A Prediction: Bitcoin Is Doomed to Fail
dealbook.nytimes.com
dealbook.nytimes.com
With rising global adoption, many new kinds of applications are likely to be created to take advantage of the Bitcoin network, the design of which even specifies a built-in script for defining and executing new types of transactions involving any arbitrary number of parties.[1]
In short, Bitcoin is a technology platform -- one that is benefiting from network effects.
It may fail as "money" (in a narrow sense) and still succeed as a global platform.
In fact, Bitcoin is already a success.
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Please explain how a bitcoin blockchain record can testify in court that a copy of a document is authentic. Hint, you're infront of a jury, you have a blockchain hash, and opposing council has a notary public with 40 years of experience, both copies of the document differ, the original cannot be found. Hers has an official looking seal, you have some random numbers.
Please explain how I can buy a pack of cigarettes at 11 pm in under 5 minutes with bitcoin.
In short most of your claims are highly exaggerated and don't work beyond the most trivial scenarios.
Here's an imaginary possibility. A hundred and fifty years from now, courtrooms come with computer systems built from scratch and operated by court clerks. Their sole purpose is verifying blockchain records. The jury knows to trust the machine. In fact, the jury instructions tell them to.
None of the jury members have ever seen official documents on physical paper. They only know about paper documents from watching historical fiction movies. In such movies, the possibility that the documents are forged is always a major plot factor.
Subsequent cases would be able to use the precedent, and win with less interesting experts.
If you think about it, this is a lot more convincing than getting a ribbon-covered document from a foreign jurisdiction that you may not be able to read, even if it authenticated by a series of trusted authorities (a chain of embassies in this case).
Now iam replying to this from a phone
Just saying technologies improve over time, bitcoin is a very interesting mix of technologies, probably the most exciting thing to come along since email, web, bittorent and social networks
Look, bitcoin is a platform and it is in it's infant stages. But, it has huge potential. Potential does not mean odds of success are 100%
BitCoins don't have any resistance to movement, or very little. Physical money does. This means the difference between BitCoins and physical money is perhaps comparable to the difference between massive particles like atoms and massless particles like photons, or to the difference between a classical conductor and a superconductor. Which is only to say that the same rules don't apply - new behaviors are observed.
We are in a new world and the study of economics is about to take a huge left-turn.
You can add direct-debit to bitcoint with a trusted third party. (And there might even be clever ways to do direct debit in bitcoin without that third party.)
CoinKite will be interesting to watch.
I really fail to see what problem that isn't already solved in this regard.
Actually, once you've been verified by an exchange (required prior to buying Bitcoins unless you do a private party sale), selling Bitcoins is easy; it's getting your USD wired/ACHed to your bank account that can be time-consuming. This is due to the legacy banking system, and not some problem inherent to Bitcoin.
EDIT: By the way, it's not "very difficult" to sell Bitcoins. If I want to sell a Bitcoin, I log onto my Bitstamp account, put in a limit order. When the sale is executed, I submit a short, pre-filled form for a wire transfer to my bank. I then wait a few days and the money is in my bank account, in USD. Not hard.
http://www.investopedia.com/terms/l/liquidity.asp
Part of the value of dollars as a medium of exchange is that the value does not fluctuate greatly from day to day or minute to minute. In the short term, you can rely on prices remaining fairly stable.
You make a good point, and my above explanation was a bit confused.
I think BTC faces both problems:
There's high volatility, driven by the current level of speculation and the fixed quantity of Bitcoins that exist on the market. This makes Bitcoin a fairly poor medium of exchange since it is unlikely to hold a stable value from one day to the next.
There's also (I suspect) poor liquidity, driven by the low number of people involved in the exchanges (compared to other assets and currencies). While it may be easy to exchange Bitcoin from a process standpoint, you may not be able to get a price sufficiently close to the last quoted price when you go to exchange for dollars. It may be more liquid than a house, but it is much less liquid than USD, EUR, GBP, etc.
Is my liquidity assumption mistaken?
Unless you're an investment banker, yes. There are multiple exchanges that handle daily volume in the 10's of millions USD, with order books deep enough that you could cash out millions of dollars worth of bitcoin without moving the price more than a few percent.
That's nothing compared to what Wall St or the city is used to, but it is plenty enough liquidity for all but the most well off individuals, and growing. When the Winklevoss twins get their bitcoin ETF to IPO, I expect these numbers to increase by orders of magnitude.
Also, none of that is counting the significant volume of transactions which occur non-public or off-exchange.
You're absolute (and obviously) correct about Bitcoin's volatility, but you're mistaken about its liquidity.
Bitcoin is quite liquid if you're in the U.S. and many other countries around the world. The only delay is the time required by the legacy banking system to wire or ACH funds in/out of your exchange account.
1) Bid Ask spreads vary by exchange and currency, but it seems that with the exception of BT China an MtGox, the bid ask spreads can be quite wide. Prices for BTC/USD also very a good bit by exchange, meaning the price a merchant sets might be influenced by which exchange they use.
2) The MtGox live chart seems to imply that an order of a few bitcoins (or a few thousand dollars) could have a profound impact on the actual price of BTC/USD. This does not seem particularly liquid to me, unless I misunderstand the chart.
US/EUR seems to commonly be around 100 billion or so a day.
The only reasons it is different with houses is because people are emotionally invested in them, not all houses are equivalent (and thus their value is unique per house), and liquidity is hence really low, and market prices adjust slowly.
Bitcoins are worth a thousand dollars because people who own them are not willing to part with them for less, and people who are buying them are willing to pay that much. This is economics 101. You can always cash out at the market price, unless liquidity is low; the only time that happens is in a teeny market or a crash.
It's only easy to buy a house for $100M if you have $100M you can spare for house-buying. And then you only get to choose from the rather limited range of $100M houses that are available for sale.
Similarly, you only get to sell a house for $100M if you have a house that nice to sell. And then you only get to sell to the rather limited range of people willing to buy a house for $100M.
But perhaps I've misunderstood. If you happen to have $100M burning a hole in your pocket, it's easy to buy a house that would normally cost $1M with it, because most people with $1M houses will happily sell them for $100M. But the parallel to that is that if you happen to have a house that would normally cost $100M, it's easy to sell it for $1M. Which it would be.
With the exception of Mt. Gox, this is simply not true. It's hard to both buy and sell Bitcoins if you've not been verified at an exchange, but once you do that (not very hard), it's equally easy to both buy and sell. The only delay is the time needed for the wire or ACH to arrive.
I get the feeling that many of you are talking confidently about something you have no experience with. Where are you getting the idea that it's hard to sell Bitcoins?
Bitcoins are a currency, there's no need to convert them. It's just happening now because some people want into this environment.
Have you tried paying your taxes in Bitcoin? The IRS (or regional equivalent) is not going to accept bitcoin any time soon and they will want you to pay taxes on, for example, profits. There is a need to convert, don't believe otherwise.
Companies regularly complains that this costs them 1% or so of revenue.
Not yet.
Saying you're not supposed to convert bitcoin is the statement of someone who thinks bitcoin is NOT an investment. So... not a goldbug.
1. People stop bothering to follow the law, and governments throw their hands in the air and do nothing about it.
2. Governments start accepting Bitcoin for tax purposes.
I am not confident that either of these will happen...
Yes, unless you want to, you know, buy something...
You need grocery stores, gas stations, clothing stores, and restaurants to start accepting it. Until then, it's really just a novelty for middle class college Libertarians.
Do you think that cryptocurrencies spring fully-formed from the forehead of Zeus?
That bar/grill is a novelty -- and it probably only accepted BTC in the first place because there was a BTC EVENT held at it.
There's even projects that accept donations in bitcoins, you'll see wallet addresses like this: 1JBEGFXW6ywMtZnCbjvKGJXDtdR6g6KmMi
Their utility isn't tied to the fact that you can turn them into more of your favorite currency later, that stupidity is what's driving the current bitcoin bubble. Wait till people realize what you can do with them.
Try buying an iPhone 3g right now on Craigslist. I bet it takes you all of two minutes.
Then try selling it. I bet it takes quite a bit more time.
Asymmetry.
Currently (and for the last years), the price of BTC has been rising implying that's actually easier to sell BTC than to buy? Moreover there are exchanges that are entirely symmetric (when opening accounts you do not need to qualify as a buyer or seller).
Asymmetry is a nice word but I don't see what's asymmetric here?
Also there is some basic lapse in logic here. Just because a WoW nerd can trace the currency on a technical level, does not mean it is "easy."
Why is this guy an expert? He was an equity analyst for a long-time, but obviously not good enough to get rich. And there are thousands of Wall St. analysts walking around in NYC. I wouldn't even trust their opinion on equities, much less something new. Never read opinion pieces written by journalists.
Even if you take the assumption that bitcoin will fail, the problems/issues the protocol or something similar solves are far too beneficial to ignore.
So basically if bitcoin fails, some other similar form of digital currency will rise up in its place. I feel as though its a 'cat is out of the bag' scenario.
* disconnected operation (solve the double spend problem in a disconnected setting) (this would really make something gold-equivalent)
* a provably correct, but cryptographically secure ledger (meaning real anonymity)
* proof of work based on a single crypto standard seems risky. Use 5 of them.
* provably no way to compromise the network even with overwhelming computational power
I think that was the author's point.
For example, Paypal, Amazon or the IRS could announce tomorrow they will accept payment in Bitcoins but peg their BTC/USD exchange rate to one.
Speculation would all but stop and Bitcoins would become a transaction platform.
It's an open question whether such substitutes will trade on par with the real "in-blockchain" thing. Personally, I doubt it.
If enough goods and service providers followed suit, current speculators would have to take a hilarious loss to buy anything.
If enough goods and service providers pegged their BTC/USD exchange rate to one, the initial BTC speculators would take a bath.
But subsequent Bitcoin users would receive the benefit of Bitcoin transaction technology and the benefit of the US government's fiat currency for monetary policy.
I do have a friend with 900btc though: I told him I was in the market for a dollar, and he just gave it to me, no questions asked. I wonder where he got it from?
In fact, I would argue that the script functionality is a huge flaw in bitcoin, probably the largest flaw. The existence of a scripting language within the transaction log makes it much more difficult to analyze whether I hold bitcoins or not -- my ability to spend bitcoins "held" in my address is contingent on my having additional information at the time that I post the transaction.
Having a generic proof-of-work-chain-based cumulative notary service might be valuable in and of itself. But bitcoin's value as "money" is independent of that functionality, and in the long run, the complexity of that scripting language and the difficulty of answering the question "have I been paid" will become problematic.
Fortunately software excels at automating tasks like this.
You already need software to scan the entire blockchain to determine address balances, is it really that hard for it to keep track of non-trivial unspent transactions separately?
Instead, you'll have a ton of publisher clearing house style "you just received a million bitcoins" notifications, once they enable more of the language in the client. It just seems confusing and unnecessary.
Edit
I'll just leave this here... http://www.befuddled.org/
There're ample historical counterexamples of currencies that are not tied to a government. Gold is the most obvious example; if currency was inextricably tied to governments, there would not have been a mad rush to colonize the New World (and extract its gold reserves). In prisons cigarettes frequently serve as currency, as a medium of exchange that is widely valued.
What really makes a currency is confidence. People have to believe that other people will continue to value the currency later. Government backing can provide one source of confidence. But so can strong crypto, and one could argue that these days people have more confidence in crypto than in governments.
What'll really kill Bitcoin is that this speculative wave has made the price incredibly volatile, so volatile that real merchants selling real goods have no idea what to price things at. So everyone holding Bitcoins purchases them for investment value, and then the price will crash when it stops going up. That destroys confidence in the currency, which destroys the currency.
I could easily see a successor currency based on the Bitcoin protocol emerging from the ashes, though. By then the speculators will have been burned so badly that they'll stay far away, so it'll quietly gain adoption in the background, and then eventually become the new currency of choice when inflation starts to make it's way through current fiat currencies.
Not quite. The confidence in "normal" fiat currency arises not so much from government backing, but from the fact that a well-managed national currency envelopes the GDP of a national economy. Government really needs fiscal discipline to not break the system (the consequences are well known); the trust part comes from the health of national economy and intersection of interests of all involved players.
Consider a major issuer like USA or Eurozone. The strength of their currencies stems from strength of the backing economies. In theory, the government could try fooling the system and run the printing press amok. In practice, such a government would be very short-lived, as it would piss off just about every person with money.
Save for outliers like Zimbabwe, there aren't really many cases of modern governments running themselves in the ground like that. Usually, runaway inflation is a consequence of a catastrophic event in the economy (bubbles, wars, loss of markets and other externalities).
Now, a super-fiat currency like Bitcoin is not backed by anything like that. It is a virtual construct with finite supply, and crypto is just a production vehicle here. It envelopes no economy, so the all trust here comes from compound interest of people who invest into it.
Then again, it’s entirely possible that we will be proven wrong.
It makes rational sense for merchants to accept BitCoin and to keep some holdings in BitCoin because the price is increasing at such a rapid pace. Why wouldn't you want to sell something for x BTC today when that amount could be worth twice as much tomorrow? For the same reason it doesn't make a whole lot of sense to spend a BitCoin. Eventually the currency will level out when the incentive to spend equalizes with the incentive to receive. This might not happen for a while as long as speculation remains the predominant driving force.
It has loads of benefits over using the dollar, but a lot of those benefits are lost the second you're having it exchanged.
For instance, if I wanted to use bitcoin for contracting, my clients would have to convert their dollars into bitcoins, then I'd accept the bitcoins smoothly and easily, and then I'd have to exchange them (sell them) back for dollars to buy groceries and pay for the bus. Whereas right now, I get an Interac e-transfer and in less than 30 seconds I have money I can go to the store with, and it cost the sender only a dollar in fees. Sure, it's taxable, but the second I convert it from bit coins it's trackable anyway.
I definitely think this is a model we're going to see a lot more of in the future, but Bitcoin with it's thousand dollar and rising valuation and constant fluctuations is very difficult to get behind and actively use. And with the number of people, just of the people I know, who bought in hoping to cash out, there might be quite the tumble on the way. Who knows though, it will be interesting to watch, that's for sure.
By this logic you should put all your available cash into bitcoins right now. Are you? If not, why not?
So the question is will it crash to 0? Seeing the price soar to 1,000 means that people in the future might always be willing to purchase it at some price, hoping that it will return to that level.
Though, as it stands I don't think speculation gives it credibility. People who believe that are creating the positive reinforcement cycle so common in economic bubbles.
Another poster made me aware of this joke that I think summarizes Bitcoin pretty accurately. http://www.getamused.com/jokes/pennystock.html
Only in this case it's not a single buyer.
Found the link: http://www.youtube.com/watch?v=zz_yfB72S9c
...governments were accepting gold for tax purposes, kings were filling their treasuries with gold, armies were sent to steal gold from other countries, etc. Gold was absolutely tied to government when it was used as currency, and I am using the past tense here because gold is not a currency outside of a few highly niche markets.
"What really makes a currency is confidence"
I think you are confusing confidence with demand. What makes currencies work is demand -- the fact that everyone in the market demands the currency. Typically this happens because of a government, or more precisely because of a government that enforces certain laws.
"so can strong crypto"
Oh yeah? Let's just assume that Bitcoin actually qualified as "strong crypto." I'll release my fork of Bitcoin that is identical in every way, but happens to have its own block chain that I started using this post. How successful do you think that will be as a currency? Why can't we all just create our own personal block chains (and thus all be rich)? There is more to the story than "strong crypto."
Not very convincing. If anything, the speculative phase matches the growth process bitcoin enthusiasts have predicted.
wut. you do know what middle-ages, gov't issued currency was made of, don't you? and who funded the new world expeditions? and for what reason? and you do know that even given the spanish crown's desire to repay their debtors, the bulk of that gold and silver windfall ended up going to china to fund their switch away from paper money by the Ming dynasty?
acting like gold != governments is... well, frankly, it's ignorant.
For example, physically shipping hundreds of kilograms of gold (or physical, folding USD) is a costly exercise fraught with security risks, and the risk profile varies depending on many factors, for instance the political situations in the sending and receiving countries.
Transferring large amounts of electronic USD across international borders via the traditional banking system is going to invoke all kinds of reporting requirements, and possibly higher transaction costs (though you can do large wire transfers for like $25 I think).
Transferring arbitrary amounts via bitcoin is easy, secure and the transaction itself is cost-effective (notwithstanding the current relative difficulty/expense of moving large amounts of fiat currency into and out of bitcoin in the first place, which problem I'd expect to ease as the btc economy matures).
You really need to see it as a powerful idea, not just a speculative asset
In practice, no one suddenly got richer because they'd gotten all this new gold, they just experienced massive inflation (and forgot to peg their tax rate to it, so their revenues collapsed but their expenditures did not and they went bankrupt).
Because it turns out you can't eat gold nor make weapons or ships with it.
Let me ask you if you can summarize the reasoning for why paying taxes in a currency helps a currency? It seems very obvious that the opposite is true -- if you don't have to pay taxes by working in an alternate currency, then you would obviously want to use that. Which is why tax law always requires arcane provisions to allow the taxation of barter and foreign currency transactions so that the loophole can be closed.
It seems that if the ability to pay taxes in a currency were sufficient to support a currency, then laws dictating how to handle non-local-currency transactions would be unnecessary.
It's not so much that "paying taxes in a currency helps a currency" - it's that forcing people to pay taxes in a particular currency or go to jail creates demand for that currency, which percolates through the economy (especially if they're concurrently giving it out when they're obliged to pay someone).
Consider what would happen if the US declared "you can pay your taxes in BTC, and only in BTC". There being ~21M bitcoins, and ~$2.5trillion of federal taxes, the price of BTC massively spikes. It's also suddenly much easier to pay people in BTC and not futz with an effective forex trade every paycheck (especially since that's what the government is paying all of its contractors and pensioners in).
Unless you want to legally live and do business in a country, in which case you're going to have to pay the taxes that country levies in the legal tender currency.
The value of the US dollar, in essence, is the value of being able to live and do business in the US plus the avoided cost and risk of doing so illegally (which is generally quite high).
actually, we can. it's called historical anthropology, and books upon books have been written on the topic. to summarize those books for you: the chartalists were basically right. standardized currency and thus stable markets took off once governments did what governments do: pass laws to standardize things. also, contrary to your assertion that the only "monetization" event was "how gold emerged as money", we've actually gone through a number of cycles back and forth between gold/precious metal-backed money and credit-backed money. metal-backed money tends to hold during periods of imperialism and warfare (where the expected lifetime of a given state is low due to risk of being conquered/defeated, and soldiers have high exposure to other markets), while credit-backed money tends to emerge during periods of stability and peace (where states are more stable and trust-worthy than the rate at which some given metal comes out of the ground).
Inflation is the expansion of money supply. Once bitcoin reaches full supply, by definition there can be no further inflation from bitcoin. There can be price fluctuations in the value of bitcoin, but not inflation. It's necessary to differentiate between prices going up / down, as opposed to inflation / deflation.
I have to be honest though, I'm not an expert on the subject. Also, everything about the critique presented doesn't have to be false for the successes that bitcoin has had to be real. I think that bitcoin really serves as a form of regulatory arbitrage... its real value, the value that people are placing on it, represent gains that can be made by avoiding fees and oversight. Its an alternate currency that couldn't exist without a state system.
As for the inflationary ideas...I find it really very similar to gold or maybe some other more rare natural resource... don't all of the ideas about hoarding and "de beers" (sic) style monopoly still apply? I'm genuinely asking not trying to be a prick...
>> "The developers of bitcoin are trying to show that money can be successfully privatized."
There is so much bias in this sentence that I don't even know where to start.
First of all, the developers of bitcoin are not necessary trying to show anything, are also not necessary the ones or the only ones. Bitcoin is an experiment, and they say that explicitly everywhere. Second, people encouraging the use of bitcoin are way bigger than what the author seems to imply, It's now an economy worth billions, remember?
>> "sophisticated algorithms guaranteeing the anonymity"
Again, bitcoin does not guarantee anonymity. They say that explicitly here https://en.bitcoin.it/wiki/Anonymity
>> "bitcoin is tiny; at the current exaggerated exchange rate, the total projected volume of “coins” is worth less than the gross domestic product of Mongolia"
_is_ tiny now doesn't give you a clue about it's future size.
"But the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money."
Web-based? Seriously?
I honestly stopped reading to do my brain a favor.
Despite the link-bait title, he doesn't seem to want to make a definitive statement.
The recent rise in Bitcoin valuation is speculation based on merchant trends. Well established merchants in Asia are starting to accept Bitcoin. The total valuation of Bitcoin is still around $15Bn. The total value of annual US domestic cash flow is somewhere around $15T. Think about the potential of Bitcoin. Highly unlikely? Absolutely! But think about if you woke up tomorrow and Amazon or Apple announced that they would start accepting Bitcoin? What do you think the valuation would be?
The guy was every bit a classical liberal, like nearly all of the US' founding fathers, emancipationists and suffragettes. Classical liberalism is decidedly anti-collectivist and modern conservatives are much more collectivist than individualist: "support our troops", faith-based education, corporations as people. Classical liberal ideology predates the modern conservative and liberal thought that grew from it and you can't just decide to associate him with modern ideology.
I'd even say this article is deliberately deceptive.
http://www.pieria.co.uk/articles/lady_thatchers_relationship...
Thatcher was one of the primary reasons that Hayek had a resurgence of popularity in the 1980's.
Ahem. http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
You can't slap a sticker saying "public-minded!" on a government, and expect it to therefore be public-minded, any more than you can slap an "environmentally friendly!" sticker on a coal power plant and expect it to stop polluting.
"What kind of role, if any, should a government take in supervising a parent's choice of genes for their child? Could parents deliberately choose genes for schizophrenia? If enhancing a child's intelligence is expensive, should governments help ensure access, to prevent the emergence of a cognitive elite? You can propose various institutions to answer these policy questions—for example, that private charities should provide financial aid for intelligence enhancement—but the obvious next question is, "Will this institution be effective?" If we rely on product liability lawsuits to prevent corporations from building harmful nanotech, will that really work?
I know someone whose answer to every one of these questions is "Liberal democracy!" That's it. That's his answer. If you ask the obvious question of "How well have liberal democracies performed, historically, on problems this tricky?" or "What if liberal democracy does something stupid?" then you're an autocrat, or libertopian, or otherwise a very very bad person. No one is allowed to question democracy.
I once called this kind of thinking "the divine right of democracy". But it is more precise to say that "Democracy!" functioned for him as a semantic stopsign. If anyone had said to him "Turn it over to the Coca-Cola corporation!", he would have asked the obvious next questions: "Why? What will the Coca-Cola corporation do about it? Why should we trust them? Have they done well in the past on equally tricky problems?""
Lots of countries have explicitely recognized that putting control of the money in the hands of public-minded government is often horrible idea. Those countries created separate institutions that are responsible only for keeping value of money stable by regulating its supply. They don't care about what public or government wants. They don't care what effects on the economy will their decissions have. They just have to keep inflation around 2-3% by adjusting rates.
USA money controller for some reason has to support the economy with their decissions. The only reason they get away with it without hiperinflation so far is because dollar is strongly tied to the oil and because USA after the WWII had thriving economy, not economical wasteland like almost all other countries that took part in the war.
He doesn't know how Bitcoin works, though. Claiming it's an attempt to "privatize money" (huh?), or that governments will "take it over" (how? Building mining farms forever so as to maintain >50% of the network hashrate?) suggests he thinks there's someone in control of it. That's kind of like suggesting there's someone in control of TCP. There's a standard, sure, and there's people who develop and maintain that standard, but if their actions ever significantly diverged form the interests of users there'd be a brand spanking new standard pretty quickly.
1. Money has always been controlled by governments,
2. So money always will be controlled by governments.
3. Bitcoin is identical to money, but
4. Bitcoin cannot be controlled by governments,
5. Therefore bitcoin is doomed to fail (no date specified).
I'm not sure any of the premises are beyond scrutiny, or that the conclusion is even meaningful.
Anyone can say that nothing lasts forever. Let us know when someone predicts that bitcoin won't last out the year.
Meanwhile, fiat currency (as we know it) is not merely a tool of state; it is a command-and-control tool of the government-industrial complex, a creation not only of the U.S. tax code, but by massive private banking institutions who steal value from the public through complicated mathematics.
I actually quite like Graeber and his ideas; I think crypto-currencies come closer to fulfilling "an intricate structure of social relationships and spiritual beliefs" than the U.S. dollar ever could.
I think it's good to take a critical look at Bitcoin when the price rises so rapidly, but this article is more like a political hit piece than anything with economic merit.
Everything can be a currency satisfying these criteria:
(1) enough quantity
(2) limited quantity
(3) convenient to move/exchange
(4) widely acceptedAll currencies is based on "faith". Any currency is doomed if it looses trust. For instance cigarettes were used as currency in Germany between world wars.
And it seems to me that Edward admits that at the end: "governments are not fully living up to the responsibility". Yep, he is contradicting the claim that monetary policies are independent of the government. They are not and you can see it in the price of gold.
Since bitcoin is based on math and official currency on politics, bitcoin is inherently more trustworthy. Its deflationary tendency, limited supply, and lack of physical presence are common drawbacks of bitcoin as a "common" currency. Not trust. And they are actually advantageous for its particular area.
Being based on "math" is nonsensical. Money is based on math, that's the whole reason it evolved - to keep track of debts!
The question is one of the axioms behind the monetary system. Bitcoin's axioms are every bit as political as a fiat currency, the only difference is the entity that made the political judgement.
Users of Bitcoin must trust in the algorithm, as users of currency must trust in the central bank.
[I'm not interested in debate; I just want to give my prediction. And if I'm wrong, I will be sure to add this to my list of spectacular mistakes.]
BTW, the majority of gold's current market price does not stem from industrial/ornamental usage, but a collective "delusion" of monetary value (that has lasted thousands of years). Not to say gold shouldn't have any monetary value, as it is one of most useful materials in that regard. But the intrinsic value argument against bitcoin seems silly to me, given the story of gold.
"a glass of water is worth very little when I'm boating across a large pristine lake"
So you're saying that when someone is offering you 1 dollar, doesn't matter much to you, if you sleep in a bed made of dollars. No way!!!
I hope you understood that water didn't lose its intrinsic value. Because you can(and want to) still drink it and it will still keep you alive. Whether you have lots of it, or none at all, your body will keep asking for its usual dosage.
I think there's a big crash coming, but I think that won't say much about the long-term success of bitcoin. The most likely case I see for bitcoin failing is that it's replaced by another cryptocurrency, and that's still great in my book.
(I got my original investment back with btc to spare, so thankfully my finances will be unaffected either way)
Would you abandon your investment into lcd manufacturers bacause your in-laws started talking about those thin TVs?
Would your grand grand ancestor abandon his investment in railroad comapnies if his in-laws started talking about this strange horseless carriage that can only travel on pair of metal rods placed on the ground?
But I have three comments:
1. Personally,
I would probably be - out of self interest - a strong supporter of Bitcoin if I had any, or would have belonged to the first miners. But I have no BTC, and such I only observe as a bystander how this technology develops.
2. Energy and intrinsic value of BTC
For me, the argument that cryptocurrencies can be made out of thin air and thus BTC is just some digital data does not hold. Gold can be mined from many sources as well (e.g. in can be found in the oceans as Au2+). Or another currency can be created and printed/minted. However, with a currency such as BTC it takes a lot of energy to fire up such a system until a certain level of penetration is reached, and it takes energy to maintain it. Actually, this is one of the greatest drawbacks I see: every BTC that is created now now will be more expensive in terms of energy cost. I prefer a one time energy and material cost for the creation of a currency, and minimal energy/material costs that come with its operations.
3. Penetration and access.
I wonder if it might not have been better to distribute all BTC among all of mankind. That way, everyone would be in possession of an instant amount of currency and could readily engage in trading. The early mining process support the creation and distribution of bitcoin but gives extreme gains to early adopters. A better initial distribution might have helped to position BTC as the dominating cryptocurrency. Right now any follow up can beat BTC if it excels the parameters that define the adoption and usage rate of the currency as trading medium.
The result is that the cryptocurrency will continue to gain momentum until it is used everywhere worldwide. This will eventually lead to a single worldwide government or an agreement between all countries across the world to act uniformly in regards to the currency. This will become a necessity to properly administer taxes and/or settle cross-border contract disputes.
Once you have a single government, worldwide government ids will be initiated (or all local ids, like driver's licenses will require integration with a wordwide database). At this point, the single government will then co-opt the cryptocurrency or initiate a new cryptocurrency and require everybody to tie their id to their cryptocurrency usage. The reasoning will be to crack down on crime, tax evaders, etc. Because it's a one world government or all governments are working together in lock-step, they would then have the capability of controlling/banning the cryptocurrency. Anyone not properly linking their identity to the currency will be breaking the law, and it will be very difficult to participate in commerce because there will be no more physical cash or coins.
Either way, the only way I see this playing out is a currency that most people assume was initially intended to break from government control will eventually lead to ultimate government control.
As a side note, I realize the concept of a one world government is controversial, but my personal opinion is that it is an eventuality.
The current hyperdeflation is encouraging people to hoard their bitcoins; which means that they are behaving a lot more like a commodity - and there-in lies the problem: they are deluding people. Not only do they have the word "coin" in their name but they also fall under the category of "cryptocurrency".
The problem is that people are so firm in their belief that inflation is one way for a government to screw them; that they will change their argument (no, it's a commodity vs. no, it's a currency) depending on which argument you present to them.
What we need a cryptocurrency that penalizes hoarding; or at the very least in some way encourages spending (or exchanging).
Let's say that hypothetically I don't know what I am talking about; and that hypothetically bitcoin becomes a universal currency as many would have it (all other currencies are abolished). Now consider the hypothetical scenario where you are selling property and have a family to feed at home. You spend your day showing people properties and nobody buys - why? Because their currency will be worth a lot more tomorrow than the fixed asset you are offering. The economy will collapse.
So its used by - who? Speculators and suckers?
I am not an expert by any stretch of the imagination, but this seems like a big point in the authors argument.
Isn't the removal of this flaw baked into bitcoin by it's nature?
" Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system."
Isn't this pretty damn hard as well?
No, it's not. Bitcoin isn't backed by any political will of any kind. It is a sheer market. That is the author's main point. That since it is money not backed by the, hopefully, benevolent will of a state it will be subject to the whims of market makers or the panic of the crowd. I think the author of the article is quite correct in making this point.
History has repeatedly shown that the mercy of the state is better than the chaos of the market, at least over the long term. Yes, every once in a while the state will take away a punch bowl that it didn't need to take away, but that doesn't mean that their overall goals aren't worthwhile. More rarely the state clamps down too hard, but history shows that in these instances the market's ability to correct an overbearing state has greater celerity than the body politic's ability to overcome the enormous chaos of a completely free market.
History isn't even necessary in the argument though. We all get to vote. Bitcoin has already failed as a currency. It is subject to incredible moodiness and instability, which are the characteristics of a very poor currency indeed. Currency, in a well functioning economy, is supposed to be the most stable and predictable security that one can invest their wealth; in theory, it is not even supposed to be a security. Bitcoin may have made some people wealthy, but I'm not going to trust all of my wealth in it like I would American dollars.
Bitcoin has to climb up to a stable value, once.
The idea is that it will be stable once it did.
Nah. If all the govt. does is says that every merchant cannot accept bitcoin for transactions, that's enough to render every bitcoin market black.
"Of course, the global monetary system has suffered from appalling management in recent years. The authorities, especially in the United States, first allowed banks to act almost as if they were in a right-money world, lending and speculating wildly. That led to a typical right-money disaster — a sudden loss of trust and the failure of leading institutions."
The Federal Reserve has the ability to set interest rates in the way it deems best for the economy. There is nothing "right wing" about the way they set very low interest rates before the financial crisis. There is no way that private money could ever replicate the kind of economic stimulus that the Federal Reserve was able to engage in.
Anyway I don't believe that bitcoin will become much larger (or smaller) than it is now. Not for any deep reason, but because it is inconvenient, and commercial banks are already very good at what they do. Hopefully it will provide enough of a shock to the system to cause a reform in the current system of merchant fees for credit cards, which are an aberration that should have never existed in the first place.
Is that his choice or the editors?
[1] http://blogs.reuters.com/edward-hadas/2013/11/27/edward-hada...
1) "currencies...increase the efficiency of barter" 2) "Barter played a tiny role in all premodern economies" 3) governments have tended to issue currencies 4) Bitcoin is inferior because it lacks "the backing of a political authority" or the ability to "raise taxes or pass laws to unwind monetary excesses" 5) private money generally has uncertain value and legal status 6) government might shut Bitcoin down 7) Bitcoin is a part of "Right Wing Money" 8) all effective money is "left money" and "state backed. The recent banking system is a part of "Right Wing Money". 9) Bitcoin is for criminals and speculators
I think there have been much more intelligent and nuanced opinions on why Bitcoin might fail, I wouldn't put this on the list.
http://www.dartmouth.edu/~jshambau/Papers/AntebellumExchRtsJ...
There were a lot of bank busts and currency scares.
In the tech sector, new things come along every day. We see new ideas, approaches, left-field thinking on a steady, almost predictable pace.
We also see that, more often than not, the very first version of the thing is not the thing that lasts. It's a proof. It mostly works. There are problems. It sticks around for a bit, till someone else comes up with a better idea, implementation, etc, which takes hold. And then something else replaces that.
If you believe Bitcoin is Money 2.0, that it is destined to replace the USD, or other global currencies, you clearly accept that a newer, better thing is destined to replace an old flawed thing.
If you don't believe in Bitcoin, you cannot deny that while IT might not be the thing to take down the USD, something else might.
So why does every article treat Bitcoin as a yes/no proposition? Either it is a moonshot success, or tulips? Either it changes the world and creates new millionaires, or it joins the pantheon of quick money schemes that tempted and fooled so many in the past?
I realize we're talking technology here, but it doesn't have to be binary.
Bitcoin, the software, solved a few problems thought unsolvable. It showed that you can decentralize the ledger, with some amount of stability. It showed you can solve the double-spend problem, and create some guarantee of transactional consistency.
But bitcoin has a few obvious issues. It is illiquid, and deflationary. It is slow (unless you just pretend its fast and hope for the best). It is only basically anonymous, though not foolproof. It is easy to steal, and easy to destroy.
Some of these problems are solvable, and some are inherent to BTC itself and cannot be removed from BTC.
But that's not to say something can't come along with all the good properties of BTC and fewer of the bad. Or none of the bad. That's not to say there's not some kid sitting at a computer thinking of a better way.
FWIW, unless governments start to intervene by outright banning it, I suspect Bitcoin will first become the ultimate storage of value, then its price will become less volatile and with time stable enough to start using it as a currency.
You can't explain the high price of gold merely by its intrinsic value. OK, it's shiny, but there are other sniny metals. It can be used in electronics, or as filling/crown material - but it was valuable before people started using it for that. So much for the intrinsic value.
So it must be something else that makes gold as valuable as it has always been. It's rare, fungible, divisible, portable - an ideal medium for storing value.
Well, bitcoin is all those things and more.
1) money must come from the state (because I say so)
2) bitcoin is bad because it appeals to "right wing" people and I'm (presumably) left wing (my enemy's friend is my enemy?)
3) free markets caused the financial crisis (not massive gov money printing and trillions in implicit backing of credit markets) so free market money must also be bad
4) the value of bitcoin disappears if people loose trust but this could never happen to a gov currency (even though it happens several times a year with fiat currencies around the world)
5) fiat is fine so we don't need a replacement (as long as we ignore the trillions in debt transfer from the bankrupt banks to the bankrupt governments)
-- Not really. Bitcoin is open sourced. They did not try to privatize bitcoin.
Excerpt from the article: "The currency’s issuer is an unknown computer programmer"
-- No, bitcoin is not issued by Satoshi Nakamoto in the sense that cash is printed by the government. The currency is generated by mining, which can be participated by anyone with the right equipment.
I do not have a better crystal ball than anyone here, but the article's author made a mistake in trying to shoehorn bitcoin into his own concept of currency.
Governments have more mechanisms to adapt to changes in public opinion, while bitcoin deals with a more specific problem. If bitcoin loses endorsement, it will be replaced (traded) for other goods, probably the next generation cryptocurrency. The same goes for governments that don't adapt, and their currencies.
"Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith"
Is this not also true of state run currency? Have we not seen massive deflation during the great depression, in Israel, in Russian and in many other part of the world?
The legal status is an interesting one, but given that the feds got some 31million (and rising) USD worth of BTC from the Silk Road seizure I doubt they will make BTC illegal.... But it could happen in the future.
Loosing faith, well believe it or not this is true of all currencies. That is why it's called Fiat, there is nothing other than faith behind currencies.
So really the only issue is the legality, which basically translates into government regulation, which is what we already have for "state run currencies", so at worst BTC becomes regulated by the state and becomes more of a "state run currency". In some views I guess that is failing, but that means that worst case it will end up like cash but with a lot of technical benefits.
I think the real issue with BTC is deflation, and that will probably continue for a long time. At least until all the BTC are out, if not for much longer.
Bitcoin has two qualities that are unique:
1) Extremely high degree of privacy (you can put 50.000.000 USD worth of USD in a USB stick and pass through 7 airports, or print them in an A4 page encrypted with GPG, and no one will know).
2) Transaction speed: You can send money from Iceland to China (even huge amounts) very quickly (less than 1 hour), with no third party being involved.
There will be always a market to request this kind of qualities. However if any of those two qualities goes missing for whatever reason it is doomed. Another way to kill BTC would be to create another crypto-currency that have additional features and would kill BTC on the spot.
Even better, you can keep those millions in your head, using a deterministic wallet (google "brainwallet").
In short, you keep a password in your head, and when you are ready to spend, all you need is access to an Internet-connected device - using that password you can reconstruct your private keys and import them into a bitcoin client.
Stopped reading right there. Does this author actually believe that money is issued by governments?
Why do you think your notes have "Bank of England" or "Federal Reserve", or whatnot written on them?
It's because they're issued by those private institutions. They're not government bodies.
Of course, the government has the alleged power to regulate those private institutions, but in reality it works the other way - those private institutions have the real leverage to regulate governments.
It's because the governments are in debt to the private institutions that they can force the government to back their monopoly issuance of currency, and of course, they can force the government to privatize publicly owned assets to pay back the debts.
Once you see past the very basic myth that "governments issue money", you quickly realize why politics is theatre, and any chance of change to the status quo won't happen through government. Bitcoin is the game changer.
This relegates it to the status as a "virtual collectible" (as someone so humorously put it).
Maybe Bitcoin 2.0 will be smart and remove a cap (or build in the ability to allow itself to float).. but Bitcoin as it is isn't flexible enough.
So, I guess the question becomes.. is there a (or what is the) difference between:
1. [0, ∞)
2. (0,1]
when it comes to a currency?
I think that the traditional "boil the frog" approach of monetary inflation is psychologically easier for people to take.
A central authority just sort of wills new currency into existence as it is demanded.. Which, presumably, allows for price stability.
To me, the fact that it is hard to get "1 bitcoin" makes it too unstable. Someone could will 0.001 bitcoin into existence and pay $1 for it.. but, that 0.001 bitcoin may be worth $0.50 tomorrow (but then worth $3 the next week). So.. what's the point (presuming I desire an alternative currency).
One needs a clever way to create an "algorithm" (seems people think this stuff is as magical as the idea of a central bank).. that people trust to sell currency units.
The system would just run and sell 1 bitcoin (or 1 mystery coin or whatnot) for $1 to anyone who wanted it. The goal would be to achieve parity with the dollar (and maybe any other currency).
The thing this magic algorithm would NOT do is.. it would not BUY its mystery coins back. It would just create a verifiable.. non-counterfeit coin for anyone who desired one for a set price.
If a deflationary spiral set in on the dollar.. well, magic algorithm learned from Soros and the Bank of England.. you don't fight that..
It won't succeed as a currency because it can't maintain a stable value--again, just like gold.
At best, Bitcoin will end up as yet another option for investment. The deflationary trend and lack of legal tender status make it a total nonstarter as a currency.
Terrible argument.
Is it doomed to fail? Perhaps it is, but things are not quite as grim.
Here is what is likely to happen as a result of bitcoin: 1. The future of banking transaction fees is bleak - The current financial systems will get threatened and adapt. Here bitcoin will succeed. 2. Bitcoin is used as proof of concept and paves the way for a world currency, think euro but global.
The two points above are definitely wins. If you have any problems with those playing out, its likely you have the same concerns about bitcoin and just haven't realized it yet.
Here is what would likely happen to bitcoin v1, it will fail to become a real currency.
Its currently morphing into a speculative store of value. I'd like to say its like tulips, but I'd be wrong, as it is definitely more useful than tulips. On the speculation front it may play out like the tulip mania/bubble, but I hope I'm wrong about that.
The reason for it to fail as a currency is the very reason for the spike in interest at the moment. Exchange rates seem to be soaring and may continue to soar which would make people vary of buying some thing worth $1000 USD for 1btc if there is a possibility that deferring a purchase by a couple of days could offer a notion discount of x% from the hope of the value of btc increasing. If you could wait a few days for the purchase and buy the $1000 item for 0.8btc, who wouldn't wait?
On the flip-side, if you bought 1btc for $1000 to buy something but the value of btc suffered a temporary squeeze to the effect that 1btc = $800, hence the same item now costs you 1.25btc or 25% premium to what you were willing to pay. Hence who would be willing to pay extra if you were sure the value of btc would rise?
This applies to all commercial transactions. In 90%+ of cases people will likely defer spending btc unless the value was at the same level +/- 5% as their purchase price.
Bitcoin as a currency/for commerce will leave every consumer in a constant state of buyers remorse and THAT will be the real reason for its failure.
Or is the unreported reality of BTC is that it is just too difficult to cashout in a big way due to liquidity/transaction fees/general sketchyness of exchanges that will transfer BTC to hard currency?
The reason I believe bitcoin will continue to exist and even be supported by states like USA is because transactions are public and traceable. The identity of wallet owner can sometimes even be determined through that.
I guess Banks feel threaten because this currency is not (yet) ~ 80% depth. It is so by design. The depth bubble grown by banks and countries will soon or later burst. Get ready for that moment. I'm not sure that bitcoin is the best placement, but in an placement diversification strategy, this would definitely be one of my picks.
How about gold? Bitcoin can just as easily be seen as a limited commodity as as currency. It's even mined :).
Bitcoin has no intrinsic value. It's a financial instrument.
If so, I can empathize with the "losing faith" perspective. It only takes the tiniest bit of squinting to see bitcoins not at fundamentally limited, and therefore currency-worthy, but as completely unlimited.
Also, what if the new coin has some minor technical improvement? How do we know that won't outweight the established network effects?
Yes, but money issued by governments is also doomed to failure, with a failure rate modestly higher than the failure rate of governments.
And when, in the time of QE, does he expect that it will come to pass that "authorities do better?"
However, the author rather fails to explain his reasoning about the social entanglement of money, referring us instead to a book which is £10.34 in paperback or £9.31 on Kindle[1] (a rather uneconomic proposition, if you ask me.)
[1] http://www.amazon.co.uk/Debt-The-First-000-Years-ebook/dp/B0...
Other crypto-currencies already exist and there will only be more. Paul Graham was right when he pointed out that "hackers love it"—that key point means people are going to continue to evolve the general idea. If deflation proves to always be a serious problem, I'm sure hackers will build in something to solve that. Anonymity is a problem, so Zerocoin is tackling that. And Litecoin tackles other problems.
I'm not Rothbard and I can't prove to you that we will be better off with an unregulated decentralized currency. But I do want to see the experiment through, for the alternative is worst from a point of view of my morality -- certain members in government shutting down the Bitcoin experiment by decree, because it is inconvenient for them.
They will cite history and circumstances to justify their centralized control of a currency and the need for income taxes, but I also know alternative lines of reasoning that negate them. What I do know for sure is that control over currency gives near-absolute power to those who handle the levers, and I would imagine that such power is not something you simply abdicate.
There are aspects of the economy that does require a policing authority, in such areas as environmental sustainability to prevent a tragedy of the commons. A growing income disparity between the wealthy <1% and the impoverished majority is also another tragedy of the commons, but perhaps the current way of dealing with these issues aren't actually helping. I suspect that a better way to deal with these issues is more competition amongst alternative economic forces, and for that we need a diaspora of currencies; currency and economy is what helps people converge upon a stable state solution in a distributed fashion. It's a heck of a tool, and we'd be damned if we don't explore its uses.
I'm not sure what the future holds for us in terms of governance structures. Bitcoin shows us that not everything need be "privatized" as the old libertarians had predicted. I think we're just now entering the beginning of the end for government as we know it. It's going to be exciting, wrought with pain, and probably unfathomably rewarding.
All that I ask is that any time you encounter an argument that assumes that taxes must be paid to fund a centralized government that controls the issuance of currency (for the good of the people), think twice before nodding your head. Our technology is new and we don't yet know what is possible.
With such a sensationalist title, I'm not surprised this article is much balooney but I wonder how it got to HN frontpage in the first place.
By the Gresham's law [1] (i.e.: "Bad money drives out good") being an "inferior money" is actually a good thing.
What I do think is very interesting about Bitcoin is that it is a harbinger of things to come. It won't replace greenbacks anytime soon, but I think it's an indicator of where the world is heading.
I believe the global and historical trends we are seeing right now is away from traditional authorities acting as monoliths, in favor of empowered individuals. We are most likely at the very beginning of the trend - I doubt anyone reading this board in 2013 will be alive to see the transformation completed. But we will be alive to see some very interesting changes. Generally speaking, all centralized authorities, be they monetary, political, technological, etc. are fracturing in favor of empowered individual actors. That poses challenges as well as opportunities.
For example: consider a technology like Square coupled with a store of value such as Bitcoin. (In this example, the terms "Square" and "Bitcoin" are just placeholder values for mechanisms and tools). Oversimplifying greatly, if we take these technologies to their logical extreme, we have the tools for an individual to completely bypass banks and traditional governments. You have some goods that I want, I have some Bitcoins, we do a point-to-point transfer; you get the money, I get the donut, end of transaction. Truly savvy users in this system will have their own way of transmitting the money from themselves to the merchant. I'll choose to trust someone like Square to do it safely and securely for a nominal fee.
Whether or not you agree with the mechanics of how this happens isn't really the point. The point is to show that we are heading towards a future where two individuals can transact freely without a middleman "getting in the way." For the purposes of this discussion, "getting in the way" means limiting the freedoms of those individuals to transact as they please.
Of course, there are problems with this. If there are no rules, inevitably someone will game the system or take advantage of someone else. That'll be unpopular, and so people will seek to band together to transact in a network of trust. The idea of a network of trust is important today, it's value will only increase over time. I can't remember the exact term, but I read a wonderful book some years ago called "Anarchy, State and Utopia" which dealt with the philosophy around these types of issues (it's a pretty academic book, but here's a link in you'd like to see - http://amzn.to/18883MU - and yes, that's a kickback link).
Boiling it down, the main argument I took away from that book was that, even in a world where there are no "governments" as we're used to thinking about them, we'll never achieve true 100% freedom because there'll always be those who are stronger who take advantage of those weaker than themselves. For this reason, people join together and form mini-states. Within those mini-states and associations, rules will exist that people choose to live by, limiting individual freedom to provide security.
I think people are right to be excited about Bitcoin, but I'd be cautious about heralding any brave new world within the next 25 to 50 years.
Power to the people, right?
since i wrote this bitcoins value has soared, but i still hold that opinion. national governments might tolerate bitcoin as a sandbox playground for now, but once it gets widely adopted and threatens national currencies, they can choose between giving up vast economic and fiscal powers or restricting bitcoin. i see no reason why they should choose the former.
did i convince you? want to get rid of your bitcoins? send me some: 17Dk1cugCynTaNdmQihF7tproJgyKyWiwr :-)
I guess he focused more on philosophy (unfounded ramblings) and journalism in his life.
I still struggle with how a fixed money supply vs. a steadily growing economy does not lead to deflation, and (eventually) hoarding.
If _they_ believe that Bitcoin places a threat upon their positions of power, then Bitcoin will be crushed and if they can't crush it, they'll make it illegal. Or they'll do it the German way, and they'll allow it, but tax it to fuck.
Like what? Gold?
only if there's no demand. And I think there's a floor on how low demand can go that comes from the black market.
So I don't think its doomed to fail.
If I create my own dollar and claim it is backed by the U.S. Government, I am breaking the law. Until a few decades ago, it was physically impossible to create new gold (and now it is still prohibitively expensive-- and radioactive).
There is nothing that stops someone from generating a new currency (ZitCoin) with the same desirable properties, but without the obvious favoritism toward early adopters. If one more can do it, then many can do it. I don't see why this won't eventually drive the value of fixed-pool cryptocurrencies to (or near) zero.