Bitcoin: The future of money is at stake
newscientist.com
newscientist.com
This comparison is so erroneous that it's embarrassing. Too bad it's from NewScientist, I had much respect for the magazine. Now every time I'll read a NS article I'll think along the lines: who knows, they might got this one wrong too.
Not disagreeing with you, but it would be nice if you could elaborate on that, rather than just stating that you disagree with the article.
The current system
Today we have the ECB (I'm Greek) and you (I take for granted that most of you are from the US) the FED. So let's talk about the FED. The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates.
From Wikipedia we can read: Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.
To simplify it more: You may or may not like the FED but it's main object is currency stability. Every US citizen chooses a candidate of a political party. This candidate, if elected, goes to congress. The senate and the US President, both elected by the majority of voters[1], appoint[2] the "chair of the FED". Now this is a DEMOCRATIZED process, although indirect: You don't get to vote directly for the chairman of the FED. There are arguments for and against this process, probably studies on how to make it less prone to corruption and so forth, but ultimately the voter's choice shapes the candidates and their odds.
The FED uses inflation or deflation, in order to promote and ensure stability a central power, controlled by the government and indirectly by the people, must have the power create new money on demand (thus create inflation) or deflate the money (thus create deflation) according to what the economy (i.e. the large amount of the population) needs.
Enter Bitcoin
In bitcoin we have a crypto-currency which offers strong anonymity. There is no central control, so the currency inflates[4] or deflates according to the market. That's all good and well and may even work for a while, but if a strong player enters the market then he can make it go up, down and side-ways as he see fit. So, say you have a player owning as much as 20% of bitcoin. If he cashes out the price goes down. If he cashes the price flies up and so forth. By selling at price A+10 and buying double the amounts at price A-10 he could easily double his amounts by out-playing the market. That's not moral, but legal. Now, in wall street there are authorities against this sort of behavior (they don't act as expected of course, but still you have some sort of control and you have always the government that if decides at some point in time to become more responsible towards tax-payers it can regulate the financial market overnight). According to a paper by none other than Adi Shamir (one of the three founders of the RSA algorithm), 98% of BTC belongs to 2% of portfolios. Hence it's expected from them to act in an immoral self-serving way in the long run.
So, did Satoshi democratize the financial system? No, not really. He did the opposite: He create a system which turned the shark totally loose. Of course, the average programmer who doesn't understand much about economics - and we have a huge amount here on HN, more than believed for sure - it seems as if the bitcoin set's him free from the bank but that's not exactly the true. The problem with people vs banks are not the extra fees on money transfers: The problem is people NOT having money to put on the bank. Bitcoin doesn't make you rich. If you are rich you have just one extra toy. If you don't have money, there's no way you could buy bitcoin. Mining? Sure, but minings costs equipment. Only early adopters got an edge and made some money out of the huge price-spike. But this price-spike does promote, hoarding and opportunistic behaviors and in no way promotes democracy.
So although the bitcoin protocol is a huge step forward, because adjusts the double spending problem introducing a public ledger, the currency is useful as it has some attributes which you can't find elsewhere (speed, portability, etc.), but it's in no way more democratic or decentralized as many bigots would like to believe.
Sorry the long post and any grammar mistakes, it's late here and I'm kinda sleepy.
[1] In the US we have small % of population voting. That's an interesting problem: how to get larger part of the population interested in elections?
[2] http://en.wikipedia.org/wiki/Chair_of_the_Federal_Reserve#Ap...
[3] http://en.wikipedia.org/wiki/Black_Wednesday
[4] Bitcoin was not designed to be inflation: It's deflationary on purpose. No one would had any reason to own bitcoin if they were inflationary since you can't pay taxes with BTC.
• make (something) accessible to everyone: mass production has not democratized fashion.
Finance:
the management of large amounts of money, especially by governments or large companies: [ as modifier ] : the firm's finance department.
• monetary support for an enterprise: the clearing banks are important sources of finance.
• (finances) the monetary resources and affairs of a state, organization, or person: the club's finances are stretched to the limit.
Defintions, Oxford Dictionary.
I don't see how those two terms in connection with a decentralized system for issuing and controlling money are in any way at odds with comparing them to a decentralized system for communication. You need to elaborate more on what you want to say here.
why? seems apt to me. Care to elaborate?
Maybe I'm looking at it from the wrong corner, but actual money transfer is such a minor part of finance that the comparison is akin to "Internet Protocols has democratised Computer Science".
I guess what the NS is trying to say is that there are a lot of services that at the end of the day require money transfer (like bank account, credit card, escrow, ...). Until now such services needed to be backed by an underlying financial institution since there was no way to transfer currencies safely without them.
Now with Bitcoin, there is an infrastructure that is free to use. Theoretically, using that infrastructure, you could create banking service outside the traditional infrastructure (messaging networks, clearing houses, settlement banks, ...)
However, all those institutions bring a lot more services on top of money transfer. The internet revolution was the opening of networks, rather than HTTP itself. So Financial institutions acceptance, rather than public recognition really matters if that comparison is to hold. Right now, Bitcoin and other crypto-currencies are treated as a new type of asset, it is far from making any progress in the infrastructure side.
And of course, the elephant in the room are the regulations. The world is still recovering of the last financial crisis, the world mood is not really looking forward to less regulations. The best that can be hoped right is for Bitcoin to dodge regulations and become de-facto currency, rather than actual currency. IMO that would be a criminal-smelling loophole left there by the various regulatory institutions. Because let's face it, even with regulation, large financial institutions like HSBC have no trouble laundering drug cartel money, so they are the one that will most benefit it, not some startup in the Valley.
Out of Satoshi Nakamoto's paper:
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them.
In order to render Central Bank obsolete, you would need major economies like the US, EU, China to switch their currency to Bitcoin.
Also it used to be the case when all currencies used the gold standard and there are reason why countries left it for regular fiat currencies. Those reasons where not for technical issues, so a better gold will not convince countries to switch to bitcoin on their own.
It is a bit of a chicken-egg problem, bitcoin needs to rise in popularity a lot before that happens. From a consumer point of view, there is no benefit to use bitcoin over using his VISA card. So the push will need to come from somewhere else.
I fail to see any killer benefit in Bitcoin that would put Bitcoin as the main world currency. But, if I did I would have converted all my money in Bitcoin right now, since in that case Bitcoin value is several order of magnitude cheaper than it will be when that happens.
If there is such a stupid population, which I don't believe there is, but IF then they are really deserve what they are getting into.
At the end of the day, it does not really matter. The people that have the power to adopt it listen to different arguments. Although a lot of them recognize the same problem as people on HN, they share the same opinion as you do. The others have no interest in changing a system that favors them. So the point is mood regardless what my opinion is.
The only other option is to have the population impose its currency. In a lot of third world countries, the USD has been adopted as a alternative to the local currency. They could adopt bitcoin. To them, the possibility to build complete financial services outside the official channels is good. Having a currency controlled by few rich people rather than the US government and few rich people could be perceived as an improvement.
Difficult to see that happening in the biggest economies though. The balance between corruption and general interest is good enough, and there is just nothing for the consumer.
The key to bitcoin success is the balance between popular interest in emerging nations and the games the financial institutions of the first world nations extracting as much profit out of it. Significant success in that area could force first world economies to deal with bitcoin as a currency, despite its flaws.
After that, eventually, I guess there is the extremely remote possibility that bitcoin proves a better currency in the long term and gets adopted (for example, in a world where growth and recessions alternate all the time, it may become beneficial to rely on a currency with predictable deflation / inflation curve rather than a man being a printer )
That's an awful lot of ifs.
I agree with your views and I like the feeling that I get from your comments, as you strike me as where someone who seeks the truth rather the following a new trend like a bigot.
I like better the man with the printer as far as I know his name and I can even indirectly exert some influence, but as you said it's just a personal opinion :-)
But what about "turning off" the world wide web so to speak? I'm sure if governments really believe bitcoin is a threat to their currency, they will do whatever it takes to essentially shut it down. If it cannot be digitally traded on the internet, then that value of bitcoin is lost.
Good luck on that.
Yes, partly because there are too many countries and partly because each time the government of one country tries to shut it down, and fails, it makes bitcoin look stronger and more viable to the others.
Bitcoin is like a dividend-free stock or commodity: you have to sell your share to get some cash. Of course, those who come earlier get easier access to more shares, but they are exposed to a higher risk. Zuckerberg had 100% of Facebook initially and was selling it partially to get more cash to keep it going. When he started anyone could do the same, but not many succeeded. Later investors were willing to pay higher amounts of money when the value of the company became more certain in their eyes. But in each case, the owners of stock had to lose some part of it to enjoy extra cash.
Also, consider this approach: http://auroracoin.org These guys intend to distribute coins "fairly" to each individual in Iceland. Sounds like a fair distribution? Well, once some individuals get this weird coin, they will decide if they want to keep it. And some of them will sell them to collectors for cheap. This will make the price go down noticeably and cause more folks to get rid of such coins. So they will end up for very cheap in the hands of a very few "early adopters". Whether it will start growing organically from there or not - is another question, but you can see that you cannot force "equality and fairness" on the market. It will reconfigure itself according to everyone's personal preferences. And in case of a weird new tech it will always mean little number of early believers vs. big number of mainstream doubters.
Yes, it is an asset. A very easy to trade purely electronic asset. Due to its easy tradeability it is similar to a currency, but much like stocks, it is not a currency.
You bought Bitcoin in 2011 if you believed it was a sound technology, that would inevitably get popular, and you still buy Bitcoin today if this is your conviction. It might not pan out, as there might be a severe flaw in the protocol, or something better might come along, so don't invest anything you can't watch burn. But if Bitcoin fulfills its promise, then there is still significant growth to be seen.
sigh.