7 ms·

Building a Better Bitcoin

37 points by Hoff 14y ago

ekianjo 14y ago
I stopped reading when the article cited Gold as one of the roots of the Great Depression. Ha! Yeah, sure.
- trevelyan 14y ago
  This is a truth accepted by economists of basically all political persuasion at this point. The best book on the subject is Barry Eichengreen's "Golden Fetters", but you can get a faster sense of things by going to NBER (nber.org), searching for "great depression" or "gold standard" and walking through the results.
cs702 14y ago
Quoting from the article: "So ... bitcoins are without intrinsic value as assets, yet they have risen too fast in value to be much use as a currency. Kind of makes your head hurt, doesn't it? But it also sounds a bit like a familiar commodity, gold, that's also been on a roll, with its dollar price quintupling over the past decade. Gold has, over time, not been the greatest of assets to invest in. It's not the greatest of currencies, either: Back when the gold standard was widely adhered to, nations struggled regularly with deflation. There's persuasive evidence that the primary cause of the Great Depression was a refusal to unlink currencies from gold until too late. Still, gold has held onto its purchasing power over time." I agree with the author: bitcoins are very similar to gold ("the people's currency"), except they're digital and their supply is mathematically fixed. So ... how much would a Bitcoin sell for if the world ever comes to value it like gold? Granted, that's a big if, but let's entertain the thought for speculative fun. All gold mined since the start of civilization is currently valued at around $8.8 trillion.[1] Divide this figure by the maximum of 21 million bitcoins that can ever be created, and the figure is over $400,000 per Bitcoin. So the answer is, in the order of a few hundred dollars per milli-Bitcoin. For reference, all bitcoins in existence are currently valued at $0.002 trillion.[2] -- [1] http://en.wikipedia.org/wiki/Gold#Production http://en.wikipedia.org/wiki/Gold#Production [2] http://www.bitcoinwatch.com http://www.bitcoinwatch.com
- venomsnake 14y ago
  That is a bit misleading. A lot of gold is not on the markets for various reasons -jewelry, hoarders, some electronics. So you should count only liquid gold (hehe) ... the amount that you can actually buy. I think it is much smaller than 8 trillion.
  - deleted 14y ago
    [deleted]
  - scottmp10 14y ago
    Many bitcoins have been lost permanently or are in cold storage. Only a small percentage are available on exchanges.
- dcminter 14y ago
  Bitcoins are divisible up to eight decimal places. So there are rather more units than that potentially available to circulate.
  - warfangle 14y ago
    Thus, the Satoshi: the smallest denomination in bitcoin, at 0.00000001 bitcoins. To continue with the above speculative fun, one satoshi would be worth .004 dollars. If the M3 money supply were replaced with bitcoins overnight (assuming 21 million bitcoins and an M3 of 10.3 trillion circa 2009), a bitcoin would be worth $490,476.19. One satoshi would be $0.004947619; a big mac would cost 806 satoshi. Which is only about half the the current USD->Yen exchange rate.
rjtavares 14y ago
> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the purchasing power of the 1950 version. By contrast, bitcoins have been skyrocketing in value. This sounds like a good thing, but for a currency it's really not. An economy where bitcoins were the means of exchange would have experienced 98% deflation over the past year. No one would be able to repay any loans, or really do business at all. What we want out of a currency is not price appreciation but stability. Monetary economists differ on whether the optimal stability is inflation of 0% or in the low single digits. Nobody thinks 98% deflation is healthy, and all but a small minority seem to think any deflation at all is a bad thing. This needs to be repeated until exhaustion.
- venomsnake 14y ago
  Krugman has been doing it for 10 years now ... no effect.
  - zenocon 14y ago
    That's because he's wrong on so many levels.
- jl6 14y ago
  It's not yet clear whether Bitcoin is money, or whether it is some strange new hybrid of asset and currency for which conventional wisdom does not apply and for which historical analogies fail.
  - jwr 14y ago
    Exactly. I'm also growing tired of people endlessly repeating the 'deflation is bad' mantra. Even if we agree to call what will happen to bitcoin 'deflation', the argument that people will just stop producing and just hold on to their money is bogus. Does it describe you? Because it certainly does not describe me.
    - dragontamer 14y ago
      Are you willing to loan out your bitcoins? Do you believe that you will be able to purchase say... a house or a car using bitcoins? Do you think any financial institution will come out and loan you bitcoins? As a financial instrument, this massive deflation will prevent any form of financing (ie: Credit Cards, Mortgages, Car Loans, etc. etc.) from growing inside of the Bitcoin world.
rheide 14y ago
A much better and less biased article than the 'Bitcon' one. It shows once more that no one really knows what Bitcoin is and what's going to happen to it. If you must compare Bitcoin to gold, consider the current price of gold, imagine that we didn't know it existed until yesterday and then suddenly it appeared. Bitcoin currently fulfills a niche in the same way that gold did in the past (and still does).
tocomment 14y ago
Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity? Perhaps solving hard problems like protien folding, or a big virtual CPU that people can send processes to?
- DigitalJack 14y ago
  Because protein folding doesn't validate transactions, and doesn't solve the "Byzantine Generals" problem.
- betterunix 14y ago
  How about not pouring energy into Bitcoin and just doing something more efficient: http://www.links.org/?p=1179 http://www.links.org/?p=1179 (Or maybe the Bitcoin community should just calm down, develop a rigorous definition of the security properties they want, and then develop a system that meets that definition. Right now it is all hand-wavy, vague, and it ignores a known polynomial time attack.)
- kiba 14y ago
  Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity? It's not a huge waste of electricity. It provides security for the bitcoin ecosystem.
  - betterunix 14y ago
    Only as long as nobody comes along with a tiny bit more computing power than the rest of the Bitcoin system and decides to double spend their money. Ultimately, you would need to use half of all computing power in the world for Bitcoin for it to be secure.
    - warfangle 14y ago
      Similar things have happened: look into the history of blockchain forks.
    - 14y ago
PnuklOEvolu 14y ago
Articles like this demonstrate why most people don't get Bitcoin in the 1st place. Let's ignore the factual inaccuracies like bitcoin production bottoming out in 2040 (it's 2140, Justin, and that's a big difference) and focus on how Justin doesn't get it. Bitcoin is in use right now transferring money around the globe. If I buy 100$ worth of bitcoin (0.478 bitcoin at current prices) and immediately use it to purchase anything, it has served its purpose as a value transfer medium. This is regardless of tomorrow or yesterday's price. It is this efficacy that people pay for when they buy bitcoins. Bitcoin was not designed as a storage or investment medium it was designed to facilitate the transfer of value. As long as it performs that function it will continue to defy the misplaced expectations of those who refuse to go to the effort of understanding it.
- SeanDav 14y ago
  Until the time comes, as it almost certainly will, when your bitcoin crashes in dollar value and the "value" you were trying to transfer, becomes severely depleted. Bitcoins have real issues and you ignore them or reject them at your peril. The USD is not going to halve in value overnight - Bitcoins could easily do just that, or worse.
- sks 14y ago
  I agree that Bitcoins were designed as an instrument to facilitate transfer of value and not as store of wealth. But the example of a transaction you just gave in your post is not how people spend currency. No one converts a currency (100$) to another currency (0.478 Bitcoins) for immediate spending in the real world. People generally minimize number of currency conversions (to save transaction costs) and store the currency (wallets or banks) for some time before spending it, and storing volatile currencies carries huge risk. The current price explosion is not good for bitcoin if you look at it as a currency. People who believe this is a bubble will just cash out of bitcoins anticipating a fall and the (apparently) greater number of people thinking the value will rise will just hold on to the coins. The only way this price explosion can be helpful is in providing media exposure to bitcoins and cryto-currencies. Only after we have sustained period of stable prices we can hope of bitcoins becoming a major facilitator of transaction.
Aloisius 14y ago
I really wish these articles would just stay off HN. All they do is bring out the armchair economists and the gold bugs.
gesman 14y ago
It's like building the better "Internet Explorer". Once it becomes de-facto standard - the world will have no choice but to embrace it's global penetration and live and work around it's limitations.
- khuey 14y ago
  Except it's not entering a completely new market. There are around 200 existing currencies, and for bitcoin to become a de-facto standard it would have to succeed where every one of those 200 currencies have failed.
  - jacoblyles 14y ago
    It has one big advantage going for it - it's not controlled by any government. You expect the euro to be manipulated for the benefits of the Europeans, the USD to be manipulated for the benefits of Americans, and the Yuan to be manipulated for the benefits of the Chinese. But who manipulates the bitcoin?
dragontamer 14y ago
Best article on Bitcoin so far.
keltex 14y ago
But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin? What makes bitcoin special other than it's the first one that was created? All other currencies have some sort of backing. Either a government or something physical like Gold that can't be easily duplicated. That seems to me the big difference between bitcoin and other assets.
- kiba 14y ago
  But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin? Absolutely nothing. What makes bitcoin special other than it's the first one that was created? Nothing.
- afoldman 14y ago
  Forking is easy. Maintenance can be extremely hard. Since Satoshi left, Bitcoin has evolved dramatically in terms of security and functionality. Thanks to the core developers and the whole community. Aside from the core Bitcoin system, peripheral infrastructures like exchanges, end-user software clients, and online wallet services, etc., have been and will be created and improved. None of these is easy work. There are many forks of Bitcoin as of now and will probably be more, but it could be hard for all of them to survive in the long run.
qdog 14y ago
Something with quickly fluctuating value may be useful for trading goods, but very poor for paying wages IN OUR CURRENT ECONOMIC MODEL. Borrowing in a deflating currency is very difficult, as your future earnings are likely to decrease in number, not value. The lender has no reason to lend if they can't get more from interest than what they expect from just holding the bitcoins. Some would welcome this model, where there is little or no investment lending, and everything is bought only with readily available funds. YC funding would probably be radically different. Buying a car, a house, or anything else using credit would be extremely difficult, if not impossible for most people. While putting things you don't need on credit cards is only really good for the credit card companies, borrowing to expand your business, reliable transportation to work, or even reasonable housing is the grease in the current world economy. Our economic model is mostly a recent phenomenon, historically, deflation was the norm. I don't think that going backwards is actually going to help anyone except the enormously wealthy, who can easily hold onto the majority of their wealth while it accrues value.
ryusage 14y ago
One thing that I haven't really seen addressed in these discussions is how we're actually measuring the value of bitcoins. The focus is entirely on the USD/BTC exchange rate, but is that really the proper measure of value to use when discussing inflation or deflation? I'm not an economist by any means, so I honestly don't know, but that seems a little wrong somehow. In particular, when we say the USD is worth 10% of what it was 60 years ago, we're not comparing that to any other currency. We're just saying that things that were $1 USD back in the day tend to be $10 USD now. Then when we talk about BTC being deflationary, we talk about 1 BTC a year ago being traded for $200 USD now (or whatever it is). It seems a bit apples to oranges to me. So here's a question: when BTC value in terms of USD spikes, does the price of goods in BTC spike proportionally? If so, maybe that's a reasonable metric of value for now. I haven't bought in to BTC yet, so I don't actually know the answer. But in all these discussions about inflation or deflation and instability in a hypothetical BTC economy, does it really make sense to still talk about the USD/BTC rate?

37 points by Hoff 14y ago

ekianjo 14y ago

I stopped reading when the article cited Gold as one of the roots of the Great Depression. Ha! Yeah, sure.

trevelyan 14y ago
This is a truth accepted by economists of basically all political persuasion at this point. The best book on the subject is Barry Eichengreen's "Golden Fetters", but you can get a faster sense of things by going to NBER (nber.org), searching for "great depression" or "gold standard" and walking through the results.

cs702 14y ago

Quoting from the article: "So ... bitcoins are without intrinsic value as assets, yet they have risen too fast in value to be much use as a currency. Kind of makes your head hurt, doesn't it? But it also sounds a bit like a familiar commodity, gold, that's also been on a roll, with its dollar price quintupling over the past decade. Gold has, over time, not been the greatest of assets to invest in. It's not the greatest of currencies, either: Back when the gold standard was widely adhered to, nations struggled regularly with deflation. There's persuasive evidence that the primary cause of the Great Depression was a refusal to unlink currencies from gold until too late. Still, gold has held onto its purchasing power over time." I agree with the author: bitcoins are very similar to gold ("the people's currency"), except they're digital and their supply is mathematically fixed. So ... how much would a Bitcoin sell for if the world ever comes to value it like gold? Granted, that's a big if, but let's entertain the thought for speculative fun. All gold mined since the start of civilization is currently valued at around $8.8 trillion.[1] Divide this figure by the maximum of 21 million bitcoins that can ever be created, and the figure is over $400,000 per Bitcoin. So the answer is, in the order of a few hundred dollars per milli-Bitcoin. For reference, all bitcoins in existence are currently valued at $0.002 trillion.[2] -- [1] http://en.wikipedia.org/wiki/Gold#Production http://en.wikipedia.org/wiki/Gold#Production [2] http://www.bitcoinwatch.com http://www.bitcoinwatch.com

venomsnake 14y ago
That is a bit misleading. A lot of gold is not on the markets for various reasons -jewelry, hoarders, some electronics. So you should count only liquid gold (hehe) ... the amount that you can actually buy. I think it is much smaller than 8 trillion.
- deleted 14y ago
  [deleted]
- scottmp10 14y ago
  Many bitcoins have been lost permanently or are in cold storage. Only a small percentage are available on exchanges.
dcminter 14y ago
Bitcoins are divisible up to eight decimal places. So there are rather more units than that potentially available to circulate.
- warfangle 14y ago
  Thus, the Satoshi: the smallest denomination in bitcoin, at 0.00000001 bitcoins. To continue with the above speculative fun, one satoshi would be worth .004 dollars. If the M3 money supply were replaced with bitcoins overnight (assuming 21 million bitcoins and an M3 of 10.3 trillion circa 2009), a bitcoin would be worth $490,476.19. One satoshi would be $0.004947619; a big mac would cost 806 satoshi. Which is only about half the the current USD->Yen exchange rate.

rjtavares 14y ago

> According to the Bureau of Labor Statistics, a 2013 dollar has one-tenth the purchasing power of the 1950 version. By contrast, bitcoins have been skyrocketing in value. This sounds like a good thing, but for a currency it's really not. An economy where bitcoins were the means of exchange would have experienced 98% deflation over the past year. No one would be able to repay any loans, or really do business at all. What we want out of a currency is not price appreciation but stability. Monetary economists differ on whether the optimal stability is inflation of 0% or in the low single digits. Nobody thinks 98% deflation is healthy, and all but a small minority seem to think any deflation at all is a bad thing. This needs to be repeated until exhaustion.

venomsnake 14y ago
Krugman has been doing it for 10 years now ... no effect.
- zenocon 14y ago
  That's because he's wrong on so many levels.
jl6 14y ago
It's not yet clear whether Bitcoin is money, or whether it is some strange new hybrid of asset and currency for which conventional wisdom does not apply and for which historical analogies fail.
- jwr 14y ago
  Exactly. I'm also growing tired of people endlessly repeating the 'deflation is bad' mantra. Even if we agree to call what will happen to bitcoin 'deflation', the argument that people will just stop producing and just hold on to their money is bogus. Does it describe you? Because it certainly does not describe me.
  - dragontamer 14y ago
    Are you willing to loan out your bitcoins? Do you believe that you will be able to purchase say... a house or a car using bitcoins? Do you think any financial institution will come out and loan you bitcoins? As a financial instrument, this massive deflation will prevent any form of financing (ie: Credit Cards, Mortgages, Car Loans, etc. etc.) from growing inside of the Bitcoin world.

rheide 14y ago

A much better and less biased article than the 'Bitcon' one. It shows once more that no one really knows what Bitcoin is and what's going to happen to it. If you must compare Bitcoin to gold, consider the current price of gold, imagine that we didn't know it existed until yesterday and then suddenly it appeared. Bitcoin currently fulfills a niche in the same way that gold did in the past (and still does).

tocomment 14y ago

Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity? Perhaps solving hard problems like protien folding, or a big virtual CPU that people can send processes to?

DigitalJack 14y ago
Because protein folding doesn't validate transactions, and doesn't solve the "Byzantine Generals" problem.
betterunix 14y ago
How about not pouring energy into Bitcoin and just doing something more efficient: http://www.links.org/?p=1179 http://www.links.org/?p=1179 (Or maybe the Bitcoin community should just calm down, develop a rigorous definition of the security properties they want, and then develop a system that meets that definition. Right now it is all hand-wavy, vague, and it ignores a known polynomial time attack.)
kiba 14y ago
Speaking of a better bitcoin, why can't the proof of work aspect be something that's useful instead of a huge waste of electricity? It's not a huge waste of electricity. It provides security for the bitcoin ecosystem.
- betterunix 14y ago
  Only as long as nobody comes along with a tiny bit more computing power than the rest of the Bitcoin system and decides to double spend their money. Ultimately, you would need to use half of all computing power in the world for Bitcoin for it to be secure.
  - warfangle 14y ago
    Similar things have happened: look into the history of blockchain forks.
  - 14y ago

PnuklOEvolu 14y ago

Articles like this demonstrate why most people don't get Bitcoin in the 1st place. Let's ignore the factual inaccuracies like bitcoin production bottoming out in 2040 (it's 2140, Justin, and that's a big difference) and focus on how Justin doesn't get it. Bitcoin is in use right now transferring money around the globe. If I buy 100$ worth of bitcoin (0.478 bitcoin at current prices) and immediately use it to purchase anything, it has served its purpose as a value transfer medium. This is regardless of tomorrow or yesterday's price. It is this efficacy that people pay for when they buy bitcoins. Bitcoin was not designed as a storage or investment medium it was designed to facilitate the transfer of value. As long as it performs that function it will continue to defy the misplaced expectations of those who refuse to go to the effort of understanding it.

SeanDav 14y ago
Until the time comes, as it almost certainly will, when your bitcoin crashes in dollar value and the "value" you were trying to transfer, becomes severely depleted. Bitcoins have real issues and you ignore them or reject them at your peril. The USD is not going to halve in value overnight - Bitcoins could easily do just that, or worse.
sks 14y ago
I agree that Bitcoins were designed as an instrument to facilitate transfer of value and not as store of wealth. But the example of a transaction you just gave in your post is not how people spend currency. No one converts a currency (100$) to another currency (0.478 Bitcoins) for immediate spending in the real world. People generally minimize number of currency conversions (to save transaction costs) and store the currency (wallets or banks) for some time before spending it, and storing volatile currencies carries huge risk. The current price explosion is not good for bitcoin if you look at it as a currency. People who believe this is a bubble will just cash out of bitcoins anticipating a fall and the (apparently) greater number of people thinking the value will rise will just hold on to the coins. The only way this price explosion can be helpful is in providing media exposure to bitcoins and cryto-currencies. Only after we have sustained period of stable prices we can hope of bitcoins becoming a major facilitator of transaction.

Aloisius 14y ago

I really wish these articles would just stay off HN. All they do is bring out the armchair economists and the gold bugs.

gesman 14y ago

It's like building the better "Internet Explorer". Once it becomes de-facto standard - the world will have no choice but to embrace it's global penetration and live and work around it's limitations.

khuey 14y ago
Except it's not entering a completely new market. There are around 200 existing currencies, and for bitcoin to become a de-facto standard it would have to succeed where every one of those 200 currencies have failed.
- jacoblyles 14y ago
  It has one big advantage going for it - it's not controlled by any government. You expect the euro to be manipulated for the benefits of the Europeans, the USD to be manipulated for the benefits of Americans, and the Yuan to be manipulated for the benefits of the Chinese. But who manipulates the bitcoin?

dragontamer 14y ago

Best article on Bitcoin so far.

keltex 14y ago

But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin? What makes bitcoin special other than it's the first one that was created? All other currencies have some sort of backing. Either a government or something physical like Gold that can't be easily duplicated. That seems to me the big difference between bitcoin and other assets.

kiba 14y ago
But what stops other people from making their own versions of bitcoin? Why can't somebody else create the AsiaCoin or the Bitcoin II or the OceanCoin? Absolutely nothing. What makes bitcoin special other than it's the first one that was created? Nothing.
afoldman 14y ago
Forking is easy. Maintenance can be extremely hard. Since Satoshi left, Bitcoin has evolved dramatically in terms of security and functionality. Thanks to the core developers and the whole community. Aside from the core Bitcoin system, peripheral infrastructures like exchanges, end-user software clients, and online wallet services, etc., have been and will be created and improved. None of these is easy work. There are many forks of Bitcoin as of now and will probably be more, but it could be hard for all of them to survive in the long run.

qdog 14y ago

Something with quickly fluctuating value may be useful for trading goods, but very poor for paying wages IN OUR CURRENT ECONOMIC MODEL. Borrowing in a deflating currency is very difficult, as your future earnings are likely to decrease in number, not value. The lender has no reason to lend if they can't get more from interest than what they expect from just holding the bitcoins. Some would welcome this model, where there is little or no investment lending, and everything is bought only with readily available funds. YC funding would probably be radically different. Buying a car, a house, or anything else using credit would be extremely difficult, if not impossible for most people. While putting things you don't need on credit cards is only really good for the credit card companies, borrowing to expand your business, reliable transportation to work, or even reasonable housing is the grease in the current world economy. Our economic model is mostly a recent phenomenon, historically, deflation was the norm. I don't think that going backwards is actually going to help anyone except the enormously wealthy, who can easily hold onto the majority of their wealth while it accrues value.

ryusage 14y ago

One thing that I haven't really seen addressed in these discussions is how we're actually measuring the value of bitcoins. The focus is entirely on the USD/BTC exchange rate, but is that really the proper measure of value to use when discussing inflation or deflation? I'm not an economist by any means, so I honestly don't know, but that seems a little wrong somehow. In particular, when we say the USD is worth 10% of what it was 60 years ago, we're not comparing that to any other currency. We're just saying that things that were $1 USD back in the day tend to be $10 USD now. Then when we talk about BTC being deflationary, we talk about 1 BTC a year ago being traded for $200 USD now (or whatever it is). It seems a bit apples to oranges to me. So here's a question: when BTC value in terms of USD spikes, does the price of goods in BTC spike proportionally? If so, maybe that's a reasonable metric of value for now. I haven't bought in to BTC yet, so I don't actually know the answer. But in all these discussions about inflation or deflation and instability in a hypothetical BTC economy, does it really make sense to still talk about the USD/BTC rate?