Why is Bitcoin a good currency again? If I understand how it is distributed correctly, those with higher/more computational power receive more of the finite bitcoins. How does that not favor the already rich?
It isn't, but almost anything can work if the community of users is small enough. As for why it isn't, we need to step back a bit.
In a barter economy an exchange occurs when two individuals each produce something which takes time/labor/capital and which the other person values more than what they're giving up. For example, if I grow an apple, and you grow an orange, and we trade, it is clear[1] that I value the orange more than the apple, and you value the apple more than the orange (otherwise we wouldn't have made the exchange). The value of those items is individually subjective[2], and the supply of those items is constrained by market forces (e.g., alternate uses of time, labor, and capital).
A money economy emerges from a barter economy when individuals accept in exchange something they do not want for itself, but with the anticipation that they can use it for some future exchange. It is critical that the commodity in question be desirable eventually. If no one ever wants it, then it wouldn't emerge as money. (Important Aside: once a commodity begins to function as money, part of the demand for the commodity will be as money, thus there is positive feedback loop, but some non-money demand needs to exist to get the process running. This is why all functioning fiat currencies have their roots in a commodity money.)
It's important to notice that commodity money has some inherent constraint on its creation (i.e., its supply curve is bounded by market forces), and that it satisfies the wants of others (i.e., there exists some demand curve). For example, the gold supply is constrained by the cost of mining/processing new gold, and the demand affected by its consumption into produced goods and demand to hold "cash balances" of gold.
So far as I can tell, bitcoin is a scheme whose total supply is constrained only by an exogenous, artificial limit of 21M coins, and not by the demand for alternative uses of its factors of production[3]. There can be, at most, a marginal value[4] equal to the marginal cost of producing a coin, which appears to be nothing but otherwise-idle computer time and some electricity.
But far more importantly, this is a scheme whereby artificial scarcity is created (e.g., it takes n hours to produce a coin) but no thing of value is produced. This would be akin to inventing a system of money involving sticks whittled into perfect cylinders. Sure it might take a long time to create one, and it might consume resources, but if the end result doesn't have any value to anyone, it isn't money, it's just waste.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
[1] http://en.wikipedia.org/wiki/Revealed_preference
[2] http://en.wikipedia.org/wiki/Subjective_theory_of_value
Or how about an entry in a ledger on some bank's computer?
The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them, and people accept it as currency in exchange for good, because they expect that other people in the future will accept it in exchange for goods.
Well, Bitcoin just gets rid of that central entity. It makes it hard to produce new units (and impossible after 21M have been produced). And it relies on the fact that people are willing to trade it for goods, services, and other currencies to give it value.
Look, if I have 100 bitcoins right now, I could get $100 for it, or I could buy web hosting services, or I can buy specialty coffees, or a variety of other things. That seems like real value to me. Now, the total size of the bitcoin economy is pretty small at the moment, but it is growing.
I don't see why people feel like other fiat currencies somehow have value but something like bitcoin cannot. They are both artificially scarce things that can be easily transferred with no intrinsic value.
I think perhaps you and I are using different definitions of "value". If someone is willing to accept something in exchange for something else, that act reveals that they value it, either for its use value or for its exchange value (i.e., as money).
>The only reasons the $20 bill or the entry in the computer retain value are because there's a central entity that limits the creation of too many of them
Why do you think that? It's certainly true that artificial scarcity raises prices (for money, in terms of all other goods), but that scarcity is not what is being subjectively valued.
A $20 bill today is valued (as money) based on what it could buy yesterday. And yesterday's valuation (as money) was based on the day before that. Go back far enough and the money valuation will have spawned from the commodity valuation.
Bitcoin is flawed in largely the same ways that fiat currencies are flawed, namely that the commodity has no use value demand, and the supply is not subject to market forces.
The difference with fiat currencies is that they have quite a few things going for them that keep them around: taxes are demanded in them, a raft of laws eliminate competition, and a central bureaucracy actively manipulates the market.
I meant intrinsic value in that context. Of course I agree that it has value based on what people are willing to exchange it for. That's precisely the point I was trying to make; in your original post, you had claimed that bitcoin was flawed because it wasn't based on a commodity originally, and I was pointing out that that really has no bearing on its present value.
> Why do you think that? It's certainly true that artificial scarcity raises prices (for money, in terms of all other goods), but that scarcity is not what is being subjectively valued.
> A $20 bill today is valued (as money) based on what it could buy yesterday. And yesterday's valuation (as money) was based on the day before that.
You trimmed out my next sentence in your quote in which I said almost exactly that. My only point about artificial scarcity is it limits the rate at which value can be lost due to inflation; it helps it retain its value, because you know that someone else won't be able to just go and get more for themselves, but instead will be more likely to want to trade you something for the currency you are trading.
> Go back far enough and the money valuation will have spawned from the commodity valuation.
It doesn't really matter how far back you look; just because a currency was originally based on a commodity has no bearing on its value now, other than as a historical artifact. What matters is what it will buy you when you spend it, which is in the future, and while not entirely predictable, in the near future tends to be close to what it would buy you in the recent past.
All I'm saying is that there is as much intrinsic value to a bitcoin as there is to a dollar, or a euro, or what have you. The difference is mainly in how they are transferred, and how the supply of them is constrained. I'm not entirely convinced that a deflationary currency is a good idea, but I think that bitcoin is a technically, economically, politically, and socially interesting experiment.
I generated a few back in the day when I could do so on my laptop in a few hours without dedicated GPUs running constantly, and I'm going to hold onto them for a while to see how this whole thing pans out. Who knows, with only 21M in existence, if this thing takes off the few I have could wind up being pretty valuable later on; and if not, well, I just lost a few hours of CPU time, no big deal.
If you don't think that bitcoins will hold their value, I'll gladly take any you have off your hands. Just send them to 1Lz9u29gLLUJ3yH6GrMeSuRUmbUounXinG ;)
The intrinsic value of a dollar is that the United States Government is obligated to accept a dollar as a payment of tax and other obligations you may have towards the government. A dollar is not an arbitrary thing, it fundamentally profoundly is a warrant to discharge a debt obligation against the United States Government. The rest of its value emanates out transitively from that.
A BitCoin is fundamentally more arbitrary than a dollar. (At least at the moment. Hypothetically this could change.) Perhaps it will make it anyhow, despite my skepticism, but it is absolutely, empirically true that a dollar is not an arbitrary value store. It has a base case for its value chain. BitCoins do not have this.
I'm heading out the door, but just wanted to note that nothing has intrinsic value. All value is subjective.
Granted, gold doesn't have any use value demand either. Its only advantage is that its rare and shiny. You can't eat gold, burn it as fuel, use it for tools, or build shelter with it. The only industrial application of gold is in specialized electronics processes, and even in those, gold has substitutes.
The only difference between gold and fiat currency is that gold has a finite supply, while fiat currency does not.
It can be used to pay taxes levied by a government that will employ force if I refuse to pay them. How do I do that with bitcoins?
That said, bitcoins do favour the already rich. If I have $1000 I can buy more bitcoins than someone with only $100. This is not exactly unusual.
The advantage of using bitcoins as a currency is that you can transfer them electronically without the need for a centralised banking system and all the bureaucracy that entails. As a programmer, this is what really excites me about the system.
You can say that about any resource. It's still generally easier for someone who's wealthier to put up more of that resource.
The point is that Bitcoin really is different from other currencies in terms of how bitcoins are created. Dollars are largely created by banks. They get special permission from the government to create dollars and lend them out. Bitcoins, in contrast, can be created by anyone with some computing power, no permission needed.
The fact that one must expend resources to create bitcoins is what makes them valuable - a currency that anyone could create with no effort would be worthless.
You need to distribute the initial bitcoins somehow, and these people are putting value in by protecting the network from scammers (the reason for mining is that you're doing a lot of hard work to validate transactions, forming a long chain of valid transactions, such that it would be quite difficult to form an alternative chain in which an attacker spends money differently). So, miners are providing the security of the network, and helping roll out the currency slowly and smoothly, as well as speculating on the future value of bitcoins, so they do deserve to receive some compensation for their efforts.
If you feel like bitcoins will be valuable in the future, and don't want to get into mining, then sell some goods or services for bitcoins. If you happened to have sold a loaf of bread for BTC 50 last October (about $2.50 back then), you could now trade that for $50; that's a pretty good return on your investment. Don't worry about the miners are getting money for nothing; they are help making the whole system work, and there are plenty of ways of earning bitcoins besides mining.
Serious miners use GPU hardware, so there are effectively two tiers of miners: Those who have a GPU and can dedicate it to bitcoin, and those who don't.
Why would you have to do that in order to use BitCoin? I've used all kinds of currencies/monies (including trading, labor, whatever) in my life without giving up faith in the US Govt's ability to back the dollar.