5 ms·

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 tha

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.
  - pjbrunet 13y ago
    I think a certain entertainment factor will keep the price from reaching zero too--lots of volatility, cheap transactions, very low barrier to entry. Seems like you could even build a game like "Trade Wars" on top of the various exchanges, that would be pretty interesting. http://en.wikipedia.org/wiki/Trade_Wars http://en.wikipedia.org/wiki/Trade_Wars
  - vectorpush 13y ago
    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? You're absolutely correct. People forget that bitcoin functioned just fine as a black market currency back before it became a rite of passage to opine on its future. Barring prohibition by governments, the cryptocoin ecosystem is here to stay and will likely continue to grow.
  - wpietri 13y ago
    Interesting! It seems to me that the shared fiction of the dollar is based on the shared fiction of America. The fiction of America creates a real American government that has a strong interest in maintaining the fiction of the dollar. From what I can tell, Bitcoin does have a similar pair of shared fictions, the idea and the currency. But I'm not seeing the thing that America has between the two fictions: a powerful organization with a strong interest in keeping the money useful as money.
  - wpietri 13y ago
    Regarding your last bit, I'd guess his notion of "successful currency" is observational. There have been a lot of currencies, so it's pretty easy to look at the ones that have lasted versus the ones that haven't. Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off people would, as much as possible, not hold sucres; they'd buy dollars. Poorer or less connected people couldn't do that as easily, so they just got screwed. Eventually, the currency collapsed entirely and now they just use the dollar: http://en.wikipedia.org/wiki/Ecuadorian_sucre http://en.wikipedia.org/wiki/Ecuadorian_sucre I don't think BitCoin can survive purely as a medium of exchange. There's the obvious reason: why pay two sets of transaction costs when you can pay just one? But I think the bigger problem is that there's a period when someone is holding BitCoins. If those are a stable store of value, then you're ok with that. But if not, you're in the land of currency risk, and the only people who like currency risk are currency traders; everybody else hates it.
yohanatan 13y ago
> If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin? If the infrastructure goes on to do great things for society then it has (and has always had) intrinsic value and thus the price of BTC rebounds (or more likely never collapses in the first place).
- icambron 13y ago
  No, it doesn't. BTC isn't a good value store (or have intrinsic value) just because the infrastructure that processes it is--in a different sense of the word--valuable. If a bitcoin conferred a fraction of ownership of that infrastructure to the coin's holder, you'd have a point, but it doesn't; the holder just has the coin. The parts of the infrastructure you might actually sell are owned by someone else, and the open source parts of it are owned--in the sense relevant here--by everyone, so it doesn't provide the coin any value. It's like saying gold is a good value store because mining and ore extraction equipment are useful. Doesn't make any sense. Of course, you can say the infrastructure makes the coin more useful as a medium of exchange, but that's a totally separate point, as Krugman points out. My personal view is that none of these things--gold, dollars, or bitcoin--has enough intrinsic value to make a useful value floor, and that as value stores they all just rely on a shared convention. So I'm not sure Krugman is right, and perhaps bitcoins will work out without that floor feature, and perhaps without ever really being used as a store of value. But this argument about infrastructure just doesn't work.
  - yohanatan 13y ago
    I was considering the blockchain itself as part of the infrastructure. If the [rest of the] infrastructure (i.e., the mining equipment) becomes (or is) useful, it is only inasmuch as it is a good shepherd of the blockchain. It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a globally-distributed secure ledger and a network capable of maintaining it, then the individual accounts within its purview obviously have whatever values it records them as having.

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.
- pjbrunet 13y ago
  I think a certain entertainment factor will keep the price from reaching zero too--lots of volatility, cheap transactions, very low barrier to entry. Seems like you could even build a game like "Trade Wars" on top of the various exchanges, that would be pretty interesting. http://en.wikipedia.org/wiki/Trade_Wars http://en.wikipedia.org/wiki/Trade_Wars
- vectorpush 13y ago
  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? You're absolutely correct. People forget that bitcoin functioned just fine as a black market currency back before it became a rite of passage to opine on its future. Barring prohibition by governments, the cryptocoin ecosystem is here to stay and will likely continue to grow.
- wpietri 13y ago
  Interesting! It seems to me that the shared fiction of the dollar is based on the shared fiction of America. The fiction of America creates a real American government that has a strong interest in maintaining the fiction of the dollar. From what I can tell, Bitcoin does have a similar pair of shared fictions, the idea and the currency. But I'm not seeing the thing that America has between the two fictions: a powerful organization with a strong interest in keeping the money useful as money.
- wpietri 13y ago
  Regarding your last bit, I'd guess his notion of "successful currency" is observational. There have been a lot of currencies, so it's pretty easy to look at the ones that have lasted versus the ones that haven't. Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off people would, as much as possible, not hold sucres; they'd buy dollars. Poorer or less connected people couldn't do that as easily, so they just got screwed. Eventually, the currency collapsed entirely and now they just use the dollar: http://en.wikipedia.org/wiki/Ecuadorian_sucre http://en.wikipedia.org/wiki/Ecuadorian_sucre I don't think BitCoin can survive purely as a medium of exchange. There's the obvious reason: why pay two sets of transaction costs when you can pay just one? But I think the bigger problem is that there's a period when someone is holding BitCoins. If those are a stable store of value, then you're ok with that. But if not, you're in the land of currency risk, and the only people who like currency risk are currency traders; everybody else hates it.

yohanatan 13y ago

> If BTC starts collapsing, perhaps all that infrastructure will go on to do great things for society, but how does that help Bitcoin? If the infrastructure goes on to do great things for society then it has (and has always had) intrinsic value and thus the price of BTC rebounds (or more likely never collapses in the first place).

icambron 13y ago
No, it doesn't. BTC isn't a good value store (or have intrinsic value) just because the infrastructure that processes it is--in a different sense of the word--valuable. If a bitcoin conferred a fraction of ownership of that infrastructure to the coin's holder, you'd have a point, but it doesn't; the holder just has the coin. The parts of the infrastructure you might actually sell are owned by someone else, and the open source parts of it are owned--in the sense relevant here--by everyone, so it doesn't provide the coin any value. It's like saying gold is a good value store because mining and ore extraction equipment are useful. Doesn't make any sense. Of course, you can say the infrastructure makes the coin more useful as a medium of exchange, but that's a totally separate point, as Krugman points out. My personal view is that none of these things--gold, dollars, or bitcoin--has enough intrinsic value to make a useful value floor, and that as value stores they all just rely on a shared convention. So I'm not sure Krugman is right, and perhaps bitcoins will work out without that floor feature, and perhaps without ever really being used as a store of value. But this argument about infrastructure just doesn't work.
- yohanatan 13y ago
  I was considering the blockchain itself as part of the infrastructure. If the [rest of the] infrastructure (i.e., the mining equipment) becomes (or is) useful, it is only inasmuch as it is a good shepherd of the blockchain. It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a globally-distributed secure ledger and a network capable of maintaining it, then the individual accounts within its purview obviously have whatever values it records them as having.