The horizon is not so far as we can see, but as far as we can imagine

As Bitcoin Falls Apart

It seems Bitcoin is skirting disaster. They need to increase the amount of memory allocated per block, but have refused to do so. The result is that transactions can take hours to occur. To manage this, fees for bitcoin usage are increasing, to the point where it costs more than a credit card. (Accepted by a lot less people, and costs more. The upside is…?)

One proposed solution is to, oh, increase the memory, but doing so is opposed by three of the five members of the people with access to the code base, and by the Chinese miners who control most of the “mining” which creates Bitcoins. (You can read about the adolescent infighting details here).

Now remember, Bitcoin was a Libertarian experiment in money. You have to “mine” it using computers which do nothing worthwhile except mine it. There is a built-in limit to the number of bitcoins which can ever be created, to  ensure that, in the long run, Bitcoins will be deflationary. All in all, it’s structure was designed to create huge, first-mover advantages and no governance worth speaking of (because that will all just “sort itself out”).

Or, as Daniel put it:


Now, Bitcoin was about the worst way possible to do something which REALLY needed to be done, which is to create a peer-to-peer payment system which cuts out the middleman. You do this so that banks/credit card companies can’t get what amounts to unearned money (the amounts of which are far more than the cost of the service provided), and also so that companies and governments can’t shut down the ability of people they don’t like to send and receive money, a power which has been terribly abused–especially by the US Treasury Department.

Bitcoin, minus Libertarian assumptions, with a bit of decent governance, could have really changed the world in a good way.

It didn’t, though the underlying technology of blockchains may yet. We’ll see about that, because what I’m hearing from the blockchain world is that banks are investing in it highly because they think it may help them with “know your customer,” “anti-money laundering,” and reduce transaction costs (for them, obviously, not necessarily the clients).

A “revolutionary” technology, thus, is likely to wind up reinforcing the status quo, though we’ll see.

Another contributing factor in all this is that, in addition to Bitcoin being a way for early movers to get rich (and for speculation), it’s real use has been primarily moving money in and out of countries.

It is important in China and tolerated, not just because the miners cluster there, but because the Chinese (including many of their officials) want an unofficial way to get money out of the country. Everyone has known China was going to run off the Mercantalist cliff, and people have wanted to get money out of there (the US dollar spiking like it is almost always a sign of flight to safety and presages a global recession).

Bitcoin got its first spike of fame outside tech circles by helping people get their money out of Cyprus when their banking sector had its collapse.

Political theory, which includes economic theory as a subset, matters. Bitcoin was based on libertarian theories which do not and cannot work in the real world. That is why it has not and will not live up to the utopian dreams of its early political backers.

We will see how the Blockchain is used by other cryptocurrencies, and whether any of them manage to create a functional peer-to-peer payments system.

I hope they do.

The failure of the Bitcoin dream (as opposed to the actual creation) doesn’t make me happy. We can use it as a lesson, the first of which is: “get your motives straight,” and the second of which is “Have a workable political and economic ideology.”

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  1. Jeff Wegerson

    So, finish the article Ian.

    You describe this as a “build it and they will come” sort of thing. Something so right for the times that it can succeed on its own. What then am I missing?

    Ok we need one or more skilled coder/designers to create the software. Then we need a group of trustworthy administrators. The second need being, I assume, the political side of the economics. So whom could we trust: some government, some private non-profit or the UN. So who?

    Or could the administration be built into the code? Every holder of the currency gets a vote for the board? I feel left hanging.

    How does such a currency fit into an economic system that furthers civilization?

    Or is this article one piece in your ever expanding pie? I guess I just need to keep reading your on-going cliff-hanger story.

  2. \’Everyone has known China was going to run off the Mercantilist cliff\’.


    Mercantilism was an economic theory and practice, dominant in Europe from the 16th to the 18th century, that promoted governmental regulation of a nation\’s economy for the purpose of augmenting state power at the expense of rival national powers. It is the economic counterpart of political absolutism.

    High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included
    forbidding colonies to trade with other nations;
    monopolizing markets with staple ports;
    banning the export of gold and silver, even for payments;
    forbidding trade to be carried in foreign ships;
    subsidies on exports;
    promoting manufacturing through research or direct subsidies;
    limiting wages;
    maximizing the use of domestic resources; and
    restricting domestic consumption through non-tariff barriers to trade.

    China employs none of these strategies to a greater degree than the US or EU.

    Nor is China\’s economy in any danger of \’running off a cliff\’.

  3. Well of course the *emotional* root of the attraction to bitcoin was precisely the deflationary nature. Bitcoin fans were the next generation of gold bugs. That attraction to deflation and loathing of deliberate inflation ties into their contempt for democracy, and then the whole debacle emanates from there.

  4. Erin Gannon

    Libertarians know d*ck about collective action, by definition. And Richard Stallman wept…;-p

  5. V. Arnold

    Apparently Max Keiser hasn’t gotten the message; he’s still bullish on Bitcoin and crypto currencies.
    Thanks for this thread and links…

  6. As someone who has followed the bitcoin space for 6 years, this is total nonsense. Bitcoin is not dead. This is what the fourth time the press has made this claim?

    I leave it to Bram Cohen, father of Bittorrent, to set the record straight.

  7. Ivory Bill Woodpecker

    Again, anyone who tries to pay me in cybernetic funny money will need to find another wage slave. 😆

  8. Bram Cohen’s response, particularly on block sizes, doesn’t make much sense to me. If Bitcoin is going to be used for paying for things, it needs to have stable (and low) transaction fees, lower than what Visa can provide. Are the transaction fees going to remain lower than Visa’s? The “libertarian” solution has no hope of widespread acceptance without having characteristics that allow it to compete with Visa and Mastercard for convenience and affordability. But one of the accusations, as I understand it, is that Bitcoin is in danger of becoming more expensive at a critical point.

  9. Chris

    Ian, just because Mike Hearn writes these things it does not make them true. Don’t believe every alarmist, butt-hurt blog entry. It makes you look really bad and misinformed.

  10. You are wrong

    You could not be more wrong:

    It seems Bitcoin is skirting disaster. They need to increase the amount of memory allocated per block, but have refused to do so. The result is that transactions can take hours to occur. To manage this, fees for bitcoin usage are increasing, to the point where it costs more than a credit card. (Accepted by a lot less people, and costs more. The upside is…?)

    1) It is called blocksize, aka MB per block and has nothing to do with memory or RAM

    2) Transactions do NOT take hours. I just made a transaction that cleared in 1 second, and setled on the blockchain in 5 min

    3) The fee’s are not compareable to Visa or Mastercard. You can send 1 billion right now, today, and pay pennies. You can send 100$ equivalent in Bitcoin and pay pennies.

    Educate yourself and stop thinking that someone that can write on has or gives the full picture.

  11. Mandos,

    Satoshi never said his creation was intended to take on visa. Bitcoin is digital gold – very different. It has all the advantages of gold without the weight. It also has fungibility, ease of transfer, and actually a far more stable and predictable supply. On all those fronts bitcoin is a winner.

    By the way, it’s price is back on an upward trajectory, just like every other time it’s declared dead. I’ve said it before and I’ll say it again, all you naysayers, including Ian, are going to look foolish in the near future.

  12. By the way, the idea that consensus hasn’t been reached on the scalability issue is false. Here’s the list of all bitcoin developers who have reached consensus on the path forward regarding scalability. Every developer I’ve respected in the last year is on that list. The only three that aren’t are the same three – Hearn, Garzik and Gavin – who tried to hijack Bitcoin with XT.

  13. Facepalm

    So much FUD and nonsense.

    OP, how much did you get paid to publish this piece of crap.

  14. Facepalm


    Core is trying to suppress Bitcoin with a too low limit to secure Blockstream’s Lightning Network ambitions.

    If anything Hearn, Garzik and Gavin are working to set Bitcoin free.

    Bitcoin Classic will release soon, 75% of the hashpower and economic majority are already behind it, and it will inevitably end BlockstreamCore’s rule over the network.

    Core has to be dethroned to allow Bitcoin to progress:

  15. Lex

    A little bit too early to make a victory lap. I assume you feel uncomfortable by libertarian ideas and will desperately hold to anything to post a rant without checking the facts. We can say Bitcoin is dead when the price hits rock bottom and nobody makes any transactions.

    As for project governance, the debate is a integral part of a decentralized free society and a way to find optimal solutions for hard problems.
    Only centrally planning body like FED can make foolish decisions without public discussion.

  16. Ian Welsh

    Well, I figured this would bring the Bitcoiners out in force.

    My understanding is with “Facepalm”, except it’s not clear to me that Classic will dethrone. If it does, that’s good for Bitcoin.

    If I got some of the technical issues wrong, well, unsurprising, and I apologize.

    Creating the digital equivalent of gold, rather than a peer-to-peer payment system is exactly what I meant by fucked up political ideology. The world does not need digital gold.

    And yeah, no one paid me. Would that people would pay me large amounts of money to write what I was going to write anyway.

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