I think his previous statements are also significant.
"[bitcoin] has fluctuated sharply, but overall it has soared. So buying into [bitcoin] has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in [bitcoin]."
BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available.
Isnt that a system that "facilitate transactions and make the economy as a whole rich"??
Consider this initial profit just by hoarding Bitcoin as a reward to put your own assets at risk in this uncertain beginning. Bitcoins can't exist (or anything else, matter of fact), if the people who supports it arent driven by selfish motivation.
I think it's fair that the people who risk themselves in the beginning are awarded, if Bitcoin succeeds.
> BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available.
First: inflation isn't equivalent to taxation (it transfers wealth from net creditors to net debtors, not from everyone else to the government.) [It also, at moderate levels, promotes investment and, thereby, economic growth.]
Second: as consensus among those who control a sufficient portion of the network can evolve the bitcoin protocol, its not actually immune to having a privileged class impose monetary policy.
Third: Except by replacing some functions of "bankers" with those of "miners", I'm not sure how Bitcoin gets away from any "banking monopolies" that actually exist.
> Isnt that a system that "facilitate transactions and make the economy as a whole rich"??
No, it would (assuming that the features which make inflation impossible were maintained) be a system which undermines the features that were introduced to encourage productive development (and, therefore, "make the economy as a whole rich") with deflationary features which have the opposite effect.
Regardless of what happens going forward, Bitcoin has been a huge success by basically any metric that would have been put together >2 years ago.
I don't think a lot of people who haven't been following the topic since the project was first put together really get how much larger and mainstream Bitcoin has become in such a short time with (relatively) so few hiccups compared to what seemed realistically possible when the experiment began.
Also, I think there are a lot of companies that are now considered integral to world economics who, if they had publicly and transparently traded from inception, would have fluctuated just as much in their beginning years.
It's certainly not being used as a currency, its original intention. It's being used by speculators to get rich. Sure you might find a few examples of buyers and sellers using bitcoin currency, but you'll find a lot more speculators buying and selling bitcoins to profit from the spreads.
It is being used as a currency, and any metric on this far exceeds where people thought it would be a few years ago. It's also having massive adoption from a wide number of people. The reason the price is moving is not "speculation" as people seem to assume, but adoption.
MtGox said they were getting 20,000 new accounts a day recently. By definition, new accounts are not "speculators" putting in trades to manipulate the price, they are people putting in trades to acquire their first bitcoins.
People rushing into a currency, right after the EU forced bank depositors to lose %40-%60 of their money in a state run bank (which was only insolvent because they were forced to buy greek debt by the very same EU) is not "speculation" -- it is seeking a safe haven.
A lot of people hope bitcoin will be a safe haven away from these increasingly manipulated and untrustworthy national currencies.
That's a huge level of success, given the limited expectations for bitcoin only a few years ago.
Suddenly it's actually considered a viable store of value for some segment of the population. Sure, it's a small percentage, but still, it's massive.
Do you have a source for this? As far as I know, and I know this is a theory but I suspect a good theory, people used bitcoin as a currency when it was relatively stable and before it skyrocketed in value, and became extremely volatile. I highly doubt they're using it as a currency now because the value of a bitcoin changes dramatically within a day. Say it stabilizes at this price (~$95), you won't be able to transact with everyday goods because the price of 1 bitcoin is close to $100. Who would buy a hamburger for 1 bitcoin right now?
"By definition, new accounts are not "speculators" putting in trades to manipulate the price, they are people putting in trades to acquire their first bitcoins."
What definition are you talking about? That sounds exactly like speculation. You do not need to manipulate anything to be a speculator, you simply need to be making a gamble that what you are betting on will increase [or decrease if youre betting against] in value.
Your quote is relevant, but it's a shame he doesn't address the implied claim that bitcoin doesn't "facilitate transactions". And while it is relatively small in that use now, he really needs to make a compelling argument to why it won't work that way in the future.
Further, it's worth pointing out that Krugman endorses a monetary system that makes people poor, via inflating the money supply by printing funds to underwrite policies that benefit, primarily, politicians.
A currency whose supply is fixed, or whose inflation rate is constant and predictable (like bitcoin) is better for facilitating transactions.
When you have a variable (and often high these days- in the US money supply is up over %50 in recent years) rate of inflation, it wrecks havoc with prices and other signals causing malinvestment and worsening the economy.
Something that Krugman, to my knowledge, has never answered for.
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Since I am not allowed to reply to the person below me:
It's quite silly to to say that a limited supply of a currency is bad for it. There is little incentive to hang onto bitcoins. A simple example will prove this to you: The amount of computer you can get for a given amount of money improves dramatically every three years. You could just hold onto your money and buy a much better computer. Thus, relative to computers, the dollar is deflationary.... yet people still buy computers.
This is the kind of argument Krugman gives because he wants to excuse the inflation that has destroyed the dollar, and the economy.... but it is nonsensical. People still buy computers.
Uh, Krugman's whole point is that the capped supply is inherently deflationary so the incentive is to hang on to bitcoins, ie, not the best attribute of a currency.
"Best to have a stable currency with low inflation" grew out of hundreds of years of observations in the history of human production, prices, and mediums of exchange, and what conditions have traditionally leads to periods of peace and prosperity in a region, and what conditions have led to war, revolt, famine, etc.
In short, empirically, wages and prices are sticky. We assume it has something to do with humans being stubborn, but don't really know why. However, until our imminent replacement by the kind robots, currencies must move if people won't.
The "computers make the dollar deflationary" argument is terrible.
Deflation is bad because it shifts investment into savings.
Computers are mostly immune to this effect because until a company has enough computer equipment, it's one of the highest ROI things they can spend funds on, and once the need is filled, there is very little additional benefit from buying more. This gigantic cliff in the demand curve overwhelms any marginal benefit to altering the number of computers you buy.
Most of the targets of investment are not like that, and you see a small return on incremental investment after accounting for things like risk. Deflation makes these productive investments impractical because they lose out to just holding the currency.
Krugman obviously don't know what he is talking about. The resources he is talking about are used to process the transactions between bitcoin owners. The mining is just a side effect.
How did a nobel prize winner made a so basic mistake on a topic that has been covered before by him so many times?
In theory, yes you are correct. But you can't tell me all the computer resources that are spent on mining are required to process transactions. There are a whole lot of wasted cycles, electricity, and other resources.
The resources are required to process transactions securely in a distributed network. You could do the same thing much more efficiently by putting all your trust in a central authority; it's called a bank. But that's not solving the same problem.
Ok, let me rephrase my prior point. If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? If there is no noticeable benefit from my single PC then the resources being used by that PC aren't contributing to anything of value.
Yes, resources are required, but the amount of resources used far and away exceeds the amount of resources required.
> If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way?
Yes, there's a computational power threshold to perform certain attacks against the network, and removing your node marginally decreases that threshold.
Is it necessary? That depends on your priorities and your threat model.
There is a correspondence between the output and the resources consumed. If your output is negligible, then your resource usage was proportionally negligible to the end of providing the network with monetary units.
Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack. Whatever he looks at, he looks at it from his lens of ideological reasoning.
His ideology clearly aligns with the status quo of economic policy, promoting quantitative easing and keeping up the artificial smokescreen of the superiority of the US dollar.
Therefore any competing ideas (e.g. gold, bitcoin) need to be disregarded, especially as economists by now have realized the importance of trust and its cognitive impact on markets.
Krugman isn't being a political partisan hack here. Every mainstream economist from the Republican and Democratic administrations agree that a currency backed similarly to gold (as opposed to a central bank) is not a good idea.
Prove it. Also, using the word "mainstream" is equivocation, you'll just say anyone who doesn't agree with this position isn't "mainstream".
Further, in support of your claim that he's not being partisan, you name a partisan spectrum of "economists". Both democrats and republicans are partisans.
Mainstream economists aren't central planners. I don't mean just economists from both administrations. I meant mainstream economists from every school on the US News and beyond.
But Krugman isn't complaining about Bitcoin's monetary policy here; he's complaining about the operation of the network itself. It's a pretty weak argument; he's claiming that the network costs too much without doing any kind of serious cost-benefit analysis, just an inapt comparison to gold coins.
Interesting. I didn't realize the IS-LM model (which is the relatively simple lens Krugman uses for 80% of the reasoning on his blog the past 3 or 4 years) was
(a) ideological,
(b) partisan, or
(c) a smokescreen.
I thought it was used to analyze the relationship between investment, interest rates, and economic production. It's been able to (for example), explain why inflation would be nowhere in sight in the face of government borrowing or quantitative easing given the current state of our economy.
Or why any finite currency (gold, bitcoin) would lead to rampant deflation and thus depression conditions.
Can you please elaborate as to why IS-LM the ideological ruse you claim it to be? Krugman may be a hack, but I start to believe the hacks who are continuously right most of the time, and ignore the ones who are often wrong. Just the empiricist in me.
In his defense, it was Krugman who identified in 2003, that we really needed to have a housing bubble, and advocated that we create one, because it would stimulate the economy.
And he was right- it did! Until it popped.
At the end of the day, Krugman is more a spokesperson for liberal politics than an economist. The liberals want to believe that unlimited spending is not bad, and so they put forth this narrative that it is actually good. They look to Keynes for support, but have to be very selective when they do.
Bitcoin is a currency that is not inflationary. Since unlimited spending is enabled with inflation, they see it as a threat.
What's kinda surprising, and amusing, is just how vocal and vociferous the objections to bitcoin have become in the last couple weeks.
This is not because economists recognize it will be a failure- after all, if it were to fail, they could just let it fail, no need to comment on it.
All of these stories, including this one, are indicators that the establishment economists feel threatened by bitcoin.
The reason is one they will never mention publicly - they can't control bitcoin, and they can't stop its adoption, short of draconian measures, and so it threatens their monetary regime.
Ironically if it wasn't for the mismanagement of the dollar, there wouldn't be much need for bitcoin anyway.
PS - Whenever you see someone pointing out that bitcoin dropped %XX in one day, remember the dollar has already failed twice in US history (eg: gone to zero!) and even the latest incarnation is down %98!
So you've gone and pointed out that the dollar is worth about 2% of what it used to be.
Sure. A currency's real value is always moving relative to the underlying goods and services produced and exchanged in the economy - if it's not inflating, it's deflating, and it's never really standing still.
The key is a low volatility in that interest rate itself. The dollar's historical average inflation rate, since such records were kept, has been 3.35%-ish, and that rate has gotten much less volatile over time (e.g. 1920 saw monthly rates as high as +23% and 1921 saw rates as low as -15.8%). But since about 1980, it's been pretty level all around.
Bitcoin's value has experienced more volatility during the course of one day as the US dollar had in a whole year DURING THE GREAT CRASH OF 1929 AND LAUNCH OF THE GREAT DEPRESSION.
Maybe some day Bitcoin will come to be the same bastion of stability that the US dollar has been and more. That day is not today.
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Postscript.
If Bitcoin is a currency, its rise in value is deflationary. Deflation can be kind of bad sometimes. If you think back to your high school history courses when they were talking about the days that "bimetallism" was a thing during the Panic of 1893, it was because ordinary peoples' gold-backed-dollar-denominated debts and mortgages were becoming more expensive to pay off. "You shall not crucify mankind upon a cross of gold!"
Not so obvious. The critique is also of the fact that the resources to process a bitcoin transaction are intensive. Yes, I know this is part of the elegance of bitcoin. Elegance by one measure is cumbersome by another.
Can you explain this in more detail for those of us who don't fully understand how bitcoins come in to existence, because it sounds like one of those things that violate some laws of thermodynamics, like the "hydrogen generator" that you strap to your car to increase fuel economy.
I ask because I know I've heard about people building huge computers with lots of expensive video cards for the purpose of mining bitcoins. Why would so much computing power be required to perform a simple task like processing transactions? Isn't there additional work necessitated by the intentional complexity of the mechanics of bitcoin mining?
I don't know very much about how bitcoins are mined, so I'm speaking from ignorance here, but I'm hoping you can see why the layman observer would need more of an explanation than "Because, of course!"
A bitcoin faq would give you more details, but the short answer is that bitcoin is built on cryptography. Every transaction in the system is stored in a chain of blocks. These blocks are created whenever someone discovers the answer to a very hard mathematical problem. When they do this, the new block is created, and that block contains all the transactions that were done since the last block was created. To make the next block, you have to have the previous block, so the entire chain of blocks can be authenticated, thus the entire history of transactions can be authenticated.
As a reward for securing the system in this way, that is, providing a secure distributed transaction history, the miners are rewarded with some bitcoins whenever they discover a new answer and create a new block.
Thus they are providing the security of the system and as a reward are given bitcoins. To keep the rate of new blocks contstant, the difficulty of the mathematical problem is adjusted up and down. Over time, the number of bitcoins you get for finding a new solution will diminish to zero.
To keep miners finding new answers, even after the reward in BTC hits zero (in the year 2140) the system has transaction fees. These are an incentive to keep finding blocks, and the person who finds the next block gets the fees for the transactions that go into that block.
Since blocks are discovered once every 10 minutes, you'd get 10 minutes worth of fees for the whole system-- which could be quite a bit in the future.
In short: no, it doesn't really need so much computing power; miners upgrade to improve their relative chances of finding the solution first (which gives them the newly minted coins), and the software automatically increases the difficulty of the process in response. The result is an arms race among miners.
Every time a block is added to the block chain, whoever "solved" that block gets a fixed number of new bitcoins (25 is the current number, I think).
A block contains several pieces of information: a list of transactions, a link to the previous block, some other stuff and a nonce.
The nonce is a value used by the mining process.
"Solving" a block means finding the value for the nonce that, together with the proper contents of the block, hashes to a hash value that starts with a given number of zeroes.
You can't really find a correct nonce any other way than by trying new nonces until you find a correct one, hashing the block each time.
This is what the mining process is, in short.
Rather abstractly Bitcoin is a scheme to solve the Byzantine General problem[1]. The problem is, how can we build a trusted history of accounting without knowing which nodes in the network are trustworthy. And the way Bitcoin does this is essentially by letting every miner vote with his CPU power and the history backed by the most computing power wins. Therefore as long as the majority of miners (weighted by their computing power) is honest, you can trust the accounting.
As to the question how Bitcoins come into existence, the miners are in control of the accounting and by design whoever "finds a new block," is allowed to create some Bitcoins (currently 25) out of thin air. The advantage of this is, that even if some very large miner is considering that he could try a 50+1 % attack, he has a strong incentive to stay honest because that way he earns half of the newly mined Bitcoins.
> Therefore as long as the majority of miners (weighted by their computing power) is honest, you can trust the accounting.
As computing power is a function of the expenditure of wealth, this is equivalent to saying "as long as you trust the people who have thrown the most money at having power over the bitcoin system are honest."
Never thought of it that way, but yes. However, those who have thrown the most money at Bitcoin are also those with the highest interest to seeing it succeed.
What do you mean by "the history backed by the most computing power wins"? Doesn't each transaction need to be verified by at least 6 miners?
Are you saying that each transaction that is verified has many miners competing to verify it and the one with the most gpu power wins the race? And if so, does that mean that the gpu that won the race an then say it is verified even if to say it is an incorrect transaction would be the truth?
If instead you are merely referring to the 50%> effect, the solution to that is way easier than the potential for abuse intrinsic if the statement quoted above is correct, i.e. simply have more miners.
Bitcoin transactions are stored in blocks, which are then chained together by cryptographic hashes. ( That is, each block contains a hash of the previous one.) To build a valid block, a miner needs to verify that all transactions in the block are valid and solve a cryptographic problem, which requires 10 minutes for the aggregate computing power of the entire network. On the other hand, checking that the block chain is valid is a rather simple task, since it only involves checking if all the hashes are valid.
B1 -> Bx -> Bx3 -> Bx4 branch (with non valid block Bx)
\
->B2->... branch with all valid blocks (the miners work on this one)
The trick is then, that the longest block chain (without an invalid block) is assumed to be correct, and the honest miners are all working on this longest chain. ( That is what I meant with 'backed by most computing power.') For a transaction to be verified, there is actually no hard standard but in the Bitcoin paper [1] it is suggested to wait, until the transaction is 6 blocks removed from the newest block, since a malicious transaction could be introduced into the top of the block chain, e.g. at block Bx above. But the honest miners would not accept the block, continue to try to extend B1, and eventually they will find B2. ( And extend this branch.) The attacker ( who is working on the Bx chain) can then perhaps beat the network by luck for a few blocks ( Bx3, Bx4), but assuming the honest miners control most of the computing power at some point they will win. ( It should be noted that AFAIK there are no known deterministic algorithms for creating a valid block. Because of this, who solves the next block is a probabilistic process. So it is not the guy with the most computing power, but some random guy who had a chance proportional to his computing power just like everyone else.)
Miners choose transactions which obey the network rules. They then "vote" on which transactions to commit by exerting computational power. To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure.
> To subvert this collective decision making process would require a computation power at least equal to the bitcoin network (bigger than any supercomputer). Therefore any such attack would be absurdly expensive, and we can consider confirmed bitcoin transactions to be secure.
There are plenty of organizations that, if they wished to mess with bitcoin, could easily afford more computing power than the bitcoin network (yes, even though that is "bigger than any supercomputer".)
Included in these organizations are ones (such as the US government) that have been accused by some of bitcoins proponents of being actively attacking bitcoin.
So why should we consider confirmed transactions to be secure?
No one considers them to be absolutely secure. Rather there is a calculable cost to subverting the network, currently measured in the millions of dollars and growing. Having the cost of reverting a transaction be $X,000,000 is sufficient for most purposes.
Ultimately I think mining protects against sybil attacks and thus helps everyone agree on a single transaction history. Without mining, it would be fairly easy to create multiple alternate histories and it would be hard to tell which one to believe.
(If you don't care about sybils, you can use Ripple which requires no mining.)
Mining prevents double spends, that's all it does.
It doesn't prevent your bitcoins being stolen or make you whole afterwards, it's not analogous to a security guard standing outside a vault, or the government guaranteeing your deposits.
Mining prevents double spends, that's all it does.
That is the level of security in the bitcoin network. It might be a design flaw to assume we can act like responsible adults, I agree. But if you're looking for something that makes end-runs completely impossible, I'm afraid you are asking to much and you won't find it in anything that exists.
I'm not commenting on the politics and economics of using public funds to guarantee deposits. I actually agree with the philosophy behind bitcoin, it's clear from the levels of public and private debt that west is gaining a reputation for poor fiscal discipline.
I just think the term is misleading, especially to people who don't know much about bitcoin.
How much does it cost to change bits of data on a computer? That's what happens with quantitative easing. Bernanke isn't calling up the printing presses to print $2 trillion in paper currency.
That's not how quantitative easing works. Quantitative easing doesn't fire up the printing presses. Bernanke can add $2 trillion into the system within 15 minutes, and no paper money is printed or manpower expensed aside from a few clicks on a computer mouse. Once you secure your financial system network, adding currency adds virtually no costs relative to the amount of currency you put into that system. You've already secured the network.
It's akin to Facebook's security system. It works the same regardless if it's 100 million users or 1 billion users.
$2 trillion in 15 minutes might be a wee bit of an exaggeration... considering the monetary base needs to, um, actually buy something, usually Treasury Bills. Which are managed by whole swath of administrators in the Dept of the Treasury (and could lead to printing presses -- for the T-Bills, anyway), as they're usually issued in bond series, etc.
The Fed prints money through an auction/market involving only privileged actors (a small number of investment bankers). The new money then changes hands a couple of times before being distributed wide enough to have the desired macroeconomic effects. By the time it reaches you our me inflation has already set in. In those intervening steps, profits are made that dampen the effects of quantitative easing, requiring that the fed spend/create more money than it theoretically would need to in order to have the desired effect. That extra money can be thought of an "economic rent".
> I suppose he actually compared the costs of mining with the costs of minting paper money?
First: Coins are minted, paper money is printed.
Second, and more significantly: Most US dollars in the money supply are neither paper money nor coins, so the cost to mint or print money is pretty much irrelevant to the cost to create dollars.
Maybe, just maybe, it's not Adam Smith who hates bitcoin like this misleading title suggest, but Krugman.
The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement.
Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the alternative uses which where then prevented.
There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
How could Adam Smith may have hated something that did not exist back then, and that many economists had previously advocated for - a single worldwide fiat currency.
The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Also, it's quite fun that a system based on trust, of the people, by the people, is not trusting the government. It's something the founding fathers would certainly be quite proud of :-)
EDIT: And to those who argue the amount of computing power and electricity to run the bitcoin network is insane, just think for a second about Moore law, or how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is a whole lot of money for the simple job of allocating resources (currency, saving, investment, transaction, etc).
It seems ripe for disruption.
A bitcoin economy will be able to do the same job for a fraction of these cost, thus allowing capital to be best spent on other uses (say actually advancing technology, or building real stuff) ie human capital and physical capital, which according to mainstream economic growth theory (from Solow to Romer) is essential for economic growth - real economic growth.
If you have some data and some time to spend, draw a graph of the log of gdp per capital and the percentage of the gdp spend on the finance sector. You'll see a strange recent trend - less growth, and more gdp for the finance sector. I'm not arguing a causation, but that's some food for throughts.
Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow. It's a blessing to anyone who can provide value.
You dont refute his point at all. There is something inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock;" the fact that you need to take an insane amount of computing power and electricity to "create" new bitcoin. He could hate something that did not exist in his lifetime because he hated the principles that are fundamental to the process.
You don't need an insane amount of computing power to create new bitcoins. The amount of bitcoins generated every ten minutes is essentially set in stone. What drives people to dedicate more and more computing power to the mining process is market incentives: as you put more computing power into securing bitcoin, more of the generated bitcoins end up in your wallet.
The only way bitcoins are being generated is by wasting computer cycles solving problems that are of no use to anyone. Krugman's problem is not with the concept of bitcoin, but the process of mining.
I may not be an economist, but the method used for mining seemed.. illogical to me as well. If a bitcoin was released into the wild based on running real world problems like folding@home or something else it would have much more sense to me.
But you're both completely missing the point that mining for coins will become exponentially more efficient over time, with new mining techniques and hardware.
When more energy-efficient mining equipment is created, people buy enough of the equipment to use the same amount of power that they used to have. For example, one might replace a 300 W GPU with a 300 W ASIC miner. The total amount of mining is determined by the exchange rate; since the exchange rate is expected to increase due to deflation, the amount of power spent on mining is also expected to increase dramatically.
I understand that. I said it would make more sense than the existing one. It would not be a perfect solution, and I would not have participated in that xCoin system either.
Then it is not a useful monetary system. When people trade money (paper or electronic), they are trading time they invested in doing useful work for someone else. When bitcoins are traded, you are trading wasted computer cycles.
It's not by definition a fiat money, but has similarities:
- it is declared by a group of cooperating people to be a form of tender (legally protected only via contract law),
- they effectively have no intrinsic value,
- nor is it fixed in value to any objective standard
It's effectively not that different from currency of the "free money" era in the 1700 through early 1800's, where there were hundreds, if not thousands, of currencies in the USA issued ("by fiat") by independent banks. The civil war mostly was what changed that.
I usually see the term "fiat money" used in the context where people are arguing that a central banks ability to control the money supply is either good or bad. Fiat money in that context is used as the contrast to something like the gold standard.
In this current context, bitcoin is more like the gold standard that typical fiat money. The supply of bitcoin can not be manipulated to manage the economy.
The one area that Bitcoin is NOT like fiat currency and like the gold standard is that it is (somewhat) finite.
However, keep in mind that the programmers behind Bitcoin can change their minds and decide to generate more bitcoins. Or they can create offshoot bitcoin currencies that do this.
That's how it's like Fiat money -- there's just people and trust behind it, not shiny rocks in the ground.
What's curious is why some think managing the economy (to a limited degree) is a bad thing.
> Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow.
Wow. Talk about the delusions of being persecuted. It is important to have a discussion about whether or not bitcoin is based on a sound system. Just stuffing hands in your ears and calling the critics names solves nothing. Having a decent conversation may help the system in the long run.
> Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust
That's what most currencies are today - symbols fully based on trust.
> In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
What friction are you referring to?
> The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
There are a finite number of Bitcoins (21 million total), so yes, that would be one way to look at it. However, that would also lead to rampant deflation, which was associated with the Great Depression - rampant unemployment, social unrest, slow growth, etc.
Or, put another way, the governments currently prefer (out of the lessons of history) encouragement of investment, full employment, and growth ... over the rentiers (i.e. dead stock) sitting on their money, and letting everyone get poorer.
You seem also to be contradicting yourself, as easier you suggest:
> There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
Yet its finite nature actually does encourage dead stock -- rich holders sitting on piles of cash instead of using it for productive purposes.
> Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Right, Bitcoin is far superior as it merely ensures that the current fat cats get fatter and skinny cats die of starvation due to deflation.
Today's currencies are based on government. They are fiat money in that sense, ok.
Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government.
[there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggregate growth in the EU. The ECB (european central bank), unlike the FED, is almost independent from the government, but still political power managed to create funny mechanism to buy back sovereign debt, which now results in Cyprus style situation. politics and money do not mix well]
The "friction" you ignore is the bid/ask spread and volatility - bad things in any international trade. It's called currency risk and it makes import-export companies take money-market positions for a good reason.
There is also the risk of rampant inflation aka "shoes leather cost" - the best example is when talking about people in the Weimar republic who were paid an always increasing salary twice daily and immediately cashed out all their money because of the crazy inflation. You should like that - so many money changing hands at a high speed must be a good thing for the economy!
Joke aside, your understanding of economics seems very tainted by political correctness, but you correctly noticed I should have added more details, at the risk of creating a contradiction. This is a very valid critic.
The "dead stock" is theoretical - even more with pure fiat money:
- With gold, that could have been a problem, due to storage costs and alternative uses (gold is a very conductive metal, and apparently is also enjoy as jewelry by many people.
- With fiat money, some issues remain, like storage costs, but the risk of inflation is an even bigger issue.
- With a "pure fiat" money, since there are little alternative use, and even better in the case of bitcoin - no risk of inflation, the problem may vanish altogether. People invest just because inflation makes keeping cash a bad idea.
When you reduce the frictions (transaction costs, etc) and remove the risk of inflation, why not convert money to stuff you need "just in time", ie when you need it, instead of wasting time and effort to store it and look for bigger yields due to the frictions and inflation? Presently, you want to do everything you can to avoid losing capital, which creates a game theory problem for other people who have to play the same game you do. But if you remove the problem, you remove the incentives for such behaviours.
Which leads us back to what money is. You can't eat money, or sleep in money. But since you can convert it whenever you need and there can be no inflation, why bother being a rentier when you remove the risk of inflation? In fact, it might be harder to be a rentier, since instead of funding "minimal returns" (ie just a bit more than inflation) investment project of any kind, one would have to aim for "high returns" - as in startups, ambitious companies, etc.
That clarification aside, the core difference with the current system is that by removing inflation, no one will be forced to earn more and more money just to maintain a status-quo (except by your own new needs of new things - we are not hippies, most of us want new shiny things - the economy won't stop).
The removal of this coercion will make useless and redundant all those who currently live on this man-made coercion called inflation.
10% of the GDP is the financial sector - and just how many bright people are employed doing that? That's a lot of freed human capital, which could be put to better use (bring mankind to new planets) once the problem is solved. Bitcoin solved that, and the market is noticing.
If you are not sure about inflation, let me be crystal clear - it was not a bad thing when money had to be a precise unit of accounting matching the growth of the real economy, but with today's computational power (bitcoin can be divided) and networks milliseconds late...
While I haven't completely read through this entire essay I do have a small observation:
I find it fascinating how much distrust for Government and banking systems fuels your passion for Bitcoin. So long as capitalism exists in its current state currency will just be an instrument of capitalism's will. Whether that be Bitcoin, USD or Disney Dollars.
Capitalism is what inspires transaction fees, denying health insurance requests, taking away someones house, poverty, planned obsolescence, etc.
I feel your fire is being pointed at the wrong direction. That maybe your beef is with capitalism and not whether we use semi-anonymous block chains or pieces of green paper.
I have a beef, but with inefficiency due to wilful stupidity.
You could be right- there was even a well written essay I read about how governments could try and turn bitcoin into an oppressive financial system, due to the ease it provides to track every transaction.
Maybe I'll have a beef with capitalism if, after the implementation of a system which trims down what I perceive to be a self-made problem (inflation fuelling governments destructive policies), I still notice persisting issues. I can't say for now. The experiment is just beginning :-)
I hope I do not have any blinding faith in any political system. It just seems to me that capitalism is what works best, and could work better with a libertarian approach. Just like Thomas Sowel says - I don't have faith, but proofs. (Still, this doesn't mean there can't be better proofs or better things we just don't know yet.)
So I would not say I hate the banking system, no more than I hate horse buggies : it just seems to me that cars are more efficient. I would hate it if horse buggies were mandatory and cars forbidden, because it would be a loss of efficiency for society.
The current banking system performs an important role, in an efficient way, but it will hopefully made obsolete and replaced by something more efficient.
It is likely that governments and capitalism will still be involved, but between governments and capitalism, I know what I fear the most.
It's not the self interested capitalists who acts following their best interests, doing things as you said, like taking away someones houses, but the governments who takes a "moral superiority" position, use their power to benefit some well connected ones, pretend to act in the common good and violating both the letter and the spirit of the law - all the while doing the very same things.
At least the capitalist doing these things is honest in the reasons why they are done. And the "good ones", Ayn Rand style capitalist, do worry about the letter and the spirit of the laws and of a contract.
She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."
The more times money moves around the more money others stand to gain. The economy as a whole does well when moving between parties at a consistent rate.
Eliminating the inefficient transaction doesn't just hurt profit. It hurts the very core of how our economic models currently work.
That being said Bitcoin is currently no threat to that system. It's hard to imagine it ever being honestly.
It seems inconsistent with walrasian pure and perfect competition, where profits tend to zero and the optimal outcomes are achieved.
Eliminating the inefficiencies, ie profit in pure and perfect competition, is the way the system works - non null profits attract new businesses. That's basic economics, with very special edge cases (ex - natural monopolices)
I'm not sure exactly why or how economy as a whole would do better with more inefficiencies at each point, and money moving more as you suggest.
Are you referring to the equation of the velocity of money (MV=PQ) ?
It says nothing about how desirable the outcome is (ex: broken window fallacy)
Pure and perfect competition has never existed in the real world, however - it's a theoretical modeling tool to remove complexities when describing interactions. The real world has to deal with asymmetric information and product differentiation. In other words, price is not the only signal driving supply and demand.
It also has to deal with the dynamic disequilibrium that is caused by entrepreneurship and innovation, which "creatively destroys" previous markets in favor of new ones. It is this process that is the source of all profit and economic growth, at least according to Schumpeter.
Banks don't really want to be more efficient and charge less fees. Banks are essential to any system (capitalism) that requires a currency. Nobody would want to be a bank if they could not charge fees. No bank would offer loans or any kind of securities without some backing and protections. Since Bitcoin is finite, semi-anonymous and not backed by a central bank or government banks will never have those protections. So instruments that are essential to our economy like car loans, mortgages, etc. will not be possible.
I want to hone in on a couple of points that may better crystallize where I feel your analyses is unconvincing.
1. The Great Depression and deflation is a case of a general glut -- ie a lack of demand. This wasn't supposed to happen in an economy, but can from time to time due to problems with the "symbol economy" of money and credit messing up the "real economy" of goods and services. This was Keynes' insight. This has nothing to do with agricultural surpluses, and there is no evidence that depressions will be made obsolete.
2. I also suspect you may be underestimating the size and influence of the Financial sector and people's general desire to make money. Reducing friction in transaction costs will not change or reduce the desire for specilation or arbitrage. That usually has required governmental control. Our current economic crisis is based on banks making a lot of bad, questionable bets on mortgage debt - fed by poor ratings agencies, lax regulation, a housing bubble, and monetary policy that encouraged a real estate bubble. Technology and poor regulation made us all interconnected and fragile.
3. I also suspect you may be overestimating the reduction in transaction costs that bitcoin enables. Electronic funds transfer is pretty frictionless these days, as is FOREX. Large amounts need to be flagged for potential criminal, fraud, or terrorist uses - do we really want to give up those checks?
Most transaction costs have to do with human capital - we tend to be slow, yet indispensable for many initiatives.
4. Stagflation was caused by a pile of supply shocks in the Nixon era in combination with very expansionist monetary policy assumptions in the early 70s. The inflation part was fixed as soon as Volker decided to kill inflation in 1982 by tightening the money supply. The stagnation got better by the mid-late 80s. Note that Reagan was arguably the mother of all stimulators (cutting taxes AND spending like mad). But typically Keynesian dont encourage deficit backed stimulus -- except when dealing with liquidity trap (deflationary) conditions like the Great Depression, and um, now.
5. Encouraging full employment through economic policy is quite a bit different from holding back progress to keep workers employed.
That's social policy, and a different argument - how do you insulate society from the "creative destruction" of capitalism? Go too far and you rid yourself of capitalism's core benefit (growth through innovation). But fail to protect people in the short run, and you have regional unrest and revolt, as we've seen in 18th and 19th century attempts to impose free markets on traditional communities and exchange systems. Or in Thatcher's crushing of the UK coal industry and unions in the early 80s.
On the other hand, encouraging full employment through monetary and fiscal policy is just another way of promoting an efficient market that takes advantage of all the resources (eg labour) that is available to it. It is underproducing if people aren't working and want to. Perhaps that is structural (people need training, education, etc) but in the current global recession all quantitative evidence points to it not as structural but rather a lack of demand - ie. people
sitting on cash instead of spending it, which makes a lot of sense when you realize this was triggered by a debt crisis. When everyone rich is paying off their debts, people aren't going to be working as much. Unless, of course you realize that it doesn't have to be this way - since interest rates are 0 and inflation is negative.
"Never before in history was there anthing like bitcoin"
The problem here is that you believe that bitcoin is being treated differently than anything that's come before. Its booms and busts are a sign that it is being used/abused for its familiar qualities, and not as much for its novel ones.
"Just like Gandhi say - first they ignore you, then they fight you, then you win"
Except for the many, many situations where "they" ignore you, then they trample you. There is not necessarily any step 3.
>Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack.
Funny thing,I called MG Seigler a hack, and was attacked. Even PG came out of the word works to say he was "embarrassed" by the comment. Now we are calling Nobel prize winning economists hacks and asses?
The economic illiteracy of this place is what is embarrassing.
I think Bitcoin is useful as an experiment in economics and monetary systems.
But the thinking is far from baked and opportunists are jumping on this so quickly that a lot of money is going to be lost, .com-style. Maybe not with Bitcoin, but perhaps with its successor. And a lot more money than the .com bust, because now we're not dealing with just "new economy" utopias, we're dealing with 100+ year ideological disagreements.
Just looking at the comments here, most people seem to have received their economic eduction from political rants and newspaper editorial pages rather than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek, Schumpeter, or even Polanyi and Drucker).
This is not to say the profession of economics is noble or even has any real use to the modern world currently, given its problems. But we do have an economic system, and some people do seem to have a better empirical understanding of it than others. And I'm not seeing a lot of empiricism here - lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's a good way to start something, but it's not a great way for it to finish the way you want. Ask the Marxists.
What is the opportunity cost for bitcoin mining using different techniques? (ie the next most valuable thing that can be done with the hardware). I would guess it is a small fraction of the value of a bitcoin. I'm pretty sure it didn't cost bitcoin's market cap of ~1 billion in computing resources to mine all of bitcoins we have today. I wonder what it did cost?
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[ 3.2 ms ] story [ 101 ms ] thread"[bitcoin] has fluctuated sharply, but overall it has soared. So buying into [bitcoin] has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in [bitcoin]."
BUT, if the project becomes mainstream as the dollar is today, the people of the earth will have a monetary system that doesnt allow taxation through inflation, with no banking monopolies, and globally available.
Isnt that a system that "facilitate transactions and make the economy as a whole rich"??
Consider this initial profit just by hoarding Bitcoin as a reward to put your own assets at risk in this uncertain beginning. Bitcoins can't exist (or anything else, matter of fact), if the people who supports it arent driven by selfish motivation.
I think it's fair that the people who risk themselves in the beginning are awarded, if Bitcoin succeeds.
First: inflation isn't equivalent to taxation (it transfers wealth from net creditors to net debtors, not from everyone else to the government.) [It also, at moderate levels, promotes investment and, thereby, economic growth.]
Second: as consensus among those who control a sufficient portion of the network can evolve the bitcoin protocol, its not actually immune to having a privileged class impose monetary policy.
Third: Except by replacing some functions of "bankers" with those of "miners", I'm not sure how Bitcoin gets away from any "banking monopolies" that actually exist.
> Isnt that a system that "facilitate transactions and make the economy as a whole rich"??
No, it would (assuming that the features which make inflation impossible were maintained) be a system which undermines the features that were introduced to encourage productive development (and, therefore, "make the economy as a whole rich") with deflationary features which have the opposite effect.
Does this refer to the 51% effect? Isn't the solution to that for other people to simply start mining?
I don't think a lot of people who haven't been following the topic since the project was first put together really get how much larger and mainstream Bitcoin has become in such a short time with (relatively) so few hiccups compared to what seemed realistically possible when the experiment began.
Also, I think there are a lot of companies that are now considered integral to world economics who, if they had publicly and transparently traded from inception, would have fluctuated just as much in their beginning years.
MtGox said they were getting 20,000 new accounts a day recently. By definition, new accounts are not "speculators" putting in trades to manipulate the price, they are people putting in trades to acquire their first bitcoins.
People rushing into a currency, right after the EU forced bank depositors to lose %40-%60 of their money in a state run bank (which was only insolvent because they were forced to buy greek debt by the very same EU) is not "speculation" -- it is seeking a safe haven.
A lot of people hope bitcoin will be a safe haven away from these increasingly manipulated and untrustworthy national currencies.
That's a huge level of success, given the limited expectations for bitcoin only a few years ago.
Suddenly it's actually considered a viable store of value for some segment of the population. Sure, it's a small percentage, but still, it's massive.
Do you have a source for this? As far as I know, and I know this is a theory but I suspect a good theory, people used bitcoin as a currency when it was relatively stable and before it skyrocketed in value, and became extremely volatile. I highly doubt they're using it as a currency now because the value of a bitcoin changes dramatically within a day. Say it stabilizes at this price (~$95), you won't be able to transact with everyday goods because the price of 1 bitcoin is close to $100. Who would buy a hamburger for 1 bitcoin right now?
What definition are you talking about? That sounds exactly like speculation. You do not need to manipulate anything to be a speculator, you simply need to be making a gamble that what you are betting on will increase [or decrease if youre betting against] in value.
Further, it's worth pointing out that Krugman endorses a monetary system that makes people poor, via inflating the money supply by printing funds to underwrite policies that benefit, primarily, politicians.
A currency whose supply is fixed, or whose inflation rate is constant and predictable (like bitcoin) is better for facilitating transactions.
When you have a variable (and often high these days- in the US money supply is up over %50 in recent years) rate of inflation, it wrecks havoc with prices and other signals causing malinvestment and worsening the economy.
Something that Krugman, to my knowledge, has never answered for.
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Since I am not allowed to reply to the person below me:
It's quite silly to to say that a limited supply of a currency is bad for it. There is little incentive to hang onto bitcoins. A simple example will prove this to you: The amount of computer you can get for a given amount of money improves dramatically every three years. You could just hold onto your money and buy a much better computer. Thus, relative to computers, the dollar is deflationary.... yet people still buy computers.
This is the kind of argument Krugman gives because he wants to excuse the inflation that has destroyed the dollar, and the economy.... but it is nonsensical. People still buy computers.
There are plenty of legitimate arguments that can be constructed against the idea of an inherently inflationary currency too.
In short, empirically, wages and prices are sticky. We assume it has something to do with humans being stubborn, but don't really know why. However, until our imminent replacement by the kind robots, currencies must move if people won't.
I think the field of economics disagrees with you.
Deflation is bad because it shifts investment into savings.
Computers are mostly immune to this effect because until a company has enough computer equipment, it's one of the highest ROI things they can spend funds on, and once the need is filled, there is very little additional benefit from buying more. This gigantic cliff in the demand curve overwhelms any marginal benefit to altering the number of computers you buy.
Most of the targets of investment are not like that, and you see a small return on incremental investment after accounting for things like risk. Deflation makes these productive investments impractical because they lose out to just holding the currency.
How did a nobel prize winner made a so basic mistake on a topic that has been covered before by him so many times?
Bet one Btc that he did that on purpose.
Yes, resources are required, but the amount of resources used far and away exceeds the amount of resources required.
Yes, there's a computational power threshold to perform certain attacks against the network, and removing your node marginally decreases that threshold.
Is it necessary? That depends on your priorities and your threat model.
Your argument neatly cancels out your conclusion.
The network is made of the nodes.
Therefore any competing ideas (e.g. gold, bitcoin) need to be disregarded, especially as economists by now have realized the importance of trust and its cognitive impact on markets.
Further, in support of your claim that he's not being partisan, you name a partisan spectrum of "economists". Both democrats and republicans are partisans.
I'd prefer the opinions of PhD economists with a special emphasis on currency transactions over yours or anyone else's, actually.
(a) ideological, (b) partisan, or (c) a smokescreen.
I thought it was used to analyze the relationship between investment, interest rates, and economic production. It's been able to (for example), explain why inflation would be nowhere in sight in the face of government borrowing or quantitative easing given the current state of our economy. Or why any finite currency (gold, bitcoin) would lead to rampant deflation and thus depression conditions.
Can you please elaborate as to why IS-LM the ideological ruse you claim it to be? Krugman may be a hack, but I start to believe the hacks who are continuously right most of the time, and ignore the ones who are often wrong. Just the empiricist in me.
And he was right- it did! Until it popped.
At the end of the day, Krugman is more a spokesperson for liberal politics than an economist. The liberals want to believe that unlimited spending is not bad, and so they put forth this narrative that it is actually good. They look to Keynes for support, but have to be very selective when they do.
Bitcoin is a currency that is not inflationary. Since unlimited spending is enabled with inflation, they see it as a threat.
What's kinda surprising, and amusing, is just how vocal and vociferous the objections to bitcoin have become in the last couple weeks.
This is not because economists recognize it will be a failure- after all, if it were to fail, they could just let it fail, no need to comment on it.
All of these stories, including this one, are indicators that the establishment economists feel threatened by bitcoin.
The reason is one they will never mention publicly - they can't control bitcoin, and they can't stop its adoption, short of draconian measures, and so it threatens their monetary regime.
Ironically if it wasn't for the mismanagement of the dollar, there wouldn't be much need for bitcoin anyway.
PS - Whenever you see someone pointing out that bitcoin dropped %XX in one day, remember the dollar has already failed twice in US history (eg: gone to zero!) and even the latest incarnation is down %98!
Sure. A currency's real value is always moving relative to the underlying goods and services produced and exchanged in the economy - if it's not inflating, it's deflating, and it's never really standing still.
The key is a low volatility in that interest rate itself. The dollar's historical average inflation rate, since such records were kept, has been 3.35%-ish, and that rate has gotten much less volatile over time (e.g. 1920 saw monthly rates as high as +23% and 1921 saw rates as low as -15.8%). But since about 1980, it's been pretty level all around.
Bitcoin's value has experienced more volatility during the course of one day as the US dollar had in a whole year DURING THE GREAT CRASH OF 1929 AND LAUNCH OF THE GREAT DEPRESSION.
Maybe some day Bitcoin will come to be the same bastion of stability that the US dollar has been and more. That day is not today.
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Postscript. If Bitcoin is a currency, its rise in value is deflationary. Deflation can be kind of bad sometimes. If you think back to your high school history courses when they were talking about the days that "bimetallism" was a thing during the Panic of 1893, it was because ordinary peoples' gold-backed-dollar-denominated debts and mortgages were becoming more expensive to pay off. "You shall not crucify mankind upon a cross of gold!"
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TLDR: Price stability or STFU
I ask because I know I've heard about people building huge computers with lots of expensive video cards for the purpose of mining bitcoins. Why would so much computing power be required to perform a simple task like processing transactions? Isn't there additional work necessitated by the intentional complexity of the mechanics of bitcoin mining?
I don't know very much about how bitcoins are mined, so I'm speaking from ignorance here, but I'm hoping you can see why the layman observer would need more of an explanation than "Because, of course!"
As a reward for securing the system in this way, that is, providing a secure distributed transaction history, the miners are rewarded with some bitcoins whenever they discover a new answer and create a new block.
Thus they are providing the security of the system and as a reward are given bitcoins. To keep the rate of new blocks contstant, the difficulty of the mathematical problem is adjusted up and down. Over time, the number of bitcoins you get for finding a new solution will diminish to zero.
To keep miners finding new answers, even after the reward in BTC hits zero (in the year 2140) the system has transaction fees. These are an incentive to keep finding blocks, and the person who finds the next block gets the fees for the transactions that go into that block.
Since blocks are discovered once every 10 minutes, you'd get 10 minutes worth of fees for the whole system-- which could be quite a bit in the future.
In short: no, it doesn't really need so much computing power; miners upgrade to improve their relative chances of finding the solution first (which gives them the newly minted coins), and the software automatically increases the difficulty of the process in response. The result is an arms race among miners.
A block contains several pieces of information: a list of transactions, a link to the previous block, some other stuff and a nonce. The nonce is a value used by the mining process. "Solving" a block means finding the value for the nonce that, together with the proper contents of the block, hashes to a hash value that starts with a given number of zeroes. You can't really find a correct nonce any other way than by trying new nonces until you find a correct one, hashing the block each time. This is what the mining process is, in short.
As to the question how Bitcoins come into existence, the miners are in control of the accounting and by design whoever "finds a new block," is allowed to create some Bitcoins (currently 25) out of thin air. The advantage of this is, that even if some very large miner is considering that he could try a 50+1 % attack, he has a strong incentive to stay honest because that way he earns half of the newly mined Bitcoins.
[1] https://en.wikipedia.org/wiki/Byzantine_fault_tolerance
As computing power is a function of the expenditure of wealth, this is equivalent to saying "as long as you trust the people who have thrown the most money at having power over the bitcoin system are honest."
Are you saying that each transaction that is verified has many miners competing to verify it and the one with the most gpu power wins the race? And if so, does that mean that the gpu that won the race an then say it is verified even if to say it is an incorrect transaction would be the truth?
If instead you are merely referring to the 50%> effect, the solution to that is way easier than the potential for abuse intrinsic if the statement quoted above is correct, i.e. simply have more miners.
[1] http://bitcoin.org/bitcoin.pdf
There are many, many costs associated with securing the integrity of established financial networks too.
Could you expand on this? I'm not sure I understand it. Thanks.
There are plenty of organizations that, if they wished to mess with bitcoin, could easily afford more computing power than the bitcoin network (yes, even though that is "bigger than any supercomputer".)
Included in these organizations are ones (such as the US government) that have been accused by some of bitcoins proponents of being actively attacking bitcoin.
So why should we consider confirmed transactions to be secure?
(If you don't care about sybils, you can use Ripple which requires no mining.)
Mining prevents double spends, that's all it does.
It doesn't prevent your bitcoins being stolen or make you whole afterwards, it's not analogous to a security guard standing outside a vault, or the government guaranteeing your deposits.
I'm mildly optimistic about about crypto currencies in the long term (10 years or more), but energy usage is the weak point of bitcoin, I wrote about this here http://www.reddit.com/r/Bitcoin/comments/195k4o/the_case_for...
That is the level of security in the bitcoin network. It might be a design flaw to assume we can act like responsible adults, I agree. But if you're looking for something that makes end-runs completely impossible, I'm afraid you are asking to much and you won't find it in anything that exists.
I just think the term is misleading, especially to people who don't know much about bitcoin.
It's akin to Facebook's security system. It works the same regardless if it's 100 million users or 1 billion users.
Silvio Gesell explores this concept in depth: https://www.community-exchange.org/docs/Gesell/en/neo/
First: Coins are minted, paper money is printed. Second, and more significantly: Most US dollars in the money supply are neither paper money nor coins, so the cost to mint or print money is pretty much irrelevant to the cost to create dollars.
The guy may have a nobel prize, but his strong leftist views seems to be clouding his judgement.
Never before in history was there anthing like bitcoin. It's not a commodity like gold - is is pure fiat money, fully based on trust. Hoarding gold or silver or any metal or rare thing was a bad idea because of the alternative uses which where then prevented.
There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
How could Adam Smith may have hated something that did not exist back then, and that many economists had previously advocated for - a single worldwide fiat currency.
The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Also, it's quite fun that a system based on trust, of the people, by the people, is not trusting the government. It's something the founding fathers would certainly be quite proud of :-)
EDIT: And to those who argue the amount of computing power and electricity to run the bitcoin network is insane, just think for a second about Moore law, or how much GDP goes to the finance sectors. IIRC it is around 10%. That sure is a whole lot of money for the simple job of allocating resources (currency, saving, investment, transaction, etc).
It seems ripe for disruption.
A bitcoin economy will be able to do the same job for a fraction of these cost, thus allowing capital to be best spent on other uses (say actually advancing technology, or building real stuff) ie human capital and physical capital, which according to mainstream economic growth theory (from Solow to Romer) is essential for economic growth - real economic growth.
If you have some data and some time to spend, draw a graph of the log of gdp per capital and the percentage of the gdp spend on the finance sector. You'll see a strange recent trend - less growth, and more gdp for the finance sector. I'm not arguing a causation, but that's some food for throughts.
Just like Gandhi say - first they ignore you, then they fight you, then you win. We are currently at step #2. I expect the heat against bitcoin to raise in the next weeks. It's a big threat for the current establishment cash cow. It's a blessing to anyone who can provide value.
I may not be an economist, but the method used for mining seemed.. illogical to me as well. If a bitcoin was released into the wild based on running real world problems like folding@home or something else it would have much more sense to me.
any money declared by a government to be legal tender.[7]
state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.[8]
money without intrinsic value.[9][10]
- it is declared by a group of cooperating people to be a form of tender (legally protected only via contract law),
- they effectively have no intrinsic value,
- nor is it fixed in value to any objective standard
It's effectively not that different from currency of the "free money" era in the 1700 through early 1800's, where there were hundreds, if not thousands, of currencies in the USA issued ("by fiat") by independent banks. The civil war mostly was what changed that.
In this current context, bitcoin is more like the gold standard that typical fiat money. The supply of bitcoin can not be manipulated to manage the economy.
However, keep in mind that the programmers behind Bitcoin can change their minds and decide to generate more bitcoins. Or they can create offshoot bitcoin currencies that do this.
That's how it's like Fiat money -- there's just people and trust behind it, not shiny rocks in the ground.
What's curious is why some think managing the economy (to a limited degree) is a bad thing.
Wow. Talk about the delusions of being persecuted. It is important to have a discussion about whether or not bitcoin is based on a sound system. Just stuffing hands in your ears and calling the critics names solves nothing. Having a decent conversation may help the system in the long run.
That's what most currencies are today - symbols fully based on trust.
> In fact, by reducing friction, making transaction costs almost negligible, it will help this very thing!
What friction are you referring to?
> The only real problem is for governments, who won't be able to use the seignorage tax anymore, ie inflation, ie printing money out of thin air at the detriment of currency owners, to coerce people to do things or lose money.
There are a finite number of Bitcoins (21 million total), so yes, that would be one way to look at it. However, that would also lead to rampant deflation, which was associated with the Great Depression - rampant unemployment, social unrest, slow growth, etc.
Or, put another way, the governments currently prefer (out of the lessons of history) encouragement of investment, full employment, and growth ... over the rentiers (i.e. dead stock) sitting on their money, and letting everyone get poorer.
You seem also to be contradicting yourself, as easier you suggest:
> There is nothing inherent to bitcoin that may hamper a "country to convert a great part of this dead stock into active and productive stock".
Yet its finite nature actually does encourage dead stock -- rich holders sitting on piles of cash instead of using it for productive purposes.
> Bitcoin is a game changer, the end of a tyranny - the use of force to make people work, instead of being able to live with what they have without the fear that the government will decide to reduce the purchasing power of what one owns by 20% overnight, through inflation or plain just stealing (as in Cyprus) to "transfer that wealth", reverse Robin Hood style, to their well connected and too big to fall fat-cat friends.
Right, Bitcoin is far superior as it merely ensures that the current fat cats get fatter and skinny cats die of starvation due to deflation.
Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government.
[there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggregate growth in the EU. The ECB (european central bank), unlike the FED, is almost independent from the government, but still political power managed to create funny mechanism to buy back sovereign debt, which now results in Cyprus style situation. politics and money do not mix well]
The "friction" you ignore is the bid/ask spread and volatility - bad things in any international trade. It's called currency risk and it makes import-export companies take money-market positions for a good reason.
There is also the risk of rampant inflation aka "shoes leather cost" - the best example is when talking about people in the Weimar republic who were paid an always increasing salary twice daily and immediately cashed out all their money because of the crazy inflation. You should like that - so many money changing hands at a high speed must be a good thing for the economy!
Joke aside, your understanding of economics seems very tainted by political correctness, but you correctly noticed I should have added more details, at the risk of creating a contradiction. This is a very valid critic.
The "dead stock" is theoretical - even more with pure fiat money:
- With gold, that could have been a problem, due to storage costs and alternative uses (gold is a very conductive metal, and apparently is also enjoy as jewelry by many people.
- With fiat money, some issues remain, like storage costs, but the risk of inflation is an even bigger issue.
- With a "pure fiat" money, since there are little alternative use, and even better in the case of bitcoin - no risk of inflation, the problem may vanish altogether. People invest just because inflation makes keeping cash a bad idea.
When you reduce the frictions (transaction costs, etc) and remove the risk of inflation, why not convert money to stuff you need "just in time", ie when you need it, instead of wasting time and effort to store it and look for bigger yields due to the frictions and inflation? Presently, you want to do everything you can to avoid losing capital, which creates a game theory problem for other people who have to play the same game you do. But if you remove the problem, you remove the incentives for such behaviours.
Which leads us back to what money is. You can't eat money, or sleep in money. But since you can convert it whenever you need and there can be no inflation, why bother being a rentier when you remove the risk of inflation? In fact, it might be harder to be a rentier, since instead of funding "minimal returns" (ie just a bit more than inflation) investment project of any kind, one would have to aim for "high returns" - as in startups, ambitious companies, etc.
That clarification aside, the core difference with the current system is that by removing inflation, no one will be forced to earn more and more money just to maintain a status-quo (except by your own new needs of new things - we are not hippies, most of us want new shiny things - the economy won't stop).
The removal of this coercion will make useless and redundant all those who currently live on this man-made coercion called inflation.
10% of the GDP is the financial sector - and just how many bright people are employed doing that? That's a lot of freed human capital, which could be put to better use (bring mankind to new planets) once the problem is solved. Bitcoin solved that, and the market is noticing.
If you are not sure about inflation, let me be crystal clear - it was not a bad thing when money had to be a precise unit of accounting matching the growth of the real economy, but with today's computational power (bitcoin can be divided) and networks milliseconds late...
I find it fascinating how much distrust for Government and banking systems fuels your passion for Bitcoin. So long as capitalism exists in its current state currency will just be an instrument of capitalism's will. Whether that be Bitcoin, USD or Disney Dollars.
Capitalism is what inspires transaction fees, denying health insurance requests, taking away someones house, poverty, planned obsolescence, etc.
I feel your fire is being pointed at the wrong direction. That maybe your beef is with capitalism and not whether we use semi-anonymous block chains or pieces of green paper.
You could be right- there was even a well written essay I read about how governments could try and turn bitcoin into an oppressive financial system, due to the ease it provides to track every transaction.
Maybe I'll have a beef with capitalism if, after the implementation of a system which trims down what I perceive to be a self-made problem (inflation fuelling governments destructive policies), I still notice persisting issues. I can't say for now. The experiment is just beginning :-)
I hope I do not have any blinding faith in any political system. It just seems to me that capitalism is what works best, and could work better with a libertarian approach. Just like Thomas Sowel says - I don't have faith, but proofs. (Still, this doesn't mean there can't be better proofs or better things we just don't know yet.)
So I would not say I hate the banking system, no more than I hate horse buggies : it just seems to me that cars are more efficient. I would hate it if horse buggies were mandatory and cars forbidden, because it would be a loss of efficiency for society.
The current banking system performs an important role, in an efficient way, but it will hopefully made obsolete and replaced by something more efficient.
It is likely that governments and capitalism will still be involved, but between governments and capitalism, I know what I fear the most.
It's not the self interested capitalists who acts following their best interests, doing things as you said, like taking away someones houses, but the governments who takes a "moral superiority" position, use their power to benefit some well connected ones, pretend to act in the common good and violating both the letter and the spirit of the law - all the while doing the very same things.
At least the capitalist doing these things is honest in the reasons why they are done. And the "good ones", Ayn Rand style capitalist, do worry about the letter and the spirit of the laws and of a contract.
She said that beautifully : "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."
The more times money moves around the more money others stand to gain. The economy as a whole does well when moving between parties at a consistent rate.
Eliminating the inefficient transaction doesn't just hurt profit. It hurts the very core of how our economic models currently work.
That being said Bitcoin is currently no threat to that system. It's hard to imagine it ever being honestly.
It seems inconsistent with walrasian pure and perfect competition, where profits tend to zero and the optimal outcomes are achieved.
Eliminating the inefficiencies, ie profit in pure and perfect competition, is the way the system works - non null profits attract new businesses. That's basic economics, with very special edge cases (ex - natural monopolices)
I'm not sure exactly why or how economy as a whole would do better with more inefficiencies at each point, and money moving more as you suggest.
Are you referring to the equation of the velocity of money (MV=PQ) ?
It says nothing about how desirable the outcome is (ex: broken window fallacy)
It also has to deal with the dynamic disequilibrium that is caused by entrepreneurship and innovation, which "creatively destroys" previous markets in favor of new ones. It is this process that is the source of all profit and economic growth, at least according to Schumpeter.
Does anybody really want that?
1. The Great Depression and deflation is a case of a general glut -- ie a lack of demand. This wasn't supposed to happen in an economy, but can from time to time due to problems with the "symbol economy" of money and credit messing up the "real economy" of goods and services. This was Keynes' insight. This has nothing to do with agricultural surpluses, and there is no evidence that depressions will be made obsolete.
2. I also suspect you may be underestimating the size and influence of the Financial sector and people's general desire to make money. Reducing friction in transaction costs will not change or reduce the desire for specilation or arbitrage. That usually has required governmental control. Our current economic crisis is based on banks making a lot of bad, questionable bets on mortgage debt - fed by poor ratings agencies, lax regulation, a housing bubble, and monetary policy that encouraged a real estate bubble. Technology and poor regulation made us all interconnected and fragile.
3. I also suspect you may be overestimating the reduction in transaction costs that bitcoin enables. Electronic funds transfer is pretty frictionless these days, as is FOREX. Large amounts need to be flagged for potential criminal, fraud, or terrorist uses - do we really want to give up those checks?
Most transaction costs have to do with human capital - we tend to be slow, yet indispensable for many initiatives.
4. Stagflation was caused by a pile of supply shocks in the Nixon era in combination with very expansionist monetary policy assumptions in the early 70s. The inflation part was fixed as soon as Volker decided to kill inflation in 1982 by tightening the money supply. The stagnation got better by the mid-late 80s. Note that Reagan was arguably the mother of all stimulators (cutting taxes AND spending like mad). But typically Keynesian dont encourage deficit backed stimulus -- except when dealing with liquidity trap (deflationary) conditions like the Great Depression, and um, now.
5. Encouraging full employment through economic policy is quite a bit different from holding back progress to keep workers employed.
That's social policy, and a different argument - how do you insulate society from the "creative destruction" of capitalism? Go too far and you rid yourself of capitalism's core benefit (growth through innovation). But fail to protect people in the short run, and you have regional unrest and revolt, as we've seen in 18th and 19th century attempts to impose free markets on traditional communities and exchange systems. Or in Thatcher's crushing of the UK coal industry and unions in the early 80s.
On the other hand, encouraging full employment through monetary and fiscal policy is just another way of promoting an efficient market that takes advantage of all the resources (eg labour) that is available to it. It is underproducing if people aren't working and want to. Perhaps that is structural (people need training, education, etc) but in the current global recession all quantitative evidence points to it not as structural but rather a lack of demand - ie. people sitting on cash instead of spending it, which makes a lot of sense when you realize this was triggered by a debt crisis. When everyone rich is paying off their debts, people aren't going to be working as much. Unless, of course you realize that it doesn't have to be this way - since interest rates are 0 and inflation is negative.
The problem here is that you believe that bitcoin is being treated differently than anything that's come before. Its booms and busts are a sign that it is being used/abused for its familiar qualities, and not as much for its novel ones.
"Just like Gandhi say - first they ignore you, then they fight you, then you win"
Except for the many, many situations where "they" ignore you, then they trample you. There is not necessarily any step 3.
Funny thing,I called MG Seigler a hack, and was attacked. Even PG came out of the word works to say he was "embarrassed" by the comment. Now we are calling Nobel prize winning economists hacks and asses?
The economic illiteracy of this place is what is embarrassing.
But the thinking is far from baked and opportunists are jumping on this so quickly that a lot of money is going to be lost, .com-style. Maybe not with Bitcoin, but perhaps with its successor. And a lot more money than the .com bust, because now we're not dealing with just "new economy" utopias, we're dealing with 100+ year ideological disagreements.
Just looking at the comments here, most people seem to have received their economic eduction from political rants and newspaper editorial pages rather than reading (and understanding) a few classics (Keynes, Marx, Minsky, Hayek, Schumpeter, or even Polanyi and Drucker).
This is not to say the profession of economics is noble or even has any real use to the modern world currently, given its problems. But we do have an economic system, and some people do seem to have a better empirical understanding of it than others. And I'm not seeing a lot of empiricism here - lots of emotion, angst, rebelliousness, armchair theorizing, and hope. That's a good way to start something, but it's not a great way for it to finish the way you want. Ask the Marxists.