Ben Laurie on BitCoin

I wrote yesterday about Dan Kaminsky's excellent thoughts on BitCoin, and wished aloud for comparable work from Ben Laurie. It turns out such work exists: here's Ben's critique of BitCoin, and here's his proposal for an alternative. Both are short, clear, excellent reads.


  1. No mention of the inherent problems associated with a purposely deflationary currency?  To me, that’s the real deal-breaker. 

    1. Many people see that as a feature, not a bug. And one of the nice things about bitcoin is that no one is forced to use it, unlike certain other currencies.

      Laurie’s analysis from 2011 entirely misses the point. Of course there has to be “central authority” that determines what transactions are accepted. But with bitcoin this central authority is open to participation by anyone at any time,  participation is entirely voluntary, and everyone is incentivized to behave.  That’s an enormous difference between bitcoin and most existing monetary systems.

      1.  Being deflationary is a feature for speculation, but not for use as a currency in an actual economy. And that’s what BitCoin is in the end: a totally artificial medium for speculation, rather than a reliable currency.

        1.  everyone repeats that deflation is oooh bad, so bad. But the US had a long period of deflation in the 1800’s, some of the greatest expansion the nation has ever seen, prices declined 32% while incomes rose 110%. As Jim Grant points out in many cases declining prices can otherwise be known as “progress”. My laptop has more power than a mainframe of 15 years ago etc etc and nobody complains about that and the tech industry seems to hum along. But the central bank operating myth that prices must rise (so banks can sell more debt) is very very ingrained. Free your minds

    2. How is either Laurie’s proposal or BitCoin purposely deflationary? Neither of them specify the number of participants in the market, BitCoin does not allow for a decrease of the money supply and has a routinely increased money supply (though the rate of increase declines slowly on a published schedule, which is disinflation, not deflation), and Laurie’s proposal includes no requirements on how the “mintettes” should agree on the rate of money supply, so that’s an open question.
      The speculative rush to BitCoins causing a deflationary temporal phenomenon in the market is not a purposeful feature of the protocol, and even if you analyse the number of participants and the money supply in the BitCoin market under classic monetarist theory, the hyper-deflation is far more ascribable to speculation and market rush. Once those level off – there’s only so much computing power available to most people, so the mining rush is mostly over, except for pools and professional ASIC-wielding miners – the value will stabilise when the cost of machinery and electricity meets the value of the BitCoin for the majority (hint: that’s easily calculated from publicly available figures).

      1. “BitCoin does not allow for a decrease of the money supply and has a routinely increased money supply (though the rate of increase declines slowly on a published schedule, which is disinflation, not deflation)”

        Inflation & deflation are not about the absolute amount of currency but the ratio of currency to goods and services.  When the amount of currency in the economy is growing faster than the production of goods and services, there is inflation.  More money chasing the same amount of goods.  When the reverse is true, there is deflation: the same amount of money can buy more goods.  The main point is that it is a ratio.

        The economy will continue to grow, or so we hope.  For now, the amount of Bitcoins that exist (or will be produced) is fixed.  When the rate of production of goods and services in the Bitcoin economy grows faster than the production of Bitcoins, there will be deflation: each Bitcoin can purchase increasing amounts of goods.  Any holder of Bitcoins will be better off deferring any purchases because the same amount of Bitcoins tomorrow will purchase more goods and services than that amount of Bitcoins can purchase today.  People hoard currency.  This leads to a dramatic slowdown in economic activity.

        When this happens with regular currencies, the central bank can adjust the amount of currency.  What will happen in the Bitcoin world?

        1. Indeed, you have described ISLM and risk-adjustment theory. BitCoin has a dramatic difference from central-bank-adjusted-regulated-taxed-seizable currency: there will be no buy-back, no adjustment, no stimulus. If the market – the MARKET – can’t sell items, in BitCoin, because too many are holding on to their BitCoin, the MARKET will sell the items for another currency – digital or physical. The exchanges between dollars and bitcoins are fairly fluid for small amounts, less than a hundred dollars or so – which is what BitCoin is being used for, and often for just long enough to perform the market transaction. For them, inflation and deflation occur at too slow a rate to matter.
          For the speculators, the market is absorbing their discretionary capital – no-one is buying bread or milk, neither are they buying houses or building businesses through BitCoin. If they weren’t investing in BitCoin, they’d be investing in gold, or rare earths, or some actually-toxic exotic financial instrument that’s actually tied to someone’s livelihood or retirement.
          When the demand for BitCoin collapses, because a major exchange gets hacked, or a competing and superior system is introduced, or it loses its novelty because the holders want to buy something the market isn’t offering, or the demand declines, the bitcoins will get sold, market disdeflation or equilibrium or inflation will occur, etcetera.
          The deflation would be a concern if there was high liquidity, or no liquidity, or no alternative trade mechanism, or no exchanges. BitCoin doesn’t have these problems, it doesn’t exist in a vacuum, and it shows the value people ascribe to a value exchange system that cannot be used to prosecute an unconstitutional cultural war against substances, isn’t subject to a political party’s whims or machinations to collapse a government or form of government, and can’t be (inherently) used to raid their pensions or enforce “austerity” measures that are designed to protect unprosecutable high-class thieves.
          What happens? The market happens, and not a thumb-on-the-balance-scales “market” that the world’s economy has become.

          1. If there is high demand for Bitcoin, but the supply grows only slowly (and eventually becomes fixed), the price of goods and services denominated in Bitcoin will rise and rise.  However, you are correct to point out that Bitcoin is just a small part of global economy.  It is a small part, even, of the online economy.  And currencies are to some extent, substitutable.  If there is high demand for Bitcoin and the supply is fixed, ultimately people will shift some of that demand to other currencies.

            The dangers of deflation are currently avoidable precisely BECAUSE so few people use Bitcoin and so many other options exist.  But that doesn’t seem to be a great argument for more people adopting Bitcoin!  If more people adopt Bitcoin, the deflation issue becomes more and more relevant.

            This indicates to me that Bitcoin will remain a cool toy and niche currency, suitable for speculation and maybe some black market transactions.  But the Bitcoin economy will never be any meaningful proportion of global economic activity.  At least, IMHO.

        2. What will happen?  Nothing.  If I want to buy some LSD, I will buy some BitCoin, and transfer it via Silk Road.  The seller will transfer it back into USD or whatever tickles his fancy.  The price can be 1 BitCoin to 1,000 USD, or 1,000 BitCoin to 1 USD.  It literally does not matter, so long as that exchange doesn’t fluctuate violently in the few minutes it takes to complete the transaction.  I am going to shove $40 USD in one end, and the seller is going to pull $40 USD out the other end.  

          People can horde until hell freezes over, and it doesn’t diminish the use of BitCoin.  The only people who care about how the conversion to USD and BitCoin changes are people speculating or saving money in the form of BitCoin.  If you save money as BitCoin, you are a moron.  If you are speculating, well, it is your money to gamble.  

          Finally, if you truly believe that BitCoin is deflationary, WTF are you doing here?  GO BUY SOME. 

          1. “if you truly believe that Bitcoin is deflationary, WTF are you doing here?  GO BUY SOME.”

            This gets to the heart of the matter.  Bitcoin may be a fun speculative investment.  But as a medium of exchange?  Not so much.  Why would I spend any Bitcoins if I expect them to become more valuable?  Any purchases I can delay, should be delayed.  My Bitcoins will buy more computer equipment next month than they will today.  The other issue, of course, is that Bitcoin deflation will be a long-run phenomena.  Who the heck knows what it will do over the next days, weeks, or months.

            Currencies serve as a store of value, as a medium of exchange, and as a unit of account.  If we expect Bitcoin to appreciate over time, it will be doing quite well as a store of value.  But to the very extent that this is true, it will be a terrible medium of exchange!  And if there is high volatility in the US$/Bitcoin exchange rate (as we have seen over the past months), then it fails as a unit of account.

            So on the whole, Bitcoin looks like it will be a good toy for speculators to play around with.  Personally, I haven’t got that the taste (or perhaps nerves is the better word) for that kind of gambling.  More power to you if you do.

          2. What are you, an economist?  No one is going to delay purchasing LSD because BitCoin might be worth more in a year.  If you truly believe that it is going to be worth more in a year, then fucking go buy some.  If you are not confident enough to do that, then you clearly don’t believe the words coming out of your mouth.

            BitCoin isn’t a worthwhile store of value.  The price clearly isn’t stable and there certainly is speculation.  It IS a worthwhile medium of exchange.   It does stuff no dollar can.   The actual value of a BitCoin is independent of how stable it is as a medium of exchange.  If you can convert dollars to BitCoin to dollars again in a day and keep roughly the same value, it just made itself useful.

          3. Incidentally, as far as investment advice goes, saying that I believe that Bitcoin is deflationary over the long run is just another way of saying that I believe the global economy will grow faster than the supply of Bitcoins.  Therefore, the implied investment advice is NOT to go buy Bitcoins but to buy an indexed mutual fund that covers the market.  That’s a bet that the economy will grow over time, and you are not vulnerable to all the many, many uncertainties around Bitcoin (eg, regulatory risk). 

          4. Uh, no.  You are having a fundamental misunderstanding of economics.  The value of BitCoin can grow or contract independent of the economy.  If the Euro imploded tomorrow and went into  hyperinflation, the value of BitCoins (and USD) would go up, and the world economy would implode.  If suddenly world unemployment went to 3% and all governments balanced their budgets, the value of BitCoin would probably collapse down to a fraction of what it is now because its value as something to speculate on would shrink.  It would still retain some value as a black/grey market transaction medium.

            Deflation of BitCoin has little to do with the world economy.  The only way the real world economy is going to realistically effect BitCoin would be if currencies started to fail and go into hyper inflation, in which case BitCoin would likely deflate (increase in value) as people ran to put savings in something that isn’t inflating.

        3. Rather, what happens when people start buying and selling bread and milk and houses and bikes and etcetera for distributed digital currency, and the markets being manipulated for the benefit of the .01% dry up? Will it matter if they have 384 million USD when 384 million USD can’t buy a used car?

          1. There is nothing that the .01% loves more than a deflationary economy. After all, they are by definition the segment of the population that can afford to leave 99% of their assets sitting in the bank. Regular people have to spend the majority of their money as fast as they earn it.

            A strongly deflationary economy will always end up looking like good old fashioned feudalism.

          2. They could “afford” it, except that leaving an asset unappreciated or unexploited is not the hallmark of the .01%. Most of their assets are illiquid, but handsomely appreciating – much like BitCoin. The thing that makes BitCoin repulsive to an actual investor (actual investor as opposed to a commodity speculator) is that BitCoin is a commodity, not an investment, and the best investment in BitCoin is in the shovels (mining rigs).

            BitCoin isn’t an economy. It’s a financial instrument in a diverse economy – a financial instrument that is highly valued, and highly speculated upon, and with no way to tell the difference between bitcoins that are being sat on in hopes of appreciating and bitcoins that no-one has the keys to because they were stolen and/or lost.

            Feudalism involved a complete lack of liquidity and exchangeability – everything you had belonged to the guy above you in the hierarchy, and everything he had to the one above him.

            And the legacy of BitCoin might just – metaphorically – be large accumulated piles of unmoveable stone.

          3. Inflation is good for borrowers, bad for lenders.  Deflation could be the reverse, but in practice it is so bad for the economy in general that everyone suffers.  If you look at the history of the Great Depression in the US, the poor suffered terribly, but the wealthy did not prosper.  Everyone, rich and poor alike, would have been better off if that period of deflation could have been avoided.

    3. Uhg, give it up with the OMFGITISDEFLATIONARY!!111!!!  You really and truly don’t understand what that means or else you wouldn’t be saying it.

      Deflationary currency is bad if you are a sovereign nation with a central bank trying to manipulate your currency to achieve social policy goals.  Are you a sovereign nation with a central bank?  No?  Then stop freaking out over its lack of inflation.  You don’t need to balance your trade or inflate away your sovereign debt, so why the bloody fuck do you care if the coin is inflationary or deflationary?  

      If you really believe that BitCoin is strongly deflationary, then, um, stop bitching about it, and GO BUY SOME.  Go put your money where your mouth is.  A deflationary currency is the kind of currency you want to have a pile of.  It means that if you buy $100 USD worth today, you can sell it for MORE than that tomorrow.

      The only people in this world that have the right to bitch and moan about deflationary currency outside of sovereign central banks are people who are writing contracts or using BitCoin to invest in capital.  You probably shouldn’t be buying large scale capital equipment on a payment plan with BitCoin.  Is anyone doing that?  No?  Then GTFO and go read an economics book until you understand why deflationary currencies are bad when you are a sovereign nation, and understand how that means less than nothing for an individual.

      This OMFG IT IS DEFLATIONARY!!!11!! meme is so stupid it physically hurts.  If BitCoin was showing signs of inflation, you would be correct in questioning its long term survivability.  Complaining about it being deflationary means you really and truly do not understand WTF you are talking about.


      1. Thanks for covering this facet of the discussion – it saves me the time and experience of becoming motivated (ie angry enough about the elephant-throwing and Gish-galloping) to write the response you’ve written. Thank you, thank you, thank you.

      2. If the majority of the economy your livelihood relies on is un-alterably tied to a currency that’s deflationary, or inflationary, you have a problem, if you are a seller or a buyer, respectively. BitCoin and other actual and hypothetical digital currencies, and government-issued currencies, and exchanges, ameliorate the central problem in either situation : the “un-alterably tied to” part.
        What has this problem built-in? IRAs, 401-Ks, insurance policies, certificates of deposit, and all the other “investment products” that are supposed to offer a hedge against inflation, might (if you are lucky) barely beat inflation and cost-of-living adjustments (but often do not), and stipulate significant penalties for early withdrawal, and which are far more risky than what the public was led to believe, as evidenced in 2008, 2009, 2010, 2011, 2012…

    1.  Quite amusing, given the comments in the previous BitCoin thread.  No doubt the local BitCoin proselytizer bardfinn will accuse the Nobel Laureate of Economics of not understanding basic economic theory…

      1. Talk about the the old appeal to authority argument.  Did you even read the article?  Krugman spends a few hundred words saying nothing and flailing at a straw man that no one here has proposed.  Krugman argues that dollars are good enough, you should trust that dollars will continue to be good enough, and that BitCoins singular goal is to be finite, which is dumb and wrong.

        Dollars are clearly not good enough if you want to do a black market transaction, like gamble, buy drugs, or order a vibrator in Saudi Arabia.  Dollars are also clearly not good enough if the government has strong-armed companies into putting up an embargo on something like Wikileaks.  Now, you can claim that doing any of the above is immoral and wrong (and I would think you are a jerk who can’t keep his hands to himself), but the need is there.

        Finally, he argues that the point of BitCoin is to have a finite supply because people are afraid of inflation.  On this point, Krugman is an idiot.  BitCoin isn’t a fucking national currency.  It isn’t trying to be.  It doesn’t want to be.  He is under the delusion that it is in competition to replace national currency, and that the crypto-nerds that developed it thought they were solving an economic problem.  They aren’t and they weren’t.  They just wanted a way to keep the coin from devaluing too fast, and distribute the money.  They picked a natural resource model because they wanted people to emulate the mining behavior, not because they thought a deflationary currency would solve sovereign debt or add jobs.

        I don’t understand why it is so fucking hard for people to understand that BitCoin isn’t a national currency run by a sovereign bank.  It doesn’t give two shits about the balance of trade or sovereign debt.  It isn’t a government instrument of economic manipulation.  It has an entirely different and unique purpose, so stop pointing to a USD and a BitCoin and going “uh, they are different, this one must be bad”.  BitCoin teleports money around the world without transaction fees, anonymously.  That is its goal, and it does it very well.  Dollars suck at this.

        1. “Dollars are clearly not good enough if you want to do a black market transaction, like gamble, buy drugs, or order a vibrator in Saudi Arabia.  Dollars are also clearly not good enough if the government has strong-armed companies into putting up an embargo on something like Wikileaks.  Now, you can claim that doing any of the above is immoral and wrong (and I would think you are a jerk who can’t keep his hands to himself), but the need is there.”

          Strange, my dealer on my speed dial won’t take bitcoins.

          They take unmarked, non sequential dollars just fine.  Or precious metals/stones.

          I tried trading small arms, but apparently they get these cheap like candy in certain places.

        2. Actually, Krugman didn’t say nothing. He said something. Maybe it sounded like “nothing” because you didn’t like it.

          Also, the part about $USD being “clearly not good enough if you want to… buy drugs” is one many people disagree with, such as every junkie I know; and the one dealer I know still acepts $USD and, surprisingly, doesn’t accept Bitcoin. Also, Monopoly money.

          1. No, he really doesn’t have anything worthwhile to say.  He is speaking to gold bug paranoids.  No one on this thread is advocating that.  Everyone on this thread talks about BitCoin as having value as a medium of exchange.

            As far as concern side drug dealers, sure, you can buy drugs off of the street, and good luck to you.  In order for that exchange to happen you and the dealer have to know each others identities and come to a verbal agreement.  If either party is an undercover cop or has been busted and been forced to turn informant, you are going to spend some quality time in prison.  If the drug dealer is selling shit, you won’t know because you don’t get to survey all of his clients.  You rarely get a choice of multiple dealers.  If you call that a “working”, you are a moron.  That is barely functional, and that doesn’t include the non-legal black market dangers you encounter when dealing with a drug dealer.  

            Functioning shittily is not good enough.  Have you ever actually tried to buy anything more exciting than pot from a drug dealer?  It is a shitty experience that often results crap.

            I’ll take Silk Road any day of the week over risking life, limb, and liberty with a drug dealer.  Dollars and street side deals fucking suck when it comes to buying drugs.

      2. Three things:
        First, I’m not a proselytiser for or against it. I am the local One Man Campaign For More Facts, Fewer Assumptions;
        Second, you will note I am not impressed by argument from authority, nor by the Nobel Prize, as one very famous recipient of the Peace prize is currently prosecuting bombing campaigns in countries the USA is not at war with and has not kept a promise to shut down a prisoner-of-war-on-Islam camp. Nobels do not mean infallibility or even championship; in today’s world, the best you can ask for is an argument from basic principles that avoids fallacies. Don’t get me wrong – Krugman is my favourite economist of all time – I’d make Krugman a Cabinet member, I /wish/ the world had listened to him for the past decade, but I would not make him head of the FED.
        Third, if you thought Krugman’s argument had merit versus something I had argued, you should have replied to something I argued. This – is silly. I only have it out for bad arguments, and I like you as a human, ok?

      3. “The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

        Paul Krugman, 1998

        Here’s a thing to remember buddy: Having a nobel laureate of economics isn’t a license to prophecy. People can’t see the future, and neither can a nobel laureate.

    2. In other words what Krugman is saying is, that if you blow more air in to a balloon it is deflating.

      Is there a way of taking back his Nobel price.

      To his excuse he is only mixing up words, economy and currency.

  2. My own preference would be for a currency that is neither inflationary or deflationary, but keeps (on the long-term average) a stable value relative to goods and services.

  3. True. What you do need is between 400MB to ten gigabytes of free disk space (depending) and a little patience.

  4. Without trying to be negative – Ben Laurie’s article wasn’t relevant, clear or helpful even at the time it was written.

  5. Ben completely misses the mark. He proposes bitcoin without proof of work. While he bemoans that a network with the proof of work would be attackable if somebody amasses 50% of the computing power, his proposed solution would be attackable without even that.

    Proof of work keeps the network honest. Creating a fork requires real world resources. Those do not come cheap. If you gain control over the network by beating 50% of its computing power, you are becoming a target. If you behave, your work that your resources bought you is not in perill. But if you do not behave (i.e. violate rules previously coded into everybody elses software like crediting yourself limitless coins) then you run the risk of having all your work invalidated by random chance slightly less than the chance of a coin toss every 10 minutes to loose your fork.

    It is in the best interest of malicious forks, to behave benevolently, even if they could do otherwise, because their investment in a fork can instantly loose any value if they do not.

    1. While he bemoans that a network with the proof of work would be attackable if somebody amasses 50% of the computing power…

      You mis-read the article. He says that the consensus network is attackable if someone amasses 0.1% more computing power than is currently used by bitcoin.

      If, for example, 1% of the total power available is used to produce Bitcoins at present (in fact, the amount is far less than that), then at any point someone could come along with a further 1.1% of the total power and use this to define their own consensus, thus invalidating all the work, and all the money, of the initial group, and instead take possession of the entire currency for themselves.

      Since Bitcoin currently uses far less than 1% of the world’s computing power, this isn’t impossible, even though it would be difficult. If Google decided to “go rogue,” for example, they could almost certainly manipulate the Bitcoin markets using their own servers alone, and could quite likely create their own consensus of what a BitCoin was worth.

  6. For those concerned about falling prices leading to economic stagnation, we already have a counter example of this in practice: electronics. Why ever would you buy a computer or smartphone knowing it will be cheaper tomorrow? 
    Another counter argument is that when a currency gains in value over time, people are eager to acquire that currency so they offer goods and services for it. Again, we see this in practice as more and more merchants are accepting bitcoins on a daily basis. 

  7. SO, if I’m understanding bitcoin correctly, it seems to me that at it’s best, at some point it will be an inexpensive way for people to send and receive payments quickly to then be converted to their own real currency on either end.
    As of now, it’s just so people can argue on the internet..

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