The problem with Bitcoin is not who supposedly created it, or did not. That's just mumbo-jumbo of no consequence. The following note was written in March following a discussion at City University and not developed further at that time, so I share it here now because I do believe that there are very real problems with Bitcoin and the supposed blockchain. But, I stress, I am open to persuasion as a person should be.
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The problem that I see with Bitcoin can all be explained using double entry book keeping, plus a little bit of explanation of the supposed technology as I understand it.
The first thing to say is that there is no such thing as a Bitcoin. A Bitcoin is represented by an entry in a computer ledger kept on a peer-to-peer network, the multiple versions of which that should all reconcile comprising what is called the 'blockchain'. There is nothing intrinsically smart about this that I can see: all the peer-to-peer system supposedly does is eliminate the need for a central bank for Bitcoin.
The Bitcoins in use are all created out of thin air, as is any other currency in the modern economy. I am well aware that there is a supposed 'mining' process to create new Bitcoins and that every ten minutes or so someone who wins the 'race' to solve the utterly useless task of unravelling the next iteration of the Bitcoin algorithm has the right to put into use the coins required to clear the uncleared transactions since the last race was won. But, when they do so all they actually win is the right to put an entry into the blockchain ledger, which is the debit entry representing the new coins.
This is where the problems really begin. As far as I can see - and I may be wrong - so I accept I am open to correction here - the balancing credit is not recorded in that blockchain. In other words, the blockchain is not a ledger in the accounting sense that we have known it since Luca Pacioli invented double in 15th century Italy. It appears to be single entry record keeping. This gives rise to two issues. I will deal with both in turn as both are substantial before then considering some of the economics of this. As an aside though let me make clear that the issue of single entry I refer to is not the same as the supposed triple entry issue some talk about with Bitcoin. This is a supposed advantage of entries being duplicated in multiple versions of the ledger that it is claimed means that fraud is hard. I am suggesting something entirely different, which is that entries may be entirely absent.
The first reason for saying so arises from the question as to what happens to that credit on the creation of this money? Credits can be three things. They are liabilities, or income, or equity reserves. That's it in double entry. In many ways it is not a very sophisticated language. To put it another way, does this mining represent someone's income? Or is it, as it would be in a bank when money is created, properly reflected as a liability (even notes and coins represent liabilities of the Bank of England, which is why notes say they represent a promise to make payment), or is this a credit to the capital of Bitcoin, albeit that no one seems to know who might own that capital?
My very strong suspicion, based on the Bitcoin narrative, is that this credit is effectively taken as income. This must mean it is credited to the account of the Bitcoin miner who then via the entry in their books treats it as income against which they offset the supposed costs of the mining process (the reality of which is, for all I know, just another Bitcoin rumour) to then take the resulting net sum after expenses for their gain. In other words, if the credit is technically a liability in the blockchain when the initial double entry for coin creation takes place then it is one that is then, apparently, settled almost immediately in the Bitcoin narrative by way of payment to the account of the miner as recompense for the costs they incur in Bitcoin creation. But we cannot be sure of that. So much for the transparency of the blockchain.
However, if I am right (and the so-called mining narrative seems to require that I am) then the blockchain has no capital left in it because the only sum available to make settlement to the Bitcoin miner will be the coins they have created. Except that, according to the blockchain, those coins are now still in the system. That can only be explained by the blockchain being a single entry system where the consequence of the capital in the system having apparently already been extracted to pay the Bitcoin miner is ignored. That is concern number one, and logic seems to suggest it must be right. After all, if there was capital in the system continual mining of new Bitcoins to clear transactions would, surely, not be needed? It is because there is no liability that can be cleared through the payment system (as happens in conventional banking, where cash can be and is cancelled on loan repayment, which is a possibility that does not appear to exist in Bitcoin) that requires the continual creation of new debits because there are no credits in the system.
This then presents the second conundrum. This is that the payment system in the blockchain is, if I am right, a continual system of reallocating the debits. Now I accept that it can be argued that this is a debit and credit process, and of course in a sense it is, but subject to the massive overall condition that all the sums must be part of a continually accumulating overall sum of Bitcoins in existence, or the miners would generate no continuing value. This is not then a system of true debits and credits in because net credits are not apparently allowed. This means that the blockchain is not remotely close to a proper banking system where the process of creating simultaneous debits and credits that remain on the balance sheet until loan repayment, giving rise to account offsetting and so cancellation, is the fundamental process that singularly identifies the existence of a credit creating bank.
At this juncture then a note of economic concern has to be raised. A blockchain where the extraction of value (the credit transactions) is not identified but where it is said that the supply of debits is finite (as the Bitcoin algorithm must imply) has at least three important economic characteristics that pose difficulties. One is that it attempts to mirror the operations of the gold standard, which proved to be little short of an economic disaster during its period of use in the twentieth century. Secondly, because of its opacity, the system is at best inherently risky. And third, it would appear that the arrangement could, because of its opacity, be exploited. I am not saying it is: I am saying that based on my initial review I have that concern. I stress however, someone may allay my fears and so I may be wrong. But, based on what I have seen that possibility exists.
So let me summarise my concerns.
First, the blockchain, about which so much is said when Bitcoin is discussed, does not appear to be a credible accounting system. It seems to be single entry at best and such systems were rightly abandoned many centuries ago because they did not allow proper risk appraisal.
Second, the apparently missing credits within the blockchain might represent an absence of capital and so an inherently unstable system.
Third, that the system requires continual data mining suggests that all transactions are reallocations of existing and new currency and are not matched by the settlement of liabilities as would be expected in what we understand to be a banking system.
The consequence is that Bitcoin appears to be a claim on nothing at all. All banks are a confidence trick but most are at least based on the idea that a deposit may be capable of settlement out of capital, loan repayments or government guarantee (in the last resort). In the case of Bitcoin none of those credits provide such comfort - it is just the hope that there will be new debits (mined Bitcoins) that provides this comfort. And when the system is supposedly finite that seems like a perilous act of faith.
Comment would be welcome. It would be good to be wrong on this one, and you never know, I may be. But please, address the concerns. I do not need rhetoric, abuse or assertion. Just tell me what the debits and credits are and reconcile them with Bitcoin mining, the blockchain and the continual needs for new coins.
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Interesting: economists believe – correctly, I think – that bitcoins and other ‘proof-of-work’ currencies are inherently deflationary.
Your contribution is an explanation at the lowest-possible level of detail; economists pay very little heed to the formal methods of accountancy and I do not believe that anyone else has published this analysis.
You have also come up with cautionary note for bankers who are playing with blockchain-based systems for electronic trading: it’s a useful record but it’s only single-entry book-keeping.
Krugman on Bitcoin has the wider picture on economics and Bitcoin and, while it’s a well-expressed economist’s argument, he could do with an accountant’s detail in his broad-brush explanation:
http://mobile.nytimes.com/blogs/krugman/2013/12/28/bitcoin-is-evil/
…And again, in a very entertaining New York Times op-ed:
http://mobile.nytimes.com/blogs/krugman/2014/10/04/the-long-cryptocon/
And here’s a technician’s insider explanation of the technical limitations of bitcoin – one of very few accounts which are accessible and readable:
http://www.forbes.com/sites/jasonbloomberg/2016/01/18/something-rotten-in-the-state-of-bitcoin/
That article illustrates an important point about all failed software projects: the problems described in technical terms arise from social and managerial dysfunction.
A corollary to that observation is a caution to all libertarians who wish to remove ‘government’ and ‘politics’ from monetary economics: money is a process of computation and it needs a ‘user community’ who can exercise effective criticism of the system’s governance.
Meanwhile, you can expect an avalanche of economically-illiterate comments from Bitcoin enthusiasts: I leave you with Charlie Stross’ derogatory nickname for blockchain currencies, the: Dunning-Krugerrand.
Thanks!
I appreciate the response
I freely admit that I have no understanding of Bitcoin, and little of any other form of money, other than that it seems the value of everything is in the eye of the beholder.
Bitcoin may well come crashing down in flames, it may prove to be a huge success, the fact that it has been created and is being used by many to bypass the established (and now corrupt in my view) monetary and banking system is an interesting development.
When we have a monetary and financial system that is both democratic and fair, I’ll be pleased to support it. For the time being, I would rather be a hermit and live in a cave!
Richard,
I come to Bitcoin from a more legal angle and from a definition of what money is. A good example is the legal comparison of English banknotes with Scottish banknotes. Whilst English banknotes are legal tender in England and Wales, Scottish banknotes are never legal tender. Scottish banknotes are promissary notes for legal tender. The only legal tender is Scotland is coinage. So if you chose you can go to the HQ of the bank that printed the banknote and have coins paid out on the banknote (as stated on the paper itself). Luckily, Scottish banknotes are guaranteed by the Bank of England in case of default of the Clydesdale Bank, Royal Bank of Scotland or Bank of Scotland that prints the notes. Fundamentally, people do not necessarily have to accept Scottish banknotes (as one or two Scots have found out travelling to England and the taxi driver will not accept the colourful note). Whereas English banknotes in England are legal tender and must be accepted when offered for payment.
So if Bitcoin is indeed a currency then it is certainly not legal tender. But so what? The bearer carries the risk that the currency will not be accepted and there is no land where it is obligatory to accept.
Money for me is ultimately a tax voucher. Governments print or allow to be created money for services and goods but then extract the money from the economy through taxes. This then ultimately allows the system of double entry bookkeeping to come full circle. The payment of taxes becomes a suction mechanism in the economy that is fundamental to the velocity of money and health of the economy. With money creation is a push and taxes a pull on velocity. Taxes become a integral part of the health of an economy. As no government allows payment of taxes in Bitcoin, then Bitcoin is lacking in this fullness.
So if Bitcoin is not legal tender or money (as money defined as being a tax voucher), what is it? To me it is a payment mechanism such as credit cards are. Its value lies in its lower transaction costs (especially for transactions we might not want others to know about – legal or otherwise). As such if ever an alternative cheaper method were to be found or Bitcoin became unable to lower transaction costs due to legal or other regulations, it would lose its value substantially. This is a huge risk when technological innovation is always finding new ways to lower costs. This is unlike real money due to the seeming inevitability of taxes!
Hope this helps and please come back if you disagree or find error in the above.
Euan
But a credit card has a recognisable process involved in the creation of a debt claim
Bitcoin does not
I do not see how they can be compared
But you are right: they are definitely not money
I would like to see personal “credit cards” correctly labelled as “debt cards”, and phased out as quickly as possible. Followed by all personal unsecured lending which creates a debt contract on the individual. Followed by all personal secured lending that creates a debt contract against an individuals assets.
All personal debt should be replaced by a true form of social credit finance, one which provides all people with the ability to meet their needs and the means to fulfill an honest and purposeful life. This social credit finance will be repaid by their efforts to contribute towards society as a whole in whichever way they can and which acknowledges that some people will never be able to repay their credit in full but have contributed all that they are able.
It would provide the financial basis to meeting the objective of “from each according to his ability, to each according to his needs”
I would like to see personal debt abolished, and usury against individuals to be made illegal. I would like to see honesty, fairness and social purpose returned to personal finance.
Corporations and the banks that support them can do whatever they please in my opinion, I care not for the debts and losses of any of them. They have the full support of the legal and financial profession to protect them or attack their interests as they see fit. This is where the capitalist financial warfare game can be played, if it is to be played at all.
But the increasingly hostile and aggressive financialised war against individual people, and populations as a whole, should be ended as soon as possible.
I’ll continue to dream of a better world, no matter how unrealistic it may be!
The block chain is a one-sided system of account for precisely the reason you mention: there are no actual promises behind Bitcoin. They’re more akin to collectibles–Beanie Babies®, which a friend’s daughters amassed great wealth in, a while back, only to see the market evaporate.
“Ponzi scheme” is a bit harsh, but I don’t see much else wrong with the characterization. The blockchain may have great value as a computing notion, the way hashing does, but bitcoins are simply an intellectual experiment parked upon it.
Value is derived from a combination of two things (despite there being no actual promises behind Bitcoin): scarcity and utility. For as long as Bitcoin works, bitcoins will necessarily have some value.
Ultimately, bitcoins are a claim of a ‘proof of work’: a computational effort to extract prime numbers that satisfy a rule.
This effort requires tangible resources and the supply is self-limiting.
Note that the coins are a claim ‘of’, not ‘on’: there is no economic asset like loan or a plot of land which can provide an interest or be reclaimed.
There *is* a token of assurance in the blockchain: a record of transactions which may give a reasonable expectation that the holder of a bitcoin can exchange it with some other person.
However, this is not the same assurance as a claim on gold, which everyone accepts in payment – which functions as a medium of exchange and store of value because everyone agrees that it is valuable – nor is there a bank or government to act as guarantor. That is an important claim, and bitcoins do not have it.
So your comment about the single-entry validation of the blockchain is a matter of considerable economic interest: the Dunning-Krugerranders eagerly deride our ‘fiat’ currency but our modern money is created with a double-entry book assuring us that there is a recoverable claim upon a loan.
And that, in turn, founds our ‘fiat’ money upon measurable economic activity instead of gold, which is mere hoarding and the hope that some still greater fool will pay us more for it that we did; the differences and the parallels with bitcoin are obvious.
I stress I may be wrong on the single entry issue
But Izabella Kamninska shares the concern, albeit I think she got to that point for different reasons
“I may be wrong on the single entry issue”
I wouldn’t bet against you, and here’s why: Bitcoins guarantee anonymity and a great deal of effort has been expended by law enforcement agencies and other groups to crack it.
Once a payment is made from a qualifying transaction system to a bitcoin, the book is effectively closed. You paid ‘to bitcoin’ and no other information exists: you do not know and cannot know the balance of the bitcoin account before and after the transaction; all that you know is that an external account has registered a change.
You do not know and cannot know who has received the payment, beyond the name that they have given you at the time of the transaction.
It would take a considerable effort to attach an identfying code for a specific bitcoin to the transaction, in such a way that it could be identified in subsequent transactions; and the bitcoin holder would know that you had tried to do it, unless you have exploited an as-yet-unpublicised flaw in the published payment protocols.
It is theoretically possible to contaminate a blockchain with an identifying code and there are rumours that a law-enforcent agency has done so with at least one ‘Silk Road’ transaction; but the subsequent effort of matching and correlation-fishing bears a very close resemblance to a forensic audit on a single-entry ledger with almost all the pages missing.
Even if the blockchain of a bitcoin has a data structure that permits it to act as a ‘book’ in a double-entry book-keeping exercise – and I will not assert that it actually can – a bitcoin is a book that is securely locked. Double-entry book keeping requires a set of two or more books, opened to record transactions, and open for subsequent inspection; bitcoins are closed and locked against all subsequent inspection by the use of asymmetric algorithms that can implement and close transactions with ease, but render subsequent forensic audit computationally intractable.
A bitcoin payment record is the very definition of a single-entry book: even a used banknote has an promissory value – eventually! – in a ledger at the Bank of England. All you know with Bitcoin is the money’s gone.
I would encourage you to repeat that final sentence in all conversations with cryptocurrency enthusiast:
“All you know with Bitcoin is the money’s gone”.
…And that’s why I wouldn’t bet against you being right, here.
I am increasingly surei am right
At least to the extent that no one will ever say what the credit is – because there is one, for sure
Of course it is a single entry system – like physical gold/silve.
If you control it, it is yours. No double entry accounting reconciliation of counter party claims is needed.
That leaves Bitcoin only vulnerable to systemic risk – just like physical gold/silver. Your risk is that the world changes and no one is prepared to accept your token (or gold coin) in exchange for goods and services.
The Bitcoin blockchain is NOT an accounting system. It is an asset tracking system – the asset it creates, tracks and verifies is the Bitcoin token (more accurately multiples of Satoshis).
Gold and silver are fully accountable under double entry
I have already noted how
By my understanding, the gold standard doesn’t work because balance of trade fluctuations lead to crazy prices (via forced interest rate changes).
If bitcoin is a universal currency traded freely across all economies, balance of trade fluctuations could not have the same effect. Also, unlike physical gold stocks within a country, the number of bitcoins is unchangeable, i.e. it can be seen either as finite at the predetermined maximum or infinite in terms of the number of times a bitcoin can be divided.
So what is the specific process by which bitcoin suffers from the same problems that the gold standard did?
As for double entry accounting, a huge amount of energy is burnt in the mining process. The cost of electricity defines the profitability of mining. Could the destruction of value, in terms of energy, that goes into the mining of each bitcoin act as an assurance of value within the system? It does not constitute double entry accounting but it ensures that those mining bitcoin value them.
This would mean that bitcoin is indeed a claim on nothing, but may in this way, act more like a commodity than a currency, and has an inherent value of its own. In theory, the value of the bitcoin market cap would equal the benefit to society of having unregulated transactions (i.e. silk road) and everything else that blockchain could hypothetically provide (i.e. cheap remittances or smart contracts).
Wow, long comment! Thanks for your article, it certainly raised some deep questions.
But all money is credit
Bitcoin is not credit
It cannot therefore be money
And it cannot meet the need for credit creation that any real money does
It is just nothing that it claims to be
I think journalists claim bitcoin is money in order to simplify the concept.
It is clear that bitcoin is not money. It is a new thing and we don’t know yet how it is going to be used.
I am still leaning towards the idea that mining is the key to value within the system. By this I mean that bitcoin does not create credit like money does. Mining transfers value in the form of energy to value in the form of transaction verification. If the market values transaction verification higher than the cost of energy consumed then mining will be profitable.
It comes back to the idea that if people value the blockchain and, most importantly, the service that it provides, they will pay for it. This is an economics argument but I’m not sure how the accounting argument refutes it. The value derives from the service it provides, not from a debt claim.
To address the issue of finite mining, I don’t believe it is finite. After the final new coin is generated miners will work for a transaction fee. This fee will be set by the people initiating the transaction. A higher fee will mean the transaction is verified very quickly while a transaction with a lower fee will potentially take a long time be verified. There will be a market for verification speed. In order to keep the mining reward similar to where it is now estimates have placed this fee at significantly less than 1%.
Why pay 1%?
What s this for?
It’s clearly a rent. Who gets it?
And why?
But what is the urpose for it?
Secrecy?
So we have a new tax and crime haven?
“Why pay 1%?
What s this for?
It’s clearly a rent. Who gets it?
And why?”
Here’s an analogy: if you have gold in a vault at a broker and want to transfer the gold to someone else, there will be a fee associated with the transfer paid to the broker. The broker does some work to ensure that you are the proper party owning the gold and the receiver is the proper party who should get it and verifies the transaction, for which they will charge a fee. The same is true for Bitcoin. Except in this case, you aren’t forced to use just one broker, there is a competitive market of brokers (miners) competing to be the one to do the transfer verification.
“But what is the urpose for it?
Secrecy?”
Secrecy? No. The fee exists for two reasons: first, because work is required to verify the transaction just as in any financial intermediary, and second, because there is a finite amount of transactions per second that can occur in the system, it is also a competitive bid to be allowed to use a scarce resource, since the ledger size is limited.
I do not believe you
“I do not believe you”
Which part don’t you believe, and why not? Give me some more detail and I can point you to publicly available specifications to back my assertions.
Just answer my questions
I have posed them often enough
Bitcoin does not stack up in accounting terms. But that is just one way where it does not stack up.
It is just a massive con. If it had been useful it would have caught on. It supposed value is just about its supposed scarcity.
The main problem is of course it is not money, as you cannot pay any government taxes with it. That would give it value.
As far as “block-chain” is concerned, I think that is actually a very useful concept.
As far as I understand it, “block-chain” is just some kind of weird name for “time-stamp and account identifier” for money.
That could be quite easily implemented now, with each £ or $ in accounts having an identifier when it came into that account, and from where it originated, so that an audit-trail for each £ or $ is available.
That would be quite useful to fight tax-avoidance and evasion (as with a block-chain audit trail one could track all money through accounts, even off-shore), but it could also be useful for other purposes.
I hate to say it – but all bank payments can be tracked through clearing now
The only problem is bank secrecy
Pedantic but interesting clarification, coins are a liability of the Treasury not the Bank of England. Could be argued that the Bank is just an arm of the Treasury or Government generally but that is not how the government accounts are presented.
Government accounts are presented on a consolidated basis
There is no divide
Mining of new coins is not essential to bitcoin-like systems. The “miners” do need to be paid somehow – think of this as payment for the service of verifying transactions – and in bitcoin, the design is that creation of new coins will trail off over time (with a hard limit on the total number of coins), and “miners” will then be paid only with transaction fees, deducted from the amount tranferred. With a different design, there could be only transaction fees and no new coins. The only question would be who gets the initial, finite stock of coins. With bitcoin, most of the coins have gone to the early miners – by design, mining becomes less lucrative over time; which was a financial incentive for early adopters.
I’m not sure I follow your discussion of double- and single-bookkeeping properly. But I agree with your conclusion that using bitcoin as a currency would be have similar disadvantages to the gold standard. Nobody is in a position (as governments / central banks who have their own currency are) to decide that an increase in the money supply is necessary; there is a finite money supply, which would be deflationary. And bitcoin is appealing to some people for the same reason that gold is: because governments can’t control it.
Bitcoin is not a functional banking system. But it may have uses as a transaction processing system.
As a store of value, bitcoin is at risk from most people deciding to adopt a similar but different system. In that case, bitcoins could become worthless. There are also potential attacks on the integrity of the blockchain to consider, but I don’t know enough to comment meaningfully on that. However, the actor who is best-resourced to attempt such things is probably the NSA; which is ironic, considering the appeal of bitcoin to people who are hostile to government control.
So mining is a charade
Bitcoins are the gold standard
And you have no clue who owns the capitaln- if there is any – either
This is not banking
It is not a functioning payment system (it cannot function once there is no more mining because there are no credits)
It is something else – you offer the right word
I’m not sure I know what you mean by saying mining is a charade.
It’s not banking. And it would be a disaster as a currency (but that won’t happen, since governments won’t accept it in payment of taxes – or if they did, they would immediately convert payments in bitcoin to the currency they really accept – which comes to the same thing).
It can function as a payment system when there are no new coins. A fee is deducted from the payment to pay the “miners”, who are (at least at that stage) better thought of as transaction processors.
In the earlier stage, when miners do get new coins, I would think that counts as their income. Mining does involve costs: capital cost for the necessary computer hardware, which depreciates; energy to run it; etc. Does that make it any different, in terms of bookkeeping, from mining gold?
I’m not sure I get the significance of the question of who owns the capital. Are you arguing bitcoin couldn’t be money (however widely adopted it might become), or just that it would be a bad system? I’m inclined to the latter view; it seems very similar to gold.
I am arguing it may not be anything at all in terms of financially credible systems
Mining will not stop. It will transition from receiving new coins as reward to receiving transaction fees.
Transaction fees already exist. If you want a transaction verified quickly you just program in a transaction fee. Miners find these transactions, verify them first and take the fee.
But how do you know they verify them?
And why – this is an open ledger, or so I am told. So why is verification needed?
I don’t understand the link between bitcoin and the gold standard. Could you please explain the mechanism by which bitcoin will suffer from the same problems that the gold standard does?
To go back to basics, the gold standard doesn’t work because price levels fluctuate based on changes in the physical stock of gold or changes in the countries balance of trade. This can lead to deflation and/or high interest rates during times of economic recession. What is the analogy here with bitcoin?
The gold standard limited credit which the economy needs
If Bitcoin is finite it suffers the same constraint
“But how do you know they verify them?
You know they verify them because they use standard rules everyone in the system has agreed to, and it’s cryptographically verifiable.
“And why — this is an open ledger, or so I am told. So why is verification needed?”
When you engage in wire transfer with your bank, stock transfer with your broker, or a gold transfer, you will generally incur a fee for the work required for verification and recording of the transfer. Banks, brokers, etc. could choose to publish the ledgers publicly if they wanted to (they don’t), but that doesn’t mean verification isn’t still needed when a transfer occurs.
Oh come on: you know you are missing the point
Verification is not a competition
Or mining
Nor does it have a time delay built in
Bitcoin verification is not verification as anyone else thinks of it and is the flaw in the system as well as its only supposed strength
“Oh come on: you know you are missing the point”
“Verification is not a competition”
“Or mining”
“Nor does it have a time delay built in”
Wrong on all fronts. Miners are transaction versifiers, and they are indeed in competition with each other. They want to verify transactions first because they will be able to collect fees paid with the transactions. Think of it the same way as if I want a title company to record my land transaction and I put out a competitive bid and I decide to award my business to whoever can get the transaction verified and recorded the fastest. Various title companies could compete for my business and win the right to record my title deed with the corresponding government ledger. The incentives are similar.
Miners ARE responsible for verification of the transactions, and full nodes also, in turn, verify the work the miners have done.
And there is a time delay because the difficulty of the mining problem is adjusted periodically to create a built-in delay approaching 10 minutes to solve each new problem.
“Bitcoin verification is not verification as anyone else thinks of it and is the flaw in the system as well as its only supposed strength”
Verification is checking to ensure that a given lot of bitcoin has not already been spent and that sender has a valid signing key and addresses are valid and transactions conform to certain rules. How is that different than how “anyone else thinks of it”? And why is this a flaw?
More missing the point
I am entirely right and know all about verification – now answer the questions or give up
That’s a fair point. But bitcoins do not operate within a country and it’s economy. I’m also not sure how to think about the deflationary nature of having a finite number of bitcoins when any given bitcoin is almost infinitely divisible.
Either way, bitcoin can not create credit in the way banks do when they issue loans. Therefore bitcoin is not money, it is not a currency, it has no debt claim. But it still has worth.
The price of cryptography is prohibitively high, as you have stated and I agree.
It is higher than the costs face by Visa and Mastercard, so bitcoin will not compete as an everyday payment processor.
It is higher than any privately controlled database run by a trusted third party so it won’t compete against governments to secure property rights, for example.
However, the high price of cryptography is cheaper than the cost of dealing with the truckloads of cash that large scale drug dealers do business with. So bitcoin is already competitive there.
The high price of cryptography is almost certainly cheaper than the 20% charged by Western Union on small value remittances. So it may compete there.
The price of cryptography is cheaper than the cost to a Chinese citizen of capital controls or a Maltese citizen of a bank account ‘haircut’, so maybe thats why up to 80% of bitcoin transaction volume originates in China.
A smart contract on the blockchain may be cheaper than a team of lawyers so it may one day compete there.
Cryptography may be cheaper than SWIFT so international interbank transfers may soon be competitive on the blockchain. There are certainly companies looking at this.
My point is that these are the uses of bitcoin that have value. Miners charge a fee to process transactions. Users exchange fiat money for bitcoin up to the point at which using the blockchain is cheaper than not using it for whatever end they want to achieve. The value of bitcoin will equal the aggregate value to society of having the blockchain available and the services it provides.
I do not see why bitcoin should be labelled as a currency. It is not. It is something else. It has an inherent value that does not stem from a debt claim.
(I mention drugs a lot as this is the single biggest and most obvious use case for bitcoin as it is at the moment. I want to make it clear though, that the only thing I’ve ever bought using bitcoin was a history podcast denominated in USD. It was cheaper for me to purchase the bitcoin using AUD than to accept the exchange rate my credit card offered.)
Verification of what though? I think that’s an important question to add
And at an extraordinary price in the future
Miners compete to solve a mathematical problem. The winner verifies that the coins have not been spent previously on the blockchain and then publishes a block of ten minutes worth of transactions to the blockchain, taking any fees that accompanied those transactions. At the moment that “winner” is rewarded with new coins and few fees but that will eventually change to fees only.
That is what the miners verify. It avoids double spending. It is slow and expensive and inefficient but it works.
You are wrong to assume the costs of verification will increase tremendously. The current hash rate of the bitcoin network is 1,400,000,000 GH/s. This is just a mindbogglingly huge amount of processing power. All of Google, Apple, Amazon and Microsoft’s servers combined would not reach 1% of this number (I’ve no source for this, but it would be in that order of magnitude).
There is far and away more than enough computing power within the system to process transactions. There is already more than enough processing power now than would ever be needed no matter how big bitcoin became. On top of this, processing power is still growing fast. The shelf life of a specialist mining rig is about 6 months before it become out of date and too slow to be profitable.
Almost all of this processing power (and its associated energy cost) is being spent on the computation that solves the mathematical problem every ten minutes, not on the computation required to verify and publish the transactions to the blockchain. The difficulty of the problem that the network has to solve automatically adjusts so that the average solution time is 10 minutes.
It is irrelevant to miners whether they are being reimbursed by new coins or transaction fees. If, at any point, the energy costs became prohibitively high or revenue drops too low, miners will become unprofitable and drop out. This decreases the overall processing power in the system which would then lead to the average solution time increasing above ten minutes. This will trigger the problem to automatically become easier to solve for future blocks. The difficulty will continue to decrease until the average solution time returns to 10 minutes. And only those miners who are profitable will remain.
The system will automatically reduce the amount of energy required if mining becomes unprofitable. Changes in difficulty will reduce energy consumption to the point at which the cost of processing transactions (mining) matches the willingness to pay. This is one of those aspects of bitcoin that will look like genius if it plays out how it is intended. With 1,400,000,000 GH/s already in the system and only a tiny fraction of that doing the real work there is more than enough wiggle room to play with the difficulty levels well into the future.
I am very confident in saying bitcoin and the blockchain will not run out of processing power and become expensive. Even a very small average fee will more than cover the costs of transaction verification. But I could be wrong. Maybe. But I don’t think so. I’d like to see research into what fees would be required for given transaction levels and energy costs.
As an aside, the huge energy usage that bitcoin consumes appears to be pretty wasteful, but it is this incredibly high energy usage that makes bitcoin secure. It is just too expensive for any one party to dominate it and attempt a 51% attack. On top of that, if you’d spent that much money taking over the blockchain would have so much money tied up in it their incentive would be to keep it working.
So we have an absurd system imposing enormous cost providing benefit to unnamed people in an incomplete accounting system that as a result has none of the necessary controls to prevent fraud
I rest my case
Hehe, no we will have to disagree about this.
Your characterisation of bitcoin here is unfair.
It obviously doesn’t “impose” costs on anyone. A person volutnarily uses bitcoin when it is the most efficient way to achieve an objective.
“Unnamed people” deriving benefit is not correct.The benefit is not completely known yet, just as the benefit of the internet wasn’t known 20 years ago. I have given examples of people who would derive benefit from bitcoin, from drug dealers to remittance senders through to big banks’ clearing houses.
It doesn’t have controls to prevent fraud? Know Your Customer laws and other ID laws apply just equally to bitcoin companies. I’m really not sure what type of fraud you’re referring to here but it doesn’t matter.
Your main point is what I’m really trying to understand, but I can’t. You claim that bitcoin is a currency. I’m afraid you will have to define this term for me and provide evidence for this claim. I realise that sounds stupid but I have no idea what you mean when you say it is a currency and therefore requires a debt claim. I can refute that by saying it isn’t a currency.
Miners process transactions. People pay them for it. Bitcoin is an asset that allows people to put things on the blockchain.
Gold miners mine gold. People pay them for it. Gold is an asset that looks nice and makes electronics work.
Paypal processes payments. People pay them for it. “Money” in a paypal account is an asset that you can use to buy things.
I could list more examples that I think are analogous to bitcoin. I do not understand how double entry accounting works for two of these but not the other.
In your example elsewhere you described the credit generated by physical gold mining as effectively seignorage. This seems odd to me. Either way, the credit generated is a form of capital or reserves. Fair enough.
But gold is a lump of rock that has a value. You’ve defined that value, less cost of acquisition, as a credit to capital or reserve.
If you mine or purchase a bitcoin. Why can that credit not be listed as capital or a reserve.
If you buy a ticket to the cinema, what do you enter that as? It gives you the right to see the movie.
If you buy a bitcoin, why don’t you enter that the same way? It gives you the right to put something on the blockchain.
I hope you have patience with me as I am genuinely trying to understand why it is that bitcoin is magically different to any other commodity or contract or asset in our economy.
If Bitcoin is a commodity that’s fine
But it’s no substitute for anything to do with money in that case
Nor is it clear it has any real value. At least gold has
Yes. Now we’re getting somewhere!
I agree that bitcoin is a very poor substitute for money. We need to stop thinking of it as money or as currency. It is not created by a bank issuing debt, it is not backed by a government, it does not operate within a single country and it is not generally accepted as a means payment. Even when it is accepted as payment the vendor will immediately convert it back to fiat money.
Bitcoin is a commodity and therefore all your questions about double entry accounting are answered.
So we need to determine if it has value.
If we work backwards from the blockchain we can find the value.
Miners manage the blockchain and for this they are paid in bitcoin. It doesn’t matter whether they are paid in newly minted bitcoin or fees. The effect is the same as bitcoin holders incur dilution or a fee.
Miners sell their bitcoin to users for fiat currency. You can think of a bitcoin as a license to put X number of transactions onto the blockchain.
When you buy something using bitcoin you give back one license to the miners and give a million other licenses to the person you’re buying from. The miner enters that transaction onto the blockchain and sells that license to someone else. The other party now has a million licenses that they can either keep or sell and you have a little bag of marijuana.
The value of entering something onto the blockchain ledger is real. Whether it stems from the unregulated and secure exchange of value, or from something fancy like smart contracts, from being able to dodge taxes or capital controls, or simply from being cheaper than conventional banking options.
The market capitalisation of bitcoin is currently approaching $7 billion USD. At first glance that seems high.
But, the global drug trade is worth something like $400 billion.
The global remittance market is worth almost $500 billion.
The US market for illegal online gambling is worth at least $50 billion and probably a lot more.
The market for online micro-transactions, cheaper to process on the blockchain than in the regular banking system, could explode.
Share markets, clearing houses and large banks everywhere have teams researching blockchain to find specific use cases where it is cheaper to use the blockchain than the conventional system.
Each of these potential blockchain users will be required to purchase a license to put their transaction on the blockchain. That license is a bitcoin. The value of that license will fluctuate with the number of people wanting to use the blockchain.
That is what makes bitcoin a commodity. It is a token that you have to buy from a miner if you want to put a transaction on the blockchain. The benefit of putting a transaction on the blockchain is obvious for all the users I’ve mentioned above.
Just because these tokens are called “coins” does not make them money and in conversations like this we shouldn’t call it money.
Just as another aside, anyone who thinks the blockchain can exist seperately from bitcoin is wrong. Bitcoin exists to incentivise miners. A blockchain without tradeable transaction tokens (bitcoins) is by definition a centralised and inefficient database. And we already have databases.
Am I wrong? Do you agree that bitcoin is a commodity and that there is therefore no accounting issue? Do you think those users I’ve mentioned above don’t find value in using bitcoin?
I do not agree that because Bitcoin is a commodity there is no double entry issue
The issue remains exactly as before – where are the credits? If this system is to be of any value – and since the commodity is virtual it only has value in use so the system has to have value or there is no point to it – then we have to know what that system is and we do not
You have simply conceded that I am right
This is a weird article. Obviously you’ve spent some time to understand what Bitcoin is about but you try really, really hard to shoehorn it into classical banking systems, and failing at that, you conclude that bitcoin is flawed.
Maybe you should start with what Bitcoin claims to be : a decentralized system to reliably transfer digital tokens. It works, brilliantly.
Now to your specific arguments.
Yes, “all transactions are reallocations of existing and new currency and are not matched by the settlement of liabilities”. You cannot have debt onchain (though nothing prevents you from having debt offchain). So you conclude it’s not a proper banking system. It’s not meant to be. Why is this a problem?
About the single entry issue. All transactions except new bitcoins are double entry. If you absolutely need to have a double entry ledger, just assume currency creation is handled the same way as any central bank : as debt. OK, it’s offchain, but is it a big deal. Nothing is more transparent, predictable, auditable than new bitcoin generation.
“All banks are a confidence trick but most are at least based on the idea that a deposit may be capable of settlement out of capital, loan repayments or government guarantee (in the last resort).” That’s an interesting affirmation that I’ve seen many people (economists, bankers, politicians…) make. How is it true? If I travel to Frankfurt and bring a bag full of euro notes to the ECB, what will they give me against it? What actual guaranteee are there for our euros ou dollars? I’m really eager to know.
I also think you missed the point of mining. Don’t worry, very few people really understand mining. When you say “it is just the hope that there will be new debits (mined Bitcoins) that provides this comfort”, you imply that new bitcoins are necessary to prop up the value. You’re mistaken. Value of bitcoins is derived from the utility of the network and the guaranteed scarcity of bitcoins.
It’s the other way around. To secure transactions, you need energy. It’s a consequence of Shannon’s information theory, itself a branch of thermodynamics. A closed system cannot reduce entropy, it needs energy. Cryptography is not enough, if you want past transactions to be cristalized, you need to apply energy. Thus mining and the proof of work. Now the challenge for Nakamoto was to find a reliable way for people to provide energy (at least in the early days). Mining was a clever solution : use the money creation to incentivize energy providers and adapt the complexity of mining to always have an economic equilibrium. Genius.
So you confirm the credit is not recorded
OK then – tell me who owns it in that case
Because I promise you it exists – and don’t give me the BS about mining – that’s an economic charade in my view. No one needs to ‘mine’ to make this system work: it’s just a silly game and not remotely related to any economic fundamental. Someone gains from this process outside the system denying the capital it needs to be sustainable – who is it?
OK, you obviously don’t want to understand mining. Fine with me.
The rest of your answer doesn’t even make accounting sense. A liability is owed, not owned.
I’m disappointed. I had hoped that, at last, someone would have explained to me how exactly fiat money is guaranteed.
Fiat money is backed by capital
Bitcoin is not
And as others point out, as mining is finite it is not key to Bitcoin so you cannot rely on that argument
And you have ignored the fact that I amlooking for a credit, not a liability
Please address the real issues
“No one needs to ‘mine’ to make this system work: it’s just a silly game and not remotely related to any economic fundamental”
Mining is important to make the system work. It serves as a transaction verification mechanism and the method used to update the ledger.
“Someone gains from this process outside the system denying the capital it needs to be sustainable — who is it?”
I don’t understand the question, could you clarify? How is the system denying capital it needs to be sustainable?
But either mining is essential, or not
Bith cannot be true
I suspect mining makes good the shortfall of capital
But in that case the insecurity I refer to is real
I think my questions are clear
“But either mining is essential, or not
Bith cannot be true”
You need to properly define mining. Mining is currently used for multiple purposes at the moment, issuance of new bitcoin as well as transaction verification and publishing new versions of the ledger. I suspect when you say “mining” you are only viewing it as issuance of new bitcoin, but that will not always be the case, and it not required to be the case. The system can continue to function, in theory, without issuance of any new bitcoin
I do not believe you
There is no incentive to mine without new coin creation
That is where the value is for the miner
No coin creation = no bitcoin at anything like reasonable cost I suspect
But we do not know who gains now
You utterly fail to address my points
“I do not believe you”
“There is no incentive to mine without new coin creation”
“That is where the value is for the miner”
“No coin creation = no bitcoin at anything like reasonable cost I suspect”
Just to be clear, a fledgling fee market already exists in Bitcoin — transactions that attach higher fees are generally included in the next block. Transactions that attach lower fees are treated as low priority and might not be included in the next block or indeed the following block. This is more acute if block space is limited. Transactions that attach no fees at all take a very long time to be included in a block or indeed they may never be included.
In July this year, the mining reward (in terms of newly minted bitcoins) will halve (from 25 bitcoins to 12.5 bitcoins). It should be interesting to watch! The same will happen four years later (from 12.5 to 6.25) and every four years after than until the last fractions of bitcoins are mined in October 2140. Between now and then miners will necessarily transition from relying almost exclusively on newly minted bitcoins as their reward to relying exclusively on transaction fees as their reward.
Your point, presumably, is that without newly minted bitcoins as reward, transaction fees would be unreasonably high. That would be true only if transaction volume does not increase and the price of bitcoins remains flat or falls. If transaction volume increases and/or the price of bitcoins increases, transaction fees should be sufficient. The hash rate may plateau, but that has no bearing on the capacity for growth.
Richard,
I totally understand where you’re coming from, but in a fiat currency world, I’m not at all convinced why, conceptually, there needs to be a double entry. I’m going to come at this from a National Accounts perspective, but I think the logic is valid.
Consider gold, and specifically monetary gold. In National Accounts (and in the UN System of National Accounts and the IMF Government Finance Statistics Manual and the other manuals in this family of manuals) Monetary gold is a financial asset, but it is a monetary asset with no matching liability. Therefore in theory, were government to own a gold mine, and be able to smelt the gold and create bullion, this would create a financial asset, and while there would be costs associated with this process, the time and energy spent to mine and acquire the gold) depending on the value of the gold, the resulting financial asset would essentially appear, on the government balance sheet, with no matching transaction.
Now take normal currency, notes and coins. Here, in National Accounts, these do are financial assets that do have a matching liability. Notes and coins issued are assets for the holders, and liabilities of the government or central bank that issued them. But the reason for this is historical.
Historically, notes and coins were convertible, and backed by gold, so it made sense to record an asset and liability when they were issued. In the fiat currency world we now live in, I don;t think makes sense any longer. When government’s print bank notes or mint coins it would make much more sense to regard them as creating something like monetary gold – an asset with no matching liability, and in that sense that is what bitcoin resembles. There are costs associated with mining a bitcoin, but once done a financial asset appears but its no one’s liability.
Bitcoins, gold and currency has value because we (wider human society) have collectively agreed that it does.
I am sorry, but you are just wrong
The double entry for gold creation is:
Dr Asset value: Cost of acquisition
Cr Account of person cost due to
Dr Asset value: difference between cost and current value
Cr Reserves
The credit is effectively to capital
There is a no liability but there sure as heck is a credit – to reserves – which is what they are called
That is capital in the system as a result – effectively seignorage – a government income
You are wrong that there is no double entry
But what is it in Bitcoin?
Why would the double entry for new bitcoin creation (as you’ve described it) be any different than the one you’ve described for gold? There is an asset value, a cost due, a difference between cost and current value, and a reserve. Exactly the same.
Read what I have written
It is clear what I am saying, and why
“Read what I have written
It is clear what I am saying, and why”
And it’s clear to me that creation of bitcoin has the exact same accounting ledger entries as the mining of new gold
Then where are the credits?
Please tell me, precisely who has them in this blockchain and who benefits
“Then where are the credits?
Please tell me, precisely who has them in this blockchain and who benefits”
Where are the credits when gold is mined? If an individual mines gold, who has the credits and who benefits?
You are no wasting my time reposting my comments
Answer or I will delete your further comments
Have the users of Bitcoin created a new form of accounting? I suspect not.
Is the Bitcoin a pari passu replacement for fiat currency? Given the existence of a totally incomprehensible “blockchain” if it is unemployment benefit payments will be problemattical. However ! Bitcoin miners may be unemployed.
Double entry requires multiple sets of books, one man’s credit is another’s debit.
Sorry but you are wrong
Double entry is within a set of books
I do know how double entry works
And you have missed the point
Ouch!
Of course I understand that double entry is within a set of books.
My point was that a multiplicity of books must say the same thing for such a system to retain its meaning; a debt in one set of books must be represented by a credit in someone else’s books. Try chasing overdue debt if the accounts payable clerk at the other end of the telephone has a completely different record of transactions.This is the point I thought you were making with Bitcoin.
The double entry system supporting bank transactions is, in a sense, consolidated by the reserve account system where uncleared transactions between banks are debited / credited to the reserve accounts at the BoE.
In general the accurate recording of debits and credits in a multiplicity of books ensures that the system works although I have encountered PFI accounting where the asset in question is on both sets of books.
Not true at all
Debt in one book may not yet be recognised as a liability in another for all sorts of reasons, include dispute
And a sale in one is not a cost in another, by any means
Double entry does not require reciprocity to be valid
“I do need rhetoric, abuse or assertion.”
Missing a NOT, I presume.
Indeed!
Cannot add anything about assets or liabilities or double entry but I know Steve Keen has said that whilst he’s in favour of alternative currencies, Bitcoin is problematic because it is 1. supposedly, Ã la gold, finite. 2. the computer power to authorise its payment transactions means that they take at least a minute for the initial authorisation and I think he said about 7 minutes to complete fully and there is not enough computer power within either commerce or its customers for it ever possibly to become a widespread system for payment.
Steve is right in bith counts
And that delay involves massive risk
Real world clearing systems have to be faster than that
Have you seen how quickly your bank can debit your account?
“Steve is right in bith counts”
It’s a small point, but the suggestion that the number of transactions is determined by or otherwise related to the hash rate is wrong (I haven’t read Steve Keen’s work, but that seems to be part of what was being said). Today’s hash rate could secure a vastly bigger Bitcoin. Hash rate is determined by miner profitability (for each miner, the price of bitcoins (x FX rate if and to the extent he/she needs to convert) vs costs of mining (primarily electricity, hardware and maintenance)). It is not true to say the hash rate (and electricity consumption) must increase to support more transactions (though it may well do if the price of bitcoins increases).
“And that delay involves massive risk”
Bitcoin transactions are not suitable for point of sale transactions (except, perhaps, for small transactions where the merchant is happy to accept the risk, or larger transactions where the customer is be expected to be present for a certain amount of time in any event). It is much better suited to online commerce where a merchant can wait for one or more confirmations. Compare that risk (none) to the risk of PayPal reversals or credit card chargebacks (which can occur months later).
“Real world clearing systems have to be faster than that”
But they generally are not.
“Have you seen how quickly your bank can debit your account?”
They can just as quickly reverse transactions, sometimes days or weeks later.
I have – but cheques take three days and sometimes (theoretically) longer!
I think Steve would say that blockchain is secure, but far too slow for all the transactions that might like to use it. It is a computer capacity issue. IE payment is secure but so secure it is far too slow for everyday life.
Cheques?
Bitcoin and the blockchain are inherently inefficient. Centralised databases will always be cheaper and faster than blockchain. That is why the idea of private blockchains is strange, it would merely be an inefficient database.
Bitcoin only derives value from the fact that it is decentralised and allows for unregulated (often illegal) transactions. In bitcoin speak this is called “regulatory arbitrage”. The market for skirting around laws, regulations and taxes is massive.
The fact that silk road and its reincarnations have operated successfully for years is some evidence that bitcoin works for this at least.
I don’t undetstand the problem here. What happened when gold was money and a gold miner mined some gold? What happened when someone in the Californian gold rush found a gold nugget? That was all certainly money and treated as such. A bitcoin could just be seen as a virtual version of an ounce of gold.
Obviously bitcoin is different to credit money. It is more like commodity money, which given was the way money existed for thousands of years is nothing to be surprised about.
Nb. I am somewhat sceptical of bitcoin, but not for the reasons of accounting you discuss.
I have already answered this
I think your argument is: money must be credit. Bitcoin is not credit. Therefore bitcoin can’t work as money.
The solution is that money doesn’t have to be credit. It can be a commodity. Problem solved. Payments then become as simple as transferring ownership of the commodity. This is how money worked throughout history.
Tally sticks are sn unlikely feature of a modern economy
There may be other features of bitcoin that are problematic but I can’t see how your double entry argument is a problem at all. On a set of books the double entry simply records assets and liabilities with respect to the company itself. So if I set up a company and find a lump of gold, I can record an asset and the liability is the company’s liability to me as the owner in the owner’s capital/reserves. Isn’t that day 1 on any accounting course? Same with bitcoin. And, if we decided to value all of the company’s assets and liabilities in bitcoins we could prepare the accounts and undertake double entry using bitcoins as the unit of account.
So to answer your questions. Those are all the debits and credits you need. Mining is largely irrelevant – the costs to mining can be accounted for like any other costs. The blockchain is the mechanism by which the veracity and ownership of the bitcoin is maintained (a bit like the physical properties of gold but with a built in ownership property – that’s why blockchain is innovative). And there is no reason why continual mining needs to happen at all for bitcoin to work. As I undetstand it, a single bitcoin is sufficient to act as currency (ignoring other problems) because it can be broken down into tiny fractions.
I think you are getting confused because fiat money only exists within a double entry book keeping system. Without the accounting it doesn’t exist. But not all money requires this – gold and bitcoin (if it is money) don’t. Afterall, when was money invented and when was double entry book keeping invented?
You utterly miss my point
There is double entry for Bitcoin, of course
But we are not being told what it is
This makes the Butcoin block chain deliberately incomplete and opens it to abuse
“Tally sticks are sn unlikely feature of a modern economy”
Bitcoin is a completely new thing: a bona fide digital bearer asset. A ‘tally stick’ shared globally, in real-time, with each notch being cryptographically secure and its correctness provable, trivially, by anyone. The result thus far has been sound, error free accounting with zero downtime. Unheard of, frankly, and when you consider how consensus is achieved – between anonymous actors online and with no central record keeper – a truly remarkable achievement.
I fully expect Bitcoin will outlive you and me (and will continue to work as expected even when the mining subsidy of newly minted bitcoins becomes insignificantly small). Accounting will adapt, one way or another. So how should it adapt?
It can’t adapt
The price of its cryptography is too high
Thing is, while most “money” in a modern economy is electronic, and therefore has double entries (a deposit is an asset of the account holder and a liability of the bank) these are backed by currency, currency is what you are able to exchange your asset for, and currency in a fiat currency world really is a tally stick – it has no intrinsic value, neither for that matter did gold (we all just agreed that because it was rare and long lasting that it would serve as a means of exchange.
Currency gets treated as a liability of the issuer due to convention and the legacy of the gold standard not due to any fundamental economic logic. It remains the case that fiat currency is only convertible into other fiat currency – in what sense is this any kind of real liability for the issuer (unless they are dumb and mint coins that are worth more as scrap
This is not true
Central banks do have a liability which is taken seriously to ensure payment for value can be made. This is what tgeir liability implies
Now, either Bitcoin has no such obligation or it has the status of a currency without value
Which is it?
Maybe you are equating liability with ownership? Bitcoin doesn’t require double entry upon creation. Just as a piece of gold doesn’t require an obligation to pay in order to be owned. You need to think of bitcoin as commodity money, not credit.
It is impossible for there to not be double entry: there always is
But it is hidden here
Answer my question and stop making up excuses
Why is the credit hidden from view?
Who gets it?
What are the consequences?
There always has to be double entry if you are preparing a set of accounts. Bitcoin, although it includes a record of ownership and transactions, is not based on double entry accounting. So there isn’t, and doesn’t need to be a creditor at the point at which the bitcoin is mined. It is a commodity type system. You may assert that this is impossible, but it exists. You may also assert that only debt can be money in the 21st century. That may be true, although you’d have to make a case as to why. Simply asserting bitcoin can’t work because where is the creditor? presumes you’ve made the case for there needing to be a creditor.
Stop talking nonsense
There is a credit: definitionally there has to be and, as I have explained, there is. It is a tautological impossibility that there is not
So answer my questions: who has the credit, what is it, and why is it suppressed?
Or admit you’re clueless
Why definitionally does there have to be a credit? Bitcoin is based on blockchain, not on T accounts. If I hold a gold coin, there is no debt. No one in the world owes me anything. There is just the physical coin in my hand.
There is no transaction that can be conceived of which is single entry
Yes. Every transaction must be double entry. But the initial mining doesn’t have to be a transaction. If I find some gold then there is no one else on the other side of the transaction. Also, after I complete a transaction in gold there are no outstanding liabilities. Unlike with fiat currency where there is always an outstanding liability with the issuer of the currency.
Fiat currency cannot definitionally come into existence without double entry because it is phenomenon of accounting. Commodity money can come into existence outside of any accounting system, and then be subsequently accounted for using double entry, just like any other physical asset. Bitcoin applies this theory to a digital form.
Stop making up fairy tales, please
Because if tgat’s all you can offer I will believe you are defending a sham
Bitcoin mining is a commercial transaction but we have no idea who gains
There are some mathematical geniuses in the world. While I don’t know much about it, it strikes me that Bitcoin could the invention of one such person who didn’t have anything better to do than come up with a virtual currency that combines the functions of both bank and marketplace in one. Given the attention paid by the affluent hegemony to these very things, I find it quite plausible that Bitcoin could turn out to be a concept that actually works.
Please permit me to respond to your concerns Richard. I regret I am not so familiar with your accounting terminology, but I will attempt it as best I can.
“First, the blockchain, about which so much is said when Bitcoin is discussed, does not appear to be a credible accounting system. It seems to be single entry at best and such systems were rightly abandoned many centuries ago because they did not allow proper risk appraisal.”
I think it is important to understand the mathematical basis of Bitcoin. It is not an accounting system, it is a transaction system. That does not mean that there is no accounting whatsoever, but that the accounting is contained within the very structure of its operation.
For example, you say that Bitcoin operates a single entry, not double entry book keeping. That is true, there are individual transactions recorded as single events, not as a separate credit and debit to two accounts. But on the scale of the large numbers operated by powerful computer systems, the difference between single entry and double entry vanishes. For example, the numbers 1 and 2 could be seen as two separate entries, or as a single number: 12. The possibility of combining two numbers into a single larger number on an accounting scale was clearly not applicable in the fifteenth century, before the advent of computers.
“Second, the apparently missing credits within the blockchain might represent an absence of capital and so an inherently unstable system.”
Again, the mathematical basis of the Bitcoin means that capital is not required to sustain it. Instead of thinking of bank accounts to record who owns what, the blockchain fulfils the function of recording individual exchanges. It contains a complete transaction history. Credits occur within individual transactions. What capital there is in the system is contained within the combined total of all transactions in the blockchain.
“Third, that the system requires continual data mining suggests that all transactions are reallocations of existing and new currency and are not matched by the settlement of liabilities as would be expected in what we understand to be a banking system.”
You said that credits can either be income, liabilities or equity reserves, and suspected that the data miners took them as income. But we could also view them as liabilities instead. The liability is the complete transaction history in the blockchain which has to be reconciled with the new credit. Data mining may seem like a frivolous activity, but actually it might be the process whereby the banking clearance system is upheld.
I could equally be mistaken, and I do have some concerns of my own. Firstly, the amount of computing power required to sustain the system seems phenomenal, and I am conscious of the need for energy conservation. Also in the event of technical faults or power failure, the whole system might come down. As for the possibility of exploitation I am less concerned, as there are equally risks associated with conventional finance. No system is perfect. But crucially, I would ask what is the benefit gained from doing away with banks and employing a virtual currency instead? Or even, what is the benefit of having a bank? If it is true bankers were responsible for the 2008 crisis, wouldn’t we be better off without them? (Please excuse my naivety).
You miss my point
There is double entry in Bitcoin but we are not told what it is
There is a dark secret that is not apparent within Bitcoin that it deliberately hides
This is why cryptography is needed – because trust is impossible
This too is why it will fail
It’s not deliberately hiding anything. It’s an open, public ledger, everything is happening in full view. I don’t see how a missing starting entry for the creation of new coin would cause a failure scenario or lead to it’s failure. There are other reasons bitcoin may fail, such as loss of confidence in the currency, lack of adoption, code vulnerabilities, etc. but I can’t see any possible scenario where it might fail due to missing a credit at the time the coins are created, or that this somehow makes it unstable. Let’s assume the last block has been mined (which will happen one day), the system can, in theory, continue to function with no new bitcoin being mined or created.
So who gets the credits?
Please tell me
“So who gets the credits? Please tell me”
Who gets the credits when new gold is mined?
The miner
And when value changes the owner
But we can see that
Who does in Bitcoin?
And why can’t we see?
Please answer the very simple questions
Dear Richard
Ah thank you for that clarification and for your patience in dealing with me and the other commentators on this blog.
I only had the chance to read one of Dr Wright’s blog posts before he took it down, but it was enough to convince me of his genuineness and sincerity. He started off by talking about the reasons he went public, from seeing his critics attack Bitcoin using ‘strawman’ arguments. Such an argument is directed against a proposition X by targeting a second proposition Y, which bears resemblance to X but has some fundamental flaws. The flaws of Y are then used as the basis for an attack against X. This is a logical fallacy called the ‘strawman’ argument.
The ‘strawman’ in question was the total energy consumption of the Bitcoin process, which had been said to exceed the energy consumption of a small country like Denmark. But this is an unfair comparison. So he discussed the energy consumption of different countries such as the US, and the total world energy consumption. Then he considered the energy used by a multinational business such as Google or conventional banks, which would be better benchmarks to measure up against. The conclusion was that although Bitcoin consumes a certain amount of energy, in the context of other businesses operating on the same scale, it was quite modest. It follows that the value generated by the Bitcoin process must always be considered in context, e.g. relative to other modes of finance.
He also threw in Douglas Adams’ Hitchhiker’s Guide to the Galaxy, that the answer to life, the universe and everything is 42. What this tells us is that to get a proper answer our questions must be properly formulated.
There were also some mathematical equations on the Bitcoin generation process, and the value extracted by miners from the system on successive iterations.
I realise that these thoughts do not directly address the concerns you have raised in this blog Richard (regarding trust and ledgers), but please bear with me just a little longer. Indeed, your suspicion of a cryptographic account system is understandable given all the abuse you are aware of and have helped to expose. But what would it take for you to have trust in such a system? Many people would look for familiarity, for example, similarities to other accounting systems they are aware of, but Bitcoin really is something else. Does that make trust impossible? What type of argument would it take to persuade you?
I would like to draw a parallel with another question you claimed was irrelevant to the issue, which is the identity of Satoshi Nakamoto. Indeed, even Dr Wright has said that it doesn’t matter to the Bitcoin community. But it does matter to one person, the person who founded it, and it seems that one person has now decided it doesn’t matter to anyone any more. On one level, it makes no difference to the Bitcoins being mined and exchanged every day, but on another level, it is a pity, and a great loss. The missing element is trust. The world would never believe that Craig Wright and Satoshi Nakamoto were one and the same, and consequently, they will remain two separate personae.
Yet to my mind, by withdrawing his claim, Dr Wright has given us more a convincing proof for the genuineness of his identity as creator of Bitcoin than any number of early digital signatures ever could.
But Bitcoin is not something else
This is a business. Double entry can always apply. But it has chosen a reporting system that denies where benefit rests
Yes, that is something else
But it’s deeply unsavoury even if there is nothing going on.
Richard
Thank you for your reply. I think I am beginning to understand your concern.
This could be the dilemma Dr Walker landed himself in. He accepted a world that denies accountability and trust. It doesn’t remove from the ingeniousness of his invention, but we mustn’t let that blind us to the need for reporting standards.
Sorry Richard
I can’t reconcile you saying Bitcoin isn’t something else and then saying it is.
If Bitcoin is no different to an ordinary business, then clearly business reporting standards must apply.
But if it is different, then it is not clear to me what the reporting standards should be.
If, for instance, it is a security service, then by definition there would be no reporting in the ordinary sense we are familiar with.
That would not be unsavoury, but the nature of the service.
So the question becomes a matter of responsibility of how we use the service. What we need to do is study the associated risks in the context in which they arise. I don’t think there is a clear cut answer, and we’re not going to settle it on this one blog.
But the debate you have sparked does suggest you have touched on a very important issue, which lies at the very heart of our collective living in society.
David
That does not work
Blockchain is part of Bitcoin and it is a decidedly incomplete accounting system
It does not matter precisely what Bitcoin is – the accounting is part of it and it fails in my opinion
That is my argument
And it stands as far as I can see
Richard
Richard
Unfortunately your argument does not stand up to Gödel’s Incompleteness Theorem. On that basis, every set of accounts which uses arithmetic must necessarily be incomplete.
I draw your attention again to a quote of Craig Walker before he took down his blog:
“As F. Bastiat noted in his seminal essay ‘What is Seen and What is not Seen’: ‘I am sorry to upset’ [those] ‘ingenious calculations, especially since their spirit has passed into our legislation. But I beg’ [you] ‘to begin them again, entering what is not seen in the ledger beside what is seen’.”
There is more to the issue than meets the eye, which is why I am not sure we will settle it now.
David
Sorry – but what the heck are you saying about Arithmetic?
All accounts use arithmetic
I am sorry to say that this is becoming surreal
Craig Wright, that is. Doh!
Richard
Try this
http://www.scientificamerican.com/article/what-is-godels-theorem/
So we come back to the question of trust. Do you trust the results of mathematics? I can’t make you believe them.
But this is not about trusting the result of mathematics
It is about knowing I do not know the result of the maths
You are correct Richard.
That’s why we might not be able to settle it now. We might have to admit we don’t know.
But let’s try. The difference between conventional accounts and Blockchain is that in the latter some things are hidden. That is part of the security service. But by the Incompleteness Theorem there are some things (unprovable propositions) hidden in the conventional accounts too. That is counter intuitive because we cannot see them. If we could see them, they would not be hidden.
To refer to F Bastiat’s essay (http://bastiat.org/en/twisatwins.html), he gives the example of a boy who accidentally breaks a window. The father is angry, the boy is sorry, but the father forgives him after a good scolding and goes to the glazier and spends six francs for him to put in a new pane of glass. That six francs enters the glazier’s books as revenue. But it would be a mistake to conclude that it is good to break windows because it boosts the glazier’s trade. If the boy had not broken the window, the father might have spent the six francs on a new pair of shoes instead. That six francs which is the glazier’s revenue also represents lost revenue for the shoemaker. The former is seen in the accounts, the latter is unseen, but both are relevant.
The difficulty we have setting aside our popular assumptions can be explained by Bernard Lonergan’s notion of intellectual conversion. He says:
“Intellectual conversion is a radical clarification and, consequently, the elimination of an exceedingly stubborn and misleading myth concerning reality, objectivity, and knowledge. The myth is that knowing is like looking, that objectivity is seeing what is there to be seen and not seeing what is not there, and that the real is out there now to be looked at.” (http://lonergan.org/online_books/Liddy/chapter_seven_lonergan.htm)
In the present case, the myth says that accounts exist if we can inspect them by taking a look. This seems so obvious that we very rarely question whether it is true. Evolution has formed our senses to see the world in this way. Overcoming this mistake is the path to real knowledge, but is the pursuit of a lifetime.
Returning again to the nature of trust. I agree we cannot have trust in abstract mathematical theorems. I think trust must always be in a person. Lonergan makes the point that there are two ways to knowledge, first by working things out for oneself, second, by asking the people who already know the answer. If you want to know the logarithm of the square root of minus one, you can either set down the axioms and work it out from first principles, or you can ask a mathematician who will do so. But if we want that knowledge to be available to a great number, not just the ones with the skill and expertise, then only the second method will suffice. That is why we need trust.
Neat story and wholly irrelevnt. The shoemaker had not trade and his accounts show that fact. Accounts do not record opprtunity cost.
In Bitcoin there is a transaction and it is not shown.
That’s not an account.
Actually, in my kindest description that is misrepresentation.
Nothinbg changes that.
@DavidB – I think your points are very interesting and I tend to agree. It’s only when we accept that the unknown is part of the fabric of the system, that we can create systems that don’t assume we can know everything. We can’t get rid of uncertainty, depreciation (the glass being broken by an externality event), or people basically changing their minds, rebelling on pre-agreed contracts etc… That’s the risk in the system.
I am tickled by the idea that bitcoin is not so much a currency as a base security protocol for value transmitted beyond our local radius. The transmission of value beyond a network that is directly verifiable by our own eyes and experience involves trust in other interlocutors. But as such intermediaries grown in their own right, they themselves depend on an agency of bottom up feedback through their own trusted agents – and we have no knowledge if those agents can also be trusted. The bigger the institution, the bigger the opportunity for the unknown risk to creep in.
We’ve tried to battle this with top down regulations. But if bitcoin is actually an attempt to implement a global anti-virus, or even to institute a kind of immune system, then it must rely on bottom up defences.
When the Romans were dealing with pirates, they knew that they could not defeat them with the usual ordered battle machine confrontation. So instead they cut deals, which gave them safe harbours. A grain toll was essentially created to pay off the pirates, providing they stayed in their pre-agreed areas. As a result pirate activity was controlled in a specific area under the presumption that you can’t stop from happening but at least you can know where it is, avoid or anticipate, or most importantly ACCOUNT for it (X amount payoff to the pirates became the cost TO capital).
We’ve been using similar tactics ever since. Las Vegas. Atlantic City. Macao. These are all necessary black areas (a.k.a unknown risk areas) based on the understanding we will never stamp out gambling, and other dodgy activities completely, so it’s better to allow them to happen, and keep them in controlled areas rather than lose further economic value trying to stamp them out. There’s not even a problem with people from the other zones interacting with these zones on a temporary basis, providing it’s all based on caveat emptor.
With pompey and the pirates, the idea was also that if you settled the pirates and turned them into people with vested interests instead of nomads who have nothing to lose, you could more easily control them and attack them with your organised systems.
The problem with bitcoin and the blockchain obsessions that have followed with it, as that people are treating it as something asbolute. That you can put all your trust in this system. That is a fallacy. All these technologies are still reflections of the underlying flawed and fallible human system. There will always be uncertainty. But for some reason the entire incomplete theorems has been conveniently ignored by the bitcoin radicals.
I think the entire spectacle of the Craig Wright phenomenon — and the fact no-one was ultimately convinced by the proofs he offered –was possibly an attempt to show that uncertainty is always there. Perhaps the architects of bitcoin whoever they are created this as a security system, but never wanted anyone of us to lose our sense of caveat emptor via the process? Because even if you control all the pirates with a predictable cost to capital of doing so function (which is what the bitcoin algorithm ultimately achieves) doesn’t stop them from escaping their enclosures, or other risk factors creeping in. But perhaps a digital system based on this understanding is a darn sight better than what we have currently?
There is a hint of the arguments once used to justify tax havens in here, which have now fallen apart, of course
Opacity kills business
Dear Richard,
Everything you have said is correct. But nothing you have said comes anywhere remotely near to undermining Bitcoin.
David Hume said that if you want to conquer an enemy, you march on the capital and take that. Otherwise, you may take the surrounding towns and settlements, but leave intact a base from which counter operations could be launched.
So if you are serious about exposing the flaws of Bitcoin, you have to attack it in its strongest possible form. If you are open minded about the issue, then this is the only way to discover whether in fact it is an opponent too strong to be conquered. Otherwise you might defeat a straw man like the analogy I offered (which was not intended as a representation, by the way) while the real opponent remains secure in his fortress.
I think our differences can be explained by the fact we are approaching the issue from different angles. You are looking for answers. I am looking for questions, but I am not sure which question you are seeking the answer for. Well there is one, you asked where the credits were. So let me attempt to answer that.
Bitcoins do not exist on account ledgers. They are the unspent output of transactions, which are organised in blocks, and joined together into a block chain. Blocks are created by the data mining service. This is a process whereby miners compete with each other to solve a cryptographic formula, which is the cryptographic key for joining a new block onto the block chain. The data miner is rewarded by a certain amount of Bitcoins plus transaction fees, but for the purposes of our analysis we can ignore those fees (which are optional anyway).
So the source of credits is in the data mining operation. Forget that they are not accounted for in the familiar way, because doing that profoundly misses the point. Data mining is an essentially competitive activity, but the complexity of the equations means that no data miner has an inbuilt advantage over the rest. Their income, if you so call it, is assured to oscillate statistically around a certain average value. The net value extracted by the miners will be relative to their gains over the energy expended.
That is the answer to the source of credits as far as I can see, but I for one don’t believe it can be the whole story. That is why I am still looking for more questions, about the impact of a steady supply of new coins to a closed system, about the energy efficiency of the process relative to other forms of finance, about the merits and dangers of a security service in which transactions occur but are not recorded, and fundamentally the relationship to trust. Whatever it is, Bitcoin looks like it is around to stay, so it makes sense to study its impact on society with a view to minimising any inherent risks it may present.
I am sorry David but I repeat, Bitcoins do exist on account ledgers and they do exist
But we are denied them in the block chain
And so all my points stand and all you do is keep confirming that fact
And single entry accounting exposes users to a high risk of fraud and financial collapse as capital is not accounted for
That is my point and not one iota of what you have said changes that
“In Bitcoin there is a transaction and it is not shown.
That’s not an account.
Actually, in my kindest description that is misrepresentation.”
But if there is no representation (in the form of an account), there can be no misrepresentation. This is non-representation.
But there is an account – there has to be because someone benefits
Might we deal with the real world?
They do not benefit from the account, but from the transaction.
Bitcoin ownership is of personal keys, not accounts.
So my account with a bank is not personal?
Thank you Richard.
I will not take up any more of your time on this matter but consider carefully the questions you have raised.
Best wishes,
David
Thanks for your time
Richard
Apologies, I thought the issue was about the accounting ledger, but I see now it is about trust.
Trust never exists in a vacuum. Trust is always in something, in a person perhaps, or in the promises backing up capital. Therefore I agree that without trust, Bitcoin is doomed to fail.
Whether trust is impossible is another matter. Since there is no capital underlying Bitcoins, that cannot be the source of trust and stability. But there could be trust elsewhere, for example (and this is purely speculative) in the proof of work of the data mining operation. Indeed, such trust could be better founded than the promises underlying capital, because they are backed up by verification process on a peer to peer network.
The best way to investigate the truth about Bitcoin would be to see what Craig Walker has to say (see Izabella Kaminska’s comment below). If it is true he is the creator of Bitcoin, then he could shed some light on the methods of its operation, so they do not remain dark secrets. But some things may remain hidden. As he aptly said on his blog:
“As F. Bastiat noted in his seminal essay ‘What is Seen and What is not Seen’: ‘I am sorry to upset’ [those] ‘ingenious calculations, especially since their spirit has passed into our legislation. But I beg’ [you] ‘to begin them again, entering what is not seen in the ledger beside what is seen’.”
Since I made this post, I noticed that Dr Walker has taken down his blog.
So it seems that some people want his secrets to remain dark after all.
How annoying.
Dr Craig Wright, that is.
I’m terrible with names!
The ledger was created to indicate a relationship that could be equated to trust
These are the same issue in essence
You seem to be trying to compare Bitcoin to a bank. Bitcoin is not a bank or a company and is not meant to approximate one.
>The consequence is that Bitcoin appears to be a claim on nothing at all.
A bitcoin is indeed a claim on nothing at all, in the exact same way that a silver coin is a claim on nothing at all. The silver is valuable because the physical properties that it has cause people to agree that it is useful as physical money. Bitcoin is valuable because the mathematical properties that it has cause people to agree that it is useful as digital money. Bitcoin is independently mathematically (cryptographically) verifiable by anyone who wants to verify it. Therefore bitcoins can be sent from any person in any country to any other person in any other country over the internet without requiring a trusted bank or company in the middle. Because of this, people value bitcoins. A bitcoin is not a claim something else. A bitcoin is the money.
Money is not a commodity
It is a claim
Bitcoin is not a claim
And if it were, upon whom the claim is to be made is not known which is the point I was making and the risk within it
That is why bitcoin is not “money” as we know it with fiat money, it is something different, more like a commodity like gold. It does not need to have a “claim” to work. What “claim” does gold have? None. Yet it still can function as a store of value, a medium of exchange, and a unit of account.
And gold proved to be a dire basis for a currency
“And gold proved to be a dire basis for a currency”
Yes, agreed. The problem with gold, and bitcoin is that supply is fixed or relatively fixed, so if goods and services are priced in gold or bitcoin, prices can be unstable.
If gold was such a bad currency why did it emerge as a currency? It must have had some benefits over the other options given it holds the record of the most longstanding currency in history. And you accept that commodities can be the currency? Bitcoin may represent a further improvement, or it may not.
In a modern economy a commodity can never be a currency
Simple fact
Money is debt
Debt is not a tangible commodity
ok, this idea that gold emerged as money is historically inaccurate. Gold was almost never used as a daily currency in any ancient civilized stated. Where metals were used they were more common metals such as copper or silver. In other societies it was clay coupons. The currency factor came from those guaranteeing and minting those currencies. Aka by the underwriters. So it’s a fundamental misunderstanding. Gold was of course used in early trade or as a store of value, but mostly in trade with people OUTSIDE of your trust circles. a.k.a foreigners, or pirates. Consequently, it was used as a balancing unit for international accounting more than a form of daily currency. This is a very important distinction because the accounting was more akin to international balance of payments accounting (which as far as I know nobody has ever agreed on, even tho we have finally arrived on a consensus up until the 70s there were three different methods being touted for how best to account for intl payments).
So why was gold used? Because it was scarce and it was relatively useless. An alternative bartering tool with strangers and pirates is the provision of technology or information. But that would undermine your own system potentially. Gold on the other hand was a final settlement. It’s value lied in its consistency and its non-reactive state. A gold was a common measure. A common benchmark. A common weight/mass ratio. That’s all. But you could not have had civilisation emerge in that sort of structure, because the common currency is a currency of subsidisation. A currency backed by tax and spend, based on collective cooperation and identity.
Thanks
And agreed
What worries me is this:
The mining requires computer skills and more energy as time goes on. That means those in on it at first control the wealth.
The Bitcoin scene seems dominated by libertarian inclined 30 somethings -that worries me.
Really? I am a member of a babysitting circle that uses straws as its currency. The arrangement works well. Whether it is technically money, or whether there are double entries is irrelevant for practical purposes – it helps us exchange a valuable service in a way that works. In principle Bitcoin functions as a barter good in the same way as our straws – and we have to acknowledge the brilliance of its design (which I only partially understand).
There is a famous article by Paul Krugman – http://www.pkarchive.org/theory/baby.html on how the problems with one babysitting circle have wider implications for monetary theory and how we deal with depressions. I suspect Bitcoin will run into similar problems as the supply tightens over time – an intended feature of Bitcoin, but one which was ideological and is surely misconceived.
I found the following article by John Lanchester interesting. He explains a bit more about the technical background but it still leaves me wondering where the value is other than the computing resources devoted to the ‘race’ of generating a Bitcoin. Do you have any comments on his assumptions and conclusions please?
Sorry the link is here:
http://www.lrb.co.uk/v38/n08/john-lanchester/when-bitcoin-grows-up
Lanchester does not understand banks: he thinks they’re intermediaries. That is not a good start
But he’s right in the inevitable power failing of cryptography
So Bitcoin will fail
Why, because it is not based on trust
And currencies have to be trusted. The price of trust in Bitcoun is too great
Even if bitcoin *is* a commodity, which I am open to, it is still a depreciating wealth asset, because commodities in general incur the running cost of insurance, storage and in some cases spoilage. If Bitcoin is a commodity its natural depreciation exceeds that of natural commodities on many grounds, not least the fact a permanent source of energy has to be expended in the system’s name plus the usual costs of storage, insurance etc (servers still have to operate in the real world). That means someone has to altruistically keep assigning value to the system to keep it afloat. For now that value comes mostly by way of speculative inflows on a equity basis (the speculators bear all the capital risk, and sit effectively on paper profits only until the moment they choose to redeem their claims).
Given all that, as a commodity, bitcoin (and gold too) has a natural carry rate.
For all the criticism he has got from the bitcoin community Mr. supposed Satoshi, Craig Wright, actually offers some of the most illuminating thoughts I’ve seen so far on these matters on his blog. I have to confess, that having read his interpretation of the system, it makes a helluva lot more sense.
http://www.drcraigwright.net/bitcoin-costs-consumption/
It’s the first time anyone in the bitcoin world has actually made a compelling argument, with historical references. First, he describes bitcoin not as a currency or a commodity but as a security service. Given wealth/capital is the natural byproduct of the prosperity/security paradox problem (when it costs more to secure your wealth than the prosperity you create from the network, the system falls into decay and collapses) the idea that finance is inherently a security business, is actually quite appealing to me. Sound finance is supposed to maintain that balance. He also clearly states the system is zero sum and exposed to a natural depreciation rate (the cost of mining.)
There are historic parallels here too. When the Roman denarius system collapsed, Diocletian used a soldier’s yearly wages (annona) as the benchmark base/numerarie to re-establish a viable tax based relative value system between the taxable capacity of a single man (the caput… which the word ‘capital’ is derived from) and the soldier. One day’s soldiering equalled x amount of food and shelter/welfare support. From that base all other accounts and occupations could be derived.
If 2008 was a breach of trust by the custodians we trusted with our wealth — a collapse of financial security — then perhaps it isn’t crazy to use a measure of security as the new value base. It’s not an asset in the conventional sense of the word, but it is a necessary social protection for a civilised society. And the inefficiency of the system is perhaps essential. It’s only when we learn to trust each other again, and distribute wealth more equitably that we can afford to reduce the mining/security expense.
But I still have other concerns.
1) An often cited hypothesis for the latter 20th century’s reduction in violent crime is that has become incrementally easier to conduct fraud/white collar crime. Cybercrime, credit card fraud and even mail order fraud have all helped to reduce some amount of violent crime out there, say the experts. So whereas the Mafia used to whack you over the head to extort your money, it now just extorts you by stealing and taking your data hostage. If we increase the security of the cyber world, it stands to reason that violent crime could resurface as desperate people turn to more direct means to get their hands on wealth. This is why I have a problem with Bitcoin’s uneven distribution of wealth, and the creation of the new 1 per cent. If security is power, those who command the biggest security cohorts dictate power even in the bitcoin world.
2) The depreciation cost is a real thing. And Richard’s single-entry view is also a real thing.
We have no idea how the capital assigned to the security of the system is being spent in the real economy. As Wright points out this is a zero sum transference of wealth. If excessive capital flows into the system over and above the costs of security thus providing free-lunch windfalls to the soldiers of Satoshi, this creates bad incentives for the economy in general, and amounts to a rentier cost on the system — albeit one funded by speculative sucker capital at their risk.
On the flip side, if insufficient capital flows into the system to cover the costs, it reduces the incentive to be a soldier exposing the system to predatory attack (especially in an environment where there are lots of former soldiers with their arms still at hand). This is potentially system compromising, nobody can be bothered to pay for protection.
Bitcoin’s solution to the ‘rentier problem’, as I would call it, is difficulty. When soldiers doing not much work become overly spoilt from windfalls everyone suddenly wants the life of a soldier. But bitcoin counters this by making every soldier in the system work harder for his rents, putting off new entrants. Likewise if there isn’t enough rent to incentivise anyone to bear arms so to speak, bitcoin lowers the grade and makes it easier to become a soldier. It draws on unprofessional reserves. The job is all the more easier still because there’s a whole bunch of spare equipment hanging around.
Once we understand it that way, we can view it as the minimal cost of capital creation is the cost of security. Without security further capital can’t be created. Double entry comes once the new numeraire is this base cost of security.
My issue is that speculators just sitting on early mined bitcoins stand to be the biggest free-lunch beneficiaries without any energy expenditure or work. But I guess they also don’t benefit from seigniorage income. Bitcoin is a zero-yielding asset which means there is no inherent usury in the system only capital gains exposure. I suspect, and the accountants can hopefully help me here with respect to the wider effects.
IK
Izzy
Much to reflect on there
We should bash those ideas around
Mail me
Best, and thanks
Richard
Does anyone know any good reading (preferably online) about a democratic socialist monetary system and currency (i.e. not communist)?
My limited reading about Bitcoin has intrigued me as to whether there is a truly democratic alternative to the capitalist financial system, which would seem impossible without a democratic monetary system and currency.
Bitcoin appears to be neither democratic nor socialist in principle, so has no further interest for me at this stage.
Your conclusion is correct
We could have a democratic system of money now: just bring the BoE back under explicit state control
Absolutely-and get rid of articles 123/125 of the Lisbon Treaty?
Remind me…
But in order to be a truly “democratic system of money” it would require a real “democratic political state” to be in control of both the Treasury and central bank. Which could then lead to a real “economic democracy” to be developed as the primary means of finance, production and service to meet all essential social needs.
But as we do not have a democratic political state in the UK (just my view, but I think I’m correct by any left leaning democratic socialist definition of a political democracy), there needs to be a bit more grass roots work before we could really place democratic trust either the Treasury or the Bank of England.
I agree
But I have tried and no doubt others will as well
Being inherently conservative (with a small c), I have been very dubious about Bitcoins. This was no doubt due to a lack of knowledge about them and a touch of scepticism about the latest big idea. Thank you for your article and your responses to various commentators above. This has encouraged me to look at this further. I am now convinced they are the future.
I cannot say for sure from this post that I fully understand the concept of Bitcoin; I’ve certainly had a blitz of knowledge and insight however on the nature of the creation or origin of ‘real’ money (such as it exists).
Not since I read Richard Douthwaite’s Schumacher Briefing ‘The Ecology of Money’ have my misconceptions been so rigorously tested in order to keep up. My ignorance of these matters has been shattered and I need to put my knowledge back together again.
You know………….why is this sort of stuff not explained to us at school? I mean, it’s fundamental. Society really needs to know about this stuff about money creation.
As for Bitcoin, I do not think – speaking objectively now – that anyone has answered Richard’s challenges adequately.
If we accept that money as a way to exchange for goods and services can be created out of nothing (fiat money) we must also accept that even if it is made out of noting someone or something is making that happen (is doing the creation) and therefore has some sort of role or benefit to be gained from that. And we should know what that is within the system – whether people or flows of Bitcoin or whatever.
Even if Bitcoin starts off as intended, who is to say some entity may not emerge and take it over by stealth and use it to launder ill gotten gains? Or begin to politicise it? Is money in any guise ever really neutral? And isn’t the so-called neutrality argument a load of rubbish anyway? Why do some insist on removing morality or purpose from the concept of money?
The encryption involved in the system maybe able to hide mal-behaviour, motives or drivers.
Those who support Bitcoin uncritically seem more interested in its utility than the obvious problems it creates. To me it sounds like a sort financial Utopia.
My observation is to go back to an old saying:
“If a deal looks too good to be true, it usually is”
There may not even be a deal here….
While this article is a few years old it makes interesting reading for those interested between currency, trade, politics and power (in this case the US Dollar, oil and global hegemony).
Key paragraph:
“The idea of moving away from the dollar is also finding support from major international agencies. The United Nations Conference on Trade and Development has stated that “the current system of currencies and capital rules that binds the world economy is not working properly and was largely responsible for the financial and economic crises.” The statement continued, saying “the dollar should be replaced with a global currency.” The International Monetary Fund agrees, recently arguing that the dollar should cede its role as global reserve currency to an international currency, which is in effect a basket of national currencies.”
http://www.businessinsider.com/the-media-wont-touch-this-story-about-the-end-of-the-us-dollar-2012-4?op=1&IR=T
Richard, thought provoking article and some very good comments and links here. I’ve been trying to think of a simple analogy that would clarify your position. Some commentators have been trying to compare Bitcoin to gold/commodity to explain away a single entry start. But I would argue that nothing has a single entry start, For gold/commodity you have the labour/capital/energy expended in obtaining it.
In the case of Bitcoin there’s nothing that was sitting there waiting to be ‘dug up’ it had to be placed there and then further ‘veins’ progressively generated. So the double entry sits with whoever placed it there in the first place…this isn’t transparent and, at present, seems unlikely to become so. After that it becomes a case of trust, credulity or the lack thereof.
I’ve just found the Richard Douthwaite Schumacher Briefing (2008) ‘The Ecology of Money’ and on page 11-12 he suggests a number of key questions about money creation – any money – as he says it and this seems redolent of the questions Richard has been asking (and still to my mind remain unanswered)about Bitcoin:
1) Who issued the money? The state? Banks? Or the users of the money themselves?
2) Why did they do so? Taxation? Profit? Means of exchange?
3) Where was the money created? Within the area it was going to be used? Or elsewhere outside the area?
4) What gives the money its value? Is it backed by Gold another commodity or a promise?
5) How was the money created? By people going into debt to a central organisation? Or is it produced as mutually agreed credit and generated amongst users themselves?
6) When was the money created? Once? Many times? Continuously – made and destroyed, catering for trading needs?
7) How well does it (did it) work?
As a:
a) Medium of exchange – ease of use; value for its weight; divisible; limits to its availability so that it is taken seriously and confidence in it is maintained by users.
b) A store of value: consistently able to used it over time to purchase the same level of goods.
c) A unit of account: good to use to keep financial records and quote prices.
I was unaware of that
Richard was an inspirational man
Yes indeed – and an Irishman to boot!
I read his book ‘The Growth Illusion’ (late 90’s I think) whilst at University as my consciousness about economics was being awakened and then read ‘Short Circuit’ where he argued for more stronger local communities as a bulwark against increasing global economic turbulence.
I was sad to find out that he died in 2011 – I did not know this.
One of the tenets of the Schumacher Briefing was an argument for different types of money for specific uses – something that I think is still a good idea and should be tried. The common interest rate link between savings and borrowing is a big con in my opinion – I’m uneasy about it although I may not be in full receipt of all the technical details to say why.
I know how weird and wonderful this idea was because when I used to tell people about it I used to get this strange look as if I’d come from another planet.
I get the same look when I try to discuss some of YOUR ideas in your writings you’ll be pleased to know – perhaps!!
When that happens you know you are amidst ideas that challenge the status quo and injustice.
The Ecology of Money does look like very good reading for those interested in a democratic and sustainable monetary system. Available to download online:
http://www.feasta.org/documents/moneyecology/contents.htm
From the summary:
The most important feature of this Briefing is its insistence on three things.
1. All monies should be created by, or on behalf of, their users and not by institutions wishing to profit from the activity.
2. Different types of currency have to be used concurrently if the three key functions of money are to be adequately performed.
3. The international unit-of-account currency, to which all other monies would be related, has to represent, and thus protect, a truly scarce resource. In other words, when we save money, we should also be saving
something vitally important, like the integrity of the natural world.
I see a role for bank money
Indeed, I do not think an economy can survive without it
So it is how banks are regulated that matter