Bitcoin and Gresham’s Law

Another day, another mainstream news outlet showing off its inability to reason about Bitcoin economics. Today we have Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero in the Wall Street Journal where James Mackintosh informs us that, among other reasons, Bitcoin will ultimately be worth zero because:

Even if bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum that bad money drives out good. Given the choice of spending inflationary government-issued money or something which holds its value, everyone would spend the bad paper stuff and hoard the bitcoin.

That bad money would drive good money out of the market is a pretty amazing statement if you stop and think about it. Why would this be? In every other instance good products drive bad products from the marketplace. Yet money is presumed to be the exception to this rule. Mackintosh tries to pin this phenomenon on deflation, however this argument relies on poor reasoning is very easy to dismiss. I wont rehash the arguments here but will point you to a couple previous posts of mine [1, 2].

But more importantly “bad money drives out good” isn’t Gresham’s law! To understand the correct version of Gresham’s law, give the following video a watch:

Why Spend Bitcoin?

Nothing causes people to lose their economic sense more than Bitcoin. I’ve had quite a few opportunities to highlight economic fallacies on this blog over the years. This time I’m going to call out Fred Wilson for this comment:

And that point is that you can’t keep spending something that goes up as much as Bitcoin has.

So I don’t spend Bitcoin anymore.

I hold it.

It’s a store of value now.

That much is clear.

The Bitcoin Cash Roadmap

It has been exactly once month since Bitcoin Cash split away from Bitcoin Core and by any reasonable standard it should be considered a success. At the time there was a huge amount of uncertainty. Would anyone support the new fork? Would it trade on any exchanges? Would it survive the initial difficulty adjustment? Would anyone mine it? The answer to all these questions turns out to be yes. And while some of the loud voices in the Bitcoin community went on the record predicting that Bitcoin Cash would be worth “not even a dollar each”, it’s currently trading around $622 and has a $10 billion market cap making it the third most popular cryptocurrency.

So where does Bitcoin Cash go from here? While I’m personally not affiliated with Bitcoin Cash per se, though I did write a Bitcoin Cash wallet, I’ve been following it closely enough to report on what seems to be a growing consensus around it’s long term roadmap. And I have to say, while the roadmap is probably more risky than Bitcoin Core’s, it’s certainly much more ambitious and much more capable of delivering meaningful scaling if successful.

Bitcoin Cannot Be Only a Store of Value

In December I wrote an article, Can Bitcoin Exist Only as a Store of Value?, in response to what I perceived to be an increasing belligerence among some people in the Bitcoin community who argue that Bitcoin doesn’t need any actual use cases because “store of value” is the use case. In that article I attempted to show that there is no such thing as an asset that has no utility except as a store of value. A sentiment recently echoed by Rick Falkvinge on Twitter:

You cannot have something be a store of value, except as a _secondary_ function, where a primary function generates ongoing demand.

— Rick Falkvinge (@Falkvinge) June 7, 2017

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Sadly, the recent run up in the Bitcoin price has caused people to double down on the store of value argument, seriously jeopardizing Bitcoin’s future in my opinion.

So let’s revisit the Store of Value. Maybe I’ll do a better job explaining it this time.

On Craig Wright

I’m probably risking being run out of polite society with this post but I figured I would write up my thoughts on the Craig Wright saga. My purpose here isn’t to argue that Craig Wright is Satoshi Nakamoto, I don’t think anyone can say definitively one way or another, but rather to highlight what I view to be non-critical and/or biased thinking by most people who have commented on it.

Before we start let’s review some epistemology. Often times when we’re evaluating conspiracy theories, 9/11 was an inside job for example, we’re confronted with theories that are not falsifiable and thus we can not employ standard methods to determine truth or falsehood. In the case of 9/11, there is literally no evidence that can disprove or falsify the theory that the U.S. government was behind the terror attack. Any evidence that comes to light that seems to falsify the theory just ends up pushing the conspiracy back one layer. If someone were to testify that they watched Mohammad Atta plan and execute the attack from start to finish without outside influence, well that that guy must be lying! He’s in on the conspiracy too! And thus the conspiracy gets pushed back one layer deeper and can never be falsified.

The Prospects for a “Bitcoin Standard”

The current block size debate involves not only heated debates about how best to scale Bitcoin but, more fundamentally, what Bitcoin should be. There are a wide range of views on this topic. Some want Bitcoin to be a high speed payment system. Others, believe it or not, want Bitcoin to be nothing more than a speculative investment asset and tell people to just use dollars if they want to buy things. One view that is pretty widely held is that Bitcoin should be a “base layer” for higher level systems (such as banking or payment systems) built on top of it.

As Greg Maxwell, the primary champion of this view, put it:

A censorable or reversible base system is not very suitable to build powerful upper layer transaction processing on top of… and if the underlying asset isn’t sound, there is little point in transacting with it at all.

Can Bitcoin Exist Only as a Store of Value?

As the block size debate has raged on I’ve noticed more and more bitcoiners (usually on the small block side), argue that Bitcoin should first and foremost be a store of value with all other use cases being secondary at best. In this view, being able to use Bitcoin as money ― that is, exchanging it for goods and services ― is a nice-to-have feature but not a necessity. If we fast-forward 30 years into the future and find that Bitcoin is only used as a store of value, and nothing else, it will still be a success. This view seems to be, if only implicitly, guiding some of Bitcoin’s development efforts.

In this post I’m going to argue that Bitcoin cannot exist as a pure store of value with no other form of utility. Indeed I’m going to argue that there is no such thing a pure store of value ― an asset whose only demand stems from people looking to “store” value. And should Bitcoin go down the road where much of it’s useful attributes are either deprecated, limited in usefulness, or just too expensive for most use cases, then Bitcoin cannot function as a store of value and indeed will lose most of it’s value.

3 Common Sense Solutions for Ending Police Violence

I assume everyone reading this already knows that the United States has a major problem with police violence. In particular police wielding excessive force, up to and including killing people, on a semi-regular basis. The Black Lives Matter movement is a direct response to the seemingly unending stream of African Americans unjustly killed by police, but African Americans aren’t the only victims of the police. Other racial minorities as well as whites are also killed in large numbers. Killedbypolice.net has the current body count at 746 through mid-August 2016. That number is only deaths and does not include people who were unjustly shot, tased, beaten, or in some way victimized by the police.

Addressing the root causes of the problem likely requires radical changes that we aren’t likely to seen any time soon. So with this post I’m going to present several solutions to better align the incentives of the police with the needs of our communities and to reduce the instances of physical altercations between the police and members of the general public. While these proposals are a fairly dramatic departure from the way things are currently done, I hope that reasonable people would take them seriously.

To The Moon With Larger Blocks

I’ve written a number of articles as of late that are related to the bitcoin block size debate but have never really laid out my reasons for supporting an increase. This occurred to me while reading Greg Maxwell’s trip to the moon reddit post.

In that post Greg more or less gave his reasons for not supporting a block size increase. It comes down to:

1) Bitcoin can’t handle transaction volumes similar to credit card companies without payment systems layered on top of it.

2) Attempting to increase transaction volumes without using these layered solutions makes bitcoin less secure.

Rejoinder: Soft Forks Are Safer Than Hard Forks

This is a bit of a rejoinder to Peter Todd’s blog post, Soft Forks Are Safer Than Hard Forks, which I assume was a response to my previous post on soft forks.

I’m happy that the issue is being discussed more and it seems more people are questioning the appropriateness of softforks. Or at least enough people are questioning them to provoke a response from supporters. I’m open to changing my mind. Bitcoin development isn’t (and has no reason to be) as partisan as, say, political ideology, but Peter’s blog post didn’t convince me.

If you recall from my original post I stated that the primary reason why we are told softforks should be preferred over hardforks is because with softforks the chain converges while with hardforks it forks.

I proceeded to give several reason why I believe that conventional wisdom is wrong: