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I was researching Bitcoins for use in a project I'm working on, so I've been slogging through this and other articles lately with great dismay. The biggest pro

by pico303 14y ago

I was researching Bitcoins for use in a project I'm working on, so I've been slogging through this and other articles lately with great dismay. The biggest problem right now with these kinds of articles (this one included) is that while yes, they are dramatic, they are technology-focused. We're not getting a lot of economists writing on Bitcoin. Paul Krugman has written a bit that I think is spot on. Every article I read seems to compare Bitcoin to other currencies and say it's the same because those currencies are made up too. This is a patently false statement, and why we need more economists involved. Real-world currencies are valued on the GDP and credit-worthiness of the nations that issue the currency. Bitcoin lacks this fundamental property. As it stands, Bitcoin is more like gold or the old tulip craze: it's based on the desire of those involved to have it. As Paul Krugman indicates, Bitcoin is actually a pretty bad currency. It's difficult to convert to, few places accept it as currency, and worst there's rampant speculation on the fictitious value of the currency. Take the exciting tech out of the picture, and you've got a currency that is about as interesting and useful as the Zimbabwean dollar. For example, one author writes about how he purchase 92% of a single Bitcoin for $130. One site I found that accepts Bitcoin will send you a free t-shirt if you spend more than 1.5 Bitcoin. So if you spend over $200, they'll send you a $10 t-shirt. What an incentive. And I'm not sure how the site deals with the wildly fluctuating value of the currency. I know banks and governments don't always manage money well, but there is something to be said for the regulation and support we do get from traditional currencies. If the USD fluctuated like Bitcoin, the US economy would probably collapse. Needless to say I've decided to just go with plain credit card transactions in our project, and stay away from this volatility and uncertainty.

lenazegher 14y ago
>As Paul Krugman indicates, Bitcoin is actually a pretty bad currency. It's difficult to convert to, few places accept it as currency I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There is nothing inherent to bitcoin that precludes it being easy to convert to or being widely accepted. In fact, there are qualities inherent to bitcoin that make it easy to convert to and to be widely accepted. The problem is that there is no appropriate frame of reference for these qualities because there have been so few digital currencies in the history of the world. A fairer assessment might be that bitcoin is a fairly bad currency at the moment but has the potential to be a pretty great currency. The same is not true for the Zimbabwean dollar. I agree, however, that currency speculation is currently the biggest problem facing bitcoin (by far).
- Locke1689 14y ago
  I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There's no such thing as fair criticism here. If it's a valid critique that any non-governmental currency would share then chalk up a win for governmental currencies.
codeulike 14y ago
Real-world currencies are valued on the GDP and credit-worthiness of the nations that issue the currency. Right, but ultimately thats just a confidence judgement. The 'credit worthniess of a nation' is just a consensus judgement by the markets. Hence Money is based on confidence and consensus. With most currencies that fact is hidden away, but with Bitcoin its just made more explicit.
- Locke1689 14y ago
  USD is a confidence judgement of many things which are not the literal note. Bitcoin is just the confidence in Bitcoin. Of which I have none. I'm pretty sure the US govt is here to stay, though.
  - marssaxman 14y ago
    Bitcoin is just a distributed ledger which keeps track of which coins are associated with which wallets, where "coin" and "wallet" are nothing more than unique ID numbers. Do you lack confidence that this system actually works, or when you say "confidence in Bitcoin" are you actually referring to some other system built around it?
  - codeulike 14y ago
    right, the USD has some institutions and a very large community (i.e. a nation) behind it, and they're huge so its not really an easy comparison with Bitcoin. But Bitcoin is not 'just bitcoin', it also has institutions and a community, they're just much smaller at the moment.
temphn 14y ago
We're not getting a lot of economists writing on Bitcoin. What's the track record of economists vs. computer scientists over the past ten years (or twenty, or fifty)? You don't have liberal sorting algorithms and conservative ones, but you do have liberal and conservative economic theories. This indicates that economics, especially macroeconomics, is more like opinion journalism than science. We need empirical tests. Bitcoin provides one. Postscript: Computer science has delivered the goods in a way that economics just hasn't, as even Krugman admits[1]: ...the widely accepted proposition that events like those of the 1930s could never happen again. But even pessimists like me, even those who realized that the age of bank runs and liquidity traps was not yet over, failed to realize how bad a crisis was waiting to happen... What you can criticize economists for – and indeed, what I sometimes berate myself for – is failing even to see that something like this crisis was a fairly likely event. Why weren't they able to see this was a likely event? Well, rewind a bit and witness Bernanke writing in 2004 about the "Great Moderation" [2], the ostensible "decline in macroeconomic volatility": My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation. In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck, as some have argued, though I am sure good luck had its part to play as well. In other words, Bernanke thought the (nonexistent) Great Moderation was the result of improvements in monetary policy. Thereby approving of the monetary policy that inflated the housing bubble, while blithely unaware of the catastrophe that was to unfold. Conclusion: economists aren't so good at predicting economic events or structuring economic systems. Ben thought the system he'd helped build wouldn't fall down. It did. Time for some new ideas, from people who actually do build systems that don't fall down: computer scientists. [1] http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the... [2] http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/ http://www.federalreserve.gov/boarddocs/speeches/2004/200402...
- codeulike 14y ago
  What's the track record of economists vs. computer scientists over the past ten years? Compare y2k to 2008 banking crisis?
JumpCrisscross 14y ago
"We're not getting a lot of economists writing on Bitcoin" Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency". The conclusion is that it will not be fulfilling its anarchist ideological aspirations by unseating the dollar. But it may have a place as an electronic equivalent of cash with appeal for illicit (read: extra-state) transactions. My dismay with the Bitcoin discussion, as an economist, has been the level of confidence everyone comes with. Whether it is dismissing the last century of economics off-hand or arguing one position in a rich debate with dogmatic passion, it is difficult to have an informed conversation. This comes from both sides, e.g. deflation is good for a currency versus deflation causes a deflationary spiral, both highly contentious statements at best, comes up in every HN bitcoin discussion.
- narrator 14y ago
  "Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency"." You need to go back to papers written by F.A Hayek criticizing Keynes in the 30s to get any serious academic discussion of the benefits of a fixed money supply. His critique of Keynes' idea of the "Paradox of Savings" is good, also the later paper he wrote: "The Denationalization of Money", which explores privately issued competing currencies is pretty interesting.
  - cynicalkane 14y ago
    Hayek later changed his mind on monetary policy, denounced some of his old views, and endorsed inflation targeting, so that's not a very good example.
    - DennisP 14y ago
      He published Denationalization of Money when he was 77 years old.
    - narrator 14y ago
      Funny thing about Hayek. If you read "Monetary Theory and the Trade Cycle" (http://mises.org/daily/3121 http://mises.org/daily/3121) he describes the dynamics of the boom/bust cycle and how they are a direct result of fractional reserve banking but then says: "If it were possible, as has been repeatedly asserted in recent English literature,[114] to keep the total amount of bank deposits entirely stable, that would constitute the only means of getting rid of cyclical fluctuations. This seems to us purely utopian. It would necessitate the complete abolition of all bank money — i.e., notes and checks — and the reduction of the banks to the role of brokers, trading in savings. But even if we assume the fundamental possibility of this state of things, it remains very questionable whether many would wish to put it into effect if they were clear about its consequences. The stability of the economic system would be obtained at the price of curbing economic progress. The rate of interest would be constantly above the level maintained under the existing system (for, generally speaking, even in times of depression some extension of credit takes place).[115] The utilization of new inventions and the "realization of new combinations" would be made more difficult, and thus there would disappear a psychological incentive towards progress, whose importance cannot be judged on purely economic grounds. It is no exaggeration to say that not only would it be impossible to put such a scheme into practice in the present state of economic enlightenment of the public, but even its theoretical justification would be doubtful." He's basically apologizing for finding all these flaws in the monetary system and central banking. He was convinced, at least at this point in his life that he could reason with the financial system to resolve these issues through better understanding. That's the interesting thing about Hayek. He was not opposed to the structure of the financial system out of ideological conviction but just that he had enormous insight into the dynamics of the system and stated his understanding without editing or simply repeating the conventional wisdom.
pjreddie 14y ago
Real world currencies are valued solely on the desire to have them; GDP and credit worthiness only play a role because they affect people's perception of how stable or valuable a currency is. There is nothing tangible tying the dollar to the US GDP, if everyone decided the dollar was worthless it would be. The main thing is that since hundreds of millions of people use the USD and you can use it to buy many goods and services, it's difficult to sway the opinions of a large chunk of the population that use it so any change in value will be slow. Bitcoin on the other hand has a much smaller user base so its volatility is much larger.
- jerf 14y ago
  No, real world currencies are based on the fact that the issuing government accepts it as payment of debts to that government. The fundamental base of the US dollar is that the taxes you owe the US must be paid in US dollars. The rest of its value extends out transitively from there. But it is not baseless, it is built on the fact that if you do not give the US government the dollars it thinks it deserves, it will come and put you in jail. If this ceases to be a credible threat, it's actually quite amazing to me how quickly a government's currency can become nothing but so much paper, which argues strongly against the idea that the value is arbitrary.
hencq 14y ago
Yes, that's my frustration as well. What's worse is that the articles that are economics focused are clearly written by non-economists. They all seem to be very close to crackpot conspiracies about the global banking system and how fiat currencies are inherently bad.
nhaehnle 14y ago
From my non-economist understanding, the biggest difference between BTC and modern fiat currencies is that the money supply in the latter is endogenous. That is, when a bank makes a loan, the amount of money in the system actually increases. When the loan is paid back, the amount of money in the system decreases again. This means that the amount of money can fluctuate to accomodate demand at a fixed interest rate, and it does so automatically, in a decentralized way, as part of the regular operation of the system, without any government intervention. This is why it is called endogenous. Now, there are the goldbugs who think a fixed money supply is somehow morally superior. But my understanding is that experiments with controlling the money supply exogenously in the past, i.e. where the central bank set a fixed size of the money supply as target and tried to enforce that, resulted in a wildly volatile interest rate - simply because the demand for money is volatile, and by fixing the size of the money supply, something else had to budge. For businesses, a volatile interest rate is bad because it makes planning difficult. This is why central banks now target a fixed interest rate (with volatile, endogenous money supply) - it simply is better for the economy. Aside from the crazy waste of energy, this is probably the most important argument against basing the economy on Bitcoin.

by pico303 14y ago

lenazegher 14y ago

>As Paul Krugman indicates, Bitcoin is actually a pretty bad currency. It's difficult to convert to, few places accept it as currency I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There is nothing inherent to bitcoin that precludes it being easy to convert to or being widely accepted. In fact, there are qualities inherent to bitcoin that make it easy to convert to and to be widely accepted. The problem is that there is no appropriate frame of reference for these qualities because there have been so few digital currencies in the history of the world. A fairer assessment might be that bitcoin is a fairly bad currency at the moment but has the potential to be a pretty great currency. The same is not true for the Zimbabwean dollar. I agree, however, that currency speculation is currently the biggest problem facing bitcoin (by far).

Locke1689 14y ago
I'm not sure this is a fair criticism because literally every non-governmental currency would suffer from this problem at first. There's no such thing as fair criticism here. If it's a valid critique that any non-governmental currency would share then chalk up a win for governmental currencies.

codeulike 14y ago

Real-world currencies are valued on the GDP and credit-worthiness of the nations that issue the currency. Right, but ultimately thats just a confidence judgement. The 'credit worthniess of a nation' is just a consensus judgement by the markets. Hence Money is based on confidence and consensus. With most currencies that fact is hidden away, but with Bitcoin its just made more explicit.

Locke1689 14y ago
USD is a confidence judgement of many things which are not the literal note. Bitcoin is just the confidence in Bitcoin. Of which I have none. I'm pretty sure the US govt is here to stay, though.
- marssaxman 14y ago
  Bitcoin is just a distributed ledger which keeps track of which coins are associated with which wallets, where "coin" and "wallet" are nothing more than unique ID numbers. Do you lack confidence that this system actually works, or when you say "confidence in Bitcoin" are you actually referring to some other system built around it?
- codeulike 14y ago
  right, the USD has some institutions and a very large community (i.e. a nation) behind it, and they're huge so its not really an easy comparison with Bitcoin. But Bitcoin is not 'just bitcoin', it also has institutions and a community, they're just much smaller at the moment.

temphn 14y ago

We're not getting a lot of economists writing on Bitcoin. What's the track record of economists vs. computer scientists over the past ten years (or twenty, or fifty)? You don't have liberal sorting algorithms and conservative ones, but you do have liberal and conservative economic theories. This indicates that economics, especially macroeconomics, is more like opinion journalism than science. We need empirical tests. Bitcoin provides one. Postscript: Computer science has delivered the goods in a way that economics just hasn't, as even Krugman admits[1]: ...the widely accepted proposition that events like those of the 1930s could never happen again. But even pessimists like me, even those who realized that the age of bank runs and liquidity traps was not yet over, failed to realize how bad a crisis was waiting to happen... What you can criticize economists for – and indeed, what I sometimes berate myself for – is failing even to see that something like this crisis was a fairly likely event. Why weren't they able to see this was a likely event? Well, rewind a bit and witness Bernanke writing in 2004 about the "Great Moderation" [2], the ostensible "decline in macroeconomic volatility": My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation. In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck, as some have argued, though I am sure good luck had its part to play as well. In other words, Bernanke thought the (nonexistent) Great Moderation was the result of improvements in monetary policy. Thereby approving of the monetary policy that inflated the housing bubble, while blithely unaware of the catastrophe that was to unfold. Conclusion: economists aren't so good at predicting economic events or structuring economic systems. Ben thought the system he'd helped build wouldn't fall down. It did. Time for some new ideas, from people who actually do build systems that don't fall down: computer scientists. [1] http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the... [2] http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/ http://www.federalreserve.gov/boarddocs/speeches/2004/200402...

codeulike 14y ago
What's the track record of economists vs. computer scientists over the past ten years? Compare y2k to 2008 banking crisis?

JumpCrisscross 14y ago

"We're not getting a lot of economists writing on Bitcoin" Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency". The conclusion is that it will not be fulfilling its anarchist ideological aspirations by unseating the dollar. But it may have a place as an electronic equivalent of cash with appeal for illicit (read: extra-state) transactions. My dismay with the Bitcoin discussion, as an economist, has been the level of confidence everyone comes with. Whether it is dismissing the last century of economics off-hand or arguing one position in a rich debate with dogmatic passion, it is difficult to have an informed conversation. This comes from both sides, e.g. deflation is good for a currency versus deflation causes a deflationary spiral, both highly contentious statements at best, comes up in every HN bitcoin discussion.

narrator 14y ago
"Economists have written on the mechanics of a Bitcoin-like currency, in essence, a fixed-supply alternative anonymous fiat "currency"." You need to go back to papers written by F.A Hayek criticizing Keynes in the 30s to get any serious academic discussion of the benefits of a fixed money supply. His critique of Keynes' idea of the "Paradox of Savings" is good, also the later paper he wrote: "The Denationalization of Money", which explores privately issued competing currencies is pretty interesting.
- cynicalkane 14y ago
  Hayek later changed his mind on monetary policy, denounced some of his old views, and endorsed inflation targeting, so that's not a very good example.
  - DennisP 14y ago
    He published Denationalization of Money when he was 77 years old.
  - narrator 14y ago
    Funny thing about Hayek. If you read "Monetary Theory and the Trade Cycle" (http://mises.org/daily/3121 http://mises.org/daily/3121) he describes the dynamics of the boom/bust cycle and how they are a direct result of fractional reserve banking but then says: "If it were possible, as has been repeatedly asserted in recent English literature,[114] to keep the total amount of bank deposits entirely stable, that would constitute the only means of getting rid of cyclical fluctuations. This seems to us purely utopian. It would necessitate the complete abolition of all bank money — i.e., notes and checks — and the reduction of the banks to the role of brokers, trading in savings. But even if we assume the fundamental possibility of this state of things, it remains very questionable whether many would wish to put it into effect if they were clear about its consequences. The stability of the economic system would be obtained at the price of curbing economic progress. The rate of interest would be constantly above the level maintained under the existing system (for, generally speaking, even in times of depression some extension of credit takes place).[115] The utilization of new inventions and the "realization of new combinations" would be made more difficult, and thus there would disappear a psychological incentive towards progress, whose importance cannot be judged on purely economic grounds. It is no exaggeration to say that not only would it be impossible to put such a scheme into practice in the present state of economic enlightenment of the public, but even its theoretical justification would be doubtful." He's basically apologizing for finding all these flaws in the monetary system and central banking. He was convinced, at least at this point in his life that he could reason with the financial system to resolve these issues through better understanding. That's the interesting thing about Hayek. He was not opposed to the structure of the financial system out of ideological conviction but just that he had enormous insight into the dynamics of the system and stated his understanding without editing or simply repeating the conventional wisdom.

pjreddie 14y ago

Real world currencies are valued solely on the desire to have them; GDP and credit worthiness only play a role because they affect people's perception of how stable or valuable a currency is. There is nothing tangible tying the dollar to the US GDP, if everyone decided the dollar was worthless it would be. The main thing is that since hundreds of millions of people use the USD and you can use it to buy many goods and services, it's difficult to sway the opinions of a large chunk of the population that use it so any change in value will be slow. Bitcoin on the other hand has a much smaller user base so its volatility is much larger.

jerf 14y ago
No, real world currencies are based on the fact that the issuing government accepts it as payment of debts to that government. The fundamental base of the US dollar is that the taxes you owe the US must be paid in US dollars. The rest of its value extends out transitively from there. But it is not baseless, it is built on the fact that if you do not give the US government the dollars it thinks it deserves, it will come and put you in jail. If this ceases to be a credible threat, it's actually quite amazing to me how quickly a government's currency can become nothing but so much paper, which argues strongly against the idea that the value is arbitrary.

hencq 14y ago

Yes, that's my frustration as well. What's worse is that the articles that are economics focused are clearly written by non-economists. They all seem to be very close to crackpot conspiracies about the global banking system and how fiat currencies are inherently bad.

nhaehnle 14y ago

From my non-economist understanding, the biggest difference between BTC and modern fiat currencies is that the money supply in the latter is endogenous. That is, when a bank makes a loan, the amount of money in the system actually increases. When the loan is paid back, the amount of money in the system decreases again. This means that the amount of money can fluctuate to accomodate demand at a fixed interest rate, and it does so automatically, in a decentralized way, as part of the regular operation of the system, without any government intervention. This is why it is called endogenous. Now, there are the goldbugs who think a fixed money supply is somehow morally superior. But my understanding is that experiments with controlling the money supply exogenously in the past, i.e. where the central bank set a fixed size of the money supply as target and tried to enforce that, resulted in a wildly volatile interest rate - simply because the demand for money is volatile, and by fixing the size of the money supply, something else had to budge. For businesses, a volatile interest rate is bad because it makes planning difficult. This is why central banks now target a fixed interest rate (with volatile, endogenous money supply) - it simply is better for the economy. Aside from the crazy waste of energy, this is probably the most important argument against basing the economy on Bitcoin.