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Bitcoin and positive vs. normative economics

krugman.blogs.nytimes.com

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Re: Bitcoin and positive vs. normative economics

#501

Post by yohanatan »

icambron wrote: post #496
yohanatan wrote: post #430

Earlier quoted context omitted.

I was considering the blockchain itself as part of the infrastructure. If the [rest of the] infrastructure (i.e., the mining equipment) becomes (or is) useful, it is only inasmuch as it is a good shepherd of the blockchain. It is both the mining equipment (at any point in time) and the blockchain which make possible the use of BTC as both a storage of value and a medium of exchange. As long as there exists both a glo…

> then the individual accounts within its purview obviously have whatever values it records them as having. I think there's a basic disconnect here about what we mean by "store of value". The simplest way to put it is that something stores value well if I can buy a predictable amount of stuff with it in the future. That the ledger does a good job of establishing that I have N bitcoins is different from telling me how…

I'm using the standard definition of 'store of value' (see: http://en.wikipedia.org/wiki/Store_of_value). The only requirement to have a store of value (aside from ability to store and retrieve) is that there exist a floor; i.e., that an entity 'merely have economic value that is not known to disappear even in the worst situation' or in other words 'be predictably useful when retrieved'.

Of course, we can easily imagine scenarios where Bitcoin loses all value but I think a sufficient imagination can produce scenarios for the other stores of value listed on that page as well. So, this is obviously a bit subjective territory (i.e., different people can assign different probabilities to each of the circumstantial propositions) but there is a strong argument from consistency for the designation of Bitcoin as a 'store of value'.

I personally think that mathematically-interesting (and rare) numbers do have an intrinsic value (even if only as a novelty or perhaps antique/collectible).

Re: Bitcoin and positive vs. normative economics

#502

Post by icambron »

yohanatan wrote: post #501
icambron wrote: post #496

Earlier quoted context omitted.

> then the individual accounts within its purview obviously have whatever values it records them as having. I think there's a basic disconnect here about what we mean by "store of value". The simplest way to put it is that something stores value well if I can buy a predictable amount of stuff with it in the future. That the ledger does a good job of establishing that I have N bitcoins is different from telling me how…

I'm using the standard definition of 'store of value' (see: http://en.wikipedia.org/wiki/Store_of_value ). The only requirement to have a store of value (aside from ability to store and retrieve) is that there exist a floor; i.e., that an entity 'merely have economic value that is not known to disappear even in the worst situation' or in other words 'be predictably useful when retrieved'. Of course, we can easily ima…

I take back what I said about the definitional problem.

But I don't see where you've established that Bitcoin has such a floor, as I said above. I don't think we're getting anywhere, though, so I'm going to break off.

Re: Bitcoin and positive vs. normative economics

#503

Post by fat0wl »

dragonwriter wrote: post #421
jadeddrag wrote: post #417

Earlier quoted context omitted.

Which is more likely, that economists don't understand cryptography, or cryptologists don't understand economics?

More likely than either being particularly more likely than the other is that neither economists nor cryptographers are particularly likely to understand the other field.

yea but my view here is that you don't need to understand cryptography to derive the value of a Bitcoin. It is akin to other currency systems that have come before it. the crypto aspects are new, sure, & provide a good infrastructure that may give it staying power but the cryptography shouldn't actually be where the value comes from.

I think a sound economic analysis of the market can be done regardless of the transactional method. sure, it's clever but its a feature of a value store, not actual value

Re: Bitcoin and positive vs. normative economics

#504

Post by yummyfajitas »

atmosx wrote: post #487
yummyfajitas wrote: post #483

Earlier quoted context omitted.

I don't see a relevant distinction between them for the purposes of this discussion. Can you explain what you believe the relevant difference is, and why it matters? (Express your model in maths as much as possible, for the purpose of clarity.)

Currency[1]: Primarily a medium of exchange. Asset[2]: Anything that has value and can be converted to cash. For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably. Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust t…

Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not.

It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitcoins. If you use the BoA card, you spend $50. Then you shift $45 from bitcoins to USD and maintain a 10/90 portfolio. If you use the Bitcoin card you instead shift $5 from dollars to bitcoins.

The only reason to choose one over the other is transaction costs. I.e., if it costs you $1 to make this transaction, and you expect a $50 USD deposit in the next month, you'll use USD to avoid the $1 transaction fee. If transaction costs are a % of the transaction size, you'll pay with the BTC card (and pay only x% of $5, rather than x% of $45).

Your post still doesn't explain why a deflationary currency will cause a person to stop consuming. Just as we could hypothesize a BTC backed credit card, we can also hypothesize an SPY backed credit card. The mechanics would basically be identical - at the point of transaction, the card company converts from the buyer's preferred asset to the seller's preferred asset. Both BTC and SPY backed credit cards already exist - it's equivalent to getting a regular USD credit card and selling BTC/SPY whenever you want to make a monthly payment (modulo a couple of extra clicks).

Incidentally, your post completely ignores the reason central banks manipulate currencies. The reason has nothing whatsoever due to the distinctions you make between currencies and assets (which, if I'm understanding correctly, is merely liquidity and the ability to pay taxes in them).

http://en.wikipedia.org/wiki/Nominal_rigidity

Re: Bitcoin and positive vs. normative economics

#505

Post by fat0wl »

tolmasky wrote: post #229
loceng wrote: post #221

Earlier quoted context omitted.

The problem that I have heard being stated before is that Bitcoin is associated with real money. This basically leads to the value of each Bitcoin increasing, and then early adopters making gains that they shouldn't really be making. I don't know how a system would look, where everyone starts off with X Bitcoin, though the current system feels wrong where some people now have $100s millions of Bitcoins and didn't do…

... Why? It seems to me that it works the same as any system with early adopters willing to take on risk. People that got into twitter early make more than people who get in later, without any necessary correlation to how much work they've contributed. Early investors in a company often put in no work beyond their capital, should their shares be redistributed after it becomes a sure thing? If bitcoin fails, the losse…

Hah someone countered this quite elegantly once -- something like "You mean the risk of leaving their computer on overnight a few times 3 years ago?"

No, that should not make you vastly wealthy...

Re: Bitcoin and positive vs. normative economics

#506

Post by wpietri »

icambron wrote: post #490
wpietri wrote: post #469

Earlier quoted context omitted.

Regarding your last bit, I'd guess his notion of "successful currency" is observational. There have been a lot of currencies, so it's pretty easy to look at the ones that have lasted versus the ones that haven't. Being a store of value is a goal if you want people to hold a currency. For example, when I was an exchange student in Ecuador long ago, the Ecuadorian sucre was not seen as a good store of value. Better-off…

I tend to agree, and my musings to the contrary were mostly just spitballing. But to play devil's advocate because it's fun: to the degree to which it is useful to hold onto the currency you also use as a medium of exchange, then perhaps that does provide a value floor. In other words--assuming it is successful as a means of exchange--the fact that you have to pay a transaction cost to get out of a BTC position means…

Interesting notion. I'm not sure that works; if the cost of getting out is the only floor then I don't think it's really a floor. To get out, somebody else needs to get in, and if they subtract their trading cost from the value floor, they get zero.

I think that experiment has been done with paper currencies where people stop trusting the backing. It would still have the same cost-to-get-out value (indeed, I'd think that value would go up as the currency fails). I know the Ecuadorian sucre went from something like 500 to the dollar to 25,000 at the end, so it would seem that the cost-to-get-out value is small even with traditional currencies; given BTC's theoretically low transaction costs, I presume it would be even smaller.

Re: Bitcoin and positive vs. normative economics

#507

Post by alphydan »

nhaehnle wrote: post #193
alphydan wrote: post #148

Earlier quoted context omitted.

Unfortunately the squiggle trick doesn't work to send $0.20 to that friend in Angola who runs the water and sanitation project? It also doesn't convert to Mpesa in Kenya [1] (Bitcoin now does). And wiring $500k to China for that shipment on a Sunday doesn't work either with squiggles or e-payments. [1]: http://www.economist.com/blogs/economist-explains/2013/05/ec...

On the other hand, all of your examples could easily be addressed if there was sufficient demand for it. So Bitcoin could be valuable in disrupting payment systems: Step 1: Bitcoin becomes superior to traditional payment systems. Step 2: This becomes relevant enough in the large scheme of things that Bitcoin gets serious adoption outside of speculation. Step 3: Traditional payment providers up their game. Step 4: Tra…

I fully agree. It's not something traditional payment systems couldn't do (at least in principle. In practice I don't know if they can operate on such low fees). The actual success of Bitcoin over the next decade is a much more uncertain issue.

Re: Bitcoin and positive vs. normative economics

#508

Post by gnaritas »

lamontcg wrote: post #497
gnaritas wrote: post #495

Earlier quoted context omitted.

> Is that like "Real Estate only goes up?" No, it's saying that Bitcoin has the feature that people who like Gold like, the supply can't be artificially inflated. That's all. Keynsian's won't like that because that means it's deflationary. > This problem really does lead to crypto currencies having no floor like Krugman points out. Krugman is wrong because he doesn't see the inherent value in them yet, and there is v…

Can you not see yourself contradicting yourself? You admit that some other crypto currency may win. That means that bitcoin may lose. Lose. LOSE What happens when it LOSES? Like Krugman points out, there's nothing to backstop it and no floor. Oh right, but he's just an economist, he doesn't see the "inherent value". He just doesn't understand... You so easily swap contexts completely between all of this "inherent val…

> You admit that some other crypto currency may win. That means that bitcoin may lose.

Your thinking is very binary. It's possible that another crypto currency becomes the biggest one, that doesn't mean bitcoin loses, it means it's not the reserve currency that it is now. You don't seem to understand that people have different ideas about how a currency should function and each crypto that comes out will attract those that agree with its rules. Bitcoin is designed for Austrian economic fans who think inflation of the money supply is the worst thing ever. They will never abandon it for another crypto, it's already exactly what they want. Keynsian's will eventually move to something that includes built in inflation.

> Like Krugman points out, there's nothing to backstop it and no floor.

Yes there is, it has utility; even if another crypto becomes the more favored currency, Bitcoin will remain the digital gold it is because it's deflationary, easily tradable, and aligns ideologically with how many people think money should work (they're wrong, but that doesn't matter).

> I'm clearly going to need to load up on popcorn, this is gonna be fun to watch...

It's already fun to watch. That neither you or Krugman see inherent value in crypto currencies is something both of you will come around on eventually. He certainly changed his mind about the Internet being no more useful than a fax machine.

Hey, I love Krugman, we agree on much, but on this, he's simply wrong and he's been very wrong very publicly before. Your appeal to his authority is not a valid argument for why Bitcoin is a bubble, if you can't make your own, then move on but don't get snarky with this "he just doesn't understand" b.s. you're slinging; it's unbecoming.

Re: Bitcoin and positive vs. normative economics

#509

Post by baddox »

EGreg wrote: post #485
baddox wrote: post #403

Earlier quoted context omitted.

Fair enough. It's hardly the worst idea I've ever hear of, nor the most upsetting to be personally (the fact that "modern" Western governments still reserve the authority to perform military conscription is far worse). I would still prefer not showing up for paying the fine.

What about jury duty

I'm not a fan.

Re: Bitcoin and positive vs. normative economics

#510

Post by atmosx »

yummyfajitas wrote: post #504
atmosx wrote: post #487

Earlier quoted context omitted.

Currency[1]: Primarily a medium of exchange. Asset[2]: Anything that has value and can be converted to cash. For the purpose of this or any other discussion I've made this argument, the author of the comment/post clearly confuses the two above stated words or uses them interchangeably. Currencies, in modern economics, are control by central authorities (FED/EBC/etc) which control their performance and try to adjust t…

Say you have 2 credit cards: 1 from BoA with USD and one issued by a third party linked to your BTC account. You enter in a grocery store and you need to pay, which one you think most people choose? The rational choice is to use the USD because it's an inflationary currency, while BTC is not. It doesn't matter. Say you want to maintain a portfolio of 90% bitcoins, 10% dollars. You have $100 USD and $900 worth of bitc…

> Your post still doesn't explain why a deflationary currency will cause a person to stop consuming.

I never said will stop consuming. It will consume less. It makes sense, a consumer will spend whatever has bigger Y% of having LESS value in X time, not more!

Secondly: Have you tried buying/selling bitcoins? If you use a bank it's a pretty straight forward process but has huge costs.

Thirdly: Do you buy products using bitcoin? Do you think that people uses bitcoin to buy products online? Because all the transactions I'm aware off are either illegal (hard to track) or perceive bitcoin as an asset.

Central manipulate currencies in order to adjust the economy of a certain group, which is under their authority, as far as I know.

The distinction I make between currencies and assets come from ~ 300 BC (at least, probably way back) and I don't understand why even is a topic of discussion. BitCoin is treated by 99% of it's users as an ASSET not as a CURRENCY. No one is buying services in Bitcoin, if does not want to hide. Isn't it weird that while Silk Road used BTC as it's main currency, Amazon, eBay, Apple and every other big player, doesn't even care? You think it's out of spike or anything?

I'm not making any assumptions here, I'm stating facts. It's you who are suddenly re-writing 2000 years of economic history by assuming that buying with Gold (bitcoin) is the same as buying with FIAT.

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