Why bitcoin is doomed: I can't couterfeit them

[stochastic]

https://quantiger.wordpress.com/2012/06/29/why-bitcoin-is-doomed/

tl;dr :
Suppose I have 10 bitcoins.  If I want to loan you money, I have to actually give these coins to you! 
Where's the profit in that?  Ridiculous.   

Note to quantiger:  you can still defraud investors.  Happy now?     

haha! [/captain haddock]
reposted here for the lulz

Let’s create a game to understand this better. In my game there are 100 QuantCoins and I am the angel investor who holds them all. There are ten players. I loan out 10 QuantCoins to each player and charge 10% interest, and I take a 50% equity position in each player. All players must either pay off their loans, with interest, after 20 rounds of the game or go bankrupt and I collect whatever money they have left. Only if they pay off their loan do they get to keep half of what they made.

Tell me where the players that pay off their interest get the money from. Obviously, everyone can’t pay their interest for the simple reason that the game has been designed to demand 110 total QuantCoins out of a system containing only 100 coins.

This is the best rebuttal in the comments to the inflation argument:

Could you use a QuantCoin example where the person doing the 100 QC investment doesn’t own all the coins in the system (aka realism)? If there were only $100 in existence and I get back $110 after another $10 is printed, the value of the $110 now is exactly the same as the value of the $100 then, no? Printing the extra $10 didn’t create more value, as I understand it.

[Rassah]

I really love the “Bitcoin will die because it will be valued too much” theories! I mean, look at gold. It’s very deflationary, so it’s doomed too!

Regarding his $100 example. That is true if all he did was sit on the money paid back to him. If, instead, his borrowers paid him back $1 at a time, and he went out and spent that money for something else, that $1 would get recirculated back into the economy, he would own that something else, AND that $1 would eventually make it back to him as a loan repayment, again. In the end, he would have received a total of $110, though not all of that money would have been in his bank at the same time. Also, the value of everything he owns and bought would be worth $110 using pre-loan exchange rates.
Is that about right?

[Come-from-Beyond]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

Well... I think [my "supply" of bitcoins] != [ur "supply" of them]. If there are 90% of bitcoins mined (10% in supply) then after a split there are still 10% in supply. At extremum when all bitcoins in someone's hand splitting doesn't create bitcoins somewhere else.

[hazek]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

Well... I think [my "supply" of bitcoins] != [ur "supply" of them]. If there are 90% of bitcoins mined (10% in supply) then after a split there are still 10% in supply. At extremum when all bitcoins in someone's hand splitting doesn't create bitcoins somewhere else.

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Let's refresh our memory what we are really talking about for a second:

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

This is how new value is accounted for in bitcoins by moving the decimal point to the right:
First by doing so you get 10 times more coins each worth ten times less than the original coin. And when the new value is added and then PRICED in these new coins, their purchasing power raises. If item x required 1 old bitcoin and now after the split required 10 bitcoins with the new value added this might change to a PRICE of 5 new bitcoins. In other words value is added the only way it can possibly get added - through a revaluation.

The SAME THING HAPPENS if you inflate(increase) the supply by creating new money instead of splitting the old. Then too a revaluation happens but in this case instead of holders of currency having their purchasing power increased, which is what really matters and not the number of coins one has, their purchasing power stays the same or decreases if more money was created than value added. But the newly added dollars now also have the same value or purchasing power, where did that come from? It came directly from holders of the currency before it was inflated. In this case if item x cost 10 dollars before inflating after the revaluation it now still costs 10 dollars or maybe a bit more AND someone else new that before the increase of supply didn't have any purchasing power now also has 10 dollars to spend. The revaluation in this case happened where the newly created dollars went from being nothing to being worth exactly the same as the old ones meaning the purchasing power of 10 new dollars increased from 0 to being able to buy item x.


Voila, value or rather purchasing power added in both cases. In the first I as the holder of bitcoins am the one that gets it, in the second the money printers get it.

[DublinBrian]

Tell me where the players that pay off their interest get the money from. Obviously, everyone can’t pay their interest for the simple reason that the game has been designed to demand 110 total QuantCoins out of a system containing only 100 coins.

The blogger is a fool. It is perfectly possible for a debt + interest of 110 coins to be paid out of a total money supply of 100 coins.

Every month a debtor pays monthly interest to the lender. This is the lending banks revenue stream. Out of that revenue the lender pays their staff wages, salaries, operating costs, utilities, rents, taxes, dividends etc. They spend that money out into the economy where it can be earned again by the debtor to pay next months interest.

In theory the debtor could actually earn the same banknote with the same serial number, that he used to service his loan the previous month.

[Come-from-Beyond]

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Ok. Never mind then.

[hazek]

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Ok. Never mind then.

I did write the reasons why I think so which it appears you aren't even willing to address. So it's not like I'm ad homineming you.

[Chang Hum]

The problem with this article is that it's undermined by it's title. The author's argument would have a lot more credibility if it was titled "why Bitcoin is doomed at failing to replace the current monetary system". However the author chooses to intellectualize an argument based on what he defines as the ultimate goal or purpose of Bitcoin and doesn't elaborate that he is countering the crazy idea a few have of Bitcoin taking over the world until his blog comments.

I thought it was a well written, interesting piece from someone that clearly understands economics as much as someone can, but as the above the title undermines the argument IMO.

As Joel Katz pointed out in his blog comment

"Bitcoin is a system for securely storing and transferring value. Without limits, delays, high fees or borders. Anyone can use it, no documents to sign. You can make a transfer or receive one any time, anywhere and from/to anywhere in the world. Location makes no difference, as long as you have internet connection.
Bitcoin can potentially remove middlemen from the money transfer and storage equation completely. Aside from the other cryptocurrencies that popped up in Bitcoin’s wake, There’s nothing else out there that I’m aware of that even comes close."

[Etlase2]

Voila, value or rather purchasing power added in both cases. In the first I as the holder of bitcoins am the one that gets it, in the second the money printers get it.

While your argument is correct, it leaves out some subtleties. Let's say in the bitcoin scenario the value of a bitcoin has increased solely because of increased value in the economy, and this value is 10%.

If person X has 10,000 bitcoins, he now effectively has 11,000 bitcoins, a real increase worth 1,000 (original) bitcoins in value.
If person Y has 100 bitcoins, he now effectively has 110 bitcoins, a real increase worth 10 bitcoins in value.

While this may be slightly more fair than the way fiat works (this is not necessarily true because of the issues of employment when it comes to deflation; factoring in deflation into the economy is still upsetting to the economy and probably more so than inflation), it still isn't that much different. It is not the people producing the new value that benefit, it is those that have control of the wealth in currency (banks mostly). And if it is money from the banks that is being lent to produce this new wealth, it is doubly advantageous for the banks because not only do they get the lion's share of the new wealth, but they also earn interest on it. A situation that is remarkably similar to fiat.

But the worst part is that Bitcoin doesn't know if new value has been added to the economy or if the velocity of money has reduced (equation of exchange). It has no way of knowing, and the wealthy can spend/loan less to make it seem like new value has entered into the economy, when in reality it is just manipulation of the supply. So while no new value has entered the system, person X still has 11,000 effective bitcoins and person Y has 110 effective bitcoins, but 1,000 bitcoins buys a lot more existing value than 10. And once those 1,000 effective bitcoins get into the economy and increases the velocity of money, person X has more real world value than he traded for in bitcoins.

[Etlase2]

You left out some subtleties yourself. Of course you're entitled to your opinion that the economy has grown by 10%, but I say that it has only grown by 5%. Who is correct? This goes back to my comment about using a representative "basket of goods" to judge growth. Why should your particular method of judging economic growth take into account items that I think should carry less weight (just for the sake of this example)? And why should we trust some secretive authority to make "official" rulings on economic growth, which invariably try to justify inflation?

Relax, brother. It is obviously unrealistic to tie this to an exact real-world scenario, but I am giving a similar parable to the person I quoted. You are derailing that.

But let's say that the growth appears to be real because some guy just manufactured a large number of widgets. How do we measure this growth? By the profit he makes, denominated in the currency we're about to alter? By the retail price of the widgets? It's nonsensical! And if that's not bad enough, we can muddy the waters even more by discussing the opportunity cost of the time and resources he spent making widgets. We could argue that there was never any growth per se. He simply spent some effort converting one resource into another kind of resource. And if he hadn't made widgets, he could have made quibblets instead.

This is all completely irrelevant to the example I provided.

And neither does anyone else. Observer bias is the rule of the day.

This is where you are exceptionally wrong. Those manipulating the economy know precisely what is happening, and how best to take advantage of it. See the ENTIRE HISTORY OF MONEY.

[markm]

Unlike fiat, bitcoin is freely copyable - free open source.

So unlike fiat, with bitcoin anyone who produces a bunch of widgets could also produce a bunch of widgetcoins, fully compatible with bitcoin handling systems merely by choosing a different port number to connect to for each such currency whose daemon you want to talk to for a particular transaction.

Thus any time a whole bunch of new value is created, a whole bunch of new currency can also be created, and like the new goods its issuer offers in exchange for it it is plainly something new; it is not snuck out of other people's purses nor does it sneak extra, un-earned value into the purses of the hoarders of the older varieties of coin.

Canadian Tire, Walmart, Macdonalds, and such are probably in a good position to issue new coins, but wait, do they actually create new goods? Maybe having the retailers issue currency is just yet another usurping, a step closer to the actual producers maybe than the banks but still, maybe it should be the factories that issue the new coins? Hmmm...

-MarkM-

[grondilu]

Unlike fiat, bitcoin is freely copyable - free open source.

So unlike fiat, with bitcoin anyone who produces a bunch of widgets could also produce a bunch of widgetcoins, fully compatible with bitcoin handling systems merely by choosing a different port number to connect to for each such currency whose daemon you want to talk to for a particular transaction.

Thus any time a whole bunch of new value is created, a whole bunch of new currency can also be created, and like the new goods its issuer offers in exchange for it it is plainly something new; it is not snuck out of other people's purses nor does it sneak extra, un-earned value into the purses of the hoarders of the older varieties of coin.

Canadian Tire, Walmart, Macdonalds, and such are probably in a good position to issue new coins, but wait, do they actually create new goods? Maybe having the retailers issue currency is just yet another usurping, a step closer to the actual producers maybe than the banks but still, maybe it should be the factories that issue the new coins? Hmmm...

True.

If there really is a need for more monetary signs, they will appear as secondary currencies.  And the market will give them their appropriate price.

Just like silver and copper coins were used during the gold standard.

[VogueBlackheart]

I actaully poked around Quantiger's blog for a little while, read most of the posts. He's interesting in some places, sensitive to nuance at times. Though the utterly facile examples (Beanie Babies are the best analogy you can come up with for bitcoins? Really?) raised some red flags, his claims to being peer-review published in economics and exasperation with the 'uneducated' led me to really think hard on what I might be missing...

But yeah, inevitable conclusion: The guy does not understand money.

[firefop]

I'm still not convinced that the 21mil bitcoins would ever need to be expanded.

We'd be talking about ~1,666,666 USD per bitcoin before we'd even have to consider moving the decimal place.