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Krugman is to Bitcoin as Ebert was to video games. The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simpl

Krugman is to Bitcoin as Ebert was to video games. The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.

jamroom 13y ago
But does Bitcoin really have a floor related to the energy put into the mining? Since the energy cost is paid for by the miners, do other players in Bitcoin "respect" that floor? I don't see that - there's nothing keeping a Bitcoin from going all the way to zero - regardless of the energy consumed in it's production, and Krugman argues that gold (and the feds) have a bottom that is greater than zero. My understanding could be wrong, as my understanding of Bitcoin would definitely be at the "noob" level :)
- sans-serif 13y ago
  No, the floor is unrelated to the energy put into mining. The intrinsic value of Bitcoin is the ability to facilitate financial transactions. Brinks' entire CIT vehicle business is based upon just a subset of this function, and we can agree their value is not zero.
  - kordless 13y ago
    Bitcoin is able to facilitate transactions because of the power put into the computers running the Bitcoin network. Mining Bitcoin provides the functionality for validating the block chain. So, power into the network provides the value of security.
    - dcc1 13y ago
      Newer mining equipment doesnt use as much electricity. Power is a variable but not an important one.
      - kordless 13y ago
        Regardless, power is used to run the equipment. There's a correlation here.
        dcc1 13y ago
        Our whole economy relies on energy, which ultimately comes from the sun, theres a correlation, doesnt mean its important as you are trying to imply
    - gnaritas 13y ago
      Bitcoin happens to currently use power that way, other coins don't; mining is not the only way to facilitate transactions and facilitating transactions is where the value is, regardless of the method used to do it. Power is but one of several options so the value can't be there.
  - mcguire 13y ago
    So, bitcoin's ability to store value is due to its ability to be a medium of exchange?
- chipsy 13y ago
  I think Bitcoin does have a soft floor because that cost would form the natural price target for a miner trying to trade, but the cost is avoidable by switching to proof of stake as done in PeerCoin and Nxt. The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal; you could make a better argument for something like PrimeCoin, which attacks a major computation problem, having this kind of utility. So as I see it Bitcoin is already obsolete; there are new coins that achieve the transaction capabilities for cheaper - they can be used in more potential applications, thus they're more interesting speculative instruments. The specific benefit of proof of work mining comes in insuring more people have a chance to enter during initial distribution, but it still massively favors the early entrants and especially the people who have the hardware environment to mine efficiently.
  - dnautics 13y ago
    "The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal." So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then? Plating astronaut helmets and high-conductivity, corrosion-resistant electronics? The intrinsic utility of gold was that it was eminently verifable. It's got a characteristic ductility and it was a yellow metal. You could easily verify if it was 100%, 80% etc. In other words, to the ancients, the intrinsic utility of gold was "its trust model". Sound familiar?
    - aes 13y ago
      Jewelry.
      - dnautics 13y ago
        that's not in any way "intrinsic" value.
        thaumasiotes 13y ago
        Yes it is. The intrinsic value of food is that you can eat it; the intrinsic value of art objects is that you like them. All "intrinsic" value refers to is the use you can make of something without exchanging it for something else. If you were the only person in the world, and you appreciated the appearance of gold, than gold would be intrinsically valuable to you.
ashray 13y ago
I think the core problem with bitcoin acceptance is that understanding the way it functions spans many domains of expertise. There are cryptography, cryptocurrency, decentralized networks, economic concepts (inflation/deflation), centralized banking, government controlled currencies, computing ability, mathematics, human psychology, and ... so much more! It's really something that has a little bit of everything in there. As such, to an expert in any one of those fields, it's very hard to digest because looking at it from the perspective of one field might suggest it is doomed for failure. But experts tend to look at things from the perspective of their own expertise. For laymen who might know a little bit about each of those domains, it feels like "Yeah.. this could work..". A simple analogy might be about how hardcore web developers always feel about PHP. They always say it's a pile of garbage and it's bound to self destruct and swallow the earth in the process. However, PHP trudges on with some very large projects and sites under it's belt.. and novice developers will almost never notice a problem with it. Experts can be wrong. So yes, bitcoin has it's issues if you analyze each aspect of it. But maybe if you zoom out and take an overview it might start to make sense how all the parts get together and even with flaws with each sub-aspect it just might work.
- vincvinc 13y ago
  > suggest it is doomed for failure Wait, I think we are missing his point. Last sentence of the article: "So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other." I think this article does not go into the 'will it work?' debate. It alerts us instead to another debate, 'to what degree do we want it?' It is an addition to what Charlie Stross was saying. He is just adding "guys, why are your comments replying to a different question?" At least, I think that is the discussion he wants to start. But his talk about the ceiling and floor in value in the middle of the article actually belongs to the OTHER discussion, the one he does not want to start but spends half of the text going into. It is like trying to talk about empirics to consider for deciding national policy, while everyone is shouting their usual political opinions.
  - gbhn 13y ago
    I think this is a good point, but for Paul Krugman, the discussion of the role of the central bank in the stability of the dollar is absolutely, well, central, to the question of desirability. That is, the central bank is in some sense "responsive" to the monetary environment in a way that bitcoin is explicitly and inexorably not. I think Paul Krugman is arguing that that is a big deal.
olefoo 13y ago
So you need to write that up in a format that Krugman can understand and get it in front of his eyes. But I think his main criticism is that all of that infrastructure falls under the medium of exchange function and doesn't serve as a store of value. What I think you're saying is that the block chain and it's supporting infrastructure and the functions it enables ( decentralized notary, unrepudiable statements, etc. ) are creating value in the same way that making jewelry from gold creates value. And that's an interesting argument. Much more interesting than a bunch of people ranting incoherently about "fiat". If I were in search of a dissertation topic as an economist/anthropologist; I would be looking at the current wave of cryptocurrencies as a fascinating natural experiment in the social construction of value.
- davidy123 13y ago
  Couldn't someone under any sane system simply copy someone's block chain work in a new system? There has to be more to a 2014 system than a technical ability.
ansible 13y ago
It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. I don't see how it is not the case that mining Bitcoins is throwing away energy. If someone had made a crypto currency based on, say, protein folding [1], I could get behind that. We could just create a crypto currency where we just hand out 100 units to every person. That certainly wouldn't require ASIC farms and such. [1] Yes, I realize that the whole 'hard to do, easy to verify' bit is not completely obvious in the case of protein folding or SETI signals.
- jellicle 13y ago
  Nearly 100% of the attractiveness of bitcoin is the promise of infinite rewards to the early investors in the Ponzi scheme. Bitcoin couldn't and wouldn't exist at all without that promise. So a simple system based on allocating 100 coins to everyone just wouldn't do at all.
  - james1071 13y ago
    Yes-it's a marketing trick.
    - SectioAurea 13y ago
      Flowers trading food for pollination.
- codeulike 13y ago
  We could just create a crypto currency where we just hand out 100 units to every person. Not without a trusted central party you couldn't. The work that goes into bitcoin mining is the 'distributed engine' that prevents double spending or forging of bitcoins. Bitcoin mining is not just a way of handing out new coins, its the very engine of the whole system. The only known way to break that engine is to control a bigger engine of the same spec (the >50% attack), and thats looking increasingly unachievable by anyone.
- aaren 13y ago
  I don't see how it is not the case that mining Bitcoins is throwing away energy. The 'work' is actually the verification of transactions on the blockchain - the reward from mining is just an incentive to do this (mining & verification are tied up in the same process). The energy expended in mining is necessary to validate transactions in the network. You might be able to make it more energy efficient but you can't remove the energy expenditure.
gnaritas 13y ago
> The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. Mining is not that valuable, there are other ways to do it that don't waste so much energy. > It's not simply throwing energy away into solving useless math problems Yes it is, since there are solutions like proof of stake that solve the same problem using vastly less energy.
haberman 13y ago
> It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. But it is also an arms race of energy spent. And the more valuable BTC becomes, the more energy a rational agent will use to mine it. Unlike mining gold, BTC mining does not have a fixed cost.
- gweinberg 13y ago
  Gold mining doesn't have a fixed cost either. Different locations have different costs per gram of mining and refining gold, and whether it is worthwhile or not to mine in a given location depends on the price of gold.
  - SectioAurea 13y ago
    And the yields from mining have decreased by orders of magnitude over the last several decades as technology increases have made it more possible, while less efficient, to extract additional known deposits.
jjindev 13y ago
All currencies rely on belief (like those flats in Monty Python). It is possible that gold could lose global belief, but unlikely, given the long history of belief. The US dollar too could lose faith, but again, a pretty good history of trust. Bitcoin? I think belief and trust battle novelty a bit. Will enough people believe, in 20 years, to power the computations necessary at that point? Or will a more novel and exciting currency emerge?
- XorNot 13y ago
  Gold isn't a currency at the moment. Even if no one wanted gold for its store of value properties, they'd still want it for electronics, science etc. at which point the market would revitalize.
  - saalweachter 13y ago
    Which is to say (not disagreeing, just saw an opportunity to jump in): it has a floor value. It might not be $1000 or even $100 per ounce, but it is at least a floor of $1 or $10. The complaint Mr Krugman is registering is that Bitcoin's don't even have that. If my car is totaled, I can always sell it for $100 for scrap. There is no bit scrap dealer.
  - jjindev 13y ago
    In a literal sense we have gold coins. I guess it's interesting that governments mint and sell them for a thin premium on bullion prices. And then, yeah, I'm sure there are things you could buy with a pocket full of Krugerrands. Really though, governments are giving you this opportunity to go off their currency standard. If you want to keep part of your wealth, near-cash, in gold coins, you don't have to use American Eagles to do it.
icambron 13y ago
The positive part of Krugman's argument that discusses floors is saying that external forces have ensured that dollars and gold are useful even in the event that people stop wanting them as a value store. Your infrastructure argument seems to say that, all of that spent electricity has second order effects that make it a net positive for society. Not sure I agree, but fine. But that does not provide a floor of Bitcoin, because infrastructure being useful for other things does not make Bitcoin more useful. If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin? So either you're misunderstanding Krugman's argument or I'm misunderstanding yours. I think you're confusing his normative and positive arguments (which are entirely separate!). You have used an argument against his normative argument ("Bitcoin is evil because it's wasteful.") but then used it to challenge his positive argument ("Bitcoin won't work out because it has no value floor."). That a crypto currency might end up helping society does not make it a good value store. Why would it?
- mortenjorck 13y ago
  I appreciate your putting the distinction between Krugman's arguments into greater relief – I believe I have conflated them somewhat in talking about second order effects. For the time being, let's ignore those and concentrate on the primary purpose of Bitcoin's infrastructure, to facilitate decentralized value transactions between arbitrary parties. It is the infrastructure's fitness for this purpose that I see as giving it its floor; this may seem a slightly circular argument, but by enabling what it does it will always have the value of accomplishing that goal, even if it's trading for vast fractions of a cent (like Dogecoin). Adding the network effects of its installed base, this probably places its floor somewhere well above Dogecoin's current value, but certainly far below what it's currently trading at. And indeed, it could very well undergo further corrections until it reaches a level of stability appropriate for a value store.
  - icambron 13y ago
    Krugman actually takes that on directly in the article: > I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions. In other words, "to facilitate decentralized value transactions between arbitrary parties" does not actually provide a floor and thus give the coin intrinsic [1] value. Being useful is different from being valuable, at least insomuch as storage is concerned. I think Krugman has this one right. One point made elsewhere in this discussion is that while Krugman might be right about the floor, he may be wrong about the floor being necessary to make BTC a stable, suitable store of value. Specifically, he might be overestimating the degree to which the dollar has a meaningful price floor, and the degree to which such a floor is actually the reason the dollar is stable and dependable. In other words, perhaps it maintains its value through adequately shared fiction, and perhaps BTC could do that too. I don't really know enough to have a strong opinion on that issue, but I think that's the structure of it. It's also worth pointing out the Krugman has the conventional view here. Another question to ask of Krugman is why being a store of value is even a goal; what does the "success" in "successful currency" mean? Does it mean that BTC will be the unit of account, with prices and salaries denominated in it? That's certainly the case Krugman is taking on (hence the normative claims about central banks), and the case many here on HN arguing for. Or can it succeed as just a medium of exchange? I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth? [1] For certain values of "intrinsic". The semantics aren't very clean here.
azernik 13y ago
I don't think you're understanding Krugman's point. If the gold price collapses, you can sell it to jewelry and electronics manufacturers at some (low) price point. Gold has a weakness as a store of value because this price point is a lot lower than its market price during good times - and this is why Krugman is also not in favor of it as a store of value. If the price of the dollar collapses, you can sell it to the Fed (usually indirectly - the Fed sells debt and then sits on the proceeds). This floor is pretty solid, cf. Volcker's recession in the early 1980s. If the price of Bitcoin collapses, you can't sell the electricity used to produce it onto the grid - that electricity is a sunk cost. So what provides a floor to the Bitcoin price if for whatever reason its value suddenly falls? Probably only its utility as a medium of exchange, which in an era of electronic exchanges lasting fractions of a second probably doesn't provide a huge demand for the stuff.
- aestra 13y ago
  Yeah right. If the gold market collapsed then nobody would be making selling or wearing gold jewelry. The reason it is popular now is because it is expensive.
  - wpietri 13y ago
    People have been making and wearing gold jewelry for thousands of years despite wide fluctuation in price. Gold doesn't tarnish and is easy to work, so it is uniquely suited for jewelry. (That also gives it a lot of industrial applications, which set another price floor.)
    - aestra 13y ago
      My original post was somewhat negative (as I have a personal issue with the jewelry industry) however Gold originally was the only metal colored like that (shiny) so it stood out, coupled with its scarcity it became a status symbol. It was the stuff of royality. It has some properties that make it useful in jewelry but pure gold is actually too soft for jewelry and is used mostly as alloys. I am not saying gold (like other metals) doesn’t have its industrial applications, it does! You can not convince me however that gold is inherently a better metal for jewelry than alternatives. It is only there to give jewelry that golden shine, which has been considered a status symbol. Now, if gold somehow became a "cheap" metal I don't think people would be keen on displays of their gold.
Canada 13y ago
I'm not disagreeing with everything you're saying, but your point about Bitmessage is wrong. Bitmessage doesn't use the same blockchain as bitcoin. The work of bitcoin miners does nothing at all to help bitmessage. Only inherited protocol design or reused code can be said to contribute, and that's not relevant to this discussion.
james1071 13y ago
I am afraid that you have missed the point entirely. The only function that mining performs is a means of distributing the currency and encouraging its use.
SectioAurea 13y ago
In the case of clones Namecoin/Primecoin/Gridcoin/Datacoin and others, there is even useful work being performed as part of the protocol of the software. Gridcoin's block rewards, for example, scale 30x in favor of those who devote enough computing resources to BOINC to achieve a BOINC score of 100.
zby 13y ago
You don't need this amount of computing power to send messages. All that these processors do is guarding against 'double spending' - but 'double spending' is a peculiar problem of distributed cash - a centralized currency could be secure against 'double spending' without burning so much electricity.

jamroom 13y ago

But does Bitcoin really have a floor related to the energy put into the mining? Since the energy cost is paid for by the miners, do other players in Bitcoin "respect" that floor? I don't see that - there's nothing keeping a Bitcoin from going all the way to zero - regardless of the energy consumed in it's production, and Krugman argues that gold (and the feds) have a bottom that is greater than zero. My understanding could be wrong, as my understanding of Bitcoin would definitely be at the "noob" level :)

sans-serif 13y ago
No, the floor is unrelated to the energy put into mining. The intrinsic value of Bitcoin is the ability to facilitate financial transactions. Brinks' entire CIT vehicle business is based upon just a subset of this function, and we can agree their value is not zero.
- kordless 13y ago
  Bitcoin is able to facilitate transactions because of the power put into the computers running the Bitcoin network. Mining Bitcoin provides the functionality for validating the block chain. So, power into the network provides the value of security.
  - dcc1 13y ago
    Newer mining equipment doesnt use as much electricity. Power is a variable but not an important one.
    - kordless 13y ago
      Regardless, power is used to run the equipment. There's a correlation here.
      - dcc1 13y ago
        Our whole economy relies on energy, which ultimately comes from the sun, theres a correlation, doesnt mean its important as you are trying to imply
  - gnaritas 13y ago
    Bitcoin happens to currently use power that way, other coins don't; mining is not the only way to facilitate transactions and facilitating transactions is where the value is, regardless of the method used to do it. Power is but one of several options so the value can't be there.
- mcguire 13y ago
  So, bitcoin's ability to store value is due to its ability to be a medium of exchange?
chipsy 13y ago
I think Bitcoin does have a soft floor because that cost would form the natural price target for a miner trying to trade, but the cost is avoidable by switching to proof of stake as done in PeerCoin and Nxt. The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal; you could make a better argument for something like PrimeCoin, which attacks a major computation problem, having this kind of utility. So as I see it Bitcoin is already obsolete; there are new coins that achieve the transaction capabilities for cheaper - they can be used in more potential applications, thus they're more interesting speculative instruments. The specific benefit of proof of work mining comes in insuring more people have a chance to enter during initial distribution, but it still massively favors the early entrants and especially the people who have the hardware environment to mine efficiently.
- dnautics 13y ago
  "The crypto problems solved in Bitcoin don't have the intrinsic utility of a precious metal." So gold was used extensively 2000-3000 years ago. Exactly what was its intrinsic utility then? Plating astronaut helmets and high-conductivity, corrosion-resistant electronics? The intrinsic utility of gold was that it was eminently verifable. It's got a characteristic ductility and it was a yellow metal. You could easily verify if it was 100%, 80% etc. In other words, to the ancients, the intrinsic utility of gold was "its trust model". Sound familiar?
  - aes 13y ago
    Jewelry.
    - dnautics 13y ago
      that's not in any way "intrinsic" value.
      - thaumasiotes 13y ago
        Yes it is. The intrinsic value of food is that you can eat it; the intrinsic value of art objects is that you like them. All "intrinsic" value refers to is the use you can make of something without exchanging it for something else. If you were the only person in the world, and you appreciated the appearance of gold, than gold would be intrinsically valuable to you.

ashray 13y ago

I think the core problem with bitcoin acceptance is that understanding the way it functions spans many domains of expertise. There are cryptography, cryptocurrency, decentralized networks, economic concepts (inflation/deflation), centralized banking, government controlled currencies, computing ability, mathematics, human psychology, and ... so much more! It's really something that has a little bit of everything in there. As such, to an expert in any one of those fields, it's very hard to digest because looking at it from the perspective of one field might suggest it is doomed for failure. But experts tend to look at things from the perspective of their own expertise. For laymen who might know a little bit about each of those domains, it feels like "Yeah.. this could work..". A simple analogy might be about how hardcore web developers always feel about PHP. They always say it's a pile of garbage and it's bound to self destruct and swallow the earth in the process. However, PHP trudges on with some very large projects and sites under it's belt.. and novice developers will almost never notice a problem with it. Experts can be wrong. So yes, bitcoin has it's issues if you analyze each aspect of it. But maybe if you zoom out and take an overview it might start to make sense how all the parts get together and even with flaws with each sub-aspect it just might work.

vincvinc 13y ago
> suggest it is doomed for failure Wait, I think we are missing his point. Last sentence of the article: "So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other." I think this article does not go into the 'will it work?' debate. It alerts us instead to another debate, 'to what degree do we want it?' It is an addition to what Charlie Stross was saying. He is just adding "guys, why are your comments replying to a different question?" At least, I think that is the discussion he wants to start. But his talk about the ceiling and floor in value in the middle of the article actually belongs to the OTHER discussion, the one he does not want to start but spends half of the text going into. It is like trying to talk about empirics to consider for deciding national policy, while everyone is shouting their usual political opinions.
- gbhn 13y ago
  I think this is a good point, but for Paul Krugman, the discussion of the role of the central bank in the stability of the dollar is absolutely, well, central, to the question of desirability. That is, the central bank is in some sense "responsive" to the monetary environment in a way that bitcoin is explicitly and inexorably not. I think Paul Krugman is arguing that that is a big deal.

olefoo 13y ago

So you need to write that up in a format that Krugman can understand and get it in front of his eyes. But I think his main criticism is that all of that infrastructure falls under the medium of exchange function and doesn't serve as a store of value. What I think you're saying is that the block chain and it's supporting infrastructure and the functions it enables ( decentralized notary, unrepudiable statements, etc. ) are creating value in the same way that making jewelry from gold creates value. And that's an interesting argument. Much more interesting than a bunch of people ranting incoherently about "fiat". If I were in search of a dissertation topic as an economist/anthropologist; I would be looking at the current wave of cryptocurrencies as a fascinating natural experiment in the social construction of value.

davidy123 13y ago
Couldn't someone under any sane system simply copy someone's block chain work in a new system? There has to be more to a 2014 system than a technical ability.

ansible 13y ago

It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. I don't see how it is not the case that mining Bitcoins is throwing away energy. If someone had made a crypto currency based on, say, protein folding [1], I could get behind that. We could just create a crypto currency where we just hand out 100 units to every person. That certainly wouldn't require ASIC farms and such. [1] Yes, I realize that the whole 'hard to do, easy to verify' bit is not completely obvious in the case of protein folding or SETI signals.

jellicle 13y ago
Nearly 100% of the attractiveness of bitcoin is the promise of infinite rewards to the early investors in the Ponzi scheme. Bitcoin couldn't and wouldn't exist at all without that promise. So a simple system based on allocating 100 coins to everyone just wouldn't do at all.
- james1071 13y ago
  Yes-it's a marketing trick.
  - SectioAurea 13y ago
    Flowers trading food for pollination.
codeulike 13y ago
We could just create a crypto currency where we just hand out 100 units to every person. Not without a trusted central party you couldn't. The work that goes into bitcoin mining is the 'distributed engine' that prevents double spending or forging of bitcoins. Bitcoin mining is not just a way of handing out new coins, its the very engine of the whole system. The only known way to break that engine is to control a bigger engine of the same spec (the >50% attack), and thats looking increasingly unachievable by anyone.
aaren 13y ago
I don't see how it is not the case that mining Bitcoins is throwing away energy. The 'work' is actually the verification of transactions on the blockchain - the reward from mining is just an incentive to do this (mining & verification are tied up in the same process). The energy expended in mining is necessary to validate transactions in the network. You might be able to make it more energy efficient but you can't remove the energy expenditure.

gnaritas 13y ago

> The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. Mining is not that valuable, there are other ways to do it that don't waste so much energy. > It's not simply throwing energy away into solving useless math problems Yes it is, since there are solutions like proof of stake that solve the same problem using vastly less energy.

haberman 13y ago

> It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. But it is also an arms race of energy spent. And the more valuable BTC becomes, the more energy a rational agent will use to mine it. Unlike mining gold, BTC mining does not have a fixed cost.

gweinberg 13y ago
Gold mining doesn't have a fixed cost either. Different locations have different costs per gram of mining and refining gold, and whether it is worthwhile or not to mine in a given location depends on the price of gold.
- SectioAurea 13y ago
  And the yields from mining have decreased by orders of magnitude over the last several decades as technology increases have made it more possible, while less efficient, to extract additional known deposits.

jjindev 13y ago

All currencies rely on belief (like those flats in Monty Python). It is possible that gold could lose global belief, but unlikely, given the long history of belief. The US dollar too could lose faith, but again, a pretty good history of trust. Bitcoin? I think belief and trust battle novelty a bit. Will enough people believe, in 20 years, to power the computations necessary at that point? Or will a more novel and exciting currency emerge?

XorNot 13y ago
Gold isn't a currency at the moment. Even if no one wanted gold for its store of value properties, they'd still want it for electronics, science etc. at which point the market would revitalize.
- saalweachter 13y ago
  Which is to say (not disagreeing, just saw an opportunity to jump in): it has a floor value. It might not be $1000 or even $100 per ounce, but it is at least a floor of $1 or $10. The complaint Mr Krugman is registering is that Bitcoin's don't even have that. If my car is totaled, I can always sell it for $100 for scrap. There is no bit scrap dealer.
- jjindev 13y ago
  In a literal sense we have gold coins. I guess it's interesting that governments mint and sell them for a thin premium on bullion prices. And then, yeah, I'm sure there are things you could buy with a pocket full of Krugerrands. Really though, governments are giving you this opportunity to go off their currency standard. If you want to keep part of your wealth, near-cash, in gold coins, you don't have to use American Eagles to do it.

icambron 13y ago

The positive part of Krugman's argument that discusses floors is saying that external forces have ensured that dollars and gold are useful even in the event that people stop wanting them as a value store. Your infrastructure argument seems to say that, all of that spent electricity has second order effects that make it a net positive for society. Not sure I agree, but fine. But that does not provide a floor of Bitcoin, because infrastructure being useful for other things does not make Bitcoin more useful. If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin? So either you're misunderstanding Krugman's argument or I'm misunderstanding yours. I think you're confusing his normative and positive arguments (which are entirely separate!). You have used an argument against his normative argument ("Bitcoin is evil because it's wasteful.") but then used it to challenge his positive argument ("Bitcoin won't work out because it has no value floor."). That a crypto currency might end up helping society does not make it a good value store. Why would it?

mortenjorck 13y ago
I appreciate your putting the distinction between Krugman's arguments into greater relief – I believe I have conflated them somewhat in talking about second order effects. For the time being, let's ignore those and concentrate on the primary purpose of Bitcoin's infrastructure, to facilitate decentralized value transactions between arbitrary parties. It is the infrastructure's fitness for this purpose that I see as giving it its floor; this may seem a slightly circular argument, but by enabling what it does it will always have the value of accomplishing that goal, even if it's trading for vast fractions of a cent (like Dogecoin). Adding the network effects of its installed base, this probably places its floor somewhere well above Dogecoin's current value, but certainly far below what it's currently trading at. And indeed, it could very well undergo further corrections until it reaches a level of stability appropriate for a value store.
- icambron 13y ago
  Krugman actually takes that on directly in the article: > I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin — but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how it’s a terrific medium of exchange. Even if I buy this (which I don’t, entirely), it doesn’t solve my problem. And I haven’t been able to get my correspondents to recognize that these are different questions. In other words, "to facilitate decentralized value transactions between arbitrary parties" does not actually provide a floor and thus give the coin intrinsic [1] value. Being useful is different from being valuable, at least insomuch as storage is concerned. I think Krugman has this one right. One point made elsewhere in this discussion is that while Krugman might be right about the floor, he may be wrong about the floor being necessary to make BTC a stable, suitable store of value. Specifically, he might be overestimating the degree to which the dollar has a meaningful price floor, and the degree to which such a floor is actually the reason the dollar is stable and dependable. In other words, perhaps it maintains its value through adequately shared fiction, and perhaps BTC could do that too. I don't really know enough to have a strong opinion on that issue, but I think that's the structure of it. It's also worth pointing out the Krugman has the conventional view here. Another question to ask of Krugman is why being a store of value is even a goal; what does the "success" in "successful currency" mean? Does it mean that BTC will be the unit of account, with prices and salaries denominated in it? That's certainly the case Krugman is taking on (hence the normative claims about central banks), and the case many here on HN arguing for. Or can it succeed as just a medium of exchange? I can trade my dollars for bitcoins and send them to someone, who will convert them to euros on receipt. Then who cares how much they're worth? [1] For certain values of "intrinsic". The semantics aren't very clean here.

azernik 13y ago

I don't think you're understanding Krugman's point. If the gold price collapses, you can sell it to jewelry and electronics manufacturers at some (low) price point. Gold has a weakness as a store of value because this price point is a lot lower than its market price during good times - and this is why Krugman is also not in favor of it as a store of value. If the price of the dollar collapses, you can sell it to the Fed (usually indirectly - the Fed sells debt and then sits on the proceeds). This floor is pretty solid, cf. Volcker's recession in the early 1980s. If the price of Bitcoin collapses, you can't sell the electricity used to produce it onto the grid - that electricity is a sunk cost. So what provides a floor to the Bitcoin price if for whatever reason its value suddenly falls? Probably only its utility as a medium of exchange, which in an era of electronic exchanges lasting fractions of a second probably doesn't provide a huge demand for the stuff.

aestra 13y ago
Yeah right. If the gold market collapsed then nobody would be making selling or wearing gold jewelry. The reason it is popular now is because it is expensive.
- wpietri 13y ago
  People have been making and wearing gold jewelry for thousands of years despite wide fluctuation in price. Gold doesn't tarnish and is easy to work, so it is uniquely suited for jewelry. (That also gives it a lot of industrial applications, which set another price floor.)
  - aestra 13y ago
    My original post was somewhat negative (as I have a personal issue with the jewelry industry) however Gold originally was the only metal colored like that (shiny) so it stood out, coupled with its scarcity it became a status symbol. It was the stuff of royality. It has some properties that make it useful in jewelry but pure gold is actually too soft for jewelry and is used mostly as alloys. I am not saying gold (like other metals) doesn’t have its industrial applications, it does! You can not convince me however that gold is inherently a better metal for jewelry than alternatives. It is only there to give jewelry that golden shine, which has been considered a status symbol. Now, if gold somehow became a "cheap" metal I don't think people would be keen on displays of their gold.

Canada 13y ago

I'm not disagreeing with everything you're saying, but your point about Bitmessage is wrong. Bitmessage doesn't use the same blockchain as bitcoin. The work of bitcoin miners does nothing at all to help bitmessage. Only inherited protocol design or reused code can be said to contribute, and that's not relevant to this discussion.

james1071 13y ago

I am afraid that you have missed the point entirely. The only function that mining performs is a means of distributing the currency and encouraging its use.

SectioAurea 13y ago

In the case of clones Namecoin/Primecoin/Gridcoin/Datacoin and others, there is even useful work being performed as part of the protocol of the software. Gridcoin's block rewards, for example, scale 30x in favor of those who devote enough computing resources to BOINC to achieve a BOINC score of 100.

zby 13y ago

You don't need this amount of computing power to send messages. All that these processors do is guarding against 'double spending' - but 'double spending' is a peculiar problem of distributed cash - a centralized currency could be secure against 'double spending' without burning so much electricity.