Quora discussion - Is the cryptocurrency Bitcoin a good idea?

[k]

http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea

discussion on bitcoin. top answer at the moment is pretty critical basically saying that it is a scam.

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[kiba]

Completely unoriginal and boring arguments that had been debated on this forum to death.

Go search the economic forum and you will see what I mean.

[N12]

It makes me sad that people actually believe this stuff.

Fiat money is a scam, a voluntary currency without rulers on top of it certainly not. But I guess Gold is a scam too … and Google IPO …

[k]

Completely unoriginal and boring arguments that had been debated on this forum to death.

Go search the economic forum and you will see what I mean.

i'm not agreeing with the argument in the link. just pointing out what was happening on the quora site.

[Anth0n]

Obviously to a standard Keynesian, Bitcoin is a terrible idea. Keynesians believe a central bank is necessary and that what they call "deflation" is a horrible thing that must be avoided at all costs. According to this author's argument, supply of a currency needs to grow in order for more people to use it. If this were true, then that means the only way to obtain Bitcoins is for new Bitcoins to be created out of thin air. Hogwash at its finest.

Luckily, people like us who understand sound money and the failures of the fiat dollar system can buy in early. By the time the utility of Bitcoin expands to accomodate the needs of the average Joe, each coin's price will be sky high. If Bitcoin is a bad idea, then why does the Bitcoin economy continue to expand? Buying Bitcoins just means investing in a new economy! Furthermore, they can be used as real money and don't have to sit around like other investments, which can only be traded for dollars. Bitcoins can be traded for anything.

[draaglom]

You should take his word for it. He is an "Internet Economist" after all.

[Drifter]

Been all over twitter mostly because Tim O'Reilly and his 1,400,000+ followers.

[Deckard]

I agree with a lot of what he says. Most of his criticisms arise from the fixed supply nature of bitcoins. I agree this is a Bad Idea (just as the Gold Standard was a Bad Idea) and ultimately makes bitcoins unviable at the societal level.

The fixed supply thing also lends credence to the idea that it's a scam since the early adopters stand to benefit so much (though I don't agree it was created with this in mind).

Had I devised bitcoin, I'd have made it so mining availability would be based on some sort of community driven inflation targets. At first probably fix it to USD and if it ever became popular enough, some fixed basket of goods scheme. Though I'm not sure how I'd tighten supply if the need arises.

I think BTC nailed it in terms of anonimizing transactions and keeping the gov't out of my life, but I think the fixed supply thing's bad.

[marcus_of_augustus]

unviable at the societal level

Is that like 1 level below the ruling elite level or 2 levels below?

[paulie_w]

This post is smart:

http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Zbigniew-Lukasiak

[benjamindees]

Is that like 1 level below the ruling elite level or 2 levels below?

You have no idea, man.



http://www.youtube.com/watch?v=jHHw1ihH1iw

[Timo Y]

Had I devised bitcoin, I'd have made it so mining availability would be based on some sort of community driven inflation targets. At first probably fix it to USD and if it ever became popular enough, some fixed basket of goods scheme.

How would you achieve this without making the system vulnerable to corruption?

Who enforces the exchange rate? Who chooses the basket? Who gets to vote? How do you prevent double voting?

In a way, we already have community driven inflation targets, because changes in the bitcoin protocol will only be successful if the majority of users agree with them.  A community-driven target will always be deflationary because people who already own BTC would never "vote" for inflation that decreases the value of their savings.

Your concept of pegging the exchange rate by the community is thus flawed.  Which leaves some central authority to peg the exchange rate (the developers?).  But that would nullify the main advantage of Bitcoin.

I would go as far as saying that it is impossible to make a currency decentralised and fixed to a basket at the same time.  A decentralised currency must be free floating by its very nature.  If you can think of a solution that proves me wrong, please let me know!

[zby]

The top answer is now quoted on wikipedia: http://en.wikipedia.org/wiki/Bitcoin#Critique_of_Bitcoin_economy

[kiba]

Thought you might like this comic:

http://bitcoinweekly.com/articles/reactions-to-bitcoin

Basically details 4 common reactions to bitcoin including Game-changing, scam, stupid, and indifference.

Apparently the "internet economist" thinks it's stupid and scammy at the same time.

[silversurfer]

Haters are sooooo jelly!

[kiba]

Haters are sooooo jelly!

Haters gottach hate. It's what they do and their sole purpose in life.

[againey]

The top answer is now quoted on wikipedia: http://en.wikipedia.org/wiki/Bitcoin#Critique_of_Bitcoin_economy

2. Cohen argues that Bitcoin has a built-in deflation mechanism. As the supply of more Bitcoins run out but the 'bitcoin economy' grows, the value of a single bitcoin will increase over time. Knowing that the value of your bitcoin will increase, it makes sense for a person to save the bitcoin and spend normal money instead, as the normal money is known to lose value over time. Cohen predicts that this will bring bitcoin transactions to a halt and also comments that like point 1, it is an effect that puts early adopters at a considerable advantage.

That makes sense to me, as long as I have "normal money" to spend.  But if I keep spending it, eventually I will run out, unless I replenish my supply by earning more of it one way or another.  But when I think about that, I believe I'd be more inclined to earn bitcoin specifically due to its deflationary nature.  So eventually I would have no "normal money" left, and only bitcoin, and would gladly spend bitcoin to buy goods and services, regardless of the fact that it'll be worth more in the future than it is now.  But critics never think that far, do they?

[Mike Hearn]

The fact that this topic keeps coming up just means we're doing a bad job of answering it. There's no need for flaming. This sort of Quora thread is simply a wake-up call to improve the FAQ.

There are lots of possible answers to the deflation argument. The simplest is that fractional reserve banking is possible with Bitcoin and might well end up occurring, at which point you have the same type of inflation as what we see today.

Another simple answer is that the case against a currency that (very slowly) increases in value is not at all open and shut. Economics is not an advanced science and economists still barely agree on how to measure inflation, how much of it there should be and even what it is! There are actually strong arguments that the current rates of inflation are leading to lots of money sloshing around that ends up inflating a constant series of bubbles. In recent history the dot com bubble followed by the housing bubbles are a good example.

Specifically because of a rate of inflation that will easily halve your savings over your own lifetime, people are practically forced to invest all their money regardless of their investment skills, or whether there are even opportunities worth investing in at all! It's not surprising that such a society is very prone to bubbles and mindless "house prices only ever increase" type groupthink.

[unk]

the 'it deflates so it can't be used' argument is a red herring, but so is the notion that it won't deflate because an individual bank could lend money based on fractional reserves. the latter doesn't inflate a currency without a lender of last resort that has the power to do so; fractional-reserve lending is merely a conduit by which the central bank's inflation is spread.

but the quora discussion raises some good, though only germinal, points. better analysis distinguishes the bitcoin technology from the current block chain. it's important to understand that most of the 'economic' discussion outside this forum is not critiquing the code or p2p design. it's critiquing the economic role that the main block chain, the present currency exchangers, and the early adopters are playing.

a discussion at bogleheads also seems to get at the right 'economic' and 'practical' concerns at the moment. it's apparently the same guy from fatwallet to whom i've pointed people:

http://www.bogleheads.org/forum/viewtopic.php?t=74834&mrr=1305706655

The problem with that model is that it entices people into the technology on the implied promise that they will make money from future users. That is not all that Bitcoin does in theory; it's also potentially a system for processing payments conveniently online. But the problem is that the promise of future wealth is presently such a driving force behind Bitcoin's adoption that even though the technology has the potential not to be a scam, it ends up in practice working almost wholly as a pyramid scheme.

You buy and hold Bitocins at present only because you hope to sell them higher to people in the future willing to pay more, knowing it's backed by nothing. That's the essence of a pyramid scheme. But what complicates things is that there are technically other reasons to buy (and not hold) Bitcoins: for example, you might make payments with them to people around the world, for goods and services. The problem, in practical terms, is that Bitcoin isn't a very convenient system for making payments for most law-abiding people at present. That's what led me to say on Fatwallet that the only people buying Bitcoins, in practice, appear to be (1) speculators banking on a pyramid scheme, (2) people who want Bitcoins in order to make payments for illegal things that PayPal and similar payment-processors would prohibit, like drugs and illegal forms of pornography, and (3) ideologues who have been convinced that Bitcoin fits their anti-government worldview. There's literally nobody else buying Bitcoins at present, or at least that's true with very few exceptions.

Now, promoters of Bitcoin tend to say that what much of what I've said is true of gold and other precious metals; if Bitcoin is a pyramid scheme, they say, so are these other instruments. And so, they say, are dollars. They're right in formal terms, but only in formal terms; the analogy ignores all cultural history and institutional factors. And in any event, the analogy just shows a problem with gold and other precious metals. The last thing rational investors need is another such way of storing value, particularly when the new vessel is immature, exists in a very thin market, and is subject to technical problems and market-manipulation.

To summarize, the perversion of Bitcoin is that it has attracted a small core following, based on the way it was designed, that is based mostly on ideology and on its function as a pyramid scheme. That is unfortunate, because it's a legitimately interesting technology that could have a role in simplifying online payments. In the meantime, it would be a horrible mistake to "invest" in Bitcoins unless you think you're very good at playing a period scheme -- and also if you think it won't be regulated or stopped for being exactly that sort of scam, functionally and substantively. And it could indeed be regulated successfully, notwithstanding all the protestations of marginally savvy Bitcoin users to the contrary.

note that this isn't an argument against bitcoin. it's an argument about what people are doing with it at the moment and why people outside the group of early adopters shouldn't adopt the main block chain. as an early adopter myself, and as a statement against 'selfish' interest, i can't find fault with his logic. i would not recommend that a friend take hard-earned money and buy coins that result from coinbase generations in the current block chain.

[Mike Hearn]

Well, I agree fractional reserve lending might seem too risky to do if there's no lender of last resort, but it's theoretically possible (current day laws notwithstanding ... again by the time this is an issue it will be decades or more).

W.R.T the other stuff, I was only talking about the deflation argument. I think the bogleheads poster has it pretty much right: there is a bubble, and when it pops it will unfortunately tarnish the name of Bitcoin for a long time. I don't think it's avoidable, better to just hope it happens soon and we get it over/done with.

Ultimately though I think he underestimates the utility of Bitcoin. It's not simply about the ideology of a tiny minority though if you read these forums you could be forgiven for thinking that. The current electronic payment systems just have a lot of very basic problems. Bitcoin has the potential to be much better than what we have now. Not just a bit more convenient but fundamentally more robust. Distrust of banks and the financial system is much higher than it used to be, thanks to the financial crisis. The man on the street is more likely to be receptive to alternatives than before.

I see it this way. The internet itself was once the epicenter of a massive bubble. When it popped, some people who got out early were rich and a whole lot of other people were poor. During the bubble some said that internet companies would never amount to much and this whole "e-commerce" thing was kind of a fad. You couldn't see what you were buying! And none of the then-trusted names were in this space.

Yet whilst it took years to recover after the bubble burst, clearly "dotcoms" were not a fad and had tremendous value to bring. Bitcoin is the same way. Especially as some of the things it can do are not explored yet (cf. distributed contracts).