Yanis Varoufakis: Bitcoin and the Dangerous Fantasy of ‘Apolitical’ Money

By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog

The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

1. What are Bitcoins and What Makes Them a Very Special Form of Digital Currency

Bitcoins are digital units of currency that one can use, on the Internet, to purchase (a limited number of) goods and services. The digital nature of bitcoin is not what makes it novel and unique. There are, indeed, a large array of digital currencies, including dollars, euros, frequent flyer points, Amazon points etc. Starting with standard (fiat) money, more than 90% of dollars, euros, yen etc. are, indeed, digital. When your bank gives you a loan, for instance, it appears as digital money in your bank account. And when you use debit/credit cards or Internet Banking in order to transfer it to someone else’s account, from whom you are buying a good or service, your dollars, euros and yen come and go as mere digital currency units. Only a tiny portion of standard money takes a paper or metallic form.

Similarly, when an airline grants you frequent flyer points, that you can add to by using a particular credit card or redeem on some flight, upgrade or duty free item, it is creating a digital currency that you are accumulating for the purposes of using it in the future in order to purchase goods or services. Similarly, when the European Union created its carbon trading scheme, to be used by corporations and traders, it concocted a digital stock of carbon dioxide, divided it up in small bundles, distributed them to corporations (attaching to each such bundle or unit a quantity of carbon dioxide that the bundle’s owner could emit) and then set them free to trade these bundles (or pollution rights) amongst themselves in the hope that this digital market would generate a price for carbon dioxide such that corporations would have an incentive to produce less of it and sell (to less efficient firms) the balance of their bundles. Had this scheme worked, these bundles of carbon dioxide would emerge as a digital-only currency.

So, bitcoin is not novel because it is a digital currency or because it is a ‘made up’ currency. Digital, ‘made up’ currencies are everywhere. What is, however, genuinely novel and unique about bitcoin is that no ‘one’ institution or company is safeguarding the so-called Ledger: the record of transactions that ensures that, when you have spent one unit of currency, there is one less unit of currency in your (digital) wallet.

Put differently, take gold sovereigns as an example: By their (metallic) nature they constitute private and excludable media of exchange, in the sense that if I use one to pay Mary for a car that she is selling, I shall end up with one less such unit in my wallet. The great challenge of creating a non-physical, wholly digital, currency is the pressing question: If a currency unit is a string of zeros and ones on my hard disk, who can stop me from taking that string, copying and pasting it as often as I want and become infinitely ‘moneyed’? For if I can do that, then it is as if all of us have a printing press in their living room, in which case we would have the makings of instant hyperinflation.

Until bitcoin’s emergence, the conventional wisdom was that to make a non-hyper-inflationary digital currency possible, a Ledger of Transactions, keeping track of each unit that you and I spent, must be kept by some Central Bank or some corporation. E.g. the Fed or the ECB or indeed Visa keeping track of our digital dollars, or euros. Or British Airways or Lufthansa or Amazon maintaining a Ledger of the ‘frequent flyer’-like points that they administer. Bitcoin, quite audaciously, broke the back of this assumption.

Bitcoin was born the day in 2008 some anonymous computer geek, using an unlikely Japanese pseudonym (aka Nakamoto), posted an algorithm (on some obscure listserve website) that made something remarkable possible: It could generate a string of zeros and ones that was unique, ensuring that, before it could be transferred from one computer or device to another, a minimum number of other users had to trace its transfer and verify that it left the device of the seller (of some good or service) before moving to the device of the buyer. Moreover, the algorithm was written in such a way as to guarantee a steady ‘production’ of these strings, or bitcoins, over time and in response to the computing power devoted by users in order to help track transfers and, thus, in order collectively to maintain The Ledger. Lastly, to cap the supply of bitcoins, and thus safeguard their value, the algorithm guaranteed that the maximum number of these strings, or bitcoins, could only grow (given the algorithm’s structure) to 21 million units by the year 2040. Once it reached that quantity, its ‘production’ would cease and the users of bitcoins would have to do with these 21 million units. Meanwhile, before that date, and before the maximum bitcoin supply is reached, the ease with which users could ‘mint’ or ‘dig up’ fresh bitcoins (by making computer power available to the bitcoin community) would be inversely related to the total quantity of bitcoins already ‘created’ or ‘extracted’ from the algorithm.

In a sense, the designer of the bitcoin algorithm (the delectable Mr ‘Nakamoto’, who has, by the way, dropped off the radar some time ago) seems to have designed the new currency on the basis of faith in the crudest version of the ‘monetarist’ Quantity Theory of Money (i.e. the idea that the value of money depended solely on the quantity of money supplied to the public) and, thus, aimed at creating the digital equivalent to… gold. Come to think of it, bitcoin was, indeed, modelled on gold.

2. Bitcoin as a Digital Simulation of Some Precious Metal (e.g. Gold)

What is the great merit of gold? Its scarcity! The fact that, once humans, for some strange reason (most possibly related to gold’s perpetual glitter and scarcity) started using it as (a) a means of exchange and (b) a store of value, gold became a currency and its smallest possible, meaningful, quantity became a currency unit. The designer of bitcoin’s algorithm tried his damnest to emulate gold. Just like gold, which one presumes to be in fixed supply under the Earth’s surface, bitcoin is also limited, artificially (through the design of its algorithm) to a plateau of 21 million units. And just like gold, there are two ways in which bitcoins can be acquired: One is to buy them using dollars, chickens, silk, honey, whatever… The other is to ‘dig’ for them like 19th century gold diggers dug for gold. To that intent, Mr ‘Nakamoto’ designed his brilliant algorithm in a manner that allowed for ‘bitcoin digging’. This is how he did it:

The uniqueness of bitcoin, as alluded to earlier, is that no centralised institution (private or public) is the custodian of the bitcoin transactions’ Ledger. So, who is? The answer is a spectacularly liberal-cum-communitarian: “We all are!” By that, what I mean is that the bitcoin algorithm is written in a manner that makes it possible (indeed demands) that the whole community of bitcoin users has access to, and polices, the Ledger of Transactions (which ensures that I cannot cut and paste my one bitcoin a large, or indeed infinite, number of times).

In this sense, bitcoin users must make available computing power to the bitcoin users’ community so that everyone can ‘see’ the Ledger, in order to ensure perfect community ownership of the transactions’ record, as opposed to trusting some government agency (e.g. the Fed) or some private corporation that may have its own agenda. Naturally, as the bitcoin economy, and the number of transactions grows exponentially, the amount of computing power that is necessary for one individual to devote to the ‘bitcoin community’ in order to ‘mint’, or ‘unearth’ a new bitcoin rise exponentially with time. This increasing complexity also acts as a legitimiser of the notion that new bitcoins are delivered to the accounts of the users that put increasing computing power at the bitcoin community’s disposal.

3. Bitcoin’s Two Fundamental Flaws

As with all things digital, there are a number of concerns to do with security; with the fear of hackers and e’spivs. Imagine a world that has shifted entirely to bitcoin. Would we not live in fear that some ingenious hacker will get the better of Nakamoto’s algorithm and manipulate it to his benefit? Would it be wise for humanity simply to assume that the bitcoin algorithm is un-hackable (especially so in the absence of some authority that can intervene and save the day if something horrible happens to the algorithm)? Besides, even if the algorithm is safe, there is always the danger of waking up to the realisation that one’s bitcoin stash was e’looted during the night. And if one entrusts one’s stash to some company with better firewalls and computer security, what happens (in the absence of a bitcoin Central Bank) if that company goes broke or simply disappears into the Internet’s darker crevices (with its customers’ bitcoins)?

These concerns would probably suffice to put a dent in bitcoin’s prospects. But they are not the main drawbacks of the currency. No, there are two insurmountable flaws that make bitcoin a highly problematic currency: First, the bitcoin social economy is bound to be typified by chronic deflation. Secondly, we have already seen the rise of a bitcoin aristocracy (a term ‘coined’ by Greek blogger @techiechan) which, besides the issues of distributive justice which it raises, evokes serious fears about the capacity of very few entities or persons to manipulate the currency in a manner that enriches them at the expense of financial instability. Let us look at these two problems in some detail.

First, deflation is unavoidable in the bitcoin community because the maximum supply of bitcoins is fixed to 21 million bitcoins and approximately half of them have already been ‘minted’ at a time when very, very few goods and services transactions are denominated in bitcoins. To put simply, if bitcoin succeeds in penetrating the marketplace, an increasing quantity of new goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins (a rate which, as explain, is severely constricted by the Nakamoto algorithm). In short, a restricted supply of bitcoins will be chasing after an increasing number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation. And why is this a problem? For two reasons: First, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?). Secondly, because to the extent that bitcoins are used to buy factors of production that are used to produce goods and services, and assuming that there is some time lag between the purchase of these factors and the delivery of the final product to the bitcoin market, a steady fall in average prices will translate into a constantly shrinking price-cost margin for firms dealing in bitcoins.

Secondly, two major faultlines are developing, quite inevitably, within the bitcoin economy. The first faultline has already been mentioned. It is the one that divides the ‘bitcoin aristocracy’ from the ‘bitcoin poor’, i.e. from the latecomers who must buy into bitcoin at increasing dollar and euro prices. The second faultline separates the speculators from the users; i.e. those who see bitcoin as a means of exchange from those who see in it as a stock of value. The combination of these two faultlines, whose width and depth is increasing, is to inject a massive instability potential into the bitcoin universe. While it is true for all currencies that there is always some speculative demand for them, as opposed to transactions demand, in the case of bitcoin speculative demand outstrips transactions demand by a mile. And as long as this is so, volatility will remain huge and will deter those who might have wanted to enter the bitcoin economy as users (as opposed to speculators). Thus, just like bad money drives out good money (Gresham’s famous ‘law’), speculative demand for bitcoins drives our transactions demand for it.

Can these two flaws be corrected? Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin.

4. Conclusion: The Fantasy of ‘De-Politicised’, ‘Honest’ Money

The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.

The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.

Epilogue

Bitcoin enthusiasts, just like believers in the Gold Standard, understand money as if it were some commodity which has spontaneously emerged as a unit of exchange – a little like cigarettes did in the POW camp ‘economy’ that R.A. Radford (1945) described so brilliantly. This is a gross misconception based on the unexamined (and dangerously false) faith that there is no substantial difference between Radford’s POW camp and a modern capitalist economy; that, like in that POW camp, output is independent of expectations and demand is always abundant enough to absorb the produced output. As for investment, it is assumed to be uni-directionally determined by savings which are, in turn, determined by the rate at which present consumption is deferred to the future. None of that holds in an economy involving not only exchange but also production and investment. It is these two activities, production and investment, that preclude the possibility of apolitical money.

Further reading

Radford, R.A. (1945). ‘The Economic Organisation of a POW Camp’, Economica, Vol. 12, No. 48., pp. 189-201

Varoufakis, Y., J. Halevi and N. Theocarakis (2011). Modern Political Economics: Making sense of the post-2008 world, London and New York: Routledge, Chapter 6&7

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86 comments

  1. Aussie F

    Just one comment: ‘Capitalism’ hasn’t given us anything. As Noam Chomsky keeps on pointing out, it’s the dynamic state sector that gives us innovation, technology and growth. In the US that’s the Pentagon system.
    The ‘market’ sector, when it’s not profiting from financial fraud, simply works on copyright monopolies and marketing developments – just take a look at Apple or Microsoft.

    Yet economists seem to have a limitless capacity for ignoring how the system actually works.

    Plus ca change, etc….

    1. washunate

      I am assuming this comment was written in haste from a general tone of frustration with how things are going, rather than more detailed thought on the specifics? You are not claiming that defense contracting creates more value than the IT sector, are you? I would take the single product of the iPhone over the entirety of the trillions of dollars spent on foreign military bases and prisoner abuse and missile defense and drone strikes and drug eradication and weapons sales and so forth. The depth to which our legal, educational, and media systems are now entrapped in the national security state is a direct threat to individual liberty and intellectual independence, not a productive development that is creating wealth through innovation and discovery.

      But of course, the government throwing the Constitution and the rule of law under the bus has so convoluted the common meanings of capitalism and socialism and corruption and cronyism that I do sympathize with the feeling that everything is turned upside down.

      1. Lambert Strether

        Well, no internet, no iPhone 4G. No DARPA, no internet.

        So I don’t disagree with the general tenor of what you say, I think things are more deeply intertwingled.

        1. washunate

          I thought DARPA might be where this was going, but long-term research/investment is such a tiny portion of the national security state that it’s an exception that proves the rule.

          But moreover, that work is from a time that doesn’t exist today. The internet was invented back when we had a broad class of workers who shared in the gains of their productivity. What has defense contracting produced in the last quarter century?

          Waste, corruption, abuse. That’s about it. Iraq alone provided oodles of this. Even much of what the military funds through higher ed isn’t useful research that creates innovation and productivity – it’s things just brought under the umbrella of terrorism/bioweapons/surveillance/etc.

          And often times it has worse negative repercussions in warping the larger policies/missions of the schools. A classic example of this was when then Harvard Law Dean (now Supreme Court Justice) Kagan pronounced that ending employment discrimination was a moral obligation and no recruiters would be allowed to recruit law students that discriminated on sexual orientation. Then President Larry Summers explained to Kagan that the military wanted to recruit while also engaging in employment discrimination. Presto, Kagan un-moral obliged the problem. Obviously, as a senior member of the management team at Harvard, she couldn’t place military contracting funds in jeopardy.

          That kind of loose corruption and cognitive capture and soulless careerism is exactly why our higher education leaders specifically, and media and other leaders more generally, have been so mute and impotent in speaking out about the public policies that have shifted wealth from workers upward – they’re literally bought off by military contracting dollars doled out by the national security state or whatever you want to call it.

          1. jrs

            I think they still fund (the government broadly, but much of it under the defense department dollars) much of things like theoretical physics research that wouldn’t get funded otherwise. Do I like the implications of that? No. I also don’t know who else would fund it, and I’m not anti-science research. So …

            You’re probably right about the corruption of the universities, although they knew all that in the 60s – at this point corrupted by the military plus corporate dollars. It’s only gotten worse. We’ll go into a full on police state, and where will the intellectuals be? Utterly silent. A guide to nothing. We’re (the people) are on our own.

          2. Nathanael

            High-energy physics research — the expensive experimental sort — hasn’t discovered anything since the 70s and isn’t *worth* funding.

            The same is true of much, though not all, of what is still DoD-funded.

  2. paulrg

    “what happens (in the absence of a bitcoin Central Bank) if that company goes broke or simply disappears into the Internet’s darker crevices (with its customers’ bitcoins)?”

    Your assumption here is that the existing “pooled” wallet services are a good idea and will prevail when the vast majority of Bitcoin advocates do not, and would never, trust that model. An evolution of the hybrid wallet system such as provided by blockchain.info would be the better and far safer solution. Future developments that simplify the process of maintaining total ownership and control of your own coins would mitigate the risk you describe.

    “First, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?).”

    Does the consumer electronics industry not flourish under the same concerns?

    “Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin.”

    There are, and will continue to be alternative crypto-currencies based on the Bitcoin protocol. If the network eventually decides that Bitcoin itself has too many flaws to succeed as a functioning currency unit that doesn’t mean a more preferable iteration that fixes these flaws won’t come along at a later date.

  3. herzmeister

    Bitcoin is not a monopolistic currency. Expansion of monetary supply, if necessary, can also come from competing (crypto-) currencies which in fact already exist.

    Bitcoin is not “deflationary”, because it is not an enforced monopoly money. It is just an asset. It follows supply and demand. So you could ask even today, why should I lend someone my dollars, if I can buy bitcoins instead? Simply because bitcoins exist, you would therefore want to charge high interest even on dollar loans. Or would you? No, because, as we see, the value of Bitcoin fluctuates; it is therefore not deflationary. And even in an economy that is dominated by the Bitcoin currency, it will have to compete with other assets that may promise higher return. So the average interest rate in an economy that is not dominated by a central bank would have nothing to do with the mainly used currency. It will rather be the median of any assets out there.

    Also because Bitcoin is not monopolistic, everyone can set up a competing currency if they’d like to have different parameters or more “fairness”. The concept of crypto-currency was very new back then. Satoshi (or the early adopters) had no other choice than to mine the first coins themselves in order to bootstrap it. If they had not done it, or if they had publicized the concept widely first and waited, they would not only have met skepticism (bitcoins were practically worthless back then, the concept would not have been understood), but also someone else would have started mining instead. It was an experiment, a proof of concept. Turns out it was successful.

    Now if there is a significant envy of early adopters, some people will have to get together by their own initiative (i.e. not expect a government to do it for them) and start a competitor with the goal of more equal initial distribution. The concept of crypto-currency is more widely understood by now, so maybe they will be successful.

    Anyway, so why does Bitcoin (or a similar crypto-currency) act like gold? Because only by essentially simulating a commodity type of money is what can enable a form privacy adequate enough for organizations like Wikileaks.

    Credit-/promises types of online currency exist as well: see http://en.wikipedia.org/wiki/Ripple_monetary_system – such a form of money is very empowering, creates adhoc-liquidity on the spot where it’s needed from the bottom-up (instead of FED printing it and pouring it into wall street hoping it would trickle down). But this “soft” kind of money carries more risk (a chain of debt may collapse), and enables less privacy as it’s ultimately backed by a web of trust, and all balances of your profile would necessarily have to be public. A treasure chamber for data mining.

    So both have advantages and disadvantages. But they can exist alongside each other in parallel very well. In fact this yin-yang relationship may be the ultimate monetary theory.

    1. jrs

      If most people end up geting bitcoins by trading national fiat for for it (dollars, euros etc.), and this is the way it’s going because mining has now become too “costly”, it seems in some sense it’s not a currency at all.

      Or not a primary currency at any rate (some sort of complementary currency I could accept as a definition). Most people are not self-employed. Until companies themselves start paying wages in bitcoins, bitcoins will always just be something you exchange the primary fiat currency for.

      1. jrs

        It’s kinda like while labor backed currencies have a way to innately generate them entirely outside and entirely independent of the fiat system (you perform some kind of labor) and this is often the main or only way they are generated, and while bitcoins could in theory do the exact same thing, and bitcoins become a major way to trade labor. I wonder how widespread this actually is compared to just trading fiat for bitcoins, which makes them in some way at least at present not as self-cotained a system as they may seem.

    2. Dan Kervick

      People can set up alternative currencies, but I don’t think that gets around the deflationary problem. Those alternative digital currencies will be to bitcoins as euros and yen are to dollars. Each on would presumably have its own economy of goods and services that are provided by sellers who accept the digital currency in question. If you want to buy something that is available for sale in snitcoins, but all you have is bitcoins, you will have to use some kind of conversion brokerage (which perhaps will charge a conversion fee paid in one of the currencies.)

      If there is a maximum number of bitcoins that can be created, that means there is a maximum size to the bitcoin economy compatible with price stability in bitcoins. If bitcoins continue to be accepted for ever more goods and services, even after the bitcoin cap has been reached, that can only happen if prices posted in bitcoins begin to fall. Deflation of this kind is usually thought to prompt hoarding behavior, and it can wipe out people who have debts in the currency in question. It would lead to a flow of wealth from bitcoin debtors to bitcoin creditors, and an increase in real wealth for those who have stores of bitcoins.

      But of course, if bitcoin is a crypto-currency that is off the governmental grid, there will be no way of enforcing any of those debts (other than by sending Fat Tony the bitcoin leg-breaker). So what I would expect to happen is that once the deflationary tipping point is reached, then if there are alternative digital coins, debtors would rush madly out of the deflating coin into the other one, so then you would get a reverse surge of hyperinflation, and then pfft.

      I think those kinds of dreams of speculative glory are why we saw the big boom in bitcoins, and then the realization that there were no mechanisms stabilizing for the value of bitcoins lead to the mass exit.

      Government is good. Currency is a valuable utility, but systems are inherently unstable without a framework of laws, regulation and management.

  4. craazyman

    I only read part 4 so far, but this sounds like profeser Delerious Tremens, NFL, GED. He always said it possible to channel this stuff up without the hassle of reading all the books and equations. When you factor the math down it reduces to x = 3, but man the blackboard is a circus of chalk and confusion before you do. haha.

  5. Jim Haygood

    ‘The 1920s thus demonstrates the impossibility of an apolitical money supply.’

    HA HA HA — talk about selective data mining!

    Reinhart and Rogoff omitted five countries. V-fakis omits whole decades and centuries.

    The spayed chihuahuas bark, but the monetary caravan rolls on.

  6. Claudius

    So far, crypto-currencies such as Bitcoin, Litecoin, Name coin (as opposed to digital currencies (Yen Dollar, Pound, air miles, hotel points etc) are not a big deal. The volume of transactions in crypto currency is growing only slowly, relative to the massive increase in demand for the currency. Its total value in circulation is about $3 Billion. That’s equivalent to the currency stock of a small nation – somewhere between Iceland and Ireland – and just one-thousandth of the total value of U.S. dollars in circulation.

    But alongside Yanis’ two fatal flaws there are three (or more) others that will actually limit/prevent the use of crypto currencies.

    Crypto-currencies won’t be allowed to go much further
    Crypto-currencies can’t, practically, go much further.
    Potentially, almost, everyone using crypto-currencies want to stop using them.

    1.) Why will Crypto-currencies not be allowed to go much further?
    Crypto-currencies represent an existential threat to the modern state in the as it relates to:

    A.) Taxation: Crypto-currency’s anonymity poses a direct challenge to the power of states to levy taxes.

    B.) Policing: One of the major alleged uses of crypto-currency is buying illicit drugs (Silk Road being, cough, the greatest testament to that). Bitcoin’s cryptography makes it uniquely, arguably, (see below) able to facilitate money laundering, insider trading, fraud, and bribery. The transactions would be untraceable, and the money doesn’t ever have to return to the bank, where the financial crime might have been detected. The Financial Crimes Enforcement Network, the wing of the U.S. Treasury Department that investigates money laundering, said last month that it has the authority to regulate transactions involving both crypto currency and U.S. dollars under the Bank Secrecy Act.

    C.) Macroeconomic policy: A crypto-currency economy would undermine the power of real-world central banks to make monetary policy. The monetary lever on private transactions and lending would be gone if such commerce was denominated in crypto-currency. And by displacing governments as currency issuers, threatens their ability to finance public debt. In a world where many transactions are anonymous, it’s unclear how governments could even compile accurate economic data, without which macroeconomic policy is impossible.

    2.) Why can’t Crypto-currencies go much further?
    Inherent within the design itself, all crypto currencies to-date depend for their operation on a block-chain, a digital entity that chains together every transaction that has happened dating back to the currencies’ launch. The reason, perhaps, aka Nakamoto designed a currency limit is because by its nature, this type of block chain will grow rapidly and without limit, ultimately becoming cumbersome for ordinary end-users running a client program on a PC – imagine being the 50 billionth transaction on your atom CPU, 1500Mhz mobile phone processor.

    3.) Why will, almost, everyone using crypto-currencies want to stop using them?
    Despite being touted as “anonymous,” crypto-currencies are anything but in their native form. The block-chain encodes an explicit, public record of every transaction conducted involving every address which has ever utilized it. Even if the system itself attaches no names to the addresses, forensic techniques such as behavior cluster analysis can usually pinpoint who the owner of a given address actually is, given such a wealth of data. Furthermore, unless anonymzing services are use, it is quite easy to match coin addresses with IP addresses. If Silk Road users (cough), Al Qaeda, Sexy Kittens -R-Us.com or those who simply want to “give it to the man” are all serious about privacy, then the minute MegaBurpSupeHadronCollider Computer at Nakamoto University comes on line, some folk will be crapping digital coins like a Zack & Wikii Chicken (Google it, it’s funny).

    1. herzmeister

      1 A) Generally, Crypto-currencies cannot be taken down on technological ground (without destroying the internet or means for computer networking for that matter). If they formally outlaw it, they will go (or remain) underground. Apart from that, there are two views in the Bitcoin community about this: i) Indeed, it will abolish the state, and we’re in the transition to network societies. ii) Governments in history have so far always been creative enough to find ways of taxation.

      1. Claudius

        It’s the “generally” caveat so which we could dance on the end of a pin about… So, I make the point in general in order not to be overly technical in this forum. but see my reply to “ii” below.

        Do I read i) “Indeed, it will abolish the state” as “Indeed, it will abolish BY the state?

        ii.) creative yes, ingenious, never. Their only hope is to decrypt or rather de-crypt, by legally mandating that crypto-currencies to be just pain old digital currencies.

        No taxation without digitization…..

        1. herzmeister

          I meant i) that many in the Bitcoin community believe that Bitcoin (or another Crypto-Currency) *will* make the national governmental structures of hitherto obsolete. We’ll transition to self-governed, more voluntary, network-like structures.

          ii) there are lots of ways. Historically, they also taxed barter. They could demand people to register their Bitcoin addresses, and watch and investigate unknown addresses in the blockchain. This would be quite dystopian and only lead to another crypto-currency, and history will merely repeat itself. They could also tax businesses, land property, roads, utilites, more VAT etc

  7. Wdorff

    Another misleading article based on wrong arguments and minimal understanding of Bitcoin. A lot of these economic journalists or academics would need to be the first to receive massive re-education on the subject.

    Readers, move on.

    1. Claudius

      I think we could all benefit from you insight as to the “right” argument and “the” comprehensive understanding of Bitcoin (if not crypto-currencies in general) so that we many be the first among many to “receive massive re-education on the subject”, before we move on. Well, at least before I move on.

      1. Wdorff

        Where do I say that I am the one with right arguments? I am not. But then again, I’m not the one posting lenghty columns with very bold statements as titles on matters which I’m not an expert on (economics). I’m just a simple software developer. What I do know is that Bitcoin economics are fundamentally different from what these academics have been learning from their books all these years.

        1. Lambert Strether

          And you feel that refusing to share anything more than your, er, concerns — for example, your evidence and reasoning — adds value to this thread?

          NOTE tweaked

        2. Yves Smith Post author

          Anyone who claims they won’t argue has no argument. You seem to object to the fact that Yanis is persuasive.

          Smells of a Bitcoin promoter protecting his long. Really lame.

      1. Winston Smith

        It’s a feature. Desperate people who gamble on bitcoin and win are good advertising, and desperate people who gamble on bitcoin and loose are profit.

    1. banger

      I’m not sure about the pyramid scheme but I will go with the vomit. There is something compelling about the whole Bitcoin thing–I don’t think its going to go very far but the ideas behind it are very, very interesting–it’s not another rip-off agenda. The vomit part is that libertarians believe there is a possibility that we can live without the state–we can’t. Just as there is no such thing as a free market (a state must be there to insure that the goods for sale aren’t just stolen–and they will be without the state) there is no such thing as civilization without the state. Our state structure is fine and there’s no need to go either to the extreme left or right to remedy it–what we need is a dose of courage and honesty to be added to the mix.

      1. Lambert Strether

        Are courage and honesty endogenous?

        * * *

        “there is a possibility that we can live without the state.” Lot of things seem possible that have never been done. I suppose hunter-gatherers lived without the state.

        While I would prefer not to have a state dominated (under the Sachs Conjecture) by a “morally pathological” elite, I also don’t think I want to live in state-less Somalia, or the neo-liberal social experiment on building a state from scratch for faraway brown people, Iraq, or (more on point) a world like Snow Crash:

        The Mafia wouldn’t do that.”

        Don’t be a sap,” Hiro says. “Of course they would.”

        Y.T. seems miffed at Hiro.

        “Look,” he says, “I’m sorry for reminding you of this, but if we still had laws, the Mafia would be a criminal organization.”

        “But we don’t have laws,” she says, “so it’s just another chain.”

        It’s always possible to make things worse…

        1. looselyhuman

          A-effing-men. And _billions_ of internets to you, Lambert, for the Stephenson reference. Snow Crash and Diamond Age are still his best works.

      2. Valissa

        About your libertarianism point, a couple of things (and no, I;’m not one)… there is a great diversity of thought amongst libertarians about how little gov’t one can get away with, what is necessary for basic state security to protect the mythical free market creature. It is more accurate to call them gov’t minimalists (an interesting modern variation of neo-primitivism). Yes, at the extreme end some want no government, but this is hardly different from some anarchists who for some reason are seen in a better light by the so-called left. It has been interesting to observe how libertarianism has become a scapegoat for people (liberals/progs) to kick around and be angry at, when it’s not libertarians that are in power right now (despite the fact that some of them like what Ayn Rand has to say). Or do you believe the emergent elite paradigm you’ve been discussing is based on libertarianism?

        1. jrs

          Anarchist may be seen more favorably because they’re communitarian. I’d prefer that I have to say.

          I’m sure many anarchist would like nothing more than for some kind of anarchist currency to be the new darling. Alternative currency thinkers say to look at what biases are built into the currency. Fiat is quite amoral and with our central bank system with built in favortism for banks and big business etc. (rich get richer). Bitcoins *only* built in moral value is privacy and ability to escape the state. That’s very right libertarian I guess (not just that you care about that, but that it’s the only concern). They have favortism as well (early adopters) but it doesn’t strike me as as bad on that front as central bank fiat. An ideal currencies bias (from an anarchist perspective or just mine?) might be: pro-social, cooperative, not discounting the future (and thus the environment) and yes bottom up empowering.

          1. Valissa

            I do not believe that anarchists are any more “communitarian” than libertarians except in their espoused statements. It’s almost all “political marketing.” I think the distinction between individualism and communitarianism is overstated, and is more a meme than a reality. In Jan 2005 I spent 5 days hanging out with anarchists at the Bush Counterinaugural. It was very educational. There were all kinds of hidden hierarchical norms in the group. Certainly they were a community that was bonded by their antipathy to the establishment, but I think that if by some miracle they actually got any power they would be as fractious and divisive as any other human group.

            All the liberals I know pride themselves in being individuals first, which is odd to me because they all believe they exact same set of things which is hardly an indication of individual thinking. My observation is that the so-called left pays more lip service to the ideals of community than is actually true. The libertarian groups I’ve researched all seem to be bonded on their ideals and likewise tend to agree on most things. They talk a lot about individualism but they do take group actions to attempt to attain their ideals (political and otherwise), and they have friends and family like everyone else.

            Given the areas that liberals and libertarians have in common (civil liberties, anti-war) you would think people could get together on those. But no, divide and conquer by the elites is winning, as can be seen by the levels of hostility that most lefties throw at any remotely libertarian idea.

          2. banger

            @vallissa

            I think you are right–your impressions are excellent and I’ve noticed the same things. But one thing is true on all sides and as someone who has roots in the old “new” left that discussions among and between these groups seems rather shallow. The only “movement” I see that has any powerful thought behind it that also is ongoing, dynamic and deep is the Zeitgeist movement. I disagree with them in some areas (I’m religious but not dogmatic) but I see no other social/political movement that is better.

          3. Valissa

            @banger… I wasn’t aware of the Zeitgeist Movement so I looked it up http://www.thezeitgeistmovement.com/mission-statement. After reading the mission statement all I can say is that I admire the intentions. But it seems like just another neo-utopian movement to me. I’m somewhat of a “student” of Eric Hoffer and John Gray, neither of which is big on social movements.

            I am satisfied to live my life in accordance with my spiritual beliefs and philosophies so feel no need to be part of a civil religion (aka political ideology & group).

          4. jrs

            I don’t think there is anything wrong with being involved with politics, it doesn’t sully one, or make one hopelessly dirty. In fact it’s deeply human. Movements? There are definitely protest movements I would join. Because they have all the anwers? No, because at a certain point many protests against the status quo are worthy.

            There are also things that might be called movements, that are seeking postive changes, generally starting local, that I am actively involved with. Because they have all the answers? No because I believe their experiments are in the right or at least a desirable direction and so I’ll give it all the push I can and see what comes.

        2. banger

          No, I’m not talking about libertarianism as a clear political philosophy–of course there are various levels of government, I prefer, for example, libertarian communitarianism which is much like some forms of anarchism–but I’m a realist and know that such political arrangements cannot be set up without a strong state at the beginning of the process so to speak.

          I’m a critiquing cultural libertarians who are always talking about “liberty” and “free markets” without bothering to define those terms–you’d be surprised how many people who are attracted to that philosophy don’t think about the implications of what they’re saying.

          So I agree with you, really. I should have moderated my statement.

          1. Valissa

            you’d be surprised how many people who are attracted to that philosophy don’t think about the implications of what they’re saying

            Isn’t this true of most liberals or conservatives or whatevers as well? For many years I was an unconscious liberal. It was only when I finally decided to pay attention to the various political philosophies and their histories and their real world implications and spent some time ruminating on the nature of my beliefs regarding these things that I “woke up” and became an ex-liberal, ex-utopian. These days I’m happy being an unbeliever and outsider/observer when it comes to politics.

            btw, I enjoyed reading your comments about the concept of the elite as an “emergent and highly networked virtual entity” in that resource shock post the other day. I added some of them to my research notes on the elite. Your terminology well describes the impressions I got when I read Rothkopf’s book “Superclass” a few years back.

          2. banger

            @valissa

            Well, we are, then somewhat kindred spirits. I believe liberalism is an excellent transition state correct for our time–at least in the sense that a liberal remains open to new ideas and new as well as old perspective and, in the old sense of the word, is generous and compassionate. The whole point of the development of the character Scrooge was to show the transition from the cult of selfishness that makes up much of the right to true liberality in temperament and deed. Those that today call themselves progressives and liberals don’t bother to fertilize their ideas with, well, ideas. It has frustrated me no end to deal with people who do not and will not question their assumptions and run strictly on slogans and cant. The liberal positions as much as the right-wing positions as currently expressed are so internally inconsistent as appear, if you really look at it, as ravings.

            As for my sense of the nature of the organism of the elites it comes from direct observation of how power operates in Washington (usually but not always at a distance) and my old studies of the principles of systems analysis.

            At any rate, I’d love to correspond with you outside this site.

          3. Valissa

            @banger… since this is a public venue, I resurrected an old spare email account. You can try contacting me at maverick_mystic@lycos.com

            It was quirky today about letting me back in after so many years, but it has accepted a couple of test posts.

        3. looselyhuman

          I’ve never seen much daylight between most forms of economic libertarianism and neoliberalism – the latter just scaled up to the state/international level.

          In the final analysis, our neoliberal police state is the rational extension of the powers that minarchists do grant (and require of) the state – protecting private property. In this case the property of billionaires and megacorps. Aka everything.

  8. Jackson Bane

    Don’t we have this fear now with Banks, only the “hacking” occurs from the inside? How do we know, is the Gov’mint gonna tell us?:

    “As with all things digital, there are a number of concerns to do with security; with the fear of hackers and e’spivs. Imagine a world that has shifted entirely to bitcoin. Would we not live in fear that some ingenious hacker”

    Also, not to be a semantic quibbler, the definition of hacker is distinct from “right” or “wrong”:

    In the computer security context, a hacker is someone who seeks and exploits weaknesses in a computer system or computer network.

    1. Claudius

      My point was not the hacking per se, it was the audit trail that chain-blocks it inherently maintain.

      Digital currencies can be audit trailed, but ironically, might be prove less revealing end-to-end than crypto-currencies.

      1. OpenThePodBayDoorHAL

        Just a few factoids and a few opinions. I think people are mis-interpreting what has been created in payments with Bitcoin: it’s not a replacement for the credit card system, it’s more like a replacement of the banking/ACH system. Faster protocols (perhaps something like Ripple) will need to sit on top of Bitcoin for it to be usable by merchants. But imagine in the 2nd and 3rd world, where you have no bank acct and you want to buy something online: voila, buy a Bitcoin from someone locally for cash (who cares if the transaction takes 10 minutes to confirm) and go online. There are something like 60 countries where even Paypal is prohibited today, perfect. An Iranian who wants a WordPress acct, for example, or a Kenyan who wants to buy something online but can’t use Mpesa (telco based Kenya commerce currency). Second thing has to do with anonymity. People say it’s impossible for one reason or another. No. It’s quite possible but takes a little juggling, use a Tor browser, use a mixing service, shuffle the amount in different wallets and Voila you have disappeared.
        Other thoughts on the value and the speculative nature: what people miss is that it is incredibly thinly-traded right now. How many on this forum own any? And this is a digitally-proficient audience methinks. So it hit $265 and a large ($2M) sell order came through and crashed the price. Add in a DDOS attack on the “largest” exchange and no wonder the price got clobbered. That “largest” exchange is run today by script kiddies with servers under the desk, but big money real-tech backers are coming very soon so silly DDOS price manipulators will have a much harder time. You can read the tape (centralized and fully transparent! Imagine if real-money forex was like that..) and see that there are orders in SIZE moving in, repeated strings of BUY orders for $300K or $600K. my advice is: BUY. I also like Litecoin, Namecoin may reach escape velocity…and I wonder whether the Amazon One coin will be pegged to the USD or will float…hmm

  9. skippy

    Bitcoin Miners Are Racking Up $150,000 A Day In Power Consumption Alone

    RYAN LAWLER

    Saturday, April 13th, 2013112 Comments

    There’s a gold rush going on these days, or a Bitcoin rush, at least. Driven by the recent swings in the value of a Bitcoin, more and more people are learning about and becoming interested in the currency. While they could just buy Bitcoins at the current market rate, others are looking to try their luck at mining Bitcoins. And like prospectors who traveled west during the Gold Rush of the 19th century, many Bitcoin miners will find that they spend more on chasing the Bitcoin dream than they’ll ever hope to win back.

    As explained here, Bitcoins are “mined” by unlocking blocks of data that “produce a particular pattern when the Bitcoin ‘hash’ algorithm is applied to the data.” It seems simple enough, but the cost of Bitcoin mining is greater than one might expect. The more Bitcoins are mined, the more difficult it becomes to find the next block. Unless the miner is using the latest specially-designed mining rigs, the computers used often sport high-end graphics cards (since the GPUs are more efficient than CPUs for mining application). And running those computers requires a lot of power.

    Blockchain.info, which tracks Bitcoin-related data, estimates that miners are using 1,005.59 megawatt hours of electrical consumption each day in their pursuit of new blocks of Bitcoins. That ends up costing about $150,000 in power costs each day to mine the currency. [Hat tip to Bloomberg for reporting on the data.]

    That may sound like a lot, but miners on average are making money. According to Blockchain, miners are generating $470,000 in Bitcoin-related revenue per day. In fact, due to the recent interest in the virtual currency and its popularity, operating margins for Bitcoin miners are close to record highs.

    While it might be easy to look at those numbers and think it’s NBD to just like, extract value out of thin air, Bitcoin mining isn’t as lucrative as it seems. Regular users hoping to use their regular computers to mine shouldn’t expect to just start making money by setting aside a few compute cycles to dig up Bitcoins. That’s generally reserved for special mining computers that do nothing BUT mine for Bitcoins using custom encryption processors.

    As Biggs points out in his article, “While you could simply set a machine aside and have it run the algorithms endlessly, the energy cost and equipment deprecation will eventually cost more than the actual Bitcoins are worth.” That’s been confirmed by my colleague Matt Burns, who wrote in our internal message board that “after mining for a few days, the energy required to run my computer at full tilt was far greater than the Bitcoins I mined.”

    Even if you do choose to pool your resources to mine, it’s a fairly complicated process, even for tech-savvy users. Check out the aforementioned article by Biggs for how he connected his home PCs into a Bitcoin-mining pool.

    The alternative is to just buy specialty hardware designed to do nothing but mine for Bitcoins. Like any other investment, the return isn’t assured, and likely will be based on how Bitcoin market takes shape as time goes on. But right now, as with most gold rushes throughout history, it’s those who are supplying the miners that are finding the real riches.

    http://techcrunch.com/2013/04/13/the-cost-of-a-bitcoin/

    Skippy… Bitcon… is like watching avatars mine gold in an old WOW gaming platform or Starcraft Mgf… its the psychological worm on the hook… the mental mind fook… to position a humans mind to the – game – its self… as you can’t play the game at – all – or – win – if you don’t mine.

    PS. bonus thought… out of all the humans in history… how many made it rich looking for gold and how much destruction was committed to both the environment and humanity its self…. electronic barbarity… methinks

  10. JGordon

    The fear and loathing of non-political currencies among the fiat-lovers is a direct consequence of the fact that as soon as somoene abandons political currencies every theory, tool, and ideological believe of the fiat-lovers goes out the window, and then we’re in a whole other world.

    It destroy the paradigm. And a lot of people just can’t take that.

    Well, I believe in choice and competition myself. So if you want to use a “political” currency that the author is so enthusiastic about, then by all means use it. And meanwhile, don’t make any crazy, draconian laws preventing me from using something else. That’s all I want.

    1. skippy

      “That’s all I want.” – JGordon – freemarket neoliberalism in a nut shell.

      Skippy… I wantism – ology… barf~

      1. Valissa

        Skippy do you really believe that bitcoin is a symbol of freemarket liberalism, whatever that propaganda phrase means? Or that it is an accurate label for jgordon? Your remark strikes me as an attack based on past interactions and bias.

        It seems to me that bitcoin is a rebellious act, challenging the status quo of neoliberalism (freemarket liberalism?) I see bitcoin as a kind of collective experiment which some people are choosing to support by investing in the concept of rebelling against the .01% who control the world of fiat money. I wish them well in that!

        Skippy I would think you would support such rebellion.

        1. Valissa

          ooops, bad editing again… it should read freemarket neoliberalism not freemarket liberalism… although really what’s the difference these days… “what’s in a name?” They are all just labels for the rapacious financial elite regardless of actual stated ideology.

          1. skippy

            See Zero Heads blog for Bitcon (vitual MOG gold mining) stamp of neoliberal stamp of approval…

            Skippy… There’s a difference between anti government and anti the people affecting – our – government, that’s a distinction.

          2. Valissa

            Well Skippy, if we all saw the world the same way there would be nothing for us to talk or argue about ;)

    2. jrs

      “every theory, tool, and ideological believe of the fiat-lovers goes out the window, and then we’re in a whole other world.”

      a world where it seems instead of governments that act like mafias (with a thin veneer of democratic responsibility) we have mafias that act like mafias with as much power as governments (and no veneer). It could be argued that it’s not worse, but I’m not sure it’s better.

  11. F. Beard

    Common stock as a private money form:

    1) Common stock as money requires no borrowing or lending. Assets and labor would simply be bought with new stock issue. Thus no PMs, usury, or fractional reserves are required. This is a huge benefit since PMs, usury (see Deuteronomy 23:19-20) and fractional reserves are all problematic.
    2) All price inflation is born by the owners of the corporation since every receiver of the new common stock money is by definition a part owner of the corporation. This is an important moral consideration.
    3) With no borrowing or lending, deflation is not built into common stock money as it is with the present money system.
    4) Since all money holders are part owners of the corporation then they could vote on how much new money is issued and for what purposes. Thus price inflation is under the control of only those affected by it.
    5) The assets of a corporation are typically performing assets though PMs could easily be accommodated too.
    6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease.

    But hey, why “share” when one can steal legally by means of the government-backed counterfeiting cartel, the banking system?

    1. skippy

      Multinational – corporations are the biggest thieves and destroyers of the planet and run – unduly influence most of the the governments and the plan is to allow them to enslave populations with their own script?

      Share holder votes?~~~ whats that? CEOs and board members view them as ballast on a good day and legitamizers for shenanigans all the rest ie increasing share holder value cough… rape the company… increase bonuses and other entitlements.

      Skippy…. eek gads man… have you no eyes… have you not seen the devastation… the world is turning into one big Enron. Shezz… prosecution is all that is needed… don’t make it so complicated… eh.

      1. F. Beard

        There is nothing inherently wrong with corporations, which, after all, are a means for many small capital owners to consolidate their capital for economies of scale in a democratic (at least per share) manner.

        But government backed banks are in the business of lending stolen purchasing power for usury. They are inherently evil.

        1. skippy

          There is nothing inherently wrong with playing Monopoly MB tm with fellow human beings, until sociopaths take over.

          Skippy… do you remember – those kids – when you were a kid?

    2. Wat Tyler

      When common stock ==> money , it would seem that CEO’s become central bankers. Central Bank like activity is already happening when stock or options are awarded as compensation by issuing new shares (which dilute existing shares) or buying back existing shares which reduce either the dividend or retained ernings. I have been watching GE buy back shares for decades and the number of shares outstanding has been around 10 Billion the entire time – management just gave them away to themselves.

      I fail to see the difference between fiat money and fiat common stock but I am the world’s worst investor.

      Jim

  12. gmaxwell

    Once again, Yanis doesn´t get the main point.
    The current implementation of the distributed currency are possibly deflationary; cloning it and setting pretty much any inflation rate wanted, is a fairly trivial excercise. What Yanis isn´t getting is that through the constant appreciation of bitcoin a whole ecosystem of companies is evolving, that will be compatible with any clone of bitcoin.
    The relevant point is the technology, not the current implementation(which whilst being useful for adoption, most likely won´t survive in the long run), provides for the development of an ecosystem of businesses, which can be transplanted to a cloned currency with any form of money suplly schedule extremely easily.

    1. Lambert Strether

      Hmm. If I understand you, you’re saying that BitCoin variants could be introduced that use the same algorithm but tweak the parameters. One such parameter would be the upper limit of coins that can be created. Yes?

      However, if I understand the poster, he claims that a fixed upper value as such is what makes BitCoin a digital gold standard, and hence subject to all the ills of a gold standard. Am I correct? If so, are you saying that setting the BitCoin quantity to infinity is (a) possible and (b) would disprove this claim by the poster?

      On the ecology, again, hmm. It’s well known that one way that software firms collect rents is by making it difficult for users to move data from out of their platform onto another. Is there a reason to think this won’t happen with bitcoin variants in the ecology you propose?

      We might also look to cell phones. It’s my understanding (I don’t own a cell, so readers correct me) that in the US we have a pig’s breakfast of proprietary formats, and that’s why we can’t do the cool things that Europeans can do with their cellphones, like order and pay for unhealthy fizzy flavored water from vending machines. And the reason for that is that the Europeans went with GSM, which is a standard developed and enforced by state actors.

      Calling something an ecology doesn’t necessarily make it functional from the standpoint of users, as opposed to rent seekers. Even if you’ve got private currencies, you might need the state to make them interchangeable. (I wonder if this is a collective action problem for BitCoin vendors…)

      NOTE tweaked

      1. gmaxwell

        Hi Lambert,

        ” If I understand you, you’re saying that BitCoin variants could be introduced that use the same algorithm but tweak the parameters. One such parameter would be the upper limit of coins that can be created. Yes?”

        Yes that is precisely what I´m saying, it´s rather trivial too, furthermore it has been done already and all kinds of clones exist (quicker blocks, higher limit demurage,…)

        “However, if I understand the poster, he claims that a fixed upper value as such is what makes BitCoin a digital gold standard, and hence subject to all the ills of a gold standard. Am I correct? If so, are you saying that setting the BitCoin quantity to infinity is (a) possible and (b) would disprove this claim by the poster?”

        Yes this is exactly what I am saying, essentially cloning bitcoin and setting it to pretty much whatever (well defined) behaviour you want to have it is fairly trivial and has already been done in numerous variants.

        Even the current version of bitcoin as a substantial increase of currency supply atm , whilst moving towards an upper bound.

        The point I was trying to make is that the technology is what is interesting, not the current implementation.

        I guess my secondary point was that the belief that bitcoin in it´s current implementation is currently seeing a high increase of the money supply whilst promising an overall limit, which obviously draws a lot of developers into that market, however any service/software developed for bitcoin will work just as well with for example a lambertcoin designed to your specifications and I don´t see any reason why any such services would not expand/migrate to such a coin, should it proove more successful.

        I think that´s the point Yanis doesn´t get.

    2. ChrisPacific

      You’re confusing inflation with increase in the currency supply. They are related, but not quite the same.

      If you think of inflation as a rise in the amount of currency needed to buy a standard unit of a commodity that remains roughly constant in ‘value’ over time (), then it’s proportional to the total supply of currency divided by the value of the total pool of goods and services that could be bought and sold using the currency. (Very roughly speaking). GDP is usually used as a proxy for this figure.

      So you could tweak the algorithm to provide for a constant growth in the currency supply of say 2% per annum. But you can’t know in advance what GDP growth will be. It might collapse, in which case the denominator of the inflation equation shrinks and your 2% annual increase is likely to be massively inflationary. Or it might race ahead, Industrial Revolution style, in which case your currency supply is growing more slowly than GDP and you still have deflation.

      The only way around this is to provide a feedback mechanism to allow the rate of currency supply increase to be adjusted up or down based on developments in the real world. This is why Varoufakis says we’re back to needing a central bank:

      The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.

      Personally I think he’s lacking imagination on this point. Maintenance of the transaction record for Bitcoin is already collective and democratic (in the sense that the record that gets the most votes is considered to be the ‘true’ one) and does not require a central agency. Why couldn’t you add a mechanism for collective ‘voting’ to manage the rate of supply increase dynamically, with the nodes that manage transaction records and/or holders of Bitcoins acting like shareholders? Granted this would be a significantly more complex and politically fraught task than maintaining a common transaction record, but I’m not prepared to say it’s impossible.

      1. gmaxwell

        Quibble much,
        I was trying to correct a mistake the original author made in his post whilst trying to keep my post short and and to the point, obviously money supply!=inflation. But that wasn´t really the point I was making here. In fact the current increases in money supply in bitcoin are quite substantial, though there is a predetermined limit. My point was just that you can implement any regime in a clone that you choose, even doubling money say daily or weekly and yes, I would consider such a coin inflationary…

  13. The Dork of Cork.

    Well the very political Euro fiat ( the modern elite have built political structures which they do not call political) will cause the total collapse of the European entrepot economy.
    Indeed the wider European entrepot economy has already died……the German operation was all about turning the European hinterland into a energy surplus area for its global mercantile operations.
    We are no longer a Imperial market for cars and other good stuff , we are a imperial salt mine.

    Of course it is not a fiat currency in its truest sense but a bankers & corporatist plaything with some fiat characteristics.

    You see because of the Euro very little primary production now occurs.
    It is all added value crap.
    But you can only add so much value / extract labour value until the system breaks down.

    It will not be without its good moments.

    I hope to see the end of Ryanair in my lifetime.
    Its dark existence started at the beginning of the end of the credit hyperinflation around 1986 ~
    It will die at its end.
    Much like its Irish operations – it will simply run out of customers with money to spend……..
    I am keeping a good Malt for this moment in time – if I live long enough it will be a very special occasion.

    Two neo liberals walk into a Irish bar……

    http://www.irisheconomy.ie/index.php/2013/04/23/financieel-dagblad-on-ireland/

    What a fucking pox.

  14. kevinearick

    Hoard Economics: The Cloud & Big Bang

    Labor is not going to turn the generator back on until the majority gets out of the way. Family Law, all the certification and licensing impediments, and companies like Microsoft, Boeing, Apple and Google, selling America out with regulation, is going, one way or the other.

    The Internet is designed to breed these functions out of existence over time, but the majority is welcome to terminate itself more abruptly by choosing war, leaving itself no other choice, for lack of brain cells. The system under construction is in no way dependent upon US Navy controlled trade routes, while the majority is entirely dependent upon that control.

    Economics is, and always has been, about propulsion. Navy is a utility, and its power may be rescinded at will. Have you driven along RT 20 in NY? That is the majority’s future, Hillary Clinton and Henry Kissinger, a marriage made in hell, or heaven depending upon your perspective.

    I will sit here in Fort Bragg, CA, while everyone around me tries to stop me from going back to work, and watch the potheads fleece dumber and dumber tourists, as their town crumbles from beneath them, like most every other town in America. Over 100 million Americans are already out of work. Half of the remaining is processing those out of work. And the other half is competing to sell America out just as fast as it can. Don’t put the shovel down; keep digging for gold.

    There is an entire forest out here, and an entire ocean, but the corporations have locked them down, to keep individuals out, because the corporations have exploited them dry and are waiting for nature to replenish them, at the behest of the majority, to do it all over again. The majority is its own worst enemy, creating artificial borders to create artificial scarcity, in a positive feedback cycle, paying the Krugmans of the world to justify their behavior. Brilliant.

    So, I’m drinking my coffee, watching groups crowd the elevator. Pretty soon, out comes a pry bar, the door is opened, and the nearest group jumps in, before they realize there is no cab at the floor, and falls to the pit. The process repeats while capital waits for the bodies to stack up, creating a floor to inflate itself upward. Funny, the cab turns out to be virtual. It exists only to the extent labor chooses it to exist.

    We have already given the majority of people on this planet the weapons necessary to kill each other. Just get out of the way. There is no exit, the volume is decreasing as individuals exit, and the pressure is increasing as capital controls are implemented to stop them. One way or the other, labor gets paid.

    If you have a sustainable local economy, you don’t need the US Navy, and soon, Government will have no teeth. You can print oyur own money at will. The majority should have taken better care of its children. It makes the same mistake, every time.

    1. kevinearick

      There are any number of exits for individuals, but the vortex algorithm groups by characteristic, linking to maximize torque. Upping the bet from Japan was stupid, but expected. In the beginning, it’s like boiling a frog…

  15. brian t

    ” … in the case of bitcoin speculative demand outstrips transactions demand by a mile … ”

    I’d call that a blatant understatement. From the outside, it looks like *all* speculation, and one thing folks forget is that speculation of this form is a zero-sum game. You have people trying to make money off of other people, and that’s all she wrote. With the stock market, at least there is still some semblance of investment as a way to help a business grow (unless you’re Facebook) – but BitCoin doesn’t even offer that much. I’m not buying all these post-facto attempts at justification for the early-adopter speculation.

  16. casino implosion

    Isn’t that scoundrel Peter Thiel behind this? It has his fingerprints all over it.

    ANyhow, the failure of bitcoin will be a nice empirical test of the nonsense these people propagate.

  17. washunate

    “Bitcoin was born the day in 2008 some anonymous computer geek, using an unlikely Japanese pseudonym (aka Nakamoto), posted an algorithm”

    How is that fundamentally different than the Fed or Amazon or Delta Airlines or Hilton Hotels or any other entity creating a digital something and releasing it?

    If there is some deeper insight into our monetary world that bitcoin reveals, I am curious, but what is remarkable to me is how much general heat it has generated with so little accompanying revelatory light. It is not bitcoin that fascinates me, but how much interest people have in it.

    One other general note:

    “The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks.”

    Good Lord, I hope people were skeptical of authorities before 2008.

  18. indio007

    This guy has it soooooooo wrong. First, take you BTC offline and they won’t be stolen. Second, BTC is divisible to 8 decimal places. So in reality there are 21 million million units.

    Being ignorant about to very basic aspects of Bitcoin tells me this guy was lazy when he researched his slam of BTC.

    The best thing about BTC is they CAN NOT be counterfeited. That has been a problem with money since it was invented.

    1. Massinissa

      Because cutting a dollar into 8 parts creates more than a dollar right? Right?

      That doesnt stop deflationary tendencies…

  19. castor

    The often repeated argument that a fixed currency supply -> deflation -> death of currency/economy seems a bit hand-wavy to me, and I’d like to understand it better. Anyone care to share links that might help quantify this relationship, or derive some model that shows why the argument is correct?

    1. F. Beard

      A fixed money supply encourages risk-free money hoarding. But progress requires taking risks, not risk-free money hoarding.

      Also, a fixed money supply is a way for the old to loot the young as the population grows but the money supply doesn’t.

      And money hoarding is non-Bibical too. See Matthew 25:14-30 (“The Parable of the Talents”).

    1. skippy

      Social well being trumps gold any day, unless you have a huge army to protect it and enforce its status. Lone wolfs or petite wealth running for the boarder don’t stand a chance… see history.

    2. Doug Terpstra

      physical gold, not virtual-reality bitcoins or paper derivative contracts — proving to be worthless as the world stages a run on actual bullion.

      James Howard Kunstler has excellent commentary on the gold futures smackdown:

      “If the FBI can track down two homicidal Chechen nobodies inside of forty-eight hours of their Boston bombing caper, you kind of wonder how come the Bureau can’t detect the odor of racketeering, insider trading, and wire fraud in this month’s orchestrated smackdown of the gold futures markets, including the parts played by the Federal reserve, one or more too-big-to-fail banks, self-interested big money players such as George Soros, slumbering regulators at the Commodities Futures Trading Commission, and tractable editors at The Wall Street Journal and The New York Times.”

      http://kunstler.com/blog/2013/04/aftershocks.html

      1. AbyNormal

        yep thats Kunstler…”It was not a coincidence that the smackdown happened three weeks after the Dutch bank ABN Amro notified clients that it would only satisfy demands for redemptions of gold held in its custody with equivalent cash payments. “No gold for you today!
        The basic fact remains: there isn’t enough to go around.”

      2. Glenn Condell

        ‘you kind of wonder how come the Bureau can’t detect the odor of racketeering, insider trading, and wire fraud…’

        You can’t beat ’em if you’ve joined ’em (or rather, been co-opted by them)

        From Yanis’s previous post on the courageous Lagarde list man, Kostas Vaxevanis (quoting him):

        ‘Upon noticing the stalkers I called the police and asked them to come quietly. The police arrived noisily and went to a nearby house first, thus giving the men plenty of time to make their escape’

        ‘She said that she had been, and was, part of a group comprising former agents and salaried members of the Greek intelligence services, connected to business interests who worked on, at first, wrecking my public image and, later on, planning my physical demise. She added that it was her who, following specific orders, had forged the document ‘proving’ that I was on the payroll of the secret service – a document which her group then circulated to the various blogs that used it’

        It Couldn’t Happen Here, could it?

        Arkin’s report for WaPo a few years ago said the NSA alone had nearly a million top secret clearances. I wonder how many of them are now working for rather than against the forces they are supposed to be protecting the citizenry from. Every other public body (and most public officials) has decayed into ineffectuality if not outright collusion, why should they, especially they, be any different?

        I hope Vaxevanis’s profile is high enough now to discourage the faked suicide or coronary or road accident.

        Yanis – ‘You may wonder what happened to The Chairman and to The Bank. The Chairman is doing fine, thank you. His insolvent bank has now turned into a (by Greek standards) Too-Big-Too-Fail monster, having been handed on a silver platter the good chunks of banks that the Greek taxpayer has paid through the nose to carve out of failed operations’

        There have always been organic links between criminals from top to bottom, but stories like these show how this nexus is becoming institutionalised.

        The ‘respectable’ indeed the creme de la creme in their finery, set fast top and centre by the official robes of state and judicial power, greased by the exaggerations and omissions of their media… are now ultimately propped up not by their own reputations or the dwindling legitimacy of the civic instruments they have bought – but by state surveillance, followed by iron bars and concrete shoes. Full spectrum corporate dominance of state functions; modern fascism in action.

        Another truth-teller who burrowed a little too close for elite comfort recently was Golem 14, or David Malone. After much digging he wrote a piece for Reuters on Magnitsky and Cyprus, passing several dead ‘uns on his path thru the story, which Reuters decided to pull before publication ‘because they and I had been threatened, by a major European Bank, with legal consequences’

        http://www.golemxiv.co.uk/2013/04/making-the-truth-illegal-revisited/

        Apart from a brief hooray at Maggie’s demise the following day he has been quiet. I do hope he’s on holiday or something.

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