14 ms·

Bitcoin Is Fundamentally Flawed

67 points by itsprofitbaron 14y ago

zacharyvoase 14y ago
Wow. Currencies are supposed to be used as a medium of exchange where, they facilitate transactions thus the multiplier effect kicks in and increases the economies wealth. An example of this, is fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[15] however, this is not happening with Bitcoin. So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore it will experience depressions and recessions, unlike regular currencies? OH WAIT.
- tudorizer 14y ago
  ha ha. Yes. It's good that the USD was backend by the government. Who can bail out the bad credits? You can just print more Bitcoins?
- dragonwriter 14y ago
  > So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore it will experience depressions and recessions, unlike regular currencies? You missed the big problem; while one could make an argument that the lack of the capacity for monetary stimulus with Bitcoin is an issue, fiscal stimulus is quite possible with Bitcoin (there isn't any now, because no government uses Bitcoin as the currency in which its budget works), and the multiplier effect resulting from the velocity of money would conceptually work the same way as with any other currency (the inherently deflationary construction of Bitcoin makes the likely velocity lower, which might reduce the effectiveness of fiscal stimulus, but its still possible; and different forms of fiscal stimulus could address the velocity of money.)
- pkulak 14y ago
  You're confusing two points just like the author. First you're saying that controlling your currency doesn't help (hurts?). Look at how many recessions the US had when it was pegged to gold vs now, then get back to me on that one. But, that doesn't really matter because Bitcoin is _not_ a national currency. It really is more like gold in that it's not really a currency in itself, but a way to store/transfer other currencies. No one buys something with gold without first doing the conversion to their local currency and I don't see that ever changing with Bitcoin either. And, it doesn't have to.
  - gbaygon 14y ago
    I don't see the problem of buying thins with bitcoins directly, as long as the merchants are willing to accept it. And it will happen when/if the market stabilizes. Gold has a lot of disadvantages (fractionating, checking for purity) that bitcoins doesn't.
  - Houshalter 14y ago
    I don't think that's true, that the economy was less stable a century ago than it is now. People used to give out 50 or even 100 year bonds, and recessions usually were not as bad and didn't last as long. But even if I'm wrong, the currency not being based on gold is only one of a billion other things that has changed in the economy since then. It's a completely different world. And while bitcoin is not a national currency it has the potential to become a universal currency online. People could work for bitcoins and use them to buy what they need online from other people that accept bitcoins. The currency could circulate through many hands without ever once being converted to another currency. And since it's online any conversion could be done quickly and automatically so the effective difference between holding two different currencies wouldn't really matter. The only thing you would have to take into account is how likely they were to increase or decrease in value in the time that you aren't spending them, and bitcoin has a clear advantage in that regard.
- slg 14y ago
  Comments like this show a complete lack of understanding about economics and the positive impact government spending and lending can have on the economy. Just because recent monetary policy hasn't improved the economy as much as we would like is no excuse to give up all control over the monetary policy.
- itsprofitbaron 14y ago
  Unlike other currencies, Bitcoin is limited in supply and produces a set amount every 10 minutes - as a result there is the potential for a liquidity trap because these new injections into the market may fail to stimulate economic growth. Whereas, fiat currencies are backed by Governments etc (something which Bitcoin isn't) and these currencies can theoretically have an unlimited amount supplied into the economy - and as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect. [1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
  - zacharyvoase 14y ago
    But my point is that the possibility of fiscal stimulus is not critical for a functioning economy, and in many cases simply does not work. I disagree with the monetarist principle that economic growth is stimulated by money injections—it's just people getting up and going to work in the morning, and inventing new things and discovering new processes. All this money mechanics stuff is distracting fluff.
base698 14y ago
This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded and transfered. When a gram becomes worth so much it buys a house that makes other purchases of food and bills become impractical and people stop buying, and when building a billion dollar construction project moving it and protecting it has another set of problems and overhead. Bitcoin does not have the division problem--a single coin can be divided into pieces 10^8 pieces as the code currently works. That can also be changed in future versions to be divided even smaller. Ie, when one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum. So, we are then left with the argument, "Oh My God people won't buy because of the psychology that 0.01 coin today that currently buys a pack of gum being able to buy a car in the future." But, that's almost true now with savings and stocks and people still spend their money today and go into debt. Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc. Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. Venture Capital also would have issues, but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time. Inflation is built into the current model to encourage investment and prevent concentration of capital. Clearly, given the wealth divide that isn't working (blame exploitation of 3rd world or robots).
- dragonwriter 14y ago
  > Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money. > Inflation is built into the current model to encourage investment and prevent concentration of capital. Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.) > Not to say bitcoin is the solution, but it's something different. That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."
lojack 14y ago
I still don't understand how people treating bitcoin as an investment rather than a currency is a fundamental flaw in the algorithm.
- fc2 14y ago
  He thinks people will suddenly decide they'd rather live under a bridge and keep their bitcoins than buy a house with them.
- itsprofitbaron 14y ago
  The reason I said that is because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future (therefore Bitcoins are being treated as if it’s a currency) OR the expectation that Bitcoin will rise in monetary value which means that, Bitcoin is a speculative digital asset – however, it’s not tied to anything in the way a stock or bond is for example. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply. However, a long-run inelastic and fixed supply currency is not useful for a real world economy which is why, Bitcoin is useful as a speculative digital asset rather than a currency.
  - richardw 14y ago
    Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.)
    - dragonwriter 14y ago
      > Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.) The "no red tape, no forex hassles" are largely because of immaturity in the regulation of "virtual currencies" that exist largely because most states haven't gotten around to addressing them because of scale issues compared to traditional soveriegn currencies. This is already starting change.
return0 14y ago
I was worried that they would expose a fundamental flaw in the encryption algorithm, however the post goes on with irrelevant FUD. It s a lot less flawed than even paper currency, and the fact that there haven't been any forgeries is a testament to its success. The argument about identifying transactions is a bit disconcerting, but how much of a real concern is it? After all, even paper money has a trail of DNAs from the hands that touched it. As for the comparisons with other currencies and commodities, it has been exhausted as a subject; money is a matter of trust after all. The question is what are the actual security threats to bitcoin's p2p infrastructure/integrity?
- DanBC 14y ago
  > and the fact that there haven't been any forgeries is a testament to its success. There has been a successful double spend.
  - return0 14y ago
    Is that something that can be fixed/improved?
    - pixelcort 14y ago
      There is a fix that will go live in the future at a predetermined date. All users are being encouraged to update their clients or patch their clients' config files before the impending deadline. I'm not sure what will happen to clients that don't patch or update.
  - erikpukinskis 14y ago
    Not really. The possibility of a short lived double spend is a valid state for the system to be in. What is vanishingly unlikely is a long lived double spend. There are currently no long lived double spends in the block chain, and that means no double spend has ever been successful.
  - ramblerman 14y ago
    errr. no there hasn't
jondtaylor 14y ago
"However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer." This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills? I'm not joking I seriously have no idea what this has to do with anything...
- SODaniel 14y ago
  I agree that this argument is purely stupid. How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it? Some people feel 'richer' with 1 OZ of gold then $1700 in bills, some feel 'richer' with 100x $1 then a check for $100. But why does that matter as a success factor of a currency? I don't get it.
  - dragonwriter 14y ago
    > How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it? Because the success or failure of a medium of exchange lies in how it affects human behavior, which it does through its impact on human psychology.
- defen 14y ago
  It's stupid. If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Bitcoins can be divided up, but then uninformed people forget why this is important and then make nonsensical arguments about splitting a $100 bill into 10 $10 bills.
  - dragonwriter 14y ago
    > If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Its actually pretty trivial to issue new paper currency in smaller denominations and exchange existing currency for it; the problem with deflation is that it creates a disincentive to spend or invest, not that there is a logistical difficulty in subdividing currency.
gwern 14y ago
Summary: deflationary spiral. Good job repeating what's been said by like everyone since the start, and not adding the slightest bit of new insight or information.
SODaniel 14y ago
While I don't disagree with the author I would say that the finite supply shines a light on an even more direct problem. What happens to 'lost' coins? The BTC supply is not only finite but in fact dwindling over time, as inevitably the amount of currency is going to diminish due to digital loss. I have personally lost a few BTC due to computer crashes, wallet file lost etc. (In the early days) and considering this the total supply of bitcoins will be diminishing over time at (maybe already?) higher rate then they can be mined. I haven't taken the time to do ANY form of math on this but I can guarantee that already 10.000s if not 100.000s BTC are lost forever due to people simply not having access to them anymore and the data being destroyed. Over years of loss this is probably more likely to kill the currency than anything else in my opinion.
- TimSchumann 14y ago
  Tens of Thousands of Bitcoins have been lost, easily.
  - deleted 14y ago
    [deleted]
- thelema314 14y ago
  I expect this will cause little problem; if 1M bitcoins are lost, the system will just work as if there were only 20M bitcoins created instead of 21M bitcoins. Everything would be a little less expensive because bitcoins would each be worth about 5% more.
  - SODaniel 14y ago
    Nope. Since no one can ever satisfactory answer the question of the 'real' amount of BTC in circulation, this will only serve as a factor of uncertainty. Lost bitcoins affect nothing, FOUND bitcoins can affect everything.
    - anonymoushn 14y ago
      So, MV=PQ and all that. Lost bitcoins are functionally identical to any other bitcoins that aren't being spent. Burning dollar bills does not move the price of the dollar in a different way than keeping them in your pocket.
drewblaisdell 14y ago
There are many legitimate arguments for the existence of flaws in Bitcoin that could prevent it from becoming a legitimate currency. Unfortunately, this was poorly written, poorly formatted, and has a set of premises that do not lead to the conclusion in the sensationalist title.
rocky1138 14y ago
By 2140 we'll probably have a new currency that we can replace Bitcoin with.
- ceejayoz 14y ago
  2140? I'd expect the "new hotness" in cryptocurrencies to hit in 2014, not 2140.
  - rocky1138 14y ago
    Probably true, but I just used the same number that was in the article.
chrisrhoden 14y ago
Watch this: From now on, for the purposes of transactions, I am going to refer to bitdollars. In any software using bitdollars, one bitdollar is equal to 0.001 bitcoins. Nobody needs to feel less or more rich.
- ph0rque 14y ago
  I prefer the term nanobitcoin. That way, the conversion to bitcoins is built-in.
jnevelson 14y ago
"Eventually the Bitcoin economy is going to run into the problem of its algorithm and the Bitcoin-hoarding because; there will not be enough currency." There is an oscillation process at work here - as people hoard bitcoins, the value of each individual bitcoin increases. People will then sell off their bitcoins in exchange for a higher price than they initially payed for them, thus increasing the money supply and allowing others to buy into the system. Am I missing something here?
- brazzy 14y ago
  Why would anyone sell when they see the price keep rising? Unless they fear it will go down - and then everyone wants to sell and the bubble pops...
  - ph0rque 14y ago
    Why would anyone sell when they see the price keep rising? Some will sell when the total sum of their bitcoins is big enough for them to retire on.
tibbon 14y ago
Yes, there will be (at some point) a downward force on the value of Bitcoin due to hoarding. But that will not be the only force. At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it. Also- its important to remember that there are relatively few places to 'use' it now compared to most other currencies. I cannot pay my rent, groceries, etc.... I think to trying to sort it into neat categories of 'investment' or 'currency' is a bit flawed. Its a bit of both. Gold (at least to some degree) was used as a currency at various points in history, but now paying with gold doubloons is difficult for most transactions. The hoarding of gold makes it deflationary as well, but doesn't prevent it from being traded frequently as well (well, at least futures of it on the exchanges). Gold backed dollars at one point were theoretically limited in number as well. Another claim against Bitcoin is the fact that it isn't "backed by anything", but neither is gold. Its value is what we assign to it as a market. Aside from industrial processes, the inherent value of gold or diamonds is very low. I don't think Bitcoin is perfect. I'm glad I bought a handful a few months ago. But some of the 'flaws' that people find aren't as much as flaws as features. One of the things that I do love about Bitcoin is that it isn't a theory- its happening. We could talk all day about the things that are supposed to happen with it from a variety of perspectives, but the experiment is being actively run in a real market which is challenging the perspectives of 'what might happen if...' with what's actually happening. If we were talking about USD as a new concept, we could write tomes on the 'flaws' of it as a currency. It has nothing backing it. It can be infinitely created at will. A private entity (federal reserve) controls a huge amount of policy. It can be lost, destroyed, stolen. Political forces of a single government can have massive impact on it. It is hugely regulated, and can be relatively easily tracked in its system. Yet, it largely works.
- brazzy 14y ago
  > At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it. No; then people start selling their BTC in a panic, MtGox is overwhelmed and stops working, and a lot of temporary millionaires start looking for work...
  - 14y ago
pg_bot 14y ago
Why hasn't anyone forked bitcoin and started mining a new currency from scratch?
- axusgrad 14y ago
  A list is here: https://bitcointalk.org/index.php?topic=134179.0 https://bitcointalk.org/index.php?topic=134179.0 One that avoids the fixed currency limit is PPcoin: https://github.com/ppcoin/ppcoin/wiki/FAQ https://github.com/ppcoin/ppcoin/wiki/FAQ
- TimSchumann 14y ago
  Several have. http://dustcoin.com/mining http://dustcoin.com/mining
- lojack 14y ago
  they have, one example of this is called litecoin.
- fusiongyro 14y ago
  I'd expect it to work about as well as Ido, the better-than-Esperanto: not well. The whole point of currency (and language) is exchange. As you limit yourself to ever-smaller numbers of people in the search for more ideal manners of exchange, the missed point becomes harder and harder to ignore.
  - krcz 14y ago
    I might try to learn Ido someday. I probably won't talk to anyone in it, but it might be fun. It has one advantage over Esperanto: its vocabulary wasn't chosen by one guy arbitrarily, but by a committee that analyzed various European languages and tried to find common word roots. That way knowing Ido might help me to dig some meaning from French, Spanish, Italian texts.
    - fusiongyro 14y ago
      I think Interlingua would be even more interesting to you then, since it was designed to be comprehensible to ordinary speakers of French, Spanish and Italian without any special knowledge. It's sort of like a modern idealized Romance language. It would probably serve your purpose better than Ido.
tomrod 14y ago
Sure, this is a flaw if one only uses bitcoins. As far as I know, there is nothing stopping alternate, new competitors using the same algorithm. So bitcoins run out and everyone hoards? Start a new currency. A smart implementation can overcome the network effect/firstmover advantage of bitcoin. Then people trade between the currencies, and hoarding ceases to be as much of a problem.
- paulhodge 14y ago
  Or more likely.. the Bitcoin developers release a new version that allows for more than 21m coins. I think a lot of people don't realize that Bitcoin is still an actively developed beta-version software project. There are several parts of the code that the devs are already thinking about changing (such as the way that transaction fees are calculated, or increasing the number of times you can subdivide one coin). If the 21m limit becomes crippling, I'm sure they will change that too. Really, they can change anything they want as long as they can convince 51% of pool owners to upgrade.
  - wmf 14y ago
    Can you imagine miners or MtGox voting to devalue their own holdings? I don't think many people are in it for the revolution.
    - dragonwriter 14y ago
      > Can you imagine miners or MtGox voting to devalue their own holdings? I can imagine, if Bitcoin was perceived as a serious currency, nation-states and existing large and wealthy financial institutions investing large amounts in becoming participants in the network. Can I imagine those institutions acting with regard to Bitcoin the same as they act with regard to traditional sovereign currencies? Easily.
  - ramblerman 14y ago
    not quite. The 21m upper limit is one variable that can't change.
gojomo 14y ago
This is essentially the "it will become so valuable, no one will want it anymore" argument. There are uses of Bitcoin that are complementary to traditional currencies, and can survive both volatility and a large level of hoarding. One example: an enabler of quick, distant, irreversible transfer under software mediation. That is, you get the transactional Bitcoin you need from a trusted source, then engage in a transaction with a distant/less-trusted source in a matter of minutes. Neither the overall level nor volatility of Bitcoin's pricing level matters much in such a scenario, but it still enables new kinds of transactions. Also, for a post that includes 15 footnotes, one whopper of a claim goes without support: "Bitcoin is not meant to be an investment it’s meant to be a currency." Sweeping claims about what Bitcoin or currencies are "meant to be" need more support and careful definition. Maybe, because Bitcoin is something new that's only made possible by computers, networks, and cryptography, it doesn't exactly fit into the classic categories and purposes.
- hilko 14y ago
  Very well put. I think past experiences are definitely reason to be cautious, but too often it seems that analysis neglects to even consider the fact that there is no direct equivalent to Bitcoin. It remains to be seen if Bitcoin is 'worth' its current valuation, but I think it's obvious that it has and will continue to have uses in the future.
  - itsprofitbaron 14y ago
    There are direct equivalents to Bitcoin and I am interested in a global virtual currency however, I don't believe that Bitcoin is going to be it. I believe that Bitcoin's value is more of a speculative digital asset rather than a currency because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future OR the expectation that Bitcoin will rise in monetary value. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply (after all there are only 21M of them). However, a long-run inelastic and fixed supply currency is not useful for a real world economy because, currencies are supposed to be used as a medium of exchange to facilitate transactions which, allows the multiplier effect kick in and increase the economies wealth. Whereas due to the deflationary spiral you're incentivised to hoard Bitcoins & let them appreciate in value instead which is the opposite effect of what a currency is meant to do.
mp99e99 14y ago
Since theoretically there is a fixed number of bitcoins, and once lost they can't be retrieved, bitcoins should theoretically be worth infinity when the last one is finally lost.
jwr 14y ago
I hope by the time we hit major problems with Bitcoin we will have several new digital currencies to chose from. Nobody ever said there needs to be only one, after all.
- hilko 14y ago
  Or that enough services, project and uses have sprung up to keep Bitcoin valuable enough to remain somewhat mainstream and not fade away.
bbbhn 14y ago
Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon.
- dragonwriter 14y ago
  > Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon. Its not ridiculous when one of the arguments for adopting Bitcoin is how much better it would be for our economy to be dependent on it than existing soveriegn currencies. Certainly, one reasonable response to this is to argue that the assumption that Bitcoin could displace those currencies is far-fetched, but its also reasonable to accept, for the sake of argument, that it could and then address whether or not it is desirable.
jff 14y ago
Bitcoin is certainly flawed for a number of reasons, but this article is quite poorly-written; we'd have been better off with just the list of references. Summary: Bitcoin is deflationary.
bcoates 14y ago
Two issues: Firstly, the mining allocation rate isn't meaningfully part of the bitcoin protocol; it's just a setting. Any portion of the network large enough to survive as a detached economy can choose to change the (batty) monetary policy whenever it likes. Secondly, this probably won't be necessary, as nothing really prevents bitcoin holders from forming banks and issuing inflationary/debased/pegged notes to beat the price down to sanity, using the existing transaction ledger for accounting.
- basch 14y ago
  Exactly. Everyone seems to be missing the fact that "bitcoin" is a protocol and the most prominent instance of its use. Any government or group of people can go start their own blockchain.
  - pixelcort 14y ago
    Or even fork off the existing block chain at a pre-determined block. This way, all existing owners of the parent crypto currency would have equal coin-to-coin values in the new crypto currency as of a certain date. I'm surprised I haven't heard of any existing alternate crypto currencies intentionally forking off of the existing Bitcoin block chain. They all seem to start off with their own new block chains.
vimes656 14y ago
I hear so many disparate opinions about Bitcoin economy that I don't consider them anymore. The classic counter argument to this one is that hardware is constantly improving and still people buy hardware even though everyone knows that in 6 months with the same money you can buy something better. And another one is that Bitcoin is so divisible that deflation is not a problem. In the end, Economics involves the behavior of people acting on free will. How anyone can attempt how people are going to behave with respect to something? If anyone could predict what society is going to value in the future, or how people will react to some new technology would he be writing blog posts about what is going to fail? Has there been anything remotely similar to the Bitcoin now in history? I don't know whether deflation is good or bad but I consider the potential advantages of a deflationary currency, if it works, worth trying it. Why not, nobody is being forced to get into Bitcoins. If you don't like it, ignore it and move along.
bcantrill 14y ago
This fundamental flaw is absolutely glaring to anyone who has any understanding of economic history -- and it's amazing to me how many technologists willfully disregard several centuries of accumulated experience. Because of their built-in deflationary spiral, Bitcoins can never meaningfully be used as a medium of exchange: it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services. (And certainly, no one will take on debt denominated in Bitcoins. Can you imagine if you had taken out a Bitcoin-denominated mortgage a year ago?) All of this looks a lot like the 19th century in terms of economics, which suffered from manic booms and absolutely devastating depressions on a regular basis.[1] It took the mother of all depressions -- a decade-long monster that casted a generations-long shadow -- to permanently shift thinking. While economists still debate the precise causes of the Great Depression (and why so many attempts to right the economy in the 1930s failed), there is broad consensus on one key element: deflation is an economic carcinogen, and must be avoided at all costs. As such, Bitcoin is macroeconomic cancer -- no matter how breathless its techno-utopian proponents may be. [1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1
- zacharyvoase 14y ago
  The principle of dual circulation and 'bad money driving out good' is formulated as Gresham's Law. While this is typically applied to two currencies pegged by fiat, it would also apply to a pair of circulating currencies in which one is appreciating and the other depreciating. The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.
  - ryusage 14y ago
    Not completely, no, but it could certainly be stunted. The first question anyone asks about bitcoin is "What can you actually buy with it?" If it becomes illegal for American or European companies to accept bitcoin payments, that would certainly certainly do a lot to prevent it from taking over.
johnny4000 14y ago
This deflation argument seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in. Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.
- dragonwriter 14y ago
  > If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. It would be good if your wage was fixed in bitcoins and your debt was set in dollars, but bad if the reverse was true. I think, given a deflationary currency, it'll be a lot easier to find people willing to lend money with the loan obligation denominated in bitcoins than it is to find people willing to offer employment with a long-term salary base fixed in bitcoins.
- smacktoward 14y ago
  "If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in." It would be! Except for the part where that very spiral discourages employers from paying wages in Bitcoin, since they'd make more money just holding on to those Bitcoins and letting the spiral make them money than they ever could paying workers with them. So those Bitcoin-paying jobs never leave the realm of the theoretical.
TimSchumann 14y ago
I'm going to try and be useful to this discussion, and I haven't seen anyone mention this by name yet so, here goes... The Law Of Diminishing Marginal Utility. It essentially states that the more of something you have, the less additional value each subsequent unit brings to your life relative to the last one you added. (Even billionaires stop with a handful of houses) The problem is the author implicitly tries to objectify the value of bitcoin, when in fact the value is completely subjective, just as the value of anything truly is. One cannot take the subjectivity out of value as the author has tried to do here by saying 'More = Good' Value, being subjective, comes in the form of utility. I do not care what you call it, what it's priced in, or if you value it but, if I were to acquire a voucher for unlimited free flights, lifetime duration, transferable from myself to anyone of my choosing, on any airline, I would value that voucher very highly. That being said, while I may keep the next one for family, and several for friends, at some point I'm going to start selling them to others for a metric boatload of money. Please note none of this implies any kind of 'rational actor' theory or any such thing. I see the law of diminishing marginal utility as just that, a law of nature. Despite what people may say, their actions prove it to be so. *Also I think the author is implying that people who act like the people he's talking about in his post will take a pretty big haircut at some point in this whole bitcoin experiment. I think that says more about the people than the system at large.
jerf 14y ago
Actually, nothing stops a government from using fiscal stimulus if BitCoin is pervasively used. The US Government will, I'm sure, never accept taxes in anything other than US Dollars (that being the fundamental base of value the US Dollar is based on, and the subsequent avoidance of jail time due to not paying taxes or otherwise satisfying Uncle Sam), and they will remain free to helicopter-drop as many Dollars on the world as they like. If the BitCoin economy subsequently devalues Dollars, well, that's just the expected reaction. It's not as if there aren't commodities already out there doing just that. (Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either.)
- Aloisius 14y ago
  Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either Please explain how looking out the window and gathering local anecdotal data disproves a macroeconomic theory that in the short run, demand stimulates economies?
  - jerf 14y ago
    For better or worse, I treat economics as a science, and judge an economic theory on its ability to make accurate predictions, not retrodictions. My point about "looking out the window" is that while we've been operating on a supposedly Keynesian theory in trying to repair our economy these past six years, it has consipicuously, repeatedly, and grossly failed to correctly predict the results of its own massive interventions. You don't need fancy economic theories to see how it has failed, you need merely open your eyes and look around. (And I include newspapers and television, etc, in the looking around, so my point is that it is easy to see the failures, not that it's failing literally right outside my window.) You need fancy economic theories to explain how even though the results are awful, we're still doing the right things even so. Keynesians cover this by claiming it would have been even worse without the near-continuous and now open-ended "stimulus". I don't believe them. Had they said in advance that the current scenario was a significant possibility, I would at least listen, but instead we've been in a world where "recovery is just around the corner" for about four years now. It isn't, it hasn't been, and it continues not to be. I find it a valid theory that Keynesianism is the reason why, rather than the thing saving us. The fact that we're talking about a "new normal" is also code for "Keynesianism is a failure of an economic theory, but rather than give up the theory because we like it too much, we're going to tell people to just get used to being poorer." (Of course if you want to say that our politicians are only using the name of Keynes for a cover while in fact not acting particularly Keynesian, well, I beat you to it. Keynesianism isn't, really. But nobody seems to open with that defense, only use it as a fallback when attacked. It's true enough in theory, but a useless defense of the theory's current users, which are what I'm actually critical of. The real Keynes is a great deal smarter than the psuedo-Keynes being used to drive policy today, but also a great deal less influential.)
vader1 14y ago
The deflationary-spiral argument is pretty much as old as Bitcoin itself, and in my opinion quite overrated. Sure, the Euro and the Dollar themselves are inflationary currencies, but because of interest your buying power increases when you keep your money locked in a savings account rather than spend it today. Yet consumers spend their money on trivial products every day rather than saving it to let their wealth grow. Sure, the current volatility is so extreme that it might induce hoarding, but as the Bitcoin economy grows and matures this should eventually decline to acceptable levels.
ttrreeww 14y ago
Sounds like sour grape to me...
chm 14y ago
All I can say is that I've made 6$ on a 50$ investment in two days. That's more than a 10% increase in two days. Problem is, when do I withdraw? This is just a (zero-sum) game, stop taking it so seriously.
- return0 14y ago
  Wealth in general is a zero sum game too (a little is being created, but mostly it just changes hands). I would instead say, stop taking all money seriously.
Aloisius 14y ago
Out of curiosity, is there any way to design a crypto-currency that is at least marginally adaptive to deflation/inflation? Like say, if the aggregate number of xcoins traded goes down, start allowing more xcoins to be mined and vice-versa?
- wmf 14y ago
  That is possible, but if the exchange rate is fairly stable you get much less press coverage and much less adoption.
GhotiFish 14y ago
Has anyone worked out the math on the divisibility of bitcoin? Here are some questions: Bitcoin gets world wide adoption. It's used in transactions by ~3 billion people (right now). * What's the expected value of a bitcoin? (how much BTC for a stick of gum?) * What is the average permanent loss rate of bitcoins now? (when a bitcoin wallet is accidentally deleted, the coins are lost forever) What about in the future? Would it go up or down? * accounting for human growth, how many people will there be? (50 years down the road? 100?) Answering all these questions, then the big one. * How long can bitcoin last until it the satoshi (the minimum divisible unit of currency) is greater than a stick of gum? That's how long bitcoin could functionally last in society. It DOES have a limit. I just want to know if it's an unreasonable huge limit. Will it last a century? A Millennium? Until Sol becomes a red giant?
- makira 14y ago
  The bitcoin protocol can be changed to add as many decimal points as needed. It's not static. Whether a change is adopted depends on each person running a node: it's decentralized.
- mahyarm 14y ago
  I think Bitcoin can change it's implementation in a later version to make bitcoins even more divisible.
- neilk 14y ago
  I don't think your test is meaningful. There are already lots of items which cost much less than a penny. Individual squares of toilet paper, use of a cafe wi-fi for a few minutes, that sort of thing. You just buy these items in bulk or make them free with other transactions. Right now I just "paid" for these items by buying some expensive bottled water in a café. It seems sort of crazy when you think about it - I paid for the thing that falls from the sky in large quantities in the Pacific Northwest, in order to obtain a manufactured good and access to advanced technology. Also, the expected value of a bitcoin isn't dependent only on the number in circulation. Basically, it's related to "demand" and that depends on how many people are hoarding, how convenient it is relative to other currencies, and who knows, there may even be competing cryptocurrencies in the near future.
scotty79 14y ago
Money is inflationary not because it is printed, but mostly because government allows banks to lend for long years the money that the bank could need tomorrow if the people whose money it is showed up at the said bank and demanded it back. There's nothing that could stop it for bitcoin. I can easily imagine that inflationary pressure from growing body of bitcoin credit could overcome bitcoin appreciation due to increase of humanity wealth. Yes. Government won't be able to print money but banks will be still be able to inflate money as today. Government will just have to tax the banks in return for the privilege of operating this way.
- itsprofitbaron 14y ago
  Inflation is considered a bad thing however, it doesn't necessarily mean that it’s a bad thing - if it's anticipated or unanticipated and it’s the sign that an economy is growing (although too little/much inflation can cause issues). What I'm arguing about Bitcoin is a potential liquidity trap because these new injections into the market may fail to stimulate economic growth (especially as Bitcoins can only add 25 new Bitcoins to the market every 10 minutes which is being halved every 4 years from 2017). I believe that, there is potential for the Bitcoin economy to run into the problem of a limited money supply & the Bitcoin-hoarding because; there will not be enough currency. Since a long-run inelastic and fixed supply currency is not useful for a real world economy, the result will be a recession and due to the limited money supply it will evolve into a depression. This is the opposite of what happens with fiat currencies as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect. [1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
  - scotty79 14y ago
    Inflation is just sign that the supply of money printed by government and blown up by banks is higher than actual demand for the means of exchange (which is probably correlated with growth of economy). Inflation isn't very bad if it's predictable. I can be made sort of predictable by hand-managing the supply to match the actual growth of economy but the process is very fuzzy. I'm not sure if inflation is good though. I think that the fact that you have to give your money away to the bank just to keep your saving from deteriorating is horrible. Deflation is sort of bad because people start to save money and reduce inessential purchases. They also have higher standard for considering investment to be good. I think that economy build on currency so solid as bitcoins will be somewhat different than what we have now. I think it will be much less volatile than current situation and that it will much better reflect the development of humanity.
3am 14y ago
The Bitcoin craze is without a doubt one of the most insane things I've lived through. I feel badly for all the late arrivals who are (anecdotally) dipping into long term savings and levering up to buy them. The dynamic is identical to me between this, the NASDAQ at 5000, and the Case Schiller index just under 190. Maybe some economists out there are trying to be polite, but this is just nuts. Best regards to those involved, I hope I'm wrong for your sakes. But if I can convince _one single person_ on HN from wasting their savings on BC, then I'll feel like I've made a difference.
- oscilloscope 14y ago
  Weren't those both trillion dollar markets at the time? Bitcoin is tiny by comparison.
- SODaniel 14y ago
  While I agree to an extent, the current $2 billion market cap is far to small to compare with. When/if BTC reaches around $5,000 each ($50 billion or so market cap) I will agree.
  - userulluipeste 14y ago
    What gives you the numbers you've written? I mean why $5000 and not orders of magnitude more or less? Also, if the currency trading means wealth transfer, just what will come to mean the dollar as currency if it's going to be 5000 for one BTC?
mrmiller 14y ago
One thing that struck me about this article is the poor use of punctuation. It really damages the credibility of the author when their language is so choppy. It might seem superficial, but this completely ruined the author's argument for me. Just one example: "At the current rate, 25 Bitcoins are generated every 10 minutes although; this will be continuously halved every four years...". That semicolon is so wrong.
Kapura 14y ago
The fundamental flaw is not with bitcoin, but with people. At the beginning of march, I told all of my friends that Bitcoin was worth more than it was selling for, for many of the reasons listed in the post. It's essentially inflation proof; supply of bitcoin is not going to outstrip demand. I reasoned, then, that long term, the value is likely to go up. This is great if you're planning on spending any bitcoins as currency on silkroad or any of the numerous other websites that now accept some sort of payment in bitcoin: if you know you're going to want to buy in the future, it makes sense (generally) to buy into them now. This creates a broader base of unique users, giving more validity to the currency. However, people see that the value of something is going up, they think "IT WILL ONLY GO UP" and then buy them with no intent to use them for a 'real' transaction. That's the problem identified in the post. But hey, guess what: Bubbles pop. At some point, the value of bitcoin will drop, and many of these speculators will sell off. This will devalue the currency for the people who wanted to use it for legitimate transactions, but sometimes you bite the bear, and sometimes the bear bites you. The important thing to remember is that this currency is not inherently worthless. The housing bubble was catalysed by complex financial packages that disguised the fact that they were garbage assets. The Dutch tulip craze[1] was about fucking flowers. They were being purchased by people who had no desire to plant and grow the flowers. But Bitcoin is different. As long as people will still accept and trade in bitcoin, Bitcoin will never be as susceptible to collapse as other historical bubbles. Further, with bitcoin, all news is good news. Any press that gets more people interested in bitcoin is good for the bitcoin economy in general. There will, of course, be some speculators who jump on hoping for a big payout. But there will be some people who look and see the inherent value of a decentralised currency and begin to accept bitcoin. A lot of people can peg their bitcoin prices to more stable currencies: 4chan pass sells for $20 usd, but you can pay in bitcoin. I'm under the impression that Silkroad vendors do something similar. This means that, regardless of the current price of bitcoin, it's still useful for its intended goal. [1]http://en.wikipedia.org/wiki/Tulip_mania http://en.wikipedia.org/wiki/Tulip_mania
- dragonwriter 14y ago
  > The important thing to remember is that this currency is not inherently worthless. Yes, it is. Like all fiat currencies, Bitcoins (as distinct from the physical artifacts in which some of them might be housed) have no inherent value, only the value that results from the fact that some people are currently willing to accept them for other things. > As long as people will still accept and trade in bitcoin, Bitcoin will never be as susceptible to collapse as other historical bubbles. "As long as people accept and trade in X, X will never be as susceptible to collapse as other historic bubbles" is equally true for all possible values of X. The difficulty is predicting when and to what degree people will stop accepting X.
jpalomaki 14y ago
If the value of Bitcoins is bound to go up, no matter what, then why don't we all exchange our dollars and euros to bitcoins and stop spending completely? I think the mistake people make when comparing Bitcoin to historical counterparts is that they don't realize that Bitcoins are easy to split up and exchange. This is not the case with physical currencies. Splitting for example copper coins is not very practical so it is much easier to run "out-of-money" if the supply is limited.
p6v53as 14y ago
The article claims it is possible to know who makes transactions, but does not explain it. Anyone have any more detail?
pjdorrell 14y ago
This is the "hyperdeflation" argument that we've already heard elsewhere. The thing about deflation is that eventually it has to stop, because there is a limit to how much value all the people of the world can hold in any currency. People are buying bitcoins now and holding on to them, because they expect Bitcoin to be a useable currency in the future. It will become a useable currency when the deflation stops. (It is somewhat useable now for buying and selling, but taking taking out a loan in bitcoins is extremely ill-advised.) There may be some bouncing up and down before the value of bitcoins settles down to a somewhat stable final value. But it will eventually reach some type of equilibrium between the desire to hold it as a combination of desired savings (no longer held in expectation of constant hyperdeflation) and desired liquid "cash" holdings, and the desire to spend it, because sometimes there are things you want to buy. All this holds whether or not Bitcoin replaces all other currencies (which it probably won't). Whether of not Bitcoin hyperdeflation is bad for the world economy for some Keynesian reason is separate from the question of whether Bitcoin will continue to have value for its users.
Houshalter 14y ago
Bitcoin not inflating is a good thing, or at least for everyone that uses it. If some people do hoard bitcoins, that doesn't affect anyone else, and in fact it will benefit everyone else in some sense. Everyone else's money will increase in value. Think about it this way. People spend hours arguing about this, but in reality which would you actually want to use? The currency that will increase in value if you don't spend it or the one that decreases? That is, can you make any argument of why it would be rational for you yourself to not use bitcoin, all else equal?

Wow. Currencies are supposed to be used as a medium of exchange where, they facilitate transactions thus the multiplier effect kicks in and increases the economies wealth. An example of this, is fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[15] however, this is not happening with Bitcoin. So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore it will experience depressions and recessions, unlike regular currencies? OH WAIT.

tudorizer 14y ago
ha ha. Yes. It's good that the USD was backend by the government. Who can bail out the bad credits? You can just print more Bitcoins?
dragonwriter 14y ago
> So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore it will experience depressions and recessions, unlike regular currencies? You missed the big problem; while one could make an argument that the lack of the capacity for monetary stimulus with Bitcoin is an issue, fiscal stimulus is quite possible with Bitcoin (there isn't any now, because no government uses Bitcoin as the currency in which its budget works), and the multiplier effect resulting from the velocity of money would conceptually work the same way as with any other currency (the inherently deflationary construction of Bitcoin makes the likely velocity lower, which might reduce the effectiveness of fiscal stimulus, but its still possible; and different forms of fiscal stimulus could address the velocity of money.)
pkulak 14y ago
You're confusing two points just like the author. First you're saying that controlling your currency doesn't help (hurts?). Look at how many recessions the US had when it was pegged to gold vs now, then get back to me on that one. But, that doesn't really matter because Bitcoin is _not_ a national currency. It really is more like gold in that it's not really a currency in itself, but a way to store/transfer other currencies. No one buys something with gold without first doing the conversion to their local currency and I don't see that ever changing with Bitcoin either. And, it doesn't have to.
- gbaygon 14y ago
  I don't see the problem of buying thins with bitcoins directly, as long as the merchants are willing to accept it. And it will happen when/if the market stabilizes. Gold has a lot of disadvantages (fractionating, checking for purity) that bitcoins doesn't.
- Houshalter 14y ago
  I don't think that's true, that the economy was less stable a century ago than it is now. People used to give out 50 or even 100 year bonds, and recessions usually were not as bad and didn't last as long. But even if I'm wrong, the currency not being based on gold is only one of a billion other things that has changed in the economy since then. It's a completely different world. And while bitcoin is not a national currency it has the potential to become a universal currency online. People could work for bitcoins and use them to buy what they need online from other people that accept bitcoins. The currency could circulate through many hands without ever once being converted to another currency. And since it's online any conversion could be done quickly and automatically so the effective difference between holding two different currencies wouldn't really matter. The only thing you would have to take into account is how likely they were to increase or decrease in value in the time that you aren't spending them, and bitcoin has a clear advantage in that regard.
slg 14y ago
Comments like this show a complete lack of understanding about economics and the positive impact government spending and lending can have on the economy. Just because recent monetary policy hasn't improved the economy as much as we would like is no excuse to give up all control over the monetary policy.
itsprofitbaron 14y ago
Unlike other currencies, Bitcoin is limited in supply and produces a set amount every 10 minutes - as a result there is the potential for a liquidity trap because these new injections into the market may fail to stimulate economic growth. Whereas, fiat currencies are backed by Governments etc (something which Bitcoin isn't) and these currencies can theoretically have an unlimited amount supplied into the economy - and as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect. [1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
- zacharyvoase 14y ago
  But my point is that the possibility of fiscal stimulus is not critical for a functioning economy, and in many cases simply does not work. I disagree with the monetarist principle that economic growth is stimulated by money injections—it's just people getting up and going to work in the morning, and inventing new things and discovering new processes. All this money mechanics stuff is distracting fluff.

base698 14y ago

This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded and transfered. When a gram becomes worth so much it buys a house that makes other purchases of food and bills become impractical and people stop buying, and when building a billion dollar construction project moving it and protecting it has another set of problems and overhead. Bitcoin does not have the division problem--a single coin can be divided into pieces 10^8 pieces as the code currently works. That can also be changed in future versions to be divided even smaller. Ie, when one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum. So, we are then left with the argument, "Oh My God people won't buy because of the psychology that 0.01 coin today that currently buys a pack of gum being able to buy a car in the future." But, that's almost true now with savings and stocks and people still spend their money today and go into debt. Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc. Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. Venture Capital also would have issues, but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time. Inflation is built into the current model to encourage investment and prevent concentration of capital. Clearly, given the wealth divide that isn't working (blame exploitation of 3rd world or robots).

dragonwriter 14y ago
> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money. > Inflation is built into the current model to encourage investment and prevent concentration of capital. Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.) > Not to say bitcoin is the solution, but it's something different. That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."

lojack 14y ago

I still don't understand how people treating bitcoin as an investment rather than a currency is a fundamental flaw in the algorithm.

fc2 14y ago
He thinks people will suddenly decide they'd rather live under a bridge and keep their bitcoins than buy a house with them.
itsprofitbaron 14y ago
The reason I said that is because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future (therefore Bitcoins are being treated as if it’s a currency) OR the expectation that Bitcoin will rise in monetary value which means that, Bitcoin is a speculative digital asset – however, it’s not tied to anything in the way a stock or bond is for example. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply. However, a long-run inelastic and fixed supply currency is not useful for a real world economy which is why, Bitcoin is useful as a speculative digital asset rather than a currency.
- richardw 14y ago
  Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.)
  - dragonwriter 14y ago
    > Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.) The "no red tape, no forex hassles" are largely because of immaturity in the regulation of "virtual currencies" that exist largely because most states haven't gotten around to addressing them because of scale issues compared to traditional soveriegn currencies. This is already starting change.

return0 14y ago

I was worried that they would expose a fundamental flaw in the encryption algorithm, however the post goes on with irrelevant FUD. It s a lot less flawed than even paper currency, and the fact that there haven't been any forgeries is a testament to its success. The argument about identifying transactions is a bit disconcerting, but how much of a real concern is it? After all, even paper money has a trail of DNAs from the hands that touched it. As for the comparisons with other currencies and commodities, it has been exhausted as a subject; money is a matter of trust after all. The question is what are the actual security threats to bitcoin's p2p infrastructure/integrity?

DanBC 14y ago
> and the fact that there haven't been any forgeries is a testament to its success. There has been a successful double spend.
- return0 14y ago
  Is that something that can be fixed/improved?
  - pixelcort 14y ago
    There is a fix that will go live in the future at a predetermined date. All users are being encouraged to update their clients or patch their clients' config files before the impending deadline. I'm not sure what will happen to clients that don't patch or update.
- erikpukinskis 14y ago
  Not really. The possibility of a short lived double spend is a valid state for the system to be in. What is vanishingly unlikely is a long lived double spend. There are currently no long lived double spends in the block chain, and that means no double spend has ever been successful.
- ramblerman 14y ago
  errr. no there hasn't

jondtaylor 14y ago

"However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer." This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills? I'm not joking I seriously have no idea what this has to do with anything...

SODaniel 14y ago
I agree that this argument is purely stupid. How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it? Some people feel 'richer' with 1 OZ of gold then $1700 in bills, some feel 'richer' with 100x $1 then a check for $100. But why does that matter as a success factor of a currency? I don't get it.
- dragonwriter 14y ago
  > How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it? Because the success or failure of a medium of exchange lies in how it affects human behavior, which it does through its impact on human psychology.
defen 14y ago
It's stupid. If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Bitcoins can be divided up, but then uninformed people forget why this is important and then make nonsensical arguments about splitting a $100 bill into 10 $10 bills.
- dragonwriter 14y ago
  > If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Its actually pretty trivial to issue new paper currency in smaller denominations and exchange existing currency for it; the problem with deflation is that it creates a disincentive to spend or invest, not that there is a logistical difficulty in subdividing currency.

gwern 14y ago

Summary: deflationary spiral. Good job repeating what's been said by like everyone since the start, and not adding the slightest bit of new insight or information.

SODaniel 14y ago

While I don't disagree with the author I would say that the finite supply shines a light on an even more direct problem. What happens to 'lost' coins? The BTC supply is not only finite but in fact dwindling over time, as inevitably the amount of currency is going to diminish due to digital loss. I have personally lost a few BTC due to computer crashes, wallet file lost etc. (In the early days) and considering this the total supply of bitcoins will be diminishing over time at (maybe already?) higher rate then they can be mined. I haven't taken the time to do ANY form of math on this but I can guarantee that already 10.000s if not 100.000s BTC are lost forever due to people simply not having access to them anymore and the data being destroyed. Over years of loss this is probably more likely to kill the currency than anything else in my opinion.

TimSchumann 14y ago
Tens of Thousands of Bitcoins have been lost, easily.
- deleted 14y ago
  [deleted]
thelema314 14y ago
I expect this will cause little problem; if 1M bitcoins are lost, the system will just work as if there were only 20M bitcoins created instead of 21M bitcoins. Everything would be a little less expensive because bitcoins would each be worth about 5% more.
- SODaniel 14y ago
  Nope. Since no one can ever satisfactory answer the question of the 'real' amount of BTC in circulation, this will only serve as a factor of uncertainty. Lost bitcoins affect nothing, FOUND bitcoins can affect everything.
  - anonymoushn 14y ago
    So, MV=PQ and all that. Lost bitcoins are functionally identical to any other bitcoins that aren't being spent. Burning dollar bills does not move the price of the dollar in a different way than keeping them in your pocket.

drewblaisdell 14y ago

There are many legitimate arguments for the existence of flaws in Bitcoin that could prevent it from becoming a legitimate currency. Unfortunately, this was poorly written, poorly formatted, and has a set of premises that do not lead to the conclusion in the sensationalist title.

rocky1138 14y ago

By 2140 we'll probably have a new currency that we can replace Bitcoin with.

ceejayoz 14y ago
2140? I'd expect the "new hotness" in cryptocurrencies to hit in 2014, not 2140.
- rocky1138 14y ago
  Probably true, but I just used the same number that was in the article.

chrisrhoden 14y ago

Watch this: From now on, for the purposes of transactions, I am going to refer to bitdollars. In any software using bitdollars, one bitdollar is equal to 0.001 bitcoins. Nobody needs to feel less or more rich.

ph0rque 14y ago
I prefer the term nanobitcoin. That way, the conversion to bitcoins is built-in.

jnevelson 14y ago

"Eventually the Bitcoin economy is going to run into the problem of its algorithm and the Bitcoin-hoarding because; there will not be enough currency." There is an oscillation process at work here - as people hoard bitcoins, the value of each individual bitcoin increases. People will then sell off their bitcoins in exchange for a higher price than they initially payed for them, thus increasing the money supply and allowing others to buy into the system. Am I missing something here?

brazzy 14y ago
Why would anyone sell when they see the price keep rising? Unless they fear it will go down - and then everyone wants to sell and the bubble pops...
- ph0rque 14y ago
  Why would anyone sell when they see the price keep rising? Some will sell when the total sum of their bitcoins is big enough for them to retire on.

tibbon 14y ago

Yes, there will be (at some point) a downward force on the value of Bitcoin due to hoarding. But that will not be the only force. At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it. Also- its important to remember that there are relatively few places to 'use' it now compared to most other currencies. I cannot pay my rent, groceries, etc.... I think to trying to sort it into neat categories of 'investment' or 'currency' is a bit flawed. Its a bit of both. Gold (at least to some degree) was used as a currency at various points in history, but now paying with gold doubloons is difficult for most transactions. The hoarding of gold makes it deflationary as well, but doesn't prevent it from being traded frequently as well (well, at least futures of it on the exchanges). Gold backed dollars at one point were theoretically limited in number as well. Another claim against Bitcoin is the fact that it isn't "backed by anything", but neither is gold. Its value is what we assign to it as a market. Aside from industrial processes, the inherent value of gold or diamonds is very low. I don't think Bitcoin is perfect. I'm glad I bought a handful a few months ago. But some of the 'flaws' that people find aren't as much as flaws as features. One of the things that I do love about Bitcoin is that it isn't a theory- its happening. We could talk all day about the things that are supposed to happen with it from a variety of perspectives, but the experiment is being actively run in a real market which is challenging the perspectives of 'what might happen if...' with what's actually happening. If we were talking about USD as a new concept, we could write tomes on the 'flaws' of it as a currency. It has nothing backing it. It can be infinitely created at will. A private entity (federal reserve) controls a huge amount of policy. It can be lost, destroyed, stolen. Political forces of a single government can have massive impact on it. It is hugely regulated, and can be relatively easily tracked in its system. Yet, it largely works.

brazzy 14y ago
> At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it. No; then people start selling their BTC in a panic, MtGox is overwhelmed and stops working, and a lot of temporary millionaires start looking for work...
- 14y ago

pg_bot 14y ago

Why hasn't anyone forked bitcoin and started mining a new currency from scratch?

axusgrad 14y ago
A list is here: https://bitcointalk.org/index.php?topic=134179.0 https://bitcointalk.org/index.php?topic=134179.0 One that avoids the fixed currency limit is PPcoin: https://github.com/ppcoin/ppcoin/wiki/FAQ https://github.com/ppcoin/ppcoin/wiki/FAQ
TimSchumann 14y ago
Several have. http://dustcoin.com/mining http://dustcoin.com/mining
lojack 14y ago
they have, one example of this is called litecoin.
fusiongyro 14y ago
I'd expect it to work about as well as Ido, the better-than-Esperanto: not well. The whole point of currency (and language) is exchange. As you limit yourself to ever-smaller numbers of people in the search for more ideal manners of exchange, the missed point becomes harder and harder to ignore.
- krcz 14y ago
  I might try to learn Ido someday. I probably won't talk to anyone in it, but it might be fun. It has one advantage over Esperanto: its vocabulary wasn't chosen by one guy arbitrarily, but by a committee that analyzed various European languages and tried to find common word roots. That way knowing Ido might help me to dig some meaning from French, Spanish, Italian texts.
  - fusiongyro 14y ago
    I think Interlingua would be even more interesting to you then, since it was designed to be comprehensible to ordinary speakers of French, Spanish and Italian without any special knowledge. It's sort of like a modern idealized Romance language. It would probably serve your purpose better than Ido.

tomrod 14y ago

Sure, this is a flaw if one only uses bitcoins. As far as I know, there is nothing stopping alternate, new competitors using the same algorithm. So bitcoins run out and everyone hoards? Start a new currency. A smart implementation can overcome the network effect/firstmover advantage of bitcoin. Then people trade between the currencies, and hoarding ceases to be as much of a problem.

paulhodge 14y ago
Or more likely.. the Bitcoin developers release a new version that allows for more than 21m coins. I think a lot of people don't realize that Bitcoin is still an actively developed beta-version software project. There are several parts of the code that the devs are already thinking about changing (such as the way that transaction fees are calculated, or increasing the number of times you can subdivide one coin). If the 21m limit becomes crippling, I'm sure they will change that too. Really, they can change anything they want as long as they can convince 51% of pool owners to upgrade.
- wmf 14y ago
  Can you imagine miners or MtGox voting to devalue their own holdings? I don't think many people are in it for the revolution.
  - dragonwriter 14y ago
    > Can you imagine miners or MtGox voting to devalue their own holdings? I can imagine, if Bitcoin was perceived as a serious currency, nation-states and existing large and wealthy financial institutions investing large amounts in becoming participants in the network. Can I imagine those institutions acting with regard to Bitcoin the same as they act with regard to traditional sovereign currencies? Easily.
- ramblerman 14y ago
  not quite. The 21m upper limit is one variable that can't change.

gojomo 14y ago

This is essentially the "it will become so valuable, no one will want it anymore" argument. There are uses of Bitcoin that are complementary to traditional currencies, and can survive both volatility and a large level of hoarding. One example: an enabler of quick, distant, irreversible transfer under software mediation. That is, you get the transactional Bitcoin you need from a trusted source, then engage in a transaction with a distant/less-trusted source in a matter of minutes. Neither the overall level nor volatility of Bitcoin's pricing level matters much in such a scenario, but it still enables new kinds of transactions. Also, for a post that includes 15 footnotes, one whopper of a claim goes without support: "Bitcoin is not meant to be an investment it’s meant to be a currency." Sweeping claims about what Bitcoin or currencies are "meant to be" need more support and careful definition. Maybe, because Bitcoin is something new that's only made possible by computers, networks, and cryptography, it doesn't exactly fit into the classic categories and purposes.

hilko 14y ago
Very well put. I think past experiences are definitely reason to be cautious, but too often it seems that analysis neglects to even consider the fact that there is no direct equivalent to Bitcoin. It remains to be seen if Bitcoin is 'worth' its current valuation, but I think it's obvious that it has and will continue to have uses in the future.
- itsprofitbaron 14y ago
  There are direct equivalents to Bitcoin and I am interested in a global virtual currency however, I don't believe that Bitcoin is going to be it. I believe that Bitcoin's value is more of a speculative digital asset rather than a currency because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future OR the expectation that Bitcoin will rise in monetary value. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply (after all there are only 21M of them). However, a long-run inelastic and fixed supply currency is not useful for a real world economy because, currencies are supposed to be used as a medium of exchange to facilitate transactions which, allows the multiplier effect kick in and increase the economies wealth. Whereas due to the deflationary spiral you're incentivised to hoard Bitcoins & let them appreciate in value instead which is the opposite effect of what a currency is meant to do.

mp99e99 14y ago

Since theoretically there is a fixed number of bitcoins, and once lost they can't be retrieved, bitcoins should theoretically be worth infinity when the last one is finally lost.

jwr 14y ago

I hope by the time we hit major problems with Bitcoin we will have several new digital currencies to chose from. Nobody ever said there needs to be only one, after all.

hilko 14y ago
Or that enough services, project and uses have sprung up to keep Bitcoin valuable enough to remain somewhat mainstream and not fade away.

bbbhn 14y ago

Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon.

dragonwriter 14y ago
> Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon. Its not ridiculous when one of the arguments for adopting Bitcoin is how much better it would be for our economy to be dependent on it than existing soveriegn currencies. Certainly, one reasonable response to this is to argue that the assumption that Bitcoin could displace those currencies is far-fetched, but its also reasonable to accept, for the sake of argument, that it could and then address whether or not it is desirable.

jff 14y ago

Bitcoin is certainly flawed for a number of reasons, but this article is quite poorly-written; we'd have been better off with just the list of references. Summary: Bitcoin is deflationary.

bcoates 14y ago

Two issues: Firstly, the mining allocation rate isn't meaningfully part of the bitcoin protocol; it's just a setting. Any portion of the network large enough to survive as a detached economy can choose to change the (batty) monetary policy whenever it likes. Secondly, this probably won't be necessary, as nothing really prevents bitcoin holders from forming banks and issuing inflationary/debased/pegged notes to beat the price down to sanity, using the existing transaction ledger for accounting.

basch 14y ago
Exactly. Everyone seems to be missing the fact that "bitcoin" is a protocol and the most prominent instance of its use. Any government or group of people can go start their own blockchain.
- pixelcort 14y ago
  Or even fork off the existing block chain at a pre-determined block. This way, all existing owners of the parent crypto currency would have equal coin-to-coin values in the new crypto currency as of a certain date. I'm surprised I haven't heard of any existing alternate crypto currencies intentionally forking off of the existing Bitcoin block chain. They all seem to start off with their own new block chains.

vimes656 14y ago

I hear so many disparate opinions about Bitcoin economy that I don't consider them anymore. The classic counter argument to this one is that hardware is constantly improving and still people buy hardware even though everyone knows that in 6 months with the same money you can buy something better. And another one is that Bitcoin is so divisible that deflation is not a problem. In the end, Economics involves the behavior of people acting on free will. How anyone can attempt how people are going to behave with respect to something? If anyone could predict what society is going to value in the future, or how people will react to some new technology would he be writing blog posts about what is going to fail? Has there been anything remotely similar to the Bitcoin now in history? I don't know whether deflation is good or bad but I consider the potential advantages of a deflationary currency, if it works, worth trying it. Why not, nobody is being forced to get into Bitcoins. If you don't like it, ignore it and move along.

bcantrill 14y ago

This fundamental flaw is absolutely glaring to anyone who has any understanding of economic history -- and it's amazing to me how many technologists willfully disregard several centuries of accumulated experience. Because of their built-in deflationary spiral, Bitcoins can never meaningfully be used as a medium of exchange: it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services. (And certainly, no one will take on debt denominated in Bitcoins. Can you imagine if you had taken out a Bitcoin-denominated mortgage a year ago?) All of this looks a lot like the 19th century in terms of economics, which suffered from manic booms and absolutely devastating depressions on a regular basis.[1] It took the mother of all depressions -- a decade-long monster that casted a generations-long shadow -- to permanently shift thinking. While economists still debate the precise causes of the Great Depression (and why so many attempts to right the economy in the 1930s failed), there is broad consensus on one key element: deflation is an economic carcinogen, and must be avoided at all costs. As such, Bitcoin is macroeconomic cancer -- no matter how breathless its techno-utopian proponents may be. [1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1

zacharyvoase 14y ago
The principle of dual circulation and 'bad money driving out good' is formulated as Gresham's Law. While this is typically applied to two currencies pegged by fiat, it would also apply to a pair of circulating currencies in which one is appreciating and the other depreciating. The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.
- ryusage 14y ago
  Not completely, no, but it could certainly be stunted. The first question anyone asks about bitcoin is "What can you actually buy with it?" If it becomes illegal for American or European companies to accept bitcoin payments, that would certainly certainly do a lot to prevent it from taking over.

johnny4000 14y ago

This deflation argument seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in. Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.

dragonwriter 14y ago
> If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. It would be good if your wage was fixed in bitcoins and your debt was set in dollars, but bad if the reverse was true. I think, given a deflationary currency, it'll be a lot easier to find people willing to lend money with the loan obligation denominated in bitcoins than it is to find people willing to offer employment with a long-term salary base fixed in bitcoins.
smacktoward 14y ago
"If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in." It would be! Except for the part where that very spiral discourages employers from paying wages in Bitcoin, since they'd make more money just holding on to those Bitcoins and letting the spiral make them money than they ever could paying workers with them. So those Bitcoin-paying jobs never leave the realm of the theoretical.

TimSchumann 14y ago

I'm going to try and be useful to this discussion, and I haven't seen anyone mention this by name yet so, here goes... The Law Of Diminishing Marginal Utility. It essentially states that the more of something you have, the less additional value each subsequent unit brings to your life relative to the last one you added. (Even billionaires stop with a handful of houses) The problem is the author implicitly tries to objectify the value of bitcoin, when in fact the value is completely subjective, just as the value of anything truly is. One cannot take the subjectivity out of value as the author has tried to do here by saying 'More = Good' Value, being subjective, comes in the form of utility. I do not care what you call it, what it's priced in, or if you value it but, if I were to acquire a voucher for unlimited free flights, lifetime duration, transferable from myself to anyone of my choosing, on any airline, I would value that voucher very highly. That being said, while I may keep the next one for family, and several for friends, at some point I'm going to start selling them to others for a metric boatload of money. Please note none of this implies any kind of 'rational actor' theory or any such thing. I see the law of diminishing marginal utility as just that, a law of nature. Despite what people may say, their actions prove it to be so. *Also I think the author is implying that people who act like the people he's talking about in his post will take a pretty big haircut at some point in this whole bitcoin experiment. I think that says more about the people than the system at large.

jerf 14y ago

Actually, nothing stops a government from using fiscal stimulus if BitCoin is pervasively used. The US Government will, I'm sure, never accept taxes in anything other than US Dollars (that being the fundamental base of value the US Dollar is based on, and the subsequent avoidance of jail time due to not paying taxes or otherwise satisfying Uncle Sam), and they will remain free to helicopter-drop as many Dollars on the world as they like. If the BitCoin economy subsequently devalues Dollars, well, that's just the expected reaction. It's not as if there aren't commodities already out there doing just that. (Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either.)

Aloisius 14y ago
Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either Please explain how looking out the window and gathering local anecdotal data disproves a macroeconomic theory that in the short run, demand stimulates economies?
- jerf 14y ago
  For better or worse, I treat economics as a science, and judge an economic theory on its ability to make accurate predictions, not retrodictions. My point about "looking out the window" is that while we've been operating on a supposedly Keynesian theory in trying to repair our economy these past six years, it has consipicuously, repeatedly, and grossly failed to correctly predict the results of its own massive interventions. You don't need fancy economic theories to see how it has failed, you need merely open your eyes and look around. (And I include newspapers and television, etc, in the looking around, so my point is that it is easy to see the failures, not that it's failing literally right outside my window.) You need fancy economic theories to explain how even though the results are awful, we're still doing the right things even so. Keynesians cover this by claiming it would have been even worse without the near-continuous and now open-ended "stimulus". I don't believe them. Had they said in advance that the current scenario was a significant possibility, I would at least listen, but instead we've been in a world where "recovery is just around the corner" for about four years now. It isn't, it hasn't been, and it continues not to be. I find it a valid theory that Keynesianism is the reason why, rather than the thing saving us. The fact that we're talking about a "new normal" is also code for "Keynesianism is a failure of an economic theory, but rather than give up the theory because we like it too much, we're going to tell people to just get used to being poorer." (Of course if you want to say that our politicians are only using the name of Keynes for a cover while in fact not acting particularly Keynesian, well, I beat you to it. Keynesianism isn't, really. But nobody seems to open with that defense, only use it as a fallback when attacked. It's true enough in theory, but a useless defense of the theory's current users, which are what I'm actually critical of. The real Keynes is a great deal smarter than the psuedo-Keynes being used to drive policy today, but also a great deal less influential.)

vader1 14y ago

The deflationary-spiral argument is pretty much as old as Bitcoin itself, and in my opinion quite overrated. Sure, the Euro and the Dollar themselves are inflationary currencies, but because of interest your buying power increases when you keep your money locked in a savings account rather than spend it today. Yet consumers spend their money on trivial products every day rather than saving it to let their wealth grow. Sure, the current volatility is so extreme that it might induce hoarding, but as the Bitcoin economy grows and matures this should eventually decline to acceptable levels.

ttrreeww 14y ago

Sounds like sour grape to me...

chm 14y ago

All I can say is that I've made 6$ on a 50$ investment in two days. That's more than a 10% increase in two days. Problem is, when do I withdraw? This is just a (zero-sum) game, stop taking it so seriously.

return0 14y ago
Wealth in general is a zero sum game too (a little is being created, but mostly it just changes hands). I would instead say, stop taking all money seriously.

Aloisius 14y ago

Out of curiosity, is there any way to design a crypto-currency that is at least marginally adaptive to deflation/inflation? Like say, if the aggregate number of xcoins traded goes down, start allowing more xcoins to be mined and vice-versa?

wmf 14y ago
That is possible, but if the exchange rate is fairly stable you get much less press coverage and much less adoption.

GhotiFish 14y ago

Has anyone worked out the math on the divisibility of bitcoin? Here are some questions: Bitcoin gets world wide adoption. It's used in transactions by ~3 billion people (right now). * What's the expected value of a bitcoin? (how much BTC for a stick of gum?) * What is the average permanent loss rate of bitcoins now? (when a bitcoin wallet is accidentally deleted, the coins are lost forever) What about in the future? Would it go up or down? * accounting for human growth, how many people will there be? (50 years down the road? 100?) Answering all these questions, then the big one. * How long can bitcoin last until it the satoshi (the minimum divisible unit of currency) is greater than a stick of gum? That's how long bitcoin could functionally last in society. It DOES have a limit. I just want to know if it's an unreasonable huge limit. Will it last a century? A Millennium? Until Sol becomes a red giant?

makira 14y ago
The bitcoin protocol can be changed to add as many decimal points as needed. It's not static. Whether a change is adopted depends on each person running a node: it's decentralized.
mahyarm 14y ago
I think Bitcoin can change it's implementation in a later version to make bitcoins even more divisible.
neilk 14y ago
I don't think your test is meaningful. There are already lots of items which cost much less than a penny. Individual squares of toilet paper, use of a cafe wi-fi for a few minutes, that sort of thing. You just buy these items in bulk or make them free with other transactions. Right now I just "paid" for these items by buying some expensive bottled water in a café. It seems sort of crazy when you think about it - I paid for the thing that falls from the sky in large quantities in the Pacific Northwest, in order to obtain a manufactured good and access to advanced technology. Also, the expected value of a bitcoin isn't dependent only on the number in circulation. Basically, it's related to "demand" and that depends on how many people are hoarding, how convenient it is relative to other currencies, and who knows, there may even be competing cryptocurrencies in the near future.

scotty79 14y ago

Money is inflationary not because it is printed, but mostly because government allows banks to lend for long years the money that the bank could need tomorrow if the people whose money it is showed up at the said bank and demanded it back. There's nothing that could stop it for bitcoin. I can easily imagine that inflationary pressure from growing body of bitcoin credit could overcome bitcoin appreciation due to increase of humanity wealth. Yes. Government won't be able to print money but banks will be still be able to inflate money as today. Government will just have to tax the banks in return for the privilege of operating this way.

itsprofitbaron 14y ago
Inflation is considered a bad thing however, it doesn't necessarily mean that it’s a bad thing - if it's anticipated or unanticipated and it’s the sign that an economy is growing (although too little/much inflation can cause issues). What I'm arguing about Bitcoin is a potential liquidity trap because these new injections into the market may fail to stimulate economic growth (especially as Bitcoins can only add 25 new Bitcoins to the market every 10 minutes which is being halved every 4 years from 2017). I believe that, there is potential for the Bitcoin economy to run into the problem of a limited money supply & the Bitcoin-hoarding because; there will not be enough currency. Since a long-run inelastic and fixed supply currency is not useful for a real world economy, the result will be a recession and due to the limited money supply it will evolve into a depression. This is the opposite of what happens with fiat currencies as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect. [1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
- scotty79 14y ago
  Inflation is just sign that the supply of money printed by government and blown up by banks is higher than actual demand for the means of exchange (which is probably correlated with growth of economy). Inflation isn't very bad if it's predictable. I can be made sort of predictable by hand-managing the supply to match the actual growth of economy but the process is very fuzzy. I'm not sure if inflation is good though. I think that the fact that you have to give your money away to the bank just to keep your saving from deteriorating is horrible. Deflation is sort of bad because people start to save money and reduce inessential purchases. They also have higher standard for considering investment to be good. I think that economy build on currency so solid as bitcoins will be somewhat different than what we have now. I think it will be much less volatile than current situation and that it will much better reflect the development of humanity.

3am 14y ago

The Bitcoin craze is without a doubt one of the most insane things I've lived through. I feel badly for all the late arrivals who are (anecdotally) dipping into long term savings and levering up to buy them. The dynamic is identical to me between this, the NASDAQ at 5000, and the Case Schiller index just under 190. Maybe some economists out there are trying to be polite, but this is just nuts. Best regards to those involved, I hope I'm wrong for your sakes. But if I can convince _one single person_ on HN from wasting their savings on BC, then I'll feel like I've made a difference.

oscilloscope 14y ago
Weren't those both trillion dollar markets at the time? Bitcoin is tiny by comparison.
SODaniel 14y ago
While I agree to an extent, the current $2 billion market cap is far to small to compare with. When/if BTC reaches around $5,000 each ($50 billion or so market cap) I will agree.
- userulluipeste 14y ago
  What gives you the numbers you've written? I mean why $5000 and not orders of magnitude more or less? Also, if the currency trading means wealth transfer, just what will come to mean the dollar as currency if it's going to be 5000 for one BTC?

mrmiller 14y ago

One thing that struck me about this article is the poor use of punctuation. It really damages the credibility of the author when their language is so choppy. It might seem superficial, but this completely ruined the author's argument for me. Just one example: "At the current rate, 25 Bitcoins are generated every 10 minutes although; this will be continuously halved every four years...". That semicolon is so wrong.

Kapura 14y ago

The fundamental flaw is not with bitcoin, but with people. At the beginning of march, I told all of my friends that Bitcoin was worth more than it was selling for, for many of the reasons listed in the post. It's essentially inflation proof; supply of bitcoin is not going to outstrip demand. I reasoned, then, that long term, the value is likely to go up. This is great if you're planning on spending any bitcoins as currency on silkroad or any of the numerous other websites that now accept some sort of payment in bitcoin: if you know you're going to want to buy in the future, it makes sense (generally) to buy into them now. This creates a broader base of unique users, giving more validity to the currency. However, people see that the value of something is going up, they think "IT WILL ONLY GO UP" and then buy them with no intent to use them for a 'real' transaction. That's the problem identified in the post. But hey, guess what: Bubbles pop. At some point, the value of bitcoin will drop, and many of these speculators will sell off. This will devalue the currency for the people who wanted to use it for legitimate transactions, but sometimes you bite the bear, and sometimes the bear bites you. The important thing to remember is that this currency is not inherently worthless. The housing bubble was catalysed by complex financial packages that disguised the fact that they were garbage assets. The Dutch tulip craze[1] was about fucking flowers. They were being purchased by people who had no desire to plant and grow the flowers. But Bitcoin is different. As long as people will still accept and trade in bitcoin, Bitcoin will never be as susceptible to collapse as other historical bubbles. Further, with bitcoin, all news is good news. Any press that gets more people interested in bitcoin is good for the bitcoin economy in general. There will, of course, be some speculators who jump on hoping for a big payout. But there will be some people who look and see the inherent value of a decentralised currency and begin to accept bitcoin. A lot of people can peg their bitcoin prices to more stable currencies: 4chan pass sells for $20 usd, but you can pay in bitcoin. I'm under the impression that Silkroad vendors do something similar. This means that, regardless of the current price of bitcoin, it's still useful for its intended goal. [1]http://en.wikipedia.org/wiki/Tulip_mania http://en.wikipedia.org/wiki/Tulip_mania

dragonwriter 14y ago
> The important thing to remember is that this currency is not inherently worthless. Yes, it is. Like all fiat currencies, Bitcoins (as distinct from the physical artifacts in which some of them might be housed) have no inherent value, only the value that results from the fact that some people are currently willing to accept them for other things. > As long as people will still accept and trade in bitcoin, Bitcoin will never be as susceptible to collapse as other historical bubbles. "As long as people accept and trade in X, X will never be as susceptible to collapse as other historic bubbles" is equally true for all possible values of X. The difficulty is predicting when and to what degree people will stop accepting X.

jpalomaki 14y ago

If the value of Bitcoins is bound to go up, no matter what, then why don't we all exchange our dollars and euros to bitcoins and stop spending completely? I think the mistake people make when comparing Bitcoin to historical counterparts is that they don't realize that Bitcoins are easy to split up and exchange. This is not the case with physical currencies. Splitting for example copper coins is not very practical so it is much easier to run "out-of-money" if the supply is limited.

p6v53as 14y ago

The article claims it is possible to know who makes transactions, but does not explain it. Anyone have any more detail?

pjdorrell 14y ago

This is the "hyperdeflation" argument that we've already heard elsewhere. The thing about deflation is that eventually it has to stop, because there is a limit to how much value all the people of the world can hold in any currency. People are buying bitcoins now and holding on to them, because they expect Bitcoin to be a useable currency in the future. It will become a useable currency when the deflation stops. (It is somewhat useable now for buying and selling, but taking taking out a loan in bitcoins is extremely ill-advised.) There may be some bouncing up and down before the value of bitcoins settles down to a somewhat stable final value. But it will eventually reach some type of equilibrium between the desire to hold it as a combination of desired savings (no longer held in expectation of constant hyperdeflation) and desired liquid "cash" holdings, and the desire to spend it, because sometimes there are things you want to buy. All this holds whether or not Bitcoin replaces all other currencies (which it probably won't). Whether of not Bitcoin hyperdeflation is bad for the world economy for some Keynesian reason is separate from the question of whether Bitcoin will continue to have value for its users.

Houshalter 14y ago

Bitcoin not inflating is a good thing, or at least for everyone that uses it. If some people do hoard bitcoins, that doesn't affect anyone else, and in fact it will benefit everyone else in some sense. Everyone else's money will increase in value. Think about it this way. People spend hours arguing about this, but in reality which would you actually want to use? The currency that will increase in value if you don't spend it or the one that decreases? That is, can you make any argument of why it would be rational for you yourself to not use bitcoin, all else equal?