Wednesday, June 8, 2011

Response to Adam Cohen, re bitcoin

Adam Cohen's post Is the cryptocurrency Bitcoin a good idea? (his answer: no) is getting linked in a bunch of places. It seems worth going through it point by point.


1a. Seeding initial wealth

He seems to be complaining that — oh no! — there is no central bank to dole out money in a "proper" fashion. I can think of worse ways to distribute new currency than rewarding early participants who took risks.

This is rather the point of a decentralized currency. The people creating new currency are performing very useful work of making the network secure.

1b. Mining is unscalable

Big hand-waving assertion with zero evidence. The proofs-of-work require zero network traffic to generate, and the profitability of mining will reach a natural equilibrium.

His assertion "It is a nonsensical system for a real currency, not to mention being obviously unscalable (what happens when everyone tries to mine bitcoins all day long?)" has already been disproven:

Today's miners, absent the odd crowd of kids and overclockers who own GPUs, are rapidly becoming very professional operations with datacenters worth of number crunchers.

Mining ("free money!") is already so difficult that the costs exceed the income for all but the most powerful ATI GPUs. People who want bitcoins have taken the obvious route: they buy them on the open market.


2. Deflation is evil

Economics is a social science, and this is an honest and on-going debate among economists. See e.g.

This is an argument between two theories of economics, not bitcoin. At best bitcoin could be thought of as a modern experiment in deflation.

But keep in mind that bitcoin is quite different from the foundations of much deflation study, which often includes an assumption that deflation is related to the -debt- practices within a currency. Issuance of bitcoins has nothing to do with debt.


3. Lack of convertability

"because Bitcoin is completely decentralized, no one is completely invested in the long-term success of the system."

Completely nonsensical. Everybody holding bitcoins is collectively invested in the success of the system.

For a startup currency that did not exist 24 months ago, the existence of multiple, liquid, -legal- (registered with govt) bitcoin exchanges trading USD/EUR/JPY/... is pretty good progress. As more people become invested in the system, greater convertability appears.


4. Something might go wrong, somewhere, sometime

Amusingly, you can apply the author's same argument to the current state of affairs in Zimbabwe. Something might go wrong. People might panic and bitcoin value might plummet.

Sure. But everyone invested in the system has an incentive to fix the problem.


5. In conclusion

The author does not fully understand all the incentives built into bitcoins, nor the current ways that bitcoin is scaling up to meet increased demand.

But as a startup currency, like any startup business, standard disclaimer applies: it is a highly risky experiment, but I would push back towards any claims of "scam."  There are a great many valid economic and technical criticisms of bitcoin; Mr. Cohen managed to miss nearly every one.

My own personal opinion is that the world has plenty of inflationary currencies, and it's a fun experiment to see how a global, decentralized currency with predictability behaves. A mix of styles is always healthy for an ecosystem.