Whatever Kurgman says, it is good to keep in mind that he is an economist turned partisan-politics hack. Whatever he looks at, he looks at it from his lens of ideological reasoning. His ideology clearly aligns with the status quo of economic policy, promoting quantitative easing and keeping up the artificial smokescreen of the superiority of the US dollar.

Therefore any competing ideas (e.g. gold, bitcoin) need to be disregarded, especially as economists by now have realized the importance of trust and its cognitive impact on markets.

Krugman isn't being a political partisan hack here. Every mainstream economist from the Republican and Democratic administrations agree that a currency backed similarly to gold (as opposed to a central bank) is not a good idea.

Central planners like central banking? Get out.

Mainstream economists aren't central planners. I don't mean just economists from both administrations. I meant mainstream economists from every school on the US News and beyond.

But Krugman isn't complaining about Bitcoin's monetary policy here; he's complaining about the operation of the network itself. It's a pretty weak argument; he's claiming that the network costs too much without doing any kind of serious cost-benefit analysis, just an inapt comparison to gold coins.

When the entire mainstream media portrays a complex and controversial issue as entirely one sided, this gives you confidence?

"mainstream media" != "mainstream economists"

I'd prefer the opinions of PhD economists with a special emphasis on currency transactions over yours or anyone else's, actually.

Economists who don't agree with Keynes aren't credible because they're not the majority? I prefer science over mob mentality.

Are you serious? Just because you're not Keynesian, it doesn't mean you do not believe in a central bank. Milton Friedman believed in a central bank.

Interesting. I didn't realize the IS-LM model (which is the relatively simple lens Krugman uses for 80% of the reasoning on his blog the past 3 or 4 years) was

(a) ideological, (b) partisan, or (c) a smokescreen.

I thought it was used to analyze the relationship between investment, interest rates, and economic production. It's been able to (for example), explain why inflation would be nowhere in sight in the face of government borrowing or quantitative easing given the current state of our economy. Or why any finite currency (gold, bitcoin) would lead to rampant deflation and thus depression conditions.

Can you please elaborate as to why IS-LM the ideological ruse you claim it to be? Krugman may be a hack, but I start to believe the hacks who are continuously right most of the time, and ignore the ones who are often wrong. Just the empiricist in me.

Can you explain this in more detail for those of us who don't fully understand how bitcoins come in to existence, because it sounds like one of those things that violate some laws of thermodynamics, like the "hydrogen generator" that you strap to your car to increase fuel economy.

I ask because I know I've heard about people building huge computers with lots of expensive video cards for the purpose of mining bitcoins. Why would so much computing power be required to perform a simple task like processing transactions? Isn't there additional work necessitated by the intentional complexity of the mechanics of bitcoin mining?

I don't know very much about how bitcoins are mined, so I'm speaking from ignorance here, but I'm hoping you can see why the layman observer would need more of an explanation than "Because, of course!"

Rather abstractly Bitcoin is a scheme to solve the Byzantine General problem[1]. The problem is, how can we build a trusted history of accounting without knowing which nodes in the network are trustworthy. And the way Bitcoin does this is essentially by letting every miner vote with his CPU power and the history backed by the most computing power wins. Therefore as long as the majority of miners (weighted by their computing power) is honest, you can trust the accounting.

As to the question how Bitcoins come into existence, the miners are in control of the accounting and by design whoever "finds a new block," is allowed to create some Bitcoins (currently 25) out of thin air. The advantage of this is, that even if some very large miner is considering that he could try a 50+1 % attack, he has a strong incentive to stay honest because that way he earns half of the newly mined Bitcoins.

[1] https://en.wikipedia.org/wiki/Byzantine_fault_tolerance

> Therefore as long as the majority of miners (weighted by their computing power) is honest, you can trust the accounting.

As computing power is a function of the expenditure of wealth, this is equivalent to saying "as long as you trust the people who have thrown the most money at having power over the bitcoin system are honest."

Never thought of it that way, but yes. However, those who have thrown the most money at Bitcoin are also those with the highest interest to seeing it succeed.

Sounds very familiar like trusting the entity with the largest arsenal of weapons.

What do you mean by "the history backed by the most computing power wins"? Doesn't each transaction need to be verified by at least 6 miners?

Are you saying that each transaction that is verified has many miners competing to verify it and the one with the most gpu power wins the race? And if so, does that mean that the gpu that won the race an then say it is verified even if to say it is an incorrect transaction would be the truth?

If instead you are merely referring to the 50%> effect, the solution to that is way easier than the potential for abuse intrinsic if the statement quoted above is correct, i.e. simply have more miners.

Bitcoin transactions are stored in blocks, which are then chained together by cryptographic hashes. ( That is, each block contains a hash of the previous one.) To build a valid block, a miner needs to verify that all transactions in the block are valid and solve a cryptographic problem, which requires 10 minutes for the aggregate computing power of the entire network. On the other hand, checking that the block chain is valid is a rather simple task, since it only involves checking if all the hashes are valid.

    B1 -> Bx -> Bx3 -> Bx4      branch (with non valid block Bx)
       \
         ->B2->...              branch with all valid blocks (the miners work on this one)

The trick is then, that the longest block chain (without an invalid block) is assumed to be correct, and the honest miners are all working on this longest chain. ( That is what I meant with 'backed by most computing power.') For a transaction to be verified, there is actually no hard standard but in the Bitcoin paper [1] it is suggested to wait, until the transaction is 6 blocks removed from the newest block, since a malicious transaction could be introduced into the top of the block chain, e.g. at block Bx above. But the honest miners would not accept the block, continue to try to extend B1, and eventually they will find B2. ( And extend this branch.) The attacker ( who is working on the Bx chain) can then perhaps beat the network by luck for a few blocks ( Bx3, Bx4), but assuming the honest miners control most of the computing power at some point they will win. ( It should be noted that AFAIK there are no known deterministic algorithms for creating a valid block. Because of this, who solves the next block is a probabilistic process. So it is not the guy with the most computing power, but some random guy who had a chance proportional to his computing power just like everyone else.)

[1] http://bitcoin.org/bitcoin.pdf

Yes so we are on the same page. The most computing power in the whole ecosystem i.e mining system.

The section on Wikipedia on Bitcoin mining is fairly informative: https://en.wikipedia.org/wiki/Bitcoin_mining#Bitcoin_mining

In short: no, it doesn't really need so much computing power; miners upgrade to improve their relative chances of finding the solution first (which gives them the newly minted coins), and the software automatically increases the difficulty of the process in response. The result is an arms race among miners.

Every time a block is added to the block chain, whoever "solved" that block gets a fixed number of new bitcoins (25 is the current number, I think).

A block contains several pieces of information: a list of transactions, a link to the previous block, some other stuff and a nonce. The nonce is a value used by the mining process. "Solving" a block means finding the value for the nonce that, together with the proper contents of the block, hashes to a hash value that starts with a given number of zeroes. You can't really find a correct nonce any other way than by trying new nonces until you find a correct one, hashing the block each time. This is what the mining process is, in short.

In theory, yes you are correct. But you can't tell me all the computer resources that are spent on mining are required to process transactions. There are a whole lot of wasted cycles, electricity, and other resources.

The resources are required to process transactions securely in a distributed network. You could do the same thing much more efficiently by putting all your trust in a central authority; it's called a bank. But that's not solving the same problem.

Ok, let me rephrase my prior point. If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way? If there is no noticeable benefit from my single PC then the resources being used by that PC aren't contributing to anything of value.

Yes, resources are required, but the amount of resources used far and away exceeds the amount of resources required.

> If I have my PC mining and then disconnect it, does the Bitcoin network suffer in any noticeable way?

Yes, there's a computational power threshold to perform certain attacks against the network, and removing your node marginally decreases that threshold.

Is it necessary? That depends on your priorities and your threat model.

There is a correspondence between the output and the resources consumed. If your output is negligible, then your resource usage was proportionally negligible to the end of providing the network with monetary units.

Your argument neatly cancels out your conclusion.

If you stop paying taxes in a typically sized country, the country's finances do not suffer in a noticeable way, either.

The network is made of the nodes.

Krugman is an arrogant ass. He makes sweeping generalizations about topics he knows little to nothing about all the time.

Not so obvious. The critique is also of the fact that the resources to process a bitcoin transaction are intensive. Yes, I know this is part of the elegance of bitcoin. Elegance by one measure is cumbersome by another.

So you've gone and pointed out that the dollar is worth about 2% of what it used to be.

Sure. A currency's real value is always moving relative to the underlying goods and services produced and exchanged in the economy - if it's not inflating, it's deflating, and it's never really standing still.

The key is a low volatility in that interest rate itself. The dollar's historical average inflation rate, since such records were kept, has been 3.35%-ish, and that rate has gotten much less volatile over time (e.g. 1920 saw monthly rates as high as +23% and 1921 saw rates as low as -15.8%). But since about 1980, it's been pretty level all around.

Bitcoin's value has experienced more volatility during the course of one day as the US dollar had in a whole year DURING THE GREAT CRASH OF 1929 AND LAUNCH OF THE GREAT DEPRESSION.

Maybe some day Bitcoin will come to be the same bastion of stability that the US dollar has been and more. That day is not today.

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Postscript. If Bitcoin is a currency, its rise in value is deflationary. Deflation can be kind of bad sometimes. If you think back to your high school history courses when they were talking about the days that "bimetallism" was a thing during the Panic of 1893, it was because ordinary peoples' gold-backed-dollar-denominated debts and mortgages were becoming more expensive to pay off. "You shall not crucify mankind upon a cross of gold!"

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TLDR: Price stability or STFU