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This title of this post does a disservice to its contents. "Bitcoin is evil' makes it sound like it's a propaganda piece. I went in expecting some of the usual

by ashray 13y ago

This title of this post does a disservice to its contents. "Bitcoin is evil' makes it sound like it's a propaganda piece. I went in expecting some of the usual poorly researched allegations that we've been seeing over the past few weeks. But surprisingly, the post does make a few good points. > Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly? However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ? That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow. Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles. Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control. This ability is what places a floor on its value, whatever that hypothetical floor may be. This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.

username223 13y ago
Maybe some day Bitcoin will be a cheaper way to transfer money than EBT, credit cards, etc. (a few percent). If/when that happens, people will hold Bitcoins for just long enough to complete a transaction -- microseconds -- rather than for however long it takes them to cash out their speculative bets.
- MarkPNeyer 13y ago
  Yes. This is already happening to a small extent, and the use of bitcoin as a money transfer mechanism is where the value comes from. People who wish to transfer money using bitcoin do not care about the market price; if they have $1000 USD to send, they buy $1000 USD worth of bitcoins at market price, send them over the network in seconds, and then that value is converted into cash locally. They don't care about the market price, as long as it isn't volatile over the short time it takes to move the value. The market price of bitcoin is determined by the number of bitcoin holders who think they will go down in value; as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value, which increases the store of bitcoins held for long term positions and thus the market price of BTC, etc. The increase of its usage as a medium of transfer ALSO increases the market price of BTC; that interplay between new value-minded long term investors and new users of btc as a transfer mechanism is what has been pushing the price up continually. the entrance and exit of speculators in the market is a short term distraction that has the benefit of spreading awareness but the drawback of adding to conception as a bubble. after about the 6th or 7th one of these 'boom and bust' cycles that triples/quadruples the market price, people will stop seeing this as a 'maybe' thing, and my guess is that will drive a massive one-time spike in the value.
  - lutorm 13y ago
    as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.
    - DennisP 13y ago
      By the same argument, if you think the value of bitcoins will increase, you shouldn't spend your dollars either. You should convert them to bitcoins and hold them. If you do spend dollars, you don't lose anything by converting them to bitcoins just before spending them.
      - lmm 13y ago
        So there'll be a deflationary spiral where the value of bitcoins goes up and up, until the only people who have bitcoins are the idle rich who won't sell them at anything less than extortionate prices. Which is not a situation I see as sustainable; at some point the actually productive people making economically valuable things will realize that rather than funding this bunch of freeloaders, they should stop accepting bitcoins as payment.
        MarkPNeyer 13y ago
        The rates at which bitcoin holders sell them won't be 'exorbitant' because they'll be irrelevant for peopel using them as a transfer mechanism. if you want to send a thousand bucks, and there are many bitcoin holders just sittign on them, the market rate of btc won't matter and you'll be able to quickly sell them whenever you've sent the btc where you wanted to. those 'unproductive' people holding incredibly valuable bitcoins will enable bitcoin to work as a dirt cheap payment processing system.
- richcollins 13y ago
  This would create a floor on price ... which would then make it useful as a store of value (since there is a high probability that you'd be able to sell them in the future).
pdonis 13y ago
What's the point of a store of value if ultimately it cannot be exchanged for something else? One can also turn this point around: what requires the store of value to be the same thing as the medium of exchange? The store of value must be convertible into the medium of exchange, but that doesn't mean they have to be the same thing. Yet Krugman blithely assumes that they must be: "To be successful, money must be both a medium of exchange and a reasonably stable store of value." He doesn't even consider the possibility of, for example, an economy based on Bitcoin as a medium of exchange and, say, gold as a store of value. For that matter, he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.
- ubernostrum 13y ago
  he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress. Individual people, perhaps not. But the US dollar is the most widely-held reserve currency in the world, followed by the Euro. Wikipedia states that approximately 2/3 of reserve currency holdings are dollars.
  - pdonis 13y ago
    You're assuming that reserve currency holdings are stores of value. I'm not sure I buy that assumption, since central banks use those reserves to manipulate the monetary system in a number of ways, not to store value. Also, as far as I can tell, the total amounts in these holdings are small compared to the total amounts held in stocks, real estate, gold, and other non-monetary stores of value.
- notahacker 13y ago
  If Bitcoin isn't a relatively stable store of value then there is no sane reason to use it purely for exchange. If you're able to send dollars to Coinbase or MtGox and the end user is able to receive dollars from Coinbase or MtGox, chances are you can cut out the middleman and the liquidity risk by sending them direct, at similar or lower transaction costs. The equation looks a bit different if you're holding non-trivial Bitcoin balances, but you won't do that if it doesn't reliably store your value.
vixen99 13y ago
"its contents", "its value", "its utility". "It's" is an abbreviation for "it is" or "it has".
- ashray 13y ago
  Right, I've edited the post. Thanks for pointing that out.
fm8892 13y ago
> To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ? It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction. More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint <-> USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening. There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.

by ashray 13y ago

username223 13y ago

Maybe some day Bitcoin will be a cheaper way to transfer money than EBT, credit cards, etc. (a few percent). If/when that happens, people will hold Bitcoins for just long enough to complete a transaction -- microseconds -- rather than for however long it takes them to cash out their speculative bets.

MarkPNeyer 13y ago
Yes. This is already happening to a small extent, and the use of bitcoin as a money transfer mechanism is where the value comes from. People who wish to transfer money using bitcoin do not care about the market price; if they have $1000 USD to send, they buy $1000 USD worth of bitcoins at market price, send them over the network in seconds, and then that value is converted into cash locally. They don't care about the market price, as long as it isn't volatile over the short time it takes to move the value. The market price of bitcoin is determined by the number of bitcoin holders who think they will go down in value; as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value, which increases the store of bitcoins held for long term positions and thus the market price of BTC, etc. The increase of its usage as a medium of transfer ALSO increases the market price of BTC; that interplay between new value-minded long term investors and new users of btc as a transfer mechanism is what has been pushing the price up continually. the entrance and exit of speculators in the market is a short term distraction that has the benefit of spreading awareness but the drawback of adding to conception as a bubble. after about the 6th or 7th one of these 'boom and bust' cycles that triples/quadruples the market price, people will stop seeing this as a 'maybe' thing, and my guess is that will drive a massive one-time spike in the value.
- lutorm 13y ago
  as coins gradually transfer to the hands of people who believe they hold long term promise, the market price of 'loose change' available for transfer will rise; that rise in price will actually _increase_ the use of btc as a transfer mechanism because it will attract more people seeing BTC as a store of value This sounds backwards to me. If I think the value will increase, I'm not going to transfer them to you at today's price. So this will decrease the amount of transactions, making it less and less useful as a transfer mechanism. Which is exactly what people say is the problem with deflationary currencies.
  - DennisP 13y ago
    By the same argument, if you think the value of bitcoins will increase, you shouldn't spend your dollars either. You should convert them to bitcoins and hold them. If you do spend dollars, you don't lose anything by converting them to bitcoins just before spending them.
    - lmm 13y ago
      So there'll be a deflationary spiral where the value of bitcoins goes up and up, until the only people who have bitcoins are the idle rich who won't sell them at anything less than extortionate prices. Which is not a situation I see as sustainable; at some point the actually productive people making economically valuable things will realize that rather than funding this bunch of freeloaders, they should stop accepting bitcoins as payment.
      - MarkPNeyer 13y ago
        The rates at which bitcoin holders sell them won't be 'exorbitant' because they'll be irrelevant for peopel using them as a transfer mechanism. if you want to send a thousand bucks, and there are many bitcoin holders just sittign on them, the market rate of btc won't matter and you'll be able to quickly sell them whenever you've sent the btc where you wanted to. those 'unproductive' people holding incredibly valuable bitcoins will enable bitcoin to work as a dirt cheap payment processing system.
richcollins 13y ago
This would create a floor on price ... which would then make it useful as a store of value (since there is a high probability that you'd be able to sell them in the future).

pdonis 13y ago

What's the point of a store of value if ultimately it cannot be exchanged for something else? One can also turn this point around: what requires the store of value to be the same thing as the medium of exchange? The store of value must be convertible into the medium of exchange, but that doesn't mean they have to be the same thing. Yet Krugman blithely assumes that they must be: "To be successful, money must be both a medium of exchange and a reasonably stable store of value." He doesn't even consider the possibility of, for example, an economy based on Bitcoin as a medium of exchange and, say, gold as a store of value. For that matter, he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress.

ubernostrum 13y ago
he doesn't even bother to mention that very few people actually use dollars as a store of value: people don't keep their retirement funds in cash under the mattress. Individual people, perhaps not. But the US dollar is the most widely-held reserve currency in the world, followed by the Euro. Wikipedia states that approximately 2/3 of reserve currency holdings are dollars.
- pdonis 13y ago
  You're assuming that reserve currency holdings are stores of value. I'm not sure I buy that assumption, since central banks use those reserves to manipulate the monetary system in a number of ways, not to store value. Also, as far as I can tell, the total amounts in these holdings are small compared to the total amounts held in stocks, real estate, gold, and other non-monetary stores of value.
notahacker 13y ago
If Bitcoin isn't a relatively stable store of value then there is no sane reason to use it purely for exchange. If you're able to send dollars to Coinbase or MtGox and the end user is able to receive dollars from Coinbase or MtGox, chances are you can cut out the middleman and the liquidity risk by sending them direct, at similar or lower transaction costs. The equation looks a bit different if you're holding non-trivial Bitcoin balances, but you won't do that if it doesn't reliably store your value.

vixen99 13y ago

"its contents", "its value", "its utility". "It's" is an abbreviation for "it is" or "it has".

ashray 13y ago
Right, I've edited the post. Thanks for pointing that out.

fm8892 13y ago

> To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ? It's very simple: Suppose you used Bitcoins only to facilitate transactions. You'd identify some good/service you want to purchase, buy the appropriate amount of Bitcoin on the open market. You then transfer them to the merchant who then sells the Bitcoin in his or her local currency. In order for that to work, the value of Bitcoin must be relatively stable over the timescale of the transaction. If ratio of Bitcoin to USD (for example) goes up a few percent over a period of ten minutes, then you're either giving the merchant a "tip" or he is giving you a discount. Either way, both you and he don't really know the cost of the good you are purchasing until sometime after the transaction. More relevantly, if Bitcoin were to catch on, people would probably keep some assets in the form of Bitcoin so that they don't need to pay Bitcoint <-> USD transaction fees on every purchase. People will not do that if the value of a Bitcoin often changes radically between paychecks. Frankly, I can't see Bitcoin being used by "normal" people until the value is relatively stable (say, in most months the Bitcoin-USD exchange rate varies by less than 10% over the course of most 30-day periods) for this very reason. Unfortunately, the 21 million coin limit will prevent this from ever happening. There seem to be a large number of people who operate under the misapprehension that "Inflation Bad -> Deflation Good." Inflation is bad, but deflation can be just as destructive to an economy, and having the ability to conduct transactions in a femtoSatoshi does nothing to fix that.