Bitcoin’s 3 Fatal Design Flaws

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This Saturday I’m giving a talk in a panel debate on Bitcoin at the O2. I’ve been asked to be the critic of an  alternative currency that has some very enthusiastic fans.

For those that don’t know, Bitcoin is a digital currency (known as a cryptocurrency) that is not issued by governments or banks. Instead the currency uses some complicated programming to limit the amount of money that can be created. Only 21 million Bitcoins will ever be created, and there is no  human decision maker who can influence that. For advocates of the currency, this is a major advantage, as it prevents the abuse of the power to create money. It is easy to see why this would be so appealing – after all, we have recently seen the damage that can happen when commercial banks have the power to create hundreds of billions of pounds in just a few years.

But there are serious problems with Bitcoin. This was highlighted most recently when one of the largest exchanges MtGox, revealed that it had lost around $500 million of customer’s Bitcoins after hacking incident. “Lost” in this sense doesn’t mean they made bad investments that went bad; the Bitcoins were literally stolen, now exist on somebody else’s computer, and the exchange has no idea where they are.

I want to look at Bitcoin’s design flaws here, so if you want to know more about the details of the currency itself, read How to Explain Bitcoin to your Grandmother by Brett Scott or this Chicago Federal Reserve paper for a central bank perspective.

Bitcoin is a prototype

The key point to note is that Bitcoin is a prototype for what is now known as crypto currency. It was the first of its kind, an experiment designed by someone (or a some group) going by the name Satoshi Nakamoto. The original paper that outlines the proposal for a currency is well written but has the tone of a working paper – an initial proposal, not fully thought out, rather than a fully worked out master plan.

What usually happens with a new idea or product is that you try it out, find that it’s inherently flawed, and then you alter the design to make it work better. Orville and Wilbur Wright’s original plane flew just a few metres. The first bicycle, designed in 1817, involved sitting on a saddle whilst pushing the bike along by running with your feet on the floor:

First Bicycle

The fanaticism of some Bitcoin enthusiasts, along with the claims that Bitcoin – specifically – will become the currency of the future, is a bit like someone in 1902 insisting that in the future we’ll all be flying across the Atlantic in individual gliders that look like this:

Wright Brothers Initial Plane

Of course we won’t. The first prototype of something should be a test case, which reveals the design flaws then gets discarded in favour of something better.

(UPDATE: A few people have commented that the Bitcoin source code has already been changed significantly, and further design changes can be made, which is exactly what should happen with a prototype. It’ll be interesting to see whether Bitcoin can be changed enough to deal with the flaws and make it a functioning currency.)

I believe there are two  design flaws that are fatal for Bitcoin.

Design Flaw 1. The rate of money creation

Bitcoin is designed so that new Bitcoins are created (‘mined’) at a predetermined and gradually decelerating speed. Around half the Bitcoins that were ever designed have been created already. The money supply will increase by another 66% between now and 2025, but by then the rate of creation of new Bitcoins will have slowed to a negligible amount, essentially making it a fixed money supply by 2025.

This limited supply was supposed to be a clever design feature, but actually it’s turned Bitcoin into a speculative asset. The problem with this is that the amount of the currency doesn’t increase in line with the number of people using it. Economists from the Austrian school would argue that this is fine: just allow prices to fall relative to the currency. Indeed, that’s what has happened with Bitcoin – each Bitcoin now buys you more real “stuff” in the economy than it did in the past.

The problem comes when the limited supply affects the way people use the currency. Bitcoin users who have seen the currency go from 1 Bitcoin = $5 (in 2011) to 1 Bitcoin = $445 (as it currently is) don’t think “Great, the price of a Coke is falling in terms of Bitcoin”. Instead they think, “If I sit on the Bitcoins that I own, in 1 year they might be worth 10 times more. So I won’t spend them.”

This means that Bitcoin users don’t want to pay using Bitcoin. In other words, they want to use Bitcoin as a speculative investment, rather than as a means of payment. 

The only way to avoid this is to ensure that the supply of the currency increases in line with how much it is being used, so that the exchange of Bitcoin to other currencies or of Bitcoin to real goods and services is broadly stable. Without this design feature, a currency that consistently and rapidly appreciates relative to other currencies will be held as an asset rather than being used to make payments.

This is a design flaw specific to Bitcoin. Other cryptocurrencies have different ways of regulating the creation of the coins.

A Note on Volatility

Bitcoin is also highly volatile, having jumped from $13.36 at the beginning of 2013 to $1,124.76 in November 2013 – an 8,313% increase – and then back down to $445 today. I don’t list this as one of the currency’s design flaws as it’s largely to do with the fact that Bitcoin is new, uncertain, and that the authorities aren’t quite sure how to deal with it, so volatility is a result more of the speculation about whether Bitcoin will be banned or accepted, rather than the fundamental issue of the rate of money creation.

Design Flaw 2: Bitcoin rewards the adopters and speculators

As with the current monetary system, Bitcoin rewards the creators of the currency (the ‘miners’ who use their computers to do complex calculations to create the currency). The early adopters have become very wealthy, along with speculators who sit on their coins rather than spending them. Again, this means that those who benefit from the currency are not those who use it to trade in the real economy i.e. people who actually produce real value and make Bitcoin a viable and usable currency. Instead, the benefit goes to those who sit on the currency (which prevents it functioning as a currency and makes it a speculative asset).

I would prefer to see a cryptocurrency that rewards those who use the currency as a means of payment, rather than as a speculative asset. So the more you use the currency to buy goods and services from the real economy, the more you would get rewarded with a portion of any newly created currency, whereas those who sit on their coins and use them as a speculative asset would get no share of the newly created money.

My knowledge of computer science and maths aren’t sufficient to propose a particular algorithm for managing that, but there are people who could. (There would need to be some kind of check to ensure that you don’t end up with people gaming the system, for example two users trading the currency between themselves at high speed in order to ‘earn’ more of the newly created coins.)

Design Flaw 3: Bitcoin is LESS secure that national currencies

Because of the design of Bitcoin, anyone who gets access to your password (‘private key’) has access to all your funds, and the authority to spend them. In the same way that a house burglar could steal gold coins (which I’m sure you have lying around the house), a computer hacker can steal your password and use it to spend your Bitcoins.

One user left his private key on a hard-drive which went to landfill, and then saw the value of the coins appreciate to hundreds of thousands of pounds. The exchange MtGox has alleged ‘lost’ 650,000 Bitcoins as a result of hacking.

Anyone holding a significant amount of Bitcoins is advised to transfer them to “cold storage” –  a hard drive or USB disk that is disconnected from any computer connected to the internet, and hidden somewhere secure (eg. a physical safe).

For all the arguments that Bitcoin is ‘safer’ because it has no central authority, it certainly isn’t yet safer in practical terms.

The Way Forward

Cryptocurrencies are fascinating. We’ve made a very clear argument that the current monetary system, in which most money is created by banks when they make loans, has been a disaster. But at the same time, when states have used their power to create money, such as through QE, they’ve used it to inflate financial markets (enriching the already wealthy), rather than benefitting the real economy and ordinary people.

We’re obviously campaigning for national currencies to be created and used in the public interest, but it’s still possible that national currencies might be bypassed completely if a currency comes along that is stable, works in the interest of ordinary people, and prevents abuse of the power to create money.

Since Bitcoin was established, literally hundreds of other cryptocurrencies have been designed and released. One of them already out there might have the right design features to make a stable currency that can be a real benefit to society and the economy. Cryptocurrencies have only been around for half a decade; there will be a lot of innovation over the next 5 years and it’s possible that we might see something genuinely socially useful come out of it.

But with regards to Bitcoin, it’s time to let it die to make way for something better.

(UPDATE: It’s been pointed out that the code and design of Bitcoin is being continually updated by the Bitcoin community. It might be that Bitcoin can deal with these initial problems and morph into the standard cryptocurrency. Time will tell.)

 

PS. This reddit thread by people who lost money when the MtGox exchange shut down shows how Bitcoin has become a speculative asset bubble similar to the dot com bubble or any stock market bubble. There are stories of people taking their  kid’s education fund, or partner’s life savings, and investing them entirely in Bitcoin. One guy even claims his friend committed suicide after investing – and losing – over $900,000 in Bitcoin.

But this is not the fault of Bitcoin, or a disadvantage of Bitcoin. It’s more a fault of a lack of general financial literacy, in particular an ignorance of the basic point that you should never invest all of your wealth in one single asset, whether it’s Bitcoin, or RBS shares (or property for that matter). Many of these people had no concept of risk management. I’m not sure we can blame them – an understanding of money and financial literacy is not something that most people acquired at school.

There’s also the desire to “get rich quick” or even just boost your income beyond what you can earn from working. Again, I’m not sure how much we can blame people for that. When the current monetary system is making it harder and harder for people to save anything after paying the mortgage and the costs of living, it’s natural to look for other ways of making money. If the guy mentioned above genuinely believed that investing in Bitcoin would mean that his kids could go to university whilst avoiding being saddled with the debt, then it’s natural for him to take that option. It was the lack of understanding of money, finance or risk management that led to him making such a bad decision.

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Ben Dyson (formerly Positive Money)

Ben Dyson was Positive Money's Head of Research until December 2016. He is a co-author of Modernising Money: why our monetary system is broken, and how it can be fixed. Ben's research focuses on potential reforms to monetary policy, structural reforms to the banking system, and the potential for technology to disrupt the payment and banking systems.
  • Gil

    Any algorithm that tries to reward people for using their coins will end up being gamed. If it is not simple it will fail.

    People are not using their gold to buy stuff and yet it is rather stable value-wise.

    If you think that Bitcoin rewards early adopters too much you can ignore it and support any of the other 200+ crypto currencies.

    Bitcoin is NOT a file on your computer’s hard drive. I suggest you read a bit more and realize that a Bitcoin wallet is merely a random number. You may store it wherever you like and protect is as you wish.

    • http://bsd.wpengine.com.uk/ Ben Dyson

      Re: gold – that’s precisely the point. Bitcoin has become a speculative asset that people hold in the hope of the price going up, just like gold. Yet the original paper was proposing a means of payment that didn’t rely on a central authority (eg. banks). So Bitcoin as it is today is far from what the initial proposal intended it to be.

      It might be that over time the volatility dies down and it can start to function more as a means of payment.

      • darren kis

        it’s a payment network amongst other things, do your research.

        • Gerard Shea

          I’m with you Ben. Your critics appear to be placing their affection for IT above real-world economics. I know I will suffer a backlash alleging that cyberspace is not like the real world and so different rules apply and all that nonsense. People probably thought a different economic paradigm would apply when we switched from barter to fiat money. But it didn’t. What we got was a completely different medium of exchange and store of value operating within the same economic system – in fact a wide variation of systems ranging from centrally planned to laissez fair economies.

          Your main point is totally correct. A medium of exchange has to actually involve exchange, both from a lexicological and common-sense point of view. The circular flow of income does actually require a flow. And the volume of money (ignoring how it is actually created because I am referring to the volume as calculated once it is in circulation) depends on both quantity and velocity. A small quantity of money must move faster to equate with a larger, more sluggish volume.

          The comparison with gold is fallacious. Most gold is horded, and by governments, not individuals. It is not generally used as a medium of exchange, except in large quantities – considering that most of it exists in the form of ingots which would be impractical to use as currency for anything but the largest purchases.

          If even a small element of the system exists as a file on a computer than the entire system can be said to be a file on a system. Paper money has a weakness – it can be set on fire. To say that money is easily burnt is therefore correct, but it isn’t stating that the entire global financial system can be easily burnt. So, yes, that is a flaw in the system – not unique to Bitcoin though.

          The fervent desire to see Bitcoin succeed either through a love of all things tech or a distaste of the existing financial system should not blind us to reality.

          Disclosure: Just so I don’t get labelled, I have IT and financial qualifications. I am pro-alternative currencies and actually becoming involved in the peer-to-peer lending and crowdfunding industries.

      • Border North

        I think you need to look at the reasons people hold onto gold one more time. Yes in some ways it is speculative but only because fiat currencies are so unstable. Gold is stable wealth at most if not all times, Before we started using paper money and thus made gold become a speculative asset relative to paper and increasingly electronic currencies Gold was actually used as money in coin form as was silver.

  • Jamie_Griff

    You make some powerful arguments Ben but I think you’re looking at BitCoin from within the paradigm of government controlled currencies and that a wider perspective might be more revealing.

    BitCoin certainly is a precursor of stronger, safer and more reliable crypto-currencies to come but ultimately it’s whether or not people use a currency to pay for goods and services that determines its success, not its mathematical credentials when compared to competing currencies. When it comes to competing technologies the best doesn’t always win (cf. Betamax and HD-DVD).

    You kind of dismiss the innovation of the Blockchain as a bit of ‘complicated programming’ but the people who’ve actually made Nakamoto’s white paper a reality would argue that the Bitcoin algorithm is actually very simple. The concept of the Blockchain is an incredibly simple and powerful one which has thousands of potential applications (of which BitCoin is one) many of which are disruptive to big financial entities.

    It’s the uptake of alternative currencies by people who are traditionally excluded by the established powers (e.g. M-Pesa in Kenya) that is really driving the demand for a genuinely transnational digital currency that doesn’t require banks and other rent seekers to intermediate e.g. international money transfers. This demand drives innovation in the software used to handle Bitcoin – which improves access – and spreads awareness of how cryptocurrencies work – which improves safety – as well as leading to speculators piggy-backing this demand and poor use of the technology by operators looking to make a fast buck, as in the case of Mt.Gox.

    Bitcoin might not be the ultimate winner but, as part of a wider, growing ecosystem of crypto-currencies, providing alternatives to people who would otherwise be priced out by traditional financial intermediaries or simply unable to access financial services at all, I think it’s far too early to dismiss its huge potential for disrupting established concentrations of power in finance.

    • http://bsd.wpengine.com.uk/ Ben Dyson

      Jamie_Griff – absolutely, there’s huge potential in the technology. The point I’m making is that from the point of view of designing a currency, there’s real problems with Bitcoin in it’s current form that will prevent it getting adopted on a wider scale.

      • Jamie_Griff

        I agree that there are problems with BTC (though I think you’re overstating the security issue – it’s just as easy for thieves to steal your national currency by e.g. skimming your debit card details at an ATM and then emptying your account. The difference with BTC is that the user takes responsibility for their own security rather than offloading responsibility to their bank. The payoff is that you don’t have to worry about your money being confiscated by your bank or the government as part of a Cyprus-style bail-in.)

        I think though that we have to break out of the pattern of seeking ‘one currency to rule them all’. In times of great uncertainty, caused by large and unstable concentrations of power in the financial system, a broad mix of currencies (including BTC) not only provides greater access to people who are traditionally excluded but also allows those who do have access to diversify, reducing their reliance on existing power structures.

      • darren kis

        Hi ben.

        Two years have passed. What are your thoughts on Bitcoin today?

  • Cédric Moreau

    This is article is all right. Bitcoin has many flaws, the worst being its design as a currency.

    And that’s why we are developping OpenUDC and uCoin: because future is to Universal Dividend based currencies, the only one type respecting humans’ economic rights.

    Stay tuned.

    http://www.openudc.org
    http://ucoin.io

  • Jim

    This would make perfect sense if 95% of the original code hasn’t been changed. The thing about bitcoin is that while it is a prototype it is also programmable and able to adapt. Updates and upgrades are constantly being added and changed. The things that are causing problems now will be altered to best suit the wants of the market. So thanks for the critiques these things if they truely present a problem will be changed inside of bitcoin.

  • rodomonte11

    3, only serious point: you know xapo? elliptic? otp? what’s the difference between this and a normal bank? nothing, but here you can also use multisig to have total control on your money

    • Tony

      Normal banks nowaday create money out of debt instuments and are required for every transaction you do. Bitcoins can’t be created out of debts and those companies offers services that are only optional for consumers.

    • http://bsd.wpengine.com.uk/ Ben Dyson

      @rodomonte11:disqus – the security issue is probably the one that needs tackling most quickly if Bitcoin or any crypto-currency is to become mainstream. It’s true that MtGox failed because of the incompetence of the company itself, but it’s going to be one of the biggest things discouraging ordinary people from ever using it.

    • https://greenaddress.it Lawrence Nahum

      he doesn’t, just like he doesn’t know of greenaddress.it or any multisignature wallet.

      It’s easy for external and inexperienced people to judge Bitcoin without spending the required time to understand it (not that this is fundamental to start using it, just like a modern car) and indeed Bitcoin requires multiple skills from a variety of backgrounds to be really appreciated and understood.

      It would have been interesting some analysis on network effect and game theory (both at the mining, open source/code and currency exchange level) as to how it would be difficult at this point for anything to take over Bitcoin.

  • Tony

    Bitcoin reward only early adopters and speculators? I would argue that bitcoin reward those who take the risk to give it a monetary incentive for businesses to build infrastructures around it. Nothing will come out of nowhere without a lot of work and risks behind the scene.

  • http://vitamind3info.blogspot.com/ Adrian

    I disagree that people hoard their coins, well, of course they do to a degree, but there is a glass half full half empty alternative view on this. Our Current system which allows Banks and Govt free reign to print what they like, causes prices to rise, and we lose purchasing power through inflation. I don’t agree that people just sit on their hoard, supposing some guy in a one bed room was an early adopter, and is now sitting on millions of $ worth of Bitcoin, he or she is more than likely to want to now spend at least some of his Bitcoin, to buy himself a nice house, a Nice car, some Jewelry etc. Our current system, where credit can simply be conjured out of thin air has created this massive debt bubble about to burst, and its happened because of the Now now now attitude. I want to buy that car now on credit, I don’t want to wait, I want a loan now. With Bitcoin, there is the incentive to wait……Sure, I have enough Bitcoin to buy that car now, but if I wait for 1 or two years, I’ll be able to buy the car AND I’ll have some Bitcoin left.
    I think Bitcoin doesn’t encourage hoarding as much as it encourages a much more sensible, cautious approach to spending.

    • http://vitamind3info.blogspot.com/ Adrian

      One enhancement to Bitcoin I’d like to see is the developers switching it to using a much slower hash function, This would upset the precompiled rainbow table people but would provide another level of privacy and security in making Brainwallets much safer to use.

      • http://bsd.wpengine.com.uk/ Ben Dyson

        @adrianpeirson:disqus – wouldn’t switching to a slower hash slow down transaction clearing times? If so, that would make it less appealing as a means of payment. At the moment shopkeepers have almost complete confidence that if your debit card works in their machine, they’ll receive the money for the things you’ve bought. The faster that transfers go through, the more likely businesses will be to accept it. That’s why some of the cryptocurrencies based on the scrypt hashing algorithm might be more successful in the long run.

        • Meni Rosenfeld

          No, that’s completely irrelevant. The time between blocks is a design parameter which can be chosen freely, though there are ups and downs for choosing a high or low value.

          It just happens that many newer alts favor Scrypt (or a variant), and they also favor shorter block times, but there is no connection between these two preferences. (Scrypt is much much slower than SHA-256 by the way).

          Adrian is wrong though because brain wallets are an application, the choice of hash function to use in a brain wallet has nothing to do with the protocol.

    • kavadias

      Wanting to live now and not after a year or two is, simpply, in line with natural life.
      Taking risk is also natural.

      Being manipulated by markets to take unnecessary risk and wait before you live your life, as well as expecting to make money from waiting (i.e., rent seeking) is broadly harmful and makes sense only in a world of money and nothing else. Unfortunately for the rest of society, such a world exists in the minds of some people.

  • matslats

    Ben, some of the problems you list are actually design choices. For example the inflexibility of the number of coins is deliberately to prevent political interference. The risk of holding your own wallet is actually the flip side of the freedom of not having to trust anybody else with your money. So which is it to be?
    The speculative nature of bitcoin as a commodity is what made it famous and popular. There are much better designs of currencies in use, but without those design flaws making it exciting and financial those designs get no media attention and little interest!

  • Draco T Bastard

    So the more you use the currency to buy goods and services from the real economy, the more you would get rewarded with a portion of any newly created currency, whereas those who sit on their coins and use them as a speculative asset would get no share of the newly created money.

    Actually, the old system that has been tried and is successful is having the money in your bank account decreasing at a set small rate – spend it or lose it. Throw in the 0% interest rates possible when the government creates the money supply and you get rid of any incentive to accumulate large sums of money.

    But at the same time, when states have used their power to create money, such as through QE, they’ve used it to inflate financial markets (enriching the already wealthy), rather than benefitting the real economy and ordinary people.

    Just need one single, unbreakable rule to fix that. Any money created by government must be spent into the economy to bring about actual physical output. In other words, hiring people to do productive things.

    but it’s still possible that national currencies might be bypassed completely if a currency comes along that is stable, works in the interest of ordinary people, and prevents abuse of the power to create money.

    No it’s not as such a currency will prevent international trade from balancing. Of course, we have that problem at the moment but that’s because we allow the market to decide based upon return/interest rather than setting the value of a currency via the relationship of trade between two nations.

    • Gerard Shea

      “So the more you use the currency to buy goods and services from the real economy, the more you would get rewarded with a portion of any newly created currency, whereas those who sit on their coins and use them as a speculative asset would get no share of the newly created money.”

      You, like others here, are confusing two different aspects of the value of currency. The value of anything will change according to supply and demand. Unless you equate Bitcoin with Utopia where no-one will ever want to enrich themselves to the detriment of others. The mere fact that you want to use Bitcoin to ‘buy’ things means within the same financial system must exist businesses/producers/companies etc. Unless they are all co-operatives (which I personally favour) or charities, then they will want to enrich themselves at your expense through making a profit. This won’t stop at the doorstep of Bitcoin. It will just become another tool to use for personal enrichment.

      Assuming Bitcoin has 100% impregnable security, it can still be manipulated. Unless the price is pegged to something (the real world economies have already tried this and it flopped) it has to be floating and subject to speculation. Hence supply and demand will affect the price and if this becomes volatile enough it will attract the speculators and horders.

      The system should incorporate two types of rewards. One that rewards use and the other will be a default reward for speculators. Although users can be rewarded by purchasing appreciable assets, most users buy depreciating assets and hence lose money. Some sort of incentive to get the currency accepted for use should therefore be available, even if only in the initial years so that it overcomes the incentive to horde and therefore kill the currency’s value as a currency.

      I would like to see more economic/financial debate on this issue rather than just the tech and philosophical points that seem to be continually raised. We can all appreciate the technology behind it and the desire to go all techy in the future, but there has to be economic and fiscal viability for it as well.

      • Draco T Bastard

        You, like others here, are confusing two different aspects of the value of currency

        No I’m not as that was a quote of the article.

        Unless the price is pegged to something (the real world economies have
        already tried this and it flopped) it has to be floating and subject to
        speculation.

        The currency does need to float but it doesn’t need to be subject to speculation. You do this by having the exchange rate set by a formula taking into account trade flows, terms of trade and capital flows between nations. This would have the currency floating against every other currency but not subject to speculation. It also gets rid of the delusional concept of a reserve currency – when all currencies float then none can be a reserve.

        The system should incorporate two types of rewards.

        Nope. The simple fact of the matter is that we don’t need a reward system at all. In fact, reward systems seem to bring out the worst in us which probably helps explain why competition is bad for us.

        • Gerard Shea

          “No I’m not as that was a quote of the article.”

          Fair enough. I guess my comment was aimed at the person originally making that comment. As you can see I address my comments generically and only respond to individual posts as triggers.

          “The currency does need to float but it doesn’t need to be subject to speculation. You do this by having the exchange rate set by a formula taking into account trade flows, terms of trade and capital flows between nations. This would have the currency floating against every other currency but not subject to speculation. It also gets rid of the delusional concept of a reserve currency – when all currencies float then none can be a reserve.”

          Not sure how your system would work. I’m no great fan of currency speculation (or any type really) but it is an unavoidable situation. Even a system such as you suggest would mean fluctuations in currency. Speculators would soon analyse what factors affected individual currencies and play on those. Actions such as this tend to magnify the effects of such fluctuations. Better to minimise the impact of speculation than try to avoid it. One way to do that is through sheer volume. Global currencies are too vast for any individual or organisation to manipulate. Even the host countries can’t effectively do so without resorting to pegging. This is one of the flaws highlighted with Bitcoin. Not enough of the currency will be released to minimise the impact of speculation.

          “Nope. The simple fact of the matter is that we don’t need a reward system at all. In fact, reward systems seem to bring out the worst in us which probably helps explain why competition is bad for us.”

          Semantics. You are playing on one interpretation of ‘reward’ system. Look at it this way. If only a limited number of Bitcoin are injected into the system, then we have speculation as is occurring currently. Now, imagine if say, the middle class of China comes online without an increase in Bitcoin volume. That’s hundreds of millions more chasing the same currency. Of course it will go up. Anyone pre-empting this will speculate and/or the price will go up through simple supply and demand. But wait, here come hundreds of millions of middle class Indians to join the fray. What now? So, both the limited number of coins released and the arbitrary method of producing the coins are flaws in the system. Surely a ‘reward’ system that has the end result of increasing supply of Bitcoin as demand grows would be a positive element.

          • Draco T Bastard

            Even a system such as you suggest would mean fluctuations in currency.

            Of course they would as that’s the whole point of having a floating currency.

            Speculators would soon analyse what factors affected individual
            currencies and play on those. Actions such as this tend to magnify the
            effects of such fluctuations.

            They would try but:

            1. Such speculation would have no effect upon the exchange value of the currency as it’s set by the actual real world trade
            2. Such speculation would have very little effect except possibly to lose the speculator lots of money as they really are quite bad at the job that they do:

            For example, he studied the results achieved by 25 wealth advisers,
            across eight years. He found that the consistency of their performance
            was zero. “The results resembled what you would expect from a
            dice-rolling contest, not a game of skill.”

            Better to minimise the impact of speculation than try to avoid it.

            My system doesn’t avoid it – it simply makes it worthless to do in the same way that it makes having large sums of money worthless.

            Global currencies are too vast for any individual or organisation to manipulate.

            Dude, I’m a New Zealander and in 1987 we had a major market crash caused by the actions of one person trashing our currency through speculation. So, yeah, I suggest you get that fallacy out of your head right now because it’s not doing you or anyone else any favours. The big players in the world manipulate the worlds currencies pretty much at will.

            Now, imagine if say, the middle class of China comes online without an increase in Bitcoin volume. That’s hundreds of millions more chasing the same currency. Of course it will go up.</blockquote
            Yep, that would likely happen as the BitCoin algorithm only has a limited number possible solutions. This is sold as it's main strength in many quarters but is actually it's major weakness. It's actually the same weakness that prevents the Gold Standard from working.

            I'm not in favour of BitCoin and think it should be made illegal with major consequences for those who have any or try to use it for trade.

          • Gerard Shea

            “Of course they would as that’s the whole point of having a floating currency.”

            Why try to correct me by pointing out that I was right? That just indicates a mild level of deliberate opposition. And you can’t just dismiss the point either. Speculation requires fluctuation. That’s the whole point. Speculators can even prosper from a bear market through the use of options. Stagnant markets kill speculators.

            “My system doesn’t avoid it – it simply makes it worthless to do in the same way that it makes having large sums of money worthless.”

            I don’t doubt that your proposed system may achieve the desired objective. It could be the greatest financial system ever invented. I just can’t see how it would work in practice. Anything that has input variables can be manipulated.

            “Dude, I’m a New Zealander and in 1987 we had a major market crash caused by the actions of one person trashing our currency through speculation. So, yeah, I suggest you get that fallacy out of your head right now because it’s not doing you or anyone else any favours. The big players in the world manipulate the worlds currencies pretty much at will.”

            Not sure I have ever dealt in fallacies. I’d like to know the full story of this incident. I remember our own currency falling after Keating made his infamous ‘Banana Republic’ comment. But that isn’t manipulation of the currency or speculation. No-one could exert enough concerted pressure over time to control the value of a currency to their own benefit. I am no conspiracy nut but neither do I dismiss all conspiracies. I’ll only go so far as to say that the global bankers and financiers could exert pressure on currencies but only in a concerted effort. Otherwise one entity’s attempt to manipulate would be taken advantage of by an opponent to their own advantage.

            That’s one of the protections of competition. We just have to watch out for the formation of cartels.

          • Draco T Bastard

            Why try to correct me by pointing out that I was right?

            Because the context you used indicated that you thought I was trying to get rid of currency fluctuations. These always happen and really have to do so. My system would make it more stable but fluctuations would still happen.

            Anything that has input variables can be manipulated.

            It’s a question of changing the input variables. ATM the NZ$ id completely free-floating and thus can be easily manipulated by the speculators. If the currency was set by a formula taking into account the trade flows rather than demand on the currency then the speculators would have to manipulate the actual trade which would be far more difficult and, I suspect, closer to the impossible that you think it is now.

            Not sure I have ever dealt in fallacies.

            You just did. You supplied a belief that reality has proven wrong.

            I’d like to know the full story of this incident.

            The Greatest Currency Trades Ever Made

            Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand. The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.

            Investopedia, of course, thinks that this was great despite the massive poverty and deprivation that it caused across an entire country.

            That’s one of the protections of competition.

            No, that’s one of the supposed protections of competition. But like all of the myths of capitalism it doesn’t exist as the LIBOR scandal and a few others have proved.

          • Gerard Shea

            You still appear to be trying to score points rather than engage in intellectual debate.

            “Because the context you used indicated that you thought I was trying to get rid of currency fluctuations. These always happen and really have to do so. My system would make it more stable but fluctuations would still happen.”

            In fact you’ve taken my comment out of context. You fail to include the sentence immediately following the one cited. At no stage did I imply you were trying to avoid fluctuations. I clearly said your system would involve fluctuations and this would be seized upon by speculators.

            You still fail to show how such a formula would work. You yourself are clearly including an element of supply and demand within your formula. Whenever supply and demand are involved there is the opportunity for both arbitrage and speculation. It occurs in just about every other system, commodity etc. It is inherent in the distributive function of the economy – unless you are advocating a planned economy (which your comments vis-a-vis competition may indicate).

            Please elaborate on your fallacy statement. Nothing in the paragraph preceding that allegation involves anything even remotely resembling proof of a fallacy on my part. You can’t just claim your own version of reality (a currency trading formula) and then claim because I have concerns over it that I have engaged in fallacious logic.

            Also, wouldn’t your formula always be retrospective? You can’t determine trade levels until they happen. By then it is too late to have the currency value relate directly to the trades in question. Or would the currency value need to be amended at the time of each and every trade. This would prove difficult if trades were taking place simultaneously. Which one would affect the other person’s trading value? And also it would throw a degree of instability into the market – once again prime pickings for the speculators and arbitragers.

            Ahha. Full details always help. You didn’t mention the following relevant facts:
            1. The incident occurred in 1987 and the NZ dollar had only been floated two years earlier (teething problems with the new toy of the floating dollar);
            2. The incident occurred following the Black Monday crash where global markets lost around 20% of their value (not your average, everyday, stable economic environment);
            3. The currency yo-yoed between a 3% to 5% loss. That is a total fluctuation of only 2%. Nothing like Bitcoin’s wild fluctuations to date.

            Also, the article you reference clearly states:

            “The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply.”

            And that clearly vindicates the original claim as being one of the flaws of Bitcoin.

            Unfortunately by condemning capitalism you are revealing why we will never resolve this debate. You accused me of fallacious thinking, well you persist with the fallacy that capitalism is evil. (Not to be confused with evil capitalists).

          • Draco T Bastard

            I clearly said your system would involve fluctuations and this would be seized upon by speculators.

            And in the context provided you saying that implied that I thought that it wouldn’t.

            Please elaborate on your fallacy statement.

            You made a statement that was fallacious in saying that a single person couldn’t manipulate a currency. I then provided proof that a person could and did manipulate a global currency. You’re trying to hang on to your belief system now that it’s been proven wrong.

            You didn’t mention the following relevant facts:

            They weren’t and aren’t relevant. One person did manipulate a global currency and if it happened once then it can happen again and it probably happens on a more or less daily basis by the global banking system.

            You accused me of fallacious thinking, well you persist with the fallacy that capitalism is evil.

            I didn’t call capitalism evil. I said it doesn’t work as global climate change, massive poverty, unsustainable use of resources and societal break-down due to excessive competition prove. Although, those results of capitalism do stink of evil.

            The only person trying to score points is you as you misrepresent both what you said and what I’ve said. I won’t reply any more as there’s no point.

          • Gerard Shea

            “And in the context provided you saying that implied that I thought that it wouldn’t.”

            You are confusing implication with inference. No reasonable reading of my comment would suggest anything other than that I reiterated that your system would permit fluctuation which would be seized upon by speculators. You inferred what you claim I implied.

            “You made a statement that was fallacious in saying that a single person couldn’t manipulate a currency. I then provided proof that a person could and did manipulate a global currency. You’re trying to hang on to your belief system now that it’s been proven wrong.”

            I think it was an implied term that, ceteris paribus, a single person could not manipulate a currency. And your argument is in fact wrong even on the facts. He didn’t ‘manipulate’ the currency, he rode the changes in teh exchange rate brought about by the mad rush out of the US dollar into other currencies, including the Kiwi. You have proven nothing other than a misreading of the incident in question. The article you cited clearly proves me right. He merely made money by speculating on currency volatility caused by the actions of others and the low volume of currency in circulation – hold on, that rings a bell. Aren’t they the very flaws that were pointed out in the article. You are sticking to a misguided view of an incident that has clearly been proven wrong. Methinks you win the crown fallacy here.

            “They weren’t and aren’t relevant.”

            Notwithstanding the fact that he didn’t manipulate the currency in any case, you can’t just dismiss a global market collapse, inexperience in handling a newly floated currency and the minimal 2% volatility as irrelevant merely because they do not support your already proven to be incorrect fallacious assumptions.

            “One person did manipulate a global currency and if it happened once then it can happen again and it probably happens on a more or less daily basis by the global banking system.”
            Of course it could happen again (even though it didn’t happen before) if the same suite of circumstances occurs simultaneously again.

            “I didn’t call capitalism evil. I said it doesn’t work as global climate change, massive poverty, unsustainable use of resources and societal break-down due to excessive competition prove. Although, those results of capitalism do stink of evil.”

            The biggest polluter in the world is China – not capitalist. Russia, during the peak of its anti-capitalist era had entire lakes acidified. No part of any capitalist country has been affected as badly as has happened in non-capitalist countries. More people have been raised out of poverty by capitalism than any other system – even the Indian and Chinese governments will acknowledge that. Capitalism actually rations resources wisely. It is rampant consumerism that causes resource consumption. I will agree with the criticism of competition to a degree. Some is good but I personally am a co-operativist.

            Of course you won’t reply any more. That is such an old tactic., But happy to end on this note. Clearly showing that your arguments are fallacious, you infer what you claim I imply, you misrepresent things by not including relevant facts and deem anything that contradicts you as irrelevant.

  • http://edmundintokyo.wordpress.com/ Edmund in Tokyo

    “My knowledge of computer science and maths aren’t sufficient to say how this could be programmed, but it doesn’t appear to be too complicated.”

    “I’m not an expert, but how hard can it be to draw seven red lines, three of them drawn with green ink, and all of them perpendicular to each other? It’s just 7 lines, right, not 20!”
    http://twentytwowords.com/like-engineer-sales-meeting/

    Basically the problem is that whenever you try to link to some external behaviour like real-world demand for the currency, you bring in some kind of nasty dependency with a bunch of extra failure modes. You’re trying to peg money issuance to actual demand, not transactions moving around the system which as you say can be trivially gamed, so you can’t just link the thing to transaction volume.

    There are a couple of approaches you could take, but they all have ways they could go seriously wrong that don’t apply to bitcoin:

    1) Get a bunch of trusted external feeds for exchange rate data, then create and destroy money based on whether it’s too low or too high. The problems here are avoiding the original exchange rate information from being gamed, making sure you have reliable data sources that also can’t be gamed, and giving people an incentive to destroy their money. It may be possible for this to work for long enough to be useful, but you could never be confident it wouldn’t fail badly in future.

    2) Have some external backer who promises to redeem coins for real-world currency. This brings in counter-party risk if the backer loses the incentive or the ability to redeem the coins. I actually think this will end up happening; Some financial institution will issue cryptographic bearer tokens on top of the Bitcoin network (using a standard like Colored Coins or MasterCoin) or in another alt-chain. Basically you point at some data and say, “I promise the bearer, on demand, the sum of $1″, then sell that data for $1.01. Once one bank does this the others will jump in too and for a while we’ll have a bunch of competing banknotes issued by different banks, like we used to before central banks took over the printing of banknotes. From history I guess some of these banks then ultimately fail to redeem them, and eventually the central bank will take over issuing them, and then we’ll just have normal money working on a crypto-network. But this will all take a while, and the problems are regulatory and political, not technical.

    On the other hand, maybe we can make a crypto-currency in the shape of a kitten.

    • http://bsd.wpengine.com.uk/ Ben Dyson

      Edmund in Tokyo – good points. What I was suggesting is that it’s not impossible to base the creation of coins in some way on a combination of the transactions volume and some sort of measure of demand for the currency (possibly based on the total value of all coins against a basket of other currencies, or the growth in the number of users).

      If you can avoid human discretion you’d probably have a more secure system. And providing an incentive for people to destroy their money if you need to contract the supply is tricky.

      It’s worth remembering that if Bitcoin hadn’t been adopted as quickly as this, the rate of money creation could well have been inflationary i.e. the price of Bitcoin in dollars would consistently fall. There are problems when you set the growth of a currency completely arbitrary level. But on the other hand, if it’s unlimited, there’s an issue of trust too. Maybe the sweet spot is to have some flexibility, but with caps, so for example it can grow faster if the currency is being adopted faster, but never by more than x% over 12 months, so there would still be an upper limit on how quickly it could grow, and it’s not completely discretionary.

      • http://edmundintokyo.wordpress.com/ Edmund in Tokyo

        Right, like I say you can probably forget about transaction volume because it’s trivial to game, so if you want to peg to something external you necessarily pull in a dependency on an external data source at a minimum, and possibly an external backer as well, which will make your system much less robust and open to attack than a system that doesn’t have that dependency. I’d have thought once you’d taken that hit you may as well go the whole way and peg the thing to an external currency or asset price.

        One thing you could do that would give you a bit more real-world input without importing reliance on data feeds and backers would be if instead of readjusting the block reward so that it never increases given mining power, you actually let some of the increased mining power go into additional money creation. This is similar to what happens with gold, where if the demand for gold increases relative to the cost of digging it out of the ground, people spend more to dig it out of the ground and the supply also increases. The increase in the money supply then depends partly on mining technology, which is unhelpfuly unpredictable, but also partly on demand for the currency driving more spending to mine it, which is exactly what we need.

        PS. This is a separate point but I’m not actually sure the hoarding point is right. The traditional theory there is based on prices being sticky, so even though both I and my car dealer know that the price of their cars will drop next year, I have to wait until next year to get the lower price. In the bitcoin case everybody just prices in USD and converts in real time, and any new information that changes future price expectations should be immediately priced in by speculators and reflected in the price in bitcoins I have to pay for the car. So in the average case it’s not at all clear that it’s rational to hoard and wait for the value of my bitcoins to go up. If it was, it would also be rational to cash out all my USD for bitcoins, and the price would move very fast, until all the likely future appreciation was priced in.

  • Swapster_com

    I agree with most of this, especially the fact that with only 11 million BTC in existence right now, those assets are held by a relatively few thousand users. Are we expected to make them insanely wealthily because they found out about Bitcoin a year or two earlier than I did? And having a large portion of the BTC supply being involved in theft by hackers makes it unrealistic. This is why I am done with Bitcoin. Let’s see what comes next.

  • Frederick Malouf

    Hey Ben,

    I read the article on the fatal flaws of Bitcoin. I envy you going to the conference. I wish I could go to explain another viewpoint of C-currencies in general.

    You are true on the points, but I think you are not fully seeing the scope of twhat makes BTCs ingenious. I have presentation of what I believe is the endgame of BTCs here: http://vimeo.com/89289740, but I’ll explain the the points you make and why it is the foundation of what will be a revolutionary way of exchange, but yes, it is NOT Bitcoin.

    1
    Design flaw 1. The rate of money creation
    BTCs follow the same curve as any limited resource. EG, we can mine gold or oil all we want, but the finding of the resource will end. The difference is we KNOW when BTC mining will stop. This is very different to how money is created now, with debt or even free by a govt. Unlike politics, though, this is a peer based decentralised model with an incentive to invest in its creation, and after that, there would only be fees in running the structure, Not perfect, but much better than the banking system we have bow that will NEVER change through political pressure, because banks own politics.

    The key conundrum in this is that PRICE, which is usually a measure of value, will not stand up in the BTC world, especially when all coins are mined. Also, derivatives are not possible, no matter how hard people are trying to build businesses around that, as the supply of BTCs will dry up, making fractional Reserve lending, and its likes, redundant and meaningless. This is what you want, right?

    Yes, anyone can make a C-currrency, Litecoin being a simple example of a derivative, with 84million coins available to be mined. While we think like this, then we go through the process BTC is doing over and over, without much change to the creation game, speculating in money, making it meaningless, too, as who knows what we invest with to make a trade. All pretty messy, right, but stay tuned.

    2
    BitCoin rewards the adopters and speculators
    This is what is so ingenious of BTCs. People freely invest to build the structure of BTCs by validating transactions in it! Truly amazing concept. Not mining like a resource that we choose to own after the earth makes it, but that you must validate trades to get BTCs, therefore building the BTC. Ingenious!

    What is created is a new GLOBAL single currency, with many peers vying to validate your trade, offering options to incite you, etc. In the process, fees lower, to the point where the only incentive left will be to offer trades for free. This is feasible in that the infrastructure to trade is there, so there is not much left to do.

    As you say, people will make more efficient, smarter currencies, as is the nature of a democratic free market. Less energy, faster transactions, in BTCs AND in other C-currencies. And so it goes. Like I said. All pretty messy,

    Speculating is part of the deal, no matter what you are exchanging right? Interestingly enough, I think BTC makes this very transparent, and, therefore, of very little value to build networks for speculation.

    3
    Design Flaw 3: BitCoin is LESS secure that national currencies

    By the way, all new currencies are volatile if they are not backed by govt, but BTCs is opening its acceptance in a fully democratic way, not by political governance. This is the nature of free markets where the foundation of money being scarce, operate. All money has to be scarce, otherwise it is worthless. Even if we have a whole lot in the bank, it is pretty useless. It is the equivalent of hoarding for bad days, but spoiling the goods, same deal as taking a lot of anything early and keeping it for the future instead of taking when you need it, and letting it grow when you do not. No, this is not the same as interest, et al.

    I think the natural consequence elf that will be that we will evolve to using ONE, FREE, currency. But that is not the end game. When i presented at the BTC conference win Sydney, it is amazing how, when I said prices will fall while the good and services get better, that people’s argument for why price still has meaning for value is that BTC will be infinitely divisible. No kidding, but the price is still falling. How can I get more coin for my security? Keep making better stuff than your competitor. So, we keep making better an better stuff for LESS money. Sure, but look at HOW GOOD WE ARE ALL MAKING STUFF. Not only that, we will have to make the best, with minimal resources, in the shortest time. If we want people to be in our project, the proportion of payment will be much closer to peer-based social entrepreneur structures. Still it will be for LESS MONEY, even FREE.

    And that’s the real point of Bitcoin: to make us realise that OUR QUALITY HAS NO PRICE, and that economic models will follow the basic collaborative nature of people, not follow fear based game theory.

    THE WAY FORWARD
    You make the point that hundreds of C-currencies are being developed, opening a free market for what currency can work best. We are so ingrained with the idea that quality has a price, it is inevitable that this is the way to go. Still the fundamentals of a currency have to be that it is scarce, and our ability to create is of a far higher value than any price, or currency, will ever measure. Shifting to peer-based governance as to be part of the process, and no current political entity will ever advocate this in the same force as the market will.

    So, while BTCs are the first of many, I really believe NO currency will hold, because the true wealth is in people, not money. We have to disassociate that money can measure us, owned or otherwise. All people will want to own money, but now it will be very transparent that without money, you will not be able to own anyone, not even in the hope of enslaving them.

    This is what makes Bitcoin great: the realisation we are better off gifting to people, and finally building the abundance, and build supply only to demand production, that we all need, not the industrial revolution cycle that builds demand to supply.

    The real measure of value is quality, and this has to, and will be subjective. Better to let money go and see where a Quality Status Economy takes us, and this has nothing to with quantity.

    God luck at the conference. I hope you add some of what I say at it, because this is the shortcut to your positive money protocol.

    Peace, as always.

    Thanks very much for gifting me your time.

    Frederick

    T I M E B E A T S
    B O N D I B E A C H R A D I O | T U E S D A Y S 1 6 0 0 – 1 8 0 0
    E M A I L | F A C E T I M E | I M E S S A G E – T I M E B E A T S G L O B A L @ G M A I L . C O M
    F A C E B O O K | T W I T T E R | Y O U T U B E – T I M E B E A T S G L O B A L
    + 6 1 4 0 3 9 9 3 6 9 9
    How would I define myself? That’s like asking the definition of infinity …..

  • http://mymobilepatron.com/ Andy Gee

    I don’t see the security issue as being anything other than based on laziness. If everyone used local wallets instead of online wallets
    this problem would effectively disappear. Local wallets are as secure
    as the user’s computer which is good enough for online banking.
    Online
    wallets are as secure as the weakest link out of the local computer and
    the online server so adds an additional layer of potential weakness and
    a huge honey pot for would be hackers.

    • Chinthamany Chary

      “good enough for online banking”

      Ah, but if someone installs a keylogger and transfers your savings account to they will probably hit your daily withdrawal limit, and the bank will be able to trace them fairly easily. You actually need better computer security with Bitcoin, because there’s no fraud protection.

      • http://mymobilepatron.com/ Andy Gee

        There are no withdrawal limits with online banking, that applies to ATM and debit cards. And no it’s not more traceable than bitcoin at all. Anyone can set up a bank account with stolen ID, transfer the money to it and get a bankers draft or just close their account. No traces at all. At least with bitcoin, EVERY transaction is completely public.

        • Chinthamani Chary

          If fiat can be transferred faster and more irrevocably than Bitcoin, then Bitcoin has failed. However, that’s certainly not my experience.

          • http://mymobilepatron.com/ Andy Gee

            Well let’s compare apples with apples shall we.
            Number 1 Fiat cannot be transferred faster.
            The closest comparable fiat banking system to transferring bitcoin from one wallet to another is a bank wire transfer.
            EFT (Electronic Funds Transfer) takes up to 7 days
            Through a ACH (account clearing house) it takes between 2 to 24 hours.
            Bitcoin: currently 7 minutes.

            Transfer irrevocability, has absolutely nothing to do with the success or failure of bitcoin.

            The facets of bitcoin which make it more attractive are the:
            Fees:

            At the 10 largest U.S. banks, the average cost of an outgoing domestic wire transfer is $26.40 while the average outgoing foreign wire transfer fee is $45.50. The average costs of incoming domestic and foreign wire transfers were $14.70 and $17.50, respectively.
            Bitcoin: currently 2 cents for $500 worth of bitcoin

            Inflation: Since the year 2000, $100 fiat has lost 36% of it’s value due to inflation
            Bitcoin: Does not have inflation – it has built in deflation.
            http://www.usinflationcalculator.com/

            Freedom: Unlike fiat banks there are no limits on transfers, no holidays, no banks needing bailouts when they gamble your money away.

            Security: Unlike fiat banks Bitcoin transactions are irreversible, and do not contain customers sensitive or personal information.

            Control: No banking charges with bitcoin.

            Bitcoin Disadvantages:
            Volatility and accessibility. The latter is shrinking fast but the former is still an issue. My advice is to only play the exchanges with what you can afford to do so with. As a money transfer, volatility is only a factor of the individual transaction times. As more people accept the inevitable, volatility will reduce and bitcoin will gain even more favor.

          • Chinthamani Chary

            Maybe you should slow down and read my first reply to you, because you’re now waaaay off topic. I’m arguing that Bitcoin demands better computer security than legacy money.

  • Andrew Morton

    Hi Ben,

    I’m a paid up supporter of Positive Money and a big fan of all the work you’re
    doing to campaign for monetary reform. But I have to respond to your
    cynicism towards Bitcoin, because as a participant and supporter of this
    technology, I feel your arguments above are superficial.

    It’s very easy to apply hindsight to innovation and claim that because
    something isn’t perfect, it has no value and should be discarded and supplanted
    based on current wisdom. But your comparisons to the first iterations of
    the bicycle or powered flight are ridiculous. The Bitcoin blockchain is
    by design a continuous record, therefore the incentives and sunk costs now very
    strongly favour backwards-compatible improvements to Bitcoin itself as opposed
    to mass discarding and migration to a new blockchain-based currency.

    The issuance model does encode scarcity, but this rate and the total amount to
    be issued are largely arbitrary because bitcoin is effectively infinitely
    divisible (currently to 10^-8) . If you don’t like this issuance model,
    many alternatives, including demurrage based cryptocurrencies e.g. Freicoin,
    already exist and are free to compete with Bitcoin. In any case, your
    claim that bitcoin is used only as a speculative asset and not as means of
    payment is undermined by one irrefutable fact: people do use it as a means of
    payment.

    Although there may be early adopters who are sitting on their coins, there
    are just as many who have given much of their early acquisition away and are
    actively reinvesting them. There are a torrent of new companies being
    funded exclusively in bitcoin, allowing them to circumvent the banks that we’re
    all railing against for their refusal to lend to new and small
    businesses. Those that contributed and invested earliest in Bitcoin and
    saw its potential early on were also those who incurred the greatest risk in
    the event of its failure back when its continued success was far less
    assured.

    Your argument about security doesn’t identify any vulnerability that is
    specific to Bitcoin. The same carelessness that can lead to somebody
    disclosing secret information allowing access to their bitcoin also makes
    people vulnerable to phishing attacks or other scams that lead them to disclose
    their internet banking details, or the location and combination of their
    safe! Of course it is possible to lose bitcoin, just like anything else
    you consider precious, through human naivety or error.

    Finally, maybe consider what Bitcoin is achieving alongside your own
    intermediate proposal to create Sovereign Money. You propose issuing
    sovereign money to finance investment in a particular sector of the economy
    (e.g. construction of affordable housing). Bitcoin is a new technological
    sector in its own right, bootstrapping itself through the issuance of its own
    form of sovereign money. The difference is, Bitcoin is doing all this
    right now, not at some indeterminate date in the future after years of
    political campaigning. I honestly see it as analogous to, and a future
    companion of your own proposals. Bitcoin is positive money!

    • DozyHole

      I agree, I think positive money are a little out of touch on this one. I support positive money but I am disappointed with this article.
      It’s not just clever programming(I am a programmer:)), it’s clever mathematics. Also, no mention that it is the mining that verifies transactions and keeps the whole system viable, how can you leave that out?
      Anyway, most of my concerns are addressed by Andrew above.

      • Andrew Morton

        Absolutely. Alas, I only wish I was capable of appreciating it at the level of the maths! Positive Money: will you come down from your lofty perch if I send you a Bitcoin donation?!

        • ConradJones

          I think Ben has made a very good analogy between the early pioneers of flight and cycling to BitCoin.

          Anyone who works in Engineering – especially Software Engineering; knows that when they write code for a particular application, that Software will first appear to meet some of the requirements that the Application has to accomplish, But after prototypes are created (Technology Provers) the Prototype has fulfilled it’s initial objective and helped those involved to gain confidence in the concepts and so further development can proceed.

          BitCoin has proven that an Electronic Decentralised currency can work – BUT! it still requires development. The early adopters of this currency no doubt have made a huge amount of money, others have lost a huge amount of money and the fact that at some point in the near future the currency will cease to expand in line with usage and goods and services IS a significant design flaw and would make it more of an Asset type savings investment rather than a serious mainstream form of currency.

          This – as Ben has pointed out; does NOT mean that another Cryptocurrency – or a modified BitCoin Currency, won’t eventually become a real alternative to Government created money – or the Private Bank Created Deposit Money.

          There’s also no industrial use for BitCoins like there is for Gold and Silver, but Gold and Silver also suffer from the scarcity problem.

          • Mikael Olsson

            Late answer but… Gold and Silver are only scarce because they are being used for speculation (see Ben’s problem #1). The industrial uses for them are a fraction of the available output.

    • ConradJones

      Have you heard of a case where someone has paid for a House with BitCoin?
      I guess it would be possible to do this but with the violent fluctuations in the price of BitCoin – this would add to the stress associated with buying a House…
      This would also cause complications in working out the Stamp Duty to be paid to HMRC.
      How would a solicitor transfer the payment? Would you trust your Solicitor to transfer the right amount of BitCoins?
      Yes, it is a great idea to circumvent the Banks – why should we pay them £25 just to transfer a payment over a certain amount as if the Digital Money has some kind of physical weight. We all know on this site that they put charges on Bank Transfers to other Banks to slow the speed of money down so the System can cope as they are balancing the whole payments system on a few reserves at their Bank of England Reserve Accounts. Sending Money around the World without being Fleeced – first by the Banks in the Transfer Costs and then by Governments who are now starting to create Wealth Taxes and Import Taxes on Savings and even Property which isn’t even in the target Country, in European Countries to offset the catastrophic failure of the Centrally Controlled EURO.
      So I can empathise with those Die Hard supporters of BitCoin – BitCoin is a symptom of a collapsing State Currency which passively defrauds people on a daily basis through excessive house prices, increasing rampant Taxation Regimes (The UK is not quite as bad as some of the ones now forming in Countries such as Italy), ever expanding debt, mal-investment, general inflation of goods and services.
      So yes, I would like to see BitCoin expand and become more stable and widley used – becasue then, Politicians would have no choice but to do something about the Financial System. But I cannot see BitCoin – in it’s present state, being the Cryptocurrency that Ultimately succeeds – it’s kind of a Betamax Video Tape – we need the VHS equivalent (Can’t use the analogy with DVD and BlueRay as DVDs are still sold).

  • Ian Green

    There are a lot of inaccuracies in this, You can’t keep bitcoins on a USB drive – they never move outside the blockchain, because “bitcoins” don’t actually exist. Not in physical form. Not even in electronic form. They don’t live in a wallet. They don’t flow through the internet like emails or IP packets.

    If I pay you “1 bitcoin”, my address on the blockchain has -1 added to it and yours has +1 added to it, to simulate the flow of coins. Nothing has moved though.

    Using processing power competition to mine bitcoins means that very powerful computers create each block of the blockchain.

    Under normal circumstances, even a mobile phone could create each block. Having powerful computers helped the bitcoin network to survive the recent DDOS attack unscathed. Its designed to strengthen the network and drive computer development. You want to replace it with some kind of loyalty card points that reward people who move bitcoins between two wallets every 10 minutes?

    MTGOX’s owner has been dipping into the till since 2011, and this nDDOS attack was probably his only hope of avoiding jail. If you want to see where he’s hiding half a billion dollars in bitcoin, look at this wallet address:-

    https://blockchain.info/address/12Nxd2X12WZeYSjUcbtm5NpS3d81Yh8sKh

    Scroll down and click on any of those 0.000777 payments (the red arrows). Each one marks a cash pile of 10,000 bitcoins, stashed in early february. There are more than a hundred such stashes. Here is a typical example

    https://blockchain.info/address/19PPeuu4jPjqtefSQ2FDgKmNJ88Z5wiuJt

    Nice try…

    There were many cryptocurrencies before bitcoin. This is the one we’re using, there is no point using more than one decentralized currency.

    So, no fatal design flaws, because, unlike Ben Dyson, its developers thought things through. i’ll be at the O2 on saturday, heckling him. He’s clearly still thinking in feet, ounces and £, and thinking all the time “how many £ can I get” when his pension could well be in bitcoin.

    Bitcoin is the atomic clock of currencies – the straight line on the graph. Its not the bendy line against the straight dollar and pound lines, printed at will. Think of the exchange rate as THE DOLLAR UNPOPULARITY GRAPH compared to bitcoin. People want them. That’s good.

    Fatal flaws? Bitcoin is like a virus that people want to catch. It doesn’t need anyone to do anything for bitcoin to survive. It can survive a nuclear ware. Even its creator would be unable to stop it now.

  • Peretz

    Yes you are right to say that money is virtual. But I don’t think you have the good solution in separating the two roles of banks. To loan money wants interest unhappily. I give explainations in my first french book and in the second one translated in english.

  • Vince Richardson

    Bitcoin is an interesting case,and if nothing else it has people talking about money,who creates it and how it works as an alternative to fractional reserve banking.

    Personally I would say bitcoin will do no harm to our economy,but at some point it has to be converted back to a national currency,where we fall back on the usual problems associated with that.

    Money has always been the result of some power issuing and backing it.My only concern is who issues bitcoin and who backs it?

  • Meni Rosenfeld

    1. Bitcoin already rewards those who use it as a means of payment; they enjoy a medium of exchange that can be easily used to send value anywhere on the planet with almost no transaction costs (along with the rest of Bitcoin’s many advantages).

    Saying that Bitcoin (a startup currency) shouldn’t reward people who invest in it, is no different than saying that people shouldn’t be rewarded for investing in a company that later succeeds. It’s an inherently anti-capitalistic notion. By now it’s established knowledge that the economy is most efficient when people are rewarded for contributing to the effective allocation of resources.

    2. I am a Bitcoin user. I pay with Bitcoin in every opportunity, and I actively work to create new opportunities. This is because it’s a more efficient way to transfer value. If for some reason I then worry I do not own enough bitcoins, I can use some of my spare government currency to procure more.

    So your claim that people will not use Bitcoin as payment is demonstrably false.

    • Meni Rosenfeld

      Of course, if there is no government money to begin with, I’ll have to buy things using Bitcoins because I need to eat.

  • Inaltoasinistra

    Garbage.

    • Simon

      Please elaborate and say what is garbage

      • Inaltoasinistra

        Design flaw 3 is ridicoulus (it can be simple fixed without change the protocol (multisignature, better sw, …), good example of “design flaw”…), the others seems only very questionable opinions widely discussed yet.

        The conclusion is great: “I can’t propose how to bound the value to something, but it’s sure that someone could”. Sure. It’s so easy that we are waiting your advise before implement it. I don’t expect to see rubbish like that on a article.
        The author is simple ignorant about this topic

        • Simon

          I am no fan of debt based FIAT currencies, and as we have seen governments and banks have abused them. I think Bitcoin or a variant of it is the future, although it needs to become much more widely used, accepted as payment for taxes etc. When I can go to Tescos and use it, I know then that Bitcoin has arrived. In the meantime, we have to live with the existing system, and Positive Money are doing good work to try to improve it. Hopefully something like Bitcoin will achieve critical mass and become mainstream, although I am sure the banking cartel will do their best to keep extracting rent from society and stop initiatives like Bitcoin.

      • darren kis

        he means this article is garbage, the author is either an idiot or has a hidden agenda.

  • ghibly79

    1 is debatable. Time will tell, but valid doubt.
    2 is true for every good project/investement which takes over. Early adopters take the highest risk, thus the highest reward if things go well.
    3 is false: bitcoin itself as a protocol is as secure as bank (arguably more secure). However it offers you more freedom and that comes to more freedom to not secure your funds with enough care, or to trust them to private businesses who can fail at security (or just rob you).
    No one is there to babysit you if you don’t take advantage of the strong security features offered by this technology, that’s true. It an inevitable tradeoff for no centralized control.

  • Bernard

    Hello Ben ! Thank you for the paper, but i think the basis of bitcoin is not understood.

    “the Bitcoins were literally stolen, now exist on somebody else’s computer, and the exchange has no idea where they are.”

    This is just not understanding what is the “blockchain” : this is the file containing description of “location” of all and any existing bitcoin unit. By “location” i mean to which “account identifier” it is substracted, and to which “account identifier” it is added. This file is public and duplicated on lot of computers, so very difficult to lose…

    By using the basic rules of accountability of transactions, invented more than 5000 years ago in Sumer and China, and who knows where, there is no possible robbery of “accounting units” : you always know in which “account” it is, This is like the burglar of an iphone taking his own photo and sending it to the contact list…

    And no possible political corruption with bitcoin : you can see the bitcoin account of each political representative. Why do you think they do not like it ?

    This transparency is the key : thus the “design flaw 3″ is wrong, bitcoin architecture is far more safe than official currencies. This is the coin that invented the money robbery, by not respecting accounting rules.

    MtGox was not stolen its units : It has been said that they have paid 2 times, because they did not check well the execution of 1st payment. But i did not checked that info.

  • Bernard

    Dear Ben,

    On volatility, i am afraid that in an area where relativity apply, bitcoin is the most stable currency as its rules are clear and controlled. What is not clear are the creation and allocation rules for all official currencies, and the rules for publishing a change rate. i am afraid that the change rates are very sensitive to the fast change of officiel currencies, and thus it appears that bitcoin is a very stable reference, and a very fine tool for measuring variations in official currencies.

  • Bernard

    One more for the trip :-)

    The thoughts about creation rate and allocation rules are very interesting, but one more time because the show the real problems with official currencies : they have no rules, and we as citizen do not know how much is created and who receive creation, to make what ?

    It is possible to demonstrate that if we want the money to be neutral, ie not giving advantages to one against the others :
    – the creation rate MUST be a constant, like 1% per month;
    – the creation MUST be given to each citizen, in equal share.
    Each citizen will choose in which area of real economy every unit will be invested.

    It solves the greatest problem of currency, that is not solved in the last video “3 changes” :

    – there is no need for a cabinet to decide about rate : citizen only have to control that rules are followed, which should be easy with transparency of creation.

    – it is inconsistent to object that the governement is not trusted to decide the rate, but should be trusted to choose the best allocation of created money. By giving money directly to citizen, this is direct democracy, and citizen then decide how much taxes they will give to governement, as the history says it should work.

    Please send me an email in this comment data, as i do not know yours, so we can discuss on this.

    • Gerard Shea

      Why require Bitcoin as a replacement for fiat money? If people are concerned about the current financial system, before developing an entirely new currency try three simple steps:

      1. Exercise your right to vote if you live in a democracy. Or even run for election to your respective government body. Don;t just sit back and whinge about the current system and try to avoid it without at least trying to exercise some control or change over it.

      2. Spend your fiat money wisely. Don’t rush out to boost your ego by buying the latest gizmo from the world’s largest company. Use your consumer sovereignty to control which companies make profits and which don’t. Reward those that are genuinely innovative and environmentally and socially aware.

      3. Invest in companies so you can help control them via your shareholder rights. This includes banks.

      If, once you have done your bit to influence the existing governmental and financial systems without success, then go ahead and try to bypass it with an alternative currency.

  • jackrcurtis

    I see Bitcoin mainly as a replacement for the FRN as the world’s reserve currency, serving as a hedge against corruption of ones own national currency. A global reserve currency that belongs to the people, rather than to the banks, would enable people to keep the corruption of their national currencies in check.

  • Talamos

    Are BitCoins a good currency? I think not (yet).

    What makes a good currency?
    A good currency is any entity (physical or not) , that PEOPLE
    1. want use (for buying and selling) and
    2. want to keep (for whatever reason).

    If 1. and 2. are not present over a longer time, the currency will disappear.
    Now you can ask yourself what makes any currency attractive for you with regards to these two points.

    For me it is:
    1. Trust (stability, availability, acceptance)
    2. Usefulness (Who is taking it. Is it easy to pay with. Is it easy to keep.)

    BitCoins are for me mostly interesting from the speculative point of view, because I have read (like most people) that the exchange rate varies heavily, but the shops (online and physical) where I usually buy or sell things are not taking it…

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  • Michael Mears

    The Bitcoin/Litecoin and clone Alt Currency branches support architecture is fundamentally flawed. The block discovery difficulty and hash rate power to mine coins has increased to the point that you need a small server farm to achieve a small amount of profit. Recent cloud farming services have moved in because they can operate more efficiently to keep mining profitable.

    Lack of scalability (en.bitcoin.it/wiki/Scalability) and future network support is Bitcoin’s and other clones “albatross around their neck.” As of Sep 11, 2014, 13,250,900 out of the total possible 21 million Bitcoin’s are in circulation. Bitcoin’s support network is rapidly approaching a point where large scale mining will no longer be profitable. You don’t need to be an economist to realize that when doing something is not profitable, people stop doing it.

    After coin mining is no longer profitable, the support networks processing power will shrink and verifying huge block chains will take longer making it unusable as a functional daily currency. Bitcoin could eventually become the sole digital currency (gold standard) that others are valued against. Observing current markets, it’s well on it’s way.

    NXT’s nxt.org support architecture makes more sense, it’s eco-friendly and processing power is scaleable to achieve fast block processing times. Trust, transaction speed and security are ultimately the deciding factors that will make any digital currency viable. Depending on peoples acceptance, it’s marketplace could eventually be a serious competitor to PayPal and eBay, due to lower transaction fees.

  • darren kis

    so many errors in this piece. Did you actually do any research or just googled bitcoin and cut and pasted any old crap in and pretended it’s your own work??

  • Bryn2

    Bit coin is just another Ponzi scheme, or Pyramide game. Those who dont follow this judgement do not understand basic centralbank theory, and basic macroeconomics. All said.
    For those who will not understand; Just exchange your USD or GBP into Bitcoins. And wait until it all collapses.

    • Will T Nemo

      or just be a loser like you !

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