An early obituary for bitcoin

By Edward Hadas
January 8, 2014

Bitcoin is not over yet. But the pseudo-currency is close enough to collapse to merit an early retrospective.

My prediction is controversial. Many fervent fans are persuaded that this government-free currency is for real. Their ardour may keep it going for a while, but equally bitcoin could disappear very quickly – that’s the way with speculative bubbles. So now is the moment to learn some economic lessons before the whole phenomenon is forgotten. Here are five.

Money without government appeals to people without law.

Legal tender has the backing of the issuing state. The government has a proprietary interest in maintaining a reliable currency. It also has the necessary powers to do so. It can regulate lending institutions, pursue fraud and create new money to keep the system afloat.

Bitcoin has none of that protection. On the contrary, governments are either hostile or hands-off. For anyone in the legal economy, the lack of official support is a significant negative. For anyone in the illegal economy, though, the extra-legal status is a positive. Unsurprisingly, the only real business actually to rely on bitcoin – not merely issue press releases about planning to accept the tokens – has been Silk Road, a now-closed electronic exchange for illegal drugs.

Speculative fever can alight on almost anything.

Bitcoin is a pretty unlikely target. After all, the more the value of the would-be currency changes, the less it looks like a real currency – so the more liable it is to lose all value whenever the speculators get tired or wise. David Yermack of New York University’s Stern School of Business explained in a recent paper that the unstable value of bitcoin – in the last three months, its dollar price has quadrupled, then almost halved and increased by about half – leaves it without two of the three basic attributes of a currency. Bitcoin is neither a relatable store of value nor a helpful unit of account.

Yermack kindly says bitcoin satisfies the third attribute – it can be, and occasionally has been, a medium of exchange. But if speculators were thinking clearly, they would stay away from any supposed money which banks don’t accept. After all, banks are involved in almost all exchanges in today’s economies.

The current monetary system is worth complaining about.

Bitcoin is the wrong answer to a good question: what can be done to make the monetary system less crazy? After so many banks needed to be rescued in 2008, and after five subsequent years of weird monetary policy, it’s clear that the question is legitimate. Something is badly wrong.

People can be excused for thinking that governments, including central banks, have run the money system so poorly that non-governmental money might be better, but that is the wrong answer. The only practical right answer is to improve the government-run monetary system.

Central banks seem to have learned how to reduce consumer price volatility, which was the scourge of the first decades of purely fiat money. Now the monetary authorities need to figure out how to reduce the volatility of asset prices, credit flows and foreign exchange rates. And the base interest rates should be high enough to give savers a real return.

Money is misunderstood.

Admittedly, money is complicated. It is a social token as well as an economic tool. It is a store of value, but its own value shifts constantly. It is considered a safe and solid asset – “like money in the bank” – but banks cannot really promise always to make good on legitimate demands to liquidate accounts.

I sympathise with anyone who does not want to try to understand how money works, but monetary ignorance can be dangerous. Many bitcoin investors will find that out, to their personal cost.

The whole economy paid dearly for similar misunderstandings by central bankers and regulators. They did not really consider the risks of speculation and wild credit creation by non-governmental financial institutions. If they had, there would have been no need afterwards to turn so many of them into quasi-governmental financial institutions.

Too much entrepreneurial energy is wasted.

Bitcoin is basically idle speculation, but it has inspired a great deal of skilled work. This small business – total value of a mere $100 million a year ago, now about $10 billion – has generated scores of websites and seemingly unlimited quantities of enthusiastic and evangelistic commentary. The original programmer, the producers of new bitcoins and the creators of a remarkable number of sophisticated bitcoin exchanges are all are very good.

A society in which no project ever attracted this sort of attention, intelligence and ambition would be moribund. The bitcoin mania shows that ours is still quite alive. But it is a bit discouraging to see so much of what is good in our economy directed to something so misguided.

45 comments

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A society in which (apparently) nobody else has noticed that Bitcoin is actually an experiment with a built-in termination date probably deserves all the monetary turmoil it gets.

The only current incentive for anybody to clear a Bitcoin transaction is that he or she gets rewarded with a commission, in the form of a “mined” Bitcoin. Eventually, after the last of the finite predetermined number of Bitcoins has been mined, that commission will be withdrawn. Then, the current experiment stops.

After that date, all the people donating computer time to clearing Bitcoin transactions will need to either a) be philanthropists (unlikely, given the greed that motivates them at the moment), or b) charge a commission to retailers and hope to compete with the credit card giants on fees, security and service. The first seems unlikely and the last two are nowhere at the moment.

Posted by Ian_Kemmish | Report as abusive

I have no incentive to use bitcoin. I would prefer to clear my transactions transparently. Bitcoins are a murky miasma of risk without reward.

Posted by foxmountain | Report as abusive

or c) unwillingly doing so, as script kiddies break into their systems and use them for Bitcoin mining as the rotten parasites they are.

Posted by Locoluis | Report as abusive

Ian_Kemmish, you need to do some more research before so confidently predicting Bitcoin’s demise. The date you’re talking about is around 2140, and if Bitcoin still exists at that point, transaction volume will likely be large.

Miners receive the block reward, but also transaction fees. As volume increases, these small fees will add up to an amount that offsets the diminishing block reward, so people will still have incentive to mine.

Posted by murbul | Report as abusive

I guess all I would say is that there is virtually no currency that is “backed” by anything on the planet right now, Bitcoin is just as arbitrary as the debt-instruments we call the US Dollar.

Posted by elaineX | Report as abusive

Mr. Hadas, apparently you’ve missed the entire point of Bitcoin. Currency is just one application for this system. It is a consensus based public ledger system that can be used to authenticate transactions in a decentralized way. You mention that money is misunderstood, well I think you misunderstood Bitcoin. I think not enough entrepreneurial energy has gone into Bitcoin. Wouldn’t you want to invest in a system that reduces transaction costs AND reduces risk?

There is a lot of excitement and that’s why you’re seeing speculators exchanging their dollars for Bitcoin. The excitement is across the board, even criminals. But crime is symptomatic of social problems, not cryptocurrency.

Using this system for currency is a breath of fresh air compared to the crippling high cost of doing business in traditional capital markets. Even if you cite price volatility as a risk, you can still take advantage of Bitcoin to allocate capital around the world by momentarily converting it to Bitcoin, making your transactions, then converting it back to your local currency.

Your obituary on Bitcoin is fraught misconceptions about what Bitcoin actually is and how it works. Please stop leading people astray.

Posted by Enion | Report as abusive

1) $100 million a year ago, now about $10 billion
2) current monetary system is worth complaining about
3) Money is misunderstood, except when it’s peer to peer opensource with a public transaction ledger
4) Money without government, the printing of 1 trillion of american dollars last year by the fed, is the smartest thought on the planet. Didi I ask for my assets to be devalued to the point of a gallon of milk costing 7 dollars?
5) Cryptocurrencies are going to democratize financial transactions and take the power away from the corporations that run the world. They are going to give that power back to the people.

Posted by UScitizentoo | Report as abusive

Edward, your ignorance is astounding.

I can promise you more criminal activity exists using Dollars than bitcoins. Go to your local ghetto cornet, Do you think the crack and meth dealers are taking bitcoins? or dollars?

To your point referencing silk road, again you are wrong. There are several sites from gambling to other black market sites, including an exact duplicate of silk road, one called road silk, one that the owner stole all the money called “The Sheep,” one called Tormarket that is thought to be by the same ripoff artist, bitcoinpoker.com, just-dice.com, and that is just for starters. there are plenty of others

Why not do a little research before you write and pretend to know of what you speak?

When you can get past those 2 points, I’ll proceed to rip the rest of your flawed pseudo-journalist piece of garbage apart.

You’ve been schooled as being highly ignorant to reality. Enjoy your day

Posted by BearDown1 | Report as abusive

Mr. Hadas, apparently you’ve missed the entire point of Bitcoin. Currency is just one application for this system. It is a consensus based public ledger system that can be used to authenticate transactions in a decentralized way. You mention that money is misunderstood, well I think you misunderstood Bitcoin. I think not enough entrepreneurial energy has gone into Bitcoin. Wouldn’t you want to invest in a system that reduces transaction costs AND reduces risk?

There is a lot of excitement and that’s why you’re seeing speculators exchanging their dollars for Bitcoin. The excitement is across the board, even criminals. But crime is symptomatic of social problems, not cryptocurrency.

Using this system for currency is a breath of fresh air compared to the crippling high cost of doing business in traditional capital markets. Even if you cite price volatility as a risk, you can still take advantage of Bitcoin to allocate capital around the world by momentarily converting it to Bitcoin, making your transactions, then converting it back to your local currency.

Your obituary on Bitcoin is fraught misconceptions about what Bitcoin actually is and how it works. Please stop leading people astray.

Posted by Enion | Report as abusive

Mr. Hadas, apparently you’ve missed the entire point of Bitcoin. Currency is just one application for this system. It is a consensus based public ledger system that can be used to authenticate transactions in a decentralized way. You mention that money is misunderstood, well I think you misunderstood Bitcoin. I think not enough entrepreneurial energy has gone into Bitcoin. Wouldn’t you want to invest in a system that reduces transaction costs AND reduces risk?

There is a lot of excitement and that’s why you’re seeing speculators exchanging their dollars for Bitcoin. The excitement is across the board, even criminals. But crime is symptomatic of social problems, not cryptocurrency.

Using this system for currency is a breath of fresh air compared to the crippling high cost of doing business in traditional capital markets. Even if you cite price volatility as a risk, you can still take advantage of Bitcoin to allocate capital around the world by momentarily converting it to Bitcoin, making your transactions, then converting it back to your local currency.

Your obituary on Bitcoin is fraught misconceptions about what Bitcoin actually is and how it works. Please stop leading people astray.

Posted by Enion | Report as abusive

Take your antiquated ideology elsewhere. In the meantime, the rest of us will seek ways to escape the stranglehold of the banking sector.

Posted by NoBleedinIdea | Report as abusive

If you focus on the Bitcoin price you have miss the idea behind it.

Bitcoin is an amazing discovery. A group of untrusted computers can agree on a public ledger… currently used to track a “currency” called Bitcoin.

Cryptocurrency are not new but it’s the first time we get decentralized… no site web to shut down, no company to sue, no individual to arrest. That alone is not something simple, read how the blockchain works and you understand what I means.

If the price overspeculate? Probably!
Will bitcoin die? I don’t see how, as long as 2 people or more maintain the ledger it’s a working system to tracking who own what. Can be use to tracking company holding for instance.

Posted by Zyo | Report as abusive

If I understand the article correctly, the author is saying “I disagree ideologically with BitCoin, and therefore it is going to fail”.

I hope they don’t make all of their investment decisions on that basis.

Posted by JRL2014 | Report as abusive

@ Ian_Kemmish – There are indeed small transaction fees paid to Bitcoin miners. The idea is that by the time the last bitcoin is mined in 2140, the protocol will have long since reached a level of adoption where those tiny fees add up to more than the block reward. A miner can choose which transactions to include in a block, and so the market will determine what is a fair price, and fees will be added accordingly. It’s up to the person sending bitcoin whether to include a fee, and if so, how much. Miners will very quickly pick up transactions with larger fees included, and may never process one without. Another thing to consider is the variable difficulty of solving blocks. If processing transactions is too costly to be worthwhile, miners will shut down. But less computing power results in lower difficulty, so an equilibrium will be reached. Experiment or no, the system is pretty ingenious.

Posted by EvilKingWilson | Report as abusive

Money without government appeals to people without law.

Lets try this on a few other things:
“Sexual intercourse without government appeals to people without law.”
“Gatherings without government appeals to people without law.”
“Education without government appeals to people without law.”
“Church without government appeals to people without law.”

Posted by hayek3 | Report as abusive

Dear author

you actually made me sign up for the commenting system on this site. I have to suspect that was your intent. Anyone with the slightest understanding of how Bitcoin works has to object to those lines of loose assumptions and flimsy reasoning. Congratulations!

If you take your profession seriously, please take the time to understand the subject you are writing about or write about something else.

Posted by kny | Report as abusive

Edward, You have no idea what you are talking about.

Let me start by saying that I am offended by your insinuation that those involved in the bitcoin revolution are wasting entrepreneurial energy. That is like saying those early proponents of the internet were wasting their energy.
If you understood just a little bit about what bitcoin is you would understand your mistake.

So let me explain to yet another old school “economist” who has no idea how to perceive new paradigm shifting technology except through their standard old financial lens.

To say that bitcoin is only a currancy is liek saying the internet is just a fancy fax machine called “email”.

bitcoin is a protocol. Bitcoin (capital B)the currancy is only the first application to use this protocol.

The bitcoin protocol solves one of the most important computer science problems in the history of computing, and maybe all of human history. It is called the Byzantine Generals problem. and it revolves around the concept (and this goes WAY beyond money) of reaching perfect consensus, that is 100% trust, 100% absolute perfect consensus WITHOUT using a central trust authority. This has implications in every aspect of human society.
bitcoin protocol solves this problem. for the first time in human history. again the implications are profound.
Everything that is trust based has traditionally needed some type of central trust authority to provide that trust. No longer. Using a concept called proof of work, and some clever cryptography, Satoshi elegantly solved this problem.
I will not go into the details and bore you but his original whitepaper is available on the web, and there are plenty of explanations of the byzantine problem as well.

let me just off the top of my head give you one possible application. Decentralized, distributed fair voting systems, controlled by no one, regulated by no one, manipulable by no one. 100% fair 100% trust 100% no more rigged elections. that’s just one possibility.

There are thousands of applications.

But lets forget that whole thing for a moment.
The volatility of the currency, … by design. How else do you get people to rapidly adapt a new technology and build your initial network (and remember the currency is only the tip of the iceberg, and the first application – the network that it runs on, formed by all of the people who use bitcoin is the important part) how else do you spread that other than by greed and profit ? Its by design.
Now .. this can be addressed later, by both normal stabilizing market forces, and by the fact that it is PROGRAMABLE money .. we can also solve its deflationary aspects that you economists have a hard time grappling with … just reprogram it to have a secondary unit of value pegged a layer on top of it which is mathematically tied to some benchmark of the total overall global bitcoin economy … this will keep the purchasing power of this new unit stationary while the value of the underlying bitcoins deflates. (deflation is only bad in the current fiat system – get over it)

But forget all that too .. here is the real driving force that will seal the deal for crypto currency:
1 billion (aprox) people in the world have bank accounts or any real connection to the global financial system.
2 billion more have computers and internet and can simply download a free application, and instantly be connected to global finance. they can send and receive value instantly to anyone anywhere in the world, for free. did I mention instantly and free?
Furthermore there are an additional aprox 1 billion with cell phones that can download an app and instantly be connected to the global financial system. This group of individuals in some areas are already doing something similar on a local scale using pre-paid minutes sent back and fourth between phones.

Now on to your points:
Money without govt is for people without laws.
Oh really? They said the same thing about the internet in the 90′s …its just for criminals .. a den of pornographers and thieves. … guess what, the benefits outweigh the problems. as has been proven.

Speculative fever.
By design. There is no other way to spread a disruptive technology quickly especially one that governments have an interest in stopping. Greed and Profit – working according to plan. Keep on speculating and building the distributed consensus network.

Bitcoin is the wrong answer to the current problem.
I won’t even bother with this one since you didn’t bother to understand what bitcoin is. fair?

Money is misunderstood ..and you sympathize because its so hard and complicated. .. REALLY .,.. you didn’t even try to research bitcoin before writing this article, you hypocrite! I sympathize with you though !

Wasted entrepreneurial energy ? I am offended, and I am sure many other would be too. Foolish statement to make when you have not taken the time to understand the technology, kind of like the guys in the 90′s who said the internet was a waste of energy.

Bottom line, you are writing about something you don’t understand and trying to apply economic rules you do understand to it. not going to work.

Posted by ryan_p | Report as abusive

Edward, You have no idea what you are talking about.

Let me start by saying that I am offended by your insinuation that those involved in the bitcoin revolution are wasting entrepreneurial energy. That is like saying those early proponents of the internet were wasting their energy.
If you understood just a little bit about what bitcoin is you would understand your mistake.

So let me explain to yet another old school “economist” who has no idea how to perceive new paradigm shifting technology except through their standard old financial lens.

To say that bitcoin is only a currancy is liek saying the internet is just a fancy fax machine called “email”.

bitcoin is a protocol. Bitcoin (capital B)the currancy is only the first application to use this protocol.

The bitcoin protocol solves one of the most important computer science problems in the history of computing, and maybe all of human history. It is called the Byzantine Generals problem. and it revolves around the concept (and this goes WAY beyond money) of reaching perfect consensus, that is 100% trust, 100% absolute perfect consensus WITHOUT using a central trust authority. This has implications in every aspect of human society.
bitcoin protocol solves this problem. for the first time in human history. again the implications are profound.
Everything that is trust based has traditionally needed some type of central trust authority to provide that trust. No longer. Using a concept called proof of work, and some clever cryptography, Satoshi elegantly solved this problem.
I will not go into the details and bore you but his original whitepaper is available on the web, and there are plenty of explanations of the byzantine problem as well.

let me just off the top of my head give you one possible application. Decentralized, distributed fair voting systems, controlled by no one, regulated by no one, manipulable by no one. 100% fair 100% trust 100% no more rigged elections. that’s just one possibility.

There are thousands of applications.

But lets forget that whole thing for a moment.
The volatility of the currency, … by design. How else do you get people to rapidly adapt a new technology and build your initial network (and remember the currency is only the tip of the iceberg, and the first application – the network that it runs on, formed by all of the people who use bitcoin is the important part) how else do you spread that other than by greed and profit ? Its by design.
Now .. this can be addressed later, by both normal stabilizing market forces, and by the fact that it is PROGRAMABLE money .. we can also solve its deflationary aspects that you economists have a hard time grappling with … just reprogram it to have a secondary unit of value pegged a layer on top of it which is mathematically tied to some benchmark of the total overall global bitcoin economy … this will keep the purchasing power of this new unit stationary while the value of the underlying bitcoins deflates. (deflation is only bad in the current fiat system – get over it)

But forget all that too .. here is the real driving force that will seal the deal for crypto currency:
1 billion (aprox) people in the world have bank accounts or any real connection to the global financial system.
2 billion more have computers and internet and can simply download a free application, and instantly be connected to global finance. they can send and receive value instantly to anyone anywhere in the world, for free. did I mention instantly and free?
Furthermore there are an additional aprox 1 billion with cell phones that can download an app and instantly be connected to the global financial system. This group of individuals in some areas are already doing something similar on a local scale using pre-paid minutes sent back and fourth between phones.

Now on to your points:
Money without govt is for people without laws.
Oh really? They said the same thing about the internet in the 90′s …its just for criminals .. a den of pornographers and thieves. … guess what, the benefits outweigh the problems. as has been proven.

Speculative fever.
By design. There is no other way to spread a disruptive technology quickly especially one that governments have an interest in stopping. Greed and Profit – working according to plan. Keep on speculating and building the distributed consensus network.

Bitcoin is the wrong answer to the current problem.
I won’t even bother with this one since you didn’t bother to understand what bitcoin is. fair?

Money is misunderstood ..and you sympathize because its so hard and complicated. .. REALLY .,.. you didn’t even try to research bitcoin before writing this article, you hypocrite! I sympathize with you though !

Wasted entrepreneurial energy ? I am offended, and I am sure many other would be too. Foolish statement to make when you have not taken the time to understand the technology, kind of like the guys in the 90′s who said the internet was a waste of energy.

Bottom line, you are writing about something you don’t understand and trying to apply economic rules you do understand to it. not going to work.

Posted by ryan_p | Report as abusive

Edward, You have no idea what you are talking about.

Let me start by saying that I am offended by your insinuation that those involved in the bitcoin revolution are wasting entrepreneurial energy. That is like saying those early proponents of the internet were wasting their energy.
If you understood just a little bit about what bitcoin is you would understand your mistake.

So let me explain to yet another old school “economist” who has no idea how to perceive new paradigm shifting technology except through their standard old financial lens.

To say that bitcoin is only a currancy is liek saying the internet is just a fancy fax machine called “email”.

bitcoin is a protocol. Bitcoin (capital B)the currancy is only the first application to use this protocol.

The bitcoin protocol solves one of the most important computer science problems in the history of computing, and maybe all of human history. It is called the Byzantine Generals problem. and it revolves around the concept (and this goes WAY beyond money) of reaching perfect consensus, that is 100% trust, 100% absolute perfect consensus WITHOUT using a central trust authority. This has implications in every aspect of human society.
bitcoin protocol solves this problem. for the first time in human history. again the implications are profound.
Everything that is trust based has traditionally needed some type of central trust authority to provide that trust. No longer. Using a concept called proof of work, and some clever cryptography, Satoshi elegantly solved this problem.
I will not go into the details and bore you but his original whitepaper is available on the web, and there are plenty of explanations of the byzantine problem as well.

let me just off the top of my head give you one possible application. Decentralized, distributed fair voting systems, controlled by no one, regulated by no one, manipulable by no one. 100% fair 100% trust 100% no more rigged elections. that’s just one possibility.

There are thousands of applications.

But lets forget that whole thing for a moment.
The volatility of the currency, … by design. How else do you get people to rapidly adapt a new technology and build your initial network (and remember the currency is only the tip of the iceberg, and the first application – the network that it runs on, formed by all of the people who use bitcoin is the important part) how else do you spread that other than by greed and profit ? Its by design.
Now .. this can be addressed later, by both normal stabilizing market forces, and by the fact that it is PROGRAMABLE money .. we can also solve its deflationary aspects that you economists have a hard time grappling with … just reprogram it to have a secondary unit of value pegged a layer on top of it which is mathematically tied to some benchmark of the total overall global bitcoin economy … this will keep the purchasing power of this new unit stationary while the value of the underlying bitcoins deflates. (deflation is only bad in the current fiat system – get over it)

But forget all that too .. here is the real driving force that will seal the deal for crypto currency:
1 billion (aprox) people in the world have bank accounts or any real connection to the global financial system.
2 billion more have computers and internet and can simply download a free application, and instantly be connected to global finance. they can send and receive value instantly to anyone anywhere in the world, for free. did I mention instantly and free?
Furthermore there are an additional aprox 1 billion with cell phones that can download an app and instantly be connected to the global financial system. This group of individuals in some areas are already doing something similar on a local scale using pre-paid minutes sent back and fourth between phones.

Now on to your points:
Money without govt is for people without laws.
Oh really? They said the same thing about the internet in the 90′s …its just for criminals .. a den of pornographers and thieves. … guess what, the benefits outweigh the problems. as has been proven.

Speculative fever.
By design. There is no other way to spread a disruptive technology quickly especially one that governments have an interest in stopping. Greed and Profit – working according to plan. Keep on speculating and building the distributed consensus network.

Bitcoin is the wrong answer to the current problem.
I won’t even bother with this one since you didn’t bother to understand what bitcoin is. fair?

Money is misunderstood ..and you sympathize because its so hard and complicated. .. REALLY .,.. you didn’t even try to research bitcoin before writing this article, you hypocrite! I sympathize with you though !

Wasted entrepreneurial energy ? I am offended, and I am sure many other would be too. Foolish statement to make when you have not taken the time to understand the technology, kind of like the guys in the 90′s who said the internet was a waste of energy.

Bottom line, you are writing about something you don’t understand and trying to apply economic rules you do understand to it. not going to work.

Posted by ryan_p | Report as abusive

Ian
Actually there will always be built in rewards to the miners and hashers running nodes, tiny transaction fees are paid when value is sent from one address to another and this gets paid to those nodes that work to verify the transactions .. this will happen forever.

Posted by ryan_p | Report as abusive

@ Ian_Kemmish – There are indeed small transaction fees paid to Bitcoin miners. The idea is that by the time the last bitcoin is mined in 2140, the protocol will have long since reached a level of adoption where those tiny fees add up to more than the block reward. A miner can choose which transactions to include in a block, and so the market will determine what is a fair price, and fees will be added accordingly. It’s up to the person sending bitcoin whether to include a fee, and if so, how much. Miners will very quickly pick up transactions with larger fees included, and may never process one without. Another thing to consider is the variable difficulty of solving blocks. If processing transactions is too costly to be worthwhile, miners will shut down. But less computing power results in lower difficulty, so an equilibrium will be reached. Experiment or no, the system is pretty ingenious.

Posted by EvilKingWilson | Report as abusive

Step out from behind the curtain whoever you are!

Obviously, the real Mr. Hadas did NOT write this, since it makes sense.

Posted by EconCassandra | Report as abusive

@Ian_Kemmish

You are forgetting about voluntary transaction fees which incentivize miners in the first place. A reward for “mining” a block is 25 bitcoins, but the miner actually receives slightly more (e.g. 25.15666). This extra amount is the added amount of transaction fees that were spent in the block. If the global community is still using bitcoin on a massive scale even after all bitcoins have been mined, the sheer number of transaction fees will insure that plenty of computer time will be spent on the network.

Posted by Joudan | Report as abusive

Yawn. I’ll enjoy reading this in 10 years. How long before we can expect a retraction?

You’re not to be blamed though, it seems older econimics types find it hard to spot disruptive technology innovations early-on.

Bitcoin is a protocol and a solution to a long standing computer science problem. A genius one at that. It’s not going anywhere. “Money” is just its current application.

You’re on the wrong side of history, sorry to say.

Posted by Tristan_Winters | Report as abusive

@Ian_Kemmish

What a waste of 3 paragraphs. Once all bitcoins are mined, miners will be rewarded with transaction fees (which are currently in place).

Posted by Sterlingz | Report as abusive

The same was said for cell phones, personal computers, and the automobile. All wonders brought about by the free market.

In a economic and financial system that is crumbling under the weight of government interference stifling growth, Bitcoin offers to relieve that pressure and innovate.

Though the Crypto system might dramatically change in the coming years, it is anything but misguided.

Posted by Flightdeck1 | Report as abusive

The first comment says, “Bitcoin is actually an experiment with a built-in termination date”, but that’s simply not true.

While the mining reward will eventually end in the year 2140, the mining fees will continue to reward miners. The fact that the block reward halves every 4 years is very much a desirable feature as it ensures that a increasingly limited supply of coins is entering the market, ensuring deflation of the value. Miners will continue to be rewarded for mining indefinitely, even after the block reward has ended.

Posted by Kevlar-FTC | Report as abusive

To the first commenter. When all the Bitcoin are mined, Miners still make money off of transaction fees. There is still an economic incentive to process transactions, at near zero costs.

Posted by Ren23 | Report as abusive

Ian_Kemmish: Your statement is both true, and untrue.

1) The experiment “ends” in 2140, so there’s no need to panic.

2) Transaction fees are *already* built into the protocol. The way it works today, you can pay for faster confirmation by adding a few pennies to the transaction.

You can see a chart of this here:

https://blockchain.info/charts/transacti on-fees

The reason that fees are going down is because: 1) the hash rate of the network is increasing faster than transaction volume, and 2) the value of Bitcoin is rising with respect to central bank currencies.

https://blockchain.info/charts/transacti on-fees-usd

Number of transactions:

https://blockchain.info/charts/n-transac tions

Hash rate:

https://blockchain.info/charts/hash-rate

Compared to transactions fees in the banking network, this is a pretty good explanation of what excites people about Bitcoin in the first place: it’s faster, cheaper and more secure than the existing system…

The last thing I’ll mention is that nobody needs to GUESS what’s going on in the Bitcoin economy, or perhaps more accurately, we don’t need to guess the same things that we’re used to, i.e. all of the data I’ve provided to you is incontrovertible and publicly available.

Posted by tmornini | Report as abusive

There is so much misinformation and misunderstanding about what Bitcoin is and is not, that it’s impossible to render an informed opinion without substantial effort invested into understanding all of the details of Bitcoin the protocol, payment system and unit of account.

There’s plenty of hype and vilification. Where’s the objective reporting? Articles such as this in the MSM seem to be puff pieces and nothing more. Meaty journalism, positive or negative, without unwarranted prognostication, that would be welcome.

Posted by binaryphile | Report as abusive

@UScitizentoo
(4) With pre-set final quantity it has many signs of bein’ play on Ponzi scheme from the start (inverse, deflational, but nonetheless). And you do not agree with one of major money functions – taxes. Otherwise bc is on par in value with cauri shells or tulips.
(5) If you slept for last few years, then let me tell you – most of ‘mining’ last year were done by firms. If Google or other BigBoy wanted to took it as goal – they could OWNED bc generation. Same can happen with any new ‘mineable’ cryptocurrency.

Posted by chyron | Report as abusive

I’ll first start by saying that members of the cryptocurrency community disagree with pretty much all your points. Nevertheless, opinions are opinions, and many members of the cryptocurrency community have a completely different perspective from you, so the conflicts are to be expected.

However, your very first point, “Money without government appeals to people without law”, is a bit hollow. Taken as just a phrase, one could make the accusation that it’s intentionally misguiding. Swap “Money without government” with “Anything of value” and the phrase still holds up. People without law simply pursue their interests (whatever they are) and are ignoring/violating the law because they perceive it as an obstruction to their interests.

In truth, your entire article could be summed up as “Uncertain thing is uncertain”. Why are criminals the only ones who went all-in? Because legal businesses don’t want to take the risk. Why is there speculative fever? Because the value is bouncing up and down like a pogo stick.

Why do you consider the attempt to un-fiat currency a bad idea? That entrepreneurial talent is being wasted? That the currency is invalid because banks don’t accept it? Or that people are rushing to their dooms by supporting Bitcoin? It’s because you’re leaning on the failure side of risk.

There’s nothing particularly wrong with taking that stance; after all, security and steady growth is a pretty darn popular business plan, especially after 2008. However, such a stance also runs directly against risky ventures. Like Bitcoin.

Perhaps a suitable comparison would be this: pretend that the nation of Bitcoinia was founded in some tract of the Sahara desert that the neighbours didn’t mind losing control over. They settle down, create a population, and then start minting currency. Would it not be a similar situation? Such a currency would be literally based off sand and hot air. Such a small nation could just collapse completely at any moment.

However, there’s still speculation: what if there are oil reserves under those dunes? Someone finds a single oil well, and suddenly the economy of Bitcoinia explodes. Speculators flock from all over and people start trying to figure out how much oil is beneath Bitcoinia. Bitcoinia’s currency takes a massive spike in value, and people start immigrating to the nation (for whatever reason). But then people get frustrated because in the 20% of Bitcoinia they’ve prospected (fake number) they only found one other oil field. Bitcoinia’s currency plummets again.

While this is not the example the cryptocurrency community wants, it’s still worth considering. Instead of basing Bitcoinia’s population off an area of land, it’s based on the raw quantity of individuals connected to the network through either transactions or mining. Indeed, the entire system is practically based off trading volume. And, much like a small, fledgling nation, the currency isn’t going to be stable. Not this soon.

Bitcoin is still really, really young, especially compared against nations with centuries if not millennia of history. Four years is simply too short of a time frame to judge it as dead or alive.

Your piece is valuable for urging caution, but I believe it is not yet worth denouncing Bitcoin, nor praising it as a new age.

Posted by Vsin | Report as abusive

Mr. Hadas, apparently you’ve missed the entire point of Bitcoin. Currency is just one application for this system. It is a consensus based public ledger system that can be used to authenticate transactions in a decentralized way. You mention that money is misunderstood, well I think you misunderstood Bitcoin. I think not enough entrepreneurial energy has gone into Bitcoin. Wouldn’t you want to invest in a system that reduces transaction costs AND reduces risk?

There is a lot of excitement and that’s why you’re seeing speculators exchanging their dollars for Bitcoin. The excitement is across the board, even criminals. But crime is symptomatic of social problems, not cryptocurrency.

Using this system for currency is a breath of fresh air compared to the crippling high cost of doing business in traditional capital markets. Even if you cite price volatility as a risk, you can still take advantage of Bitcoin to allocate capital around the world by momentarily converting it to Bitcoin, making your transactions, then converting it back to your local currency.

Your obituary on Bitcoin is fraught misconceptions about what Bitcoin actually is and how it works. Please stop leading people astray.

Posted by Enion | Report as abusive

@Ian_Kemmish You need to study how bitcoin mining actually works.

The experiment doesn’t “end” when the block reward goes down – transaction fees ramp up to compensate. Right now the block reward is an incentive to process blocks that otherwise would not contain nearly enough transactions to be profitable. It’s a bootstrapping mechanism.

Source: https://en.bitcoin.it/wiki/Mining#Reward

Posted by wbic16 | Report as abusive

It only takes one bank to start accepting it. It only takes one retailer to start accepting it. I agree that this may be unlikely but I disagree it is impossible.

Posted by BidnisMan | Report as abusive

The attraction with Bitcoin is that like Gold, the cost to mine additional units is substantial and approximates the market value after a short time. No money printing or devaluation by decree. That being said, sometimes devaluation is a good thing (for th economy, not pensioners) as it stimulates activity.

Posted by BidnisMan | Report as abusive

Money is a social protocol. Government is a social protocol. They co-exist easily in many forms and relationships.

Many forms of private money are issued (stocks, bonds, coupons, debit cards etc.) The money supply M0 is small relative to M3-M4 which is mostly private forms of money.

Posted by NickGogerty | Report as abusive

money is a social protocol. The story is discussed in http://www.thenatureofvalue.com section on money and value.

Posted by NickGogerty | Report as abusive

Ok. I never used bitcoin but I’ve been reading about it for over a year now. The fact that the first subheading in this article is about legality obviously means the writer is just trying to tarnish its reputation and prevent it form becoming popular. Yes bitcoin is used to circumvent the government but the same is true for government sponsored real money. More illegal activity and secrecy is done with real money long before bitcoin ever got started. So the issue of legality is moot.

If the only real business dedicated to bitcoin was silk road then why is bitcoin still here when silk road is gone? This is an attempt to misinform the reader who doesn’t bother to do research. Anybody doing reading this comment should do some research on bitcoin and find out who else is using it for legal purposes.

Posted by ike820 | Report as abusive

@Ian_Kemmish:

A transaction-fee bases system is already built into the protocols of most, if not all, of these crytpo-currencies. Much like credit card companies or ESCROW, the miners will take – and in some cases already do – a percentage of the transfers between two BTC (or whichever crypto-currency is being mined) wallets.

The fee amount is defined by the transacting parties. Miners secure the transaction and take their fee for doing so.

No, they haven’t thought of everything, but no one in history ever has. It’s an experiment, gentlemen. Someone saw what happened with the Financial institutions in 2008 and started an experiment. And it has evolved to address the issues that have come up.

BTC is a collection of nodes performing virtual work. These nodes are made up of mostly cluster farms (firms) participating in mining pools. For any entity to “own” BTC generation, they would need to be willing to invest $1,937,324,020.00 to do so, approximately. This is called the 51% Attack and it is monitored.

And there are plenty of places that accept my BTC (measured in mBTC’s now) as readily as cash that don’t involve drugs or illegal anything. The sales taxes were paid as well.

Before you stand up and argue so vehemently that there is nothing but failure and the end of days for BTC and crypto-currencies in general, consider that maybe… just maybe… the world is round.

Posted by W.G. | Report as abusive

Hadas make a real error here with his propositions about legal and illegal economies and their participants.

The problem is that he ignores the fact that big business and government consistently collude in favour of their shareholders and voters to the detriment of everyone else, and by extension, anyone on the ‘outside’ of the money making machine is discriminated and marginalised for the purposes of profit.

Corporations are required by law to follow shareholders’ interests, which inevitably ends up creating massive imbalances between those with power and those without, as the corporations exercise they ‘legal’ rights.

BItcoin is then first example of what is now know as a ‘decentralised autonomous corporation’ with stakeholders and shareholders engaged in an ad-hoc economy in which they are directly rewarded for the amount of effort and investment they put in.

Hadas doesn’t understand Bitcoin or its acolytes, and he hasn’t grasped the implications of the technology and what it’s capable of because he hasn’t understood it’s social and technical architecture properly.

Projects exist within the bitcoin blockchain like Mastercoin, which has created a decentralised exchange model (useful if you never want to deal with banks, the SEC, CTFC and other analogue regulatory institutions), BitShares and Protoshares for issuing share interests in burgeoning technology and Crypto-Stocks which issue other kinds of securities and equity in companies in the arena.

He makes the classic mistake of believing that ‘Legal companies in the legal economy behave legally (demonstrably false) and that people outside of an established framework do not behave legally’ (also demonstrably false).

The truth is that the bottom billion, who do not and cannot pay taxes, who are excluded from financial Services and support (a small example is Paypal in Kenya, but the issue is systemic and much broader in fact) are discriminated against by a system which cannot and will not change it’s fundamental interests to support them, and one of the key reasons for this is that the fiat issued, regulated monetary system is entirely caught up arms manufacturing, oil production and the drugs trade, and the biggest ‘shareholders’ routinely use institutions like the IMF and the World Bank to hold the third world to ransom.

Sorry Hadas, you couldn’t be more wrong in your assessment of bitcoin and its’ acolytes. PLEASE DO MORE RESEARCH.

Posted by richardboase | Report as abusive

Hadas make a real error here with his propositions about legal and illegal economies and their participants.

The problem is that he ignores the fact that big business and government consistently collude in favour of their shareholders and voters to the detriment of everyone else, and by extension, anyone on the ‘outside’ of the money making machine is discriminated and marginalised for the purposes of profit.

Corporations are required by law to follow shareholders’ interests, which inevitably ends up creating massive imbalances between those with power and those without, as the corporations exercise they ‘legal’ rights.

BItcoin is then first example of what is now know as a ‘decentralised autonomous corporation’ with stakeholders and shareholders engaged in an ad-hoc economy in which they are directly rewarded for the amount of effort and investment they put in.

Hadas doesn’t understand Bitcoin or its acolytes, and he hasn’t grasped the implications of the technology and what it’s capable of because he hasn’t understood it’s social and technical architecture properly.

Projects exist within the bitcoin blockchain like Mastercoin, which has created a decentralised exchange model (useful if you never want to deal with banks, the SEC, CTFC and other analogue regulatory institutions), BitShares and Protoshares for issuing share interests in burgeoning technology and Crypto-Stocks which issue other kinds of securities and equity in companies in the arena.

He makes the classic mistake of believing that ‘Legal companies in the legal economy behave legally (demonstrably false) and that people outside of an established framework do not behave legally’ (also demonstrably false).

The truth is that the bottom billion, who do not and cannot pay taxes, who are excluded from financial Services and support (a small example is Paypal in Kenya, but the issue is systemic and much broader in fact) are discriminated against by a system which cannot and will not change it’s fundamental interests to support them, and one of the key reasons for this is that the fiat issued, regulated monetary system is entirely caught up arms manufacturing, oil production and the drugs trade, and the biggest ‘shareholders’ routinely use institutions like the IMF and the World Bank to hold the third world to ransom.

Sorry Hadas, you couldn’t be more wrong in your assessment of bitcoin and its’ acolytes. PLEASE DO MORE RESEARCH.

Posted by richardboase | Report as abusive

Bitcoin is worthless as it is not accepted by wider society for monetary transactions. But it has raised an interesting point. Prior to 1971 the dollar was fixed at a price of $30 an ounce of gold and the US had to hold the equivalent amount of gold in its reserves to match the money in circulation.Nixon dropped this link in 1971 and since then we no longer have money that is actually worth anything (in theory you could have gone to the reserve with your dollars and asked to exchange them for gold). We now have worthless Fiat money which only works because we all accept it as legal tender which is how our govermnents are able to keep printing more of the stuff. the bubble will burst eventually when we are no longer able to keep up with our debt repayments. We are all participating in a giant Ponzi scheme run by our governments!

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

http://www.imdb.com/title/tt2325908/

Posted by Stelios2000 | Report as abusive

The wonderful thing about the free market is that it does not ask for permission.

Posted by bradsdb | Report as abusive

@Ian_Kemmish: The incentive will be keeping the network alive so that they can continue to reap its benefits. Mining hardware is already dirt cheap. Don’t you think that in 2040 (when the monetary incentive goes away) the cost of running the hardware to keep the network running will be extremely low? Wouldn’t it be worth retailers’ money (for example) to run hardware that supports the network to be able to accept payments via the network and not have to every pay another credit card fee? It’s a HUGE net gain for them.

Be a little more creative. There are selfish incentives beyond a direct monetary reward.

Posted by LeC | Report as abusive