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What Bitcoin shows us about how money works

77 points by tbabb 9y ago

grandalf 9y ago
These are all good points except for the idea that it won't be used like normal money. The speculative environment and price volatility resulting from that, is all by design. The mining incentive creates a "boom" environment to help bootstrap the currency. Now, a few years later, BTC is blessed by regulators. The next phase of world domination is for the governance model of Bitcoin to start to seem far better than fiat governance models. This is just a matter of time.
- blowski 9y ago
  That seems like wishful thinking. You might end up in being correct, but I've yet to see firm evidence that suggests that will be the case.
  - psyc 9y ago
    How often does one get "firm evidence" about how future human affairs unfold?
    - blowski 9y ago
      We quite often get firm evidence, and the evidence turns out to be wrong. But I'm a sceptic, which is why I never bought any Bitcoins for $1 in 2012.
      - grandalf 9y ago
        I have no idea whether that will happen, just trying to express what I think the rational case is for investing in Bitcoin today. Goldbugs / conspiracy theorists have a line of argument where they describe all the fiat currencies that have ultimately experienced corruption and hyper-inflation. So I think it's fair to say that running a fiat currency successfully for more than 500 years is something that is unprecedented in the history of the world. So over a long time horizon this makes Bitcoin extremely interesting. It's not a question of whether 1 BTC will one day be worth millions of USD, it's a question of when. There is a good chance it will be hundreds of years from now if at all. Much financial risk is in fact sovereign risk in one form or another. This doesn't mean it's rational to hoard gold or BTC, but for entities that have a long-term view of their own future, it makes sense to care a little bit and to diversify. Even if 10% of the long-term entities diversify into Bitcoin, that alone will drive the price up substantially. It's far too soon for that to have happened. We are also entering an era where politics are once again a bit part of international exchange, which adds additional sovereign risk for many areas of international business and financial planning. But Bitcoin faces the same kinds of risks as governments for corruption, mismanagement, etc. The genius of it is that the governance model makes it a lot harder for one party to really control what happens with it.
        RobertoG 9y ago
        >"Goldbugs / conspiracy theorists have a line of argument where they describe all the fiat currencies that have ultimately experienced corruption and hyper-inflation" And they are, practically in all the cases wrong. What we see is in history is a mismanagement of the real economy or external factors affecting the currency. They confound the symptom with the cause. When the 'real' economy goes wrong, never mind if you have bit-coins, or whatever. In a desert, a bag with a million dollars buy you nothing. Of course, you can make a case for gold or similar because it could make easy run away to another place, but that it's not the argument they are pushing normally.
        grandalf 9y ago
        > Of course, you can make a case for gold or similar because it could make easy run away to another place, but that it's not the argument they are pushing normally. I think this is the aspect of it that applies to Bitcoin. All of the steps along the road to hyper-inflation in a fiat currency may be quite reasonable and may constitute the smartest move using the available tools. There is also the question of whether currencies should be tied to governments. The risks that (frequent) government failures pose to one of the core purposes of money (storing value) are not costless. Society bears the costs of those risks even though they are hard to measure. Of course many of the same problems could apply equally (or more) to Bitcoin depending on how the governance process proceeds.
        keithnoizu 9y ago
        You're assuming BTC will appreciate in value. There is no guarantee it will eventually become worth millions of US or equivalent dollars. Even with a fixed qty; uncovered exploits, technological breakthroughs, change in crypto trends (aka a move to another platform), or change in society could halt an increase of value. Technically the same is true of gold. Even with out a massive change in qty, something as simple as a better gold like alloy for jewelry, an alternative for electronics, or a sudden cultural aversion to gold ownership could reduce the value.
        grandalf 9y ago
option_greek 9y ago
I can now see how internet didn't make sense to Bill gates and IPhone was a passing fad to Steve balmer. I think the existing players get a sort of tunnel vision when they get in contact with disruptive technologies. Either way, we will know in a few years :).
kordlessagain 9y ago
> As we can see from everything above, holding BTC will tend to be very expensive, as large fluctuations can cut your savings in half without warning. There is no historic trend in which Bitcoin has become "very expensive" to hold long term, especially when compared to other long term asset classes. This fact is due to the price sitting at the top of its value, historically. Large fluctuations in other asset classes may also hold this property, which means it's a common issue with asset speculation, not Bitcoin itself. This is not to say that Bitcoin's value will not decrease at a future date. It likely will. This entire article's argument has been heard before. Bitcoin isn't money. It can be used as a currency, but its nature is much, much more than that.
darawk 9y ago
Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it as payment for taxes. Regardless of what currency you conduct your business in, the USG accepts its cut only in dollars. That creates intrinsic demand for dollars, and links that intrinsic demand directly to the US GDP. 2. Bitcoin also has intrinsic value. That intrinsic value stems from transaction fees. It costs bitcoin to move bitcoin. International value-transfer is a service that has been around for a long time, and there is a market in it, so we can derive its value (or at the very least, that its value is non-zero) from the existence of demand for that service. Global value transfer has value, the Bitcoin network offers that service, and accepts payment only in Bitcoin. That is intrinsic value. 3. "Yes, this check could fail, but that possibility is still better than Bitcoin’s complete absence of any check on inflation." Bitcoin's core problem is not inflation. It's deflation. A fixed-supply currency is likely to suffer from deflationary spirals and subsequent crashes. I suppose you could call those crashes 'inflation', but that's not generally how the word is used. 4. "So here lies the fundamental difference between the dollar and Bitcoin: The supply of bitcoin is fixed, but the demand is beholden to uncontrollable market forces and speculator whims. That means that unlike the dollar, the value of BTC can never be stable, because there is no means regulate the supply to keep the value consistent from moment to moment.". Yes, that is the standard econ. argument in favor of central banks. It's not a new idea. But the actual evidence for its truth is surprisingly weak. Economies existed long before central banks, and indeed, they did have boom and bust cycles. However, it's not all that clear the central banks have really helped matters much, despite what they would like to think. Now, i'm not a total skeptic of central banking. I think its possible that they're adding some value, but i'm skeptical that it's as much as they think, and that the economy wouldn't find a way to function smoothly without them.
- deleted 9y ago
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- andrewla 9y ago
  > That intrinsic value is that the US government accepts it as payment for taxes That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. To summarize -- tax obligations create no net demand for USD, thus are not a factor in the value of USD. The exception to this is things like fees and (in the short-term) specific value taxes (like property taxes). These are not a significant factor in US government revenue, so I think we can safely discount them, although many municipalities rely on them to a greater degree. I don't understand why this tired old meme keeps getting circulated -- it makes me want to write an angry letter to David Graeber. I think it's an interesting thesis for the origin of money, as early taxes were more like fees, tariffs, and tolls rather than ad valorum, and serves as a useful counterpoint to the Mises regression theorem, but stating it as a fact for the current state of things rather than a historical vestige requires a gross misinterpretation of the facts.
gima 9y ago
Hmm. Reads a lot like the video series on "The History of Paper Money by Extra Credits": https://www.youtube.com/watch?v=-nZkP2b-4vo https://www.youtube.com/watch?v=-nZkP2b-4vo
panarky 9y ago
> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx M1 tripled: https://imgur.com/a/AaLNS https://imgur.com/a/AaLNS M2 doubled: https://imgur.com/a/0RGeQ https://imgur.com/a/0RGeQ Money doesn't work like shares of stock, where a two-for-one split makes each share worth half as much. Velocity, yield curves, economic growth and exchange rates all get to vote. If you double the number of dollars "in circulation", it also matters which economic actors hold those extra dollars. US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who didn't spend it, driving velocity down. This stuff is complicated with many variables. Unfortunately the "easy to understand" version doesn't explain what happens in the real world.
- dragonwriter 9y ago
  > US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who don't spend it, driving velocity down. Note that this was done in response to the velocity going down for reasons unrelated to the money supply, and largely because the government completely dropped the ball on fiscal stimulus so the central bank was left pushing the one lever it has, even though the circumstances were such that that lever was obviously not well suited to move the economy in the intended direction.
- tbabb 9y ago
  > M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
  - panarky 9y ago
    Here's a way to think about it using simple identities. 1) Nominal GDP = Money Spent 2) Nominal GDP = Price Level * Real GDP 3) Money Spent = Money Supply * Velocity Therefore 4) Price Level * Real GDP = Money Supply * Velocity So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices. Economists call this "pushing on a string". The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages. This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead. Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves. That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq https://imgur.com/a/dtVJq As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.
danield9tqh 9y ago
> Even if demand for the dollar plummeted, the Fed could in principle keep burning money until a dollar is scarce enough to be worth the “right” amount This seems like the crux of the argument of the difference between the dollar and Bitcoin in the author's view. To me though this statement doesn't make sense and is very misleading, and someone please correct me if I'm wrong. The Fed CANNOT just keep burning dollars because they don't have all the dollars. Individuals hold those dollars. Yes, if individuals just started burning their dollars the value of the dollar would adjust to the "right" amount, but who in their right mind would burn their money for the greater good? In light of this, the Fed doesn't at all seem like a "check" on inflation or deflation. The dollar is still subject to the same supply and demand properties of Bitcoin.
- osrec 9y ago
  "Burning dollars" can be done in other ways. For example, the powers that be can issue less debt going forward, which would shrink the money supply.
  - RobertoG 9y ago
    Or higher taxes, effectively retiring money from the economy.
  - danield9tqh 9y ago
    This makes sense to me, that's something I hadn't thought of so thanks for sharing. But I still don't see how it differentiates BTC from USD. Because issuing any debt in the first place would inflate the value. So then when you stop issuing debt, the value would get deflated to what it would have been originally. I think this is how the Fed tries to control deflation as well. They print more money, not to distribute it but just so that they can hold it and burn it when they need to control inflation. Either way, both of these scenarios seems like a wash to me. You're just making money so that you can destroy it later. The only argument I can see here is the idea of having 'wiggle room' within the money supply. In essence a way to control the irrational volatility of the market. If everyone is screaming sell sell sell!, the Fed has a limited amount of room to destroy some money and calm people down before panic takes over. BTC doesn't have that. But even this seems to me like a much weaker 'check' than the author suggests.
arghbleargh 9y ago
I find a lot to agree with in this article, and it explains it pretty well, but the part about the Federal Reserve is a bit too simplistic. The value of money is determined by a complex interplay of factors, including government spending/taxation and international trade. The Federal Reserve has only limited influence on it via manipulation of interest rates. Nevertheless, the main point stands: the strength of fiat currency lies in the implied social contract that measures will be taken to ensure your savings today are not worthless tomorrow.
FabHK 9y ago
Good points. Fiat is better as a standard of value because an institution controls its quantity precisely to keep inflation in check (in other word, keep money supply in line with goods and services produced). One thing the article doesn't mention is that a country's taxes need to be paid in that country's fiat. That's another source of value for fiat (which cryptocurrencies don't have).
wintom 9y ago
>"A bitcoin is a number, and that number has no utility outside of its ability to be accepted by someone else. Unlike gold, the the minimum value of a bitcoin is zero— its value if everyone stops believing it works. This is one reason why a bitcoin is a risky way to hold assets." I think people forget that there is a lot of value to a censorship resistant currency. Before Bitcoin was worth hundreds or thousands of dollars it was being used in the black market at whatever rate it was floating at. That rate is a non zero value. There is no other way, other than another crypto currency, to do business in these black market places. Now blow that out exponentially to places like China where your money isn't exactly your money. Or places where its ok to seize someones property, depending on whose in power. This then starts to give you an idea that even when the bubble crashes we will still have Bitcoin.
- AstralStorm 9y ago
  Bitcoin wallet can be seized and the transactions are traceable and public, so a sufficiently determined actor can figure out who has it and how much. Then enforce their cut with violence.
  - maxfurman 9y ago
    I would quibble with this, depending on how we define "seized". My understanding is that your coins cannot be transferred unless the transaction is signed by your private key. So, authorities could seize the computer that has the private key on it, or, as you say, use violence against a known individual, but they have no way in-network to take your wallet. Compare this with the central banking system where governments can and do force banks to freeze or hand over their customers' assets.
    - nugget 9y ago
      The NSA was able to infect air gapped Iranian computers 100 ft underground that only a handful of individuals had access to. I doubt any hot wallets are really out of Government reach given enough time and attention. A cold wallet with offline multi sig - more likely.
githubcomyottu 9y ago
You could say there has been a massive deflation in Bitcoin since 2010. I prefer to say the Pizza price has inflated to $92.499.925,00/Pizza (5000 BTC).
revmoo 9y ago
I completely understand this argument, and I've heard it many times before. I'm not entirely sure I agree with the fundamental premise though. I'm not convinced that encouraging economic growth is actually worth the required level of allowing rich guys to literally print money and use it for their own gains, which effectively what the entire central banking and banking system is and does.
MR4D 9y ago
Good article. Two things were not addressed though, which I think have a bigger impact than the things he mentions: 1 - scalability (e.g. transactions per second) of the bitcoin block chain is abysmally low. So low in fact, that today’s society would crumble on it as it currently exists; 2 - credit markets are not addressed. How do you loan money in a bitcoin world? Our society is built upon credit transactions, from buying houses to wasting money on gadgets with credit cards. If debt cannot be issued, then it will never amount to more than second place. Perhaps a medium of exchange for the Zimbabwe’s of the world, but not supplanting a modernized country’s currency. [edited for spelling typo]
- danield9tqh 9y ago
  Debt can absolutely be issued with Bitcoin. What's to stop someone from saying, here I'll give you 1 BTC today if you give it back to me tomorrow? The reason you've probably heard that debt cannot be issued in Bitcoin is because debt cannot be issued in a 'safe' way. In other words if I give someone 1 BTC today, I can't be sure that they will give it back to me tomorrow. But that's just the nature of debt and has nothing to do with Bitcoin.
  - vilmosi 9y ago
    Because debt is fueled by interest, and Bitcoin is deflationary by design. So there's no interest to give loans in Bitcoin.
  - MR4D 9y ago
    Sure, you can do that, but that’s not how the modern world works. And it can’t create enough debt. For instance, if you borrow in USD,you generally have to put it somewhere (like a bank) who can loan it out again. How do you let two different people use a single bitcoin? You need to do that for Fractional-reserve banking. I’d reference this as a longer example of what I’m talking about: http://thismatter.com/money/banking/money-supply-money-multiplier.htm http://thismatter.com/money/banking/money-supply-money-multi...
- keithnoizu 9y ago
  For what it's worth, Fractional Reserve banking could still work fine with bitcoin. You'd simply need a pool of coins and restrictions on full withdrawals and how the coins are stored (aka end users don't know the specific coins they have been loaned, just that on request the holder will transfer coins up to their balance to a third party.
UncleEntity 9y ago
> Essentially, the gold standard commits a fallacy by assuming that the value of money comes from the commodity that backs it. Talk about a strawman, nobody believes that. Gold (or any form of money) derives its value from being a commonly accepted medium of exchange.
zxy_xyz 9y ago
ELI5 how bitcoin works anyone? I'm curious but not willing to deep dive atm.
- allemagne 9y ago
  https://www.youtube.com/watch?v=bBC-nXj3Ng4 https://www.youtube.com/watch?v=bBC-nXj3Ng4
jonnycomputer 9y ago
and not a single mention of taxes in the article as a source of demand for a currency. Roughly, the US collects about $3.3 trillion in tax every year, and the US states another $700 billion.
stevedekorte 9y ago
"What about the gold standard? Well, it didn’t really work." Saying the gold standard didn't work after central banks printed far more than their gold reserves (i.e. effectively went off the gold standard) is like saying vaccinations don't work after people stop getting vaccinated and start getting sick again. It would be more correct to say that parties responsible for maintaining the gold standard (the central banks) failed and therefore "don't really work".
- jganetsk 9y ago
  The gold standard doesn't work because it's deflationary. The Eurozone effectively functions as a gold standard. And now we are re-learning why the gold standard is bad when we look at the impact austerity has had on the Greek financial crisis.
  - UncleEntity 9y ago
    There's nothing inherently bad about deflation, the US economy was basically deflationary for the whole of the 19th century and did just fine. I would explain how the opposite is not true but people a lot more knowledgeable on the subject have written volumes.
    - deleted 9y ago
      [deleted]
    - faint_coder 9y ago
      If you say so, you don't know anything about macroeconomics, and John Maynard Keynes' thrift paradox. Money MUST BE printed, because players that use it (people and businesses) _GROW_ over time! Did you heard that Facebook ALONE in 2014 generated almost $400,000,000,000.00 in economic activity? How that would haven been possible if we had the same USD volume supply of 1930? How derivatives, futures contracts, options contracts, options writing would be possible with a fixed USD volume at 1930's levels?! What you say is absurd, for modern economies. Please, read some more books on those topics. Thank you.
  - 9y ago
Agebor 9y ago
I agree with the conclusion about bitcoin, but it's very ignorant to just dismiss all current and future cryptocurrencies and assume it's not possible to replace fiat currency. Research is currently ongoing in stable coins like https://makerdao.com/ https://makerdao.com/ In the following decades we will just begin to understand what it means to have decentralised and programmable value. Perhaps we won't use ANY currency in the future and the value of everything will be dynamic and personalised. Say, someone with low tolerance for risk will see more stable prices but slightly higher. Expressed in currency "minutes of watching TV". Anything really is possible.
cmroanirgo 9y ago
Lol. Although many good and seemingly well-reasoned arguments, the author forgot that you can only place a value on something if it is traded for something else. (eg BTC to USD, or chickens to potatoes). It is the ratio that gives the value and also depends on what side of the trade you're on. "A sudden random jolt downward in bitcoin price prompts many people to try to sell it and worsen the situation," This sentence makes no sense because the "bitcoin price" is actually the BTC/USD ratio. You can trade in other ways. My final, roll-on-the-floor-laughing moment was the description of dollar as a measure of utility: "If the utility measured by a single dollar fluctuated a lot, that would mean that the number in your bank account would suddenly miscount the utility of all the work that filled it" This happens every single day. Every government and bank in the world devalues your current bank account (aka inflation), so that you have to work harder (ie, increase your utility) to receive the same benefit. "If you’re not willing to have a fluctuating bank account, BTC does not make transactions easier. It forces you to make more transactions." That's precisely why government provided currencies are also worthless! All of us are running around like chickens without their head, hoping to get 'more money' just to survive! Currency is enslavement IMHO.
- ypeterholmes 9y ago
  Well said. I was also struck by the author's core argument- that Bitcoin will never be stable because nobody can manipulate its value. Seems to me the opposite is true; the fact that nobody can directly manipulate supply will provide the type of stability our current fiat currency sorely lacks.
  - xapata 9y ago
    Did you forget the discussion of Bretton Woods? When you can't alter supply, it might be temporarily stable, but you have catastrophic shocks. Calm before the storm, and all that.
- faint_coder 9y ago
  Currency is enslavement? Strange, because I thought you could exchange it for good and services slaves didn't have. Nowadays with a standard household purchasing power you can buy a lot of good and services. Let's back in time, to see what really being slaves would have mean in the past.
jganetsk 9y ago
> Demand for dollars is (like anything) organic and capricious, but the supply is directly controlled by the Fed. This is actually wrong. Money really consists of 2 things: 1) Government debt 2) Private bank credit The Fed only controls the amount of bank reserves, which is a function of: 1) Policy (federal funds rate target, reserve requirements) 2) Demand for reserves from private banks The fed cannot create or destroy money, because money as we know is either a balance in a bank account, coins, or notes. The fed's operations are always either neutral towards bank account balances, or swap physical currency (coins or notes) for bank account balances. The government creates money by spending it into existence, and destroys money by collecting revenue. Private banks create money by lending it out, and destroy money when loans are paid off.
bitconion 9y ago
well, also gold is yellow and shiny, not like bitcoin. the author is somewhere in the middle between abstractions and direct analogies. of course "intrinsic value" has no math definition. so one can manipulate words around it and bitcoin and gold etc

77 points by tbabb 9y ago

These are all good points except for the idea that it won't be used like normal money. The speculative environment and price volatility resulting from that, is all by design. The mining incentive creates a "boom" environment to help bootstrap the currency. Now, a few years later, BTC is blessed by regulators. The next phase of world domination is for the governance model of Bitcoin to start to seem far better than fiat governance models. This is just a matter of time.

blowski 9y ago
That seems like wishful thinking. You might end up in being correct, but I've yet to see firm evidence that suggests that will be the case.
- psyc 9y ago
  How often does one get "firm evidence" about how future human affairs unfold?
  - blowski 9y ago
    We quite often get firm evidence, and the evidence turns out to be wrong. But I'm a sceptic, which is why I never bought any Bitcoins for $1 in 2012.
    - grandalf 9y ago
      I have no idea whether that will happen, just trying to express what I think the rational case is for investing in Bitcoin today. Goldbugs / conspiracy theorists have a line of argument where they describe all the fiat currencies that have ultimately experienced corruption and hyper-inflation. So I think it's fair to say that running a fiat currency successfully for more than 500 years is something that is unprecedented in the history of the world. So over a long time horizon this makes Bitcoin extremely interesting. It's not a question of whether 1 BTC will one day be worth millions of USD, it's a question of when. There is a good chance it will be hundreds of years from now if at all. Much financial risk is in fact sovereign risk in one form or another. This doesn't mean it's rational to hoard gold or BTC, but for entities that have a long-term view of their own future, it makes sense to care a little bit and to diversify. Even if 10% of the long-term entities diversify into Bitcoin, that alone will drive the price up substantially. It's far too soon for that to have happened. We are also entering an era where politics are once again a bit part of international exchange, which adds additional sovereign risk for many areas of international business and financial planning. But Bitcoin faces the same kinds of risks as governments for corruption, mismanagement, etc. The genius of it is that the governance model makes it a lot harder for one party to really control what happens with it.
      - RobertoG 9y ago
        >"Goldbugs / conspiracy theorists have a line of argument where they describe all the fiat currencies that have ultimately experienced corruption and hyper-inflation" And they are, practically in all the cases wrong. What we see is in history is a mismanagement of the real economy or external factors affecting the currency. They confound the symptom with the cause. When the 'real' economy goes wrong, never mind if you have bit-coins, or whatever. In a desert, a bag with a million dollars buy you nothing. Of course, you can make a case for gold or similar because it could make easy run away to another place, but that it's not the argument they are pushing normally.
        grandalf 9y ago
        > Of course, you can make a case for gold or similar because it could make easy run away to another place, but that it's not the argument they are pushing normally. I think this is the aspect of it that applies to Bitcoin. All of the steps along the road to hyper-inflation in a fiat currency may be quite reasonable and may constitute the smartest move using the available tools. There is also the question of whether currencies should be tied to governments. The risks that (frequent) government failures pose to one of the core purposes of money (storing value) are not costless. Society bears the costs of those risks even though they are hard to measure. Of course many of the same problems could apply equally (or more) to Bitcoin depending on how the governance process proceeds.
      - keithnoizu 9y ago
        You're assuming BTC will appreciate in value. There is no guarantee it will eventually become worth millions of US or equivalent dollars. Even with a fixed qty; uncovered exploits, technological breakthroughs, change in crypto trends (aka a move to another platform), or change in society could halt an increase of value. Technically the same is true of gold. Even with out a massive change in qty, something as simple as a better gold like alloy for jewelry, an alternative for electronics, or a sudden cultural aversion to gold ownership could reduce the value.
        grandalf 9y ago

option_greek 9y ago

I can now see how internet didn't make sense to Bill gates and IPhone was a passing fad to Steve balmer. I think the existing players get a sort of tunnel vision when they get in contact with disruptive technologies. Either way, we will know in a few years :).

kordlessagain 9y ago

> As we can see from everything above, holding BTC will tend to be very expensive, as large fluctuations can cut your savings in half without warning. There is no historic trend in which Bitcoin has become "very expensive" to hold long term, especially when compared to other long term asset classes. This fact is due to the price sitting at the top of its value, historically. Large fluctuations in other asset classes may also hold this property, which means it's a common issue with asset speculation, not Bitcoin itself. This is not to say that Bitcoin's value will not decrease at a future date. It likely will. This entire article's argument has been heard before. Bitcoin isn't money. It can be used as a currency, but its nature is much, much more than that.

darawk 9y ago

Overall I like the article, but a few points of disagreement: 1. The US dollar has intrinsic value. That intrinsic value is that the US government accepts it as payment for taxes. Regardless of what currency you conduct your business in, the USG accepts its cut only in dollars. That creates intrinsic demand for dollars, and links that intrinsic demand directly to the US GDP. 2. Bitcoin also has intrinsic value. That intrinsic value stems from transaction fees. It costs bitcoin to move bitcoin. International value-transfer is a service that has been around for a long time, and there is a market in it, so we can derive its value (or at the very least, that its value is non-zero) from the existence of demand for that service. Global value transfer has value, the Bitcoin network offers that service, and accepts payment only in Bitcoin. That is intrinsic value. 3. "Yes, this check could fail, but that possibility is still better than Bitcoin’s complete absence of any check on inflation." Bitcoin's core problem is not inflation. It's deflation. A fixed-supply currency is likely to suffer from deflationary spirals and subsequent crashes. I suppose you could call those crashes 'inflation', but that's not generally how the word is used. 4. "So here lies the fundamental difference between the dollar and Bitcoin: The supply of bitcoin is fixed, but the demand is beholden to uncontrollable market forces and speculator whims. That means that unlike the dollar, the value of BTC can never be stable, because there is no means regulate the supply to keep the value consistent from moment to moment.". Yes, that is the standard econ. argument in favor of central banks. It's not a new idea. But the actual evidence for its truth is surprisingly weak. Economies existed long before central banks, and indeed, they did have boom and bust cycles. However, it's not all that clear the central banks have really helped matters much, despite what they would like to think. Now, i'm not a total skeptic of central banking. I think its possible that they're adding some value, but i'm skeptical that it's as much as they think, and that the economy wouldn't find a way to function smoothly without them.

deleted 9y ago
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andrewla 9y ago
> That intrinsic value is that the US government accepts it as payment for taxes That can be argued to be an abstract utility for the US Dollar, but it is not an argument for the value (or "intrinsic value", whatever that means) of the US dollar in that the value of it is what determines the tax obligation. That is, if I own taxes on a non-USD transaction (say capital gains for BTC sales), the amount of those taxes is dependent on the value of USD. There's no forcing function -- if USD is valuable, I owe fewer dollars, if USD is cheap then I owe more dollars. There's no net demand. To summarize -- tax obligations create no net demand for USD, thus are not a factor in the value of USD. The exception to this is things like fees and (in the short-term) specific value taxes (like property taxes). These are not a significant factor in US government revenue, so I think we can safely discount them, although many municipalities rely on them to a greater degree. I don't understand why this tired old meme keeps getting circulated -- it makes me want to write an angry letter to David Graeber. I think it's an interesting thesis for the origin of money, as early taxes were more like fees, tariffs, and tolls rather than ad valorum, and serves as a useful counterpoint to the Mises regression theorem, but stating it as a fact for the current state of things rather than a historical vestige requires a gross misinterpretation of the facts.

gima 9y ago

Hmm. Reads a lot like the video series on "The History of Paper Money by Extra Credits": https://www.youtube.com/watch?v=-nZkP2b-4vo https://www.youtube.com/watch?v=-nZkP2b-4vo

panarky 9y ago

> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx M1 tripled: https://imgur.com/a/AaLNS https://imgur.com/a/AaLNS M2 doubled: https://imgur.com/a/0RGeQ https://imgur.com/a/0RGeQ Money doesn't work like shares of stock, where a two-for-one split makes each share worth half as much. Velocity, yield curves, economic growth and exchange rates all get to vote. If you double the number of dollars "in circulation", it also matters which economic actors hold those extra dollars. US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who didn't spend it, driving velocity down. This stuff is complicated with many variables. Unfortunately the "easy to understand" version doesn't explain what happens in the real world.

dragonwriter 9y ago
> US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who don't spend it, driving velocity down. Note that this was done in response to the velocity going down for reasons unrelated to the money supply, and largely because the government completely dropped the ball on fiscal stimulus so the central bank was left pushing the one lever it has, even though the circumstances were such that that lever was obviously not well suited to move the economy in the intended direction.
tbabb 9y ago
> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
- panarky 9y ago
  Here's a way to think about it using simple identities. 1) Nominal GDP = Money Spent 2) Nominal GDP = Price Level * Real GDP 3) Money Spent = Money Supply * Velocity Therefore 4) Price Level * Real GDP = Money Supply * Velocity So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices. Economists call this "pushing on a string". The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages. This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead. Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves. That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq https://imgur.com/a/dtVJq As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.

danield9tqh 9y ago

> Even if demand for the dollar plummeted, the Fed could in principle keep burning money until a dollar is scarce enough to be worth the “right” amount This seems like the crux of the argument of the difference between the dollar and Bitcoin in the author's view. To me though this statement doesn't make sense and is very misleading, and someone please correct me if I'm wrong. The Fed CANNOT just keep burning dollars because they don't have all the dollars. Individuals hold those dollars. Yes, if individuals just started burning their dollars the value of the dollar would adjust to the "right" amount, but who in their right mind would burn their money for the greater good? In light of this, the Fed doesn't at all seem like a "check" on inflation or deflation. The dollar is still subject to the same supply and demand properties of Bitcoin.

osrec 9y ago
"Burning dollars" can be done in other ways. For example, the powers that be can issue less debt going forward, which would shrink the money supply.
- RobertoG 9y ago
  Or higher taxes, effectively retiring money from the economy.
- danield9tqh 9y ago
  This makes sense to me, that's something I hadn't thought of so thanks for sharing. But I still don't see how it differentiates BTC from USD. Because issuing any debt in the first place would inflate the value. So then when you stop issuing debt, the value would get deflated to what it would have been originally. I think this is how the Fed tries to control deflation as well. They print more money, not to distribute it but just so that they can hold it and burn it when they need to control inflation. Either way, both of these scenarios seems like a wash to me. You're just making money so that you can destroy it later. The only argument I can see here is the idea of having 'wiggle room' within the money supply. In essence a way to control the irrational volatility of the market. If everyone is screaming sell sell sell!, the Fed has a limited amount of room to destroy some money and calm people down before panic takes over. BTC doesn't have that. But even this seems to me like a much weaker 'check' than the author suggests.

arghbleargh 9y ago

I find a lot to agree with in this article, and it explains it pretty well, but the part about the Federal Reserve is a bit too simplistic. The value of money is determined by a complex interplay of factors, including government spending/taxation and international trade. The Federal Reserve has only limited influence on it via manipulation of interest rates. Nevertheless, the main point stands: the strength of fiat currency lies in the implied social contract that measures will be taken to ensure your savings today are not worthless tomorrow.

FabHK 9y ago

Good points. Fiat is better as a standard of value because an institution controls its quantity precisely to keep inflation in check (in other word, keep money supply in line with goods and services produced). One thing the article doesn't mention is that a country's taxes need to be paid in that country's fiat. That's another source of value for fiat (which cryptocurrencies don't have).

wintom 9y ago

>"A bitcoin is a number, and that number has no utility outside of its ability to be accepted by someone else. Unlike gold, the the minimum value of a bitcoin is zero— its value if everyone stops believing it works. This is one reason why a bitcoin is a risky way to hold assets." I think people forget that there is a lot of value to a censorship resistant currency. Before Bitcoin was worth hundreds or thousands of dollars it was being used in the black market at whatever rate it was floating at. That rate is a non zero value. There is no other way, other than another crypto currency, to do business in these black market places. Now blow that out exponentially to places like China where your money isn't exactly your money. Or places where its ok to seize someones property, depending on whose in power. This then starts to give you an idea that even when the bubble crashes we will still have Bitcoin.

AstralStorm 9y ago
Bitcoin wallet can be seized and the transactions are traceable and public, so a sufficiently determined actor can figure out who has it and how much. Then enforce their cut with violence.
- maxfurman 9y ago
  I would quibble with this, depending on how we define "seized". My understanding is that your coins cannot be transferred unless the transaction is signed by your private key. So, authorities could seize the computer that has the private key on it, or, as you say, use violence against a known individual, but they have no way in-network to take your wallet. Compare this with the central banking system where governments can and do force banks to freeze or hand over their customers' assets.
  - nugget 9y ago
    The NSA was able to infect air gapped Iranian computers 100 ft underground that only a handful of individuals had access to. I doubt any hot wallets are really out of Government reach given enough time and attention. A cold wallet with offline multi sig - more likely.

githubcomyottu 9y ago

You could say there has been a massive deflation in Bitcoin since 2010. I prefer to say the Pizza price has inflated to $92.499.925,00/Pizza (5000 BTC).

revmoo 9y ago

I completely understand this argument, and I've heard it many times before. I'm not entirely sure I agree with the fundamental premise though. I'm not convinced that encouraging economic growth is actually worth the required level of allowing rich guys to literally print money and use it for their own gains, which effectively what the entire central banking and banking system is and does.

MR4D 9y ago

Good article. Two things were not addressed though, which I think have a bigger impact than the things he mentions: 1 - scalability (e.g. transactions per second) of the bitcoin block chain is abysmally low. So low in fact, that today’s society would crumble on it as it currently exists; 2 - credit markets are not addressed. How do you loan money in a bitcoin world? Our society is built upon credit transactions, from buying houses to wasting money on gadgets with credit cards. If debt cannot be issued, then it will never amount to more than second place. Perhaps a medium of exchange for the Zimbabwe’s of the world, but not supplanting a modernized country’s currency. [edited for spelling typo]

danield9tqh 9y ago
Debt can absolutely be issued with Bitcoin. What's to stop someone from saying, here I'll give you 1 BTC today if you give it back to me tomorrow? The reason you've probably heard that debt cannot be issued in Bitcoin is because debt cannot be issued in a 'safe' way. In other words if I give someone 1 BTC today, I can't be sure that they will give it back to me tomorrow. But that's just the nature of debt and has nothing to do with Bitcoin.
- vilmosi 9y ago
  Because debt is fueled by interest, and Bitcoin is deflationary by design. So there's no interest to give loans in Bitcoin.
- MR4D 9y ago
  Sure, you can do that, but that’s not how the modern world works. And it can’t create enough debt. For instance, if you borrow in USD,you generally have to put it somewhere (like a bank) who can loan it out again. How do you let two different people use a single bitcoin? You need to do that for Fractional-reserve banking. I’d reference this as a longer example of what I’m talking about: http://thismatter.com/money/banking/money-supply-money-multiplier.htm http://thismatter.com/money/banking/money-supply-money-multi...
keithnoizu 9y ago
For what it's worth, Fractional Reserve banking could still work fine with bitcoin. You'd simply need a pool of coins and restrictions on full withdrawals and how the coins are stored (aka end users don't know the specific coins they have been loaned, just that on request the holder will transfer coins up to their balance to a third party.

UncleEntity 9y ago

> Essentially, the gold standard commits a fallacy by assuming that the value of money comes from the commodity that backs it. Talk about a strawman, nobody believes that. Gold (or any form of money) derives its value from being a commonly accepted medium of exchange.

zxy_xyz 9y ago

ELI5 how bitcoin works anyone? I'm curious but not willing to deep dive atm.

allemagne 9y ago
https://www.youtube.com/watch?v=bBC-nXj3Ng4 https://www.youtube.com/watch?v=bBC-nXj3Ng4

jonnycomputer 9y ago

and not a single mention of taxes in the article as a source of demand for a currency. Roughly, the US collects about $3.3 trillion in tax every year, and the US states another $700 billion.

stevedekorte 9y ago

"What about the gold standard? Well, it didn’t really work." Saying the gold standard didn't work after central banks printed far more than their gold reserves (i.e. effectively went off the gold standard) is like saying vaccinations don't work after people stop getting vaccinated and start getting sick again. It would be more correct to say that parties responsible for maintaining the gold standard (the central banks) failed and therefore "don't really work".

jganetsk 9y ago
The gold standard doesn't work because it's deflationary. The Eurozone effectively functions as a gold standard. And now we are re-learning why the gold standard is bad when we look at the impact austerity has had on the Greek financial crisis.
- UncleEntity 9y ago
  There's nothing inherently bad about deflation, the US economy was basically deflationary for the whole of the 19th century and did just fine. I would explain how the opposite is not true but people a lot more knowledgeable on the subject have written volumes.
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  - faint_coder 9y ago
    If you say so, you don't know anything about macroeconomics, and John Maynard Keynes' thrift paradox. Money MUST BE printed, because players that use it (people and businesses) _GROW_ over time! Did you heard that Facebook ALONE in 2014 generated almost $400,000,000,000.00 in economic activity? How that would haven been possible if we had the same USD volume supply of 1930? How derivatives, futures contracts, options contracts, options writing would be possible with a fixed USD volume at 1930's levels?! What you say is absurd, for modern economies. Please, read some more books on those topics. Thank you.
- 9y ago

Agebor 9y ago

I agree with the conclusion about bitcoin, but it's very ignorant to just dismiss all current and future cryptocurrencies and assume it's not possible to replace fiat currency. Research is currently ongoing in stable coins like https://makerdao.com/ https://makerdao.com/ In the following decades we will just begin to understand what it means to have decentralised and programmable value. Perhaps we won't use ANY currency in the future and the value of everything will be dynamic and personalised. Say, someone with low tolerance for risk will see more stable prices but slightly higher. Expressed in currency "minutes of watching TV". Anything really is possible.

cmroanirgo 9y ago

Lol. Although many good and seemingly well-reasoned arguments, the author forgot that you can only place a value on something if it is traded for something else. (eg BTC to USD, or chickens to potatoes). It is the ratio that gives the value and also depends on what side of the trade you're on. "A sudden random jolt downward in bitcoin price prompts many people to try to sell it and worsen the situation," This sentence makes no sense because the "bitcoin price" is actually the BTC/USD ratio. You can trade in other ways. My final, roll-on-the-floor-laughing moment was the description of dollar as a measure of utility: "If the utility measured by a single dollar fluctuated a lot, that would mean that the number in your bank account would suddenly miscount the utility of all the work that filled it" This happens every single day. Every government and bank in the world devalues your current bank account (aka inflation), so that you have to work harder (ie, increase your utility) to receive the same benefit. "If you’re not willing to have a fluctuating bank account, BTC does not make transactions easier. It forces you to make more transactions." That's precisely why government provided currencies are also worthless! All of us are running around like chickens without their head, hoping to get 'more money' just to survive! Currency is enslavement IMHO.

ypeterholmes 9y ago
Well said. I was also struck by the author's core argument- that Bitcoin will never be stable because nobody can manipulate its value. Seems to me the opposite is true; the fact that nobody can directly manipulate supply will provide the type of stability our current fiat currency sorely lacks.
- xapata 9y ago
  Did you forget the discussion of Bretton Woods? When you can't alter supply, it might be temporarily stable, but you have catastrophic shocks. Calm before the storm, and all that.
faint_coder 9y ago
Currency is enslavement? Strange, because I thought you could exchange it for good and services slaves didn't have. Nowadays with a standard household purchasing power you can buy a lot of good and services. Let's back in time, to see what really being slaves would have mean in the past.

jganetsk 9y ago

> Demand for dollars is (like anything) organic and capricious, but the supply is directly controlled by the Fed. This is actually wrong. Money really consists of 2 things: 1) Government debt 2) Private bank credit The Fed only controls the amount of bank reserves, which is a function of: 1) Policy (federal funds rate target, reserve requirements) 2) Demand for reserves from private banks The fed cannot create or destroy money, because money as we know is either a balance in a bank account, coins, or notes. The fed's operations are always either neutral towards bank account balances, or swap physical currency (coins or notes) for bank account balances. The government creates money by spending it into existence, and destroys money by collecting revenue. Private banks create money by lending it out, and destroy money when loans are paid off.

bitconion 9y ago

well, also gold is yellow and shiny, not like bitcoin. the author is somewhere in the middle between abstractions and direct analogies. of course "intrinsic value" has no math definition. so one can manipulate words around it and bitcoin and gold etc