8 ms·

What Bitcoin Is Teaching Us

29 points by bcl 14y ago

noclique 14y ago
Mr Tucker is truly a treasure. If anyone is not familiar with him or the ideas, check out mises.org
gesman 14y ago
Well said!
prairiedock 14y ago
"it does what currency should do, which is increase in value over time." What utter rubbish. Bitcoin may or may not survive (as a volatile commodity, like gold), but you buy it now at your peril. It is backed by nothing, and generates no earnings. It started at $.10, and to $.10 it might well return.
- nwzpaperman 14y ago
  What is gold, silver or fiat currency backed by? Commodity demand for gold is only about 12%. http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/ http://www.gold.org/investment/why_how_and_where/why_invest/...
  - ChikkaChiChi 14y ago
    gold and silver are historical commodities that still have common uses even today. "Fiat" currency is usually backed by the gold standard until such a point as the reputation of the state has matured to the point where borrowers can trust the state. Bitcoin has neither.
    - dragonwriter 14y ago
      > "Fiat" currency is usually backed by the gold standard until such a point as the reputation of the state has matured to the point where borrowers can trust the state. That's not really true; even immature states with poor reputations rarely have gold-backed currency these days. Some of them have currency backed by (convertible at a fixed exchange rate to) more mature fiat currencies, though.
  - sfjailbird 14y ago
    What is Google public stock backed by? It buys no influence and yields no dividend, and Larry and Sergei have said it will stay that way, yet investors are happy to pay $800 for a symbolic piece (costing 25 times the share of earnings it represents, useless as that is without dividends).
    - dhosek 14y ago
      Which is one reason that I'm not buying stock. Of course even Groupon stock might when the company fails still yield some Aeron chairs and cubicle dividers. There is a something behind any (non-scam) stock. The same cannot be said about Bitcoin. If I had a bitcoin I would sell it as quickly as I could.
    - betterunix 14y ago
      "What is Google public stock backed by?" The equity of Google -- if the company is liquidated, stockholders are entitled to the proceeds after bondholders have been paid. You can read the prospectus if you are curious about what a share of a company's stock actually means.
  - gtt 14y ago
    12% of what? The gold has a limited supply as with bitcoins but it needed by industry. You may not be able sell your gold in 2040 for the same price in us dollars as you bought it today but it will be demand as industry hopefully will continue to exist.
    - nwzpaperman 14y ago
      Annual industrial demand makes up only 12% of the annual gold production-consumption. I provided a source for the stat above.
  - betterunix 14y ago
    "What is gold, silver or fiat currency backed by?" Laws.
    - nwzpaperman 14y ago
      Man's laws are higher than nature's laws? Scarcity has natural authority on its side.
      - betterunix 14y ago
        Scarcity is not sufficient to make something valuable. Something must be both scarce and useful to have value. I would argue that even when gold and silver were used as money, it was because of human laws -- taxes, debt laws, torts, etc. Even wampum's use as currency was connected to authority: tribal laws and religion. Even prison cigarette trade is government by a complex code that involves gangs, guards, etc.
        nwzpaperman 14y ago
        A contraire. There is a long debate over subjective vs. objective value. Your argument falls under the category of an objectivist's arguments. A simple example of subjective theory are two identically optioned vehicles isolated to one difference: Vehicle A: Silver Metallic Clearcoat Vehicle B: Sunny Yellow Clearcoat w/Orange Flames Under an objectivist framework the two must sell at the exact same price because the are intrinsically identical save for the cosmetic difference. The US Government could pass a law making bitcoin legal tender much the same as pieces of paper or the majority of circulating money that is nothing but electronic bits also. See J. orlin grabbe's essays if you prefer to hear about it from someone else.
dkhenry 14y ago
Yes please Ignore the deflationary spiral that its currently undergoing. It amazes me that people are buying into a system which actively discourages people from using it as a way to exchange good and services.
- amalag 14y ago
  i don't think it discourages exchange. After all this bitcoin hoopla i saw bitcoinstore which has significant discounts on items over amazon. The next time I have to buy something, I may use them, but I will not keep any money in bitcoins. If there is a P2P economy that processes payments for 1% of a transaction, that could be a very useful thing assuming I trust the merchant.
- gwern 14y ago
  A deflationary spiral is not a price increase, large or small. It is supposed to be when price increases, large or small, shrinks actual economic activity, causing more price increases, more shrinkage, etc. Has this actually happened? This shouldn't be a hard question to answer if the Bitcoin economy is indeed "currently undergoing" a deflationary spiral.
  - jbooth 14y ago
    It doesn't seem that it's happening or even can happen, because there really isn't much of a bitcoin economy. The speculation on the currency absolutely dwarfs any usage of it as a currency. Nobody on earth uses it for more than 1% of their purchases. So anyone who wants to use it as a justification for some reactionary ron paul economics is really not observing what's going on. Is claiming you made money on gold as an investment really an argument for gold-backed currency?
    - dkhenry 14y ago
      Because of the nature of bit coin its impossible to determine how much of the current activity is actual commerce and how much of it is speculative trading. The truth is the system is set up to encourage deflation and there is nothing to prevent it from happening on a large scale. The huge price increase seen over the last few weeks is not because there is an explosion in commerce using BitCoin. Its because people are viewing BitCoin as a investment vehicle and they are hording it. As to your point about there not being an economy, thats exactly the point their currency is worthless not because people won't give you stuff for it, but because in terms of its ability to foster an exchang3e of goods and services it is actively discouraging you from using it ( why buy something today for 1 BTC when next week it will be 0.5 BTC ) The fixed nature of introducing new currency into the market only exasperates this problem as the hard limit on all bit coins that can ever be mined makes it so eventually even that small control over deflation will be non existent and increase the deflation.
johnyzee 14y ago
This article is quite opinionated, but one thing I liked: This brings us to another lesson that Bitcoin has taught us. Money is like any other good in society in that it can be produced and managed entirely by the free market. This is the reverse of what scholarly opinion has said for more than 100 years.
- betterunix 14y ago
  Bitcoin has not taught us that money can be produced and managed by "the free market." Bitcoin would be worthless if it could not be exchanged for fiat currencies, and there is no reason to think that will ever change.
  - gyom 14y ago
    They're not worthless if you can purchase real stuff with it instead of converting back into fiat currencies. The same can be said of every fiat currency : they're useless unless you can get real stuff (or services) for it at the end of the day.
    - betterunix 14y ago
      Except that fiat currencies are useful for paying your taxes, which is how governments back them. Tax laws, debt laws, torts, fees, and all of the other ways governments collect money from their citizens are what give fiat currencies utility. Even if a business only dealt in Bitcoin money it would still need to exchange at least some of its earnings for fiat currency if it had any intention of following the law. That is why Bitcoin exchanges matter: even if a business did transactions with both Bitcoin and fiat currency, there would be times when that business did not have enough fiat currency and would have to exchange its Bitcoin money to survive. There is a reason that everyone talks about the value of Bitcoin relative to other currencies, and it is that people must use other currencies to conduct some of their business. On the other hand, fiat currencies do not require foreign exchange to be valuable. It was very difficult to convert the Soviet Ruble to foreign currencies, but in the USSR the Soviet Ruble was money and had value.
- 14y ago
dsjoerg 14y ago
I wonder what Tucker will say Bitcoin is teaching us if it falls to $40. Bitcoin is very interesting and agree with Ezra Klein's piece on it. However, the importance of Bitcoin is not in its exchange rate to other currencies, but in all its other unique properties. Tucker puts far too much weight on what is quite likely a speculative bubble, which will be to the ultimate detriment of Bitcoin's long-term future.
Aqueous 14y ago
Yes, let's go back to the glory days of the deflationary late-19th century. The reason the Keynesians like currency that slowly decreases in value is because it brought about the longest sustained period of economic growth in human history, without which we would not even have Bitcoin to celebrate right now (the widely adopted technology that makes it possible to implement being a result of aforementioned growth.) If everyone hoards, and never spends, then the economy stalls and then recedes. What's good for us as individuals is terrible for us as a whole. That said, I think BitCoin is very interesting, and if some sort of shorting is introduced to cause a downward pressure on prices then the price could very well stabilize. A stable, slightly deflationary currency is just about as good as a stable, slightly inflationary currency.
- api 14y ago
  It remains to be seen how this will end. There are a lot of very smart people who believe very strongly that this "longest sustained period of economic growth in human history" is absolutely unsustainable in a very, very dangerous way. It is built upon the runaway exponential exploitation of fossil fuel energy, and on economic systems that require constant exponential growth to sustain themselves. A crash of this system could be catastrophic-- as in millions or even billions of lives lost and a new dark age. Without Keynesian economics, growth might have been much slower... perhaps slow enough for its underpinnings such as energy technology to keep pace. It's also possible that without Keynesian economics there would have been less waste-- less "empty calories." Keynes argued that even seemingly pointless economic activity could be good in that it employed people and permitted debts to be repaid, but the problem is that all this busy-work is powered by unsustainable fuels. So in reality it's drawing down on a massive ecological line of credit that took hundreds of millions of years to accumulate. China is presently running the largest experiment in Keynesianism in human history. Here are some of its results so far: http://en.wikipedia.org/wiki/Asian_brown_cloud http://en.wikipedia.org/wiki/Asian_brown_cloud http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12?op=1 http://www.businessinsider.com/pictures-chinese-ghost-cities... http://www.geni.org/globalenergy/library/technical-articles/generation/climate-change/greenpeace/china-coal-cost-$248B-in-hidden-expenses-in-07/CH_coal_conc_large.png http://www.geni.org/globalenergy/library/technical-articles/... So basically they are incinerating a century's worth of coal to build things nobody wants. This is also very, very relevant: http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ An intelligent species would use its fossil fuel reserves wisely to construct renewable energy or develop sustainable ways of using nuclear power. The Keynesian orgy of "growth" has biased us toward spending these reserves foolishly. "But these predictions have always been wrong!" In any iterated debate between an economist and a physicist, the economist will win N-1 times and the physicist will win 1 time. I have a strong suspicion that the Keynesian miracle is simply an unimaginably huge bubble founded -- like many financial bubbles -- on a novel "creative" accounting technique that temporarily hides underlying physical realities. If I'm right, its collapse could be ugly... like canned food and shotguns ugly. Of course there's a lot of good news in renewable energy these days. My optimistic hope is that we'll avoid the full-blown energy trap "Olduvai theory" scenario. The collapse of the Keynesian exponential growth bubble will still occur since eternal exponential growth is physically impossible (and physics always wins), but the collapse of industrial civilization may not. Edit: One other point. Its true that the goldbugs and "pop Austrians" have been repeatedly wrong about hyperinflation. I think that's because many of them don't understand the present-day credit-based economy. The vast, vast majority of dollars in circulation are M2 and M3 (credit), not M1. I personally think the bursting of the Keynesian bubble could result not in hyperinflation but in a chaotic series of inflations and deflations. Depending on policy responses, a hyper-deflationary collapse is one possible failure mode. Credit dries up and boom... the dollar hyper-deflates and wave after wave of mass defaults destroys the financial sector. Or you could have that followed by panicky money printing resulting in weird localized hyperinflations, short-lived explosive bubbles, etc. Various economic graphs such as stocks, bonds, exchange rates, etc. could start looking like random noise. I also have other issues with Austrian economics, so I don't consider myself a follower of that camp. But I do-- as I wrote above-- have serious problems with the fantasy physics underlying Keynesian economic practices.
crabasa 14y ago
It seems that the author thinks Bitcoin is going to steadily appreciate indefinitely, which is obviously not the case. Give a kid a BC at $140 and you'll have a furious kid when it crashes to $15. Somewhat off-topic: isn't BC just digital gold? Is there any reason to think of it any differently?
- Spooky23 14y ago
  The difference is that gold is a tangible, immutable substance that doesn't decay much. It doesn't go anywhere. I bought a bunch of bitcoin early, and sold it for a handy profit at $10. The ones I kept aside (about 20) were lost on a PC whose hard disk crashed. My understanding is that these coins are forever lost.
  - cdh 14y ago
    You may have lost bitcoins, but you did so before you knew they'd be worth hundreds of dollars. I'd expect that in the future, people will be much more careful to backup (or print out) their private keys. In any case, the ones you lost just increased the value of all the other bitcoins still in use. Since each unit is theoretically divisible into infinitely smaller units at some point in the future, people will just trade smaller amounts for larger values. That's a feature, not a bug! A lot of people are claiming that deflation is a death sentence for a currency like this. Something they overlook is that new coins will continue to be created for many years still, and that all it takes is a new version of the protocol to 'fix' any fatal flaws in the current system. If the majority of users have a financial interest in defending the value of their coins, it seems logical to me that they are likely to act rationally to achieve that if a threat were to emerge. But then, who knows.
- maxerickson 14y ago
  I think there is a rough analogy with gold, but I would think of gold as an established value instrument and bitcoin as an unestablished one. For instance, ~$690 million of trading has crossed a single gold trading instrument since this morning: http://finance.yahoo.com/q/bc?s=GLD http://finance.yahoo.com/q/bc?s=GLD I don't have an argument that bitcoin could not handle that sort of volume, but I don't think it is particularly controversial to say that it has not proven itself to be a stable store of value.
tomku 14y ago
Bitcoin seems to be teaching people exactly what they wanted to believe in the first place, what a coincidence!
- billiam 14y ago
  This is the only comment that matters here. FWIW, at my SW company which is filled with brilliant people I spend most of my day patiently explaining that monetary systems are always about power, not technological innovation, and Bitcoin will demonstrate that brutally, sooner or later. I think debates like this mostly illustrate how shockingly poorly engineers are educated in subjects like history and basic economics.
  - tomku 14y ago
    Engineers have a tendency to view everything as an engineering problem, when most of the "really hard" problems are about people, interactions and relationships. When all you have is a hammer, everything looks like a nail - and we have an entire culture of hammer designers churning out the most effective hammers in history.
  - 13b9f227ecf0 14y ago
    If bitcoin plays out like the enthusiasts envision, then some laws get passed and people get thrown in jail and there's your kibosh. This should be obvious but the enthusiasts will still be surprised.
zeteo 14y ago
Bitcoin has already taught us that even smart people are not immune to drinking the Kool-Aid. The tech community is quickly separating into two camps that are becoming unintelligible to each other. For some, this article is an amazing piece full of profound insights that justify their decision to buy Bitcoins. For others, it piles weak arguments on top of an assumption that the recent rise in Bitcoin value will continue forever.
- wamatt 14y ago
  Two issues: 1)Having insights and owning bitcoins can be mutually independent variables. In other words, it's entirely possibly you have it completely backward, and that upon arriving at a lengthy deliberation, some rational actors, are therefore choosing to take a position. 2) >"that the recent rise in Bitcoin value will continue forever." That's a pretty decent sized strawman you've rustled up. Most people in that camp are not arguing that bitcoin will rise forever. The discussion is about the shape of the graph. I believe both an s-curve (slow adoption, exponential growth, maturity) and [perhaps multiple] sawtooth (crash scenario) are plausible.
  - jbooth 14y ago
    It seems to me, with a finite supply and limited usage, it has to either keep increasing forever or crash, right? Finite supply and an uptake in usage as an actual currency (aka something different than what 90% of the players seem to be doing) would mean an increase in demand causing prices to continue to rise with adoption (which could spell some problems with adoption, but not necessarily insurmountable ones). Meanwhile, if adoption as an actual currency never takes off, then eventually the whole thing's gotta fall over, right? So it's either continual price rises or a big crash? What are the other scenarios? All of this talk about the nature of currencies when it's clear that 90% of the activity is treating it as a speculative asset seems silly to me. Either it transitions to a currency (which is more about usage than price), or it doesn't and eventually crashes.
melvinmt 14y ago
The author mistakenly attributes the deflating aspects of a controlled limited supply of Bitcoins (by design) as the cause of the recent surge in valuation while it's really just speculation at this point. Even worse, he's urging everyone to hoard their bitcoins and not spend them because he believes t1 will always be higher than t0. When you undermine the only true value of a currency (which is trading) you might as well place your bets in a Las Vegas casino and get some free drinks while you're at it because the thin line between speculating and gambling has been crossed at this point.
willholloway 14y ago
I find the Ron Paul/Austrian school camp's complaints that central banking causes bubbles hilarious because their most notable achievements so far have been the creation of two asset bubbles. Since 2008 they have been claiming that monetary policy will usher in hyper inflation and they created a gold/silver asset price bubble. Now the same ideology is being used to create a bitcoin bubble. Even more hilarious is their assertion that a crypto-currency like bitcoin is scarce and limited in supply. Clone the bitcoin github repo, find and replace bitcoin with HollowayCoin, edit a couple lines of code to create a new genesis block and boom I just made my own crypto currency with all the benefits of bitcoin. New crypto coins will become important because the block chain won't scale, and new block chains will need to be created. These alt coins are already being traded for btc on a couple exchanges. These crypto-currencies serve a purpose, but there is no need for them to trade at $230 per coin.
- Spooky23 14y ago
  Even funnier is claiming that the gold/silver standards resulted in more stable financial systems. Inflation, deflation, and starvation of capital were huge problems before we switched to debt-based currencies. They also equate "no central banking" with commodity-based currency. The United State's 19th century experiments with disbanding central banking wasn't exactly an economic revolution.
  - 3pt14159 14y ago
    The point is not that gold and silve were stable, but that they have been more stable and have kept more value than fiat/debt-based currencies.
    - dragonwriter 14y ago
      > The point is not that gold and silver were stable, but that they have been more stable and have kept more value than fiat/debt-based currencies. Which is exactly half true. They have been less stable (more volatile) than major fiat currencies, but kept more value over the long term. "Less stable" makes them worse as currency. "Kept more value" makes them potentially better as long term investments.
easy_rider 14y ago
i just wished i'd hit the buy button when they were $20. I didn't believe in them then, I don't believe in them now, but I sure as hell believe I would have cashed in some nice short term earnings from the bubble :)
deleted 14y ago
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ChikkaChiChi 14y ago
Bitcoin is, at most, a payment service similar to Paypal. It is not a true currency nor will it ever be one. All anyone cares about is how it relates to the USD. All government backed currencies at least start on the gold standard. After sufficient time and economic development, some countries (like the US) can move off the gold standard and lend and borrow on reputation alone. Bitcoin was started by people who do not appear to exist, the "money" was printed by a select group of early adopters who still control vast portions of its economy, and with nobody to regulate or monitor the exchanges, the recent inflation can all be some part of manipulative collusion. WoW Gold and Team Fortress 2 Apple Earbuds seem to have a more stable and trustworthy currency than Bitcoin. Yes, I wish I could predict the spike and have cashed out, but I'm not losing sleep over avoiding an investment that doesn't feel right in the least.
aidenn0 14y ago
Inflation is a tax on held currency. You may think a tax on wealth is good or bad, but from a policy position I don't see a compelling reason to argue about it in any other terms. This means that inflation encourages people to hold their wealth in assets other than currency. Considering that wealth aggregates at the top, the effect of inflation is greatest on the wealthiest. This also means that if you have $100 worth of assets held in a currency that is expected to depreciate and $100 worth of assets in a currency that is expected to appreciate, then you will spend the former rather than the latter. Hence the argument that deflationary currencies are worse than inflationary currencies as a unit of exchange.
skastel 14y ago
Is anyone else as annoyed at the moralizing tone of this article? "With paper money, governments and central banks are in a position to punish holding money. Because it can be created without limit, discipline vanishes. Individuals, families, businesses, and government can ramp up spending without limit and avoid the consequences of their behavior." Punishing the "sinners" for not keeping their currency and spending it in order to support the economy as a whole seems to be a primary goal of those that want commodity currency. "You can try this experiment at home. Let’s say you have a problem teenager who lives like everyone else, throwing around cash and seeing no point whatsoever in saving money. Send that kid a Bitcoin and see what happens, even without hectoring instructions." Yes, give them a Bitcoin and they'll be saved, praise our lord and savior Bitcoin! Unless that teenager wants a skateboard today, not two skateboards in 2 months. Maybe they want to buy a meal b/c they are hungry? Finally don't reference the Gilded Age as a model of good monetary policy, two major depressions and a thin veneer of success for a wealthy minority shouldn't be the zenith of monetary policy.
not_that_noob 14y ago
Ridiculous. Bitcoin - as cool as it is and as much as I admire the cleverness of the system - is a FAILED currency. What it MIGHT turn out to be is a store of value once the speculation cools - but that is still a few years away. If a currency encourages saving and discourages spending, it brings the economy to a screeching halt. This is why Bitcoin fails as a currency. It is also the reason why it will never be accepted commonly as a currency. However, because the supply will be (artificially) limited in time as all Bitcoins are mined, there is a case to be made that it might emerge like gold as a decentralized store of value. It's anonymous and infinitely portable. So time will tell.
shousper 14y ago
What happens when we don't need to exchange BTC for another currency anymore? Or will BTC be forever inherently dependant on the existence of a government controlled currency? How would we price things in BTC like groceries or salaries? Would that be always changing because the value of BTC would be forever going up? I'm probably talking beyond our lifetime here..

29 points by bcl 14y ago

noclique 14y ago

Mr Tucker is truly a treasure. If anyone is not familiar with him or the ideas, check out mises.org

gesman 14y ago

Well said!

prairiedock 14y ago

"it does what currency should do, which is increase in value over time." What utter rubbish. Bitcoin may or may not survive (as a volatile commodity, like gold), but you buy it now at your peril. It is backed by nothing, and generates no earnings. It started at $.10, and to $.10 it might well return.

nwzpaperman 14y ago
What is gold, silver or fiat currency backed by? Commodity demand for gold is only about 12%. http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/ http://www.gold.org/investment/why_how_and_where/why_invest/...
- ChikkaChiChi 14y ago
  gold and silver are historical commodities that still have common uses even today. "Fiat" currency is usually backed by the gold standard until such a point as the reputation of the state has matured to the point where borrowers can trust the state. Bitcoin has neither.
  - dragonwriter 14y ago
    > "Fiat" currency is usually backed by the gold standard until such a point as the reputation of the state has matured to the point where borrowers can trust the state. That's not really true; even immature states with poor reputations rarely have gold-backed currency these days. Some of them have currency backed by (convertible at a fixed exchange rate to) more mature fiat currencies, though.
- sfjailbird 14y ago
  What is Google public stock backed by? It buys no influence and yields no dividend, and Larry and Sergei have said it will stay that way, yet investors are happy to pay $800 for a symbolic piece (costing 25 times the share of earnings it represents, useless as that is without dividends).
  - dhosek 14y ago
    Which is one reason that I'm not buying stock. Of course even Groupon stock might when the company fails still yield some Aeron chairs and cubicle dividers. There is a something behind any (non-scam) stock. The same cannot be said about Bitcoin. If I had a bitcoin I would sell it as quickly as I could.
  - betterunix 14y ago
    "What is Google public stock backed by?" The equity of Google -- if the company is liquidated, stockholders are entitled to the proceeds after bondholders have been paid. You can read the prospectus if you are curious about what a share of a company's stock actually means.
- gtt 14y ago
  12% of what? The gold has a limited supply as with bitcoins but it needed by industry. You may not be able sell your gold in 2040 for the same price in us dollars as you bought it today but it will be demand as industry hopefully will continue to exist.
  - nwzpaperman 14y ago
    Annual industrial demand makes up only 12% of the annual gold production-consumption. I provided a source for the stat above.
- betterunix 14y ago
  "What is gold, silver or fiat currency backed by?" Laws.
  - nwzpaperman 14y ago
    Man's laws are higher than nature's laws? Scarcity has natural authority on its side.
    - betterunix 14y ago
      Scarcity is not sufficient to make something valuable. Something must be both scarce and useful to have value. I would argue that even when gold and silver were used as money, it was because of human laws -- taxes, debt laws, torts, etc. Even wampum's use as currency was connected to authority: tribal laws and religion. Even prison cigarette trade is government by a complex code that involves gangs, guards, etc.
      - nwzpaperman 14y ago
        A contraire. There is a long debate over subjective vs. objective value. Your argument falls under the category of an objectivist's arguments. A simple example of subjective theory are two identically optioned vehicles isolated to one difference: Vehicle A: Silver Metallic Clearcoat Vehicle B: Sunny Yellow Clearcoat w/Orange Flames Under an objectivist framework the two must sell at the exact same price because the are intrinsically identical save for the cosmetic difference. The US Government could pass a law making bitcoin legal tender much the same as pieces of paper or the majority of circulating money that is nothing but electronic bits also. See J. orlin grabbe's essays if you prefer to hear about it from someone else.

dkhenry 14y ago

Yes please Ignore the deflationary spiral that its currently undergoing. It amazes me that people are buying into a system which actively discourages people from using it as a way to exchange good and services.

amalag 14y ago
i don't think it discourages exchange. After all this bitcoin hoopla i saw bitcoinstore which has significant discounts on items over amazon. The next time I have to buy something, I may use them, but I will not keep any money in bitcoins. If there is a P2P economy that processes payments for 1% of a transaction, that could be a very useful thing assuming I trust the merchant.
gwern 14y ago
A deflationary spiral is not a price increase, large or small. It is supposed to be when price increases, large or small, shrinks actual economic activity, causing more price increases, more shrinkage, etc. Has this actually happened? This shouldn't be a hard question to answer if the Bitcoin economy is indeed "currently undergoing" a deflationary spiral.
- jbooth 14y ago
  It doesn't seem that it's happening or even can happen, because there really isn't much of a bitcoin economy. The speculation on the currency absolutely dwarfs any usage of it as a currency. Nobody on earth uses it for more than 1% of their purchases. So anyone who wants to use it as a justification for some reactionary ron paul economics is really not observing what's going on. Is claiming you made money on gold as an investment really an argument for gold-backed currency?
  - dkhenry 14y ago
    Because of the nature of bit coin its impossible to determine how much of the current activity is actual commerce and how much of it is speculative trading. The truth is the system is set up to encourage deflation and there is nothing to prevent it from happening on a large scale. The huge price increase seen over the last few weeks is not because there is an explosion in commerce using BitCoin. Its because people are viewing BitCoin as a investment vehicle and they are hording it. As to your point about there not being an economy, thats exactly the point their currency is worthless not because people won't give you stuff for it, but because in terms of its ability to foster an exchang3e of goods and services it is actively discouraging you from using it ( why buy something today for 1 BTC when next week it will be 0.5 BTC ) The fixed nature of introducing new currency into the market only exasperates this problem as the hard limit on all bit coins that can ever be mined makes it so eventually even that small control over deflation will be non existent and increase the deflation.

johnyzee 14y ago

This article is quite opinionated, but one thing I liked: This brings us to another lesson that Bitcoin has taught us. Money is like any other good in society in that it can be produced and managed entirely by the free market. This is the reverse of what scholarly opinion has said for more than 100 years.

betterunix 14y ago
Bitcoin has not taught us that money can be produced and managed by "the free market." Bitcoin would be worthless if it could not be exchanged for fiat currencies, and there is no reason to think that will ever change.
- gyom 14y ago
  They're not worthless if you can purchase real stuff with it instead of converting back into fiat currencies. The same can be said of every fiat currency : they're useless unless you can get real stuff (or services) for it at the end of the day.
  - betterunix 14y ago
    Except that fiat currencies are useful for paying your taxes, which is how governments back them. Tax laws, debt laws, torts, fees, and all of the other ways governments collect money from their citizens are what give fiat currencies utility. Even if a business only dealt in Bitcoin money it would still need to exchange at least some of its earnings for fiat currency if it had any intention of following the law. That is why Bitcoin exchanges matter: even if a business did transactions with both Bitcoin and fiat currency, there would be times when that business did not have enough fiat currency and would have to exchange its Bitcoin money to survive. There is a reason that everyone talks about the value of Bitcoin relative to other currencies, and it is that people must use other currencies to conduct some of their business. On the other hand, fiat currencies do not require foreign exchange to be valuable. It was very difficult to convert the Soviet Ruble to foreign currencies, but in the USSR the Soviet Ruble was money and had value.
14y ago

dsjoerg 14y ago

I wonder what Tucker will say Bitcoin is teaching us if it falls to $40. Bitcoin is very interesting and agree with Ezra Klein's piece on it. However, the importance of Bitcoin is not in its exchange rate to other currencies, but in all its other unique properties. Tucker puts far too much weight on what is quite likely a speculative bubble, which will be to the ultimate detriment of Bitcoin's long-term future.

Aqueous 14y ago

Yes, let's go back to the glory days of the deflationary late-19th century. The reason the Keynesians like currency that slowly decreases in value is because it brought about the longest sustained period of economic growth in human history, without which we would not even have Bitcoin to celebrate right now (the widely adopted technology that makes it possible to implement being a result of aforementioned growth.) If everyone hoards, and never spends, then the economy stalls and then recedes. What's good for us as individuals is terrible for us as a whole. That said, I think BitCoin is very interesting, and if some sort of shorting is introduced to cause a downward pressure on prices then the price could very well stabilize. A stable, slightly deflationary currency is just about as good as a stable, slightly inflationary currency.

api 14y ago
It remains to be seen how this will end. There are a lot of very smart people who believe very strongly that this "longest sustained period of economic growth in human history" is absolutely unsustainable in a very, very dangerous way. It is built upon the runaway exponential exploitation of fossil fuel energy, and on economic systems that require constant exponential growth to sustain themselves. A crash of this system could be catastrophic-- as in millions or even billions of lives lost and a new dark age. Without Keynesian economics, growth might have been much slower... perhaps slow enough for its underpinnings such as energy technology to keep pace. It's also possible that without Keynesian economics there would have been less waste-- less "empty calories." Keynes argued that even seemingly pointless economic activity could be good in that it employed people and permitted debts to be repaid, but the problem is that all this busy-work is powered by unsustainable fuels. So in reality it's drawing down on a massive ecological line of credit that took hundreds of millions of years to accumulate. China is presently running the largest experiment in Keynesianism in human history. Here are some of its results so far: http://en.wikipedia.org/wiki/Asian_brown_cloud http://en.wikipedia.org/wiki/Asian_brown_cloud http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12?op=1 http://www.businessinsider.com/pictures-chinese-ghost-cities... http://www.geni.org/globalenergy/library/technical-articles/generation/climate-change/greenpeace/china-coal-cost-$248B-in-hidden-expenses-in-07/CH_coal_conc_large.png http://www.geni.org/globalenergy/library/technical-articles/... So basically they are incinerating a century's worth of coal to build things nobody wants. This is also very, very relevant: http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/ An intelligent species would use its fossil fuel reserves wisely to construct renewable energy or develop sustainable ways of using nuclear power. The Keynesian orgy of "growth" has biased us toward spending these reserves foolishly. "But these predictions have always been wrong!" In any iterated debate between an economist and a physicist, the economist will win N-1 times and the physicist will win 1 time. I have a strong suspicion that the Keynesian miracle is simply an unimaginably huge bubble founded -- like many financial bubbles -- on a novel "creative" accounting technique that temporarily hides underlying physical realities. If I'm right, its collapse could be ugly... like canned food and shotguns ugly. Of course there's a lot of good news in renewable energy these days. My optimistic hope is that we'll avoid the full-blown energy trap "Olduvai theory" scenario. The collapse of the Keynesian exponential growth bubble will still occur since eternal exponential growth is physically impossible (and physics always wins), but the collapse of industrial civilization may not. Edit: One other point. Its true that the goldbugs and "pop Austrians" have been repeatedly wrong about hyperinflation. I think that's because many of them don't understand the present-day credit-based economy. The vast, vast majority of dollars in circulation are M2 and M3 (credit), not M1. I personally think the bursting of the Keynesian bubble could result not in hyperinflation but in a chaotic series of inflations and deflations. Depending on policy responses, a hyper-deflationary collapse is one possible failure mode. Credit dries up and boom... the dollar hyper-deflates and wave after wave of mass defaults destroys the financial sector. Or you could have that followed by panicky money printing resulting in weird localized hyperinflations, short-lived explosive bubbles, etc. Various economic graphs such as stocks, bonds, exchange rates, etc. could start looking like random noise. I also have other issues with Austrian economics, so I don't consider myself a follower of that camp. But I do-- as I wrote above-- have serious problems with the fantasy physics underlying Keynesian economic practices.

crabasa 14y ago

It seems that the author thinks Bitcoin is going to steadily appreciate indefinitely, which is obviously not the case. Give a kid a BC at $140 and you'll have a furious kid when it crashes to $15. Somewhat off-topic: isn't BC just digital gold? Is there any reason to think of it any differently?

Spooky23 14y ago
The difference is that gold is a tangible, immutable substance that doesn't decay much. It doesn't go anywhere. I bought a bunch of bitcoin early, and sold it for a handy profit at $10. The ones I kept aside (about 20) were lost on a PC whose hard disk crashed. My understanding is that these coins are forever lost.
- cdh 14y ago
  You may have lost bitcoins, but you did so before you knew they'd be worth hundreds of dollars. I'd expect that in the future, people will be much more careful to backup (or print out) their private keys. In any case, the ones you lost just increased the value of all the other bitcoins still in use. Since each unit is theoretically divisible into infinitely smaller units at some point in the future, people will just trade smaller amounts for larger values. That's a feature, not a bug! A lot of people are claiming that deflation is a death sentence for a currency like this. Something they overlook is that new coins will continue to be created for many years still, and that all it takes is a new version of the protocol to 'fix' any fatal flaws in the current system. If the majority of users have a financial interest in defending the value of their coins, it seems logical to me that they are likely to act rationally to achieve that if a threat were to emerge. But then, who knows.
maxerickson 14y ago
I think there is a rough analogy with gold, but I would think of gold as an established value instrument and bitcoin as an unestablished one. For instance, ~$690 million of trading has crossed a single gold trading instrument since this morning: http://finance.yahoo.com/q/bc?s=GLD http://finance.yahoo.com/q/bc?s=GLD I don't have an argument that bitcoin could not handle that sort of volume, but I don't think it is particularly controversial to say that it has not proven itself to be a stable store of value.

tomku 14y ago

Bitcoin seems to be teaching people exactly what they wanted to believe in the first place, what a coincidence!

billiam 14y ago
This is the only comment that matters here. FWIW, at my SW company which is filled with brilliant people I spend most of my day patiently explaining that monetary systems are always about power, not technological innovation, and Bitcoin will demonstrate that brutally, sooner or later. I think debates like this mostly illustrate how shockingly poorly engineers are educated in subjects like history and basic economics.
- tomku 14y ago
  Engineers have a tendency to view everything as an engineering problem, when most of the "really hard" problems are about people, interactions and relationships. When all you have is a hammer, everything looks like a nail - and we have an entire culture of hammer designers churning out the most effective hammers in history.
- 13b9f227ecf0 14y ago
  If bitcoin plays out like the enthusiasts envision, then some laws get passed and people get thrown in jail and there's your kibosh. This should be obvious but the enthusiasts will still be surprised.

zeteo 14y ago

Bitcoin has already taught us that even smart people are not immune to drinking the Kool-Aid. The tech community is quickly separating into two camps that are becoming unintelligible to each other. For some, this article is an amazing piece full of profound insights that justify their decision to buy Bitcoins. For others, it piles weak arguments on top of an assumption that the recent rise in Bitcoin value will continue forever.

wamatt 14y ago
Two issues: 1)Having insights and owning bitcoins can be mutually independent variables. In other words, it's entirely possibly you have it completely backward, and that upon arriving at a lengthy deliberation, some rational actors, are therefore choosing to take a position. 2) >"that the recent rise in Bitcoin value will continue forever." That's a pretty decent sized strawman you've rustled up. Most people in that camp are not arguing that bitcoin will rise forever. The discussion is about the shape of the graph. I believe both an s-curve (slow adoption, exponential growth, maturity) and [perhaps multiple] sawtooth (crash scenario) are plausible.
- jbooth 14y ago
  It seems to me, with a finite supply and limited usage, it has to either keep increasing forever or crash, right? Finite supply and an uptake in usage as an actual currency (aka something different than what 90% of the players seem to be doing) would mean an increase in demand causing prices to continue to rise with adoption (which could spell some problems with adoption, but not necessarily insurmountable ones). Meanwhile, if adoption as an actual currency never takes off, then eventually the whole thing's gotta fall over, right? So it's either continual price rises or a big crash? What are the other scenarios? All of this talk about the nature of currencies when it's clear that 90% of the activity is treating it as a speculative asset seems silly to me. Either it transitions to a currency (which is more about usage than price), or it doesn't and eventually crashes.

melvinmt 14y ago

The author mistakenly attributes the deflating aspects of a controlled limited supply of Bitcoins (by design) as the cause of the recent surge in valuation while it's really just speculation at this point. Even worse, he's urging everyone to hoard their bitcoins and not spend them because he believes t1 will always be higher than t0. When you undermine the only true value of a currency (which is trading) you might as well place your bets in a Las Vegas casino and get some free drinks while you're at it because the thin line between speculating and gambling has been crossed at this point.

willholloway 14y ago

I find the Ron Paul/Austrian school camp's complaints that central banking causes bubbles hilarious because their most notable achievements so far have been the creation of two asset bubbles. Since 2008 they have been claiming that monetary policy will usher in hyper inflation and they created a gold/silver asset price bubble. Now the same ideology is being used to create a bitcoin bubble. Even more hilarious is their assertion that a crypto-currency like bitcoin is scarce and limited in supply. Clone the bitcoin github repo, find and replace bitcoin with HollowayCoin, edit a couple lines of code to create a new genesis block and boom I just made my own crypto currency with all the benefits of bitcoin. New crypto coins will become important because the block chain won't scale, and new block chains will need to be created. These alt coins are already being traded for btc on a couple exchanges. These crypto-currencies serve a purpose, but there is no need for them to trade at $230 per coin.

Spooky23 14y ago
Even funnier is claiming that the gold/silver standards resulted in more stable financial systems. Inflation, deflation, and starvation of capital were huge problems before we switched to debt-based currencies. They also equate "no central banking" with commodity-based currency. The United State's 19th century experiments with disbanding central banking wasn't exactly an economic revolution.
- 3pt14159 14y ago
  The point is not that gold and silve were stable, but that they have been more stable and have kept more value than fiat/debt-based currencies.
  - dragonwriter 14y ago
    > The point is not that gold and silver were stable, but that they have been more stable and have kept more value than fiat/debt-based currencies. Which is exactly half true. They have been less stable (more volatile) than major fiat currencies, but kept more value over the long term. "Less stable" makes them worse as currency. "Kept more value" makes them potentially better as long term investments.

easy_rider 14y ago

i just wished i'd hit the buy button when they were $20. I didn't believe in them then, I don't believe in them now, but I sure as hell believe I would have cashed in some nice short term earnings from the bubble :)

deleted 14y ago

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ChikkaChiChi 14y ago

Bitcoin is, at most, a payment service similar to Paypal. It is not a true currency nor will it ever be one. All anyone cares about is how it relates to the USD. All government backed currencies at least start on the gold standard. After sufficient time and economic development, some countries (like the US) can move off the gold standard and lend and borrow on reputation alone. Bitcoin was started by people who do not appear to exist, the "money" was printed by a select group of early adopters who still control vast portions of its economy, and with nobody to regulate or monitor the exchanges, the recent inflation can all be some part of manipulative collusion. WoW Gold and Team Fortress 2 Apple Earbuds seem to have a more stable and trustworthy currency than Bitcoin. Yes, I wish I could predict the spike and have cashed out, but I'm not losing sleep over avoiding an investment that doesn't feel right in the least.

aidenn0 14y ago

Inflation is a tax on held currency. You may think a tax on wealth is good or bad, but from a policy position I don't see a compelling reason to argue about it in any other terms. This means that inflation encourages people to hold their wealth in assets other than currency. Considering that wealth aggregates at the top, the effect of inflation is greatest on the wealthiest. This also means that if you have $100 worth of assets held in a currency that is expected to depreciate and $100 worth of assets in a currency that is expected to appreciate, then you will spend the former rather than the latter. Hence the argument that deflationary currencies are worse than inflationary currencies as a unit of exchange.

skastel 14y ago

Is anyone else as annoyed at the moralizing tone of this article? "With paper money, governments and central banks are in a position to punish holding money. Because it can be created without limit, discipline vanishes. Individuals, families, businesses, and government can ramp up spending without limit and avoid the consequences of their behavior." Punishing the "sinners" for not keeping their currency and spending it in order to support the economy as a whole seems to be a primary goal of those that want commodity currency. "You can try this experiment at home. Let’s say you have a problem teenager who lives like everyone else, throwing around cash and seeing no point whatsoever in saving money. Send that kid a Bitcoin and see what happens, even without hectoring instructions." Yes, give them a Bitcoin and they'll be saved, praise our lord and savior Bitcoin! Unless that teenager wants a skateboard today, not two skateboards in 2 months. Maybe they want to buy a meal b/c they are hungry? Finally don't reference the Gilded Age as a model of good monetary policy, two major depressions and a thin veneer of success for a wealthy minority shouldn't be the zenith of monetary policy.

not_that_noob 14y ago

Ridiculous. Bitcoin - as cool as it is and as much as I admire the cleverness of the system - is a FAILED currency. What it MIGHT turn out to be is a store of value once the speculation cools - but that is still a few years away. If a currency encourages saving and discourages spending, it brings the economy to a screeching halt. This is why Bitcoin fails as a currency. It is also the reason why it will never be accepted commonly as a currency. However, because the supply will be (artificially) limited in time as all Bitcoins are mined, there is a case to be made that it might emerge like gold as a decentralized store of value. It's anonymous and infinitely portable. So time will tell.

shousper 14y ago

What happens when we don't need to exchange BTC for another currency anymore? Or will BTC be forever inherently dependant on the existence of a government controlled currency? How would we price things in BTC like groceries or salaries? Would that be always changing because the value of BTC would be forever going up? I'm probably talking beyond our lifetime here..