Bitcoin : Where can it fail ?

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Zamfir
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Re: Bitcoin : Where can it fail ?

Postby Zamfir » Tue Mar 29, 2011 6:24 pm UTC

I was hoping you had a link to the internet. :)

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Re: Bitcoin : Where can it fail ?

Postby OllieGarkey » Tue Mar 29, 2011 6:40 pm UTC

Zamfir wrote:I was hoping you had a link to the internet. :)


LOL, it is now my mission in life to find one.

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Re: Bitcoin : Where can it fail ?

Postby docl » Tue Mar 29, 2011 6:57 pm UTC

OllieGarkey wrote:So this is basically Wildcat Banking but on the internet.

Good luck, folks.


I think this has already been covered, but the difference between bitcoin and standard fiat money is that it is decentralized and uninflatable (i.e. no more than 21 million coins can exist.) It is not dependent on the success or continued existence of any one commercial venture. It is currently trading at a rate around a dollar per coin. This could go up or down, but as long as it finds an equilibrium point somewhere and stays relatively stable it can continue to be used as money.

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Re: Bitcoin : Where can it fail ?

Postby Arrian » Thu Apr 07, 2011 2:47 pm UTC

A little late and maybe offtopic, but here's a podcast of Gavin Andresen of the BitCoin project talking with Russ Roberts, an Economist at George Mason University.

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Re: Bitcoin : Where can it fail ?

Postby OllieGarkey » Fri Apr 08, 2011 6:47 pm UTC

docl wrote:I think this has already been covered, but the difference between bitcoin and standard fiat money is that it is decentralized and uninflatable (i.e. no more than 21 million coins can exist.)


That doesn't mean that its value wont collapse against other currencies if people stop trusting it.

There are fewer Myanmar Kyats than there are US dollars. That doesn't mean that the Kyat is worth more than the dollar. It's worth a little more that 15 cents. No matter how much you deflate it, it will never reach the value of the dollar.

Inflation doesn't necessarily have an effect on international trade values.

A 10-30% inflation in the dollar over the next decade wouldn't hurt the dollars trade value too terribly, because it's still the world reserve currency, especially if the fed modified interest rates to provide a better payout to those countries banking in dollars.

Above 30% and you're in trouble.

This idea that inflation is some horribly evil force is silly fearmongering. Our inflation rates in the US are running around 2% last time I checked.

Out of curiousity, if you could get a decent price right now, how many of you would also buy gold or other specie right now?

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Re: Bitcoin : Where can it fail ?

Postby docl » Sat Apr 09, 2011 1:58 am UTC

OllieGarkey wrote:That doesn't mean that its value wont collapse against other currencies if people stop trusting it.


Why would they stop trusting it?

There are fewer Myanmar Kyats than there are US dollars. That doesn't mean that the Kyat is worth more than the dollar. It's worth a little more that 15 cents. No matter how much you deflate it, it will never reach the value of the dollar.


If more people desired kyats and it was impossible to produce more, the price would rise. If this continued for long enough it would reach the value of the dollar. But that's beside the point -- why are we even interested in measuring single Kyats instead of groups of ten? And why are we measuring Kyats against dollars instead of pennies?

It's completely arbitrary what unit value you use -- what matters is how fast it inflates or deflates relative to another unit of currency. That is in turn determined by how many wealthy people are interested in holding reserves of the currency, and whether there are new units of the currency being introduced to meet that demand.

Inflation doesn't necessarily have an effect on international trade values.

A 10-30% inflation in the dollar over the next decade wouldn't hurt the dollars trade value too terribly, because it's still the world reserve currency, especially if the fed modified interest rates to provide a better payout to those countries banking in dollars.

Above 30% and you're in trouble.


Sure, but how is it supposed to compete against a currency that works just as well but doesn't inflate at all?

This idea that inflation is some horribly evil force is silly fearmongering. Our inflation rates in the US are running around 2% last time I checked.


I don't think inflation is "horribly evil", but it is expensive to anyone who holds large reserves of a given currency. So all other things equal, why would I want my wealth to remain in dollars instead of bitcoins for any significant amount of time? Loyalty to the US government and banking system?

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Re: Bitcoin : Where can it fail ?

Postby OllieGarkey » Mon Apr 11, 2011 2:06 am UTC

I don't think inflation is "horribly evil", but it is expensive to anyone who holds large reserves of a given currency. So all other things equal, why would I want my wealth to remain in dollars instead of bitcoins for any significant amount of time? Loyalty to the US government and banking system?


Because the value can drop very quickly, just like what happened with wildcat currency, which was backed by specie.

docl wrote:Why would they stop trusting it?


Because it isn't backed by anything. The Dollar is backed by the US Government.

Currencies must be backed by something. Look at iceland:

http://www.bbc.co.uk/news/business-13029210

Iceland's National Bank, Icesave, was backed by the Icelandic government. There's someone to sue when things collapse.

Additionally, you're ignoring the threat of speculation.

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

The difference between tulips and bitcoins is that tulips actually exist.

Bitcoin speculation can lead to a value bubble which can lead to a collapse, especially since bitcoins represent nothing and are by definition worthless.

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Re: Bitcoin : Where can it fail ?

Postby Silknor » Mon Apr 11, 2011 5:00 am UTC

OllieGarkey wrote:A 10-30% inflation in the dollar over the next decade wouldn't hurt the dollars trade value too terribly, because it's still the world reserve currency, especially if the fed modified interest rates to provide a better payout to those countries banking in dollars.

Above 30% and you're in trouble.

This idea that inflation is some horribly evil force is silly fearmongering. Our inflation rates in the US are running around 2% last time I checked.


Inflation has been running below 2%, which is generally the Federal Reserve's target level. I don't know where you get the 30% number from. 2% a year over a decade is roughly 22%. 30% a decade is 2.65%, which is far below historical trends for the dollar.

The consequences of inflation that's expected and reasonable is generally considered positive. It's only unexpected inflation or hyperinflation which is dangerous.

docl wrote:
This idea that inflation is some horribly evil force is silly fearmongering. Our inflation rates in the US are running around 2% last time I checked.


I don't think inflation is "horribly evil", but it is expensive to anyone who holds large reserves of a given currency. So all other things equal, why would I want my wealth to remain in dollars instead of bitcoins for any significant amount of time? Loyalty to the US government and banking system?


Except that compensation for inflation is built into just about anything you'd put your large reserves in. So either the problem is inflation is significantly higher than expected (a fear which you can alleviate by investing in Treasury Inflation Protected Securities, which will not lose value as a result of inflation), or that your hypothetical person is literally storing money in a shoebox.

Why keep money in a dollars over bitcoins?

Liquidity: Bitcoins are for the foreseeable future going to be accepted at far less locations than the dollar. This will likely remain true in foreign countries. And the lower daily circulation and exchange between currencies of bitcoins also points to a predicted higher spread on exchange rates, costing you additional money whenever you need to exchange currencies.

Investment opportunities: You have greatly restricted options for investing your money while it's denominated in bitcoins. No doubt bitcoins have growth potential, as it's still being adopted by merchants, and each adoption adds value. But there's a large variety of both safe investments and higher yielding ones you can't get. This might not matter if you're comparing holding dollars in a shoebox to bitcoins in a digital wallet, but that's not the right comparison to make.

Decreased risk of inflationary spiral: The chances of a given retailer stopping taking dollars is incredibly tiny. The only real conceivable case for this is a retailer in a foreign country that would still accept a physical currency which is easily exchanged with dollars. Bitcoin is not like this. Retailers aren't bound by law to accept bitcoins, unlike physical currencies in their respective countries. If the costs of it exceed the expected benefits, they'll simply drop it. Every time a retailer drops it, it becomes less valuable. As it loses value, it becomes more likely that more people will want to stop using it, creating a nasty feedback loop.

In the end, it's not as simple as saying fiat currency has an inflation risk and bitcoin doesn't. Both currencies have inflationary risks. For fiat currency, it comes from monetary policy. For bitcoin, it comes from individual's decisions to no longer honor it as currency. The former is easier to predict, easier to hedge, and the decision makers are more accountable to the currency holding public, or at least it's possible for the currency holding public to influence monetary policy by electing new politicians who appoint new Fed Reserve board members.
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Re: Bitcoin : Where can it fail ?

Postby docl » Thu Apr 14, 2011 2:23 pm UTC

OllieGarkey wrote:Additionally, you're ignoring the threat of speculation.

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

The difference between tulips and bitcoins is that tulips actually exist.

Bitcoin speculation can lead to a value bubble which can lead to a collapse, especially since bitcoins represent nothing and are by definition worthless.


Perhaps I wasn't clear: price inflation is possible with bitcoin, but only due to fluctuations in demand. The supply of raw bitcoins (past the first 21 million) never changes. That is what sets it aside from tulips, paper money, and so forth. Yes speculation can lead to artificial deflation which then corrects itself by deflation, but the basic infrastructure does not suddenly become worthless.

Silknor wrote:Why keep money in a dollars over bitcoins?

Liquidity: Bitcoins are for the foreseeable future going to be accepted at far less locations than the dollar. This will likely remain true in foreign countries. And the lower daily circulation and exchange between currencies of bitcoins also points to a predicted higher spread on exchange rates, costing you additional money whenever you need to exchange currencies.


Acceptance by particular vendors doesn't matter as much as you'd think. If I can dial into a dollar-bitcoin exchange from my smart phone at any time, I can still keep all my spare cash in bitcoin form at all times, pulling out dollars only when I need them for a transaction.

Investment opportunities: You have greatly restricted options for investing your money while it's denominated in bitcoins. No doubt bitcoins have growth potential, as it's still being adopted by merchants, and each adoption adds value. But there's a large variety of both safe investments and higher yielding ones you can't get. This might not matter if you're comparing holding dollars in a shoebox to bitcoins in a digital wallet, but that's not the right comparison to make.


Again, that depends how convenient it is (and what kind of premium you have to pay) to transfer your wealth from bitcoin to other currencies.

Decreased risk of inflationary spiral: The chances of a given retailer stopping taking dollars is incredibly tiny. The only real conceivable case for this is a retailer in a foreign country that would still accept a physical currency which is easily exchanged with dollars. Bitcoin is not like this. Retailers aren't bound by law to accept bitcoins, unlike physical currencies in their respective countries. If the costs of it exceed the expected benefits, they'll simply drop it. Every time a retailer drops it, it becomes less valuable. As it loses value, it becomes more likely that more people will want to stop using it, creating a nasty feedback loop.


Requiring retailers to accept a particular currency by law is an act of force. Like slavery, we should expect gains in productivity when it is removed from the equation. As to the retailers dropping it, that is kind of irrelevant if I can simply dial in with my smart phone and transfer the exact purchase amount to dollars on a virtual Visa card or some such. Meanwhile, stores that let me purchase store credit with bitcoins will tend to get more of my business.

In the end, it's not as simple as saying fiat currency has an inflation risk and bitcoin doesn't. Both currencies have inflationary risks. For fiat currency, it comes from monetary policy. For bitcoin, it comes from individual's decisions to no longer honor it as currency. The former is easier to predict, easier to hedge, and the decision makers are more accountable to the currency holding public, or at least it's possible for the currency holding public to influence monetary policy by electing new politicians who appoint new Fed Reserve board members.


The concern about people deciding not to honor the currency (which seems to be the only real concern here) makes sense if you're talking about pieces of paper, but we're talking about bits that can be easily sent anywhere in the world, from any seller to any buyer. As long as there is infrastructure to prevent fraud (which would be software-based rather than legally based), there's no reason to think this will be a particular problem IMHO.

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Re: Bitcoin : Where can it fail ?

Postby Silknor » Thu Apr 14, 2011 5:10 pm UTC

Yes, you can keep your wealth in bitcoins and exchange for dollars when you need to. This imposes exchange costs, and I don't know how significant those costs are (the first site that popped up in google had a spread of 1.75%, meaning you lose 1.75% of your value each time you exchange back and forth).

Requiring retailers to accept a particular currency by law is an act of force. Like slavery, we should expect gains in productivity when it is removed from the equation.


First sentence true. Second, complete non sequitur added to irrelevant example. If every state had its own currency, and then the federal government imposed a single currency upon all the states, we would expect massive productivity and efficiency gains. If you have a moral objection to force, so be it, but that doesn't mean the economics lines up in your favor.

As to the retailers dropping it, that is kind of irrelevant if I can simply dial in with my smart phone and transfer the exact purchase amount to dollars on a virtual Visa card or some such.


Yes, it's less convenient, though perhaps only a little. But that's not the issue. The issue is that every time a retailer drops it, bitcoins become less valuable (conversely, bitcoins increase in value as more people accept and use them). This is where inflation comes from with bitcoins.

The concern about people deciding not to honor the currency (which seems to be the only real concern here) makes sense if you're talking about pieces of paper, but we're talking about bits that can be easily sent anywhere in the world, from any seller to any buyer. As long as there is infrastructure to prevent fraud (which would be software-based rather than legally based), there's no reason to think this will be a particular problem IMHO.


Keep in mind that currently, it's probably more than 99.99% of the world that doesn't honor bitcoins. And has no real reason to besides an ideology few of them hold. In a world where you started with 99% of people honoring bitcoins, there would be less of an incentive to drop bitcoin. But we don't live in that world. Non-ideological retailers will accept bitcoin if it's profitable, and it's not clear it will be.
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Re: Bitcoin : Where can it fail ?

Postby SunAvatar » Mon Apr 18, 2011 2:48 am UTC

Well it would have been profitable for them if they'd started accepting them a few weeks ago, since the Mt Gox exchange just reached an all time high of 1.199 bitcoins to the dollar. (Actually just wanted to drop into the thread to report that, not to actually rebut what you're saying.) Anyone who sold products at the 0.7 - 0.8 exchange rate a couple weeks ago could have made a nice chunk of extra money, there.

Honestly, I've just sold a pretty good chunk of my bitcoins in anticipation of a drop. Maybe they can reach that height permanently in another month or so, but not today.
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Re: Bitcoin : Where can it fail ?

Postby docl » Wed Apr 20, 2011 10:22 pm UTC

I probably stepped over the line with the slavery analogy, for which I apologize. Nonetheless I think there are generally efficiency gains to be made by removing unnecessary sources of coercion.

My prediction is that the world will be moving towards the ability to accept any currency with equal ease, due to technological limitations being removed. This is fundamentally a software issue, and with enough automated trading bots the spread in transferring value from one commodity to another can be narrower and narrower, to a point where it is irrelevant to the everyday purchaser or retailer. To mitigate risk of betting on the wrong one, people might begin to instead trade in an indexed currency that is based on the value of a wide range of commodities, including various Bitcoin clones. The current Bitcoin will probably continue to have value due to its historical status if this catches on, but it won't be the only currency of its kind.

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Re: Bitcoin : Where can it fail ?

Postby mjm » Fri Apr 22, 2011 7:19 pm UTC

So, first I should say that I like the versatility of Bitcoin. If it works, the ease of digital payment is great. However, I've thought of another means of attack.

One possible mode of failure I don't think has been fully explored on this thread is that of another currency superceding Bitcoin. Improvements can be made directly to the Bitcoin system, of course, but I am thinking as far as a malicious attack, as the OP was asking. If/when bitcoin becomes somewhat mainstream, more people will have an interest in it, but the average person's stake will be relatively small. If another organization came up with a significant improvement, it could launch its own version and gather a small following. How could this be a bad thing? Lots of people with no loyalty to the bitcoin system, probably without even concern about cryptography, control the bitcoin value. As soon as major media get hold of the story that there is a better version, the masses, not wanting to be left out, sell and cause bitcoin to crash while the new currency skyrockets in value. If the new version was made in good faith as a real improvement, things may recover and eventual get better. If it were made maliciously, it may turn out to have back doors, which the average person might never consider. I would say this is very unlikely, but this is definitely a feasible plan if you assume an entity the size of the U.S. gov'mint is bent on destroying bitcoin.

What kind of improvement could this be? Obviously not something that can be incorporated into bitcoin in a few days. Maybe the US would openly back a currency, or accept it as legal tender. If it had the appearance of cryptological strength, it would seem that government backing could only be a help.

In fact, the government wouldn't even need to build in back doors. If it caused to be created (clandestinely) new currencies every year or so, people would probably give up on such digital currencies.

The reason this doesn't happen with gold or specie is because of two things that I'm aware of. Tradition/human culture is one part. Gold is, well, golden. The second is that very few new commodities with good properties are discovered. At one time gold won out over silver because it's easier to store, but new resources of limited quantity, good time stability, uniformity, and difficulty of counterfitting aren't discovered every day. Any virtual system without government backing is going to be less stable than physical systems because of the progress and high possibility of better systems. I think the ease of virtual transfer far outweighs this, myself. So, meh.

Again, that was for the benefit of those who want to know how the system can be exploited, not what I think is likely. Now for some other musings.

Aside from debates about reducing loan availability if bitcoin or a deflationary currency were universally used, deflation can hurt the spread of the currency in the transition stage. If someone has both BTC and USD (or other fiat money), what are they going to spend first? The inflationary money, of course. If most people follow the same rational decision making, that person will get paid in inflationary money as well. They will keep spending USD as long as it has a higher inflation rate than BTC. That basically means that BTC is no longer a medium of exchange, one of the primary functions of currency. It has become a hedge, like gold. It's a more environmentally friendly hedge than gold, sure, but it's not exactly the revolutionary currency people hope.

But let's say that for ideological reasons, people spend the BTC and keep the currency moving. If you have some people who are using primarily BTC and some who are using USD, you end up with somewhat separated economies. The USD economy is growing faster, spurred by lending and inflation. The BTC economy is almost constant in size. This is an interesting result, and I'm not saying it's bad. More economic production isn't necessarily the best ultimate goal. I personally think we can and should grow somewhat more, currently, but a community with self imposed limits to growth is intriguing.

To close, a couple thoughts regarding the specific situation rather than currency in general.

If the bitcoin community wants the use of BTC to spread, they should work a bit more on PR, as was mentioned. Not being deceitful, just explaining the benefit. If average people can't understand in 30 seconds why bitcoin is good, they may end up listening to whatever the media say. Not necessary the reasons Austrian school libertarians would use BTC, but why they should use it.

If this works out, it should drop the price of gold and silver, which would be cool. They are neat metals, but the high prices caused by use as hedge means they are underused. People who make jewelry as a hobby get irritated when the prices go crazy, and corrosion resistance and highest conductivity respectively are useful in lots of areas.

I am no economist. I enjoyed doing AP macro & micro, but I may be wrong about stuff. If so, please correct me (politely).

EDIT: I remembered another point, which I believe no one has discussed either. Assuming my understanding is correct, inflation is perfectly possible. Given a decrease in resources, like an oil shock, the total economic output will go down because more has to be put in to extracting resources rather than making additional goods. For a fixed supply of currency and a decreasing amount of production, the value of the currency will go down. This is how inflation is possible even with limited growth (stagflation). When this happened in the 1970s in America, inflation was far higher and more damaging than that of any moderately responsible government's monetary policy.

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Re: Bitcoin : Where can it fail ?

Postby SunAvatar » Mon Apr 25, 2011 5:30 pm UTC

Everyone should ignore my earlier post---I sold off a large stash of bitcoins only to see the exchange rate spike up to 1.9 or so, then settle down around 1.5 - 1.6. New plan: always follow the opposite of my impulse.
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Re: Bitcoin : Where can it fail ?

Postby SunAvatar » Wed Jun 01, 2011 1:00 am UTC

Bump to point out that earlier today I sold 20 bitcoins for 9.2 US dollars apiece. The price has fallen a bit since then, and is now hovering around 8.7. Keep up with the charts at Mt Gox.

In the time between buying in and now, I've read at least dozens of different explanations of why only an idiot would buy bitcoins. I used to try and argue rationally with these people, but it just doesn't work. So, instead, I just quote Eliezer Yudkowsky at them.
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Re: Bitcoin : Where can it fail ?

Postby Goplat » Wed Jun 01, 2011 5:54 am UTC

SunAvatar wrote:Bump to point out that earlier today I sold 20 bitcoins for 9.2 US dollars apiece.
So you're a hundredaire now? Am I supposed to be impressed by that?

The only people who could potentially make big bucks off Bitcoin are the creator and his friends, who were able to mine in 2009 before it was made public. Since there was no competition yet, they were easily able to mine millions of coins (out of 21 million total that will ever be created). When the value gets high enough, they'll cash out and become filthy rich while everyone else gets stuck holding now-worthless imaginary money. Sure, others can make some money in the meantime, just like you could have made some money by investing in Bernie Madoff's fake fund if you knew when to get out - but it's someone else's scam, so you don't know.

(Eliezer Yudkowsky with his fake "charity" is a con artist too, but that's another story.)

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Re: Bitcoin : Where can it fail ?

Postby Zamfir » Wed Jun 01, 2011 8:33 am UTC

SunAvatar wrote:Bump to point out that earlier today I sold 20 bitcoins for 9.2 US dollars apiece. The price has fallen a bit since then, and is now hovering around 8.7. Keep up with the charts at Mt Gox.

In the time between buying in and now, I've read at least dozens of different explanations of why only an idiot would buy bitcoins. I used to try and argue rationally with these people, but it just doesn't work. So, instead, I just quote Eliezer Yudkowsky at them.
Be careful . . . any time you find yourself defining the "winner" as someone other than the agent who is currently smiling from on top of a giant heap of utility.

So, you have just traded bitcoins for dollars? That's not exactly a recommendation of bitcoins, is it?

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Re: Bitcoin : Where can it fail ?

Postby skeptical scientist » Wed Jun 01, 2011 9:18 am UTC

Goplat wrote:(Eliezer Yudkowsky with his fake "charity" is a con artist too, but that's another story.)[citation needed]
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Re: Bitcoin : Where can it fail ?

Postby SunAvatar » Wed Jun 01, 2011 9:21 pm UTC

I sold the 20 bitcoins to offset the cost of new computer toys that I impulse-bought earlier the same day. Dollars have the advantage of being currently accepted at BJ's Wholesale. I was considering selling more, to recover my initial expenses, but I really don't feel safe selling more than that right now.

Not that, if I had sold them anticipating a drop, that would mean I'm down on bitcoins. It would only mean I think $9.2 is a better price than the fundamentals can support right now. Maybe I think a bitcoin only ought to be valued at $8.5. Maybe I think it ought to be $9.

Let's try testable claims. Would someone like to fill in the blank? "The market price of a bitcoin will be below $0.01 before ____________."

Personally, I predict that the value of a bitcoin will spike above $25 before the end of August, and be steadily above $25 by the end of November. I actually think it will be higher than that, but I don't want to be too extreme in my predictions.
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Re: Bitcoin : Where can it fail ?

Postby joeda » Thu Jun 02, 2011 11:43 am UTC

I didn't read the whole thread, but there are obvious problems if an anonymous currency that can converted to another curreny exists.

This article (http://www.wired.com/threatlevel/2011/06/silkroad/) is about a website that has to be accessed anonymously where drugs and other illegal goods are sold. The only accepted currency is bitcoins, effectively making the seller act anonymously. Since there is no way to prove that someone actually bought things there, even if he recieves illegal goods, this sounds like a good reason to ban anonymous currencys.

What do you think about that?

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Re: Bitcoin : Where can it fail ?

Postby Ttul » Thu Jun 02, 2011 1:16 pm UTC

It is what it is. Bitcoin won't replace major currencies. It's a medium of exchange with no central control, and for some, it's a store of value. How would anyone regulate a p2p digital currency anyhow? Basically all you can do to keep people honest is to algorithmically restrict the creation of it.

Should they all run out at 21 million BTC? Who cares. The market knows this will happen and value will accrue accordingly. If there was no end to the coins but a steady rate of creation, then it would still have a "value," but I see this particular choice of the inventor as arbitrary.

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Re: Bitcoin : Where can it fail ?

Postby Deep_Thought » Thu Jun 02, 2011 3:08 pm UTC

Possibly stupid question, but what actually fixes the 21 million Bitcoin limit? Is it an arbitrary number or some limit of the algorithm/data structures used? I've read the Bitcoin FAQ and it doesn't really provide an answer. If it's an arbitrary limit who determines it? On the same topic, the Bitcoin FAQ says:

Eventually, if and when it gets to the point where the largest transaction is less that 1BTC, then it's a simple matter of shifting the decimal place to the right a few places, and the system continues.


Who is in charge of that process?

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Re: Bitcoin : Where can it fail ?

Postby im3w1l » Thu Jun 02, 2011 3:14 pm UTC

Coins are stored anonymously in peoples accounts, right?
If someone loses their account due to hard drive failure, forgetfulness, not caring about those 0.0001 BTC etc, that money will be out of circulation FOREVER. Since the money supply can't expand those losses will, over time, add up. Is this a problem?

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Re: Bitcoin : Where can it fail ?

Postby mjm » Thu Jun 02, 2011 5:13 pm UTC

Deep_Thought wrote:
Eventually, if and when it gets to the point where the largest transaction is less that 1BTC, then it's a simple matter of shifting the decimal place to the right a few places, and the system continues.


Who is in charge of that process?


No one needs to be "in charge." If less currency is in circulation, it just becomes more convenient to work in milliBTC or microBTC. It's a matter of notation: so as long as it's clear what a particular person/website/program means, it doesn't matter how they say it, and it's easier for humans to deal with fewer decimal places.

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Re: Bitcoin : Where can it fail ?

Postby fr00t » Fri Jun 03, 2011 1:04 am UTC

I'm not sure If I fully understand the concept. Fiat currency issued by governments is at least backed by that governments word; it's infrastructure, or whatever. But what is propping up the value of bitcoins (or, why do people trust it)? The fact that the idea is novel and it is the first kid on the block? Also, when people are "generating" bitcoins with their computer cycles, they aren't creating wealth (like solving protein folding or something), just searching for some of the "undiscovered" bitcoins?

Apparently the currency's value has increased by like 1000% in the past 3 months.. why? Because of publicity?

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Re: Bitcoin : Where can it fail ?

Postby Silknor » Fri Jun 03, 2011 1:30 am UTC

I'm not sure how much it's increased recently, but there's a simple reason for it: positive feedback.

As more people accept bitcoins, their value grows, since you can use them for more and be more certain they'll have value in a month or a year.
Growing value makes retailers more likely to accept bitcoins, because it adds an appearance of safety to accepting them as payment.
More retailers accepting them means more people have reason to use them, further adding value.

On top of all of this, speculators see rapid growth in bitcoin prices and buy them not for currency but as an investment. The network effects that make it more valuable also fuels speculation, and speculators going long on bitcoins in turn boosts those network effects.

All of the above should sound very much like a potential bubble, and indeed it's easy to see similarities between it and the housing bubble.
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Re: Bitcoin : Where can it fail ?

Postby Deep_Thought » Fri Jun 03, 2011 10:31 am UTC

mjm wrote:No one needs to be "in charge." If less currency is in circulation, it just becomes more convenient to work in milliBTC or microBTC. It's a matter of notation: so as long as it's clear what a particular person/website/program means, it doesn't matter how they say it, and it's easier for humans to deal with fewer decimal places.

But how do you make it clear to a website/program whether you are dealing in BTC, milliBTC or microBTC? As I understand it, currently your personal stash of BTC is expressed as a single number, with 8 decimal places of precision. To split that up into milliBTC you either have to define a new data structure with more decimal places, or add some kind of tag to specify "this number is BTC, that one is milliBTC", or just suddenly multiply every BitCoin "stash" in the system by 1000. Then all the BitCoin clients in the world have to be updated to accept those new numbers. Who gets to say when and how that happens?

So I suppose what I'm really asking is, who is in charge of the BitCoin software? I know the individual clients are distributed, but who agrees on the standard/protocol that they all have to follow? This ties in to my original question, why the 21 million BTC limit? Is there any hard reason for it or did the original author just pick that number? And if so, what's to stop him somehow updating BitCoin with a new upper limit?

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Re: Bitcoin : Where can it fail ?

Postby MrConor » Fri Jun 03, 2011 10:43 am UTC

Silknor wrote:All of the above should sound very much like a potential bubble, and indeed it's easy to see similarities between it and the housing bubble.


With the important difference that people will always need housing, but if they lose money because the value of bitcoins crashes due to a speculative bubble then they'll likely lose trust in the bitcoin system and stop using it. Since the value of bitcoins is based on other people trusting bitcoins to keep their value, that could be the end of it.

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Re: Bitcoin : Where can it fail ?

Postby Manabu » Sun Jun 05, 2011 4:48 pm UTC

This remembers me of the Mississippi company incident (1717~1720). I think it was the first western concerted attempt to convert a monetary system away from metal, into an paper money economy. But Law, the chief economist in this, didn’t want to only fix the shortage of gold, but also tried (or had to) solve the state public debt and trade balance problems.

The paper money was shares of an newly created monopoly company, and it attracted buyers to it because it was constantly and quickly rising in value. The government accepted public debt papers bearing interest money in exchange for new shares, and people happily exchanged them in expectation of big gains on the valuation of Mississippi company papers. Gold coins were eventually banned in benefit of the new paper money. Financial engineering at it finest, and we all know how those things ends.

If you want to read the whole story, see John Law: Economic Theorist and Policy-Maker by Antoin E. Murphy

And why deflation is bad? For a start, Fischer debt-deflation theory (see wikipedia as I can't put links...). Prices are not perfectly flexible (especially wages and debts), and inflation and deflation aren’t homogeneous.

You should also look into how severe were the crisis in the gold standard. And not in England or USA, where the gold invested somewhere else flied back home in the event of a crisis, but on commodities exporting countries, where international trade was a big part of the economy, and had open capital accounts where capitals fled in any crisis. They often dropped off gold standard in those events (i.e. Suspended conversion, devaluated their money), but not before serious economic downturn and regression.

Bitcoin looks like an small open economy like that... At the same time, I know that bitcoin economy is different than anything else. But once/if there are wages and debts in bitcoins, it is likely that those problems will arise somehow. Besides the already covered especulation problem.

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Re: Bitcoin : Where can it fail ?

Postby Xeio » Fri Jun 10, 2011 11:53 pm UTC

So, first big market crash. Very volatile market, -15% worth in a day.

I see more of those in the future.

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Re: Bitcoin : Where can it fail ?

Postby elasto » Sat Jun 11, 2011 11:10 am UTC

It's hugely fluctuating value would seem to be a huge drawback. I think I'm right in saying it's gone from $1 to $30/bitcoin in two months. A 15% correction is nothing on that scale.

Who'd want to store any significant portion of their wealth in bitcoins with that kind of volatility though?

It or something like it will always have a use, but mainly for people who wish to make anonymous purchases. Anonymity in financial transactions online is pretty hard due to money-laundering and 'terrorism' laws forcing card providers to ask for a lot of id. A minority of people will react against that and turn to something like this sooner or later.

Governments will respond by making specific currencies illegal but that's like trying to make piracy illegal. Suppression will only be partially successful.

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Re: Bitcoin : Where can it fail ?

Postby Stacy S. » Sat Jun 11, 2011 12:11 pm UTC

I like the idea of bitcoins. It is an excellent alternative to cash for some internet transactions. I created an account but have zero. I'm not sure how I'm going to get any but just having an account is enough for right now. This question intrigued me though. Does anyone have an answer?

im3w1l wrote:Coins are stored anonymously in peoples accounts, right?
If someone loses their account due to hard drive failure, forgetfulness, not caring about those 0.0001 BTC etc, that money will be out of circulation FOREVER. Since the money supply can't expand those losses will, over time, add up. Is this a problem?


Also, is there any person or group of persons that can control the distribution in any manner? For example, change the bit mining prize from 50 to 40.

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Re: Bitcoin : Where can it fail ?

Postby DaBigCheez » Mon Jun 13, 2011 2:26 am UTC

My understanding is that unused bitcoins will slowly decay over time, allowing them to be mined and put into general circulation. My understanding is further that the algorithm is meant to be self-correcting to a maximum of 21 million bitcoins, and will continually adjust the rate of bitcoin mining downwards, halving production about once every 2-4 years (don't remember which).
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Re: Bitcoin : Where can it fail ?

Postby Xeio » Mon Jun 13, 2011 3:44 am UTC

DaBigCheez wrote:My understanding is that unused bitcoins will slowly decay over time, allowing them to be mined and put into general circulation.
What? No, they don't decay...

The reduction of mined coins is correct though.

Wow though, starts close to $30, drops to $10, rebounds to $24, is now back at around ~$20. I'm not sure volatile is an adequate word to describe it anymore.

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Re: Bitcoin : Where can it fail ?

Postby buddy431 » Mon Jun 13, 2011 4:53 am UTC

Xeio wrote:
Wow though, starts close to $30, drops to $10, rebounds to $24, is now back at around ~$20. I'm not sure volatile is an adequate word to describe it anymore.


Presumably, as people become more aware of them, and they become accepted for more transactions, the exchange rate will stabilize somewhat. Of course, that rate might be 0. I'd like this to succeed (if for nothing else than to providing a way to buy things online without giving a credit card number to some sleazy seller), but I am a bit skeptical. I suppose this volatility is the time of trial, so to speak. Either the price will stabilize and they'll become an acceptable method of buying things online, or the price will collapse as people see the volatility and lose faith in them. Time will tell.
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Re: Bitcoin : Where can it fail ?

Postby DaBigCheez » Mon Jun 13, 2011 10:06 pm UTC

Xeio wrote:What? No, they don't decay...


Hrm - could have sworn I read that somewhere, but a quick search reveals pretty unanimous agreement that unused bitcoins are out of circulation forever. Maybe I stumbled across a confused source, or myself confused the bitcoin-mining rate reduction with decay of unused bitcoins.

My bad!
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Re: Bitcoin : Where can it fail ?

Postby Minerva » Fri Jun 17, 2011 1:05 pm UTC

If only we had Neal Stephenson in here, I'm sure he would be able to explain every minute detail of BitCoin and how it works financially and how it's going to save the world.
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Re: Bitcoin : Where can it fail ?

Postby savanik » Fri Jun 17, 2011 3:40 pm UTC

Apparently there are now trojans running around specifically to steal the Bitcoin wallet off of people's computers. Considering that it's stored in a well-known location and the Bitcoin software doesn't do any encryption, that's all they need to transfer all your Bitcoins into their account.

If you actually read the Bitcoin wiki on 'securing your wallet' it begins with, 'keep your wallet on an encrypted disk image created by third-party software, such as TrueCrypt'. I have configured TrueCrypt on computers before. While secure, it is still well beyond end user administration in terms of complexity. Then you have to edit the shortcut's command line options to tell it to open your wallet in the new location.

It's things like this that make me reluctant to view it as a secure method of trade. Or store of value. Or many of the other definitions of 'money' you might care to use.
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Re: Bitcoin : Where can it fail ?

Postby epigrad » Sun Jun 19, 2011 1:00 am UTC

A few notes:

- The idea its "secure" is absurd - the crypto properties of it are mainly for the "Math must be done for bitcoins to be created" part, and the "Your name isn't attached part". But the actual "money"? For most people, as secure as leaving $20 on the table with a note that says "Do not touch!", or kept in a PayPal account with your cat's name as the password.

- I'm not sure why "regular" people would ever use it - the vast majority of merchants will take dollars, and you're paid in dollars (or whatever). Why convert back and forth, and pay fees? I honestly think that "Criminals and Internet Libertarians" are as big as its market is ever going to get.

- It's *really* fun to hang around in Bitcoin forums and watch the speculation and the echo chamber. It's like listening to Goldbugs, but with video cards.

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Re: Bitcoin : Where can it fail ?

Postby Dark567 » Sun Jun 19, 2011 1:17 am UTC

Once the first big hack occurs, I can't see anyone holding onto them. The value will plummet.

I wonder if I can find anyone willing to lend me bitcoins so I can short sell....
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