What Nobody Seems to Understand About Bitcoin

This has been around a couple of weeks, but I managed to miss it, and I suspect many NC reader might have as well. Plus we can always more levity. God knows we need it. Hat tip diptherio

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15 comments

  1. R Foreman

    ..and yet btc keeps getting more valuable while dollars keep losing purchasing power. People seem to notice that more than propaganda videos from central bankers.

    Btc ending up at $100,000 just means the dollar is worthless paper.

    The Fed keeps printing $85 Billion per month, and bitcoin goes on a meteoric rise. I don’t think these two events are coincidental.

    1. R Foreman

      Another nice thing about bitcoin is it’s infinitely divisible.. not so with the dollar. If Btc goes to $100,000 then you can still buy a loaf of bread for .000003btc

      You know what is really odd though, is the USGovt is embracing btc as if it’s a harmless commodity, or some kind of theme-park money. It’s hard to explain their reaction, other than to call it hubris. Normally a government takes great exception to anything that replaces their own currency. You can bet there is already scheming to destroy bitcoin, like with propaganda videos and high profile thefts.

      1. Dan Kervick

        I had to laugh yesterday about the bitcoin enthusiasts reaching for straws in Bernanke’s testimony and claiming he had given it his “seal of approval.” The government hasn’t embraced bitcoin other than to suggest that it might have some use as a confidential electronic payment system. At the same time, as Bernanke reported, they are intensifying their efforts to prevent bitcoin-powered money laundering and tax evasion. Since the latter are the two central advantages of conducting transactions in bitcoins.

        Of course, bitcoin as a payment system isn’t a very significant economic factor. All that’s going on now is a speculative bubble driven by the possibility of making short-term profits on the back of a pyramid of suckers for as long as the bubble lasts.

        1. R Foreman

          Anti- money laundering becomes a moot issue if nobody converts back to state currencies. Hence the reason why the states might want to destroy bitcoin, but it seems as Bernanke has given bitcoin his quiet nod of approval. So strange. I’d have to say this is just hubris, and they don’t yet see bitcoin as a threat.

          One thing is for sure though, populations will have a difficult time doing daily transactions with a micron-sized spec of gold, but will not have the same difficulty with bitcoin, so bitcoin has the same positive characteristics as gold (limited quantity) without the negative effects (difficulty in divisibility).

          1. Dan Kervick

            It’s not a threat, so there is nothing that needs to be done other than to go after the criminals. The natural progress of the legal system in motion will do the job.

            It doesn’t really matter whether people convert back into dollars or not. Income is income, no matter what form it comes in. If people retain bitcoin income in bitcoins and don’t report that bitcoin income they will ultimately be prosecuted for tax evasion. After some high profile prosecutions, they will all come to understand that they have to convert back to dollars anyway to pay their taxes.

            The government is hardly prepared to tolerate a giant off-the-books black market for goods and services, and it won’t. There is no need for Bernanke to make a big deal about it. The problems will mostly take care of themselves.

            The infinite divisibility of bitcoin is a minor theoretical convenience that has little value in practice. It only comes into play if bitcoin values continue to appreciate and/or the size of the bitcoin economy continues to grow once bitcoin tops out at its coded maximum. I doubt that will happen since the built-in deflationary architecture of the system plus the erratic and unsupervised fluctuations in bitcoin market values make bitcoin an impractical medium of exchange – except for criminals who are willing to put up with the instability risk in exchange for confidentiality.

    2. Lichu

      Everything is in a meteoric rise, not only bitcoins
      that’s why they cannot taper without causing global havoc, check the rise in 10y fed bonds since the announcement

  2. Yonatan

    BitCoin is a software implementation. Either it is the first perfect piece of software, in which case BitCoin is sound, or it is not, in which case BitCoin will be (or already is) compromised.

    It appears to rely on Elliptic Curve cryptography which requires the use of some Magic Numbers. Who chose those? Bruce Schneier has doubts about EC precisely because of this weakness. He states ” the fact that the NSA is pushing elliptic-curve cryptography is some indication that it can break them more easily.”

    https://www.schneier.com/blog/archives/2013/09/the_nsas_crypto_1.html

  3. craazyboy

    Pretty simple actually.

    Bitcoins are “nothing” made “scarce” – hence their value!

    Disclosure: I don’t own any.

    1. Dan Kervick

      Scarcity alone is not enough to give something a market value. Scarcity adds to market value by the way it interacts with demand.

  4. Greg Simon

    It is interesting to see not only the fiat-bugs attacking bitcoin but also the gold-bugs attacking bitcoin. Perhaps they have something in common? Fiat-bugs want to protect the value of fiat money. Gold-bugs want to protect the value of gold. I thought the whole idea was innovation to create a superior product than what is available currently? It sadly seems most, if not all of the gold-bug community are not pro-capitalism after all, they are pro-establishemnt, just like the fiat-bugs they claim to be in opposition to. They have exposed themselves as two sides of the same coin.

    http://knowmadiclife.com/blog/2013/4/3/is-bit-coin-sound-money

    1. Dan Kervick

      Ultimately, Bitcoin’s gee-whiz experimenters will understand why it is actually a good thing to have a monetary system that is law-governed and well-regulated, and whose market value doesn’t oscillate wildly in response to speculative frenzies.

      Notice that the current surging value of bitcoin (and its general unpredictability) is the very thing that makes it unsuitable as a medium of exchange. If bitcoins are rapidly appreciating in value – i.e. if there is rapid and ongoing price deflation for prices expressed in bitcoins – then people will want to acquire bitcoins primarily for the purpose of holding them, not exchanging them for goods and services. It’s thus a very good thing that only a miniscule part of the economy depends on bitcoin transactions, because if the bitcoin economy were significant, the deflationary environment would cause economic contraction. Also, continual appreciation of bitcoin value means that few people will want to contract debts in bitcoins.

      If bitcoin ever settles down, it will just evolve into an alternative method of wiring money. People will convert some currency into bitcoins, transfer them to a recipient, and the recipient will convert them into the currency of choice. It will be a small appendage to existing currency systems, not an alternative to them. The government will take its tax cut out of the currency conversion, and any capital gains resulting from the buying and selling of bitcoins.

      1. R Foreman

        I tend to see it as growing pains as people attempt to determine it’s true value. Until we figure it out of course it will move around a lot, but then lots of market-determined constructs tend to move around a lot.

        1. Dan Kervick

          The value of the dollar moves every day, but not so wildly. That’s because we have a government that supervises domestic price stability and exchange rates. The fact that the dollar’s market value is predictable within tolerable boundaries, and that it otherwise has no intrinsic value other than its exchange value, is precisely what makes it valuable as a medium of exchange.

  5. ChrisPacific

    BitCoin was more or less a software experiment: an attempt to construct a virtual thing with some of the same properties as gold. Most notably the property that people want to own it because it’s shiny.

    It seems to have succeeded very well on that last point… so far. The main drawback would seem to be that while gold is inherently shiny, Bitcoin’s shininess derives mostly from the fact that it’s the first credible attempt at a digital currency to hit the market. Down the road there might be a dozen of them. Will Bitcoin still be shiny then?

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