6 ms·

A quick reminder why Bitcoin was created in the first place

67 points by js7745 9y ago

yumaikas 9y ago
This post is a repost of: https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quick_reminder_why_bitcoin_was_invented_in/ https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quic... Similar to that Paul Graham article earlier. Could we get a relink?
EGreg 9y ago
The part about the Liberty Dollar is fearmongering. It was shut down because it looked and sounded too much like the US Dollar. Toronto Dollars existed. Bristol Pounds exist now and are thriving. Oakland just opened their own bank. Nebraska had its own banks. There are time banks, Berkshares, and so on. I used to think local currencies are illegal but as long as they are Complementary Currencies and fiat is still legal tender for all debts, that's not true. Look it up on wikipedia (virtual currencies, complementary currencies). Congress retains the power to mint coins, that's it. There has never been a court case that tested whether Congress can crack down on complementary currencies. And the USA never did, except in the Liberty Dollar case for sounding too similar. So the article is wrong about that. You can actually make a centralized currency as a city or even as a community. What do you think payment networks like VISA, PayPal, Patreon etc. do? Sure some need to register as money transmitters. But others are just marketplaces like AirBNB. They do payouts via Stripe etc.
- protomyth 9y ago
  > Nebraska had its own banks I thought North Dakota was the only state with its own bank. Did Nebraska create one? To add to your point, many cities have "Christmas Cash" as a form of local currency for holiday spending to help local businesses.
  - EGreg 9y ago
    Sorry I meant North Dakota, nice catch :)
Justin_K 9y ago
Dumb question, because I'm still trying to grasp bitcoin... Doesn't the recent "split" show that bitcoin still isn't addressing the common need? It still appears that a few central players are controlling how it is created, backed and exchanged.
- bluejekyll 9y ago
  This might be wrong, someone correct me if so... I'm thinking of the split that occurred as being nearly if not actually just like a stock or other securities split. In effect some portion of the original security 20% or so left. That reduced the market cap of the original security, and created a new market cap for the new one. Now it's possible the new one could eventually become worth 0 and the original would increase back to it's pre-split. A question this then raises for me, is if you went through this split, would you account for this in capital gains the same way you would with a stock split?
  - revmoo 9y ago
    > That reduced the market cap of the original security Actually it didn't. The BTC market cap has increased since the fork. > would you account for this in capital gains the same way you would with a stock split Stock splits have no effect on capital gains.
apeace 9y ago
Try this one with your friends. Tell them that if there were no debt, there would be no dollars, because debt and dollars are the same thing. You can quote the former chairman of the Federal Reserve Board, Marriner Eccles[0]: "That is what our money system is. If there were no debts in our money system, there wouldn't be any money." This is a simplification, but it's an accurate one, and is widely understood by anyone paying attention[1]. Without even getting into a debate about the merits of our central banking system (or cryptocurrencies), most people are surprised by this fact. Most folks I have spoken to think that the dollar is still backed by gold. [0] https://mises.org/library/our-money-based-debt https://mises.org/library/our-money-based-debt [1] http://www.npr.org/sections/money/2011/10/21/141510617/what-if-we-paid-off-the-debt-the-secret-government-report http://www.npr.org/sections/money/2011/10/21/141510617/what-...
- seanalltogether 9y ago
  And if you take it a step further, you learn that debt and IOU's are at the very heart of human transactions, going back as far as society has existed. The currency needs to reflect the lossy nature of payments that people make between each other.
  - Frondo 9y ago
    Yeah. The common myth is that barter preceded currency, like primitive man was going around, trying to swap his carcass for some arrowheads or something. The myth is that the development of currency followed from that, as a way to facilitate barter. Not so, according to this guy: https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years Worth a read. Edit: another good, quick read: https://www.theatlantic.com/business/archive/2016/02/barter-society-myth/471051/ https://www.theatlantic.com/business/archive/2016/02/barter-...
    - apeace 9y ago
      Right, debt came first. Then we invented currency as a store of value, so that we could perform even transactions. To avoid creating debt!
BenoitEssiambre 9y ago
This is full of misunderstandings about monetary policy and money creation. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity. This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of cycle but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not sufficiently widely held to significantly affect the macroeconomy but speculation already keeps them rather volatile and the knowledge that as they get more popular you get additional volatility pressures, will keep the speculation wild and the deflationary cryptocoins unstable.
- revmoo 9y ago
  This is just a theory btw, just like any other economic theory.
Cakez0r 9y ago
> People used to pay each other in gold and silver. Difficult to transport. Difficult to divide. It would be interesting to hear some of the history behind why gold and silver were decided to have value. What are the steps leading up to the first point in this post?
- jcranmer 9y ago
  Gold really wasn't used for currency outside of the main area known to ancient Western civilization. China did use silver for bullion, but mostly avoided it in the everyday coinage, which would be made out of metals like iron, copper, or bronze. Other civilizations chose a variety of things for coinage--Aztecs, for example, used cacao beans and bolts of cloth. So why did gold and silver become the major standard in the Western world? Well, gold and silver are fairly unreactive--you're not going to lose coinage by leaving them it in open air to spoil. Gold is also remarkably malleable, and both metals are fairly easy to work with in terms of metallurgy. The final notable feature is that gold and silver are actually relatively rare in the Mediterranean and Northern Europe. By contrast, where they were quite common--the Americas in particular--they were purely used for decoration and ornamentation, never for currency. Thus the Spanish conquest of the New World was promulgated because they found cultures who were literally covering their walls in money, and Spain was desperately short of cash for their commitments in the Wars of Religion in the 16th century.
kevindkeogh 9y ago
> After all, banks remained basically insolvent in this fractional reserve scheme. This is incorrect. Bank solvency has to do with the assets of the bank, even in markets with commodity (e.g., gold) or representative money (e.g., gold-backed paper). The assets of a bank include loans, the liabilities are the money the bank owes to depositors. There is no reason a bank can't take a gold deposit and loan it out (thereby, "creating" gold). The purpose of a central bank, at least in orthodox economics, is to loan to solvent banks that are nonetheless cash-poor. Imagine a mismanaged bank, that has loaned too much, and cannot meet the demands of depositors. If the loans + cash are more valuable than the deposits, the central bank will loan to the bank to meet their temporary cash shortage. [0] This is essentially what happened in the case of AIG. The Fed believed that the value of AIGs assets were greater than its liabilities, and loaned them the money at a penalty rate. The Fed believed that AIG was _solvent_. There were a number of extenuating factors here that I'm glossing over, but that is the underlying point. The reason that Lehman was not saved was that the Fed had substantial reason to believe that the assets (primarily the sub-prime loans) were not worth more than the liabilities, and the Fed will not lend into hole. Lehman was _insolvent_. Fractional reserve banking, by itself, does not suggest solvency or insolvency. Without fractional reserve banking, there cannot be credit. Sharia banking is an example of full-reserve banking, because interest is prohibited, so there is no incentive to loan. (There are ways Islamic banks get around these prohibitions). [0] I would suggest looking at Bagehot (1873) for a full description of this idea.
- pash 9y ago
  There is no well defined financial distinction between insolvency and whatever you want to call the situation in which the marked to market net value of a bank's assets goes negative due to a fall in prices during a liquidity crisis.† There almost certainly were such situations during the last crisis, when a bank's book value went negative, and yet it was not deemed to be insolvent. That's because in practice insolvency is not so much a financial concept but an accounting and legal one, and in those domains it refers only to situations in which a corporation cannot meet its financial obligations as they come due. In ordinary circumstances that convention gives corporations some leeway to re-negotiate their obligations to stave off insolvency. But during a liquidity crisis it means that an institution whose book value goes negative (temporarily?—who knows?) will or won't become insolvent in part depending on whether third parties are willing to lend to it to plug the hole that exists in its books at the moment. That means that solvency during such periods is a bit of an artificial thing, depending in part on the of vagaries of the marketplace, as well as the judgement and munificence (or whim, if you'd like) of central bankers and other governmental actors. > Without fractional reserve banking, there cannot be credit. This is not true. There can be credit, just not with the simultaneous fiction that creditors retain access to the money they've lent. Bond markets and old-fashioned money-market bank accounts operate without that fiction, for instance. † — Or for that matter during a classic bank run, which is another form of liquidity crisis. A typical bank operating on fractional reserve is solvent in the sense that over some indefinite future time horizon it should be able to give its depositors their money if they demand it, since the money the bank is owned in loans exceeds the money the bank owes its depositors. But a bank does not enough money in its vaults to pay all its depositors if they all want it back at the same moment; if no third party is willing to lend cash to the bank suffering the run ("provide it liquidity"), then it will become insolvent, no matter what its book value.
TearsInTheRain 9y ago
How long until somebody issues paper money backed by bitcoin?
deleted 9y ago
[deleted]
neilwilson 9y ago
The fundamental purpose of a currency is to pay taxes and debts. Which means that bitcoin isn't really a currency, it's just a particularly transportable bottle of wine. Nothing more than an intangible asset. You still have to swap it for some actual currency at some point - or go to jail for tax evasion.
taw55 9y ago
If you ever did econ 101, you might be shocked to read this: R.A. WERNER, A lost century in economics: Three theories of banking and the conclusive evidence http://www.sciencedirect.com/science/article/pii/S1057521915001477 http://www.sciencedirect.com/science/article/pii/S1057521915...

67 points by js7745 9y ago

This post is a repost of: https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quick_reminder_why_bitcoin_was_invented_in/ https://www.reddit.com/r/Bitcoin/comments/6rr6ph/just_a_quic... Similar to that Paul Graham article earlier. Could we get a relink?

EGreg 9y ago

The part about the Liberty Dollar is fearmongering. It was shut down because it looked and sounded too much like the US Dollar. Toronto Dollars existed. Bristol Pounds exist now and are thriving. Oakland just opened their own bank. Nebraska had its own banks. There are time banks, Berkshares, and so on. I used to think local currencies are illegal but as long as they are Complementary Currencies and fiat is still legal tender for all debts, that's not true. Look it up on wikipedia (virtual currencies, complementary currencies). Congress retains the power to mint coins, that's it. There has never been a court case that tested whether Congress can crack down on complementary currencies. And the USA never did, except in the Liberty Dollar case for sounding too similar. So the article is wrong about that. You can actually make a centralized currency as a city or even as a community. What do you think payment networks like VISA, PayPal, Patreon etc. do? Sure some need to register as money transmitters. But others are just marketplaces like AirBNB. They do payouts via Stripe etc.

protomyth 9y ago
> Nebraska had its own banks I thought North Dakota was the only state with its own bank. Did Nebraska create one? To add to your point, many cities have "Christmas Cash" as a form of local currency for holiday spending to help local businesses.
- EGreg 9y ago
  Sorry I meant North Dakota, nice catch :)

Justin_K 9y ago

Dumb question, because I'm still trying to grasp bitcoin... Doesn't the recent "split" show that bitcoin still isn't addressing the common need? It still appears that a few central players are controlling how it is created, backed and exchanged.

bluejekyll 9y ago
This might be wrong, someone correct me if so... I'm thinking of the split that occurred as being nearly if not actually just like a stock or other securities split. In effect some portion of the original security 20% or so left. That reduced the market cap of the original security, and created a new market cap for the new one. Now it's possible the new one could eventually become worth 0 and the original would increase back to it's pre-split. A question this then raises for me, is if you went through this split, would you account for this in capital gains the same way you would with a stock split?
- revmoo 9y ago
  > That reduced the market cap of the original security Actually it didn't. The BTC market cap has increased since the fork. > would you account for this in capital gains the same way you would with a stock split Stock splits have no effect on capital gains.

apeace 9y ago

Try this one with your friends. Tell them that if there were no debt, there would be no dollars, because debt and dollars are the same thing. You can quote the former chairman of the Federal Reserve Board, Marriner Eccles[0]: "That is what our money system is. If there were no debts in our money system, there wouldn't be any money." This is a simplification, but it's an accurate one, and is widely understood by anyone paying attention[1]. Without even getting into a debate about the merits of our central banking system (or cryptocurrencies), most people are surprised by this fact. Most folks I have spoken to think that the dollar is still backed by gold. [0] https://mises.org/library/our-money-based-debt https://mises.org/library/our-money-based-debt [1] http://www.npr.org/sections/money/2011/10/21/141510617/what-if-we-paid-off-the-debt-the-secret-government-report http://www.npr.org/sections/money/2011/10/21/141510617/what-...

seanalltogether 9y ago
And if you take it a step further, you learn that debt and IOU's are at the very heart of human transactions, going back as far as society has existed. The currency needs to reflect the lossy nature of payments that people make between each other.
- Frondo 9y ago
  Yeah. The common myth is that barter preceded currency, like primitive man was going around, trying to swap his carcass for some arrowheads or something. The myth is that the development of currency followed from that, as a way to facilitate barter. Not so, according to this guy: https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years Worth a read. Edit: another good, quick read: https://www.theatlantic.com/business/archive/2016/02/barter-society-myth/471051/ https://www.theatlantic.com/business/archive/2016/02/barter-...
  - apeace 9y ago
    Right, debt came first. Then we invented currency as a store of value, so that we could perform even transactions. To avoid creating debt!

BenoitEssiambre 9y ago

This is full of misunderstandings about monetary policy and money creation. Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity. This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens. Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics. The 1920s and 1930s suffered from this type of cycle but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly). It's true that crypto currencies are currently not sufficiently widely held to significantly affect the macroeconomy but speculation already keeps them rather volatile and the knowledge that as they get more popular you get additional volatility pressures, will keep the speculation wild and the deflationary cryptocoins unstable.

revmoo 9y ago
This is just a theory btw, just like any other economic theory.

Cakez0r 9y ago

> People used to pay each other in gold and silver. Difficult to transport. Difficult to divide. It would be interesting to hear some of the history behind why gold and silver were decided to have value. What are the steps leading up to the first point in this post?

jcranmer 9y ago
Gold really wasn't used for currency outside of the main area known to ancient Western civilization. China did use silver for bullion, but mostly avoided it in the everyday coinage, which would be made out of metals like iron, copper, or bronze. Other civilizations chose a variety of things for coinage--Aztecs, for example, used cacao beans and bolts of cloth. So why did gold and silver become the major standard in the Western world? Well, gold and silver are fairly unreactive--you're not going to lose coinage by leaving them it in open air to spoil. Gold is also remarkably malleable, and both metals are fairly easy to work with in terms of metallurgy. The final notable feature is that gold and silver are actually relatively rare in the Mediterranean and Northern Europe. By contrast, where they were quite common--the Americas in particular--they were purely used for decoration and ornamentation, never for currency. Thus the Spanish conquest of the New World was promulgated because they found cultures who were literally covering their walls in money, and Spain was desperately short of cash for their commitments in the Wars of Religion in the 16th century.

kevindkeogh 9y ago

> After all, banks remained basically insolvent in this fractional reserve scheme. This is incorrect. Bank solvency has to do with the assets of the bank, even in markets with commodity (e.g., gold) or representative money (e.g., gold-backed paper). The assets of a bank include loans, the liabilities are the money the bank owes to depositors. There is no reason a bank can't take a gold deposit and loan it out (thereby, "creating" gold). The purpose of a central bank, at least in orthodox economics, is to loan to solvent banks that are nonetheless cash-poor. Imagine a mismanaged bank, that has loaned too much, and cannot meet the demands of depositors. If the loans + cash are more valuable than the deposits, the central bank will loan to the bank to meet their temporary cash shortage. [0] This is essentially what happened in the case of AIG. The Fed believed that the value of AIGs assets were greater than its liabilities, and loaned them the money at a penalty rate. The Fed believed that AIG was _solvent_. There were a number of extenuating factors here that I'm glossing over, but that is the underlying point. The reason that Lehman was not saved was that the Fed had substantial reason to believe that the assets (primarily the sub-prime loans) were not worth more than the liabilities, and the Fed will not lend into hole. Lehman was _insolvent_. Fractional reserve banking, by itself, does not suggest solvency or insolvency. Without fractional reserve banking, there cannot be credit. Sharia banking is an example of full-reserve banking, because interest is prohibited, so there is no incentive to loan. (There are ways Islamic banks get around these prohibitions). [0] I would suggest looking at Bagehot (1873) for a full description of this idea.

pash 9y ago
There is no well defined financial distinction between insolvency and whatever you want to call the situation in which the marked to market net value of a bank's assets goes negative due to a fall in prices during a liquidity crisis.† There almost certainly were such situations during the last crisis, when a bank's book value went negative, and yet it was not deemed to be insolvent. That's because in practice insolvency is not so much a financial concept but an accounting and legal one, and in those domains it refers only to situations in which a corporation cannot meet its financial obligations as they come due. In ordinary circumstances that convention gives corporations some leeway to re-negotiate their obligations to stave off insolvency. But during a liquidity crisis it means that an institution whose book value goes negative (temporarily?—who knows?) will or won't become insolvent in part depending on whether third parties are willing to lend to it to plug the hole that exists in its books at the moment. That means that solvency during such periods is a bit of an artificial thing, depending in part on the of vagaries of the marketplace, as well as the judgement and munificence (or whim, if you'd like) of central bankers and other governmental actors. > Without fractional reserve banking, there cannot be credit. This is not true. There can be credit, just not with the simultaneous fiction that creditors retain access to the money they've lent. Bond markets and old-fashioned money-market bank accounts operate without that fiction, for instance. † — Or for that matter during a classic bank run, which is another form of liquidity crisis. A typical bank operating on fractional reserve is solvent in the sense that over some indefinite future time horizon it should be able to give its depositors their money if they demand it, since the money the bank is owned in loans exceeds the money the bank owes its depositors. But a bank does not enough money in its vaults to pay all its depositors if they all want it back at the same moment; if no third party is willing to lend cash to the bank suffering the run ("provide it liquidity"), then it will become insolvent, no matter what its book value.

TearsInTheRain 9y ago

How long until somebody issues paper money backed by bitcoin?

deleted 9y ago

[deleted]

neilwilson 9y ago

The fundamental purpose of a currency is to pay taxes and debts. Which means that bitcoin isn't really a currency, it's just a particularly transportable bottle of wine. Nothing more than an intangible asset. You still have to swap it for some actual currency at some point - or go to jail for tax evasion.

taw55 9y ago

If you ever did econ 101, you might be shocked to read this: R.A. WERNER, A lost century in economics: Three theories of banking and the conclusive evidence http://www.sciencedirect.com/science/article/pii/S1057521915001477 http://www.sciencedirect.com/science/article/pii/S1057521915...