Bitcoin's appeal reaches from left wing critics, "who perceive the state bitcoin banking sector as representing increase same elite interests, [ Posted April 8, 2: Technical interview with Gavin Andresen about BitCoin. Everybody can see the code that changed; people could simply refuse to download the difficulty version of the software. In such a case, next additional dates is used, returning the change back to the payer.
Retrieved 23 September The blockchain is a public ledger that records bitcoin transactions. While Jihan continues to mine Bitcoin Cash and sell his mining rewards, he primarily mines Bitcoin as this is where he makes most of his money. Ole Not at all. As a counter point Casey 30 April And it's also being released as open source.
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Eventually, credit cards and checks might no longer be accepted -- everyone would insist on being paid with bitcoins. Proponents of local currencies say they difficulty the community's economy increase keeping money next the area, but critics dismiss them as bitcoin gimmicks, tantamount to protectionism. We'll go into much more technical detail later on why that actually works. I'll just speculate for a minute; thinking off the top of increase head. They wouldn't be accepted. In this instance, it could be easier next store dates BTC on an exchange like Difficulty because they will do the bitcoin protection for you before even have access dates your B2X coins.
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You may not agree with one side of the argument, but it does not make it invalid, it just makes it different to yours. There may also be valid technical arguments back; I have done my best to write something as a non-techie, which other non-techie investors can understand. Believe me when I tell you, the majority of people now invested in Bitcoin have no idea how this stuff works and don't care, they just want fast, low-cost payments.
Firstly, I want to thank Chad Lauterbach for helping proof this article; he is one of the resident miners in my Facebook group. Secondly, I wrote another article on Saturday focusing in on why the futures market will destroy B2X before it launches.
In that post, I highlighted a couple of essential terms worth knowing, which I have included below but added to:. It is the simplest and easiest to understand explanation of how the Blockchain works that I have read.
In its purest form, the blockchain is a linear collection of blocks which collect records of transactions. Everyone in the network keeps a record of all the transactions in the block and a block is closed by solving a complicated mathematical equation, this is called mining. Once the block is closed, it is sealed, can't ever be edited and a new block is created. The Bitcoin network is maintained by nodes, also known as a 'full client', which is a computer running the Bitcoin software nodes and thus participating in the network by validating and relaying transactions.
A fork happens when there is a change to the rules within that software. There are two types of fork possible, a soft fork and a hard fork and they differ by what the rule changes in the software are:. A fork almost only ever occurs as a planned event where an individual or group wants to develop Bitcoin in a way which is different from the current software, but they can't get agreement from the entire community.
It is a political disagreement over the Bitcoin rules, for example, the size of blocks. If enough of the network decides to start mining this new version of the software, Bitcoin will fork, and the chain will split, in this scenario, we now have two chains and essentially two separate coins.
Occasionally forks happen for short periods of time without being either a hard or soft fork. I am going to ignore the Bitcoin Gold fork, for now, I discuss this at the end of the article. I am going to focus on the B2X fork which is a result of the raging debate within the Bitcoin community about how to address scaling. I am going to explain this in the simplest way I can. Bitcoin has a scaling issue, in that each block can carry a maximum of amount of data.
If a block is 1MB, therefore 1,, bytes and a transaction will use bytes of data. Consequently, each block can handle around 2, transactions. A new block is mined every 10 minutes, thus seconds which means that Bitcoin can process 3. If you compare this to PayPal which can handle transactions per second and Visa which can handle 1, transactions per second you can see that Bitcoin must compete on these numbers.
Once a transaction is made on the Bitcoin network and has been validated by the nodes it sits in something called the memory pool also known as the mempool.
Think of this as a holding area for transactions where they wait here for a miner to pick them up and add them to a block to be mined. If when miners are adding transactions to a block, and it reaches its 1mb limit, then any other pending transactions need to wait in the memory pool until the next block.
The issue this causes is that when the blocks are filling up, the miners will increase their fees for including transactions within the block, and therefore it becomes a supply and demand bidding war for having your transaction included. What this means is that for small transactions the old cup of coffee argument , either the transactions do not get picked up because the fee offered is too low or the fee becomes too high to justify the transaction.
Therefore, the Bitcoin use case will only support large transactions as it is cheaper and quicker to use cash and cards for small ticket items.
It is clear with this that high transaction fees are only within the best interest of the miners as no user wants to pay more for transactions than they have to. As such there will always be a conflict of interest allowing miners to lead the scaling debate.
This may change in the future; the Bitcoin software is designed to halve the mining rewards every four years until all 21 million Bitcoins have been minted. We currently have over The block reward is set to halve again to 6. Only at the point when all Bitcoins have been mined, and miners rely purely on transactions fees to support the network should transaction fees change to economically support them. Still, this should be led by the users in a way which makes mining economically profitable but does not allow miners to have full control over network fees.
The big block argument is that we can keep increasing the size of the block to handle more transactions and therefore there is a single record of all transactions kept within the blockchain, and this, by itself, is not a long-term solution as it can increase centralisation. To understand this, we need to understand how mining works. The following explanation from the Economist is good edited as the block reward has changed since this was written:.
Forcing miners to solve puzzles to add to the ledger provides protection: The miners compete to solve these puzzles with hashing power. Thus the more power they have to crunch the numbers, the more likely they are to solve the puzzles and receive the mining rewards. Successful mining comes down to scale, and scale comes from money and cost of power, as such, mining has become increasingly centralised around large operations.
You can see the mining pools below and read more about them here. Lots of the mining operations work in pools, whereby lots of miners work together and share the mining rewards. Miners, and mostly that means mining pool operators, must run a full node and thus, the software code Bitcoin is using. Therefore, most will support a version which drives their commercial interest rather than the needs of the users and network.
Small blockers want to improve the scaling by doing two things, implementing SegWit and developing off-chain scaling solutions. So, let's start with SegWit, the process by which the block size limit on a blockchain increases by removing signature data from Bitcoin transactions.
On the small blocker's side, you also have a group of developers known as Core, who worked side by side with the Bitcoin inventor, Satoshi Nakamoto to develop and improve Bitcoin and still do to this day. Whalepanda wrote an excellent article on Keeping Stock also pointing out that SegWit2x is an attempt at a corporate takeover of Bitcoin.
One result of SegWit2x is the removal of Core as the Bitcoin development team and replacing it with Jeff Garzik, more on him later, but the following highlights why it is so vital to keep Core in control of the Bitcoin software. Personally, I take a third position; I am both blockers so to speak, but this is where I am likely opening myself up to attack from either side and be accused of being an idiot who doesn't know what he is talking about.
I accept we will need bigger blocks at some point but is best achieved first by making the blocks as efficient as possible and then increasing the block size as required.
I also believe this is what Satoshi would have wanted. Big blockers argue that Satoshi would never have supported off-chain scaling, but now he is not an active part of Bitcoin development it is not wise to argue what he may or may not have wanted I am aware of my hypocrisy here. By departing from Bitcoin, he has forgone his role in its future development. For me, it comes down to the community now and those actively developing Bitcoin.
Also, it is difficult to know what he did or didn't want; I am sure he had many thoughts he shared with others which aren't public. As the Coin Telegraph article highlights, he wasn't able to anticipate everything, for example, mining pools, centralisation of mining through ASICS and so on. He also didn't have all the answers which is why he recruited people around him to support him. We honestly do not know his opinion on the current scaling issue, so I am ignoring these arguments until he appears out of the wilderness to prove his identity and tell us what he thinks.
Even then we might not agree with him. He did though secretly put in the 1MB limit due to some problems he saw by not having a limit, but he questioned about the size he said:. In my mind, Satoshi always expected a block size adjustment at some point. Even with the SegWit optimisation and the next trick Core is working on to decrease transaction sizes they will eventually, no matter which way you slice it, need bigger blocks.
Between 1 March and 1 March , the average number of nonces miners had to try before creating a new block increased from The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.
Computing power is often bundled together or "pooled" to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block.
The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. To claim the reward, a special transaction called a coinbase is included with the processed payments. The bitcoin protocol specifies that the reward for adding a block will be halved every , blocks approximately every four years. Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins [e] will be reached c.
Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation. A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold [64] or store bitcoins, [65] due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger.
A better way to describe a wallet is something that "stores the digital credentials for your bitcoin holdings" [65] and allows one to access and spend them. Bitcoin uses public-key cryptography , in which two cryptographic keys, one public and one private, are generated.
There are several types of wallets. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. With both types of software wallets, the users are responsible for keeping their private keys in a secure place.
Besides software wallets, Internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware.
A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such security breach occurred with Mt. Physical wallets store the credentials necessary to spend bitcoins offline. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions. Bitcoin was designed not to need a central authority [6] and the bitcoin network is considered to be decentralized. In mining pool Ghash. The pool has voluntarily capped their hashing power at Bitcoin is pseudonymous , meaning that funds are not tied to real-world entities but rather bitcoin addresses.
Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" e. To heighten financial privacy, a new bitcoin address can be generated for each transaction. Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin's fungibility.
The blocks in the blockchain are limited to one megabyte in size, which has created problems for bitcoin transaction processing, such as increasing transaction fees and delayed processing of transactions that cannot be fit into a block. Bitcoin is a digital asset designed by its inventor, Satoshi Nakamoto, to work as a currency. The question whether bitcoin is a currency or not is still disputed. According to research produced by Cambridge University , there were between 2.
The number of users has grown significantly since , when there were , to 1. In , the number of merchants accepting bitcoin exceeded , Reasons for this fall include high transaction fees due to bitcoin's scalability issues, long transaction times and a rise in value making consumers unwilling to spend it. Merchants accepting bitcoin ordinarily use the services of bitcoin payment service providers such as BitPay or Coinbase.
When a customer pays in bitcoin, the payment service provider accepts the bitcoin on behalf of the merchant, converts it to the local currency, and sends the obtained amount to merchant's bank account, charging a fee for the service. Bitcoins can be bought on digital currency exchanges. According to Tony Gallippi , a co-founder of BitPay , "banks are scared to deal with bitcoin companies, even if they really want to".
In a report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. Plans were announced to include a bitcoin futures option on the Chicago Mercantile Exchange in Some Argentinians have bought bitcoins to protect their savings against high inflation or the possibility that governments could confiscate savings accounts.
The Winklevoss twins have invested into bitcoins. Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in Jersey in July and approved by the Jersey Financial Services Commission. Forbes named bitcoin the best investment of The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.
According to Mark T. In particular, bitcoin mining companies, which are essential to the currency's underlying technology, are flashing warning signs. Various journalists, [84] [] economists, [] [] and the central bank of Estonia [] have voiced concerns that bitcoin is a Ponzi scheme.
In , Eric Posner , a law professor at the University of Chicago, stated that "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion. Zero Hedge claimed that the same day Dimon made his statement, JP Morgan also purchased a large amount of bitcoins for its clients.
You can have cryptodollars in yen and stuff like that. Bitcoin has been labelled a speculative bubble by many including former Fed Chairman Alan Greenspan [] and economist John Quiggin.
Lee, in a piece for The Washington Post pointed out that the observed cycles of appreciation and depreciation don't correspond to the definition of speculative bubble. It's a mirage, basically. Two lead software developers of bitcoin, Gavin Andresen [] and Mike Hearn, [] have warned that bubbles may occur. Louis , stated, "Is bitcoin a bubble? Yes, if bubble is defined as a liquidity premium. Because of bitcoin's decentralized nature, nation-states cannot shut down the network or alter its technical rules.
While some countries have explicitly allowed its use and trade, others have banned or restricted it. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
Bitcoin has been criticized for the amounts of electricity consumed by mining. As of , The Economist estimated that even if all miners used modern facilities, the combined electricity consumption would be To lower the costs, bitcoin miners have set up in places like Iceland where geothermal energy is cheap and cooling Arctic air is free. The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media.
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods. It will cover studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh. Authors are also asked to include a personal bitcoin address in the first page of their papers.
The documentary film, The Rise and Rise of Bitcoin late , features interviews with people who use bitcoin, such as a computer programmer and a drug dealer. In Charles Stross ' science fiction novel, Neptune's Brood , "bitcoin" a modified version is used as the universal interstellar payment system.
From Wikipedia, the free encyclopedia. Bitcoin Prevailing bitcoin logo. For a broader coverage related to this topic, see Blockchain. For a broader coverage related to this topic, see Cryptocurrency wallet.
Legality of bitcoin by country or territory. Cryptography portal Business and economics portal Free and open-source software portal Internet portal Numismatics portal. The fact is that gold miners are rewarded for producing gold, while bitcoin miners are not rewarded for producing bitcoins; they are rewarded for their record-keeping services. Archived from the original on 7 August Retrieved 25 May Archived from the original on 20 June Retrieved 20 June Archived from the original on 9 January Retrieved 15 January Archived from the original on 20 January Retrieved 30 September Archived PDF from the original on 20 March Retrieved 28 April Financial Crimes Enforcement Network.
Archived PDF from the original on 9 October Retrieved 1 June Archived from the original on 9 October Retrieved 8 October Archived PDF from the original on 21 September Retrieved 22 October Archived from the original on 24 October Retrieved 24 October The Economist Newspaper Limited.
Archived from the original on 21 August Retrieved 23 September Bitcoin and its mysterious inventor". Archived from the original on 1 November Retrieved 31 October Archived from the original on 31 October Retrieved 16 November Archived from the original on 28 November Retrieved 20 November Archived PDF from the original on 10 April Retrieved 14 April The Age of Cryptocurrency: Archived from the original on 2 January Retrieved 28 December Archived from the original on 27 July Retrieved 22 December Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.
Is It Bitcoin, or bitcoin? The Orthography of the Cryptography". Archived from the original on 19 April Retrieved 21 April The Chronicle of Higher Education chronicle.
Archived from the original on 16 April Retrieved 19 April Archived from the original on 5 January Retrieved 28 January Retrieved 2 November Archived from the original on 27 October Archived from the original on 2 November Archived PDF from the original on 14 October Retrieved 26 August Archived from the original on 15 January Archived from the original on 18 June Retrieved 23 April Archived from the original on 11 October Retrieved 11 October Archived from the original on 21 July Archived from the original on 26 March Retrieved 13 October Archived from the original on 15 October And the Future of Money.
Archived from the original on 21 January The second is a bare assertion. He doesn't inflate the currency, he just wrote the original code. If it bothers you, you can even write your own code that conforms to the bitcoin spec, and it will also work.
Adam Gaz "My economically naive expectation would be that the production of food and other basic necessities would become more important at the expense of luxury goods. Generally in an inflationary regime, durable goods and assets rise in price because the dollar isn't a very effective store of value. So you see things like stocks, housing, gold, etc go up in price. I guess one of the main issues with collecting taxes from BitCoins is that, as Andresen says, it need not be nor should in his opinion I believe a universal currency, but one of many competing currencies.
This raises the problem of which currency to tax in and what exchange rate to offer if the gov't excepts multiple currencies. Also bitCoins are not physical, and although physical money is getting rarer, there would need to be developed some kind of card system in order for it to be practical as a ubiquitous currency. One more thing, how would governments deal with national debt? Again, unless BitCoin becomes the sole, unrivaled no serious competitors currency, it would greatly complicate cross country monetary matters.
That is why certain illegal operations have already latched onto BitCoin see their website. Although you can easily track the flow of funds, velocity, etc. Again, very hard to tax. I think De Vany is a very interesting guest and I would love to hear more from him about these topics, and some more about evolutionary fitness too although I'm not running around with a dead deer on my shoulders! I dont think bitcoins or some other e-coin will wipe out national currencies.
The privacy and flexibility that bitcoins offers could be a game changer. Whats to stop you from banking on the other side of the planet? Theres no fees for transfering the money back and forth. Theres no need for even a name and address..
If you dont need a checkbook or cash anymore, then you dont need a local bank with atm machines in your area. I would guess the ability of a particular government to collect taxes would be drastically reduced. Their side business of aggregating your spending habits and selling that off to advertisers or worse, the government certainly would go away..
Ryan, have you read my posts? Banking reaquires trust between the borrower and the lender. And without some type of enforcement, usually by use of the law, banking is impossible. There needs to be punishment for people who dont repay their loans, and there needs to be sanctions and regulations of a bank, else they will gamble with or steal other peoples money.
I cannot believe the ignorance and lack of understanding of finance and economics from many of the supporters of bitcoins. One should expect that you at least have thought these issues through.
Instead it feels like you are lacking basic knowledge. Sure you are smart guys, but the complexity of currency requires study. I have the right to be very negative towards bitcoins, since there are many people who are investing their own money into it, and who dont understand what they are doing.
I dont claim that i understand bitcoin or its future prospects. But at least i know my limitations. And anybody who invest in that currency need to know the huge risks involved. And its clear to me that many of its supporters have no idea.
I expect people who are into bitcoins to be more knowledgeable about econmics than me. But that isnt the case most of the time. I still don't see why bitcoins would make any difference. The government does not collect taxes by tracking money. It uses other mechanisms, such as strict accounting rules, government-registered cash registers, property registers, heavy penalties for undeclared taxes it works like bus tickets -- they are rarely checked, but when it is discovered you hadn't bought one, the penalty is much higher than the price of the ticket.
Money laundering is a different issue, but it is an issue for the police, not the tax authorities. Indeed, bitcoins would deprive the police of one instrument they currently use to hunt down criminals. It's not very effective, though, since money laundering is quite easy even now, at least for big players, thanks to the offshore banking system. It is true that criminals have to get their proceeds into the banking system, but it's sufficient if there is just one entry point.
Some small fry crooks would indeed find life easier in a bitcoin world, but this drawback would be amply offset by greater freedom for law-abiding citizens. I mean, if handguns are legal, would bitcoins be made illegal because they would be a nuisance to the police?
What currency would the Treasury accept for the payment of taxes? Currently it accepts checks drawn on commercial banks, and makes its payments with checks drawn on Federal Reserve banks. If people accepted bitcoins from the government, the government would presumably accept bitcoins as tax payment. However, the spread of bitcoins would be a huge crisis for the banking industry, and since the banking industry has huge influence on the government, I expect the government to resist fiercely.
So, the current democracy deficit would have to be fixed first see, for instance, Larry Lessig: Re everyday use of bitcoins: There is a problem, though: Certainly too long to pay in a shop.
Do you mean internal debt or foreign debt? I think you are confusing two things: Currently the two are indeed wedded to one another, but the bitcoin would change precisely this. The currency we are using now is balances in bank accounts, which come into existence when banks make loans.
Almost all the currency in circulation, which people need to transact with one another, is loans on which banks are charging interest!
Once there is an alternative, lending and borrowing will be decoupled from money creation. The banks will hate this, obviously, but they will still be able to function as lenders. The difference will be that they will be able to lend only the bitcoins that people have actually deposited with them.
The issue of trust between the depositor, the bank and the borrower is not changed by the bitcoin. Of course, I would deposit my bitcoins with a bank only if the bank signed a legally binding contract with me, promising to repay me the bitcoins and some interest later. Same in the opposite direction, that is, if I'm the borrower except that the interest will be much higher ;-. Money is indeed based on trust, but a completely different kind of trust, one which is not based on police enforcement apart from the prevention of counterfeit money, which the bitcoins are much more resistant to than today's money.
Here is how it works: The police and the legal system have nothing to do with it. The fact that we now accept payment in the form of an increased balance in a bank account was never sanctioned by the government and is not subject to legal regulation.
We just do it, because we know that others do it, too. In the first quote you say you will trust a bank paying you back your money as long as its legally binding. In the next quote you say that we shouldnt trust the banks and shouldnt trust payment in the form of bank money. If you are not able to see these contradictions, it validates the comments i made in the post above. It appears as if you dont understand how modern banks works. A bank doesnt keep the money you think you deposit to them.
They lend them out. All what the bank is doing is claiming that it will at any time be able to pay you back your money. Even if you create a bank account in a bitcoin bank and save your money there, the bank is NOT saving or storing your money.
It only claims it is able to pay back your money. There is no contradiction between the two statements you have quoted, but I must apologise for having picked a misleading example. People don't usually put their savings in a current account - only just enough for immediate needs.
It is the banks that lend large sums, and therefore it is the banks that need legally binding contracts, the police etc. The risk I face by having my salary paid at the end of the month into my current account is minor.
Once this is done or earlier, if I have a credit card with the bank , I will spend the money and the balance will soon, all too soon, go down to zero. I don't need the police and the law to give me the assurance that they will not do this. They'd rather do more business with me, and especially with my employer and the rest of their employees, next month and the one after that and so on.
Do I understand how modern banks work? I'm sure there's a lot I don't understand! But the basic mechanics of money creation seem fairly clear to me, thanks to a slim book written by Peter Bernstein nearly half a century ago I mentioned the book in my first post under this podcast.
Is the book inaccurate or out of date? Well, it had a second printing in , with a brand new introduction and a glowing endorsement from no lesser a figure than Paul Volcker himself.
See, that's the trick. That's how money is created. When I use my loan created out of thin air to pay for a new car, the check will merely be deposited with this or that bank, so the system as a whole will not have to pay out anything.
This is based on the trust and confidence shared by all that a check will be accepted as payment. Even the government accepts checks when taxes are paid. Once bitcoins replace balances in bank accounts as the means of exchange, banks will not be able to create money. Secondly, If bitcoins are the currency, I will need the actual bitcoins, not just a number in some bank account.
If I buy a car with bitcoins, I'll pay with the actual bitcoins, not with a check drawn on a bitcoin bank. The latter simply would not be accepted as payment. Banks dont create money out of thin air. They lend the same cash several times. If you have got a 10 dollar bill, 10 bitcoins or 10 gold coins and saves them in a bank, the process is the same. The bank will keep a fraction of those cash and lend out the rest. Thats why its called Fractional Reserve Banking.
A fraction of the cash is reserves. Cash is the base in a currency, and out of that base, money on bank accounts can be created. Because the same cash are been lent out several times, the money on the bank books are many times bigger than the amount of cash around.
Cash is the monetary base of any currency. Banks dont create check money out of thin air but from the monetary base. Banks will create check money out of bitcoins if the bitcoins are the monetary base.
It doesnt matter what base money you have, gold, fiat money or bitcoins. Check money can be created out of all these base moneys. This will be my last post regarding this matter since i dont wanna ruin these webpages with repetitive posts.
Im sorry, but my patience discussing this topic is over. If you dont understand this simple process, i cant help you. I don't want to beat a dead horse either, but let me just say -- not for your sake, if you've lost patience, and certainly not to annoy you -- but for the sake of others who might read this exchange: Money is created by banks out of thin air. Admittedly, the concept is rather tricky and has the flavour of a paradox, but nevertheless this is what actually happens.
Let me close with a somewhat longer quote from Peter Bernstein, to whet your appetite for the whole book. I highly recommend this short and very accessible book if you wish to understand what money really is and how it works. I must say that so far--I'm 24 minutes into the show--it is unfortunate that much of the discussion is about the open source software development model. That issue is basically irrelevant to what is important about BitCoin!
When a commercial bank lends out bitcoins, new money is created. Bernstein is saying the same thing I have said. You seem to be lost in the choosing of words by Bernstein. Because he probably used som literary freedom when he said a banker " can create money out of nothing ".
More accurate is the quote of Bernstein above. Creation of check money is a response to credit expansion. OK, my last attempt.
Imagine there is only one bank. Its vault is empty, it has no deposits and has made no loans. Now, Jones comes to the bank and asks for a loan.
Can the bank give him a loan when the vault is empty and there are no deposits? The bank tells Jones: It sits in Jones's account. Jones now wants to use the loan to buy something from Smith.
Smith takes the check to the bank. A transaction has taken place between Jones and Smith: Jones bought some goods from Smith and paid him with money. Notice that when the transaction took place, the total amount of money in the system did not change: After a while, Smith wants to buy something from Jones.
A second transaction has taken place. Now, for the last act: Does he have the money to do it? So, he tell the bank: I'm repaying the loan. The total money in the system is back to what it was at time zero: Now, take this basic scenario and add complications, such as interest, many banks and many customers, paper currency, credit cards, bonds, the FED, the State Treasury, etc. None of this changes the essence of the money creation and destruction process just illustrated.
The details are complicated, there are various institutions involved, rules and customs etc. These are just facts you have to know, but the logic is not difficult to figure out, though subtle and quite surprising when you learn about it for the first time.
The fact is that practically all the money it lends out needs to be cash and not check money as you use in your example. The check money will soon be transformed to cash because the borrower will spend the money, and other banks wont accept anything other than cash in payment.
Check money are not traded between banks. What loans creates are new demand deposits in other bank accounts. And thats how new money is created. If you read Bernstein one more time, you will realise that lending causes an increase in the overall demand deposits. Now the 20 dollars A and C have in the bank are check money, also called m2. Check money are important and they are considered inflationary. So if banks lends too much it can cause inflation.
You will not avoidthat banks creates money with bitcoins. Because its the lending that creates the extra check money. My understanding in this area is pretty shallow and I have the impression that yours may not be much deeper, so perhaps indeed someone more knowledgeable could shed some light on these issues.
Haven't we by any chance stepped into the old controversy over endogenous money? Ole, Adam Gicz I think there's some confusion in the discussion between different measures of money supply M0, M1, etc.
But as far as fractional-reserve banking I agree with Ole's explanation. Have a look at the Wikipedia articles on Money Supply and how money is created by fractional-reserve banking. Look at it another way: Say person A earns "real money" M0 money supply , deposits it at a bank and the bank gives A an IOU in return in the form of a positive bank balance. The same can happen with bitcoin if anyone would trust an unregulated bitcoin bank.
However there is a difference: With regular money like dollars there is inflation so you need to put it in a bank to get some interest and prevent its value eroding as quickly. If bitcoin has no or negative inflation there is not such a need to put it in a bank. So you'll just about keep up with inflation. When listening to the podcast I knew you had found a topic that would generate a lot of comments.
I think it was an exceptionally good topic, but I remain very pessimistic about bitcoin as a mainstream currency. I see strong signs that it can be a niche method and could be an excellent market to study.
However, my reservations comes from the source of the value created. The amount of bitcoin is arbitary and not based on value created. As the currency grows the conflicting interests are going to be very hard to manage from the controling interest that magnatize the bitcoins prints the money. Thanks for the great podcast and I hope this podcast expands Econtalk as a currency of relm in knowledge. The most important single thing about BitCoin appears to have been missed by some of the commentators.
No person or organization—nor even a large group of people or organizations—can accelerate the production of BitCoins faster than the prescribed rate nor can they slow it. It is even less manipulable than the supply of gold, which people can accelerate by investing in gold-mining. There are other interesting things about BitCoin, some of which you touched on in the podcast, but this is the most interesting one to me. BitCoin is sufficiently important that you should consider getting a different interviewee find someone with a dissenting opinion perhaps?
Here is a graph of the estimated aggregate computational power being spent per second on BitCoin, around the world:. Thanks to the denizens of the bitcoin-dev channel for answering my questions about the current state of the BitCoin network. I applaud any attempts to bring down the Fed - maybe I should not be writing this in public, lest they send the NotHaus brigade to get me - so on that note I like BitCoin. But BitCoin, as described by Andresen, is a flawed system that does not address the basic concerns about fiat currency nor does it add value over gold.
Namely, like any fiat currency, it is created by men, therefore it is controlled by men. Andresen says the 'rules' of BitCoin can't be changed That may be OK when it's run by a gang of benevolent technonerds, but once guys like Hank Paulson get their hands on it - and they would if it became a source of power - they won't need much time to convince the masses that the rate of BitCoin printing needs to increase exponentially to avert various disasters.
It didn't work out for Socrates either. Gold seems "irrational" to intelligent people after a lifetime of indoctrination against it. But it has a number of properties that make it attractive as a currency. Unlike BitCoins, it cannot be created by man, and cannot be controlled by man. Unlike other less "barbaric" seeming candidates units of energy comes to mind , it is fungible, easy to store and transport, and has limited other uses. And doesn't require a phd in number theory to understand.
So I don't see any advantages offered by BitCoin over the status quo. Luckily, gold already exists, you can go buy some today. The BitCoin enterprise might usefully be considered in a broader historical context. After all, private currencies, issued by commercial banks, were common in the 19th century, and exist today in places like Hong Kong I believe. In much of the world, currency then evolved to a commodity-based government-issued monopoly, then to fiat money function not just as a medium of exchange and store of value, but also as a macro policy instrument.
The role of technology in re-introducing competitive privately created currencies competing with government monopoly fiat GMF money is certainly intriguing.
An important question is, from the users perspective, what advantages do BitCoins offer over GMF money? I didn't feel the interview quite answered that question squarely, though a couple of factors were explored: With respect to the latter, there is an arbitrage condition with available dollar investment returns that must be examined.
Another point not discussed though I suspect the answer is whether the government might assert a monopoly right against BitCoin as it recently did in prosecuting Bernard von NotHaus who had created so-called "Liberty Dollars" http: It is possible that it was specific technical features of Mr. The most creative features of BitCoins are, in my view, it virtual nature using distributed computing, and the seigniorage lotttery it uses.
One is tempted to believe that it has found a means of basing a currency to establish trust in its stability that does not suffer from the criticism of commodity-based currencies: But that criticism applies here as well since real, scarce, computing power is required to base the currency see the chart linked earlier by Zooko: Hence, opportunity cost here as well.
Sorry to post so late, but I just listened to last week's podcast yesterday. This was an excellent topic that deserves continued monitoring and assessment. Fractional reserve banking will not be possible with Bitcoin.
If someone attempts that, they will be attempting something very dangerous. There will be blood unfulfilled promises. The initial value that bitcoin brings is its transportability across borders and its ability to hide. Potential customers could be anyone from narcotics traffickers to men who are afraid of the courts seizing their assets in a divorce case.
Also, thanks to the clever protocol, the initial chicken and egg problem is attempted to be balanced out by the fact that earlier adopters can get rich due to deflation. That is the quintessential reason that bitcoin is not a ponzi scheme. In a ponzi scheme, the early adopters get all the value of the scheme.
In bitcoin, the later adopters adopt it because they get much more value many more merchants, much less risk, lower social constraints than the early adopters. The value of the dollar is based solely on the ability of the U. The value of the dollar is in the labor of humans. The value of the bitcoin is based on scarce computing power a resource with alternative uses.
Thomas Sowell calls dollars "Certificates of Labor", bitCoins are "certificates of processing power". This is what the singularity is about: Theoretically, if the U. However- I can't imagine many catastrophes that destroy the U. Recent Episodes and Extras. Extras by Russ Roberts: Extras by Amy Willis: Quote of the Day.
Hosted by Russ Roberts. How do I listen to a podcast? Readings and Links related to this podcast Podcast Readings. Entrepreneurship 53 , Gavin Andresen 2 , Industry Interviews: Follow Russ Roberts EconTalker. Russ, Terrific show once again. I found this particular part very interesting: Posted April 4, 6: How can we donate bitcoins to EconTalk? Posted April 4, 8: Posted April 4, 1: Posted April 4, 2: Another great show Russ. I'd been waiting for you to talk about bitcoins for a while. One thing touched on struck me as presenting a couple of problems, or at least, um, "issues".
Posted April 4, 3: The article below is from the BBC about "The Brixton Pound", a local currency that was launched in , some of the issues mentioned in this article overlap with those of this very interesting podcast: That's just what traders in one London shopping district are hoping for, as they begin accepting a new local currency.
Posted April 4, 4: Gotta confess that there were parts of the idea that I could not wrap my brain around: Posted April 4, 5: Collum Im no expert, but I can answer a couple of your questions fairly accurately I think. Harris The second problem is privacy: Posted April 4, 7: That would be you, if you like. Bitcoin really is utterly decentralized-- anybody can connect their computer to the network and participate, using their computer to try to generate bitcoins.
Collum 2 The exchange rate with other currencies is a huge issue. Posted April 4, Posted April 5, 3: Collum Good questions David. Hope that answers your questions. Please feel free to raise more. Aside to David B. Collum and Daniel on Gresham's Law: Posted April 5, 8: Russ, Methinks you let Gavin off too easy.
Lets compare bitcoins to other "currencies" It shares with precious metals that there is a fixed limit on how much can be produced. This subject seems like a waste of time.
Posted April 5, Alok Why is the amount of bitcoins that the originator Satoshi has, is unknown? Its not like a bank account. I would also like to add my vote to revisiting this topic as time goes on. Ryan There is no central repository of information. Posted April 5, 1: Posted April 5, 2: BZ What stops me from indefinitely issueing IOUs, thus extending uncontrollably the issuance of my own "personal" currency in excess of my actual cash balance my reserve? Jeffry Erickson I think you are right!
Adam Gicz If this is true, then there will be a point in time after which the supply of bitcoins will gradually and permanently decrease -- once the death rate which is roughly stable exceeds the birth rate which keeps going down exponentially.
AHBritton In other words, if BitCoin IS able to disrupt the governments ability to levy taxes, it will cease being able to function as it depends on those taxes for its continued existence, does it not?
NormD A limit of 21M coins??? RFID will put an end to anonymity. Posted April 5, 4: First the Fed buys a bond from a bank by money it have just printed.
Responding to NormD's "bitcoins are borderline evil" because lazy geeks tending computers don't deserve to get rich creating money: Bankers are the only people who should get rich creating money! Posted April 5, 6: I don't think Bit-coin will succeed but hopefully something like it eventually will.
Jeffry Erickson As I understand it, unlike with the dollar, which as you point out can be spent when the physical dollar never exists, a bitcoin cannot be spent unless its electronic manifestation is transferred.
Posted April 5, 7: Steve This idea for a 4 year half-life on currency generation rate is arbitrary and ignorant. Posted April 5, 9: Daniel and Adam Daniel writes: Daniel "Ignorant and arbitrary" is probably too harsh. Posted April 6, Ole First the Fed buys a bond from a bank by money it have just printed. Posted April 6, 2: Posted April 6, 3: Posted April 6, 4: Posted April 6, 6: Just a comment on the nature of many of the other comments here.
Posted April 6, 7: Adam Gicz, I guess one of the main issues with collecting taxes from BitCoins is that, as Andresen says, it need not be nor should in his opinion I believe a universal currency, but one of many competing currencies.
Do you not see a problem with these issues? Posted April 7, 2: Posted April 7, 9: Posted April 8, 4: Posted April 8, 5: Same in the opposite direction, that is, if I'm the borrower except that the interest will be much higher ;- Money is indeed based on trust, but a completely different kind of trust, one which is not based on police enforcement apart from the prevention of counterfeit money, which the bitcoins are much more resistant to than today's money.
Adam Gicz Quote 1. Its the process of lending that creates bank money. Posted April 8, 6: Posted April 8, 7: When I use my loan created out of thin air to pay for a new car, Posted April 8, 8: He would deny any connection with such a printing press operation and would insist that he is no more capable of creating money than a savings bank or an insurance company or any individual he can think of. In fact, whether he is the fishy-eyed type or the more friendly model, the banker would point out that he cannot even lend or invest all the cash that he has, because he must always have enough on hand to meet the net withdrawals that his depositors are likely to make.
No matter how we cross-examine him on this point he is sure to be adamant about it. He would stress that his bank loses cash when he has to pay for the securities he buys. He would point out, too, that borrowers usually draw out the proceeds of loans in short order, for no one borrows money and pays interest on it for the sheer joy of seeing a larger bank balance.
They soon start writing checks and, when they do, his bank will be losing cash to the banks in which these checks are ultimately deposited. Then has our analysis up to this point been incorrect? Can we really say that new money is created when commercial banks make loans or buy securities just because demand deposits go up as a result?
If the banker loses cash when he lends or invests, how then can he be creating money? No, the analysis is not incorrect. New money is created in response to credit expansion by commercial banks.