Bitcoin part 8: Big numbers Bitcoin part 9: How proofs of work work » Bitcoin makes journalists say stupid things The problem with this topic — unlike, say, how Bitcoin works — is that there’s just too much material to cover. Let’s start with Felix (h/t Moldbug): In reality, then, bitcoin doesn’t really behave like a currency at all. In terms of its market value, it looks much more like a highly-volatile commodity. That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen — to the point at which they would effectively erase the distinction between a commodity and a currency. Blah, blah, blah. Does it really take 5,000 words to say “Bitcoin is like gold and therefore cannot possibly function as money”? Or does it just sound too stupid when phrased that way? But the best quote: Because it turns out that financial-services companies are a very important part of any democracy. It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust.

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Bitcoin, in that sense, is anti democratic. So there you have it: The government is the people, and to oppose mega-banks is to oppose democracy itself. Pretty sure I read that in the Federalist Papers. Next, the sheer quantity of stupid emanating from the FT is mind-boggling. Izabella Kaminska writes a piece quoting a bunch of falsehoods from some moron at SocGen, then goes on to spout a bunch of her own. Seriously, I do not think she managed to get a single statement right in the entire piece. Just a couple of my favorites: Yes, we still have some room to go, but given exponential dynamics, the fact that we’ve reached the “half-way point” in supply is no doubt meaningful. Anyone who has the CPU power to create new coins, also has the power to hack existing coins (She issued a correction for the latter.) She ends by quoting another moron — at length — all of whose criticisms apply equally well to bitcoins, dollars, Euros, or gold. She follows up with another article where, once again, approximately every statement is false. My favorite quote this time: So how does Bitcoin self-regulate? Unless you are a computer geek, an MIT grad or an algorithmic genius, it’s unlikely you will ever really understand. Izabella — may I call you Izabella? — you really should get beyond the “math class is tough” thing and try to understand the subject. Preferably before you write about it. OK, full disclosure: Strictly speaking, I am a computer geek and an MIT grad. But you do not have to be either to understand Bitcoin. When I wrote: There are literally decades of cryptological research, including “digital cash” research, that Bitcoin simply ignores because it can. …I was not exaggerating. Bitcoin relies on extremely elementary cryptography. Embarrassingly so, actually, if you are a cryptography researcher who spent decades designing cunning “digital cash” schemes that nobody will ever use. But I digress. One more “money” quote (ha ha): That said, it’s understandable why the darker elements in society might feel threatened by an economic system that’s trending towards a more equitable distribution of wealth by means of government-controlled fiat system. The threat is heightened further when governments are doing their best to counter the hoarding of wealth in concentrated pockets by means of “dilution” through processes such as quantitative easing. Well, I guess that explains why Jamie Dimon launched his “End the Fed” campaign. If not for all that equitable wealth redistribution through quantitative easing and interest on excess reserves, he could be a truly rich man. I will skip the definition of “fiat money” as the exact opposite of what everyone — including, say, the dictionary — thinks it means. Another FT piece examines the Bitcoin “bubble”. I wonder, how would the Tulip Mania have played out if tulip bulbs were indestructible, had limited supply, were weightless and volumeless, could be broken into 100 million pieces and reassembled again at will, could be teleported around the planet instantly, and could not be stolen through any amount of force? Honestly, I have no idea. But we are going to find out. The co-author of that piece tweeted: “Head trader tells me: ‘Even my PhDs can’t explain how you mine a bitcoin’.” So you see? The HEAD TRADER at an INVESTMENT BANK says his ECONOMICS PH.D.s can’t explain Bitcoin. Therefore, you can write about it all you want with zero comprehension and not look like an idiot, apparently. One final quote from that piece: “We are just one scandal away from Bitcoin collapsing entirely.” That is kind of like saying “we are just one bank robbery away from the U.S. dollar collapsing entirely”. People writing breathlessly about attacks on Mt.Gox do not understand the difference between a currency and an exchange. Look, I have no clue whether bitcoins will be worth $300 in a year, or $3. But I do know the financial journalists are in way over their heads here, their “sources” are useless, and you will learn less than nothing by reading them. Bitcoin is new, it is interesting, and it is under literally nobody’s control. (Thus any analogy to anything under somebody’s control is false.) Do yourself a favor and try to understand it for yourself. Part 9 this weekend. Izabella Kaminska responds. She is being more gracious than I would be, so thanks for that. And if I overreached, I apologize. The media landscape is littered with bad reporting on Bitcoin, and these articles just happened to be recent ones at hand. A few quick comments before I go back to strictly technical concerns. First, I am neither “for” nor “against” Bitcoin. I am nobody’s ally. (Were I to start over, I would probably choose “Amicus Neminis” as my pseudonym.) I do not own any bitcoins and never have. For now, I am quite happy to be an observer of, not a participant in, this massive and fascinating experiment. Second, I do not see how anyone rational can have a strong opinion either way at this point. The Bitcoin true believers accuse the mainstream media of running hatchet jobs as a defense mechanism for the status quo. Frankly, a lot of what I see — some of it quoted above — makes it hard to rebut that. How can anyone have such a strong negative opinion about something they do not even understand? On the other side, how can anyone have such a strong positive opinion about something so new? Third, it is true that my own politics are skeptical of the status quo, particularly regarding finance. I believe many people working in finance are paid ludicrous sums for producing literally nothing, and those sums are extracted as rents from the productive economy. I personally could increase my salary by multiples if I took such a job, but I would be unable to look myself in the mirror. I do not think this makes me a good person; I just think it makes me not a sociopath. While this perspective certainly colors my opinions and my language, it does not inform my criticisms here. Fourth, of course Bitcoin has some attributes of a Ponzi. But gold has the exact same attributes. The main difference is whether the first mining happened thousands of years ago or thousands of hours. I think gold is probably the best analogy for thinking about the economics of Bitcoin — with all of the history and crackpottery that entails — but it is still an imperfect analogy because Bitcoin is something new. Bitcoin or its successors will be with us a for a while, I think, and they will be relevant. Even if this turns out to be a joke, the next one or next one or next one will not. So it is a good idea to slow down, pay attention, and get your head around the technology. If nothing else, it is all quite entertaining; I look forward to the Congressional speech that concludes, “you shall not crucify mankind upon a cross of one-way functions!” Finally, I do not believe “that not being an MIT and algo nerd is indeed a bit of a crime”. I do believe writing hatchet pieces on something you do not understand is a bit of a crime. “It’s complicated” is never an excuse for speaking from ignorance, and doubly so in this case because it’s simply not that complicated. You can understand it. All of it. Yes, I mean you.