Bitcoin, or more generally cryptocurrencies is a somewhat complex subject in that it connects technology, economics and law. But it is kind of fashionable now, so some famous people decide to publicly formulate opinions about it without devoting time and effort to gain knowledge about how the technology actually works. As one commenter on the Marginal Revolution site nicely put it:
The situation has all the makings of your standard paradigm shift, where pundits with less neurological plasticity give future history books lots of look-how-wrong-they-were quotes.
I would like to mention two examples of such epic fails.
The first one is a paper
by Dorit Ron and Adi Shamir titled “Quantitative Analysis of the Full BitcoinTransaction Graph”. Adi Shamir is a cryptographer and a coinventor of the RSA algorithm (the “S” in RSA stands for Shamir). The paper is actually a preprint, so it has not gone through peer review to be accepted by any scientific journal. There is a good reason for that: it is so weak that it made some people speculate that Adi Shamir is in fact Satoshi Makamoto and the paper is supposed to divert attention from him as one of the main suspects. There are many flaws in the paper, summarized
in the review by Jeff Garzik. The one that is most revealing about the state of knowledge of the authors (at least at the time when the first version was published) is that they reconstructed the Bitcoin blockchain by scraping 180,000 of HTML pages off the blockexplorer.com site, instead of downloading it directly from the Bitcoin P2P network. As Garzik informs the authors in his review
Another epic fail that actually prompted me to write this post is the recent analysis
by Cowen Tyler
, titled “How and why Bitcoin will plummet in price”. Tyler is an economist and he thinks like one. He models Bitcoin as a product made by a company and asks a question what happens when “the QuitCoin company comes along, with its algorithm, offering to sell you QuitCoin”. The conclusion is
There is thus a new theorem: the value of WitCoin should, in equilibrium, be equal to the marketing costs of its potential competitors.
The problem with this prediction is, as commentators were quick to point out, that there are already dozens
of alternative cryptocurrencies, some available for years. Creating your own cryptocurrency is not difficult and can be done nowadays by filing a web form
. And yet nothing like Tyler predicts is actually happening.
Tyler has a long history
of predicting Bitcoin collapse. However, those predictions were about Bitcoin’s future. This time he failed to predict Bitcoin’s past.
Nevertheless, the Tyler’s post was a success in that it stimulated a very interesting discussion in the comments thread on the reasons why what should be happening is not. People mostly mentioned network effects, but I like the following
The more compelling point here, though, is (ii): Bitcoin’s relatively large infrastructure of miners (i.e. machines that enable transactions to be added to the blockchain) presents a considerable advantage over nascent competitors. The amount of horsepower that undergirds the BTC system to enable a high volume of transactions to be processed reasonably quickly developed over *years*. I haven’t seen characteristics in any competing cryptocurrency (e.g. Litecoin, Dogecoin) that would make jumping ship and abandoning that infrastructure worthwhile in the long run.