How is it at risk of a feedback loop in a way that other currencies aren't?
It seems bitcoins defend specifically against hyper inflation by limiting the number of coins that will ever be produced.
It seems bitcoins defend specifically against hyper inflation by limiting the number of coins that will ever be produced.
At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises. All the major world currencies have faced them in the past three years. But they didn't simply collapse because they have backing. I don't know what stops the first BitCoin currency crisis from completely collapsing the currency, because when BitCoin holders ask themselves, "Hey, what is this really good for?", I don't have an answer. I know what a dollar is good for: Not being put in jail by the United States Government due to unpaid debt. Ultimately, without trying to be too philosophical, dollars are backed with men with guns (and the privilege of them not being pointed at you).
Contrary to apparently popular belief, currencies aren't merely arbitrarily-agreed-upon numbers that we all trade with. Every currency I know has some actual backing. Even the fancy electronic ones we've seen spontaneously develop online, they all have some form of local economy-appropriate backing. It isn't always "gold" (literal or electronic), but so far the "men with guns" approach has proved successful in the real world. BitCoin is an apparently-good design for the arbitrary number approach, but until it solves the backing problem I won't be putting one dime into it. As much as I don't particularly enjoy having the US government as my currency backing I do not see how going to a backing-free currency is the solution.
The currency can still hyperinflate even if it is physically impossible to produce more by virtue of people raising all BitCoin prices as their confidence in the currency collapses. But instead of hyperinflation producing lots more BitCoins, then collapsing the economy, hyperinflation will simply directly collapse the economy as it takes ever increasing amounts of the BitCoins in the world to buy a service, until eventually even every BitCoin in the world isn't adequate. Hyperinflation is a symptom of lack of confidence in a currency, not a cause. (Of course observing hyperinflation can further decrease confidence, but the hyperinflation started in the first place because of lack of confidence.)
BitCoin advocates tend to get very angry when I point this out. I think it's because they have no answer to this. The site used to have a FAQ that addressed this, but it just sort of mumbled words and now it's gone because it was actually better just to ignore the problem. My challenge would be to anyone who claims that currencies are somehow backing-free is show me the successful currency of any kind that really is just an arbitrary number with no backing that has reached any sort of significant size, shall we say, a million dollars or so worth of an economy? (All the electronic currencies like Microsoft Points are well above that size, for instance.) And I'll show the backing. It isn't always a physical item, especially in the electronic world, but it's always something that serves as a locally-appropriate backing.
("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.)
Who got angry over this? I happily concede that bitcoin have no intrinsic value.
("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.)
When the price of bitcoin rose so fast, it is only natural that a correction followed.
At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises.
Let see if your hypothesis bare this out.
(And that's the gentle one. There's also "The US government has decided that BitCoins are primarily a money laundering operation" and it starts throwing people in jail for using them. I consider this a less likely outcome by far, but still on the table.)
When I say confidence crisis, I do mean that as a distinct thing from a collapse; as I said, all currencies face confidence crises.
Fair enough.
Since your argument is so good, I linked to it on the bitcoin forum. http://www.bitcoin.org/smf/index.php?topic=4832.msg70583#new
I don't know who the bitcoin advocates that hate hearing this is coming from but the bitcoin community had always debate possible attack vectors and ways to counter it, if indeed it was a problem. Indeed, the government's response is a constant worry and there had been various opinions as to how big of a problem it is and how to win.
Running away from problems does not help us or anybody. It's best to confront it head on.
I think the biggest confidence crisis possible for bitcoin would be a security breach discovered in the software.
Other things, like the IRS interefering, will cause smaller panics. There will still be a lot of countries left where it can be used. Bitcoin is by no means a US-only operation.
The surprising thing for me for bitcoin is that it's actually being used to trade things, and is not just seen as an investment vehicle. This makes me think it can succeed.
And the "bitcoin = domestic terrorism" attack is quite hilarious (in it's futility) if you compare it to war on drugs. Demand won. You can't make war on something large part of populations want and win.
Only with a heaping helping of wishful thinking. In the real world, when a currency incurs previously-nonexistent liabilities (in the accounting sense) the reaction of people isn't going to be piling in even faster. It may not kill BitCoin but it isn't going to be a moment where the value rises.
"And the "bitcoin = domestic terrorism" attack is quite hilarious (in it's futility)"
For the record, I disagree with the argument that alternative currencies are solely for money laundering or terrorism (note you added the terrorism connection, I just mentioned money laundering). I'm simply saying the government may make it. If you're going to be paranoid and cynical, do it right. If the government perceives BitCoin as a threat to its power, it isn't just going to come out one day and say "We perceive BitCoin as a threat to our power and so we're going to just stomp it out." They're going to have some reason with vague plausibility for enough people to give them cover to do what they want. (In fact I think that there may not even necessarily be any one person who thinks to themselves BitCoin is a threat to the dominance of the US Government and we must come up with some pretext to stomp it out, these things can sort of emerge from the successfully-evolved system itself.)
I actually approve of alternate currencies and expect that they will exist in the future regardless of what governments say. I think the embryonic versions already exist and the technological trend is unstoppable. I just don't think BitCoin is it, as it is today. Someone pointed out to me that someone could take BitCoin and actually provide some sort of backing, and I think that would be a potent combo, though given the "men with guns" option isn't really available that seems to only leave physical assets, which is tricky to pull off at scale. (You would need to actually be ready to provide all the physical assets if there is a run on the currency, no excuses, no clever contractual "no we didn't really mean it", you actually have to have it. Perhaps ironically, if you can, you may never have to, but if you can't, you will certainly have to.) If there's some sort of third option, someone might be able to actually provide the recursive base case and put BitCoin on a firm footing.
My point is that Bitcoin has backing that is even more powerful than men with guns or physical assets. That backing is subjective value of Bitcoin in people's minds. Think Apple or Luis vutton, it's valuable because people think it is, and if the ideas on which Bitcoin is based are a solid foundation, the value of Bitcoins will only grow.
So for your third option of backing i'm thinking in terms of http://en.wikipedia.org/wiki/Subjective_theory_of_value the "men with guns", or "gold in storage" has the same value as "men who combined great ideas(PGP P2P Crypto Currency) and produced value (Bitcoin)".
Making bitcoins illegal would make them worth more as drug dealers and pimps would value their qualities more.
tl;dr bittorrent.
Hows shutting down piracy working out for you ?
It's too easy to use it anonymously and too hard to crack down on it for there to be any real effect.
Edit: To clarify, even when a company pays dividends which holding the stock entitles you to you are speculating the company will continue to pay, or be able to pay, which is why you continue to hold the stock. This is why stocks are risky -- they have no guaranteed value (or backing) and can crash theoretically at anytime.
You say that it's because the US government forces other people to accept it as payment for debt? I don't understand how that enforces any particular value. It enforces that it's accepted, but what's to stop someone from asking for 10 times more than they do?
Or do you mean that for a debt incurred at time A at a given interest rate, it's guaranteed to be a certain ("inflated", but predictably so) amount by time B? What about with Bitcoins? The owner of the debt could lose credibility if s/he decides to change the contract and say "Bitcoins are looking bad these days, you owe me gold now instead". But I guess guns work a lot better than reputation loss against a currency collapse. Hmm.
Or did I misunderstand your point altogether?
There are legal tender laws, but these are not the point. They are largely irrelevant.
The point is that the US government itself accepts dollars as payment for debt. This may not seem like a big deal, until you realize that governments are unique in their power to force a debt onto you via taxation. Just like their monopoly on physical power, they also have a monopoly on economic power - for a number of reasons, which are not really important here, but the concepts are indeed very similar.
So the government forces debt on people, which can only be paid using the dollars that the government issues. This creates demand for dollars and therefore value.
Side note: You can learn an important point lesson from this. In a fiat money system, taxation has nothing to do with financing government spending. Government (by which I mean the union of all governmental institutions, i.e. executive + legislative + Fed etc.) can spend whenever and whatever amount it likes. The point of taxation is to create a demand for currency, which entices the private sector to offer goods and services for sale in exchange for that currency, thus enabling government to execute its mandate.
Returning to Bitcoin, there is no entity that can force Bitcoin-denominated debts onto people, and therefore the only people using it are doing so either out of curiosity or out of ideological dislike of government-run monetary systems - or perhaps out of the desire to make money off people who are simultaneously fools and members of the former two categories.
What backs gold??? Nothing other than the subjective valuations of individuals. The same is true of fiat currencies, except here individual subjective valuations concern matters such as 'not getting arrested' or 'not getting shot.'
Bitcoin is a technologic, cryptographically-rooted, informational commodity. It has unique, desirable properties inherent to its design and structure. Individuals subjectively value these properties. Their reasons and value scales differ, but the simple fact that people are already trading Bitcoins proves that it is subjectively valued.
You talk about 'confidence crises.' This is unique historically only to fiat currencies (and paper currencies built fractionally on commodities like gold). The subjective valuation of fiat currencies is derived from political considerations. As such, confidence in them is built on the ever-shifting sands of political perceptions.
When was the last confidence crisis in gold? There hasn't been one. People value gold for its physical properties defined by the laws of nature. Those properties do not change and individuals have continued to subjectively value them.
The same is true of Bitcoin. Its properties are rooted in our present understanding of cryptographic principles. As long as individuals continue to value properties such as anonymity, decentralization, finite supply, low transaction fees, ease of digital manipulation, ability to integrate smart contracts, etc... we have no reason to expect a 'confidence crisis.'
This will be true as long as the cryptographic logic buttressing the system remains sound – just like the laws of physics underlie the desired properties of gold. Breaking this cryptographic logic (akin to cheap transmutation of lead into gold) would require breakthrough advancements of our knowledge of cryptography and discoveries on hitherto unsolved mathematical problems. But even in this case, the open-source nature of Bitcoin allows it to evolve new cryptographic implementations that would avoid such problems.
I'm not a BitCoin supporter, but I still think you are wrong on this count.
Confidence depends on perceptions. Nothing can command confidence consistently if the underlying economy is bad or broken. In the case of BitCoins, not being able to artificially increase the supply is a virtue. (ps I'm not a supporter because bankers always figure out a way around limited supply of a precious commodity).
This is not really 'backing'. Backing is when your currency can be traded for a specific amount of a specific thing. Your currency actually 'stands for' something else. Saying the US Dollar is 'backed' by the fact that you can pay debts to the US govt is isomporphic to bitcoins being 'backed' by the fact they are anonymous and you can trade them for DNS hosting.
And fwiw.. the bitcoin economy is roughly ~4.5 million USD right now.
I overlooked the Bitcoin limit - price inflation will certainly be limited through this mechanism. But I wonder if this might not cause prices to drop at a constant rate (since Bitcoins are so divisible) - this would include labor costs (although how wage stickiness would hold up to this remains to be seen).