Jerry Brito defends Bitcoin

by on April 20, 2011 at 2:40 pm in Economics | Permalink

Read him here for a discussion of the revolutionary P2P properties of the system. 

Here’s a way to restate my worry.  Many people tell me, or write to me, about how great the transactions system is for its anonymity, invulnerability to governmental shutdown, and so on.  Let’s put aside the social desirability of this and just focus on the predictions.  I personally, would much rather have lots of dollars in the Cayman Islands (which is fairly anonymous already) than lots of assets in the Bitcoin system.  I just don’t see why the Bitcoin assets are supposed to be so attractive compared to dollars, euros, Swiss francs, and so on.  I would rather hold diamonds, for that matter, or a Picasso print.  If I suddenly had a large stash of Bitcoin assets, from a heroin sale, I would work very hard to convert them into something else (p.s. I know they don’t call them “Bitcoin assets” but I wish to, to make the point).

Imagine that I can convert Bitcoin assets into other, non-Bitcoin assets quite easily.  Then I will, and many other people will (there is a lot more wealth tied up in the Cayman Islands than in Bitcoin), and the velocity of Bitcoin assets accelerates.  That encourages even more conversion out of Bitcoin assets.  Why hold Bitcoin assets?

Alternatively, imagine that I can’t convert Bitcoin assets into other, non-Bitcoin assets easily.  Then I would say the system fails as an alternative money, virtually by definition.  Arguably Bitcoin is still at this stage right now, and what I am pointing out is that further development, and a move to the former scenario, isn’t going to work either.

To convince me on Bitcoin, you need to discuss the store of value function more explicitly, not just its (possible) efficiency as a transactions medium.  If something is a good transactions medium — let’s grant that for the sake of argument –, but not a good store of value, its velocity will accelerate and sooner or later that spells trouble.  Here are Girton and Roper on currency substitution.

Jim Clay April 20, 2011 at 2:43 pm

Hmmm. If it was a good transaction medium, couldn’t its value be pegged to the dollar, and basically be used more-or-less purely as a transaction medium?

EorrFU April 20, 2011 at 4:56 pm

Then what is the point? All that is left is laundering.

PlasticLiving April 20, 2011 at 6:11 pm

I think you’ll find most BitCoin supporters are Agorists trying to build their counter-economy.

Dan Weber April 20, 2011 at 6:12 pm

Not paying huge transactions fees to the banks or credit card companies sounds like a good enough reason.

Jim Clay April 21, 2011 at 12:42 pm

EorrFU,
There are lots of reasons for wanting to anonymize transactions besides the illegal ones. For instance, I am Mormon, and took note of how many Mormons were attacked professionally for supporting Prop. 8 in California. It does not appear to me that this kind of “making the political personal” is going to stop anytime soon, so making anonymous political donations is attractive.

Doc Merlin April 21, 2011 at 3:54 am

No no no, the entire point was to create a very price-deflationary currency, so people would hold it despite it not yielding interest.

samuel April 20, 2011 at 3:17 pm

Your argument is circular, Tyler. No novel currency is strictly preferable to other existing currencies and assets until it reaches a certain critical mass of acceptance, so its value is more predictable. It comes down to you saying “Why should we accept it until it has greater acceptance?” If bitcoin catches of it will be because good publicity or other circumstances cause collective action, and give it the storage capacity you’re craving.

sohbet April 20, 2011 at 3:36 pm

great post and thanks for sharing..

Darrell Duane April 20, 2011 at 3:50 pm

I am very impressed with Bitcoin’s ability to store value, but I think that is because I have some understanding of the cryptographic principles and social principles of the peer-to-peer network that underlies the Bitcoin system architecture. Bitcoins work as a currency because they have fungability, scarcity, and lack of counterfeitability, and can be transacted easily. There are still a lot of things that need to happen with the technology to enhance transact-ability, but its clear to me that these are in progress and not big hurdles.
As more and more people adopt Bitcoin, continuing at the rate that they have been since early 2009 when it was introduced, Bitcoins will take on more value. Assuming that more people continue to use Bitcoin, it is a deflationary currency in that the money supply will continue to become less and less available over time. Tyler, I can’t read the paper about currency substitution, but I’d like to hear more specifics about your concerns about Bitcoin’s ability to store value. Its clear to me that Bitcoins are strong representations of value, as long as I back up my wallet.dat files and keep them secure.

Dan Weber April 20, 2011 at 6:15 pm

I am very impressed with Bitcoin’s ability to store value

A Bitcoin’s value has had multiple weeks this year where its value changed by 10%. That is not a stable store of value.

it is a deflationary currency

And this is a good thing?

Doc Merlin April 21, 2011 at 3:55 am

it is a deflationary currency

And this is a good thing?”

For the currency holder? Yes.

Dan Kervick April 21, 2011 at 7:30 am

If a deflationary cycle sets in, and it turns out that it is almost always better to hold bitcoins than trade them, the bitcoin payment system will rapidly become very illiquid and dysfunctional.

damien April 20, 2011 at 3:54 pm

@samuel I don’t see the circularity. Tyler is arguing that there is no way to reach an equilibrium where it is desirable to hold bitcoins unless bitcoins are a good store of value. Since they are easy to trade and not a good store of value, the equilibrium will be where no one holds bitcoins.

Rahul April 20, 2011 at 4:22 pm

If Tyler had been around in the 1700′s would he make the same argument against the (then new) American dollar? Why not?

Ed April 20, 2011 at 4:33 pm

Because the American dollar was actually backed by an entity of presumable reliability, i.e. the federal government (post-Articles of Confederacyt) and the states that issued the dollars. And, you know. It was pegged to specie. Which Bitcoin obviously cannot be.

Phill April 20, 2011 at 5:14 pm

Forgive me, but then how is it intrinsically any different from any other fiat currency issued by a government foreign to you?

Since you’re not coerced to pay taxes in it, aren’t we down to perceived strength and value all over again?

david April 20, 2011 at 6:22 pm

Someone else is forced to pay taxes in it, and those people will necessarily have a demand for their currency.

Björn April 20, 2011 at 3:57 pm

I don’t understand what point you are trying to make. What is the fundamental difference between dollars and bitcoins? Isn’t it just a question of what goods and services you can get in exchange for dollars and bitcoins? Obviously at the moment you can get more for dollars, but there is no guarantee that dollars will continue to be valuable (no such guarantee for BitCoins, either). Investing in BitCoins is speculation, but so is investing in other currencies.

Maybe you could say that dollars and BitCoins face different types of risks. dollars can be ruined by governments, bitcoins maybe less so. Although I fully expect BitCoins to be made illegal at some point, and then it remains to be seen how the bitcoin economy will continue to function.

david April 20, 2011 at 4:20 pm

Fiat dollars necessarily have a value because you must pay taxes with them. Commodity currencies and stocks have a value because their underlying commodities have a value. BitCoins are a fiat currency without the government-backed ability to charge you with tax evasion. So there is no value to accumulating a store of BitCoins as opposed to storing any other kind of financial asset (even if dollars inflate, you could always buy commodities), so rational investors should attempt to trade away any BitCoins they receive as fast as possible.

Björn April 20, 2011 at 5:34 pm

I still don’t see it – so maybe you prefer having 1000 $ to 1000 BTC. But if in 10 years the government wants 1 billion $ in taxes (because of hyperinflation), your 1000 $ are still pretty worthless. Therefore currencies don’t really have a guaranteed value just because you can pay taxes with them.

As for the commodities, that is just “what can you buy for bitcoins” – if people accept bitcoins, they have a value. Even if you buy a “commodity currency” (according to Wikipedia a currency of a country that relies heavily on exporting commodities), just as with fiat currencies you don’t have a guaranteed exchange rate. Your 1000 commodity dollars might only buy you a single coffee bean in ten years.

david April 20, 2011 at 6:09 pm

In this context, “commodity currency” means commodity-backed currency.

You’re thinking about this the wrong way. If people accept bitcoins, they have a value set at whatever rate other people accept bitcoins at. The value of any unit of bitcoin is indeterminate and bitcoins become a pure bubble financial asset. The long-run supply of money-like financial assets is infinite; bitcoins are only one type of possible currency, and although the number of bitcoins is fixed, the number of money-like assets is not.

With dollars and commodities, their value is always “determined” in the long-run by their alternate uses besides as a medium of transaction, as a store of value, say. This is not the case for Bitcoin.

Samuel April 20, 2011 at 6:24 pm

In the recent econtalk on Bitcoin the spokesperson / head programmer suggested one way it may gain acceptance is if a smaller nation, perhaps a failed state or experimenting developing country embraced it. There’s no reason in principle a nation couldn’t print bitcoin backed dollars, effectively vouchers for bitcoins.

Nick April 20, 2011 at 4:12 pm

Back from college I seem to recall that one requirement of money is that it be a demand on future or past labor. When I first heard of bitcoin, I thought it would be a neat way of keeping track of demand for computer labor, so that bitcoins would enter circulation based on computers doing things for people willing to pay them, like folding@home would become a central bank allowed to create bitcoins.

But instead its just another tradeable security, like gold or tulips. I just don’t understand how the rules of minting bitcoins prevent there from being more than a certain number – how it “ties itself to the mast.”

Look, in the best case scenario bitcoin becomes widely used as a medium of exchange. I would assume that some sort of credit will then be established for some buyers (or even trade receivables). Once you have credit, you will have the net debtors versus the net creditors, and it is likely that the net debtors will come to outnumber the net creditors in number. It’s not too long before you hear cries of “You shall not cruficy mankind on a cross of bitcoin 1.0!” and the government intervenes and decides that the bitcoin steering committee needs to have regional representation and a Presidential-appointed and Senate-nominated governor at the head. If they don’t do it, see what happened to the online poker sites this week.

Jerry Brito April 20, 2011 at 4:27 pm

The thing about Bitcoin is that it has no steering committee, and unlike the poker sites, there is not corporation, no executives, no servers.

Dan Kervick April 21, 2011 at 8:01 am

The whole unregulated system seems made for endless opportunities for fraud, hacking and manipulation, and endless disputes about payments and contracts. Nor will bitcoin, to the extent that it is successful, eliminate the need for credit banking and interest. If a sphere of money-lubricated market transactions expands, the money supply needs to rise along with the rate and value of transactions, or else it will cease to function. If there is no central banker or central payment system regulator, then at the very least you will need a distributed system for the endogenous creation of bitcoins though credit, and the payment of interest as the price for credit and as insurance against inflation risk.

And at that point, people will want somebody they trust to be in charge, to make rules and enforce them.

The thing anarcho-capitalists never seem to figure out is that the reason we have powerful governing authorities monitoring and regulating the supply of a currency, verifying and regulating contracts, and prosecuting contract-breakers is not because the evil State simply muscled in and took over something that was working fine. People create governing authorities and invest them with power because they want there to be governing authorities because the distributed, organic self-regulation of anarchist mythology doesn’t work.

To the extent that bitcoins become useful, the users of bitcoins will want predictability and security. It might be that the the participants in markets for various illegal goods will be willing to tolerate the wild inflationary and deflationary swings, and the fraudulent rackets, and the ridiculous scams and bubbles, because they have few other alternatives for moving their goods. But most people won’t.

Nor do I see how this system circumvents government regulation. For a payment system to be effective, the information has to be somewhere, and it has to be publicly verifiable and enforceable. And “everywhere” does not equal “nowhere”. If the information is distributed everywhere rather than at a central intermediary, that just means the government has a larger choice about which computers to seize. If however, the transactions leave no record, that might be great short-term advantage for some people who want to shield them from government eyes. But it also means that records of the transaction do not exist to settle contract and payment disputes. Few people will prefer such a system to other alternatives.

Dan Weber April 21, 2011 at 11:17 am

Transactions do leave public records. Bitcoin isn’t so much anonymous as its pseudonymous with essentially infinite pseudonyms.

For example, I can receive transactions at 1DgwUpVcCPuZ4rUccgcAucudwyvQBQYSiJ. You can go to http://blockexplorer.com/address/1DgwUpVcCPuZ4rUccgcAucudwyvQBQYSiJ to see what payments have been received at that address. (There are none, I just made it up, but if you pay me 0.01 I’ll pay you back so you can watch.) My business could use that address as its “accounts receivable” and pay taxes on it.

If it were stable I’d love it.

Rahul April 20, 2011 at 4:25 pm

“I won’t adopt Bitcoins if they are easily convertible. I also won’t adopt Bitcoins if they are _not_ easily convertible”. What’s left? Are we arguing that no new currency will ever have a chance?

EorrFU April 20, 2011 at 4:58 pm

Unless it is representative of something else that has value or required to fufill a legal obligation (taxes),

cthorm April 20, 2011 at 4:38 pm

What implications/utility can bitcoin have as part of a carry trade?

It seems to me that the long-term equilibrium is only relevant for savers with a long time horizon. As long as the currency and its value remain stable between transactions, I think there is value in a currency like bitcoin. A carry trade, or any trading business, is affected by the relative price volatility of all of the assets involved; a value-stable commodity like bitcoin should, in principle, reduce the risk of a costly reversal.

Gavin Andresen April 20, 2011 at 4:43 pm

Bitcoins should, eventually, assuming they get past their initial chicken-and-egg stage, be a really good store of value.

They are better than a Picasso print or gold in a vault because they can be encrypted, backed up, and stored all over the world. You can make them secure from Tsunamis and bank nationalizations. And inflation protection is built-in.

And unlike gold or picasso prints, they can be both secure and also immediately available– enter your password, and maybe type in a verification PIN number on your cellphone and you unlock a copy of your digital wallet which can contain millions of dollars as easily as $1.50.

That’s the vision, anyway. It will take a year or ten to actually get to where the Bitcoin economy is large enough so that prices are stable and Bitcoins really DO function as a good store of value (again, assuming that there are enough crazy early adopters to get over the bootstrapping problems).

James Oswald April 20, 2011 at 4:45 pm

Bitcoin is just another in a long line of Gresham’s Lawesque substitutions for money with lower opportunity costs. Bitcoin deliberately targets a lower rate of inflation than government created fiat currency. Perhaps if they had a mechanism for paying people some other asset to get out it would get more accepted. A fiat currency backed by another fiat currency, perhaps.

djoot April 20, 2011 at 10:25 pm

They do have a mechanism to get some other asset. It’s called the market. There are of course no guarantees of future prices in the market, so you can’t be sure that your bitcoin will fetch $1.15 a week from now. Equally, there is no guarantee that your $1 will fetch a quarter of a gallon of gas a week from now.

Andrew' April 20, 2011 at 4:49 pm

What if a bunch of futures contracts for all the tangibles Tyler refers to were denominated in Bitcoin?

IVV April 20, 2011 at 4:51 pm

How do Bitcoins compare to Rai Stones?

Steven Kane April 20, 2011 at 4:58 pm

“If I suddenly had a large stash of Bitcoin assets, from a heroin sale, I would work very hard to convert them into something else (p.s. I know they don’t call them “Bitcoin assets” but I wish to, to make the point).

Imagine that I can convert Bitcoin assets into other, non-Bitcoin assets quite easily. Then I will, and many other people will (there is a lot more wealth tied up in the Cayman Islands than in Bitcoin), and the velocity of Bitcoin assets accelerates. That encourages even more conversion out of Bitcoin assets. Why hold Bitcoin assets?”

Why hold Bitcoin assets? To buy more heroin to sell. If other people in the underground economy are using Bitcoin, then you as a participant in the underground economy will probably want to buy stuff from them using Bitcoin.

Dan Weber April 20, 2011 at 6:21 pm

This.

Converting to or from Bitcoins runs about 1% transaction costs. But transacting in Bitcoins is incredibly cheap; something on the order of 0.01%.

If you just use Bitcoins for transfer, you don’t gain all that much. But leaving assets in Bitcoins lets you perform nearly-free transactions. Think of it like tax-deferral.

(My big complaint is that Bitcoins are not stable in value, and their user community seems to see this as a feature, not a bug.)

lurkingowl April 20, 2011 at 10:19 pm

Is think the volatility is mostly because it’s a new thing, getting press here and there. So the demand fluctuates a lot, so the price fluctuates a lot. Presumably it will set down when (if) the vendor network fills out more.

Explodicle April 20, 2011 at 5:02 pm

Stupid question: why hold USD assets? It’s constantly devaluing, and certainly won’t stop any time soon. Everything beyond my normal spending cash and my emergency stash gets invested. I had always thought of my losses from USD holdings were like a service charge for convenience. If I could instantly turn other currencies into USD and back without exchange fees I would never keep USD at all.

david April 20, 2011 at 5:17 pm

In the long-term, someone would need the USD to pay taxes.

In the short-term, you need USD to pay other people.

BitCoin meets the latter but not the former; it can achieve a short-term equilibrium where it is valuable as a medium of transaction because everyone else treats it as a medium of transaction – but that value would not be stable in the long term. Its value would be pure bubble. Add in its inherently deflationary nature (BitCoins, once lost to accidents like a fried backup server, cannot be recovered, for the same cryptographic reasons the maximum number of possible BitCoins is fixed) and we have an inherent problem.

Dan Weber April 21, 2011 at 11:21 am

USDs do devalue, but only a few percent a year. Bitcoins are a few orders of magnitude more volatile than that.

Corporate Serf April 21, 2011 at 2:09 pm

USD volatility is of the order of what, 50 percent (volatility is more than decreasing in value)? Commodities including gold and silver have volatilities many multiples of that and still people talk about those as serious currency material.

mpkomara April 20, 2011 at 5:13 pm

Tyler–

Here is a diamond/BTC swap proposal:
Upon agreement and t+2, You buy a diamond with dollars, I will buy the USD equivalent of bitcoins, no less than a 500 dollar diamond, no more than a 1000 dollar diamond. One year from now, you sell the diamond for dollars. I sell the bitcoins for dollars. if you make more dollars than me, i will pay you the difference. if i make more dollars than you, you will pay me the difference. i offer you the same proposal for a picasso painting.

John Williams April 20, 2011 at 5:24 pm

Money is backed by promises, and promises can be classified as one of:

- Promises to do something of value on presentation of a token. (ie: commodity-backed money)

- Promises to not do something damaging on presentation of a token. (ie: protection-racket money otherwise known as “fiat” money which is backed by the promise not to throw you in jail if you present it as legal tender for taxes)

People seem to think that it is important to have only one currency as “the standard.”

Prior to desktop automatons pushing electrons around as tokens and ‘zero-risk’ arbitrage algorithms for money markets, this may have been necessary but discovery and transaction costs are now so low there is no reason for it.

Doc Merlin April 21, 2011 at 4:02 am

Bitcoin is backed by the promise to not make too many, too fast, and to be EXTREMELY difficult to forge.

Nate April 21, 2011 at 4:34 pm

Bitcoins are the commodity. The commodity happens to be a set of numbers that facilitates monetary functions, especially the ability to trade at low transaction cost, and their mathematically defined scarce nature.

albert April 20, 2011 at 5:42 pm

Diamonds are a terrible store of value. they are each unique and you have to be an expert to do a correct appraisal. very illiquid (large bid ask spreads), lots of transaction costs, plus the whole market is artificially high because of the de beers monopoly which can end someday. Also, artificial diamonds are indistinguishable from natural ones and the only cost to make is energy, which tends to go down as production efficiency increases.
Art is also bad for the same reasons. That’s why rich investors worried with fiat currencies are buying gold right now.

Dan Weber April 20, 2011 at 6:22 pm

That’s why rich investors worried with fiat currencies are buying gold right now.

Rich people already bought gold before its recent run-up.

Rahul April 20, 2011 at 6:02 pm

These days it is harder to get your ill-gotten heroin money to the Caymans or Switzerland. Money laundering regulations do bite. Bitcoins might solve that problem of international transport.

dirk April 20, 2011 at 6:03 pm

You mean I can buy heroin with Bitcoin assets? Where?

Anon. April 20, 2011 at 6:14 pm

Here you go: https://en.bitcoin.it/wiki/Trade#Psychoactive_drugs

You will need TOR.

anon April 20, 2011 at 6:04 pm

One thing that puzzles me is what would happen if the (few) websites honoring Bitcoins were to stop gradually. A run on Bitcoins?

Prakash April 21, 2011 at 2:42 am

One possible entreprenurial solution I can see for this is the following. Warning, speculation follows.

A hedge fund spots the potential of bitcoin and through its unsavoury contacts in the dark nets, sees its value. They notice that vendors are dropping off – assuming
that this is a natural process, and not a guv crackdown. They slowly buy up as much bitcoin as they can since as you mention, a run is on. Their front is a few “true believers”
. Parallely, they buy up warehouse space somewhere in the centre of USA and prepare an online store selling everything. They announce the store and its USP – we accept bitcoins.

The store re-seeds the bitcoin market and the hedge fund is soon sitting on the world’s most valuable stash. The above operation is expensive, no doubt, but it’s like any corporate raid. High-Risk High-Reward.

PlasticLiving April 20, 2011 at 6:10 pm

Thanks for the elaboration. You had me scratching my head after yesterday’s post.

John Williams April 20, 2011 at 6:12 pm

If I issue currency without a promise to give the bearer of the currency something of value in exchange, there will be no demand for it — UNLESS — I create demand by threatening to harm those who DO NOT obtain it.

That’s where taxation steps into the fiat shoes.

I can bootstrap a fiat currency by the simple expedient of taxing something you do and then demanding that you pay your taxes in fiat currency. You don’t acquire it? Then I punish you. The fiat authority of the money is limited only by my ability to torture you.

Federal Reserve money buys protection from punishment. You are punished if you don’t pay taxes. This has become the Federal Reserve’s primary monetary authority. The moral hazard of basing monetary authority on punishment has now been realized in the systemic and out-of-control gang rapes of prisoners in the US. All other unlawful acts by US governments are now overshadowed by the murderous, sexually sadistic character of governmental authority that has developed in US penal systems. Federal Reserve money is now protection racket money, or, if you prefer “punishment protection money”. Calling it “fiat money”, “debt money” or even “legal tender” obscures its true character.

LOL@sillydogmatism April 21, 2011 at 10:06 am

You look like a clown when you try to pass off political ideology couched in economic dogma as some sort of economic truth. Hayek disagreed with you, but you obviously don’t care for reasoned thought on the matter:

“Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold, as the common belief that the value which gold has in other uses determines the value of money. The gold standard is the only method we have yet found to place a discipline on government, and government will behave reasonably only if it is forced to do so….

I have said that it is an erroneous belief that the value of gold or any metallic basis determines directly the value of the money. The gold standard is a mechanism which was intended and for a long time did successfully force governments to control the quantity of the money in an appropriate manner so as to keep its value equal with that of gold. But there are many historical instances which prove that it is certainly possible, if it is in the self-interest of the issuer, to control the quantity even of a token money in such a manner as to keep its value constant…”

http://mises.org/daily/3204

dirk April 20, 2011 at 6:26 pm

“That’s why rich investors worried with fiat currencies are buying gold right now.”

Why aren’t rich investors worried about fiat currencies buying houses right now? Gold MIGHT be a huge bubble, but the housing bubble — by a much greater likelihood — has deflated. I’m led to believe that gold is rising for reasons other than fears of depreciating currencies.

Jeff Licquia April 20, 2011 at 9:06 pm

I see BitCoin and similar schemes as being about technology more than economics. These are not people who are keen on, say, printing paper scrip or whatever; it’s all about addressing perceived flaws in the tech that currently underpins the monetary system, things like a lack of anonymity in electronic transactions, fraud, identity theft, and so on. The fact that a new currency has to be invented to support the technology is more of a nuisance than a feature.

Suppose the Fed endorsed BitCoin the technology as the mechanism for managing the US dollar electronically. I expect that BitCoin the currency would rapidly disappear in that case, and most BitCoin proponents would declare this as a victory rather than a defeat.

Jeff Licquia April 20, 2011 at 9:16 pm

To follow up (hit “submit” too early), the interesting question seems to be: how do you develop, test, and promote these technologies without an alt-currency underpinning?

NormD April 21, 2011 at 12:41 am

Perhaps I am missing something. BC seems like a scheme to steal value from producers. I buy a room full of computers with fancy GPUs and keep them busy all day (consuming lots of power) making BC which I then hand to a farmer or miner or factory worker or dentist and expect them to give me things of real value. How does this make sense? Its seems like printing money. In fact, how is minting BC any different from printing money? BC is hard to counterfeit, but so is modern money.

The comment about BC surviving a Tsumani seems a little strange. Hello. When there is no power and no Internet there is no BC. Cash in your pocket still works though.

Comments that your BC is protected by your password seem pathetic. Its almost like criminals don’t exist. You know like the ones who point a gun, knife, club or fist at you and say “give me your BC”. You gonna risk your life for your BC?

Stephen April 21, 2011 at 2:16 am

NormD, do you think people who mine gold, gold which is then stored in a vault, also steal from producers who exchange the gold for dollars that are then handed to a farmer or miner or factory worker or dentist and get real value?

Additionally, BC is not printed, it is issued randomly in fixed amounts over time. Why does the initial creation of the BC bother you so much? Does that really matter one bit? Competition will tend to make the endeavor minimally profitable over time, where hardware + electricity costs will be approximately the same cost as the value of the BC.

As far as a Tsumani goes, so what? Credit cards and online banking transactions suffer the same issues. No one is saying it is a disaster proof payment method. That is a strawman.

As far as criminals go, how the hell will they even know you have BC? You can remain anonymous and there is no way for a criminal to determine who has how much BC if you encrypt your wallet.

BC May 3, 2011 at 8:35 pm

If BTC comes to dominate, then the rich will all have large amounts of it. If I see you driving a nice car, I know that you are probably a man of money, so I demand to receive some of it, or I do like the Filipinos and kidnap you to make your family pay. Wonderfully, I can simply give your family the Bitcoin address to send the money to, using an I2P-to-email gateway. I have no risk of having to collect the money from a police-watched drop location, and as long as I don’t have to go through a centralized agency like Mt. Gox (because in this scenario it is rarely necessary to exchange BTC for another currency), I don’t have much to worry from spending the dirty money, either.

Prakash April 21, 2011 at 2:16 am

That’s why the protocol is structured the way it is. It decentralises the printing of money, but the mathematics severely restricts the effective value that you can take
away from it. The bitcoins you gain by printing will almost always be a trivial amount compared to the bitcoins you’ll gain when you offer to exchange your labour for
bitcoins to willing buyers. It’s only in the initial years that the mining is even worth doing. It also sets up a positive feedback loop in which the earlier adopters will
try to boost the value of the currency by offering more services.

In the later years when bitcoin stabilises, some lucky guy somewhere gets a bonanza every now and then. Not a big deal at all. The same thing happens today with
lottery winners. You don’t scream “Hey – those fiat dollars are backed by my labour!! How Dare you win a million of them!”

The underlying thing is that most of us want money backed by something of value, instead of just a proof-of-concept. But proof-concept is probably better than
threatened use of weapons. (what backs today’s money)

About computer security, valid point. After bitcoin picks up, computer security will go to another level altogether. You’ll see multiple wallets, diversification and tons
of things that are not imagined now, because they are not worth imagining. When the real money starts playing, innovations will happen.

One concern I have with bitcoin is a bit hansonian. if a bitcoin like protocol picks up, then there will come a point when it has to become official and enormous status
has to be transfered from the holders of the old money to the holders of the new money. I’m not sure how human civilization will handle that.

Doc Merlin April 21, 2011 at 3:53 am

From the money supply side, its a very very deflationary currency, because the growth rate in monetary base is very, very slow and slows with time. In addition, because of the nature of the bitcoin market, its unlikely that fractional reserve banking will increase the bitcoin money supply.

This is why Tyler is exactly wrong. Bitcoins should store value excellently well over the long term so long as interest rates are low. If interest rates increase substantially enough to offset Bitcoin price deflation then bitcoins will cease to be as good, and will quickly drop in price.

Saliency April 21, 2011 at 8:50 am

Tyler,

All currencies are subject to currency substitution.

All currencies derive their value/utility from the utility they provide as a currency. Whatever this value is it is always possible for it to drop to zero.

Gold’s value is derived from it’s utility as a commodity and it’s utility as a currency. If people on mass start fancying platinum over gold as a store of value then gold’s price will decline to something more close to it’s value as a commodity.

The USD’s value is derived from it’s utility in paying taxes and allowing people to avoid go to jail and it’s utility as a currency. If all american’s were expats living in other countries paying taxes back to america the value of the USD would only be derived from it’s function in paying taxes. The analogy is the same if states had their own currencies.

Because BitCoin’s value is only derived from it’s value as a currency does not mean it is inherently more risky then USD or Gold. A currencies utility as a currency is always subject to evaporation.

If BitCoin has advantages as a transaction medium over government issued currencies or commodities then it will have value as an alternate currency.

Saliency April 21, 2011 at 9:00 am

BitCoin is not anonymous!

At best a synonym

All transactions are visible. If you ever have something shipped to your address or convert BitCoin to USD and deposit it back into your bank account it will be possible to ti all the transactions you have made with that BitCoin account to that address or bank account.

Again all your transactions for a synonym are visible. Once you link it to your real-self all transactions done under the synonym are tied to you.

david April 22, 2011 at 2:20 am

I think you mean “pseudonym”, not “synonym”.

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