Fiat is Effective: fiat for the crypto crowd [pdf] | Hacker News Reader

Fiat is Effective: fiat for the crypto crowd [pdf]

interfluidity.com

163 pointsrgbrgb267 comments

Some of these arguments assume a single fixed-supply cryptocurrency, instead of the ecosystem of cryptocurrencies we actually have, which is more like Hayek's proposal for competing privately-issued currencies. He thought it would be stable without the need for active management.

As a payment system I think cryptocurrency is vastly better; the more I use my hardware wallet, the more I'm horrified by legacy systems that work by giving vendors the ability to withdraw as much as they want. It's a fundamentally insecure system, made sort of workable by layers of hacky mitigations.

In theory, fiat payment could use a hardware wallet that gives vendors the ability to withdraw only as much as specified in a signed transaction. I doubt that'll happen unless crypto is successful enough to drag fiat providers kicking and screaming; in the meantime we could use fiat-backed tokens on a blockchain if governments didn't make that near-impossible with AML/KYC laws.

Reversibility could also be implemented in a token smart contract, if the market really does value that enough to put a central admin in control. So far that doesn't appear to be the case, but maybe just because that market segment hasn't been reached yet.

I think that feature could be summed up as:

With criptocurrencies, if your software and opsec are good, you're a lot less vulnerable to identity theft and overcharges.

Yes, and with a hardware wallet, opsec is trivial. In my ideal world everyone has one in their leather wallet or on a keychain, and also uses it for secure 2FA on websites.

This is laughable.

An investment of $700 (http://www.gunbroker.com/item/696279983) makes content of one's hardware wallet non-recoverable. Right of redress does not help as the transaction is not reversible.

Hardware wallets use a seed to generate key pairs using a cryptographic random number generator. The seed is usually a sequence of words which you backup on a piece of paper.

If the hardware wallet is destroyed you can simply generate the keys again with either a new hardware wallet or a software one.

Read up on hardware wallet passphrases. You can have as many wallets on your hardware wallet as you like, and there's no way to tell how many there are. The hidden funds certainly won't be vulnerable to a fast mugging.

And of course, if you have a large amount of money you probably shouldn't put it on the hardware you carry around anyway. Apply a little common sense and put it in a safe deposit box.

Oh no, your attacker will point a Desert Eagle at your head and you will unlock all your wallets. After the money is transferred you won't be able to recover it.

The reason why currency in current form is so interesting is that it is not easy to move massive amounts currency into a form that can be easily consumed. Even uncut diamonds is a small market so in event crime happens the proceeds of crime will likely be recovered given determined tracking party (i.e. nation state) and returned to the victim of the crime. This, essentially, is the single most important part of the non-crypto currency UX.

I can provide you with an example another extremely popular ( much more popular than BitCon ) currency that does not have such UX - it is cocaine. I think we all can agree its main UX property is violence.

The attacker would need to spend significant time on that. It'd work in a home invasion, but street muggings are over fast. And again, safe deposit box for large amounts, spendable money in the portable. With a simple smart contract you don't even need to go to the bank to refresh small amounts every few days.

You're trusting your hardware provider similarly to how I trust my bank.

They need to opt out of attacking you, and prevent rogue employees and suppliers from being able to attack you.

If my bank was open source, modifiable, and runnable in a private instance on my own hardware, I might trust banks more. (Ignore that it might not be right to call it a bank at that point...)

What happens when you lose your wallet, or someone steals the peace of paper with your private key? Credit cards and atms get stolen all the time.

A few questions:

> As a payment system I think cryptocurrency is vastly better; the more I use my hardware wallet, the more I'm horrified by legacy systems that work by giving vendors the ability to withdraw as much as they want. It's a fundamentally insecure system, made sort of workable by layers of hacky mitigations.

Do you think cryptocurrencies are vastly better because they don't allow transaction peers to withdraw arbitrarily from your wallet, or for some other reason?

If the former, do you consider cryptocurrencies to be better than simply implementing this functionality in fiat systems like ACH?

> Reversibility could also be implemented in a token smart contract, if the market really does value that enough to put a central admin in control.

Why do I want a smart contract for this, instead of just trusting that the vendor will be heavily penalized for trying to arbitrarily take funds from my account? In fact, why do I want anything to be trustless? In a trustless transaction system, there is less transparency: it might be harder to take more funds than allowed from my account, but in the event the vendor finds a way to do it, what is my recourse without a trusted third party for arbitration?

It feels like a lot of this debate circles back to one group of people saying, "Cryptocurrencies are great for when you don't trust the government" and the second group of people responding, "Yes, but why would I not trust my government or the people I transact with, and don't I have worse concerns than my currency if that's honestly the case?"

From my perspective, perfect feels like the enemy of good here: you sacrifice efficiency in the average case for catastrophe in the worst case. The problems solved by solutions that don't require trust seem to be sort of decently solved in the average case using brittle technical features (e.g. smart contracts that prevent a vendor from double dipping your personal wallet); on the contrary, we have solutions for those now in basically every stable country's fiat currency, and fiat currencies at least solve the worst case, but cryptocurrencies do not (e.g. your smart contract was hacked and your entire account is gone, but no one knows who the vendor was that did it).

Basically, I trust smart contracts less than I trust my government, and to be honest I don't endorse strong trust in my government either way. I kind of want my currency to be backed by people with guns and a complex legal system instead of a distributed ledger and whatever half-baked smart contract system is used by the vendors. Stripe has one of the best security teams in tech right now, and routinely hires security consultants from excellent firms like NCC Group. If Stripe put out a new cryptography library, I would default assume it's broken in some way, at the very least in implementation.

Whenever the "Stripe of cryptocurrency payments" emerges, I am basically going to assume that it's critically broken and will be catastrophically exploited after a huge number of users and vendors are vulnerable. Solving a fully technical smart contract system to abstract away all of these concerns (like arbitrary ACH transfers) isn't feasible in the current state of software security.

It's not just about the vendor. It's about anyone who gains access to the information which gives the vendor the ability to withdraw. This has not been a minor problem over the past decade or two.

The idea of making fiat payments work more like crypto is something I mentioned above. For now, we're a long way from it being ubiquitous.

>instead of the ecosystem of cryptocurrencies we actually have, which is more like Hayek's proposal for competing privately-issued currencies.

That's interesting, it's the first time I hear about this concept. I just barely skimmed a few articles about the concept but I'm not sure how this would solve the problems in TFA. In particular deflation: if I need to invest in a currency why would I even elect to use an inflationary one? What would be the incentive?

Also a currency is only as good as the things it can buy, if you end up having to convert your WhateverCoin to BTC or ETH before spending, does it change anything? You could use special-purpose crypto currencies to replace frequent-flier miles, starbucks credit and other privately owned "currencies", but what would be the point of that?

>As a payment system I think cryptocurrency is vastly better; the more I use my hardware wallet, the more I'm horrified by legacy systems that work by giving vendors the ability to withdraw as much as they want. It's a fundamentally insecure system, made sort of workable by layers of hacky mitigations.

Is it a problem in practice? If a vendor overcharges me I complain to my bank, the charge is reverted and then the bank takes care of dealing with the misbehaving party. If anything it's the opposite that's usually the problem in practice, people using chargeback fraudulently.

Meanwhile in the crypto world if your wallet is compromised or if you get scammed you're on your own.

Bitcoin is great for buying drugs but for legit purchases Visa is a whole lot more convenient. It's quicker, easier and offers much stronger guarantees. From the vendor's point of view it's less great but as TFA points out "Sellers bear costs from reversibility, but those are offset by increased buyer confidence." No citation though, unfortunately.

That's one of the weaknesses of crypto IMO, it's all about "trustless" transactions, except that when you actually use your currency to buy something outside of the blockchain at some point you have to trust somebody (or somebodies) to actually provide the goods or services you're purchasing. All the systems that try to work around that so far seem to simply reinvent the banking system with extra steps (trusted 3rd parties etc...).

Hayek points out that you wouldn't choose an inflationary currency. He relies on that to limit overall inflation. But you also don't have the deflationary problems of the gold standard, since it's possible to make more money at will if you need it.

Regarding payments: suppose we were starting from scratch, with two proposed systems: (1) user signs transactions that authorize transfers with specific recipients and amounts, or (2) user gives multiple parties enough information to withdraw unlimited amounts, hoping unauthorized parties don't get hold of it, and we make up for the inevitable thefts with statistical antifraud protection, manual intervention, and banks just eating the losses.

I can't imagine anyone choosing the second option.

You're proposing a false dichotomy regarding payments... As if the cryptocurrency way has no flaws and the other is chalk full of them.

If life has taught us anything it is that; Given things of value, people will find a way to defraud, game or otherwise manipulate said items of value.

I am positive that people will abuse or are abusing the cryptosystems to the same extent people abuse fiat given more time.

I'm not saying that at all, and fiat payment security is improving. But the very fact that it's able to improve implies that some systems are more secure than others.

>suppose we were starting from scratch

"What-ifs" are always an interesting game but practically we're veeeery far from starting from scratch with the economy. But okay, I'll play.

>user signs transactions that authorize transfers with specific recipients and amounts

Great, but you've only secured one tiny part of the "earn money/spend money" loop. What if the service/goods you buy turns out to be a scam or something defective? What if my company stops paying me? What if the government starts unfairly taxing me and threatens to throw me in jail if I don't comply?

Our current economy is a lot more than just adding a value on one counter while decrementing an other. It's a complex web of laws, regulations and arbitrations that mean that I can buy something on Amazon without having to cross my fingers that I'll get what I paid for.

That's where this whole libertarian wet dream collapses for me. The whole argument behind bitcoin seems to be "what if your government turns into a fascist state, do you really want them to control your money?"

And clearly the answer is no, but if we end up in this situation my savings account might not be the first of my worries. Nor would having my money in bitcoins prevent me from being thrown in jail if I refuse to yield my secret keys to the neo-gestapo.

On the other hand if the government is benevolent and works for the good of the people then I really want it to be able to control the currency, be able to cease the money generated by illegal activities and tax legitimate income fairly in order to build roads, hospitals, schools, the police and firestations (amongst other things).

I don't want to live in a society where I can't trust my democratically elected government. So maybe we should work on fixing that rather than coming up with incomplete workarounds. "Hey, my sister got detained for thought crime yesterday, but at least I can send her Bitcoins to prison unhindered! Take that Ür-Hitler!"

> What if the service/goods you buy turns out to be a scam or something defective?

Reputation systems reportedly have worked well on darknet markets, but it's also simple to do third-party arbitration; when the two parties agree, the arbitrator doesn't even have to be aware of the transaction (or get paid).

> What if my company stops paying me?

You sue or quit, just like now. Fiat has no particular protection here. I'm arguing for a payment system, not a new judicial system.

> What if the government starts unfairly taxing me and threatens to throw me in jail if I don't comply?

I don't advocate cryptocurrency as a way to avoid taxes. However, if they did make our existing taxes hard to collect, various other taxes could be used instead. E.g. I'm a fan of carbon taxes at major point sources; just count tons of coal coming out of the mine.

The remaining paragraphs argue with points I didn't make. However, I'll mention that capital controls and confiscation are not that uncommon in emerging markets, and while your money might not be your biggest problem in that scenario, it can sometimes help solve your other problems.

> you wouldn't choose an inflationary currency.

Inflation only hurts people that hold non-trivial amounts of that asset. Most people benefit from inflation as it makes their debts easier to pay.

However, it's foolish to assume most people make make such choices rationally. People would choose currencies based on popularity and/or whatever they heard on TV.

> I can't imagine anyone choosing the second option.

"Signing transactions and having to authorize every transfer sounds like a lot of work. Bank $FOO will handle all that for me, for 'free' if I open a new account before $DATE."

edit:

Sure, the ability to use proper user-controlled, signed/authenticated transactions would be wonderful, regardless of the currency.

"Hayek points out that you wouldn't choose an inflationary currency. He relies on that to limit overall inflation. But you also don't have the deflationary problems of the gold standard, since it's possible to make more money at will if you need it."

Ideally, you'd want your currency to expand (or contract, heaven forbid) at the same rate as the economy. But that's a little hard to do. A deflationary currency is way bad. (By definition, you're economically irrational if you spend it.) On the other hand, uncontrolled inflation is way bad, too. "Controlled" (in some, hopefully meaningful, sense of the word) inflationary currency is probably the best of the options.

>> the more I use my hardware wallet, the more I'm horrified by legacy systems that work by giving vendors the ability to withdraw as much as they want

While this is still the case for online transactions, in-person payments with chip cards and contactless methods like contactless EMV, apple pay and android pay do not allow this.

We had privately created money in Europe for centuries. It was a disaster.

It wasn't too different from the recent ICO stuff. Except that it was mainstream.

In other words, I completely agree.

Yep, and we had it in the U.S. as well before the advent of the Constitution. Similarly a disaster.

I would strongly disagree with that characterization. The bank note system - the major form of private money - worked reasonably well for centuries in Europe, evolving into the check clearing systems that virtually every first-world nation has today.

That was much later on. I am talking about basically end of Roman Empire to 1600.

In the words of Patrick McKenzie's tweet linking to this pdf‏, "Hey look, someone took the time to explain to cryptocurrency enthusiasts why the rest of us perceive money as working".

For those singing the praises of cryptocurrency I pose this question:

Say the United States decides to allow decentralized cryptocurrencies to become the dominant medium of exchange in the US; say it even gets rid of the $USD. What problem do you think this would solve? (assuming the US gov desires to continue all other operations in exactly the same manner as it does currently).

I don't think cryptocurrencies are a solution to anything, but saying that the current system is «working» is dubious to say the least: the Fed has been controlling the money supply by targeting low inflation but the money supply grew much quicker than growth nonetheless (probably linked with the decline in money velocity, probably caused by the concentration of wealth. Disclaimer, this is a personal interpretation, not a fact). Inflation for consumption goods was kept low, but the asset prices grew up a lot in the past decades : in the late 90s the stock market was inflated and collapsed (the internet bubble), in the mid 2000s the overpricing of real estate in the US was responsible for the financial crisis, nowadays the stock market is inflated again, how bad will it end this time ?

What do you think the Fed was attempting to do? Or let me put it another way - it sounds like you are advocating there be no way for an agency of a democratic government to dynamically adjust money supply (or interest rates). Say we went all-in on crypto and 10-years-in for whatever reason the crypto supply generation rate we set a decade ago wasnt working (the US economy was crumbling). What then?

This is an honest question: Say north korea suddenly waged total was on US, or a massive natural disaster happens, but the government didnt have huge reserves of money to pay for defense or aid? Should they suddenly issue a tax on their citizens to raise capital, and hope they pay in a timely manner?

> What do you think the Fed was attempting to do? Or let me put it another way - it sounds like you are advocating there be no way for an agency of a democratic government to dynamically adjust money supply (or interest rates).

You are misinterpreting me. To be more explicit : cryptocurrencies suck for the exact reason you explained (if you look around in this discussion, that's exactly the point I'm making against any cryptocurrency fan) yet saying that current system is working properly is foolish. The recent history (since the 80s) is a good illustration that interest rate isn't a good enough tool for money supply control. And actually it should have been predicted: you have two independent things you want to control (consumer price inflation and asset price inflation) then you can't control them with only one variable. The fed's policy ignored the asset price, and it had the bad consequences I was talking about, but if you chose to control the asset price you'll probably cause deflation and kill economic growth. My take: because it's a system with 2 degrees of freedom, we should have at least two variables to adjust. If the first one is the interest rate, what should the second one be ? I don't know, but probably taxes (On savings ? On capital held maybe ?).

Economists talk about having two main tools: monetary and fiscal policies. Traditionally monetary policy is driven by the Fed and fiscal policy is driven by the government, this disconnect means that the two can work at cross-purposes, such as when the Fed is raising rates while the government is talking about boosting the economy with business tax cuts.

In reality the state has basically unlimited power to affect the economy, but it chooses to limit what levers are allowed to be used in order to provide stability and confidence. And also out of morality-driven ideology of the same sort the that gave rise to Bitcoin.

There are many countries which do not have the ability to print money, either because they use another country's currency or their currency is pegged. This usually comes about in order to ease trading (e.g. Hong Kong), because the existing currency was very weak, or because that country is too small to manage its own currency.

Not advocating for or against the fed or advocating for or against crypto currency but instead attempting to answer your three main questions.

> What do you think the Fed was attempting to do? The Fed was attempting to save a system from complete collapse.

> it sounds like you are advocating there be no way for an agency of a democratic government to dynamically adjust money supply (or interest rates)

This is the crux of the problem. Modern societies need currency and yet the management of the supply of that currency that is equitable to all participants remains illusive.

> Say north korea suddenly waged total was on US, or a massive natural disaster happens, but the government didnt have huge reserves of money to pay for defense or aid?

The government would use its existing resources, any reserves they put aside for this type of contingency or they could borrow (e.g. bonds) the necessary funds.

Fed policy has really not done any of the terrible things you think it did.

> management of the supply of that currency that is equitable to all participants remains illusive

The interests of participants are mutually exclusive: debtors want high inflation, lenders want deflation.

And that's precisely the problem that an immutable issuance schedule, like Bitcoin's, attempts to solve (fairly successfully so far). It prevents either of those 2 sides from unilaterally manipulating the currency supply to rob the other side after a contract or borrowing arrangement is signed.

Ahhh, the Feds.... There is one Variable nobody is talking about. Where are the bitcoins that were seized from the silk road and other drug dealers, etc... As soon as the USA floods those bitcoins back into the markets prices of bitcoin will drop.

They were already sold off 2 years ago.

https://www.coindesk.com/four-winners-44000-bitcoins-final-s...

Patrick McKenzie is fortunate enough to not be born in a country that is currently suffering from hyper-inflation neither is he living under a dictatorship that is putting capital controls and deciding how he should use his hard earned money .... yet :)

In other words, "the rest of us" of Patrick's folks do not represent the people for whom crypto is a necessity and not a luxury. So if money is already working for you, keep using it and ignore this fad

Yeah but when that happens you probably look for weapons, not GPUs :)

Civil war of the future: everyone already having GPUs for cryptocoins, the resistance will offer "Freedom Coins" in exchange for lending compute via mesh networks for purpose of guiding DIY drones and missiles.

Sure but how do you afford the weapons? https://www.theatlantic.com/magazine/archive/2017/09/big-in-...

How would a dictatorship allow stores to accept Bitcoin? If you order from abroad, how would a dictatorship not open and track parcels?

You can use Bitcoins on a black market for illegal goods in a dictatorship, as you can use Bitcoins for illegal goods in a democracy.

Do you know what we did here in Brazil during our hyperinflation? We traded in Dollars.

Do you know what people are doing in Venezuela right now? They are trading in Dollars, Peruvian Pesos and Brazilian Reals.

I bet Chinese people are also using Dollars to evade their capital controls.

The USD is probably the most well-behaved fiat currency of the last century, so that’s basically the least interesting example, but:

USD is inflationary. Ceteris paribus, a rational actor would generally prefer to hold something deflationary. The (epsilon-) no-arbitrage argument suggests that the frequently raised “but then no one will ever invest in things” objection doesn’t actually make any sense.

USD is highly controlled (but not by you). This is a technical and legal issue, not a fundamental problem with fiat currencies in general, but it’s impossible to ignore. Bitcoin sidesteps it entirely. What actually drove me to try Bitcoin is when a paperwork error by the state comptroller led to them withdrawing several thousand dollars from my bank account with no warning. I eventually got it back when they realized they made a mistake, but Wells Fargo still charged me “legal fees” and the realization that I really didn’t have control over my money was uncomfortable. With bitcoin I can use my money however I want, whenever I want, and no one else can. No paperwork, no ACH/fed clearing, no delays, no surprise fees, no one stealing money out of my account with impunity. That’s only the tip of the iceberg for how much the legacy financial system sucks, and most of it can’t be fixed with a software upgrade.

Fiat could theoretically work as well as bitcoin in terms of convenience and reliability, but it never does in practice and there’s no way to avoid governments instituting worse policies later on.

I also don’t think most Bitcoin supporters want the government to get rid of USD. It’s about adding choice, not forcing everyone to do something different.

> paperwork error by the state comptroller led to them withdrawing several thousand dollars from my bank account with no warning

It's a good job that the computer you store your bitcoin on never has any security issues.

You can go to great lengths to secure your own Bitcoin private key, you have data sovereignty. The same cannot be said about your own bank account.

It's difficult to evaluate whether crypto would have mitigated your situation without knowing the details. Why were you charged legal fees by Wells Fargo?

Do you think the state comptroller could not seize your cryptocoin assets if you refuse to pay your taxes?

I'm with you, reasonable Bitcoin supporters should not want to get rid of USD. I personally think of Bitcoin like having a Paypal account, except less businesses accept it, and after dinner when we get the check none of my friends have ever said "hey do you have the bitcoin app on your phone". Maybe that will change soon.

"Do you think the state comptroller could not seize your cryptocoin assets if you refuse to pay your taxes?"

Not by simply helping themselves to my account. They'd have to, like, talk to me first, possibly even use Due Process. That's a huge improvement.

> USD is inflationary. Ceteris paribus, a rational actor would generally prefer to hold something deflationary. The (epsilon-) no-arbitrage argument suggests that the frequently raised “but then no one will ever invest in things” objection doesn’t actually make any sense.

This is only true for savers and the vast majority of Americans, likely the world, are debtors (source: http://time.com/money/4709270/americans-die-in-debt/).

How’s that been working out? If only saving was incentivized. Bitcoin true believers have a positive view of increasing savings

Pretty well actually. There may be too much debt but debt is clearly a good thing.

Also don't forget if you want to save, to earn interest means you need to lend so at the end of the day you're going to need debtors.

Not with a finite currency. Hodling in your own possession gives you a "return".

And even with some sort of smart contract placing your Bitcoin on deposit (payment channels might achieve this. Committing your Bitcoin to a channel and charging market rate fees), there's no fractional reserve banking so at least credit/money supply swings won't be so drastic and we can avoid the volatility in the business cycle we experience with fiat currencies.

Interest rates would be lower with bitcoin. Again, consider this from the no-arbitrage angle. If interest rates weren’t correspondingly lower for loans denominated in deflationary assets, there would be an obvious and low-overhead arbitrage opportunity. So debtors don’t actually gain anything unless the loan is fixed-rate and the inflation rate increases.

I can't see how the no arbitrage hypothesis applies here. You're talking about different currencies. No arbitrage doesn't mean that whatever you do to the world won't change anything.

That said, you're probably right that interest rates would be lower since the demand for debt would go down since Bitcoin is deflationary but then again that goes against what you stated in the first place.

Arbitrage opportunity if bitcoin and USD interest rates are the same, but the EV of holding a bitcoin is higher than holding a dollar: borrow dollars, buy bitcoins, loan bitcoins at current rate, sell bitcoins at repayment, your returns are equal to interest returns plus deflation returns, sell bitcoin, pay back dollar loan. Your profit is equal to the deflationary increase in bitcoin. Bread and butter arbitrage. Financiers would keep doing this until bitcoin loans are lower interest rate enough that this doesn’t make sense.

Hey look, someone took the time to explain to cryptocurrency enthusiasts why the rest of us perceive money as working.

Most knowledgeable cryto enthusiasts I know already know that fiat currencies work well enough for many people.

Folks like McKenzie will see no value in Bitcoin and other cryptos because their money needs are already satisfied. Good for them, but their narrow perspective excludes many valid use cases.

Consider these problems, for which Bitcoin offers a unique solution (and which folks like McKenzie may not even acknowledge as problems):

- civil asset forfeiture;

- capital controls;

- black market trading (remember, what's illegal to a foreign government might be a fundamental human right to you);

- intense privacy invasion by governments;

- widespread privacy loss through corporations (Equifax, Verizon).

Bitcoin doesn't need to ape the services offered by the likes of Visa, PayPal, and Chase. It needs to address those unmet needs that can't be addressed by the incumbents.

That's going to be a niche audience, at least initially. But that's how all marketplace disruptions begin.

>- civil asset forfeiture;

How would cryptocurrencies prevent the police from seizing your private keys? They can already throw you in jail if you refuse to provide passwords, or the keys themselves.

Current situation: Government takes your money and you must sue to get it back.

Crypto: Government is incapable of taking your money and must prosecute in order to coerce you to turn it over. And you could still refuse and accept your jail time.

Edit: People replying to me are missing the point. This is about the case where the government is wrongfully taking your money. Under the current system your money can be seized without your knowledge and you have to prove it was taken wrongfully after the fact. With crypto the burden is shifted to the government who has to prove they have the right to seize it in the first place.

And you could still refuse and accept your jail time.

In most jurisdictions (including the US) the sanction for contempt of court is potentially unlimited: the convicted individual may find that they are only freed when they comply with the court’s requirements.

IOW, good luck with that.

My understanding is that in general under current law a US citizen cannot be held in contempt or put in prison indefinitely for failing to disclose a password. The 5th ammendment protection there is not entirely void, but it can be void under certain specific circumstances (such as the "foregone conclusion doctrine", where LE can prove that specific illicit content both exists, and can be decrypted, by the accused).

Refusing to provide the password to a BitCoin wallet found on a computer you own is probably going to fall under that particular doctrine. I look forward to the first test case...

Civil forfeiture is not limited to cash money. Your lambo car, mansion house or any other property could be seized just as easily under the current regime.

In case of crypto, the storage media containing the private keys could be seized. Failing that, the government can always obtain an injunction to blacklist your addresses to exchanges, nodes and miners as long as those operate within their jurisdiction.

You could use a brain wallet to mitigate these risks to some extent, but I doubt it is possible to put all your assets in one place and you expose yourself to the risk of cryptanalysis by torture.

These days, most of us use an exceedingly long 25 word mnemonic key; also, look into actually fungible currencies like Monero, where transactions are private by default, with the option to decrypt them for a regulatory body.

The mnemonic phrase is a representation of the private key, so the same limitation applies.

I really like XMR but converting your money to XMR would still leave a paper trail.

That assumes that you have perfect key management. Looking at current cases about phone & other device searches suggest that most people would be compromised.

This also forces other issues: e.g. offline wallets are a standard answer to security concerns but those are more vulnerable to physical compromise. This scenario needs a lot more discussion of threat models.

And then you get held in jail indefinitely.

And they sold your shoes.

So essentially what you’re saying is that the unique value proposition of BitCoin is that it allows you to make payments that break the law in your jurisdiction.

I mean, I agree with you entirely: that is BitCoin’s unique value proposition. It’s just good to see it out on the table.

Yeah as a proponent of bitcoin and cryptocurrencies I think it's important to recognize how they first established value. The only people that really had a self interested reason to use cryptocurrencies are people that were poorly served by the current situation.

Cryptocurrencies create a minimum coverage of ability to conduct financial operations, they are assets that a third party can not freeze, they are assets that a third party can not invalidate. Of course the first use cases will be illegal ones.

Can you explain something to me- say I wanted to transfer the equvalent of $5 USD to someone using bitcoin. How do I transfer that amount when one coin is worth $5000? If it requires having coin on an exchange is that not a 3rd party? And would it be impossible for them to freeze coins in that wallet?

So this is Bitcoin 101 and you should really be reading up on it, but basically:

Bitcoins can be divided, the smallest fraction is called a "Satoshi" and is a millionith of a Bitcoin (So a cent is 500 Satoshis). The blockchain is a peer-to-peer, which while technically 3rd party, is not something that "you have coin on". The blockchain is basically a cryptographically signed ledger that says a certain public key has this much bitcoins. If you have the matching private key, you have the coins. Exchanges are mostly used to exchange between Bitcoin and some other currency, like US Dollars or another crypto currency.

Bitcoin does not solve 2, 3, 4, or 5!

You have a job, so you get wages. These wages are sent to a bitcoin address. Now your employer can track every transaction you make. There's no reason why this would not also have to be reported for tax reasons, so your government can also track every transaction you make. You buy something, now that company can have a decent chance of tracking your spending too!

There are ways around these issues, but nothing _straightforward_ or scalable. Not everyone can or will use a tumbler for all their wages.

It does not solve 1 either. It just changes the action from coercively taking some papers to coercively taking a password/token.

Civil asset forfeiture isn't necessarily, or even usually, dollar denominated. The same mechanism that allows the police to confiscate the $10,000 you kept in a briefcase in the trunk of your care can be, and more often than not is, used to confiscate the car itself.

I'd like to see a lawyer chime in on the legality of using civil forfeiture laws to compel someone to give up their private key or password. My intuition is that law enforcement would seize literally everything peripherally related to, or capable of transacting in, Bitcoin.

civil asset forfeiture, capital controls

Bitcoin offers no special protection against this. Your problems would arrive in the real world with guns. See shutdown of exchanges in China.

Black market trading

If your opsec is perfect, maybe. See Ross Ulbricht.

intense privacy invasion by governments

Bitcoin keeps a public record of every transaction, forever. That is trivial to tie to your real world activity, in retrospect. It has not been important enough to do yet, but the data is there and data is already collected on other selectors linked to all online activity.

widespread privacy loss through corporations (Equifax, Verizon)

Bitcoin solves this how? Companies checking credit record will require your real world identity and past records. Why would they want to participate in your crypto-anarchist future?

Pseudo-anonymity is not anonymity, and most of the features you have listed as desirable, people simply don’t want, even if bitcoin could deliver them in a meaningful way for non technical people. For better or worse, they are revolutionary ideas which require a change of laws and government, not a change of tech.

>If your opsec is perfect, maybe. See Ross Ulbricht.

The bar is so much lower than many think. Ulbricht posted the first advertisements of Silk Road with accounts publicly linked to his personal email address.

>Bitcoin keeps a public record of every transaction, forever. That is trivial to tie to your real world activity, in retrospect. It has not been important enough to do yet, but the data is there and data is already collected on other selectors linked to all online activity.

Privacy isn't automatic in bitcoin, but it's easy enough in practice to break the public link in the blockchain. Depositing into an exchange account or other bitcoin service and then withdrawing a few days later is usually enough. If you want privacy from the exchange too, then exchanging bitcoin for a cryptocurrency with anonymity built-in (ie. monero or zcash), and then exchange that back to bitcoin at an exchange that doesn't require user identification. (Alternatively, convince your intended recipients to accept monero/zcash directly and don't even bother with bitcoin.) (It's possible that in the future, the Lightning Network functionality for Bitcoin will add some anonymity as a byproduct to transactions using it.)

Against a state (the ones who impose capital controls etc) every contact with the bitcoin network would give you away. It’s not really designed for privacy and even networks that are like tor have been subverted. You can’t hide from a sufficiently determined state without continuous & extraordinary efforts.

If you're willing to live outside the law, bitcoin could help you do so (with difficulty). If you want to live normally, it can't help you. So I guess I'm trying to say - change the law, not the tech.

> - widespread privacy loss through corporations (Equifax, Verizon)

Bitcoin does not offer a compelling solution for privacy concerns.

Intrinsically, the blockchain is antithetical to this: it stores a record of every transaction. It was not designed to achieve privacy, full stop (unlike, say, Zcash).

Extrinsically, you can use things like tumblers or anonymous wallets, but in practice this relies on trusted third parties (just not orthodox ones) and the reliability of your own personal opsec in the face of centralized parties "bolted on" to the blockchain to hide your activity. Moreover, the easiest way to buy and sell Bitcoin is through companies with extensive KYC requirements, essentially all of whom can and will participate with law enforcement.

Finally, there are already companies crawling the blockchain continuously to develop creditworthiness models they can sell to financial institutions. They are extremely good at uniquely fingerprinting wallets, or wallet activity, to social media profiles elsewhere.

> What problem do you think this would solve?

Exactly. I know a few local shops & bars that accept bitcoin. Although it sounds cool, I‘m always asking myself „why should I?“. It’s way more convenient to just throw some coins or put the Credit card on the reader for about 1 second to pay for my beer, instead of initiating a transaction on the distributed ledger.

Well, whether or not it's a problem depends on who you're asking, but:

Remember in the first Captain America movie when his first role in the military was on a tour raising money for the war? That was actually a thing at that point in time. You had to actually convince people to invest or give money to fund a war. The USD was tied to gold in the real world and they couldn't just create more.

Nowadays, we don't have that. A President might have to ask Congress for funding, possibly. And even then, that money might simply be borrowed (adding systemic risk) or printed (devaluing the rest of our money). As a result, the amount of public support required for waging a war (or any huge expenditure) is much lower.

That's a good thing if the people in power are correct despite popular opinion. That's not always the case, though.

But you are asking a sovereign authority, with few restrictions in terms of monetary policy, to voluntarily restrict itself for no benefit.

The benefit is a more free society and less systemic risk.

It doesn't benefit the sovereign authority directly, but neither does freedom of speech, religion, etc.

The gold standard, in the same way, formerly removed much of the ability to conduct monetary policy, and it was supplanted because it turned out that counter-cyclical policy was very useful.

Cryptocurrency is similar except that it wastes a lot more energy to accomplish the same thing.

The government, of course, retains unlimited power to tax, so the ability to fund whatever it wants is retained in all cases.

"Cryptocurrency is similar except that it wastes a lot more energy to accomplish the same thing."

Out of curiosity, what's the carbon footprint of bitcoin mining as compared to gold mining (and then parking the gold in a depository vault)?

Gold mining is ecologically destructive, but varies based on the form. When gold becomes absurdly expensive, as would happen under a renewed gold standard, it would be very likely that the proposals to mine the sea floor would be pursued, and could have major ecological damage. As for carbon footprint, specifically, I don't know.

Thankfully, USD is not based on gold at all.

The US currency was effectively not tied to gold by the time of the second world war:

https://www.federalreservehistory.org/essays/roosevelts_gold...

You only need to take a look at the many other highly intrusive powers the federal government was able to exercise at the time (everything from directing economic production, resource and price control, conscripting large chunks of the population into the war effort to internment of some of its own citizens) to recognize the idea a cryptocurrency would somehow act as a check is far fetched to put it very mildly.

But they had to exercise those powers, which themselves had significant political costs since they were explicitly seen and felt by the population.

Now compare that to the wars in Iraq and Afghanistan, or Syria. The difference is clear.

Besides, cryptocurrencies have a property gold doesn't: They take up no physical space and even huge quantities can be hidden easily and/or lost forever. If your government became oppressive, you couldn't take your life's savings in gold and leave the country. They could feasibly confiscate your gold [1] in a way they can't with crypto.

They can still point guns at you, conscript you, or imprison you, but their options are lot more limited with crypto.

[1] https://en.wikipedia.org/wiki/Executive_Order_6102

I don't see the difference or understand what the difference is supposed to be or the rest of your argument at all, really. First you said something inaccurate about the gold standard on the basis of a comic book movie. Now you're saying what exactly?

Seems like a horribly inefficient national defense strategy. A country is on the brink of having a war levied against them by a belligerent, and plead for funds... some are scared for their life and donate their entire savings, others give nothing because they think/know their neighbors will.

Anyway, this is not a primary reason for having fiat money, but it is a reason.

Yep. I certainly wouldn't want to go to war asking for donations if the other side can use a pen to put half the value of his country's money toward fighting me.

It's definitely a benefit--it just also has the potential to be abused.

And yet somehow America didn't lose WWII. This type of rhetoric (that we need big government to make decisions for us) scares me a little.

Also, people don't need to be altruistic saviors, they can buy bonds.

Nobody donated money (well, ok, maybe....), people bought treasury bonds of varying flavors, and intentionally devaluing your currency by "printing money" to pay for war expenses is essentially always the last thing you do before your government goes down in flames, one way or another---either you just lost the military war, or you destroyed your economy.

Cryptocurrencies would indeed preclude printing money.

>that money might simply be borrowed

...but I don't think any cryptocurrency would have any effect on any government's hability to borrow money. What would stop a lender from trading 1 BTC from a note saying "I.O.U. 1 BTC"?

They could still borrow, just not indefinitely the way they do now.

How come? Now, they just sell more I.O.U.s to pay the ones that reach the due date. They could do exactly the same in BTC, gold, tulips, or whatever.

To whom do they sell the IOUs?

There's a limited number of Bitcoin in existence, and with each one you buy (issuing an IOU in return), the price goes up and people doubt your ability to pay back more and more.

This is almost exactly what's happening with Puerto Rico's debt crisis [1]. They've sold a bunch of bonds, were downgraded to "junk status" in 2014, and then defaulted on a bunch of them in 2015. Eventually you have to face the music and cannot borrow any more.

[1] https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_c...

No one distinguishes between "original" USDs and accounting IOUs in a bank. In Bitcoin, people can and do distinguish between a real Bitcoin and IOUs for one.

People can and do distinguish between dollars and IOUs, the IOUs are called US Treasury Bonds.

Sure, they're traded at very close to face value, but that's because traders trust the US government to pay. That's different for governments considered at risk of default. That could also become different for the US government, if the economy really goes south or if enough people start talking about defaults.

I don't see how criptocurrencies would change any of that. For how much less than 1 BTC would people trade a 1 BTC IOU backed by the US government?

I’m not talking about bonds, but fractional reserve banking, where a bank will credit two accounts with $1 when it has only $1 in cash.

Edit: As it stands now, there is a "lender of last resort" that can create new money as needed to fill in the gaps if those two account holders want to get their money out, so there's no need to distinguish the original vs bank-created money. But you can't create new Bitcoins, so there is a reason to distinguish Bitcoins on the blockchain vs those IOUs.

The president can’t spend money without authorization from congress (see Authorization for Use of Military Force congress keeps renewing) It doesn’t matter where the money comes from. Congress doesn’t just control how tax receipts can be spent, they also control how much can be borrowed and when, and directs the president in how to use it. And neither the president nor congress control monetary policy.

"And even then, that money might simply be borrowed (adding systemic risk)..."

https://en.wikipedia.org/wiki/War_bond

Cap, in the movie, was selling war bonds; i.e. getting people to loan money to the government. Nobody donated money to pay for WWII. (Donating metals, though, was a thing.)

In fact, my personal feeling is that retail war bonds were more a war propaganda/patriotism thing and the majority of the funding was through the normal commercial bond market.

I suspect your idea of the power of the executive branch is significantly and unrealistically inflated.

Its more of a global currency than a US specific one. Speaking from my experience - moving large amounts of money as a student or as someone who wants to send money back home across international borders when one starts earning becomes a pain when it comes to transaction charges, and international payment charges on credit cards etc. Cryptocurrencies can replace USD as a global currency when it gains enough users across the globe.

Can you not avoid fees by using paypal or venmo for example? I transfer money to my friends and family all the time with no fee using these existing services.

Paypal has a fee for international transfer - and they also don't cover India. Same for venmo.

It solves the problem of having the US gov print money out of thin air for example.

> Say the United States decides to allow decentralized cryptocurrencies to become the dominant medium of exchange in the US; say it even gets rid of the $USD. What problem do you think this would solve? (assuming the US gov desires to continue all other operations in exactly the same manner as it does currently).

I don't think the second condition "assuming the US gov ..." is compatible with the first. My objections to fiat and my fondness for cryptocurrencies is much more in line with what the slide's authors seem to be saying -- specifically, I feel that it gains in ethics, rather than effectiveness.

The problem that would be solved is that the US government would no longer be able to continue operations in exactly the same manner. Bailouts for failed companies are no longer a given -- the money has to come from somewhere, and if the government comes to your door and says "give me 10 bitcoins so that I can give them to these idiots who lost billions of bitcoins making bets on the real estate market, but they also get to keep the billions they made while those bets were winning", you're going to do your best to vote those people out on their ear. Similarly when it comes to financing a state of perma-war against the very concept of being afraid.

Printing money would indeed no longer be an option for governments.

But their main source of income are taxes. And why would taxes change?

>and if the government comes to your door and says "give me 10 bitcoins [...]", you're going to do your best to vote those people out

Why would that be different with 10 bitcoins than with 10 thousand dollars?

Main source of income is taxes, but it got close there -- in 2009 the federal deficit got up to 1.413 trillion, which made debt a larger source of income for the government than income taxes and corporate taxes combined. Even without emergency spending like that, the gradual deficit increases are going to mean that soon receipts will not be sufficient to cover interest on the debt.

My point about "coming to your door" was not bitcoins vs. dollars, but taxes vs. FOMC. If the government really wants to give away the value equivalent of trillions of dollars, they have to get the money from increasing receipts, rather than just monetizing debt. They can take on debt, but they have to pay for it, rather than use accounting tricks to borrow at zero interest to support zero interest "loans".

That said, you're probably right; no effective political action is going to be taken in opposition to tax levies, especially if they're aimed at the "1%" -- by the time the 1% becomes the 30% (vis a vis AMT) people will have forgotten why they cared.

I think that understanding Modern Monetary Theory (MMT) and viewing bitcoin through that lens helps a lot. Here's a good article from the MMT perspective: http://neweconomicperspectives.org/2013/12/fair-price-bitcoi...

It also helps to understand the history of money and how it came to be in the first place, and how fundamentally currencies and states go hand in hand. David Graeber's "Debt" is good in that sense.

And in case that's not enough, here's JPM's Jamie Dimon's take on it: https://www.bloomberg.com/news/articles/2017-10-13/jamie-dim...

It's also weird how bankers, anarchists, and MMT economists come to agree on this.

This is the wrong way to look at it.

All functioning currencies are about trust. Both Bitcoin and fiat currency has trust. Bitcoin has more trust than some governments fiat currencies and less than others.

Bitcoin is the first truly international wire transfer system all others are based on contracts between banks in an international network.

It's an international currency with no country or bank owning it. That alone makes it extremely valuable.

"That alone makes it extremely valuable."

More or less valuable than the electrical generating capacity dedicated to creating bitcoins?

More/hard to say

Why do many people (including bitcoin fans) assume that bitcoin must replace the world's currencies to be successful? Does anyone judge PayPal on that metric? I just think bitcoin can fill PayPal's niche in a more open decentralized way.

100% agree!

How would this work in practice? Naturally you would need a free/open/secure mobile app (maybe such an app exists already?). Is there a way to hold and transfer fractions of bitcoin without using exchanges? Can I purchase fractions of coin from exchanges and transfer those fractions into my personal wallet?

>Naturally you would need a free/open/secure mobile app (maybe such an app exists already?).

There are free open source mobile apps for holding and transferring Bitcoin. ("Mycelium Bitcoin Wallet" is one, but I'm not terribly familiar with it or any other mobile apps.)

>Is there a way to hold and transfer fractions of bitcoin without using exchanges?

Yes and yes. You don't have to have an integer amount of bitcoin, and you can hold bitcoin directly. (In fact the main big point of bitcoin was that people can hold it directly instead of only being able to have 3rd parties manage it for them.)

>Can I purchase fractions of coin from exchanges and transfer those fractions into my personal wallet?

Yeah. (All US exchanges do require you to identify yourself pretty rigorously, so it is hard to transfer between USD and BTC without a paper trail. So yes, it makes it hard if your goal for using BTC was to go 100% off-grid, but otherwise I don't think it's a show-stopping issue except for anyone engaged in illegal activity, earning a lot from it, and wanting to get it into USD easily.)

In such a scenario, the US government cannot continue all other operations as it does currently, as its activities are financed by issuing practically risk-free USD bonds (if the US government defaults on its bonds, the USD is gone).

In a market with decentralized money, the US government would have to issue bonds on equal footing with profitable, private enterprises, and would consequently have to pay market interest rates. No market would lend out to a government in a decentralized currency when that government is unwilling or unable to pay back, thus removing the option of issuing more bonds to pay dividends on current bond issue. It just wouldn’t work as it does now.

No wonder the US can be the world super power when it can start a war and have the rest of the world finance it by buying the bonds the US government issued to pay for it.

Summary of key points:

• The case against fiat is an ethical case, much more than an effectiveness case. Crytpo advocates often misunderstand this.

* The primary reason fiat succeeds is it offers price stability. But stability is often purchased at the expense of workers and the unemployed.

* The management of fiat provides state actors with incredibly powerful, ultimately discretionary, tools which significantly affect who wins and who loses and how equal or unequal a society is.

(Edit 1: Based on the presentation's concluding "summary" slides. Edit 2: Removed the point about war as less germane.)

"Fiat money and associated banking systems are the technology that enables the finance of war on scales that would have been unimaginable a few centuries ago"

This quote appears in the summary but isn't really supported by argument within the article, and is quite a big claim!

See how every big countries got rid of the gold standard during World War 1.

What of countries that go full crypto, then later have a war levied against them; this suggests these governments would not have effective economic means to defend themselves.

Its almost like it assumes if citicens of a state switch to crypto their government would/could not tax them

> this suggests these governments would not have effective economic means to defend themselves

They'll just re-introduce a fiat currency like they did all the other times that this was a problem. Assuming they want to survive.

Historically, communities that favoured philosophical consistency over self preservation tended to become, well, historical.

I don't think this is a good summary of the article at all.

It's mostly about why fiat currency is so entrenched, and why a lot of the things that cryptocurrencies advocates cite as weaknesses are actually strengths.

> The primary reason fiat succeeds is it offers price stability. But stability is often purchased at the expense of workers and the unemployed.

Fiat is successful because it is backed up by guys with lots of guns. The backers of the most successful ones have aircraft carriers, nuclear submarines, predator drones, etc.

These arguments against bitcoin have been the same since 2010. They seem to ignore the point of bitcoin (it is impossible to counterfeit, unlike fiat which is counterfeited as a matter of course by the central bank to pay the federal government so it can buy bombs).... and all the features of bitcoin which are increased privacy, better control over your funds, better security, etc.

At any rate, the past 7 years has shown the market accepting bitcoin and the price being driven up.

People don't want to accept this fact so they call it a bubble. It bubbles a bit, sure, and there will be a bitcoin bubble-- but we're not there yet.

Bitcoin is the internet of money. This isn't just a slogan. Bitcoin is a platform that provides many improvements to the existing system.

But as a technology platform it is going thru the technology adoption life cycle, so was more and more people hold some, the price goes up. It will be "volatile" until it's fully distributed.

So "speculating" is not bad-- it's how bitcoin gets its wide distribution. Over time as applications are built on top of the platform, the utility will come more into play.

This is ok. This is the early years. Bitcoin isn't meant to replace the entire system right out of the gate.

Bitcoin isn't the internet of money, it is an internet for money. With this distinction in mind, it would be foolish to think that the first cryptocurrency would be the last. It took many implementations and iterations of wide area networks to arrive at the Internet Protocol we have today.

While Bitcoin doesn't share the same set of problems as fiat currency, it has its own burdens, and has proven completely ineffective as a functional money system outside of speculation and fraud. The novelty of Bitcoin is supposedly its 'immutable ledger', a phrase used so frequently in defending Bitcoin, that it has become divorced from its meaning, and divorced from the reality that solutions to distributed logging existed long before Bitcoin, and many more solutions to this problem will be developed with no regard to the blockchain.

Bitcoin itself will never replace anything -- cryptocurrencies will remain monolithic in purpose and function for a very long time. The underlying ideas to the Bitcoin protocol will be iterated on, and we'll see these ideas implemented in distributed software, but to incessantly hype Bitcoin as the singular platform for cryptocurrency is to live in a bubble.

pls buy litecoin

"pls buy litecoin"

... there's always a vested interest!

Maybe at some point people will do some thinking about how their own conflicts of interest affect the hype and FUD they spread in crypto communities.

pls buy iota

I have been trying to keep track of some of the cryptocurrency idiocy on HN, but no one seems to care/get it: reddit.com/r/BoHN/

Wow. There is a twist at the end

Yeah, Litecoin is no better than Bitcoin in any fundamental way. It doesn't solve volatility, scalability, reversibility, etc.

Yes, it seems that human attention has become the ultimate luxury commodity. I think that a cryptocurrency derives a significant portion of its value from the mere fact that that a lot of people know about its existence.

A lot of celebrities these days make huge sums of money in spite of being untalented. Being famous is valuable in itself.

People (especially rich people) want to be loved and/or respected. The "why" doesn't actually matter. If you own a lot of something which a lot of people know about, then you will be respected.

The blockchain is public. Everybody can see it. It's the ultimate instrument of vanity. In the future you'll be able to show off your wealth without the stigma associated with actually showing it off. People will be able to look you up on a popular blockchain and know that you are an influential individual.

It solves a big problem that rich people have. They want to appear humble but at the same time they want other people to know that they are rich.

Yes, and we can see the Oligarchical squatters who acquired large stakes in Bitcoin.

  In economics, the Gini coefficient is the standard measure 
  of how inequitable a society is. This is tricky to 
  determine for Bitcoin, as it's not quiet a "society" in 
  the Gini sense, one person may have multiple addresses and 
  many addresses have been used only once or a few times. 
  (The commonly-cited figure of 0.88 is based on one small 
  exchange in 2011.) However, a Citigroup analysis from 
  early 2014 notes: "47 individuals hold about 30 percent, 
  another 900 a further 20 percent, the next 10,000 about 
  25% and another million about 20%"; and distribution 
  "looks much like the distribution of wealth in North Korea 
  and makes China's and even the US' wealth distribution 
  look like that of a workers' paradise

  Dorit Ron and Adi Shamir found in a 2012 study that only 
  22% of then-existing Bitcoins were in circulation at all, 
  there were a total of 75 active users or businesses with 
  any kind of volume, one (unidentified) user owned a 
  quarter of all Bitcoins in existence, and one large owner 
  was trying to hide their pile by moving it around in 
  thousands of smaller transactions. (Shamir is one of the 
  most renowned cryptographers in the world and the "S" in 
  "RSA encryption")"

[1] via https://news.ycombinator.com/user?id=davidgerard

If only humans always chose the best solutions to a problem. That's not how things work though. Many sup-par solutions have been chosen because they gained adoption more than because they were the best solution.

Bitcoin will never be the most interesting w.r.t technology, but it has the potential for having the highest market cap. It has a huge network effect, and currently stands as the major conduit for fiat to any other cryptocurrency.

> unlike fiat which is counterfeited as a matter of course by the central bank to pay the federal government so it can buy bombs

While I agree with your underlying premise, you're comically off mark in your criticism. Fiat (in this case we're obviously talking about the US Dollar) is mostly counterfeited by the US Government to buy votes, pay for welfare programs, shore up hemorrhaging entitlement programs, and to pay military salaries & benefits (the vast majority of military expenditures).

Bombs are a low single digital factor in the dollar debasement party from the last ~45 years.

The US budget deficit is approaching such a permanently large scale in non-recession years, that you could wipe out the entire US military and not balance the budget, while still running a real deficit on needed spending for things like infrastructure, Social Security, healthcare, et al.

Bomb (weapons) expenditures are near the bottom of financial concerns. The US has a massive, system-wide cost imbalance on nearly everything (all entitlement programs, all healthcare programs, all infrastructure programs, all education). In government we spend more and get less, on basically everything vs other developed nations.

Want to slash $300 billion out of the military? Ok. In ten years, we'll still have a $600+ billion perpetual budget deficit just due to ballooning entitlement programs alone (and about $27-$30 trillion in public debt at that point, most of which didn't come from bombs either).

If you're talking about debt in nominal terms and equating money supply with debasement in the absence of actual inflation, then you are talking rot. The fact that we can finance massive amounts of debt when needed and easily recover (see WWII) is a testament to incredible dependability of fiat currency.

> it is impossible to counterfeit, unlike fiat which is counterfeited as a matter of course by the central bank to pay the federal government so it can buy bombs

And it's inflammatory rhetoric filled with hyperbole and straight-up falsehoods like this that puts the bulk of the population off of Bitcoin.

> and all the features of bitcoin which are increased privacy, better control over your funds, better security, etc.

The history of the Bitcoin community, so far, can best be described as "libertarians learn step-by-step why financial regulations are necessary".

The boom-bust cycle, exchanges closing down and running away with their customers' money, etc., are things that modern financial regulations exist to prevent (or at least should; see how the repeal of Glass-Steagall led to the 2008 Financial Crisis). With a few exceptions, the financial system regulated these problems away in the 1930s. There's no fraud protection with Bitcoin, either. If you pay Bitcoin for something and the seller takes the money and runs without shipping your product, you're screwed. With a credit card, I can call my bank and have them execute a chargeback.

I think what we're going to find is that privacy is incompatible with stability or consumer protection, and when push comes to shove, the general population is going to side with stability and consumer protection.

And just wait until every last Bitcoin has been mined and the supply will never again grow with the population. The Bitcoin community will learn why hyperdeflation is bad.

And that's assuming the federal government doesn't just ban Bitcoin and call it drug paraphernalia as an excuse.

You're a true believer and I respect that, but I think Bitcoin has many serious downsides that will only get worse the more value is stored there.

It has been demonstrated to be preposterously easy to steal. The privacy angle is a double-edged sword, and won't appeal to many people anyway.

I would argue Bitcoin (and blockchain in general) is the Linux of currency. It may have a major impact on the backend (lots of things may be built on blockchain one day). But to regular people, not true believers, the interest level will be extremely minimal.

You sound like Richard Stallman, a man I admire but think lacks perspective.

So the argument basically comes down to that crypto is too volatile and not usable as unit of account?

1. Crypto is still in its initial stage, where capital is flowing into it. Once it is there, it will be less volatile. You can already see this in Bitcoin[1], where relative volatility is dropping every year.

2. There are projects coming that will enable decentralized trustless peg of fiat currencies into blockchians[2][3]. So you will have usd/eur in blockchians. Similar like Thether, but without central issuer. This will be very convenient for pricing (unit of account), but with all the benefits of blockchains.

And as author admits fiat is terrible as "store of value" - so with this combination - fiat pegs in blockchain for accounting and native crypto as store of value (keep bitcoin for your grandchildern instead of dolar that looses 95% value over century), it might be the best combination of both worlds.

1: http://woobull.com/bitcoin-volatility-will-match-major-fiat-...

2: http://cryptopeg.org/

3: http://www.getbasecoin.com/basecoin_whitepaper_0_99.pdf

I don't think that's an accurate summary. The author's own summary (last three slides) doesn't mention volatility.

Volatility isn't the problem so much as a symptom of the problem, which is a lack of central control. Crypto enthusiasts like the lack of centralization on supposed ethical grounds, but the author draws a separation between ethical considerations and considerations of effectiveness. The author makes the point that fiat is effective.

> You can already see this in Bitcoin[1], where relative volatility is dropping every year.

Curious - Is that really due to bitcoin stabilizing or is it because of the deflationary nature of bitcoin? I mean if bitcoin does have some promise, then holding is better than trying to trade in and out of it.

I also went through the quoted link on volatility: http://woobull.com/bitcoin-volatility-will-match-major-fiat-...

One of the things holding cryptocurrencies back is that there is lot of misinformation. Specially in form of articles written without understanding financial fundamentals. It excites the crowd but the takeaways are mostly nonsense. This article is also along the same lines.

There is no concept called "peak volatility" as highlighted in the conclusion. There is only volatility.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. (from: http://www.investopedia.com/terms/v/volatility.asp)

There is average volatility which is a measure of volatility across a >particular period<. In most cases, if I have a data point for say July 2016, the data point will actually be "average volatility" of all July price movements.

And that makes the 2nd graph even more confusing. What is the average volatility is being talked about here? Is it the rolling average of the average of data points or something else? This is so confusing.

I'm a big advocate of cryptocurrency but am unconvinced that stable value coins can work. The Sai was recently released:

https://blog.makerdao.com/2017/06/05/introducing-sai/

and BitUSD has been out for years:

https://bitshares.org/technology/price-stable-cryptocurrenci...

but neither have a significant amount of value riding on them and I personally wouldn't trust them with significant value.

The problem with any stable value coin is that its stability depends on the underlying cryptocurrency collateral. As long as the value of cryptocurrencies is significantly more volatile than that of fiat, I wouldn't trust a stable value coin's ability to remain solvent and maintain its peg.

I would rather bear the greater volatility of holding the underlying cryptocurrency, and get to enjoy the upside potential, than hold a stable value coin that has no potential to appreciate and a greater than zero probability of going to zero.

When cryptocurrencies get stable enough to make good collateral for stable value coins, they will be stable enough to use directly as a low-risk store of value.

The one wildcard in my estimation is decentralized options and futures markets. By creating a market for volatility hedging, it might make it possible for parties to 'buy' the requisite stability for a price.

That's about what kind of risks and rewards you want for your investments or savings. If you consider the unit of account for a debt, it seems unlikely that you'll have the same preference.

If a trustworthy stablecoin arrives, you will probably want to collateralize some of your other assets to lend stablecoin just to participate in trades and contracts. Most people don't want stuff to be priced in a volatile unit.

Of course I have to believe this because I do some work on Maker!

By the way, Maker's idea of a stablecoin (the dai, the planned successor to sai) isn't pegged. The dai value floats on exchanges while the issuance system reacts to the market prices and tweaks its own parameters to incentivize medium term stability. In the longer term, the stablecoin might be somewhat deflationary or inflationary even compared to its own stability anchor (the SDR currency basket).

What's the best introduction to the Maker system? Something that explains clearly how the current design works.

A pretty good introduction would be the three videos linked on https://makerdao.com/ (overview, how dai works, and how MKR works).

The current revision of the white paper should lay out the motivation and mechanics of the system without being too verbose:

https://github.com/makerdao/docs/blob/master/Dai.md

If there's something about it that doesn't make sense to you or seems poorly explained, let me know, or you can join the chat/subreddit to discuss.

>>That's about what kind of risks and rewards you want for your investments or savings.

True, if I were a retailer and not looking to invest long-term in cryptocurrency for example, I might prefer to receive a stable coin rather than a cryptocurrency, and then eventually liquidate it for fiat it or exchange it for goods/services.

>>If a trustworthy stablecoin arrives, you will probably want to collateralize some of your other assets to lend stablecoin just to participate in trades and contracts.

That's true, but that's a big 'if' in my opinion.

For anyone saying that, in spite of digital currencies being poor candidates for replacing fiat, they're still legit "stores of value", I have an alternative "store of value" that is also guaranteed to never inflate its supply. It's called: me!

There is only one of me, forever! The supply of me will eventually go to zero! Get in now- only $4999.95 for one 1/1000th share of me! Want to trade shares of me? Just use craigslist. I'm sure I'll be on Poloniex soon. I hear there's a double bottom pattern so get in now!

Don't like me? Well I also hand-made a copper wire sculpture! It's truly one of a kind and guaranteed to last forever! A 1/1000th share of my sculpture is $15,000 though because it'll make you feel sophisticated and artistic (I'm more of a lowbrow investment myself)

Volitilty will be inherent with bitcoin, and any blockchain database where the supply has been distributed for low computational/energy/capital input to the small pool of users who aquire majority stake in the total supply, thus devaluing any long term inherent store of value.

additionally, bitcoin and the exchanges can rapidly plummit to zero if and when there's a run to get out as the value requires demand from another just buyer. no buyers, and the price freefalls.

> Volatilty will be inherent with bitcoin... majority stake...

You're making a strong claim here -- and I think this applies to any scarce resource. Why is bitcoin different from, say, gold?

> additionally, bitcoin and the exchanges can rapidly plummit to zero if and when

Here too -- how is that different from any other traded instrument?

The production curve Satoshi designed was to produce the largest supply of Bitcoins for the least amount of effort/resource input to the smallest group of users running the software. Half of the supply was produced this way in the first few months.

Blockchain and Bitcoin is different than physical resources because it's so easily produced.

Crypto tokens are different from other traded instruments because of the exchanges they're traded on are unregulated exchanges which can easily manipulate prices, fake orders, front run, or entirely falsify their deposits until there's run on the withdraws.

> designed was to produce the largest supply of Bitcoins

No; he simply designed for a fixed total amount of bitcoins, namely 21 million.

> Half of the supply was produced this way in the first few months.

No; half the supply is produced in 4 years. Then the next 4 years halves that again. And so on every 4 years.

"Satoshi" choose to produce the largest percentage of the total Bitcoin supply to the smallest group of users for the lowest computational effort/value input.

Rather than designing the supply distribution to coincide with increasing computational and energy value input, the production curve was crafted to gain control of as many coins as possible before anyone else joined the network.

This is a catastrophic design flaw as it means the majority of BTC in circulation was created with very low value input. i.e. 10,000 bitcoins shouldn't surpass the value of two pizzas.

The current value is a mix of passing on the "coins" to greater fools who only think someone else will buy their coin at a higher price. Combined with exchanges which arnt required to publish their reserves, or prevent insider trading or falsifying bids.

More stability will come if verifiable liquidity is offered at any of the exchanges. As we've seen many times, panic sells over trivial news and rumors create freefalls in price from the absence of buyers willing to hold the bag.

> The production curve Satoshi designed was to produce the largest supply of Bitcoins for the least amount of effort/resource input to the smallest group of users running the software.

The total supply was fixed from the start and the supply curve was designed to incentivize mining. When it was initially deployed, there was no reason to believe that Bitcoin would become as huge as it is now, and lots of coins were simply lost in frivolous transactions, faucets, and destroyed data.

> Half of the supply was produced this way in the first few months.

This is not true.

> Blockchain and Bitcoin is different than physical resources because it's so easily produced.

The whole point of PoW is that it is not easy to produce Bitcoin -- physical goods have scarcity enforced by nature; Bitcoin has scarcity enforced by mathematics.

> Blockchain and Bitcoin is different than physical resources because it's so easily produced.

  The whole point of PoW is that it 
  is not easy to produce Bitcoin -- 
  physical goods have scarcity 
  enforced by nature; Bitcoin has 
  scarcity enforced by mathematics.

This is not true. The math in Satoshi's mining algorithm produced most of the coins for extremely low value input.

Most people are simply unaware how the supply was gathered very early on, effectively in the style of a pump and dump scheme.

To be more specific, half the supply was minted at low computational effort from 2009-2013. Mining was made easy so Satoshi could maximize ownership of the supply, hoping speculators would purchase the units for a sum surpassing the value it took to produce the coins.

Bitcoin advocates try to dismiss how easy it is to produce blockchain tokens. Satoshi could just as easily have made the algorithm produce bitcoins in limited quantities early on especially with each coin being divisible to 100000000 units each. Instead Satoshi choose a very easy way to generate the coins before other users took notice of his network.

Along with how easy it is to manipulate prices on exchanges. Exchanges will make huge profits during freefalls because they have no oversight on their order books. There's a reason the exchanges often set up shell companies and use off shore banks in jurisdictions often associated with gambling and credit card fraud.

The market is hardly user driven, it's now at the whim of which exchange can fake their order books while surviving public relations to avoid their solvency getting called out for. Take note how often exchanges have delays with customer withdraws.

> keep bitcoin for your grandchildern instead of dolar that looses 95% value over century

Whereas bitcoin has a proven track record of almost a decade of... existence?

Anyway, why would anybody preserve value in cash over those time scales? The alternative isn't bitcoin or US$ or gold, it's stocks or bonds or real estate or fuck them let's spend it on blow.

Its like pink sheets. Don't tell people who are invested in pumping them that they are not investing into NASDAQ listed securities.

"The alternative isn't bitcoin or US$ or gold, it's stocks or bonds or real estate or fuck them let's spend it on blow."

This is the true question.

In the last two or three weeks BTC has been down to around 3k USD and is now approaching 6k. It's still massively volatile.

No, that is not at all the argument. The argument is that you cannot have an economy run on a deflationary currency, which bitcoin is. An effective economy requires a bit of inflation and the ability to issue new money when necessary for socio-political reasons. Crypto currencies are a cult, though the underlying tech is interesting.

While I understand the desire to have 2% inflation across the economy, wouldn't the individual parties prefer to hold their cash in a deflationary currency?

Put differently and going fast forward; how can you have a mildly inflating currency (eg. EUR) when there's a deflationary currency (eg. BTC) as a viable alternative around?

Would you propose we prohibit crypto currencies? (What would you propose?)

Crypto currencies can exist for those who want them, I don't see any reason to block them beyond ponzi scheme and marketing issues - similar to stock issues. So probably they need some regulation to not defraud unwitting people.

Bitcoin is not an alternative to Euros. That is the whole point. If you switched all euros to bitcoins and asked people to trade those, the economy would collapse as no one would want to trade their bitcoins because mathematically, they increase in value due to the limited issuance of them. Without modest inflation, the economy cannot grow as no one would spend money for investment purposes.

Well, inflationary currencies have the natural tendency of displacing deflationary ones out of the market. Not the other way around. It takes a lot of inflation to reverse that relationship.

"While I understand the desire to have 2% inflation across the economy, wouldn't the individual parties prefer to hold their cash in a deflationary currency?"

Typically, they'd prefer not to hold currency; they'd prefer to make an investment that gives a supra-inflationary return. This is, in general, good for the economy and the society.

"Put differently and going fast forward; how can you have a mildly inflating currency (eg. EUR) when there's a deflationary currency (eg. BTC) as a viable alternative around?"

I dunno, why isn't everyone parking their money in gold?

> wouldn't the individual parties prefer to hold their cash in a deflationary currency?

Net (currency-denominated) creditors would.

Net (currency-denominated) debtors would prefer inflation-adjusted currency.

Those whose significant assets and obligations are not currency-denominated (e.g., who own mines or are committed to deliver commodities) don't really care, directly.

I don't disagree, but I suppose on a technical side it's possible to allow inflation in a cryptocurrency. The rate could possibly also be determined via some distributed consensus approach, though this again would likely not be particularly democratic without some central instance to keep track of voting identities (else you have to use stuff like proof-of-work which definitely isn't democratic in the least).

What if they fork it? I agree with your main point though.

You are just delaying the problem, not actually fixing it and who forks and when? Unless you change the way crypto currencies are made and allow for unlimited creation of new money, it cannot work as a general purpose currency.

Even that raises interesting questions, though. That only works as long as people choose or are de-facto forced into using the state currency.

What if enough people would rather have their money increase in value than allow others in power to deflate it for "necessary socio-political reasons?"

Then you would not have an economy.

Then the author does not understand how cryptocurrencies work. There is nothing preventing to have inclationary currency, and indeed many such exists.

Isn't bitcoin limited in the number of coins that can be issued?

Crypto can remain in this initial state longer than you can remain solvent and longer than your wife will decide to tolerate your adventures in being right at some point.

Source: I was long certain CDS that eventually did pay off.

"And as author admits fiat is terrible as "store of value" - so with this combination - fiat pegs in blockchain for accounting and native crypto as store of value (keep bitcoin for your grandchildern instead of dolar that looses 95% value over century), it might be the best combination of both worlds."

Why do you want a long-term "store of value"?

Buy your grandchildren a pleasant mixture of diversified stocks and bonds---they and the economy will be better off.

Or, buy your grandchildren gold; it's had a much longer track record as a store of value and is prettier to look at while it is value-storing.

Being a terrible store of value is a good thing in a currency, because the encourages investment in actual productive assets as a store of value.

Nice summary. The author has correctly observed that so much of the finance industry is really about clearing and settlement, and that what circulates are claims on money.

This is present in the crypto world too. When you wire money to an exchange and use it to buy cryptocurrency, it doesn't immediately turn into a crypto transaction - you get a claim on that cryptocurrency. Sometimes exchanges are unable to meet those claims or issue claim-like tokens ("Tether").

Also correctly notes that "inflation" worries are more to do with how your future asset and liability flows match up, which have very little to do with supply of the currency itself (apart from extreme Zimbabwe moments). Hard Money == Price instability.

Zimbabwe had little to do with supply of currency, and more to do with supply of stuff.

They forgot that our economies rely upon the magic of the pin factory. Unsurprisingly if you take land from a specialist farmer and give it to a load of people who have no such specialism, then you get a collapse in production.

The result of that is obvious unless you ramp up taxes to colossal levels to kill the excess money circulation.

Are you suggesting that a government, having regulated against specific capable farmer running farms, should raise taxes to colossal levels if they observe food shortages?

I suspect you want to rephrase your comment. That argument seems to have a non-sequitur in it.

I don't believe the GP is advocating it.

I believe he's implying that you'll get hyperinflation unless you do something draconian to take all the money out of the system.

This may well solve the hyperinflation at the expense of not having any (legal) economy left.

Not food shortages, price rises.

Food shortages are inevitable if you implement a policy that ignores the insight of Adam Smith.

So given that you need to shrink the money supply rapidly to fit your new subsistence economy.

> Fiat currencies are not “backed by nothing”. They are backed by the labor and assets of all the humans who have obligations to pay in fiat

So when we "print" more money, we print more labour?

No, but if there is an increase in productivity and you don’t print money there will be deflation.

Is deflation an awful situation ?

It is believed to be the primary reason for the great depression.

https://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

Deflation or Hyperinflation on the other side is nothing compared to the crises we have today.

They are both a path for disaster, this is the primary fear of economists.

Good explanation: https://www.quora.com/Why-is-2-the-ideal-inflation-rate

"Our main finding is that the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929—34). We find virtually no evidence of such a link in any other period."

-- Federal Reserve Bank of Minneapolis (Research Department)

https://www.minneapolisfed.org/research/sr/sr331.pdf

I hoped for a logic rationale, not an interpretation of an historic fact :(

Let's suppose that today, a dollar will buy you a loaf of bread. Tommorrow, though, you have a very strong expectation that a dollar will buy you two loaves of bread, and it seems likely that next week a dollar will buy you a Lamborghini Countach.

What do you do?

1) Spend the least amount of money today that you can to continue living and put the rest under your mattress?

2) Anything else.

Being rational, you choose one. Now magnify this by every other rational actor in the area affected by deflation.

You can no longer buy bread because the grocer decided not to spend his money on new stocks. You no longer have a job because your employer would rather have your wages than your work. The widget factory expansion gets canceled because no one will loan the company money to pay for it.

Ask Japan.

And how do I verify that the money printed is not more than the increase in productivity ? Effectively stealing from my productivity through price inflation ?

First, that already occurs to the tune of of about 2% annually. The Fed aims for about 1-2% inflation annually to encourage investment.

But to answer your other question, in order to verify this you would need a complete-ish picture of the entire economic output of the country: how much it grew (Growth Rate), and how much currency was destroyed (Destruction Rate). With those metrics you can determine how much currency you need to print.

When (commercial or central) banks "print" money, they extend a loan which the debtor is obliged to repay in future, meaning they will have to sell labour (or earn returns on others' sold labour) to do so.

When cryptoenthusiasts "print" money, they burn electricity in exchange for digital tokens which they hope more people will want in future, but nobody is under any obligation to need any of the newly minted tokens at any point in future. (there probably is a niche cryptocurrency out there which only issues coins as repayable debt, and there definitely should be, but it's not the prevailing economic model)

When you create more money, which banks do every time they issue a loan, you are accommodating more saving in that currency.

If you're saving, you're not spending and if you're not spending you are denying other people an income.

The alternative is to confiscate savings, or ban them.

The bit the mainstream metallists miss is that deposits are a result of loans, not the other way around.

and most loans depend on some collateral as a deposit, some income producing property possibly with a personal guarantee.

Nope, you mostly devalue existing claims which is - depending on your perspective - either a nice feature or a glaring bug.

On page 4/5 this presentation says: >this might not be true of a sufficiently credible Tether-like stablecoin whose value is pegged to a fiat currency, but there the crypto is piggybacking on the effectiveness of the fiat.

I was intrigued by this Tether thing and ended up on the site: https://tether.to/

It says:

> Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.

> Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves.

A nitpick I have on the site design is that nowadays sites don't put sitemap in the footer. So I have to difficult time finding the balance page: https://wallet.tether.to/transparency

Can someone help me make sense of this? I thought the numbers are there for the claimed 1-to-1 USD reserve but that doesn't seem to be the case. The value there is from the assets issued on blockchain and not the USD balance on company's book.

Secondly, I might be wrong but can't seem to find who is conducting the audit. Is it one of the big 4 or some home office? If it is a small time office I will be even more skeptical of this whole thing.

Tether and it's sister company, Bitfinex have had a long history of extremely suspicious and opaque behavior.

The CEO has been quoted as sympathetic towards a known ponzi scheme after it vanished with everyone's deposits.

https://steemit.com/bitfinex/@gaitan/bitfinex-ceo-suspected-...

Raphaelle Nicole, the CEO of Bitfinex invested in the past years in a number of ponzi schemes and also supported Trendon Shavers, who was found guilty recently for "a classic ponzi scheme" and was sentenced to 18 months in prison. In 2012, Raphaelle tried his own ponzi scheme: “When I need more coins than I have to fill an order, I will ask everyone that previously “registered” with me to lend me some btc. After 7 days, I will return all of it, principal + 2% interests [per week]…. Now the questions you might have: What could you do to make so much profit? Let just say that I do “arbitrage”: I buy low and sell high.”

Here is the summary of Tether:

https://www.reddit.com/r/btc/comments/6xpddt/as_20m_more_tet...

https://medium.com/@bitfinexed/latest

https://twitter.com/Bitfinexed

https://www.reddit.com/r/btc/comments/7059hr/more_25_million...

You, and everyone else, ought to be very skeptical.

A peg like Tether isn't any kind of guarantee. It's so easy to imagine the insolvency of such a firm through government action, fraud, bank seizures, or a juicy combination of all three.

https://hackernoon.com/the-curious-tale-of-tethers-6b0031eea...

Having the private keys that controls a Tether token is not at all like owning a US dollar. That's why their legal policy states:

Once you have Tethers, you can trade them, keep them, or use them to pay persons that will accept your Tethers. However, Tethers are not money and are not monetary instruments. They are also not stored value or currency. There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money.

I don't think a centralized and fragile thing like Tether deserves to be called a stablecoin. We should reserve that concept for a decentralized and resilient collateralized token issuance system...

Just checked the page, does Tether really have $437,346,130.08 USD? Site just doesn't look like what you'd expect from something that big, doesn't feel right.

Tether was allegedly created by Bitfinex to raise capital after the latter was hacked last year and had to find money to reimburse the customers.

In April, Bitfinex was cut off from the US banking system and to this day it had no means to send and receive USD. The supply of tether has expanded 12x under suspicious circumstances* to ensure Bitfinex will have some form of liquidity, without which they would have ended up like MtGox already.

*: There is zero evidence to suggest the tokens are backed by fiat. Nor have I come across anybody who came forward with evidence that they have managed to redeem tethers for fiat.

Bitcoin is now at the peak of the hype cycle. A lot of the 23 year old traders don't know anything but a bull market. When it inevitably goes through a bear market, like every other asset, when there is $50 billion of sellers higher ready to sell on every uptick, what brings bitcoin back? Stocks very rarely come back from 70-80% declines, unless the stock is Amazon or similar. All the hodlers are going to turn into baghodlers if they don't sell pretty soon.

1- Bitcoin is not stock so comparing with stock has no weight in your argument

2- It has already been on a very long bear market (2013-2015) where everyone said pretty much the same thing (fad, tulip, the experiment failed .... ). So yeah the new holders will go through rough times but your argument that it reached the peak of the hype cycle has no logical facts to support it since you could have said the same in the peak of 2013.

If anyone knew when the peak is(was or will) would not be here commenting on HN or talking about it but rather selling this knowledge ... and this holds true for any investment.

You're right, I have no idea when the top is going to be. My point is that bear markets have a very different feel and can be emotionally devastating if you're in the middle of one and bitcoin has not been through that and made it to the other side. Are the bitcoin boys ready for that? Because it's coming, sooner or later.

The exact sequence of events you are describing happened between 2013-2016 when Bitcoin fell from a hype induced >$1000 to (at its lowest) $200, and didn't rise above $1000 until this year.

It clearly did not kill Bitcoin, and Bitcoin won't die if the same thing happens again.

And before that, it hit a high of $31 and crashed to $2, and slowly recovered to $13 over the next year.

Ethereum crashed from $21 to $7 last year after the DAO theft. A couple months ago it went from $420 to $130.

Many of the "bitcoin boys" won't be ready for that. But that doesn't mean Bitcoin will fail. It does mean that many people investing in it are set for massive pain, though.

Do you have a short position on Bitcoin?

Another perspective - this might be a new bank run. We haven't seen one in the last century.

Possibly, although we haven't really seen how Bitcoin performs during a 2008-like recession, either, and the market (sans Bitcoin) is already becoming due for a downturn.

I also think it's a little silly to categorize Bitcoin owners as 23 year old traders. It has a $95 billion market cap. I think there's a lot more traders than just 23 year olds.

> Stocks very rarely come back from 70-80% declines, unless the stock is Amazon or similar.

FWIW Bitcoin has already come back from a >85% decline at least twice, if you use intra-day data.

This debate is dividing most of the technology space. It's a good sign, for the crypto guys. VCs, angels are experiencing their very own Uber moment.

If you read/watch Debt the First 5000 years. A lot of this makes sense. The first form of money was credit. Which is Fiat.

For anyone interested in understanding what money is, and the downside of commodity money without a central bank, Allyn Young wrote this[1] in 1924[2]. It talks about the gold standard, bi-metalism and decentralized banking that was taking place in the US in the XIXth century.

[1] https://fr.scribd.com/document/251483136/The-Mystery-of-Mone... [2] it's just 11 years after the creation of the Fed. He had a good understanding of what is a financial system without a central bank.

I can’t read the whole story without paying money. Is there a link to a free version?

Oh really ? I just googled it up quickly and found this link.

I uploaded a PDF containing the full version here https://framadrop.org/r/Awpt0Pvlax#17V8BZqBeYZgyzW5F0WOXwDop... (will only live for 60 days though).

Curious; why XIXth century instead of 19th century?

Just me mixing up and applying French conventions in English ;).

The author uses a slide to say:

> fiat currencies issued by strong stable states capable of taxing their citizens, with banking systems effective at encouraging widespread borrowing, with large, diversified domestic economies (and so the capacity to do with fewer imports if necessary) that borrow in their own currency, and do not have sizable debts in foreign currency aren't weak.

This speaks to me as if the author has a modicum of trust in the current banking industry, saying: "I trust that we can still solve the problems we've created." Call me a skeptic, but I don't. That is the fundamental problem that cryptocurrencies were created to solve; trustless money.

I agree with the author on the part of currency needing to be stable, and cryptocurrencies in their current state are not stable. However, as more and more value is attributed to cryptocurrencies, and more and more people adopt it, those fluctuations will even out. I feel comparing crypto's stability with most fiat money is like comparing the gait of a toddler with that of a grown man. It takes time, effort, and entropy to gain the momentum needed to be stable, crypto is still in its early-adoption-phase.

> Fiat currencies are no more “created from thin air” than...

Fractional Reserve Banking would like a word.

> That is the fundamental problem that cryptocurrencies were created to solve; trustless money.

What's the actual problem here? "Trustless money" is a philosophical objection.

Cryptocurrency tends to move the trust locus to your software and hardware stack, along with a choice of crypto-to-real-money gateways, none of which seem particularly trustworthy.

Cryptocurrencies indeed move the trust from a centralized accountant to a distributed system guarded by both code and math. Instead of trusting a mostly anonymous group of people that stand to gain from abusing that trust and have done so in the past without punishment, crypto replaces that trust with user-controlled software and verifiable algorithms.

Any transaction between fiat and crypto requires a modicum of trust, in the same sense that buying something with a credit card requires some trust. Once you are inside the crypto bubble, that trust is no longer required.

Yes, you've moved the trust to the user's computer.

Now the question becomes "which would you trust with a large chunk of money, a regulated financial institution or the information security of a personal computer", which for me would be the institution. For most people I know, it would definitely be the institution, because personal computer security is terrible.

> Instead of trusting a mostly anonymous group of people that stand to gain from abusing that trust and have done so in the past without punishment, crypto replaces that trust with user-controlled software and verifiable algorithms.

This used to be true in the beginning of Bitcoin (when CPU mining on your desktop was OK) but it's not true anymore. The integrity of the ledger is guaranteed by the miners, and now the miners are not individuals but companies with ASIC farms. You have basically no guaranties that these companies aren't going to plot against you to tamper with the ledger. Of course at the moment it would be a terrible idea because it would destroy the confidence in Bitcoin (and that would destroy them) but it's not that different from what stops a central banker to print a huge amount of money.

Tampering with the ledger is sufficiently difficult that it's not a real risk in cryptocurrency. There are plenty of other real risks that are far more relevant.

If a cartel controls more than 50% of the mining power, it's not difficult : they make authority on the ledger. (IIRC you don't even need 50% of the mining power to control the ledger in practice but it's not as straightforward).

> I agree with the author on the part of currency needing to be stable, and cryptocurrencies in their current state are not stable. […] It takes time, effort, and entropy to gain the momentum needed to be stable, crypto is still in its early-adoption-phase.

The problem is : if you want a stable currency you need a money supply that grow as much as `inflation + growth + the slowdown of the money flow`, if you don't have that your economy collapses. All of this is changing over time, then you need to adjust the supply of money dynamically. And unless someone finds a way to do this automatically, you'll need a pilot in charge of this. This is currently the job of the director of the central bank, it can also be the president of the country, the parliament, or anyone but you need someone (or some cleverly designed distributed mechanism that doesn't exist yet). If you don't address this, cryptocurrencies aren't better than gold money, which historically proved inefficient in an industrialized society.

There are project like MakerDAO that indeed use smart contracts (plus fiat price oracles and some other things) to implement monetary policy without any "pilot".

I think one of the problems is that there are now, what, a few thousand cryptocurrencies? The optics of the multitudes of ICOs? Those aren't good. No, no they are not.

A part of me wonders if this popularity boom might actually be the reason it dies out. How many hacks, thefts, and scams have there been? Sure, those happen with real money but real money isn't the one needing to work on its optics. We already accept real currency.

This one is anonymous, this one is for burgers in Russia, this one is tied to fiat currency, this one is for an online file system... The list goes on. I'm not sure that diversity in choice is a net benefit with this, at least not in the long term.

Someone important is going to lose some money and it's not that hard for a government to make it illegal. Depending on your jurisdiction, it's just a stroke of the pen.

If I did want to invest, or use, I'd barely have an idea of where to start and I'm pretty technically literate. Hell, I even mined some BTC when it was new. Now, there are so many varieties. Maybe too many choices. There are even sites to let you easily make new ones.

Maybe it's like the internet. There used to be a lot of different websites, and a lot of them were scams. Now there's just a handful of websites, so it's easier for people to understand what to do... And of course there's still a long tail of weird niche sites with new experiments.

The UN recognizes 180 different currencies, by the way. That's 180 different units of accounts, but the amount of forms of money is much larger, and then you have to consider the derivative forms of money, and the various credit systems. It's already an immense, staggering, crazy cornucopia.

I don't think it's realistic that world governments will just eradicate cryptocurrency through legislation. Banking, insurance, finance, the internet itself, all of those things were really chaotic in the beginning, but businesspeople recognized them as useful and transformative, so states didn't want to ban them, even though they were dangerous.

The IMF director is already saying that cryptocurrency will be massively disruptive and that they expect to play a part in regulating the ecosystem and that it's conceivable that the IMF would issue their own cryptocurrency.

https://www.cnbc.com/2017/10/13/bitcoin-get-serious-about-di...

That makes me think it's really unlikely to just go away.

Your first paragraph, kind of. For many people, the net is just a few social media and streaming sites. The net has much of its wealth consolidated in just a few companies.

We shall see.

Idk, we seem to live fine with thousands of fiat currencies, stocks, bonds, and derivatives, all non-pairwise-fungible. Markets could make it so that you'd just buy utility tokens when you need them, and only investors would need to care about owning equity-type tokens

Re price stability: A cryptocurrency adopted on a mainstream level (at tens of trillions of dollars market cap) for means of everyday payment would be very stable, more stable than any fiat today.

Re effectiveness: Bitcoin itself is not really fast, scalable and transaction fees are not that small anymore, but something like Dash for example can be much more effective than Fiat even at a large scale. (I mean small latency, small transaction fees, high throughput.) Should scalability become a really big issue, I am sure it will be solved by some projects. (There are already projects working on extreme high throughput like EOS.)

The lightning network is one of the proposed solutions for scaling bitcoin further.

> Re price stability: A cryptocurrency adopted on a mainstream level (at tens of trillions of dollars market cap) for means of everyday payment would be very stable, more stable than any fiat today.

This sentence sounds like preaching. Do you have any evidence of this ?

IMO this is really unlikely because you can't dynamically adapt the supply of money. See my other comment in this thread[1].

[1] https://news.ycombinator.com/item?id=15481953

"This sentence sounds like preaching." Yes, you are right, I was wondering whether to edit that sentence to sound less confident. :) I have no evidence, and I am not an expert on this. I just think that if a currency is a utility currency, actually used by merchants and everyday users globally across a wide range of industries, countries and people, it has a huge market cap (it is the dominant currency of the world): I just don't see what could cause big fluctuations in its 'price'. (When you start to be the dominant currency 'price' becomes an interesting concept, because the 'relative to what?' aspect starts to be very significant.)

The expansion and contraction of the real economy causes a change in the demand for money, resulting in changes in the price level. This is usually summarised in the equation "MV=PQ"; see the economics literature for more detail on this.

(This is independent of what the money actually is, and was a big problem with price fluctuations under the gold standard)

Let's say we have a huge global cryptocurrency, that the whole world uses. If I understand well, when the economy expands, you can buy more BigMac for one unit, when the economy shrinks, you can buy less BigMac for one unit. What I am wondering now is whether is it something that needs to be avoided at all, (or can it be avoided in the long term at all).

For bigmac it's not a big deal, but for investment it is. Imagine your company have 10 millions in cash, you could invest on a new machine to produce more (or better quality, or cheaper). But if you knew that the machine was going to cost you only 9 millions in 3 months. Will you buy it now even though you know it's only going to make you earn 300k in 3 months ? Of course not, you'll wait those 3 months. This is the problem with deflation, nobody wants to invest and people delay or reduce consumption. this really harms the economy.

The Capitol Hill Babysitting Co-op is sometimes cited as an example of this. https://en.wikipedia.org/wiki/Capitol_Hill_Babysitting_Co-op

Never heard of that, thank you !

That would be an argument against stock market and interest rate as well.

If a significant number of companies waited those 3 months to invest, there would be no deflation.

The deflation will be the same as the increase in a stock market index.

> If a significant number of companies waited those 3 months to invest, there would be no deflation.

And little economic activities in the meantime (because all those investment deals wouldn't occur).

At the equilibrium, you'll have zero deflation and a growth which is way below its potential (it could even be a recession, slowly converging toward zero growth). That sounds fantastic doesn't it ?

I didn't understand you two other points though.

If a cryptcurrency grows large enough to be the size of an economy, the value of the cryptocurrency should grow or shrink with the economy, like a stock market index. At that point keeping money in the cryptocurrency should be similar to keeping it in an index fund.

When the economy does well you earn 20 CryptoUnits a year selling widgets. When the demand for widget falls the staff refuse to take a pay cut to 15 CryptoUnits a year and so the company introduces big layoffs instead. This is made worse because nobody's willing to lend the widget manufacturers part of the fixed supply of CryptoUnits, firstly because hoarding the coins is a less risky strategy with the same expected return even when the economy is doing well, and secondly because they're especially not keen to lend CryptoUnits when they're expecting goods to get cheaper in the future.

Recessions happen with fiat too, they just can be a lot deeper when nobody can intervene to stabilise things and induce the people holding Crypto into lending and spending again or accepting real terms wage cuts.

The economics literature is wrong. The quantity theory of money is cobblers - or rather the mainstream assumptions are.

https://www.forbes.com/sites/johntharvey/2011/05/14/money-gr...

In your hypothetical wouldn't BTC would have to be at least as volatile as the world's RGDP?

There's one huge problem with fiat currencies that Bitcoin improves on:

Trusted Third Parties Are Security Holes

http://nakamotoinstitute.org/trusted-third-parties/

IS it not deflationary?

2015: Block reward: 25 btc * 6 blocks per hour * 24 hrs* ~250 euro = 900.000 euro worth of daily mined supply

2017: 12.5 btc * 6 blocks * 24 * ~2000 euro = 3.6 Million

Indeed, prior to 2015 it had double digit inflation, thought this has declined to just under 3% per year and will continue to fall.

Morever, some estimates suggest up to 1/3 of all BTC are unspendable (lost keys, malformed txns, minute dust UTXOs, etc) so the deflationary spiral could have already been under way.

Steve has missed the main point.

The value of a currency is determined by the effort required to obtain it.

That's not its value, just an upper bound on its value.

If you disagree, boy do I have some currency to sell you. I worked very hard on it, I swear! :)

And the lower bound is the tax I have to pay in it.

I need 100 of your currency, here's a small caraway seed for it.

Now shall we negotiate?

> unit of value

Nope, it's a unit of human work. Value is a subjective measure.

What is a "unit of human work", and how much is it worth?

Why are people paid differently for the same work?

>What is a "unit of human work"

Money, obviously?

> Why are people paid differently for the same work?

Do you want me to do a crash course on history of economics in a HN comment?

I think the issue is that there's nothing obvious about the labour theory of value:

https://en.wikipedia.org/wiki/Criticisms_of_the_labour_theor...

I was hoping you would say that. Do you not realize the circular logic you're using to define "money"?

Q. What is money?

A. It's a unit of human work.

Q. What is a unit of human work?

A. Money.

If you cannot provide a concrete definition of either 'money' or 'a unit of human work', I have no idea how valuable 1 of your 'moneys' are.

Let's call your money 'CRYPTOS'. One may assume 'a unit of human work' is like a person doing some defined task for 1 hour; and the value of 1 CRYPTO is established as number of CRYPTOS (1) you would be willing to give someone for doing that task for 1 hour. Naturally, for this to work, there would also need to be someone willing to perform this task for exactly 1 CRYPTO per hour; and nobody willing to do it for less. Is that basically what you are talking about when you say 'money' is 'a unit of human work'?

Above you scoff at the idea of money representing a unit of 'value', and say that value is subjective. So let me again point out the obvious - people paid different amounts of money for the same work. If you pay people different amounts for the same 1 hour of human work, then a unit of human work isn't always worth same number of CRYPTOS. So explain to me precisely how you are defining 'a unit of human work' and how it equals X amount of 'money', without introducing some subjective concept of value or worth.

You either have it backwards or you have a very Marxist view of capital. Value and utility are measured in dollars.

Even the most stable currencies of developed world can be influenced by a black swan. For example, see Swiss Franc or British Pound. If some cryptocurrency is adopted for mainstream use (big if), it won't have this risk, inherent to a centrally controlled currency.

This kind of exchange risk is nothing to do with central control, but to do with which economy the currency is associated with?

The Black Swans I'm talking about are about failed attempts to control the exchange rate by central bank. Fiat currencies are stable until they aren't.

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

https://en.wikipedia.org/wiki/Swiss_franc#End_of_capping

Attaching the value of a fiat currency to something is very unstable in the long run. This is independent of if what it is attached to, be it gold or another fiat currency. Imbalances will simply pile up over time and doom it to fail. This can be exemplified by your examples, but also by the currencies going off the gold standard during the Great Depression.

Reply on news.ycombinator.com