"The embrace of Bitcoin is largely driven by dissatisfaction with the modern banking system but the designers and proponents of Bitcoin have made the fundamental and fatal mistake of believing that the problem with modern banking is that paper and digital money have no intrinsic value.
Since digital coins must be created out of thin air the creators of Bitcoin developed an ingenious method of making coin creation take computational power, thus imposing a cost on creating new coins, and allowing them to limit the total circulation of coins.
These measures give Bitcoin an intrinsic value (the cost of creating a new coin) and make inflation impossible by setting a hard limit on total currency issue."
This is just filled with misunderstanding. The purpose of mining is not to give intrinsic value to Bitcoin. It is to economically incentivize a fair system of transacting without centrality. The cost of mining is the price the Bitcoin system pays for distributed, trust-less consensus.
Just like fiat, Bitcoin has no intrinsic value. Just like fiat, Bitcoin is a bubble that seemingly never pops, because it is a collectively imagined means of transacting. A discussion of the disadvantages or advantages of Bitcoin should start with this understanding.
One potential quibble. Fiat currency is given value also because the government can demand taxes in its fiat currency on threat of imprisonment or other government-backed sanctions, and thus come tax time, one better have some fiat's currency on hand. Thus it is a store of value beyond just general belief of its value..bitcoin does not have this.
Agreed, this reasoning about Bitcoin is entirely backwards.
Any discussion of the value of Bitcoin needs to address some of the unique properties is has as a network, namely resistance to Sybil attacks, a solution to the Byzantine Generals Problem, and Nakamoto Consensus.
This article is clearly from the point of view of an economist that doesn't understand in what ways Bitcoin is novel. Without understanding the value that Bitcoin presents, it's not surprising to find it lacking in value.
Don't think this is from the point of view of any sort of economist at all. Exhibit A:
> Inflation is synonymous with a decrease in the value of money which in effect means that inflation is a partial default on the debt contract that money represents.
Actually, the purpose of mining gives Bitcoin value.
The value of gold and silver is that it is a store of value. In order to acquire those gold or silver, it required doing expeditions to search for where they are, it required heavy machinery to mine it out of the earth, it required human labor paid to mine them, it required factories to process them to purity, it required transporting them, etc...
All of that WORK is stored in the value of the gold or the silver to make it rare. This is why they are real money. Bitcoin digitally replicates this using computing power. This is important because essentially it ensures that a BTC has stored value. It is still currency but it ensure banks and the Federal Reserve cannot just print them digitally whenever they see fit.
"Bitcoin developed an ingenious method of making coin creation take computational power, thus imposing a cost on creating new coins, and allowing them to limit the total circulation of coins. These measures give Bitcoin an intrinsic value (the cost of creating a new coin) and make inflation impossible by setting a hard limit on total currency issue."
I think the system is more complex in terms of feedback than that. A miner (Bitcoin or gold) makes a decision, based on the market value of their chosen commodity, and the cost of mining that amount, as to whether to mine or not. As the price goes up, there is a greater incentive to mine, and as the price goes down, there is less of an incentive to mine.
The core difference between Bitcoin and gold is that Bitcoin was designed from the get-go so that the more mining there is, the more secure the coin is. That is, mining makes all Bitcoins lose some value because more Bitcoins are created, but it makes them gain value because the network is more secure.
Gold, on the other hand, presents no such tradeoff -- the mining of gold makes gold less valuable by making there be more of it, but it in no way makes existing or past transfers of gold more resistant to tampering or anything like that.
There is some bidirectional feedback for Bitcoin, though it's hard to estimate the strength of that signal. But for gold, it definitely feels like you're talking about the tail wagging the dog.
Yeah I was thinking the same thing, but that aside it's kind of like some reasoning they have to introduce their thesis. What do you think about that? Like a universal, self-granted credit/debt system?
If I create my own medium of exchange (MoE) it's only valuable to someone else if that MoE can be used to purchase goods or services from anyone in the system. What would incentivize Amazon or my local baker to accept my currency?
This is just filled with misunderstanding. The purpose of mining is not to give intrinsic value to Bitcoin. It is to economically incentivize a fair system of transacting without centrality. The cost of mining is the price the Bitcoin system pays for distributed, trust-less consensus.
Just like fiat, Bitcoin has no intrinsic value. Just like fiat, Bitcoin is a bubble that seemingly never pops, because it is a collectively imagined means of transacting. A discussion of the disadvantages or advantages of Bitcoin should start with this understanding.