers.

  And I plead guilty to falling into that fallacy. I was 
  vaguely aware of the existence of a growing sector of 
  financial institutions that didn’t look like conventional 
  banks, and weren’t regulated like conventional banks, but 
  engaged in bank-like activities. Yet I gave no thought to 
  the systemic risks.

  Even more broadly, economists should have been aware of the 
  dangers of leverage. This was hardly a new concern. Back in 
  1933 – yes, 1933 — Irving Fisher published his classic 
  paper on debt deflation, that is, on the way high levels of 
  debt create the possibility of a self-reinforcing downward 
  spiral. And the paper remains astonishingly relevant; aside 
  from a few archaisms of style it could have been written 
  from today’s headlines. So remembering Fisher all by itself 
  should have been enough to rouse at least a few worries as 
  household debt rose dramatically relative to income, not 
  just in America, but in a number of European nations too.

  Again, I plead guilty to negligence. I had especially 
  little excuse for being oblivious to these dangers given 
  that I had actually laid great stress on balance-sheet 
  factors in causing financial crises in emerging market. 
  True, those crises had a lot to do with currency mismatch – 
  basically, private debt in other countries’ currencies, so 
  that a speculative attack on a currency could quickly 
  translate into a crippling collapse of domestic demand. But 
  I and others should have seen that this was only one 
  possible channel for balance-sheet crises, that plunges in 
  housing prices or for that matter income could have the 
  same effect.


While it's true that getting butthurt about fiat currency not being a good value store is not rational, calling inflation/debasement-proofing a "disadvantage" depends very much on your place in the economy.

If you have an income and the freedom to set your own pricing levels, inflation can be dandy. If you live off savings and the central bank has crushed interest rates, not so much.


Sure. From an overall welfare point-of-view, I would argue that society should discourage people living off monetary savings, anyway. Yes, this includes retirement, which is better served by a tax-funded system.


Every currency created since the advent of money 2,700 years ago has fit nicely into one of two classifications: Either it was a representative money system, deriving its worth from a link to some physical store of value like gold, silver or gemstones; or it was fiat [...]

And then the author suddenly stops and ignores the next obvious question: where do gold, silver and gemstones get their value from? The simple answer is because people like to have them and their supply is more or less fixed (which causes people to believe they won't suddenly lose their value). The exact same thing applies to bitcoins: bitcoin is the store of value.

The US already tried once to make a certain type of currency it couldn't control illegal: in 1933 it forbid anyone to own gold. That didn't make gold worthless any more than it will make bitcoins worthless. The only thing I believe that could do that to bitcoin is if it is replaced by another digital currency.


My humble perspective: Nothing matters as long as profitability and opportunity exist. Bitcoin will continue its growth as long as it's profitable to operate a miner, a business, an exchange and as long as there is an opportunity to run something. People will go where the money is.

My other humble take: High-rises and businesses are built by continuous and large flow of money (wealth) into a system. Bitcoin business will continue to grow and solidify (have better security, legal status, branding...) as the money keeps flowing to the system.


The 'crush' scenario presented here -- governments using their fiat currency power to alternately buy and dump Bitcoins, creating a boom-bust cycle that scares other people away -- doesn't seem very smart or likely to succeed.

Speculators would recognize it and attempt to profit by front-running the government operations (increasing the cost to the government, and dampening the volatility).

Bitcoin service providers could offer volatility-protection (instant conversion to other currencies), as some do already.

Governments could lose money on each manipulated boom-bust cycle, and at the bottom of each cycle, Bitcoin would still be alive and ready for new uses.

Far more likely, in my mind, is an attempt to coopt Bitcoin. Officially approve it, with reporting/identity conditions that don't encumber legal use but ensure tax collection. Or, launch a Bitcoin-like competitor backed by government redemption guarantees (T-Bills, TIPS, etc). So, above-ground businesses can get most of the crypto-currency benefits without the rough edges created by its most anti-State qualities.


> Governments could lose money on each manipulated boom-bust cycle, and at the bottom of each cycle, Bitcoin would still be alive and ready for new uses.

Not only that, once people realised they could make money by buying when it's cheap and selling when it's expensive, new users would flock to the currency.

So I agree with you that this attack probably wouldn't work. What is much more likely is that if banks decided they wanted to destroy Bitcoin, they would bribe governments to do so. They would also spend money on a propaganda campaign linking Bitcoin with terrorists, pedophiles and drug dealers.


A lot of governments intervene in their currency to target an exchange rate (eg: Swiss). I don't see a lot of people flocking to frontrun them. It's volatile and risky. Sure traders do it, but not 'people' as in 'the people'.

Governments also won't care about losing money when taking strategic action to protect their seignorage and inflation tax racket.

Maybe the boom/bust wouldn't matter too much. It depends on how people see bitcoin. Are they trying to save in it? Anyone trying to save in bitcoin is delusional given its infancy and volatility. A better description would be some people are trying to speculate in it. For similar reasons, people won't use it as a unit of account.

If people use it as a medium of exchange then volatility won't be of as much concern. If you need to make a trade in BTC then obtain the BTC and trade your item quickly. Given there would be spreads to pay on each trade in and out of BTC then it doesn't seem that likely a strategy unless people wrongly think of BTC as anonymous and are 'hehe, the man have no idea i'm ordering this off silkroad'.

What is interesting is that BTC is not a sovereign currency. So say BTC takes off in Russia and Putin decides to smash it: Does he need to think of the American's reaction if he does? Any country in the world - or any entity big enough (a corporation, a multi billionaire) could decide to cause mischief without it being considered an act of war - which say if China decided to sell 1 trillion of US treasuries might be construed as.


> A lot of governments intervene in their currency to target an exchange rate (eg: Swiss).

Generally to stabilise their currency, not destroy confidence in it -- only kleptocracies would deliberately damage their own currency in that way.

> Governments also won't care about losing money when taking strategic action to protect their seignorage and inflation tax racket.

Sometimes, even governments find it too expensive to manipulate currencies, e.g. in 1992 the UK government lost £3 billion in an afternoon propping up sterling. (http://en.wikipedia.org/wiki/Black_Wednesday)

> Maybe the boom/bust wouldn't matter too much. It depends on how people see bitcoin. Are they trying to save in it? Anyone trying to save in bitcoin is delusional given its infancy and volatility. A better description would be some people are trying to speculate in it.

Agreed.

> If people use it as a medium of exchange then volatility won't be of as much concern. If you need to make a trade in BTC then obtain the BTC and trade your item quickly. Given there would be spreads to pay on each trade in and out of BTC

The sprreads make this costly. My main interest in BTC is in the hope that it could be used as a cheap way of transferring money, particularly in small amounts, which obviously isn't going to be possible if there are big costs in exchanging it.

> So say BTC takes off in Russia and Putin decides to smash it

Putin can smash BTC in Russia. It would be harder fro him to do so in the rest of the world.

> Does he need to think of the American's reaction if he does?

If BTC are being heavily used in the USA or other countries, then those countries would be unhappy about Putin's meddling.


From the government's perspective, Bitcoin could be the least of very many evils. Don't forget that the protocol logs every single transaction publicly, and companies have the usual mandatory reporting for transactions over $10,000. In the future, if Bitcoin becomes a well established currency, Bitcoin companies would have no option to refuse requests for information - Liberty Reserve is a good example of what noncompliance will result in. They could only pray the deal is not altered further.

Sidenote: Liberty Reserve was shut down a month after the FinCen released clarification of regulations that neatly closed the loophole they exploited, and at the same time greatly legitimized Bitcoin operators that comply with the strict MSB regulations.


> From the government's perspective, Bitcoin could be the least of very many evils. Don't forget that the protocol logs every single transaction publicly

That's a good point. Would it be possible to have something like Bitcoin but with better anonymity?


There is a protocol called Zerocoin which may be integrated with Bitcoin. AFAIK it is currently being tested. However it's not sure if Bitcoin developers will integrate it with current protocol. In theory it makes possible to do totally anonymous transactions.


Right, it doesn't seem likely to succeed, especially if these dynamics prevail: "A currency that quintuples in a month, and then loses two-thirds of its value in the following week, is not a currency that inspires confidence in users."

A currency that behaves that way is a currency that appreciates 67% every five weeks. That will not be sustainable for long without hyperinflation. It will also inspire confidence in people who buy the dips.


I agree that the crush scenaro wouldn't work, but you didn't specifically mention one important reason.

Every time the value dropped, people who have the intention to actually hold onto the currency and prop it up would but up lots of it _and hold onto it_, and it would be cheap to do so at that point.

So the pool of liquid bitcoin the government could work with would keep shrinking drastically.

I believe it's the case that the vast majority of bitcoin are not "on the market," they're being held for the long run.


The problem with BTC is how long it takes to confirm a transaction. Paper-based transaction is instant, you hand bills over and you're done. Credit cards are the same.

BTCs take 4 or 5 block-chains before they're "confirmed", and you don't really know if your customer has "double-spent you" until the confirmation occurs. This makes BTC unacceptable to the vast majority of typical transactions.

Its fine for say... online shopping, because 30 minutes of confirmation time isn't that big of a deal. However, waiting 30, 40, or 50 minutes for confirmations is not the best way to buy coffee in the morning.


Most merchants in practice accept transactions immediately as soon as they receive the unconfirmed notification. The security is not 100% perfect that way, but it's still way better than the risk of getting a chargeback with a more traditional system.


It's probably instant for the 99%. I don't think people are willing to handle the security and technical aspect of Bitcoin. They'll hand these details to a service like Coinbase, which will have merchant APIs and accept transactions instantly.


http://blog.coinbase.com/post/43285532179/unconfirmed-transa...

In this case we fell far short of that goal (some transactions were delayed for a number of days), and for that I am truly sorry

Uhhh... you were saying? If you fail to understand the technical aspects of the technology you're building a business on, be ready for it to bite you in the ass in obscure ways.

Any implementation of Bitcoin will have "leaky abstractions".


This theoretical problem isn't that big in practice. Ensuring your malicious second-spend 'wins' the confirmation race requires a lot more effort than an ill-gotten morning cup of coffee is worth.

If it actually started happening -- burning merchants who accept 0-confirmation transactions -- a bunch of cheap countermeasures could be adopted. For example, only accepting 0-confirmation transactions from certain origins with a traceable reputation, performance bond at trusted third party, or subject to other recourse/debt-collection. Or, having a consortium of major pools commit (for a tiny fee) that they haven't seen a competing transaction and will prefer the one presented first, by the merchant.


Bitcoin is not anonymous, why do people keep harping this falsehood? At best, Bitcoin is pseudononymous. But every single transaction is forever kept in the Bitcoin Ledger, for the rest of time (or at least... till the end of BTC's existence).


Yes. And even at "the end of BTC's existence", archival copies of the blockchain will persist.

And, some subsequent attempts at an improved cryptocurrency are likely to try to include the past blockchain balances as an initial endowment (or balances as of a certain checkpoint).

Doing so would help lay claim to being Bitcoin's rightful heir, and attract the immediate financial interest of people who've already proven their interest in cryptocurrencies.


It is much easier for governments and banks invest in negative media like this poor and spiteful article. A massive negative media do some tickle, but Bitcoin always back stronger.


It is not prospering by any stretch of imagination, what are you talking about?


It has a ten digit market cap, how is that not prospering?




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