Bitcoin’s roller-coaster ride gets wilder as Wall Street, China climb on
arstechnica.com
arstechnica.com
There's a long history of old business leaders viewing the technology that destroys them through the lens they view all of their traditional competitors, and vastly underestimating what it's impact will be. Innovator's Dilemma is one way of looking at it, but in this case I think that's woefully inadequate of an explanation (i.e. comparing a new tech company against an old tech company).
Here's the thing about Bitcoin, and the reason I've become really excited about it: If it succeeds, it means an end to banking and money as we know it.
You can't compare that to Western Union, or PayPal, or Visa, or MasterCard, or even gold, or silver. It'd be like comparing the Internet to Time Warner Cable or Clear Channel or book publishers or books, in general. It doesn't make sense. They're wholly different levels of abstraction.
If Bitcoin really succeeds, it is nearly impossible to predict its value, because it will change the entire financial world (and it will look like it happens overnight, even though it'll be 10-20 years before we see all of its effects). So, if this analyst is predicting what will happen to Bitcoin in January, he's probably right. If he's predicting what will happen a year, five years, and ten years down the road, he's gonna be in for a big surprise.
Then, when you start looking further up the chain...PayPal, Visa and MasterCard, gold and silver for value store, and you try to figure out how PayPal could beat Bitcoin in a free market. I can't see any way for PayPal to win. There's nothing PayPal does better than Bitcoin. Literally nothing, and Bitcoin does it for less. So, if we assume Bitcoin subsumes Western Union and PayPal, it's actually looking undervalued by a lot. If we follow that line on out, it begins to look more and more undervalued.
So, I like the method, but disagree with stopping at silver and money transfers. Those are the low-hanging fruit. Those are the things that will first feel the wrath of their customers for being more expensive and less convenient and more intrusive than Bitcoin. But, those aren't the only things that will be disrupted by Bitcoin. It just takes a little imagination to see that the market cap for Bitcoin is potentially the same as the market cap for every currency in the world.
It's damned near impossible to predict how this is gonna play out, but if it succeeds, Bitcoin is gonna be huge.
As to the advantages of centralized entities they have the support of the state, are better organized and can act unilaterally among others.
I'd like to see a decentralized system win for once but history has shown that centralized services almost always do.
Perhaps I lack imagination or ambition. I think it is an incredibly hard problem and I think it is a pretty defensible position. My biggest concern, as someone holding a little bit of Bitcoin, is that a competing cryptocurrency will win out in the end. But there currently is no such competitor. Litecoin is the nearest second fiddle to Bitcoin and it's nowhere near the same league, and provides no benefits over Bitcoin (except to people that want to mine with GPUs rather than ASICs).
"And since the marginal cost of transfers is low so should be the value ascribed. So Bitcoin might kill Western Union and the money transfer oligopoly but not capture much value doing so."
Yes, that's entirely true. But, there has to be enough value in Bitcoin the coin for Bitcoin the protocol to work for money transfers. If there are a billion dollars worth of transfers in the queue, then there needs to be a billion dollars worth of Bitcons in existence to make those transfers work. Maybe they would instantly go to zero in value after those transfers...if everyone cashed back out.
The value doesn't have to be captured for Bitcoin to be a success. Bitcoin isn't a business. It just needs to be better for some classes of problems than what currently solves the problems. And, the more I learn about Bitcoin, the more I realize that it is better for nearly every class of money problem than what the banks, the federal reserve, the credit card vendors, etc. have to offer.
"As to the advantages of centralized entities they have the support of the state, are better organized and can act unilaterally among others."
If a centralized entity can make something that is as good for users as Bitcoin, that'd be a believable scenario. But, short of making Bitcoin illegal (which could still happen in some places), I am beginning to believe we are past the point of anything being able to derail Bitcoin's rise. It's just too good for so many purposes to lose out to something that is so expensive, so inconvenient, so intrusive, and so abusive to users (the traditional banking and finance world).
If Bitcoin were merely an ethically better money (and I do think a decentralized money is more ethical), I wouldn't hold out any hope for it. But, it's an ethically better money that is cheaper and more convenient.
Anyway, it's not that I believe Bitcoin can't fail. It certainly can. It can go wrong in all sorts of ways. But, I can also imagine a scenario where it changes the world, and I'm pulling for that scenario.
It depends on what you define to be a competitor. There are many money transfer services, many of which aren't cryptocurrencies. Bitcoin has to compete with each of them.
> But, there has to be enough value in Bitcoin the coin for Bitcoin the protocol to work for money transfers.
The argument was that the value is de minimis because BofA Paybuddy is willing to transfer money (change some numbers) for 0.5%
> The value doesn't have to be captured for Bitcoin to be a success. Bitcoin isn't a business.
It needs to be captured if you are considering it an investment.
I'm considering it a currency and a revolution.
I want to make money by building things for the new Bitcoin economy. The price of Bitcoin going up is just a pleasant side effect of rising popularity. Bitcoin going up doesn't provide new value to the world...building a new kind of money and the infrastructure to use that new money does provide value. A tremendous amount of it.
As a software developer, I've always had the ability to have the Internet give me money for very little effort (relatively speaking). What's interesting here is the power to change the world.
- Waiting 1-2 hours for a transaction is unacceptable. Don't tell me about oddballs like Namecheap that sells products that are free to copy and can be revoked at any time.
- Getting money in and out is a hassle and doesn't seem to get better. Who is to say next week the US doesn't ban exchanges from allowing you to cash in or out? It already happened to Mtgox.
- When I tried to get people to pay with Bitcoins, they were all turned off by how slow it is to get money in and to perform a transaction.
Another crypto-currency might solve these problems, but it won't be Bitcoin. I doubt many of the speculators today have ever tried buying and selling things with it and use it only to get rich.
First confirmation is plenty for most transactions, and you're more likely to actually see that money than a credit card transaction (which can be charged back later). And, that usually takes a few seconds. If you're paying a small fee, you're very likely to get confirmations even faster.
The only reason to wait for many confirmations is for something particularly expensive. Food at a restaurant? No need to go overboard; one confirmation is plenty. Even no confirmation is probably fine in most cases. Dine and dash is more of a fear for most restaurants than someone paying with a bogus card (or bogus Bitcoin payment), I suspect.
Anyway, I've never had a transaction where I included a fee (even a fee of less than a penny) take more than a few minutes to receive ten confirmations.
"- Getting money in and out is a hassle and doesn't seem to get better. Who is to say next week the US doesn't ban exchanges from allowing you to cash in or out? It already happened to Mtgox."
Certainly a valid concern and fear. Coinbase works great for me. But, if Bitcoin succeeds, why would you ever need to get "money" out? If Bitcoin succeeds, Bitcoin is the money you want. It's better money than the "money" you're talking about. I want to be paid in Bitcoin, and I want to pay all of my bills in Bitcoin. I never want to have to see another US dollar.
"- When I tried to get people to pay with Bitcoins, they were all turned off by how slow it is to get money in and to perform a transaction."
If you were telling them it takes two hours to send someone Bitcoins, I don't blame them.
Chargebacks are a positive attribute for consumers (and possibly indirectly for merchants if the comfort of chargebacks makes consumers more likely to spend).
If you need chargeback capabilities, you can get it.
Plenty according to who? Like I said before, don't keep telling me about oddballs like Namecheap. It really doesn't matter when the vast majority of bitcoin vendors force you to wait 1-2 hours.
"Anyway, I've never had a transaction where I included a fee (even a fee of less than a penny) take more than a few minutes to receive ten confirmations."
I have included fees of many multiples of a penny and every confirmation takes on average 10 minutes as it is supposed to. I have no idea how you are getting 10 confirmations in a few minutes.
"Certainly a valid concern and fear. Coinbase works great for me. But, if Bitcoin succeeds, why would you ever need to get "money" out? If Bitcoin succeeds, Bitcoin is the money you want."
Have you not heard all the people saying they ordered from Coinbase just to have Coinbase tell them their order failed 4 days later when Bitcoin went up, and only when it goes down does their order go through? Coinbase isn't even large enough to be put under scrutiny by the US government.
I tell people bitcoin transactions take 1-2 hours because for 99% of the vendors taking bitcoin that is how long it takes.
I consider payment made on one confirmation for both of my businesses that accept Bitcoin payments. It takes a few minutes.
If by "majority of Bitcoin vendors" you mean exchanges, then sure...they make you wait roughly an hour for 6 blocks to confirm, I guess. But, that's not a normal thing; it takes me a lot longer than that to get USD into or out of my stock account at TD Ameritrade. You seem to have a serious beef with exchanges, and I understand that. That was a point of frustration for me, too. But, it's not Bitcoin that's a problem there. It's that the Bitcoin industry is brand new. It's such a tiny thing right now, and there's so much room for growth and improvement.
"I have included fees of many multiples of a penny and every confirmation takes on average 20 minutes as it is supposed to. I have no idea how you are getting 10 confirmations in a few minutes."
You're right, actually...I looked back at my transactions...only LTC was confirmed that quickly (which makes sense as it has a 2.5 minute cycle instead of a 10 minute cycle like Bitcoin). Bitcoins take about an hour to get 6 confirmations, but that's far more confirmation than one needs for any small transaction. I don't call my customer's bank when they hand me a check, and I don't have to wait around forever to find out if their Bitcoin transaction is good. I've never thought about the time for confirmations as I've never been in a situation where it was an issue.
"I tell people bitcoin transactions take 1-2 hours because for 99% of the vendors taking bitcoin that is how long it takes."
I believe you should re-think the necessity of waiting for 6 (or more) confirmations for the average PoS use case. As a business owner, myself, I'm fine trusting that my customer isn't going to go to great lengths to cheat me. If I were a restaurant owner, I'd take payment, go make the food, and check for confirmation before handing the customer the food. No big deal.
There's a number of business opportunities for solving the need for more speed and more security with rapid PoS transaction (and if Visa and Mastercard were smart, they'd already be working on it). Bitcoin is still a low-level protocol. Better/faster than ACH, but still needs some buffer layers for some use cases.
Not a big deal, just some software to be written and some infrastructure to be built. Huge opportunities for those who want to build it.
Most people aren't selling web apps or licenses that you can just revoke after the transaction turns out to be fake.
The only way to make transactions faster is a fundamental change in the bitcoin protocol.
>Waiting 1-2 hours for a transaction is unacceptable. Don't tell me about oddballs like Namecheap that sells products that are free to copy and can be revoked at any time.
Two hours is not the time that bitcoin transactions require. It is, rather, the time until full irreversibility, and it compares favorably to the same figure for conventional transfers like wire, ACH, and depositing a check.
Do you claim credit cards are useless because merchants have wait ~30 days before they get their money for sure? Or checks given that they take 7 days to clear? No, because intermediaries and protocols are layered on top of them that facilitate sufficient trust for quick confirmation.
So you're right that the protocol by itself is insufficient for PoS, and right that there aren't mature payment systems for bitcoin, but that's no different than most non-cash payment systems.
>Getting money in and out is a hassle and doesn't seem to get better. ... [People] were all turned off by how slow it is to get money in and to perform a transaction.
That's a problem for users but only because it inherits the problems with the rest of the financial system to the extent that you want to interface with it.
1) The most interesting aspect of Bitcoin is the possibility that it will enable previously unknown financial transactions and institutions. This means it's hard to predict the future value of Bitcoin, especially in the case of overwhelming success.
2) The value that Bitcoin creates in the economy is different from the "market cap" of Bitcoin. The former could be multiple orders of magnitude higher. The value created is similar to the concept of "consumer surplus" (and we have to remind ourselves that nobody owns the entirety of the Bitcoin network and all the value it creates, so there can be no "producer surplus")
3) Given point #1, we don't know what this future economy will look like. It seems likely there will be multiple institutions (services, etc) that leverage Bitcoin and there will likely be some successful competing/complimentary cryptocurrencies. Since we can't predict the structure of this Bitcoin economy it is hard to determine the "velocity of Bitcoin" which yet again makes it hard to predict the future value of 1 BTC.
Good run down, it was this year.
A change can not be enforced. If a significant subset of clients decides on a different path (for example stay on the old protocol), a fork of the blockchain would be the result. I guess then if you would own 1 BTC before, you'd suddenly own one "old Bitcoin" and one "new Bitcoin".
There are already clients that only download parts of the blockchain, trading storage and bandwidth for reduced security - for example the mobile clients, or Multibit (afaik). I suppose they rely on trusted nodes (not sure).
But suppose SHA256 would be broken and the "vote" would be to change the mining protocol to scrypt. Why wouldn't the nodes and miners change? It's not so different from updating your web server when there has been a security bug. Some people forget to update their web servers and get hacked. The next time, maybe they won't forget to update. Maybe if you installed your bitcoin software with a package manager, it will be automatically updated.
It would be interesting if there was an attempt to enforce "tainted coins" (forcing clients to reject bitcoins that are known to have been through criminal hands). I suppose governments could require businesses to only accept btc that are not tainted. I honestly don't know how things would play out - maybe the community would addopt it, maybe not, or maybe there would be a fork...
All just from my limited understanding, please correct me if necessary.
There are definitely challenges with its current growth rate. As currently designed, it's capped at about 25,000 transactions per hour. The developers are working on addressing this limitation, but the solution is complex and they aren't done yet. We went from ~200 transactions/hour in Jan 2012 to ~2,700 transactions/hour in Dec 2013, so it's conceivable we end up getting pretty close to (or hitting) the cap in the near future.
25,000/hour is a shockingly small number to me. I feel like I must be misunderstanding something, or else someone from 4chan would have already DOS'd bitcoin for fun.
Current transaction fees are typically in the range of 0.1-0.5mBTC, so in order to continuously flood out everyone else, you'd need to spend more than 2.5BTC/hour in fees.
True.
>How is this expected to scale over time and are there any challenges for the network if it becomes too large to quickly/easily share?
This is debated.
>(Or not since only the tail is really needed?)
That's basically the first approach.
If you trust someone else to tell you the state at time X (give you a 'checkpoint' basically), then the volume of data still grows with the number of separate accounts that have 'bitcoins' in them, but [where all the remaining money is as of recent time X] is a lot less information than [the complete set of previous transactions for all time].
Or you could have a thin client, that trusts some other service to maintain and monitor the current state of the system, which your thin client regularly queries.
Both of these schemes cut down the data storage requirement a lot, and sort of solve that scalability problem.
However, both require trusting some third party to supply you with an abbreviated version of the transaction history (or group or parties, or chain of authority, etc.), and its open to debate whether, if you do that, you lose some of the 'decentralised' aspects of the system that make it nice. Or you could say that's "just a philosophical concern" that doesn't really matter.
I personally guess that the various developers will be able to engineer around this problem.
I'd be more worried the system handling real time transaction volume, if it became mass adopted, and people tried to do all transactions on the blockchain.
Check out https://en.bitcoin.it/wiki/Scalability as a starting point.
I suppose some of the fun parts would go away then, such as the possibility to view every transaction that has ever been made - in the Merkel Hashed blockchain not all information would be preserved.
Edit: I suppose it would still be possible to monitor all transactions and remember them by some other means, just not in the blockchain.
I agree with fragsworth that once Bitcoin is mature the blockchain will grow linearly; in the short term we may see more rapid growth. Most users are not expected to store the whole blockchain; using SPV or UBC a peer can store much less data.
(p.s. This should be read with your best John Cleese accent)
So now Ars Technica is giving financial advices? ok...
When the price suddenly dives, you may want to consider buying. It's always paid off so far. It seems like a solid investment strategy, because Bitcoin is still very young. Therefore it's probable that the infrastructure will continue to grow, and it will continue to become more popular over time.
It's looking like the price is about to enter into a "slow'n'steady" phase of growth... I predict it will rise from $1100 to $1500 over the next month or so.
Consider this: If you have $10k lying around, you can set up a Coinbase account and buy 9.5654BTC right now. Then you can set up an MtGox account and sell those coins when the price climbs to $1500 (which seems pretty inevitable). Therefore your $10k will become $14,262 after fees, which you can then wire back to your bank account. $4k is a pretty nice chunk of change, so you may want to seriously consider it.
But you must be willing to keep your money in BTC if the price tanks. It requires a lot of discipline not to freak out and sell. The overall thing to remember is that BTC will almost certainly hit $1500; it's just a matter of when. So if you have a mutual fund, you may want to redeem it buy BTC instead.
Something else to consider: the price of BTC won't be able to double very many more times. That means an opportunity exists right now; an opportunity that won't exist very much longer. In a year or two, I predict you won't be able to count on BTC steadily rising in value. Whereas you can pretty much count on it between now and then. Anyone who's interested in growing their money on a long-term basis should seriously consider investing now.
EDIT: My comment was written mainly for historical purposes. A year from now I'm going to go back to this comment and see how wrong I am. This is the first time I've been confident in an investment opportunity of any kind, so it'll be interesting to see whether that confidence is misplaced.
EDIT2: Don't invest any money you aren't comfortable with losing, obviously. But it's unlikely you'll lose more than half of it. I'd say there's a 95% chance that putting up $10k now will net you $4k sometime in the future, because BTC is only going to grow in popularity and capability, not diminish. Therefore the question is how long you're comfortable with waiting.
EDIT3: Hm, I've hit a nerve. I wasn't trying to tell anyone what to do... but it probably sounded that way. Sorry. I was just doing a quick writeup of my own personal thoughts regarding Bitcoin's near future outlook. I'm nobody special, so please don't take financial advice from me.
http://bitcoinity.org/markets seems handy for this.
I would use btc-e or bitstamp over Mt Gox.
> When the price suddenly dives, you may want to consider buying. It's always paid off so far. It seems like a solid investment strategy
This isn't really an "investment strategy", it's just speculation - betting on the short term future and hoping it pays off. It's a fun way to gamble your money, but it's a lot riskier than the OP suggests. A "solid investment strategy" is putting a fraction of your paycheck into an index fund each month, not trying to predict the price of Bitcoin.
If you've really done your homework and you think the price of Bitcoin will go up in the long term, by all means buy a couple. Don't worry about waiting for the price to spike down; in fact, maybe stagger your purchase over a period of time to smooth out any variation (this is called 'dollar cost averaging'). Don't try to speculate on short term fluctuation; you will probably get burned.
> Consider this: If you have $10k lying around [...] your $10k will become $14,262 after fees
Or, the price could drop to $500 and you'll lose a few thousand. Can you afford to lose a few thousand dollars, even for a few months while the price recovers? Would you be better off investing it in something less risky? Do you know that you won't need that money in 6 months to pay for emergency surgery, or to fund 3 months' runway for your new startup idea?
You should try to think of investment return as compensation for taking on risk. If there's a large return in a short time, there's probably a big risk, too. Some people can afford to take big risks, but most of us can't.
The opportunity cost of being constantly distracted and worried about your investment might be higher than the profits you're realizing. Especially if you are a developer and command decent hourly rates.
It's also not enjoyable to wake up at 4:30 in the morning, worrying about what the current price is.
Facebook's market cap is $63,000,000,000. If the market cap of Bitcoin were just 10% of Facebook, each Bitcoin would be worth about $500. 1% and it's about $50. Can a global financial system conceivably give the world just 10% of the value of Facebook? Because just ten percent ... and one BTC is $500.
https://news.ycombinator.com/item?id=5398140
I couldn't have possibly imagined that Bitcoin would soar so quickly. In all honesty, the infrastructure has NOT improved noticeably over the last 6 months. This runup in price was fueled by shameless speculation, or possibly the Chinese seeking to evade capital controls. I've followed the Bitcoin market closely since the time I made that post, and what you'll notice is the price moves up considerable amounts based on miniscule volume. Liquidity is dire.
I would advise very cautious optimism if not pessimism at this point. Is Bitcoin worth really 20% of Facebook right now? That's a tough question, especially considering the open regulatory question in America, which I personally don't see doing so hot.
I think Bitcoin was a fantastic, visionary buy at $10-$50 back when nobody was taking it seriously, and I enthusiastically stated as much to everyone who would listen. However, at this point I'm telling people they've missed the boat. There's still plenty of value in Bitcoin, don't get me wrong. It's just that this run up was 100% speculative, and based on people hoarding coins because the price was going up. Not the sign of a healthy foundation.
To be honest I don't think you can compare a company and a market. I don't even know how you can estimate what is a "reasonable" price for a bitcoin ; since it's a finite resource it seems normal that the price would go up when more participants enter the system but I don't know of how much.