Fool's Gold 2.0: The siren song of Bitcoin
aarongreenspan.com
aarongreenspan.com
Aaron Greenspan, repeat after me: Mining energy is not wasted. Mining energy is not wasted. Mining energy is not wasted.
Now, it is an open question as to whether the cost of running the Bitcoin network is worthwhile. However, for the moment, it clearly is. The fact that some miners can turn even a small profit on the Bitcoins they're rewarded with demonstrates that the utility they provide has positive market value.
Of course at some point it may be that it costs substantially more to mine new Bitcoins than they are worth on the market. If this happens soon, Bitcoin will likely fail. If it happens later, it's possible that transaction fees could prop up the network, but that's purely speculative.
Another thing to consider when assessing the energy efficiency of the Bitcoin network is how it compares to the efficiency of existing currencies. Cash has a physical component and must be manufactured. Electronic fiat is backed by huge, complex, and expensive networks. Visa's datacenters are not free. Keep in mind that credit card transactions typically have a transaction cost of 3%, which in some way represents the cost of operating the Visa network. 3% is kind of a staggeringly huge number, and off the cuff I expect that's actually quite a bit higher than the total Bitcoin network cost to volume ratio...
> Aaron Greenspan, repeat after me: Mining energy is not wasted. Mining energy is not wasted. Mining energy is not wasted.
I think you're missing the point here: Aaron is not denying that markets run on trust, and trust takes work (in both the physical sciences sense and the layman sense) to maintain.
What he is saying, as should be clear through his use of the water analogy, is that we should choose currencies for which it is easiest to convert work into trust and usage. Water is off the table, in his analogy, because of the large amount of work required to use it.
In other words: he views BTC as another currency which, compared to systems like the USD/ACH/Credit system, is overly laborious to maintain.
What's nice is that this is a reasonably scientific claim-- it is not out of the question that someone could compare measurements of the energy usages of the two currencies per unit of value and per transaction. To me, it seems clear that the USD, riding on the trust externalities from the already present authority of the US Gov't, is going to be cheaper. But again, it's a totally measurable assertion.
The fact that some farmers can turn even a small profit on the tulips they're rewarded with demonstrates that the utility they provide has positive market value.
It's just not possible at this time to know whether Bitcoin provides enough value to succeed in the long term. But to survive in the long term, it has to survive in the short term, and our best measure of short term utility is the market.
Again, if the market crashed far below the mining costs, then I would view that as a demonstration of the lack of Bitcoin's utility. And that very well could happen! But it hasn't yet.
There is no other way to calculate whether something is done at an economic loss or profit than by the loss/profit mechanism of the economy.
Again, if the market crashed far below the mining costs, then I would view that as a demonstration of the lack of Bitcoin's utility.
Keywords being "far below". In cases where gold was the unit of money, there would be times where mining gold was economically unprofitable. As a result, more goods started chasing a fixed supply of money, bringing up the price of money making it more profitable to mine gold.
And Greenspan would still call it a "bubble"
When he is personally responsible for creating dot-com bubble and the housing bubble. Who would ever listen to this clown anyway?
Quickly is subjective... I don't believe several years, according to some historians, is "quickly" considering if you were affected by it.
Also "seems to be pretty reasonable" means it's just your opinion.
You're also very high strung and on the offensive for bitcoin. This is not how you would sell an idea and a huge warning sign of your view being very skewed and not objective when it comes to the matter of bitcoin.
Calling me high strung/on the offensive/skewed though is a bit of an argumentum ad hominem and thus irrelevant. My argument would not be affected at all even if I were foaming at the mouth and wearing a sweater woven out of paper wallets.
[1] https://blockchain.info/stats
* I assume they meant watts per gigahash/second.
[EDIT] It seems like the recent ASIC miners on the market are vastly more efficient (>100x) than blockchain.info's estimates [2] (which probably include CPU/GPU miners since ASICs are relatively new). Without knowing the makeup of the Bitcoin network (i.e. what portion is CPU/GPU/ASIC etc), though, it seems like any efficiency estimate will be pretty inaccurate.
1) it's relatively rare 2) it's easily minted into objects of consistent mass. 3) because of quantum mechanics, gold has a yellow color. This makes it easy to verify gold content without advanced technology. You take a set of "gold standards", say, 99%, 90%, 80%, 75%, and then make a series of streaks against a black rock (http://en.wikipedia.org/wiki/Touchstone_%28assaying_tool%29). Then you take your sample and make a cross-streak. Then you and your trading partner can agree upon an approximate purity level at which you are willing to make the trade for goods.
currencies will be backed by actual work that provides social and economical value
Who decides what this value is? By hours consumed? Is one hour of sitting on your butt playing a video game worth the same as one hour helping to build a rocket that is destined to try to destroy a (hypothetical) asteroid on a collision course with the planet? How about by "type of work"? Well then, is one hour sitting on your butt playing a video game worth the same as one hour sitting on your butt playing a video game in a playtesting environment?
If it were possible, the absolute currency would be 'life time' as in the movie http://en.wikipedia.org/wiki/In_Time. In the absence of that, something equally dear for staying alive in a increasingly moving towards apocalypse world, like may be bottles of oxygen or water ? But even then, the things that are of value may not be easier/handy to barter/trade with. That is when an alternative 'scarce' 'hard to create and requires resource intensive mining' but 'easy to handle' , 'easy to determine purity' type of resource takes the place as a currency. Gold has that property inherently. Not saying that it is the only absolute resource that has it. But it is a time tested resource with those qualities.
If gold and other precious metals did not have their historical use as a currency and the trust of markets (and its suitability as a currency, I suppose), they would be worth at least an order of magnitude less than they are today. And it would be mined a lot less of them.
You forgot speculation. The reason it's so much more expensive than 10 years ago is because people expect that at a certain point inflation will finally be realized, and prices will be so high that it will be used for scientific, jewelry, and ornamental uses again, at prices even higher than today.
And even forgetting that, we have the fact that people buying gold to save removes it from the market, reducing supply at lower prices, leaving only higher bidders in the market. And you can still get gold tipped RCA cords, despite what you say. So as long as there are any consumption buyers just below the current price, the price is justified.
The easiest support for my argument would be looking at the list metals with a similar rarity to gold, and noting that gold is more expensive than all but platinum, despite having an annual production which is >15 times higher.
http://en.wikipedia.org/wiki/Abundance_of_elements_in_Earth%...
Now, please provide a citation for your claim "gold's market value is mostly caused by demand from art and manufacturing processes". I claim that this wrong because 34% of all the world's gold is kept in vaults, and an additional 52% is stored in jewelry (of which a significant amount should be considered an investment by its owners due to the high market value).
http://en.wikipedia.org/wiki/Gold_reserve#World_gold_holding...
Gold has unique chemical, mechanical, and electrical properties - it's not just any old commodity.
Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. Source:http://online.wsj.com/news/articles/SB1000142405274870403270...
If Bitcoin became a major currency, I think there might be other incentives, too. To speculate: a large government might want to run mining operations to make it more difficult for other governments to collude against them in a 51% attack. Of course if they did this, they'd probably want to pick up transaction fees as well.
EDIT - other criticisms:
- He criticizes energy waste, but doesn't compare it to the energy use of existing financial systems.
- He points at the risk of owning wallets without recognizing that this should be a diminishing risk as better software develops.
At its core, Bitcoin is a proxy for another commodity we are all familiar with: electricity
You're right that tracking debts (or, to be more correct per cpervica's comment, tracking balances) and using resources are not mutually exclusive, but I don't think that resource usage is the scarce resource that bitcoin represents, as Greenspan (you?) suggests. I think the scarce resource is a set of values contained in the bitcoin ledger, and the mining needed to change their ownership is (as the second question puts it) an externality.
I disagree.
Except there are no debts, since there are no debtors. The ledger is a registry of ownership, not debts.
Couldn't the same be said of gold? Mining and extraction are resource (energy) intensive and yield a result (gold) that is less than it's practical intrinsic value (eg. for industrial purposes).
Nothing he says in the article is false, except that it is also not "correct." True anything can be used as a marker for value, from notched sticks in Egyptian times, to rocks on an island, to BitCoin. As long as a community exists which agree on their relative value, the marker continues to work as a marker. And the more difficult it is to counterfeit, the better marker it is. So far BitCoin meets that criteria and so it is not 'fools gold.'
He also missed the part where someone cracks your 256 bit key to your wallet and steals all your BitCoin. There is an interesting cryptography problem/question which looks at the cost of mining new BitCoins in comparison to the cost of attempting to guess BitCoin wallet keys.
I like the notion that the intrinsic value of bitcoins are as entries in a global distributed ledger (or even more fundamentally, timestamps in a distributed timestamp server)
A Satoshi is the small unit you can account for in that ledger, so there are actually 2,100,000,000,000,000 of them, making the intrinsic value way less than the extrinsic value, but that's true of gold as well.
The relentlessly negative articles (like this Aaron Greenspan piece) gives me the impression that the author has a spiteful resentment of those who bought early, and wants to see it crash to $0 so he can be right in the end and tell everyone "I told you so".
On the other hand, many unquestioningly positive writings (which we also see plenty of) are hugely influenced by the fact that the authors invested in Bitcoin and want to see it rise.
Greenspan's criticism of Bitcoin is reminiscent of the same pontification he had about Facebook. It competed with his houseSYSTEM. Later, in an open letter for publicity, he advised Zuckerberg to either keep Facebook a closed network, exclusive only to students and faculty of an educational industry (.edu addresses), or to sell to Yahoo at their bid. That's interesting. Then he hawked CommonRoom. I had a level of disgust over Facebook's cavalier attitude with privacy and security that Greenspan seemed to have shared. Competition? Great. Bring on the competition. Criticism? Yes. Let's hear everything. However, the way it was presented as a whole didn't command credibility.
I stopped reading his criticism of Bitcoin when it was clear he didn't understand Bitcoin. "Processing" might be a more digestible term to him, rather than "mining." There are valid criticisms of Bitcoin. This has been the case for 5 years. So too, there are valid criticisms about anything. Bitcoin was never intended to be everything to everyone. It will likely remain relegated to a subset of people. Knowing the state of security and the virus-prone systems of today, I wouldn't want the average person to use bitcoin beyond light money. It's risky. Beyond this, bitcoin's positives are entirely purposeful to enough people to trump its negatives. Being different and useful is rare. Being both and decentralized is a true marvel. Fool's Gold 2.0? Nothing is fake about bitcoin. Bitcoin never claims to be what you want it to be.
In my mind, this severely damages the author's credibility.
A fixed amount of bit coins are mined (on average) per unit time. Thus, how much work it takes to mine a coin depends solely on the number of miners. Econ 101 theory tells us that the aggregate costs of the miners will equal their aggregate rewards. So, the total cost of mining (hardware, electricity, people's time who work on it) will equal the reward.
That's all that's happening with mining. No for either side to complicate it and make it seem like more is there.
Miners consume an estimated 108,619 megawatt hours per day (according to https://blockchain.info/stats). This is actually a very high estimate as most miners have switched to ASICs and are consuming orders of magnitude less power, but let's use it anyway. This would add up to about $16m spent per day on electricity.
In 2011, the United States alone consumed 367 million gallons of gasoline daily (according to http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10). At an average gas price of $3.576 / gallon (http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_a.htm), this would be $1.3b spent per day on gas.
Pretty much everything on Earth is going to consume power, but I don't think Bitcoin mining consumes enough to worry about.
btw, did anybody else get really disappointed after clicking the link and realizing it was Aaron Greenspan not Alan? I would love for legit economic analysts to take a crack at Bitcoin but so far most have dismissed it (I saw some figure like 87% and no I am not going to bother backtracking to find my source sorry). I wish somebody with some real knowledge of world economies/currencies would drop some knowledge but they seem to either
A) Not care (I suspect because even tho BTC is at the forefront of the tech world, it is a trinket to the aged eyes of those who have spent their lives watching the fluctuations of the world economy)
B) Not wish to comment because it's a fun experiment to watch so why ruin your rep by seeming like an old fuddy-duddy when you could just enjoy the view
When I told my father (very successful attorney guy) about the Senate hearing he was like "Of course they're interested in it. If the tech works, why wouldn't they want to use it? But yeah they probably will want to strip it and start over without the dispersements the founders put in". Seems like about the most reasonable off-hand assessment I've heard from a non-techie business type. The gov has no interest in protecting black market holdings and redistributed wealth pulled out of thin air
back to your original point -- yea i think it's tough for negative press to get anyone's attention in the midst of the $$ signs soaring. It's like a NYE celebration for the speculators. it's why I believe that Bitcoin "news" isn't really "news" -- it's just some articles characterizing the current hype with a bit of random theory thrown in.
But I think as Mr. Aaron Greenspan aptly points out, a sound offline (not looking at the $$ signs) theoretical analysis should prove that it's not something worth the interest regardless of how far the price climbs