A while ago I wrote that perhaps the greatest contribution the Bitcoin experiment will make to humankind is to teach you and me and our neighbors more about the realities of economics. And now I will add that the Bitcoin experiment will also contribute to greater understanding of attack surfaces and online crime. Many of the ideas about how to mine Bitcoins, store Bitcoins, and trade with Bitcoins as a medium of exchange illustrate both the strengths and weaknesses of any other medium of exchange in a world full of human beings. Seeing the discussion of Bitcoins here on Hacker News reminds me of early discussions in the 1990s of online payment systems such as PayPal, and the arguments beforehand that PayPal wouldn't have to invest a lot of time and effort (as it eventually did) building defenses against theft and fraud. If a weakness in a system is attached to a lot of money, the way to bet is to bet that someone will go looking for that weakness, even if you haven't thought of it.
As we know, each new version of speculative excess has the slogan "it's different this time". And each one is different, in some way. And you can extract various interesting particular lessons from all these newnesses - I'm sure after 2008, someone's written a deep, interesting article on the failure of the Gaussian copula but really, you didn't need to understand the heat equation and Ito's Formula to know that synthetic bonds were a problem in 2006 (I'd recommend the enlightening discussions of Doug Noland of Prudent.com from that time).
But it is important to not allow ourselves to let the details of these situations distract us from the psychological dynamics which ultimately has carried all these phenomena. This psychological dynamic allows a slightly stretching of numerous points to add up to the concrete mistakes one point can point out later as "what went wrong". And these "what went wrong then" arguments are themselves dangerous since they general are coupled with "so this time, the different thing we are doing is..." and so forth.
Essentially, understanding magician's tricks are great. But never let yourself be fooled by the belief that you know all the tricks.
And I writing with the assumption that bitcoins aren't a "medium of exchange" in any meaningful way - for example, I could directly my car for something else valuablle far more easily than I could directly trade bitcoins and cars aren't a very meaningful medium of exchange today. This is the position that I believe most serious economists take, Nobel Prize winner Paul Krugman being on record here (not that I think this is really a left-right question).
Bitcoin is not another tulip mania, as it has unique properties that surely others have already pointed out.
Paul Krugman and others do not see the whole point.
What is money? Money is information. That's all it is. Who owes what to whom.
So we could have a giant centralized computer system that tracks everyone's move. If we want a car, the computer could tell us how much we would have to work and serve society in order to deserve that car.
Now if we want to live in a somewhat free society, we obviously don't want to be tracked that way. In a free society, there will be different concepts to approach the money-as-information idea, each with their own advantages and disadvantages, and people would choose freely what to use.
For example, there is Ripple: http://en.wikipedia.org/wiki/Ripple_monetary_system , a peer-to-peer credit system. When its base unit is set to "hours of unskilled labor", it comes very close to an information system. While it makes much sense for steady business-to-business and buyer/supplier relationships, it is necessarily trust- and reputation-based, and thus may not appeal to everyone and be applicable in every scenario. Also some seem to be concerned that it might destroy friendships. ;)
Bitcoin's approach is different. It's obviously only information as well, but simulates a commodity, thus ensuring privacy to a large degree.
But it is important to not allow ourselves to let the details of these situations distract us from the psychological dynamics which ultimately has carried all these phenomena. This psychological dynamic allows a slightly stretching of numerous points to add up to the concrete mistakes one point can point out later as "what went wrong". And these "what went wrong then" arguments are themselves dangerous since they general are coupled with "so this time, the different thing we are doing is..." and so forth.
I am not sure what you're trying to say. The fact that money's value created by people merely believing it have value is not particularly insightful.
And I writing with the assumption that bitcoins aren't a "medium of exchange" in any meaningful way - for example, I could directly my car for something else valuablle far more easily than I could directly trade bitcoins and cars aren't a very meaningful medium of exchange today. This is the position that I believe most serious economists take, Nobel Prize winner Paul Krugman being on record here (not that I think this is really a left-right question).
Don't buy that assumption. For example, the majority of libertarians at Porcfest actually use bitcoin as a medium of exchange. The other money of choice are precious metals, which are beaten out by the more convenient bitcoin. BTW, how exactly can I pay my VPS with cars instead of bitcoin?
Ideas/products with excessive speculation have failed in the past. Therefore, this product will fail.
I disagree with that. It suffers from survivor bias (or actually non-survivor bias). Mackey doesn't discuss ideas with excessive speculation that ultimately succeed. The internet in the 1990s and the California gold rush both had excessive speculation, but ended up being successful... so no one refers to them as 'extraordinary delusions'.
> for example, I could directly my car for something else valuable far more easily than I could directly trade bitcoins and cars aren't a very meaningful medium of exchange today.
Are you sure about that? Bitcoins are easily divisible, a car isn't. Yes, you can take your car apart but the sum of the parts is worth much less than the whole car. Bitcoins can be easily transported and even transferred internationally. Exporting a car incurs a lot of overhead in transport fees and taxes. Even selling a car to someone on the other side of a large country might end up being too expensive.
No matter what you think of bitcoin, it should be compared to existing national currencies, gold, etc. I like the concept of bitcoin, but I believe that even risky currencies like those of (say) Mexico, Turkey, etc are a better bet than bitcoin.
>Yes, you can take your car apart but the sum of the parts is worth much less than the whole car
The opposite, actually, is true. It's not very intuitive, but yeah; I've got a '96 Nissan maxima with unrepaired body damage and what sounds like a suspension problem that I've gotta get rid of. If I wanted to sell it fast? I think I'd have a hard time getting four hundred bucks for it. (I mean, if I drove it into a car buying business and wanted to walk away with cash) But, the salvage yard where it would end up? I bet they'd make that much back selling all the windows and tires... then what they'd get for the other parts would be gravy.
I think the key to understanding this is that selling a car all at once is way less effort than selling each part individually. Sales takes effort and we're only measuring value within the context of a sale.
(nothing to do with bitcoin; I just think that this is an interesting way to point out that the way we measure value ends up giving us some non-intuitive answers to how much a thing is worth.
Just because you can't bring in gold into your car dealership, or bring in gold to buy for groceries, doesn't mean that it's worthless.
Bitcoins already have some concrete uses - gambling & drugs namely ;) And these uses won't disappear. There are also some more legitimate uses for Bitcoin coming up. Virtual goods for example.
I agree, but would expand it somewhat as it's not just Bitcoin but all of the 'virtual' videogame currencies as well (Eve and Second Life come to mind).
I wonder how many people learned a lesson from Ginko Financial collapsing [1] (a little hand wavy but around $750,000 USD pyramid scheme) and weren't conned in real life.
