Digital Gold: Bitcoin, money and drugs

I enjoyed Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money partly because it makes one question long-standing assumptions. Wences Casares, an Argentine Bitcoin pioneer, noted that “The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money. … We use it in jewelry because it’s very expensive. It’s not expensive because we use it in jewelry. … You put the ledger on your neck to show power and wealth.” Debt: The first 5000 years is referenced as the source of the idea that “barter was never common and money was actually an evolution of credit–a way of tracking what people owed to each other.”

If you’re interested in learning about the criminal mind, the book contains a detailed history of Silk Road and the government’s attempts to hunt down the operators. (Silk Road was facilitated by Bitcoin, though not related to the currency any more than street drug dealers using $100 bills are related to the U.S. Mint.)

There is a good explanation of Mt. Gox, a huge success despite the spectacular incompetence of its operators (you’ll hate Bank of America less after you read about what it is like when amateurs run a bank’s IT systems!). It is also kind of inspiring, in a way, because it shows that a huge factor for career success is to be in an industry with rapid growth.

Wences Casares gives a good explanation for why Bitcoin is important: “You can call someone in Jakarta on Skype. You can see them and you can hear them and there’s a synchronous connection with a lot of bandwidth. … And you hang up and you want to send them one cent and that’s not possible. … It should be a lot easier to send a cent than to see video and audio.”

10 Comments

  1. Paul Sas

    July 31, 2015 @ 2:16 pm

    1

    Casares is the most interesting/entrepreneurial voice in the book. He’s also seasoned by Argentina’s collapses.

    There’s an interview with him that’s recently up on Econtalk:
    http://www.econtalk.org/archives/2015/07/wences_casares.html

  2. Eric

    July 31, 2015 @ 2:59 pm

    2

    Presumably gold became money because it was desirable for aesthetic reasons, it is durable and its supply is relatively fixed (even in times of scarcity/high prices, finding and exploiting new gold mines is difficult). The first criterion makes holding gold desirable because it is demanded for jewelry and ornamentation, factors independent of its monetary use. The latter two criteria make gold a good store of value because supply is relatively fixed (so a spike in supply will not devalue current savers’ holdings) and because individual hoards will last for a long time. The fact that small amounts of gold are worth a lot makes gold a convenient medium of exchange.

  3. BillG

    July 31, 2015 @ 3:31 pm

    3

    Didn’t gold become valuable because it is pretty, durable (never rusts or decays), and because it takes significant work to extract grams of gold from tons of rock? It’s value is so obvious only an economist could miss it.

  4. Izzie L.

    July 31, 2015 @ 4:25 pm

    4

    I don’t think you need bitcoin to send someone 1 cent in Jakarta. I buy lots of little knicknacks (cables & connectors,etc.) on ebay from China and often send as little as $1 (using Paypal) and the transaction costs are only a couple of % and the currencies are (unlike bitcoin) stable in value and accepted everywhere and the risks (unlike bitcoin) of the money just disappearing are very low. Possibly bitcoin is needed in sh*tty countries like Argentina because if you try to send dollars the government will try to steal them from you or prevent you from taking them out of the country, etc. but anywhere with a non-sh*tty government and where you are not selling drugs, plain old hard currency works just fine.

  5. paddy

    July 31, 2015 @ 10:09 pm

    5

    Gold is durable, is of limited quantity, reacts with very few chemicals, is easily worked (when pure it is a soft metal), can be beaten into very fine, thin sheets, and there is even some evidence that it is anti-bacterial.

    Most importantly, when compared to fiat currencies, governments cannot “print” up more gold, the way they can print up Euros, dollars, yen, renminbi, etc. In ancient China they used silk imprinted with the emperor’s seal as currency – of course he could print up as many as he wanted!

  6. Pete Dushenski

    August 1, 2015 @ 12:14 pm

    6

    Phil,
    Wences’ explanation for why Bitcoin is important isn’t quite as accurate as it may appear. While sending a penny may be possible on today’s Bitcoin network, this is only economical given the current proportion of timed block reward to transaction fees being so heavily weighted towards the former. In the future, transaction costs are very likely to increase, making smaller transactions less cost-effective. As such, Bitcoin’s power rests moreso in its ability to send $10,000,000 of value near-instantly, uninterdictably, pseudonymously, and of a finite and counterfeit-proof resource than it is in the low transaction costs afforded by the distributed network as it stands today.

    Paul,
    That was an interesting EconTalk episode to be sure. It was a useful reminder just how whacked Wences is and just how much trouble Xapo both faces and represents.

    Eric,
    A spike in supply will always devalue current savers’ holdings. See what QE’s done to bubble up the housing and stock markets.

    BillG,
    Yes, gold, like Bitcoin, is all about the work. Gold is unfortunately prey to large new finds, however, whereas Bitcoin is mathematically deterministic with a self-adjusting network that adapts to the increased efforts of miners to create new coins. As such, new bitcoins are always mined at an average rate of 25 every 10 minutes presently. By this time next year, however, only 12.5 btc will be mined every 10 minutes…

    Izzie L.
    You’re right about the nickle and dime transactions, for which PayPal is fine. However, you’re incorrect in assuming that there presently exists such a thing as a ‘non-shitty government’. All nation states extant have capital controls and illegal substance policies and are all too happy to enforce them so that you keep using their shitty scrip while supporting their phriendly pharma phriends to the exclusion of any other. Also, as mentioned above, Bitcoin isn’t about the pennies. It’s about the millions and billions. That’s where it makes all the difference.

    paddy,
    Governments unfortunately CAN print gold to the extent that a monopoly on force is required to protect and secure gold reserves. Gold’s physicality bug – and make no mistake, for physicality is a severe limitation in the implementation of gold as sound money – means that only state-level and near-state-level actors can secure the stuff. As such, what’s traded are paper promises of delivery for ‘gold’ ; delivery that can never occur for anything more than a few kilos due to the inherent risk and cost of effectively securing it. Bitcoin, of course, resolves this mathematically, digitally, and weightlessly and therefore allows individuals to control their wealth, and thus their destinies, for the first time in history. It’s no wonder some people are so excited by it!

  7. philg

    August 1, 2015 @ 12:24 pm

    7

    Thanks, Pete. Once all 21 million Bitcoins have been mined, what incentive will people have to verify transactions? From reading the book I got the impression that it is the miners who invest the effort and computing power to keep the blockchain going and verified. Once there is no mining who will do this and why?

  8. Pete Dushenski

    August 1, 2015 @ 3:16 pm

    8

    Phil, good question. While this is far from a solved problem – and in theory won’t be faced head-on for more than a *century* from now, around the year 2140 AD when the last satoshi is mined – the scales between block rewards and transaction fees will tip towards the latter far before then.

    As you may well be aware, it’s worth reiterating for your readers that the block rewards (earned by miners in exchange for transaction verification) halves every ~4 years (every 210,000 blocks, to be more precise) from the baseline block reward level of 50 bitcoins per block established in 2009. As such, more than 20/21 mn bitcoins will be mined within the *first twenty years*. It’s truly a gold rush, this.

    Going forward, as ever, Bitcoin will be controlled by a combination of market incentives and pure altruism. Nodes relaying transactions (but not mining) are not directly financially motivated other than by the value inherent in promoting the health of the network and thus the underlying investment of the node operator. Conversely, miners are entirely financially motivated and will continue to be thus. What this means in the years (and blocks) to come is that miners will be increasingly motivated by transaction fees to the point where they will reject transactions below some threshold as determined by operating costs and the competitiveness of the mining environment.

    There’s certainly room for an increase in miner fees. While the current miner fee is in the range of 0.0001 BTC, Bitcoin would be every bit as revolutionary and every bit as sustainable if that fee increased two full orders of magnitude to 0.01 BTC. Even at that, there would be no better means of transferring large quantities of wealth safely and securely.

    This being said, to your question as to what happens when ‘miners’ have nothing left to mine, well, even though they’ll keep working to verify transactions in exchange for fees, I suppose we might stop calling them ‘miners.’ Though I’ll leave replacements titles as a project for my great-grandchildren.

  9. Patrick O'Keefe

    August 1, 2015 @ 4:25 pm

    9

    Hi Philip,
    After the last Bitcoin is mined, there will still be transaction fees, but it’s not clear if that will be a sufficient incentive to keep the party going.

    http://bitcoin.stackexchange.com/questions/5275/what-will-happen-to-mining-after-the-20-999-999th-bitcoin

    http://www.reddit.com/r/Bitcoin/comments/163kdd/what_happens_when_all_21_million_bitcoins_have/

  10. Eric

    August 4, 2015 @ 8:48 am

    10

    Pete:

    You are correct. My wording was poor. I meant that spikes in supply that devalue current holdings are unlikely (barring new discoveries of gold-producing regions), not that a spike in supply would not devalue current holdings if it were to occur.

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