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Comment by thkim | Hacker News Reader

it's already posing a significant threat in smaller economies like South Korea. a lot of people (even here on hacker news) don't seem to understand the consequences of bitcoin & cryptocurrency. i am very concerned.

a lot of bitcoin followers seem to think that decentralization saves us from arbitrary value adjustments. decentralization completely exposes currency to volatility and does not self-stabilize nicely regardless how many people use it, because supply is broken. this false idea that decentralization is good for currency shows lack of understanding in how currency works. a central authority is required to protect the value of currency. that is why central bank prints money and does QE. it is not a conspiracy to enrich some cronies. without central authority, it cannot function as currency.

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Are you specifically including Bitcoin's fixed coin emission cap in your reasoning? It is known to be problematic. One of the things it apparently prevents is a flexible blocksize because that apparently requires a tail emission instead of fixed cap. Tail emission yields an inflationary coin (see Monero's economics) whereas the fixed cap of Bitcoin causes it to be continuously and strongly deflationary. I'm not an expert in QE but you're comparing a centrally governed fiat system to a system which places governance in the hands of strong social/financial incentives. Such incentives eventually lead to asking the most qualified person for guidance (which becomes governance). I'll be very interested to read your reply in case this modifies your thinking at all. Thanks

What is the best book on our current central bank currency paradigm you would recommend?

I don't know a book to recommend. basic scheme is explained in any money & banking textbook. if you know what a bank run is, why it occurs and how it is being prevented then you will see why bitcoin's decentralization makes no sense. only part that is probably not on textbook is this blind faith that volume guarantees stability. it does not.

I know what a bank run is, why it occurs and how it is being prevented (probably better than your average bear) and I see no correlation between that and bitcoin.

The only problem I see, if you could even call it that, is that bitcoin "banks" (exchanges?) are restricted to being 100% warehousing operations since there is nobody to bail them out if (when?) they decide they can make more profit earning interest by loaning out the funds they are contractually obligated to hold.

If you want to avoid a run on your bitcoin exchange then simply don't engage in fractional reserve banking...or, I suppose, don't lose all your holdings to hackers.

i am saying that when bitcoin value takes a hit by some global event, and people panic to sell, there is nothing that will stop the value from gyrating to zero. what are you talking about? what does charging interest or reserve have anything to do with this? you make no sense.

You know that's totally, completely different from a bank run, right?

Central banks have very little influence on the value of their currency once people lose faith in it, people will buy anything instead of holding on to their (usually rapidly devaluing) currency.

One thing every holder of bitcoin knows is it will never suffer through hyperinflation, ever.

central bank scheme is not perfect. however central bank has proven to be very effective at providing stability to currency. bitcoin's scheme is vastly inferior. protection from hyperinflation is not a great benefit compared to unstable currency value bitcoin is designed to suffer. also hyperinflation doesn't occur unless the government is essentially defunct. I'm sure people would just switch to some other reputable currency before it happens.

There's at least one thing to stop them: fundamentals and speculation. People buy back in (in part) because Bitcoin is designed to strengthen itself (not price, I'm mainly referring to incentives to mine and to steward). (And it's not equivalent to the shitcoins that it spawned so the assumption it it's not special is invalid.) That makes Bitcoin a completely different asset to model than a fiat currency. If there's one difference, there are probably more. And there certainly are.

My two cents is Banking and Financial Institutions Law in a Nutshell by William Lovett. He was my law professor on this subject, and had a knack for teaching the fundamental forces at play.

Peter D. Schiff "How an Economy Grows and Why It Crashes"

> ...a central authority is required to protect the value of currency. that is why central bank prints money and does QE.

So, what you're saying is they protect the value of a currency by devaluing it?

> it is not a conspiracy to enrich some cronies. without central authority, it cannot function as currency.

No, it's a conspiracy to tax the population without actually taxing them through devaluing the currency (aka inflation). Enriching some cronies is merely a side effect that keeps the bankers in line (and, more importantly, in the cartel) since they profit handsomely through fractional reserve banking and debt monetization -- neither of which is possible "without central authority".

> So, what you're saying is they protect the value of a currency by devaluing it?

A central banks job is to stabilize the currency and the relevant economy. Controlling liquidity and interest rates are two tools to affect this change. Side effects of which are controlling the rate of inflation.

Stability is the key for a currency at global level.

But don't take my word for it:

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

https://www.federalreserve.gov/aboutthefed/section2a.htm

Sure, I know what they claim to do. My assertion is they in fact do something entirely different while using propaganda to tell you what they want you to think they do.

But, anyhoo, totally off topic.

everyone gets taxed in the scheme, even the board of governors at the fed, so whats your point? who benefits? government tax income increases? so what? does fed get a pay raise everytime they do this? you are really over your head.

Well, you see, people have this aversion to taxes and if they knew exactly how much they are paying they might start to get a little upset. So governments came up with this scheme to hide how much they tax them so they don't upset the people.

Not even to mention the negative effects inflationary policies have on the factors of production but, as you're some kind of expert, I obviously don't have to.

I really should know better than to try to discuss economic issues with someone who can't even manage to use a shift key but, as the say, "someone is wrong on the internet."

  ... a central authority is required to protect the value of currency. ...

I don't really see the need for a central authority and you'd have to make a really good case to convince me. I believe most currencies originated in a decentralised way. I think the central authorities have failed in a big way during the euro-crisis and I welcome a future where the value of money cannot be manipulated by some central authority in order to push some economic and politic agendas. It's clear to me that decentralised currencies provide many needs that cannot be met by centralised currencies.

i'm not sure what you mean by euro crisis but if you are asking why euro failed, it shows exactly why bitcoin will not work. euro is an attempt to use single currency for different economies. euro failed because it ignores simple fact that different economies need different currency value to stabilize their economy. reason why portugal ireland greece spain are suffering worse than it should be is because those countries lost their power to control currency to european bank.

> reason why portugal ireland greece spain are suffering worse than it should be is because those countries lost their power to control currency to european bank.

So you're saying there is no way to have a stable economy without control over your currency?

Monetary policy is hugely important yes.

Many countries have big internal variations within areas, just as much as between other countries - by your logic why is it not just as necessary to have separate currencies for California, Southern Italy etc? London, New York, Shanghai, Paris, Singapore would be better served by a common currency than their national ones according to this line of logic, and given that they make up significant proportions of the economy for their respective nations, you'd think that enforcing use of the local currency is hugely damaging for their economies.

"I don't really see the need for a central authority and you'd have to make a really good case to convince me."

A central bank can ultimately control the value of a currency by either grabbing assets on the free market and emitting currency - or the inverse - grabbing currency and selling off the underlying asset.

This is a very powerful way to control volatility.

Gold has fairly strict supply and it moves around a lot.

If the US Fed really, really wanted to control the USD vis-a-vis some other currency, they could do that.

"I believe most currencies originated in a decentralised way"

Ah? No, definitely not. Except for gold ... currencies have issuers, rules, a central bank of sorts. Like the King. Or whatever.

> don't seem to understand the consequences of bitcoin & cryptocurrency

Everyone keep saying that but these words are empty. What are consequences of regular stock market? And what difference does it make for someone who bought bitcoin for $15,000 and sold for $50,000 ?

I fail to understand how frightening people helps? Its been acknowledged so many times yes its a bubble. Yes, a major correction is in works, but shorting or selling now is "catching falling knives" (term I learnt trading stocks in 80s). But when the bubble burst EVENTUALLY, you won't be able to buy bitcoin for 1 cent, as it will never go back to basics again. We need deep correction so that we can test major mining holders how much they withstand so 80% correction would be healthy for Bitcoin, if we want to (should!) look at it at any other trading stock.

The truth is - unless something else comes along, there is almost infinite number of dollars waiting to be convert to bitcoins. these traders will be passing a baton to each other for a very long time to come.

you are confusing what stock is. it has stream of dividend to recoup investment. bitcoin, no.

? many companies with stock ticker do not pay dividends.

are you seriously saying their assets and power to generate income amount to nothing? you need to think. bitcoin does not generate income.

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