Why Charles Stross Doesn’t Know a Thing about Bitcoin
bitcoinmagazine.com
bitcoinmagazine.com
"I agree with folks that I basically dodged the argument about deflation. I did it deliberately. Talking about deflation is like talking about God. Basically as soon as you mention the word all dialogue stops. People already have an idea in their head about whether it is good or bad and nobody listens any more. I admit I am no economic expert." http://bitcoinmagazine.com/9359/charles-stross-doesnt-know-t...
That pretty much answers the question of whether he's a libertarian. At this point does anybody besides hard libertarians like the mises institute think deflation can be a good thing?
Second, addressing deflation.
From the point of view of production: deflation would get priced into the value of the currency so that it wouldn't at all be clear that holding onto deflationary currency will net you more than actually investing it in productive activity.
From the point of view of consumption: Arguing that people will hold onto currency to eek out a little more value is like arguing that people in an inflationary economy will withohold selling goods and services to eek out a little more value. It just doesn't happen that way.
In an inflationary society, consumption can't and won't be deferred indefinitely (the rich would rather have their new boat now and the poor don't have an option to wait and buy food later). Same goes for production in an inflationary society.
(I’d also argue that there is nothing special about “zero”, that slight inflation or deflation are not different in kind.)
Further, the tech industry fits every definition of deflationary – your dollars will buy more next year, and consumers hold expectations of same. But it has grown in wages, revenues, consumer benefit, persistently.
2. Even if we imagine a currency which must be produced, it's a matter of degrees. A little inflation is good, a little deflation isn't terrible.
3. Arguing that, because your dollar buys a better computer next year, it is the same as your dollar buying more food tomorrow than what it can today is beyond ridiculous.
They are not the same thing in any rational way.
Deflation: A consumer should hoard cash because it will (likely) be worth more tomorrow than it is today. Outside of home security they don't need much to store it. They'll eventually spend some of it, because they need to eat and feed and clothe their family. But overall, the hoarding here is relatively cheap.
These may both be rational positions, but they are not equivalent positions or mirrors of each other. There is a symmetry, but similarity is not the same as equality.
- The firm would need to choose potential future income over current income i.e. not need the cash flow and have no good way of investing that money (internally or externally)
- Current sales would have to cannibalize future sales, or else they would sell now and in the future
- The value of the future sale would have to be discounted by the chance that the customer buys from a competitor. So either you're talking about a monopoly or staggering inflation
I don't see this ever happening under what anyone would consider acceptable levels of inflation. What annual rate do you think you'd have to see before this makes any sense?
The discount rate cannot be negative. That is, lenders will never pay people to borrow money from them.
The natural interest rate since ancient times is about 10%/year. So if there is 1% annual deflation, lenders can charge 9%. If the deflation is 8%, lenders can charge 2%. But if deflation is 13%, lenders cannot charge -3% interest. You cannot possibly pay people to borrow money from you. At that point all the mortgaging, public works bonding, factoring, revolving credit, etc. comes crashing to a halt. And firey politicians start saying that mankind shall not be crucified on a cross of gold.
People bought debt from governments at a negative discount at several points during the Great Recession because it was perceived as less risky than a bank (they were afraid the bank would go under, and take with it their money), and less costly than a cash vault. So that once self-evident fact now has a couple of exceptions.
Of course, this doesn't help consumers, since they aren't safer than banks, and it doesn't apply to Bitcoins, since the cost to store them securely is zero.
Anyway, in a hypothetical bitcoin economy, I can't _imagine_ annual deflation in the range you are talking about (e.g. close to 10% or greater), because that should be "priced in" ahead of time. I mean, there should/could be some deflation (or even inflation) on a year-by-year basis, but it shouldn't be that high. Right?
If there are any doubters out there, let me spell it out: "infinite divisibility" does NOT address the built in deflationary character of bitcoin.
While the bitcoin protocol is interesting in some aspects and even innovative at the margins, the currency portion of it is asinine. All it takes to understand this is to learn very basic economics and some knowledge of what exactly makes a currency a currency.
What a fair and emotionally unladen assessment of an economic phenomenon.
Everyone is free to access wealth of information out there about deflation, starting with wikipedia.
Right. It can't possibly be because inflation makes it easier for governments to repay debt obligations and increase their cash flow without overtly increasing taxes.
Since the issuance of credit is severely curtailed under Bitcoin (which may doom it as a currency for other reasons), I don't see how that kind of deflation can happen with it.
The U.S. dollar was essentially a gradually deflationary currency throughout the latter half of the 19th Century. Despite modern attempts to paint the period as a horror show of volatility and panics, there was actually quite robust economic progress and growth. The trend toward lower prices was widely appreciated and seen as a sign of material progress (assuming you weren't, say, a farmer with a vested interest in higher prices). There were some hard times following the panic of 1893, but nothing like the sort of calamity that happened in the 1930s, long after inflationary forces had already wrested a significant amount of control over the dollar.
The tl;dr amounts to:
* author agrees with Stross that bitcoin is energy intensive.
* author says there have been improvements to carbon footprint (as if that some how address the issue of theft of other people's electricity/CPU cycles being more efficient than spending your own electricity)
* An argument about deflation that amounts to "there's no consensus in economics so it's fine if we run speculative experiments with economies"
* A non-argument assertion that bitcoin is somehow no worse than cash as a vehicle for illegal/unethical behavior.
Somehow this is suppose to amount to a take down of a dude who wrote literally an entire book about how algorithmically mediated systems which do not depend on human judgement are inherently inhuman and unconcerned about human ethical concerns.
"It’s hard to believe that an author who wrote about algorithmically run 2.0 economies and trading exchanges for personal reputations can fail to see the precursors of that tech in the real world."
wat.
Seems like the author seems to be the primary source of misunderstanding.
Most of theoretical economics is, at best, approximations that only work sometimes. I don't care if Krugman tells you otherwise; economic theory is, at best, a feeble attempt to find a pattern that matches experimentally observed behaviors. So yes, it is fine to run economic experiments. And the great thing about Bitcoin is that no one is being forced to use it, which I can't say is true for most economic systems.
Do you disagree that Bitcoin is no worse than cash for illegal behavior?
Stross didn't actually describe or design any of the economic systems he wrote about; he just imagined them from an external perspective and wrote some vague description of what they might accomplish.
Even if you had a million slave computers, you really couldn't make all that much Bitcoin. There are significantly more profitable things to do with CPU time.
Inflation encourages spending money but discourages earning it.
Deflation encourages earning money but discourages spending it.
People need to eat, so in the end these competing interests will always balance out, whether your currency is inflationary or deflationary.
Is this an ideal economic system? Maybe not, who knows. It's what we have though. And it is a direct consequence of an economy driven by growth, and one that encourages liberal individual consumption.
[1] http://en.wikipedia.org/wiki/Consumer_economy [2] http://en.wikipedia.org/wiki/Panic_of_1837
What a meaningless statement in this context. "Consumer spending" refers to private sector spending. This is as opposed to, for example, Government spending, which might also fluctuate with changes in monetary policy. What percentage of the GDP is estimated to come from consumer spending has little bearing on the effect changes in inflation rate might have on the economy. You are trying to oversimplify a vastly complex system.
If what you are implying (that there is a causal positive relationship between inflation and production) were true, it would be economically advantageous to adopt zimbabwe-style inflation.
>...would be devastating to the national economy
Please actually read the article you linked.
"Speculative lending practices in western states, a sharp decline in cotton prices, a collapsing land bubble, international specie flows, and restrictive lending policies in Great Britain were all to blame."
Deflation was a result of this panic, not the cause of it.
"A little is good, a lot is bad" is in no way an inconsistent position - it's true about most things.
Although the point is contested, many economists believe that the competing interests you describe will not balance out.
Some Wikipedia links:
Economics is perhaps second only to psychology in the amount of internal inconsistency it experiences as an allegedly somewhat scientific field.
>(which has been conducted over nearly a century)
Is this supposed to convince me? Half of contemporary economic theory gets thrown out the window every few decades.
>Although the point is contested
No shit. Equally legitimate disciplines of economics reach completely different conclusions on the matter, which doesn't say much for the legitimacy of overarching economic theory in general.
Just as a very basic overview, here's some of what Wikipedia has to say about it:
Very exciting stuff. I'm glad to be part of it.
But it's pretty easy to purposely foul the data if you want, especially given the ease-of-use of mixers. I would guess if Bitcoin usage gets more important, obfuscating schemes will only get more sophisticated and widespread.
Think about all the Friend of Friend wire taps. Suddenly the $20 bill you bought starbucks with gets given as change to a drug dealer and you are on a known associate list.
You also have all sorts of issues where if 50% of the world's transactions were done in BTC the blockchain data would be too large for 90+% of nodes to store.
II'm optimistic about cryptocurrencies in general, but it could well be that Bitcoin itself will be made obsolete.
Law enforcement is a strict finite resource. Much like the futility of trying to bring down bittorrent seeders, BTC has the advantage of technology, decentralization, and scale, which multiplies (in an increasing fashion over time) the complexity of being able to track individuals to cryptocurrencies. Is it possible with effort? Sure. But it's an incredibly expensive endevour. Especially when someone invests time and effort into trying to hide.
While this is not something anyone who values privacy wants, this isn't that great of an example because the transaction history would show that the association is specious, as the association only exists through being a customer at the same establishment. A Venn Diagram of who "touched" which money wouldn't provide any value (this wouldn't stop people from making that association, I grant however).
However, this sounds a lot like contaminated currency[0], and no one thinks that just because you have a dollar bill that has illicit drugs on it means that you're drug dealer or associate with drug dealers. This ends up working for the benefit of those in the illicit drug industry much more than it harms those who are not, despite that both parties are using the same medium of exchange.
What an insulting way to conclude an article.
"If you lack the vision to agree with me about Bitcoin, maybe you're old and terrible at your job."
The gist of it, if I remember it right, is that all transactions are authenticated by an interstellar 2-phase commit handshake. The distances involved keep the value of the currency stable, because transactions can take decades to process, and the direction of the signal is actually used as a form of authentication, to guard against (literal) MITM attacks. The goal of slow money was to have a currency that was stable enough to finance multi-century interstellar colonization projects.
As we watch out for fallacies, we need to be careful not to invoke the fallacy fallacy :)
Note I'm not trying to be argumentative. I'm actually genuinely curious. Even just order of magnitude. Folks in the media talk about the energy cost, but never with any attempt to quantify it.
So 13 million gigahash per second translates into at least 6.5 megawatts. But 2 is a pretty aggressive figure, it's probably easily above 10 megawatts.
Unfortunately though, my guess is that it is very very tough to estimate due to the sheer variety of hardware that is being used.
I am sure that a large number of people are still mining with GPUs which consume more power/mhash than ASICs.
I came across someone last week who was mining with a CPU, I am confident he's not the only one.
I don't get this argument. Why do they have to be used for something else after "you're done with them"? You've made your profit with them (since if you aren't going to make a profit with them, you aren't going to buy them in the first place), so what else would you use them for?
The ASIC's serve a purpose: mining Bitcoin and maintaining the Bitcoin network. I don't get why there has to be "something else" they need to be useful for. Bitcoin is the point.
However, even if it were to change, there are several altcoins that use the same hashing algorithm (PeerCoin being the biggest), and/or someone will invent a new blockchain service to take advantage of the existing hardware. While I think there is great merit to ASIC-resistant hashing algorithms of ProtoShares/PrimeCoin/etc, that ASICs would ever become useless seems highly unlikely.
For example, on Amazon right now I see a Bitmain AntMiner U1 USB miner. It costs $70 and they claim it uses 2 watts and is a recent chip.
Let's say it has a lifetime of three years. Three years of two watts is 26 kWh, which will cost about $2.60, which means that for this chip, the electricity is only 4% of the total mining cost.
Of course the rest of the computer uses power, I'm assuming that either the computer is being used for something else as well, or a large operation has a special chassis holding lots of these chips and not wasting power on much else. Anyone who's not so efficient won't be able to compete.
The fact that bitcoin's mining cost is becoming dominated by hardware rather than energy is a very positive development, in my opinion.
A lot of the emerging currencies are focusing on memory-constrained hashing algorithms. RAM has price/energy ratios similar to what I mentioned for ASICs, and is already in mass production and about as optimized as major industry is able to make it.
That unit does 1.6 Gigahash / second.
The bitcoin earned in a period of time will roughly follow that proportion.
I would like to offer a possibility about Stross. Hasn't anyone considered that he's simply trolling? I've read all of his books and even met him once in SF. It seems much more likely to me that he is playing a game here and his recent comments do not reflect his actual thoughts.
The amount of energy "wasted" by the Bitcoin network will always be approximately the amount of energy that can be bought with the Bitcoins mined in a given period.
If the cost of energy is higher than the value of the Bitcoins the miners earn, miners will stop mining.
Some miners don't care about cost (people who get free electricity) but they are not a significant factor.
Miners also have to cover the cost of their hardware, so they want to leave a significant margin for profit.
The cost of power for the Bitcoin network is very small compared to worldwide power usage.
I don't know though, that this amount of theft is significant compared to the bulk of resources spent on bitcoin.
Bitcoin mining, from my cursory research however, doesn't really consume much electricity compared to the aggregate of all usage across the world, as you've stated.
EDIT: I'm not actually interested in stealing time on people's ASICs to mine bitcoin. I just think it's effectively impossible to do so. But I'm genuinely curious to know if there's a plausible attack vector.
On the other hand, a small number of miners (none of the big mining groups) steal (if you want to call it that) electricity from, say, dorm rooms or apartment buildings. However, I doubt these people contribute even a percent of the network's total hashing power.
Rather than a single deflationary currency, what we have is a lot of privately-issued competing currencies. Hayek advocated a system like this, arguing that it would result in stable prices and economies without need of a central bank.
http://www.antipope.org/charlie/blog-static/2013/12/why-i-wa...
Exactly how wasteful they are is yet to be determined. This depends on how much value a successful attack on the blockchain could be to an attacker. The greater the value, the greater the cost of the proof-of-work system needed to prevent it.