What Do You Want to Know About Bitcoin? And Do You Really Care?

(Photo: Zach Copley)

(Photo: Zach Copley)

We get a lot of e-mails with requests/suggestions for podcast and writing topics. These days, the most popular request by far is for  Bitcoin. I am still not sure we’ll do it but I’m thinking about it. If so, what do you want to know? Please be specific. Also: do you really care? It strikes me that, at the moment, Bitcoin is one of those things that a small number of people care about hugely but that most people couldn’t care less. (Freakonomics readers aren’t, of course, “most people.”) The rapid spikes and drops in value of course invites lots of news coverage but that is among the least-interesting aspects of a cryptocurrency, isn’t it?


Josh

Can you explain if/how the blockchain solves the Byzantine generals problem and how there can be trust in a system when you don't have to trust any of the other actors in that system.

Also can you explore bitcoins value as

A currency
A commodity
A payment network
A shared chronology

Can you explore the cost of running the bit coin network (via electricity) and compare it with the cost of running the visa/mc/Amex network?

Boogie

Bitcoin is not anonymous unless a user takes great pains to make it so. One has to very carefully avoid associating their addresses with their own identity, which is actually pretty complicated unless you’re spending mined coins with no history, or you buy them with cash from a seller on localbitcoins.com. Every transaction is permanently recorded in the blockchain for everyone to see. But that feature is actually what gives bitcoins intrinsic value that things like fiat currency or even gold lack. A bitcoin (lowercase, the unit) is essentially a share of Bitcoin (capitalized, the protocol), which is a creation unique in history. That public ledger allows information that cannot be counterfeited or destroyed to change hands at very low cost. This information can be “money”, but it can also take the form of digitally signed contracts, titles, or deeds. A concept called colored coins takes this even further, allowing satoshis – 1/100,000,000 of a bitcoin – to be encoded as, for instance, a share of stock in some company, thus eliminating the need for a centralized exchange as well as the need to trust some third party to honestly maintain or control the asset. These colored coins would then take on the value of whatever information is encoded within them, and they would be traded as such. The possibilities are really endless. You can think of Bitcoin as being like the world wide web in 1988 – a protocol whose potential is seen by a select few who are working hard to unlock it.

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S.T

Would definitely like to hear Freakonomics' outlook and opinion about the cryptocurrency that is Bitcoin

kleer001

I love Freakonomics! Such lovely transgressive sciencey discussions for the public. So important. Please consider my comment here free as in air :)

I care about Bitcoin because it takes power away from the corrupt banking system and gives the power back to the people. Sure, the people that are curious then able to understand Bitcoin enough to use it, but that network is growing everyday. I believe that Bitcoin will be as revolutionary and as important as the internet its self.

I think the most important thing to keep in mind is that there's 2 different things called "Bitcoin". First there's the payment network, the peer to peer transparent ledger (the block-chain) with super strong crypto, low fees, and irreversibility. That payment network can be used by any merchant with the help of a second party that turns the bitcoins to money so they're not subject to the violent ups and downs of... The second part of Bitcoin, bitcoin the only token that's allowed on the ledger. Bitcoin the token is kinda like a public stock that can be held by anyone and is gifted to the people that work at the company. But since Bitcoin the protocol is decentralized there's no "company". But there are miners and they deserve a healthy dose of bitcoin the token for their hard work, electricity, and support of Bitcoin the network.

I found this article via the subreddit /r/bitcoin

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Baseline

I care about Bitcoin being able to get around AML and KYC laws which cause so much unnecessary friction, cost and lack of privacy to payments in this world. Sure I don't like people using Bitcoin for illegal activity, but I have a strong suspicion that the divide between rich and poor is being maintained by financial controls which are currently in place and that doesn seem like a fair trade to me.

Shaun

I find bitcoins really useful when doing things like donating to wikileaks or things that I support but the US government might not be so keen on.

joe

The economics of bitcoin are fascinating. You should cover it for that reason alone. What is the nature of money? Why has gold maintained a value far above it's non-monetary use value for so long while other assets seem to crash whenever their value rises significantly above their value in direct use? (tulip bulbs, south sea company stock, las vegas real estate) Why does the dollar have value despite the fact that the only thing you can do with it is trade it someone else, and why would they want it if they can only do the same?

milo

Bitcoin would be very interesting! Unfortunately, i don't think it would be very germane to most of your readership; BTC are still viewed as Dollars2.0, when in reality the value of Bitcoin is in the protocol, not the tokens.

For example, if i asked for my salary to be payed in BTC for the next year, either my employer or i would come out a loser in the resulting zero sum game; the only reason either of us would agree is if we were seeking a wager. On the other hand, if i asked my employer to pay my salary to an account in a bank in Zimbabwe, bitcoin would make this request easy and cheap to accommodate. Employer simply converts USD salary into spot price of BTC, forwards to Zimbabawe, i convert BTC at same spot price into the Zimbabwe dollars i desperately crave, and Bobs your monkey's uncle. The whole process would take 5 minutes and cost less than 0.5%.

I would like to see Freakonomics add ress one of the major criticisms of Bitcoin, one that touches on all macroeconomic theory: Deflationary currencies are intrinsically nonfunctional.

There have been many studies of the hyperinflation of the Wiemar and numerous South American cases. How about a case study of what happens in a deflationary environment?

Also, since i am already imagining you addressing this topic, please be so kind as to addess the important nuance of the difference between the cases of being FORCED to use a deflating currency (e.g. all taxes MUST be paid in BTC), and the case of having the OPTION to use a deflating currency.

P.S. Loved the books, looking at them on the shelf as i type. Some of us still read print media

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Tom

I would very much like to see a BitCoin blog. I'm an ASIC miner operator and am very much interested in seeing bitcoins as a stable currency in its own right, but the aforementioned spikes in value make it more usefull only as a medium of exchange. In other words: People set prices in dollars and then convert to the day's bitcoin exchange rate. It should be the other way around. Freakonomics keeps a unique perspective on pretty much everything they cover and would it would be valuable to hear their views on what bitcoin can do or what it should do. Afterall, BitCoin has been designed to have a predictable supply and that should give rise to stable prices (more so than the ever falling dollar), but that hasn't been the case. So, I put it to freakonomics: Where is bitcoin going? How can we change that direction if we don't like it.

Alec

You're right that most people don't care about Bitcoin at all. It's beta software and the units of account have highly volatile price while the technology is somewhere in the steep curve of the adoption phase.

Most people won't care until the technology is evolved enough that they can use it very simply (no keys or complicated wallet and security management etc.) and when there are truly useful services wrapped over the protocol.

I care because I find the technology and social experiment very fascinating. It doesn't hurt that historically interest in bitcoins for most people (myself included) just happens to have been very lucrative.

If the data is available I'd be interested to hear your guys' thoughts on Bitcoin's ratio of spending and transaction velocity to price movement and how this aligns or doesn't with various popular theories on effects of inflation and deflation on a currency/economy (deflationary spiral, "hoarding" being detrimental to the currency and whatever else fits here).

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Charles

Is the price volatility of bitcoin due in large to the absence of options payable in a fiat currency?

What is the value of the public ledger? Is it like being able to trace a dollar through the entire economy?

What is the benefit to businesses/people accepting bitcoin in terms of reducing interchange fees, or other benefits?

What percent of GDP is currently paid for existing electronic transactions, which could be accomplished with bitcoin, such as an ACH draft, interchange fees, remittance fees?

Would it be more efficient to transition electronic transfers to a decentralized global system? or is it better for some reason to have a confederation of different electronic payment systems?

Neal Gafter

I'm most interested in the deflation vs inflation aspect. Bitcoin was designed with a strictly limited amount that can ever be created. As the economy grows and coins are lost, this is deflationary.

Conventional fiat currencies today are strictly inflationary, with the Fed, for example, targeting a 2% rate of price inflation. The pro side of this says that it stimulates economic activity, which is good. The con side says that. among other problems, this is a transfer of wealth from the poor (whose meager savings are reduced in value by 2% each year) to the rich (whose savings are denominated in things that increase in value with inflation). Moreover it distorts price relationships, which makes the economy as a whole less efficient.

Opponents of deflationary currency cite the following scenario: everyone will hoard their currency rather than spend it, because they expect it will be worth more tomorrow than it is today. That will result in a "collapse" of the economy. Deflationary economics are associated with recession/depression. However, that doesn't jibe with the observed "wealth effect", where an increase in wealth appears to translate to increased spending. See also .

Other interesting topics:

The bitcoin system was designed to create a number of incentives among its various participants, which create a positive feedback loop encouraging the success of the system as a currency. What are those incentives and how are they working?

What are the economic/financial problems bitcoin was designed to solve, and how is it doing on that? See .

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Ross Gemuend

What do I want to know?:
One of the most common questions I hear about bitcoin is "what gives it value?" or "who sets the price?" I feel that most people who ask these questions don't really understand supply/demand or what money is - a medium for exchange of value. I would love it if you focused on what money is, how it works, and how bitcoin fits into everything. It would also be wise to point out that "a bitcoin" is not nearly as interesting as the bitcoin network. The bitcoin network is the revolutionary part, regardless of how much value "a bitcoin" has. Here's a great write-up by someone smarter than me:
http://www.reddit.com/r/Bitcoin/comments/1rxmk3/my_open_letter_to_peter_schiff_followup_from_the/

Why do I care?:
I recently had to make two purchases from a company that takes bitcoin in Sweden. I did one with a wire-transfer and the other in bitcoin. The wire transfer cost me $45, a long phone call with my bank (BoA), and three business days of waiting. The bitcoin transfer was free, instant, and hassle free.

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charles

If you do, record this story, will you kindly add a donate button for bitcoin. I'd love to support the show with my internet funny money.