Factual Errors in Adam's Article:
Bitcoin is not a ponzi scheme. Bitcoin does not pay interest on deposits. Adam seems to be using a "very unique definition" of ponzi scheme, which includes any asset which is appreciating in value.
Bitcoin is not a scam. "Calling Bitcoin a scam demonstrates your limited knowledge of the protocol and underlying system. In order for something to be a 'scam' there has to be someone who benefits." Adam later publicly retracted his statement that Bitcoin was a scam, "I regret using the word 'scam' in my answer" (
http://news.ycombinator.com/item... ). He however has not edited his answer to reflect his retraction.
Adam describes a bank run scenario on Bitcoin. Bitcoin does not have a bank or any counterparty. Bitcoin floats and therefore Adam's bank run scenario is a misunderstanding of how Bitcoin works.
Adam wrote his article when Bitcoin was experiencing a bubble driven by increased media attention. The bubble lasted two weeks. Adams predicted that Bitcoin would collapse from panic selling when the Bubble collapsed. Adam was completely wrong. See the graphs below. We now actual data and no opinions, about how the Bitcoin market reacts to adverse events.
Adam states that Bitcoin has no mechanism to deal with fluctuations in demand. Bitcoin floats and the price of Bitcoin reflects the balance between supply and demand. Bitcoin deals with fluctuations in demand through a market. His statement is a misunderstanding about Bitcoin.
Adam states that Bitcoin has extremely high volatility and low liquidity. This was true when he wrote his answer, but is no longer true. High volatility seems to have been a transitory artifact of the media driven Bitcoin bubble. Bitcoin is now relatively stable compared to other currencies. As Bitcoin matured, liquidity has increase substantially, with a corresponding decrease in volatility. See graphs below.
Differences of Opinion:
Adam's economic opinion are unorthodox and do not reflect the mainstream of the economists profession. Adam States "The economic assumptions underpinning the Bitcoin ecosystem are laughable, and ignore hundreds of years of accumulated understanding of how currencies work with each other", Adam goes on to claim that a viable currency must suffer from an increase in the monetary base.
Nobel Laureate in economics, Friedrich Hayek has argued at length in seminal work on Competing Private Currencies that debase of the monetary base is undesirable. What Adam criticizes as a weakness of Bitcoin, Hayek would praise as one of its advantages over government issued currencies.
Nobel laureate F. A. Hayek makes a powerful case that government involvement in providing a medium of exchange (money) is neither necessary nor beneficial. In fact, government provision of currency is a threat to both liberty and financial stability. Hayek points out that governments have everywhere and always undermined the value of their currencies to reap revenue through inflation. He argues, convincingly, that the best hope for sound money lies in competition amongst privately issued currencies.
