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Why Charles Stross Doesn’t Know a Thing about Bitcoin

Science fiction writers excel at predicting the future. Jules Verne imagined rocket ships long before rockets were blasting into space. William Gibson foresaw the rise of the internet in Neuromancer. Arthur C Clark wrote about satellites decades before one ever shuttled a call to a cell phone.

At its core, sci-fi writing is about imagination, about openness to new ideas and change.  To do that, sci-fi authors must transcend internal biases and limitations. If you can only see what’s right in front of you, you can’t see what’s coming. Sci-fi authors not only predict the future, they help create it. Their ideas act as catalysts that spur later innovation. As a young author I read the greats, and they inspired my own fiction. Old sci-fi inspires new.

One of the speculative authors who influenced me was Charles Stross. Accelerando and Glasshouse are two of the best sci-fi books of all time. His mind-bending worlds push the limits of what’s possible in fiction. Unfortunately, when it comes to Bitcoin he seems to have very little imagination. He wrote an article called “Why I want Bitcoin to Die in a Fire” that got picked up by Slashdot and Reddit and other news outlets. Even Paul Krugman got in on it, quoting the article directly for a post in the NY Times blog. The only problem is that the article is poorly researched and based on an incredibly shaky foundation. Like many others Stross is completely missing the point on why Bitcoin is a revolutionary concept and system of commerce, all while repeating wild nonsense as if it is fact. It’s hard to believe that an author who wrote about algorithmically run 2.0 economies and trading exchanges for personal reputations can fail to see the precursors of that tech in the real world.

Stross makes some typical arguments against Bitcoin: it wastes electricity; bad money will push out good because it will be more profitable for botnets than legitimate miners; it’s deflationary; it is semi-anonymous so it enables crime; it’s a conspiracy by Libertarians to take over the world. But do any of them stand up to scrutiny?

The first point he makes is that it has a “carbon footprint from hell.” In other words, it wastes electricity. This is the only argument I partially agree with. Stross’ actual calculations are based on fantasy numbers from blockchain.info, but there is no denying that Bitcoin and other currencies have a large electricity footprint. Yet so do Visa and Amex and all of the big payment processing companies that we rely on to process transactions today. If we are going to do business online then we will use electricity.  Unless we go back to using the Pony Express, that’s a fact of life. Bitcoin simply shifts the electricity used to a distributed cluster of people working together as opposed to a data center at a big company.

It’s also arguable we can’t calculate the impact of miners based simply on electrical usage alone. They serve a dual purpose in the economy. They process transactions and act as a distributed web of trust. They power an entire economic system by preventing people from cheating the system. When you consider how much time and how many resources payment processors currently use to make a complete mess of the same thing, that starts to look like a lot of money saved indeed. Total ROI for their efforts can’t be understood just by counting the amount of kilowatts burned.

In another point Stross argues that Bitcoin violates Gresham’s Law meaning that it would be more profitable to steal electricity with a giant botnet rather than mine legitimately. He cites this paper, that says botnets will come to dominate Bitcoin mining. The math in it is good. There’s just one problem. The paper was written in 2011, before the rise of ASICs (Application Specific Integrated Circuits), chips specially created for mining that are 100s of times more energy efficient and powerful. You can’t mine much with the CPUs or even the GPU’s in people’s computers these days. It’s not profitable with one CPU or a million CPUs. The botnets will fail and sleazy cybercriminals will just go back to trying to get old ladies to cash fake checks.

Actually, the opposite of what the paper theorizes seems to be happening. The competition among miners is already working to reduce that carbon footprint, unlike our current economy where the big payment processors have little to no incentive to get much more efficient. There are only a few of them and they own the market. A little more energy efficiency saves them a chunk on their bottom line, but not by much. By contrast, the Bitcoin economy has already seen a number of incredible increases in efficiency. We went from CPUs to GPUs to ASICs in the five years that the Bitcoin economy has been churning. ASICs are much more energy efficient than giant banks of GPUs running at 99% constantly. ASICs represents real businesses accreting around the crypto economy and delivering more processing power to handle additional load, while reducing energy consumption on a per unit basis. This is an open market driving new efficiencies. When big firms are putting real money into the Bitcoin economy every day, this will only drive more and more efficiencies and reduce the overall carbon footprint, even as the economy grows.

Stross also attacks the currency on the basis of it being “deflationary,” because it mimics a limited money supply that increases in value over time while reducing prices of goods and services. He also notes that the Bitcoin system seems to come with a Libertarian agenda. Algorithmically defined economic systems mirror the real economic systems they model. Bitcoin picked one that is largely deflationary. Nobody has the final say on what economic system is the best. Economists can’t even agree on basic assumptions, which is why they argue endlessly. Economic systems work if they work for the people who use them. Whether Bitcoin works in the long run will be up to the people buying and selling goods and services in that system. There are a huge number of cryptocurrencies already, each with different designs and monetary policies. Nearly every economic system that we have ever come up with is now modeled by one cryptocurrency or another. They are currently battling it out for mind share and utility. Some can verify transactions faster. Some increase the monetary supply quicker or have a larger output of coins. These alternative coins share one thing in common: almost all of them are based on the original Bitcoin open source code. Some of them, like Worldcoin, are built right on top of Bitcoin protocol. In other words, Bitcoin is already enabling different economic systems with different rules. May the best economic system win.

Bitcoin is more of a hybrid system than a true deflationary system. The gold standard is considered deflationary and Bitcoin is often seen as the digital equivalent of gold. Gold has a limited supply, so it is scarce, just like a digital currency. But real gold can only be subdivided so far. It can only be chopped up so far before it’s nothing but dust. Bitcoin has no such limitations. Theoretically, it can be subdivided into fractions of a coin almost indefinitely, growing as needed with people’s demands. Its current limitation is eight decimal places. Even with only 21 million Bitcoins, that’s still 2000 trillion of the smallest unit. The protocol is designed to be upgradeable, so if we ever need to divide it further we can.

It’s shouldn’t be hard to see that cryptocurrencies can actually lead to better economic understanding and better transparency. Imagine a money map that shows all the world’s transactions in real time, similar to Google’s gorgeous wind map. Think of big data analytics running nonstop, studying the impact of money on people’s lives with real data, not estimations and surveys and guesswork. You can easily visualize all of the world’s money as it moves by studying the Bitcoin blockchain, a central transaction ledger of all the transactions in Bitcoin history. Imagine if economists could study the flow of all global commerce in real time?  What would they learn from it?  What would we?

Stross also argues that Bitcoin is only good for criminals and scumbags buying drugs and illegal weapons. This is perhaps the lamest of all arguments against Bitcoin. Can Bitcoin be used to buy illegal drugs?  Of course.  But so can dollars, pounds, or yuan.  These currencies can be and are used for that every single day. Yet nobody talks as if this invalidates the usefulness of these currencies, only Bitcoin. Everything that exists in this world can be used for both good and ill. A humble kitchen knife can still be used to stab someone but few people would argue we should ditch kitchen knives. Just because something can be used for ill purposes doesn’t make it evil. Nothing really changes here. People have been using money to do bad things since the dawn of money.

The second half of the “Bitcoin is only for criminals” argument is that its pseudo-anonymous nature will make it harder for criminals to be hunted down and put in jail. That didn’t work out well for the Silk Road. If the Silk Road saga taught us anything, it’s that if you openly set up a big, in-your-face, stick-it-to-the-man illegal enterprise you will get caught. You’ll get caught the way all criminals get caught: through good old-fashioned police work. The police didn’t need any special tools to get the folks from Silk Road. They needed some digital forensics people – par for the course these days – as well as some detectives willing to follow all the leads. They got their man. People will always try to beat the law, and there will always be police and investigators to track them down, Bitcoin or not.

Lastly, Stross points to a random blog post by a cloud engineer from the UK about how Bitcoin is a nuclear weapon designed to take out the global banking system. This is something that Krugman picks up on in his “Bitcoin is Evil” post. Of course, as good as sci-fi authors are at predicting things, the truth is that none of us can see all the permutations of what’s to come. While sci-fi authors are good at predicting individual technologies, they can’t always see how a future society will really function. Like that blogger, we often imagine a total dystopia or utopia. Life usually ends up somewhere in between. Big banks will adapt and change as cryptocurrencies and the systems that support them evolve. Chris Dixon, one of the venture capitalists behind Coinbase, reminds us that “almost every significant computing movement had early proponents who were ideologically motivated. The developers of the first personal computers were closely aligned with the 60s counterculture movement. Open source software was originally created by people who believed that all software should be available for free…This isn’t coincidental: broad-based technology movements have depended on non-economic participants early on since it often took years for commercial participants to get involved.” If Bitcoin only worked for Libertarians it wouldn’t be much of an economic system at all. Economic systems work because lots of people of differing backgrounds and opinions find them useful. People will vote with their wallets on Bitcoin, and that’s the way it should work.

I don’t know what Bitcoin will become, but whatever it is it looks like a profound technological innovation. It doesn’t “sound” impressive, Mr. Krugman, it is impressive.  Bitcoin challenges some basic assumptions about what’s possible. While Bitcoin specifically might not achieve the gestalt needed to support a mature economy, it seems almost certain that another cryptocurrency will. What exactly that will look like we can’t predict, but you don’t have to wait for the future. Economics 2.0 is online now and you can play with the beta version. For a sci-fi author like Stross that potential should prove intoxicating.

Being a sci-fi author is about being open to possibilities. When a writer loses that ability to see what might be, maybe it’s time for him to step aside and make way for a new generation of authors who still can.

BTC: 1PTwnNqK7eMbq8J349UEiFbTPRveBrt19j

LTC: LSU51kE1XbnF1AjQ9KYgoQneRdZJkW6QyB

By

Dan Jeffries is an author, engineer and serial entrepreneur. During his two decades in the computer industry, he's covered a broad range of tech from Linux to networks and virtualization. From time to time, he's known to enjoy the finer aspects of drinking, smoking and screwing. He lives with his wife and two spirit animals in sunny southern California. Blog: meuploads.com Twitter: @dan_jeffries1

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  • simplulo

    What convinces me most about bitcoin is the weakness of the arguments against it, and the obvious interest and bias of those making the arguments.

    • Dieter Engel

      This is true. There is potentially great risk in Bitcoin, and we would be well served by insightful, honest arguments against it… instead we have to listen to ignorant crap from anti-science types like Stross and Krugman.

      • phuzz

        Are you being sarcastic when you say “anti-science types like Stross”? I really can’t tell.

        • Nufsed

          Sounds more “ironic” to me ..;-)

  • Peter

    Great article. It’s amazing how the establishment is so convinced that bitcoin has no future. Is that because they can see the future or is that because it’s failure is in their best interest? In reality, clowns like Krugman are just propagandist for the government. He can’t see a world without a central bank. We’re too stupid to stay alive and have an economy without geniuses like him. Don’t forget, Krugman predicted the internet would be no more revolutionary than the fax machine. I believe that is what he was given his noble prize for.

    • http://www.about.me/patrickcurl Patrick Curl

      The genius of bitcoin…isn’t the currency – it’s the Ledger/Decentralization – via distributed network — currency is just phase 1… when other established centralized concepts become decentralized we will see a lot of interesting things… think of what bitcoin for medical records, or voting/government, … I’m sure there are a lot of uses of this technology that is gonna appear in the next 5 years.

  • http://konradsgraf.com/ Konrad S. Graf

    This is most of what needed to be said. Well done. Just one small comment. I found this statement ironic: “If Bitcoin only worked for Libertarians
    it wouldn’t be much of an economic system at all. Economic systems work
    because lots of people of differing backgrounds and opinions find them
    useful. People will vote with their wallets on Bitcoin, and that’s the
    way it should work.”

    Yes, this is how it should work. However, this is a description of what libertarianism itself actually advocates. It is supporting precisely this freedom of all persons to “vote with their wallets” for their preferred “economic
    system.” This contrasts with the more common advocacy of systems of “voting” for one’s own preferred “economic system” with _other people’s wallets_. Libertarianism itself is the only fundamental legal-theory position that makes such wide-ranging social options and experiments possible within an internally consistent framework.

    • Daniel Jeffries

      Thanks, Konrad. I admit that sentiment is very Libertarian. I’m not sure that I subscribe to any one political system completely, but this is one point I do agree with Libertarian folks on. People should be able to decide for themselves how to spend their own money. My main point was that if only Libertarians participate in the system and find it valuable it doesn’t have a larger value as an economic system. In other words, an economic system has to eventually draw people from all backgrounds and ideologies and allow them to buy goods and services from each other for it to work on the global scale.

      • Dieter Engel

        If only libertarians used bitcoin for the next 10 years, thru some magical restriction, bitcoin would likely still succeed. In fact, it would probably be better for bitcoin because it wouldn’t be getting attacked in its infancy by all these people who see it as a get rich quick scheme….

        I think you might get a great deal of benefit out of SEK3′s New Libertarian Manifesto.

        It was written in the 1970s and talks about how to make libertarianism win without using any violence…. and bitcoin is a key enabler of the method it describes.

    • Boronx

      What’s naive is the notion that the best system will win. That’s part of where libertarianism falls flat.

      • Dieter Engel

        Libertarianism is not predicated on the notion that the best system will win.

  • Andrew

    My biggest complaint with Bitcoin is the energy usage, and there are no hard numbers in the point being made here:

    “there is no denying that Bitcoin and other currencies have a large electricity footprint. Yet so do Visa and Amex and all of the big payment processing companies that we rely on to process transactions today.”

    What I want to know is how much energy does it take to process a Bitcoin transaction vs. a traditional transaction. Hard numbers, not “well, they both consume electricity”.

    • Raziel

      The answer to that is pretty simple, the most efficient mining hardware available (or soon to be available) runs @ .5Watts per Gigihashes per second, for a daily payout of 1 block (25 BTC, with the potential to have a few million transactions encoded) you need 48 Terrahashes per second. So 24,000 Watts per second for a 25 BTC/day payout (blocks are generated every 10 minutes on average), which amounts to about a $1210 power bill at my local energy rate of $0.07/kwh, the turnabout on that is at the current exchange rate it’s about $458,000 a month

      • Razielfails

        That is not an answer to his question, since you failed to answer his question about the relative energy cost of a VISA transaction. Maybe look at the VISA balance sheet, divide by number of transactions, use some carbon equivalent for the cost of goods?

        • Dieter Engel

          I think it’s hilarious when people who have no facts demand that others prove their position and provide facts, under the presumption that if they can’t then somehow the other position is wrong.

          If you want to make the assertion that bitcoin takes more energy, as Stross did, then it’s incumbent on you to prove it.

    • OldEagle

      The closest approximation we have to the energy usage is the cost of the transaction. How much does a Visa transaction cost as compared to a Bitcoin transaction?

      Where that approximation breaks down is that part of the cost of the Visa transaction pays for the 3rd party arbiter, so you have to add that into the Bitcoin transaction. Currently escrow services exist, but I’ve never used one and have not paid attention to their prices.

    • MasonBially

      It isn’t just electricity either. What about all of the facilities, cars, factories, etc. that transaction proccessors are responsible for? Bitcoin isn’t the only one hard to track.

      The thing about the energy usage complaint is that people are paying for this energy. It’s a profitable enterprise (by definition it will always be, as long as crypto currencies have value). If the energy requirements of bitcoin were prohibative, no one would mine it. In the end, the value of bitcoin and similar currencies are meant to be tied to the price of energy via transaction fees. So by definition bitcoin will be worth the energy spent to mine it because everyone using bitcoin will be paying for that energy directly.

      If you want to reduce the carbon footprint of bitcoin, then focus on a global transition to complete renewable energy. Because the energy for making smart phones and the internet work far outstrips that of bitcoin, same for air travel, or any other number of profitable technologies. And since we’re talking on the internet, I doubt you want to give those technologies up.

    • Dieter Engel

      Processing a bitcoin transaction should be vastly cheaper than a “normal” one. There are no hard numbers available for either side, so you can’t hate on bitcoin without any evidence based on your assumptions. But the process of cutting trees, turning them into pulp, making very highly secure paper out of them, shipping that paper around ,distributing it, etc, is much vaster than generating some hashes.

      Plus, it’s not like energy is a really rare resource that we need to conserve. That’s just economic ignorance from “environmentalists” talking.

      • Maritz

        1. Where did he ‘hate on’ anything?
        2. What are the ‘assumptions’ that you attributed to him?

        I’m actually pro bitcoin, but you are really doing it no favours. Even in your last line you take a pot shot at ‘environmentalists’ – way to nail your colours on the mast and paint yourself as an ideologue.

        Will be taking everything you say with a grain of salt; you’re clearly *very* biased and very clearly have a dog in this fight. I prefer to pay attention to comments that aren’t quite so one-eyed.

      • meustrus

        Environmentalists aren’t the only ones or even the loudest ones claiming that energy is scarce. The biggest proponent for energy savings tends to be power utilities that don’t want to have to build expensive new power plants.

        That said, we have lots of free energy coming from the sun every day. And some of the most successful Bitcoin mining operations exist where there is cheap and abundant hydroelectric power, a renewable and relatively permanent energy source.

        In fact, one could even argue that because of the decentralized nature of Bitcoin’s energy usage, Bitcoin is more ideally suited to green intermittent energy sources like solar and wind. A centralized transaction system has a lot more trouble with that since it needs a constant source of power to maintain constant service. With mining operations all over the place, it’s pretty likely the sun is shining in one of those places.

    • Dave

      It’s actually rather scary just how much energy *is* being used.

      If we made some very conservative assumptions, I think the “energy cost” of a single transaction works out like this :-

      Assume we are using Cointerras latest 2THash/s ASIC miner, which consumes 1.650 Kilowatts. Now 2 THash/s will solve a block in approximately 1.41 days, for an energy cost of 56 Kilowatt Hours. Right now, the average number of transactions per block is hovering around 320. So we could say that each transaction “costs” 175 watts.

      However, this does not take into account all the redundant work done by other miners running the same hashes on potentially thousands (or more) of other machines, only to discover they didn’t “get lucky” and solve the block. Nor does it take into account that many miners may be running on less efficient hardware.

      We might be talking 175 x 1000 = 175 Kilowatt Hours, enough to power the typical US home for 5.5 days! And that’s just for one transaction, NOT one block solved!

  • Rick Fictus

    The counter-point on electricity is specious. If Bitcoin became significantly popular, it would need the same tracking and distribution systems that Visa and Mastercard use. Your bank would still need SQL databases and backup systems. The mining cost is in ADDITION to all that, so I don’t think it’s possible to argue that Bitcoin is not an environmental minus.

    • Dieter Engel

      You ignore the great amounts of energy cutting trees, printing paper and burning fuel to move tonnes of currency around.

    • meustrus

      That’s pretty blatantly untrue. Bitcoin is designed not to need or obviously benefit from any central banks. Think about what a bank provides to you: security and convenience. Bitcoin is secure without vaults and convenient without ACH. Banks also provide growth to balance out or exceed inflation, but because Bitcoin is deflationary you’re really just fine keeping it to yourself.

  • Chris E

    “Theoretically, it can be subdivided into fractions of a coin almost indefinitely, growing as needed with people’s demands”

    Er .. that is not an argument against it being inherently deflationary. That you think it is tells me all I need to know about your argument.

    • Dieter Engel

      That you think this is revealing tells me you don’t understand money or the arguments around it.

      The inflationists get quite concerned about “liquidity”. They often conflate lack of liquidity with “deflation”. You cannot practically subdivide a penny, and even the penny, due to inflation is getting impractical. But that doesn’t matter- you talk to them about gold and they complain that gold is not “liquid” enough because it cannot be subdivided enough and thus is “deflationary”, by which they mean there won’t be enough gold in circulation for people to be able to pay for human sized things.

      Bitcoin solves the liquidity problem as the poster mentioned and that takes one of the legs out of the “delfationary” argument that inflationists make.

      It’s obvious the author doesn’t think that divisibility makes bitcoin inflationary.

      So, you were either being dishonest, are are pretty ignorant about the situation.

    • Carl Hopkinson

      But you yourself ignore his second argument that their are variants on BitCoin that are inflationary…and the future variants can be engineered to have whatever level of inflation is deemed desirable. Just because an author has an error, doesn’t mean you can precipitously discount his other points.

  • Brian

    While I support bitcoin and think it has a very bright future, this article misses out on so many points. Some of the rebuttals are specious, and some are just flat out wrong.

    Looking at the author, it is no wonder, since he doesn’t have a macroeconomic background. I think it would be in the interest of both the bitcoin creators, as well as the whole community, to ask people with a better “pedigree” if you will, to tackle some of the issues that have been raised recently concerning bitcoin as a currency.

    • Dieter Engel

      Don’t confuse pedigree for quality. Look at Krugman with his fake “nobel” in economics… who hasn’t made a good economic argument in a decade.. the guy who advocated creating the housing bubble, and talked about an alien invasion as “stimulating”. He’s got ultimate pedigree and all he spews is ideological crap.

      This rebuttal may not be the best, but consider what he’s rebutting– a rant from someone ignorant of even the basics.

      • voxnulla

        “He’s got ultimate pedigree and all he spews is ideological crap.”
        I’d rather have that than the soulless liberal circle-jerking that happens in forae like this. At least in idealogical crap, sometimes, there sits an ideology. When did this become a naughty word to stupid people?`

      • RageOfReason

        Seriously? You think Krugman is ‘someone ignorant of even the basics’? We all have our ideologies, it’s just that Krugman likely does understand the basics better than you, I or the author. Doesn’t mean he’s right but, in your own economic interest, you might do better to think about what he’s saying.

  • Stuntmonkey

    The subdividability of Bitcoin says nothing about deflation. Simply carving it up doesn’t mean you’ve created more money. Likewise when Mexico defined the “New Peso” as 1000 Pesos in 1993, they didn’t end up with any less money — they were just renaming things. Subdividability is important for the practicality of Bitcoin transactions but has no bearing on deflation.

    • stuntmonkeyisright

      Agreed. An actual argument about Bitcoin being deflationary might point out growing merchant acceptance. Another counter-point would be Bitcoin’s inability to inflate/deflate the money supply, which makes it less valuable to a population that wants to hand over individual power to the government. For example, in wartime, it is desirable for citizens to hand over individual power to concentrate at the government, since the enemy is doing the same. However, governments also over-print money and cause currency crises, so in that sense Bitcoin is better. I like the Feynman analogy… it’s an experiment: let’s see what happens!

      • Boronx

        Why wouldn’t merchants want a deflationary currency? But then, why would you give it to them?

        • Dieter Engel

          The USD is deflationary with respect to computers due to Moores law. People still make a trade in them.

        • JoelKatz

          Merchants wouldn’t want a deflationary currency because it’s worth more to those holding it, so merchants would have to incentivize people to part with it with lower prices. I’d want to give it to them for the same reason — they want it very badly and so presumably will make the deal extra good to induce me to hand it over.

        • h4x

          Because consumers don’t want a deflationary currency. Why spend your dollars today if they are worth more tommorrow?

          BTC will end up with a fixed number of coins in circulation. When that limit is reached, when demands for coins increases, you can’t increase the number of coins in circulation so the only thing that can happen is that prices fall because each coin is worth more to those holding it.

    • JoelKatz

      Divisibility has a huge bearing on deflation. If you don’t see why, imagine if dollars were limited in divisibility to the penny and we had deflation to the point where a penny became sufficient to buy a car. How would you use dollars to buy groceries?

      • Stuntmonkey

        As I said, I agree that divisibility is important for practical reasons. But this is a completely separate issue from deflation/inflation. The author of the article was trying to draw a connection, and economically there is none.

        We don’t need to argue this, because the experiment has been done many times. For example quite a few countries have decided to eliminate their pennies — most recently Canada which started its phaseout in 2012 — and thereby decrease the divisibility of their money supply. Does this affect the value of money? According to the author, the answer is yes: There would be deflation since there are fewer coins overall in circulation.

        However in these real-world examples, a correlation between divisibility and currency valuation has ever been observed. So when you say, “Divisibility has a huge bearing on deflation” there are a large number of case examples from many countries and points in time that show exactly the opposite.

        • josh

          agreed, divisibility alone does not negate the deflation risk. it really has to do with interest rates. what interest rate can you lend at that will allow a reasonable return but not bankrupt the borrower when they have to pay it back with deflated bitcoins.

  • Daniel Jeffries

    I agree with folks that I basically dodged the argument about deflation. I did it deliberately. Talking about deflation is like talking about God. Basically as soon as you mention the word all dialogue stops. People already have an idea in their head about whether it is good or bad and nobody listens any more.

    I admit I am no economic expert. As for infinite divisibility, I have a question for the more economically minded on the board. Have we ever had a system where we can subdivide it as far as bitcoin can theoretically go? I know we can trade in fractions of pennies on the stock markets, but the average person never deals with fractions. They deal with pennies and nickles which are fractions even though they don’t conceive of them that way. But has there ever been anything that keeps going down forever, beyond theoretically? I realize this is still deflationary, but I just don’t know that deflationary systems of the past had the same feature. I know they ideally there were supposed to have infinitely divisible money but in reality it never worked out that way because the shiny rocks could only get cut up so far. So it feels like deflationary +. I don’t have a great description for it. Maybe there already is one and I am ignorant of it? Maybe this is just ideal deflation because it is digital bits. I am open to people’s thoughts here. I certainly don’t have all the answers.

    There are people who can make economic arguments much better than me, but I just don’t know that it matters. Nobody changes their minds about economics or God. Multiple economic systems are already being modeled. People will choose what works best if they are allowed to in the long run.

    • Ari Maniatis

      The problem with deflationary money is that it discourages investment. Today, you can choose to put your money under the pillow or in the bank (where it is lent to people who use it to build businesses). If it is more profitable to put it under the pillow, the economy collapses. Slowly, but inexorably. The Japanese economy is a perfect case study of this process.

      • OldEagle

        That’s bunk.

        • jhdevos

          Care to explain why?

          • OldEagle

            There has been many papers and entire books written on the topic since the mainstream conclusion that deflation was inherently bad. Dieter’s post is as good a counter-example as any.

            If you are serious about learning more, try Murray N. Rothbard. “America’s Great Depression”, or more casually Salerno’s “Deflation and Depression: Where’s the Link?” editorial on Andrew Atkeson and Patrick J. Kehoe, “Deflation and Depression: Is There an Empirical Link”, and etc.

          • jhdevos

            I thank you for the references.

            If you mean Dieter’s ‘computers’ argument; I don’t think that is a good counter example at all (for the reason that shakethemonkey gives).

            Also, there is probably a difference between a period in which deflation occurs caused by other economic factors, vs. a financial system where deflation is basically the only thing that is possible (which seems to holds for bitcoin, as long as it is growing in popularity as fast as it is doing).

            I’m not yet convinced :)

      • Dieter Engel

        If deflation discouraged investment, nobody would buy a new computer. All economic transactions are exchanging one item for another. Money is a commodity. When you buy a computer, you’re buying it knowing full well that in 18 months you can buy twice as much computer for the same price. Thus even the inflated US dollar is deflationary with respect to computers.

        What have we seen? Massive sales of computers, and massive investment in technology to make them (technology that itself can be replaced with more capable equipment in a few years.)

        Intel spends billions on chip fabs that are only top of the line for a few years.

        Deflation as a risk is disproven by reality.

        • shakethemonkey

          This argument is wrong, because computers are purchased for their utility value, and not as a store of value or as an investment.

        • josh

          sorry dieter but dropping prices of consumables is not deflation. deflation is the an across the board lowering of prices on everything including real estate, food and energy.

          • josh

            and wages!

      • JoelKatz

        The movement of the money doesn’t matter, what matters is whether useful resources are invested or not. You can stuff all the money you want in mattresses, it won’t hurt economic growth if useful resources are still invested. And in order get money to stuff in your mattress, you have to produce something that you trade for that money. So you have to add to the store of resources available for investment. Tractors don’t sit idle because money is in a mattress, the price of the tractor just drops and people who want to use it to build a business can thus more easily afford it.

    • bradlee seccomb

      Technically, traditional currencies are “infinitely divisible” but not because they can be divided downward forever, but because inflation devalues them progressively and (in theory) infinitely. The Zimbabwean currency being the most extreme example in recent times. Rather than dividing the currency, each unit becomes less so you print notes with more zeros on the end. The question in my mind is: can anyone put together the resources required to artifically create so much bitcoin that the value of it is significantly reduced. The answer is of course: yes – but not in the sense that there is more bitcoin. By attacking the perception of the integrity of the currency you can devalue it as we saw a week or two ago in China. What you don’t get (yet) is governments creating masses of it at a whim, which to my mind is a strong positive for the system.

  • jake kolb v

    Great Job Dude+

  • Dieter Engel

    Stross is a leftist, and his attacks on Bitcoin, just like Krugman, and many others, are driven purely by political ideology. The actual facts of the matter are things they could not care less about.

    These people believe government should have absolute power over the populace, effectively enslaving them, to achieve their utopian communist goals. (and yes, properly understood they really are communist, they just don’t want to admit it because they know communism doesn’t work.)

    One of the methods of enslavement is to tax people via inflation. The reason they hate bitcoin is that it doesn’t allow the government to tax via inflation.

    It’s that simple.

    There is not much point in rebutting Stross…. an ideological article rests on ideology, not facts. Anyone reading it either agrees with the ideology- and thus doesn’t care about your rebuttal, or can see it for what it is.

    What’s important to learn here, is that Charles Stross is, quite literally, evil.

    I may read his books in the future, but I will not pay for them ever again. I will not financially support an evil scumbag such as him.

    • MasonBially

      Yes the solution to ideological articles is ideological attacks on the people writing the ideological articles.

      sarcasm

      Your ideology is no different than theirs it appears.

      • Dieter Engel

        If you think there is no difference in our ideologies, you’re not too bright. But to be accurate, I showed the error in their thinking, and thus, unlike Charlse Stross, Krugman, and notably YOU, I actually made an argument on the point.

        All you did is smear me with a dishonest characterization. Oh, look at the big brain on bially!

        • MasonBially

          I agree with the original author’s (Daniel Jeffries’s) position on bitcoin, which also appears to be yours. As evidenced by me supporting the author’s arguments farther down.

          Stick that in your worldview and smoke it.

          • Dieter Engel

            My objection is not with your position, but with your ad hominem and dishonesty. You may have reached the right conclusion, but that’s pretty useless if you cannot defend it. Plus, why attack someone who has the same position as you?

            If I made an error in my argument, speak to the point.

          • MasonBially

            The very first sentence you uttered was an ad hominem:

            “Stross is a leftist, and his attacks on Bitcoin, just like Krugman, and many others, are driven purely by political ideology.”

            From there I basically stopped caring about what you said because as your first thought on the subject was to attack someone for their political leanings. Instead of arguing the points on the subject.

            And then you ranted on ideology blinding people, while making ideological attacks yourself. I couldn’t resit some sarcasm to point out your hypocrisy.

            The reason I attacked your post, even though I agree, is because you are doing more harm than good.

          • Dieter Engel

            I would advise you to look up what ad hominem means, but the reality is, every response from you so far has been based on a lie about me, so you’ll just make up more lies. I can’t stop you from making up lies, and I obviously can’t expect you to actually make an argument that addresses the point, or the argument I made, which you just admitting you stopped reading before getting to.

            It is impossible to do harm by making cogent arguments, no matter how personally humiliated you choose to feel at their superiority.

            I’m sorry you lack the personal integrity to be honest, the sense to talk to the point instead of the person, and the smarts to construct an actual argument… but that’s all on you, not me.

            I do enjoy pointing it out… and so long as you keep talking about me, I’ll keep talking about what it reveals about you that you keep lying about me.

          • MasonBially

            “I do enjoy pointing it out… and so long as you keep talking about me, I’ll keep talking about what it reveals about you that you keep lying about me.”

            I’ll take that deal, but only because I’m supremely bored while waiting for things to hurry up.

            “I would advise you to look up what ad hominem means,”

            Dictionary adventure time!

            1: appealing to feelings or prejudices rather than intellect
            2: marked by or being an attack on an opponent’s character rather than by an answer to the contentions made
            (Merrium Webster)

            Hmm and let’s examine the sentence in question:
            “Stross is a leftist, and his attacks on Bitcoin, just like Krugman, and many others, are driven purely by political ideology.”

            In this sentence you call the author of the opposing article, Stross, a supporter of his, Krugman, and some unnamed other people (which I’ll ignore since they are unspecified), leftists and ideologs.

            Definition 1: This sentence definitly seems to be aimed at appealing to prejudices against ‘leftists’ (which I assume are members of the ‘left-wing’ party (aka ‘liberals’, Democrats) and not left handed people) and for that matter, feelings and prejudices that many people who like to see themselves as reasonable may have against ideologs, who tend to do the very annoying and unreasonable things in our society.

            Definition 2: Yea this sentence is definitly not about the subject matter, and most people would read this as an attack on character.

            Well done, by both definitions in the Merrium Webster dictionary the first sentence of your first post was an ad hominim. Should we continue to the second sentence?

          • something@else.com

            Congratulations. I think your comment is the only comment in the history of the internet to win an argument. And you knew the actual definition of ad hominem!

        • jhdevos

          I honestly did not see any ‘argument’ in your post. Just a lot of shouting and name-calling. You showed no ‘error’ in anyone’s thinking; you just made some rather ridiculous statements about what Stross must have been thinking (absolute power? enslaving the populace? don’t be absurd).

    • meustrus

      You’re right about one thing: people in power don’t like Bitcoin because it could break them free of some of the means of exerting power over them. But you’re misidentifying the culprit. It’s not the government; the politicians get their power by convincing people to vote for them, not by keeping the people poor. It’s the wealthy, the “plutocracy”, who get their power by increasing the class divide and making everyone else less powerful.

      As for Stross, Krugman, “and many others”, I wouldn’t be so quick to identify them as actual culprits. Most things that people say are actually someone else’s ideas, and those with power have used it for decades to gain ideological mindshare without necessarily revealing the reasons behind their ideologies. My point is that it’s a commonly held belief that our current economic system, centralized and inflationary, is the best system possible, regardless of whether that’s actually true.

    • Bill Quick

      Charlie’s pretty much a communist, but of the variety “communism has never been properly implemented.” It’s a fairly common stance among the Brit SF contingent – McLeod and Banks spring to mind, although Banks’s Culture economy implements communism in the form of an economy of abundance, as Marx theorized would and should eventually occur. They are all good writers, though I regard Banks as considerably more elegant in his economic creations than Stross.

      • Daniel Jeffries

        I agree about Banks. His Culture novels are amazing but they are based on the total benevolence of his AIs running the system. I’ve always imagined our systems getting more and more intelligence and by extension more complex. As Asimov saw in one of the best short stories of all time, The Last Question, we will probably have a lot of machines running the show without fully understanding them. In a way it’s already starting. Few people understand the math behind Bitcoin. It will only get worse as systems get more complicated.

        One of the funniest things about the Culture novels is how few of them take place in the actual culture. The irony of fiction writing is that utopias are not much fun to read about. We like to read about problems. If there is no conflict, there is no story. So most of the Culture novels take place outside of Culture under the guise of the Special Circumstances division dealing with the less evolved cultures out there.

  • Dieter Engel

    Hilarious to read the Hacker News comments about this article. They really should rename it Dunning Kruger sufferers news.

  • Rat9

    Good job sir.

  • voxnulla

    While decentralized currency may be the future, bitcoin isn’t it. The next revolution in monetary units will be a method where the currency will have the value that most people need it to be, not what a small group wants it to be. Bitcoin is just greed and speculation, digitalized, we have no need for that.

  • NateFinch

    What’s funny is this is pretty much an exact mirror of my comment on the original Stross article: http://www.antipope.org/charlie/blog-static/2013/12/why-i-want-bitcoin-to-die-in-a.html#comment-1837445

  • mmmm

    You might want to read Stross’ Neptune’s Brood
    http://www.amazon.com/Neptunes-Brood-Charles-Stross-ebook/dp/B00AR2RZ4K

  • ZeroCredit

    But what about credit? How do you create a market where entities will want to loan and will want to borrow, when the currency is zero sum and deflationary? I see this as the biggest problem with a potential BitCoin economy.

    • skies2006

      I belive it would be possible to create paper bitcoin using Fractional Reserve Banking just like we have electronic paper gold and electronic dollars that only exists inside the bankning system.

      The paper bitcoins can be used for trade, and cleared/settled between banks. As soon as they leave the bankning system they need to be converted into real bitcoins.

      So it should be possible to issue loans and borrow bitcoins from the bank at interest. Fun yeah.. :-)

  • neeneko

    To be fair, the deflationary argument is not completely arbitrary. It is a system that has been tried in the past and historically has been found to be bad for an economy, which is why modern currencies explicitly avoid the situation. Granted it only becomes a problem when your economy primarily uses the currency, so BTC can avoid the issue as long as it remains small, but if people are going to discuses its potential to play on the same level as dollars or pounds then such consequences need to be part of the discussion since at that scale the question becomes less and less ‘how can individuals gain?’ and more ‘how does this impact the system?’. Deflationary currencies are wonderful for the former, but terrible for the later.

    • josh

      yes, the deflationary argument is real. you can look up william jennings bryan’s famous “cross of gold” speech to see how much populist anger there once was against gold deflation. for example, during the boom times of the 19th century farmers would borrow gold currency to pay for planting and because of deflation they couldn’t afford to pay it back at harvest.

      the ideal currency increases it’s supply directly in proportion to the expansion in wealth of the economy. this is what central banks are supposed to do but in practice they always issue more currency than they should causing inflation.

      the goal is price stability. the question is how will bitcoin achieve it?

  • Rob Lewis

    This is a takedown that isn’t a takedown. Examining your points in order:
    1. Electricity consumption. You partially agree but claim ASICs will save us. Your comparison with other electronic banking functions is specious: no actual numbers, and no recognition of the fact that conventional payment processors work with currencies that already exist (and of which more can be created without all the cryptographic folderol). And payment processors have exactly the same incentive to be more efficient as everybody else: the rising cost of electricity (it will probably be a while before you can pay your electric bill in BitCoin).
    2. Your answer to the deflationary problem is a complete handwave. Even if BitCoins were infinitely divisible, that has absolutely nothing to do with this issue. Then you put in a plug for big data analytics, which I admit is an intriguing idea but again has nothing to do with deflation. You simply betray a lack of understanding of money and economics.
    3. “For criminals and scumbags.” Let’s look at the incentives: who but a person with something to hide would keep their money in a currency with nothing backing it, and which is subject to wild fluctuations in value? Not a straight-laced business person.
    4. As for BitCoin being a libertarian neutron bomb, you admit nobody knows what will happen. So one prediction is as good as another.

  • ex-change

    Just a few things I don’t trust (or just don’t understand well enough) about bitcoin:

    - if the bitcoin wallets may be anonymous, because there’s no bank asking for credentials (I know, many banks don’t ask either… but many do), how can you fight against tax evation? Ok, don’t tax revenue can be the answer… ! Think what your taxes pay, and I don’t mean bureaucrats. I mean roads, harbors, airports, medical services (at least in some countries), research, etc.
    - Are we sure internet connection will always, in any place, be available? How will I trust a payment made off-line?
    - If bitcoin were succesful and +7 billion people were using it every single time they pay for something… is it scalable enough? realistically? what will be the size of that shared ledger after a few years? at what rate will it have to be updated? Think of stock exchanges, and HFT, on top of personal purchases.
    - How would a system with multiple bitcoins (think of different linux distros) work?

    And a final thought. I think the possibility to buy bitcoins with “normal” money goes against its expansion and reliability. The value of a bitcoin should be given by the services and commodities it is able to purchase, not by its exchange value agaisnt another currency.. if it’s meant to be “the” global, decentralized, coin. But hey, how are you going to avoid it?

  • http://bannedsorcery.com/ Bryce Anderson

    Great article! What’s your Dogecoin wallet?

    • Daniel Jeffries

      Here you go, my friend: D5DZet1tzxcmKo8Wb9wJN14Sgzo25vYogJ

  • Lawrence Bottorff

    I’m sorry but CS’s arguments stand; you haven’t refuted anything he has said. Indeed, saying BC has a carbon footprint from hell is very accurate — with or without your ASICs. What madness is this to simply give “money” to whomever can digitally “mine” it — high hurdles or not? This is the ultimate example of the Jevons paradox, ferchristsake. CS is so right about BC being criminal heaven. Like it or not, my government can suspect me at any time of criminality and use its full powers — including its considerable oversight of our common currency — to chase me down. That’s life. Dark Ages? Been there, done that. Now, whether BC is deflationary or not is moot for me. Fiat currencies are massively inflationary. (Ever wonder why they don’t count the incredible inflation the housing market causes in inflation calculations?) So whether the damned treadmill is slowing down or speeding up, we’re trapped on it. Let’s think of something better than fiat money or digital precious metal.

  • RageOfReason

    “Economics 2.0 is online now”. Oh oh – I remember that delusion in 1999, it vaporized in 2000 when the laws of economic gravity (Economics 1.0) were found to still be alive and well. Perhaps history will repeat itself. I wouldn’t underestimate Mr. Krugman’s grasp of economics; I believe he’s read a couple of books on the subject.