BitCon: Don't
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Karl is not a trained economist in the sense having gone to school for it, but he is a very intelligent investor who profited heavily during the 2008 recession. He does not keep his knowledge to himself; in fact, he was warning of the collapse of Fannie Mae and the problems with Freddie Mac more than six months prior to the events of 2008. He has consistently and accurately predicted the results of various failures of US and international monetary policy, which you can read and critique from his year end reviews.
Karl is an old school hacker, having run an ISP and developed a variety of software. It was the sale of his ISP that allowed him to become a full time investor.
Karl organized the first "tea party" style protest of Washington through the organization Fed Up USA. He views inflation via money printing as taxation and has been working for years to have those who illegally profited from fraud in relation to the 2008 recession prosecuted.
His writing style can be a real pain to read, especially with his liberal use of html tags... but it's well worth it.
There is another side, as there always is with everyone, to this assessment of Karl Denninger. I ran (tech operations for) a popular ISP in Chicago too (mine was EnterAct), and my experience with Denninger --- which I feel was relatively extensive --- did not leave me looking to him for advice about world affairs.
As I wrote elsewhere in the thread, the points in this blog post that seem valid are also well-worn --- the lack of direct anonymity in Bitcoin, the fact that Bitcoin is deflationary and lacks a central bank, the theoretical possibility of double-spending --- and are also overwrought, written in jargon that makes the points seem fresher than they are. The rest is a jumble of idiosyncratic first-principles stuff, like the "entropy" of Bitcoin relative to gold doubloons.
As I said, I haven't followed him much lately, and he admits that he gets an F in terms of predictions for 2012: http://market-ticker.org/akcs-www?post=215356
Regarding the freshness of his views: his post was written to his current audience (he runs a forum for investors). I don't think he had any idea this would end up on HN, if he even knows what HN is!
When did he start warning about Italy, Spain, and Greece? What were his warnings? Wasn't the disparity between the economies of Greece and of Germany one of the original structural concerns about the Euro from the jump? Either way, let's see if he started warning about "PIIGS" before or after Michael Lewis wrote about Greece.
Perhaps I shouldn't have said anything in the first place if I can't take the time to piece together the sequence of events from all of the articles, emails, and forum discussions that I had during the three year time period that I followed his blog. I realize that the sequence of events is critical to my endorsement of Karl's ability; as such, I apologize if I unintentionally misled people to perceive him as an authority based off of a faulty recollection of events from my memory.
Edit: I just realized that this post might sound very snarky, but I really don't mean it that way at all. I should have contributed something better in my initial post.
The fact that there will be a permanent record that $100 was transacted is neither here nor there. Even if the dealer gets caught later, nobody will be able to link that to Joe. If the dealer confesses and implicates Joe, then that would be the same as the dealer being caught with the $100 in cash and implicating Joe. In both cases, Joe can just deny that he ever held the cash (whether in dollars or BTCs).
I do take the author's point that arranging to make your money less traceable is illegal under money laundering laws in most jurisdictions. But using Bitcoin for illegal purposes is no different to using dollars for illegal purposes; it's illegal either way.
Interestingly, since there's a record of all Bitcoin transactions, records of your own transactions that you keep yourself can easily be corroborated with the public record by the authorities. This can be done far more readily than with cash. If you want to keep your financial transactions above board, then perhaps Bitcoin is even better than cash for proving that you aren't laundering money.
The currency doesn't actually seem like the problem here: $100 isn't much even if it's in bitcoins, so how you spend it and where you get it doesn't matter much in practice. The purchase is what matters, because if the purchase is illegal that's what's putting you at risk no matter the amount of money.
Of course, once you start dealing in large amounts of currency - USD or BTC - that's when you start increasing risk because governments keep an eye out for large amounts of money being moved around. At that point, I think you'd have reason to be concerned about people simply tracking your large transactions towards their destination and using that to identify you.
The upside of more robust record-keeping does seem like a potential upside, though, I agree.
True. All BTC that has come out of a mixer might be considered suspect. But if you buy BTC for cash, should that be suspect? What if it turns out that the BTC that you now consider yours has been through a mixer some time in the past before it reached your hands?
Take the analogy to bank notes. Are all my bank notes suspect?
We accept this situation with cash. Why should Bitcoin be any different?
Also, any BTC you possess having been through a mixer in the past - yes! That seems like it could be a real problem. Here's how I see it: If I end up buying a used car, and it turns out the guy who sold it to me stole it, that doesn't somehow protect me from the consequences of the original theft. I certainly won't get to keep that car. Bitcoins aren't cars, but I wouldn't be shocked if governments decided to go overboard and say that trading in any BTC that came out of a mixer is illegal. After all, you can check the history of the BTC yourself and decide whether it's legit.
>I certainly won't get to keep that car.
No. But what if you sold a car and it turned out to have been paid for with stolen cash? And what if the cash was obtained by the buyer legitimately, but his source had stolen it? How about the same situation but three times removed?
You might be interested in this proposal: http://www.loper-os.org/?p=988 ("Shitcoin is to be a distributed network for attaching “dirt” to particular bitcoins...")
Here's an exercise for you: prove that Joe purchased $100 worth of Bitcoins to obtain drugs illegally. You only know that they were purchased using a cash deposit to a BitInstant account, which was moved to MtGox. Neither of those accounts have IP addresses, e-mails, or any other type of personally identifying information. The bank doesn't have surveillance records anymore.
I prefer the hacker mentality which is to build it, release it and see if it works. There are a crap tonne of variables never controlled for in Denniger's philosophy.
There is a time and a place for analysis and trying to understand, a priori, the failure modes of a system. As the potential for loss increases, the importance of "pontification and postulations" (hopefully more of the latter than the former!) also increases.
I agree that there is room for a priori pontification - at the hypothesis formation stage of theory building, but that's about it. Except folks like denniger aren't forming hypotheses that can be tested at all. He's just waxing lyrical - tensing his ideological bow.
If bitcoins ever take off in the larger population I foresee trustworthy banks that will hold your bitcoins for you. Transactions from them can immediately be trusted due to trust in the bank that is sending them.
Well that's a bit hilarious to consider since the entire point of alternative currencies is to bypass that clot in the circulatory system.
That. As production costs lower prices, money should increase in value just by sitting in your damn wallet. Not lose value.
EDIT at add: Blah blah oil shortage, oil price increases, prices increase downstream. But we've been ripping oil out via fracking and if you believe the PR, oil should be plummeting in price. Somehow, it's only in clear-cut cases like manufacturing that prices can actually decrease.
If your cash is increasing in value (because of deflation), then it's a smarter financial move to stuff cash under a mattress than to spend or invest it. This is why most economists think 1-5% inflation is about the sweet spot.
Slight inflation is good and keeps the economy healthy.
Fortunately, nobody forces you to participate in deflationary currencies.
Most of the purchases we make are not to satisfy core needs, but wants. You buy slightly more expensive delicious foods instead of cheaper boring foods. You strive to live in a decent environment rather than a mud hut because the former is more pleasant than the latter. You buy things or experiences that are unnecessary to survival, but bring some form of happiness. (Research, has, however shown that buying experiences leads to greater happiness than buying tangible goods!) The list goes on. We do this in part because because we have dopamine. Eliminate dopamine and we not only struggle to feel pleasure, but our brains also stop functioning properly.
Nobody ever says it, but inflation is really a good thing because of the way our brains are wired up.
> you're just killing savings (which are the best safety net there is)
Some savings are good to smooth out the bumps in the road, but when people save too aggressively people reduce their spending and the economy also slows. When the economy slows, you're more likely to find yourself out of work and having to use those savings so you don't end up living in that mud hut!
> and inducing a misallocation of productive resources
Your conclusion is a non sequitur.
Similarly, you know how we always hear that people put out of work by new technology should move up the value chain? Where they gonna move to if people aren't buying things? Wants as opposed to needs are the sign of economic progress.
The solution to this is to meddle with interest rates or policy.
You are right that a reduction in spending/increase in savings (whatever their form) does tend to correlate with interest rates decreasing, and vice versa, but this is a deliberate decision to speed the velocity of money up again before longer-term damage happens. It's not a long-term solution. Interest rates are in many way a fiscal ballast to keep the economy properly weighted.
The trouble with Bitcoin is it's inherently deflationary. Meddling with interest rates doesn't work if your currency is Bitcoin. You also can't have a healthy amount of inflation to keep the economy growing. If Bitcoin did become a de facto currency, we'd be poorer both economically and intellectually. The latter I believe because there would be less "excess" to spend on scientific research, as typically happens in periods of economic slowdown.
Historically the best time to make an investment or start a business is in lean times (depressions are good!), but people aren't generally that rational. The value of something (currency included) is typically driven by emotions. This is why what people feel about something is everything, from a product you're selling to your currency.
A few hours ago I thought Bitcoin was awesome and a good thing, but after thinking it through and arguing this point I'm convinced it's a bad thing and will lead to a longer-term harm if it is widely adopted and begins to replace traditional currencies.
No. That is totally against the American tradition of consumer banking (at least until 1970s stagflation) as well as the way banking has been practiced in Japan. "Save it for a rainy day" didn't come from nowhere. It's what most Americans used to practice. And in Japan they are exhorted to bank as a national good to fund loans to companies. A lack of confidence in the future -- incomes remaining the same -- would empty banks of deposits.
The consumer confidence index is a measure of savings and spending. The more confident consumers are, the more people are spending and the less they're saving, and vice versa. This isn't an American thing.
What people have been taught and what people actually do are two different things.
Well, we can agree there.
So while bitcoin is a good thing in itself, it can't replace in near future traditional currencies.
However, the more people accept Bitcoin, the more people can spend it. There will be a network effect. Eventually, if this pattern holds, the food producers will start to accept it and that's where the "trouble" occurs.
In theory, if people perceive the stability, utility, and value of Bitcoin to be greater than a traditional currency, and it starts to replace that traditional currency, the traditional currency will collapse, hyperinflation will occur, and there will be a period of pain. The late majority and laggards will lose a lot of money, and the early adopters and early majority will gain. There will simply be a redistribution based on tolerance for risk and foresight. At this stage the value of Bitcoin will soar.
Frankly, I wouldn't be surprised if governments did their best to make it illegal. Governments don't entertain competition because their role is to maintain the stability of the status quo, which is fair. We all enjoy living in a degree of stability, as opposed to a Hobbesian state of nature.
No, I don't think you'll find many economists who like deflation. It doesn't spread prosperity, it spreads laziness.
>>>It'd be stupid to put $1000 in an investment when the spending power of that money will only increase over time, and you'll never get your money back.
How do you know you'll never get it back? The entire point of investing is to make money faster than via labor or interest or prices artificially increasing (a bubble).
I think you're a little mixed up on the definitions of "inflation" and "deflation".
I believe this sentence.
The big problem with Bitcoin's finite money supply is that it encourages people to sit out. If there are 1000 people and someone has WLOG 1/1000th of the wealth, if they sit things out and come back 100 years later, there's no reason to think they should still have 1/1000th of the society's wealth at that point. More people were born, more resources were mined, more buildings were built, more technologies were developed -- and that person had nothing to do with it. I can see why he would wish he could still claim 1/1000th of society's wealth, but what's the incentive for all the other people to agree to this? The hope that they can be the ones to sit things out and freeride next time?
Nominal prices can go up while costs are going down (this is more or less what inflation is).
Putting it another way: in an inflationary economy, if the price of a good stays the same, the cost of that good is going down.
You need to eat to stay alive, and staying alive is more important to you than saving money, so food purchases won't be delayed very long. You don't need to play video games to stay alive, so you can wait for a couple of years to buy a video game when it becomes cheaper; some people do it to save money while other people decide that they prefer to pay more and be able to play that new video game right away (some even pay a premium if it is sold out, even though they know they could pay regular price by waiting a few days).
You don't have to buy useless things in a deflationary economy. By not spending, you have more buying power for when you do decide to spend (holding all other variables constant, which isn't real-world truth). Thus, inaction is more profitable than "useless" actions/goods/services.
In an inflationary economy, you stick money into deposits (instead of under your mattress) because you lose less that way. These deposits are used by banks to fund loans. These deposits probably guarantee a very low but fixed interest rate (such as 0.1%), which makes a tiny dent in how much you lose due to inflation. They also make the bank lots of profit when they do well and are insured against you losing any money (except by inflation, of course) as long as your deposits total <$100k.
P.S. The deposit interest rates are around 5.5% actually.
Second, and more importantly, the idea that deflation is a bad thing because it encourages saving (derisively called hoarding) is not at all accepted by Austrian economics.
Rather, saving is actually a Good Thing because savings is the source of investment.
An excessive increase in savings causes a reduction in spending which causes the economy to slow which causes people to use their savings.
Savings aren't really an investment, or at least not a very good one. The utility of savings is to smooth out changes in expenditures in relation to income. Some savings are good as a cushion to protect against temporary declines in income, in the same way body fat was a good way for our ancestors to maintain their energy expenditures when their food intake was insufficient (in the short term).
Savings aren't an investment because the return they're expected to yield is not greater than inflation. This is why someone says they "invested" in something that should ordinarily be considered an expense, you know they're making bad financial decisions.
"Hoarding" consists of putting all one's assets into extremely conservative classes (gold, cash, vast parcels of real estate in the middle of nowhere) or otherwise removing it from the economy (a yacht that's never rented out and rarely used), thereby depriving useful capital from the economy (e.g., perhaps the "saver" is too lazy or stupid to do anything profitable with the land they own, and they are just holding it as an inflation hedge; or perhaps the yacht is only important as a symbol of status).
"Investing" means making one's capital available to others in exchange for a return and thereby supporting economic exchange and development.
In a finite world, "hoarding" increases one's relative wealth (the multiple by which one is wealthier than, say, the median person) at the expense of most everyone else. "Investing" increases wealth overall, but in doing so decreases one's relative wealth.
Any idiot can hoard; and if an individual cannot invest in order to reliably earn a return that beats 1-5% inflation, it's a wonder they have the money at all in the first place.
Economy is positive feedback loops mostly. Exponential function is a bitch to control in the real world.
The fact is, Bitcoin doesn't and will not fit the theory. What it will eventually do is create a new theory, based on these new technological realities. In fact, I envision such tremendous changes in our society because of cryptocurrency in general that it's hard to even imagine what the consequence will eventually be.
My concern is not that Bitcoin will not work, but that it will work so well that it will totally transform the world, which, given human nature, can lead to big disasters, like famines, wars and so on.
If Joe wants to buy drugs, then he can walk into any bank and do a cash deposit to a BitInstant account, which gets dumped into MtGox and he can then move it around any way he wants, including online marketplaces. There's no identity that can be traced back to him except for the bank's video surveillance, and how long is that stored at a bank?
Without the surveillance, there's no way to tie any transaction Joe does back to his identity. The wallet, the address, the marketplace (if done right using tumbling and encrypting all messages) all leave no trace to a transaction.
I'm not clear on the process at all!
And if you want to avoid the address issue, you can (currently) use one of the many 'exchanges' at localbitcoins.com and pick it up personally. Hell, if that's too dangerous you can probably get a minion to do it for you.
If the government ever cracks down on this kind of stuff, for example by making it harder to be a local trader at localbitcoins.com, then I have no doubt that a small industry of 'illegal traders' will appear, or methods of laundering the money.
Example:
http://www.wired.com/threatlevel/2013/03/anonymous-phone-loc...
Remember: Attacks only get better, not worse.
Practically, it seems like a stretch to try and look at GPS logs through a carrier and prove that someone was at a bank at a given time. It says the precision is down to 2 hours, so you can theoretically get to a bank, not make/receive any calls, and get back before that 2 hour window and nothing would ever be recorded by the cell towers. If anything, this only proves that you were in a geographic region. Plausible deniability?
Also, this problem goes away completely if you leave your cell phone at home. An easy trick to adopt for the Joes looking to buy Bitcoins anonymously.
So at some point I would expect goverment/people to crack open the bitcoin data and stat mapping it to people and looking for trends.
I don't think that is specifically a bad thing but you should conciser it before doing something foolish with bitcoins.
It sounds way too hand-wavy to me to say things like "Well, Bitcoins.. It's a con.. the government will find Joe, somehow.. Be afraid!"
So far, my point stands that you can remain completely anonymous while buying Bitcoins. The article started out with fear mongering, and so far, I'm unconvinced that it has any substance to it. To call it a "con" is sensationalism at best.
Concering the entropy argument, which makes logical sense to me, it remains to be seen how much of an impact coin loss makes. As long as the amount remains small enough, that makes the coins rarer and just makes them rise in value a bit. Of course, as soon as everyone loses their coins, we're screwed. Who knew?
Sadly, I think the conclusion is pretty accurate: once Bitcoin rises above the grass, states will try to crush it with everything they've got. And they will probably succeed.
I have no idea why his thoughts on Bitcoin would be worth spreading on HN. He has no particular authority regarding economics (he's not a trained economist so far as I know) an the reasoning in this post seems to be of the typical working- backwards- from- foregone- conclusion attempted- first- principles stuff you can get on any HN thread arguing about Bitcoin.
I really dislike Bitcoin, but can think of much better devil's advocates than Denninger.
Ad hominem attacks are somehow better? One would hope the crowd on HN is mature enough not to be swayed by those...
It's popular because he made valid, well-supported points. If you disagree with his points, why not attack those instead of Denninger himself?
So far as I can tell, all the points Denninger has made here are supported only by Denninger's bare assertions. It reads like a message board post. Here's an article critical of Bitcoin that does better than recasting opinions as facts:
http://ftalphaville.ft.com/2013/04/03/1425292/the-problem-wi...
If you think he's misusing a concept, then say so. He clearly names the concepts and describes what he believes them to mean, so you can plug those into Google and see if you agree.
If you think the logic he's using to support his arguments is faulty, then you can simply point out the logical flaws in his arguments. This again does not require any citations or particular outside authority.
Finally, the entire post is clearly presented as his opinion on Bitcoin and in response to people asking for his thoughts. Given this, what is wrong with him expressing his opinion based on logic and his understanding of concepts. Why does his opinion require citations?
Next, if you look carefully at the post, you'll find, I think, that it's a mix of two basic rhetorical approaches:
1. Recapitulating shopworn arguments about Bitcoin as if they were fresh points, sometimes using jargon that conceals their banality, such as the "privilege of Seigniorage" that boils down to Bitcoin having no central bank.
2. Idiosyncratic attempts at first-principles arguments, like the "entropy" (helpfully defined in the article) in comparison to gold coins lost off the side of a ship.
There's nothing wrong with writing a post like this. Denninger didn't ask for his post to be nailed to the top of HN. I just don't find the post particularly credible.
From that author's biography:
> Everything she knows about economics stems from a childhood fascination with ancient economies. . .
> She studied Ancient History at UCL, and has a masters in Journalism from what was then the London College of Printing.
I hope this is just an elaborate troll, since this was your criticism of Denninger:
> He has no particular authority regarding economics (he's not a trained economist so far as I know)
(55 minutes pass)
I'll take that as a 'no'.
> Bitcoin’s programming ensures there can never be more than 21m coins in existence. Part of the “bubble” effect, no doubt, is linked to a realisation that we are quickly approaching that limit. According to the latest data from Bitcoin charts, for example, there are currently 10,986,175 bitcoins in issuance. Yes, we still have some room to go, but given exponential dynamics, the fact that we’ve reached the “half-way point” in supply is no doubt meaningful.
The article is formatted a bit strangely, and the author is strange, sure, but neither of those are legitimate reasons to discard the actual content without consideration. The article does go to quite significant lengths to try and establish a foundation for what he's arguing so that the reader can decide whether they agree with the logical steps he's taking to reach his conclusion, which I think is a good thing.
'Well, I don't agree or disagree with what you're saying, I just think YOU shouldn't be able to say it' doesn't seem to be different from an ad hominem attack in practice in this case. It's refusing to engage with the actual content on quality or validity grounds and instead engaging with some unrelated point.
The original post is not arguing 'you should agree with what I'm saying because I'M saying it' and it's also not saying 'these are facts because I say they are'.
I would further argue that the HN voting system can be relied on to determine what is interesting instead of credibility. Certainly, I believe just because 37Signals or Dustin Caldwell posts something doesn't make it interesting, but the voting seems to disagree with me. At any rate, we have an existing system to determine what should be relevant comment, so there's no need to invoke credibility here.
"Denninger ran an ISP in Chicago in the mid-90s and is an infamous curmudgeon. He sold the ISP in the late '90s and, as I understand it, retired to Florida to curmudge professionally." Author attack
"I have no idea why his thoughts on Bitcoin would be worth spreading on HN. He has no particular authority regarding economics" Author attack.
"I really dislike Bitcoin, but can think of much better devil's advocates than Denninger." Author attack
Notice the pattern? not a single rebuttal of the content provided in this article All comments directed at the author. That's an Ad hominem attack.
This is another example of the ad hominem fallacy fallacy, wherein any assessment of a person making an argument is judged out-of-bounds because of the existence of the ad hominem fallacy. Here is an example of an actual ad hominem fallacy:
Arguer: "Bitcoin is doomed to fail because it lacks a central banking authority."
Opponent: "That's bullcrap because you're not a trained economist."
Here is an example of the ad hominem fallacy fallacy:
Arguer: "I looked up Karl Denninger and it says he's the founder of the Tea Party."
Opponent: "Also he's a professional curmudgeon who sold an ISP once and has no economics training."
Arguer: Ad hominem!
I am not too invested in this particular thread, but the ad hominem fallacy fallacy drives me up a wall a little bit.
What? I'm astonished you said that. How many people who have created the companies of today were "trained" to do them. Show me Jeff Bezos' bookselling training. Steve Jobs' design training and programming degree. The Google team's former analog advertising agency and their degrees in those fields. Just stop.
When the wacko founds a fortune 500 company, I'll pay attention.
> However, Denninger later expressed concern with the Tea Party movement, stating in an October 20, 2010 blog post that Republicans had hijacked the movement and perverted its original goals to the standard Republican concerns of "guns, gays and God".
Facebook and a lot of other sites have made a hell of a lot of money off of PHP. It works well enough, it's adopted and it gets the job done. Go be successful with your perfect system and then come back and tell everyone how much the other system sucks.
On the surface, it seems like it would be easy to send coins and disbursement instructions to a big pool somewhere. Then someone watching the network sees a node that eats and emits coins, but doesn't make it obvious which source/destination were involved in one transaction. (Similarly, your bank sees a check to your credit card company each month, but doesn't know or care what exactly you bought on that credit card.)
Even without a "dark pool", I don't think the block chain verification requires each transaction counterparty pair to be identified. Imagine you print out a bitcoin and give it to someone in person. This reduces the value of the coin, since you could have made multiple copies and the first copy wins when spent on the real network. But people performing illegal activities already pay a lot for the risk, so this would be nothing new.
Anyway, I mostly stopped reading the linked article when I looked at the banner at the top of the page.
facepalm If the "natural tendency" of capitalism is for prices to deflate, and you want time preference to not be defined by the currency, then exactly what you want is for the currency to be inflationary! Otherwise, you now have two compounding forces toward hoarding, or "late" time preference: capitalism, which drives future prices down, and the currency (Bitcoin, gold...) which also drives prices down -- since, when we say a currency is deflationary, like Bitcoin is, we mean it deflates goods' prices over time... Needless to say, that should fuck the economy up pretty badly, by your own admission.
To be fair, it was an interesting argument, until he just freaked out and confused up for down. Or deflation for inflation, whatever. And this is supposed to be one of the founding fathers of the Tea Party, by the way?
> This in turn forces the producers of goods and services to innovate in order to attract your economic surplus from under the mattress and into their cash registers, since not spending your economic surplus is in fact to your advantage.
Yeah, this forces producers to work harder in order to get paid the same. That this means a production glut is left as an (easy!) exercise for the reader. Extra points if you develop your conclusions regarding debt and interest under this currency.
To be fair, I completely agree with his comparison of Bitcoin to a pyramid scheme. It's funny how the dude has such a tenuous grasp over the most basic economics, that he gets it right by pure accident and for all the wrong reasons.
> That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later! That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy. If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!
You know what? This is exactly the definition of a deflationary currency. He just admitted BTC is a pyramidal scheme because it's deflationary! But, of course, he's a right-wing pundit, he can't admit that! What to do? No matter, some pseudo-cryptography, pseudo-physics bullshit (entropy, of all things!) saves the day... Now I'm just fucking screaming at the screen... Holy shit holy shit holy shit holy shit...
I just can't believe it. The inevitable conclusion is, I must be just too fucking stupid to understand these elaborate libertarian doctrines. Yeah, that must be...
EDIT: As a side note, it's kinda funny to watch how touchy he is about the Tea Party concept. He gets angry and claims that he first came up with the idea. He resents Santelli for being the one to popularize the movement on CNBC. Denninger doesn't seem to get the idea that people have been using the tea party term to fight political waste since the original tea party itself. Yet he persists and occasionally (when I still followed him) fires off blog posts essentially saying "but I was first!!"
#1 Instant
This makes such a currency severely handicapped for general transaction use in an economy, and that in turn damages goods and service preference -- the ability to use it to exchange one good or service for another.
This can be solved by services which provides such functionality and process the transaction later. This is certainly a limitation in Bitcoin but you are not going to process the transaction manually anyway. There will be a third-party that will handle this stuff.
#2 Anonymity
You can buy Bitcoins with paper dollars making you securely anonymous. You can even (probably) trade Bitcoins for some work you did anon.
#3 Pyramid Scheme
Early adopters in Bitcoins benefit. That's downright right. But at least you get to choose if you are an early adopter. You don't chose to take a loan. You'll probably have to apply and go through their process. You don't chose to be in the position of making "Quantitative Easing" or benefiting from it.
#4 Bitcoin is destructible
I'm also concerned with this, but some attention by the owners is required. If enough attention and development is awarded to security in Bitcoins, this will only happen few times to be noticed.
#5 Taxes
Let's say you "buy" Bitcoins (whether for cash or in exchange for a good or service you provide) at a time when they have a "value" of $5 each against the US dollar. You spend them when they have a "value" of $20 each. You have a capital gain of $15.
I agree that's a problem, but it's manageable nevertheless. Companies are managing this already. People can manage this with the assistance of a third-party. You are making a profit, so everything is good :)
We can probably expect a Trojan to infiltrate a exchange and destroy the wallets and backups at some point just for the lulz.
Security is hard and I don't see expect of these exchanges to handle security right.
Ok,I'm being cynical.
* government will kill it
* not really anonymous somehow
* verifications take too long
A bit off-topic, but what curse-word is he using here?
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"There is now an indelible and permanent record of the transfer of funds and that record will never go away."
The author is absolutely correct that there is now a permanent record of a transfer funds. But immediately the assumption is being made that such a record is bad, if you're trying to hide your financial activities. In reality, all you see is "Wallet A" sending bitcoins to "Wallet B". While you still need to pay real and traceable money for bitcoins, which can then be tied to your "Wallet A", all one needs to do, for example, is generate a couple of throw-away wallets, split the amount of bitcoins up, send them to each wallet, then use those wallets for the final transfer to "Wallet B". What happens then is that the pot dealer receives, let's say, 10BC, but such an amount has never directly left your wallet in a single transaction and you have no connection whatsoever to the pot dealer. Again, you might be presented with a chain of transfers and you might be asked why you sent 5BC to a random wallet that has only ever been used to forward that money to the pot dealer. But that, by itself, is not illegal. I can send money to whoever I wish right now and, unless I have specific knowledge of their future actions, what they do with the money has nothing to do with me.
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" That liability never goes away as it was wilfully evaded and yet the ability to track the transaction never goes away either!" Personally, I think this is more about the ethics of tax evasion, rather than a problem with the currency itself. I do not like to blame objects for the actions of people, but the author clearly has a different point of view.
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"If you wish to fill up your tank with gasoline, for example, few people are going to be willing to wait for 10 minutes, say much less an hour, before being permitted to pump the gas -- or drive off with it." Again, this is a completely valid statement, but the author immediately assumes that BC is the end-all global currency, thus tries to validate his disapproval of bitcoins based on an imaginary problem, that isn't even an actual problem with bitcoins. If bitcoins solve one or two problems, but don't solve a third, is that a valid dismissal of the currency as a whole? Can we not imagine a world where bitcoins are complementary to government-backed currencies?
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"your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy." I admit I do not get this one. If I mined 50BC from the start, how do I profit if someone else now mines 25BC? Of course, if the value of BC goes up, as it is doing right now, we both profit, but that has nothing to do with the later person mining bitcoins. Rather it is a normal process where a lot more people are interested in buying bitcoins, so demand goes up along with the price. If no one wanted to use bitcoins, then both people would now be stuck with worthless bits. Also, I disagree with the premise that early adopters shouldn't be rewarded. If I start mining bitcoins right from the start, I carry a much bigger risk of wasting my investment (electricity usage, etc.) than the person that joins later on, once the currency has been established and it seems reasonable that it might be used by millions of people.
At some point in time - a point in time which is probably in the past - the government is going to lock a cryptographer and a forensic accountant in a room together and tell them to develop a tool to unroll bitcoin networks. They will (have) done so. The tool will, given a couple of known transactions, create a graph of every activity ever that is in any way related to those transactions. Each known transaction or account added in will fill in the graph further. A handy printout will correlate all the intersections between graph 1 and graph 2 for any two individuals the government wants to link together.
"Says here on November 3rd you sent another $7,500 to the opium dealer from Hong Kong. What were you buying?" "On the advice of my lawyer, I refuse to answer."
The first people the federal government decides to take down who have used bitcoin in their financial shenanigans are going to be facing 1000-count indictments and 500-year prison terms.
He's missing the entire point, bitcoin was designed to stop the federal reserve and US Mint from systematically diluting the value of our money through systematic inflation, (taking taxpayer dollars and giving it to AIG buddies for bailouts and million dollar bonuses) while bribing the media to trick the masses that inflation is somehow "good" for us.
Yes, evil men exist, and they will swindle others with tricky transactions. The purpose of bitcoin is to stop the people who create the money from stealing most of the value of all wealth on Earth every 20 years or so through Quantitative easing, inflation, and "printing dollars and giving the money to your friends" which is running rampant in this country.
He's ignoring one of the primary strengths of bitcoin, that if you want to acquire bitcoins, you will have to either A: deprive another human of them through specific and traceable theft/deception, or B: to provide reasonable goods and services in exchange them.
It stops the "Government printing Money and giving it to buddies" inflation problem dead in its tracks. But who cares? It means 5 hours of human labor deposited into bit coin equals 5 hours of human labor back out 20 years from now. We don't have anything like that now. It is as revolutionary as the invention of agriculture.
Sadly his conclusion is right. When this thing starts taking off (especially in cyprus where the governmental theft is rampant), anyone who uses it significantly is going to find their head on the chopping block, having been convicted of aiding and abetting the domestic terrorists. We must think clearly, putting ourselves in their shoes, on how they will crush BitCoin like a bug, and be prepared for the counter attacks.
Also, he points out that btc has no method of deflation aside from actually destroying the coins. The section about seigniorage explains his views here and while it's not worded the most clearly I think that it's a reasonable critique.
If this were really a method that he felt was viable enough to escape the taxation of inflation through money printing, manipulation of the CPI, etc., then I'm sure Karl would be on board. He has been writing about these exact topics for more than five years now.
But they've replaced it with a massively deflationary system. As the number of bitcoins approaches the maximum of 21 million, there will be massive incentives not to spend or exchange bitcoin which should grind any bitcoin economy to a halt. Deflation is a much, much harder trap to get out of than inflation.
There are pretty significant problems with an inflationary currency as well: it can incentivize risk-taking activity out of proportion with the actual opportunity available in the real economy, and ultimately lead to crises like the housing bubble.
Ideally, the money supply would expand exactly in proportion to the real economy, so there wouldn't be price fluctuations due to money at all, but this is hard to achieve, because there's no clear-cut way to quantify the size of the real economy (GDP doesn't really work) and because it'd be difficult to devise a mechanism that could keep the money supply indexed to the real economy without having it be dependent on some sort of central authority. So a currency that maintains a constant relation with the real economy probably isn't an option here and now.
If we have to choose between maintaining a single monopoly inflationary currency, or adding a deflationary alternative currency like bitcoin into the mix, such that each currency can temper the excesses of the other, I think the latter is a better choice.
I disagree. A money supply that was perfectly indexed to the real economy would magnify ups and downs. Nobody wants a slight downturn to result in a death spiral because the money supply keeps getting incrementally tighter.
>> If we have to choose between maintaining a single monopoly inflationary currency, or adding a deflationary alternative currency like bitcoin into the mix, such that each currency can temper the excesses of the other, I think the latter is a better choice.
I'm not saying bitcoin is the worst thing ever, but I think its design will keep it from making a big positive impact. It'll be a novelty akin to precious metals but with more volatility and fraud.
How so? If the money supply stays constant during a recession, that's what would magnify its effects, because the downturn in the real economy would be compounded by the currency being worth less and prices, in real terms, being higher.
You might argue that people might be more likely to refrain from spending if the money supply contracts in the wake of a downturn, but this isn't the same as refraining from spending due to deflation, because holding on to money for longer doesn't increase its purchasing power in this scenario like it does with constant deflation. The whole idea of binding the size of the money supply to the size of the economy is to keep the value of currency constant no matter what happens in the real economy: a dollar would always buy the same amount of utility, regardless of whether the real economy is expanding or shrinking.
Bear in mind also that downturns are often instigated by inflation in the first place. If the money supply expands faster than the real economy, then the only way to maintain the value of your assets is to invest them in something that produces a return greater than inflation. But, by definition, there isn't enough real value being generated to provide a viable investment opportunity for every dollar - if there was, then the money supply wouldn't be growing faster than the real economy, and there wouldn't be inflation. So inflation actually incentivizes speculative bubbles, which damage the real economy when they burst.
The content was actually quite interesting underneath.