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Sunday June 12 2011

Comment from mike on this, removed from there and put here:

Off-topic notice Brian (apologies):

No worries.

Bitcoin. A virtual currency run over a distributed network with no central authority to control it.

Plenty of techie interest, e.g. here.

Hasn’t anyone at Cobden been looking at this yet?

Not that I know of.

Anyone got any opinions about Bitcoin?

Plus: any other otherwise off topic comments on whatever you feel like commenting about?  Put them here.

Hmm, moving my comment seemed to have killed one of the links… here.

What strikes me as interesting is Bitcoin’s monetary policy being fixed on a decreasing expansion curve from the beginning, which is perhaps why some people have questioned whether it might be an elaborate ponzi scheme.

It seems to me that an alternative currency, at least once “established”, would have to be able to both expand and contract the money supply depending on circumstances rather than be set only according to an expansion curve. That being the case, I am not quite sure whether bitcoin is best described as a currency itself, or as a means of allowing other, commodity-backed currencies to work - a “metacurrency”.

Posted by mike on 12 June 2011

I don’t have a problem with the finite number of bitcoins.  In a world of quantitative easing it makes a refreshing change to see a currency for which is mathematically armoured against inflation (in the Austrian sense of the word).

It isn’t a Ponzi scheme, because the decreasing expansion is known to all market participants.  The total number of bitcoins “mined” will never exceed 21 million.  The real question is: will the currency gain traction as a real medium of exchange for goods and services.  If not then the price of bitcoins compared to fiat currencies will collapse.  The other danger is a statist clampdown.

Another possibility is that it is a huge success.  In which case the phrases “Bitcoin millionaire” and even “Bitcoin billionaire” will become common currency (pun intended).  Some of the lucky ones will be teenagers who happen to be throwing the spare cycles from the video card GPU on their gaming-grade PCs at “mining” bitcoins.  I kind of wish I was still into computer gaming!

Posted by Charles.Pooter on 12 June 2011

I can’t comment on most of the above (because I’ve not done the studying) except to say that I strongly agree about the danger of “statist clampdown”.  This point deserves a paragraph to itself.

This is the problem with all alternatives to fiat currency, most definitely including gold.  If the fiat currencies collapse as spectacularly as the pessimistic Austrians (like Detlev Schlichter) believe, then the governments who created them may be chastened and ready to be told how to behave better, or - which is to put it very mildly - they may not.  They may be angry, vengeful, blaming the gold bugs, and the fiat currency pessimists generally, for their own blunders the way they already blame speculators when their fiat currencies tank only quite mildly.

They may even sincerely believe that it is their sacred duty to defend their indefensible arrangements no matter what.  With all manner of statist clampdowns such as we can now hardly imagine.

This is why I think that ideas, in the event of total financial meltdown, will still matter very much.  What the people with the power believe will matter more than ever.

Posted by Brian Micklethwait on 12 June 2011

Bitcoin is all over the free banking page on Facebook (just mentioning...). There have been some discussions about this between some Cobden Centre people.

At this stage I haven’t made up my mind. I’m skeptical of it at the moment. As I once wrote (actually, you edited it Brian!) I wouldn’t want to be one of the first million users of a private currency.

It looks too much like a pyramid sales scheme that ends up losing a lot of people either their savings, or their friends or both. Not having much of the former, I value the latter too much to get involved for now.

We have a promise not to inflate. That’s nice, but a promise about future digital currency emission doesn’t mean as much to me as a lump of gold I can test for purity. Call me a French peasant if you will.

Posted by Antoine Clarke on 12 June 2011

Antoine Clarke: you’re a French peasant then! And, should it want to, the government will simply take your lump of gold away from you.

The “statist clampdown” goes without saying: the evil Chucky egg Schumer is already onto it. But how feasible is this? They’d have to go after users’ bank accounts (HSBC, RBS etc) which would require international cooperation between governments and banks. But they’d need to know whose bank accounts to go after, and that means deciphering encrypted transaction chains - potentially millions of them.

Posted by mike on 13 June 2011

More here:

I emailed the Samizdata team list about Bitcoin about a month ago.

Posted by Jackie D on 13 June 2011

I sincerely hope it works, but I find two criticisms pretty compelling.  Bitcoins have no inherent value in themselves:

The ‘Austrian’ criticism

It occurs to me, if you look at bitcoin as a network, then there is a value, not inherent in the individual coin, but whatever value there is to being able to access and transact on the network.  Unfortunately, this leads to the second criticism- our evil overlords will happily search out and destroy the infrastructure that bitcoin uses.  They will seek out bitcoin users that don’t use encryption, and then go find every TOR server they can get their hands on to shut it down.  I wouldn’t be surprised if they used drones.  Too many of our internet dreams depend on the internet being far less vulnerable to goverments than it actually is.

Posted by August on 13 June 2011

Jackie D

Yes, I knew I had heard about it.  This was where.  I may do a link from Samizdata to this.  Real Soon Now.

Hey, I just did.

Posted by Brian Micklethwait on 13 June 2011


I’m not buying Kramer’s line. The regression theorem was invented to demonstrate how money could have arisen from a barter economy. We do not live in a barter economy. The necessity of a commodity (or commodities) on which to base a money is twofold; first, in order to seed price memories, and second to serve as a limit to supply. Since bitcoin can be traded for other currencies in which prices already exist, the first function is satisfied (if enough people start using it without it being destroyed by the State). That the rate of bitcoin “mining” is mathematically prescribed from the beginning seems to satisfy the second function (although I am not yet convinced on this point myself).

You’ll note also how poorly argued (from authority) Kramer’s article is.

The potential value of bitcoins in addition to their mere function as a medium of exchange, lies with the potential cost-savings they offer on account of their anonymity.

I’m finding it difficult to argue against bitcoin to myself aside from the obvious attempts by governments and credit card companies to destroy it.

I’ve asked around for other opinions, but I’d really like to read Ian B’s take since he has (I recall) a peculiarly personal interest in getting this sort of thing to work. Too bad he’s not around anymore.

Posted by mike on 13 June 2011

My problem is that there is too much I don’t understand.  What is Bitcoin “mining”?  How does encryption work?  Why is it important?  Does it work?  What has mining got to do with graphics processors?  How do I know no more than 21m coins will ever exist?

More to the point even if someone told me the answers I probably wouldn’t understand them and if I did I’d forget them.

Gold and silver, on the other hand, can be understood by a 5-year old.

Posted by Patrick Crozier on 13 June 2011

I would like to echo what Brian was saying about ideas.  If the state gets into its head the idea that wrecking everything is the right thing to do then it will.  And there will be precious little the rest of us can do about it.

Posted by Patrick Crozier on 13 June 2011

There is nothing remotely new about this. There have been proposals and schemes of this nature using similarly encryption based authentication and anonymity for at least 20 years, and the necessary mathematics has been in the public domain for about 30 years. None of them have stuck, and one reason for this has been that states and central banks have deliberately tried to undermine them. That doesn’t mean that none will ever stick, but it does make me a little sceptical. If it was going to happen, I tend to think it would have happened already.

Posted by Michael Jennings on 13 June 2011

The good thing about gold and silver is that it is not possible for central bankers and politicians to debase the currency. This is just about the only good thing about it though. There are lots of other things that can debase the currency: mining discoveries, nuclear physicists perfecting transmutation, improved recycling and extraction techniques. You take away a money supply controlled by central bankers and replace it with a money supply that in the medium term is something close to a random number. This is possibly better than a fiat currency, but it still isn’t very good. (There are a number of historical examples of precious metal based currencies being debased, and also plenty of instances of liquidity crises due to shortages of precious metals).

A situation like bitcoin where the money supply is known and managed, but mathematically designed so it cannot be debased is definitely better, but I still think it misses the point.

The problem is that states and their central banks have a monopoly on money. People should be free to use gold, silver, anonymous encryption based monetary systems, sea shells, fiat money, Flavian Pobble Beads or anything they like as money, and all these systems should be able to compete with one another. Do that, and what is best will be figured out by the market, and probably fairly quickly.

However, politicians and governments gain a large portion of their power out of having monopoly power to issue money. They are not going to give this up willingly. And if they don’t, not much will change.

Posted by Michael Jennings on 13 June 2011


How is Kramer arguing from authority?  I don’t see it. I just see he got grumpy because most folks haven’t read what he considers to be the relevant literature. 

Anyway, I would be happy to find out bitcoin is somehow different.

There is one thing to be aware of- bitcoin isn’t anonymous.  You can make it anonymous by using TOR and encrypting all your transactions, but this doesn’t happen automatically.  Each bitcoin is unique and the system functions openly, so if you don’t use some form of encrypted internet service, the government could associate your bitcoin to your IP address.  When a bitcoin changes hands, this is recorded openly, on purpose, to avoid people spending the same bitcoin multiple times.  This means agents could figure out your transaction history as well.  I think this could be ameliorated, by, for instance, the sellers at Silk Road changing their bitcoin address for every transaction, but again, here is an extra layer of security that the individual must do.

Posted by August on 13 June 2011

“What is Bitcoin “mining”?  How does encryption work?  Why is it important?  Does it work?  What has mining got to do with graphics processors?  How do I know no more than 21m coins will ever exist?”


“The good thing about gold and silver is that it is not possible for central bankers and politicians to debase the currency.”

Except that it is: Roosevelt through Nixon.

“...but I still think it misses the point… The problem is that states and their central banks have a monopoly on money.”

I don’t think it does miss the point: the anonymity of transactions spread across a decentralized network is what gives bitcoin value over and above any other fiat currency; and some sort of distributed system is surely necessary to any attempt to break the monetary monopolies, no?

How resistant to State predation this particular system is likely to be is not something I would be prepared to defend a thesis on, but the impression I got from reading the Satoshi Nakomoto paper and the other Bitcoin introductory texts was that this is being run more as a proof-of-concept experiment to see how long it would take to get a certain number of users, and to test the reactions of the government (though I could be reading into it a little too much there).

Posted by mike on 13 June 2011

Except that it is: Roosevelt through Nixon.

Okay, so a gold or silver standard is an even less good idea than I was claiming. (I am not a fan). On the other hand, Roosevelt through Nixon were probably debasing the money through a gradual retreat from the metal standard. If you are the government, you can do this.

There is one thing to be aware of- bitcoin isn’t anonymous.  You can make it anonymous by using TOR and encrypting all your transactions, but this doesn’t happen automatically.

It is possible to use encryption to make pretty much everything we do electronically anonymous. The Oyster card system we use to pay for transport journeys could certainly be designed in such a way that the information a card gives to the reader proves that the journey is allowable, and deducts money from the card, without identifying the card. (Yes, this is anonymous digital cash, the same thing we were talking about already). It is possible for everything we do over the internet to be made in such a way that the parties can be trusted but not identified.

However, we generally don’t do this. Merchants and other website owners don’t like it. Governments don’t like it. And most people simply don’t seem to care. I suspect that the same will be true with electronic currencies, as well. Encryption for authentication is vital and will be used. Encryption for privacy, less so.

Posted by Michael Jennings on 13 June 2011

Yes Jackie, that was an interesting link. I’m still thinking about Bitcoin. All the good things I hear about it come from advocates, which means it could have a lot of wishful thinking going on. I remember when eGold and earlier PGP were going to shut down the IRS and the Federal Reserve.

What some Americans (not Jackie) don’t get is there are over 5.7 billion people living abroad, who, if they store SOME of their savings in gold, will be WEALTHIER because Barack Obama confiscates his co-citizens’ holdings. War on Gold? Bring it on! Last person to try that was Maximilien Robbespierre and that didn’t end well for him. (Paul Marks tells it so well).

Obama’s destruction of America is a feature for gold investors, not a bug.

Considering that until about two years ago (Obamacare, the unions, the TSA gropers etc), I would have happily taken a job for 10 years cleaning a restroom in Cincinnati for thruppence a month rather than live in Europe, my focus has changed somewhat. I really hope we get some change soon. I don’t relish what’s happening, but it would be daft not to notice the opportunities of being outside the USA right now and not having US citizenship.

And Michael, you’re right about the threats to gold, such as new mining and transmutation. However, people have been looking for mining sites for a long time, so until we find solid gold asteroids I think it’s OK. Transmutation is of course possible, but costs more than the gold one can make. I accept this puts a ceiling of a few million dollars an ounce, but that’s a margin I could live with, if I had any gold. Which, I of course do not.

Posted by Antoine Clarke on 13 June 2011


It’s a doomed pyramid scheme.

(Even if it doesn’t collapse immediately, it’s - quite intentionally and by design - doomed to deflationary pressure, forever.

Which is bad for a “real currency”, since it penalizes actually spending.)

Posted by Sigivald on 14 June 2011

(And, note that “Everyone knows the conditions” doesn’t make it not a pyramid scheme - it just makes it an honest one.

If “everyone” thinks they can benefit from the initial buy in and then sell-off before the crash, it’s still a scam; they’re just all hoping the other guy is the rube.)

Posted by Sigivald on 14 June 2011
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