It's easy to get confused by BitCoin's technicals; it's the difference between reading an article on Wikipedia, and examining that article's source code (or the various web protocols that deliver it to you).
At its core, BitCoin is unbelievably simple: a ledger of account, no different than an Excel file, distributed across millions of computers, kept honest through offering rewards for protecting the ledger's integrity. There's really no such thing as a BitCoin, just a row in that ledger that says "1.23456", and only the holder(s) of the key for that row can send a portion of that number to a different row. Like with any form of money, any value derived from that ledger is purely a product of collective belief.
BitCoin is roughly at the place where Mosaic was in the early 90s. The real story isn't about BTC becoming the new world currency; it's a technological and sociological prototype of a new type of distributed application which has only barely begun to be explored.
In theory, applications can be built on top of the existing BitCoin blockchain, which is now well-guarded by many vested interests; some projects like MasterCoin [1] and Colored Coins [2] are attempting to do just this.
But ultimately, you are correct: bootstrapping a new blockchain-based service requires assembling a community with enough hashing power to fend off 51% attackers. Time will tell how the experiment will pan out, but even if most projects fail, my gut is that at least a few will succeed in the long run.
> In theory, applications can be built on top of the existing BitCoin blockchain, which is now well-guarded by many vested interests
"Presumed to be well-guarded by many vested interests". Of course, if you don't know who controls how much of the network, you don't know that its guarded by anything, or what the vested interests with influence over the security of the blockchain are actually interested in.
Does anybody know how on earth Bitcoin is supposed to scale in X years, when everyone needs to have every transaction ever made stored on their computer?
It's an implementation detail. Currently the reference wallet stores all transactions, but future versions will be able to prune old blocks and rely on more recent "reference blocks" as their starting point.
Another narrative goes as follows: The world's major governments unlinked their currencies from gold because it proved inconvenient for their regressive redistribution activities - cronyism, military-industrial complex, propping up the banking system, etc (not saying it's a conspiracy, just a natural consequence of authoritarianism). Note that the US unlinked in 1970 and the last year that the GINI coefficient improved was 1973. FDR temporarily unlinked in 1933 and we had the great depression [1].
This narrative is consistent with 1000s of years of history, e.g. Diocletian cutting his gold dinars with silver [2] (and enforcing its fiat trade value), many many examples in small european fiefdoms prior to the dark ages, and again at the end of the renaissance.
At the end of all of these periods, the survivor was gold, because it kept its value and inflation proved to be unsustainable and extremely destabilizing to the society by propping up incompetent economic and political 'winners'.
> Note that the US unlinked in 1970 and the last year that the GINI coefficient improved was 1973. FDR temporarily unlinked in 1933 and we had the great depression [1].
The U.S. domestic economy unlinked in 1933, permanently. Only international trade continued to use gold-backed currency, and it is that aspect which was finally eliminated in 1973.
Likewise you have mixed up your cause/effect for the Great Depression, which started 4 years before 1933. On the contrary, the very election of FDR in 1932 was due to the economic crisis, and the unlinking of gold reserves was in response to the depression, not the cause of it.
One funny thing is that many people who are otherwise economically intelligent get so confused with gold. Holding currency to a gold standard by some fixed price would be called "price control" in any other context, and we already know price controls to be bad policy. By unlinking currency from gold we can well and truly "let the market efficiently decide".
The biggest irony for me with regard to Bitcoin is that it proves the fiat concept. Bitcoin is literally worth nothing more than what people think it's worth; there's no physical thing of intrinsic worth underlying it after all. But this is of course more or less exactly the claim for fiat currency.
> The U.S. domestic economy unlinked in 1933, permanently. Only international trade continued to use gold-backed currency, and it is that aspect which was finally eliminated in 1973.
If the iternational market for dollars is still linked, in spite of domestic unlinkage, there is still some level of grounding, because of the possibility of commodity arbitrage (both directly and indirectly). Certainly there was inflation during that era, and the dollar slipped so far that it led to Nixon's actions... But for the most part the standard of living was able to keep up, largely thanks to technological and infrastructural improvements. Moreover, you couldn't soak the bankers/financial sector quite as easily because of the international connection to gold (and international currency arbitrage is more important to bankers and finance than your average domestic schmoe).
> Likewise you have mixed up your cause/effect for the Great Depression
Sorry, I should have said, I believe if we hadn't unlinked it we would have only had a shorter, not-so-great depression (emphasis on great, not on depression). Obviously, I'm aware that the unlinking came after the stock market crash of 29.
> Holding currency to a gold standard by some fixed price would be called "price control" in any other context, and we already know price controls to be bad policy.
No, price controls are setting the price relative to a standard that's backed up by guns (guns = "control", as in, if you don't do what I say I can shoot you, or point a gun at you and take you to jail). Dollars are already backed up by guns, so the notion of 'price controlling' dollars makes no sense. If anything, you want to back dollars by gold to keep the people with guns honest.
The dollar is already an 'amarket' entity by virtue of its backing by the state. A better example of 'letting the market decide' in the context of 'valuing currency' would be letting the interest rate float, without manipulation, which is also something we most certainly don't do.
>The biggest irony for me with regard to Bitcoin is that it proves the fiat concept.
There are goldbugs who insist that Bitcoin is silly because it's not tied to anything with 'intrinsic value'. That's one interpretation of the fiat concept. But I (and many others) interpret fiat to mean 'by a higher power' (by analogy to fiat lux) except in the general case of state currencies, the higher power being the authority of the state.
Indeed a gold-backed dollar is still a fiat currency, albeit a more responsible one.
> No, price controls are setting the price relative to a standard that's backed up by guns (guns = "control", as in, if you don't do what I say I can shoot you, or point a gun at you and take you to jail). Dollars are already backed up by guns, so the notion of 'price controlling' dollars makes no sense.
On the contrary, with a fixed-ratio gold standard currency it is still the state who said that a dollar was by definition equivalent with, say, 1/35th of an ounce of gold (as it was just before the U.S. finally abandoned the standard for good). But the only reason the government would give you $35/troy ounce was because of the men with the guns, and the government could change their minds.
In fact, the U.S. did arbitrarily change their mind several times throughout their history about "what gold was worth". This didn't change the market value of gold of course, but this didn't stop the politicians from abusing fiscal policy for their own interests.
The interesting thing is more that there was a market value of gold which was different from the "official" government price of gold, which should illustrate by itself the issue.
Rather there was never anything special about gold except that people thought it was special. The U.S. started off on a gold and silver standard after all, which led to problems fairly soon after since the difference between gold and silver value that Congress decreed was not always the difference the markets created.
While I'll agree it's possible to have gold-backed fiat currency (like the Civil War-era greenbacks), there's no reason why it's "more responsible". It's still just as susceptible to government intervention and it unnecessarily conflates non-orthogonal concepts for the sake of... what?
Gold was only valuable because people thought it was valuable. If you went to a desert island you could form an economy on water bottles. Prisoners actually did form economies on cigarettes, and when cigarettes were banned the currency shifted to cans of mackerel.
As far as I'm concerned gold-backed dollars make as much sense as dollars backed by sardine cans. At least true fiat currencies (and Bitcoin) finally gave up the middle-man and acknowledge that their currencies are worth what people think they're worth. It may be too spooky, but it's the truth.
Not entirely true. Gold is a good choice because it's chemical properties make it fungible, durable, and easily verified (using low tech touchstones). These properties reflect themselves in bitcoin. As for why it's more responsible to have a commodity backed currency, it's because the exchange rate is set by statute and any legislator that messes with it is potentially accountable to the downstream effects.
The gold standard is also inconvenient for progressive policies: it removes the floating of currency exchange rates, which tends to act as an automatic stabilizer. See the Eurozone to see how this played out over the last few years, since the Euro has the same technical effect on the member countries. If a country like Spain had had its own currency with a floating exchange rate, that currency would have automatically devalued against other European currencies, which would have acted as a big boost to the Spanish economy via increased exports. Instead, Spain got atrociously high unemployment.
The gold standard is just inconvenient, period. It restricts the policy space for governments. This can be a good thing, but in democracies - where the government mostly does act in the interest of the population[0] - I would say that it mostly ends up being a bad thing.
> FDR temporarily unlinked in 1933 and we had the great depression
Yes, both of these things happened. The important thing is the order in which they happened: The great depression happened first. Abandoning the gold standard was a somewhat late and indirect reaction to that. In fact, countries recovered roughly in the order in which they abolished the gold standard (see e.g. [1] for references).
Edit to add: As to the history of coin debasement, I genuinely wonder whether historians have got their causality right. There appears to be a self-reinforcing belief that historically, coin debasement always caused inflation. At a superficial glance, that story seems to fit the data, hence the self-reinforcement. However, there are some episodes in the Roman empire where it seems plausible that causality could have run in the other direction: Inflation came first, and the coins ended up being debased to match the reality of how much (or how little) they were still worth.
I know that gold bugs must deny the mere possibility of such a "reverse causality" on quasi-religious grounds, but a sober look at the data leaves quite a lot of room for this. Some of the inflation values use price data that is almost a century apart, and a 5x increase in price over a century is actually relatively modest inflation on a year-over-year basis, if you take the exponential nature of inflation into account. This level of inflation could easily arise endogenously, say out of modest wage-price pressure effects. Changing the coins to adjust to a new reality after a century is then merely reasonable administration.
This is not to say that the story of "bad emperor flooded the market with coins to fund wars" never happened. It's just to say that perhaps history was sometimes more complicated than what fits into a bug's brain.
[0] Yes, yes, come at me with your cynicism; and indeed modern democracies are imperfect. But compare today to the middle ages without prejudice, and you'll see what I mean.
I'm unconvinced that deflation is a problem. The buyer's incentive to hoard is mathematically equal to the seller's incentive to acquire; as with all pricing, buyer and seller would eventually meet in the middle.
The greatest significant bit for spending is stability/volatility. If BTC accumulated value at a steady 3% per year, many would still spend it (especially if vendors offered a 5% pay-with-BTC discount). The problem is that no one knows if BTC's value a year from now will be 10%, or 1000%.
Crypto-currency will either find a stable equilibrium over the coming years/decades, or it won't.
Deflation is, in effect, valuing labor and productivity done in the past, relative to the future; inflation is, valuing labor and productivity done in the future relative to the past.
Deflation is fundamentally less dangerous than inflation, because there is less counterparty risk. Technology is supposed to be the "rising tide that lifts all boats", perhaps not surprisingly, technological goods decrease in price in spite of inflation. But by inflating we rob society of the value created by technology and distribute it to bankers and government contractors. It's really sad, and a large reason why the rich get richer and the poor get poorer.
>> "Not only that, but the bitcoins themselves need solid liquidity before becoming a feasible currency. That's impossible with the impending cap."
How does that make you feel about dogecoin's decision to allow 5% inflation per year? It's currently the third largest crypto currency (behind Bitcoin and Litecoin) and I think most highly traded coin. Does the inflation make it more viable in the longterm as a currency people will actually use and not just hoard as an investment?
Seems like every American is going to have trouble with this, since they are not taught how to use decimals and powers of ten. The rest of the world will do just fine using mBTC and uBTC.
At its core, BitCoin is unbelievably simple: a ledger of account, no different than an Excel file, distributed across millions of computers, kept honest through offering rewards for protecting the ledger's integrity. There's really no such thing as a BitCoin, just a row in that ledger that says "1.23456", and only the holder(s) of the key for that row can send a portion of that number to a different row. Like with any form of money, any value derived from that ledger is purely a product of collective belief.
BitCoin is roughly at the place where Mosaic was in the early 90s. The real story isn't about BTC becoming the new world currency; it's a technological and sociological prototype of a new type of distributed application which has only barely begun to be explored.