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A Rebuttal To Charles Stross About Bitcoin
New submitter buddha379 writes "Over the holidays we discussed a story from SF author Charles Stross called 'Why I Want Bitcoin to Die in a Fire,' just as Bitcoin's price collapsed on news of the Chinese government's cautious approach to the fledgling internet currency. Well known economist Paul Krugman quoted the piece in a NY Times blog post called 'Bitcoin is Evil'. Now, with U.S. regulators reaffirming their hands off approach, U.S. companies embracing it and prices surging again, Bitcoin Magazine returns with a rebuttal called 'Why Charles Stross Doesn't Know a Thing about Bitcoin.' The article notes that like many other popular pieces, Stross' story seems to 'completely miss the point on why Bitcoin is a revolutionary concept.'"
As we've seen, all a government needs to do is make a statement about support/regulation and the price drops in half.
http://slashdot.org/index2.pl?fhfilter=bitcoin
Over the last few months, we've been averaging a little more than 1 Bitcoin story every 2 days. Please - please, stop accepting every submission that has the word Bitcoin in it. At this point, I'd almost like them to start covering the 2016 Presidential Election. Enough.
So what? Why does the price of bitcoin even matter? Bitcoins strength lies in its ability to be used as a payment processing network - and at a fraction of the cost of traditional payment networks (visa, mastercard, paypal, SWIFT, etc).
Everyone is obsessed with the price of bitcoin (and therefore comparing it to a ponzi scheme because of its price) and treating it as a speculative investment scheme or get rich quick scheme. This is actually very detrimental to bitcoin.
But no. Bitcoins power lies in using it as a payment processing network not its price. It does need some more price stability, however, so this crazy speculation needs to stop.
You can tell how powerful someone is by the magnitude of the crime they can commit and be able to get away with.
You're partially right, but the vast majority of bitcoin users are speculators, gamblers and hoarders. It is not primarily used for transactions. Until this changes, which it probably won't, it is an electricity-wasting ponzi scheme.
TFA doesn't really counter Stross's arguments much (besides arguing about carbon footprint, but really BTC is small potatoes even if you care about such things). The authors instead focus on why his objections just aren't important, and I tend to agree with that.
In terms of actual economics, Stross is much in favor of state control of things, especially economic things (read his blog to get the best insight on his views), and BTC is the opposite of that. TFA primary argument, and one I'm quite sympathetic to is "well, who knows!" Economists argue over everything, and there's certainly no uniform agreement over what makes a good currency.
As Feynman would say "one experiment is worth 1000 expert opinions". BTC is quite worthwhile IMO as an experiment. Personally, I think it's misguided and solves only unimportant problems, but hey, lets run the experiment and find out who's right. If bitcoin really becomes mainstream then it is a good currency, because the best currency is the one people want to use. And if instead it's crap, then it will never realy matter outside of eternal /. stories, and so no significant harm done.
Socialism: a lie told by totalitarians and believed by fools.
But it's not a good payment network if the value of the payment are not stable.
The network exists to 'mine' coins and process transactions. It's cheap because there is a payout for participating in the network split two ways, you get to mine coins, which are worth something and you can charge transaction fees. If there is little worth in the coins, the network will either be tiny and easier to take over and control (if you control the majority of the processing power, you control the entire network) or the transaction fees will increase.
You are right though, New Zealand is the place to be.
No. The power that Bitcoin may or may not have is not at all related to using it as a payment processing network.
People obsess over Bitcoin's price (in dollars, yuan, whatever) because a Bitcoin only has value if people agree it's worth an exchange for goods and/or services, and can reasonably expect to exchange a received Bitcoin for other goods and services.
Right now if I get 100 dollars, or 100 euro, or 100 yuan, or 100 yen, in payment for some services I render or product I sell, I can reasonably expect to go down the street and exchange that currency for hookers (services) and/or blow (goods), within a reasonable timeframe (say 1-5 years in the future.) Right now if I get 100 Bitcoin, I might be able to buy Michael Jordan's $16 million mansion in Chicago in 1-5 years - but it's equally likely that I won't be able to exchange them for anything in 1-5 years.
Most government-backed currencies (with the recent notable exception of the Zimbabwe dollar and several other currencies over the last 50 years) pass this test. Bitcoin, as of yet, does not. Many people would have to choose to use Bitcoin over a government-backed currency (think 60-80% of the population in your local country - in the US, that would be around 200-230 million.) In order to get that many people to switch, there would have to be a significant compelling reason for them to hold their wealth in Bitcoin instead of the government-backed currency. I have yet to see a compelling reason to switch. Not only that, there are high barriers to overcome yet: security, convenience of exchange, and relative durability all spring to mind as specific examples.
Given the above, coupled with the fact that the Bitcoin exchange rate is being manipulated by speculators, and the number of knock-off alternative currencies floating around, why would any rational person think about holding their wealth in Bitcoin at any given moment?
It is being used as plain money, becoming just a speculative bubble, but its potential is far more than that. The technology is good enough for other uses, like Twister, there is where its value resides.
From TFA:
Bitcoin is more of a hybrid system than a true deflationary system. The gold standard is considered deflationary and Bitcoin is often seen as the digital equivalent of gold. Gold has a limited supply, so it is scarce, just like a digital currency. But real gold can only be subdivided so far. It can only be chopped up so far before it’s nothing but dust. Bitcoin has no such limitations. Theoretically, it can be subdivided into fractions of a coin almost indefinitely, growing as needed with people’s demands. Its current limitation is eight decimal places. Even with only 21 million Bitcoins, that’s still 2000 trillion of the smallest unit. The protocol is designed to be upgradeable, so if we ever need to divide it further we can.
The problem with a deflationary system is not one of divisibility. The problem with a deflationary system is that the value of a given amount of currency is basically guaranteed to increase over time, as the total amount of possible currency has a hard limit--by design, in Bitcoin's case. Unless human civilization starts becoming less valuable as a whole (which is BAD), this is basically inevitable.
That you can chop your Bitcoins up into Nanobitcoins doesn't change the fact that the currency will simply continue to increase in real value. That's like saying you can make a ten-ton boulder less heavy by crushing it into pebbles.
That this is advanced as a serious counterargument to deflation should tell you everything you need to know about the author(s) of this piece.
Obliteracy: Words with explosions
Wrong. Bitcoins' strength lies in the starbursts in the eyes of it's biggest proponents, who will gladly and patiently explain to you how they'll reform the monetary system, end poverty and make them fabulously wealthy.
Nothing is stronger than a True Believer, especially when they are neo-libertarians on a mission from Ayn.
You are welcome on my lawn.
I know how bitcoin works, but I'm missing a couple elements:
Once the last coins are mined, what happens?
How do you convince people who sold theirs to keep giving away computing power in exchange for nothing? I know that fees can be added, but in a distributed semi-ananymous network, how do you set fee levels such that people will validate little transactions as well as big ones?
And even before all the coins are mined, has anyone calculated yet what is the ceiling for BTC? That'd be the value over which some country's national labs or universities turn on their supercomputers and mine almost everything (publications might bring revenue, but mining apparently does), preventing individuals from getting any return from their hardware, thus discouraging them from participating?
They mine for transaction fees
"When life gives you lemons, don't make lemonade. Make life take the lemons back!" -- Cave Johnson
Are Bitcoins minted in Rearden Metal?
Wrong. Bitcoins' strength lies in the starbursts in the eyes of it's biggest proponents, who will gladly and patiently explain to you how they'll reform the monetary system, end poverty and make them fabulously wealthy.
Nothing is stronger than a True Believer, especially when they are neo-libertarians on a mission from Ayn.
Of course, because nicely formulated ad hominem is an excellent logical rebuttal.
Silence is a state of mime.
But it's not a good payment network if the value of the payment are not stable.
The price fluctuates widely because it is thinly traded. As it becomes more popular, the price will stabilize.
There is no reason to think that. It has no floor, no control, no way to slow wild swings. Without those 'brakes' BitCoin, any currency really, can swing wildly on pure emotional mood of the day.
The Kruger Dunning explains most post on
The transaction fees already exist. It's not like the designers never thought about what will happen after all bitcoins are minted.
And even before all the coins are mined, has anyone calculated yet what is the ceiling for BTC? That'd be the value over which some country's national labs or universities turn on their supercomputers and mine almost everything (publications might bring revenue, but mining apparently does), preventing individuals from getting any return from their hardware, thus discouraging them from participating?
A) The maximum number of bitcoins was publicly predetermined from the start. It's 21 million.
B) Bitcoin mining requires specialized hardware to be profitable to mine, so this isn't something that anyone with a supercomputer can just decide to mine effectively on a whim any more.
C) Why would it be bad that most individuals couldn't mine? Bitcoin mining isn't supposed to be an egalitarian "everyone gets free money" system. It's a reward for using your computational power to help secure the system. If a hundred groups with supercomputers / mining machines can mine more than 100,000 people using desktop machines, then the former group pushing out the latter from the market is the way things should be. (However there is a problem if any group colluding gets more than 50% of mining power together.)
> Once the last coins are mined, what happens?
Miners also get transaction fees included in the block, so they still have incentive to search for block hashes.
> how do you set fee levels such that people will validate little transactions as well as big ones?
Fees are *user defined*. If you are in a hurry, slap a big fee on it. If you can wait, put a small fee on it. The bitcoin software allows zero-fee transactions if you meet some conditions, and some miners will include zero fee transactions in a block if there is room. In the long run, many small transactions will move "off chain". For example, Coinbase processes bitcoin transactions for merchants, accepting BTC payments on their behalf and depositing local currency to their bank account. Conversely they sell BTC to individuals and pull money from bank accounts to pay for it. When a Coinbase user uses their online wallet to pay a Coinbase merchant, that can be all internal to Coinbase, and never reach the Block Chain. Eventually such processors will arrange to settle with each other in bulk transactions, gathering up many little ones and posting it as one big transaction on the block chain. That both avoids bloating the block chain, and makes small transactions easier to process.
> the value over which some country's national labs or universities turn on their supercomputers and mine almost everything
Custom chips (ASICs) that do nothing but the particular calculation for bitcoin mining are 100 times more efficient than GPU's, and 1000's of times more efficient than general CPUs. Supercomputers are useless for bitcoin mining. The world's top 500 supercomputers combined process 250 million GFLOPS ( http://www.top500.org/statistics/perfdevel/ ). The Bitcoin Network at the moment is running at 78 billion GFLOPs, which is over 300 times faster. Custom hardware and monetary incentive wins big time. The downside is the ASICs are absolutely useless for any other calculation, because it is hardwired into the chip.
Wait a second. Someone else paying for stuff is what taxes are about.
In the situation you're describing, all you're getting rid of is SWIFT. Banks processing Bitcoin payments in your situation can still create Bitcoin money through fractional reserve banking. Basically same as the gold system, but Bit-gold. There is nothing really innovative if you use Bitcoin that way.
If retail transactions are actually done on the Bitcoin network however, things get a bit more interesting, but the Bitcoin network will never scale to those transaction volumes.
:. Ultimate Control Dedicated/VM Servers
But is Bitcoin payment processing really that cheap?
Disclaimer: I started mining Bitcoins using the official client with CPUs. However, I don't really buy all of this blue-sky "to the moon" Bitcoin hype. For me it's more of a cool concept to test and mess around with.
Although the Bitcoin concept is revolutionary - if you use it as a payment network - as you can get rid of banking and payment processing industries, with such a peer-to-peer architecture, you have scalability issues that limit the amount of transactions that can be processed. Aside from the elephant-in-the-room technical limits (with the current 1MB blocksize, Bitcoin can process 10tx/s max. The VISA network can process a max of 25000tx/s) , you also have the question of why using Bitcoins is any better than current methods for the customer or merchant.
Fully decentralized peer-to-peer filesharing was hot back in the day because there was no digital content available on the net. It was also very slow on the completely decentralized systems. Now that the content industries have caught on, most people prefer to use those offerings (Youtube, Netflix, Spotify, etc.), due to the convenience and speed of those services.
With Bitcoin, it is the other way around. We have a very well developed retail financial services sector. You can pay people and businesses easily through many different means. The payment processors charges a comparatively small fee for commercial transactions - usually around 3%, and gets lower as volumes increase. Customer don't see this at all as credit card fees are paid by the merchant. From a customers point of view, why would I pay in Bitcoins, if I can much more protection by paying with a credit card? If you don't have any bitcoins, you will have to do a fiat-bitcoin conversion and then the merchant does a bitcoin-fiat conversion back for stabilty? That kills the values proposition of low rates. The spread for the two conversion will already be close to or over the 3% you pay your current payment processor. Not to mention the hassle. You can introduce a processor like Coinbase to optimize the process (and also increase transaction performance by keeping local transactions off-net), but then you've just introduced a middleman that will also charge you fees.
Wiring money overseas will cost customers a bigger fee, but this fee is usually fixed, so batch transfers are usually done. Furthermore, for people with frequent Forex needs, you can open an account with a dedicated Forex company that will give you much better rates and you can probably save on some fees with them as well as they have many local bank accounts in different countries accepting and sending money.
So all-in-all no, I don't think it's all smooth sailing for Bitcoin and once people wake up to the limitation of this particular and novel implementation or decentralized digital currency, it will be better for everybody involved. We will start asking the right questions (eg. is if possible at all to create a decentralized crypto-currency network with similar performance to commercial payment processing networks) and maybe incorporate some of the better ideas from Bitcoins to more practical applications.
:. Ultimate Control Dedicated/VM Servers
We have run plenty of experiments with government-run fiat currencies. Every single one, without exception, has become totally worthless, or worth a lot less than when it originally started. In the 100 years since the formation of the Federal Reserve, the US dollar has fallen in value by a factor of 23 as measured by the consumer price index ( ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt ) , an average rate of -3.2% per year. Many nations do worse. For example India has had an average inflation rate of 7.5% over the last 50 years, Argentina has varied from zero to 40% per year over the last 20 years. If bitcoin can improve on this record, it would be a good thing.
Except that BTC blantantly hasn't outperformed anything. The value of Bitcoin - measured against USD, EUR, CHF, loaves of bread, goats, airplanes or anything - has rocketed up and down on a weekly basis by far more than 3.2%. And the measure of a currency isn't whether you can dig a hole in the ground, bury some notes in a barrel Walter White-style, and dig them up in a hundred years. A better measure would be looking at what short-term interest-bearing US notes have yielded over that time frame, as they have minimal liquidity/fair-value risk, equivalent credit risk and are actually investments, rather than a currency. Critizing USD notes because they are not a good long-term 'investment' is like critizing them for not being attractive wall-paper - you're missing the point.
Whether it trades at $600 or $1200 today, a pair of trading partners in different countries can save a fucking fortune (in bank fees, not taxes) by buying BTC, denominating the trade in BTC, and converting back to the local currency.
According to Mt. Gox fee schedule, each conversion will cost you 0.60% (under 100 BTC.) Then two conversions (say, USD to BTC to USD) will cost you 1.20%. A wire transfer through a US bank costs $40 (a fixed fee) and you can transfer as much as you need. Let's say 1 BTC = USD 1000, and you want to send 100 BTC. Then the bank fees will be 40/100000 = 0.04%. The Bitcoin method is 30 times as expensive!
If you transfer less money, at some point BTC method and the bank method will be equally expensive. (Obviously, 40/x = 1.2%, and then x=40/0.012 = USD 3333.) Below that sum you will be better off using BTC; above that you will want to use your bank.
In the 100 years since the formation of the Federal Reserve, the US dollar has fallen in value by a factor of 23 as measured by the consumer price index ( ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt ) , an average rate of -3.2% per year.
Umm, for the most part, that's by design. Since the Depression in the 1930s, the Fed's general policy has mostly been to encourage gradual inflation. Why? Well, a lot has to do with details of economic theory, but in simple terms, it encourages people to invest and spend money in the economy.
You can disagree with this idea (and there are people who do), but in the case of the dollar at least, it seems to have been effective. Between the Depression of the 1930s and 2008, we had nothing like the series of financial "panics" of the 1800s in the U.S.
When currency value rises (deflation), people hoard cash. They save. There's nothing inherently wrong with that, but it doesn't encourage investment or innovation. Why should I bother taking a chance funding my brother's new small business (or even some crazy guy's cool new idea) if I can effectively increase my assets simply by hiding them under my mattress?
If deflation could occur at any moment, investors are also skittish. At a moment's notice, they could sense things decreasing in value and try to "cash out" of any investments, as happened in 2008. The main reason we don't experience such severe "runs on the market" (or actually runs from the market) every few years is because long-term investors believe that they'll still likely make a profit in the long run, at least due to the gradual rise in prices.
A targeted small rate of inflation makes it so the cash savers don't lose a lot of value, but the investors are encouraged. This is all by design.
Again, you can disagree with this strategy (and there are good reasons to question some assumptions), but that's what the Fed DESIGNED the system to do. You can't come back and say this is an inherent property of fiat currencies, since it isn't.
(And, by the way, all currencies that exceed their natural inherent value are effectively "fiat" -- if it weren't for speculation and some irrational attraction to shiny rocks, gold's value would be a lot lower. Thus, a "gold standard" is not inherently more stable, even if endorsed by a government -- lots of severe financial panics and depressions occurred while many countries were still under the gold standard. Contrary to popular belief, what makes a currency behave differently from a "fiat" currency isn't merely scarcity -- lots of things are scarce, and most of them have little to no value. In the long run and in dire circumstances, neither shiny rocks nor green pieces of paper nor Bitcoins are guaranteed to be of use -- only actual useful commodities that can be traded are.)
So it's not your BTC then. You're beholden to them to keep it all safe, with no repercussions if they fail to do so, since there is no law or regulations.
That's trust.
I dunno, I think Silk Road kept it more stable than it is now. For awhile, there were lots of people that needed to buy bitcoins to get real goods and one big guy needing to sell them to get real money.
Now you've got much less of that. The speculators, hoarders and idealists have more weight than the actual market, and the price jumps and crashes.
Play Command HQ online
The "value" is, in general terms, approximately the cost of production and distribution.
That sounds suspiciously close to Marx's brain-dead "labor theory of value".
The value of anything is determined by its buyers and sellers. You can spend all you want on producing statues of Alexander Hamilton made out of compressed manure, but that doesn't mean they're worth the shit you put into them.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
If you read posts from many Bitcoin supporters, you will discover that they actually believe that deflation is a good thing. They think that deflation will make the money in their piggy bank worth more, and thus they like it. They have a poor understanding of the overall economic impact so they believe it would be positive. They also tend to conflate the ideas of saving and hoarding so while Bitcoin encourages the latter, they believe that's the same thing as the former.
What's even funnier to me, is that these are often the same people that get mad about "the 1%". What they fail to realize is that deflation is something that would benefit the rich and the very most and harm the poor the very most. The more money you have, and the less debt you have, the better deflation would be for you. If you've got a massive bank account, more than you need for the rest of your life, deflation is great. You keep all your money in cash, spend it only as you need, and the remaining money gets worth more. You don't need to invest it or take any risk, just keeping cash increases your value.
On the other side, if you owe money, deflation is a big problem. A loan becomes increasingly difficult to pay back as your nominal payment stays the same, but the real value that you are having to pay out increases. It works to keep you poor and to make it more difficult for you to ever become financially self-sufficient.
Really what it comes down to is many Bitcoin supporters just have a very poor understanding of economics. They don't understand the downsides of Bitcoin, because they actually believe many of them to the upsides. Really, Bitcoin is a dream for the rich robber barons. They would love something outside of any government regulation, something that works to make the rich richer, something where there's no recourse if they take money from you, no chargeback that kind of thing. It really isn't something that the rest of us should be that interested in seeing.
The idea of a crypto currency is an interesting one, but Bitcoin is very poorly implemented from an economic standpoint, if nothing else.
So both parties A and B have to use the same ban... erm... "ledger". And of course, this ledger then would have to be regulated and policed - you don't want your money disappear if the ledger decides to pack stuff and move into a nice tropical country without extradition treaty with the US.
Oh, and of course this ledger would be able to "borrow" your money for a little while. Since you won't be able to access it while it's on the deposit account.
And at this point, there are no advantages to using bitcoins versus regular currencies.
have you ever tried to transfer 100k USD?
Yes. Many businesses do that daily. Many private investors do that all the time. People gather up money for houses or expensive cars. (How did you pay for your house, with cash? I used a wire transfer, IIRC.) Nothing stops you from transferring money. The transactions will be reported, but as long as the money is sufficiently traced you will never hear a peep from anyone.
I got caught in those moving savings between banks
Sorry to hear. But in my experience it's smooth sailing. Banks are not in business of interfering with your money. The government might be, but the banks do their best to keep the government out of your pants. People with money are subtle and quick to anger.
Yes it does. Bitcoin needs up to 3.6 million dollars of fresh new suckers daily, for the price of Bitcoin to remain the same. Why is this so? Because miners have real costs that have to be paid in non-Bitcoin currencies, so they have to sell some on the exchanges.
Why 3.6 million, or perhaps a large chunk of that? Because, mining is basically a perfect competition situation, nobody can stop new miners from joining, and new miners will stop coming only when the cost of one Bitcoin more than the price on the exchange. This guarantees that mining will be a low profit business, and most of the value will be lost to electricity.
Who pays for that (large chunk) of 3.6 million daily? New suckers.
You've correctly pointed out that the only difference between gold and yak tears is that people are irrationally attracted to gold. But you haven't shown that there's any fundamental difference other than scarcity between gold and fiat currency.
Just because a government can inflate "fiat currency" doesn't mean that they must. Theoretically, the U.S. federal government could pay off all of its debts tomorrow, shut itself down completely (absolute minimal spending to satisfy Constitutional requirements), and then shut down all the presses and coin minting. If they still continued to claim the "legal tender" status for the dollar and only accepted dollars for tax payments, guess what? Dollars would start to become scarce. People would hoard them.
In practice, no government would EVER do this deliberately. Why? Because it would result in a deflationary spiral that would be economic suicide. Instead, most adopt a policy of moderate inflation for the reasons I outlined in my original post. Sometimes it gets out of control for random economic reasons or because governments can't rein in spending. Note that hyperinflation generally is not caused by governments printing money to pay debts in their own currency; it is generally caused when governments owe money in another currency, and as they print more, the value of the local currency plummets in relation to other international currencies, forcing an inflationary spiral to pay debt.
The U.S. debt, on the other hand, is almost all owed in dollars. That's a fundamental difference, though governments can still be stupid enough to ruin economies if they try.
Anyhow, the primary point you've failed to understand is that a precious metal standard does not prevent currency inflation (nor government running the "press" to make more money), as can be learned from reading any history. When governments run out of gold, it's not like everyone throws up their hands and says "Oh well, gold is a scarce resource, and we're out! So... oh well, let's just shut things down!"
No -- first governments switch to less precious metals, historically silver was important, but in the ancient world, currencies were even issued in things like giant iron "coins" (which corroded), just to keep up the spending.
But the next step is seigniorage, where governments start mixing in crap metals with precious ones or simply declaring that coins in a particular metal are worth more than the value of the raw metals. In good economic times, this may work okay. In bad economic times, it too can lead to an inflationary spiral.
You can believe all you want in some "magical" powers of a gold standard, but people will always find ways to screw up things economically with currencies, particularly if things get dire enough. Using gold or any other scarce -- but ultimately small-valued -- item won't fix that. The moment you convert actual "wealth" in useful goods (food, textiles for clothing, essential tools and weapons, etc.) into currency, you're taking a risk and trusting your wealth to the whims of others in power who have more currency than you do. It's only if you have the power and/or control the actual supplies of goods that you can have any guarantee of value.