[ThereBeDragons]

The problem seems to be that the people in control of bitcoin have no reason not to try and abuse it for their own ends. Once it gets big enough and they can cash out for millions or maybe even a billion or more dollars, who's to say that they won't "print" a lot of bitcoins and do it?

The supply of bitcoins is finite.

[Rainbow Crow]

Why, though? Because the people running it said they would be?

[ThereBeDragons]

Why, though? Because the people running it said they would be?

Because it is mathematically impossible to make more than that many bitcoins.

[Rainbow Crow]

Ok, fair enough, I don't know much about bitcoins. A lot of it doesn't make sense to me.

[Someone5]

The problem seems to be that the people in control of bitcoin have no reason not to try and abuse it for their own ends. Once it gets big enough and they can cash out for millions or maybe even a billion or more dollars, who's to say that they won't "print" a lot of bitcoins and do it?

They do not have the capacity to do so, nor would the protocol they have established allow it.

[SolarCross]

The US government spends a billion dollars buying computers and network capacity for an immense and sustained DDoS attack against the bitcoin network.
You are assuming that laws are the only weapon in a government's toolbox.

DDoS attacks are problematic for server/client models but I think p2p networks are much more resilient to that kind of attack. Bitcoin of course is p2p. I doubt that even the US gov would be lunatic enough to try to DDoS an increasingly extensive p2p network. Bitcoin nodes don't even use that much bandwidth, most of the work is in internal number crunching not data transmission.

[Someone5]

DDoS attacks are problematic for server/client models but I think p2p networks are much more resilient to that kind of attack.

Hence why they might need to spend a lot of money. Oh, wait, governments have a ton of that. And every incentive in the world to kill competing currencies.

Bitcoin of course is p2p.

P2P networks aren't immune to DDoS attacks. They just require a lot more effort--but funny enough, governments can afford to attack them, if they were so inclined. Or large corporations. Or any group with an ideological motivation. It's a huge waste of money, but that's never stopped powerful people before.

I doubt that even the US gov would be lunatic enough to try to DDoS an increasingly extensive p2p network.

Why not? Attacking it would be a drop in the bucket for the US. While I agree that the US probably wouldn't do it (because bitcoin is pretty irrelevant all things considered), if it was the kind of threat you describe they would pay enough to crush it in a heartbeat. Hell, if they could even shut it down for six month they would utterly destroy bitcoin as a currency. Who's going to trade in a currency that has to be verified against a network being attacked by a national government? A currency that is unusable large portions of the time?

For that matter, all the government would need to do is make bitcoin verification slow. All they would need to do is radically increase the bandwidth cost of running a node and bitcoin would die.

There are plenty of ways to attack bitcoin--it just isn't profitable to do it. But when we're talking about governments and ideological terrorists, that doesn't matter very much does it?

Bitcoin nodes don't even use that much bandwidth,

They would if they were getting hassled by an aggressive DDoS attack by the US government. Who's going to run a server just for bitcoin transactions and nothing else? Only companies trying to make money--and that would reduce the scope of the problem pretty quickly if someone were to start organizing a multi-million-dollar DDoS attack on the network.

There's really absolutely nothing the bitcoin network could do to protect against this while still pursuing a goal of expanding usage of the currency.

most of the work is in internal number crunching not data transmission.

Yeah, okay, keep sending bad verification checks to the network. The intensity of the number crunching involved just makes a DDoS attack easier to implement. The more work a node has to do, the easier it is to tie up resources.

[Eran]

My main concern about bitcoin is that the amount of money isn't stable.

Why do people think the creators of bitcoin felt the need for an increasing money supply?

Using elements as currency is absurd. Gold has way more valuable applications in industrial/medical fields. Hoarding it in vaults is irresponsible to the extreme.

Resources can have many different uses. Gold, for example, is used in industrial and medical fields, but also for jewellery. Would you consider wearing gold necklaces to also be "irresponsible"?

The reason many human societies converged on gold (and copper and silver) as currency is because gold makes for an excellent currency, and many people value holding currency.

Bitcoin (and similar electronic currencies) have the potential of displacing gold as the currency of a free society. Members of society would weigh the relative value of the two, and a "winner" will likely emerge.


edit: This article in the bitcoin wikipedia attempts to explain the rationale behind "mining". It is based, unfortunately, on the faulty economic premise that the money supply ought to gro with the value of foods exchanged, so that prices remain stable.

Secular deflation caused by productivity rise (i.e. by an increase in the value of goods and services exchanged under stable money supply environment) is, of course, harmless.

[Someone5]

My main concern about bitcoin is that the amount of money isn't stable.

But strictly, horribly, impossibly finite. It will inflate to 21 million bitcoins and never a coin more than that, and it will inflate at increasingly slow rates as blocks get filled.

Why do people think the creators of bitcoin felt the need for an increasing money supply?

Because inflation is an important facet of a functional currency, despite the delusions of austrian economists.

Resources can have many different uses. Gold, for example, is used in industrial and medical fields, but also for jewellery. Would you consider wearing gold necklaces to also be "irresponsible"?

Yes, though it would be more irresponsible in the case of things made of platinum or copper.

The reason many human societies converged on gold (and copper and silver) as currency is because gold makes for an excellent currency, and many people value holding currency.

"Excellent" is certainly a matter of opinion! Throughout history people have also been criticizing gold. It depends entirely on your viewpoint.

Bitcoin (and similar electronic currencies) have the potential of displacing gold as the currency of a free society. Members of society would weigh the relative value of the two, and a "winner" will likely emerge.

Gold wouldn't win that.

edit: This article in the bitcoin wikipedia attempts to explain the rationale behind "mining". It is based, unfortunately, on the faulty economic premise that the money supply ought to gro with the value of foods exchanged, so that prices remain stable.

The bitcoin protocol also establishes why the currency will expand at progressively slower rates as blocks get filled. It is utterly unlike the rationale used by central banks. Dangerously so, but that is the risk that the users choose to take.

Secular deflation caused by productivity rise (i.e. by an increase in the value of goods and services exchanged under stable money supply environment) is, of course, harmless.

Incidentally, inflation is also mostly harmless.

[Eran]

"Excellent" is certainly a matter of opinion! Throughout history people have also been criticizing gold. It depends entirely on your viewpoint.

Of course it is a matter of opinion. Everything is.

Historically, it is evident that most people's opinion, as expressed through their market actions, was that gold makes an excellent currency.

Incidentally, inflation is also mostly harmless.

Any artificial manipulation of the money supply is harmful. Secular deflation is the change in price level due to a change in productivity, rather than a change in the money supply. That is what makes it harmless.

Secular inflation (i.e. inflation due to productivity decline) wouldn't be harmful. But virtually all historic inflationary episodes have been due to an artificial increase in the money supply.

Such increases distort relative prices and enrich one section of the population at the expense of another. And guess what? It isn't those in need that are typically enriched. It is the banker friends of government.

[Someone5]

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[Someone5]

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[Someone5]

Of course it is a matter of opinion. Everything is.

Historically, it is evident that most people's opinion, as expressed through their market actions, was that gold makes an excellent currency.

Historically speaking, almost no one had an actual choice about that. Historically, the poor clamored for inflationary currencies, but the rich got their way and gold was retained. Whether gold makes for an excellent currency or not depends entirely upon who you ask--it certainly was not the popular choice, even if it was what lots of people were forced to use.

Any artificial manipulation of the money supply is harmful.

Inflation is not primarily driven by changes in the money supply. That has a minor impact at best unless one is talking about truly extreme examples (like trillion dollar bills and such). Monetary policy really isn't as big a deal as austrians pretend--most inflation or deflation is caused by private markets, not the government. There's really very little the government can do about it directly.

Secular deflation is the change in price level due to a change in productivity, rather than a change in the money supply. That is what makes it harmless.

Almost all inflation is the same way. Monetary policy really has way less impact on inflation or deflation than Austrians think. Neither is it some beast that needs to be fought unquestionably. Inflation happens, there's not much anyone can do about it, other than to rip their own economy to pieces.

Why do you think everyone was trying to stop using gold? It made natural expansion and contraction of the money supply damned near impossible.

Secular inflation (i.e. inflation due to productivity decline) wouldn't be harmful. But virtually all historic inflationary episodes have been due to an artificial increase in the money supply.

That... simply is not true. Almost all inflation is driven by the market--not by changes in productivity, but rather because of changes in demand and occasionally because of changes in supply. The slow growth of productivity does reduce the cost of goods, but that only actually shows up if people are interested in buying it. Still, virtually all inflation is caused by that mechanism in healthy economies--which is why inflation rates are rather low in most countries.

Admittedly, it IS possible to use the relatively weak influence of monetary policy over inflation to create hyperinflationary scenarios, but that requires truly excessive manipulation which we just do not see in developed countries.

Such increases distort relative prices and enrich one section of the population at the expense of another.

Back in the days of the gold standard, people would just force the government to bounce between pricing in silver and pricing in gold because they WANTED that level of control. It's like you gold bugs refuse to even recognize the reasons for bimetallism and other horrible gold-related monetary policies. "Stable" currencies are a bad thing for everyone but the folks who already own most of it.

And guess what? It isn't those in need that are typically enriched. It is the banker friends of government.

Yeah, and they were enriched by gold even more!

[Eran]

Historically speaking, almost no one had an actual choice about that. Historically, the poor clamoured for inflationary currencies, but the rich got their way and gold was retained. Whether gold makes for an excellent currency or not depends entirely upon who you ask--it certainly was not the popular choice, even if it was what lots of people were forced to use.

I am talking about which commodities emerged spontaneously as currencies, not which arrangements were dictated by governments (at the pressure of whichever group) and imposed by force on the public.

Inflation is not primarily driven by changes in the money supply.

Then you wouldn't object to freezing the base money supply?

Why do you think everyone was trying to stop using gold? It made natural expansion and contraction of the money supply damned near impossible.

The reason is obvious - governments wanted to stop using gold because that allowed them to counterfeit money without limit.

"Stable" currencies are a bad thing for everyone but the folks who already own most of it.

In other words, you (and those people who tried to force government to manipulate the currency) want the freedom to counterfeit money at will.

[SolarCross]

My main concern about bitcoin is that the amount of money isn't stable.

Why do people think the creators of bitcoin felt the need for an increasing money supply?

In contrast to all preceeding currencies, bitcoin's supply is hyper-stable. The following graph shows how many bitcoins will exist in the network over time. The protocol was designed to produce this supply pattern no matter how much processing power is used to support the network.

It is of course an increasing supply but then it has to be since it is starting from zero! Gold was the same, thousands of years ago. Go back far enough the gold supply was zero, it was all buried in the earth. As people dig it out, it then becomes available as a tradable commodity. The gold supply is still increasing, as people are still digging it out of the ground, though it is harder to find now than it used to be.
Bitcoins are artificially mimicking the way gold is brought into the money supply, which is why those involved in solving the mathematical puzzles that creates bitcoins call themselves "miners" and not minters or issuers. The bitcoin process for releasing new bitcoins into the wild is much more compressed over time than the gold mining process. Gold is still being dug out of the ground many thousands of years after people first started doing that, but the bitcoin process started in 2009 and will completely finish creating new coins by 2140.

[Eran]

Gold's increasing supply is natural. Bitcoin's is artificial.

Gold mining is necessary to maintain a stable supply, as some gold always gets lost and leaves circulation. The same need not apply to bitcoins.

I am not familiar with the details of the technology, but it seems to me that creating a mechanism for slowly and controllably increased supply is more complicated than having a fixed initial supply.

Being electronic, it would be easy, if necessary, to re-denominate bitcoins (equivalent to stock splits) for convenience, if the use of bitcoins becomes very common.

To be clear, given the limited supply and lack of monopolistic control over it, the problem is much less severe than with fiat currencies. However, it is a complication derived from economic ignorance.

[SolarCross]

Eran - sorry but you don't really get bitcoins yet as your preceeding post makes very clear. If you have a faulty understanding then the conclusions that you come to from that understanding will be faulty too.

Bitcoins can be lost, and I mean lost not just stolen. The bitcoins exist across the entire p2p network but they are all cryptographically locked by private keys. Your bitcoins are locked by your private key, mine are locked by my private keys. To "spend" a bitcoin you unlock it using your private key and then lock it with the public key of the person you want to give it to so that now only they can unlock that coin with their private key. But if someone loses their private key to a store of bitcoins then those bitcoins become unspendable by anyone, in other words "lost" for all time. So once the network has reached its 21 million limit not only will there be no more new bitcoins but the actual number of bitcoins that can be spent will tend to decrease as occasionally some coins will become inaccessible due to carelessness, they will be "lost".

The bitcoin network couldn't just start with 21 million coins, it had to start from zero, because the coins are not simply magiked into existence with an accounting entry as fiat currency is, they are created through intense computational work solving difficult cryptographic puzzles. These puzzles are crucial to the scarcity of bitcoin which is what gives it a gold like value as a commodity even though it is also non-material. If the network started with all 21 million coins then a very different, more fiat, way of producing them would have to been used, and then no one could believe that the supply couldn't be just fiated up to 42 million or more some time in the future.

The economics of bitcoin are genius and very austrian. When you understand bitcoin better I am sure you will appreaciate the genius of the system better.

[Eran]

The system is indeed ingenious.

However, the profile of growth in bitcoins is clearly artificial. The same underlying algorithms could have been "tweaked" to reach the desired number of coins sooner, perhaps much sooner (e.g. within days or weeks, rather than years), effectively creating and freezing the supply.

I take your point regarding lost coins. Obviously, there is no way of telling whether coins stored in an electronic purse are merely stored, or completely lost forever.

However, it isn't difficult to think of ways around that. For example, coins may have a built-in "expiration date", requiring occasional re-registration (which could be fully-automated, of course). Lost coins wouldn't get re-registered, and thus the network would "know" that they disappeared, and either more coins could be created, or the existing supply could be re-denominated to preserve the total amount of money under circulation.

And if you read the entry I linked to in bitcoin wiki, it clearly states that:

In a centralized economy, currency is issued by a central bank at a rate that is supposed to match the growth of the amount of goods that are exchanged so that these goods can be traded with stable prices.

That, together with the attempt to mimic the growth of available gold appear to be the reasons behind the design of the system to allow for (limited) growth in money supply.

Neither reason makes sense. The ideal, Austrian solution would be to have a constant money supply, not a growing one (though having limited growth is clearly vastly superior to the unlimited growth of fiat money).

[ThereBeDragons]

However, the profile of growth in bitcoins is clearly artificial. The same underlying algorithms could have been "tweaked" to reach the desired number of coins sooner, perhaps much sooner (e.g. within days or weeks, rather than years), effectively creating and freezing the supply.

Then the creator, his friends, and a few early adopters would have started out with all the bitcoins and nobody would want to use the currency.

[Eran]

That's an excellent point I haven't thought of.

As I said, I was going by what appeared to be the explicit reasons on that wiki article.