Bitcoin does not pose a threat to law and order
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At worst, BitCoin at this point is a scam where people who got involved with it early who are sitting on lots of BitCoin need to keep up a level of interest to cash out BitCoin for coin, as the curious poke around with it.
This. The volatility that makes bitcoins so attractive to speculators makes them a nightmare for merchants. Bitcoins have - on multiple occasions - dropped or risen by 25%+ in the course of a few minutes. If you accept bitcoins as payment, when should you cash them out? There's a chance that they dramatically rose or dropped in value during the short time it took you to process the transaction.
You could peg your price in bitcoins to the amount of USD they're worth at a particular time at the Mt. Gox exchange, but that is even more dangerous. The Mt. Gox exchange has shown itself to be incredibly vulnerable to market manipulation by anyone with more than ten thousand dollars (which is a miniscule amount of money, all things considered). Someone could cause the price of bitcoins to crash for just a few minutes and quickly buy thousands of dollars worth of goods from your store at firesale prices. (Edit: See two posts down for the inverse version of this scam, which I think would be even more effective.)
What honest bitcoin speculators don't realize is that until the volatility problems in the exchange are worked out, no big merchants are going to want to accept bitcoins. When the speculative value of bitcoins goes up, the practical value of bitcoins goes down.
Well, not necessarily. You set the cost of your products to a price in dollars multiplied by the current Mt. Gox exchange rate. You could then immediately exchange your Bitcoins for dollars upon receipt of payment. Mt. Gox has an API for getting the current buy rate, and for placing a sell order, so this wouldn't be hard to automate.
The only problem with this is that getting dollars out of Mt. Gox involves messing about with Liberty Reserve.
As far as using the API goes, there are still a few problems. My understanding from the #bitcoin-otc IRC channel is that there is a 30-second delay on trades on the Mt. Gox exchange. This contributes to weirdly huge sub-minute swings in the exchange rate. Two nights ago, there was a point where the rate went from $5 up to $6 and then back down to $5 within the space of a few seconds. This means that in the time it takes for the merchant to process the transaction, upload the bitcoins to the Mt. Gox exchange, and put in a sell order for the highest buy rate, the price may have changed dramatically.
Another problem is that the gap between the highest bid and the lowest asking price is often very large. There is no 'market rate' as of yet. So depending on when the merchant places a sell order, they may be getting a bad rate.
And it opens up another way for someone to manipulate the market to rip off the merchant. The highest buy order is usually placed by a bot that takes the highest non-bot buy order and increases it by something like .0001 bitcoins. The bots update their bids every minute or so. Since there are only a small number of traders in the exchange, a single large trader or group of medium-size traders could manipulate the market by placing a series of strategically high buy orders. This will drive up the overall rate, as the bots respond to the change in price by increasing their bids. (Edit: There are also bots programmed to make bids at somewhat less than the highest buy order, which would contribute to the illusion of a legitimate upward movement in the price, as all of those bots chase after the highest price.) Within just a few minutes, they can increase the highest bid by a significant amount (say $1 USD), and then place a bitcoin order for real goods and services with the merchant, knowing that they use an automatic system to exchange bitcoins for USD at the inflated market price. But during the time it takes the merchant to get their bitcoins into Mt. Gox's system and sell them, the price will have dropped back down as the fraudsters stop making inflated buy orders.
It's a bit more risky (you may lose one day of sales if bitcoin was to crash definitely), but since you don't have any fixed cost, it shouldn't matter.
In the 19th century, you'd usually see financial crises appear in the fall before harvest, because local banks would be at their weakest point before the harvest came in and crop loans were repaid.
Like any currency without intrinsic value (like paper money) it only has value when people believe it has value.
Many people attributed the skyrocketing price of silver as testimony to the declining value of the currency, etc. That's partially true, but the events of the last few weeks have established that about 25% of silver's valuation was linked to the ability to buy it on margin. Tighten the margin, and speculative demand vaporizes.
The difference between, say BitCoin and the Euro is that there isn't a mature market to establish the value of BitCoin. What there is a small amount of demand and a small number of people who control lots of BitCoin.
This doesn't seem like the type of community that will spearhead a mainstream currency alternative.
Is that just conjecture or do you have some evidence?
I hold bitcoin and expect it to prosper in time; I also expect a crackdown if it does succeed, but I would be very surprised to see anything soon.
It's hard for them to touch: the existing currency laws certainly don't apply. The more-likely scenario of them becoming stores of value and/or securities (legally speaking) gives them little room for enforcement as there is no central issuing party to go after.
I think the most likely crackdown will happen at the exchange level; but the only major one is in Japan, with new ones popping up everywhere within 6 months.
Honestly, the market is so small right now I would expect nefarious market manipulation as the main course of action for at least another order-of-magnitude growth in bitcoins market cap.
Securities are more closely regulated than commodities in the US. I'm not sure what the laws are in Japan, where Mt. Gox is located, but I expect they could find some legal pretense to raid the exchange. There may be more exchanges popping up all the time, but almost everyone uses Mt. Gox. As a result, they're holding a huge amount of bitcoins and digital cash. That makes it a major target for a raid.
I wonder if they will start keeping backup servers in multiple countries, like Wikileaks? I'm not sure if that would protect peoples' digital cash, but their bitcoins would be safe in the event of a raid on the main server.
Edit: Also, it looks like Mutum Sigillum LLC, the company that processes Mt. Gox's deposits and withdrawals through Dwolla, is incorporated in Delaware. I wonder if they process those transactions in the US?
The lack of a central issuing party isn't a problem - they can go after any point that converts them to get "real money" or provides goods subject to control.
Physical goods are a subset of the latter.
If you can't buy food or pay rent with Bitcoin, how much can it catch on?
By the time they have gotten around to see this as anything worth wasting time on, bitcoins have either court on or have completely disappeared (most likely the latter, sadly).
To mutilate a phrase Congress is not webscale, threats cannot be discovered, assessed and lobbied about fast enough to out-compete technology. And technology isn't going to get any slower.