Are we delusional?  Well, maybe. But this dude didn't do a particularly good job of making that case.  So he claims that the people who believe that Bitcoin is "going to take over the entire planet," i.e. become the dominant global currency, are "delusional."  He also says that "virtual currency is the future. There's no doubt about that. Digital payments are the future.  Bitcoin is not that. Bitcoin is a step along the way. It will eventually disintegrate and atrophy. But yes, digital currencies and digital payments are the future" and that "the original genius of Satoshi is the blockchain."  

Ok... so there's "no doubt" that "digital currencies are the future" and Satoshi is a "genius"... but Bitcoin is still destined to fail for ... reasons.  

So what actual arguments does he advance in support of his claim that Bitcoin will not succeed in becoming a major world currency?  Well, his primary argument for why Bitcoin won't become a major world currency in the future is that Bitcoin is currently relatively small with only a few hundred thousand users worldwide.  Do I really have to explain why that argument is not terribly persuasive?  

And then in response to the question "where did it [Bitcoin] go wrong?" he replies: "the get-rich-quick kids, they got into it and everybody saw a huge profit. You've got people like the Winklevoss twins who are pumping this thing because they're now holding 1% of all the bitcoins.  And they're pumping it and saying '40,000 dollars a coin.' Well, the theory of the greater fool comes in here. If you've been fortunate enough to buy that many, the only way you're going to get out is to find greater fools to buy it from you. That's where it went wrong."

Huh? So the problem with Bitcoin is that people are speculating on its future value? I guess every financial asset in the world (including every currency) is fatally flawed.  And this bit about the "greater fool" suggests that he fundamentally misunderstands the nature of money.  As I've written before:


So, to summarize, Bitcoin is doomed to fail because it hasn't yet succeeded in taking over the world and because some people are speculating on its future value.

Someone on reddit argued that the value proposition for Bitcoin I describe is not one that people (other than ancaps and libertarians) care about.  Here was my response. (Note that the discussion there also touched on "censorship resistance" as one of Bitcoin's important properties which I'd argue is simply a corollary of trustlessness.)


Well, I’d say that claiming that "no one” cares is obviously an overstatement. The people being censored care. Anyone who has ever purchased an illicit product or been paid in cash in an effort to evade taxes cares about censorship-resistance. The illegal drug trade is a 300-billion-dollar-a-year market. The broader "underground" or "shadow economy" in just the US is estimated at two trillion dollars. So censorship-resistance is absolutely important to a lot of people. But that doesn't mean that mean that many forms of financial censorship aren't popular. They are. To use the examples above, most people still support the drug war and coercively-collected taxation.


I actually think that's generally true, with some important qualifications. Certainly that's the case for most people if we’re just talking about trusting a bank to honor their deposit or properly effectuate an ordinary (not-likely-to-be-censored) transaction. Do most people trust their government to maintain the value of their currency? Well, the answer to that question is probably “mostly” and “most of the time.” When a fiat currency begins to fail, however, that trust can evaporate pretty quickly. I don't think most Venezuelans have a whole lot of trust in their government's current management of the Bolivar. And even for a currency like the dollar that's currently experiencing low inflation, people only “trust” the government / central bank to erode the purchasing power of their money relatively slowly. That doesn't mean that they like seeing their money lose purchasing power or that financially savvy people don't spend lots of money and effort on attempting to minimize their exposure to inflation. But is a little bit of inflation going to cause most people to immediately abandon the dollar? Obviously not. As I said in the linked comment, in the short-term, the network effect is by far the most important determinant of what’s actually used as money.

Now if you want to argue that most people / "the average Joe" don't currently recognize Bitcoin's value proposition, I would agree with you 100%. They obviously don't, or Bitcoin would have a much larger user base than (at most) a few million people and a much higher "market cap" than a few billion dollars. But Bitcoin doesn't need the average Joe to recognize its potential right now in order to be successful over the medium- and long-term. If Bitcoin's monetary properties are good enough to allow it to, over time, out-compete fiat as money (or, more modestly, just out-compete gold as a "store of value" / inflationary hedge), Bitcoin is still unlikely to get there in one giant leap by suddenly appealing to the masses. It will be an iterative process with adoption occurring at the margins. And again, the network effect of money is such that it creates the potential for a positive feedback loop as adoption begets greater utility begetting still greater adoption.

Glad you liked it. Thanks very much!

I don't think so. Regardless of whether or not fiat is the unit of account used to express Bitcoin's purchasing power, Bitcoin's purchasing power will still be subject to fluctuations. Even if Bitcoin becomes the universal money, if the demand to hold Bitcoin decreases, so will Bitcoin's purchasing power. (Although from a practical perspective, at that point, we could expect far, FAR less day-to-day volatility.)

One objection I've seen to the claim that Bitcoin is "trustless" goes something like this: "what do you mean I don't have to trust anyone to store value in Bitcoin? What about trusting Satoshi with his million-plus coins? What about who knows how many other early-adopting whales who could crash the market with a huge sell off?" It's not a bad-sounding argument, but it's important to understand that the risk involved is really just "market risk," a risk that is common to all assets (including fiat). In other words, there's always a risk that the market price of an asset in the future will be less than its current price due to changes in supply and demand. Now, as a practical matter, the market risk associated with holding Bitcoin (certainly in the short-term) is a lot greater than the market risk associated with holding US dollars. But the reason it's greater is that the Bitcoin market is small and illiquid. In other words, the problem goes back to the fact that Bitcoin is not yet money / still has a small network effect.

Liked this Reddit post I made so I thought I'd share it here as well.  

Here are my two favorite ways of understanding and explaining Bitcoin's core value proposition.  (I've made a lot of these points before in comments so my apologies if this stuff is old hat to anyone.  I thought it was important enough to put together in one place.)

"TRUSTLESS" MONEY

You often see people describe Bitcoin as money that "doesn't require trust."  Unfortunately, they rarely take the time to really explain what that means.  I think in order to fully understand why Bitcoin's "trustless" nature makes it so revolutionary, you need to do two things: (1) explicitly consider trust in the context of both value storage AND value transfer; and (2) compare Bitcoin's performance in these two respects with the performance of the "Big Three" conventional monetary alternatives, namely, digital fiat, physical cash, and gold. Ok, so how does the competition stack up?

1. Digital fiat

Storage - Most people in this sub probably understand that the dollars in "their" bank account are nothing more than bank-issued IOUs for dollars. As such, holding dollars in a bank requires that you trust the bank to make good on those IOUs (and not say, freeze your account or steal your money) as well as requiring you to trust the bank with your confidential financial information (i.e., your balance and complete transaction history).  Storing your funds in fiat also requires you to trust the central bank not to erode your money's purchasing power through arbitrary expansion of the money supply.

Transfer - In order to send digital dollars to someone else using the conventional financial system, you have to trust a central authority (a bank, PayPal, Western Union, etc.) to effectuate that transfer in accordance with your wishes. And that means you also need their permission. If the transfer you want to make is one that the central authority (or the government it answers to) doesn't approve of (e.g., a donation to Wikileaks), you're out of luck.

2. Cash

Storage - Holding cash doesn't require you to trust your commercial bank, but it still requires you to trust the central bank's management of the money supply. Furthermore, securely storing cash yourself (without the aid of a trusted third party) is difficult, if not impossible. You can't make backups of your physical banknotes (or they'll call you a counterfeiter), can't encrypt them, and can't use the equivalent of multi-sig or Shamir's secret sharing algorithm to eliminate the loss of those unique physical items as a single point of failure.

Transfer - you can transfer cash from one person to another without a trusted intermediary, but only if you and the recipient are in the same physical location.  That's obviously a massive (and usually unacceptable) inconvenience in a modern global economy. Moreover, large in-person cash transactions are not without their own set of risks (e.g., the risk of being robbed or receiving counterfeit banknotes).

3. Gold

Storage - With gold, you don't have to worry about a central issuer arbitrarily expanding the supply, but attempting to store gold in a secure and trustless manner presents the same types of logistical challenges as storing a significant quantity of cash.

Transfer - The analysis here is pretty similar to the one for cash.  In-person transfers are possible without a trusted intermediary (although still problematic), but trustless transfers at a distance are simply not possible.  Of course, IOUs for gold can be transferred across distance electronically, but transacting in IOUs simply reintroduces the requirement for a trusted central authority.

Ok, so why is Bitcoin revolutionary under this framework? Because it's the first form of money that lets you both store and transfer value (including across distance) without the need for a trusted intermediary.  With Bitcoin, there's no central authority with the power to arbitrarily create new units, freeze (or seize) your account, or block a particular payment from being processed.  And payments can be made quickly and trustlessly to anyone anywhere in the world without the requirement of physical proximity.  They don't call it magic internet money for nothing.

THE THREE REQUIREMENTS FOR GOOD MONEY

The second way of understanding Bitcoin that I really like starts with a very fundamental consideration of the nature of money. What is money? Money is memory. Money is a societal IOU. Money is a favor voucher.  Money is an accounting ledger for keeping track, in a provable way, of value given but not yet received. (If you want to get really fancy, you can describe money as a "formal token of delayed reciprocal altruism.") The paradox of money is that while everyone wants it, no one actually wants it (they want the stuff they can exchange it for). The "real" economy is the exchange of useful goods and services for other goods and services. Money is simply a way of keeping score, a medium of exchange that facilitates that real value exchange across time and across multiple parties. (In contrast, a traditional barter transaction involves a simultaneous bilateral exchange of value.)  Ok, so I've now said the same thing in about half-a-dozen different ways.  Why?  Because it's that important.  You need to understand what money is in order to understand what properties a system of money should have, which in turn allows you to understand why some of us are convinced that Bitcoin has the potential to be the best form of money the world has ever seen.  So what are the requirements for good money? Well, you'll find lots of discussions on this topic that identify six or so very specific properties ("divisibility," "fungibility," "portability," etc.), but personally I think it's more intuitive to think in terms of just three requirements.  Those three requirements can be mapped, more or less one-to-one, onto the three traditional functions of money. They are:

• transactional efficiency - This requirement corresponds most closely to the "medium of exchange" aspect of money.  I'd argue that, from a modern perspective, this requirement necessitates digital representation.
• reliable scarcity - This corresponds to the "store of value" aspect of money.
• network effects / widespread acceptability - Only a form of money that is widely accepted is suitable for use as a "unit of account."

In other words, a good monetary ledger must be easy to update; the information contained in the ledger must be reliably accurate or "honest"; and the ledger must be one that people--preferably lots of people--are actually using. Gold is reliably scarce but not transactionally efficient. Fiat (and specifically, electronic fiat) is transactionally efficient but not reliably scarce. Both fiat and gold have high degrees of acceptability. Bitcoin is even more reliably scarce than gold and even more transactionally efficient than fiat. But its acceptability is, for now, comparatively low. And, at least in the short-term, the network effect requirement is by far the most important of the three.  But while gold can't become more transactionally efficient (sorry, Peter Schiff, the CombiBar doesn't quite cut it) and fiat can't become more reliably scarce, Bitcoin can become more acceptable as more people begin to use and accept it. Indeed, the nature of the network effect creates the potential for a virtuous cycle as greater Bitcoin adoption leads to greater usefulness, which can in turn incentivize greater adoption, leading to greater usefulness, etc.

I like to focus on "unpacking" three words: digital, decentralized, ledger. Here's my standard intro comment:

Thanks! Glad you liked it!

I was pretty happy with this longish piece I submitted to reddit so I figured I'd post it here as well.

https://www.reddit.com/r/Bitcoin/comments/2jxndm/the_two_categories_of_bitcoin_skepticism_and_why/

I'd recommend having them start with this video instead (Erik Voorhees' "Bitcoin as Money" talk). 

https://www.youtube.com/watch?v=H2YllvbJo6g

It's much more important to understand the why of Bitcoin (i.e., why a decentralized, digital currency is useful) than it is to understand  how bitcoin achieves that result.  People use technology all the time without understanding how it works, but they can usually appreciate why it's useful / valuable. 

I've also gotten some pretty good feedback on my standard explanation:

You know, I'm starting to suspect we might not be following the super-exponential trendline.

Just kidding. $10,000 in May for sure.

3. Girls
4. George R.R. Martin Dying Before Completing the Song of Ice and Fire Series

(Ok, I stole that second one from this list: http://www.dorkly.com/article/26731/the-nine-greatest-nerd-fears-today)

"Fuck you, fuck you, fuck you. You're cool. And fuck you, I'm out."

I disagree.  Remember that money isn't wealth. Instead, it represents your right to make an immediate claim on wealth, i.e. useful goods and services. When you don't exercise that claim immediately and instead save your money, the resources that would have gone into satisfying your present consumption remain available to be immediately used by others -- including new businesses. You've effectively made a loan to the remaining holders of the currency who do spend now whether for consumption or investment. (They're able to buy cheaper because there's now less money chasing the same number of resources.) And that's why savers are rewarded with increased purchasing power over time in an economy that uses sound money. In such an economy, deflation is simply the market-determined interest rate for an extremely low-risk loan that can be recalled at any time.

And when I say that it's a market-determined interest rate, I mean it.  People frequently argue against deflation by imagining absurdly unrealistic deflation rates, e.g. "Would you buy a car that costs 1000 bucks today if you knew that it would cost 500 tomorrow?" No, probably not. Very few people would. On the other hand, in that scenario, you'd have LOTS of sellers willing to sell you a car today for 1000 bucks. (Even if you need your car, why not sell it today and buy another one tomorrow at half price?) Lots of people willing to sell at that price and almost no one willing to buy = that won't be today's market clearing price. The actual rate of deflation will reach an equilibrium reflecting people's preferences.

The current rate at which Bitcoin's purchasing power is increasing is obviously not sustainable indefinitely, but so what?  The "price" of a bitcoin doesn't need to increase exponentially forever in order to prevent some "scheme" from collapsing. Bitcoins are simply digital commodities whose value will continue to be determined by the intersection of supply and demand.  That value can go up, down, or sideways. And in fact, we've already had several extended bear markets where the price has fallen.  Now, your response might be something like: "Yeah, but the only reason people are interested in buying bitcoins is because they believe the price will continue to rise over the long-term and that can't continue indefinitely."  And my response would be to ask you to think about how money works.  No one actually wants dollars (or Bitcoins). They want stuff -- useful goods and services that can be used to directly satisfy their wants and needs. The only reason anyone ever agrees to accept money in exchange for providing something else of value is because they believe that later, they'll be able to exchange that money for something they really want. And note that it doesn't particularly matter whether people access the stored value represented by their bitcoins by exchanging those bitcoins directly for goods and services, or by going through the intermediate step of first exchanging them for fiat. (Consider that gold still serves a useful monetary function as a store of value even though almost no one "spends" gold directly.)

And so the inevitable end game for Bitcoin is not that you eventually run out of "greater fools" to sell them to; it's that Bitcoin's monetization reaches a saturation point. When that occurs, people who accept Bitcoin in exchange for fiat / providing goods and services won't do so because they expect its value to increase dramatically; they'll do so simply because they expect Bitcoin to hold its value (or increase relatively slowly at a rate that's commensurate with the growth of the underlying economy).

So here's an "explanation" for why super-exponential growth might not be completely crazy.

Lots of people have speculated that Bitcoin's adoption might follow the familiar "S-curve" that's been seen with many other new technologies.  And, of course, the initial part of the S-curve looks like exponential growth. And so that's been used to justify the underlying exponential (or so we thought) growth trend for Bitcoin's price that we've witnessed over the past four years.  But why should we assume that the relationship between the rate of adoption and the price is linear?  And, in fact, if the rate of adoption is a measure of the number of users, isn't there at least some reason to expect a non-linear relationship with price? After all, if there are n users in the Bitcoin network, there are n(n-1) / 2 total possible connections.  

kdrop objected that the super-exponential trendline would put us at a million dollars per coin by the end of 2014 which, I have to admit, does seem a tad too optimistic.  But isn't the simple response that the super-exponential trend will only hold true for the initial phase of our now-modified S-curve?  On the other hand, hitting the slowdown / saturation phases in 2014 doesn't feel right to me.

Thoughts?

Uh oh. The last time this thread was bumped (by me) was April 9.

I was thinking the other day that we need a new statistic to track this type of lost productivity. I propose "days Bitcoin destroyed."

Yes, looks like a classic "2 cups, 1 bull" pattern. Very bullish.

Excellent video. The "exit" vs "voice" framing reminds me a lot of the "innovation" vs "(political) agitation" discussion from a TED talk that was posted here a while back.