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I read some criticisms of Bitcoin (including those from a previous HN post about Bitcoin) and one of the biggest criticisms from an economics perspective (if I

by wynand 16y ago

I read some criticisms of Bitcoin (including those from a previous HN post about Bitcoin) and one of the biggest criticisms from an economics perspective (if I understand correctly) is that the Bitcoin network is at the mercy of positive or negative feedback loops (hyper inflation or deflation). All current currencies are controlled by central bodies that can dampen the effects of these feedback loops. Does anyone with an economics background have an idea of how the Bitcoin network could be adapted to counteract these feedback loops? For example, perhaps the network should make the transfer of small amounts very liquid whilst the transfer of larger amounts becomes progressively more "viscous".

eof 16y ago
How is it at risk of a feedback loop in a way that other currencies aren't? It seems bitcoins defend specifically against hyper inflation by limiting the number of coins that will ever be produced.
- maurycy 16y ago
  Decreasing supply of a good with a constant or increasing demand, ensures its increasing value. The govt is able to control the supply of money.
- jerf 16y ago
  Real-world currencies have backing. The ability of dollars to hyperinflate or hyperdeflate is bounded by the fact they can be used to pay debts to the United States Government that are denominated in dollars. Their value recursively emanates out from there, but that's the base case. That's also why the fall of the US government would be pretty much immediately followed by the fall of dollars, as has happened to other government-backed currencies. Stripped of its backing, currencies completely collapse in practice. The recursive base case is gone and if the currency briefly holds on it's a Wile E Coyote off the cliff moment, and in the modern connected world I can't imagine it would be more than a few minutes. At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises. All the major world currencies have faced them in the past three years. But they didn't simply collapse because they have backing. I don't know what stops the first BitCoin currency crisis from completely collapsing the currency, because when BitCoin holders ask themselves, "Hey, what is this really good for?", I don't have an answer. I know what a dollar is good for: Not being put in jail by the United States Government due to unpaid debt. Ultimately, without trying to be too philosophical, dollars are backed with men with guns (and the privilege of them not being pointed at you). Contrary to apparently popular belief, currencies aren't merely arbitrarily-agreed-upon numbers that we all trade with. Every currency I know has some actual backing. Even the fancy electronic ones we've seen spontaneously develop online, they all have some form of local economy-appropriate backing. It isn't always "gold" (literal or electronic), but so far the "men with guns" approach has proved successful in the real world. BitCoin is an apparently-good design for the arbitrary number approach, but until it solves the backing problem I won't be putting one dime into it. As much as I don't particularly enjoy having the US government as my currency backing I do not see how going to a backing-free currency is the solution. The currency can still hyperinflate even if it is physically impossible to produce more by virtue of people raising all BitCoin prices as their confidence in the currency collapses. But instead of hyperinflation producing lots more BitCoins, then collapsing the economy, hyperinflation will simply directly collapse the economy as it takes ever increasing amounts of the BitCoins in the world to buy a service, until eventually even every BitCoin in the world isn't adequate. Hyperinflation is a symptom of lack of confidence in a currency, not a cause. (Of course observing hyperinflation can further decrease confidence, but the hyperinflation started in the first place because of lack of confidence.) BitCoin advocates tend to get very angry when I point this out. I think it's because they have no answer to this. The site used to have a FAQ that addressed this, but it just sort of mumbled words and now it's gone because it was actually better just to ignore the problem. My challenge would be to anyone who claims that currencies are somehow backing-free is show me the successful currency of any kind that really is just an arbitrary number with no backing that has reached any sort of significant size, shall we say, a million dollars or so worth of an economy? (All the electronic currencies like Microsoft Points are well above that size, for instance.) And I'll show the backing. It isn't always a physical item, especially in the electronic world, but it's always something that serves as a locally-appropriate backing. ("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.)
  - kiba 16y ago
    BitCoin advocates tend to get very angry when I point this out. I think it's because they have no answer to this Who got angry over this? I happily concede that bitcoin have no intrinsic value. ("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.) When the price of bitcoin rose so fast, it is only natural that a correction followed. At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises. Let see if your hypothesis bare this out.
    - jerf 16y ago
      The part you should have highlighted at the end is where I predict collapse, not where I predict it'll have a confidence issue at some point. There's no way BitCoin will avoid some sort of issue at some point and just monotonically increase in value forever and ever, amen. If nothing else, after its inevitable and mathematical wild success (cough) BitCoin will one day attract the attention of the IRS who will decide they need to tax it. If you manage to get that far without a confidence crisis, that's an automatic one. You'll lose a chunk of people for whom the primary draw was that the IRS didn't care about it. Confidence crisis isn't the question, collapse is. (And that's the gentle one. There's also "The US government has decided that BitCoins are primarily a money laundering operation" and it starts throwing people in jail for using them. I consider this a less likely outcome by far, but still on the table.) When I say confidence crisis, I do mean that as a distinct thing from a collapse; as I said, all currencies face confidence crises.
      - kiba 16y ago
        The part you should have highlighted at the end is where I predict collapse, Fair enough. Since your argument is so good, I linked to it on the bitcoin forum. http://www.bitcoin.org/smf/index.php?topic=4832.msg70583#new http://www.bitcoin.org/smf/index.php?topic=4832.msg70583#new I don't know who the bitcoin advocates that hate hearing this is coming from but the bitcoin community had always debate possible attack vectors and ways to counter it, if indeed it was a problem. Indeed, the government's response is a constant worry and there had been various opinions as to how big of a problem it is and how to win. Running away from problems does not help us or anybody. It's best to confront it head on.
- wynand 16y ago
  I don't know enough about economics to give a qualified answer but let me try. All currencies are vulnerable to feedback loops but governments can do things like change the interest rate to encourage/discourage spending. I don't understand how this would be possible with Bitcoin. I overlooked the Bitcoin limit - price inflation will certainly be limited through this mechanism. But I wonder if this might not cause prices to drop at a constant rate (since Bitcoins are so divisible) - this would include labor costs (although how wage stickiness would hold up to this remains to be seen).
maurycy 16y ago
Read about money creation[1]. It is not a conspiracy that it relies, simplifying, on debt. One wants to bind somehow an amount of money with the output. Right now, BitCoins ignore the output. Even if there is no limit, it links the amount of money with either the computational resources or number of miners. There is no way to fix it. The limit is an ironic bounty. [1]. http://en.wikipedia.org/wiki/Money_creation http://en.wikipedia.org/wiki/Money_creation
DennisP 16y ago
I think the answer is that multiple competing currencies give stability. Hayek wrote a book about it. So Bitcoin by itself might not be stable, but Bitcoin in an economy that also has other private currencies might do just fine.

by wynand 16y ago

eof 16y ago

How is it at risk of a feedback loop in a way that other currencies aren't? It seems bitcoins defend specifically against hyper inflation by limiting the number of coins that will ever be produced.

maurycy 16y ago
Decreasing supply of a good with a constant or increasing demand, ensures its increasing value. The govt is able to control the supply of money.
jerf 16y ago
Real-world currencies have backing. The ability of dollars to hyperinflate or hyperdeflate is bounded by the fact they can be used to pay debts to the United States Government that are denominated in dollars. Their value recursively emanates out from there, but that's the base case. That's also why the fall of the US government would be pretty much immediately followed by the fall of dollars, as has happened to other government-backed currencies. Stripped of its backing, currencies completely collapse in practice. The recursive base case is gone and if the currency briefly holds on it's a Wile E Coyote off the cliff moment, and in the modern connected world I can't imagine it would be more than a few minutes. At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises. All the major world currencies have faced them in the past three years. But they didn't simply collapse because they have backing. I don't know what stops the first BitCoin currency crisis from completely collapsing the currency, because when BitCoin holders ask themselves, "Hey, what is this really good for?", I don't have an answer. I know what a dollar is good for: Not being put in jail by the United States Government due to unpaid debt. Ultimately, without trying to be too philosophical, dollars are backed with men with guns (and the privilege of them not being pointed at you). Contrary to apparently popular belief, currencies aren't merely arbitrarily-agreed-upon numbers that we all trade with. Every currency I know has some actual backing. Even the fancy electronic ones we've seen spontaneously develop online, they all have some form of local economy-appropriate backing. It isn't always "gold" (literal or electronic), but so far the "men with guns" approach has proved successful in the real world. BitCoin is an apparently-good design for the arbitrary number approach, but until it solves the backing problem I won't be putting one dime into it. As much as I don't particularly enjoy having the US government as my currency backing I do not see how going to a backing-free currency is the solution. The currency can still hyperinflate even if it is physically impossible to produce more by virtue of people raising all BitCoin prices as their confidence in the currency collapses. But instead of hyperinflation producing lots more BitCoins, then collapsing the economy, hyperinflation will simply directly collapse the economy as it takes ever increasing amounts of the BitCoins in the world to buy a service, until eventually even every BitCoin in the world isn't adequate. Hyperinflation is a symptom of lack of confidence in a currency, not a cause. (Of course observing hyperinflation can further decrease confidence, but the hyperinflation started in the first place because of lack of confidence.) BitCoin advocates tend to get very angry when I point this out. I think it's because they have no answer to this. The site used to have a FAQ that addressed this, but it just sort of mumbled words and now it's gone because it was actually better just to ignore the problem. My challenge would be to anyone who claims that currencies are somehow backing-free is show me the successful currency of any kind that really is just an arbitrary number with no backing that has reached any sort of significant size, shall we say, a million dollars or so worth of an economy? (All the electronic currencies like Microsoft Points are well above that size, for instance.) And I'll show the backing. It isn't always a physical item, especially in the electronic world, but it's always something that serves as a locally-appropriate backing. ("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.)
- kiba 16y ago
  BitCoin advocates tend to get very angry when I point this out. I think it's because they have no answer to this Who got angry over this? I happily concede that bitcoin have no intrinsic value. ("So why's it worth so much now?" It's in a bubble generated by all this publicity. What happens the first time this bubble even threatens to pop? That's when you'll really find out who is right, me or them. Oh, and I'd predict an even larger burst of publicity and public braggadocio if it looks like that's going to happen; that will be the only way to forestall the inevitable another few days.) When the price of bitcoin rose so fast, it is only natural that a correction followed. At some point, BitCoin faces some dip in currency confidence. Not because it's "BitCoin", but because all currency face periodic confidence crises. Let see if your hypothesis bare this out.
  - jerf 16y ago
    The part you should have highlighted at the end is where I predict collapse, not where I predict it'll have a confidence issue at some point. There's no way BitCoin will avoid some sort of issue at some point and just monotonically increase in value forever and ever, amen. If nothing else, after its inevitable and mathematical wild success (cough) BitCoin will one day attract the attention of the IRS who will decide they need to tax it. If you manage to get that far without a confidence crisis, that's an automatic one. You'll lose a chunk of people for whom the primary draw was that the IRS didn't care about it. Confidence crisis isn't the question, collapse is. (And that's the gentle one. There's also "The US government has decided that BitCoins are primarily a money laundering operation" and it starts throwing people in jail for using them. I consider this a less likely outcome by far, but still on the table.) When I say confidence crisis, I do mean that as a distinct thing from a collapse; as I said, all currencies face confidence crises.
    - kiba 16y ago
      The part you should have highlighted at the end is where I predict collapse, Fair enough. Since your argument is so good, I linked to it on the bitcoin forum. http://www.bitcoin.org/smf/index.php?topic=4832.msg70583#new http://www.bitcoin.org/smf/index.php?topic=4832.msg70583#new I don't know who the bitcoin advocates that hate hearing this is coming from but the bitcoin community had always debate possible attack vectors and ways to counter it, if indeed it was a problem. Indeed, the government's response is a constant worry and there had been various opinions as to how big of a problem it is and how to win. Running away from problems does not help us or anybody. It's best to confront it head on.
wynand 16y ago
I don't know enough about economics to give a qualified answer but let me try. All currencies are vulnerable to feedback loops but governments can do things like change the interest rate to encourage/discourage spending. I don't understand how this would be possible with Bitcoin. I overlooked the Bitcoin limit - price inflation will certainly be limited through this mechanism. But I wonder if this might not cause prices to drop at a constant rate (since Bitcoins are so divisible) - this would include labor costs (although how wage stickiness would hold up to this remains to be seen).

maurycy 16y ago

Read about money creation[1]. It is not a conspiracy that it relies, simplifying, on debt. One wants to bind somehow an amount of money with the output. Right now, BitCoins ignore the output. Even if there is no limit, it links the amount of money with either the computational resources or number of miners. There is no way to fix it. The limit is an ironic bounty. [1]. http://en.wikipedia.org/wiki/Money_creation http://en.wikipedia.org/wiki/Money_creation

DennisP 16y ago

I think the answer is that multiple competing currencies give stability. Hayek wrote a book about it. So Bitcoin by itself might not be stable, but Bitcoin in an economy that also has other private currencies might do just fine.