January 17, 2014

Fireside Science: Bitcoin Angst with an Annotated Blogroll

This content is being cross-posted to Fireside Science.

This post is about the crypto-currency Bitcoin. If you are interested in the technical aspects of Bitcoin (WARNING: highly technical Computer Science and Mathematics content), read the following reference paper or check out the Bitcoin category on Self-evident blog . Otherwise, please read on. Citations:

Nakamoto, Satoshi   Bitcoin: A Peer-to-Peer Electronic Cash System. Internet Archive, ark:/13960/t71v6vc06.  (2009).

Friedkl, S.   An Illustrated Guide to Cryptographic Hashes. Steve Friedl's Unixwiz.net Tech Tips. (2005).

Khan Academy: Bitcoin tutorial videos.

Being a techno-optimist (or realist, depending on which metric you use), I can't help but be fascinated by the Bitcoin phenomena. I have an interest in Economics and alternative social systems, so the promise of Bitcoin is all the more attractive. Orthogonal Research is looking into the utility of the Bitcoin model (particularly the cryptographic hash function and wagering capabilities) for understanding the evolution and emergence of economic value. 

I am generally skeptical of trends and propaganda. Therefore, once I learned that there are a finite number of Bitcoins in the world, I became unconvinced that Bitcoin could ever replace governmental currencies in the long-term. This inflexibility (which may have its roots in representative money and goldbug psychology) is one potential cause for periods of Bitcoin deflation (e.g. the value has gone up relative to real-world goods and services). This deflation has increased the hype of mining opportunities, as mining activity for high-valued Bitcoins resembles a gold rush. Conversely, Bitcoin is also vulnerable to bouts of severe inflation, which has occurred quite recently due to its use in major criminal rings and the downside of the Gartner hype cycle.

Trouble brewing on Mt. Gox! This is only temporary, though.

A lot of the Bitcoin hype is confusing to say the least. And it is not clear to me if Bitcoin mining is a totally above-board activity (this will be addressed in the articles at the end of this post). Nevertheless, Bitcoin is a significant step beyond virtual currencies such as Linden Dollars. This has been demonstrated by its interchange with conventional money and the trust a critical mass of people have placed in the currency. In addition, its cryptographic features may make Bitcoin (or something similar) a prime candidate as the currency of choice for secure internet transactions.

Below is an annotated bibilography of articles and blog posts on the phenomenon known as Bitcoin mining/trading and its libertarian underpinnings. In this discussion, I have noticed a pattern similar to the public discussion surrounding MOOCs. Much like MOOCs, technology people dominated the first few years of development, and the discussion was almost universally positive. After the initial hype, more critical voices emerged, usually from more traditional fields related to the technology. With MOOCs, these are University professors and instructors, but with Bitcoin the criticism is from financial and economics types.

COURTESY: Hardy, Q.   Bitcoin and the Fictions of Money. NY Times, January 27 (2014).

Annotated Bibliography of Bitcoin: A diversity of viewpoints from academics and journalists, mostly critical. If you want a more blue sky view of Bitcoin, there are plenty of those on the web as well. Hope you find this educational.

1) Kaminska, I.   Wikicoin. Dizzynomics, December 7 (2013).
Proposes a Bitcoin-like system for adding value to Wikipedia, without relying on the rules of Wikipedia. No competition for CPUs, reward people for valuable contributions (rather than content by the word), and new coins create new resources.

2) Stross, C.   Why I want Bitcoin to die in a fire. Charlie's Diary, December 18 (2013).
Bitcoin economy has a number of major flaws, including: high Gini coefficient (measure of economic inequality), prevalence of fraudulent behavior due to scarcity, use as a proxy for black market exchanges, mining is computationally expensive and encourages spyware and theft schemes.

3) 13) McMillan, R.   Bitcoin stares down impending apocalypse (again). January 10 (2014).
An article that discusses the distribution of Bitcoins (and hence inequality) among candidate miners. Read as a counterpoint to article (2).

4) Mihm, S.   Bitcoin Is a High-Tech Dinosaur Soon to Be Extinct. Bloomberg News, December 31 (2013).
A historical survey of private and fiat currencies, and how they work against central currencies. According to this view, Bitcoin represents the dustbin of history rather than the future of currency.

5) Krugman, P.   Bitcoin is evil. The Conscience of a Liberal blog, December 28 (2013).
A skeptical take on the viability of Bitcoin, and a primer on how Bitcoin is similar to a faux gold standard. Is Bitcoin a reliable store of value? Unlikely, given its recent performance and reputation.

6) Roche, C.   The Biggest Myths in Economics. Pragmatic Capitalism, January 8 (2014).
A refresher/primer on the theories (and mythical ideas) behind monetary policy and currency circulation. No explicit mention of Bitcoin but still relevant. Read along with article (5).

7) McMillan, R. and Metz, C.   Bitcoin Survival Guide: Everything You Need to Know About the Future of Money. Wired Enterprise, November 25 (2013).
Comprehensive overview of the Bitcoin enterprise, but nary a skeptical word. Describes the intentionally-designed upper limit on the number of Bitcoin that can circulate, as well as the cryptographic hash which enables transactions and discourages counterfeiting.

8) Yglesias, M.   Why I Haven't Changed My Mind About Bitcoin. Moneybox, December 2 (2013).
Begins with an exchange of tweets regarding the counterfeiting protections afforded by Bitcoin. Additional discussion about how the currency can be used to evade national currency regulations.

9) Coppola, F.   Bubbles, Banks, and Bitcoin. Forbes, December 30 (2013).
Explores the notion of the "entanglement" of crypto- (e.g. Bitcoin) and state (e.g. Dollars, Euros, Yuan) currencies. If a private currency system is bailed out by public ones, we will end up with a situation like the Lehman Brothers bailout. Furthermore, the uncertainty of Bitcoin as a store of value will undermine the trustworthiness of the currency, which leads to other troubles.

10) Kaminska, I.   The economic book of life. Decmeber 31 (2013).
A blog post which follows up on the Forbes article by Coppola. Is Bitcoin a harbinger of the eventual "definancialization" of money? In the digital world, thousands of digital currencies might exist side-by-side. The connections between the futurist/extropian notion of "Abundance" and crypto-currencies are also explored.

11) Salmon, F.   The Bitcoin Bubble and the Future of Currency. Medium, November 27 (2013).
A historical and speculative take on the current Bitcoin bubble and the future of money. Is Bitcoin the future? Probably not, but may very well point the way ahead.

Hype vs. valuation: a Month-long comparison.

12) Authers, J.   Time to take the Bitcoin bubble seriously. FT.com, December 11 (2013).
Argues that Bitcoin is now a serious contender as a crypto-currency due to attention paid by Wall Street and major investment firms.

13) Liu, A.   Is it time to take Bitcoin Seriously? Vice Motherboard (2013).
A review of Bitcoin's place in the contemporary social and financial landscape. Is it time to take Bitcoin seriously? Many people already are. Make points that are complementary to the discussion in (12).

14) Gans, J.   Time for a Little Bitcoin Discussion. Economist's View, December 25 (2013).
A re-evaluation of one Economist's view of Bitcoin. Very thoughtful and informative.

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