Transaction Costs and Tethers: Why I’m a Crypto Skeptic
nytimes.com
nytimes.com
Secure, trustless, decentralized consensus. Or in practical terms - a ledger database that everyone can write into without having to trust third parties to maintain correctness.
It’s strange author doesn’t seem to attribute any value to solution to that problem.
It’s also strange author doesn’t know it has very strong link to reality - security of the system is proportional to hasrate.
Seems like just another case of a guy arguing without having understanding on the topic?
At best he is ignorant, at worst he is perpetuating the current monetary system(s) which is in a macroprudential[1] policy mode - not good - as many of us can see around us daily.
Aside from the truth of there being more money owed with interest (as a debt) than current money in circulation with which to pay that debt off (results in either #1 forced defaults on loans at some time in the future or #2 a feedback cycle with bursts of new loans created to pay off the previous debts without the forced defaults of #1) the current dollar system and all modern currencies are directly harmful to the population and indirectly harmful in a number of ways. I cant stay on here all night but seek elucidation elsewhere if you are interested. Macro voices the podcast does a pretty good job.
I don't think all the kings horses and all the kings men will be able to stop bitcoin from success or the dollar from failure but what always astonishes me are the endless arguments for inflation being good for the economy when its basically how the government pays off its outrageous debt by stealing from the elderly, disabled and anyone with a fixed income. And its not just the benefactors of the system, there are volunteer robot numskulls repeating this hypothetical garbage every day on the internet about inflation when really it just allows the government to sustain itself by getting senior citizens to eat dog food.
People need to stop letting themselves be tricked into exchanging their time, youth, skills and labor for tokens that are guaranteed to be devalued, its been over 100 years now and none of us know anything different. :(
[1] https://en.wikipedia.org/wiki/Macroprudential_regulation
Nothing stopping people parking their savings (if any) in mutual funds, Bitcoin HODLing is not the only choice for protection against inflation.
I would argue that it's not even protection, b/c nothing guaranties that artificially-limited supply model will work in the long term.
It's still an unsolved problem. The way Bitcoin and clones solve it, is by delegating consensus to one level up - i.e. consensus over the right fork (see [1,2,3]).
It's like saying that you agree that Trump is a legitimate president as long as you are a republican.
[1] https://twitter.com/nivertech/status/943468719241682944
No they aren't. See: Proof of stake, Lightning network.
> Bitcoin is real without knowing who issued it, so you need the digital equivalent of biting a gold coin to be sure it’s the real deal, and the costs of producing something that satisfies that test have to be high enough to discourage fraud.
This is a pretty wildly inaccurate analogy of why the Bitcoin network uses mining.
> Bear in mind that conventional money generally does its job quite well. Transaction costs are low.
To pay in cash, yes. To pay digitally? You're paying high credit card fees. So, no, not really.
> The purchasing power of a dollar a year from now is highly predictable – orders of magnitude more predictable than that of a Bitcoin.
Disingenuous argument. If the US dollar were invented 10 years ago, it'd be highly volatile today too. The fact that Bitcoin is volatile today is only relevant if you are going to argue that that volatility is inherent to cryptocurrencies. An argument which may be valid, but that Paul fails to make.
> Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens.
Because using a cryptocurrency does not require trusting anyone.
> But gold does have real-world uses, both for jewelry and for things like filling teeth, that provide a weak but real tether to the real economy.
You mean the way darknet markets provide a weak but real tether to the real economy? You literally just enumerated Bitcoin's tether's to the real economy. Also, the idea that the gold market is in any way meaningfully tethered to its industrial usage is a complete joke.
There are really great arguments against Bitcoin and crypto-currencies. All of which Paul Krugman completely fails to make in this piece. The best of which he's positioned to make, too! Bitcoin is a deflationary asset - that's a real problem for anything trying to be a currency. That's a great case against it, and one close to Krugman's heart.
This article is seriously disappointing.
LN doesn't really solve the energy problem because the incentive for miners to compete is still dominated by the mining reward rather than transaction costs. As long as there is competitive mining, the resources used for mining will approach the block reward.
Proof of stake is interesting but I don't think it's been used at scale yet has it?
You're right, it doesn't solve the energy problem. LN solves the fee problem. The energy problem is addressed by something like proof of stake.
> Proof of stake is interesting but I don't think it's been used at scale yet has it?
It's been used in a number of non-major cryptocurrencies. Its been analyzed quite a bit though, and there are high-value (in the sense of market cap - i.e. large bounty for someone to exploit it, if it were possible) working implementations out there.
I wonder what high credit card fees you are talking about. As a consumer, I pay none of them. In fact, I get money back every time I purchase something with my credit card (in addition to getting a bunch of other benefits, like purchase protection, extended insurance/warranty, ability to charge back, etc).
As far as I know, none of this is available in the cryptocurrency world, and more importantly, all of the cryptocurrencies that I know of do charge a transaction fee, which cannot compete with $0 flat (not to mention cash back).
Crypto currencies have interesting features, but low transaction fees vs CC isn't one of them.
That's not how economics works. You are still paying.
But yes, you're right. You would be paying twice, just like you're still paying once even if you pay with cash. This is a real problem, but it's not an inherent flaw in cryptocurrencies, IMO. Just a practical consequence of our existing financial system. That doesn't make it any less real, but it's "not Bitcoin's fault" so to speak.
Rationally one would think that if some cryptocoin did see large scale adoption then it would have the same effect as credit cards where the consumer doesn't actually see the transaction costs.
"On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year."
"Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or "cash" ) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year."
I was going off of the information I've received from small business owners in the Seattle area who I've formed personal relationships with, and who have told me how they increased their prices specifically to offset the cost of credit card fees.
That's going to depend on market dynamics between buyers and sellers.
The long version is, read: https://en.wikipedia.org/wiki/Tax_incidence and replace "government" and "tax" with "VISA" and "transaction fees".
To be honest I don't know who "really" pays but I'm certain that "I don't see any fees on my bill and I paid the cash price" is not the right way to read the situation.
But as a consumer myself, leaving debt part of the equation aside (since it is irrelevant to the transaction itself), I pay zero transaction fees with my CC, whereas I'd have to pay a significant fee with a cryptocurrency.
More annoying is that the cryptocurrency fee would be charged every time I make a payment. Looking at my CC statement, I can see I & wife made about 50 CC transactions last month, which would result in a significant "monthly fee" if we had used Bitcoin for example (to pick the most "widely adopted" cryptocurrency).
Like I mentioned above, cryptocurrency has very specific key positive aspects, but low transaction fees aren't one of them.
Totally agree that on a practical basis it would be crazy to try and justify the utility of crypto to the average person based on "lower fees" since they are exorbitant for all but very large transactions.
My point with CC fees was, merchants "pay" but the open question is: are prices in a given market perhaps a bit (even just 1 or 2%) higher than they would be if card transactions were free? If so, exactly how much? Does this differ across different markets / product categories and how much? This is the kind of thing one would need to figure out to know who is "really" eating the fees.
My intuition is that whether the charges can be passed through to the consumer via higher prices is going to depend on the market (say supermarkets vs luxury goods) but I'm not aware of any research on this.
Cash pricing at gas stations is pretty rare in my experience and somewhat violates the merchant's credit card processing agreement.
Credit cards are the highest transaction fees and almost entirely due to the need to keep paying users to use them (ie all the rewards points and cash back).
Debit card transactions are much less (due to legislation).
And bank transfers are a dime.
Companies like Starbucks have brought the costs even lower by bundling up transactions.
What high fees do you mean? Credit card fees in the EU are capped at 0.3% iirc.
I'm not sure there are any. Certainly not if "responsible governance" means "not printing money whenever the central bank feels like it".
While a few countries seem to be doing ok, the overall track record of central banks around the world seems to be pretty poor.
Then your trust should be severely eroded by the events of the past decade or so in the US, since the Fed is full of "thoughtful economists" who utterly failed to predict the crash of 2008, even though their policies helped to cause it, and utterly failed to predict that printing massive amounts of money from 2009-2014 would not stimulate economic activity.
No, they didn't. Both the people at the Fed and mainstream economists outside have always pointed out that monetary stimulus is an extremely limited tool.
They may have failed to predict that Congress would be completely asleep at the wheel and neglect fiscal stimulus, but then even had they predicted that there is little they can do about it.
That's true, but it's also true that Bernanke and other Fed leaders were predicting that the economy was going to improve over the next few years even in 2008, when the crash was already starting. Even a limited tool can't be used properly if you don't have predictive ability.
I'd love to borrow money at nearly 0% interest and then turn around and lend it at 5% or even 15% interest. That'd be awesome.
How people can not see this as an elitist plutocratic system is beyond me. Of course the systems it replaced were also elitist and plutocratic and so far cryptocurrency appears to be turning out that way as well, so this remains an unsolved problem.
A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers, they are not in a position to price granular risk, and that is the normal function of a working banking system.
No, a central bank injects the money via the banking system as a hidden subsidy to banks and other financial institutions.
If a central bank really wanted to make printing money neutral (i.e., not picking any winners or losers), it would use newly printed money to increase every single person's dollar holdings by the same percentage.
That's true. But it doesn't change the fact that any other way of printing money is playing favorites--some will be winners and others will be losers.
Only if you think printing money whenever the central bank feels like it is a good idea and we just need to make sure they don't play favorites.
But not if you think, as I do, that it would be better for the central bank not to monkey with the money supply at all.
Tried what? Not monkeying with the money supply? Surely you jest. There was no Fed then, but the US Treasury started printing greenbacks (United States Notes) in 1862 and never stopped.
As for since the Fed existed, the worst depression in history happened on its watch. And the reason for the lack of financial panics from the end of WW II into the 1970s was the US being the only economy that wasn't impoverished by the war, so it could basically dictate monetary policy to everyone (the Bretton Woods system). Once the rest of the world rebuilt, that policy fell apart and the financial panics started up again.
The one big difference since the 1930s is deposit insurance: that is what prevented financial panics since then from turning into bank runs. That can seem like an improvement, but it just exchanges one failure mode for another: instead of bank runs forcing everybody to admit when a bubble has collapsed, now it can keep on until it's big enough to tank the world's entire economy when it collapses. Which is what happened in 2008.
> Central banks would eventually generate too much moral hazard; we're not quite there yet but we're getting close.
I don't share your optimism. I think we're there already and have been for quite a while.
The banks are no less arbitrary winners than anyone else.
On the other hand, the banks did redeposit much of the money back with the Fed. If that were the argument then there could be a more fruitful discussion.
They didn't have to "redeposit" it. The money the Fed prints goes straight into the banks' accounts at the Fed when the Fed uses it to buy bonds from the banks. The reason all that money is still in those accounts is because the banks did nothing at all, instead of increasing their outstanding loans, which was what the Fed predicted they would do (and which was the reason for the QE in the first place).
As for QE, increasing lending from reserves didn't turn out to be the only or even main channel of effect. Driving down yields was the main channel. In that sense it was indirect and inefficient for the amount of reserves injected, but not ineffective. In the end the spreads collapsed and money filtered out (not only from banks but from every holder of capital) from less risky investments to more risky investments, increasing the supply of capital to everyone. If you had to complain, it was that money took the longest time to reach the riskiest borrowers and that we're all on the hook for being front-run on Fed news (Fed paid more than they should to buy those bonds) [1]. That was unfair, not the rates that borrowers had to pay.
[1] On the other hand, by pre-announcing, they probably needed to buy fewer bonds over all as the market moved itself on the Fed's credibility.
No, just the 97% of them that banks (at least those in the "upper reserve tranche" at the Fed, which is basically any bank you've ever heard of) are allowed to lend out. But in fact banks lent out virtually none of it.
> They did lend a fraction.
A tiny fraction (a few percent).
> That it was not a bigger fraction should tell you something about the perceived risks and risk appetite at the time
Which was exactly the point the Fed did not get at the time. (In the Fed's obfuscatory language, the "money multiplier" decreased drastically, which they had not expected.)
You complained about high interest rates for loans. But the main reason that so many banks needed bailouts in the first place is that the interest rates they charged were too low and so they couldn't absorb all the defaults.
Until the value does collapse that is, just look at <how many?> examples of hyperinflation in my lifetime.
Maybe he's from Brazil? Maybe he's 76+ years old? If so, then I think there were 5 "ish" 1000x devaluations in that single country in his lifetime.
I never lived in Brazil but knew people who did. Some quick checking Wiki for dates, I probably missed some devaluations?:
1942 cruzeiro replaces real at 1000x
1967 new cruzeiro replaces old at 1000x
1986 cruzado replaces second cruzeiro at 1000x
1989 cruzado novo replaces cruzado at 1000x
1993 cruzeiro real replaces cruzado at 1000x
https://nakamotoinstitute.org/static/docs/micropayments-and-...
He literally advocated a housing bubble. (Broken Window fallacy)
The housing bubble collapsed causing bailouts of banks.
Bitcoin is a direct response to this nationalization of private losses. Not to mention the century of financial corruption that preceded it.
Satoshi was not coy.
The genesis block contains the text: “Chancellor on brink of second bailout for banks”.
Of course Krugman is a “skeptic”.
Bitcoin repudiates his entire career, ideology and work, and is having a significant positive impact in the world.
Unlike Krugman.
Every year bitcoin continues it gets stronger, it rewards supporters and forces the corrupt banking system Krugman endorses into the light a bit more.
Krugman and other nocoiners hate bitcoin?
Bitcoin don’t care.
This is what you have to understand about bitcoin:
Bitcoin doesn’t have to care.
It’s the first real tool of individual financial sovereignty.
Crypto-currencies are a totally different story. For one, many of them are scammy rich quick schemes that have used greed to influence the technically unsaavy to corrupt the English language.
In economics if reality does not conform to theory then it's reality thats at fault
No I'm not saying bitcoin is the future but millions of users are freely choosing to use this system seems to count for nothing against some theoretical failings in Krugman's eyes.
The justification is first mover advantage
I also live in a country that wants to pursue land expropriation without compensation based on skin colour. Having a bank account that no one but me can access is quite appealing right now.
So I'm not using it to spite your worldview - it's been genuinely useful
>If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.
It wouldn't though. The bitcoin network itself has a non-zero value.
Well, the value isn't really TCP/IP, it's the network (i.e. the internet).
Bitcoin isn't the valuable bit. It's the network of millions of nodes that has value.
A phoenician ship at a minoan harbor didn't need to buy gold in order to trade purple dyes for bronze ingots and olive oil. They used hardor-credit or something. It was probably "gold backed" too, in the sense that it was denominated in gold or silver even if no metals were present.
Money and credit are intertwined. We can always make money by loaning it to eachother.
I think both the crypto-libertarian sm and Krugman's veiled response to it miss that point. Also, neither have much to do with cryptocurrency's success or lack thereof.
"Technobabble" and "libertarian derp" are pejoratives clearly designed to shut down the conversation in certain places. He can use those terms to disregard basically any argument, as Bitcoin is both technical and libertarian in nature.
> The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’ — which states that the number of potential connections in a network is proportional to the square of the number of participants — becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s
EDIT: Really? Downvoted for stating a true context fact?
Reddit, Facebook, Snapchat, Instagram, Whatsapp even HN disagree.
This quote pretty much seals the deal that I was right all along and he's not worth paying attention to.
Your instincts are right. Go to Mises.org for real economics.
Another thing people pull out is his dire predictions on the eve of Trump's election. He was quick to point out his error (I think the next day, maybe).
He does seem to admit when he's wrong and adapt his views.
https://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil...
You did not provide the context at all, and I'm surprised that you would imply you did.
The context is that he said that as part of an article about why economists make incorrect predictions. In context, it was clearly (in my opinion) intended to be a provocative possibility, rather than taken as something the author thought would definitely happen.
HN is a farm for socialist sheep and explicitly anti-intellectual.