The Gold Standard comparison is invalid

[spenvo]

This was originally posted on my blog at the bulletin here:  http://www.bitcoinbulletin.com/2011/05/09/the-bitcoin-payment-system-isnt-like-the-gold-standard/

Never have I written a blog post with so little preparation, but in the wake of reading this steaming rant about Bitcoin (http://apenwarr.ca/log/?m=201105#08), I was compelled to do my worst.

Fact #1 – Bitcoin ≠ the Gold Standard.

Is Bitcoin a deflationary currency?  Yes.  That’s where the similarities end.

I cringe when people make these kind of historically inaccurate comparisons.

What was the Gold Standard?  It was a system in which one currency was tied directly to a finite resource.  There was no choice in how one could pay, payments were made in a vacuum.  All transactions had to be made in a currency backed by gold.  That meant that any abuse of the Standard could affect the economy negatively and runs on banks were almost inevitable.

Bitcoin’s contribution to capitalism is choice, not control.

Fact #2 – Bitcoin is a convenient solution for web transactions

Anyone who’s interfaced with the Bitcoin client will tell you that it is a brilliantly written program that can be controlled easily via JSON-RPC.

It’s not “a stupid inconvenient currency that’s worse than paper” like gold.  That guy really took the whole Bitcoin = Gold thing way way too far.

Fact #3 – Unlike w/Paypal, floating cash is not at risk of being frozen

As scores of entrepreneurs will tell you, Paypal is notorious for taking action without warning, especially when thousands of dollars are at stake.  As the vast majority of online transactions rely upon a few trusted third parties, this makes “choice” even more relevant.

Fact #4 – Cool, mainstream services use and accept Bitcoin

My next two interviews are with www.ActiveGrade.com and www.Wuala.com for example.

Fact #5 – Bitcoin is highly international

This only enhances the point that it’s not a standard.  How could something so distributed (distanced from a fiat currency) be considered a Standard?

[1714169416]

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[1714169416]

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[no to the gold cult]

FAIL #1: If you like bitcoin, then you must think the gold standard was a good idea.

Hnarf.

I think the gold standard is for idiots that hate paper fiat but want shinney yellow metal fiat, yet I think bitcoin is great. So he fails from the get-go really.

[no to the gold cult]

Thanks for the link, I actually agree with him on most of what he said but I think he's misunderstood bitcoin in some ways.

[HostFat]

I wrote this email to him:

Miners and bitcoin clients are doing a "work/job".
They aren't just "mining" and doing some useless math.
"They are confirming that all transactions are good."
Without their work, the network will become totally insecure.
It's like a secretary job.
Everyone in Bitcoin is doing the same job.
You should give a check to see what are doing the miners and simple client other then simple "mining".
The "block" isn't a simple random data.

Making sure that all transactions are good is a valuable job, and the fact that Bitcoin is totally anonymous is another big value for some merchants.

If I mine, and then I confirm a block of Bitcoin ... then I confirmed that many and many transactions were done well.
I just did the secretary job well.

I see it like this physics joke:
http://www.funnyjunk.com/funny_pictures/357458/Magic/
It's like a circle, everything works because one thing has a meaning that give a value to the other one and vice versa.

I see a difference from just mining "gold", because as you said finding "gold" is a totally useless job.

What do you think about my point of view?

Sorry but english isn't my mother language ... I hope that you have understood well

[ploum]

The guy starts very badly that, to him, asking why bitcoin will fail is like asking why the sky is red. It is funny because, during my first read, I though that he was referring to a dusk sky. Then I realized that he consider something I see every night during summer as the most impossible thing in the world. Which tells you a lot about how our vision of the world are different.

This is also really lame to start an reflexion by stating your conclusion and by stating that, before thinking about it, everybody not agreeing with your conclusion is completely stupid. This is a very bad way of reasoning, writing or convincing.


But let start with the arguments themselves:

50% of his arguments are against "gold as money".

* Gold is heavy
* Gold is inconvenient
* Gold is the reason why we had a crisis in the 1930's

And

* Bitcoin is like gold

thus, his conclusion is "Bitcoin is heavy and inconvenient".

I don't even need to underline the flawed logic behind that. At some point, I thought that bitcoin was responsible for the 1930's crisis.

It also makes me very skeptical about the rest of the post as I believe that someone doing so huge logical errors is very unlikely to come to any worthy conclusion (or is deliberately manipulative).

Then, he makes the point that the ability to make money out of nothing is what makes a good economy. This is debatable but no compelling argument is made to support this statement.

Finally, he point the danger of a bug/security hole in the bitcoin software.

That argument is *very* important and indeed something that should be a concern of the whole bitcoin community. As he said, mixing known algorithm in an unproven way is not as strong as the strongest algorithm.

He made a very good point there.

But where he fails is when he write that the current economic system is verified and cannot fail. He also say that counterfeiting paper money is harder than counterfeiting virtual money and that counterfeiters of real money are arrested before taking too much advantage of the system (which we will grant as true, even if unproven).

1) The current economic system is not using any mathematic algorithm. Instead, he's relying on a constant monitoring and supervision. Banks *are* creating money everyday. The states ensure, by regulations, that the bank don't create too much money out of nothing.

2) The current system already had failure. What was the 2008 crisis if not a failure of the system? Someone saw a hole in the system (despite existing regulations and enforcements) and managed to put most of the world economy on its knees. If that's not a failure, I don't know what it is.

3) Most of the money in the world right now *is* virtual. It's only numbers in the computer of your bank. What percentage of your monthly salary do you see in real paper money sooner or later? I would say less than 10%. Sometimes, it could even be less than 1%. So 90% of the money is already virtual. The only way we know it is not abused its because there are some regulations and because banks are under a sever monitoring.


So his argument could be rewritten as:

"Would you trust more a mathematical algorithm that could have flaws or would you trust more a system monitored by humans that already showed its flaws ?"

Put in that way, the answer is less straightforward.

[no to the gold cult]

You preach to the converted, I couldn't be bothered to answer his points in such detail here. Better to tell it to him.

[Longmarch]

You preach to the converted, I couldn't be bothered to answer his points in such detail here. Better to tell it to him.

Oh, no.  I for one am not converted.  I have bitcoins that I paid good US cash for, but I'm not entirely convinced that this thing, in this form, will necessarily settle in as a real and permanent currency.  The guy said in his blog post something about "where's your peer reviewed study."  Well, this is the peer reviewed study.  We're doing it right now. 

The weird thing about the bitcoin naysayers that I've read so far is that they seem to think they have to come down on one side or the other... well at least a few of them seem to.  It's like they need to be the Smart Guy, or the one who "told ya so" instead of just thoughtful, or curious.  You don't have to be a true believer to be involved with Bitcoin.  You just have to be willing to take a risk.   

It's true, what ploum said.  Calling people crazy and stupid on this topic is just a knuckle-headed way to go about making your point.  The guy has some good thoughts buried in his blog post, but his aggressively condescending tone suggests that maybe he's unsure about his position and needs to bluster to cover that up.

Further, there's no need to communicate with this guy, or to rebut him directly. He's dug in.  Someone who makes their case in such absolute terms is not likely to change their mind even in the face of logic or evidence.  So screw 'im.

[eMansipater]

You don't have to be a true believer to be involved with Bitcoin.  You just have to be willing to take a risk.   

+1

Cryptocurrency is clearly the way of the future, but right now we don't know if BitCoin will be BitTorrent or Napster.  The difference between the two is a lot of old-fashioned hard work that has to be put in to make BitCoin usable, practical, relevant, and successful.  Putting your nose to the grindstone on these issues is much more worthwhile than arguing with people who will eventually be proven either wrong or right.

[bittersweet]

Napster was a centralized service, so you can't really compare it with Bitcoin.
Once the Bitcoin started it's impossible to take the plug off by suing one company.

[wumpus]

Apenwarr is a notorious naysayer for new technologies. I don't think it's possible to convince him that anything could be a success until its under his nose.

For example, his rant about IPv6 is similar: http://apenwarr.ca/log/?m=201103

You don't have to be a true believer to be involved with Bitcoin.  You just have to be willing to take a risk.   

We should put that quote on top of the homepage.

[eMansipater]

Napster was a centralized service, so you can't really compare it with Bitcoin.
Once the Bitcoin started it's impossible to take the plug off by suing one company.

You're interpreting the metaphor too broadly.

[Steve]

I have two points to add:

1.  You need to think about pricing and exchange separately.  Bitcoin or any commodity may indeed be too volatile to serve as a good pricing mechanism (or general unit of account).  Instead, I could see some kind of cost of living index being used for pricing, accounting and contracts.  The points that they made about elastic money are true, however I don't see what value it has over using some price index...and centralized control over money supply will always attract corruption and manipulation.  Bitcoin might not be good for pricing, but could be excellent for exchange.  I imagine the MIT billion prices project might play a big role in pricing in the future.

2.  Gold's major flaw is that it is physical and inconvenient to store and handle.  That led to the introduction of warehouse receipts and fractional reserves.  Paper became a substitute for physical gold and that enabled all sorts of fraud and manipulation that continues even today.  With bitcoin however, there is no reason to substitue contracts for the real thing (except perhaps for momentary conveniences like trading on mtgox).  I think for this reason, bitcoin will be far less vulnerable to such manipulation (especially with information that shows the diminishing returns if one were to accumulate too large of a position in bitcoins...for instance 100,000 btc isn't really worth $500,000 if one were to sell it all in a short period of time...so, someone trying to obtain a substantial percentage of bitcoins to corner the market isn't really accomplishing much...especially since, unlike most commodities, the demand side of bitcoin is elastic).

[benjamindees]

Gold's major flaw is that it is physical and inconvenient to store and handle.

Gold is inconvenient in *certain quantities*.  You could buy a house or a car very easily with a few pounds of gold.  You can't buy a sandwich with gold because the smallest coin (1/20 oz) is worth $100.  On the high end, consider that ten billion dollars in cash ($100 bills) was sent to Iraq on a few pallets, weighing perhaps a ton.  In gold coins this would have been about 200 tons.  Both could be divided into approximately the same units.  Gold would have weighed 200 times more but that probably wouldn't have made any difference.

Same thing for silver.  You could easily buy a sandwich or a week's worth of groceries with silver.  Buying a house would be a hassle but not impossible.  Waging war halfway around the world with silver currency, though, would mean sending a small cargo ship's worth and you'd be totally screwed if it sank.

[MacFall]

Waging war halfway around the world with silver currency, though, would mean sending a small cargo ship's worth and you'd be totally screwed if it sank.

More to the point, waging war on the scale of modern warfare with silver OR gold would be damned near impossible, because modern warfare depends upon deficit spending with a currency tied to physical commodities only nominally at most. Obviously a fixed-quantity currency like Bitcoin would offer the same wonderful problem for the warfare state. The reason why I advocate the use of gold and silver in addition to things like Bitcoin is that gold and silver will retain their usefulness as a medium of exchange even if things get so bad that we no longer have the Internet on which to trade electronically. But that's definitely a worst-case scenario.

[barbarousrelic]

Fact #5 – Bitcoin is highly international

This only enhances the point that it’s not a standard.  How could something so distributed (distanced from a fiat currency) be considered a Standard?

Being accepted and agreed upon by a large amount of people over a wide area sounds like a good definition of "standard."

[ploum]

Fact #5 – Bitcoin is highly international

This only enhances the point that it’s not a standard.  How could something so distributed (distanced from a fiat currency) be considered a Standard?

Being accepted and agreed upon by a large amount of people over a wide area sounds like a good definition of "standard."

Not enough. You are talking about a "de facto" standard, which could be a bad thing (like .doc format). To have a real standard, you have to ensure that everyone can read the standard, that everyone can implement the standard without any barrier and that any change made to that standard are driven by a well-known body not related to any particular private interest.

Standardization is an hard science, really.