Economics of Bitcoin

post by Matt_Simpson · 2011-04-04T17:02:11.012Z · LW · GW · Legacy · 8 comments

I haven't read/listened to them, but I thought these might be interesting to the local bitcoin users:

Eli Dourado (GMU econ PhD candidate) on the economics of cryptocurrency.

Econtalk podcast - Russ Roberts (GMU econ prof) with Gavin Andresen, Principal of the BitCoin Virtual Currency Project on, Virtual Currency.

Roberts' podcast is always stimulating even if I disagree with him, and Eli is a pretty insightful guy who I've met in meatspace.



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comment by SilasBarta · 2011-04-04T21:57:50.529Z · LW(p) · GW(p)

I posted some comments on the Eli Dourado page, but it looks like the conversation had long since stopped, so I'll repost them here:

-There could be a central monetary authority that conducts monetary policy (for Bitcoin), and signs its actions. That would kind of defeat the purpose of a decentralized currency though.

-Regarding the idea of making the money creation rate inversely proportional to total spending rate (“NGDP”), Wei Dai said:

The only problem I can think of with this right now is that a malicious attacker could try to slow down or stop money creation by doing a lot of transactions between accounts they control.

This isn’t so much a problem of attacks on the Bitcoin per se, but one inherited from the problems of current monetary theory: economists like Scott Sumner think it would all be so much better if monetary policy aimed to stabilize (the growth rate of) total nominal spending. But such a measure is uninformative and Goodhart-prone for the very reason you give: the goal can be trivially met by simply doing a bunch of “toy” transactions between people until NGDP is at the desired level.

Incidentally, this is why I think the idea of NGDP targeting is fundamentally misguided, as are the people who conclude it’s a reasonable solution.


Bitcoin is fully traceable, in the sense that you can see all transactions and for each transaction you can see the amount and the addresses of the sender and recipient. (An address is a public key, so you don’t necessarily know how they are linked to physical people.)

But how do you tell people who to send the money to without telling someone the connection between your identity and your public key (from which they can trace all further targets of the money from that key)?

comment by jsalvatier · 2011-04-07T15:31:01.827Z · LW(p) · GW(p)

What is the purpose of decentralized currency (the decentralized part anyway)? Relatedly, I do not understand the allure of cryptocurrency, to me is seems like a novelty; I've seen the cryptocurrency -> anarchy link but that always seemed like nothing more than a plot device to me.

comment by blogospheroid · 2011-04-12T09:46:02.868Z · LW(p) · GW(p)

When the authorities want to go after bitcoin and shut it down like e-gold or the liberty dollars people, there is no central place where they can attack. They have to insert half the computation power of the entire bitcoin network to break it.

comment by SilasBarta · 2011-04-07T15:51:24.682Z · LW(p) · GW(p)

This kind of cryptomoney has a lot of the desirable properties of gold: anonymity, difficulty of counterfeiting, restricted inflation rate, high value density.

Sure, people like you might view the "difficulty of abusing those who store their wealth in money (rather than jump on the latest government-endorsed bubble) by inflating away their savings arbitrarily" as a bad thing, but others disagree.

What do you think about the problem of NGDP targets being trivially achievable with no economic effect? Does that suggest to you that the concept of NGDP may not carve reality at its joints?

comment by jsalvatier · 2011-04-07T16:11:30.627Z · LW(p) · GW(p)

1) Of course those are useful things, but lack of them doesn't seem like a serious issue currently, do I underrate such problems?

2) Fair enough. 2b) I would prefer it if you used more neutral language to describe our disagreements. Here's a good reason for you to do this: neutral language makes me less likely to get defensive and thus makes it psychologically easier for me to agree with you.

3) The NGDP thing: obviously I do not view NGDP as fundamental, which is why I usually talk about 'monetary disequilibrium' instead. I do think that NGDP targeting is better than currently used targets, and I haven't been able to think of significantly better rules for the money supply (including 'known increase in the quantity of money', like bitcoin).

comment by Mystfan · 2011-04-05T15:52:27.156Z · LW(p) · GW(p)

But how do you tell people who to send the money to without telling someone the connection between your identity and your public key (from which they can trace all further targets of the money from that key)?

I'm pretty sure Bitcoin at least provides the ability to run as many keys as you choose; if you're really concerned about that kind of tracking, it's quite simple to make a new key for each transaction.

comment by SilasBarta · 2011-04-05T16:02:13.255Z · LW(p) · GW(p)

Yes, but my point is, that still requires you to trust the counterparty not to tell others that you're connected to that key, which would allow them to follow its transactions. You can make it a little harder by having that account spend the money around to other accounts you're connected to, but it's still traceable.

comment by clkvjdlk · 2011-04-28T05:27:24.389Z · LW(p) · GW(p)

It gets worse: Suppose a fraudster swindles someone else out of their money. The victim can go to the authorities with the fraudster's Bitcoin address. The authorities can force Mt. Gox to halt and flag any attempt to trade Bitcoins that, according to the transaction history, were once at the Bitcoin address that was used by the fraudster.

If the fraudster then spends his Bitcoins, and they eventually end up in your hands, and then you take the funds to Mt. Gox, you can end up getting charged with "receiving stolen property", even if the fraudster is never found.

The more likely scenario, however, is that the state attacks Bitcoin by shutting down Mt. Gox and similar services, making it next to impossible to convert Bitcoin into other currencies.