Bitcoin, Considered and Reconsidered

NEW YORK (TheStreet) -- In response to comments to my recent Lost in Translation: A Bitcoin Economics Puzzle, I've put together some answers to some of the more pressing and compelling questions posed by the story. Here goes:

You dismiss the difficulty of solving the algorithm by saying marginal cost of production is near zero. It is very, very hard!

Technology changes fast, very fast. Not only does technology rapidly advance, but it gets cheaper, too.

Let's look at the Univac (1968, cost about $1.6 million): 512k RAM, 1.3MHz speed, 100 MB memory. Takes up the whole room. Any serious research institution needed to have this thing, if they could afford one (and had the space). Graduate students needed to block time in the middle of the night, if they got approval that is, to use this thing.

Compare to the Samsung Galaxy S4 (2013, cost about $500): 2GB RAM, 1.9GHz, 16GB memory, expandable up to 64GB. Fits in my pocket. (And makes mobile calls, accesses email and the Internet, replaces/replicates my iPod, my GameBoy, my TV remote control, and my HP (HPQ) 12C...none of which existed at the time of the Univac.)

The point being, products and problems that seemed unimaginable become possible in short order --technologists, of all people, should know that. Creative destruction abounds! So while today one might think it is "hard" to mine the bitcoin, computing power will advance and it will become "easy" (or "easier," if you prefer) in short order.

There will be barrier to entry (as there is with anything, you need the equipment to produce a good), but after that fixed cost the marginal cost of production approaches zero.

What about electricity costs and the value of my time?

Electricity costs are essentially negligible. If your electricity bill is too large, install a dedicated solar panel and you have just turned electricity into a fixed cost, and electricity doesn't touch your marginal cost at all.

As for your time, what do you make a day if you don't successfully mine anything? That's what I thought. We just valued time. Seriously though, the only reason you would invest your time "mining" is because you could get free tokens...er, bitcoins. The only reason these bitcoins have value is because of the synthetic cap!!! No arbitrary cap, and you wouldn't waste your time.

Ha-ha. It's up 50 bucks today!

While I said I don't get why people would treat this as a currency, the larger point was questioning whether or not a monopolistic inefficiency was being created due to the marginal cost of production and the placement of the arbitrary cap in production, thus placing a dead weight cost on the buyer. The point was that something was getting lost in translation between the economic world (where scarcity is a bedrock principle) and the virtual world (where scarcity does not exist and thus we must manufacture it in order to create economic value). This is a very interesting question to consider because it resonates well beyond bitcoin. Could even have implications for how we interpret the Sherman Act.

If you want to buy bitcoin, go nuts! (Of course, I reserve the right to think you already have...)

How can there be a "monopoly" if no one person or company owns it?

This is a very good question. But I would ask back: Are we concerned with monopolies because one company extracts extra profits? Or are we concerned with monopolies because of the dead weight burden they place on market participants? If the latter, it doesn't matter.

Stop calling the limit on supply "arbitrary." It is based on math!

No, I will tell you where math determines value of something. Levered exchange-traded fundss. There is an inherent design flaw there that ensures, given time and volatility, that their price will asymptotically approach zero. Math determines value there.

Now, where math comes into the equation with bitcoin mining is because there was a desire to manufacture scarcity. Ever increasing math difficulty does the trick. Could have just as easily been improvements in the world's fastest time for the mile. Would have limited the supply just as well.

But it is a manufactured cap just the same. No different than OPEC deciding to limit production of oil. (Actually, it is a lot different because the actual oil supply IS finite and there ARE marginal costs to extract oil.)

You obviously know nothing about cybersecurity and cryptocurrencies.

Need I go through the litany of "breakthrough improvements" over the last 50 years that the Luddites couldn't possibly understand but were assured by experts -- all distinguished, well-meaning men and women of their field-- that they were perfectly safe for them and made their lives better? (Asbestos **cough***, Saccharine ***cough***, Red Dye #2 ***cough***, Portfolio Insurance ***cough***, Levered ETFs ***cough****)

To be clear, the technology is worthwhile, no doubt. What is dubious is the value of a virtual currency made scarce by manufacturing a cap.

Don't you understand that this is the future?

Actually, what I don't understand is why we are diverting resources to "mining" virtual currency and that people actually place value on the practice.

Can we place value on the technology of transferring an item from one computer to another? Absolutely. This is breakthrough.

But bitcoin as money?

If this is about "the future," I wonder why we are using all of these resources towards mining things in the virtual word instead of trying to figure how to mine things in the real world, cure cancer or develop a more fuel efficient car.

A market economy is about the efficient allocation of resources. If we are allocating resources towards solving ever-increasing-in-difficulty hash blocks in order to "mine" digital bits in virtual reality rather than solving real world problems, I think we have lost our way a little bit...

Have you even studied the protocol going through the hexidecimal hash-blocking algorithm which creates value to bitcoin as a currency?

I have seen the slide show, yes. I think what is happening is people are so focused on engrossing themselves in the details and processes that they are missing the larger picture.

Best explanation of it was given to me by Walt Whitman:

WHEN I heard the learn'd astronomer;

When the proofs, the figures, were ranged in columns before me;

When I was shown the charts and the diagrams, to add, divide, and measure them;

When I, sitting, heard the astronomer, where he lectured with much applause in the lecture-room,

How soon, unaccountable, I became tired and sick;

Till rising and gliding out, I wander'd off by myself,

In the mystical moist night-air, and from time to time,

Look'd up in perfect silence at the stars.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Eric Oberg worked in fixed income, currencies and commodities for Goldman Sachs for 17 years before retiring as a managing director.

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