Understanding Bitcoin: Cryptography, Engineering and Economics

The first chapters are quite good. although when you go into technical details, you talk about elements not introduced before and take a very abrupt leap in level

Well written

This is the first book I’ve encountered that appears to cover the technology of Bitcoin in sufficient detail to make it comprehensible. However, like many other technology enthusiasts writing on the same subject, this author’s grasp of money and banking appears to be sorely lacking. (Despite his rather impressive credentials in the financial markets. He should know better.) In the Prologue he states (in an hypothetical conversation) that “Currencies have value because of social convention… Neither euros, dollars, nor Bitcoin are backed by anything.” Nothing could be further from the truth (excepting Bitcoin). The author is equating goods and services with a “symbol” for debt – not the debt itself. The fact that someone, somewhere owes you goods and services is a matter of record. It just so happens that euros, dollars, bonds, letters of credit, and more importantly bank account statements make up the records. The records are kept by banks, subject to regulation, whose job it is to keep these records, and more importantly to vet the people who wish to create debt. The records themselves have no inherent value. It is important to make this distinction from the get-go, else this whole business gets off on the wrong foot.

Art has value because of social convention (and the society is quite small). Money, on the other hand, has value because it represents the goods and services associated with a particular denomination of money. Money, by definition, is simply debt. Debt has value because it represents readily available goods and services. It is the potential value of those goods and services that give money its value. This is not the whim of a few individuals: this is food, clothing, shelter, protection, etc., to a large number of people who create and own the debt. One can misconstrue the value of these goods and services and call them a basis of social convention, but that is a long stretch.

To correctly value money in terms of the goods and services it represents, is a problem that is solved by markets – the foreign exchange market in particular. Around the world, the debt of sovereign nations is made available in the form of their currency – dollars, euros, kroner, francs… whatever. It’s all “money” (debt). Now we get to the important part of valuing money. The value that markets attribute to money depends on perceived notions of the goods and services that the owner of the debt can acquire, relative to the amount of “comparable” goods and service that could be acquired by holding debt in another currency. For example: the euro recently lost value relative to the dollar. One of the reasons (besides speculation and fear) is that the quality and quantity of goods and services that one could acquire by trading a dollar was perceived be greater (and more stable) than that of a euro.

At the heart and soul of money is the IOU. Let’s see, I need to borrow your plow for a couple of weeks, but at the end of the summer I’ll give you 50 bushels of grain in return. Here’s my IOU (contract) to that effect. The owner of the IOU is now free to trade his 50 bushels of “promised” grain for a new shed to be built next his barn, and the IOU ( the debt, the money) passes into other hands. It just so happens that IOUs have been standardized in the modern world (ancient, as well, as marks on clay tablets) as money in the form of dollars, euros, etc., but the value inherent in those forms will still depend on the quality and quantity of the goods and services that can be acquired by trading that debt.

One of the reasons the Eurozone is in such financial turmoil, is that there exists a disparity in the quality and quantity of goods and services that can be acquired in different regions. Just think of the difference in hotel accommodations from one country to the next and you can see my point. Without naming names, if the hotel accommodations in two countries “cost” the same, but the the actual accommodations are much better in one than in the other, then the value of the euro in these two regions is mismatched. So how is the euro then valued overall? Its value is diminished by the disparity, especially if the “buyer” doesn’t know a priori what they will be getting when they make the trade of debt – euros – for goods and services.

In summary, the value of money depends on the the perceived and generally accepted value of the goods and services that we can acquire with the debt instruments we own. And even within regions using the same currency, large disparities in value can occur. But in the regions in which we live, we bear with this turmoil because it is the best game in town. Now, along comes Bitcoin. It has no goods or services associated with it from any region of the world. Bitcoin is worthless because it is impossible to value it in terms of the goods and services it represents. Until the entire world adopts the same monetary and banking system, and until the entire population of the world is able to exchange comparable goods and services, Bitcoin will be impossible to value. And I have not even begun a discussion of how complex the technology is to make it work. That is the subject of this book. It appears that the author’s faith in technology exceeds his faith in markets. Now that is really scary.

Very detailed book and good for anyone wanting a basic understanding of cryptocurreny.