As one of the comments point out, at least one of these 'professors' is wrong about anonymity. Don't let the title fool you into crediting more authority than warranted. I shouldn't have read this article.
Bitcoin does not have anonymity; it has pseudonymity with a public transaction record. Depending on your needs and what other precautions you take, that may be good enough, but it's not the same as handing someone a pile of small, unmarked bills.
Freshly minted coins are as anonymous as the public IP that claimed them. If you mine behind TOR (even if you're part of a pool), your new coins are anonymous.
And I reiterate, that's not what people care about. We don't, primarily, target drug users; we target dealers. You can't receive and then spend bitcoins without there being patterns in the network that should be worrisome for anyone wishing to retain strict anonymity. This can be attacked further through policy (merchants must register accounts and can only deal with registered accounts), &c, to undermine flow of anonymous value. From an anonymity standpoint it is certainly a better situation than using your mastercard (or even someone else's mastercard, maybe) but it's not as anonymous as physical transfer of value with no record.
I didn't see much new there... perhaps except for the talk on currency 3.0 that fixes bitcoin's deflationary problem. I wonder if we'll see some new digital currency that has something of a decentralized algorithmic fed that can increase/decrease a monetary supply based off of certain rules.
Divisibility fixes an important piece of the problem of a fixed maximum number of bitcoins. It doesn't address the deflationary-spiral piece (holding bitcoins means fewer in circulation, means you're paid more to hold bitcoins, means there's fewer in circulation...). Freicoin adds demurrage to attempt to deal with that piece; I'm curious as to how effective that is, but it seems plausible that between the two there's then no real issue.
An entertaining thing about articles of the form "How n Economists Think About x" is just how confident most of them manage to sound when making statements that some of the others disagree with.
Which I don't think is in the least bit limited to either economists or articles. Any of us could easily find five developers (or any other group of professionals) and we'd also observe "just how confident most of them manage to sound when making statements that some of the others disagree with"
Economics, like politics, is heavily based on axioms over which reasonable people disagree. The problem is that people value their axioms so intensely that they take them for granted and don't even share what those axioms are, let alone discuss them with people who hold opposing axioms.
As an idea, bitcoin is perhaps one of the most revolutionary ideas in our lifetime. As a practical, functional currency bitcoin may fall short. It is clear that the first two economists quoted in the article simply fail to grasp the gravity of the concept of a purely digital currency. It is without borders. It is beyond the reach of government. It is the future.
Or perhaps the economists are far more familiar with BTC's precursors in spirit and practice than you are. Very few concepts are truly original. That you can't imagine them does not mean that the economists are wrong.
(Granted, they could be still, but arguing from a lack of imagination is far less convincing.)
An idea does not have to be novel or radically different from everything before it to be revolutionary. Perhaps the best ideas simply build on the old ones.
Which is true (and why I think BTC's children will fare much better) but "revolutionary" doesn't mean unfathomable, unquestionable, and alien from all that's come before.
Say it's a bubble. People still buy tulips, internet stocks, and houses. Their bubbles didn't kill those markets. As long as a few people value what bitcoins offer, a market will exist for them. You may not value them, but no market needs your personal involvement.
As for economists' views on something they've never studied, I'm reminded of I. Fisher, Prof. of Economics at Yale, saying in 1929 "Stocks have reached what look to be a permanently high plateau." ... and how many people told me with utter certainty and hifalutin credentials how stupid Wikipedia was and how much it would fail. Or Linux, for that matter.
Some things work better in practice, not in theory. Or at least need time for the theory to catch up.
Bitcoins are just special numbers--there's no inherent value in them. If everybody decides tomorrow to use a different blockchain they will become completely worthless numbers.
A tulip looks pretty in your garden, (many) internet companies make money, and houses are a basic necessity. Bitcoin, on the other hand, is a purely social phenomenon. It has value only because other people think it has value.
The argument trotted out at this point is some variation of "but there is value in having an anonymous, decentralized currency." And that may well be true. But the high valuation and extreme volatility of bitcoin (not to mention its inherent deflationary character) is actually a hindrance to its use in that manner. Who will accept bitcoin if its value can fluctuate 100% in an hour, and who will spend them if their price just keeps going up?
Your argument applies equally well to any form of money. Money is a purely social phenomenon. It has value only because other people think it has value.
There's no "inherent" value in any form of money. Whenever you hear someone say "inherent" or "intrinsic" when talking about money, run the other way.
(Yes, even commodity money. It may have direct-use value in addition to exchange value, but both kinds of value are market phenomena, and totally dependent on the surrounding society and capital structure.)
Fiat currencies have value because of the law, not some wishy-washy magic agreement that people wake up with. Tax laws, debt laws, torts, fees, fines, etc. are what create the demand for fiat currencies.
Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
> not some wishy-washy magic agreement that people wake up with
Agreements are voluntary and magical, what's not to like? It's the other stuff that's wishy-washy (involuntary arrangements).
> Tax laws, debt laws, torts, fees, fines, etc. are what create the demand for fiat currencies.
There's no reasons these same things won't work for bitcoin. Private mediation and arbitration already exist that support bitcoin. Things like contracts are built into the bitcoin protocol and will facilitate many of the things you list.
> Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
Pretend the bitcoin market is only used for black market activity, it would still have a large utility. Plenty of people on the market would see one less revenue stream.
> Who will accept bitcoin if its value can fluctuate 100% in an hour[?]
If it can be cashed out immediately into another currency, that's not too big a problem, I think. Note that there's a huge difference between accepting bitcoins and listing prices in bitcoins, though.
It's pretty simple to work around the price fluctuations. You keep your money in a USD denominated account in a bitcoin exchange (MtGox or whatever) and convert just what you want to spend whenever you need to pay for something in bitcoin. It's instantaneous and easy.
Now that's fanboyism at its worst. I mean, equating A with something X when it is not clear, how even remotely similar those are, but where X conveniently failed some time ago.
But to reply in kind, how are greenbacks these days?
Greenbacks are doing great, comparatively speaking - the US government continues to demand tax payments exclusively in dollars and jails those who don't pay. Only in another branch of the multiverse would the govt. ever allow tax payments in beanie babies or bitcoin.
The OC argument to seems to be, bitcoin and beany babes are expression of the same idea and beanie babes flopped. Ergo bitcoin will fail.
Hence the question about greenbacks, which are now not worth a continental.
Yes, you can say that greenbacks are doing great, comparatively speaking, but than if greenbacks ~= dollars and beanie babies ~= bitcoins, than you are bound to say that.. beanie babies are at least moderately successful
Which if I understood the OC correctly it is exactly the opposite of what was implying.
Egads! You've definitively proven that Bitcoin will go the way of the Dodo! Congratulations! See the receptionist on your way out to receive your prize. </sarcasm>
On a more serious note, you've really contributed nothing here. The parent post is saying that a crash does not necessarily imply that something is useless and going away, giving examples of where crashes haven't affected whether or not people still value something.
You're anecdote doesn't even work. Like tulips there was a market bubble for Beanie Babies which burst, but Ty still sells them.
Isn't it possible to build a bitcoin(protocol) system with predictable inflation in the single digit percents, maybe with few negative feedback loops to keep it there.
This way the currency will be great for transactions, but ultimately unsuitable for long time value storage. It should be only slight modification and will remove a lot of the practical problems.
> It would really be something if intelligent people chose to invest more trust in a currency system built and managed, in large part, by anonymous computer hackers than they did in currency systems built and managed by governments of the people, by the people.
Chris Robert doesn't seem to understand the mathematics behind bitcoin. The whole point is that the bitcoin network doesn't require any trust, or rather, it only requires trust that the longest block chain is mostly honest and that the current understanding of cryptography and computational complexity theory is correct.
Then we have Robert McMillan:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
This is a common straw man argument. Which bitcoin enthusiasts have claimed that bitcoin needs to be a "workable replacement currency"?
> Furthermore, as it has no apparent use-value (unlike, say, Platinum), this kills it entirely.
Technically, since a bitcoin is a proof that a certain amount of difficult computational work has been performed by or on behalf of the current owner of the bitcoin, there is some use-value. Bitcoin can be thought of as a networked version of Hashcash that allows the work to be performed in advance. Mail servers could be configured to require that a tiny amount of bitcoin be attached to every message it receives, hopefully making most spam unprofitable. This is probably merely an oversight by Mr. McMillan, but does this really even matter? What is the apparent use-value of a government-issued currency like the USD?
Matthew Bishop poses an interesting question:
> But what if a sovereign state was to issue an algorithm-based currency? Would that drive fiat money out of business?
I wonder if it would also drive non-governmental crypto-currencies out of business.
I find the following quote from Brett Gordon humorous. Economists don't seem to agree over whether bitcoin's deflationary nature is a benefit or a drawback. It's almost as if different people value different things.
> Two benefits are that bitcoins are inherently deflationary and transactions are anonymous. Given the recent slew of fiscal crises and increasing concerns about online privacy, these are two strong points in bitcoin’s favor—or whatever future crypto-currency arises.
> Two benefits are that bitcoins are inherently deflationary and transactions are anonymous. Given the recent slew of fiscal crises and increasing concerns about online privacy, these are two strong points in bitcoin’s favor—or whatever future crypto-currency arises.
This was the funniest thing to read for me. It flies in the face of two of the biggest complaints I see about Bitcoin (the third being the "it has no inherent value, not even status as legal tender").
You mention that Brett Gordon is disagreeing with many people when he claims that being deflationary is a benefit. Even in this same article you see the exact opposite being said:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
So there's two completely contradictory positions on that issue. But also on the anonymous transaction issue. Every bitcoin transaction is quite obviously public, so that right adjacent to this quote is Chris Robert's:
> The bubble can just grow and grow, so long as... the fundamental lack of anonymity doesn’t bother anyone.
So in the same article we have economists saying built-in deflation and anonymity are benefits of Bitcoins, while others say deflation will kill any chance of viability as a currency and that Bitcoin has no anonymity. What's a person to think, besides that many economists don't really understand Bitcoin and are probably just as speculative as the people buying Bitcoin at $250 several days ago.
I think essentially the Austrian explanation of money is a good one.
Simplified version...
Ask yourself this question: Why is money valuable. Answer: because I can buy stuff with it. Why can I buy stuff with money? Because it's valuable doh.
This is circular of course, von Mises solved this by turning it into an infinite regress i.e. money is valuable because it was valuable before and moving the chain of reasoning backwards and arriving at the fact that money must have been valuable as a commodity before it became a money. There are certain characteristics that make one commodity more likely than another to become a money and to make a long story short that's why Austrians tend to favour the gold standard (because gold used to be a commodity then turned into a money).
This would suggest bitcoins (and dollars, Euros and so forth) are bubbles. In the case of bitcoins one could even argue that if you could redeem them for the computational input you used when mining there is some commodity behind it.
With that and the disclaimer that Austrians are fringe at best and laughed at by many mainstream economists out of the way let's get to my opinion on bitcoins and fiat money.
I think that fiat money which is just backed by the word of the government that it's solid somehow works. Why and how I cannot explain nor do I seek to. But essentially I think that's why bitcoins could very well work, too.
The backing is not by any government but rather by "internet consensus of sorts". In the information age that could essentially become a more powerful word of mouth backing (if enough people believe it it'll be stable) than the backing of any government.
I don't think this is the final iteration of this sort of currency but if we must have a fiat currency by all means please let it be one that allows for the privacy bitcoin has inherently built in. Ultimately though the currency that you have to pay your taxes in is the one that has the edge.
At the very least it shows that people are interested in a currency that is easy to use electronically, anonymous etc.
> I think that fiat money which is just backed by the word of the government that it's solid somehow works. Why and how I cannot explain nor do I seek to.
Because of fiat, of course.
To be precise, US Dollars are valuable because the US Government only accepts tax in US Dollars. Since taxes are levied on a proportion of economic activity by definition, that percentage of economic activity is instantly converted into demand for US Dollars. Additionally, thanks to legal tender laws, it's obligatory in the United States to accept US Dollars as payment for a debt. Thus, there is a large quantity of legally generated demand for US Dollars--enough to keep the currency valuable enough for other economic activities.
It is also no mistake or coincidence, for instance, that wages and salaries are paid in US Dollars. When you combine laws saying both "income taxes must be paid in US Dollars" and "income taxes must constitute a proportion of total earned income", it saves a lot of effort for the earned income to be denominated and paid in US Dollars. If you got paid in bitcoins, someone would have to calculate the value of bitcoins in USD, sell some bitcoins for USD, and pay the taxes in USD. Actually, this is exactly what happens with stock grants (in a publicly traded company).
Unless you can somehow generate similar amounts of demand for bitcoin, and simultaneously tightly couple that demand with major streams of economic activity, you won't accomplish the same thing. As far as I can determine, only the government can unilaterally dictate the currency that large, double-digit percentages of the GDP need to be denominated in.
The notion that the US dollar is intrinsicly valuable due to it's ability to pay taxes is flawed at best. In several foreign countries, the primary means of exchange is USD, yet taxes are still paid in the local currency.
Multiple currencies will coexist, and if bit coin somehow overtakes USD, that won't say anything about what you pay taxes with.
> In several foreign countries, the primary means of exchange is USD, yet taxes are still paid in the local currency.
I feel so sorry for those countries' governments - imagine being paid in currency which is completely worthless because it has no intrinsic value, not even that set by taxation! One wonders why they bother collecting taxes if the proceeds cannot buy so much as a coffee; wouldn't it save everyone a lot of time and hassle if they just dropped the pretense of taxation entirely?
Is anyone else bored by the Bitcoin debate yet? As far as I'm concerned it's the ultimate "put your money where your mouth is" situation. If you think Bitcoin is a foolhardy endeavour doomed to failure, just don't buy any. Short it when that becomes possible, for all I care. Problem solved, and you are not harmed in any way when it inevitably collapses. If you think it's the greatest idea since fiat currency, buy some and gloat when one BTC is worth $900,000 in 20 years. But what is the point of these endless articles debating it?
46 comments
[ 3.5 ms ] story [ 98.9 ms ] threadThe same goes for the transaction fees.
This:
> Bitcoin does not have anonymity; ...
is thus not true.
If you purchase your coins through an exchange, it becomes traceable, off course.
It's the outward facing economists, the ones who you actually hear from, that project a kind of false confidence in their models.
(Granted, they could be still, but arguing from a lack of imagination is far less convincing.)
Not even remotely close to it.
"It is the future"
I am sure people will talk about it in the future -- as an example of a failed experiment in currency without authority.
As for economists' views on something they've never studied, I'm reminded of I. Fisher, Prof. of Economics at Yale, saying in 1929 "Stocks have reached what look to be a permanently high plateau." ... and how many people told me with utter certainty and hifalutin credentials how stupid Wikipedia was and how much it would fail. Or Linux, for that matter.
Some things work better in practice, not in theory. Or at least need time for the theory to catch up.
A tulip looks pretty in your garden, (many) internet companies make money, and houses are a basic necessity. Bitcoin, on the other hand, is a purely social phenomenon. It has value only because other people think it has value.
The argument trotted out at this point is some variation of "but there is value in having an anonymous, decentralized currency." And that may well be true. But the high valuation and extreme volatility of bitcoin (not to mention its inherent deflationary character) is actually a hindrance to its use in that manner. Who will accept bitcoin if its value can fluctuate 100% in an hour, and who will spend them if their price just keeps going up?
There's no "inherent" value in any form of money. Whenever you hear someone say "inherent" or "intrinsic" when talking about money, run the other way.
(Yes, even commodity money. It may have direct-use value in addition to exchange value, but both kinds of value are market phenomena, and totally dependent on the surrounding society and capital structure.)
Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
The law is simply the threat of violence, which is what makes it so distasteful. http://en.wikipedia.org/wiki/Executive_Order_6102
> not some wishy-washy magic agreement that people wake up with
Agreements are voluntary and magical, what's not to like? It's the other stuff that's wishy-washy (involuntary arrangements).
> Tax laws, debt laws, torts, fees, fines, etc. are what create the demand for fiat currencies.
There's no reasons these same things won't work for bitcoin. Private mediation and arbitration already exist that support bitcoin. Things like contracts are built into the bitcoin protocol and will facilitate many of the things you list.
> Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
Pretend the bitcoin market is only used for black market activity, it would still have a large utility. Plenty of people on the market would see one less revenue stream.
So when the value of the Euro swings 30%, it's because somebody passed a law changing its value?
Zimbabwe's government wrote a law saying its currency's value was now zero?
No. Any money has value because there's a market for it. Legal tender status helps by guaranteeing certain markets, but even that is no guarantee.
If it can be cashed out immediately into another currency, that's not too big a problem, I think. Note that there's a huge difference between accepting bitcoins and listing prices in bitcoins, though.
But to reply in kind, how are greenbacks these days?
The OC argument to seems to be, bitcoin and beany babes are expression of the same idea and beanie babes flopped. Ergo bitcoin will fail.
Hence the question about greenbacks, which are now not worth a continental.
Yes, you can say that greenbacks are doing great, comparatively speaking, but than if greenbacks ~= dollars and beanie babies ~= bitcoins, than you are bound to say that.. beanie babies are at least moderately successful
Which if I understood the OC correctly it is exactly the opposite of what was implying.
Cheers
On a more serious note, you've really contributed nothing here. The parent post is saying that a crash does not necessarily imply that something is useless and going away, giving examples of where crashes haven't affected whether or not people still value something.
You're anecdote doesn't even work. Like tulips there was a market bubble for Beanie Babies which burst, but Ty still sells them.
This way the currency will be great for transactions, but ultimately unsuitable for long time value storage. It should be only slight modification and will remove a lot of the practical problems.
> It would really be something if intelligent people chose to invest more trust in a currency system built and managed, in large part, by anonymous computer hackers than they did in currency systems built and managed by governments of the people, by the people.
Chris Robert doesn't seem to understand the mathematics behind bitcoin. The whole point is that the bitcoin network doesn't require any trust, or rather, it only requires trust that the longest block chain is mostly honest and that the current understanding of cryptography and computational complexity theory is correct.
Then we have Robert McMillan:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
This is a common straw man argument. Which bitcoin enthusiasts have claimed that bitcoin needs to be a "workable replacement currency"?
> Furthermore, as it has no apparent use-value (unlike, say, Platinum), this kills it entirely.
Technically, since a bitcoin is a proof that a certain amount of difficult computational work has been performed by or on behalf of the current owner of the bitcoin, there is some use-value. Bitcoin can be thought of as a networked version of Hashcash that allows the work to be performed in advance. Mail servers could be configured to require that a tiny amount of bitcoin be attached to every message it receives, hopefully making most spam unprofitable. This is probably merely an oversight by Mr. McMillan, but does this really even matter? What is the apparent use-value of a government-issued currency like the USD?
Matthew Bishop poses an interesting question:
> But what if a sovereign state was to issue an algorithm-based currency? Would that drive fiat money out of business?
I wonder if it would also drive non-governmental crypto-currencies out of business.
I find the following quote from Brett Gordon humorous. Economists don't seem to agree over whether bitcoin's deflationary nature is a benefit or a drawback. It's almost as if different people value different things.
> Two benefits are that bitcoins are inherently deflationary and transactions are anonymous. Given the recent slew of fiscal crises and increasing concerns about online privacy, these are two strong points in bitcoin’s favor—or whatever future crypto-currency arises.
This was the funniest thing to read for me. It flies in the face of two of the biggest complaints I see about Bitcoin (the third being the "it has no inherent value, not even status as legal tender").
You mention that Brett Gordon is disagreeing with many people when he claims that being deflationary is a benefit. Even in this same article you see the exact opposite being said:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
So there's two completely contradictory positions on that issue. But also on the anonymous transaction issue. Every bitcoin transaction is quite obviously public, so that right adjacent to this quote is Chris Robert's:
> The bubble can just grow and grow, so long as... the fundamental lack of anonymity doesn’t bother anyone.
So in the same article we have economists saying built-in deflation and anonymity are benefits of Bitcoins, while others say deflation will kill any chance of viability as a currency and that Bitcoin has no anonymity. What's a person to think, besides that many economists don't really understand Bitcoin and are probably just as speculative as the people buying Bitcoin at $250 several days ago.
Simplified version... Ask yourself this question: Why is money valuable. Answer: because I can buy stuff with it. Why can I buy stuff with money? Because it's valuable doh. This is circular of course, von Mises solved this by turning it into an infinite regress i.e. money is valuable because it was valuable before and moving the chain of reasoning backwards and arriving at the fact that money must have been valuable as a commodity before it became a money. There are certain characteristics that make one commodity more likely than another to become a money and to make a long story short that's why Austrians tend to favour the gold standard (because gold used to be a commodity then turned into a money). This would suggest bitcoins (and dollars, Euros and so forth) are bubbles. In the case of bitcoins one could even argue that if you could redeem them for the computational input you used when mining there is some commodity behind it.
With that and the disclaimer that Austrians are fringe at best and laughed at by many mainstream economists out of the way let's get to my opinion on bitcoins and fiat money.
I think that fiat money which is just backed by the word of the government that it's solid somehow works. Why and how I cannot explain nor do I seek to. But essentially I think that's why bitcoins could very well work, too. The backing is not by any government but rather by "internet consensus of sorts". In the information age that could essentially become a more powerful word of mouth backing (if enough people believe it it'll be stable) than the backing of any government.
I don't think this is the final iteration of this sort of currency but if we must have a fiat currency by all means please let it be one that allows for the privacy bitcoin has inherently built in. Ultimately though the currency that you have to pay your taxes in is the one that has the edge.
At the very least it shows that people are interested in a currency that is easy to use electronically, anonymous etc.
Because of fiat, of course.
To be precise, US Dollars are valuable because the US Government only accepts tax in US Dollars. Since taxes are levied on a proportion of economic activity by definition, that percentage of economic activity is instantly converted into demand for US Dollars. Additionally, thanks to legal tender laws, it's obligatory in the United States to accept US Dollars as payment for a debt. Thus, there is a large quantity of legally generated demand for US Dollars--enough to keep the currency valuable enough for other economic activities.
It is also no mistake or coincidence, for instance, that wages and salaries are paid in US Dollars. When you combine laws saying both "income taxes must be paid in US Dollars" and "income taxes must constitute a proportion of total earned income", it saves a lot of effort for the earned income to be denominated and paid in US Dollars. If you got paid in bitcoins, someone would have to calculate the value of bitcoins in USD, sell some bitcoins for USD, and pay the taxes in USD. Actually, this is exactly what happens with stock grants (in a publicly traded company).
Unless you can somehow generate similar amounts of demand for bitcoin, and simultaneously tightly couple that demand with major streams of economic activity, you won't accomplish the same thing. As far as I can determine, only the government can unilaterally dictate the currency that large, double-digit percentages of the GDP need to be denominated in.
Multiple currencies will coexist, and if bit coin somehow overtakes USD, that won't say anything about what you pay taxes with.
I feel so sorry for those countries' governments - imagine being paid in currency which is completely worthless because it has no intrinsic value, not even that set by taxation! One wonders why they bother collecting taxes if the proceeds cannot buy so much as a coffee; wouldn't it save everyone a lot of time and hassle if they just dropped the pretense of taxation entirely?