Analyze: "BitCon: Don't"

[silzero]

Karl Denninger wrote a piece arguing against Bitcoin.
Jon Matonis wrote a response to Denninger arguing for Bitcoin (I think) .

Both articles are erudite but they still don't seem objective. I'm requesting the enlightened folks here on Bitcointalk to provide their point to point analysis. I'll try to prepare my own in a bit.

Please, please hold back one liners unless it explains whys of your thought .

[bb113]

Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns.  Yes, obligation -- not privilege.

Bitcoins are basically cryptographic "solutions."  The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin.  As each coin is "mined" the next solution becomes more difficult.  The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation.  Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.

That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later! That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy.  If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!

I'll just cover this excerpt:

1) I have no idea what this "obligation of sovereigns" has to do with bitcoin. Sounds pretty weird and not something I want anything to do with if I can help it.
2) The computational difficulty didn't just get progressively harder to discern. It went up because more people wanted some coins and the difficulty adjusted. This statement shows fundamental misunderstanding of bitcoin.
3) With regards to the pyramid scheme argument, how is this different then taking risk investing in an up and coming company?

That and the rest of it aren't real issues with bitcoin, there are some, look around. For example, number of nodes verifying the chain is much lower now that mining is more difficult. I have heard, but not experienced, there are bugs in sending large transactions. Even so, it is superior to the widely used alternative systems for most use cases.

[justusranvier]

In the last four years I've spent a considerable amount of time in conversation with Karl Denninger via his blog and forum. I personally have discussed bitcoin with other members and directly with him ever since 2010.

He understands bitcoin. He knows how it works, what it's weaknesses are, how those weaknesses are being addressed, and what it means in terms of monetary freedom for the average person if it succeeds.

That's why he opposes it. The man pretends to be a libertarian but actually he's a religious authoritarian. He hates the state that exists now only because it doesn't do what he wants it to do. He's perfectly fine with a central coercive organization wielding totalitarian control over everybody else as long as that organization fulfills his vision how how he thinks society should be organized.

Bitcoin threatens his vision of how society should be organized, therefore he will oppose it. The problems he describes in his article are not the result of an objective evaluation but rather the result of working backwards to find justifications for a predetermined conclusion. You're not going to be able to change his mind by pointing out the flaws in his justifications because he'll just invent new ones to replace them. What he's really saying is that people should not be free.

[mai77]

Denninger seemingly does not know about anon multi-transactions. that's where his argument falls apart.

[axus]

People don't understand that the difficulty in mining of Bitcoins is independent of their usefulness as a currency.  The person buying drugs on Silk Road is almost immune to the mining difficulty or exchange rate volatility of Bitcoin.  They aren't paid in Bitcoins, they have dollars or euros.  The "real price" of goods is not in Bitcoins, it is in dollars or euros.  So, the transaction costs them the same either way, and rewards the seller the same.  Bitcoins are only the medium.

Avalon miners may be the first commodity with a fixed Bitcoin price.  Which makes sense, as their value derives from the exchange rate of Bitcoins, unlike everything else you buy... except Bitcoins

[Anon136]

wait so if i consider myself a sovereign and sovereigns have an obligation to mint money than i have an obligation to mine bitcoin?

[notbrain]

Then there is what I consider to be Bitcoin's fatal flaw -- the inherent design and de-coupling of the currency from the obligation of sovereigns.  Yes, obligation -- not privilege.

Bitcoins are basically cryptographic "solutions."  The design is such that when the system was initialized it was reasonably easy to compute a new solution, and thus "mine" a coin.  As each coin is "mined" the next solution becomes more difficult.  The scale of difficulty was set up in such a fashion that it is computationally infeasable using known technology and that expected to be able to be developed in the foreseeable future to reach the maximum number of coins that can be in circulation.  Since each cryptographic solution is finite and singular, and each one gets progressively harder to discern, those who first initiated Bitcoin were rewarded with a large number of easily-mined coins for a very cheap "investment" while the computational difficulty of "extracting" each additional one goes up.

That means that if you were one of the early adopters you get paid through the difficulty of those who attempt to mine coins later! That is, your value increases because the later person's expenditure of energy increases rather than through your own expenditure of energy.  If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return -- your later and ever-increasing effort for each subsequent unit of return accrues far more to the early adopter than it does to you!

I'll just cover this excerpt:

1) I have no idea what this "obligation of sovereigns" has to do with bitcoin. Sounds pretty weird and not something I want anything to do with if I can help it.

Yeah - and if history is any guide WRT the Fed, and their "obligation" to "maintain a strong dollar" / "provide liquidity in a crisis" / "provide solvency in a crisis" as directed by the sovereign...how cute. They did exactly the opposite for every crisis.

[Bytas]

The typo in the title made me think:
When will the first Bitcoin Convention (BitCon ) be?

[mgio]

3) With regards to the pyramid scheme argument, how is this different then taking risk investing in an up and coming company?

The difference is a company does things to generate profit. Bitcoins just sit there.

You buy the stock hoping they will be able to make a larger profit in the future. You buy bitcoins hoping somebody else will be willing to pay more for them in the future.

Can you see the difference now?

There are plenty of derivatives that are tied to the value of a company or something similar but you don't actually own part of the company. These derivatives are simply gambling. No one claims they are a pyramid scheme.

Gold is also the same way. It just sits there. It's value is priced way above it's actual utility as a metal for industrial use. People think it's valuable because people have always considered it valuable and it is scarce.

There is a difference between rewarding the early adopters who take the biggest risk and a pyramid scheme. The claims of a pyramid scheme are made by people who are bitter and didn't take the risk on bitcoins sooner.

Bitcoins don't *have* to continue to appreciate to be useful. And it is their usefulness which is currently giving them value. No, they aren't quite useful as a currency for buying things yet. But they *are* useful as an inflation-proof store of value, which Europe is beginning to realize.

[mgio]

Wow, Denninger completely misses the point.

There are records of all your credit card transactions too. Cash is used less and less these days as credit and debit cards are cheap and simple to use. I know I buy things on amazon instead of going to a brick-and-mortar store whenever I can.

Yes, bitcoin is somewhat anonymous and that's nice for some people but for most of us, it doesn't really matter. It's not a priority to hide my spending from the government, at least not presently.

But if in the future, I really wanted to, bitcoin would let me do that. I guess he doesn't know about bitcoin tumblers that take money from various addresses in and spit money back out. It makes it vary difficult to track where the money is going.

His article is making the assumption that we are all in bitcoin because we wish to evade taxes and break laws. It's perfectly possible to use bitcoins and not do so.

The great thing (for me), about bitcoin is not that it let's me avoid taxes or buy drugs but because it is independent of any government, it gives me an inflation-proof store of value that no government can tamper with! Denninger completely misses this point. That is the great thing about being independent.

[bb113]

3) With regards to the pyramid scheme argument, how is this different then taking risk investing in an up and coming company?

The difference is a company does things to generate profit. Bitcoins just sit there.

You buy the stock hoping they will be able to make a larger profit in the future. You buy bitcoins hoping somebody else will be willing to pay more for them in the future.

Can you see the difference now?

I buy them to support the project and tell others to try them out because they become more useful when more people who use them. I am naturally rewarded if this occurs, due to the limited supply and increased value.

[Elwar]

wait so if i consider myself a sovereign and sovereigns have an obligation to mint money than i have an obligation to mine bitcoin?

Yes, it will be a requirement by...umm...hmm...

[hawkeye]

A pyramid scheme is when you promise people who invest in your scheme a certain amount of returns, usually quite above average, and then you pay the earlier investors with money provided by the later investors.  Which of course, breaks down when you run out of investors and the last guys in get upset.

There are no such promises with Bitcoin.   Quite the reverse, any capital gains to be made are at your own risk and in no way certain.   It's no different to Gold or any other commodity or currency that one wishes to invest in.  If the commodity or currency goes up in value, the people who bought in first will benefit.   No different to shares in a start-up company.  If the company does well, the people who bought in initially will have significant capital gains in their shares. 

So if Bitcoin is a pyramid scheme, well, so is just about everything else.

[silzero]

Here is my take on this:
{All quotes from Karl Denninger, Market-ticker.org, 2013-03-30}

... I want to first demolish the argument for using it that is going around in various circles and media these days -- the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.
This is utterly false and, if you're foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison -- with certainty.

While the intent to refute the stateless argument is good. The argument itself is a claim like: "Trust me, I know this will happen".
I hope atleast more than half of the people using Bitcoin are here to make money in a legitimate way.

All currencies require some means of validation... dollar bills are reasonably self-validating.  I can observe ... a dollar bill, feels correct and has the security features

Here he really means legal tender, such as coins and notes. Bitcoin can never be legal tender (unless US repeals the dollar as legal tender and Congress adopts Bitcoin as the legal tender. That will be the day  ). Those two paragraphs from KD are wasted.

Now consider the typical clandestine transaction --

Why would executing clandestine transactions be a marketable "feature" of real currency?

Therefore, the very act of trying to split up transactions or use of "throw-away" wallets in and of itself is likely to be ruled a crime..

I highly doubt that likelihood. I'm not a lawyer, but shouldn't the prosecution be able to prove intent to commit crime?

In particular if there is a tax evasion issue that arises you're in big trouble because there is no statute of limitations on willful non-reporting of taxes in the United States...

Factually incorrect. US Statute of limitations is 6 years from the last violation. See 26 USC § 6531 or the IRS Tax Crimes Handbook. Again, why would you try to evade taxes with Bitcoin?

Third, because Bitcoin is not state-linked and thus fluctuates in value there is an FX tax issue...
At the time of the sale you have a tax liability too, and I'm willing to bet you didn't keep track of it or report it...

Solution is to keep track of it. I'm sure the wallet services are good for that.

Those who are using Bitcoin as a means to try to foil currency controls or state prohibitions on certain transactions are asking for a criminal indictment

A crime is a crime. The solution is to not engage in criminal activity with Bitcoin or otherwise.

Here is my naive view : tying a transaction in Bitcoin chain to an actual act such as "Joe bought a sandwich from Jenny for X bitcoins" has the same difficulty level as doing finding the transaction itself. If you found the real world transaction, you most likely should have more compelling evidence than a Bitcoin transaction record.

Here the fundamental problem of wide acceptance comes into view...
To the extent that the popularity of the currency is driven by a desire to "escape" state control promotion of that currency on those grounds when in fact you are more likely to get caught...

I think he misunderstands "state control" here. Bitcoin escapes "state control" in the sense that there is no central state mandated authority that can print or create Bitcoins. That, I think is one of the factors that gives value to Bitcoin. Its not to escape into the darkness (hopefully).
 

Cryptocurrencies have a secondary problem in that because they are not self-validating...

Self validation applies to legal tender. He does have a valid point: but quite a bit longer (an hour or so) to know with reasonable certainty that it is good. This is important too when number of transactions increase. How does Bitcoin community solve this?

If that sounds kind of like a pyramid scheme, it's because it is very similar to to how the "early adopters" in all pyramid schemes get a return...

True. Anyone have point on this?
My cheesy take is yes, its a gold rush, now.

 A coin that is "lost", ... can never be recovered.

True. When Bitcoin becomes more valuable, then becomes worth trying to break the cryptographic depth. Just like gold lost at sea. We just waited n-years for HD cameras and robotic deep sea diving submarines to retrieve them. Quantum Computers are up next.

the benefit of seigniorage comes with the responsibility for it as well, and it is supposed to be bi-directional.

Response from Jon Matonis, sums it up:

Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign’s spending activity to the detriment of the unfortunate users of that monetary unit. Decentralized Bitcoin obliterates this sad state of affairs.

My take is: "We've always used the Abacus. That cal-cuu-laatar is blasphemy!"

Thanks to all contributors for keeping this discussion intelligent.

Edit: props to hawkeye,  who responded on my 'pyramid scheme' question before I submitted. Any other views?