I have a really hard time taking a column called "The Conscience of a Liberal" seriously, even more so when he claims: "Stross doesn’t like that agenda, and neither do I; but I am trying not to let that tilt my positive analysis of BitCoin one way or the other." in a piece titled "Bitcoin is Evil".
How about taking seriously someone who is, you know, well-known (to the point of receiving a Nobel Prize for his work) for being good at this economics stuff? If a Nobel-winning physicist was writing about physics, you wouldn't dismiss it because the physicist's politics don't agree with yours. Ditto Nobel-winning chemist writing about chemistry, etc.; why should economics be different?
Also, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
Krugman is more like Chomsky -- he did some academic work (including a good textbook in microecon), but then left that to do politics, almost entirely disconnected from his academic record.
The Econ "Nobel" is a little more rationally awarded than the Nobel Peace Prize, but neither is the same as Physics/Chem/Medicine.
I think it's fine to judge Krugman's political arguments on political merits; there isn't "nobel-caliber" economics behind them. They're usually about things which economics doesn't even address.
Actually, I think that if a physicist/chemist came out with unproven theories or opinions (the original article is nothing more than an opinion), the community would react pretty much the same. Physics and chemistry (and economics as well) have proofs and experiments, and this post doesn't offer either of those. It makes perfect sense to dismiss it if you disagree with him, since he doesn't really say anything concrete.
To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.
And then says he hasn't been able to get an answer to this question, that the BitCoin enthusiasts he's talked to have mostly avoided trying to answer the question, and that he has reason to suspect that BitCoin gets promoted not because it is useful as a currency but because it pushes the right ideological buttons for some people.
And, one must admit, it is a perfectly legitimate question to ask when considering something's usefulness as a currency.
The answer I've heard is that Bitcoin has utility as a payment network somewhat independent of its usefulness as a value store. This is most of how Bitcoin is used currently (save speculation)
And yet, Krugman is probably right to suggest that, as a currency, BitCoin will need to also be a store of value. Which it currently does not seem to be, and I don't see how it will become one.
He could be right, he'd just be missing the point. He's trying to jam a square peg into a circular hole and calling it "evil" for not fitting.
What I'd actually be interested in reading is a proposal from Krugman (or someone else) for a hashcash/cryptocoin/digital money scheme that addresses their concerns.
It would be hugely more interesting to hear economists discuss how new technology can advance antiquated, federated payment networks rather than pointing out well-known flaws in a very immature technology (that I'm still not entirely convinced they understand, technologically speaking).
> To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.
So maybe BitCoin isn't money? We already have something that is a reasonably stable store of value but is not a medium of exchange (gold), so why can't we have something that is a medium of exchange but not a reasonably stable store of value?
Gold is no longer widely used as money, but in the past it was, and was quite successful as a medium of exchange.
His argument seems to be that if you want something to be genuinely useful as money, it has to do both reliably, and BitCoin only seems able to do one.
Gold is also a lot more volatile than most currencies, which in turn makes it less suitable as a currency than dollars or euros.
A trait gold shares with bitcoin. The volatility makes it terrible as a currency, not to mention the expected rise in value. That makes BTC even worse as a currency - there is no sane reason to spend bitcoin if you believe in the concept.
And I don't think you're disagreeing with him. I think you're trying to say "well, this other thing that doesn't get used as money anymore also doesn't fit his definition of money" and then implying that this somehow disproves his argument.
I'm not saying it disproves his argument, just that BitCoin could theoretically be useful even if it's not money. Which is sort of tangential to his point - I'm suggesting that the money angle is perhaps overrated or a red herring.
Eh, the article doesn't say much, is pretty light on details/analysis, heavy on rhetoric ("Bitcoin is Evil") and says very little anyone with even passing familiar w/ Bitcoin doesn't know already.
I'm not sure what technologists he's been speaking with, but I think the distinction between value store and payment network is abundantly clear to most people even peripherally involved with Bitcoin. I think the view of most competent technologists is that Bitcoin is a promising technology, with somewhat unproven utility.
>> If a Nobel-winning physicist was writing about physics, you wouldn't dismiss it because the physicist's politics don't agree with yours.
First of all, Physics and Economics are two different things.
Physics tends to be about facts, Economics is more about opinions, views and theories. It's not because we're not Nobel Prize winners that we shouldn't disagree with the author, and I'm sure there are many well-known economists out there who won't agree with him.
>> Also, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
Bitcoin enthusiasts are not the only users of Bitcoin. I use Bitcoin and it's for no ideological reason. It's helping me better than any other payment system right now and that's all I care about.
It's not because we're not Nobel Prize winners that we shouldn't disagree with the author, and I'm sure there are many well-known economists out there who won't agree with him.
There are plenty of economists who don't agree with Krugman. But they would disagree for actual reasons instead of "OH NOES THE WORD LIBERAL APPEARS IN THIS COLUMN".
Economics is about models that are verified by past events, and further tested through their ability to predict future outcomes. This is the opposite of pure opinion. The fact that many pundits ignore this doesn't make it go away
Some would say that the Keynesian model is psuedoscience for having untestable priors. I don't have a dog in the fight but neither do I think your screed against Austrian economics is an airtight argument.
> How about taking seriously someone who is, you know, well-known (to the point of receiving a Nobel Prize for his work) for being good at this economics stuff?
When was the last time you saw a Keynesian taking Hayek's work on business cycle theory seriously? (For which, in part, he won the Nobel prize for!)
Ironically, to more directly address your point, Hayek had this to say in his Nobel Prize acceptance speech:[1]
In his speech at the 1974 Nobel Prize banquet Friedrich Hayek
stated that had he been consulted on the establishment of a
Nobel Prize in economics, he would "have decidedly advised
against it" primarily because "the Nobel Prize confers
on an individual an authority which in economics no man ought to
possess.... This does not matter in the natural sciences. Here
the influence exercised by an individual is chiefly an influence
on his fellow experts; and they will soon cut him down to size
if he exceeds his competence. But the influence of the economist
that mainly matters is an influence over laymen: politicians,
journalists, civil servants and the public generally."
Stated differently, the comparison between a hard science (like Chemistry) and economics is rather unfair.
>How about taking seriously someone who is, you know, well-known (to the point of receiving a Nobel Prize for his work) for being good at this economics stuff?
This is the type of claim that is fairly dangerous. It is perhaps vitally important to understand WHAT Krugman won the Nobel Prize for, and that was due to his contributions to New Trade Theory. Additionally, his work on NTT (superceded by NNTT I should add) was long, LONG ago, and he has since turned into a political pundit/shill.
Compare it to his polar opposite, say, Hayek, who won it for his general contributions to the field due to libertarian/market anarchist theories. Yet Hayek is widely seen as a crock of shit while Krugman isn't, mostly because he writes for the NYT.
On the contrary, I'd rather listen to an economist who is upfront about his political viewpoints and transparent about how he tries to keep them from influencing what he here terms the "positive economics" -- i.e. the practical economic impact -- of Bitcoin or any other problem.
As opposed to economists who conceal their political viewpoints to cover the fact that their supposedly scientific economic conclusions are intended to push a given agenda.
One of the best ways to fight your own political biases in areas where you want to try and be more objective is to be incredibly up front about them. That way, people can say, "I think you are indulging your bias in specific manner X." I wish you would do that (be specific about any complaint) instead of dismissing Krugman simply for being honest and up front.
Why do you assume you have to be moderate to consider both sides? Doesn't it seem like once you objectively consider both sides often enough you begin to develop informed opinions that could make it hard to remain a moderate? But that doesn't mean you stop considering both sides.
(Also, this implication that moderates tend to be more reasonable is erroneous. Oftentimes the correct answer starts out as marginal aka "extreme" until it is slowly validated moves the whole discourse and moderate is redefined to where one extreme used to be. And oftentimes people are moderates out of ignorance; when you begin examining any given issue and have little knowledge it is natural to stake out a "on the one hand, on the other hand" position until you learn more. Then you cease to be a reasonable moderate, at precisely the moment your knowledge becomes formidable. But I am rambling and need to go outside now :)
Yes I agree. Should have been "a moderate and/or a person that considers both sides."
But you're getting it backwards - I was unclear. You don't have to be a moderate to consider both sides, but if you consider both sides in my experience you tend to come out more moderate than if you didn't.
1) Bitcoin mining has a pretty horrible carbon footprint. ("but so does ..." doesn't eradicate this argument)
2) similar to the author's point that advocates can't tell the difference between "store" and "medium" of value, I can't tell you the number of arguments I've gotten in with people who equate a "store of value" to be the same thing as the "increase in value"
3) It's a 1% wet dream. Make money, potentially hidden income, avoid taxation? No money paid into the welfare state? WIN!
The only way you can make money off something like a currency is if demand > supply. What determines the supply? Solving problems with machines and energy only the 1% can afford. What determines the demand? The early bitcoin adopters hyping the "currency" so that they can later offload their bitcoins to bigger fools once they have made a good investment return.
Actually, for your first point, you have to compare the carbon footprint of bitcoin to the carbon footprint of the alternative. What is the carbon footprint of all the different transaction processing systems run by Mastercard, Visa, Amex, etc? What about if you add in the cost of the massive mainframes that handle ACH transfers? The cost of printing millions of archaic paper checks?
I'm not saying bitcoin replaces all those things (it certainly doesn't), but it aims to.
The other systems aren't based around grinding CPUs at 100% power utilization for days/weeks/months doing worthless busy work. Unless your power comes from a zero-carbon-footprint renewable resource, it's pretty ugly.
High hardware utilization is a good thing for efficiency because that enables ASICs to be produced that are growing increasingly more efficient.
Right now one of the main metrics people use when evaluating the profitability mining hardware is Ghash/Watt, so the market is naturally incentivizing low OpEx and therefore less power usage (per transaction processed not the nominal amount of power used).
Also, it's actually more efficient to have a smaller number of machines running at full utilization 24x7 than the typical massive datacenter that averages around 20-30% utilization [0]. That's because modern servers consume nearly as much power at 20-30% utilization as they do at 100%.
The Bitcoin network doesn't require CEOs to burn jet fuel to visit their associates for catered meals; it doesn't require metal to be pressed into little discs, or trees to be pressed into little rectangles, and then distributed via combustion engine; it doesn't require receipts to be printed, duplicated, stored, and finally destroyed; it doesn't require millions of humans to commute to HVAC supported cubes to keep the system running.
So we're all back to hoarding money under our mattresses?
There will always be central banking infrastructure controlled by billionaires who are more socially important than you. We can't just "go decentralized." An average person is too busy to even remember their password to gmail is "password456" and not "password123."
It cant be "worthless" and simultaneously have the whole system based around it. If you want to use bitcoin and the "worthless" work is what allows bitcoin to exist, then it has worth.
I'd argue that value / footprint (edit: had this backward) generated is higher for legacy systems than Bitcoin. (Unless you can totally eliminate CPU and GPU mining)
I wouldn't be surprised if the Bitcoin network already costs more than those mainframes in terms of carbon footprint - after all, the Bitcoin network is basically the world's largest supercomputer [0].
On top of that, you have to consider that those systems offer much more value than just a barebones ledger as the core of Bitcoin does. If you add in all those companies building stuff on top of Bitcoin, the comparison starts to become less favorable.
[0] Purely monetary terms are obviously different. The vendors of those systems inflate prices ridiculously because they can - banks have traditionally not been under much pressure to operate efficiently in this arena.
>1) Bitcoin mining has a pretty horrible carbon footprint. ("but so does ..." doesn't eradicate this argument)
From a logical standpoint, "so does X" (e.g gold mining) very much does eradicate this as an argument against BitCoin, unless there is some Y which has less carbon footprint than either. If there is not, then the carbon footprint it's an necessary evil, and a constant through all similar systems.
The correct question would be "What's the carbon footprint" of the money creation activity of an elected government -- since, you know, they don't only do that.
And an even better question would also ask, "What's the carbon footprint of not having a government creating more money?"
printing dollars is done by keynesians to artificially inflate consumption. Which means, burning more oil, making more plastics, mining more (physical) metals, using more agriculture, etc, etc, etc,. I shudder to think of sustainability impact of currency manipulation.
Since miners will eventually only be able to compete based cost of their electricity mining will be driven to places with extremely cheap electricity. I don't know if that will always correlate with "clean" energy, but it seems like it would. For example, the recently announced Bitcoin mining operation in Iceland, where cheap geothermal and hydroelectric electricity and plenty of cold air for cooling is available: http://dealbook.nytimes.com/2013/12/23/morning-agenda-the-bi...
If the heat from mining can be reclaimed for other purposes (heating homes, etc), then the effective carbon footprint is reduced even further.
>>BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
So basically it brings an ability to the middle-class that normally only the top 1% have. We know wealthy people use tax loopholes(and a few of them, laundering) and... why do the states need to monitor financial transactions? Don't tell me because terrorism. I'm sick of that being the reason for everything when we have this kind of nonsense[1] happening.
I translate this to: "Bitcoin is designed to free non-rich people from the restrictions, fees & surveillance placed upon them by the wealthy elite"
I don't know if crypo-currency will succeed long-term, but seeing how hardcore scared/doubtful some people are about it makes me think a nerve has been hit. I just hope that if btc fails, it fails naturally/organically/mathematically on its own... not because someone arbitrarily makes it illegal.
This may be the end result, but it seems to me like the more direct (but not necessarily simple) solution to this problem is to close up those loopholes for the rich. The government does need to collect taxes after all, and if nobody is paying then we've created another problem.
If r/bitcoin could speak, it would collectively say: "All tax is theft. It is our job to stop being stolen from. All money belongs to me for the benefit of myself. I am all that matters in society."
I will not comment on how much value this kind of snark is not adding to the conversation, but note that fairer forms of tax e.g. property taxes exist and don't require state to track financial transactions.
I think some people look at it as form of nonviolent protest, and I'm glad they've found a peaceful option. In fact, I also appreciate that more of society is becoming engaged in a discussion that used to be strictly the purview of economists. Ever try starting a conversation at a pub about how to imbue a new reserve currency with value? Unless you happen upon someone from the IMF, you'd probably be out of luck.
I guess you're trying to be snarky or clever here, but I don't get your point. Maybe you can walk over to your local BofA branch, slap someone's wrist, and feel good about yourself?
HSBC knowingly laundered billions for violent drug cartels, and were fined a mere 5 weeks of revenue. None of the executives involved in this went to jail.
Meanwhile, people's lives are ruined for selling or even possessing small amounts of harmless drugs.
like the kind HSBC did in plain sight for over a decade with essentially zero repercussions (the fine was barely enough to break out of 'cost of doing business' territory, so please don't bother with the largest settlement in history uselessness)?
I wonder: with the power of the NSA and the right laws ,maybe it's really easier to track and control bitcoin transactions than control international banks?
That's actually a legitimate concern, which is why people are working on CoinJoin [0]. ZeroCoin and other cryptographic solutions are very interesting but will not be practical for a while due to blockchain bloat and extremely high verification time.
The state monitors financial transactions primarily for tax purposes. I'm guessing a very substantial amount of data they collect is around payroll and sales.
"Monitors" is a bit strong, unless you're talking about actual states. NY/NYC will go after you fiercely if you are wealthy and try to get out of city taxes.
All federal tax information for employees is self-reported by employers. There isn't a huge monitoring infrastructure in place—just required-by-law reporting of what people get paid. Getting paid with not-dollars doesn't change the system.
The state monitors transactions first for illegal activity under mechanisms like the Bank Secrecy Act (BSA). Any payments or financial services company follow Know Your Customer standards including running OFAC checks to ensure that the recipient is not a known terrorist.
To be fair, there's also a strong contingent within the U.S. political right that believes paying taxes should be made as explicit (and, potentially, annoying) as possible, lest the citizenry fail to appreciate how much of their income is being extracted to fund the government. This kind of thinking has popped up on the left from time to time as well, around things like military spending.
The solution there is just to get a receipt showing the breakdown. W-2's are kinda that already at a very coarse-grained scale.
We don't have any system in place to show military spending breakdowns or get people upset about it or give people who are upset about it a way to influence changes shrinking it in the future.
The rich are not exempt from tax monitoring and transaction monitoring. Actually, a lot of monitoring targets exclusively large accounts and transactions.
As far as tax monitoring goes, I'm not sure that account and transaction monitoring is helpful. If you have a stated income near the median, yet own a palace, a Porsche and a Lamborghini for the wife, a yacht &c something just has to be off. Apparently you can see the phenomenon in at work in Greece. If you have undeclared income, at some point the funds have to enter the regular economy, and from then on it's just old-fashioned police work.
Just how you do the actual enforcement, that's a different issue, especially if corruption is entrenched already.
I know I personally avoid monitoring by storing my assets in trusts with formal equity in foreign (I'm in Canada) LLC's that manage said assets. Myself, I own no property, I'm legally homeless [1], and one of my LLC's gets a tax credit for owning a homeless shelter. I strongly argue to anyone around me that If you owe taxes, you should pay them. I don't tell them that you can avoid owing taxes, and it's not considered tax evasion.
Bitcoin makes a lot of this even more complex, and as more people start using/trusting it for larger transactions, it'll be quite difficult to know who actually owns what. I might not even need half my loopholes anymore.
As far as making it illegal, I wonder if the blockchain gets to a certain size where it's easy to detect and delete, if that's not already the case. At that point I think the blockchain morphs into something harder to detect--maybe that technology already exists? I think the coin with the best developers will survive--maybe that's Bitcoin, maybe not.
I'm going with the blockchain that has the most transactions is the most valuable because of the meta data you can glean from it. That's currently Bitcoin.
I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange.
My friend, you fall under this critique. While the middle-class can make transactions if it chooses using Bitcoin, it has to deal with its huge volatility - a 'store of value' problem. You cannot have just a 'medium of exchange', like the song "You can't have one, without the other".
The Krugman's problem is, that he is used to certain definition of "money", and then when something else comes, he compares it to that definition. For example, the original paper from Satoshi didn't mention the term "store of value". Given the ambiguity of the word "reliable", we can say nowadays that bitcoin is not "reliable store of value". But who said it is? It must not necessarily have the same attributes as fiat money does.
Anyway, I think the root of the problem with those mainstream journalists is that they do not distinguish between Bitcoin as an unit of account (like, I have 0.5 BTC, or this item cost 0.1 BTC), and a Bitcoin as a technology (peer-to-peer trustless network with all the wonderful attributes it has). Their mind mangles those two things into one, and they then see Bitcoins as only some virtual numbers, which are moving from one wallet to another. Starting from this perspective, they can't conclude anything useful, and can't see the intrinsic value of Bitcoin the technology.
I believe that unmanaged (fire-and-forget type) store of value is a fiction to begin with. Most if not all thing depreciate in time for wear and tear or plain obsolence. Managed assets such as a business you're controlling or your own set of talents and skills can appreciate over time. Scarce assets such as gold or real estate appreciate, however not due to their inherent value, but only due to the "greater fool" dynamic; it's unstable, and unpredictably so.
So what we have is governemnt creating an illusion of unmanaged store of value through financial engineering. It's is somewhat artificial, so I suspect it's not stable either. Consider that financial bubbles are caused by excess of capital relative to production needs, and the glut of capital was accumulated strictly due to people trying to preserve value of their savings. There is a mismatch between amount of value people are trying to preserve and cumulative size of viable investment opportunities.
What I think is important about cryptographic assets isn't exactly in the economic properties they have now, but in the potential for reforming governance.
That is, if people are successfully using a crypto asset for their business, AND they are able to use a power and network infrastructure for this that is difficult enough(not perfect) that government authorities aren't successfully applying their "monopoly on force," then government is now pushed into competition with the crypto-anarchic principles and must find a way to become a "better product," enough so that people will prefer government money over crypto.
How will government come up with a product that is better - in a positive way - than a crypto asset? Government has the authority to issue new centralized currencies. This means that if it truly embraced computing - which it never has to date, having never faced a challenge of that nature - it could program a form of currency that is "smart" and bakes in the policy decisions and taxation currently executed by bureaucracy. It would be made attractive to citizens by building in basic income, as well as the service provisions. The result would be more powerful and more efficient than anything we currently know as government. Cash would still exist as a backup, but the government could discourage its use except in emergency situations.
Ignore the flamebait headline. The distinction Krugman makes between positive and normative economics is a useful one.
On the positive side, I think Krugman and DeLong are overestimating the strength of the floor for the value of a dollar. Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency. Sure, you can pay taxes with them, but the government collects taxes to buy things, and if people no longer have faith in the dollar, the government won't be able to buy things with those tax dollars. There's no floor on the value of Bitcoin, but there's no floor on the value of the dollar either.
On the normative side, I don't think one's position on the utility of central banking matters when it comes to Bitcoin. If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. I think central banking is useful, but I don't see a future for it.
>Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency
Even if this is true, where is the evidence that we're in imminent danger of hyperinflation? Despite mounting public debt, U.S. inflation has remained incredibly low since the start of the financial crisis four years ago, as has the interest rate that must be paid by the government to issue new debt.
From what I can tell, we have on the one side a dollar that has endured as a value store and medium of exchange for hundreds of years, and which has proven remarkably resilient (valuable) by any objective measure throughout the worst economic implosion since the Great Depression (which the dollar also survived). On the other hand we have Bitcoin which is intriguing in many ways but which has demonstrable volatility even just in the short span of its existence. And which, as a feature, is not backed (in the hard economic sense) by any nation or bank. I mean it's cool and all but I see where Krugman is coming from.
We weren't in imminent danger of hyperinflation. I think mass adoption of Bitcoin will cause hyperinflation.
If every merchant you patronize today accepted Bitcoin, would you rather have Bitcoin in your bank account or dollars? I'd rather have Bitcoin. They're easier to transfer, they can't be counterfeited, and their supply can't be manipulated.
If every merchant accepts Bitcoin and every consumer agrees with my logic, hyperinflation of the dollar would occur. Coinbase and its 0% transaction fees will lead to rapid adoption of Bitcoin on the merchant side. I'm less confident about the consumer side, but I see that happening as well.
Bitcoin went up more than tenfold in less than six months. Then if fell by more than half in less than one month. So I strongly disagree that most people would want to use that for their checking account, paycheck, etc.
I am also baffled by "they're easier to transfer" than dollars. Yes you can email BTC. But I can literally hand you dollars. No smartphone needed! And large amounts are trivially easier - I squiggle some lines on a piece of paper and hand it to you. Or if you want to stick to smartphones I can pull one out and send you dollars using one of dozens of e-payment platforms.
You can hand me dollar bills, but how many dollar bills do you have? I just counted. I have $36 in bills in my possession. I should to go to the ATM today to get more in case I run out. Eventually, Bitcoin will be similar in that most of our wealth won't be stored in the actual currency, but in bank deposits. I could withdraw actual currency from a Bitcoin bank with the tap of a button and have it on my phone in 10 minutes. Getting dollars requires going to a physical place to get physical bills.
Transferring large amounts of dollars takes days. Transferring Bitcoin takes 10 minutes or so.
But why does transferring large amounts of dollars take days? There is nothing physical preventing banks from supporting fast transfers. They can do fast transfers with BTC or USD.
Transfers are slow because there is little need to transfer large amounts of money quickly, and slower transactions help address issues with fraud. If you are buying a car, or paying for a house there is little need for a fast transactions. So with BTC or USD, transferring large amounts of money will take days.
It's got nothing to do with fraud checks. Transfers take days because banks largely run on mainframes programmed in the 1970s. Because of the (by todays standards) peculiar designs those machines had, the bulk of the work is done at night in batch jobs. The vast size and complexity of the software, combined with archaic platforms, their business-critical nature, and almost total absence of competition means that banks don't upgrade to more modern systems unless forced (see the UK same day payments initiative). Then the banking network is not a perfectly connected system so sometimes payments must be routed via intermediate banks. That's why it can end up taking days.
Zero transaction fees? The bitcoin network costs something like $3.5 million per day to run, and optimistically handles tens of millions in transactions. That's a transaction fee of 10%.
You just don't notice it because they pay the miners by printing money. I'll be really interested to see what happens when they stop that and start relying on up front transaction fees to fund the network.
This is an excellent point. I'm curious to see how that pans out. My guess is that since Bitcoin transaction fees are supposed to be set by the market, they'll stay competitive. If mining is unprofitable at the rates credit cards are offering, fewer people will mine, which makes mining cost less energy, leaving more profit. Eventually an equilibrium will be reached.
The mining network shedding capacity is a bad thing for Bitcoin.
If 90% of the network is powered down to reduce transaction fees, that gives someone the opportunity to buy up 20% of it on the cheap and corrupt the network. Bitcoin has to use as many resources as possible to stay secure.
This is the biggest practical flaw I've understood so far, but it still seems fixable. If Bitcoin becomes uncompetitive with traditional payment systems and mining activity decreases, miners could collectively decide to alter the mining reward.
The problem with keeping mining rewards high is that Bitcoin is supposed to be deflationary.
Right now the mining rewards being minted increase the Bitcoin supply at a rate of 11% per year. If demand for Bitcoin were constant, this would amount to 11% inflation. Demand for Bitcoin is currently increasing, so it is net deflationary, but this only lasts as long as the demand for Bitcoin is growing constantly. If you kept mining rewards high after the demand for Bitcoins had stabilized, you'd have five times the inflation of the dreaded US dollar, as you paid for your infrastructure costs through inflationary taxation.
(Which Benjamin Franklin and I actually like, but that's another issue entirely.)
Unfortunately the squiggle trick doesn't work to send $0.20 to that friend in Angola who runs the water and sanitation project? It also doesn't convert to Mpesa in Kenya [1] (Bitcoin now does). And wiring $500k to China for that shipment on a Sunday doesn't work either with squiggles or e-payments.
On the other hand, all of your examples could easily be addressed if there was sufficient demand for it.
So Bitcoin could be valuable in disrupting payment systems:
Step 1: Bitcoin becomes superior to traditional payment systems.
Step 2: This becomes relevant enough in the large scheme of things
that Bitcoin gets serious adoption outside of speculation.
Step 3: Traditional payment providers up their game.
Step 4: Traditional payment providers win, because their intrinsic costs are lower
(mining is inherently costly and not needed for traditional payment systems).
So - there's a buck to be made in Bitcoin, but it's implausible that Bitcoin should remain superior to more traditional systems in the long term (except for illegal purposes).
I fully agree. It's not something traditional payment systems couldn't do (at least in principle. In practice I don't know if they can operate on such low fees). The actual success of Bitcoin over the next decade is a much more uncertain issue.
Do you know anyone in China that will accept $500k in BTC for real goods and services, or is your Bitcoin example just as hypothetical as the squiggle?
So someday we might see the secret service enforcing rules about how much computing capacity any one entity can control; to prevent collusion attacks on widely used cryptographic ledger systems?
I think the most likely outcome is that governments will become the largest miners to secure blockchains. The security of a blockchain is a public good.
There's no need to regulate computing capacity when you have the power to tax enough wealth to ensure that the government always has more computing capacity. It's an arms race without the nuclear winter, and with the side effects of increased pollution and rapidly advancing processing power.
Inflation is a function of money supply and velocity.
If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation would go down, not up.
And yes, I would rather have my [savings] account in a hard, non-inflationary currency. On the other hand, I can only earn interest when someone is willing to take a loan in the currency and pay interest on it. And I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. So, you're going to have a hard time finding a bank that pays interest on bitcoins. This is why "bad money drives out good", aka Gresham's law.
> Assuming the interest rates are the same, I'd agree. Would they be?
I doubt they'd be the same in either nominal or real terms. But that's a side issue.
You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations.
BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.
When gold was the primary currency, there were interest-bearing gold deposits. When paper currency was pegged to gold with full convertibility, interest-bearing currency deposits were effectively interest-bearing gold deposits.
When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.
This is an important point, because interest rates would exactly make up for the undesirability of the inflationary currency; i.e. the inflation risk would just be "baked into" a lower interest rate for the dollar-denominated loan. Unless you had a substantially different inflation risk tolerance than society as a whole, you'd be neutral about what currency to make the loan in.
Same goes for the borrower and deflation risk.
Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.
I'm referring to price inflation. You seem to be referring to monetary inflation. Less dollar use will lead to fewer dollar equivalents in circulation, but prices in dollars will go up because people will value them less.
Okay, sure. In your (imho wildly implausible) scenario, the transaction costs of doing business in dollars would rise and consumers would pay an increasingly steep premium for using them. Don't really have an argument with that logic.
>I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand.
Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this.
You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period.
There are very few risk free ways to make more money than investing in US Treasuries.
If you plan to spend your investment on rent, food, or fuel then Treasuries are a losing investment for sure. At best they reduce the amount of loss compared to holding cash.
Sorry, to clarify: I meant take out a loan as a borrower. Deflation will tend to increase my real interest rate over time, inflation the opposite. Obviously in equilibrium theory, interest rates will cancel out these effects; but they do not always do so in practice. So borrowers will tend to favor moderately inflationary currencies like the dollar.
>If every merchant you patronize today accepted Bitcoin, would you rather have Bitcoin in your bank account or dollars?
At this point, and in the foreseeable future? Dollars. I'm not sure where people find all this friction relating to using dollars in the real world. I have no problems whatsoever. Besides, it's all virtual currency.
As far as your theory of widespread adoption of bitcoin leading to hyperinflation of the dollar, I'm don't even begin to understand how you see that working.
>> we have on the one side a dollar that has endured as a value store and medium of exchange for hundreds of years, and which has proven remarkably resilient (valuable) by any objective measure throughout the worst economic implosion since the Great Depression (which the dollar also survived)
There's something you're overlooking though: the dollar was backed by gold until 1971, and that's where our problems really started mounting.
> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.
There's a somewhat cyclical argument here, as a semi-deflationary (or at least unregulated) currency was already standard for many years, and central banking and regulated currencies grew because that system was unacceptable. So you could say that central banking was a response to problems with Bitcoin-like currencies, and Bitcoin is therefore reactionary. There is little evidence yet that Bitcoin is anything but a reactionary currency, and no evidence that crypto-currencies are in any way "the future" (I believe they will be used in the future, perhaps more than they are used now, just as gold and diamonds are still used in some circles; but I don't see any indication that they are the future).
Historically (you should read http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History-...) inflationary money systems have been the tools of those in power to quietly take from the poor and less powerful. Whether or not the current era of central banking was intended to be that way is a question for conspiracy theorists - but it's very clear that that is exactly what it has become. These inflationary systems were ALWAYS less stable than their preceding deflationary systems, and ALWAYS ended in revolution, or conquering, or plagues, or what not.
Even Keynes knew this to be true:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
No, keynes says that the middle class will be outraged at arbitrary redistribution of wealth (especially to the wealthy) and the poor will be hurt harder (no comments on whether or not they are outraged).
Consider a poor family spending about 90% of their income on day to day expenses; versus a rich family spending 20% of their income - if there's 10% inflation, the poor family will go from a 10% margin of survival to a 1% margin of survival, which is a 90% reduction of ability to survive or save. Vice the rich family which has only suffered a 2.5% decrease in this margin.
Let's say (and this is atypical, as I said, poor people are usually less in debt than rich people) the poor family is additionally 5% in debt, versus 0% as in the rich case. Do you think it's any consolation that the 5% debt is nominally valued (and therefore decreasing in real terms) in the face of the fact that the family now is spending 104% of their income on day to day expenses? Moreover, the way in which poor people use debt (very short-term loans) typically involves interest rates that are far too high to take advantage of real reduction in value, and are over far to short of a term even if they had reasonable interest rates.
Now obviously these numbers were chosen because they make the calculations easier; but you should consider plugging in values of your own and proving that it is general.
The reality is inevitably more complicated than stylised examples: most obviously because wages tend to be directly or indirectly linked to inflation. In general, a person tending to spend virtually all their income within a month of earning it will lose out less than someone who hoards their wealth; if they're due a 2% annual pay rise and the Central Bank is pretty good at keeping inflation within a 2% range they're not going to suffer, particularly not if they can find a decent savings account for the money that isn't paying their monthly bills.
Ultimately, calculations of the alleged losers of moderate positive and predictable inflation are meaningless without taking into account its positive sum effects: when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced.
one, you're crazy thinking that wealthy people hoard their wealth in dollars.
two, if you think people won't consume if the money is deflationary, you're crazy. The US had net deflation for most of its history (except during wars) from 1600-1910, and certainly there was plenty of growth. Also, analogous to the "why do you ever bother buying computers knowing that they depreciate rapidly".
three. If you think laborers get paid wages that match inflation, you are crazy. In fact, as krugman himself states: http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hig..." that there’s another case for a higher inflation rate ... It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
You cannot simultaneously make the claim that inflation will fix the sticky wages problem and also claim that wages will catch up with inflation.
four. "when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced." in other words, artificially encourage people to spend so as to enrich the already-wealthy. This should give a hint as to where the wealthy actually do store their wealth, and why inflation benefits them while stealing from the poor. Related: Encourage people to artificially spend more money on stuff they don't need without regard to the downstream environmental effects of increased consumption.
The US had net deflation for most of its history (except during wars) from 1600-1910, and certainly there was plenty of growth.
And for all but the last 45 years of that 410-year period, the US also had the ability to obtain labor by force and without compensation. And even afterward, for many decades and well beyond the 1910 cutoff, the US had labor arrangements which only were not classified as slavery due to legal hair-splitting over the definition of the term.
Thus, we can just as easily argue that slavery is correlated with economic growth. Or that disregard for the intellectual-property laws of other countries is associated with growth (see the US in the 19th century, China in the 20th and early 21st). Or... well, lots of complicated factors that you seem to want to gloss over to make an argument in favor of one and only one factor.
(and that's without getting into the volatility of gold-backed currency, the boom/bust cycles, the fights over whether to have a single or bimetallic standard, etc. etc.)
Thus, we can just as easily argue that slavery is correlated with economic growth. Or that disregard for the intellectual-property laws of other countries is associated with growth (see the US in the 19th century, China in the 20th and early 21st)
I am sympathetic to both claims, given that it's possible that economic growth in the modern era is only made possible by massive credit expansion (voluntary, fractional slavery.
boom/bust cycles are normal, what's so bad about them? If the claim is that people get hurt then the question we have to ask is why aren't we stepping forward to help them? As for single or bimetallic standard, those are of course political issues, I'm not as well versed to the reasons for them but it appears to me to basically be a pre-hashing (if you will) of the same arguments we're having now about inflationary vs. deflationary currency, except with more of granularity concern (not an issue with bitcoins).
The bimetallic argument was basically a fight between those who already were wealthy and wished to preserve their position, and those who were not yet wealthy but wanted to improve their position.
Backers of a gold-only standard (mostly in the eastern US) wanted it because their fortunes were already amassed, and denominated in gold or gold-backed currency, and they did not want this diluted by the influx of silver from mines in the western US. Backers of the bimetallic standard had access to silver mines, or to the resulting silver, and wanted the ability to either have silver coined, or to present it and receive in return legal tender (which had been taken away in 1873).
For an edifying take on the populist/bimetallic position, consider reading William Jennings Bryan's "Cross of Gold" speech, which is full of eminently-quotable and still-relevant lines. For example, a rebuttal of what came to be known as the "trickle-down" theory:
Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of idle capital" and "the struggling masses, who produce the wealth and pay the taxes of the country"; and, my friends, the question we are to decide is: Upon which side will the Democratic party fight; upon the side of "the idle holders of idle capital" or upon the side of "the struggling masses"? That is the question which the party must answer first, and then it must be answered by each individual hereafter. The sympathies of the Democratic party, as shown by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.
The question that is whether the assertion that diluting the value of gold by introducing to serve as a second currency actually did improve the lot of the less wealthy. Historical evidence suggests that a fiat devaluation hurts the poor (well ultimately it hurts the rich when the poor overturn the wealthy in revolution). Moreover, the architects of this policy failed to see in-retrospect-obvious problems like arbitrage destabilization of bimetallism as the gold-silver exchange rate was, effectively fixed by law. Suffice it to say my confidence in their ability to be correct about the complex net social effects is low, given they missed this crucial, first-order economics problem.
Backers of bimetallism knew it would "dilute" the value of existing currency (i.e., would cause inflation, with subsequent known negative effects). They did not "miss" that, or overlook it; they accepted it as part of a tradeoff. They knew there would be some pain at the outset, but believed that the eventual outcome -- of increasing the number of people who could turn metal into legal tender at a favorable rate, and breaking up some of the power of established wealthy interests -- would outweigh that pain through resulting economic mobility and wider-spread prosperity.
Hence the argument for "trickle up", effectively, as opposed to "trickle down".
If you're going to call me "crazy", I'd appreciate it if you had the courtesy to address their arguments I actually made, rather than ones I didn't...
Obviously if I thought wealthy people actually did hoard their wealth in dollars I wouldn't have made the point about inflation inducing people not to hold their wealth in dollars. Wealthy people could, would, and probably should hoard large portions of their wealth in dollars in the absence of inflation though.
I didn't making any points about people not wanting to consume if the money is deflationary, because obviously there are limits to how far one would want to defer consumption. Consumption /= investment. Investment is based around getting returns, and if average return is zero then there's very little incentive to invest instead of hoarding coins for those neither certain of beating the market nor particularly enthralled by taking risks. US prices oscillated wildly between 1600-1910 so it was hardly a sustained deflation in which burying dollars in the ground was the most reliable way of ensuring continued purchasing power in a couple of years time, but it's worth noting that growth was a bit more impressive after 1910...
Three. The whole point of the "sticky wages" argument for inflation - one I didn't actually make - is that as relative prices in an economy shift, the real value of some workers' contribution falls, but they still have bargaining power sufficient to ensure this subset of the labour force doesn't accept wage cuts (they take job losses instead). A corollary of this is that productive workers in growing industries can and do have sufficient power to demand higher annual wage escalators, and inflationary increases to payscales are commonplace in normal economic climates. Nothing about the sticky wages problem implies that wages relative to labour productivity of a segment of the economy can't catch up with inflation, in which case the median worker can ask for and get accept their annual inflationary pay rise.
But I haven't mentioned the sticky wages argument. Actually I went out of my way not to mention the sticky wages argument, by giving a theoretical examples where wages were all indexed, and emphasising the importance of inflation in providing investment stimulus was far more significant than its distributional effects.
As for point four, I'm honestly not sure whether you're deliberately misunderstanding me to make a rhetorical attack or genuinely don't understand that "investment strategy" and "encouraging people to ... spend more money on stuff they don't need" are not the same thing, and the poor generally benefit a lot more from the rich investing in job creation than the rich buying nice little cabinets full of gold.
> the poor generally benefit a lot more from the rich investing in job creation than the rich buying nice little cabinets full of gold.
Sounds suspiciously like "trickle down economics". And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
> Sounds suspiciously like "trickle down economics".
That's not an argument. When rich people (or any people) get wealthier that really does benefit everyone; the problem with classical "trickle down economics" was the idea that this meant it was ok to exempt them from taxes, as if tax money was just wasted.
> And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
Policies that increase the value of cash savings (at least, to the point where it's more profitable than investing in stocks or the like) benefit the rich, and policies that decrease the value of cash savings benefit the poor, because the rich are much more able to save than the poor, and cash really is a zero-sum game. If the dollar ever became deflationary, rich people would sell their stocks and buy up ~all the dollars and capture almost all of the increasing value (businesses would probably stop paying wages out in dollars); meanwhile startups would find it much harder to attract investment, which would be bad for everyone.
> one, you're crazy thinking that wealthy people hoard their wealth in dollars.
You might want to consider what they do hoard their wealth in. It's not currency, and they also don't buy gold - they buy companies, stocks, and bonds.
"our society will have to figure out how to make the economy work with endemic deflation"
So, 1600-1900 in the US (minus wars which were incredibly inflationary but always temporary in that era) not enough for you?
The counterargument is this: In the era of central banking we have struggled to figure out how to make the economy work with endemic inflation. And it's failing. The two eras where the gap between the rich and the poor widened in a protracted, long-term fashion, have been in the aftermath of FDR's great dollar devaluation and after Nixon closed the gold window. 1972 was the last year the rich-poor gap was closing.
So would another planet colliding into the earth, fortunately we're in danger of neither.
> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.
No. Deflation is a part of bitcoin, not of crypto currencies in general. When deflation shows itself to be the problem it likely will be, we'll just switch to a better crypto currency that has predictable inflation built in; they exist already.
And Bitcoin speculators are pricing in the frictional impact of changing to another arbitrary, fragmentary currency "when we need it"...where, exactly?
Who's better positioned to move to the next better currency than Bitcoin than Bitcoin speculators? And it won't be changing, there can, are, and will likely continue to be multiple working crypto currencies each attracting a following from those who believe in its core principles. As long as they're easily exchanged for the others as they are now, they can all win and one will just be considered the reserve currency because it's the biggest most stable one, just as in the real world with real currencies. Gold bugs will always like Bitcoin, but not everyone's a gold bug.
Is that like "Real Estate only goes up?" Remember that one from circa 2005?
This problem really does lead to crypto currencies having no floor like Krugman points out. At some point everyone decides what the next hot crypto currency is, and suddenly Bitcoin turns into Friendster and there's a rush for the exits and the price collapses.
It really does seem like cryptocurrency fanboys have bought into a form of "this time its different" because... crypto. And they're ignoring the fact that it is a currency with zero to backstop, and its clearly dependent upon fashion and popularity, since there's a growing marketplace now of competing cryptocurrencies.
This thread has been very useful to convince me that bitcoin is a classic bubble. I have no idea when it'll pop, but it appears almost certain that it will.
No, it's saying that Bitcoin has the feature that people who like Gold like, the supply can't be artificially inflated. That's all. Keynsian's won't like that because that means it's deflationary.
> This problem really does lead to crypto currencies having no floor like Krugman points out.
Krugman is wrong because he doesn't see the inherent value in them yet, and there is value in shopping online without giving the retailer my credit card details and without the retailer being worried about charge backs and banking fees; but he didn't see the value in the Internet either.
Brilliant people are often wrong when stepping outside their domain, and he clearly doesn't yet understand the technological advantages of crypto currencies.
He's right that deflationary currencies won't function well as currencies in the end, which is why Bitcoin could be MySpace and a better designed crypto may ultimately win, but network effects give Bitcoin the chance to fail before someone else can win. However Bitcoin need only become stable enough to be used to move money around and it'll have a ton of value to lots of people whether it's deflationary or not simply to avoid banks, fees, and chargebacks.
You admit that some other crypto currency may win. That means that bitcoin may lose.
Lose.
LOSE
What happens when it LOSES?
Like Krugman points out, there's nothing to backstop it and no floor.
Oh right, but he's just an economist, he doesn't see the "inherent value". He just doesn't understand...
You so easily swap contexts completely between all of this "inherent value" nonsense when you're addressing Krugman, and then a marketplace of cryptocurrencies which clearly is 'libertarian' and is going to have clear winners and losers -- without, obviously, thinking that last word through very clearly.
I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
> You admit that some other crypto currency may win. That means that bitcoin may lose.
Your thinking is very binary. It's possible that another crypto currency becomes the biggest one, that doesn't mean bitcoin loses, it means it's not the reserve currency that it is now. You don't seem to understand that people have different ideas about how a currency should function and each crypto that comes out will attract those that agree with its rules. Bitcoin is designed for Austrian economic fans who think inflation of the money supply is the worst thing ever. They will never abandon it for another crypto, it's already exactly what they want. Keynsian's will eventually move to something that includes built in inflation.
> Like Krugman points out, there's nothing to backstop it and no floor.
Yes there is, it has utility; even if another crypto becomes the more favored currency, Bitcoin will remain the digital gold it is because it's deflationary, easily tradable, and aligns ideologically with how many people think money should work (they're wrong, but that doesn't matter).
> I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
It's already fun to watch. That neither you or Krugman see inherent value in crypto currencies is something both of you will come around on eventually. He certainly changed his mind about the Internet being no more useful than a fax machine.
Hey, I love Krugman, we agree on much, but on this, he's simply wrong and he's been very wrong very publicly before. Your appeal to his authority is not a valid argument for why Bitcoin is a bubble, if you can't make your own, then move on but don't get snarky with this "he just doesn't understand" b.s. you're slinging; it's unbecoming.
> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.
Good luck with that. You've just said something along the lines of, "we'll just have to figure out how to live with terminal cancer."
Now, I'm no economist, but deflation is standardly seen as really, really bad, and for good reason. It's not just 'the opposite of inflation', as you probably know: it's an accelerating, self-intensifying brake on commerce.
How? Ask yourself: why buy today what can be bought tomorrow cheaper?
> Ask yourself: why buy today what can be bought tomorrow cheaper?
I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!)
But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years?
I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?
I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?
The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors.
For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions:
* I will buy one beer at this unit price. Will I buy two?
* I will buy two beers at this unit price. Will I buy three?
* I will buy three beers at this unit price. Will I buy four?
* I will buy four beers at this unit price. Will I buy five?
* I will buy five beers at this unit price. Will I buy six?
* I will buy six beers at this unit price. Will I buy seven?
* I will not buy seven beers at this unit price.
* Therefore I will buy six beers.
I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.
Yes, remember that this is a utility calculation. The cool thing about buying Xbox One now is that I can play it now. So let's say these are my options:
* Buy it now for $300 and play it for 10 years
* Buy it in ten years for $30 and play it then
(I have no idea how much an Xbox actually costs.)
So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function.
"I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food.
But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started.
I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.
I agree with your assessment -- utility with respect to time is the first explanation I thought of as well. People (and firms) have a limited ability to anticipate or defer purchases. (I can't wait 50 years to buy a lifetime supply of food to feed myself!)
You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things.
Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume.
Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)
The question is really what's in the average bucket of things you will put off versus the bucket you won't. One important note here is that the bucket off things you can put off is roughly proportional to the advancement of your economy; most of the goods purchased in a first world society can be put off more-or-less indefinitely. On the other hand, perhaps society's expectations for its standard of living have risen, forming a utility curve that's been shifted a bit. Another way to put that is that the worst case is that the economy runs at the level where everyone is willing to live; that's a sort of consumption floor. I'm not really sure what the answer to that is, but since I believe it's quite a bit below where we actually live, I think the deflation spiral is pretty real.
One specific observation here is that short-lived deflations may not cause much behavior change because everyone expects them to be short lived. And changing your behavior is hard work, and your standard of living is sticky; you don't adapt right way, even if you're a business. Easier to just ride it out. But as the deflation period drags on, that consumption floor starts to fall (everything here is mutable!) as you get acclimated to the new normal. Since consumer confidence actually lags the other economic metrics a bit, an economy has a bit of time to pop out of deflation before the spiral really sets in. On the other hand, it makes it worse when it does.
It's also important to look at context: in that empirical evidence, we should note that the central banks were fighting deflation as hard as they could withe somewhat limited tools they had, so it isn't a spiral in a vacuum. Even then, Japan lost an entire decade of economic progress to deflation.
On specific items like video games consoles and computing power, I'd guess it's some combination of a) the utility of the items actually being quite compelling at their launch prices and b) a trick of psychology: in 10 years, there will be new, better video games and you'll want those instead, so you don't even really consider buying it later. (b) is irrational, because the console you're buying now is either worth it or not now; you don't actually have to buy it later at all. But it strikes me as very human. I think public has largely just accepted the premise the technology costs a certain amount; it just looks forward to having new features that fall into its locked-in price range.
On the other hand, one way to think about the technology stuff is that perhaps it really has held back a lot of the industry. For example, perhaps the price of the Xbox is artificially low at launch time because otherwise everyone would just wait for it to come down anyway; it's competing with its future self. The thought experiment is to ask how different purchasing decisions would be if an industry-wide announcement came out saying, "Moore's law is over. This is as good as computers get. They're going to cost X and do Y for the foreseeable future." Because I suspect a lot of people do put off technology purchases, waiting for everything to get better and cheaper. The complement of early adoption.
I should caveat that this is basically all speculation on my part; I don't actually know anything about any of this stuff.
This title of this post does a disservice to its contents. "Bitcoin is evil' makes it sound like it's a propaganda piece. I went in expecting some of the usual poorly researched allegations that we've been seeing over the past few weeks. But surprisingly, the post does make a few good points.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow.
Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles.
Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control.
This ability is what places a floor on its value, whatever that hypothetical floor may be.
This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.
Maybe some day Bitcoin will be a cheaper way to transfer money than EBT, credit cards, etc. (a few percent). If/when that happens, people will hold Bitcoins for just long enough to complete a transaction -- microseconds -- rather than for however long it takes them to cash out their speculative bets.
Yes. This is already happening to a small extent, and the use of bitcoin as a money transfer mechanism is where the value comes from. People who wish to transfer money using bitcoin do not care about the market price; if they have $1000 USD to send, they buy $1000 USD worth of bitcoins at market price, send them over the network in seconds, and then that value is converted into cash locally. They don't care about the market price, as long as it isn't volatile over the short time it takes to move the value.
The market price of bitcoin is determined by the number of bitcoin holders who think they will go down in value; as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value, which increases the store of bitcoins held for long term positions and thus the market price of BTC, etc. The increase of its usage as a medium of transfer ALSO increases the market price of BTC; that interplay between new value-minded long term investors and new users of btc as a transfer mechanism is what has been pushing the price up continually. the entrance and exit of speculators in the market is a short term distraction that has the benefit of spreading awareness but the drawback of adding to conception as a bubble.
after about the 6th or 7th one of these 'boom and bust' cycles that triples/quadruples the market price, people will stop seeing this as a 'maybe' thing, and my guess is that will drive a massive one-time spike in the value.
as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value
This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.
By the same argument, if you think the value of bitcoins will increase, you shouldn't spend your dollars either. You should convert them to bitcoins and hold them.
If you do spend dollars, you don't lose anything by converting them to bitcoins just before spending them.
So there'll be a deflationary spiral where the value of bitcoins goes up and up, until the only people who have bitcoins are the idle rich who won't sell them at anything less than extortionate prices. Which is not a situation I see as sustainable; at some point the actually productive people making economically valuable things will realize that rather than funding this bunch of freeloaders, they should stop accepting bitcoins as payment.
The rates at which bitcoin holders sell them won't be 'exorbitant' because they'll be irrelevant for peopel using them as a transfer mechanism. if you want to send a thousand bucks, and there are many bitcoin holders just sittign on them, the market rate of btc won't matter and you'll be able to quickly sell them whenever you've sent the btc where you wanted to.
those 'unproductive' people holding incredibly valuable bitcoins will enable bitcoin to work as a dirt cheap payment processing system.
This would create a floor on price ... which would then make it useful as a store of value (since there is a high probability that you'd be able to sell them in the future).
What's the point of a store of value if ultimately it cannot be exchanged for something else?
One can also turn this point around: what requires the store of value to be the same thing as the medium of exchange? The store of value must be convertible into the medium of exchange, but that doesn't mean they have to be the same thing. Yet Krugman blithely assumes that they must be: "To be successful, money must be both a medium of exchange and a reasonably stable store of value." He doesn't even consider the possibility of, for example, an economy based on Bitcoin as a medium of exchange and, say, gold as a store of value. For that matter, he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.
he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.
Individual people, perhaps not. But the US dollar is the most widely-held reserve currency in the world, followed by the Euro. Wikipedia states that approximately 2/3 of reserve currency holdings are dollars.
You're assuming that reserve currency holdings are stores of value. I'm not sure I buy that assumption, since central banks use those reserves to manipulate the monetary system in a number of ways, not to store value. Also, as far as I can tell, the total amounts in these holdings are small compared to the total amounts held in stocks, real estate, gold, and other non-monetary stores of value.
If Bitcoin isn't a relatively stable store of value then there is no sane reason to use it purely for exchange. If you're able to send dollars to Coinbase or MtGox and the end user is able to receive dollars from Coinbase or MtGox, chances are you can cut out the middleman and the liquidity risk by sending them direct, at similar or lower transaction costs. The equation looks a bit different if you're holding non-trivial Bitcoin balances, but you won't do that if it doesn't reliably store your value.
You're ignoring transactions where Bitcoin is exchanged for actual goods or services, or for non-monetary financial instruments like stocks. In such transactions Bitcoin doesn't have to be a store of value; it only has to be a medium of exchange. The same applies to traditional forms of money, which was my point.
It's true that there aren't many ways to exchange Bitcoin for actual goods or services or non-monetary financial instruments right now, but that's not due to any inherent inferiority of Bitcoin: it's due to the fact that governments and central banks have a huge incentive to either outlaw exchanges of Bitcoin for goods, services, or financial instruments like stocks, or at least impose artificial costs on such transactions that are high enough to discourage most people from making them. In other words, Bitcoin is not competing on a level playing field with other forms of money.
People won't accept Bitcoin for actual goods and services if they don't believe it will hold its value. Or more precisely, they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk. If that premium happens to be higher than the cost of transacting in an alternative currency, Bitcoin is useless as a means of exchange.
Personally I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority in something purporting to be currency too...
People won't accept Bitcoin for actual goods and services if they don't believe it will hold its value.
The same applies to any type of money. Google "hyperinflation".
Also, how much of an effect this is depends on how long people expect to hold money in between transactions; see below.
they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk.
People do the same thing with dollars and other currencies based on the rate of inflation they expect, i.e., the rate at which they expect dollars to lose their value.
Also note that qualifier: "over the period they expect to hold the Bitcoins". In other words, people need enough cash to cover current expenses for some period of time; but that amount can be pretty small compared to their total wealth, and it gets smaller as technology advances and economies evolve. People used to get paid quarterly, so they needed enough cash for a full quarter's expenses. Then the payment cycle became monthly, and now many people get paid biweekly or even weekly, so they need to hold less cash to cover expenses. (More precisely, they need to hold less as a fraction of their total wealth.)
I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority
It's "inherent" only in the sense that we're not likely to get rid of governments any time soon. Is that a problem with Bitcoin, or a problem with governments?
> To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction.
More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint <-> USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening.
There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.
Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen.
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
He claims that the ability to pay taxes in dollars and the Federal Reserve's willingness to buy up dollars to maintain their value places a floor on the value of the dollar. I disagree. In a crisis of confidence in the dollar, both factors would fail.
In a crisis significant and widespread enough to crash the dollar or any other government-backed currency you'd like to pick on, it seems likely that there would also be significant disruption to electrical and communication networks, which does not suggest BitCoin is a great thing to hold for that situation.
(a similar point is often raised against gold, in that a post-economic-apocalypse world would not immediately have the infrastructure to verify claims like "this is one ounce of pure gold", meaning gold's utility as a medium of exchange would not be as high as suspected by people who buy it to hedge against such apocalypses)
I'm not talking about a hypothetical doomsday scenario. Bitcoin is the crisis.
The idea that holding Bitcoin is a better idea than holding dollars is spreading. The more it spreads, the higher the value of Bitcoin will be, and the lower the value of the dollar will be. Eventually, we will hit a tipping point. That's the crisis. That's the hyperinflation.
None, but it's important to remember that currency is wishful thinking. The value of a non-commodity currency is what people believe it's worth. Trends in the public's beliefs about currency are incredibly significant.
I'm a liberal, a Keynesian, but my interest in BitCoin is completely non-ideological. And I resent being painted with an ideological brush by Krugman because I can see the elegance in BitCoin, and I can see the possibility that one day, in spite of my ideological beliefs that unregulated markets are susceptible to bubbles and destructive volatility, BitCoin or something like it might still be able to function as a stable, useful world currency.
Ideology is never an accurate or complete description of the world. It is false awareness. What might be true under paradigm A might no longer be true under paradigm B, but at no point will an ideologue change his world-view to fit paradigm B. He will try to cram paradigm B into his ideology in order to preserve his ideology, rather than adjust his ideology to describe paradigm B.
For instance a fiat currency heavily regulated by state monetary policy might have been the best idea in the 20th century, during which for the most part there was no Internet. But in the 21st century, where the Internet enables markets that can function more efficiently, a virtual currency with a self-regulating monetary policy might be a better replacement. The jury is still out on that. BitCoin is an experiment, and that's the best thing about the Internet - it is a laboratory for experiments, where we can try new and different monetary policies really quickly, whereas in the wildly inefficient 20th century we were locked into one monetary policy at a time. We're just figuring out what works the best, but Krugman calling BitCoin "evil" suggests to me that he is afraid of what we might find out.
You seem pretty accustomed to economics. Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency?
Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-)
So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Best Regards,
ps. FIAT currency is regulated by the FED and you know who runs the FED. BTC market is run by those who have huge amounts of BTC and you don't have a clue about who they are. Not sure which one is more secure for a society.
USD and BTC are very easy to interchange. I see no difference between the dollars in my wallet and the Bitcoin in my e-wallet from a spending perspective. I'd spend my Bitcoin at any merchant willing to accept them. I think their value will go up, but I can buy more at the same price at which I just spent them.
It depends on how fast the deflation happens. BitCoin is not all that useful as a currency right now because it's value is so volatile. This is because it is subject to huge increases in demand as it spreads to more places across the globe. It is not hindered by any export controls or borders, which means it can "infect" whole nations/societies/cultures in lumps, as we saw recently with China, sparking a huge jump in price.
But eventually everyone will have heard of BitCoin, and I believe BitCoin's growth will slow down, and its curve will flatten and look more stable. The more people have BitCoin the less small groups of individuals, or even countries, can influence its price.
But look at the growth of vendors who are accepting BitCoin over the same period. For the same reason it doesn't make a whole lot of reason to spend BitCoin during this growth phase, it does make sense to accept BitCoins. And even though most merchants don't wish to speculate with their revenue, even keeping a "float" of currency in BitCoin could be profitable, and so it is reasonable that merchants and vendors might want to accept BitCoin even though not a whole lot people are spending them these days. That can only increase BitCoin's value as a currency in the long run.
If it was unwise or wise to spend something based on its changing value, no matter how slowly, then it would be rational for me to want to spend all my dollars for goods and services today because the dollar value is going down. But the US dollar isn't depreciating at a fast enough rate for it to be rational for me to spend all of my dollars today, right? This is because the currency is inflating at a pretty slow percentage rate. A slow inflation rate is not all that different from a slow deflation rate.
It all depends on what will ultimately be the rate of deflation of BitCoin. If it is sufficiently slow(1% annually, for instance) it will be useful as a currency. If it is all over the place, it won't be.
How does the volatility of BTC make it desirable for merchants to accept it? Either they hold BTC and are exposed to the volatility, or they convert to a fiat currency and are exposed to some transaction fees.
Perhaps the transaction fees turn out to be lower than those for credit cards, in which case BitCoin maybe becomes an alternative payment network.
> You seem pretty accustomed to economics. Can you explain how exactly or why would anyone buy any items (that's what currencies are for after all) using a deflationary currency?
This is identical to arguing: Why would anyone buy computers when they are getting cheaper every year. At some point you make a choice where your preference for owning a computer is greater than your preference to save money.
> So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Gold is deflationary. When gold was the primary currency for the world commerce was very vibrant. Gold not being currency is a fairly recent development.
People currently purchase things online with bitcoins when they could use dollars but choose to use bitcoins. I think it's very early to write off bitcoins as a failed currency.
Exactly. The traditional keynesian definition of rationality (wrt inflation/deflation) is so far removed from reality that it should be a joke by now. Nobody actually behaves the way their mental model says they should.
Except that's not what Keynseian's say, and people do behave the way Keynseian's say, deflation does curb spending and inflation does encourage it; Keynseian's don't claim people will stop spending, they claim they'll spend less.
None of them seemed to act like that was their view when we were looking at 0% inflation. The general attitude of mainstream Keynesians was that we were on the verge of an unstopable downward spiral if we didn't act in that very moment...which I remind you was driven by housing prices crashing back down after their biggest bubble ever. In reality, people don't sense inflation or deflation as it is reported by the CPI, PPI, or any other price index. They sense it locally on a product by product basis. And it is still entirely uncertain as to the relative attribution of reduced income vs deflation as a cause of reduced spending.
I think the better question is: why would anyone invest if simply holding currency is an investment?
If you are an entrepreneur or a company going IPO, the you'd have to offer a better expected return than the currency itself. Your competition for investment dollars would be not only other companies, but cash.
Because (1) people do not agree that SPY ETFs are a reliable way to earn a return, (2) the process of moving money in and out of ETFs is far from frictionless, and (3) once people move money into an investment vehicle, they are in fact hesitant to liquidate it simply to make purchases, in a way they are not with "currency".
Look, the real problem with deflation is that it increases real interest rates and makes structural rigidities caused by sticky wages/prices more potent. If you want to argue against bitcoin on Keynesian grounds, start there.
The only way deflation will reduce consumption is if the rate of deflation exceeds all other rates of return. Simple math: I consume if
(value of consumption now) > exp(-(discount rate - rate of return) x time) x (value of consumption in future)
The `rate of return` term is the rate of return on my best investment - this is affected by deflation primarily if the deflationary currency becomes or improves my best investment.
If you plug in some example the numbers, you'll see that the effect this has on consumption is miniscule compared to the effect this has on the allocation of investment. That's because when choosing between investments both sides of the equation have the discount rate, and it cancels.
Atmosx is appealing to newspaper column keynesianism (that vague "I dunno what AD is, but I want more of it" flavor), and doesn't really understand what he is talking about. Do a back of the envelope calculation and you'll see I'm right.
I don't see a relevant distinction between them for the purposes of this discussion. Can you explain what you believe the relevant difference is, and why it matters?
(Express your model in maths as much as possible, for the purpose of clarity.)
Asset[2]: Anything that has value and can be converted to cash.
For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably.
Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust them. In their optimal status, when the economy goes well currencies loose value (inflation) by 1-2%. This behavior enhances money exchange and induces a spending behavior which is viewed as good for the economy. You will buy a computer today because your money will not buy the same model/computer tomorrow. When you buy something, you fight unemployment, pay taxes to the state and so on.
The computer you buy can be an asset though. The moment you buy it, starts loosing value. You won't go to the grocery store to exchange the computer for tomatoes. You will need a medium to do that, that medium is money (and that's exactly what BTC claims to be, but up until now it's not). The computer though except from an asset is also an investment. It can help you, generate value either in form of entertainment or money (programmers/designer/etc.) but it's still not money. Sure you can exchange it for something but that's not a straight-forward process as buying beers with a currency.
The next question is: Why I should own a currency? Because the local authority (a government) impose you to use it's currency to pay taxes. Currencies are never adopted, they are always enforced to populations by supreme state governments, as means of exchange. There is no other for anyone wanting to own an inflationary currency, except for that fact that you can't do anything without it. Of course in my example, I take for granted that we're talking about a relatively healthy state. Otherwise, people will prefer a foreign, more stable (less inflationary, or deflationary if possible currency. Note that less inflationary means deflationary for them anyway).
Now, BTC introduces a currency that has some characteristics. One of them is that it's finite[4]. So, deflation is chosen here by design.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
Then, why Satoshi choose to add deflation in BTC: Because otherwise no-one would even care holding any. What kind of value an inflationary digital (non-backed) currency could ever have? None.
Bitcoin is better viewed as Gold in digital form. Say you have 10.000.000.000 USD and you wanna convert that money into some asset. Would you chose a 5 year old asset or a 5.000 old year asset to do that? The rational (obvious) choice is gold. It's 5.000 old and pretty much stable, BTC as long as we know can turn to ~ 0 tomorrow if the big players choose to opt-out or USA/CN/EU/RU decide to ban it.
Why is all this relevant for the purpose of this discussion: Because the commenter (Aqueous iirc) is talking about bitcoin as a currency and not an as an asset.
NOTE: Currency is viewed as assets at FOREX[3] but I'm sure it's not relevant for the purpose of this discussion.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitcoins. If you use the BoA card, you spend $50. Then you shift $45 from bitcoins to USD and maintain a 10/90 portfolio. If you use the Bitcoin card you instead shift $5 from dollars to bitcoins.
The only reason to choose one over the other is transaction costs. I.e., if it costs you $1 to make this transaction, and you expect a $50 USD deposit in the next month, you'll use USD to avoid the $1 transaction fee. If transaction costs are a % of the transaction size, you'll pay with the BTC card (and pay only x% of $5, rather than x% of $45).
Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. Just as we could hypothesize a BTC backed credit card, we can also hypothesize an SPY backed credit card. The mechanics would basically be identical - at the point of transaction, the card company converts from the buyer's preferred asset to the seller's preferred asset. Both BTC and SPY backed credit cards already exist - it's equivalent to getting a regular USD credit card and selling BTC/SPY whenever you want to make a monthly payment (modulo a couple of extra clicks).
Incidentally, your post completely ignores the reason central banks manipulate currencies. The reason has nothing whatsoever due to the distinctions you make between currencies and assets (which, if I'm understanding correctly, is merely liquidity and the ability to pay taxes in them).
> Your post still doesn't explain why a deflationary currency will cause a person to stop consuming.
I never said will stop consuming. It will consume less. It makes sense, a consumer will spend whatever has bigger Y% of having LESS value in X time, not more!
Secondly: Have you tried buying/selling bitcoins? If you use a bank it's a pretty straight forward process but has huge costs.
Thirdly: Do you buy products using bitcoin? Do you think that people uses bitcoin to buy products online? Because all the transactions I'm aware off are either illegal (hard to track) or perceive bitcoin as an asset.
Central manipulate currencies in order to adjust the economy of a certain group, which is under their authority, as far as I know.
The distinction I make between currencies and assets come from ~ 300 BC (at least, probably way back) and I don't understand why even is a topic of discussion. BitCoin is treated by 99% of it's users as an ASSET not as a CURRENCY. No one is buying services in Bitcoin, if does not want to hide. Isn't it weird that while Silk Road used BTC as it's main currency, Amazon, eBay, Apple and every other big player, doesn't even care? You think it's out of spike or anything?
I'm not making any assumptions here, I'm stating facts. It's you who are suddenly re-writing 2000 years of economic history by assuming that buying with Gold (bitcoin) is the same as buying with FIAT.
I'm not arguing with your distinctions between currencies and assets. I don't care what label you choose to apply to BTC or SPY. I'm asking why a positive real rate of return on BTC will cause consumption to drop in a manner that a positive rate of return on Gold or SPY would not.
I strongly suggest you go read an economics textbook that actually does the math. Working the models will help you avoid arguing with yourself about definitions (a pointless exercise even if you had a partner http://lesswrong.com/lw/np/disputing_definitions/ ).
If your assumption were true, I wouldn't have bought a computer because I could have delayed my purchase and bought a cheaper+better one later. Even if I forecast computers falling from the sky in a year I would still buy one now if I didn't have one already. Wouldn't you?
This seems to be mainly a reference to another article that has also been on HN.
By approximate scroll down length on mobile, the ratio of content that isnt a quote, to that which is, seems to be approximately 7:5 .
(not taking into account the fact the quoted text takes less horizontal space, but I did overestimate the new text length in a few small ways as well, so I hope that this ratio is at least approximately accurate)
Essentially the article states a difference between "positive economics" (what is), and "nomfyvhbxgv economics" (what should be). The author claims that their political opponents tend to get the two confused (and that despite what people criticizing the article might think, that his political allies tend not to make the same mistake)
They then go on to say that the other article suggests that bitcoin was created as a weapon, connecting to the "what should be" part of economics, quote the other article, and repeat from the other article the part about a "gold fetish".
I personally believe that it didn't add a whole lot to what was already in the other article, though I admit I should probably reread the guidelines for comments and submissions. I intend to do that, and then possibly modify this post that I am now making.
Bitcoin is terrible though you guys, in it's current state, it encourages hoarding and what used to be a promising currency is now a stagnant commodity.
I like the utility of bitcoin, and I see it's value. But I do not hold the same optimism I did for the currency as I did in months past.
I do not see a future where normal people will be paid primarily in bitcoins, and all the bitcoin people will be rich and happily ever after. No, just stop. Normal people hate this coin. They hate it, and they really hate people telling them this is where there money should go.
Hacker News we are wrong about bitcoins, and we should feel bad for holding them in such high regard. They have done a lot more bad than good, and I am not sure the road forward is good or bad.
Krugman is to Bitcoin as Ebert was to video games.
The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.
But does Bitcoin really have a floor related to the energy put into the mining? Since the energy cost is paid for by the miners, do other players in Bitcoin "respect" that floor? I don't see that - there's nothing keeping a Bitcoin from going all the way to zero - regardless of the energy consumed in it's production, and Krugman argues that gold (and the feds) have a bottom that is greater than zero.
My understanding could be wrong, as my understanding of Bitcoin would definitely be at the "noob" level :)
Bitcoin is able to facilitate transactions because of the power put into the computers running the Bitcoin network. Mining Bitcoin provides the functionality for validating the block chain. So, power into the network provides the value of security.
Bitcoin happens to currently use power that way, other coins don't; mining is not the only way to facilitate transactions and facilitating transactions is where the value is, regardless of the method used to do it. Power is but one of several options so the value can't be there.
I think Bitcoin does have a soft floor because that cost would form the natural price target for a miner trying to trade, but the cost is avoidable by switching to proof of stake as done in PeerCoin and Nxt. The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal; you could make a better argument for something like PrimeCoin, which attacks a major computation problem, having this kind of utility.
So as I see it Bitcoin is already obsolete; there are new coins that achieve the transaction capabilities for cheaper - they can be used in more potential applications, thus they're more interesting speculative instruments.
The specific benefit of proof of work mining comes in insuring more people have a chance to enter during initial distribution, but it still massively favors the early entrants and especially the people who have the hardware environment to mine efficiently.
"The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal."
So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then? Plating astronaut helmets and high-conductivity, corrosion-resistant electronics?
The intrinsic utility of gold was that it was eminently verifable. It's got a characteristic ductility and it was a yellow metal. You could easily verify if it was 100%, 80% etc. In other words, to the ancients, the intrinsic utility of gold was "its trust model". Sound familiar?
Yes it is. The intrinsic value of food is that you can eat it; the intrinsic value of art objects is that you like them. All "intrinsic" value refers to is the use you can make of something without exchanging it for something else. If you were the only person in the world, and you appreciated the appearance of gold, than gold would be intrinsically valuable to you.
I will accept this. How then is it not the case that "if you were the only person in the world, and you appreciated bitcoin, then bitcoin would be intrinsically valuable to you."
The logical implication is sound, I just don't think the premise holds. If you were the only person in the world, a bitcoin would just be a random-looking sequence of numbers and letters, which really would be worthless.
Nor does glass or plastic-coated aluminium. There are lots of shiny things that people don't want in their jewelry. If diamond were as common and cheap as glass, we'd probably see just as much diamond jewelry as glass. They're not massively "better" at being shiney. Even artificial gems are worth less in than natural ones even if they have fewer defects!
Neither of those things were around or refined enough like gold was when gold became the traditional metal for jewelry. Gold has a large first-mover advantage here that is being propped up by human psychology.
Your comments across multiple domains of knowledge have been on fire lately. Fantastic work!
While I don't think this analogy works without flaw, I do think that it draws a powerful connection between something that is widely regarded as a store of wealth, and something that is vying to compete in the same space.
No it wasn't. It was that it was rare, and that it was pretty, and so rich people (the rulers) tended to buy it.
And then, promptly, they also repeatedly ran their economies into the ground by conquering and mining tons more gold, and inflating their currency into worthlessness.
And this happened over and over - the Spanish did it, the Chinese did it, the French did it. Every gold economy before the invention of actual economic thought destroyed itself with gold.
>So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then?
Well, usually, the intrinsic utility of gold and silver was that they could be used as jewelry and/or used as instruments of worship. Most bullion money has evolved from substances considered divine.
I think the core problem with bitcoin acceptance is that understanding the way it functions spans many domains of expertise. There are cryptography, cryptocurrency, decentralized networks, economic concepts (inflation/deflation), centralized banking, government controlled currencies, computing ability, mathematics, human psychology, and ... so much more! It's really something that has a little bit of everything in there.
As such, to an expert in any one of those fields, it's very hard to digest because looking at it from the perspective of one field might suggest it is doomed for failure. But experts tend to look at things from the perspective of their own expertise.
For laymen who might know a little bit about each of those domains, it feels like "Yeah.. this could work..". A simple analogy might be about how hardcore web developers always feel about PHP. They always say it's a pile of garbage and it's bound to self destruct and swallow the earth in the process. However, PHP trudges on with some very large projects and sites under it's belt.. and novice developers will almost never notice a problem with it. Experts can be wrong.
So yes, bitcoin has it's issues if you analyze each aspect of it. But maybe if you zoom out and take an overview it might start to make sense how all the parts get together and even with flaws with each sub-aspect it just might work.
Wait, I think we are missing his point. Last sentence of the article:
"So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other."
I think this article does not go into the 'will it work?' debate. It alerts us instead to another debate, 'to what degree do we want it?'
It is an addition to what Charlie Stross was saying. He is just adding "guys, why are your comments replying to a different question?"
At least, I think that is the discussion he wants to start. But his talk about the ceiling and floor in value in the middle of the article actually belongs to the OTHER discussion, the one he does not want to start but spends half of the text going into.
It is like trying to talk about empirics to consider for deciding national policy, while everyone is shouting their usual political opinions.
I think this is a good point, but for Paul Krugman, the discussion of the role of the central bank in the stability of the dollar is absolutely, well, central, to the question of desirability. That is, the central bank is in some sense "responsive" to the monetary environment in a way that bitcoin is explicitly and inexorably not. I think Paul Krugman is arguing that that is a big deal.
So you need to write that up in a format that Krugman can understand and get it in front of his eyes. But I think his main criticism is that all of that infrastructure falls under the medium of exchange function and doesn't serve as a store of value.
What I think you're saying is that the block chain and it's supporting infrastructure and the functions it enables ( decentralized notary, unrepudiable statements, etc. ) are creating value in the same way that making jewelry from gold creates value. And that's an interesting argument. Much more interesting than a bunch of people ranting incoherently about "fiat".
If I were in search of a dissertation topic as an economist/anthropologist; I would be looking at the current wave of cryptocurrencies as a fascinating natural experiment in the social construction of value.
Couldn't someone under any sane system simply copy someone's block chain work in a new system? There has to be more to a 2014 system than a technical ability.
We could just create a crypto currency where we just hand out 100 units to every person.
Not without a trusted central party you couldn't. The work that goes into bitcoin mining is the 'distributed engine' that prevents double spending or forging of bitcoins. Bitcoin mining is not just a way of handing out new coins, its the very engine of the whole system. The only known way to break that engine is to control a bigger engine of the same spec (the >50% attack), and thats looking increasingly unachievable by anyone.
I don't see how it is not the case that mining Bitcoins is throwing away energy.
The 'work' is actually the verification of transactions on the blockchain - the reward from mining is just an incentive to do this (mining & verification are tied up in the same process).
The energy expended in mining is necessary to validate transactions in the network.
You might be able to make it more energy efficient but you can't remove the energy expenditure.
This has actually been done. You can now do protein folding and SETI (and a bunch of GMO research) while mining. Gridcoin is working with the full cooperation of the UC Berkeley BOINC project and is compatible with your choice of dozens of research projects: http://gridcoin.us
That's an awesome idea. I looked into the implementation though... it uses the same software to mine litecoins, and you get a credit when running the BOINC program simultaneously. So I see that as easily abused, where you are running fake processing jobs instead.
Ideally, the BOINC processing would somehow be directly integrating into the mining itself. But again, I don't have any idea how that could actually be done. But it would be nice if that is possible.
> It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure.
But it is also an arms race of energy spent. And the more valuable BTC becomes, the more energy a rational agent will use to mine it. Unlike mining gold, BTC mining does not have a fixed cost.
Gold mining doesn't have a fixed cost either. Different locations have different costs per gram of mining and refining gold, and whether it is worthwhile or not to mine in a given location depends on the price of gold.
And the yields from mining have decreased by orders of magnitude over the last several decades as technology increases have made it more possible, while less efficient, to extract additional known deposits.
All currencies rely on belief (like those flats in Monty Python). It is possible that gold could lose global belief, but unlikely, given the long history of belief. The US dollar too could lose faith, but again, a pretty good history of trust. Bitcoin? I think belief and trust battle novelty a bit. Will enough people believe, in 20 years, to power the computations necessary at that point? Or will a more novel and exciting currency emerge?
Gold isn't a currency at the moment. Even if no one wanted gold for its store of value properties, they'd still want it for electronics, science etc. at which point the market would revitalize.
Which is to say (not disagreeing, just saw an opportunity to jump in): it has a floor value. It might not be $1000 or even $100 per ounce, but it is at least a floor of $1 or $10.
The complaint Mr Krugman is registering is that Bitcoin's don't even have that. If my car is totaled, I can always sell it for $100 for scrap. There is no bit scrap dealer.
In a literal sense we have gold coins. I guess it's interesting that governments mint and sell them for a thin premium on bullion prices. And then, yeah, I'm sure there are things you could buy with a pocket full of Krugerrands. Really though, governments are giving you this opportunity to go off their currency standard. If you want to keep part of your wealth, near-cash, in gold coins, you don't have to use American Eagles to do it.
The positive part of Krugman's argument that discusses floors is saying that external forces have ensured that dollars and gold are useful even in the event that people stop wanting them as a value store. Your infrastructure argument seems to say that, all of that spent electricity has second order effects that make it a net positive for society. Not sure I agree, but fine. But that does not provide a floor of Bitcoin, because infrastructure being useful for other things does not make Bitcoin more useful. If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin?
So either you're misunderstanding Krugman's argument or I'm misunderstanding yours. I think you're confusing his normative and positive arguments (which are entirely separate!). You have used an argument against his normative argument ("Bitcoin is evil because it's wasteful.") but then used it to challenge his positive argument ("Bitcoin won't work out because it has no value floor."). That a crypto currency might end up helping society does not make it a good value store. Why would it?
I appreciate your putting the distinction between Krugman's arguments into greater relief – I believe I have conflated them somewhat in talking about second order effects.
For the time being, let's ignore those and concentrate on the primary purpose of Bitcoin's infrastructure, to facilitate decentralized value transactions between arbitrary parties. It is the infrastructure's fitness for this purpose that I see as giving it its floor; this may seem a slightly circular argument, but by enabling what it does it will always have the value of accomplishing that goal, even if it's trading for vast fractions of a cent (like Dogecoin).
Adding the network effects of its installed base, this probably places its floor somewhere well above Dogecoin's current value, but certainly far below what it's currently trading at. And indeed, it could very well undergo further corrections until it reaches a level of stability appropriate for a value store.
Krugman actually takes that on directly in the article:
> I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.
In other words, "to facilitate decentralized value transactions between arbitrary parties" does not actually provide a floor and thus give the coin intrinsic [1] value. Being useful is different from being valuable, at least insomuch as storage is concerned. I think Krugman has this one right.
One point made elsewhere in this discussion is that while Krugman might be right about the floor, he may be wrong about the floor being necessary to make BTC a stable, suitable store of value. Specifically, he might be overestimating the degree to which the dollar has a meaningful price floor, and the degree to which such a floor is actually the reason the dollar is stable and dependable. In other words, perhaps it maintains its value through adequately shared fiction, and perhaps BTC could do that too. I don't really know enough to have a strong opinion on that issue, but I think that's the structure of it. It's also worth pointing out the Krugman has the conventional view here.
Another question to ask of Krugman is why being a store of value is even a goal; what does the "success" in "successful currency" mean? Does it mean that BTC will be the unit of account, with prices and salaries denominated in it? That's certainly the case Krugman is taking on (hence the normative claims about central banks), and the case many here on HN arguing for. Or can it succeed as just a medium of exchange? I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth?
[1] For certain values of "intrinsic". The semantics aren't very clean here.
I think a certain entertainment factor will keep the price from reaching zero too--lots of volatility, cheap transactions, very low barrier to entry. Seems like you could even build a game like "Trade Wars" on top of the various exchanges, that would be pretty interesting. http://en.wikipedia.org/wiki/Trade_Wars
I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth?
You're absolutely correct. People forget that bitcoin functioned just fine as a black market currency back before it became a rite of passage to opine on its future. Barring prohibition by governments, the cryptocoin ecosystem is here to stay and will likely continue to grow.
It seems to me that the shared fiction of the dollar is based on the shared fiction of America. The fiction of America creates a real American government that has a strong interest in maintaining the fiction of the dollar.
From what I can tell, Bitcoin does have a similar pair of shared fictions, the idea and the currency. But I'm not seeing the thing that America has between the two fictions: a powerful organization with a strong interest in keeping the money useful as money.
Regarding your last bit, I'd guess his notion of "successful currency" is observational. There have been a lot of currencies, so it's pretty easy to look at the ones that have lasted versus the ones that haven't.
Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off people would, as much as possible, not hold sucres; they'd buy dollars. Poorer or less connected people couldn't do that as easily, so they just got screwed. Eventually, the currency collapsed entirely and now they just use the dollar: http://en.wikipedia.org/wiki/Ecuadorian_sucre
I don't think BitCoin can survive purely as a medium of exchange. There's the obvious reason: why pay two sets of transaction costs when you can pay just one? But I think the bigger problem is that there's a period when someone is holding BitCoins. If those are a stable store of value, then you're ok with that. But if not, you're in the land of currency risk, and the only people who like currency risk are currency traders; everybody else hates it.
I tend to agree, and my musings to the contrary were mostly just spitballing.
But to play devil's advocate because it's fun: to the degree to which it is useful to hold onto the currency you also use as a medium of exchange, then perhaps that does provide a value floor. In other words--assuming it is successful as a means of exchange--the fact that you have to pay a transaction cost to get out of a BTC position means you'd rather hold onto BTCs so you can use them later at no penalty. So then they would have intrinsic value, based on your aversion to trading them for something else; anything that makes you want to hold BTC other than their market price counts. The question there because which is the chicken and which the egg: being a successful means of exchange or being a good store of value? And of course, whether that transaction fee provides a meaningful enough floor.
I'm not convinced of that either, and it's especially weird to have the thing enforcing the floor to be falling, but it's fun to think about.
Interesting notion. I'm not sure that works; if the cost of getting out is the only floor then I don't think it's really a floor. To get out, somebody else needs to get in, and if they subtract their trading cost from the value floor, they get zero.
I think that experiment has been done with paper currencies where people stop trusting the backing. It would still have the same cost-to-get-out value (indeed, I'd think that value would go up as the currency fails). I know the Ecuadorian sucre went from something like 500 to the dollar to 25,000 at the end, so it would seem that the cost-to-get-out value is small even with traditional currencies; given BTC's theoretically low transaction costs, I presume it would be even smaller.
> If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin?
If the infrastructure goes on to do great things for society then it has (and has always had) intrinsic value and thus the price of BTC rebounds (or more likely never collapses in the first place).
No, it doesn't. BTC isn't a good value store (or have intrinsic value) just because the infrastructure that processes it is--in a different sense of the word--valuable. If a bitcoin conferred a fraction of ownership of that infrastructure to the coin's holder, you'd have a point, but it doesn't; the holder just has the coin. The parts of the infrastructure you might actually sell are owned by someone else, and the open source parts of it are owned--in the sense relevant here--by everyone, so it doesn't provide the coin any value. It's like saying gold is a good value store because mining and ore extraction equipment are useful. Doesn't make any sense.
Of course, you can say the infrastructure makes the coin more useful as a medium of exchange, but that's a totally separate point, as Krugman points out.
My personal view is that none of these things--gold, dollars, or bitcoin--has enough intrinsic value to make a useful value floor, and that as value stores they all just rely on a shared convention. So I'm not sure Krugman is right, and perhaps bitcoins will work out without that floor feature, and perhaps without ever really being used as a store of value. But this argument about infrastructure just doesn't work.
I was considering the blockchain itself as part of the infrastructure. If the [rest of the] infrastructure (i.e., the mining equipment) becomes (or is) useful, it is only inasmuch as it is a good shepherd of the blockchain.
It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a globally-distributed secure ledger and a network capable of maintaining it, then the individual accounts within its purview obviously have whatever values it records them as having.
> then the individual accounts within its purview obviously have whatever values it records them as having.
I think there's a basic disconnect here about what we mean by "store of value". The simplest way to put it is that something stores value well if I can buy a predictable amount of stuff with it in the future. That the ledger does a good job of establishing that I have N bitcoins is different from telling me how much those bitcoins are actually worth.
I'm using the standard definition of 'store of value' (see: http://en.wikipedia.org/wiki/Store_of_value). The only requirement to have a store of value (aside from ability to store and retrieve) is that there exist a floor; i.e., that an entity 'merely have economic value that is not known to disappear even in the worst situation' or in other words 'be predictably useful when retrieved'.
Of course, we can easily imagine scenarios where Bitcoin loses all value but I think a sufficient imagination can produce scenarios for the other stores of value listed on that page as well. So, this is obviously a bit subjective territory (i.e., different people can assign different probabilities to each of the circumstantial propositions) but there is a strong argument from consistency for the designation of Bitcoin as a 'store of value'.
I personally think that mathematically-interesting (and rare) numbers do have an intrinsic value (even if only as a novelty or perhaps antique/collectible).
I take back what I said about the definitional problem.
But I don't see where you've established that Bitcoin has such a floor, as I said above. I don't think we're getting anywhere, though, so I'm going to break off.
I didn't establish that it has a floor. Did you read and comprehend the entire response I sent last? I think it's pretty clear but I'll repeat it again for you-- my point is that Bitcoin has as legitimate a floor as any of the other entities commonly considered 'stores of value' and thus, from consistency, Bitcoin should be considered a store of value as well.
I understand that you do not think that those other entities have floors either (and I, having a sufficient imagination, tend to agree with that). However, in that case, the term 'store of value' is non-sensical since, given a sufficient imagination, no entities can ever satisfy the 'floor' requirement.
I don't think you're understanding Krugman's point.
If the gold price collapses, you can sell it to jewelry and electronics manufacturers at some (low) price point. Gold has a weakness as a store of value because this price point is a lot lower than its market price during good times - and this is why Krugman is also not in favor of it as a store of value.
If the price of the dollar collapses, you can sell it to the Fed (usually indirectly - the Fed sells debt and then sits on the proceeds). This floor is pretty solid, cf. Volcker's recession in the early 1980s.
If the price of Bitcoin collapses, you can't sell the electricity used to produce it onto the grid - that electricity is a sunk cost. So what provides a floor to the Bitcoin price if for whatever reason its value suddenly falls? Probably only its utility as a medium of exchange, which in an era of electronic exchanges lasting fractions of a second probably doesn't provide a huge demand for the stuff.
Yeah right. If the gold market collapsed then nobody would be making selling or wearing gold jewelry. The reason it is popular now is because it is expensive.
People have been making and wearing gold jewelry for thousands of years despite wide fluctuation in price. Gold doesn't tarnish and is easy to work, so it is uniquely suited for jewelry. (That also gives it a lot of industrial applications, which set another price floor.)
My original post was somewhat negative (as I have a personal issue with the jewelry industry) however
Gold originally was the only metal colored like that (shiny) so it stood out, coupled with its scarcity it became a status symbol. It was the stuff of royality. It has some properties that make it useful in jewelry but pure gold is actually too soft for jewelry and is used mostly as alloys.
I am not saying gold (like other metals) doesn’t have its industrial applications, it does!
You can not convince me however that gold is inherently a better metal for jewelry than alternatives. It is only there to give jewelry that golden shine, which has been considered a status symbol. Now, if gold somehow became a "cheap" metal I don't think people would be keen on displays of their gold.
If the gold price collapses, all the energy spent mining it and transporting it will be gone too. and that energy is much much higher than the energy bitcoin network is consuming.
> If the price of the dollar collapses, you can sell it to the Fed
I think this is a dubious argument. It describes what happens most of the time, when the value of the dollar fluctuates. But what if the collapse of the dollar is accompanied by a downfall of the Fed? Hyperinflation has happened in many, many countries that used fiat currencies, and even the US has had high inflation:
It may be a dubious argument in theory, but it's not a dubious argument in practice. You have to store value somewhere. If you look at how most people deal with that, they use fiat currencies backed by organizations they trust. There are alternatives, but they have risks as well.
Given the strong guarantees of Fed independence and inflation-targeting written into its establishing laws, I think the hyperinflation case you're worried about boils down to a collapse of the American political system or its defeat in a much more major war than it's been involved in for many decades. This is a risk to think about and plan for, but not at the cost of exposing yourself to the risks of storing your wealth in such a volatile commodity as bitcoin. Stock up on living needs and stable commodities if that possibility seems realistic to you, and be ready to use bitcoin as a medium of exchange.
I am afraid that you have missed the point entirely. The only function that mining performs is a means of distributing the currency and encouraging its use.
In the case of clones Namecoin/Primecoin/Gridcoin/Datacoin and others, there is even useful work being performed as part of the protocol of the software. Gridcoin's block rewards, for example, scale 30x in favor of those who devote enough computing resources to BOINC to achieve a BOINC score of 100.
You don't need this amount of computing power to send messages. All that these processors do is guarding against 'double spending' - but 'double spending' is a peculiar problem of distributed cash - a centralized currency could be secure against 'double spending' without burning so much electricity.
Krugman is right, I agree with him 100% on this, but almost every time I tried to make any sensible argument about bitcoin with people actually holding bitcoin, I hit a wall.
Most people confuse currencies with assets, storage-medium with exchange, etc. While at the same they are just hoarding.
I think that BTC will stick around because it has some unique qualities that are requested by the market such as partial anonymity, speed and size (a USB can contain whatever amount of USD).
But it has some serious flaws and as a currency is clearly failed. It is a libertarian's dream, but I don't think that the US or DE or RU government can't monitor whoever moves money in and out of the BTC blockchain.
I dealt with virtual game currency before I really started messing around with banks.
There was a ton of, "What do you mean I can't do this", and "What do you mean this takes longer than five seconds.. four DAYS?!", and "they're closed? So I can't? What? You're joking with me, right?"
I understand that dealing with money is incredibly hard due to regulation, but I would like something to use as a medium of exchange which doesn't leave me constantly infuriated.
Most of that probably has more to do with horribly bad legacy systems at the banks than it does with what currency is used. A little bit of competition will do well in showing what is possible, but shouldn't automatically replace the reigning currencies.
Sometimes I wonder if Bitcoin really is a weapon made by a nation state. Like Stuxnet. Or alternatively could a nation like North Korea co-opt it in an attempt to dislodge the dollar?
Krugman was a proponent of mass inflation, aka. helicopters of money, as a solution to the credit crisis. Bitcoin makes it basically impossible to manipulate the money supply the way the Fed has done to navigate the 2008 crisis.
Krugman sees Bitcoin as a threat to the central banks ability to stabilize the economy.
One capability of bitcoin not often addressed is the ability for the majority of its users to change the rules.
If you can get the majority of users to agree to a change in the rules, then they will fork off the block chain in a direction that follows those new rules. Of course, you will have some percentage of users who like the old rules, and could theoretically continue on the old block chain.
One rule change, for example, is to have miners vote on the reward for new blocks found. Then, every so often take the medium or a random vote and award that amount for new blocks mined. This would allow miners to regulate the amount of new coin being mined, which could level off the exchange rates between bitcoin and the world currencies.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
Doesn't he get that point wrong (like many others)? The mining rate, and eventually the limit of 21 million bitcons places a limit on the supply of bitcoins, not on their value. If bitcoin is successful, it will only keep getting more and more valuable. Its hard to estimate how much, but the total market capitalization will probably that of a commodity like silver, or that of a nation state's currency.
Also, I think bitcoin is not really supposed to be a store of value. Its main purpose is to pseudonymously buy and sell stuff (drugs, cough, cough). It's good enough if it can hold its value for a few hours - if someone builds a nice way to deposit dollars or euros, convert them, and immediately pay with the bitcoins, milliseconds would even suffice. In a market with such a high turnaround, of course, the value represented in bitcoin at a given time will be lower than for e.g. silver or gold, which are supposed to store value for a longer time (and also have applications as a material).
Finally, I don't think bitcoin can replace "real" money. It might have worked a few decades ago when there was a kind of self-carrying growing economy. The only way todays econonmy is still running is because of massive state intervention, which is impossible if bitcoin in the main currency. I mean, we gave up the Bretton Woods system and the gold dollar for a reason...
>BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
And you are going to have to live with it, the same way the people who created Bitcoin will have to live with interventionist policies.
It's great that Krugman is trying to to make a purely positive analysis of the potential impacts of Bitcoin. He's entirely correct in saying Bitcoin has zero inherent value, as opposed to gold and USD. But that's missing the point.
Most of us don't think about owning gold in terms of how readily we can make pretty things out of it, or dollars in terms of how easily we can pay our taxes. We hold onto them because both have a reliable history of being easily traded for other goods and services. Ease of exchange trumps inherent value as soon as a currency's users regard it as stable, and Bitcoin hopes to be there in a few decades (presumably starting with the sort of people who follow interesting tech developments, rather than those who care about inherent value).
As a side note, the headline is ridiculous linkbait and someone really ought to change it. Krugman spends most of the article explicitly stating that he doesn't want to muddy the discussion of how well BTC will actually work with normative/political arguments (i.e. the word "evil"). I can't help but feel like someone other than the author titled this article.
Krugman is smart and a bit condescending, with a sarcastic bent. "Is evil" was not prima facie humorous, but the way certain people in this thread have responded to the title without reading the article may have been part of the joke.
It's still a totally inaccurate bait and switch title, which annoys me and makes me like his column a little less.
If I click through to an article called "Bitcoin is Evil", maybe I actually want to read about how a Bitcoin-dominated world is going to making exploiting the poor trivially easy. I'm not convinced yet, but it's a plausible (if normative) argument someone could make, so there's no sense in making a joke out of it. Especially if - like Krugman - you already support redistributionist taxation and the welfare state.
I'm not a libertarian. I am using the correct terms that apply to those policies. I don't think of the phrase "welfare state" as pejorative, nor was it originally intended to be so. A combination of redistributionist tax code and generous healthcare/education/benefits are working out really well for Scandinavia right now, and in my opinion we could learn quite a bit from what we're seeing in those countries.
In my experience, strong libertarians prefer to avoid even mentioning that the poor exist.
I'm sorry if I offended you in some way. "Welfare state" is a widely accepted academic term, and I was using it in that context. I could just as easily have said "states with very progressive tax systems that offer substantial benefits to all citizens, rather than only those who pay." It would have gone over better with those of us who feel strongly about a US transfer payment system ("welfare"), but it didn't really roll off the tongue.
I wasn't offended, I was merely pointing out that saying you don't think of it that way isn't really what matters in these matters; what others think is.
But sure, talk about the policy, though I didn't disagree with anything you said policy related.
Judging from a follow-up discussion, I believe you're using the word "redistribution" in a way that is meaningless and/or needlessly gives ground to a libertarian framing of the situation.
In a nutshell, if you say "redistribution", you must have some baseline in mind. Many people are fooled into accepting an "everyday libertarian" distribution of resources as a baseline, but this is both philosophically problematic and politically foolish if you are not a libertarian yourself.
Taxes are part of the distributive system of society, as are other parts of the legal code such as patents and copyright law. There is no reason to label one part of the law "redistributive" while you call other parts merely "distributive".
Interesting read from Bruenig! While it's true that the term "redistribution" (as opposed to "distribution") implies a default where everyone gets back exactly as much value as they paid into the system, it's also common parlance for progressive taxation and equal benefits. That was the sense in which I used the term.
Well, I disagree. He spelled out why he thinks Bitcoin is evil, he thinks it was cooked up in a lab by cyber-Libertarians to destroy the power of the State to tax, an activity which he thinks is a good and necessary thing. His only consolation is that he thinks it won't work, but that doesn't change the black, black intentions of Satoshi Nakamoto and his Crypto-anarchist crew. I'm serious that he's serious: he thinks Bitcoin is evil, in much the same way that some politicians think Tor is evil because child pornographers can use it.
> He's entirely correct in saying Bitcoin has zero inherent value, as opposed to gold and USD.
No, no, he is NOT correct on that. Bitcoin's inherent value is in the Bitcoin technology. Inherent value of USD is that government declared it has value (by fiat). You can actually create "pretty things" with bitcoin technology, the same way you can create pretty things with gold - those are just other things.
The United States is a superpower that many people enjoy calling home (you may even be among them), and it will probably be around for a good long while. If you chose to live there, you have a civic obligation to pay taxes, which are accepted in USD. If that's not inherent value, I'm really not sure what is.
Nobody believes the Bitcoin protocol itself is beautiful in the same sense as gold, although I do know a few computer scientists who might find it intriguing. I suppose you could make the case that the ability to make anonymous transfers has some inherent value - but even that depends on how well BTC is adopted as a medium of exchange.
> If you chose to live there, you have a civic obligation to pay taxes, which are accepted in USD.
1) Can you produce my signature on said document that certified this contract?
2) Let's assume I choose to expatriate because I no longer wish to pay taxes and support this country's views. Why, then, might I owe a large "exit tax" upon leaving when I've already paid capital gains tax, income tax, sales tax...
Ok, but I think the point is clear. USD has value because U.S. government said so and people trust that government, and Bitcoin has value because some people trust the Bitcoin network as the "currency issuer".
If we imagine a scenario, where a majority of businesses will accept bitcoins, and people will be able to buy bitcoins and use either dollars or btc for payments, and both methods will be legal, we will see that dollar doesn't have any more "intrinsic value" (whatever that means) as bitcoin. It will be just two competing payment systems with different attributes.
Right, the trust in the future spending power makes a currency not only a medium of exchange, but a medium of store.
It seems that as far as alternative currencies are concerned, altcoins have a better chance of being spread. What's to prevent Amazon from coming up with AmazonCoin, pre-mining an entire AmazonCoin set for themselves, and then offer this altcoin with a liquidity guarantee on largest retail site. Nothing to prevent them from accepting BTC, but I think any US retailer would be prone to quickly trade in BTC for USD after the transaction is completed, as there's volatility risk, and payments to merchants and the tax man are due in USD anyways.
Every HN post on Bitcoin has to have a discussion about the definition of fiat money.
Fiat literally means "it shall be"; in terms of fiat money this refers to government's declaration that something is legal tender. The US declares that the dollar is to be used as money - that makes the USD fiat money.
Enough people use the term to refer to money which has no "intrinsic value" that the term now means both things. Personally I think that's nonsensical – if the US declared that gold coins are to replace the USD as legal tender, then those gold coins would be fiat money, regardless of any intrinsic value gold might have. But you can't argue against language evolution; "fiat money" has two different and unrelated definitions now, and we need to repeatedly have arguments ending in both sides being correct and nothing of value being concluded.
This discussion must now, as is tradition, be followed up by a discussion of what intrinsic value means and whether it exists. So go on, discuss.
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[ 5.4 ms ] story [ 387 ms ] threadAlso, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
The Econ "Nobel" is a little more rationally awarded than the Nobel Peace Prize, but neither is the same as Physics/Chem/Medicine.
I think it's fine to judge Krugman's political arguments on political merits; there isn't "nobel-caliber" economics behind them. They're usually about things which economics doesn't even address.
Neither did Krugman.
To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.
And then says he hasn't been able to get an answer to this question, that the BitCoin enthusiasts he's talked to have mostly avoided trying to answer the question, and that he has reason to suspect that BitCoin gets promoted not because it is useful as a currency but because it pushes the right ideological buttons for some people.
And, one must admit, it is a perfectly legitimate question to ask when considering something's usefulness as a currency.
What I'd actually be interested in reading is a proposal from Krugman (or someone else) for a hashcash/cryptocoin/digital money scheme that addresses their concerns.
It would be hugely more interesting to hear economists discuss how new technology can advance antiquated, federated payment networks rather than pointing out well-known flaws in a very immature technology (that I'm still not entirely convinced they understand, technologically speaking).
So maybe BitCoin isn't money? We already have something that is a reasonably stable store of value but is not a medium of exchange (gold), so why can't we have something that is a medium of exchange but not a reasonably stable store of value?
His argument seems to be that if you want something to be genuinely useful as money, it has to do both reliably, and BitCoin only seems able to do one.
A trait gold shares with bitcoin. The volatility makes it terrible as a currency, not to mention the expected rise in value. That makes BTC even worse as a currency - there is no sane reason to spend bitcoin if you believe in the concept.
When, in fact, it lends support to his argument.
I'm not sure what technologists he's been speaking with, but I think the distinction between value store and payment network is abundantly clear to most people even peripherally involved with Bitcoin. I think the view of most competent technologists is that Bitcoin is a promising technology, with somewhat unproven utility.
First of all, Physics and Economics are two different things.
Physics tends to be about facts, Economics is more about opinions, views and theories. It's not because we're not Nobel Prize winners that we shouldn't disagree with the author, and I'm sure there are many well-known economists out there who won't agree with him.
>> Also, his point about BitCoin enthusiasts being unable to distinguish between what makes a good currency and what pushes their ideological buttons may apply to you.
Bitcoin enthusiasts are not the only users of Bitcoin. I use Bitcoin and it's for no ideological reason. It's helping me better than any other payment system right now and that's all I care about.
There are plenty of economists who don't agree with Krugman. But they would disagree for actual reasons instead of "OH NOES THE WORD LIBERAL APPEARS IN THIS COLUMN".
Edit: also, Austrian economics is like pseudoscience, it isn't representative of real economics
Edit: what are the priors you are speaking of.
When was the last time you saw a Keynesian taking Hayek's work on business cycle theory seriously? (For which, in part, he won the Nobel prize for!)
Ironically, to more directly address your point, Hayek had this to say in his Nobel Prize acceptance speech:[1]
Stated differently, the comparison between a hard science (like Chemistry) and economics is rather unfair.[1] - http://en.wikipedia.org/wiki/Nobel_prize_economics#Controver...
This is the type of claim that is fairly dangerous. It is perhaps vitally important to understand WHAT Krugman won the Nobel Prize for, and that was due to his contributions to New Trade Theory. Additionally, his work on NTT (superceded by NNTT I should add) was long, LONG ago, and he has since turned into a political pundit/shill.
Compare it to his polar opposite, say, Hayek, who won it for his general contributions to the field due to libertarian/market anarchist theories. Yet Hayek is widely seen as a crock of shit while Krugman isn't, mostly because he writes for the NYT.
As opposed to economists who conceal their political viewpoints to cover the fact that their supposedly scientific economic conclusions are intended to push a given agenda.
One of the best ways to fight your own political biases in areas where you want to try and be more objective is to be incredibly up front about them. That way, people can say, "I think you are indulging your bias in specific manner X." I wish you would do that (be specific about any complaint) instead of dismissing Krugman simply for being honest and up front.
(Also, this implication that moderates tend to be more reasonable is erroneous. Oftentimes the correct answer starts out as marginal aka "extreme" until it is slowly validated moves the whole discourse and moderate is redefined to where one extreme used to be. And oftentimes people are moderates out of ignorance; when you begin examining any given issue and have little knowledge it is natural to stake out a "on the one hand, on the other hand" position until you learn more. Then you cease to be a reasonable moderate, at precisely the moment your knowledge becomes formidable. But I am rambling and need to go outside now :)
But you're getting it backwards - I was unclear. You don't have to be a moderate to consider both sides, but if you consider both sides in my experience you tend to come out more moderate than if you didn't.
This is his column: http://www.nytimes.com/2013/12/23/opinion/krugman-bits-and-b...
2) similar to the author's point that advocates can't tell the difference between "store" and "medium" of value, I can't tell you the number of arguments I've gotten in with people who equate a "store of value" to be the same thing as the "increase in value"
3) It's a 1% wet dream. Make money, potentially hidden income, avoid taxation? No money paid into the welfare state? WIN!
I'm not saying bitcoin replaces all those things (it certainly doesn't), but it aims to.
Right now one of the main metrics people use when evaluating the profitability mining hardware is Ghash/Watt, so the market is naturally incentivizing low OpEx and therefore less power usage (per transaction processed not the nominal amount of power used).
Also, it's actually more efficient to have a smaller number of machines running at full utilization 24x7 than the typical massive datacenter that averages around 20-30% utilization [0]. That's because modern servers consume nearly as much power at 20-30% utilization as they do at 100%.
[0] - http://bnrg.eecs.berkeley.edu/~randy/Courses/CS294.F09/whare... (page 55)
There will always be central banking infrastructure controlled by billionaires who are more socially important than you. We can't just "go decentralized." An average person is too busy to even remember their password to gmail is "password456" and not "password123."
On top of that, you have to consider that those systems offer much more value than just a barebones ledger as the core of Bitcoin does. If you add in all those companies building stuff on top of Bitcoin, the comparison starts to become less favorable.
[0] Purely monetary terms are obviously different. The vendors of those systems inflate prices ridiculously because they can - banks have traditionally not been under much pressure to operate efficiently in this arena.
From a logical standpoint, "so does X" (e.g gold mining) very much does eradicate this as an argument against BitCoin, unless there is some Y which has less carbon footprint than either. If there is not, then the carbon footprint it's an necessary evil, and a constant through all similar systems.
And an even better question would also ask, "What's the carbon footprint of not having a government creating more money?"
Since miners will eventually only be able to compete based cost of their electricity mining will be driven to places with extremely cheap electricity. I don't know if that will always correlate with "clean" energy, but it seems like it would. For example, the recently announced Bitcoin mining operation in Iceland, where cheap geothermal and hydroelectric electricity and plenty of cold air for cooling is available: http://dealbook.nytimes.com/2013/12/23/morning-agenda-the-bi...
If the heat from mining can be reclaimed for other purposes (heating homes, etc), then the effective carbon footprint is reduced even further.
It will hopefully make clear that your argument is flawed.
So basically it brings an ability to the middle-class that normally only the top 1% have. We know wealthy people use tax loopholes(and a few of them, laundering) and... why do the states need to monitor financial transactions? Don't tell me because terrorism. I'm sick of that being the reason for everything when we have this kind of nonsense[1] happening.
I translate this to: "Bitcoin is designed to free non-rich people from the restrictions, fees & surveillance placed upon them by the wealthy elite"
I don't know if crypo-currency will succeed long-term, but seeing how hardcore scared/doubtful some people are about it makes me think a nerve has been hit. I just hope that if btc fails, it fails naturally/organically/mathematically on its own... not because someone arbitrarily makes it illegal.
1. https://news.ycombinator.com/item?id=6954341
I hate the "terrorism" BS as much as you, but money laundering and large-scale scamming ( https://news.ycombinator.com/item?id=6972139 ) are actual threats.
Yes, banks launder drug money for cartels. Without the state, who would slap their wrists?
Meanwhile, people's lives are ruined for selling or even possessing small amounts of harmless drugs.
http://www.bloomberg.com/news/2013-07-02/hsbc-judge-approves...
but yeah...bitcoin is bad! cuz...bad people!
[0] - https://bitcointalk.org/index.php?topic=279249.0
All federal tax information for employees is self-reported by employers. There isn't a huge monitoring infrastructure in place—just required-by-law reporting of what people get paid. Getting paid with not-dollars doesn't change the system.
Monitoring for taxes comes second.
BSA: http://en.wikipedia.org/wiki/Bank_secrecy_act
We don't have any system in place to show military spending breakdowns or get people upset about it or give people who are upset about it a way to influence changes shrinking it in the future.
Just how you do the actual enforcement, that's a different issue, especially if corruption is entrenched already.
The funds from your undeclared income could be going to other people' undeclared incomes.
Bitcoin makes a lot of this even more complex, and as more people start using/trusting it for larger transactions, it'll be quite difficult to know who actually owns what. I might not even need half my loopholes anymore.
1. just like this guy: http://blogs.wsj.com/wealth/2008/05/19/the-homeless-billiona...
My friend, you fall under this critique. While the middle-class can make transactions if it chooses using Bitcoin, it has to deal with its huge volatility - a 'store of value' problem. You cannot have just a 'medium of exchange', like the song "You can't have one, without the other".
Anyway, I think the root of the problem with those mainstream journalists is that they do not distinguish between Bitcoin as an unit of account (like, I have 0.5 BTC, or this item cost 0.1 BTC), and a Bitcoin as a technology (peer-to-peer trustless network with all the wonderful attributes it has). Their mind mangles those two things into one, and they then see Bitcoins as only some virtual numbers, which are moving from one wallet to another. Starting from this perspective, they can't conclude anything useful, and can't see the intrinsic value of Bitcoin the technology.
So what we have is governemnt creating an illusion of unmanaged store of value through financial engineering. It's is somewhat artificial, so I suspect it's not stable either. Consider that financial bubbles are caused by excess of capital relative to production needs, and the glut of capital was accumulated strictly due to people trying to preserve value of their savings. There is a mismatch between amount of value people are trying to preserve and cumulative size of viable investment opportunities.
That is, if people are successfully using a crypto asset for their business, AND they are able to use a power and network infrastructure for this that is difficult enough(not perfect) that government authorities aren't successfully applying their "monopoly on force," then government is now pushed into competition with the crypto-anarchic principles and must find a way to become a "better product," enough so that people will prefer government money over crypto.
How will government come up with a product that is better - in a positive way - than a crypto asset? Government has the authority to issue new centralized currencies. This means that if it truly embraced computing - which it never has to date, having never faced a challenge of that nature - it could program a form of currency that is "smart" and bakes in the policy decisions and taxation currently executed by bureaucracy. It would be made attractive to citizens by building in basic income, as well as the service provisions. The result would be more powerful and more efficient than anything we currently know as government. Cash would still exist as a backup, but the government could discourage its use except in emergency situations.
On the positive side, I think Krugman and DeLong are overestimating the strength of the floor for the value of a dollar. Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency. Sure, you can pay taxes with them, but the government collects taxes to buy things, and if people no longer have faith in the dollar, the government won't be able to buy things with those tax dollars. There's no floor on the value of Bitcoin, but there's no floor on the value of the dollar either.
On the normative side, I don't think one's position on the utility of central banking matters when it comes to Bitcoin. If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. I think central banking is useful, but I don't see a future for it.
Even if this is true, where is the evidence that we're in imminent danger of hyperinflation? Despite mounting public debt, U.S. inflation has remained incredibly low since the start of the financial crisis four years ago, as has the interest rate that must be paid by the government to issue new debt.
From what I can tell, we have on the one side a dollar that has endured as a value store and medium of exchange for hundreds of years, and which has proven remarkably resilient (valuable) by any objective measure throughout the worst economic implosion since the Great Depression (which the dollar also survived). On the other hand we have Bitcoin which is intriguing in many ways but which has demonstrable volatility even just in the short span of its existence. And which, as a feature, is not backed (in the hard economic sense) by any nation or bank. I mean it's cool and all but I see where Krugman is coming from.
If every merchant you patronize today accepted Bitcoin, would you rather have Bitcoin in your bank account or dollars? I'd rather have Bitcoin. They're easier to transfer, they can't be counterfeited, and their supply can't be manipulated.
If every merchant accepts Bitcoin and every consumer agrees with my logic, hyperinflation of the dollar would occur. Coinbase and its 0% transaction fees will lead to rapid adoption of Bitcoin on the merchant side. I'm less confident about the consumer side, but I see that happening as well.
I am also baffled by "they're easier to transfer" than dollars. Yes you can email BTC. But I can literally hand you dollars. No smartphone needed! And large amounts are trivially easier - I squiggle some lines on a piece of paper and hand it to you. Or if you want to stick to smartphones I can pull one out and send you dollars using one of dozens of e-payment platforms.
Interesting thesis though.
Transferring large amounts of dollars takes days. Transferring Bitcoin takes 10 minutes or so.
Transfers are slow because there is little need to transfer large amounts of money quickly, and slower transactions help address issues with fraud. If you are buying a car, or paying for a house there is little need for a fast transactions. So with BTC or USD, transferring large amounts of money will take days.
My debit card/square/venmo might have something to say about that...
You just don't notice it because they pay the miners by printing money. I'll be really interested to see what happens when they stop that and start relying on up front transaction fees to fund the network.
If 90% of the network is powered down to reduce transaction fees, that gives someone the opportunity to buy up 20% of it on the cheap and corrupt the network. Bitcoin has to use as many resources as possible to stay secure.
Right now the mining rewards being minted increase the Bitcoin supply at a rate of 11% per year. If demand for Bitcoin were constant, this would amount to 11% inflation. Demand for Bitcoin is currently increasing, so it is net deflationary, but this only lasts as long as the demand for Bitcoin is growing constantly. If you kept mining rewards high after the demand for Bitcoins had stabilized, you'd have five times the inflation of the dreaded US dollar, as you paid for your infrastructure costs through inflationary taxation.
(Which Benjamin Franklin and I actually like, but that's another issue entirely.)
[1]: http://www.economist.com/blogs/economist-explains/2013/05/ec...
So Bitcoin could be valuable in disrupting payment systems:
So - there's a buck to be made in Bitcoin, but it's implausible that Bitcoin should remain superior to more traditional systems in the long term (except for illegal purposes).It's still vulnerable to computational attacks (no matter how impractical they may be) and miner collusion.
There's no need to regulate computing capacity when you have the power to tax enough wealth to ensure that the government always has more computing capacity. It's an arms race without the nuclear winter, and with the side effects of increased pollution and rapidly advancing processing power.
If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation would go down, not up.
And yes, I would rather have my [savings] account in a hard, non-inflationary currency. On the other hand, I can only earn interest when someone is willing to take a loan in the currency and pay interest on it. And I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. So, you're going to have a hard time finding a bank that pays interest on bitcoins. This is why "bad money drives out good", aka Gresham's law.
Assuming the interest rates are the same, I'd agree. Would they be?
I doubt they'd be the same in either nominal or real terms. But that's a side issue.
You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations.
BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.
When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.
http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationar...
Same goes for the borrower and deflation risk.
Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.
Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this.
You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period.
There are very few risk free ways to make more money than investing in US Treasuries.
At this point, and in the foreseeable future? Dollars. I'm not sure where people find all this friction relating to using dollars in the real world. I have no problems whatsoever. Besides, it's all virtual currency.
As far as your theory of widespread adoption of bitcoin leading to hyperinflation of the dollar, I'm don't even begin to understand how you see that working.
There's something you're overlooking though: the dollar was backed by gold until 1971, and that's where our problems really started mounting.
There's a somewhat cyclical argument here, as a semi-deflationary (or at least unregulated) currency was already standard for many years, and central banking and regulated currencies grew because that system was unacceptable. So you could say that central banking was a response to problems with Bitcoin-like currencies, and Bitcoin is therefore reactionary. There is little evidence yet that Bitcoin is anything but a reactionary currency, and no evidence that crypto-currencies are in any way "the future" (I believe they will be used in the future, perhaps more than they are used now, just as gold and diamonds are still used in some circles; but I don't see any indication that they are the future).
Unacceptable to whom?
Historically (you should read http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History-...) inflationary money systems have been the tools of those in power to quietly take from the poor and less powerful. Whether or not the current era of central banking was intended to be that way is a question for conspiracy theorists - but it's very clear that that is exactly what it has become. These inflationary systems were ALWAYS less stable than their preceding deflationary systems, and ALWAYS ended in revolution, or conquering, or plagues, or what not.
Even Keynes knew this to be true:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Consider a poor family spending about 90% of their income on day to day expenses; versus a rich family spending 20% of their income - if there's 10% inflation, the poor family will go from a 10% margin of survival to a 1% margin of survival, which is a 90% reduction of ability to survive or save. Vice the rich family which has only suffered a 2.5% decrease in this margin.
Let's say (and this is atypical, as I said, poor people are usually less in debt than rich people) the poor family is additionally 5% in debt, versus 0% as in the rich case. Do you think it's any consolation that the 5% debt is nominally valued (and therefore decreasing in real terms) in the face of the fact that the family now is spending 104% of their income on day to day expenses? Moreover, the way in which poor people use debt (very short-term loans) typically involves interest rates that are far too high to take advantage of real reduction in value, and are over far to short of a term even if they had reasonable interest rates.
Now obviously these numbers were chosen because they make the calculations easier; but you should consider plugging in values of your own and proving that it is general.
Ultimately, calculations of the alleged losers of moderate positive and predictable inflation are meaningless without taking into account its positive sum effects: when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced.
two, if you think people won't consume if the money is deflationary, you're crazy. The US had net deflation for most of its history (except during wars) from 1600-1910, and certainly there was plenty of growth. Also, analogous to the "why do you ever bother buying computers knowing that they depreciate rapidly".
three. If you think laborers get paid wages that match inflation, you are crazy. In fact, as krugman himself states: http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hig... " that there’s another case for a higher inflation rate ... It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
You cannot simultaneously make the claim that inflation will fix the sticky wages problem and also claim that wages will catch up with inflation.
four. "when "bury it under the ground" isn't an acceptable investment strategy earning average returns, more real goods and services will be produced." in other words, artificially encourage people to spend so as to enrich the already-wealthy. This should give a hint as to where the wealthy actually do store their wealth, and why inflation benefits them while stealing from the poor. Related: Encourage people to artificially spend more money on stuff they don't need without regard to the downstream environmental effects of increased consumption.
And for all but the last 45 years of that 410-year period, the US also had the ability to obtain labor by force and without compensation. And even afterward, for many decades and well beyond the 1910 cutoff, the US had labor arrangements which only were not classified as slavery due to legal hair-splitting over the definition of the term.
Thus, we can just as easily argue that slavery is correlated with economic growth. Or that disregard for the intellectual-property laws of other countries is associated with growth (see the US in the 19th century, China in the 20th and early 21st). Or... well, lots of complicated factors that you seem to want to gloss over to make an argument in favor of one and only one factor.
(and that's without getting into the volatility of gold-backed currency, the boom/bust cycles, the fights over whether to have a single or bimetallic standard, etc. etc.)
I am sympathetic to both claims, given that it's possible that economic growth in the modern era is only made possible by massive credit expansion (voluntary, fractional slavery.
boom/bust cycles are normal, what's so bad about them? If the claim is that people get hurt then the question we have to ask is why aren't we stepping forward to help them? As for single or bimetallic standard, those are of course political issues, I'm not as well versed to the reasons for them but it appears to me to basically be a pre-hashing (if you will) of the same arguments we're having now about inflationary vs. deflationary currency, except with more of granularity concern (not an issue with bitcoins).
Backers of a gold-only standard (mostly in the eastern US) wanted it because their fortunes were already amassed, and denominated in gold or gold-backed currency, and they did not want this diluted by the influx of silver from mines in the western US. Backers of the bimetallic standard had access to silver mines, or to the resulting silver, and wanted the ability to either have silver coined, or to present it and receive in return legal tender (which had been taken away in 1873).
For an edifying take on the populist/bimetallic position, consider reading William Jennings Bryan's "Cross of Gold" speech, which is full of eminently-quotable and still-relevant lines. For example, a rebuttal of what came to be known as the "trickle-down" theory:
Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of idle capital" and "the struggling masses, who produce the wealth and pay the taxes of the country"; and, my friends, the question we are to decide is: Upon which side will the Democratic party fight; upon the side of "the idle holders of idle capital" or upon the side of "the struggling masses"? That is the question which the party must answer first, and then it must be answered by each individual hereafter. The sympathies of the Democratic party, as shown by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.
Hence the argument for "trickle up", effectively, as opposed to "trickle down".
Obviously if I thought wealthy people actually did hoard their wealth in dollars I wouldn't have made the point about inflation inducing people not to hold their wealth in dollars. Wealthy people could, would, and probably should hoard large portions of their wealth in dollars in the absence of inflation though.
I didn't making any points about people not wanting to consume if the money is deflationary, because obviously there are limits to how far one would want to defer consumption. Consumption /= investment. Investment is based around getting returns, and if average return is zero then there's very little incentive to invest instead of hoarding coins for those neither certain of beating the market nor particularly enthralled by taking risks. US prices oscillated wildly between 1600-1910 so it was hardly a sustained deflation in which burying dollars in the ground was the most reliable way of ensuring continued purchasing power in a couple of years time, but it's worth noting that growth was a bit more impressive after 1910...
Three. The whole point of the "sticky wages" argument for inflation - one I didn't actually make - is that as relative prices in an economy shift, the real value of some workers' contribution falls, but they still have bargaining power sufficient to ensure this subset of the labour force doesn't accept wage cuts (they take job losses instead). A corollary of this is that productive workers in growing industries can and do have sufficient power to demand higher annual wage escalators, and inflationary increases to payscales are commonplace in normal economic climates. Nothing about the sticky wages problem implies that wages relative to labour productivity of a segment of the economy can't catch up with inflation, in which case the median worker can ask for and get accept their annual inflationary pay rise. But I haven't mentioned the sticky wages argument. Actually I went out of my way not to mention the sticky wages argument, by giving a theoretical examples where wages were all indexed, and emphasising the importance of inflation in providing investment stimulus was far more significant than its distributional effects.
As for point four, I'm honestly not sure whether you're deliberately misunderstanding me to make a rhetorical attack or genuinely don't understand that "investment strategy" and "encouraging people to ... spend more money on stuff they don't need" are not the same thing, and the poor generally benefit a lot more from the rich investing in job creation than the rich buying nice little cabinets full of gold.
Sounds suspiciously like "trickle down economics". And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
That's not an argument. When rich people (or any people) get wealthier that really does benefit everyone; the problem with classical "trickle down economics" was the idea that this meant it was ok to exempt them from taxes, as if tax money was just wasted.
> And that's not the appropriate comparison. The appropriate comparison is, do the poor benefit more from the rich "investing in job creation" or by themselves having easy access to a mechanism by which their wages and savings are not eroded (in a compounding fashion) by fiat?
Policies that increase the value of cash savings (at least, to the point where it's more profitable than investing in stocks or the like) benefit the rich, and policies that decrease the value of cash savings benefit the poor, because the rich are much more able to save than the poor, and cash really is a zero-sum game. If the dollar ever became deflationary, rich people would sell their stocks and buy up ~all the dollars and capture almost all of the increasing value (businesses would probably stop paying wages out in dollars); meanwhile startups would find it much harder to attract investment, which would be bad for everyone.
You might want to consider what they do hoard their wealth in. It's not currency, and they also don't buy gold - they buy companies, stocks, and bonds.
What do all those things have in common?
I'm sorry, but I need you to connect the dots a bit better if I'm to understand this.
So, 1600-1900 in the US (minus wars which were incredibly inflationary but always temporary in that era) not enough for you?
The counterargument is this: In the era of central banking we have struggled to figure out how to make the economy work with endemic inflation. And it's failing. The two eras where the gap between the rich and the poor widened in a protracted, long-term fashion, have been in the aftermath of FDR's great dollar devaluation and after Nixon closed the gold window. 1972 was the last year the rich-poor gap was closing.
https://news.ycombinator.com/item?id=6977547
So would another planet colliding into the earth, fortunately we're in danger of neither.
> If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation.
No. Deflation is a part of bitcoin, not of crypto currencies in general. When deflation shows itself to be the problem it likely will be, we'll just switch to a better crypto currency that has predictable inflation built in; they exist already.
Is that like "Real Estate only goes up?" Remember that one from circa 2005?
This problem really does lead to crypto currencies having no floor like Krugman points out. At some point everyone decides what the next hot crypto currency is, and suddenly Bitcoin turns into Friendster and there's a rush for the exits and the price collapses.
It really does seem like cryptocurrency fanboys have bought into a form of "this time its different" because... crypto. And they're ignoring the fact that it is a currency with zero to backstop, and its clearly dependent upon fashion and popularity, since there's a growing marketplace now of competing cryptocurrencies.
This thread has been very useful to convince me that bitcoin is a classic bubble. I have no idea when it'll pop, but it appears almost certain that it will.
No, it's saying that Bitcoin has the feature that people who like Gold like, the supply can't be artificially inflated. That's all. Keynsian's won't like that because that means it's deflationary.
> This problem really does lead to crypto currencies having no floor like Krugman points out.
Krugman is wrong because he doesn't see the inherent value in them yet, and there is value in shopping online without giving the retailer my credit card details and without the retailer being worried about charge backs and banking fees; but he didn't see the value in the Internet either.
Brilliant people are often wrong when stepping outside their domain, and he clearly doesn't yet understand the technological advantages of crypto currencies.
He's right that deflationary currencies won't function well as currencies in the end, which is why Bitcoin could be MySpace and a better designed crypto may ultimately win, but network effects give Bitcoin the chance to fail before someone else can win. However Bitcoin need only become stable enough to be used to move money around and it'll have a ton of value to lots of people whether it's deflationary or not simply to avoid banks, fees, and chargebacks.
You admit that some other crypto currency may win. That means that bitcoin may lose.
Lose.
LOSE
What happens when it LOSES?
Like Krugman points out, there's nothing to backstop it and no floor.
Oh right, but he's just an economist, he doesn't see the "inherent value". He just doesn't understand...
You so easily swap contexts completely between all of this "inherent value" nonsense when you're addressing Krugman, and then a marketplace of cryptocurrencies which clearly is 'libertarian' and is going to have clear winners and losers -- without, obviously, thinking that last word through very clearly.
I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
Your thinking is very binary. It's possible that another crypto currency becomes the biggest one, that doesn't mean bitcoin loses, it means it's not the reserve currency that it is now. You don't seem to understand that people have different ideas about how a currency should function and each crypto that comes out will attract those that agree with its rules. Bitcoin is designed for Austrian economic fans who think inflation of the money supply is the worst thing ever. They will never abandon it for another crypto, it's already exactly what they want. Keynsian's will eventually move to something that includes built in inflation.
> Like Krugman points out, there's nothing to backstop it and no floor.
Yes there is, it has utility; even if another crypto becomes the more favored currency, Bitcoin will remain the digital gold it is because it's deflationary, easily tradable, and aligns ideologically with how many people think money should work (they're wrong, but that doesn't matter).
> I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...
It's already fun to watch. That neither you or Krugman see inherent value in crypto currencies is something both of you will come around on eventually. He certainly changed his mind about the Internet being no more useful than a fax machine.
Hey, I love Krugman, we agree on much, but on this, he's simply wrong and he's been very wrong very publicly before. Your appeal to his authority is not a valid argument for why Bitcoin is a bubble, if you can't make your own, then move on but don't get snarky with this "he just doesn't understand" b.s. you're slinging; it's unbecoming.
Good luck with that. You've just said something along the lines of, "we'll just have to figure out how to live with terminal cancer."
Now, I'm no economist, but deflation is standardly seen as really, really bad, and for good reason. It's not just 'the opposite of inflation', as you probably know: it's an accelerating, self-intensifying brake on commerce.
How? Ask yourself: why buy today what can be bought tomorrow cheaper?
I know the the correct, rational answer to this question: "I won't buy it today, or ever, because it will always be cheaper the next day." (And then the deflationary spiral begins!)
But if this is really true, why has anyone bought a Playstation 4 or Xbox One? They will undoubtedly be cheaper in two or three or ten years. Well, consumers might be totally irrational; what about firms? Why has any company in history ever bought a computer when the price of computing power has been falling rapidly and (mostly) predictably for fifty years?
I don't think the question "Why buy today what can be bought tomorrow cheaper?" fully explains the behavior of people in the face of increasing purchasing power; there seems to be something else going on. Any thoughts?
The problem is that the economic theories often cited by Bitcoin supporters presume certain fanciful behaviors.
For example, in economic-theorist world, a frictionless spherical perfectly-informed perfectly-rational actor does not buy a six-pack of beer. Instead, the actor makes decisions:
* I will buy one beer at this unit price. Will I buy two?
* I will buy two beers at this unit price. Will I buy three?
* I will buy three beers at this unit price. Will I buy four?
* I will buy four beers at this unit price. Will I buy five?
* I will buy five beers at this unit price. Will I buy six?
* I will buy six beers at this unit price. Will I buy seven?
* I will not buy seven beers at this unit price.
* Therefore I will buy six beers.
I've long assumed that all the people who actually make decisions in this way are locked up in the laboratories of mad economists, who observe their behaviors in the way a biologist might observe a terrarium.
* Buy it now for $300 and play it for 10 years
* Buy it in ten years for $30 and play it then
(I have no idea how much an Xbox actually costs.)
So the question is whether that $270 is worth those ten years of playing it. A lot goes into that: what interesting things could I do with $270? How about in 10 years? How much do I want to play the games available for Xbox? Won't all my friends want to come over and play with me? Etc. Buying now might be perfectly rational, depending on your utility function.
"I won't buy it today because it will be cheaper tomorrow" is an argument on the margins. That's why temporary bouts of deflation don't cause everyone to starve to death because they keep putting off buying food.
But those margins do matter a great deal! There's some set of stuff that I really am going to wait on, because I only kinda want them now. There's certainly a discount rate for the Xbox that could cause all but the hardest-core fan to wait. So the deflation spiral doesn't take much to get started.
I'm not saying humans are rational (though I will argue that corporations do better here), only that the Xbox One example doesn't prove they're not, and that it's still consistent with the deflation spiral concept.
You also mention that this limited ability to defer purchases in the face of deflation is what makes short bouts of deflation not catastrophic -- it is somewhat difficult to get the deflationary spiral going if you can't actually wait to purchase things.
Given all this, the interesting question to me is, how much deflation does it take to actually cause a deflationary spiral? The answer is likely complicated, given that it depends on the specific utility functions for each consumer of all the goods and services that they consume.
Empirically, we seem to be able to cope with a decent amount of deflation, at least when it is limited to certain goods, like video game consoles, computing power, other manufactured goods, etc. (In some cases, even over very long timespans.)
One specific observation here is that short-lived deflations may not cause much behavior change because everyone expects them to be short lived. And changing your behavior is hard work, and your standard of living is sticky; you don't adapt right way, even if you're a business. Easier to just ride it out. But as the deflation period drags on, that consumption floor starts to fall (everything here is mutable!) as you get acclimated to the new normal. Since consumer confidence actually lags the other economic metrics a bit, an economy has a bit of time to pop out of deflation before the spiral really sets in. On the other hand, it makes it worse when it does.
It's also important to look at context: in that empirical evidence, we should note that the central banks were fighting deflation as hard as they could withe somewhat limited tools they had, so it isn't a spiral in a vacuum. Even then, Japan lost an entire decade of economic progress to deflation.
On specific items like video games consoles and computing power, I'd guess it's some combination of a) the utility of the items actually being quite compelling at their launch prices and b) a trick of psychology: in 10 years, there will be new, better video games and you'll want those instead, so you don't even really consider buying it later. (b) is irrational, because the console you're buying now is either worth it or not now; you don't actually have to buy it later at all. But it strikes me as very human. I think public has largely just accepted the premise the technology costs a certain amount; it just looks forward to having new features that fall into its locked-in price range.
On the other hand, one way to think about the technology stuff is that perhaps it really has held back a lot of the industry. For example, perhaps the price of the Xbox is artificially low at launch time because otherwise everyone would just wait for it to come down anyway; it's competing with its future self. The thought experiment is to ask how different purchasing decisions would be if an industry-wide announcement came out saying, "Moore's law is over. This is as good as computers get. They're going to cost X and do Y for the foreseeable future." Because I suspect a lot of people do put off technology purchases, waiting for everything to get better and cheaper. The complement of early adoption.
I should caveat that this is basically all speculation on my part; I don't actually know anything about any of this stuff.
I think you haven't really looked into deflation in detail, quite frankly.
For example the German hyperinflation was started by "London ultimatum" that demanded reparations in gold or foreign currency.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow.
Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles.
Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control.
This ability is what places a floor on its value, whatever that hypothetical floor may be.
This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.
The market price of bitcoin is determined by the number of bitcoin holders who think they will go down in value; as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value, which increases the store of bitcoins held for long term positions and thus the market price of BTC, etc. The increase of its usage as a medium of transfer ALSO increases the market price of BTC; that interplay between new value-minded long term investors and new users of btc as a transfer mechanism is what has been pushing the price up continually. the entrance and exit of speculators in the market is a short term distraction that has the benefit of spreading awareness but the drawback of adding to conception as a bubble.
after about the 6th or 7th one of these 'boom and bust' cycles that triples/quadruples the market price, people will stop seeing this as a 'maybe' thing, and my guess is that will drive a massive one-time spike in the value.
This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.
If you do spend dollars, you don't lose anything by converting them to bitcoins just before spending them.
those 'unproductive' people holding incredibly valuable bitcoins will enable bitcoin to work as a dirt cheap payment processing system.
One can also turn this point around: what requires the store of value to be the same thing as the medium of exchange? The store of value must be convertible into the medium of exchange, but that doesn't mean they have to be the same thing. Yet Krugman blithely assumes that they must be: "To be successful, money must be both a medium of exchange and a reasonably stable store of value." He doesn't even consider the possibility of, for example, an economy based on Bitcoin as a medium of exchange and, say, gold as a store of value. For that matter, he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.
Individual people, perhaps not. But the US dollar is the most widely-held reserve currency in the world, followed by the Euro. Wikipedia states that approximately 2/3 of reserve currency holdings are dollars.
It's true that there aren't many ways to exchange Bitcoin for actual goods or services or non-monetary financial instruments right now, but that's not due to any inherent inferiority of Bitcoin: it's due to the fact that governments and central banks have a huge incentive to either outlaw exchanges of Bitcoin for goods, services, or financial instruments like stocks, or at least impose artificial costs on such transactions that are high enough to discourage most people from making them. In other words, Bitcoin is not competing on a level playing field with other forms of money.
Personally I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority in something purporting to be currency too...
The same applies to any type of money. Google "hyperinflation".
Also, how much of an effect this is depends on how long people expect to hold money in between transactions; see below.
they will require you to pay x% more in Bitcoin (at current exchange rates) where x is a premium to account for the expected loss in value over the period they expect to hold the Bitcoins, plus a margin for risk.
People do the same thing with dollars and other currencies based on the rate of inflation they expect, i.e., the rate at which they expect dollars to lose their value.
Also note that qualifier: "over the period they expect to hold the Bitcoins". In other words, people need enough cash to cover current expenses for some period of time; but that amount can be pretty small compared to their total wealth, and it gets smaller as technology advances and economies evolve. People used to get paid quarterly, so they needed enough cash for a full quarter's expenses. Then the payment cycle became monthly, and now many people get paid biweekly or even weekly, so they need to hold less cash to cover expenses. (More precisely, they need to hold less as a fraction of their total wealth.)
I'd see "governments have a huge incentive to outlaw it" as a pretty major inherent inferiority
It's "inherent" only in the sense that we're not likely to get rid of governments any time soon. Is that a problem with Bitcoin, or a problem with governments?
It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction.
More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint <-> USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening.
There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.
Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
Where's the floor on the value of the dollar?
(a similar point is often raised against gold, in that a post-economic-apocalypse world would not immediately have the infrastructure to verify claims like "this is one ounce of pure gold", meaning gold's utility as a medium of exchange would not be as high as suspected by people who buy it to hedge against such apocalypses)
The idea that holding Bitcoin is a better idea than holding dollars is spreading. The more it spreads, the higher the value of Bitcoin will be, and the lower the value of the dollar will be. Eventually, we will hit a tipping point. That's the crisis. That's the hyperinflation.
Ideology is never an accurate or complete description of the world. It is false awareness. What might be true under paradigm A might no longer be true under paradigm B, but at no point will an ideologue change his world-view to fit paradigm B. He will try to cram paradigm B into his ideology in order to preserve his ideology, rather than adjust his ideology to describe paradigm B.
For instance a fiat currency heavily regulated by state monetary policy might have been the best idea in the 20th century, during which for the most part there was no Internet. But in the 21st century, where the Internet enables markets that can function more efficiently, a virtual currency with a self-regulating monetary policy might be a better replacement. The jury is still out on that. BitCoin is an experiment, and that's the best thing about the Internet - it is a laboratory for experiments, where we can try new and different monetary policies really quickly, whereas in the wildly inefficient 20th century we were locked into one monetary policy at a time. We're just figuring out what works the best, but Krugman calling BitCoin "evil" suggests to me that he is afraid of what we might find out.
Then again, it's not a design a flaw - as I once thought - it's a clear choice: Why would anyone would want to own a non-deflationary asset? :-)
So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Best Regards,
ps. FIAT currency is regulated by the FED and you know who runs the FED. BTC market is run by those who have huge amounts of BTC and you don't have a clue about who they are. Not sure which one is more secure for a society.
But eventually everyone will have heard of BitCoin, and I believe BitCoin's growth will slow down, and its curve will flatten and look more stable. The more people have BitCoin the less small groups of individuals, or even countries, can influence its price.
But look at the growth of vendors who are accepting BitCoin over the same period. For the same reason it doesn't make a whole lot of reason to spend BitCoin during this growth phase, it does make sense to accept BitCoins. And even though most merchants don't wish to speculate with their revenue, even keeping a "float" of currency in BitCoin could be profitable, and so it is reasonable that merchants and vendors might want to accept BitCoin even though not a whole lot people are spending them these days. That can only increase BitCoin's value as a currency in the long run.
If it was unwise or wise to spend something based on its changing value, no matter how slowly, then it would be rational for me to want to spend all my dollars for goods and services today because the dollar value is going down. But the US dollar isn't depreciating at a fast enough rate for it to be rational for me to spend all of my dollars today, right? This is because the currency is inflating at a pretty slow percentage rate. A slow inflation rate is not all that different from a slow deflation rate.
It all depends on what will ultimately be the rate of deflation of BitCoin. If it is sufficiently slow(1% annually, for instance) it will be useful as a currency. If it is all over the place, it won't be.
Perhaps the transaction fees turn out to be lower than those for credit cards, in which case BitCoin maybe becomes an alternative payment network.
This is identical to arguing: Why would anyone buy computers when they are getting cheaper every year. At some point you make a choice where your preference for owning a computer is greater than your preference to save money.
> So actually, in my view, BTC as a currency is already failed. No one will be eager to buy online (perform an actual exchange) when he can buy the same items using USD, because BTC will possibly have a higher value tomorrow. While the USD almost certainly will not.
Gold is deflationary. When gold was the primary currency for the world commerce was very vibrant. Gold not being currency is a fairly recent development. People currently purchase things online with bitcoins when they could use dollars but choose to use bitcoins. I think it's very early to write off bitcoins as a failed currency.
Why would anyone ever cash out of any position with a positive rate of return?
By this logic everyone should stop consuming and put all their money into SPY, or similar market tracking indices. Yet they don't.
If you are an entrepreneur or a company going IPO, the you'd have to offer a better expected return than the currency itself. Your competition for investment dollars would be not only other companies, but cash.
The only way deflation will reduce consumption is if the rate of deflation exceeds all other rates of return. Simple math: I consume if
(value of consumption now) > exp(-(discount rate - rate of return) x time) x (value of consumption in future)
The `rate of return` term is the rate of return on my best investment - this is affected by deflation primarily if the deflationary currency becomes or improves my best investment.
If you plug in some example the numbers, you'll see that the effect this has on consumption is miniscule compared to the effect this has on the allocation of investment. That's because when choosing between investments both sides of the equation have the discount rate, and it cancels.
Atmosx is appealing to newspaper column keynesianism (that vague "I dunno what AD is, but I want more of it" flavor), and doesn't really understand what he is talking about. Do a back of the envelope calculation and you'll see I'm right.
The opportunity cost of doing so is predictable and calculable, and, really, needs only occur when there are better investments available.
Inflation in a currency is a feature, not a bug.
(Express your model in maths as much as possible, for the purpose of clarity.)
Asset[2]: Anything that has value and can be converted to cash.
For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably.
Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust them. In their optimal status, when the economy goes well currencies loose value (inflation) by 1-2%. This behavior enhances money exchange and induces a spending behavior which is viewed as good for the economy. You will buy a computer today because your money will not buy the same model/computer tomorrow. When you buy something, you fight unemployment, pay taxes to the state and so on.
The computer you buy can be an asset though. The moment you buy it, starts loosing value. You won't go to the grocery store to exchange the computer for tomatoes. You will need a medium to do that, that medium is money (and that's exactly what BTC claims to be, but up until now it's not). The computer though except from an asset is also an investment. It can help you, generate value either in form of entertainment or money (programmers/designer/etc.) but it's still not money. Sure you can exchange it for something but that's not a straight-forward process as buying beers with a currency.
The next question is: Why I should own a currency? Because the local authority (a government) impose you to use it's currency to pay taxes. Currencies are never adopted, they are always enforced to populations by supreme state governments, as means of exchange. There is no other for anyone wanting to own an inflationary currency, except for that fact that you can't do anything without it. Of course in my example, I take for granted that we're talking about a relatively healthy state. Otherwise, people will prefer a foreign, more stable (less inflationary, or deflationary if possible currency. Note that less inflationary means deflationary for them anyway).
Now, BTC introduces a currency that has some characteristics. One of them is that it's finite[4]. So, deflation is chosen here by design.
Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.
Then, why Satoshi choose to add deflation in BTC: Because otherwise no-one would even care holding any. What kind of value an inflationary digital (non-backed) currency could ever have? None.
Bitcoin is better viewed as Gold in digital form. Say you have 10.000.000.000 USD and you wanna convert that money into some asset. Would you chose a 5 year old asset or a 5.000 old year asset to do that? The rational (obvious) choice is gold. It's 5.000 old and pretty much stable, BTC as long as we know can turn to ~ 0 tomorrow if the big players choose to opt-out or USA/CN/EU/RU decide to ban it.
Why is all this relevant for the purpose of this discussion: Because the commenter (Aqueous iirc) is talking about bitcoin as a currency and not an as an asset.
NOTE: Currency is viewed as assets at FOREX[3] but I'm sure it's not relevant for the purpose of this discussion.
[1] http://en.wikipedia.org/wiki/Currency
[2] http://en.wikipedia.org/wiki/Asset
[3] http://en.wikipedia.org/wiki/Foreign_exchange_market
[4] 20,999,999.9769 BTC. - yummyfajitas ↗ Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not. atmosx ↗ > Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. yummyfajitas ↗ I'm not arguing with your distinctions between currencies and assets. I don't care what label you choose to apply to BTC or SPY. I'm asking why a positive real rate of return on BTC will cause consumption to drop in a manner that a positive rate of return on Gold or SPY would not.
It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitcoins. If you use the BoA card, you spend $50. Then you shift $45 from bitcoins to USD and maintain a 10/90 portfolio. If you use the Bitcoin card you instead shift $5 from dollars to bitcoins.
The only reason to choose one over the other is transaction costs. I.e., if it costs you $1 to make this transaction, and you expect a $50 USD deposit in the next month, you'll use USD to avoid the $1 transaction fee. If transaction costs are a % of the transaction size, you'll pay with the BTC card (and pay only x% of $5, rather than x% of $45).
Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. Just as we could hypothesize a BTC backed credit card, we can also hypothesize an SPY backed credit card. The mechanics would basically be identical - at the point of transaction, the card company converts from the buyer's preferred asset to the seller's preferred asset. Both BTC and SPY backed credit cards already exist - it's equivalent to getting a regular USD credit card and selling BTC/SPY whenever you want to make a monthly payment (modulo a couple of extra clicks).
Incidentally, your post completely ignores the reason central banks manipulate currencies. The reason has nothing whatsoever due to the distinctions you make between currencies and assets (which, if I'm understanding correctly, is merely liquidity and the ability to pay taxes in them).
http://en.wikipedia.org/wiki/Nominal_rigidity
I never said will stop consuming. It will consume less. It makes sense, a consumer will spend whatever has bigger Y% of having LESS value in X time, not more!
Secondly: Have you tried buying/selling bitcoins? If you use a bank it's a pretty straight forward process but has huge costs.
Thirdly: Do you buy products using bitcoin? Do you think that people uses bitcoin to buy products online? Because all the transactions I'm aware off are either illegal (hard to track) or perceive bitcoin as an asset.
Central manipulate currencies in order to adjust the economy of a certain group, which is under their authority, as far as I know.
The distinction I make between currencies and assets come from ~ 300 BC (at least, probably way back) and I don't understand why even is a topic of discussion. BitCoin is treated by 99% of it's users as an ASSET not as a CURRENCY. No one is buying services in Bitcoin, if does not want to hide. Isn't it weird that while Silk Road used BTC as it's main currency, Amazon, eBay, Apple and every other big player, doesn't even care? You think it's out of spike or anything?
I'm not making any assumptions here, I'm stating facts. It's you who are suddenly re-writing 2000 years of economic history by assuming that buying with Gold (bitcoin) is the same as buying with FIAT.
I strongly suggest you go read an economics textbook that actually does the math. Working the models will help you avoid arguing with yourself about definitions (a pointless exercise even if you had a partner http://lesswrong.com/lw/np/disputing_definitions/ ).
(had to sign in just for this comment. damn)
By approximate scroll down length on mobile, the ratio of content that isnt a quote, to that which is, seems to be approximately 7:5 . (not taking into account the fact the quoted text takes less horizontal space, but I did overestimate the new text length in a few small ways as well, so I hope that this ratio is at least approximately accurate)
Essentially the article states a difference between "positive economics" (what is), and "nomfyvhbxgv economics" (what should be). The author claims that their political opponents tend to get the two confused (and that despite what people criticizing the article might think, that his political allies tend not to make the same mistake)
They then go on to say that the other article suggests that bitcoin was created as a weapon, connecting to the "what should be" part of economics, quote the other article, and repeat from the other article the part about a "gold fetish".
I personally believe that it didn't add a whole lot to what was already in the other article, though I admit I should probably reread the guidelines for comments and submissions. I intend to do that, and then possibly modify this post that I am now making.
I like the utility of bitcoin, and I see it's value. But I do not hold the same optimism I did for the currency as I did in months past.
I do not see a future where normal people will be paid primarily in bitcoins, and all the bitcoin people will be rich and happily ever after. No, just stop. Normal people hate this coin. They hate it, and they really hate people telling them this is where there money should go.
Hacker News we are wrong about bitcoins, and we should feel bad for holding them in such high regard. They have done a lot more bad than good, and I am not sure the road forward is good or bad.
The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.
My understanding could be wrong, as my understanding of Bitcoin would definitely be at the "noob" level :)
Brinks' entire CIT vehicle business is based upon just a subset of this function, and we can agree their value is not zero.
So as I see it Bitcoin is already obsolete; there are new coins that achieve the transaction capabilities for cheaper - they can be used in more potential applications, thus they're more interesting speculative instruments.
The specific benefit of proof of work mining comes in insuring more people have a chance to enter during initial distribution, but it still massively favors the early entrants and especially the people who have the hardware environment to mine efficiently.
So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then? Plating astronaut helmets and high-conductivity, corrosion-resistant electronics?
The intrinsic utility of gold was that it was eminently verifable. It's got a characteristic ductility and it was a yellow metal. You could easily verify if it was 100%, 80% etc. In other words, to the ancients, the intrinsic utility of gold was "its trust model". Sound familiar?
You mightn't like my tastes but I don't like your gold necklace either.
Glass is not easy to work into jewelry on its own (or at least wasn't 2000-3000 years ago). Plastic-coated aluminium didn't exist 2000-3000 years ago.
While I don't think this analogy works without flaw, I do think that it draws a powerful connection between something that is widely regarded as a store of wealth, and something that is vying to compete in the same space.
And then, promptly, they also repeatedly ran their economies into the ground by conquering and mining tons more gold, and inflating their currency into worthlessness.
And this happened over and over - the Spanish did it, the Chinese did it, the French did it. Every gold economy before the invention of actual economic thought destroyed itself with gold.
Well, usually, the intrinsic utility of gold and silver was that they could be used as jewelry and/or used as instruments of worship. Most bullion money has evolved from substances considered divine.
Remember the Golden Calf?
As such, to an expert in any one of those fields, it's very hard to digest because looking at it from the perspective of one field might suggest it is doomed for failure. But experts tend to look at things from the perspective of their own expertise.
For laymen who might know a little bit about each of those domains, it feels like "Yeah.. this could work..". A simple analogy might be about how hardcore web developers always feel about PHP. They always say it's a pile of garbage and it's bound to self destruct and swallow the earth in the process. However, PHP trudges on with some very large projects and sites under it's belt.. and novice developers will almost never notice a problem with it. Experts can be wrong.
So yes, bitcoin has it's issues if you analyze each aspect of it. But maybe if you zoom out and take an overview it might start to make sense how all the parts get together and even with flaws with each sub-aspect it just might work.
Wait, I think we are missing his point. Last sentence of the article:
"So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other."
I think this article does not go into the 'will it work?' debate. It alerts us instead to another debate, 'to what degree do we want it?'
It is an addition to what Charlie Stross was saying. He is just adding "guys, why are your comments replying to a different question?"
At least, I think that is the discussion he wants to start. But his talk about the ceiling and floor in value in the middle of the article actually belongs to the OTHER discussion, the one he does not want to start but spends half of the text going into.
It is like trying to talk about empirics to consider for deciding national policy, while everyone is shouting their usual political opinions.
What I think you're saying is that the block chain and it's supporting infrastructure and the functions it enables ( decentralized notary, unrepudiable statements, etc. ) are creating value in the same way that making jewelry from gold creates value. And that's an interesting argument. Much more interesting than a bunch of people ranting incoherently about "fiat".
If I were in search of a dissertation topic as an economist/anthropologist; I would be looking at the current wave of cryptocurrencies as a fascinating natural experiment in the social construction of value.
I don't see how it is not the case that mining Bitcoins is throwing away energy.
If someone had made a crypto currency based on, say, protein folding [1], I could get behind that.
We could just create a crypto currency where we just hand out 100 units to every person. That certainly wouldn't require ASIC farms and such.
[1] Yes, I realize that the whole 'hard to do, easy to verify' bit is not completely obvious in the case of protein folding or SETI signals.
Bitcoin couldn't and wouldn't exist at all without that promise. So a simple system based on allocating 100 coins to everyone just wouldn't do at all.
Not without a trusted central party you couldn't. The work that goes into bitcoin mining is the 'distributed engine' that prevents double spending or forging of bitcoins. Bitcoin mining is not just a way of handing out new coins, its the very engine of the whole system. The only known way to break that engine is to control a bigger engine of the same spec (the >50% attack), and thats looking increasingly unachievable by anyone.
The 'work' is actually the verification of transactions on the blockchain - the reward from mining is just an incentive to do this (mining & verification are tied up in the same process).
The energy expended in mining is necessary to validate transactions in the network.
You might be able to make it more energy efficient but you can't remove the energy expenditure.
Ideally, the BOINC processing would somehow be directly integrating into the mining itself. But again, I don't have any idea how that could actually be done. But it would be nice if that is possible.
Mining is not that valuable, there are other ways to do it that don't waste so much energy.
> It's not simply throwing energy away into solving useless math problems
Yes it is, since there are solutions like proof of stake that solve the same problem using vastly less energy.
But it is also an arms race of energy spent. And the more valuable BTC becomes, the more energy a rational agent will use to mine it. Unlike mining gold, BTC mining does not have a fixed cost.
The complaint Mr Krugman is registering is that Bitcoin's don't even have that. If my car is totaled, I can always sell it for $100 for scrap. There is no bit scrap dealer.
So either you're misunderstanding Krugman's argument or I'm misunderstanding yours. I think you're confusing his normative and positive arguments (which are entirely separate!). You have used an argument against his normative argument ("Bitcoin is evil because it's wasteful.") but then used it to challenge his positive argument ("Bitcoin won't work out because it has no value floor."). That a crypto currency might end up helping society does not make it a good value store. Why would it?
For the time being, let's ignore those and concentrate on the primary purpose of Bitcoin's infrastructure, to facilitate decentralized value transactions between arbitrary parties. It is the infrastructure's fitness for this purpose that I see as giving it its floor; this may seem a slightly circular argument, but by enabling what it does it will always have the value of accomplishing that goal, even if it's trading for vast fractions of a cent (like Dogecoin).
Adding the network effects of its installed base, this probably places its floor somewhere well above Dogecoin's current value, but certainly far below what it's currently trading at. And indeed, it could very well undergo further corrections until it reaches a level of stability appropriate for a value store.
> I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions.
In other words, "to facilitate decentralized value transactions between arbitrary parties" does not actually provide a floor and thus give the coin intrinsic [1] value. Being useful is different from being valuable, at least insomuch as storage is concerned. I think Krugman has this one right.
One point made elsewhere in this discussion is that while Krugman might be right about the floor, he may be wrong about the floor being necessary to make BTC a stable, suitable store of value. Specifically, he might be overestimating the degree to which the dollar has a meaningful price floor, and the degree to which such a floor is actually the reason the dollar is stable and dependable. In other words, perhaps it maintains its value through adequately shared fiction, and perhaps BTC could do that too. I don't really know enough to have a strong opinion on that issue, but I think that's the structure of it. It's also worth pointing out the Krugman has the conventional view here.
Another question to ask of Krugman is why being a store of value is even a goal; what does the "success" in "successful currency" mean? Does it mean that BTC will be the unit of account, with prices and salaries denominated in it? That's certainly the case Krugman is taking on (hence the normative claims about central banks), and the case many here on HN arguing for. Or can it succeed as just a medium of exchange? I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth?
[1] For certain values of "intrinsic". The semantics aren't very clean here.
You're absolutely correct. People forget that bitcoin functioned just fine as a black market currency back before it became a rite of passage to opine on its future. Barring prohibition by governments, the cryptocoin ecosystem is here to stay and will likely continue to grow.
It seems to me that the shared fiction of the dollar is based on the shared fiction of America. The fiction of America creates a real American government that has a strong interest in maintaining the fiction of the dollar.
From what I can tell, Bitcoin does have a similar pair of shared fictions, the idea and the currency. But I'm not seeing the thing that America has between the two fictions: a powerful organization with a strong interest in keeping the money useful as money.
Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off people would, as much as possible, not hold sucres; they'd buy dollars. Poorer or less connected people couldn't do that as easily, so they just got screwed. Eventually, the currency collapsed entirely and now they just use the dollar: http://en.wikipedia.org/wiki/Ecuadorian_sucre
I don't think BitCoin can survive purely as a medium of exchange. There's the obvious reason: why pay two sets of transaction costs when you can pay just one? But I think the bigger problem is that there's a period when someone is holding BitCoins. If those are a stable store of value, then you're ok with that. But if not, you're in the land of currency risk, and the only people who like currency risk are currency traders; everybody else hates it.
But to play devil's advocate because it's fun: to the degree to which it is useful to hold onto the currency you also use as a medium of exchange, then perhaps that does provide a value floor. In other words--assuming it is successful as a means of exchange--the fact that you have to pay a transaction cost to get out of a BTC position means you'd rather hold onto BTCs so you can use them later at no penalty. So then they would have intrinsic value, based on your aversion to trading them for something else; anything that makes you want to hold BTC other than their market price counts. The question there because which is the chicken and which the egg: being a successful means of exchange or being a good store of value? And of course, whether that transaction fee provides a meaningful enough floor.
I'm not convinced of that either, and it's especially weird to have the thing enforcing the floor to be falling, but it's fun to think about.
I think that experiment has been done with paper currencies where people stop trusting the backing. It would still have the same cost-to-get-out value (indeed, I'd think that value would go up as the currency fails). I know the Ecuadorian sucre went from something like 500 to the dollar to 25,000 at the end, so it would seem that the cost-to-get-out value is small even with traditional currencies; given BTC's theoretically low transaction costs, I presume it would be even smaller.
If the infrastructure goes on to do great things for society then it has (and has always had) intrinsic value and thus the price of BTC rebounds (or more likely never collapses in the first place).
Of course, you can say the infrastructure makes the coin more useful as a medium of exchange, but that's a totally separate point, as Krugman points out.
My personal view is that none of these things--gold, dollars, or bitcoin--has enough intrinsic value to make a useful value floor, and that as value stores they all just rely on a shared convention. So I'm not sure Krugman is right, and perhaps bitcoins will work out without that floor feature, and perhaps without ever really being used as a store of value. But this argument about infrastructure just doesn't work.
It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a globally-distributed secure ledger and a network capable of maintaining it, then the individual accounts within its purview obviously have whatever values it records them as having.
I think there's a basic disconnect here about what we mean by "store of value". The simplest way to put it is that something stores value well if I can buy a predictable amount of stuff with it in the future. That the ledger does a good job of establishing that I have N bitcoins is different from telling me how much those bitcoins are actually worth.
Of course, we can easily imagine scenarios where Bitcoin loses all value but I think a sufficient imagination can produce scenarios for the other stores of value listed on that page as well. So, this is obviously a bit subjective territory (i.e., different people can assign different probabilities to each of the circumstantial propositions) but there is a strong argument from consistency for the designation of Bitcoin as a 'store of value'.
I personally think that mathematically-interesting (and rare) numbers do have an intrinsic value (even if only as a novelty or perhaps antique/collectible).
But I don't see where you've established that Bitcoin has such a floor, as I said above. I don't think we're getting anywhere, though, so I'm going to break off.
I understand that you do not think that those other entities have floors either (and I, having a sufficient imagination, tend to agree with that). However, in that case, the term 'store of value' is non-sensical since, given a sufficient imagination, no entities can ever satisfy the 'floor' requirement.
If the gold price collapses, you can sell it to jewelry and electronics manufacturers at some (low) price point. Gold has a weakness as a store of value because this price point is a lot lower than its market price during good times - and this is why Krugman is also not in favor of it as a store of value.
If the price of the dollar collapses, you can sell it to the Fed (usually indirectly - the Fed sells debt and then sits on the proceeds). This floor is pretty solid, cf. Volcker's recession in the early 1980s.
If the price of Bitcoin collapses, you can't sell the electricity used to produce it onto the grid - that electricity is a sunk cost. So what provides a floor to the Bitcoin price if for whatever reason its value suddenly falls? Probably only its utility as a medium of exchange, which in an era of electronic exchanges lasting fractions of a second probably doesn't provide a huge demand for the stuff.
Gold originally was the only metal colored like that (shiny) so it stood out, coupled with its scarcity it became a status symbol. It was the stuff of royality. It has some properties that make it useful in jewelry but pure gold is actually too soft for jewelry and is used mostly as alloys.
I am not saying gold (like other metals) doesn’t have its industrial applications, it does!
You can not convince me however that gold is inherently a better metal for jewelry than alternatives. It is only there to give jewelry that golden shine, which has been considered a status symbol. Now, if gold somehow became a "cheap" metal I don't think people would be keen on displays of their gold.
I think this is a dubious argument. It describes what happens most of the time, when the value of the dollar fluctuates. But what if the collapse of the dollar is accompanied by a downfall of the Fed? Hyperinflation has happened in many, many countries that used fiat currencies, and even the US has had high inflation:
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
Bitmessage doesn't use the same blockchain as bitcoin. The work of bitcoin miners does nothing at all to help bitmessage.
Only inherited protocol design or reused code can be said to contribute, and that's not relevant to this discussion.
Most people confuse currencies with assets, storage-medium with exchange, etc. While at the same they are just hoarding.
I think that BTC will stick around because it has some unique qualities that are requested by the market such as partial anonymity, speed and size (a USB can contain whatever amount of USD).
But it has some serious flaws and as a currency is clearly failed. It is a libertarian's dream, but I don't think that the US or DE or RU government can't monitor whoever moves money in and out of the BTC blockchain.
There was a ton of, "What do you mean I can't do this", and "What do you mean this takes longer than five seconds.. four DAYS?!", and "they're closed? So I can't? What? You're joking with me, right?"
I understand that dealing with money is incredibly hard due to regulation, but I would like something to use as a medium of exchange which doesn't leave me constantly infuriated.
Krugman was a proponent of mass inflation, aka. helicopters of money, as a solution to the credit crisis. Bitcoin makes it basically impossible to manipulate the money supply the way the Fed has done to navigate the 2008 crisis.
Krugman sees Bitcoin as a threat to the central banks ability to stabilize the economy.
It isn't a "threat" so much as just foolish.
If you can get the majority of users to agree to a change in the rules, then they will fork off the block chain in a direction that follows those new rules. Of course, you will have some percentage of users who like the old rules, and could theoretically continue on the old block chain.
One rule change, for example, is to have miners vote on the reward for new blocks found. Then, every so often take the medium or a random vote and award that amount for new blocks mined. This would allow miners to regulate the amount of new coin being mined, which could level off the exchange rates between bitcoin and the world currencies.
Doesn't he get that point wrong (like many others)? The mining rate, and eventually the limit of 21 million bitcons places a limit on the supply of bitcoins, not on their value. If bitcoin is successful, it will only keep getting more and more valuable. Its hard to estimate how much, but the total market capitalization will probably that of a commodity like silver, or that of a nation state's currency.
Also, I think bitcoin is not really supposed to be a store of value. Its main purpose is to pseudonymously buy and sell stuff (drugs, cough, cough). It's good enough if it can hold its value for a few hours - if someone builds a nice way to deposit dollars or euros, convert them, and immediately pay with the bitcoins, milliseconds would even suffice. In a market with such a high turnaround, of course, the value represented in bitcoin at a given time will be lower than for e.g. silver or gold, which are supposed to store value for a longer time (and also have applications as a material).
Finally, I don't think bitcoin can replace "real" money. It might have worked a few decades ago when there was a kind of self-carrying growing economy. The only way todays econonmy is still running is because of massive state intervention, which is impossible if bitcoin in the main currency. I mean, we gave up the Bretton Woods system and the gold dollar for a reason...
And you are going to have to live with it, the same way the people who created Bitcoin will have to live with interventionist policies.
Most of us don't think about owning gold in terms of how readily we can make pretty things out of it, or dollars in terms of how easily we can pay our taxes. We hold onto them because both have a reliable history of being easily traded for other goods and services. Ease of exchange trumps inherent value as soon as a currency's users regard it as stable, and Bitcoin hopes to be there in a few decades (presumably starting with the sort of people who follow interesting tech developments, rather than those who care about inherent value).
As a side note, the headline is ridiculous linkbait and someone really ought to change it. Krugman spends most of the article explicitly stating that he doesn't want to muddy the discussion of how well BTC will actually work with normative/political arguments (i.e. the word "evil"). I can't help but feel like someone other than the author titled this article.
If I click through to an article called "Bitcoin is Evil", maybe I actually want to read about how a Bitcoin-dominated world is going to making exploiting the poor trivially easy. I'm not convinced yet, but it's a plausible (if normative) argument someone could make, so there's no sense in making a joke out of it. Especially if - like Krugman - you already support redistributionist taxation and the welfare state.
Judging by the clichés you use, exploiting the poor is probably a good thing in your Libertarian utopia.
In my experience, strong libertarians prefer to avoid even mentioning that the poor exist.
But since many others do, then it is. It is not the speaker which decides whether insult was intended, but the listener.
Can we talk about the merits of the policy now?
But sure, talk about the policy, though I didn't disagree with anything you said policy related.
In a nutshell, if you say "redistribution", you must have some baseline in mind. Many people are fooled into accepting an "everyday libertarian" distribution of resources as a baseline, but this is both philosophically problematic and politically foolish if you are not a libertarian yourself.
Taxes are part of the distributive system of society, as are other parts of the legal code such as patents and copyright law. There is no reason to label one part of the law "redistributive" while you call other parts merely "distributive".
Matt Bruenig makes the argument better than I could, e.g. http://mattbruenig.com/2012/09/20/there-is-no-such-thing-as-... or http://mattbruenig.com/2013/11/14/one-last-note-on-redistrib...
No, no, he is NOT correct on that. Bitcoin's inherent value is in the Bitcoin technology. Inherent value of USD is that government declared it has value (by fiat). You can actually create "pretty things" with bitcoin technology, the same way you can create pretty things with gold - those are just other things.
Nobody believes the Bitcoin protocol itself is beautiful in the same sense as gold, although I do know a few computer scientists who might find it intriguing. I suppose you could make the case that the ability to make anonymous transfers has some inherent value - but even that depends on how well BTC is adopted as a medium of exchange.
1) Can you produce my signature on said document that certified this contract?
2) Let's assume I choose to expatriate because I no longer wish to pay taxes and support this country's views. Why, then, might I owe a large "exit tax" upon leaving when I've already paid capital gains tax, income tax, sales tax...
Wait, what? Definition of fiat currency is the one that has no intrinsic value.
USD's intrinsic value is the paper and the metal used to manufacture it.
If we imagine a scenario, where a majority of businesses will accept bitcoins, and people will be able to buy bitcoins and use either dollars or btc for payments, and both methods will be legal, we will see that dollar doesn't have any more "intrinsic value" (whatever that means) as bitcoin. It will be just two competing payment systems with different attributes.
It seems that as far as alternative currencies are concerned, altcoins have a better chance of being spread. What's to prevent Amazon from coming up with AmazonCoin, pre-mining an entire AmazonCoin set for themselves, and then offer this altcoin with a liquidity guarantee on largest retail site. Nothing to prevent them from accepting BTC, but I think any US retailer would be prone to quickly trade in BTC for USD after the transaction is completed, as there's volatility risk, and payments to merchants and the tax man are due in USD anyways.
Fiat literally means "it shall be"; in terms of fiat money this refers to government's declaration that something is legal tender. The US declares that the dollar is to be used as money - that makes the USD fiat money.
Enough people use the term to refer to money which has no "intrinsic value" that the term now means both things. Personally I think that's nonsensical – if the US declared that gold coins are to replace the USD as legal tender, then those gold coins would be fiat money, regardless of any intrinsic value gold might have. But you can't argue against language evolution; "fiat money" has two different and unrelated definitions now, and we need to repeatedly have arguments ending in both sides being correct and nothing of value being concluded.
This discussion must now, as is tradition, be followed up by a discussion of what intrinsic value means and whether it exists. So go on, discuss.
Editorials/opinion pieces, the editors typically put there stamp there.