Bitcoin would be a calamity, not an economy

https://www.technologyreview.com/s/610783/bitcoin-would-be-a-calamity-not-an-economy/

by edward • 8 years ago

37 27 8 years ago

kashif• 8 years ago

The article doesn't say much other than state the current reality of central banks shaping a lot of market forces in todays paradigm. I disagree and think that the Central bank has inserted itself in things that economic forces would have otherwise managed anyway.

toss1• 8 years ago

The history of massive boom-bust cycles before central banks says otherwise. These cycles haven't been completely eliminated, but the cycles are much more moderated than the way they were before fiscal and monetary interventions.

It seems that the best would be for a currency to automatically detect the conditions needing faster or slower creation and algorithmically adjust (as they adjust the hash rate), keeping political adjustments out of it.

zamalek2• 8 years ago

total number of bitcoins is capped at 21 million [...]. This makes Bitcoin appealing to many people because something that will never increase in supply is more likely to hold its value.

A deeper problem is what happens when the economy grows to more than what Bitcoin can represent. For example, what happens when a piece of bread is worth less than 1 satoshi? With a fiat currency, you can simply print more so that said piece of bread can have its value accurately represented. You can't do that with Bitcoin.

To make matters worse, if a whole bunch of [flames, edit: money] goes up in flames more can be printed to replace it. If Bitcoin goes missing[1], it's gone for good.

Currency was formulated to replace barter (precisely because of indivisibility problems: you have one cow, but I only have three bread to trade). Cryptocurrency is not a currency because it specifically aims to reintroduce problems that currency solves. It could be an alternative solution to the barter problem if a novel workflow is formulated (such as Ripple carrying information and not value), but buying stuff with it is unsustainable in the long run.

[1] https://www.independent.co.uk/life-style/gadgets-and-tech/ne...

supreme_sublime• 8 years ago

Cryptocurrencies are most certainly divisible. You don't have to trade whole "coins".

The biggest problem I see is the fact that it is a deflationary currency. Which makes it a pretty great store of value, but it also means that it is almost guaranteed to be worth more tomorrow than it is today. So instead of spending money or investing it for other people to use so it will grow, people will be incentivized to hold onto it.

Edit - I was not aware that a "satoshi" is the term for the smallest denomination of Bitcoin. I was under the impression it was a generic kind of cute name for cryptocurrencies.

jjnoakes• 8 years ago

Cryptocurrencies are most certainly divisible

The parent asked "what happens when a piece of bread is worth less than 1 satoshi?" - as far as I know, one satoshi is not divisible; am I mistaken?

abbasaamer2• 8 years ago

For example, what happens when a piece of bread is worth less than 1 satoshi

That does not seem to be an imminent danger. The price of Bitcoin would have to increase literally 1.4 million times for a satoshi to be worth a penny.

To make matters worse, if a whole bunch of flames goes up in flames more can be printed to replace it. If Bitcoin goes missing[1], it's gone for good.

Isn't that the same with paper cash? If by a "whole bunch" you mean enough to cause a worldwide issue, then there are solutions to that. Maybe not great solutions, but there are some. Worst case, a hard fork. That's essentially what led to Ethereum vs Ethereum Classic, isn't it?

paxys2• 8 years ago

If you mail a torn banknote to the Treasury they will send you a brand new one. There is no recourse if a hard drive or electronic wallet containing a bunch of Bitcoin is destroyed, for example.

You can say "tough luck", sure, but the end result is that the amount of money circulating in the economy will be decreasing every day.

And how does a fork solve anything? You can't just say, hey throw away all your existing Bitcoin, we're starting from scratch and using this new one now.

vkou• 8 years ago

This makes Bitcoin appealing to many people because something that will never increase in supply is more likely to hold its value.

Unless you take twenty minutes to create a fork of it.

smacktoward• 8 years ago

Now you have two problems :-D

andrewla• 8 years ago

With a fiat currency, you can simply print more so that said piece of bread can have its value accurately represented

But, realistically, has this ever happened in the era of fiat currency? Certainly the opposite case has happened. Adding another decimal place to a fiat currency would be a complete disaster -- every single moving piece in the financial system would need to be "fixed", including fixed-length protocols that date to the COBOL era. This solution is entirely unrealistic.

On the other hand, it is at least conceivable that a hard fork to increase the precision of Bitcoin would be uncontroversial (in that the old fork would not survive). There would be ripple effects throughout the (hypothetical future Bitcoin-based) banking system, but no worse, I would think, than would happen for fiat currency.

Cryptocurrency is not a currency because it specifically aims to reintroduce problems that currency solves

You say "problems" here, but you only indicate one problem. The other problem (the destructibility and replaceability of money) is not really a problem that currency solves in the context you're using it, since for most of history specie was precious metals, and if lost at sea was gone (I mean, theoretically recoverable, but it's probably cheaper to find new gold in the ground).

And for a private individual, the "replacement" will simply never happen -- if I burn a big pile of bills in my back yard, that money will never be replaced, and it's a bit absurd to claim that it would be.

dragonwriter• 8 years ago

But, realistically, has this ever happened in the era of fiat currency?

Well, no, because fiat currencies don't tend to experience either sustained or rapid deflation, so the problem never arises.

Of course, consistently avoiding the problem is even better than solving it.

Tommah• 8 years ago

what happens when a piece of bread is worth less than 1 satoshi?

If Bitcoin ever becomes that valuable, the plan is to modify the protocol to use more decimal places.

arthurcolle• 8 years ago

do you have a link/source for this? just curious, thanks

haywirez• 8 years ago

Again, Bitcoin is "infinitely" divisible, the current 8 decimal cap can be easily modified if needed. There's no limit to the smallest unit as with standard currencies.

zamalek2• 8 years ago

That is, up to the limits of IEEE 754 - unless a BCD is used.

SilasX• 8 years ago

A deeper problem is what happens when the economy grows to more than what Bitcoin can represent. For example, what happens when a piece of bread is worth less than 1 satoshi? With a fiat currency, you can simply print more so that said piece of bread can have its value accurately represented. You can't do that with Bitcoin.

1) Printing more money only "solves" that problem by debasing everyone's cash holdings. It's not an unalloyed good.

2) The protocol can change, by soft fork, to allow for greater precision.

3) You can create all kinds of derivatives or accounting fictions that subdivide an indivisible asset, exactly as is already done with:

a) fiat currencies -- where you log sub-cent transfers and then periodically settle,

b) ETFs, where a share represents a (bundle of) sliver(s) of a stock share, but they trade at par because you have the right to redeem large blocks of them for the corresponding asset. (The same mechanism can work for sub-cent instruments.)

ttul• 8 years ago

“The problem is that in the event of a crisis, there would also be no way to add liquidity to the system, since you can’t “print” more bitcoins.”

Arguably, because the rate at which BTC is printed is algorithmically fixed, it makes no difference that there is a cap of 21 million at some time in the future. The fixed rate of issuance is a curiosity. Since everyone know that it exists and how it will play out, this is entirely reflected in the price.

If BTC replaced fiat, then yes, there would be no way for anyone to issue more BTC to help provide liquidity. In this way, BTC is just like gold, and we know that backing a currency with gold is a poor idea because it similarly ties the hands of government.

However, if governments bought massive stocks of BTC, they could release it when needed to absorb shocks. This would be more like a fiscal stimulus than a monetary stimulus, but in any case I think the article overlooks it as a distinct policy tool if BTC hits the really big time.

solotronics• 8 years ago

I think backing all the global currencies with absolutely nothing is a relatively new experiment and we have yet to see if it works out.

dumbfounder• 8 years ago

It's not going to supplant the fiat of the world's strongest economies for a long time, but it hopefully will soon for the weakest. For the weakest, the central bank is often the problem, not the solution.

israelsonbj• 8 years ago

Forking creates too many issues for general public adoption.

nontechdude1• 8 years ago

Bitcoin is an economy for illicit things.

It is a store of value for early adopters trying to get people to basically put money in their pocket.

The only thing people care about is its value against USD. That alone refutes the possibility of it as a currency. USD is clearly a great currency.

Blockchain has some interesting applications; for example, medical records being secured, and maybe other applications.

dpc_pw• 8 years ago

This article is soo not worth reading. Nothing new or of any insight there. The argument about fixed supply is soo old, and argued with million times already.

Don't worry. Noone is forcing anyone to use Bitcoin. Keep your fiat, enjoy your inflation and central bank always ready to print more of it. :)

Bitcoin would be a calamity, not an economy

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