The Bitcoin Economics lesson for Engineers

http://econgoat.com/a-lesson-in-economics-for-engineers

by rogueeconomist • 12 years ago

63 90 12 years ago

dwaltrip• 12 years ago

It's pretty funny how she uses E-gold as an example, which failed due to forcible dismantling by the government.

Hint: Bitcoin was created for the sole purpose of avoiding problems of that nature.

As for the rest of the article, not much content and many unsupported assertions. It would have been nice to hear why bitcoin is completely value-less, beyond not being "goverment backed". But I suppose that discussion would involve actually understanding bitcoin.

adamnemecek• 12 years ago

What a self-promotional garbage. Why was this not written when Bitcoin was valued at $1000?

borplk• 12 years ago

Next time it reaches $1000 she will come out with a shiny new article about how fabulous bitcoin is

bachback• 12 years ago

why the upvotes? but I'm sure the author is an expert in Elliptic Curve Cryptography and understands the subtleties of hierarchical deterministic wallets.

Fuxy3• 12 years ago

Because we want everybody to see just how clueless she really is.

VMG• 12 years ago

Quote from the article: Bitcoin mining is not valuable for anything other than creating Bitcoins. Bitcoin is possibly the most valueless asset in history. If people no longer wish to hold or accept Bitcoin, the value will be exactly zero since it has no inherent value, making it an extremely fragile asset.

Therein lies the trouble with taking lessons from economists who don't think it through.

Also previously:

* http://www.wired.com/magazine/2011/11/mf_bitcoin/

* http://www.forbes.com/sites/timworstall/2011/06/20/so-thats-...

* http://money.cnn.com/2013/04/12/investing/bitcoin-bubble/

Don't get your hopes up just yet.

JumpCrisscross2• 12 years ago

Bitcoin is possibly the most valueless asset in history. If people no longer wish to hold or accept Bitcoin, the value will be exactly zero since it has no inherent value, making it an extremely fragile asset.

Stock in a shell company also has zero inherent value. This is simply a localised critique of the "most valueless asset" accusation - many assets share that characteristic.

terranstyler3• 12 years ago

And then there is fiat money, the elephant in the room of valueless things.

JumpCrisscross2• 12 years ago

Bitcoin is a fiat currency - it has no intrinsic value.

Government-backed fiat has some intrinsic value - it can cancel tax obligations and thereby has a captive source of demand (taxpayers). But practically speaking, yes, most of any fiat currency's value is in its seignorage, not tax-cancelling intrinsic value.

nopinsight• 12 years ago

Both stocks in shell companies and fiat money are protected by international treaties and the military might of supporting governments. Has any government declared official and unequivocal support for Bitcoin yet?

cromwellian2• 12 years ago

Fiat money is backed by the government, which has a monopoly on force, which is backed by civil society voting it into power.

Value is a human invention, there's really no objective value for something other than what other people demand. The only real difference between bitcoin, fiat currency, and other assets, is that some assets have multiple demand uses -- they supply value for things other than as a currency, and US government assets simply have the way of a much larger, mature, 200 year old institution, with hundreds of millions of people backing it.

Here's the thing: If you are wronged by a crook on the stock market, or by the US government, there is a non-zero chance you can get justice through the courts. But if Mt Gox or Silk Road 2.0 runs off with your money, who has jurisdiction? Who you gonna sue?

The original article makes a lot of mistakes with regards to how bitcoins work, but that's counterbalanced by the hyperinflation/currency debasement hysteria of gold nuts and anarcho-libertarians who think BitCoin is somehow going to end the Fed and restore a pre-1920's Nirvana that never existed.

terranstyler3• 12 years ago

OK, I gotta correct myself: Fiat is not valueless (what I wrote) but it has no intrinsic value (what I meant).

Just like BTC.

victorlin• 12 years ago

After world war II, people in Germany burn paper money in winter. Because, by that time, fiat money is cheaper than coal and wood.

That's funny it seems that this economist thinks fiat money can't never be valueless. Well, look Cyprus, and look Ukraine now. I am not saying Bitcoin won't never be valueless, but apparently fiat money is not completely invulnerable.

XorNot2• 12 years ago

You know how Bitcoin prices spiked after Cyprus had it's banking issues? You do realize that that happened, and could only happen, because a large number of people believed the Cypriot currency was in fact not likely to remain "valueless" seeing as how it was still the sovereign currency of Cyprus, and were willing to exchange at least Bitcoin to hold it.

The examples you give, are not examples where just fiat money fails. They're examples of the entire architecture of a society falling apart (the government is being overthrown in the Ukraine, post WW1 Germany was in the midst of a massive recession). These are all situations where no currency retains a stable value since no currency allows you to eat, fuel vehicles or defend yourself. In those situations, Bitcoin is as valueless as anything else (more so, by virtue of being unusable without the internet).

ama729• 12 years ago

Except a shell company does generally have assets, IP and so on, when there is a bankruptcy, there is a chance the shareholders get something out of it. Also, Fiat money has the government (and well, the bank notes are worth at least something on ebay :)).

Bitcoin on the other hand, by design, has NO backing, if the system tank, you wont be able to get anything out of it.

Thus she's correct on that point, whether or not it's important.

userulluipeste• 12 years ago

"Except a shell company does generally have assets, IP and so on, when there is a bankruptcy, there is a chance the shareholders get something out of it."

As far as I know (and I'm aware I don't that much), a bankruptcy means zero value left for the (ante-bankruptcy) owners. Whoever steps in has to (only) put in some value, like the government paying/writing off unsolvable debts, or the next owner that has to effectively buy the bankrupt entity from the government. Am I wrong?

terranstyler3• 12 years ago

The lesson is:

If you don't understand anything about something but need to opine, put the words "lesson" and "engineer" in the head to fake your understanding.

Fuxy3• 12 years ago

She doesn't get it bitcoin will never reach 0 there will always be people buying and selling bitcoin just as there's customers for even the crappiest websites.

Not to mention it's already reached critical mass which means it will never go away and the advantages outweigh the risks.

Now will this hurt bitcoin? Yes. Is this a good thing in the long run? Definitely.

It's always a bad thing when 70% of all speculation is done on one platform and that platform closes down.

I'm somewhat glad mtgox was allowed to fail that juts proves that the awful too big to fail mentality of the US did not corrupt the bitcoin marketplace.

This is a good thing in the long run even if it's going to hurt like hell in the short run.

NateDad6• 12 years ago

Mt Gox was like the #3 exchange, not number 1 for some time, and definitely not 70%. They'd been having problems for a long long time, which is why a lost of people didn't want to go there anymore. They had name recognition, but it was nearly impossible to get cash out.

Fuxy3• 12 years ago

That's what I've been reading in the media anyway and i couldn't be bothered to check the numbers.

I tried using them once and they were asking to many unnecessary questions so i just went elsewhere.

joosters• 12 years ago

"You might as well flush your money down the toilet by investing in the Egyptian pound."

Does the author have some insider information on Egyptian currency trading? I hope they are putting their money where their mouth is by selling EGP on the foreign exchanges!

Or in other words, the author opens this article by spouting speculative bullshit. Why then should we treat the rest of it as useful?

vijucat3• 12 years ago

The core argument surrounding Bitcoin can be brought to focus by asking the question : "Would you rather trust a government or a mathematical algorithm?". Of course, crypocurrencies are not just algorithms, they're more like algorithms + protocols, but still, that's a great question to ask at a gathering (of like-minded people); it generates some very interesting discussion.

My personal take is that : there are two kinds of people. Some need a Central authority. (They probably respect and believed everything uttered by their parents and teachers as children, too. I'd LOVE it if someone did a psychological study of such correlations in personal beliefs.) Others are suspicious of the utility of government. One need not be a full-blown anarcho-capitalist or whatever the well-read cool kids call it; it's just that the 2008 financial crisis has left a deeply unsettling feeling about whether governments are serving the common man. Such people would rather trust a computer science researcher's invention. I'm definitely in the 2nd camp.

I think the lack of central authority is what type 1 people find unsettling and unbelievable about Bitcoin. What the world needs is a "Cartoon guide to cryptocurrencies" book or video.

k-mcgrady2• 12 years ago

> ""Would you rather trust a government or a mathematical algorithm?"."

Most people can understand government fiscal policy (to a useful extent anyway). Very few can understand an algorithm even when it's explained to them. They vote in the government and currency in it's current form (e.g. USD) has worked for generations. Trusting the government seems much safer.

Also with Bitcoin you are trusting more than an algorithm. You're trusting exchanges. You're trusting in the security of a digital system that can be hacked and you don't understand how to secure properly. With physical currency security is simple and understandable. With digital currency it's not.

ben0x539• 12 years ago

When a government fucks up, you can vote to change it or sue them. When the algorithm eats your savings, there's no recourse. I'll put my trust with the concept that isn't claimed to be infallible here.

vijucat3• 12 years ago

Most people can understand government fiscal policy (to a useful extent anyway). Very few can understand an algorithm even when it's explained to them. They vote in the government and currency in it's current form (e.g. USD) has worked for generations. Trusting the government seems much safer.

Do you know what people trust more than anything else? Other people. Trust in government feels so fundamental, but actually it is based on the fact that OTHER people trust the government, too. People trust a lot many things they don't understand, too. People trust https, for example. They feel safe because "everybody else is trusting it, too".

IMHO, this kind of normative ethics ("it is correct because everyone else says so") is why many societies have totally acceptable behaviours which are obviously wrong to outsiders : whipping women if they dare to drive in Saudi Arabia, ignoring abject poverty as it stares you in the eye in India (or even the West), punishing non-religious or sexually "deviant", etc;

Coming back to BitCoin : the burgeoning community that believes in BTC has the potential to reach critical mass and create the kind of numbers that will serve as a foundation for the kind of trust that the government, for example, or religion (despite being provably nonsensical), enjoys today.

TL;DR : it's not that people trust the government, they trust what other people trust. A good enough number of people trust BitCoin.

pdkl95• 12 years ago

"Would you rather trust a government or a mathematical algorithm?"

The government, obviously. They have the guns and can simply use those guns to annex the necessary mathematicians, should the need arise.

Far too often, people seem to forget that governments are the one that has the monopoly on use of force. Thinks like "logic" and "rhetoric" and "math" don't mean a damn thing when the conflict has been reduced down to basic natural selection.

We, as a species, are incredibly talented at postponing that conflict. We pile on more and more layers of indirection - such as "politics", "police", "lawyers" - hoping to avoid the violent battle that lies at the core of any real disagreement.

Unfortunately, geeks tend to fall prey to the "just-world fallacy" in these cases. We're used to the rigor and determinism of math and logic, and often assume that such concepts are universal.

macavity23• 12 years ago

They have the guns and can simply use those guns to annex the necessary mathematicians

You clearly have a definition of 'trust' that differs significantly from my own :)

vijucat3• 12 years ago

The government, obviously. They have the guns...

Guess what is common to the guerrilla soldiers in Vietnam, terrorists spread across the world, the hackers group Anonymous, and other trouble-makers whom the big bad government seems to fight and never win against : they're decentralized.

Also, there's not much use pointing a gun at a mathematician a) after they've published the result and b) who can successfully publish his stuff anonymously (Satoshi)

Unfortunately, geeks tend to fall prey to the "just-world fallacy" in these cases. We're used to the rigor and determinism of math and logic, and often assume that such concepts are universal.

Not at all. Diffie-Helman key exchange, for example, solves the problem of exchanging a secret key on an untrusted connection. It is exactly this kind of "there WILL be bad people; how do we make it work nevertheless" thinking that gave birth so many interesting results in cryptography that is going into the creation of new currencies, too.

Centralized government has had so much history of working well + there are not that many non-centralized protocols at work in real life yet (p2p, bittorrent, distributed consensus protocols like Plaxo, Raft, etc; are the only ones I know, for example) so you may be finding it difficult to believe in a decentralized protocol, that's all?

glimmung5• 12 years ago

This is just silly - here we have someone lecturing us about economics who describes herself as a "Rogue Economist" - so are we expected to buy this analysis because she is an orthodox economist (which is how it reads), or because she is a "rogue economist"?

More significantly, the line "While we may dislike the government’s regulation and intervention into financial markets, their oversight prevents moral hazard and rampant fraud." is just laugh-out-loud funny - we've seen PLENTY of moral hazard and rampant fraud in orthodox financial markets, on a scale which is simply mind-boggling in comparison to anything happening at Mt.Gox.

interstitial2• 12 years ago

Clearly, it's a new paradigm. It's different this time.

red12ooster• 12 years ago

Here here! I also didn't like her cheesy stock images in the article.

yummyfajitas• 12 years ago

Did the 18 people who upvoted this crap not even notice the glaring factual errors?

...the efficient market hypothesis (that free markets will regulate themselves)...

Fiat currencies (money) are pegged to real assets...

...it is as vulnerable to financial crises as any deregulated financial market... US subprime mortgage market, bubbles follow the same patterns for growth and implosion.

Most amusing is the idea that unlike USD, BTC has no protection against fraud. The same is true for most "regulated" transactions, credit card payments being a notable exception.

NateDad6• 12 years ago

My guess is, half the people voted it up for pure schadenfreude, and the other half voted it up so they could talk smack back to her :)

williamcotton4• 12 years ago

Laughing at someone's misery is called schadenfreude.

Laughing at someone's tragic folly is called comedy.

Not knowing the difference between misery and folly is fucking hilarious.

grovulent7• 12 years ago

The tone of condescension that comes from professional economists is telling. It's impossible for them to just present their arguments, cleanly, simply and without ostentation and vitriol. They have to try to make you feel stupid for disagreeing with them.

When you don't have a sound scientific basis for your discipline, you need something to step in to fill the void - in order to make other humans believe in your worth. Economists use their enormous egos, as well as the frailties inherent in the egos of others.

Heather R Morgan has not written an article which rises above the flaws of her discipline. It starts with a jibe - oh, you invested in bitcoin, why not flush it down the toilet - that's HOW STUPID YOU WOULD BE...

Engineers and hackers don't have to worry about whether or not their discipline makes a genuine contribution. They have proved themselves time and time again. They build a product - ship it - and if it fails, they start working on the next idea. They don't have to worry about fighting over 'theories' with academics who desperately claw at one another for those disappearing tenure tracks.

As we who have spruiked for bitcoin have always said: "This is an experiment that might fail."

Heather might want to consider switching to a discipline in which experiments are even possible...

lclarkmichalek• 12 years ago

You haven't commented on the content of the article at all. I know attacking the tone is easy, but it's hardly constructive.

jpttsn• 12 years ago

Grandparent has a valid point about the article's tone, and attacking tone can be constructive.

grovulent7• 12 years ago

Well - I think it's important to address the tone. I was going to say more about the substantive argument - but didn't because I didn't want to write a wall of text. Also, I just see the argument as a very uncritical regurgitation of the intrinsic value argument against bitcoin and I've personally grown weary trying to encourage a greater level of depth to that discussion.

If you are interested - I've written at (great) length my thoughts about this argument here:

http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...

k-mcgrady2• 12 years ago

> As we who have spruiked for bitcoin have always said: "This is an experiment that might fail."

It's fine to experiment but when Bitcoin became more mainstream the kind of stupid mistakes MtGox has made are inexcusable. Ordinary people were using it and are losing money now. You can't promote a new technology and push for it's adoption by a wide audience and just call it an experiment when it fails. That's reckless.

> Heather might want to consider switching to a discipline in which experiments are even possible...

And you're complaining about condescension?

moe• 12 years ago

MtGox != Bitcoin.

Why is that so hard to understand?

grovulent7• 12 years ago

I presume the 'you' in your statement is directed at... well... who exactly? Who was promoting Bitcoin in a way that did not foreground its extreme risk front and center? Your journalistic finger wagging will not do here. I would like to see examples. And if you provide them, then I will accept in each such case that they were indeed irresponsible.

As for my last statement - I accept it comes off as no better. But I happen to actually mean it with more sincerity than you can possibly imagine. I was a PhD student in philosophy. After five years I quit because I couldn't stomach my own bullshit any more. I'm currently training myself in math, machine learning and programming. Even as a mediocre tech guy (and I don't doubt I'll ever be more than mediocre) - I'll add more value to the world than I ever did as a philosopher. I believe the same of economics.

matthewmacleod• 12 years ago

Can I be blunt? It's their own goddamned fault.

I get that MtGox made a lot of obviously severe errors in implementation. But I'm also aware that popular wisdom has been (for some time) to avoid it. And further, it should be immediately obvious to anybody with a shred of sense that you do not hand over piles of cash (which is the closest approximation to Bitcoin) to an unregulated, opaque private enterprise.

Yeah, it sucks for the people who lost money. But with the exception of a minority, they were obviously dabbling with things they did not understand.

Nothing about this speaks at all to the long-term viability of Bitcoin as a currency. In fact, I think it'll probably be a benefit in the long-term - there needed to be a large, damaging demonstration of the requirement for security, and this event will cause a lot of changes.

perfunctory• 12 years ago

They build a product - ship it - and if it fails, they start working on the next idea.

Insert "economic theory" instead of "product".

facepalm• 12 years ago

Complete bullshit. If my computer gets hacked, my bank passwords will also be stolen and my money is in danger. Banks have also gone bust before.

I don't know what the eventual value of Bitcoin will be, but this economist doesn't, either...

jbb555• 12 years ago

One reason the value should rise faster than this is that there are a limited amount of bitcoin in circulation. (That is, not help as long term assets). And the number needed for day to day transations is growing very quickly. So it's likely the price to acquire those needed for day to day transactions will also grown fairly rapidly.

weavejester• 12 years ago

This article has very little intelligent to say. There are plenty of legitimate criticisms against Bitcoin, but I really thought we were past the stage when economists with little or no understanding of Bitcoin attempt to weigh in on the subject.

quarterto• 12 years ago

  Bitcoin mining is not valuable for anything other than creating Bitcoins

Bitcoin mining ensures the validity of the blockchain. Bitcoin is valuable as the unit of account by which things can be entered into the blockchain. Good luck trying to convince people that a distributed, consistent transaction ledger has no value.

NateDad6• 12 years ago

By the same token, what value does gold mining have beyond "creating" gold?

graeham• 12 years ago

Gold has value and use aside from as a currency.

XorNot2• 12 years ago

A Bitcoin is not anything useful by itself. You can't melt that hash down and plate electronics with it.

But you have hit on an important point, because throughout history almost every empire bankrupted itself at one point or another when it made a big find of gold, and quickly mined and spent a lot of it presuming it was rich...and instead, tanked its currency valuations and found itself much worse off because not only had they inflated the hell out of their currency, they'd not adjusted any of their tax rates to match.

mkempe• 12 years ago

Further, if or when Bitcoin transactions with scripted contracts become commonplace, mining would support the long-term existence and enforcement of such contracts.

NateDad6• 12 years ago

"Oh you silly engineers and your bit of coins, let me econ'splain how dumb you were."

Madam, there is nothing in your article that any of the engineers who were (and are) so excited by bitcoin didn't already know long before you'd even heard of bitcoin.

lesingerouge• 12 years ago

On-topic: I remember my undergrad course in macroeconomics. It was a total and utter mess. Just tons and tons of theories and formulas that could not be demonstrated, but had to be memorized. Most macro-economists suffer greatly from the lack of a "credible" scientific base for their studies. Hence the article, a generous serving of all possible stereotypes that macro-economy can give. BUT, I also remember microeconomics, and that was a totally different story. Most useful when thinking about markets and how people behave, but interesting if applied to greater scales (macro-micro-economics?).

Off-topic, but considered interesting: Am I the only one that finds it frustrating that Subtle blogs have no local comments? I find it diminishes the value of the text in itself.

rjtavares• 12 years ago

In the article, an economist assumes engineers have no knowledge about economics. In return, Hacker News assumes economists have no knowledge. And this comment assumes everybody in Hacker News thinks the same way about economists.

Assumptions...

Patient0• 12 years ago

"As people watch asset prices rise and people make money herding mentality kicks in and many people jump on the bandwagon with hopes of grabbing some of the riches."

A few too many mixed metaphors in this article! I'm trying to imagine herds of people jumping on a bandwagon...

What is a bandwagon anyway, I realise now I've never known - it's only ever used in the phrase/cliche "jumping on the bandwagon".

Thiz• 12 years ago

The article is bullshit.

Here are the real three lessons we have learned the hard way.

#1 My money stays in my wallet. All the time.

#2 If not possible #1, know the names of those who keep your money, you're trusting them, they should be held accountable and strongly punished by law to set a precedent. Do not trust your money to a faceless business.

#3 Cryptomoney is the future, spend more in research, protect wallets, methods to test solvency, public audits, webs of trust, etc.

This tragically had to happen so we could learn these lessons. Monetary darwinism at its best.

We will raise from the ashes stronger, Spartans.

threepipeproblm• 12 years ago

To me, it seems like this article merely repeats Keynsian axioms without bothering to argue for them. Not, in my experience, the way engineers like to be talked to.

The Bitcoin Economics lesson for Engineers

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