Wednesday, June 15, 2011

Bitcoin Open Forum


I don't know much about Bitcoin, but I found this thread absolutely riveting. Thanks to RLP for posting the original story here! This is the first comment in the linked thread, a plea from the victim:

I just got hacked - any help is welcome!
June 13, 2011, 08:47:05 pm #1


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Hi everyone. I am totally devastated today. I just woke up to see a very large chunk of my bitcoin balance gone to the following address:


1KPTdMb6p7H3YCwsyFqrEmKGmsHqe1Q3jg

Transaction date: 6/13/2011 12:52 (EST)


I feel like killing myself now. This get me so f'ing pissed off. If only the wallet file was encrypted on the HD. I do feel like this is my fault somehow for not moving that money to a separate non windows computer. I backed up my wallet.dat file religiously and encrypted it but that does not do me much good when someone or some trojan or something has direct access to my computer somehow.

The transaction sent belongs rightfully to this address: 1J18yk7D353z3gRVcdbS7PV5Q8h5w6oWWG

Block explorer is down so I cannot even see where the funds went.

I tried restoring an earler backup of my wallet but naturally that does not work because the transaction has already been validated.

Needles to say I feel like I have lost faith in bitcoin.

Anyone have any ideas what I can do besides just jump off a bridge?!


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To summarize, this guy had 25,000 Bitcoins stolen from him around noon on Monday. At that time, Bitcoins were trading for around $20 each, so he lost almost $500,000 worth of Bitcoins!

I'm just learning some of the technicalities of Bitcoins now, so please correct me in the comments if I get anything wrong. I imagine this will make for a lively discussion!

It seems Bitcoins have been quite a trade recently, running from less than half a penny up to $30, back down to $10, and up again to $20. Here's the chart:

Click to enlarge

This guy that was hacked did not buy his Bitcoins. He earned or "mined" them by working on the system from his home computer. They used to be something like 260 Bitcoins = $1. On Feb. 9, 2011 they reached parity with the dollar. Today 260 Bitcoins = $5,000. So someone who earned $100 worth of Bitcoins "mining" last year could have $500,000 this year, with a peak just a week ago at $800,000. These guys, like our victim above, call themselves "early adopters." I suppose that is in contrast to someone who would pay $20 for a Bitcoin today being a "late adopter?" If this sounds a bit like a pyramid to you, you are not alone.

Bitcoin appears to have achieved something remarkable, a digital unbacked currency that is truly untethered to any institution. These Bitcoins exist only as digits on your computer, yet they can be taken (stolen) as if they were a physical item, with no recourse. If I would have money stolen from an online account with my credit card company, bank or even PayPal, I could have that transaction reversed within a reasonable amount of time. But with Bitcoin, transactions are final and irreversible unless the receiver voluntarily chooses to give them back.

But it gets even weirder. We can all take a look at these stolen Bitcoins online, right now! They are sitting right here! Just scroll down to the 25,023.93 transaction. There's your thief, and there's the loot! And there's nothing you can do about it!

In a sense, it seems, Bitcoins have something in common with physical gold coins. Once they're stolen, they're as good as gone.

One of the debates on the Bitcoin thread linked at the top is whether it is more likely this theft went down in cyberspace or, as they call the real world, in "meatspace." In other words, there are two ways this heist could have been carried out. This kid apparently had all his Bitcoins sitting in one "wallet.dat" file on his computer. It might have been taken by a hacker who could be anywhere in the world, China, Russia, wherever. Or it could have been taken by someone he knows IRL (in real life), who knew that he had a $500,000 windfall hoarded on his hard drive, and somehow gained physical access to his computer.

The attractive qualities of Bitcoins are that they are private, anonymous, discreet, they are outside of the banking and fiat system, they exist in a limited and verifiable quantity and they cannot be counterfeited or printed by a central bank or government. In other words, they have many of the same qualities as physical gold except the physicality. And just like Bitcoins, your physical gold coins can be stolen. And once they're stolen, they're gone. No central authority to get them back for you. But at the same time, with physical gold you only have to worry about "meatspace." What do you think? Is this a +1 for gold?

In all fairness, another analogy I should point out is that one of the criticisms of Bitcoin is that the "early adopters" come out way ahead. Just like our victim above (up until Monday at noon). And this is not too far off from what some say about Freegold. So I ask you, is it the same? Here's what one article says about it:
One of the hot button issues around Bitcoin is in the way it disperses early-stage currency. The system of mining, because it decreases rewards over time until it stops altogether, means early adopters come out ahead — way ahead, in a situation where large percentages of the total number of Bitcoins ever to be made end up in the hands of the first miners.

Some take it a step further and claim that the ideological rationale given for Bitcoin is just a smokescreen for its true purpose as a get-rich-quick scheme for those founders and early adopters. These people claim that those driving Bitcoin right now are working to build a currency to a point where it has a reasonably strong economy so that they can cash out and leave it hanging.

So what do you think of Bitcoin? Is it a good idea? Is it the next big thing? Are you going to rush out and buy some? Would it be a good transactional currency alongside Freegold?

Do you think Bitcoin is competing for the role of primary medium of exchange against currencies like the dollar and the euro? Or is it actually competing with the secondary media of exchange for the focal point prize? Or is it trying to be both, at the same time? Or is it really just Bernie Madoff dressed up as an Anarcho-Capitalist?

And what about the great Bitcoin heist of 2011? If you were still hoarding half a million in Bitcoins after reading that thread, would you continue to sit on them? Please tell me your thoughts. I know Bron is interested in this subject as well. Maybe he'll show up with a comment or two.

Sincerely,
FOFOA


98 comments:

Neverfox said...

So what do you think of Bitcoin?

I didn't think much of it until I started getting my hands dirty with it. Now I can't really see why it isn't a great idea.

Is it a good idea?

Like I said...and people being stupid with it (which you can be with gold) and people getting rich from early adoption (which happened with gold) are not reasons to reject it. That said, I do think you have to take the possible conspiracy theories at least somewhat seriously in such uncharted waters.

Is it the next big thing?

Actually, I think it just might be. Or rather, I think something like it is. Just like I think Facebook will eventually be surpassed but will have a long run of it's own, so will likely go Bitcoin.

Are you going to rush out and buy some?

I've actually started mining fairly heavily, including gaining an interest in a high-powered rig by consulting on the setup and operation. The window for arbitrage is closing fast though at current hardware costs.

Would it be a good transactional currency alongside Freegold?

Probably better than most.

Do you think Bitcoin is competing for the role of primary medium of exchange against currencies like the dollar and the euro? Or is it actually competing with the secondary media of exchange for the focal point prize? Or is it trying to be both, at the same time?

I think it's both. The comparison to gold ("mining" etc.) means that it obviously has potential as a store of value. At the same time though, most of the new features are designed to fill a niche in the world of mediums of exchange. So if it has any problem, it's the trying-to-be-both problem that you have pointed out before.

And what about the great Bitcoin heist of 2011?

That wasn't a problem with bitcoin per se. I do think that more institutions for dealing with this kind of theft (including possibly forms of deposit insurance) will develop as the idea becomes more widely accepted.

So to ask you a question: do all the similarities to gold combined with the things gold can't do (be digital without being a derivative etc.) make you at all feel that it could displace gold? Could gold become the handwritten letter to bitcoin's email? Gold has been king for centuries but no one predicted the internet. Paradigm shift? If not, what are the main reasons?

FOFOA, this is off-topic but I wanted to alert you to a series of articles about you on another blog. I approached the author, who was doing a series on hyperinflation from a very interesting Marxian (but not exactly Marxist) perspective, and asked em to take a look at your specific case. It turned into a series of posts (1, 2, 3). Please check them out and, if you're so inclined, I'd love to read a response.

Go said...

Hello. My name is Go and I'm a Bitcoin miner. I've been running a few machines for about a month now. I happen to be in the computer business so my cost to get started was relatively slim. I fully intend to pay my gas, electric, and mortgage this month via bitcoins. I performed my first test transaction to cash out recently and expect it to hit my bank this Friday.

There's not a lot you can buy with bitcoins right now. I think the price is driven almost entirely by speculators. From what I understand the drop from $30 to $10 was mostly attributable to one early adopter selling off $250000 usd in bitcoins. I remember stumbling across bitcoin maybe six months ago and thinking "that's interesting but will never go anywhere."

Even though I'm mining I still don't believe in the long term viability of bitcoins. I think they suffer from the same problems as any other paper currency today. Bitcoins are trying to be both a transactional currency and store of value at the same time.

I think it would do better as a store of value only. There are down sides that make it inconvenient as a medium of exchange. One being it takes around 10 minutes to complete a transaction and hours to confirm it as valid.

It's completely speculative in my opinion. Its thrown a few technical challenges my way and has sparked some interesting economic discussions with friends. If it can do that and pay my basic living expenses for a couple months I'll be happy. If it makes me filthy rich, all the better.

-Go

mortymer said...

http://en.wikipedia.org/wiki/Bitcoin

Preview release 0.3.23 June 14, 2011; 2 days ago
Development status: Beta

~wiki

[Mrt: Not only those in SW R&D know what does that mean :o)]

[Mrt Side note: often I wander about small thingies like "golden credit card", "golden" membership, etc. Even Bitcoin uses this in the image - a yellow coin.]

Ramon said...

There's been a great deal of knee-jerk reaction to Bitcoin and most don't seem to have even read the FAQ or Wiki, so first of all, thank you for taking a bit of time to understand what the system is in the first place.

The user in question was running a Microsoft Windows computer, which is a weak platform despite great strides made to increase security. By comparison to Linux, Windows is still like a sieve rather than an airtight container. I am not aware of any other measures taken to protect the computer in question.

Currently, the digital wallet created by Bitcoin is not encrypted. If it were, this may not have happened. At the very least, there might have been enough time to transfer the Bitcoins (BTCs) to a different address, but that's assuming the breach was detected (again, Windows makes both detection and protection in the first place more difficult).

Although this is a situation that needs to be remedied, the fact that the wallet is relatively unsecured means that users have to uphold a sense of self-responsibility. This is about as libertarian as it gets, and in my opinion, what the world needs in spades.

The next big thing? In the financial realm, yes. This is effectively to finance what the World-Wide Web was to publishing and BitTorrent was to media. Banks and governments will be rightfully terrified, because these radically decentralized systems make many aspects of those institutions largely irrelevant.

Bitcoin itself is not competing for anything - it is what it is. If it offers a better overall solution, it will become widely adopted. There is no marketing staff or political push to use Bitcoin or any of the other crypto-currency/token systems. Proponents are normal people who simply understand the potential and are willing to exchange goods or services for BTCs.

I am pool mining (pooling computing resources and sharing the return with others based on percentage of work done; how communal!) and expect to be keeping a reasonable (for me) amount in the system as soon as progress has been made on a few issues, particularly wallet encryption.

As Go mentioned a few posts up, transactions typically take several minutes to propagate through the system and show up as confirmed. There are ways of mitigating that delay, possibly through minor modifications to the protocol or with accelerators that handle volume as current transaction processors do. In the Bitcoin FAQ, it is mentioned that Mastercard internally uses similar methods to Bitcoin, so certain enhancements ought to be readily made by interested parties. Business with high volume (gas stations, restaurants, etc.) would then be wise to make use of those services.

Bitcoin and gold (Freegold/gold ratio/what-have-you) share nearly every major quality. They are both convenient, divisible, fungible, portable, etc. However, gold being physical, its quantity can be determined simply by human observation and manipulation. Bitcoin, on the other hand, requires electronic means. Yes, your primary address code may be written down, but in order to gain access to it, you still need a computer.

With that in mind, I am of the firm opinion that the two are complementary. BTCs can be backed by gold, or any other asset for that matter. Who knows, maybe in some absurd world gold will be backed by BTCs?

Ramon said...

I wrote too much. It's a development that I'm very enthusiastic about. Sue me.

To take the topic further, I suggest that the relative value of BTCs will continue to rise. As the difficulty of "mining" increases, more power will be required to run more advanced processing platforms in order to generate more BTCs. This rising energy input will directly influence the cost, exactly as happens when the low-hanging fruit is no longer available for oil or gold mining companies.

In addition, the deflationary nature of the system means that it will eventually stabilize, then run out after a long enough period of time. That may take a century or more. Of course, it is entirely likely that more advanced systems will arise alongside and eventually supersede Bitcoin.

The really beautiful thing about Bitcoin is the lack of central authority by which abuse can be instantiated. It is effectively a reliable fiat system that is virtually immune to human misappropriation, for now. So long as the algorithm used is not fundamentally undermined by some new mathematical theory or advances in quantum cryptography, it will remain highly secure.

There are alternatives to Bitcoin using the key concept of triple entry accounting. The Open Transactions (OT) system is similar to Bitcoin in that the software code is entirely open and that it can be used with completely abstract digital currencies/tokens. However, it also bridges the gap between legacy financial institutions and instruments. This flexibility means that it will most likely be a more widespread infrastructure at a lower level than Bitcoin, wherein there may be multiple Bitcoin-like systems. Either can be used on varying scales, independently or part of a global network.

The Bitcoin advantage is the incentive system that encourages participation. Once a critical mass of users is achieved, the desire to protect investment in the system will perpetuate it. Basically, Bitcoin is here now and beyond proof-of-concept. OT has massive potential, but is not realistically implemented as of yet.

This is the right way to break free of the established system instead of fighting it directly; a way to let the beast wear itself out while hitting the reset button. Here's to ignoring the blundering powers-that-be and each of us doing our own thing.

Finally, these are technologies that could easily make their way to seasteads, especially when there is a severely limited quantity of currency commodities and a desire to forego paper. What's a seastead? Here, Let Me Google That For You.

I've firmly believed for over a decade that massive decentralization will be the major shift that transitions the old world to the new. It's a good thing, even with all the challenges, so long as we're realistic about things and not overly whimsical. Digital currencies/tokens are one part of that.

Bitcoin
http://bitcoin.org/

Open Transactions
https://github.com/FellowTraveler/Open-Transactions/wiki

Seasteading
http://seasteading.org/

costata said...

Neverfox,

I skimmed the first essay in that series you posted links for. My impression is that the author writes well, communicates effectively and argues logically (from a Marxian perspective).

I'm looking forward to reading them when I have more time to digest them. Thanks for the links.

Crack said...

B-B-B-B-Bitcoin
(Hack and take the cash)
B-B-Bitcoin
Just want to be a richer man
B-B-B-B-Bitcoin
(Hack and take the cash)
B-B-Bitcoin
Just gonna have to be a nasty man
Firewall may take time
But I can get round

Neverfox said...

costata,

That's why I read their blog. I'm not a knee-jerk kind of person with regard to Marx, especially the more I learn from those that really seem to understand his work. The more well-communicated, an logically-argued arguments on the table, the better, whether Austrian, Marxian, post-Keynesian or whatever.

I'm interested in your thoughts on the series as well.

Texan said...

The blog Marginal Revolution has a piece dated April 19 th on bit coin. Good links to other commenters also.

The biggest problem I see (aside from how it works, of which I still have no idea, or why it's not a pyramid, or how it will be adopted by the computer less or computer illiterate) is competition. What's to stop someone from creating a whole new bit coin " peer to peer" network? Could eGold reformulate itself as a " rival"? Could PayPal start offering a fixed number of credits for " miners"?

DP said...

Coming to terms with the grief of loss is always difficult. Just the thought fills my heart with Pink Frost.

totara said...

This is somewhat off the original Bitcoin topic, but still related to security of savings from theft.

Over the last 12 months every major bank in New Zealand has ceased to accept any further ‘safe custody’ envelope deposits, or to provide new safe deposit boxes. (Although pre-existing customers can still keep their accounts - for now.)

So far as I am aware, this development has gone almost entirely unreported in the New Zealand financial news media. The last bank (Westpac) ceased accepting any more safe custody customers in January or February 2011.

Now I can understand that one or two banks might decide that they can no longer offer a safe custody service profitably, and to leave that service to other banks who are more competitive. But when every single bank quietly ceases to provide this service within a short timeframe, at the risk of infuriating their high-value customers, to me it smells of a rat.

Whereas a small saver could previously have their gold stored hassle-free for about $20 per year, they now have a much higher barrier to physical gold ownership in the form of either more expensive storage options (a private vault) or else greater storage risk (a home safe).

It seems that maybe the banks (at least in New Zealand) fear that given an obvious viable alternative medium to save in, people will abandon the negative real rates of return on fiat which their term-deposit rates presently offer to their customers.

I would be keen to hear whether anything similar has happened in Australia (seeing as most NZ banks are owned by Australian banks), or in Europe.

The point that I want to raise is that for Freegold to become widespread amongst savers of modest means (and not just for large shrimps) those people will need access to some low-cost, reliable, secure, storage facilities. And the lesson from New Zealand is that that such options can quietly be taken away from the general public.

Motley Fool said...

Comments...

DP said...

@Mrt, my experience of working very closely with [name of large software house withheld] is that any "Beta" is a VERY long way from being a usable product. I wouldn't even trust an RC1 version of a product for internal dogfood release to operate a business - certainly not in the Accounts department.

Keeping my personal money in a distributed, open source* P2P system, one that's only reached a Beta version, put out by a shoestring outfit? Not a chance in hell! I don't care what the perceived upside looks like. Good luck to all who try it; you'll need it. (That's my opinion and it's worth what you just paid, as always.)



* If you don't think the bad guys out there won't find the holes and opportunities in the logic that *will* be present in the published source code... [insert your own favourite choice of "gullibility tale" here]

g. said...

Virtual Money is not durable, in the sense that it is electrical. If you lose your power-source, drop your server/computer/memory-stick/hard-disk or whatever in some water your virtual money is gone. In that sense it has the same durability as salt. Salt once was a store of value, but has since lost that function, due to a lesser durability then better stores of value.
No, virtual money has no merit as a store of value.
It could however be used as a modicum of exchange.

Wejn said...

comments.

DP said...

How to deal with an unexpected filesystem corruption on the storage device? Seems to me like "last night's backup on another device" won't be too much use, if you're to any degree an active transactor in the Bitconomy.

jc said...
This comment has been removed by the author.
Casper said...

I basically agree with "g".

Should the scenario of FreeGold (real world ascending / illusion by digits descending) come true and the underlying assumption that it was actually gold that guaranteed the flow of value through global economy, then "bitcoin" as (long term) store of value doesn't seem to be viable.

Casper

jc said...

Gold, being the point of focus, of the storage of value, in the meatspace economy is ultimately given it's value by being completely required in some transactions, such as oil producing nations requiring gold.

Bitcoins are currently moving towards our new focal point of value storage in digitspace, but also in meatspace since the bitcoin is actually physical, being an arrangement of physical electrons stored on a drive. The difference from physical gold is that bitcoins which are also physical can be exchanged using non meatspace transactions.

The question remains of where will there be the ultimate transactions that give the physical bitcoin it's ultimate value (in gold or dollars, whatever your reference point). These ultimate bitcoin transactions will require that a physical store of value be exchanged but will also require the exchange be done in a digital manner, something gold cannot do.

DP said...

Allocated gold can be, is, and has been for a long time, transacted in a digital manner and without physical movement.

Michael H said...

Denninger had a short blurb on some shennanigans on Bitcoin forums:

http://market-ticker.org/akcs-www?post=188133

Referencing:
http://slightlyoffended.blogspot.com/2011/06/bitcoin-has-dragons.html

reproduced in full:

Bitcoin has Dragons
Just to let you know about the heavy pro-trolling at the Bitcoin forums on the weekend. Much of which was coordinated with the market correction (aka. crash).
Many of the handles used were recognizable to a seasoned commentator. It looks like they studied the forum message boards for several weeks to find weak points and newbie hangouts so they could create ultimate shock value. I spotted 10-15 matured (50+ posts) profiles that would create rapid-fire postings and quickly jump around filling other new posts created by newbie trolls (orcs) at a rate of 5-10 a minute. Some were point/counter-point style to appear as legit, some were rants to entice the vulnerable. Many were goading attempts to drag moderators and seasoned posters into endless tit-for-tat barrages. And then it got interesting...
New tactics of spoofing long-time posters, cloning moderators' profile look-n-feel, threats aimed at anyone stupid enough to reply. Wow, I knew the professionals had arrived when I saw our proudest, vibrant protagonists slowly backing out of the room. It was left a snarling, blackened mess. These people had a playbook created with forethought and malice. Trolls are one thing, these were Uruk-hai bending to the will of someone, somewhere.

Konrad said...

I can't help but wonder about the comparisons to the tulip mania. Now we think back and can't believe how people would put their life savings into tulip bulbs! To us it seems completely incomprehensible, yet at the time it was considered the smartest thing to do. Now, will we think the same about bitcoins one day? What are the true differences between tulips and bitcoins?

In the end the price is driven primarily by people trying to get on the bandwagon. As you can't buy anything of real value yet with your bitcoins, i.e. they must be exchanged for regular fiat currency first, everybody is speculating at the moment. You simply can't argue that you are investing or even saving if you cannot be sure about how to realise your digital 'wealth'.

I don't think the theft of 2011 plays a big role here. money gets stolen all the time and in much bigger sums so that is not a drawback for using bitcoins.

Jeff Herron said...

I spend a lot of time working with computers, since it's a big part of my job to do so. I try to spend just as much time or more outdoors in the garden or doing something else in "meatspace". I call my computer work my "fake work" and my outdoor work my "real work".

Work on the computer is hauntingly hollow and ephemeral. It produces a return in US Dollars (fake wealth in exchange for fake work -- sounds like a fair deal!), with which I pay for the trappings of my modern lifestyle.

Work outdoors is solid and tangible and lasting. It produces a return in real goods -- food, physical structures, etc. I'm slowly migrating my life to be more focused on "real work" with these tangible returns.

I like my store of wealth to be the same as my work -- real, tangible, and lasting. BitCoin will fail ultimately, even if it enjoys a period of popularity, because it is none of these things.

Gold has endured for millennia. BitCoin has been around for -- 2 years?!? My money is on gold.

Jeff Herron said...

Subscribing to comments...

Bron said...

I am interested in bitcoin because of the possibility that it may be a better transactional currency in a freegold system in conjunction with gold as the wealth store. While people may store long term wealth in gold, they still have to hold temporary balances of wealth in some transactional money as well. Would it not be better that such smaller wealth amounts are held in a deflationary bitcoin rather than an inflationary fiat?

I have always had a concern about the mischief conventional fiat could do in a freegold system. In other words, would gold (acting only as a wealth store and not transactionally) be strong enough to discipline “print what you want” fiat. Bitcoin could provide freegold with a better transactional currency because it shares with gold the key feature of limited supply/non-printability.

The fact that bitcoin cannot be expanded means that it could serve as a non-inflationary base money, a fixed non expanding measuring standard. Because bitcoins cannot be increased, nor fractionalised, the expanding and contracting credit needs of society would have to be met by a free banking system (see George Selgin's website for a good summary http://www.terry.uga.edu/~selgin/freebanking.html).

Free banking requires users of a bank's own banknotes/money to take on the risk of the bank imprudently fractionalising/lending/etc. Because bitcoins cannot be “printed” (a bank's version of bitcoins would not be recognised by the network), bitcoin could help free banking because it makes it explicit to users of such banknotes that they are not bitcoin “base money” and thus makes its explicit to users they have risk in using them.

So what you could have is bitcoins and freegold both disciplining a free banking system (or current banking system).

I am assuming above that bitcoins have reached mass acceptance and thus stablised in value once most people have shifted out of fiat and “squeezed” their “cash” transactional wealth (distinct from saving wealth) into bitcoin. Whether it can get to that point is another discussion.

I also like bitcoin for the reaction it gets from many who use the argument against it of "it has no intrinsic value, created out of nothing, virtual". I laugh at this, because don't they realise all that applies to fiat money as well? If you are uncomfortable with bitcoin's lack of physicality or "realness", then you should reflect carefully about those silly paper dollars you hold as well.

If all that bitcoin does is help people step outside the matrix and really see fiat for what it is, which is the first step one has to make before one can consider saving (note I didn't use the word “invest”) in gold, then it will have served a useful purpose.

And Y said...

The victim didn't have hist wallet file encrypted. That's like putting your gold coins in a safe, but leaving the door to the safe wide open. Just like gold coins, you have to be somewhat responsible with your bitcoins.

I think there are many many bitcoin holders who are in it for the trade. That's what that chart tells me.

Jeff Herron said...

@Bron:

Bitcoin as the store of wealth itself sounds like a disaster.

Bitcoin as a new transactional medium of exchange with physical gold as the ultimate store of wealth sounds like just about the perfect mix to me.

A few technical hurdles to overcome for the computer-illiterate and computer-less, to be sure.

Very interesting...

7374a8d2-982c-11e0-9ae0-000bcdca4d7a said...

Bitcoin is dependent on electricity and (apparently) upon the integrity of a file contained on a hard drive.

No electricity (or computer or hard drive), no Bitcoin. This little problem could be solved, however, with distributed/portable solar. That, along with improving speed of transactions, could provide universal accessibility and transactional immediacy.

It does not address susceptibility to hacking.

If they can make it bulletproof, or add recourse for losses due to theft/hacking, it's a winner and could swiftly replace fiat.

I still want to know what all the processing power the miners are lending to solve 'algorithms' are actually doing. The potential to harness vast amounts of miner's computing power is of at least as much interest as Bitcoin's transactional potential.

S said...

Bron,

Given what you just said re better than fiat are you at all surpised it got "hacked"

JR said...

Hi Bron,

Would it not be better that such smaller wealth amounts are held in a deflationary bitcoin rather than an inflationary fiat?


"I do believe that if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power."

http://mises.org/daily/3204

What do you think about Hayek's point?

Cheers, J.R.

JR said...

Moar food for thought on a deflationary transactional medium from "Focal Point: Gold"
(http://fofoa.blogspot.com/2010/12/focal-point-gold.html):

"Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]

So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.

For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints."

(cont)

Ramon said...

@737:

There was a major power failure in half of the US within the past decade. Did that stop the internet from working everywhere? How many battery-powered devices still worked? Was credit and debit card processing miraculously available without power?

A more pressing concern would be network availability. That is an issue that would be best rectified with dynamically-adaptive mesh networks.

External factors may affect Bitcoin, Open Transactions and similar systems, but as with the internet in general, they are highly resilient even when facing widespread failure.

I believe the main question is whether crypto-currencies are viable and/or likely to supplant existing financial infrastructure.

JR said...

Discussion of a Mish criticism of FOFOA's statement about needing money in unrestricted amounts from "Windmills, Paper Tigers, Straw Men and Fallacious Fallacies " (http://fofoa.blogspot.com/2010/12/windmills-paper-tigers-straw-men-and.html):

"FOFOA Fallacy #1: "So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

Mish says, "No we don’t." Then he quotes Murray Rothbard and sums it up with, "The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less."

"Tolbiny" offers the following excellent rebuttal:

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth."

In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace."

Cheers, J.R.

Hawks5999 said...

Thanks @Konrad, I needed my morning drink and with the new Bitcoins/Tulips drinking game I had an excuse with your post.

If you really want to get hammered you can play all three of the Bitcoin Drinking games:
Bitcoin / Tulips - where you take a drink every time a blog or commenter makes some reference to tulips

Bitcoin/Ponzi - where you take a drink every time a blog or commenter makes some reference to a ponzi scheme

and

Bitcoin/Pyramid - where you take a drink every time a blog or commenter makes some reference to a pyramid scheme.

I'm a bit of teetotaler so I just play Tulips. If I played Ponzi or Pyramid I'd be drunk before breakfast each day.

JR said...

From "The Value of Gold"
http://fofoa.blogspot.com/2010/12/value-of-gold.html - where does Bitcoin fit on the pendulum? I find that question to be helpful in understanding Bicoin, but YMMV

"Please read the following post carefully as Aristotle describes a pendulum with "gold money idealists" on one side and "easy money idealists" on the other. Notice that while he calls Freegold the "perfect bottom," he also points out that it is the most pragmatic and realistic point in an arc between two opposing idealisms:

Aristotle (8/25/2000; 4:02:42MT - usagold.com msg#: 35502)
The evolution and confessions of an unrepentant Gold advocate...

Fortunately, my mother raised me right, and I still possessed the capacity to think for myself despite the heavy influences of the Goldbug dogma I had eagerly absorbed with gusto. As I came to realize how many pieces of their puzzle didn't fit, I came to see that the explanation was owing to the well-intentioned reason that much of the "standard Goldbug rhetoric" was based on idealism. Well, that's fine and all, and something worthy to strive for, but in the end, we all must live in a pragmatic world. Happily for the buggiest Goldbugs, this same pragmatism also renders equally null and void the successful implementations of any notions of an idealistic paper-only world as seen in the wildest dreams of Keynesians, governments, and many bankers. As things are, Gold has a very important role squarely in the middle of a pragmatic world, yet too few people give much "theoretical thought" to this middle ground. Arguments are always made from the merits of the lofty points on opposite ends of a pendulum's arc. Pointless for making meaningful progress, to be sure, but God bless the idealists, anyway. ...

After a period of slower talking and deeper thinking, I arrived at a position with a realistic eye on the middle ground giving me clearer monetary understanding as it works in the real world, and also how it COULD in fact (and should) be made to work immeasurably better. Simply put, my thoughts had evolved from their starting point, and I became comfortable with my own concepts of a unique kind of monetary idealism that existed at the nadir--the bottom of the pendulum's arc. ...

Keynes didn't call Gold itself a "barbarous relic," but he rightly called the Gold STANDARD a "barbarous relic," which is also precisely what the system of Gold derivatives and bullion banking of today has become--a relic of a clever scheme originally to offer life-support to a failing dollar-based international system at a time when the world had no other option. This patchwork scheme is no longer needed. On the other hand, freemarket physical Gold, as the pure and essential reserve/savings asset (unlent with no derivatives) is desperately needed in the modern world to indiscriminately bolster each of us alongside modern currencies which are now a permanent feature in the financial landscape. Simply put, Freemarket Gold is the only way for a man to safely coexist with his currency.

Gold. Get you some. ---Aristotle"

Cheers, J.R.

InowB4 said...

what about bitcoins on rfid-chips?

JR said...

Hi Hawks5999,

I'd suggest the word "BALLOON"

Maybe even embrace the Leo Kottke song "Balloon" as a theme song.

Cheers, J.R.

Either way, beware the figurative cheese stealing pizote!

Beanie said...

Fortifying your gold and silver?

Beanie said...
This comment has been removed by the author.
Michael H said...

Bron,

"Would it not be better that such smaller wealth amounts are held in a deflationary bitcoin rather than an inflationary fiat?"

Not really about bitcoin but rather about 'inflationary fiat':

Is an inflationary fiat so bad, if your savings are not denominated in said fiat?

There is a benefit to an inflationary fiat: it allows the economy to re-balance its elements without a nomial decrease. In other words, if one sector of the economy is unproductive, or is becoming obselete, rather than see its prices and wages fall, it can be nominally constant while the rest of the economy inflates.

Granted, this is only a psychological advantage, but it is potentially meaningful.

Though there is the further caveat that this viewpoint is entirely a product of me living my entire life in an inflationary environment.

As FOFOA said (and JR just reposted), for fiat currency to function, it must be able to be created in *unrestricted* amounts.

Ash said...

Neverfox said...

"FOFOA, this is off-topic but I wanted to alert you to a series of articles about you on another blog. I approached the author, who was doing a series on hyperinflation from a very interesting Marxian (but not exactly Marxist) perspective, and asked em to take a look at your specific case. It turned into a series of posts (1, 2, 3). Please check them out and, if you're so inclined, I'd love to read a response."

Oh no, another Marxist arguing against short-term dollar HI? What is this blogoworld coming to??

This guy has a very interesting way of applying Marxian analysis to the HI vs. deflation debate. That being said, he doesn't really critique the foundations of Freegold itself, but merely picks around the edges, by arguing that every other fiat currency will hyperinflate except the dollar. I largely agree with that analysis, but it still leaves open the question of how long can the dollar survive as last fiat standing in the global economy and whether a Freegold monetary paradigm is likely to emerge at that time.

After reading the series, I am also not clear about his argument against dollar deflation, if he has made one. Is he saying that dollar-denominated prices will remain relatively stable as other currencies crash and burn and wealth is increasingly concentrated as per Marx? If so, that seems very unlikely IMO.

Hawks5999 said...

@JR - Balloon hasn't had much play, but I'd need a liver transplant by now for "Bubble." :)

One thing I'll throw out because I haven't seen it discussed and before people get the idea that 21,000,000 is too small because of the 7 Billion people in the world:

Bitcoin is divisible out to 8 decimal places (1.00000000). So when it is all mined, the total number of units (called ubits because people don't get the micro symbol cf utorrent) will be: 2,100,000,000,000,000 (2.1 Quadrillion) - if you divide by a hundred to account for a "cents" equivalent in USD, there will be 21 Trillion units. While this doesn't equal total Global GDP it is enough to be a significant portion of the global economy.

Ramon said...

@Hawks5999

If you're measuring GDP in USD, then 21 trillion units would be barely enough to provide for an approximately USD$14 trillion economy.

The current exchange rate for USD/BTC is ~20:1, so measured in BTC, the US GDP is only 700 billion. Still nothing to sneeze at, but much more manageable with BTC being stable in relation to USD.

As Bitcoin continues to gain traction, the exchange rate will continue to favor BTC. To what extent, I'm not sure and haven't worked out any possible ranges.

There have been instances where the BTC supply naturally contracted. It is self-regulating, so necessary inflation will be dynamically adjusted according to demand. I believe this is essentially the concept of "unrestricted" as mentioned in prior comments.

7374a8d2-982c-11e0-9ae0-000bcdca4d7a said...

@ Ramon: Yes, although I was thinking of extended and widespread outage, and also of network accessibility.

Think kill switch. As soon as BTC or other facsimile were to threaten fiat all the power of the State would be focused on shutting it down. If not through a targeted kill op (to which TOR might be resistant), then through regulation, coercion, and force.

Of course if it is resistant to overt kill through denial of network accessibility, and it promulgates quickly enough, it has the potential to bring down the toady government and its phony financial system rather quickly. It could generate the ultimate bank run in which everyone would rush to withdraw deposits (claim checks) to convert to BTC.

In which event, party on.

Overnight implementation of BTC as transactional currency and Gold as store of value.

Still want to know what all the prodigous computer power behind mining (solving algorithms) is being used for.

Håkan said...

The miners algoritms are actually processing and locking(securing) transactions. By verifying transactions and putting a kind of digital padlock on the transaction blocks.

The more processing power doing this stops potential bad guys from making false transactions and double spend bitcoins. To make false transactions block chains you need at least 50% of the total processing power to outprocess the normal honest working.

The more processing power in the network, the more difficult to do bad things.

The miners are rewarded for this by getting 50 bitcoins for every accepted block.

(For a more technical descriptions than this simplified explanation go to the bitcoin.org site...)

DP said...

What "backs" a Bitcoin? It feels to me like everyone raving about BTC is thinking in terms of how much their currency is going to increase in value against USD. But what is it redeemable for?

If you think an ever-strengthening transactional currency is a good thing for an economy, you're not thinking deeply enough IMO. Last time I heard, people wanting a job to earn an income, needed other people with an income who wanted to spend it on goods and services to keep other people in jobs.

Currency needs to circulate freely, or there's quickly going to be a frozen economy with nobody earning an income. I don't care if the transactional currency is BTC or USD, or anything else. If it doesn't flow ... well, IMO it just won't give us all the warm fuzzies.

Robert LeRoy Parker said...

Here's an article from the economist blog that gives an overview of bitcoin.

Economist Link

Michael H said...

So far, I haven't seen any mention of lending or borrowing bitcoins.

Will this be possible?

Aquilus said...

Hello everyone. I'm back after a long absence and glad to see we're moving to new topics and that spamming this blog stopped for the time being.

On Bitcoin, I look at it from two perspectives:

1. As store of value: it does not meet the focal point test – in other words since there eventually can only be one store of value that everyone agrees on, I do not see Bitcoin as being it for the entire world.

2. As circulating currency – possible in a better world, but if we consider central banks still in existence and/or governments wanting to control the amount of currency (see unrestricted comments above) then it fails this test.

Ramon said...

@ 747

You're right, a critical mass must be achieved before it'll be mostly immune. I think that point is fast approaching, considering the growth has been increasing logarithmically.

Bitcoin "mining" is an incentive structure that has been instrumental in developing that exponential rise in participation. Just as with the automatic inflation regulation, mining is also a purely rational and self-regulating method.

Eventually, mining will no longer be necessary or even viable without an expansion beyond the maximum network capacity for BTCs. Until that point, there will be periods where mining is done by so many that the gains are meager at best. When people start to realize that they are spending more in electricity costs than they are earning in BTCs, they'll shut down their computers until such time as the profit margins have increased. When the maximum of ~21 million BTCs is attained, mining will be virtually defunct, and only the most dedicated will last to that point.

Currently, so long as the USD/BTC exchange is greater than around 12:1, mining is an immediately profitable endeavor (assuming sufficient processing power and not accounting for hardware and power costs - those must be factored in to determine overall return). As the exchange rate rises, mining will remain profitable even as the difficulty of mining increases. This is similar to going from easy pickings in oil drilling (BTC mining) to more capital and labor intensive methods (more powerful computer hardware and greater electricity costs) while still generating profit (rising BTC valuation).

The actual purpose of mining is to increase participation in the network. That participation is required in order to facilitate Bitcoin network security. If any one participant controls more than 50% of the processing capacity, he can cause instability. The details of this are best outlined in the FAQ and whitepaper. As the network grows, it becomes more and more difficult for any individual or organization to effect that scale of control. Thus, at a certain tipping point that we agree is required, it will be extremely unlikely that it will be compromised.

I think the closest approximation of how the Bitcoin system works is to equate it to physiology. My examples will be extremely fast & loose approximations; I'm sure better examples may exist. RNA transcription generates the encoding material for new cells and that could be equated to Bitcoin mining. Transactions occur similarly to how cell membranes act as barriers - they allow certain valid materials to pass so long as those materials are uniform in nature (fungible), ie., a hydrogen molecule is a hydrogen molecule. The overall computing power is like the immune system wherein T-cells overwhelm foreign entities (protocol-breaking or encryption-manipulating variants), adding a constantly active layer of protection to the system at a reasonable cost.

Hopefully those explanations help. Open Transactions affords the same functionality as Bitcoin, but also affords multiple other types of transactions. I find that they are an interesting combination and both complement hard assets such as gold.

Ramon said...

What Håkan said, lol. Much easier explanation.

@ DP

Anything can "back" a BTC. Its adoption as an exchange medium is dictated overall by several factors including convenience, security and liquidity. This is the same with any currency.

At the moment, BTCs are more like vouchers between two parties exchanging goods and services, or bearer bonds when exchanging with other currencies.

@ Michael H

That functionality may not have to be implemented in the Bitcoin protocol. Take a look at the Open Transactions FAQ. There's a good outline of the complementary nature of Bitcoin and OT.

https://github.com/FellowTraveler/Open-Transactions/wiki/FAQ

@ Aquilus

As with fiat currencies, Bitcoin is more of a general claim on something of value, not a specific store of it as with hard assets. I agree that it may not be the world's reserve, but it could easily be a major one of many that comprise decentralized forms of money.

There is no way to directly regulate any aspect of Bitcoin itself. Alternative forms of coercion and taxation will likely drive Bitcoin out to an extent, but not harm the system otherwise. Even attempts to restrict it through external means can be largely or even entirely circumvented by use of full anonymizing techniques and conducting end-point transactions outside of the offending regime's jurisdiction. For instance, the US legislates away BTC usage, but a large portion of the free world now uses it; I2P or Tor could be used to protect the Bitcoin transaction with a computer in Papua New Guinea, outside of the geographical and legislative reach of the US. Of course, any item shipped to the US would be subject to whatever arbitrary laws are in place.

Short of going through the open-source code, the Bitcoin FAQ & whitepaper, as well as the Open Transactions FAQ & Wiki answer the vast majority of questions in detail.

https://bitcoin.it/wiki/FAQ
http://bitcoin.org/bitcoin.pdf

https://github.com/FellowTraveler/Open-Transactions/wiki

Jeff said...

Bitcoin, a complex system that exists only in cyberspace. What could possibly go wrong? Aside from the technical aspects (hack attacks, ponzi-like behavior, unstable value), there are bigger problems.

Why do people buy bitcoins? Store of value or speculative casino?

But really the biggest problem is very simple: Uncle Gorilla. Made a killing mining bitcoins and bought a cool new car or beachhouse without an obvious origin of the money? Made a cash deposit to your bank account from nowhere? Meet your IRS auditor, Agent Smith. He is very interested in taxes, as in, did you pay them? And Uncle Gorilla only accepts dollars.

Uncle doesn't like alternative monetary systems, not one bit. In fact they are illegal and if you threaten the dollar, well, you are on his radar. Think you are anonymous? Want to bet your freedom on it? Prisons are full of tax cheats, kiddie porn traders, money launderers, etc. who thought they knew how to beat the system. Heck, by law even barter transactions are taxable. Bitcoin newfags, wise up. Don't mess with Uncle Gorilla.

Ash said...

re: Bitcoin

If it's not already a pyramid scheme by strict intention, it will become one soon enough... when the people currently driving it realize that it will never be a viable competing currency on a global or regional scale. The reasons for that are numerous and many have already stated some of the more important ones here, but seriously, this is about as idealistic as it gets.

Ash said...

It also unsurprisingly reminds me of Ray Kurzweil and his predictions of "The Singularity"...

nonsense.

Derek said...

It is better than freegold as it has all the same positives but none of the drawbacks (heavy, bulky, welcome sign to thieves). Given that it is a reflection of CPU/GPU cycles, it represents work without decreasing any work/worth, ie, hoarding hurts no one. As to rewarding early adopters, regions with gold deposits are not doled out by an impartial god. That it might be a target of authorities makes it like cash to drug dealers, arms dealers, human traffickers and world governments: impossible to regulate or stop. Bitcoin will win and it will trade alongside gold and silver.

Hawks5999 said...

@Ramon
The point I was trying to make is that it's arbitrary to figure the USD/BTC exchange based on the number just to the left of the decimal point.

Worldwide GDP measured in USD is 58.26 Trillion (http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=global+gdp). If you measure that in the lowest divisible unit of the dollar (the cent) that's 5.826 Quadrillion cents.
Now measure 21 million BTC in the lowest divisible unit of the BTC (the ubit) and you have 2.1 Quadrillion units (https://en.bitcoin.it/wiki/Myths#21_million_coins_isn_t_enough;_doesn_t_scale).
Now treat that lowest divisible unit equivalent to a USD lowest divisible unit, the cent. Divide it by 100 and you end up with 21 Trillion units (that still have divisibility down to the hundredth).
Now it's entirely possible for the exchange to drop to USD$1/0.00000001BTC and have 2.1 Quadrillion available. But then it would not be useful for transactions of less than $1.
Granted, in the next 30 years it takes to mine the remaining coins the $1 could drop in purchasing power to where it buys what 1 cent does today and further divisibility is irrelevant. At that point, 1 BTC would be worth USD$100,000,000

Hawks5999 said...

umm.. @Jeff, if alternative currencies are illegal, everyone better stop playing Zynga games (eg Farmville), SecondLife, World of Warcraft and stop using Facebook.

All of these have alternative currencies that can be easily exchanged into USD$

FJF said...

Are there futures markets and derivatives related to Bitcoins? Surely there is even more money to be made by providing paper promises to deliver Bitcoins at a future date.

All kidding aside, the Bitcoin phenom is pure lunacy -- the epitamy of a confidence game and greater fool finance in action. Unlike tangible physical assets (e.g., gold) it costs nothing for the titans of Bitcoins to create a few additional Bitcoins every now and then. Who's gonna notice? Not long afterwards, you can expect full blown "fractional banking" with Bitcoins. After that, the path is clear for the Bitcoin sheeple to be systematically sheared. When are people ever going to learn?

Jeff said...

Hawks,

I'm sure Uncle Thug knows all about facebook, secondlife, etc. If the webgeeks get too uppity a few high profile convictions will remind them what a money monopoly and tax compliance is all about. Just ask all the online poker players who have their bank accounts frozen. Game, set, match, Uncle Thug.

Jeff said...

Not to mention that facebook isn't some anonymous system. One word from uncle and facebook will drop their 'money' system fast. You just can't get around Uncle with your frozen pokerstars offshore account, either. Uncle has a royal flush, Hawks. What have you got?

mr pinnion said...

What about those 'giants' FOFOA often talks about? The most powerfull richest people in the world.Will they sell their gold and buy bitcoins? I doubt it.
Gold was worth a lot before the internet.If the government hit the internet 'kill switch', gold still has value.Do bitcoins have value if the comman man doesnt have access to the net for any reason?I doubt it.
The middle east , north africa is going up in flames.Are the future 3rd world folks going to be swapping bitcoins on their abacuses?I doubt it.
It wont work if the gov. doesnt want it to work.
If hyperinflation occures, and fortunes are lost ,do you think the man in the street will say "well , i lost everything on the fiat money thing.... i know i ll have some bitcoins...only, i traded my computer for food in the fiat collapse.Ummm, problem".I doubt it.

Also, i agree with Texan about the rival bitcoins that will spring up.
I m sure all the brainiacs at google could figure out how to start up 'googcoin'.Why not?
And baring in mind all the big money's(xcoins?) made at the very early stage in the process....
You ve made a zillion pounds in bitcoins then google has big advertising campaign about 'googcoin'.Your going to put some money in.And everyone who missed out on the big gains at the start of bitcoin is going to jump in 'googcoin' then everyone cashes in bcoins to buy gcoins.
THEN microsoft get in on the act with an xcoin? startup and so on and on..
Or am i missing something?

Regards
Ozzy

Ramon said...

@ Hawks5999

Apologies, I should've included my math. The situation is the same as that of gold's revaluation to accommodate/monetize debt levels.

The maximum number of whole BTCs is:
21,000,000 * 10^8 = ฿2,100,000,000,000,000

Accounting for Bitcents, it has been suggested that two decimal places could be reserved such that the total is:
2,100,000,000,000,000 * 10^-2 = ฿21,000,000,000,000.00

With the number you have for global production in USD, we can calculate the USD/BTC ratio needed to completely switch to Bitcoins:

$58,260,000,000,000.00 / ฿21,000,000,000,000.00 = USD$2.77 per ฿1.00

We could take this even further by backing all of the world's estimated derivatives of about USD$1.4 quadrillion (as per Jim Sinclair, not the BIS).

$1,400,000,000,000,000.00 / ฿21,000,000,000,000.00 = USD$66.67 per ฿1.00

If we use the same calculation to convert $1.4 quadrillion into all of the above-ground gold, approximately 160,000 tonnes:

Using the conversion of 1 tonne = 32,150.75 troy ounces, 160,000 tonnes = 5,144,119,450 troy ounces.

$58,260,000,000,000.00 / 5,144,119,450 = USD$11,325.56 per troy ounce of gold

and

$1,400,000,000,000,000.00 / 5,144,119,450 = USD$272,155.42 per troy ounce of gold

Of course, I've not considered issues involved with currency adoption, the appreciation process or any other mechanisms. This was just to show the same basic structure applies.

At a current exchange rate of a little less than USD$20 to ฿1.00 from Mt. Gox, Bitcoin would have to do a bit more than triple in value and achieve maximum available saturation in both currency levels and population participation to provide universal liquidity. Other factors could easily push the USD/BTC rate much higher, only to come back down to match eventual supply/demand levels.

Generating additional BTCs will require more time and energy until a relative dynamic balance is achieved and large-scale BTC mining is no longer profitable. From that point, supply and demand will keep the valuation in a range. Increasing participation due to population growth will deflate BTC valuation while the opposite holds true for statistically significant population contraction - BTCs would have an inflated value relative to the participating population that will drop to meet the reduced supply/demand ratio.

Again, this assumes the SHA256 algorithm remains fundamentally sound. Other circumstances could disrupt stability as well. Only time will tell, as Pandora's Box is definitely open now.

You're absolutely right in noting the possibility that the exchange could go in favor of the dollar instead of Bitcoin, making $1 worth all 21 million Bitcoins. However, I simply don't see that drastic of a change happening, especially when the world is gradually shifting toward a flight from anything having to do with American finance.

Consider that, since Feb 9th of this year, Bitcoin has gone from USD parity to a recent high of over $31 with a rapid but absolutely tiny participation rate. It is now just under $19 per BTC and holding steady. A correction was projected well before it happened, so without further drastic collapse we can simply stick with the notion that nothing goes up or down in a straight line.

With a continuing rapid influx of users along with further USD debasement (which is being matched by all other fiat currencies or they'd be rocketing higher), I can imagine much more than 3,100% gains being made. That would suggest BTCs as a better representation/store of value than fiat, though by no means am I explicitly stating that is the only reason, especially considering the highly speculative current environment.

There are certainly more hurdles to overcome, but I see decentralized currency/token systems as an opt-out from centrally (mis)managed economies. Perception is key for adoption.

Ramon said...

@ Jeff

You can't arrest people you can't find or prosecute for actions outside of your jurisdiction. These technologies eat the old system from the inside; the weaker the old world gets, the stronger the new one becomes.

There is now a COMEX alternative. There will be Facebook alternatives. Maybe you could be productive by starting one?


@ mr pinnion

The kill switch does little, if anything other than a transient disruption to a distributed network that extends outside of the US. Why hasn't BitTorrent been "shut down"? The powers that be do not understand what is coming. There is a saying: wealth doesn't pass three generations. The richest and most powerful will only maintain their wealth if they understand and embrace progressive trends. Mobile phones are an obvious platform for even the poorest of nations.

Google hasn't usurped Facebook or Paypal. Alternatives will only serve to force competition and improvements, otherwise real failures of the currency systems will occur or less prodigious ones will be supplanted. It may as well be said that because there are varying currencies in the world today, it can't work, yet it does (central bank planning idiocy notwithstanding).

These distributed systems already exist, although a central method of control is still retained for shareholder benefit. Most corporations simply aren't capable of recognizing the coming wave.


For anyone responding with a knee-jerk dismissal, first take the time to understand what Bitcoin and Open Transactions entail, particularly the notion of triple entry accounting and how the cryptographic algorithms enable decentralization. The links again:

https://bitcoin.it/wiki/FAQ
http://bitcoin.org/bitcoin.pdf

https://github.com/FellowTraveler/Open-Transactions/wiki/FAQ

mr pinnion said...

@ramon

"Google hasn't usurped Facebook or Paypal."

There is no monetary incentive to start using 'googbook'
There would be an incentive to get in quick at the start of 'googcoin' because everyone, by then,would know thats when the biggest gains are made.
It s this quality of xcoins,(the huge gains made by getting in quick at the start) that would make new startups irresistable.

Regards
Ozzy

Jeff said...

Ramon,

What happens outside USA isn't Uncle's concern, but he can certainly make it illegal inside USA, and that is enough to stop bitcoin from competing against the monetary monopoly. No one in USA will keep their 'money' in a computer which can be seized by the government and used to convict him. And since there are already laws against tax evasion, at least some things Bitcoin users want to do are already illegal.

Finally, if Uncle wanted to delegitimize BTC he could hardly do a better job than allowing web anarchists to promote it as a way to dodge taxes, buy illegal drugs, threaten to bring down the government.

Neverfox said...

@Texan:

The biggest problem I see (aside from how it works, of which I still have no idea, or why it's not a pyramid, or how it will be adopted by the computer less or computer illiterate) is competition. What's to stop someone from creating a whole new bit coin " peer to peer" network? Could eGold reformulate itself as a " rival"? Could PayPal start offering a fixed number of credits for " miners"?

How exactly is that a bad thing? Does more than one precious metal prevent us from making rational decisions about which one is the better store of value? And it lacks some key features of a pyramid scheme (god if everything that benefited earlier adopters was called a "pyramid," imagine!) such as recruiting downlines and the need for exponential growth to ensure profits. And it doesn't share with Ponzi schemes the delayed withdrawals and constant reinvesting until the "guru" disappears. I know people have tried to point out things that seem like those features but I remain unconvinced. You can try though.

@g:

Virtual Money is not durable, in the sense that it is electrical. If you lose your power-source, drop your server/computer/memory-stick/hard-disk or whatever in some water your virtual money is gone. In that sense it has the same durability as salt. Salt once was a store of value, but has since lost that function, due to a lesser durability then better stores of value.
No, virtual money has no merit as a store of value.
It could however be used as a modicum of exchange.


Re: the dropping it in water bit, you do realize that you can make virtually unlimited copies and store them however securely without diluting the value of your wealth, right? Try doing that with your gold (and I say that as an enthusiastic buyer of physical gold).

As FOFOA pointed out, gold doesn't help much in a crisis either, but carries wealth through a crisis. To paraphrase, if you need to spend your BTC during a power outage, you didn't plan well.

Allocated gold can be, is, and has been for a long time, transacted in a digital manner and without physical movement.

Yes but it still means distance between the owner and the real physical wealth. You get all of that AND the real physical wealth (in the form of your private keys) with BTC. eGold is a great example of why that model is hard to pull off.

@Konrad:

I can't help but wonder about the comparisons to the tulip mania. Now we think back and can't believe how people would put their life savings into tulip bulbs! To us it seems completely incomprehensible, yet at the time it was considered the smartest thing to do. Now, will we think the same about bitcoins one day? What are the true differences between tulips and bitcoins?

Well, you tell me. Do bitcoins strike you as having more in common with gold or tulips in terms of use value as money? And does the recent bubble that's drawing all of the comparisons look like the tulip crash or a relatively precocious and maturing market?

@Jeff Herron:

I like my store of wealth to be the same as my work -- real, tangible, and lasting. BitCoin will fail ultimately, even if it enjoys a period of popularity, because it is none of these things.

You didn't actually provide an argument for why it isn't any of those things. Perhaps you assume it's obvious but I don't think it's obvious at all. Can you tell me why?

Now just because I find some criticisms unconvincing doesn't mean I don't have some. The main one is two-point criticism Aquilus made (it's trying to fill two-roles and it may fail at both because a) it doesn't have the platform that gold has as a SoV and b) it's not unrestricted as a MoE). I'd like to see that discussed more.

Ramon said...

@ mr pinnion

No monetary incentive to compete with Facebook?

http://en.wikipedia.org/wiki/Facebook#Revenue

Please take the time to read the materials I've linked at the end of this post to understand how early adopters are rewarded in this system. This is not perpetually re-spawning World of Warcraft gold mining.

Alternatives might use different incentives or none at all. That is not a critical component for the system, only a means to accelerate adoption and continued participation that phases itself over time due to supply/demand approaching balance.


@ Jeff

What happens inside the USA isn't the rest of the world's concern. Who cares if Americans want to immolate themselves when the world outside of EU & US is on the road to long-term freedom and prosperity?

American influence is on the decline. The banks are trying to branch out. The next several years will involve a struggle for the world's wealth between monolithic entities seeking control over it and the distributed owners of the wealth itself who wish to protect it.

Everyone has their own reasons for using Bitcoin and developing variants.

The speculation exhibited shows a lack of understanding. Please take the time to comprehend what these technologies actually are so the discussion can meaningfully progress.


Thank you for your perspectives. I will respond to meaningful questions that are not fully clarified in the information below.


The links once more, this time clickable:

Bitcoin whitepaper
http://bitcoin.org/bitcoin.pdf

Bitcoin FAQ
https://bitcoin.it/wiki/FAQ

Open Transactions FAQ
https://github.com/FellowTraveler/Open-Transactions/wiki/FAQ

Triple Entry Accounting whitepaper
http://iang.org/papers/triple_entry.html

Jeff said...

On further reflection, what happens outside the US is Uncle's business. He took action against americans who used swiss banks to dodge taxes, and shut down those nasty online poker businesses easily enough.

As far as bittorrent, I am sure that if a few bittorrent users were given stiff prison sentences, bittorrent use would drop dramatically. How many child porn torrents do you see online? None, because penalties are harsh.

Finally, an example of what happens to those who think they can create a monetary alternative to the dollar:

STATESVILLE, NC—Bernard von NotHaus, 67, was convicted today by a federal jury of making, possessing, and selling his own coins, announced Anne M. Tompkins, U.S. Attorney for the Western District of North Carolina. Following an eight-day trial and less than two hours of deliberation, von NotHaus, the founder and monetary architect of a currency known as the Liberty Dollar, was found guilty by a jury in Statesville, North Carolina, of making coins resembling and similar to United States coins; of issuing, passing, selling, and possessing Liberty Dollar coins; of issuing and passing Liberty Dollar coins intended for use as current money; and of conspiracy against the United States.

Attorney for the Western District of North Carolina, Anne M. Tompkins, described Bernard von NotHaus and the Liberty dollar as "a unique form of domestic terrorism” that is trying “to undermine the legitimate currency of this country.”

Neverfox said...

@Ash

Those are interesting questions and I hope to discuss it more with the author. I'm not sure that they have a deflationary theory or not (the answer could be 'neither' right?)

Ramon said...

@ Neverfox:

You might be interested in Open Transactions. It deals with many of the limitations of Bitcoin while offering a similar decentralized system. The main difference is OT's comprehensive nature and Bitcoin's incentive system. I find them complementary to each other as well as precious metals.

It's also interesting to note that the correction was suspected well before it actually occurred, as evidenced here:

Bitcoin Market Analysis June 10th 2011

Ramon said...

@ Jeff:

The perspective you've described is that of USA toward US citizens.

Mine was of the rest of the world viewing the USA.

It is a significant difference.

Jeff Herron said...

@Neverfox:

I'll concede that BitCoins are "real", in the sense that they exist as a quantifiable, manipulatable entity, albeit a virtual one.

Note that my comments below have BitCoin only in the view of a store of value, for which I think it is unfit. As a medium of exchange, I think BitCoin shows promise, as I stated in my reply to Bron above.

By "tangible", I mean that a BitCoin cannot be handled and safeguarded in the same way a gold coin can. To even "handle" a BitCoin requires a level of technical expertise that is in even shorter supply than mere common sense. Safeguarding them, as the recent loss of $500,000 worth depicts, is apparently difficult even for the technologically adept. While other technological means of safeguarding will no doubt emerge as the technology matures, there is no way to secure BitCoins that does not rely on sophisticated computer technology. Meanwhile, just about anyone can dig a hole and secure their gold to a reasonably high degree.

By "lasting", I mean that BitCoin has no proven track record and depends on a sophisticated amount of technology that is of fairly recent vintage. This is not BitCoin's fault, but it is at the very least a strong argument in gold's favor. A gold coin buried in the ground will be a gold coin in 50 years, unchanged in nearly every respect. In 50 years, who can say what a BitCoin will be? Who can say that the computer equipment required to access the network of BitCoin transactions will still even be accessible by the masses, let alone functional?

I am not a Luddite, but I am a conservative. Freegold rings true with me because it rests on a foundation of economic praxis that has been tried and tested for thousands of years.

While possession of physical gold requires a certain degree of theoretical construct around it to make it seem practical, that is more a function of our modern understanding of money than something inherent in the act itself. An idiot can possess a gold coin -- and be better off for it even if they don't know why or how it is the case. The same does not apply to BitCoin, which requires not only a sophisticated theoretical construct to support its possession, but also an fairly elaborate framework of electronic gear and all the civil infrastructure that supports it.

One is simple, one is not.

I suppose that may not be a formal argument, in the syllogistic sense of the word. I hope it is at least an appeal to plain sense.

Texan said...

Neverfox,

The problem with multiple private fiat currencies is that no one will know which one is "viable", ie the "winner", going forward. That is why nation-states have legal tender laws, they'd not want any competition for the medium of exchange function of their fiat. There is simply no way that, should bit coin prove successful, it won't spawn imitators, and that in turn will collapse bit coin.

Even worse, it is a CLASSIC pyramid. I convince you to
buy bit coin for $1 that maybe I paid a dime for, you then
go on to convince 10 people to buy "shares" in that bit coin
for $1 each, they each find 10 people to buy shares of
their shares for $1 each, etc. Eventually, all those share
owners will want someone to buy their bit coins, and who will be there paying $100 per bit coin? No one. Total collapse ensues. I suggest you wiki "pyramid scheme" and the let us know how bit coin differs.

Finally, and this is just me, but I suspect I am not alone, I have been to the site and read the wiki and even read the explanations on here, and I still have no idea how one "mines" a bit coin, or what the purpose of that mining is, ornhow that mining relates to anything "real" outside of a self- referential closed loop. It almost seems like you are playing world of warcraft to "earn gold" and then this "gold" is stored in your computer and you think someone in the "meat" world will pay you real greenbacks for that gold so that they can have that "gold" to later turn back into greenbacks (presumably for even more greenbacks than they paid for it, else why bother - see "pyramid scheme" again) or otherwise pay "merchants" with this "gold" for real stuff, and then I guess the merchants pay their merchants and employees with it, and so on and so on. Is that what is going on? Are you earning "gaming gold", and expecting 6 billion people, most of them without computers or the slightest tech savvy (99.999%?) to fork over old hard "meat" cash for it?

I think someone is playing an absolutely massive and
viscious joke on the bitcoin fanboys.

Texan said...

Neverfox,

I know the post came across as harsh, I don't mean to be rude. It's just the more I learn, the more awestruck I am about the whole thing. Part of it is that I can barely hook up to iTunes, so this is way beyond memfrom a technical standpoint.

But really, I just don't see the point. The whole thing requires infinite expansion or, it seems to me, it will collapse.

I appreciate your patience, I am sure all of these concerns have been answered before. Maybe they are even on the bit coin FAQ, but I kept getting a server error message whenever I tried to click on it.

Texan said...

Max Keiser has an article on bit coin date June 10th or 11 th. Click through to high-tech.org article. Very interesting, even comments. Slicer pretty much sums it up if you make it that far.

Neverfox said...

@Texan

The problem with multiple private fiat currencies is that no one will know which one is "viable", ie the "winner", going forward. That is why nation-states have legal tender laws, they'd not want any competition for the medium of exchange function of their fiat.

That's generous to nation states. They have those laws because it gives them power. There have been periods in history with competing notes and institutions have arisen to manage reputation without a central authority. I still say, "bring on the competition" because it only makes things better (unless you're just stubborn about pressing losers).

Finally, and this is just me, but I suspect I am not alone, I have been to the site and read the wiki and even read the explanations on here, and I still have no idea how one "mines" a bit coin, or what the purpose of that mining is, ornhow that mining relates to anything "real" outside of a self- referential closed loop.

The mining is a way to all decentralized growth without being subject to Sybil attacks by forcing proof-of-work problems on new blocks. The reason I think this feels like a Rube Goldberg machine to some people is that they aren't fully coming to terms with the P2P, decentralized paradigm and what it takes to pull off.

Even worse, it is a CLASSIC pyramid. I convince you to
buy bit coin for $1 that maybe I paid a dime for, you then
go on to convince 10 people to buy "shares" in that bit coin
for $1 each, they each find 10 people to buy shares of
their shares for $1 each, etc. Eventually, all those share
owners will want someone to buy their bit coins, and who will be there paying $100 per bit coin? No one. Total collapse ensues. I suggest you wiki "pyramid scheme" and the let us know how bit coin differs.


I don't need to wiki it, thanks. I've studied the aspects before. And I've personally spoken with people who have run actual pyramid schemes and been prosecuted for it. The problem I see with your example is that it begs the question. It presumes that the only way the early adopters can get paid is if the BTC isn't useful as a currency to, you know, buy things with. But that's exactly what is under discussion: will it or won't it? If everyone in BTC was just about passing the buck to the downline, then sure. But I don't think it's purpose or existence is purely to profit from downline dupes and then cash out. I think it will eventually "settle in" as a real currency and/or store of value. Maybe not a focal point and maybe only in certain kinds of transactions, but eventually something. I wouldn't confuse some people behaving like it's a pyramid for profit with it actually being one.

I know the post came across as harsh, I don't mean to be rude. It's just the more I learn, the more awestruck I am about the whole thing. Part of it is that I can barely hook up to iTunes, so this is way beyond memfrom a technical standpoint.

No worries! I don't think you're rude. And I agree that the technical savvy required to understand it is an obstacle (though I don't think it will be fatal necessarily). I think I know fewer people that understand Freegold or gold in general.

The whole thing requires infinite expansion or, it seems to me, it will collapse.

It doesn't require that anymore than gold does. What it does require, and I don't deny that this is something it has yet to do, is be sufficiently accepted and adopted.

Neverfox said...

@Jeff

Like Texan, thanks for the thorough response. That's another reason this site is great.

By "tangible", I mean that a BitCoin cannot be handled and safeguarded in the same way a gold coin can.

Granted, I understand the distinction you're making. I just don't think there is any practical difference when it comes down to it. One person's rolling a coin in their palm is another's checking their bitcoin app.

To even "handle" a BitCoin requires a level of technical expertise that is in even shorter supply than mere common sense.

Granted, again, but it still seems to me that gold bullion buying is also kind of spooky to people. Maybe that's just me.

Safeguarding them, as the recent loss of $500,000 worth depicts, is apparently difficult even for the technologically adept.

Here I have to be a little stronger. The reason it was stolen was not because of any difficulty in securing it. Securing it was a matter of not having all $500,000 worth in a single file on home PC on the internet. He was doing all the difficult stuff (secure, encrypting backups) and none of the basic, common sense stuff. As someone said, like leaving the door of the safe open...

While other technological means of safeguarding will no doubt emerge as the technology matures, there is no way to secure BitCoins that does not rely on sophisticated computer
technology. Meanwhile, just about anyone can dig a hole and secure their gold to a reasonably high degree.


Fair enough but there are other aspects of gold that make it more difficult to deal with. Traveling with large amounts of gold, for one thing. The ever increasing weight, for another (though price can help). High premiums.

By "lasting", I mean that BitCoin has no proven track record and depends on a sophisticated amount of technology that is of fairly recent vintage. This is not BitCoin's fault, but it is at the very least a strong argument in gold's favor. A gold coin buried in the ground will be a gold coin in 50 years, unchanged in nearly every respect. In 50 years, who can say what a BitCoin will be? Who can say that the computer equipment required to access the network of BitCoin transactions will still even be accessible by the masses, let alone functional?


I know I've made a lot of BTC vs. gold comparisons in BTC's favor but I want to be clear that I still favor gold now like most people here. So I agree with you in many regards on this point.

I divide the questions into two groups: questions about the inherent flaws of BTC and questions about the likely success of it. Mostly I've been addressing what I see as misunderstandings about the former and thus the comparisons to gold. I still think gold is the better "bet" in the latter set of questions....for now.

The same does not apply to BitCoin, which requires not only a sophisticated theoretical construct to support its possession, but also an fairly elaborate framework of electronic gear and all the civil infrastructure that supports it.

I'm not so sure it's not wash. Will gold be so great in an uncivil wasteland with no functioning markets? If we have those, why would we not have networks too? I don't know. The internet seems here to stay. Are the risks to it greater, all things considered, than the risks that could affect gold? I'm not sure but I don't have the intuition that they are.

Ash said...

"I'm not sure that they have a deflationary theory or not (the answer could be 'neither' right?)"

Well, it could, but that's what I would take issue with. If it was neither dollar deflation nor HI, then that would imply the dollar would stay within a limited range of value for some time... which basically means the entire global financial system would continue limping along as it has since 2008. If there's one thing that I really don't think will happen, it's that. I do believe he said something along those lines (no deflation or HI), but I'm not sure if that's what he meant. I guess I'll post the question to his site.

Back to Bitcoin (@ everyone defending it)...

I'll admit that I don't really understand the details of the computer technological concepts underlying it, but I also think it's disingenuous to suggest that people cannot evaluate its function as an alternative/decentralized medium of exchange in our global financial system without that understanding.

The thing is, even the best laid plans with pure intentions tend to turn into "pyramid schemes" within this system, when that phrase is properly understood in its broader sense. That is true of both currency systems and entire economies and their various sectors (i.e. the US "higher" education system).

Think about a "productive" business that produces...widgets, for example. If the owner is fortunate enough to get a foot in the door and establish a solid customer base, he/she will eventually be forced to issue/rollover debt to expand and remain competitive. Even if the owner maintains reasonable debt/equity ratios the whole time, the fact that it is expanding means it becomes more dependent on the broader credit market conditions and the tax/regulatory policies of the various governments in its jurisdiction (especially the largest one). To maintain adequate profits, it will be forced to solicit more investment capital via equity or credit mechanisms. At that point, IMO, it has become a pyramid scheme, because its returns on capital will necessarily fall over time.

Yes, that's a huge generalization, but it's just meant to be a simple analogy. I fail to see how a currency business operating over "decentralized" networks is fundamentally any different or capable of insulating itself from the same coercive external pressures... at such a large scale. That's the key distinction I would make - it could work at smaller scales, but not as some kind of trusted competing currency to various regional or global reserve currencies.

Rui said...

@JR

Mish is actually right, maybe for the wrong reason, that there's no need of unrestricted supply of money. A fixed but divisible supply of money is good enough to meet the reasonable demand if we just lay off and let price discovery work.

Imagine you are Steve Jobs running Apple and planning to sell 50 million iPhones this year. At 200$ / piece that requires 10 billion dollars. You don't need to call Ben at Fed to put 10B dollars in the market to support your iPhone sale. You go ahead selling it anyway. Those who would buy BlackBerry, Palm and WinMobile will be impressed enough to buy iPhones instead. BlackBerry and so on will be forced to slash the price to stay alive. Your quality product will choke the competition off and suck the money supply away from them. Free market can self-adjust. No need of unrestricted money supply.

On the other hand if a business has no market unless it's "lubricated" by unrestricted supply of money then it's probably an unprofitable business deserving no money infusion to begin with like this sub-prime mortgage bubble a few years ago. No one in their right mind would have done these zero down loans with people having bad credits had it not been Bush/Greenspan low interest-rate "home-ownership" policies and Fannie/Freddie government guarantees. Cheap money went in the real estate market not for sustainable growth but flipping an already overpriced house even higher and then dumping it onto the next sucker. The outcome was a disaster till this day.

Market driven fixed supply might not be perfect but it's definitely better than politician/banker driven unrestricted supply that always ends up in a mess.

Just one of the many reasons why money has to be hard.

Indenture said...

James Rawles at Survivalblog.com asks for donations every day (standard) but just posted this today for the first time: "For those that might feel guilty about never getting a voluntary 10 Cent Challenge subscription, here is a new, zero cost option: You can donate your computer's background processing power to mine Bitcoins for the Ten Cent Challenge. This a Java applet that is NOT installed on your PC or Mac. It simply runs within a web browser session. If everyone that reads SurvivalBlog were to keep that Bitcoin mining web page open while web browsing, or better yet, overnight... It might even add up to some significant digits."

Texan said...

Neverfox,

I have no problem with legal tender laws, as i like to know that what I get paid in can be used to buy stuff. I also have no issue with governments having power, to a degree. It's kind of the first principle of a government, ie " to govern" . Enforce laws and all that.

Actually, early adopters do not make any money if the price doesn't go up and then they sell. I know this because I read that there will only be 21 million bit coins, and the first ones started trading at 6 cents. So if I was the only miner, and successfully mined all 21 million, and was lucky enough to find a buyer, I would make 1.2 million. Is that a lot of money in the world of high finance? Appreciation is in fact the key to the whole scheme.

Other than trying to prove a political point, or have untraceable funds, or mine for profit by selling at a higher price later, what is the point of holding bit coins? Or more critically, what is the point of spending cash to buy bitcoins? What do I get for that? What service is being provided? What is the purpose of bit coin? It is not accepted anywhere I shop, i have no idea how " liquid" the "bitcoin for cash" brokers are, it's value fluctuates wildly, and it requires a computer science degree to use.


Really, what is the point?

Neverfox said...

@Texan

I have no problem with legal tender laws, as i like to know that what I get paid in can be used to buy stuff. I also have no issue with governments having power, to a degree. It's kind of the first principle of a government, ie " to govern" . Enforce laws and all that.

I'm an anarchist (which I have no problem admitting biases me in favor of something like BTC right from the start) so I could go on for a long time about why you don't need the state to have law, order and financial peace of mind but it's probably not our place to derail this thread. If you ever want to discuss political theory, I'm game. You seem like a smart and amicable person.

Actually, early adopters do not make any money if the price doesn't go up and then they sell.

I don't disagree with this. If I said something that sounded to the contrary, I can't recall but would try to clarify if you care to point it out.

Other than trying to prove a political point, or have untraceable funds, or mine for profit by selling at a higher price later, what is the point of holding bit coins?

Other than? Why can't those all be good enough reasons themselves? Aren't those all reasons that play some role in people's interest in physical gold? I just don't see why I need to put those to the side to come up with some "purer" reason. I'm not even sure what that would be for any potential SoV/MoE.

Or more critically, what is the point of spending cash to buy bitcoins? What do I get for that?

Hasn't this whole thread been predicated on the possibility that BTC might play a role in the economy and even compete with gold? Even if you aren't convinced of that, the hypothetical alone answers the question: for the same reason there is a point in spending cash for gold, there might be a similar reason for BTC, i.e. it shows itself to be a good MoE or SoV (short or long term).

What's the point? Well, I find enough point in just getting to know it by getting my hands dirty. I don't expect people to sell their gold for BTC. Hell, I'm not! But the point is that we might, just might, be witnessing a paradigm shift, or at the very least, the seed of change. Isn't that the least bit exciting?

Casper said...

I get a feeling that the debate surrounding the BitCoin is heavily influenced by its rapid price (in other currencies) appreciation recently.

If a BitCoin can be exchanged for goods/services it will be able to attract interest (network effect) and become a MoE.

The issue regarding the time span as a SoV is a bit more complicated. Every MoE is a "good" SoV for a certain time span.

I can imagine BitCoin to become both in a closed out community or at least a community limited in number since, as somebody before me said it, people around the world aren't all that computer literate.

Now a question..I don't understand why the creation is limited to the upside. If the goal is not to inflate, why not just start with fix amount of it right from the beginning? Why mining it? It just has that "let's imitate the real/meat world" to it that doesn't appeal to me.

Casper

JR said...

Rui says,

"Market driven fixed supply might not be perfect but it's definitely better than politician/banker driven unrestricted supply that always ends up in a mess. "

Oh, you mean government imposed (the opposite of market driven) fixed supply is better than the currently inflatable fiat/paper gold system that the politico/banksters currently abuse!!!

Well said than, we very much agree!!! So does Aristotle in the quote I posted above!!!!

Good thing our future "monetary" options are not limited to such a polarizing into Hobbesian choice.

Bon temps, J.R.

Casper said...

FWIW - I found this site while searching for more info on BitCoins. There are some extensive posts regarding pro and cons.


http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea


Casper

Motley Fool said...

Re : Bitcoin

I like the idealism. As Aristotle said, bless them.

Unfortunately bitcoin will fail.

I will give two quick reasons.

Firstly government doesn't like it. The standard propaganda will be sufficient to make it illegal, ie. child porn, crime, drugs, tax evasion. There are already two us senators calling for it to be made illegal.

The second quick reason. Consider, if you have two media of exchange, one inflationary one deflationary, which one would you prefer to Spend? That's right, the inflationary one.

This means in the long term, people will prefer hoarding them to using them due to their limited issue and hence increase in value. Which implies that predominantly it will compete as store of value. With gold.

My money is on the big fish to prefer gold to digital bits. :)

Still, bless the idealists. :)

TF

Motley Fool said...

@Neverfox

It is my sad duty to inform you that anarchism is a unworkable idea.

Not that I agree with our current overarching governments, I think they can be cut down to about 1/100th the size.

We do have a use for governments though, unfortunately.

Peace

TF

Ramon said...

@ Motley Fool:

Irrespective of whether Bitcoin will persist, when has a government ever been able to stem progress?

Inflationary currencies depreciate in value while deflationary ones increase in value, based on supply/demand fundamentals. It would take additional effort to devalue a deflationary currency.

If anarchy is unworkable, socialism must be even less so, as it has failed repeatedly. Asserting the validity of a concept must be backed by more than nebulous claims.

You say there is a use for government. What is your definition of 'government'? What are some examples?

Please take some time to understand what decentralized crypto-currencies are before speculating.

Crack said...

"Inflationary currencies depreciate in value while deflationary ones increase in value, based on supply/demand fundamentals. It would take additional effort to devalue a deflationary currency"

help me cuz I don get it

this good cuz ..........................?

"If anarchy is unworkable, socialism must be even less so, as it has failed repeatedly"

gess u fava zero gummint

you got water plummed at home?

paved highway to the frontyard for you hydrogenfrombrownwater ecomower?

power for PC?

how does water+power come like magic when you switch to GO? nobody else contributid? all you own work

is you anarchist neighbor standin out back in the rain for you primin the pump on his well?
also he whippin his hamster to keep the gen wheel spinnin?
hes real nice aint he?

how bout you god help us pro create and you vegitaran lifepartner drop out a lessthanperfec bun? you gonna support it on you proud strong shouldas? you go for survival the fitist?

jus tryin understand

Midnight Gardener said...

Blogger seems to have eaten my post. Please forgive if this is a dupe.

@ Jeff,
Re: Liberty Dollar conviction, me thinks you are mixing apples and oranges. Just because a criminal government can convince 12 government worshipers that something is illegal does not make it so.
Regarding BitCoin, I had been trying to figure it out and got a real boost in my understanding from this blog and the comments, thanks all. If I had to earn BTC for food with my net connection and use limits I would starve.

Since I'm not about to sell any gold to buy BTC, I guess I'll continue to mostly use FRN for exchanges until all the government worshipers realize that anarchy could never possibly be as destructive as history has shown with governments. They even wrote and/or approved the version of history we are taught that proves the point. Go figure.
Hmm, I just remembered it is time for me to pass some of my dreaded FRN off to FOFOA.

“If men are good, you don’t need government; if men are evil or ambivalent, you don’t dare have one.” — Robert LeFevre

Ash said...

"Irrespective of whether Bitcoin will persist, when has a government ever been able to stem progress?"

Well, it depends on what you define as
"progress", but according to my definition, government manages to stem progress ALL OF THE TIME. Especially "progress" made over the Internet... the Internet does not benefit anyone nearly as much as it does the government and those elite who have effective control over the government. Sure, there are many benefits to average citizens, but I wouldn't bank on them being around for many years in the name of "progress".

Ramon said...

@ Crack

To start off, I'll say that my views are my own and this isn't meant to be a personal affront. If you're aware of detailed counter-points, I encourage you to provide them.

Requiring more than nominal effort to expand the money supply helps to keep it from being inflated ad infinitum.

Self-governance would be a better term for what I desire. Central government by any other name is organized crime/extortion. It rides the coattails of individual ingenuity and continues sucking the marrow from the bones of the governed until the society is too weak to support politicians' ravenous appetite.

Infrastructure services are a poor example to use when highlighting government contributions to society. When was the last time you called a government plumber? How many government employees are in the contractor's road paving crew? How does Japan view its government-sanctioned nuclear power after Fukushima Daiichi?

One of the things government does offer for a short time during its general lifespan is a relative increase in large-scale data collection, from population census to environmental science information.

When individuals must fend for themselves, they can become very creative. Yes, some will resort to deceit or violence, but the vast majority have historically chosen to fulfill purposes needed in society. Construction, food production, clothing manufacture, sanitation services, etc. Ask yourself how people choose their profession. I suspect government mandate will hardly enter the picture.

A given society can only sustain so many thieves and parasites before it collapses. Throughout history, those thieves and parasites have been royalty, clergy, bankers and politicians. Their messages may differ, but their end results have always been the same. It typically amounts to "Peace & love for everyone, but more for me!"

Free market forces are stronger than any government-induced motivational efforts. I strongly recommend reading Linda & Morris Tannehill's The Market for Liberty or listening to the audiobook.

What I've read and seen with my own eyes leads me to firmly believe that the cause of societal decline is bank-owned government in bed with bloated corporate interests, in whatever form happens to be contemporary for the era (e.g. kings, clergy and corrupt nobility during the middle ages). I have yet to see empirical evidence to the contrary.


@ Midnight Gardener:

I think your post came through on the other thread as well; all good.

Excellent point. They don't even need to be gov't worshipers. Apologists or even people going with the general consensus would be sufficient.

Gold is definitely not something you want to part with no matter the currency being traded for. Trading all USD/FRNs except for 2-3 months worth into BTCs is something I'd do, though. Of course, the majority would have to be in gold/silver to begin with.


@ Ash:

Definitions are important as well. I consider progress to be ideas/methods/technologies that produce an improvement outweighing any realized negative impact. Maybe a better term would be quantifiably beneficial advancement? Ah, semantics. Maybe I should've been a lawyer.

I agree, it seems that government's entire purpose is to impede anything and everything worthwhile.

As far as progress, it never completely stops. Government just brings it to a crawl. At a certain point, the pressure from being held back is finally released as control is relinquished from the dying hegemony. From observation, the more progress is made, the harder government clamps down. Eventually, one of the two will have to give; my money is on progress.

Chris said...

http://paulbohm.com/bitcoin-decentralization/

This is a pretty elegant and insightful view on the value of Bitcoin.

Motley Fool said...

Hiya Ramon

I am amused by your presumptions about what I do, or do not know about crypto-currencies.

Your innuendo that I am advocating socialism, if I am not advocating anarchism, is equally funny.

I am aware my post was a bit, shall we say, rude, for just making a statement without backing it up, but I didn't have the time.

I will make some time though. :P

TF

Beanie said...
This comment has been removed by the author.
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AziPhoto said...

If you have or want to trade/buy/sell through bitcoins recent history (Mtgox) shows that one should DIVERSIFY the exchanges one uses. Should any one exchange freeze, get hacked, plummet, at this stage the other exchanges just tend to just keep plugging along.
I opened up accounts with TH: http://goo.gl/Ra5f1 , B7: http://goo.gl/Gst0D , and a few others which allow me to get money in quickly and exit quickly. Do NOT store all your eggs in one basket!
Outside of that Bitcoins will remain viable if only because they can be used to buy and sell illicit items online. Once prostitutes & pimps find a way to do transactions it's a wrap! Bitcoin will take over the earth...lol.

Khalid Al-Tayaran said...

Please have a look at this article:
http://bitcoinmedia.com/bitcoin-vs-metals/

Regards,,,

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