Bitcoin and positive vs. normative economics(krugman.blogs.nytimes.com)
krugman.blogs.nytimes.com
Bitcoin and positive vs. normative economics
http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/
506 comments
>>BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
So basically it brings an ability to the middle-class that normally only the top 1% have. We know wealthy people use tax loopholes(and a few of them, laundering) and... why do the states need to monitor financial transactions? Don't tell me because terrorism. I'm sick of that being the reason for everything when we have this kind of nonsense[1] happening.
I translate this to: "Bitcoin is designed to free non-rich people from the restrictions, fees & surveillance placed upon them by the wealthy elite"
I don't know if crypo-currency will succeed long-term, but seeing how hardcore scared/doubtful some people are about it makes me think a nerve has been hit. I just hope that if btc fails, it fails naturally/organically/mathematically on its own... not because someone arbitrarily makes it illegal.
1. https://news.ycombinator.com/item?id=6954341
So basically it brings an ability to the middle-class that normally only the top 1% have. We know wealthy people use tax loopholes(and a few of them, laundering) and... why do the states need to monitor financial transactions? Don't tell me because terrorism. I'm sick of that being the reason for everything when we have this kind of nonsense[1] happening.
I translate this to: "Bitcoin is designed to free non-rich people from the restrictions, fees & surveillance placed upon them by the wealthy elite"
I don't know if crypo-currency will succeed long-term, but seeing how hardcore scared/doubtful some people are about it makes me think a nerve has been hit. I just hope that if btc fails, it fails naturally/organically/mathematically on its own... not because someone arbitrarily makes it illegal.
1. https://news.ycombinator.com/item?id=6954341
Krugman is to Bitcoin as Ebert was to video games.
The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.
The central failure of Krugman's understanding of cryptocurrencies is in the value of mining. It's not simply throwing energy away into solving useless math problems; it's spending energy to create infrastructure. That infrastructure is the part that does have intrinsic value, that can be used for something else in the same way gold can be made into useful things. Look at Bitmessage or any of the other projects built on top of Bitcoin. These form the floor Krugman can't seem to find.
Ignore the flamebait headline. The distinction Krugman makes between positive and normative economics is a useful one.
On the positive side, I think Krugman and DeLong are overestimating the strength of the floor for the value of a dollar. Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency. Sure, you can pay taxes with them, but the government collects taxes to buy things, and if people no longer have faith in the dollar, the government won't be able to buy things with those tax dollars. There's no floor on the value of Bitcoin, but there's no floor on the value of the dollar either.
On the normative side, I don't think one's position on the utility of central banking matters when it comes to Bitcoin. If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. I think central banking is useful, but I don't see a future for it.
On the positive side, I think Krugman and DeLong are overestimating the strength of the floor for the value of a dollar. Hyperinflation would make it impossible for the Federal Reserve to buy up enough dollars to stabilize the value of the currency. Sure, you can pay taxes with them, but the government collects taxes to buy things, and if people no longer have faith in the dollar, the government won't be able to buy things with those tax dollars. There's no floor on the value of Bitcoin, but there's no floor on the value of the dollar either.
On the normative side, I don't think one's position on the utility of central banking matters when it comes to Bitcoin. If blockchain currencies are the future, central banking is over, and our society will have to figure out how to make the economy work with endemic deflation. I think central banking is useful, but I don't see a future for it.
I was not disappointed to find this as the top comment (at the time I viewed the article):
1998 - Another "evil" prediction from Mr. Krugman:
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The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
---
But hey, the future of the dollar might be the same as that of the fax machine ???
1998 - Another "evil" prediction from Mr. Krugman:
---
The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
---
But hey, the future of the dollar might be the same as that of the fax machine ???
I'm a liberal, a Keynesian, but my interest in BitCoin is completely non-ideological. And I resent being painted with an ideological brush by Krugman because I can see the elegance in BitCoin, and I can see the possibility that one day, in spite of my ideological beliefs that unregulated markets are susceptible to bubbles and destructive volatility, BitCoin or something like it might still be able to function as a stable, useful world currency.
Ideology is never an accurate or complete description of the world. It is false awareness. What might be true under paradigm A might no longer be true under paradigm B, but at no point will an ideologue change his world-view to fit paradigm B. He will try to cram paradigm B into his ideology in order to preserve his ideology, rather than adjust his ideology to describe paradigm B.
For instance a fiat currency heavily regulated by state monetary policy might have been the best idea in the 20th century, during which for the most part there was no Internet. But in the 21st century, where the Internet enables markets that can function more efficiently, a virtual currency with a self-regulating monetary policy might be a better replacement. The jury is still out on that. BitCoin is an experiment, and that's the best thing about the Internet - it is a laboratory for experiments, where we can try new and different monetary policies really quickly, whereas in the wildly inefficient 20th century we were locked into one monetary policy at a time. We're just figuring out what works the best, but Krugman calling BitCoin "evil" suggests to me that he is afraid of what we might find out.
Ideology is never an accurate or complete description of the world. It is false awareness. What might be true under paradigm A might no longer be true under paradigm B, but at no point will an ideologue change his world-view to fit paradigm B. He will try to cram paradigm B into his ideology in order to preserve his ideology, rather than adjust his ideology to describe paradigm B.
For instance a fiat currency heavily regulated by state monetary policy might have been the best idea in the 20th century, during which for the most part there was no Internet. But in the 21st century, where the Internet enables markets that can function more efficiently, a virtual currency with a self-regulating monetary policy might be a better replacement. The jury is still out on that. BitCoin is an experiment, and that's the best thing about the Internet - it is a laboratory for experiments, where we can try new and different monetary policies really quickly, whereas in the wildly inefficient 20th century we were locked into one monetary policy at a time. We're just figuring out what works the best, but Krugman calling BitCoin "evil" suggests to me that he is afraid of what we might find out.
This title of this post does a disservice to its contents. "Bitcoin is evil' makes it sound like it's a propaganda piece. I went in expecting some of the usual poorly researched allegations that we've been seeing over the past few weeks. But surprisingly, the post does make a few good points.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow.
Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles.
Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control.
This ability is what places a floor on its value, whatever that hypothetical floor may be.
This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
However, the analysis fails again because he wants to decouple bitcoin's role as a store of value from it being a medium of exchange. To which I would like to ask: What's the point of a store of value if ultimately it cannot be exchanged for something else ?
That's like saying that the energy inside an atom's nucleus has no value. (prior to the discovery of controlled nuclear fission) Of course it had value but we couldn't use it without accessing it and tapping into it somehow.
Bitcoin's value is closely coupled with its utility as a medium of exchange, which is based solely off some pretty excellent technology and principles.
Now, don't get me wrong, I don't think its current value in terms of USD/Euros/etc. is necessarily linked well to it's current utility. However, there is value in being able to transfer something (a bitcoin or parts of it..) that no one else can transfer to someone across the world securely and almost instantly with little to no centralized control.
This ability is what places a floor on its value, whatever that hypothetical floor may be.
This is what excites the 'technical people' he mentions in his article. I don't expect non-technical people to 'get it' immediately, but people will get it, eventually. No one understood why email was important in the beginning either.
I'm glad this article makes the distinction between positive and normative economics.
I have no problem with paying taxes and obeying almost all laws in a democratic country, and I am persuaded that inflation in sensible times and amounts is a good thing for the world. The paranoia and anti-society feelings that run so high in the bitcoin community actually put me off it. (Although I also dislike the fact that the Credit Card companies have the power to extract rent from nearly all transactions in the economy too - the fact that the price is the same regardless of whether the merchant is paying a fee or not means that cash transactions are subsidising credit cards).
But I don't think bitcoin has much chance of becoming a state currency, and I think it would go horribly if it did, so most of that anti-state rhetoric is irrelevant.
However, up until now, neither the government, nor the banks nor the credit card companies have provided me with an easy, cheap and safe way to make tiny transactions with my friends (and untrusted acquaintances) across the world.
Bitcoin is currently useful. I can take a picture of a QR code with my phone or fill in a simple form on a web page and safely transfer tiny sums of money with no or minimal fee reasonably quickly anywhere in the world. That is wonderful and creates a floor on the value of bitcoin, until better options are available.
Anyone who really doesn't want to see bitcoin succeeed (and that goes for Stross and Krugman) should make it a priority to work on making sure that dollars and pounds and euro balances are just as convenient, cheap and safe as bitcoin balances.
I have no problem with paying taxes and obeying almost all laws in a democratic country, and I am persuaded that inflation in sensible times and amounts is a good thing for the world. The paranoia and anti-society feelings that run so high in the bitcoin community actually put me off it. (Although I also dislike the fact that the Credit Card companies have the power to extract rent from nearly all transactions in the economy too - the fact that the price is the same regardless of whether the merchant is paying a fee or not means that cash transactions are subsidising credit cards).
But I don't think bitcoin has much chance of becoming a state currency, and I think it would go horribly if it did, so most of that anti-state rhetoric is irrelevant.
However, up until now, neither the government, nor the banks nor the credit card companies have provided me with an easy, cheap and safe way to make tiny transactions with my friends (and untrusted acquaintances) across the world.
Bitcoin is currently useful. I can take a picture of a QR code with my phone or fill in a simple form on a web page and safely transfer tiny sums of money with no or minimal fee reasonably quickly anywhere in the world. That is wonderful and creates a floor on the value of bitcoin, until better options are available.
Anyone who really doesn't want to see bitcoin succeeed (and that goes for Stross and Krugman) should make it a priority to work on making sure that dollars and pounds and euro balances are just as convenient, cheap and safe as bitcoin balances.
1) Bitcoin mining has a pretty horrible carbon footprint. ("but so does ..." doesn't eradicate this argument)
2) similar to the author's point that advocates can't tell the difference between "store" and "medium" of value, I can't tell you the number of arguments I've gotten in with people who equate a "store of value" to be the same thing as the "increase in value"
3) It's a 1% wet dream. Make money, potentially hidden income, avoid taxation? No money paid into the welfare state? WIN!
2) similar to the author's point that advocates can't tell the difference between "store" and "medium" of value, I can't tell you the number of arguments I've gotten in with people who equate a "store of value" to be the same thing as the "increase in value"
3) It's a 1% wet dream. Make money, potentially hidden income, avoid taxation? No money paid into the welfare state? WIN!
I love rule-based central banking. It injects predictability and stability into a monetary system and has had fantastic results in the developing world. Cryptocurrencies allow for rule-based monetary systems without the risk of a central bank failing to adhere to its rules prescription. A world of competing crypto currencies would be fascinating - various rule systems being adopted and phased out as (a) critical flaws are discovered, (b) more competitive rules are introduced, or (c) the global economy's needs and hence optimal rules system change.
The downside of discretionless rules-based central banking is it makes learning, and thus evolving, very expensive, requiring a rerooting of the currency and thus monetary system. This is why developed countries do better with discretionary central banks - their economies are too complicated for any known rules systems to work reliably and their central banks trusted enough not to be stupid.
I love the future Bitcoin portends - a world of competing and overlapping rules-based and discretionary monetary systems. I am fairly confident, however, that Bitcoin is not competitive for that world. Still, it's a great introduction and has its social value as a stepping stone.
The downside of discretionless rules-based central banking is it makes learning, and thus evolving, very expensive, requiring a rerooting of the currency and thus monetary system. This is why developed countries do better with discretionary central banks - their economies are too complicated for any known rules systems to work reliably and their central banks trusted enough not to be stupid.
I love the future Bitcoin portends - a world of competing and overlapping rules-based and discretionary monetary systems. I am fairly confident, however, that Bitcoin is not competitive for that world. Still, it's a great introduction and has its social value as a stepping stone.
Krugman is right, I agree with him 100% on this, but almost every time I tried to make any sensible argument about bitcoin with people actually holding bitcoin, I hit a wall.
Most people confuse currencies with assets, storage-medium with exchange, etc. While at the same they are just hoarding.
I think that BTC will stick around because it has some unique qualities that are requested by the market such as partial anonymity, speed and size (a USB can contain whatever amount of USD).
But it has some serious flaws and as a currency is clearly failed. It is a libertarian's dream, but I don't think that the US or DE or RU government can't monitor whoever moves money in and out of the BTC blockchain.
Most people confuse currencies with assets, storage-medium with exchange, etc. While at the same they are just hoarding.
I think that BTC will stick around because it has some unique qualities that are requested by the market such as partial anonymity, speed and size (a USB can contain whatever amount of USD).
But it has some serious flaws and as a currency is clearly failed. It is a libertarian's dream, but I don't think that the US or DE or RU government can't monitor whoever moves money in and out of the BTC blockchain.
It is deplorable that he used the word "evil" to describe Bitcoin. He fails to point out that Bitcoin is a system and of course it is possible for individuals to use this system to achieve some personal nefarious goals; but we have literally watched banks knowingly gamble huge sums of money in the centrally banked system and the whole system came crashing down. The decentralized nature of Bitcoin will not allow a few major players to crash the system, and then use the government to bail it out... and as a side note the government doesn't ever bail anyone out, it leverages its authority to force taxpayers (today and future generations) to bail out a system so that it can maintain the status quo.
There is perhaps no compliment greater than a criticism from the econostrologist in chief, Paul Krugman.
He is right about one thing tho. Bitcoin IS a bubble. But that is not a pejorative. Any good that becomes money will have a price that is far higher than is warranted by its use demand. It doesn't matter whether the floor price is 10% of the monetary premium, 1% or 0%. The monetary premium is based not on the good's use value, but its serviceability as money. I.e., is it fungible, divisible, transportable, verifiable etc. And along all these attributes bitcoin shines - even more than gold.
The best explanation of this so-called "bubble theory of money" is proffered by Moldbug. To wit:
http://unqualified-reservations.blogspot.com/2011/04/on-mone...
and
http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
He is right about one thing tho. Bitcoin IS a bubble. But that is not a pejorative. Any good that becomes money will have a price that is far higher than is warranted by its use demand. It doesn't matter whether the floor price is 10% of the monetary premium, 1% or 0%. The monetary premium is based not on the good's use value, but its serviceability as money. I.e., is it fungible, divisible, transportable, verifiable etc. And along all these attributes bitcoin shines - even more than gold.
The best explanation of this so-called "bubble theory of money" is proffered by Moldbug. To wit:
http://unqualified-reservations.blogspot.com/2011/04/on-mone...
and
http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
Three cheers to the mod who changed the title from "Bitcoin is Evil", even though that's what NYT wants to call it. The author spends most of the piece explicitly telling us that he will not be making a morality judgement about the currency.
One quote in the article caught my eye:
> BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
Fun thought exercise: replace "BitCoin" with "cash." Businesses across the country choose to have a cash-only policy (or destroy receipts, avoid use of electronic records, and so on) to avoid paying taxes and having their transactions monitored. That's not to say this is wise or ethical behavior, but it certainly happens, even without cryptocurrency. So why do critics describe BTC as a libertarian threat and in-person cash transfers as normal?
One quote in the article caught my eye:
> BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.
Fun thought exercise: replace "BitCoin" with "cash." Businesses across the country choose to have a cash-only policy (or destroy receipts, avoid use of electronic records, and so on) to avoid paying taxes and having their transactions monitored. That's not to say this is wise or ethical behavior, but it certainly happens, even without cryptocurrency. So why do critics describe BTC as a libertarian threat and in-person cash transfers as normal?
I've never agreed much with Krugman's theories, but at least he understands a thing or two about economy. However, what I've always found him to be always clueless about is - technology. You have a better chance finding a more insightful tech article from a random tech blogger than from Krugman. He always misses the point. Without exception. I don't know even why he keeps doing this to himself. He just ends up embarrassing himself.
How can Bitcoin, a technology, that has shown so much promise, in many other ways besides being "money" (which some still disagree it is), be "evil"?
Also, as someone else has mentioned, he says FIAT money is backed by men with fun, and Bitcoin by "nothing" (another point where he shows just how little he understands technology in general), yet Bitcoin is the "evil" one?
How can Bitcoin, a technology, that has shown so much promise, in many other ways besides being "money" (which some still disagree it is), be "evil"?
Also, as someone else has mentioned, he says FIAT money is backed by men with fun, and Bitcoin by "nothing" (another point where he shows just how little he understands technology in general), yet Bitcoin is the "evil" one?
It's great that Krugman is trying to to make a purely positive analysis of the potential impacts of Bitcoin. He's entirely correct in saying Bitcoin has zero inherent value, as opposed to gold and USD. But that's missing the point.
Most of us don't think about owning gold in terms of how readily we can make pretty things out of it, or dollars in terms of how easily we can pay our taxes. We hold onto them because both have a reliable history of being easily traded for other goods and services. Ease of exchange trumps inherent value as soon as a currency's users regard it as stable, and Bitcoin hopes to be there in a few decades (presumably starting with the sort of people who follow interesting tech developments, rather than those who care about inherent value).
As a side note, the headline is ridiculous linkbait and someone really ought to change it. Krugman spends most of the article explicitly stating that he doesn't want to muddy the discussion of how well BTC will actually work with normative/political arguments (i.e. the word "evil"). I can't help but feel like someone other than the author titled this article.
Most of us don't think about owning gold in terms of how readily we can make pretty things out of it, or dollars in terms of how easily we can pay our taxes. We hold onto them because both have a reliable history of being easily traded for other goods and services. Ease of exchange trumps inherent value as soon as a currency's users regard it as stable, and Bitcoin hopes to be there in a few decades (presumably starting with the sort of people who follow interesting tech developments, rather than those who care about inherent value).
As a side note, the headline is ridiculous linkbait and someone really ought to change it. Krugman spends most of the article explicitly stating that he doesn't want to muddy the discussion of how well BTC will actually work with normative/political arguments (i.e. the word "evil"). I can't help but feel like someone other than the author titled this article.
This is an easy one to understand.
Krugman was a proponent of mass inflation, aka. helicopters of money, as a solution to the credit crisis. Bitcoin makes it basically impossible to manipulate the money supply the way the Fed has done to navigate the 2008 crisis.
Krugman sees Bitcoin as a threat to the central banks ability to stabilize the economy.
Krugman was a proponent of mass inflation, aka. helicopters of money, as a solution to the credit crisis. Bitcoin makes it basically impossible to manipulate the money supply the way the Fed has done to navigate the 2008 crisis.
Krugman sees Bitcoin as a threat to the central banks ability to stabilize the economy.
> Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?
Doesn't he get that point wrong (like many others)? The mining rate, and eventually the limit of 21 million bitcons places a limit on the supply of bitcoins, not on their value. If bitcoin is successful, it will only keep getting more and more valuable. Its hard to estimate how much, but the total market capitalization will probably that of a commodity like silver, or that of a nation state's currency.
Also, I think bitcoin is not really supposed to be a store of value. Its main purpose is to pseudonymously buy and sell stuff (drugs, cough, cough). It's good enough if it can hold its value for a few hours - if someone builds a nice way to deposit dollars or euros, convert them, and immediately pay with the bitcoins, milliseconds would even suffice. In a market with such a high turnaround, of course, the value represented in bitcoin at a given time will be lower than for e.g. silver or gold, which are supposed to store value for a longer time (and also have applications as a material).
Finally, I don't think bitcoin can replace "real" money. It might have worked a few decades ago when there was a kind of self-carrying growing economy. The only way todays econonmy is still running is because of massive state intervention, which is impossible if bitcoin in the main currency. I mean, we gave up the Bretton Woods system and the gold dollar for a reason...
Doesn't he get that point wrong (like many others)? The mining rate, and eventually the limit of 21 million bitcons places a limit on the supply of bitcoins, not on their value. If bitcoin is successful, it will only keep getting more and more valuable. Its hard to estimate how much, but the total market capitalization will probably that of a commodity like silver, or that of a nation state's currency.
Also, I think bitcoin is not really supposed to be a store of value. Its main purpose is to pseudonymously buy and sell stuff (drugs, cough, cough). It's good enough if it can hold its value for a few hours - if someone builds a nice way to deposit dollars or euros, convert them, and immediately pay with the bitcoins, milliseconds would even suffice. In a market with such a high turnaround, of course, the value represented in bitcoin at a given time will be lower than for e.g. silver or gold, which are supposed to store value for a longer time (and also have applications as a material).
Finally, I don't think bitcoin can replace "real" money. It might have worked a few decades ago when there was a kind of self-carrying growing economy. The only way todays econonmy is still running is because of massive state intervention, which is impossible if bitcoin in the main currency. I mean, we gave up the Bretton Woods system and the gold dollar for a reason...
One capability of bitcoin not often addressed is the ability for the majority of its users to change the rules.
If you can get the majority of users to agree to a change in the rules, then they will fork off the block chain in a direction that follows those new rules. Of course, you will have some percentage of users who like the old rules, and could theoretically continue on the old block chain.
One rule change, for example, is to have miners vote on the reward for new blocks found. Then, every so often take the medium or a random vote and award that amount for new blocks mined. This would allow miners to regulate the amount of new coin being mined, which could level off the exchange rates between bitcoin and the world currencies.
If you can get the majority of users to agree to a change in the rules, then they will fork off the block chain in a direction that follows those new rules. Of course, you will have some percentage of users who like the old rules, and could theoretically continue on the old block chain.
One rule change, for example, is to have miners vote on the reward for new blocks found. Then, every so often take the medium or a random vote and award that amount for new blocks mined. This would allow miners to regulate the amount of new coin being mined, which could level off the exchange rates between bitcoin and the world currencies.
I am an on again off again fan of Krugman in some respects. In this case he has managed to clarify the discussion, which is good!
The truth is that bitcoins derive most of their value from being a great medium of exchange and enabling things (smart contracts are ahead) that otherwise wouldn't be possible. Things like making no recourse payments online for the first time ever.
Bank of America did an analysis on the value of bitcoin and concluded that one of the components is the payment network. If PayPal's market cap is billions, why not bitcoin?
So I see this as giving a "floor" to the value of bitcoin via demand the same way as the US government's demand for dollars from its citizens (or the controversial petrodllar warfare theory and other shenanigans) boosts demand for the dollar. There is definitely a lot of demand boost in that.
And for now there is alsothe speculative bubbl. I don't know what the value of bitcoins should be, but it's certainly not zero - there will be demand for it by chinese millionaires trying to get their $ out of the country and bypass currency controls, and other things like that. And if the market cap is high enough, moving a few million dollars in bitcoins at a time won't move the market. Demand drives the price up.
The truth is that bitcoins derive most of their value from being a great medium of exchange and enabling things (smart contracts are ahead) that otherwise wouldn't be possible. Things like making no recourse payments online for the first time ever.
Bank of America did an analysis on the value of bitcoin and concluded that one of the components is the payment network. If PayPal's market cap is billions, why not bitcoin?
So I see this as giving a "floor" to the value of bitcoin via demand the same way as the US government's demand for dollars from its citizens (or the controversial petrodllar warfare theory and other shenanigans) boosts demand for the dollar. There is definitely a lot of demand boost in that.
And for now there is alsothe speculative bubbl. I don't know what the value of bitcoins should be, but it's certainly not zero - there will be demand for it by chinese millionaires trying to get their $ out of the country and bypass currency controls, and other things like that. And if the market cap is high enough, moving a few million dollars in bitcoins at a time won't move the market. Demand drives the price up.
" I try to get them to explain to me why BitCoin is a reliable store of value"
I don't believe that BitCoin is a reliable store of value like the dollar is not a reliable store of value. I went to the US after a year to visit family(I live in Europe) and was surprised how much prices had gone up. Probably you don't see that when it is incremental, but you get to see after some time out.
The same happens with civil liberties. US was one of the countries with higher freedom in the world, but the tendency is so bad, compared to countries that were really bad in the past, but the tendency is so good.
Paper money, or digital money by the way is a medium of exchange. And there lies their utility as Mr Krugman knows..
I am biased about Mr Krugman, for me he is a puppet of central banks that create money and compete against bitcoin. He was awarded the Nobel Memorial price paid by a central bank and he owes his position from defending Wall Street against Main Street.
I don't believe that BitCoin is a reliable store of value like the dollar is not a reliable store of value. I went to the US after a year to visit family(I live in Europe) and was surprised how much prices had gone up. Probably you don't see that when it is incremental, but you get to see after some time out.
The same happens with civil liberties. US was one of the countries with higher freedom in the world, but the tendency is so bad, compared to countries that were really bad in the past, but the tendency is so good.
Paper money, or digital money by the way is a medium of exchange. And there lies their utility as Mr Krugman knows..
I am biased about Mr Krugman, for me he is a puppet of central banks that create money and compete against bitcoin. He was awarded the Nobel Memorial price paid by a central bank and he owes his position from defending Wall Street against Main Street.
What's quite interesting in this piece from Krugman is that for the first time I hear hime doubt his previous outright negative stance. He slips in some "clues" how he is actually "not trying to be swayed one way or the other" when everything else I have read or heard from him regarding Bitcoin was entirely negative. Maybe he is just trying to keep the door open in case Bitcoin's success will prove him similarly wrong as his funny predictation in 98 where he mentioned that "the Internet is going to disappear in 2005".
Regarding the Charles Stross article, someone else had written a very good counter-piece just the other day:
http://www.ofnumbers.com/2013/12/18/charles-stross-takes-on-...
Regarding the Charles Stross article, someone else had written a very good counter-piece just the other day:
http://www.ofnumbers.com/2013/12/18/charles-stross-takes-on-...
It boggles my mind that Krugman continues to fail to see the point. I am not the only one who has noticed his blindness [4]. Or is he deliberately avoiding discussing certain aspects of Bitcoin (notably as a payment processing platform)?
"Underpinning the value of gold is that if all else fails you can use it to make pretty things."
This is a very weak and in fact invalid argument. I can't believe Krugman is quoting this! "If all else fail" then gold would lose 90%+ of its value overnight. Look: roughly 45% of the world's gold production is used for financial speculation, 45% for jewelry, and 10% for industrial purposes [1]. In other words, 90% of gold buyers are buying mostly because they believe gold will preserve its value. And "if all else fail" (if speculators exit the gold market), prices will drop, and jewelry buyers will redirect their desire to other precious metals [2], leaving only industrial demand as buyers. Suddenly the world would be producing 10 times more gold than the demand, leaving the prices depressed.
And again, Krugman completely misses the point of Bitcoin having value not as a currency, but as a payment processing platform. Overstock CEO Byrne said it beautifully:
*"You’re getting rid of the interchange fees. We’re paying credit card companies around 2%. For a company whose margin is 1%, picking up 2% on that is quite attractive." [3]
[1] http://www.gold.org/investment/statistics/demand_and_supply_...
[2] For the same reason people prefer expensive diamond over cheap cubic zirconia, even though both are practically indistinguishable to the naked eye. Yes they CZ is less hard, but most jewelry buyers don't care about hardness. They buy diamonds because they are expensive, that is all.
[3] http://www.coindesk.com/overstock-unveils-more-details-bitco...
[4] http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/23...
"Underpinning the value of gold is that if all else fails you can use it to make pretty things."
This is a very weak and in fact invalid argument. I can't believe Krugman is quoting this! "If all else fail" then gold would lose 90%+ of its value overnight. Look: roughly 45% of the world's gold production is used for financial speculation, 45% for jewelry, and 10% for industrial purposes [1]. In other words, 90% of gold buyers are buying mostly because they believe gold will preserve its value. And "if all else fail" (if speculators exit the gold market), prices will drop, and jewelry buyers will redirect their desire to other precious metals [2], leaving only industrial demand as buyers. Suddenly the world would be producing 10 times more gold than the demand, leaving the prices depressed.
And again, Krugman completely misses the point of Bitcoin having value not as a currency, but as a payment processing platform. Overstock CEO Byrne said it beautifully:
*"You’re getting rid of the interchange fees. We’re paying credit card companies around 2%. For a company whose margin is 1%, picking up 2% on that is quite attractive." [3]
[1] http://www.gold.org/investment/statistics/demand_and_supply_...
[2] For the same reason people prefer expensive diamond over cheap cubic zirconia, even though both are practically indistinguishable to the naked eye. Yes they CZ is less hard, but most jewelry buyers don't care about hardness. They buy diamonds because they are expensive, that is all.
[3] http://www.coindesk.com/overstock-unveils-more-details-bitco...
[4] http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/23...
Who changed the title from the original's "Bitcoin is evil"? I thought Hacker News was opposed to editorial titles.
Krugman is somewhat like Bishop Berkeley, no fool, arguing against infinitesimals before they acquired--in the 20th Century--a rigorous basis. The auditability of Bitcoins distinguishes them from the inaccessibility of the highly mathematized and virtually untraceable instruments of the financial crisis.
Even if he's slightly off I still think Krugman is right in identifying Bitcoin's main weakness: it's the world's "hardest" currency ever - much "harder" than gold - and that will make it very volatile, which in turn will make it difficult to use as a store of value or (independent) medium of exchange.
What I mean by "hard" in this context is that its supply is constrained. If you look a fiat currency it can (and is) produced in whatever volume necessary by the central bank, in order to avoid a fall in prices. Gold has a similar (but distributed) mechanism: when the gold price goes up people mine more gold, increasing the money supply.
Note that that property of gold works even if it's the primary medium of exchange: if there is too much deflation then an ounce of gold will buy you more goods and services, making it more worthwhile to mine it - which in turn increases the money supply and acts as a counterforce to price deflation.
But this is obviously a flaw in the design of Bitcoin, not in crypto currencies generally. It should be possible to create one with potentially infinite supply, but where the cost of mining a coin remains relatively stable over time. Such a crypto currency would be usable as a store of value and as a (primary) medium of exchange.
I'd love to see that "infinite supply crypto coin", but unfortunately I'm much less optimistic that it would become as popular as Bitcoin. It wouldn't be usable as an investment/speculation vehicle, and that's probably the main use of Bitcoin right now.
What I mean by "hard" in this context is that its supply is constrained. If you look a fiat currency it can (and is) produced in whatever volume necessary by the central bank, in order to avoid a fall in prices. Gold has a similar (but distributed) mechanism: when the gold price goes up people mine more gold, increasing the money supply.
Note that that property of gold works even if it's the primary medium of exchange: if there is too much deflation then an ounce of gold will buy you more goods and services, making it more worthwhile to mine it - which in turn increases the money supply and acts as a counterforce to price deflation.
But this is obviously a flaw in the design of Bitcoin, not in crypto currencies generally. It should be possible to create one with potentially infinite supply, but where the cost of mining a coin remains relatively stable over time. Such a crypto currency would be usable as a store of value and as a (primary) medium of exchange.
I'd love to see that "infinite supply crypto coin", but unfortunately I'm much less optimistic that it would become as popular as Bitcoin. It wouldn't be usable as an investment/speculation vehicle, and that's probably the main use of Bitcoin right now.
Krugman and Stross base their critique on Bitcoin's libertarian appeal, as if they took the promises of a few cypherpunks as reliable predictions.
Those in Krugman and Stross's "libertarianism is evil" camp should take heart that some people out there think Bitcoin is a huge win for developing economies, and will cause only incremental disruption for places like the EU or US.
For the rich countries: Governments have many tools in their belt before they just lie down and accept, say, universal tax fraud, or the end of monetary policy. People interested in tax policy (sometimes very) slowly come up with good ideas to reduce fraud, like putting down the SSN of all claimed dependents (which made a lot of children disappear one year, but jumped revenues), or double reporting of W-2s. They likely wouldn't just roll over if we moved to BTC.
For the poor countries: A better medium of exchange, allowing cheaper remittances, easier cross border trade, or a relatively more reliable store of value than local currency is an enormous win.
There are lots of options going forward. Bitcoin could be a passing fad. Bitcoin could liberate the economically oppressed while providing little more than a nice toy for those in wealthy countries. Bitcoin could destroy monetary policy and lead to barricades of wealth while destroying the capacity of governments to benefit their most vulnerable citizens.
But it's not safe to make moral approbations based on picking one of these uncertain results and assuming it is inevitable (especially, IMHO, by picking the most outlandish of the three).
Those in Krugman and Stross's "libertarianism is evil" camp should take heart that some people out there think Bitcoin is a huge win for developing economies, and will cause only incremental disruption for places like the EU or US.
For the rich countries: Governments have many tools in their belt before they just lie down and accept, say, universal tax fraud, or the end of monetary policy. People interested in tax policy (sometimes very) slowly come up with good ideas to reduce fraud, like putting down the SSN of all claimed dependents (which made a lot of children disappear one year, but jumped revenues), or double reporting of W-2s. They likely wouldn't just roll over if we moved to BTC.
For the poor countries: A better medium of exchange, allowing cheaper remittances, easier cross border trade, or a relatively more reliable store of value than local currency is an enormous win.
There are lots of options going forward. Bitcoin could be a passing fad. Bitcoin could liberate the economically oppressed while providing little more than a nice toy for those in wealthy countries. Bitcoin could destroy monetary policy and lead to barricades of wealth while destroying the capacity of governments to benefit their most vulnerable citizens.
But it's not safe to make moral approbations based on picking one of these uncertain results and assuming it is inevitable (especially, IMHO, by picking the most outlandish of the three).
I had recently thought about this very topic, and having spent just a bit more time than Krugman on it, and knowing a bit more about bitcoin, I find it somewhat interesting that we arrived at drastically different opinions about the morality of it. I have a rather more positive (haha, pun intended) take on it given what has happened with the conventional monetary system, one that Krugman and any mainstream economist would probably agree with: the system is (largely) broken, and we must look for solutions. If Bitcoin is the technologist's experimental solution, it is worth embracing because it delivers on change. Krugman's solutions will focus more on government force as a constraining framework, instead of extensions of innovation---but I believe at the core of it all, the "libertarians" he decries are also the same people he would agree with on the utter folly of our current banking/finance dominated economy.
My expanded thoughts can be read here: https://medium.com/technology-meets-policy/fd097809f88f
My expanded thoughts can be read here: https://medium.com/technology-meets-policy/fd097809f88f
I've hit a paywall that can be disabled with real dollars. Oh the sense of irony.
That's why I invest only in Dogecoin.
Here's another interesting (though imperfect) way of thinking about bitcoin: it's a decentralized corporation, where bitcoins are ownership shares and the business is money transfer, like a decentralized Western Union. And for further thought, could other types of businesses also be structured in this way?