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Commentary: Why Bitcoin Will Fail as a Currency » The Calculating Investor
What is Bitcoin?

Recently, I’ve been following the news about a new private digital currency known as Bitcoin, and I was excited to see that Planet Money had a recent podcast on this topic.

The Planet Money podcast gives an overview of Bitcoin, but this video also provides a basic introduction.

An interesting discussion on the pros and cons of Bitcoin is available on Quora.

Why I Believe Bitcoin will Fail as a Currency

Although I think that Bitcoin is ingenious and fascinating in many ways, I don’t believe that it will succeed as a currency. The problem is that a Bitcoin is unlikely to ever be a good store of value (a primary function of any widely accepted currency) because the (eventually) fixed money supply will cause the purchasing power of a Bitcoin to be extremely volatile.

Modern fiat currencies are able to control purchasing power (some better than others) because they have a central bank that can increase or decrease the money supply in response to economic growth and economic contractions. If the central bank does its job well, the inflation expectations of market participants will be well anchored, and the purchasing power of the currency will be relatively stable over time.

Historically, commodity based currencies have also been able to provide reasonably stable purchasing power, without a central bank, because the underlying commodities which were used as currency required labor and capital to grow, gather, or mine. The value of a unit of the commodity currency was related to the amount of labor and capital which went into producing it.  This link to labor and capital helped to regulate the money supply and stabilize the purchasing power of the commodity currency.

For example, if the purchasing power of the commodity rose (deflation), there would be an increased incentive to deploy more resources to produce more of the commodity. This increase in production would increase the money supply and counteract the deflation. Alternatively, if the purchasing power fell (inflation) there would be a decreased incentive to continue investing the necessary labor and capital for additional production, and some of the existing stock of the commodity would likely be consumed for non-monetary purposes or used for trade with other groups. This would decrease the money supply and counteract the inflation. This production-based money supply response may have been rather crude, but in a slow growing economy it was likely sufficient to keep prices and expectations reasonably stable.

In contrast, the value of a Bitcoin has no similar link to labor and capital, and there is no central bank to control the money supply.  Since the supply of Bitcoins will eventually be fixed,  the purchasing power of a Bitcoin will depend on the size of the Bitcoin economy and, more importantly, on the expected future size of the Bitcoin economy.

In fact, the purchasing power of a Bitcoin today depends greatly on our expectations for the growth or contraction of the Bitcoin economy tomorrow. If market participants expect the deflation in the future due to a growing Bitcoin economy then they will want to hold large Bitcoin balances and the purchasing power will increase today. However, if they expect a decrease in the future size of the Bitcoin economy then they will want to hold minimal (or zero) balances and the purchasing power will fall today.

Similar to a speculative stock, the value of a Bitcoin will be very susceptible to swings in market confidence. However, with a speculative stock, the success of the underlying business is largely independent of the stock price volatility. In contrast, the adoption of a currency does depend on purchasing power stability. If purchasing power cannot be stabilized then widespread adoption by consumers and merchants is unlikely.


Although I’m convinced that Bitcoin will eventually fail, it is still a fascinating story to follow if you are interested in monetary economics. The online debate over Bitcoin’s viability is fierce. There is a lot of money currently invested in Bitcoins, and some individuals even claim to have invested all of their personal savings in the currency. In addition, new exchanges are being started to trade the currency, and Bitcoin enthusiasts are spending thousands to create “rigs” to “mine” the currency. Who knows?  Perhaps a future iteration of a private digital currency will solve the problems that this initial version uncovers.

43 Responses to “Commentary: Why Bitcoin Will Fail as a Currency”

  1. You know, you might be calling this a little early. The Bitcoin deployment plan stretches almost all the way to 2040. I’m honestly not sure myself where I stand on the Keynesian/Austrian scale. I like the Keynesian emphasis on empiricism and mathematics, but I also realize the economy is a chaotic system and thereby incredibly hard (some say impossible) to predict or control. Other attempts at planned economies have, in the long run, not done very well.

    On the other hand, unplanned economies based on scarce units of exchange like gold and silver have also run into trouble. Liquidity traps come to mind. However, the world has not yet seen a currency that enables its users to transfer large and small amounts with equal ease, nor has it seen one with the level of divisibility that bitcoins offer.

    We are traveling in uncharted territory. To pretend otherwise would, I think, be somewhat foolish.

  2. You are missing the point. Let me give you a 10 BTC hint: “mining”
    Now, pleas read your own post and think… 🙂
    Did you get it?

  3. So if the block award was not fixed, but instead some function of hashing power (eg. log(hashing power)), do you think bitcoin would be a more viable currency?

    • Thanks for the interesting piece, although I disagree with your conclusions.

      I recommend that anybody interested in bitcoin do their own research, and then buy a bit to play around with.

      I personally use and recommend http://www.tradehill.com for buying/selling bitcoins. They have lower fees than the main exchange (mtgox), and their website seems more professional, IMHO.

      Also, I happen to have a code that will get you 10% off your trading fees for life there: TH-R1168


      • Is there any bitcoin article that you dont spam with this comment?

        People, beware of this spammer. Do not use his code to sign up at TradeHill!!!

    • I think money supply needs to have some response to money demand, so I’m not sure a different rate of growth would solve the problem unless the growth of supply was somehow linked to demand.

  4. Paper money are just terrible store of value because of inflationary policies of central banks and goverments. There is always chance that the value of your paper will be destroyed and this chance is growing in time. USD vallue is close to nothing (less than 2/100) compared to 1900 and 1/10 compare to 1971 (end of Bretton-Woods). That’s why gold is 1600 USD today – you can’t print it and it is very hard to mine. If gold could be traded directly on web there would be no need for bitcoin, there would be no need for paper too. The gold-like property of bitcoin is exactly the reason why it can succed in long run. I think bitcoin is true e-gold, it has all its monetary properties.
    The danger for bitcoin comes mainly from goverments, they could make it illegal or persecute it in some way and I am conviced they will try the same way there were times the gold posession was illegal. Another danger is future competition from similar concept currecies, although I think bitcoin’s concept is near to perfect.

    • “The danger for bitcoin comes mainly from goverments, they could make it illegal or persecute it in some way and I am conviced they will try the same way there were times the gold posession was illegal.”

      You sound like a forum.bitcoin.org echo-chamber escapee.

      The biggest risk to bitcoin and similar proof-of-work systems is that a VISA or a small to medium bank buys enough processing power to squash all the basement gamers that presently run the network. A 90-99% capture would involve a small investment, and the result is that they would (literally) sign almost all of the checks.

      “Another danger is future competition from similar concept currecies, although I think bitcoin’s concept is near to perfect.”

      The concept is so perfect that in order to protect their investment, the bitcoin developers have “locked in” the block-chain in the standard bitcoin client. Go ahead, it’s right in the source code. Have you read it? How about Nakamoto’s paper? All of the warts and design flaws are right there for the reading.

      Another very illuminating paper is Ben Laurie’s “Decentralised Currencies Are Probably Impossible. But Let’s At Least Make Them Efficient.” (http://www.links.org/files/decentralised-currencies.pdf), wherein he notes that contrary to the bithead propaganda, bitcoin is not decentralized, and worse, is almost stupidly inefficient. Holy Heckers! Today bitcoin isn’t doing anything of much value, and it is sucking down O(10 MW) of power. Can you imagine how many nuclear reactors would be required to run a bitcoin-like system if it was scaled up to VISA or MasterCard levels?

      So alarming was Mr. Laurie’s paper that some hardcore, reading-comprehension-challenged bithead actually removed it from Wikipedia’s article on bitcoin. Out of sight, out of mind.

      • Care to explain what exactly is wrong about the block chain lock-in? As far as I see it, it’s simply there to ensure that newly installed clients don’t download stuff corrupted by bugs, or created by hackers or fraudsters. All the lock-in points are in the past, so it doesn’t prevent any future development in this or that direction.

        • The chain lock-in prevents a scenario wherein, say, VISA, develops SuperBitCoinMonster that is 10x-100x faster than the current basement gamer network and proceeds to develop a brand new block-chain that is longer than the current chain, but contains none of the coin of the current chain.

          This is an especially significant threat to bitcoin, since almost all of the coin the present network were minted at difficulty levels that are trivial compared to today. A SuperBitCoinMonster at even a lowly 10x of today’s power could compute a new set of coin in a few weeks.

          What is wrong with this can be discerned by a simple observation: It is interesting that the developers choose to protect their investment — they own most of the early coin — in a manner than is unavailable to anyone else in the network.

          Is this really any different than how the US Federal Reserve is protecting the interests of their buddies on Wall Street? Surely in the libertarian utopia that sits at the core of bitcoin, if someone brings a bigger computer to the table, should it not spur innovation and competition? Was it not Nakamoto’s Original Intent that bitcoin go to the fastest computer? If a computational threat appears, should not bitcoin deploy a larger, faster, network to protect their investment … instead of installing little ditties of regulatory, dare I say it, fiat into the network?

          Want more fiat? The bitcoin source is littered with an arcane, bizarre, fee structure that is almost as difficult to penetrate as the US tax code, and would probably make the Fed proud! Some discussion:


          The argument from the developers is that all of this is necessary to secure the network against denial-of-service attacks. Alas, it also secures the network against micro-payment schemes as well. So much for another canard of the bitheads “large or small payments, no problem!”

          Remember these every time some bitcoin shill shamelessly speaks about “decentralized currency”: the Rules and Regulations are invented by the developers of the network — the BitFed. They are not emerging from the primordial financial ooze that can be traced back to the Golden Lagrangian of Physical Reality.

  5. Surely you are joking when you write this:

    “Modern fiat currencies are able to control purchasing power (some better than others) because they have a central bank that can increase or decrease the money supply in response to economic growth and economic contractions. If the central bank does its job well, the inflation expectations of market participants will be well anchored, and the purchasing power of the currency will be relatively stable over time.”

    Stable purchasing power? hahahahahahahahah…..

  6. So what exactly is the difference between what you describe above and Gold. There is nothing stopping everybody from suddenly deciding that gold overvalued and less is mined as it’s price plummets. Ok Gold does have additional useful physical properties like being a good conductor of electricity at room temperature, as well as being inert, high mass, not being radioactive and so on and so on. But most of these properties can nearly be matched or exceeded by other materials at varying temperatures and pressures.

    Maybe you are unaware of the difficulty built into Bitcoin protocol. Mining which is meant to try and keep production of one new blocks on average mined once every 10 minutes for 14 days (2016 blocks in total before new difficulty is calculated). Current production because of exponential interest in Bitcoins had consistently driven down mining times for 2016 blocks to every10 days (each block processed today adds and distributes 50 new Bitcoins into circulation). The last time that it took 14 days or more to mine new blocks was January to December 2009 (21 days on average), once in May 2010 (15 days) and once in March of this year (15 days).


    If Bitcoin sharply drops in value, this graph will fall just as sharply as it has risen (mining will slow down for new Bitcoins, it will take more than 14 days). Bitcoins mined by GPU’s is slowly heading towards the cost the electricity (with a smaller profit margin to offset all/partial costs for mining hardware). The only thing that will jumpstart the graph up again will be some new more efficient mining technology, cheaper electricity or the price of Bitcoins to rise. If none of the previous three things happen new money added to circulation will fall off. As mining times increase.

    • I agree with you except for your last point– the mining difficulty is automatically adjusted based on the block speed; so even if many people stop mining, the inflation of the currency supply will continue at roughly the same pace. (Slightly slower, until the difficulty decreases to match the network’s computing power, but still roughly constant.)

      • If one BTC for whatever reason magical reason suddenly starting dropping down to be worth 0.0001 cent (US/EU). People who have to pay for electricity would stop mining and the drop in difficulty would be as fast as it’s rise. Some people would stop straight away, others would call them fools, saying it will go back up in relative value. But eventually most of these people would stop mining as well. Then you would have a few die-hards who would never give up, no matter what the cost of electricity. They would call everyone else crazy and look to purchase additional mining hardware.

        What I am saying is just as with a exponential growth, an exponential decline would be similar. difficulty going down would be just as hard for the protocol to track as it tried to track it going up.

        The fastest difficulty of 2016 blocks took only 3.4 days (at a rough guess this was when GPU mining was added sometime between 13th and the 16th of July 2010) . And the slowest difficulty of 2016 blocks took 41.9 days back in September 2009.

        A downward spiral if it ever happened would have similar limits.

  7. Sending money over the internet is nothing new. PayPal has been doing it the longest and their fees for doing so help to bring in about one billion dollars in revenue each quarter.

    So we know there is a market for this.

    Now lets look at the advantages Bitcoin has over PayPal.

    1.) Bitcoin’s Fees Are Much Lower
    For a normal commercial transaction, paypal takes a cut of each transactions. Send $20 and the recipient gets $19.12. That’s not such a great deal. With bitcoin, the fees are a tiny fraction of PayPal’s. Right now, a small transaction like that costs just a penny or less.

    2.) Bitcoin Give Immediate Settlement On All Transactions
    Few people store money in their PayPal accounts, so when they send money PayPal grabs from their bank account. To be relevant PayPal needed to provide immediate payments, so they actually loan the money to the sender and the funds for the transaction are available to the recipient immediately. Except because PayPal takes a risk on that, what they do is they add “reserves”, where they escrow funds that are received to help protect PayPal. Of course, any business with a tight cash flow gets knocked around as a result.

    WIth bitcoin, funds are available for spending by the recipient in minutes.

    3.) No chargebacks
    PayPal is not considered to be merchant-friendly. Fraud is rampant as the result of PayPal’s dispute resolution that heavily favors the customer (and any the fraudsters). So not only is the merchant paying the high fees, they are taking the risk of a full chargeback. PayPal will institute “immediate holds” even without the customer filing a chargeback. It is PayPal’s most profitable method against fraudsters, but the expense is paid by the merchants caught in the crossfire.

    Bitcoin transactions are irrevocable and non-reversible.

    But unlike those who receive funds in a PayPal transaction, those who receive funds in a Bitcoin transaction are, sometimes unwittingly, “investors”. That is because until they either spend those coins or cash out at an exchange, they are holding an asset whose issuance is limited. This is not unlike how using gold and silver as currency will increase the demand for those assets.

    But since the Bitcoin recipient has the option of cashing out within moments of receiving the coins, transacting in bitcoins can be performed with little exposure to exchange rate risk. As the Bitcoin economy builds, the desire to cash out will decrease because there is a small fee to do so (under 1% in most instances) and because those bitcoin funds themselves might be needed for future purchases, and “buying in” later might be a slightly more difficult endeavor so simply not cashing out can provide a supply of bitcoins for later use.

    So whether you agree that holding bitcoins is good or not, you can’t not see that bitcoin has a place in the world alongside PayPal and other payment methods. And among those methods, Bitcoin is the only one whose participants are also stakeholders.

    Those who study monetary economics are overlooking factors that previously had no impact on monetary economics. It might be time to reevaluate and to consider new factors and the re-weight those factors which stated that the Bitcoin we have today couldn’t ever happen.

    • “1.) Bitcoin’s Fees Are Much Lower”

      Only because each block is worth 50 BTC at this time. When it is worth zero, we can expect transaction fees to rise to meet the gap. Furthermore, the necessary escrow agents will demand their cut. The large corporations that will run the hashing networks will be able to apply patches to the client to allow for percentage cuts on transactions. The null hypothesis is that, assuming survival, the end-game of bitcoin will look a lot like the present day.

      “2.) Bitcoin Give Immediate Settlement On All Transactions”
      “3.) No chargebacks”

      Oh please, merchants don’t give a damn about the customer’s problems, so why should we return the favor?

      You bitheads need to sit down and think about what you are trying to sell, and who you are selling it to. For example, have you ever wondered why credit cards are so popular with consumers _AND MERCHANTS_? If I had to invent a scheme that was anti-customer, I’m not sure I could get much worse than bitcoin.

      • when did credit cards become popular with merchants? as a small business owner, I find them a complete pain in the ass, and an unwanted expense. watching bitcoin with interest!

        • Why should I care about your “pain[s] in the ass”? Your business, not mine. Should it becomes my business, then maybe my business can becomes yours and you can tell me why I should accept all of the risk in a transaction? To whom to I go when you — the merchant — defrauds me?

          Escrow agent? He wants money. Can you then explain how this is operatively different from the current arrangement?

          Until then, I can only note the trivial in answer to your question: almost all online merchants accept credit cards. Almost all transactions are honest. Credit cards make for happy and willing customers. All sane merchants are aware of this, or they would not accept credit cards at all.

          • you should “care” about my feelings towards credit cards because you suggested that credit cards are “popular” with merchants, and as a merchant my feelings directly refute your claim. Amongst my associates who also own businesses, the attitude towards credit cards is one of dislike, they are a necessary evil. They cut into profit margins, plain and simple. If bitcoin provides lower fees, that in itself is enough to perk the interest of many a business owner.

            I really don’t know what you are on about with the other rambling, but it sounds like you have a strange take on the world, I’ll leave it at that.

          • Ideally the concept is to reovme the mess that has been created with factional reserve banking. Right now so much power is in the hands of the central banks. This power gives them the ability to control the amount of currency that is in circulation. In essence money is created out of thin air with no weight to it like the gold standard created. Money is built on trust in the value of that currency, which is very scary. You can even see in recent times how this type of system has created massive problems and will only get worse as time goes on. The only way I personally feel that currency can be fixed since we left the gold standard is to create a new currency with a relative value unit assigned to it. The relative value can be tied to something tangible. To supply a certain good or service it requires certain resources. Those resources being natural, human and others. For example it takes a specific amount of resources to produce a car. Machines, equipment, people working on it, natural resources like metal, plastics and time. These factors can be used to produce a RV for that car. Unfortunately I think there is so much money in circulation, that it would be near impossible to go back to the gold standard as there may not be enough gold available in circulation to match out the currency to. Why not create a balance of the commons of ALL available tangible resources and not just gold?The concepts I like of BitCoin are the fact that there is no central authority for currency. What you produce is what you own. You actually own that currency that you have produced using your resources and it has value based on the fact that others had to go through the same create that currency as you did. The idea of using CPU cycles is very geeky and not sustainable. The idea though that you have this resource and by using that resource you are producing something that holds value amongst those doing the same type of work place the value and trust in that currency. So when you go to work based on your education, work experience, skills, time spend doing your job, the actual work being done and even the value your employer feels you are worth to them can all be used as factors. That value of currency that you produce has no value that is set by factional reserve banking and the amount of currency in circulation. It is based on a true tangible asset like the gold standard used to be.Just my two cents.

  8. Volatility is minimized by speculators. Speculators profit from volatility and compete with each other, thus reducing the volatility. They provide liquidity when the market demands it and reduces liquidity when it becomes excessive. Not by any altruistic design, but due to the basic laws of supply and demand.

    • There are many financial assets which have are traded by speculators and still have high price volatility. Why are these financial assets different from Bitcoin?

  9. To set some facts straight.

    The last block that will generate coins will be block #6,929,999. This should be generated around year 2140. Then the total number of coins in circulation will remain static at 20,999,999.9769 BTC. The mining difficulty to generate blocks controls how many bitcoins are added in circulation, which is changed dynamically to keep block creation at roughly 1 block per 10 minutes. This stable increase of currency according to formula makes it predictable, which is a lot more promising than any fiat currency have to offer.

    Our grandkids might live to see this day (year 2140), it’s not really a problem for us. Still, I don’t see a problem with the currency amount in circulation being fixed even then, because bitcoin has 8 positions to the right of the decimal point, so even when it inevitably increases a lot in value it is still perfectly fine to pay a pizza with 0.00000935 BTC for example.

    The bitcoin currency system is based on math and cryptography (as opposed to crooked politicians), so it shows a lot of promise even in its infancy.

    • Zimbabwe Government: “All we have to do is add a few more zeros to the left of the decimal point. No problem!”

      Bitcoin Shills: “All we have to do is add a few more zeros to the right of the decimal point. No problem!”

      Seriously, every time I see this from a bitcoin shill, it adds another data-point to two theories:

      a) you have no understanding whatsoever about what makes a currency work,

      b) you guys believe the mass of society are terminally credulous dimwits.

      • a) All it takes is belief and stable foundation.

        b) The masses of good people is what makes bitcoin work, not a few select who bribed their way to power.

      • Any of the “bitheads” you are referring to that try to promote bitcoin as an absolutely perfect currency are deluded. Bitcoin, like any currency, has it’s flaws and vulnerabilities. Perhaps the recent turmoil related to the debt ceiling will help you to understand that a currency can have vulnerability and still be viable.

        Take a look at who owns the debt of the Unites States http://en.wikipedia.org/wiki/File:Estimated_ownership_of_treasury_securities_by_year.gif
        Notice how the fed and foreign interests have gone from owning 61% of the United States debt to owning 75% of the debt in a very short period. At the same time, individual investors hold 1/3 of the bonds that they used to.

        This just shows you that the ownership and control of a currency isn’t as important as the faith that people have in it. If I have to choose between putting my faith in cryptography and a distributed network, or putting my faith in countries that seem to be running out of money as fast as Zimbabwe did, I’ll choose cryptography every time.

        It’s funny that you reference Zimbabwe in your comments and mention that they’ve inflated their currency out of it’s value. The US government is going to end up getting a $2 Trillion dollar extension on their never-ending credit line next week. What makes you think the US is immune to the same sort of inflationary spiral?

        At this point there is a regular volume of millions of dollars a week being traded in BTC. If the bitcoin economy can establish itself, there is no reason that the hurdles you mention will restrict the currency.

        • “This just shows you that the ownership and control of a currency isn’t as important as the faith that people have in it. If I have to choose between putting my faith in cryptography and a distributed network, or putting my faith in countries that seem to be running out of money as fast as Zimbabwe did, I’ll choose cryptography every time.”

          You are completely deluded if you think this is all about faith in the cryptography and “distributed network”.

          Let me repeat myself: you are putting your faith in the developers of the bitcoin client, while making a bet that no one will ever out-compute you. While these bets are not completely independent of each other (read Ben Laurie), there is precious little reason to make either bet.

          First, the developers are almost certainly in as much a conflict of interest with respect to their currency as is the US Federal Reserve is to Wall Street. We can predict — holy cow, >>EXPECT<< — they will serve their interests before all others. Not only that, but they will rationalize their conflict with arguments that resemble "what's good for GM is good for America". Sound familiar?

          Second, the amount of processing power in the bitcoin network is negligible by today's standards and utterly non-existent to even small-sized economic actors. Basically, once anyone perceives a real threat, bitcoin will be squished. While the gamers struggle to keep their GPU's from overheating, VISA or the government will just start popping off custom IC's at a fraction of the cost in development and electricity.

          Here are the questions potential investors in bitcoin should be asking:

          If we can't trust the Fed or other central banks to act in our general interests, then why should we be trusting the bitcoin developers? Because they espouse neo-goldbug, Austrian economics?

          Have you read the source? Do you understand the fine details of Nakamoto's paper?

          Are you aware of the real fundamentals of bitcoin, and can perceive the trivial existential threats to the network?

          Is it even possible to create a "distributed network" that manifests currency-like properties, in a manner that is operationally distinct from central banking systems?

          That you ("Bitcoin Venture Capital") say you would trust a toy application over the USD is pretty good evidence you have done none of the above. Verily, the USD may be not worth the paper it is printed on, but bitcoin — as presently deployed — is worth far, far, less.

          "What makes you think the US is immune to the same sort of inflationary spiral?"

          Did I say something about the long-term viability of the USD?

          The question is whether bitcoin is viable. Even if all the bit-warts could be corrected, can it survive and thrive in an era dominated by state sponsored fiat currencies?

          In any case, I am pleased that my Zimbabwe reference has touched a nerve with the bitheads. One hopes the lesson that brainless inflation is just as destructive as brainless deflation sinks in, and we don't have to roll our eyes at yet more appearances of the "infinite divisibility" 'argument'.

          The next lesson is that the sentence "Start using bitcoin because the USD is failing." contains at least one logical fallacy.

          • Incorrect. The currency is a currency, not a short-term investment vehicle, and certainly not a stock. Bitcoin’s cooperative nature of the infrastructure is in part a direct contradiction of your notions of its operation.

            The convenience of the currency, and its properties, and the mathematics that protect the hash chain, and its open source, are the reasons to use it as a currency. Therefore, it doesn’t actually matter what the current price is in an exchange market. It was still worthwhile back when it was $0.20USD and cheaper, there just weren’t enough of them in circulation and in enough hands to absorb entire economies.

            But we’re getting there.

            And I have read the source. I have also read Satoshi’s paper. But the paper doesn’t define Bitcoins, all it does is present an interesting way to solve the double-spend problem. The real details are documented primarily, and most accurately, only in the source code itself.

            That you think people wouldn’t give away software for the good of the people as a whole, that such people don’t exist, that these people wouldn’t be interested in operating mining equipment at least partly for the purpose of absorbing chunks of the economy away from the current financial oligarchies means you are forgetting a huge part of human history, back to ancient Greece and earlier, and up through Linux and the *BSDs.

            Meanwhile, the trustworthiness of the Bitcoin developers is irrelevant because of the transparency of the entire operation of the network. Everything is visible. It’s open source! Do you think the developers could introduce something that paid them a million dollars without the community as a whole rejecting the new software outright? Anyone could have been mining since Bitcoin was released. But nobody did except the founders. They were the ones spending their power and money protecting the early network.

            The fact that we can audit the source and watch every message on the network means we’re already head and shoulders above current government policy on fiat currencies.

            Meanwhile, a computational attack on the network also serves the interests of the network.

            One hash is about 8k-12k FLOPS equivalent; therefore, the current FLOPS rate of the network is hitting peaks of ~ 180PFLOPS.

            That’s kind of a lot. Say you built a structured ASIC similar to Art’s, which did ~ 200MH/s, @ $300/ea. You would need 75000 = $22.5m, just to equal the current network and have a slim long-term chance of outrunning the network by.. a single block, ignoring the cost of power.

            Double that for a 66% share of the entire network, for a more reasonable chance of success, long-term. So, $45m.

            …to kill a network that would just code around your efforts to inject overwriting blocks or double-spends within a few days tops. Your damage is minimized, and you have one chance to do something big, and inside of a very short, outran block chain that you hope hasn’t been obsoleted by a hardcoded hash checkpoint. It absorbs the attack, and gets stronger because of it.

            The hashrate which supports our tiny economy is ridiculous. By the time it is a threat to someone, the hashrate supporting it will be proportionally larger, and will be beyond the efforts of all but medium-to-large governments to stamp it out using the already well-studied hashrate attack.

            You seem to think the most viable attack is a competing hashrate. You are wrong.

  10. samantha23: “you should “care” about my feelings towards credit cards because you suggested that credit cards are “popular” with merchants, and as a merchant my feelings directly refute your claim.”

    I don’t care whether or not you personally like or dislike the color pink, petunias, or credit cards. Why should I? Your business, not mine.

    From the customer perspective, all I see is that virtually all online businesses accept credit cards. Hence, they are “popular”. I have given you the obvious reasons why they are in this state, and have been in this state for decades, and will remain in this state for a long time to come.

    “Amongst my associates who also own businesses, the attitude towards credit cards is one of dislike, they are a necessary evil. They cut into profit margins, plain and simple. If bitcoin provides lower fees, that in itself is enough to perk the interest of many a business owner. ”

    You are being sold a bill of goods. The equilibrium state of bitcoin will be identical to the current day: the fees will just go elsewhere. Actually, not even that, as it is likely that current day credit card companies (or their descendents) will operate bitcoin. Oh, the irony!

    Your only hope is if you can convince your customers to (a) accept all the risk and/or (b) pay all the fees. Alas, this is an anti-customer position, and frankly, people like you do not deserve to persist in the market.

    My opinion of course, but then again, you basically did ask for it (“you should care …”) Ta ta!

  11. Dear Calcinv,

    Your calculations do not seem right.
    First of all there are the economics of mining which will have an stabilizing effect in the long run. When the profit of mining depends on the (energy) electricity costs and the technology (gpu) costs.
    Depending on the price of the bitcoin people will put their systems on or off + the stabilizing formula for difficulty will keep the decreasing increase stable.
    But as what you implicitely assumed the relative effect on the price of mining could become smaller.
    Secondly you should think about the social interactions that make up the price. In essense it is a matter of valuation. When all factors are known valuation will be stable, but when risks increase, risk premia are necessary and the future cash flows will be discounted differently. Think about the absence of interest rate risk, inflation risk and other price distortions that are made by human interference with the value of the measure of exchange.

  12. Bitcoins = no risk

  13. First, currencies are not meant to be “stores of value”, land, real estate, stocks, bonds, etc are for long term store of wealth/value.

    The purpose of currencies are to be a temporary transaction medium.

    Second, you imply that central banks is something good, what a central bank essentially is, is a bunch of politicians sitting around a table deciding the short term interest rates and other things on their own whim (yes it’s economic dictatorship, todays economies are manipulated markets). Do you really think human individuals can decide what interest rate should be better than the general market can? Central banks is all about power and control.

    Bitcoins have built in deflation, this is both a pro and a con. The properties of Bitcoin is extremely valueable so people will be attracted to it, and use it.

    – zero cost transactions, can you believe that you can transfer 10 million USD anywhere in the world in less than 5 minutes for a cost zero dollars! Can any other transaction types match that? Visa/Mastercard? nope they want 1% of the transacted value. Retail and Commercial banks? nope, they also enforce these artificial bank holidays, no wire-transfers on Saturdays/Sundays.

  14. Good article. I’m convinced that bitcoin will succeed because it is more than just a “currency” as that term is defined by historical examples. Bitcoin has no historical precedence, so an analysis of bitcoin using current economic theory of historical currency may not be useful. In addition to having properties of a currency, bitcoin has the properties of a service. All of those bitcoin users provide a service to each other, a service that banks and other trusted, third-party middlemen provide in the traditional currency system. Even if bitcoin is not widely adopted, it will continue to exist in as an alternative payment system. I predict that bitcoin will become a known and widely used alternative to paypal, for example.

    You said, “I’m convinced that Bitcoin will eventually fail.” Well, every currency will fail…eventually. Could you put a time frame on that prediction please?

  15. I am always looking out for good solid reasons why bitcoin will fail.  There are good ones out there but this one is not it.
    I am sorry I did not read the rest of the article after you said bitcoin will fail because there is no central bank to stabilize it.   Your statements about central banks are academically accurate if you were trying to pass a university economic test however in the real world central banking has been a dismal failure.   Over the past 10 years prices have constantly gone up. That has been caused by negative real interest rates set by “Central banks” and we are at the edge of hyperinflation as Ben Bernake list his options that include QE3.

    Anyhow there are financial tools that can be used to ease out risk of a fixed currency and the constant price deflationary aspects of limited assets.

  16. So Bitcoin will fail because it does not inflate. [Yawning]

    That’s probably why gold nowadays is completely worthless. Oh, poor gold owners. Poor Keynesian economists, they seem not to understand that their sophisticated economic theory is wrong.

    Keynesian economists would have predicted the burst of the dollar bubble just as well as they would probably say that no one would buy computers and mobile phones at ever decreasing prices. Do you tjink is a coincidence that the crowds laugh on economists? They rarely get a prediction right.

    Keynesian economic theories are an excellent excuse for elites to keep control of the money supply. Followers of those theories are just bureaucrats unable to think independently. Even the shallowest honest analysis of Keynesian premises can lead to invalidate the theory. Good logic on false premises lead to bad results. Garbage in, garbage out.

    Let me elaborate for the sake of argument. Inflation is supposed to be necessary so people invest instead of hold on to money. Well, wrong, inflation doesn’t encourage investment, it just encourage spending. Ks the average credit card balance “investment”?

    Investment should be financed with savings, not credit, so it’s savings that should be encouraged. Bitcoin, just as gold, encourage savings, the basis of solid investment. Credit is evil, it’s enslaving.

    So, bureaucrat, if you don’t come to help, please stay out of my lawn!

  17. I think your analysis is (broadly) correct. I don’t see much of an issue with deflation, but the possibility of inflation if demand for the currency drops looms large. Since bitcoin does not provide any backstop to prop up prices (i.e. destroy extant coins), the prospect of an inflationary spiral looms large. (possible scenario: merchants expect bitcoin to inflate so they refuse to accept the currency, this is a self-fulfilling prophecy – so inflation occurs, this cause more merchants to expect inflation, self-fulfilling prophecy – inflation occurs, …, price plummets to zero). Of course, there can be deflationary spirals as well. These are fine as long as they last.

    A second problem is that the security of bitcoins is designed to be unsustainable. The currency issues coins to pay people to use their computing power to protect the currency from hacking. There is no credible explanation of how these will people can be paid as the system issues fewer and fewer coins and eventually nothing. The percentage of extant bitcoins devoted to security is coded to fall exponentially over time. Either security was never necessary or the system will become insecure.

    Final note. Both of these problems are solvable. It is just that bitcoin hasn’t solved them.

  18. Just a few comments:

    “Bitcoin is decoupled from capital and labour”. Not exactly. Similar to mining for gold, there is a finite supply of bitcoin (approx. 21M) and while the rate of bitcoin creation is designed to follow a mathematically predictable (inverse hockey stick) curve, they are allocated in direct proportion to those individuals who supply mining labor. It is work (expertise, electricity, GPU power, cooling, etc. and time) for an individual working alone or in a pool (think “mining company”) to mine a coin. It is also like gold, for now, fiercely competitive. In terms of capital, mining is no longer worthwhile for all but the diehards, and so most bitcoin is now being purchased for USD and other gov’t money from exchanges such as Mt Gox.
    Therefore I believe that bitcoin is coupled to labor and to capital.

    “The BitFed is injecting fiat into the currency”. This was a fiat currency to begin with. It’s not pegged to a commodity and it’s not backed by a gov’t (which I think is how you’re defining fiat). It is simply backed by the people and the computing resources used by the people who run the client. That’s it, that’s all. It’s not backed by the developers unless they are running the client.

    Paraphrase: “There is no destruction of bitcoin”. Actually a significant amount has been lost by those who have deleted or lost their wallet files or have abandoned using it. In that respect, it can be destroyed like cash, but currently not by a central authority. So there is an uncontrolled “sink” of sorts, and much Bitcoin has already been destroyed.

    Paraphrase: “Best case endgame scenario is that the BitFed will serve their own interests or VISA or the US government or someone else will put up a giant server farm to destroy Bitcoin by outcomputing the gaming geeks.”

    1) Of course many people tend to act in their own rational self-interest, notably the Rand inspired people involved in this project. However, it’s important here to note that the developers don’t control the client or anything else. Let me explain the management of an open source project to you by using the most famous one, Linux, as an example. Linux is the operating system which powers most the servers on the Internet.

    Most projects are a volunteer, technical merit based, benign dictatorship. So you don’t get a vote or influence unless you’re on the project, and you’re not on the project unless you have technical merit and contribute. After debate the head of the project typically has final say about what goes in. Not only that, outside groups could co-opt, pay these guys off, or otherwise influence them (Gavin has already presented to the CIA). So this is bad. But here’s what’s built in that fixes it: the code is fully transparent and can be reviewed by anyone. Also, if you don’t like it, don’t use it. Vote with your feet and walk. Or…”fork” the project, in other words, use whatever bits of it you like and make your own currency with your rules. Don’t know how to program? Hire someone, or learn yourself. In fact, there are probably 50 versions (called “distributions”) of Linux out there. Competition is good.

    2) VISA or some other group with resources will outcomputer and subvert/kill the project. Sure, maybe. That becomes more difficult as time goes on and those checkpoints are hardcoded in. Also, per the paper it’s designed so that someone with 51% or more of the computing power on the network is rewarded more by mining and accruing transaction fees then by counterfeiting/invalidating. But, let’s say it happens…ok, we get annoyed and leave and start WidgetCoin and redesign it so that kind of attack is more difficult. The Internet was originally designed by the US DoD to be decentralized and withstand Soviet nuclear attack. It is very hard to eradicate the Internet (and P2P) at this point. The vast music industry killed Napster, but couldn’t kill BitTorrent. Bitcoin is the same, very soon it’s not going to be trivial to shut it down by computation alone. Something more resilient will pop up and take its place.

    Now I do have some ideas about what would kill Bitcoin, but I’ll save them for my next reply.

  19. The best way for them to destroy bitcoin would be to make a well backed rival and advertise it.
    If somebody tries to attack the system the system is coded to reject them.
    There are ways to kill it but it is hard.
    The cpu that people keep saying would kill it is currently more than the us defence network of super-computers.
    Just something to think about.

  20. Still sticking to your story?
    Since writing this, have you at least read the Bitcoin white paper to understand how it works?

  21. It was fun to read this article more than five years later when bitcoin is almost $1000

  22. Hello it’s 2017
    Bitcoin is now 4$k
    And it’s still not too late.

  23. So … 3 months since the previous comment and it has more than doubled again. Currently holding fairly steady between $8,000 and $8,300

  24. Hi everybody early December 2017.
    Bitcoin now 11.5 $k.
    Boy was he wrong.

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