Amazingly economists can get paid to sit around talking about shit seemingly endlessly.
It's called "office hours". When they aren't talking about shit, they're investing in the shit they talk about. Don't be so quick to knock it.
Topic: Quora discussion - Is the cryptocurrency Bitcoin a good idea? (Read 3846 times)
It's called "office hours". When they aren't talking about shit, they're investing in the shit they talk about. Don't be so quick to knock it.
Some people talk about it, other people just do it.
Amazingly economists can get paid to sit around talking about shit seemingly endlessly.
The point about it being a scam for the early adopters to profit at the expense of later adopters is like saying that IPO is a scam, because people who bought shares at the time of the IPO are profiteering of those who bought their shares later in the game.
Early adopters take most risk and therefore reap most benefits.
Early adopters take most risk and therefore reap most benefits.
But there was not really much risk early on. Worst case you burn up a bit of CPU. The question is how much of a benefit should they get just by being an early adopter (rather than a developer or early investor)? The developers put a lot of time into it so they had a decent amount of risk (wasted time). Early users really didn't risk much by using it (what is the yearly electricity cost of using the software).
If 90% of the coins were held by the first 10 people to ever use Bitcoins, that seems like a system that is not terribly useful. Perhaps what we have now is ideal. Perhaps it was too generous to early adopters. Having too much in the hands of a few people makes it unstable since they have a huge influence on the market and their whims control a huge amount of supply.
But in no reason does it make it a scam.
that's the kind of 'formal' analogical reasoning that the bogleheads guy was critiquing.
some public offerings (of 'things' in the most general sense) are legitimate, and some are scams. you can't tell the difference just by calling them all 'initial public offerings'. the difference is substantive, not formal.
some public offerings (of 'things' in the most general sense) are legitimate, and some are scams. you can't tell the difference just by calling them all 'initial public offerings'. the difference is substantive, not formal.
The point about it being a scam for the early adopters to profit at the expense of later adopters is like saying that IPO is a scam, because people who bought shares at the time of the IPO are profiteering of those who bought their shares later in the game.
Early adopters take most risk and therefore reap most benefits.
Early adopters take most risk and therefore reap most benefits.
there can be short-term inflation-like effects based on people's perceptions, but in the steady state the bank run or crash ought to be as deflationary as the fake funds were inflationary. at least in theory. in practice, of course, anything can happen.
i'll read your article with interest.
i'll read your article with interest.
If people think they have coins and they are willing to trade based on that belief, you have inflation even if actually they don't have those coins. All you need is a big "bank"-like thing where one person paying another updates a database table instead of making a block chain transaction. It's the same as cash in that respect.
As it happens I don't think we'll ever see fractional reserve banking with Bitcoins to the same extent we see it done today. But it wouldn't surprise me if we see some.
Yes, distributed contracts involve complex scripts and a few other undocumented features. I've written an article explaining some of it, I was hoping Satoshi would review it but it seems he's finally left us for good so I'll post it to the dev forum now.
As it happens I don't think we'll ever see fractional reserve banking with Bitcoins to the same extent we see it done today. But it wouldn't surprise me if we see some.
Yes, distributed contracts involve complex scripts and a few other undocumented features. I've written an article explaining some of it, I was hoping Satoshi would review it but it seems he's finally left us for good so I'll post it to the dev forum now.
@mike:
re: fractional lending, i agree it's possible, just that it's not inflationary in the steady state without being backed by inflation. if an airline overbooks seats but can't create new aeroplanes, it doesn't ultimately affect the supply of seats. that happens only if they overbook seats and, when a plane is overbooked, someone steps in and provides a new plane. no?
re: everything else, i think we're very nearly in agreement.
by 'distributed contracts', do you mean complex transactions supported by scripting? that's definitely worth exploring, and i should look at that part of the code more closely. isn't it mostly disabled in the client that people are downloading, though? i think i see how was intended to work, but i'm not sure i've considered everything. many things ought to be possible: auctions within the block chain itself, multiparty escrow, binding conditional subscriptions and pledges, and so forth.
re: fractional lending, i agree it's possible, just that it's not inflationary in the steady state without being backed by inflation. if an airline overbooks seats but can't create new aeroplanes, it doesn't ultimately affect the supply of seats. that happens only if they overbook seats and, when a plane is overbooked, someone steps in and provides a new plane. no?
re: everything else, i think we're very nearly in agreement.
by 'distributed contracts', do you mean complex transactions supported by scripting? that's definitely worth exploring, and i should look at that part of the code more closely. isn't it mostly disabled in the client that people are downloading, though? i think i see how was intended to work, but i'm not sure i've considered everything. many things ought to be possible: auctions within the block chain itself, multiparty escrow, binding conditional subscriptions and pledges, and so forth.
It's an interesting article. I think each of his four points are true. However, the conclusions he draws from them are mostly incorrect.
Severe Problem Number 1: Seeding Initial Wealth-
I don't think calling it severe is true, but it could have been done better. The initial rollout was far too quick. It should have mirrored an optimistic case of number of users on time, then converted to a predictable function (such as tan-1 shifted). This is mainly a problem in that a lot of people are pissed that a lot of people get something for free just for being first, and also because it means that a small number of people control a lot of the wealth which makes things unstable.
Severe Problem Number 2: Built in Deflation.
This is not a problem. Economists are of course scared of deflation, yet they cannot explain the consumer electronics industry. Deflation is fine- it encourages savings. If a lot of people save, it means that things that are being sold are sold for cheaper prices. Things become less expensive. Everyone becomes wealthier (except those pesky bankers). When's the last time you heard an economist complain that gas prices are too cheap and they need to go up to drive the economy? Only environmentalists have this position.
Severe Problem Number 3: Lack of Convertibility
Fairly big problem until the economy grows. People still need fiat currency. They need conversions. This costs fees. Bitcoin is not very useful if you need to go in and out of fiat, unless that process was extremely expensive before. If the economy grows, there's no need to convert anything. No one converts dollars for gold anymore. This problem may not go away, but that's not that awful of a thing. It has the potential to go away if it takes off and becomes more widely accepted. There's no technical reason it couldn't go away. It's more practical in nature.
Severe Problem Number 4: When Something Goes Wrong, It Will Die
Biggest concern. While distributed, there are a ton of choke points. The exchanges could get their funds confiscated by the government and a lot of people are out of a lot of cash. If there is a panic, it might eliminate confidence. If someone makes a better version, it may die. Small economies tend to be very unstable. Will Bitcoin have the strength? Who knows.
So he's not that far off in his observations, but he is WAY off in his implications of these predictions. And I'm not surprised- conventional wisdom says "moderate inflation good, deflation bad!", "I need dollars!", "I don't like other people getting rich for free!". So that's why he thinks that way.
The deflation argument needs to be attacked. It's so widespread, people are so scared of it. The really question we need to ask is "so?" And see why people actually think its bad. The problem is most people think of wealth as currency. Wealth is not currency. Wealth is goods and services that people value. Currency is only something that people redeem for such things. If people are not buying something, then they are leaving it available to be purchased by someone else for cheaper. Or they are investing which means that they are delaying their redeeming it for a later time when more should be available (after the investment actually increases the economy). Investment is a great thing and should be encouraged. A deflationary currency will encourage sound investments.
Severe Problem Number 1: Seeding Initial Wealth-
I don't think calling it severe is true, but it could have been done better. The initial rollout was far too quick. It should have mirrored an optimistic case of number of users on time, then converted to a predictable function (such as tan-1 shifted). This is mainly a problem in that a lot of people are pissed that a lot of people get something for free just for being first, and also because it means that a small number of people control a lot of the wealth which makes things unstable.
Severe Problem Number 2: Built in Deflation.
This is not a problem. Economists are of course scared of deflation, yet they cannot explain the consumer electronics industry. Deflation is fine- it encourages savings. If a lot of people save, it means that things that are being sold are sold for cheaper prices. Things become less expensive. Everyone becomes wealthier (except those pesky bankers). When's the last time you heard an economist complain that gas prices are too cheap and they need to go up to drive the economy? Only environmentalists have this position.
Severe Problem Number 3: Lack of Convertibility
Fairly big problem until the economy grows. People still need fiat currency. They need conversions. This costs fees. Bitcoin is not very useful if you need to go in and out of fiat, unless that process was extremely expensive before. If the economy grows, there's no need to convert anything. No one converts dollars for gold anymore. This problem may not go away, but that's not that awful of a thing. It has the potential to go away if it takes off and becomes more widely accepted. There's no technical reason it couldn't go away. It's more practical in nature.
Severe Problem Number 4: When Something Goes Wrong, It Will Die
Biggest concern. While distributed, there are a ton of choke points. The exchanges could get their funds confiscated by the government and a lot of people are out of a lot of cash. If there is a panic, it might eliminate confidence. If someone makes a better version, it may die. Small economies tend to be very unstable. Will Bitcoin have the strength? Who knows.
So he's not that far off in his observations, but he is WAY off in his implications of these predictions. And I'm not surprised- conventional wisdom says "moderate inflation good, deflation bad!", "I need dollars!", "I don't like other people getting rich for free!". So that's why he thinks that way.
The deflation argument needs to be attacked. It's so widespread, people are so scared of it. The really question we need to ask is "so?" And see why people actually think its bad. The problem is most people think of wealth as currency. Wealth is not currency. Wealth is goods and services that people value. Currency is only something that people redeem for such things. If people are not buying something, then they are leaving it available to be purchased by someone else for cheaper. Or they are investing which means that they are delaying their redeeming it for a later time when more should be available (after the investment actually increases the economy). Investment is a great thing and should be encouraged. A deflationary currency will encourage sound investments.
Well, I agree fractional reserve lending might seem too risky to do if there's no lender of last resort, but it's theoretically possible (current day laws notwithstanding ... again by the time this is an issue it will be decades or more).
W.R.T the other stuff, I was only talking about the deflation argument. I think the bogleheads poster has it pretty much right: there is a bubble, and when it pops it will unfortunately tarnish the name of Bitcoin for a long time. I don't think it's avoidable, better to just hope it happens soon and we get it over/done with.
Ultimately though I think he underestimates the utility of Bitcoin. It's not simply about the ideology of a tiny minority though if you read these forums you could be forgiven for thinking that. The current electronic payment systems just have a lot of very basic problems. Bitcoin has the potential to be much better than what we have now. Not just a bit more convenient but fundamentally more robust. Distrust of banks and the financial system is much higher than it used to be, thanks to the financial crisis. The man on the street is more likely to be receptive to alternatives than before.
I see it this way. The internet itself was once the epicenter of a massive bubble. When it popped, some people who got out early were rich and a whole lot of other people were poor. During the bubble some said that internet companies would never amount to much and this whole "e-commerce" thing was kind of a fad. You couldn't see what you were buying! And none of the then-trusted names were in this space.
Yet whilst it took years to recover after the bubble burst, clearly "dotcoms" were not a fad and had tremendous value to bring. Bitcoin is the same way. Especially as some of the things it can do are not explored yet (cf. distributed contracts).
W.R.T the other stuff, I was only talking about the deflation argument. I think the bogleheads poster has it pretty much right: there is a bubble, and when it pops it will unfortunately tarnish the name of Bitcoin for a long time. I don't think it's avoidable, better to just hope it happens soon and we get it over/done with.
Ultimately though I think he underestimates the utility of Bitcoin. It's not simply about the ideology of a tiny minority though if you read these forums you could be forgiven for thinking that. The current electronic payment systems just have a lot of very basic problems. Bitcoin has the potential to be much better than what we have now. Not just a bit more convenient but fundamentally more robust. Distrust of banks and the financial system is much higher than it used to be, thanks to the financial crisis. The man on the street is more likely to be receptive to alternatives than before.
I see it this way. The internet itself was once the epicenter of a massive bubble. When it popped, some people who got out early were rich and a whole lot of other people were poor. During the bubble some said that internet companies would never amount to much and this whole "e-commerce" thing was kind of a fad. You couldn't see what you were buying! And none of the then-trusted names were in this space.
Yet whilst it took years to recover after the bubble burst, clearly "dotcoms" were not a fad and had tremendous value to bring. Bitcoin is the same way. Especially as some of the things it can do are not explored yet (cf. distributed contracts).
the 'it deflates so it can't be used' argument is a red herring, but so is the notion that it won't deflate because an individual bank could lend money based on fractional reserves. the latter doesn't inflate a currency without a lender of last resort that has the power to do so; fractional-reserve lending is merely a conduit by which the central bank's inflation is spread.
but the quora discussion raises some good, though only germinal, points. better analysis distinguishes the bitcoin technology from the current block chain. it's important to understand that most of the 'economic' discussion outside this forum is not critiquing the code or p2p design. it's critiquing the economic role that the main block chain, the present currency exchangers, and the early adopters are playing.
a discussion at bogleheads also seems to get at the right 'economic' and 'practical' concerns at the moment. it's apparently the same guy from fatwallet to whom i've pointed people:
http://www.bogleheads.org/forum/viewtopic.php?t=74834&mrr=1305706655
note that this isn't an argument against bitcoin. it's an argument about what people are doing with it at the moment and why people outside the group of early adopters shouldn't adopt the main block chain. as an early adopter myself, and as a statement against 'selfish' interest, i can't find fault with his logic. i would not recommend that a friend take hard-earned money and buy coins that result from coinbase generations in the current block chain.
but the quora discussion raises some good, though only germinal, points. better analysis distinguishes the bitcoin technology from the current block chain. it's important to understand that most of the 'economic' discussion outside this forum is not critiquing the code or p2p design. it's critiquing the economic role that the main block chain, the present currency exchangers, and the early adopters are playing.
a discussion at bogleheads also seems to get at the right 'economic' and 'practical' concerns at the moment. it's apparently the same guy from fatwallet to whom i've pointed people:
http://www.bogleheads.org/forum/viewtopic.php?t=74834&mrr=1305706655
Quote
The problem with that model is that it entices people into the technology on the implied promise that they will make money from future users. That is not all that Bitcoin does in theory; it's also potentially a system for processing payments conveniently online. But the problem is that the promise of future wealth is presently such a driving force behind Bitcoin's adoption that even though the technology has the potential not to be a scam, it ends up in practice working almost wholly as a pyramid scheme.
You buy and hold Bitocins at present only because you hope to sell them higher to people in the future willing to pay more, knowing it's backed by nothing. That's the essence of a pyramid scheme. But what complicates things is that there are technically other reasons to buy (and not hold) Bitcoins: for example, you might make payments with them to people around the world, for goods and services. The problem, in practical terms, is that Bitcoin isn't a very convenient system for making payments for most law-abiding people at present. That's what led me to say on Fatwallet that the only people buying Bitcoins, in practice, appear to be (1) speculators banking on a pyramid scheme, (2) people who want Bitcoins in order to make payments for illegal things that PayPal and similar payment-processors would prohibit, like drugs and illegal forms of pornography, and (3) ideologues who have been convinced that Bitcoin fits their anti-government worldview. There's literally nobody else buying Bitcoins at present, or at least that's true with very few exceptions.
Now, promoters of Bitcoin tend to say that what much of what I've said is true of gold and other precious metals; if Bitcoin is a pyramid scheme, they say, so are these other instruments. And so, they say, are dollars. They're right in formal terms, but only in formal terms; the analogy ignores all cultural history and institutional factors. And in any event, the analogy just shows a problem with gold and other precious metals. The last thing rational investors need is another such way of storing value, particularly when the new vessel is immature, exists in a very thin market, and is subject to technical problems and market-manipulation.
To summarize, the perversion of Bitcoin is that it has attracted a small core following, based on the way it was designed, that is based mostly on ideology and on its function as a pyramid scheme. That is unfortunate, because it's a legitimately interesting technology that could have a role in simplifying online payments. In the meantime, it would be a horrible mistake to "invest" in Bitcoins unless you think you're very good at playing a period scheme -- and also if you think it won't be regulated or stopped for being exactly that sort of scam, functionally and substantively. And it could indeed be regulated successfully, notwithstanding all the protestations of marginally savvy Bitcoin users to the contrary.
You buy and hold Bitocins at present only because you hope to sell them higher to people in the future willing to pay more, knowing it's backed by nothing. That's the essence of a pyramid scheme. But what complicates things is that there are technically other reasons to buy (and not hold) Bitcoins: for example, you might make payments with them to people around the world, for goods and services. The problem, in practical terms, is that Bitcoin isn't a very convenient system for making payments for most law-abiding people at present. That's what led me to say on Fatwallet that the only people buying Bitcoins, in practice, appear to be (1) speculators banking on a pyramid scheme, (2) people who want Bitcoins in order to make payments for illegal things that PayPal and similar payment-processors would prohibit, like drugs and illegal forms of pornography, and (3) ideologues who have been convinced that Bitcoin fits their anti-government worldview. There's literally nobody else buying Bitcoins at present, or at least that's true with very few exceptions.
Now, promoters of Bitcoin tend to say that what much of what I've said is true of gold and other precious metals; if Bitcoin is a pyramid scheme, they say, so are these other instruments. And so, they say, are dollars. They're right in formal terms, but only in formal terms; the analogy ignores all cultural history and institutional factors. And in any event, the analogy just shows a problem with gold and other precious metals. The last thing rational investors need is another such way of storing value, particularly when the new vessel is immature, exists in a very thin market, and is subject to technical problems and market-manipulation.
To summarize, the perversion of Bitcoin is that it has attracted a small core following, based on the way it was designed, that is based mostly on ideology and on its function as a pyramid scheme. That is unfortunate, because it's a legitimately interesting technology that could have a role in simplifying online payments. In the meantime, it would be a horrible mistake to "invest" in Bitcoins unless you think you're very good at playing a period scheme -- and also if you think it won't be regulated or stopped for being exactly that sort of scam, functionally and substantively. And it could indeed be regulated successfully, notwithstanding all the protestations of marginally savvy Bitcoin users to the contrary.
note that this isn't an argument against bitcoin. it's an argument about what people are doing with it at the moment and why people outside the group of early adopters shouldn't adopt the main block chain. as an early adopter myself, and as a statement against 'selfish' interest, i can't find fault with his logic. i would not recommend that a friend take hard-earned money and buy coins that result from coinbase generations in the current block chain.
The fact that this topic keeps coming up just means we're doing a bad job of answering it. There's no need for flaming. This sort of Quora thread is simply a wake-up call to improve the FAQ.
There are lots of possible answers to the deflation argument. The simplest is that fractional reserve banking is possible with Bitcoin and might well end up occurring, at which point you have the same type of inflation as what we see today.
Another simple answer is that the case against a currency that (very slowly) increases in value is not at all open and shut. Economics is not an advanced science and economists still barely agree on how to measure inflation, how much of it there should be and even what it is! There are actually strong arguments that the current rates of inflation are leading to lots of money sloshing around that ends up inflating a constant series of bubbles. In recent history the dot com bubble followed by the housing bubbles are a good example.
Specifically because of a rate of inflation that will easily halve your savings over your own lifetime, people are practically forced to invest all their money regardless of their investment skills, or whether there are even opportunities worth investing in at all! It's not surprising that such a society is very prone to bubbles and mindless "house prices only ever increase" type groupthink.
There are lots of possible answers to the deflation argument. The simplest is that fractional reserve banking is possible with Bitcoin and might well end up occurring, at which point you have the same type of inflation as what we see today.
Another simple answer is that the case against a currency that (very slowly) increases in value is not at all open and shut. Economics is not an advanced science and economists still barely agree on how to measure inflation, how much of it there should be and even what it is! There are actually strong arguments that the current rates of inflation are leading to lots of money sloshing around that ends up inflating a constant series of bubbles. In recent history the dot com bubble followed by the housing bubbles are a good example.
Specifically because of a rate of inflation that will easily halve your savings over your own lifetime, people are practically forced to invest all their money regardless of their investment skills, or whether there are even opportunities worth investing in at all! It's not surprising that such a society is very prone to bubbles and mindless "house prices only ever increase" type groupthink.
The top answer is now quoted on wikipedia: http://en.wikipedia.org/wiki/Bitcoin#Critique_of_Bitcoin_economy
Quote from: Wikipedia
2. Cohen argues that Bitcoin has a built-in deflation mechanism. As the supply of more Bitcoins run out but the 'bitcoin economy' grows, the value of a single bitcoin will increase over time. Knowing that the value of your bitcoin will increase, it makes sense for a person to save the bitcoin and spend normal money instead, as the normal money is known to lose value over time. Cohen predicts that this will bring bitcoin transactions to a halt and also comments that like point 1, it is an effect that puts early adopters at a considerable advantage.
That makes sense to me, as long as I have "normal money" to spend. But if I keep spending it, eventually I will run out, unless I replenish my supply by earning more of it one way or another. But when I think about that, I believe I'd be more inclined to earn bitcoin specifically due to its deflationary nature. So eventually I would have no "normal money" left, and only bitcoin, and would gladly spend bitcoin to buy goods and services, regardless of the fact that it'll be worth more in the future than it is now. But critics never think that far, do they?
Haters are sooooo jelly!
Haters gottach hate. It's what they do and their sole purpose in life.
Haters are sooooo jelly!
Thought you might like this comic:
http://bitcoinweekly.com/articles/reactions-to-bitcoin
Basically details 4 common reactions to bitcoin including Game-changing, scam, stupid, and indifference.
Apparently the "internet economist" thinks it's stupid and scammy at the same time.
http://bitcoinweekly.com/articles/reactions-to-bitcoin
Basically details 4 common reactions to bitcoin including Game-changing, scam, stupid, and indifference.
Apparently the "internet economist" thinks it's stupid and scammy at the same time.
The top answer is now quoted on wikipedia: http://en.wikipedia.org/wiki/Bitcoin#Critique_of_Bitcoin_economy
Had I devised bitcoin, I'd have made it so mining availability would be based on some sort of community driven inflation targets. At first probably fix it to USD and if it ever became popular enough, some fixed basket of goods scheme.
How would you achieve this without making the system vulnerable to corruption?
Who enforces the exchange rate? Who chooses the basket? Who gets to vote? How do you prevent double voting?
In a way, we already have community driven inflation targets, because changes in the bitcoin protocol will only be successful if the majority of users agree with them. A community-driven target will always be deflationary because people who already own BTC would never "vote" for inflation that decreases the value of their savings.
Your concept of pegging the exchange rate by the community is thus flawed. Which leaves some central authority to peg the exchange rate (the developers?). But that would nullify the main advantage of Bitcoin.
I would go as far as saying that it is impossible to make a currency decentralised and fixed to a basket at the same time. A decentralised currency must be free floating by its very nature. If you can think of a solution that proves me wrong, please let me know!
Is that like 1 level below the ruling elite level or 2 levels below?
You have no idea, man.
http://www.youtube.com/watch?v=jHHw1ihH1iw
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