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The article makes a series of well known criticisms, but there are a few issues with it. 1. If a BTC were to be worth $2M, you'd simply trade microcoins which

The article makes a series of well known criticisms, but there are a few issues with it. 1. If a BTC were to be worth $2M, you'd simply trade microcoins which would be worth $2. Or even nanocoins for micropayments. 2. Bitcoin's quasi-anonymous nature will be highly desirable to many people, including very large criminal organizations who'll definitely be moving those coins. 3. A large number of early adopters joined the movement because they believe in the ideal behind a p2p cryptocurrency. These people are not in it for the investment alone and will be willing to use it as a currency. 4. On paper, even the free software movement sounds idiotic. What kind of idiot would spend their time and resources to produce something for free? In practice, it works extremely well because not everyone is solely motivated by their best economical interest. 5. Few people will put all of their eggs in one basket. When the value of BTC stabilizes, investors who are happy with the valuation are likely to sell and cash in on the investment or diversify their investment through other currencies/speculations.

benihana 15y ago
Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as the reasons it will fail. They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource.
- tatsuke95 15y ago
  The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.
  - teodesian 15y ago
    You must remember, however that money != wealth. The money supply of a nation in no way represents the wealth generation going on in an economy. Printing an extra dollar does not mean the users of dollars became wealthier, it simply redistributes the existing wealth. Barter is also another factor that creates wealth, yet does not have anything to do with the monetary system. Our growing wealth in many ways is in spite of our money and governments. It is worth noting that ever since the USD lost it's scarcity (with the closing of the gold window in the 70's) real wages and quality of life has gone down, not up.
    - btilly 15y ago
      Here is a basic economic fact for you. In periods of mild inflation, people have an incentive to invest money, which leads to growth. In periods of deflation (like the Great Depression) people have an incentive to put money under the bed and wait for it to appreciate. Therefore deflation is horrible for economic growth. Thus money supply does not represent wealth generation, but controlling it does affect wealth generation in a pretty significant way. As for your comment about the 70s, the wealth of this country has gone up dramatically. However there has also been a sharp increase in inequality. Thus causing a small number of people to see wealth rise a whole lot. Whether or not the middle class has wound up better or worse is a subject of debate among economists. (The subject is not nearly as simple as you might think. We think of "inflation" as an absolute number but it is not. The inflation that you experience is relative to the goods that you purchase, and middle class or poor people purchase a different bundle of goods than rich people do.) In any case the result is that it is clear that wealth generation has been humming along very nicely. My personal belief is that the underlying cause of the increase in wealth disparity is the continual drop in the top income tax rate, the reduction of the number of tax brackets, and the increase in the tax rate on the average person. (The effective tax rate on the richest people is now below the median tax rate!) This has limited how much tax policy redistributes money between socio-economic groups. Whether this is a good or bad thing is a political debate for another time. But it is a real thing.
      - rubashov 15y ago
- kd0amg 15y ago
  Maybe we've been seeing different criticisms, but the ones I've seen don't just complain that it's not backed by fiat -- they complain that it's not backed by anything.
  - kruhft 15y ago
    I think it's getting backed by all the people that are putting money into it.
    - tptacek 15y ago
      That's the same kind of backing tulips had.
- jerf 15y ago
  "Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency." Then you're being willfully blind. Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. That has nothing to do with its fiat-ness, it is simply a characteristic of deflating currencies of any kind. You may not agree, or you may think BitCoin has some clever solution to the problem, but there are numerous criticisms that are much more sophisticated than "it's not a fiat currency". (Another one being the "it has no backing", which is not a claim that only a government can back a currency, it is observing that it has no backing at all. I'd be perfectly fine with a credible non-governmental third party that provided a credible backing (and both "credibles" are important there, I did not just repeat myself), but there isn't one, and again, that has nothing to do with it "not being fiat".) In fact I think most criticisms of BitCoin are not that it simply isn't a fiat currency. (On a general note, if you are planning on being a BitCoin activist, it is important to learn and understand the arguments your opponents are making. You can not counter an argument you do not deeply understand. Sticking fingers in ears and chanting "la la la!" is psychologically appealing, but you're sacrificing all ability to persuade when you do it. There are good arguments against BitCoin. For that matter you can't engineer solutions to problems you don't deeply understand.)
  - vrotaru 15y ago
    Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. Yes, the armchair deflationary spiral theory. With the exception of labor theory of value, I do not know of any other economic theory whose premises are a) so thoroughly laughable b) lacking any kind empirical evidence. In an attempt to reduce the noise/signal ratio (usually high) in such debates... Yes, I know the usual arguments in favor of Deflation Scare and I devoted a fair amount of time thinking and debating these matters. Done my homework, so to speak. But feel free to surprise me, with an argument I missed.
    - jerf 15y ago
      That's your persuasive counterargument? "That theory sucks"? I don't deny the standard case is controversial (which is also, BTW, not the same as "lacking in any evidence"; there's plenty of evidence, it's just that what it means is still debated), when discussing deflation spirals of a relatively small size, but when you're talking about a currency that will deflate by orders of magnitude, and that necessarily must do so if it going to be any sort of successful, I think you need more than "Ha ha ha! I laugh in the face of your argument!" I do not know of a real world parallel of such a thing, and when it comes to systems this complicated the presumption by any sane systems engineer is that your new proposal won't work. I for one am not going to take it as axiomatic that BitCoin is inevitably going to work and the burden of proof is on those who think it won't work (another psychologically tempting position). Quite the opposite. You claim to have done your homework... have you considered actually sharing it with us? Or are derisive italics all you really have?
- rmc 15y ago
  You mean when 19 out of every 20 people had to work to grow food, and there wasn't enough money for social welfare? How much of the last 200 years (industrial revolution, mass transport (trains/roads/cars/planes), etc.) have been due to having a fiat currency and modern banking system?
  - jcborro 15y ago
    Um, the U.S. dollar was fully convertible to gold until 1971. Since gold has risen from $35 to $1500 per ounce.
- nhaehnle 15y ago
  "They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource." Please check your facts. For the majority of human history, money was not backed by a scarce resource, but by government power. For example, there was no guarantee in the Roman empire of exchanging coins to a certain amount of gold or silver, and the value of the coins in the Roman empire was largely unrelated to their material value. To make that more precise, the reason that precious metals were used in coins was to prevent forgeries. If C is the cost to produce a coin or piece of paper money, then its value will (with very few degeneracies) always be in the range between C and f*C, where f > 1 is a factor that depends on the level of anti-forgery technology, and on the efficiency of law enforcement for tracking down forgers. After all, no government in their right mind would produce coins whose value is lower than or equal to the cost to produce them - that would just be a nonsensical work. Therefore, the value is larger than C. However, the higher the ratio between value and cost of production, the more attractive the coin or paper money becomes as a target for forgers. So raising the cost C of production makes it less attractive to forgers. Interesting side note: If you actually look at the (unfortunately scarce) data concerning inflation in the Roman empire, you will see that as inflation pushes the real value of coins down, and the nominal cost of production of the coins up, the government eventually reacted by minting new coins with adjusted production costs (by reducing the amount of precious metals in the coins, or by creating new coins with the same amount of precious metals, but higher nominal value). It is quite unfortunate that folklore has the causality between minting coins and inflation exactly the wrong way around.
danssig 15y ago
>In practice, it works extremely well because not everyone is solely motivated by their best economical interest. Actually free software can be in your best economical interest. I wonder if Linus would have gotten the kinds of jobs he has without Linux. I seriously doubt it, at least not the first ones.
fryguy 15y ago
He is not saying what you think he's saying for #1. He's saying that if in 10 years or whatever, 1 bitcoin is worth $2M, why would you ever spend your 1 bitcoin now when it's going to be worth so much money in the future. This means people are going to horde, or it's not going to become so big.
matthewcford 15y ago
I personally think that BitCoin as a concept is too big to succeed. It will scare governments and they'll ban trading in it.
- jonnathanson 15y ago
  More likely, they could run a bunch of PR campaigns and plant news stories about how risky and unstable Bitcoins are -- either in an attempt to scare consumers away from the currency, or to actively destabilize the speculative market for the currency. "Banning" the currency seems beyond the reach of a government unless it's prepared to place restrictions on internet usage in general (a la the PRC). This is because, even if the U.S. government (for example) were to declare that dollars are no longer convertible with Bitcoins, people could still trade dollars for BCs, and vice versa, under the table.
  - getsat 15y ago
    You just described part of the plot of "A Lodging of Wayfaring Men". Highly recommended book!
  - matthewcford 15y ago
    > declare that dollars are no longer convertible with Bitcoins Yes, what I was trying to get at (not banning the transfer of BTC). While trading could move underground, making it illegal would probably deter enough people. Should most governments adopt a similar stance, then it would be nothing more than a collectors item.
jarek 15y ago
"2. Bitcoin's quasi-anonymous nature will be highly desirable to many people, including very large criminal organizations who'll definitely be moving those coins." Acceptance of a currency is a tricky thing. For less-than-legal uses, you need someone willing to launder the money at some point. Your arms dealer isn't going to take bitcoin unless they can exchange it for a widely accepted currency or pay their supplier in bitcoin, and the supplier won't take bitcoin unless they can buy raw materials with bitcoin, and the mine isn't going to take bitcoin unless they can exchange it for something useful to them. Breaking out of the cycle is much easier with a currency that is accepted by everyone for everything. With dollars, just set up a restaurant, people pay in dollars in those, and there are more legitimate restaurants than money-laundering restaurants (in most places). You'd need enough legitimate use of bitcoins to hide laundering, and it's not clear to me that will ever happen.

benihana 15y ago

Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as the reasons it will fail. They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource.

tatsuke95 15y ago
The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.
- teodesian 15y ago
  You must remember, however that money != wealth. The money supply of a nation in no way represents the wealth generation going on in an economy. Printing an extra dollar does not mean the users of dollars became wealthier, it simply redistributes the existing wealth. Barter is also another factor that creates wealth, yet does not have anything to do with the monetary system. Our growing wealth in many ways is in spite of our money and governments. It is worth noting that ever since the USD lost it's scarcity (with the closing of the gold window in the 70's) real wages and quality of life has gone down, not up.
  - btilly 15y ago
    Here is a basic economic fact for you. In periods of mild inflation, people have an incentive to invest money, which leads to growth. In periods of deflation (like the Great Depression) people have an incentive to put money under the bed and wait for it to appreciate. Therefore deflation is horrible for economic growth. Thus money supply does not represent wealth generation, but controlling it does affect wealth generation in a pretty significant way. As for your comment about the 70s, the wealth of this country has gone up dramatically. However there has also been a sharp increase in inequality. Thus causing a small number of people to see wealth rise a whole lot. Whether or not the middle class has wound up better or worse is a subject of debate among economists. (The subject is not nearly as simple as you might think. We think of "inflation" as an absolute number but it is not. The inflation that you experience is relative to the goods that you purchase, and middle class or poor people purchase a different bundle of goods than rich people do.) In any case the result is that it is clear that wealth generation has been humming along very nicely. My personal belief is that the underlying cause of the increase in wealth disparity is the continual drop in the top income tax rate, the reduction of the number of tax brackets, and the increase in the tax rate on the average person. (The effective tax rate on the richest people is now below the median tax rate!) This has limited how much tax policy redistributes money between socio-economic groups. Whether this is a good or bad thing is a political debate for another time. But it is a real thing.
    - rubashov 15y ago
kd0amg 15y ago
Maybe we've been seeing different criticisms, but the ones I've seen don't just complain that it's not backed by fiat -- they complain that it's not backed by anything.
- kruhft 15y ago
  I think it's getting backed by all the people that are putting money into it.
  - tptacek 15y ago
    That's the same kind of backing tulips had.
jerf 15y ago
"Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency." Then you're being willfully blind. Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. That has nothing to do with its fiat-ness, it is simply a characteristic of deflating currencies of any kind. You may not agree, or you may think BitCoin has some clever solution to the problem, but there are numerous criticisms that are much more sophisticated than "it's not a fiat currency". (Another one being the "it has no backing", which is not a claim that only a government can back a currency, it is observing that it has no backing at all. I'd be perfectly fine with a credible non-governmental third party that provided a credible backing (and both "credibles" are important there, I did not just repeat myself), but there isn't one, and again, that has nothing to do with it "not being fiat".) In fact I think most criticisms of BitCoin are not that it simply isn't a fiat currency. (On a general note, if you are planning on being a BitCoin activist, it is important to learn and understand the arguments your opponents are making. You can not counter an argument you do not deeply understand. Sticking fingers in ears and chanting "la la la!" is psychologically appealing, but you're sacrificing all ability to persuade when you do it. There are good arguments against BitCoin. For that matter you can't engineer solutions to problems you don't deeply understand.)
- vrotaru 15y ago
  Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. Yes, the armchair deflationary spiral theory. With the exception of labor theory of value, I do not know of any other economic theory whose premises are a) so thoroughly laughable b) lacking any kind empirical evidence. In an attempt to reduce the noise/signal ratio (usually high) in such debates... Yes, I know the usual arguments in favor of Deflation Scare and I devoted a fair amount of time thinking and debating these matters. Done my homework, so to speak. But feel free to surprise me, with an argument I missed.
  - jerf 15y ago
    That's your persuasive counterargument? "That theory sucks"? I don't deny the standard case is controversial (which is also, BTW, not the same as "lacking in any evidence"; there's plenty of evidence, it's just that what it means is still debated), when discussing deflation spirals of a relatively small size, but when you're talking about a currency that will deflate by orders of magnitude, and that necessarily must do so if it going to be any sort of successful, I think you need more than "Ha ha ha! I laugh in the face of your argument!" I do not know of a real world parallel of such a thing, and when it comes to systems this complicated the presumption by any sane systems engineer is that your new proposal won't work. I for one am not going to take it as axiomatic that BitCoin is inevitably going to work and the burden of proof is on those who think it won't work (another psychologically tempting position). Quite the opposite. You claim to have done your homework... have you considered actually sharing it with us? Or are derisive italics all you really have?
rmc 15y ago
You mean when 19 out of every 20 people had to work to grow food, and there wasn't enough money for social welfare? How much of the last 200 years (industrial revolution, mass transport (trains/roads/cars/planes), etc.) have been due to having a fiat currency and modern banking system?
- jcborro 15y ago
  Um, the U.S. dollar was fully convertible to gold until 1971. Since gold has risen from $35 to $1500 per ounce.
nhaehnle 15y ago
"They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource." Please check your facts. For the majority of human history, money was not backed by a scarce resource, but by government power. For example, there was no guarantee in the Roman empire of exchanging coins to a certain amount of gold or silver, and the value of the coins in the Roman empire was largely unrelated to their material value. To make that more precise, the reason that precious metals were used in coins was to prevent forgeries. If C is the cost to produce a coin or piece of paper money, then its value will (with very few degeneracies) always be in the range between C and f*C, where f > 1 is a factor that depends on the level of anti-forgery technology, and on the efficiency of law enforcement for tracking down forgers. After all, no government in their right mind would produce coins whose value is lower than or equal to the cost to produce them - that would just be a nonsensical work. Therefore, the value is larger than C. However, the higher the ratio between value and cost of production, the more attractive the coin or paper money becomes as a target for forgers. So raising the cost C of production makes it less attractive to forgers. Interesting side note: If you actually look at the (unfortunately scarce) data concerning inflation in the Roman empire, you will see that as inflation pushes the real value of coins down, and the nominal cost of production of the coins up, the government eventually reacted by minting new coins with adjusted production costs (by reducing the amount of precious metals in the coins, or by creating new coins with the same amount of precious metals, but higher nominal value). It is quite unfortunate that folklore has the causality between minting coins and inflation exactly the wrong way around.

danssig 15y ago

>In practice, it works extremely well because not everyone is solely motivated by their best economical interest. Actually free software can be in your best economical interest. I wonder if Linus would have gotten the kinds of jobs he has without Linux. I seriously doubt it, at least not the first ones.

fryguy 15y ago

He is not saying what you think he's saying for #1. He's saying that if in 10 years or whatever, 1 bitcoin is worth $2M, why would you ever spend your 1 bitcoin now when it's going to be worth so much money in the future. This means people are going to horde, or it's not going to become so big.

matthewcford 15y ago

I personally think that BitCoin as a concept is too big to succeed. It will scare governments and they'll ban trading in it.

jonnathanson 15y ago
More likely, they could run a bunch of PR campaigns and plant news stories about how risky and unstable Bitcoins are -- either in an attempt to scare consumers away from the currency, or to actively destabilize the speculative market for the currency. "Banning" the currency seems beyond the reach of a government unless it's prepared to place restrictions on internet usage in general (a la the PRC). This is because, even if the U.S. government (for example) were to declare that dollars are no longer convertible with Bitcoins, people could still trade dollars for BCs, and vice versa, under the table.
- getsat 15y ago
  You just described part of the plot of "A Lodging of Wayfaring Men". Highly recommended book!
- matthewcford 15y ago
  > declare that dollars are no longer convertible with Bitcoins Yes, what I was trying to get at (not banning the transfer of BTC). While trading could move underground, making it illegal would probably deter enough people. Should most governments adopt a similar stance, then it would be nothing more than a collectors item.

jarek 15y ago

"2. Bitcoin's quasi-anonymous nature will be highly desirable to many people, including very large criminal organizations who'll definitely be moving those coins." Acceptance of a currency is a tricky thing. For less-than-legal uses, you need someone willing to launder the money at some point. Your arms dealer isn't going to take bitcoin unless they can exchange it for a widely accepted currency or pay their supplier in bitcoin, and the supplier won't take bitcoin unless they can buy raw materials with bitcoin, and the mine isn't going to take bitcoin unless they can exchange it for something useful to them. Breaking out of the cycle is much easier with a currency that is accepted by everyone for everything. With dollars, just set up a restaurant, people pay in dollars in those, and there are more legitimate restaurants than money-laundering restaurants (in most places). You'd need enough legitimate use of bitcoins to hide laundering, and it's not clear to me that will ever happen.