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Comment by overgard | Hacker News Reader

I really like the idea of cryptographic currency, but bitcoin strikes me as a somewhat ill fated v1 of the idea.

Whatever replaces it will needs some sort of more sophisticated measure for keeping the value of a coin from fluctuating wildly; because with the way the currency is wildly deflating right now, I'd be super hesitant to "spend" a bitcoin for fear that it might be worth twice what it is now, while on the other hand, I'm also terribly afraid of buying a bitcoin, because what if they drop back down to earth? Currency only really seems spendable if its value is at least somewhat predictable.

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Bitcoin is not even "v1," it is just an attempt by cryptoanarchists to create a currency without any central authority. Chaum, Okamoto, and many other researchers published a large volume of work on digital cash, creating systems that supported various notions of secure and anonymous electronic payments. Unlike Bitcoin, the security of many of these designs can be proved by reductions to hard problems, much like the security of public-key cryptosystems like ElGamal. In the typical "hack it out and pay no attention to previous work" style of the Bitcoin community, none of that research was cited or even hinted at in the original Bitcoin paper. The fact that the article presents this as a choice between something like Bitcoin and something like Paypal is telling.

The reason Chaum's digital cash startup failed is complicated, but it boils down to this: digital cash is poorly understood, banks have few compelling reasons to deploy it (their existing fraud mitigation measures keep them well within the realm of profitability), and the US government continues to work against the deployment of good cryptography.

The approach of Satoshi Nakamoto is not the way typical cryptographers would create cryptocurrencies.

See gwern's article Bitcoin is Worse Is Better http://www.gwern.net/Bitcoin%20is%20Worse%20is%20Better

Satoshi's genius is the ability to combine several well known technologies and figure out the right kind of tradeoffs that would make bitcoin works.

Yes, bitcoin sucks in many way such as not being able to do anonymous trade offline, being forced to store a blockchain, needing enough computation power to counter evil miners, needing the social cooperation of miners and users, and so on. But you have to admit, it works.

Chaum's system was centralized. A chaum token bank may be blinded but is still a great big single central point of failure and control— they can still inflate the currency— they can still selectively deny access. The centralization created a huge operating risk and would make any such effort untrustworthy just from the perspective of political exposure.

The whole point of Bitcoin (http://p2pfoundation.ning.com/forum/topics/bitcoin-open-sour... was to build a zero trust decentralized system.

Chaum's system provides some properties "perfectly" but they aren't the properties such a system needed to have in order to exist, much less be successful.

"A chaum token bank may be blinded but is still a great big single central point of failure and control...they can still selectively deny access."

That is not really true when there is an offline transaction protocol; the bank can only deny access initially (e.g. the bank can refuse to let you open an account), but once you are in the system you can spend money or be paid without the bank's permission. It is also possible to create threshold systems where there is no single bank, so that there is no single point of failure.

"Chaum's system provides some properties "perfectly" but they aren't the properties such a system needed to have in order to exist, much less be successful."

I think protection against double spending is a pretty fundamental property for a digital cash system to be successful. People would not use Bitcoin if they did not believe that it protects them from double spending. My only real point in all of this is that Bitcoin does not provide that protection according to the standard used by cryptographers; in practice, nobody has pulled off a double spending attack yet, but everyone knows how to do it and it is not impractical by any stretch of the imagination.

The reason Chaum's ecash failed was Chaum.

Well it might not be possible for a decentralized crypto currency to have a non-fluctuating value; at least at the beginning. Since it is decentralized it cannot be declared "worth something" by fiat; and therefore needs to garner its value organically. It makes sense you want to stay away, but bitcoin is still super early stages and growing.. if ti plataeus or at least becomes more or less predictable over time due to "finding its price" then those with your concerns will be more apt to adopt.

This isn't really a flaw of bitcoin but rather of markets/people.

Once bitcoin gets near some sort of saturation point in terms of adoption, you are likely to see a much more stable valuation. Now though, it's the wild west and its neigh impossible to separate the speculation from the fundamentals.

I will say though that I don't see wild fluctuations in bitcoins price as a flaw in bitcoin. I see it as inevitable for any currency bootstrapping itself from nothing to something. The path from zero to any valuation is bound to riddled with crazy swings as people get hopeful and then scared.

Consider: if bitcoin had instead had demurrage or increasing rates of inflation, how much less likely would the early adopters have stayed around? It's all well and good to consider ideals, but creating a tradeable, limited commodity out of thin air that people actually want is no small task and it has not been proven that there is another way to do it. If there is no incentive to be an early adopter, there is no reason to take the risk; you might as well just wait until it is widely accepted to start accepting inflato-coin; but with the possibility of dizzying-gains there is a strong incentive for people to use bitcoin before it is proven (which is only slightly less true today than 2 years ago); and this incentive is -- while not part of the technical appeal of bitcoin --inseparable from its success.

I agree that it's important that early adopters have an incentive to adopt early, no doubt, but given the current market, what's their incentive towards: saving or spending?

I imagine for a currency to work, the incentive has to be at least tilted a little towards spending. Economically, that's essentially why we have inflation -- the system can't reward people for just hoarding dollars, because that's essentially an economic no-op. If just holding currency was more profitable than investing it, than why would people bother to invest in the first place? I'm not an economic keynesian, but all the same, I don't think it's an accident that hiding a pile of money under your bed isn't going to net you new money in a functional system.

Right now owning a bitcoin is a lot more analogous to owning a stock than it is to owning a dollar. Which is to say it lacks liquidity.

A currency without liquidity isn't really a currency, it's just an asset. The whole point of having currency is the liquidity of it, and that liquidity generally comes from a somewhat stable valuation.

You have the incentive to spend. You need to live so you will use your fiat and bitcoin to buy for food, gas, electricity and things that you want.

I know the bitcoin is going to be worth more, but I still spend it today just like

I know that if I wait just a little bit the laptop will be cheaper and faster but I still buy it today when I need it.

If the value of BitCoin increases quickly enough (i.e. you hold a sufficient initial amount) then the amount you spend on food, gas, electricity can be less then the rate of increase.

This is literally getting something for nothing.

"you are likely to see a much more stable valuation"

Does this not assume that Bitcoin remains the only currency of its kind?

I've been assuming that there's an incentive for anybody capable to design a new currency and make sure they're in on the ground floor as it appreciates.

So in x years time there may be dozens (hundreds?) of competing currencies, giving arbitraging and carry opportunities that will contribute to volatility.

And a possible end result (though I can't see it happening outside science fiction) is that somebody designs a way for you to make your own currency, backed by your own labour, potential value, or assets. So everybody has their own currency, and it's priced according to how clever you are, or how many horses you own, or some other fundamental.

There are already quite a few. NameCoin, PPCoin, DevCoin, IxCoin, the list goes on.

The biggest (second only to bitcoin) is LiteCoin. Very similar to bitcoin but with faster transactions, and it uses a different algorithm. Using Scrypt instead of SHA-256 makes it much harder to get a fast FPGA or ASIC to mine quickly. Even top graphics cards are no more than 10-20x faster than CPUs. It's risen in price ridiculously recently, going from 7 cents to 6 dollars, now hovering around 4. People who were mining or bought in around the 7 cent mark have made quite a lot. There was no premining thought which is interesting, and I think has helped raise confidence (pre-mining is where the designers of the currency mine on their own before anyone else gets on the network, so it's a concern that they will dump vast amounts at some point and crash the price).

I think having more currencies might actually improve confidence, as there are a few ways of looking at it:

1) Lots popping up, hmm, bitcoin isn't special so SELL!

2) Lots popping up and falling, hmm, bitcoin looks quite stable comparatively, BUY!

3) Another few stable ones appearing, hmm, crypto-currencies looks like quite a normal idea, BUY!

Could go any way, could all collapse or spike. Maybe $125 is low for bitcoin, and we'll be here thinking "Why didn't I buy in?" or it'll collapse, nobody will think it's worth mining and the network will fall apart. Or it'll remain the same.

All I know is I'm currently making some money to keep my flat warm, and that it's not worth putting in anything I can't afford to lose.

Edit - Formatting.

Do you think it's wise to invest in Litecoin right now?

I don't know. It might be worth a gamble, I'd certainly put it as 'risky'! It's very difficult to say. Bitcoin looks like it'll stay high for a while at least (talk of atms, even), and interest in bitcoin seems to bleed over. Crypto-currencies seem to be getting a lot more mainstream attention, and LiteCoin is the biggest non-bitcoin one, with several advantages.

Personally I'm mining as that seemed like a fairly safe bet, as if everything comes crashing down I still have a computer, and I could afford the cost. At the current prices & difficulty, I'm getting ~$30/day. Sell half and keep half, and then if it shoots up in price I'm quids in, if it goes down then people have still helped buy me a fast computer.

I think it's worth it, but consider it a gamble rather than an investment, and only stick in money that you're willing to lose (not just see drop in value, lose). Set some points at which you'd like to sell, and try and get your stake back. You could win big.

Don't do what some guy on reddit did, which was take 30k in credit cards and loans he couldn't afford and stick it in bitcoin. Granted, it seems like it should have netted him about a quarter of a million, but don't be drawn in by stories like that, people also get rich on the lottery.

Yes and then they will develop corporations called bureau's who will rate each individual persons currency worthiness on a numeric scale. Other institutions will determine if they do business with you based on this scale and it takes 7 years before the transactions you screwed up get sharded to an archive database.

The maximum value is approximately the cost of a machine for mining it, because if you have that amount of money, you could instead buy the machine and use it to mine more than one bitcoin. The minimum value is probably some function of its reliability. If hardware costs continue to fall, and bitcoins become more useful (i.e. people gain confidence in its security and reliability), the value should become more stable.

Over time, the maximum value can go up a lot more than that.

You buy that machine which can profitably mine bitcoin. Lots of other people do the same. The bitcoin network then adjusts the difficulty, so that the same number of coins are created per hour despite the increased computation. Now the cost of the machine you need to mine that bitcoin has gone up.

These difficulty adjustments are why people used to mine thousands of bitcoins with CPUs, then had to switch to GPUs, and now are buying custom-built ASICs.

Because of the difficulty adjustment, the total cost of the machines and electricity mining coins is a function of the cost of the coins, not the other way around.

Value is stabilized by the market. Futures markets are how value changes are averaged out through time. You don't need a central banker manipulating the money supply in a misguided attempt to maintain stable prices. That's destabilize the economy while stabilizing prices.

You might want to look into Freicoin (http://freico.in/), which has a different economic model meant to fix this exact problem.

Deleted comment

"the currency is not wildly deflating right now"

Yes it is. $1 in 2012 bought as much as $1.01 today [1]. 1 Bitcoin a year ago bought about 1/27th what one does today [2]. Thus, U.S. dollars have inflated by 1% while Bitcoins have deflated by some 95%.

Inflation is not calculated from the monetary base or FX rate. It is a function of the price level of real goods and services. Since most goods and services are priced in U.S. dollars (and U.S. CPI isn't inflating ridiculously) BTC/USD does double as an estimator of Bitcoin deflation.

[1] http://www.bls.gov/data/inflation_calculator.htm

[2] http://bitcoincharts.com/charts/mtgoxUSD#rg360ztgSzm1g10zm2g... 4 April 2013 versus 11 April 2012

An alternative way of saying that Bitcoin is deflating is that the purchasing power of Bitcoins is growing. Recognizing that the purchasing power of any currency is driven by two long-run factors -- changes in productivity and in the money supply (and money demand) -- BTC will have a natural mean (trend) in terms of a basket of goods. The question is whether, in this initial adoption / speculation phase, we are above or below that mean trend.

So while you might technically describe it as deflation, it might simply be reversion to the mean, in which BTC becomes more valuable until it reaches a saturation point.

<blockquote>The question is whether, in this initial adoption / speculation phase, we are above or below that mean trend.</blockquote>

Since Bitcoin has a hard upper limit in supply which has not been reached yet, its pretty clear that -- barring a major loss in Bitcoins popularity as a currency (which is actually quite probable, and which will counteract this effect) -- its current rate of deflation while its still in the supply-expansion phase is almost certainly <i>less than</i> its long-term expected rate of deflation.

Bitcoin's hard upper limit might make it attractive as an investment, but makes it undesirable as a currency (of course, even with the upper supply limit, the lack of utility value and the fact that bitcoins are essentially intangible make it somewhat dubious long-term value as an investment, but perhaps intangible collectibles will end up as a popular collectors item.)

Intangible ? Bitcoins ? I would say the dollar is pretty much intangible. Only 7% of it is printed, all the rest is on computers. And my $10 in 2005 had more purchasing power than my $10 do now.

Effectively having bitcoin means each time you buy something over a period of time they cost you less.

> Intangible ? Bitcoins ?

Yes, like all digital goods, bitcoins are intangible.

> I would say the dollar is pretty much intangible.

Aside from the physical ones, that is correct. So what? I didn't argue that being intangible distinguished Bitcoins for dollars. I presented problems with Bitcoins as a currency, and then noted the "intangible" as an issue with them as a non-currency collectors item if they failed as a currency.

> And my $10 in 2005 had more purchasing power than my $10 do now.

So?

> Effectively having bitcoin means each time you buy something over a period of time they cost you less.

Yes, the fact that BTC has a built-in hoarding incentive and disincentive both for spending and investment is a problem for it as a currency (medium of exchange), since, were it widely accepted as a primary currency it would drive resources out of productive investment, and reduce the rate of technological progress and economic activity.

Inflation and deflation are the price of money correcting to balance supply and demand. I would describe it as reversion to a moving equilibrium versus a mean. This does not change that volatile hyperdeflation is a problem.

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