Bitcoin vs. Ben Bernanke

http://online.wsj.com/article/SB10001424127887323809304578429142650304564.html?mod=WSJ_Opinion_LEADTop

by dpanah • 13 years ago

65 88 13 years ago

online.wsj.com

joelberman• 13 years ago

Every article I read about Bitcoin has a picture of a metal bitcoin in it. I guess that is to make sure very few people get the point of what bitcoin is.

superprime• 13 years ago

It's obviously a coin made out of a bit of metal.

antonius• 13 years ago

I'm sure people that read Bitcoin articles make their judgement through the articles' content as opposed to a picture.

consz• 13 years ago

I don't. Pictures are very appealing and easy to digest, I'd rather they be more clear with visual media than with the article itself.

derefr• 13 years ago

They need a picture of something. The articles are laid out such that there's a hole labelled "insert illustration-team piece, falling back to relevant stock-image" on them before they ever get written.

Suggest what else it could be for a Bitcoin article. Perhaps a visualization of a block-chain? A hash with a lot of zeroes in it? Satoshi walking away from his computer with a wheelbarrow of money?

Falkon1313• 13 years ago

Perhaps an illustration of a transaction occurring simply, directly, rapidly, and with a tiny fee compared to one requiring trips to the bank at both ends, forms to fill out, taking several days, passing through several intermediary financial organizations, and costing several expensive fees along the way. Cruft-free transactions are one of primary distinguishing characteristics of Bitcoin, right?

But then when addressing the negatives, follow that up with an illustration of the current process to obtain Bitcoins.

finnw• 13 years ago

Metal bitcoins are real.

https://www.casascius.com/

lolcraft• 13 years ago

I'll admit that the WSJ here is not as laughably bad as some quotations from their infamous op-eds had led me to believe. Maybe I was too harsh with them. They seem to do the balance thing, or more correctly here, the common sense and economics thing, at least passably well. Either way, there are some real pieces of work here, misconceptions about economics that were dispelled before, again and again. You're going to have a laugh, I promise.

Of course, let's start about some inflammatory comments about Mr. Leftwing Strawman, as per usual: did you know that hyperinflation is inevitable because ZIMBABWE!?

"I'll use a visual aid," says Mr. Andresen. "He opens his wallet and presents me with a gift: a 10-trillion-dollar bill once issued by the government of Zimbabwe."

Deflation is good, because SAVING! (Here the Calvinist roots of old-school good Flemish capitalism start showing again, with careless disregard to any theory of supply-demand equilibrium. How do I miss Schumpeter/Marx...)

"If prices are falling, he says, it does encourage people to save instead of spend, because the currency will be worth more later. It encourages people to lend instead of borrow. [and that's a good thing]" (Yeah, because as we know, in a given economy at a given time there can be more lending than borrowing. Or that saving > spending doesn't mean a contraction in the economy, by the magic of Austerian Economics. You people...)

A classic: fiat currency is a FAITH! Heathens!

"Federal Reserve Bank of Dallas President Richard Fisher calls the U.S. dollar a 'faith-based currency.'"

(Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)

"[...] what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation? He says the engineer in him likes the simplicity of Bitcoin's fixed money supply."

Yeah, great engineering dude, let's disregard things like, you know, minimal acceptable performance for simplicity ;) You know, Unix was simple, but at least it didn't crash every five minutes. And the Apple II was simple, and it even had color!

Had many laughs. Would read again.

notahacker• 13 years ago

I liked the anecdote about the delays in wire transfers for renting a house overseas whereas with Bitcoin "the whole world is your market". I'm going go out on a limb and suggest there's a bigger proportion of the world willing to accept rental deposits in dollars than Bitcoins...

pbreit• 13 years ago

And PayPal is commonly, easily and effectively used in these instances.

Shinkei• 13 years ago

Rant much?

I wanted to actually learn something from your post but it reads like a madman wrote it.

I own exactly zero bitcoins, but following the market since 2011 has proven that it is getting easier to use and more prevalent. People will be putting down bitcoin as a serious entity even after PayPal is accepting them.

parasubvert7• 13 years ago

Have you atudied economics? The OP reads like someone who has and is utterly incredulous at the statements being made by Bitcoin's proponents. In fairness, the gentleman interviewed in this article insisted it was all an experiment. But the WSJ editorial board has a long time habit of being very non-mainstream and almost Austrian with its economic views, so this interview was likely intended to play into a political narrative.

Here is a summary of what he is trying to say:

1. Bringing up hyperinflation in Zimbabwe is a common tactic of right-wing/Austrian economists to warn of the evils of government control over fiscal spending and currency, and that our current course of monetary expansion means that we in the US too are on the same path.

This ignores of course that (a) Zimbabwe had a civil war at the time and the government confiscated or destoyed most private productive capacity; (b) we are in a liquidity trap currently, which in short means that money is nearly free to borrow at 0% interest. Companies are sitting on piles of cash or continuing to unwind their debt from the 2008 crisis, therefore we have not enough people spending. Printing money has had no discernible impact on inflation over the past 5 years. In fact, we could use a bit right now - to encourage spending!

2. The thought that "encouraging saving is good" therefore fixed currency and deflation is good.

An economy is a closed system - if some are saving, others have to spend to keep the music going. If we all stop spending, we get into a depression, where people lose their jobs, and the economy isn't working to its potential - all because the currency is rising in value.

In short, it is arguable the point of an economic system is to make and consume goods and services, not sit and watch your bank balance grow due to the psychological whims of the market.

3. A currency based in faith is not a dangerous thing - basing currency on gold is mostly a form of superstition. and it has real drawbacks (see #2).

Lots of things in the world are based on faith in institutions or theorems. Bitcoin is too - faith in the algorithm, that it works and won't be compromised. Also (blind) faith that a fixed amount of Bitcoin will not lead to destabilization.

Now. Does that help? These arguments lead to exasperation because they seem to happen over and over across decades in slightly different forms.

bergie• 13 years ago

* it is getting easier to use and more prevalent.*

Yep. I'm seeing more and more of these signs in my neighbourhood:

https://plus.google.com/100751105859582805241/posts/RpQ5adUF...

dragonwriter• 13 years ago

> (Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)

You know, you failed to specifically pick out the most relevant thing that is also based on faith: bitcoin.

Like any currency, its value in exchange for anything else is dependent on faith that people will accept in the future.

scrollbar2• 13 years ago

Regarding your point about the lending vs borrowing:

The use of the word "encouraged" makes sense to me. If people are "encouraged" to lend vs borrow, that means they will have more desire to lend vs borrow. This has an important effect on the supply vs. demand equation. Supply of loans, ie. people willing to borrow, goes down and the demand, ie. people willing to pay money now for interest later, goes up, causing prices (interest rates) of loans to go up (down).

In other words even though every dollar lent must be a dollar loaned, people's willingness to lend affects supply and demand.

saalweachter• 13 years ago

A deflationary currency doesn't encourage people to lend, it encourages them to save.

If currency is deflating at a low, constant rate (say, 2-3%, comparable to the normal rate of inflation), then the interest rate -- in real terms -- must be strictly higher than this. A 0% loan with 2% deflation the equivalent of a 2% real interest rate. But no one will ever lend money in this situation. You take on risk, but have no reward. So the rate of deflation is the minimum real interest rate of any loan in a deflationary currency.

In an inflationary currency, people will lend out money at even a negative real rate of interest and effectively lose money on an investment because the alternative is losing even more money by holding cash. If inflation is 2%, you will consider lending out money at 1% interest (if that is your only choice) because getting 99 cents back on your dollar by investing is better than getting 98 cents back on your dollar by holding cash.

Hence, an inflationary currency encourages both lending and borrowing: lenders lose less real money than holding cash, borrowers pay back less real money than they borrow. A deflationary currency encourages neither: lenders would prefer to hold cash, because it's safer and has decent returns, and borrowers have even higher real interest rates.

nijk3• 13 years ago

WSJ is a mediocre paper. WSJ OpEd is editorially a separate paper, and famously insane.

thebmax2• 13 years ago

famously insane according to who? The founding mantra of the editorial board:

"We are united by the mantra 'free markets and free people', the principles, if you will, marked in the watershed year of 1776 by Thomas Jefferson's Declaration of Independence and Adam Smith's Wealth of Nations. So over the past century and into the next, the Journal stands for free trade and sound money; against confiscatory taxation and the ukases of kings and other collectivists; and for individual autonomy against dictators, bullies and even the tempers of momentary majorities. If these principles sound unexceptionable in theory, applying them to current issues is often unfashionable and controversial."

What is insane about advocating free markets and sound money?

jrochkind1• 13 years ago

It's almost time for Mr. Andresen to get back to work. He shares some useful advice about Bitcoin: "I tell people it's still an experiment and only invest time or money you could afford to lose." If only investors could as easily follow that advice with fiat currencies.

StavrosK5• 13 years ago

Isn't anybody else afraid of the implications of basically the equivalent of easily trackable cash? The government can easily mandate that each individual declare their wallets and track every single penny you spend and where you spent it.

Sounds like a nightmare scenario to me.

nwh• 13 years ago

You can make it fairly difficult to tract the movement of money through different wallets. Verging on money laundering at times.

moe3• 13 years ago

You can easily anonymize your coins, either by tumbling or by using any number of wallets that are not associated with you.

StavrosK5• 13 years ago

Yeah, but that's like saying "you can easily launder your cash by using a laundering service".

Symmetry• 13 years ago

Decent enough article, but whenever talking about Bitcoins I find it helpful to separate the various roles that money performs. That is, Bitcoin is an awesome medium of exchange, a risky store of value, and a horrible medium of account. Just use it for what it's good for and everything's fine.

http://en.wikipedia.org/wiki/Medium_of_exchange

http://en.wikipedia.org/wiki/Store_of_value

http://en.wikipedia.org/wiki/Unit_of_account

eric_bullington3• 13 years ago

I actually think it's a mediocre medium of exchange, due to the fact that transactions are not immediate, but rather can take as long as an hour or more for a reasonable level of confidence in the integrity of a transaction. There are competing cryptocurrencies being developed now that are much better media of exchange since transactions are both secure and immediate.

I think Bitcoin's real promise is as a store of value. Yes, it's extremely volatile now, and people are getting used to the fact that if you lose your Bitcoins, they're gone for good. But compare Bitcoins to cash (tends to lose its value over time) and gold (expensive to store, hard to exchange). It's also incredibly easy to exchange Bitcoins for other digital currencies, like the ones I refer to above.

I think that once Bitcoin reaches a large market cap, like the size of gold, it will be much less volatile, and less risky. At that point, all the advantages above will become apparent. So Bitcoin's future may well be as a digital reserve currency.

Retric3• 13 years ago

Your assuming it makes it that far, I still think Bitcoins will be dead within 50 years and a far more useful cripto currency will take it's place.

illuminate3• 13 years ago

Stop adding nuance to the discussion! It's monolithically evil and/or the destroyer of capitalism/communism/The State/non-Austrian economics!

sethrin• 13 years ago

Bitcoin is to a first approximation not used as a unit of account, and that I feel is its biggest failure as a currency. Roman coinage, and subsequently Carolingian livres, were used as a unit of account centuries after they stopped existing as actual coinage.

The day that Bitcoin arrives as a market force, is the day that prices are denominated in it without the implicit reference to the USD.

irickt• 13 years ago

The biggest risk to Bitcoin is that it will become the Myspace of currencies as its many future competitors come along.

drcode5• 13 years ago

Yeah, I'm worried what happens if one of the big three (Apple/Amazon/Google) builds a bitcoin variant pegged to a baseline dollar price, which also has a large marketing budget.

aakilfernandes• 13 years ago

Interesting point:

"And for those who wish to avoid both inflation and deflation, what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation?"

My gut is that this is not possible. Enforcing stable prices requires constant data about price levels, and with decentralized markets there doesn't seem to be an accurate way to get that data.

eric_bullington3• 13 years ago

Unless a large portion of the marketplace for those goods and services moves to the currency's p2p client itself, at which point it becomes trivial to integrate price levels (i.e., a "basket of goods and services") into the protocol.

Imagine if an expanded ebay marketplace, including a wide range of goods and services, were integrated into today's Bitcoin protocol.

Unlikely, and very hard to implement, but not impossible.

ph0rque• 13 years ago

I wonder if that part is crowdsourceable, somehow... basically, tie the transaction volume/demand/etc. to its worth.

illuminate3• 13 years ago

It is not crowdsourceable when the speculators move to work against such a motive.

skylan_q3• 13 years ago

Historically speaking, the free market will gravitate to a currency that has a stable price and appreciates at least a little bit over time. No one wants to hold a depreciating currency. We use that fact to drive people to spend by driving interest rates down. Hence the lack of savings and the high levels of consumer spending.

nhaehnle• 13 years ago

The "historically" is a bit misplaced. Historically speaking, people almost universally ended up using whichever currency was used for taxation and in use by other significant institutions for practical purposes. Inflation basically never had anything to do with that.

Rich people might have been able to use other things as a store of value though, but things can only become lasting stores of value if they start out having some initial use.

PaperclipTaken• 13 years ago

There are a few challenges facing Bitcoin, and I think that in the long run Bitcoin will not be the chosen digital currency of the world.

The first problem is that there is a highly predictable and (at the moment) constant supply of bitcoins, which means that the value of the coin will adjust like a commodity as more or less people start to use it. It's like Gold or Oil in the sense that when people want it, it's worth a lot, and when people don't want it, it's not as expensive. That chains the value to the demand, meaning that any time you use bitcoin as a store-of-value, you are putting yourself at the complete mercy of the market.

Many advocates believe that as the number of people using bitcoin grows the price will stabilize, but I think that using bitcoin as a store-of-value is going to end up like using the gold standard, especially because some early adopters have tens of thousands to even a million (Satoshi is believed to have a million) bitcoins, and any of them could decide to 'cash out', which would dramatically change the supply and potentially affect the whole market.

Another problem is that the currency is highly traceable, and while you can do things to obfuscate your spending habits there are lots of techniques involving statistical analysis that shed doubt on the effectiveness of obfuscation. You can take this back to the "I have nothing to hide" argument, but there are plenty of powerful parties that will be more interested in a currency that can't be traced (imagine big business or big finance), and an untraceable currency would certainly be more attractive.

But to me the biggest current problem with bitcoin is the uncertainty. There are many conflicting schools of thought in economics each with their own reasons why bitcoin is good or bad. But beyond the basics, macroeconomics often involves a lot of voodoo, and for any new paradigm there will be major schools of thought that will believe the new paradigm is bad or unstable in some way. There is no real way to fight this except to accept that we ultimately have no idea how new economic paradigms will affect our world, and that some of the naysayers may be correct and thus caution should be used.

drcode5• 13 years ago

> ... you are putting yourself at the complete mercy of the market.

This is the "No one will want bitcoins because everybody's buying them" argument- I don't see much credibility in it. Also, what is an example of a commodity that isn't at the mercy of supply and demand?

> Another problem is that the currency is highly traceable ...

I agree with you that that is a major issue, and might hurt the popularity of bitcoin in the long run. Bitcoin is strange in that it separates the argument of "I don't want the government to control what I do" and "I don't want the government to know what I do". I'm not sure how this will play out long term. (yes, I know there is pseudo-anonymity, but if the tax man comes to you and asks you "how did you get the money to buy that car?" the block chain makes it possible to confirm/refute your response.)

> ... and thus caution should be used.

Yeah, I'm tired of folks who think they know with 100% certainty how the economy works. I have some good guesses that suggest to me bitcoin is going to do very well, but things could play out any number of ways and I have no clue whether my guesses are right.

bayesianhorse• 13 years ago

Can we please stop talking about Bitcoin replacing the Dollar? Bitcoin isn't suited for local transactions or for contracts on a large scale. That might change, but the value of the bitcoin protocol is in other applications.

em703• 13 years ago

I have yet to see it being pointed out that none of the encryption in use for these cryptocurrencies will necessarily remain extremely hard to break for long. A good question is: what if bitcoin or something alike does effectively gain traction and one day a math breakthrough (or a computational tech one) make the crypto weak? How much wealth will be destroyed then? Who would you turn to for help? Our system is not perfect, but taking central banks out of the loop is not a way to improve it. It would be much more useful to find ways to push down financial transaction and currency exchange costs.

nijk3• 13 years ago

Stealing is wealth transfer, not wealth destruction.

And it wouldn't be anonymous, so it could be investigated and relatiated.

The same argument applies to bank robberies.

em703• 13 years ago

The destruction would be by the lack of trust. Since there is nothing but supply and demand considerations keeping bitcoin's value high, guess what would happen if demand were to vanish

Zigurd• 13 years ago

Bitcoin will be the least of one's worries should strong crypto, in general, get broken through some computing breakthrough.

em703• 13 years ago

Nonetheless, it is one extra worry you do not want to have

wfunction2• 13 years ago

The terrifying part of his job is that almost all of the current Bitcoin services now use the same software, so that "any change to the core code has potentially disastrous impact. If everybody rolls out a new version and there's some problem with it, the whole Bitcoin payment network could grind to a halt."

This is the part that has always scared me.

nijk3• 13 years ago

This already happened in he 0.8 fork

wfunction2• 13 years ago

I know, but it's not going to be as easy to fix if it happens on a massive scale, i.e. when everyone's using it.

hexonexxon• 13 years ago

Bitcoin transactions are visible/traceable, but doesn't mean you can match txn to identities.

If there is one address in the middle of you paying somebody, and that address was generated either offline or through Tor, there's no way to prove you own that address unless somebody can extract the private keys from your seized hardware and match it up to the public address.

Transactions don't prove anything, anyways. If you sell on localbitcoins or IRC, you have no idea that the anon guy who showed up to buy them with untraceable cash isn't directly 3rd party funding his Silk Rd account. If you look at the blockchain it would appear I paid into SR directly however I sold coins to some random guy I'll never see again, who's contact info I also don't have. Since I sell under my countries $10k cash transaction limit I don't need to take ID or retain contact info. Tracing that transaction proves nothing.

I also can't recall any of the major bitcoin heists being recovered. Only one exchange (mtgox) has a history of holding transactions for ID if they appear to be stolen coins, and they've only done it twice: first time was cleared up with ID, second time they're still holding the coins (bitcoinica/linode theft). Every other bitcoin heist you've heard of through the years the trace leads to nowhere.

Bitcoin vs. Ben Bernanke

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