Quora discussion - Is the cryptocurrency Bitcoin a good idea?

[tomcollins]

It's an interesting article.  I think each of his four points are true.  However, the conclusions he draws from them are mostly incorrect.


Severe Problem Number 1: Seeding Initial Wealth-

I don't think calling it severe is true, but it could have been done better.  The initial rollout was far too quick.  It should have mirrored an optimistic case of number of users on time, then converted to a predictable function (such as tan-1 shifted).  This is mainly a problem in that a lot of people are pissed that a lot of people get something for free just for being first, and also because it means that a small number of people control a lot of the wealth which makes things unstable.

Severe Problem Number 2: Built in Deflation.

This is not a problem.  Economists are of course scared of deflation, yet they cannot explain the consumer electronics industry.  Deflation is fine- it encourages savings.  If a lot of people save, it means that things that are being sold are sold for cheaper prices.  Things become less expensive.  Everyone becomes wealthier (except those pesky bankers).  When's the last time you heard an economist complain that gas prices are too cheap and they need to go up to drive the economy?  Only environmentalists have this position.

Severe Problem Number 3: Lack of Convertibility

Fairly big problem until the economy grows.  People still need fiat currency.  They need conversions.  This costs fees.  Bitcoin is not very useful if you need to go in and out of fiat, unless that process was extremely expensive before.  If the economy grows, there's no need to convert anything.  No one converts dollars for gold anymore.  This problem may not go away, but that's not that awful of a thing.  It has the potential to go away if it takes off and becomes more widely accepted.  There's no technical reason it couldn't go away.  It's more practical in nature.

Severe Problem Number 4: When Something Goes Wrong, It Will Die

Biggest concern.  While distributed, there are a ton of choke points.  The exchanges could get their funds confiscated by the government and a lot of people are out of a lot of cash.  If there is a panic, it might eliminate confidence.  If someone makes a better version, it may die.  Small economies tend to be very unstable.  Will Bitcoin have the strength?  Who knows.


So he's not that far off in his observations, but he is WAY off in his implications of these predictions.  And I'm not surprised- conventional wisdom says "moderate inflation good, deflation bad!", "I need dollars!", "I don't like other people getting rich for free!".  So that's why he thinks that way.

The deflation argument needs to be attacked.  It's so widespread, people are so scared of it.  The really question we need to ask is "so?"  And see why people actually think its bad.  The problem is most people think of wealth as currency.  Wealth is not currency.  Wealth is goods and services that people value.  Currency is only something that people redeem for such things.  If people are not buying something, then they are leaving it available to be purchased by someone else for cheaper.  Or they are investing which means that they are delaying their redeeming it for a later time when more should be available (after the investment actually increases the economy).  Investment is a great thing and should be encouraged.  A deflationary currency will encourage sound investments.

[unk]

@mike:

re: fractional lending, i agree it's possible, just that it's not inflationary in the steady state without being backed by inflation. if an airline overbooks seats but can't create new aeroplanes, it doesn't ultimately affect the supply of seats. that happens only if they overbook seats and, when a plane is overbooked, someone steps in and provides a new plane. no?

re: everything else, i think we're very nearly in agreement.

by 'distributed contracts', do you mean complex transactions supported by scripting? that's definitely worth exploring, and i should look at that part of the code more closely. isn't it mostly disabled in the client that people are downloading, though? i think i see how was intended to work, but i'm not sure i've considered everything. many things ought to be possible: auctions within the block chain itself, multiparty escrow, binding conditional subscriptions and pledges, and so forth.

[Mike Hearn]

If people think they have coins and they are willing to trade based on that belief, you have inflation even if actually they don't have those coins. All you need is a big "bank"-like thing where one person paying another updates a database table instead of making a block chain transaction. It's the same as cash in that respect.

As it happens I don't think we'll ever see fractional reserve banking with Bitcoins to the same extent we see it done today. But it wouldn't surprise me if we see some.

Yes, distributed contracts involve complex scripts and a few other undocumented features. I've written an article explaining some of it, I was hoping Satoshi would review it but it seems he's finally left us for good so I'll post it to the dev forum now.

[unk]

there can be short-term inflation-like effects based on people's perceptions, but in the steady state the bank run or crash ought to be as deflationary as the fake funds were inflationary. at least in theory. in practice, of course, anything can happen.

i'll read your article with interest.

[Vasili Sviridov]

The point about it being a scam for the early adopters to profit at the expense of later adopters is like saying that IPO is a scam, because people who bought shares at the time of the IPO are profiteering of those who bought their shares later in the game.

Early adopters take most risk and therefore reap most benefits.

[unk]

that's the kind of 'formal' analogical reasoning that the bogleheads guy was critiquing.

some public offerings (of 'things' in the most general sense) are legitimate, and some are scams. you can't tell the difference just by calling them all 'initial public offerings'. the difference is substantive, not formal.

[tomcollins]

The point about it being a scam for the early adopters to profit at the expense of later adopters is like saying that IPO is a scam, because people who bought shares at the time of the IPO are profiteering of those who bought their shares later in the game.

Early adopters take most risk and therefore reap most benefits.

But there was not really much risk early on.  Worst case you burn up a bit of CPU.  The question is how much of a benefit should they get just by being an early adopter (rather than a developer or early investor)?  The developers put a lot of time into it so they had a decent amount of risk (wasted time).  Early users really didn't risk much by using it (what is the yearly electricity cost of using the software).

If 90% of the coins were held by the first 10 people to ever use Bitcoins, that seems like a system that is not terribly useful.  Perhaps what we have now is ideal.  Perhaps it was too generous to early adopters.  Having too much in the hands of a few people makes it unstable since they have a huge influence on the market and their whims control a huge amount of supply.

But in no reason does it make it a scam.

[marcus_of_augustus]

Some people talk about it, other people just do it.

Amazingly economists can get paid to sit around talking about shit seemingly endlessly.

[benjamindees]

Amazingly economists can get paid to sit around talking about shit seemingly endlessly.

It's called "office hours".  When they aren't talking about shit, they're investing in the shit they talk about.  Don't be so quick to knock it.