Top Bitcoin questions I’ve been asked
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"...one fundamental building block that BTC needs right now: legitimacy"
"Imagine if you were able to provide governments assurance that every BTC wallet that cashed out into USD had a thorough KYC procedure performed on the transaction"
I'm afraid this kind of legitimacy will never be obtained for Bitcoin - not because it's impossible, but because many (most?) of Bitcoin's strongest proponents are pushing for the exact opposite goal.
On one hand, we have people wanting to "fix" Bitcoin by providing more transparency - through decreased anonymity. On the other hand, we have people trying to "fix" Bitcoin by providing increased anonymity at all costs.
Personally, I believe both goals are admirable, but the conflict may ultimately hurt Bitcoin's chances of long-term success and mass adoption.
It comes down to this question: do we want Bitcoin to become "legitimate" and fit in to the current landscape of government regulation, law enforcement, consumer protection, etc., or do we want Bitcoin to fundamentally disrupt all of those ideas and stand as something all of its own? The first option ensures greater chances of (quick) widespread adoption without rocking the boat too much, while the second option flies in the face of systems of power and influence that have been in place for thousands of years.
I can pay someone in bitcoin for work or services, not report it, and it is just as under-the-table as paying in cash.
With cash, if both parties are complicit to keeping it secret, you can keep your acts secret. Bitcoin is very much not like that, and you have to try a lot harder to hide what you're doing.
Bitcoin ends up being two things: one is a fiat currency that is made for digital transactions. This point is the one that could actually generate a lot of wealth. The other one is that it's decentralised. A lot of proponents buy into the myth that this means that it's anonymous, but it's not really. If enough of the market decides against anonymity they can force it, and the public ledger can help a lot with that. But this second point is portrayed under the myth of anonymity and policy makers start freaking out, and the rest of us can't get what we really want (an easy way to pay for stuff).
Some people think that this can become a sort of general revolt against the dollar or whatever, but so long as taxes exist and the government has guns, we're probably not going to get far down that route.
Not sure about this. We have a public ledger which will hold information about any transaction ever made. You get access to my wallets and you have my financial life right there.
There are mixers of course, but I'm not 100% if you can't use algorithms to trace back the total amount of bitcoins coming out of a mixer or other approachers. I'd like to read some technical papers how one can track or hide bitcoin transactions... I mean this could be used as a tool for the exact opposite reason: Say every political party should accept money only through known/identified wallet via bitcoin. Only transaction that are ID-id should get accepted. Same with taxes, etc.
I'm still waiting to hear concrete examples of how Bitcoin would compete with credit cards in a First World market. There's a lot of talk about how "expensive" and "inefficient" the credit card system is (it's almost a mandatory part of any intro to Bitcoin). But so far I've heard nothing concrete. Anyone have a good link I should read?
Firstly, there's a debate on whether BTC is closer to FIAT or to an asset (e.g. Gold).
Let's say we skip that part. Until a world-wide bank like say UBS or a country decides to implement an infrastructure for bitcoin, it won't cut it.
Why a country would want to do that, is beyond me - and probably beyond anyone with a basic understanding of macro-economics - and so we're left with other possible implementations of the protocol.
Until we find a way for average Joe to switch from USD/EUR to BTC and back easily and without fear of money loss, I don't think we'll see any widespread adoption as a payment system.
ps. The argument about using bitcoin in societies where finance is not well evolved, is as ridiculous as it is dangerous. Imagine bitcoin-driven banks in Addis Ababa handing out loans (in bitcoin or the local ETB currency?!) and financial products based on bitcoin. Then imagine that an unknown, early adopter, from the other side of the world decides to withdraw 100.000 bitcoins at once: There you go, you got Ethiopians playing wall-street pranks!
A Bank has an infrastructure that could make BTC virtually omni-present in the physical world. Any other non-gov institution, would have a hard time setting up an infrastructure in large scale. A bank has also the knowledge to protect herself from bitcoin itself, because (supposedly) understands the financial (and social) ramifications of every choice made AND should be held accountable if things get out of hand.
If UBS (as in the example above) starts accepting BTC transactions, it means that thousands of hundreds of average Joes get instant access to the system. Otherwise, it's just you me and a couple of bleeding edge technophiles.
This may be a rare example, but it highlights something key: The merchant is getting cash. They have no need to perform fraud checks. They have no worries, and can make the customer's life easier as a result.
I've struggled with traditional card payments many times in the past. Using Bitcoin is pure bliss in comparison.
I see a future where Bitcoin wallets are browser add-ons, and payments really can be one-click on any website.
Kids who may not have bank cards yet is also a hugely overlooked area imo.
I agree with you that your example is probably a rare one. Which is why I'm still searching for an answer as to how this is all supposed to supplant the card system.
The merchant may be very strongly incentivized to use Bitcoin because it cuts payment fraud to zero. This saves the merchant the direct cost of payment fraud, which averages 1-2% of revenue in the US (therefore up to 50% of profit margin in some industries). Note that 1-2% is an average -- some industries have higher rates of payment fraud, and they will therefore have greater savings.
As Bitcoin payments require no fraud prevention, they also save the merchant the cost of lost business from customers deterred by cumbersome fraud prevention methods, and losses due to legitimate customers who are rejected when fraud prevention gives a false positive.
Therefore, merchants will have the option of reducing prices for items purchased with Bitcoin.
This leads to a simple question: do there exist any industries where the merchant's savings could be big enough that they could reduce prices sufficiently to encourage a significant number of customers to pay with Bitcoin, while still earning a higher margin than they would from other payment methods? I think there probably are, but we're a long way from seeing this question answered by the market. Relatively few merchants accept Bitcoin, and many of them offer no special discounts.
Relevant news: http://gigaom.com/2014/04/02/paystand-takes-on-paypal-with-a...
As for the idea that merchants will do differentiated pricing for cards... couple problems with that.
First, it's historically a really tough case. It's generally not worth the risk of losing a sale. But let's put that aside.
Second, you've got the competitive landscape wrong. The Durbin amendment changed everything. Did you know that debit card interchange is now regulated down to 21 cents + 0.05%? And they come with some consumer protections and are "built in" to most bank accounts and all the infrastructure's in place. That's what Bitcoin or any new method that competes on price is competing with. So that narrows the opportunity to almost nothing.
Yes that's true, Wikipedia does say that, but please think about that number for a minute.
0.07%
With all the wailing and moaning we hear about credit card fraud and identity theft every day, does that figure sound plausible? Would anyone really care about fraud if the cost was actually that low?
Regarding the accuracy of that figure, I'll refer you to one of my previous comments: https://news.ycombinator.com/item?id=7506761
Certainly it's true that Bitcoin has none of the consumer protection features of credit cards, and that will be a major deterrent to consumers in many situations. It's also true that differentiated pricing isn't something that every merchant will just want to casually drop in.
As for the Durbin Amendment, you seem to know more about this than me, so I'll ask you a question: Since it was introduced, has there been any significant reduction in the percentage of revenue that merchants lose as a result of identity theft (card not present) or 'friendly fraud' (chargebacks)?
The bigger question here is whether bitcoin can actually improve on this or just change the type of fraud that happens. If for example it shifts the burden from merchants (who absorb most of it with cards) to consumers (who can never recover lost bitcoins) then it's not going to gain traction. It's got to appeal to both sides of the market.
It also has to be significantly better than the status quo. There are many markets where using Bitcoin currently doesn't have a significant advantage over the existing payment options, I think. In fact, I'm fairly sure there is often a net greater cost spread across both parties if they use Bitcoin, if you consider the case where someone exchanges other money for bitcoins in order to pay with bitcoins, and the merchant exchanges the bitcoins for other money.
However, and this is an important point, Bitcoin does not have to be suitable for all markets worldwide to establish a presence in some markets. In fact, it doesn't even have to appeal to every merchant operating in a market - just to some of them, perhaps those with the lowest profit margin. If Bitcoin is to succeed as a method of payment, then I expect a scenario where Bitcoin gains a small bridgehead in niche markets, which then slowly expands to some other markets.
Markets that suffer the largest burden of ID theft/chargeback fraud as a percentage of profit seem to be the most promising candidates for that bridgehead. An online merchant with a 4% net profit margin, who is also in a high risk market where they're losing 1% of revenue (i.e. 25% of profit) to fraud, might consider offering a 10% discount to customers who use Bitcoin, for example.
I'd guess the reasons that we don't see so this happening very often, so far, are: lack of familiarity with Bitcoin on the part of merchants, lack of sufficient volume to make it worthwhile to add a new payment method, and finally, some early adopters are still willing to spend bitcoins for ideological reasons or because they made an enormous profit by buying in early, so there's no need to offer those people an incentive.
Table of average net profit margin by industry, Retail (Internet) has an average 3.37% margin: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...
I don't actually think it will be of huge benefit to people like you who are happy with their credit cards. What Bitcoin will (and is already doing) is enable new applications and a new internet economy where location and real identity is no longer important.
(In this sense, I suppose I'm kind of agreeing with you, since I don't necessarily think there are any absolutely concrete examples of Bitcoin supplanting CCs. I think Bitcoin's greatest potential is elsewhere in untapped areas.)
That doesn't hold in the mail order or online world. Consumer protections are more important.
Plus, Bitcoin has its own security nightmare scenarios, like customer wallets getting hacked. And unlike cards, there's no recourse for recovering your bitcoins stolen by fraud.
The first is marijuana merchants in CO and WA. Marijuana is legal at the state level but not federally. These merchants have a hard time using the banking and credit card systems and transacting in BTC would help them do e-commerce.
The second is very low denomination transactions (like 10c). It may become profitable for compensate people at scale for doing some very small amount of work. Like giving someone who finds a typo some small amount of compensation. Credit cards are very poor for this.
As for replacing CC, that is a tall order. They are expensive and inefficient, but accepting credit cards does increase top line revenue if a merchant accepts them. If a payment method is going to get adoption it needs to grow revenue (vs. reduce cost) for a merchant if the merchant accepts it.
Assuming Bitcoin becomes widespread, how do you convince people to take a salary that goes down every year? It's going to take a lot of re-education -- a completely different way of looking at money.
If you want amateur opinions, which I'm willing to bet is all you'll get on HN, it's been discussed to death on bitcointalk.org. Start with https://bitcointalk.org/index.php?topic=222845.0;all
Of course, psychological perceptions are a trickier matter, which is why we hear about "sticky wages"...
Like the Great Depression, yes.
No, the amount of money is fixed by the terms of the loan.
The potential value might be unbounded (but any currency can be deflationary, even those that are actively managed to avoid deflation, so that's not entirely a unique risk.)
The real issue with a designed-to-be-deflationary currency is that the rate of deflation puts an effective lower bound on interest rates, which means there becomes no economic sense to lending money below a certain interest rate. If such a currency becomes dominant with more than very mild deflation, it could have a serious negative effect on the availability of credit.
An example is the Chilean "Unidad de Fomento", which does not circulate, and varies against the peso which does circulate. But the Unidad de Fomento is used for loan terms.
http://en.wikipedia.org/wiki/Unidad_de_Fomento
A company called BTCjam currently arranges "linked loans" that are serviced via Bitcoin, but indexed to USD.
https://btcjam.com/faq/loan_types
It turns out that the traditional money bundle (medium of exchange, unit of account, store of value) can be unpacked somewhat.
What does that even mean? How can a currency be fun? Will my car become fun too if I attach a cute dog picture to it?
I'd imagine certain people could use their Stackoverflow Coins to buy a house!
Sounds like most of the world would benefit from Bitcoin then.
For almost all practical applications for which bitcoin is being used, this doesn't actually come in to play very often.
> the resources wasted in mining
It's not wasted if it's being used to process bitcoin transactions.
> and the potential consolidation of mining
Now you've got one - this is a huge threat to bitcoin today. It'll be interesting to see how it plays out over the next 6-12 months.
But could this be a self-fulfilling prophecy? Perhaps this property of Bitcoin is hurting its adoption, by relegating it only to uses where this is not a hurdle.
Not exactly. If you have all your coins in a single transaction, you will get change - which can take 10 minutes to confirm before you can spend it again.
Yes, you can solve this by splitting up your money, but it's not something people expect.
> It's not wasted if it's being used to process bitcoin transactions.
Yes it is being wasted. Waste doesn't mean "unused", waste means "using more than necessary". Due to the hashrate arms race, tremendous amounts of power are being wasted doing nothing useful.
Bitcoin is powered by electricity, a better currency would spend something else instead.
Due to the arms race, it's only getting more and more efficient.
> nothing useful
Again with that? You are starting to sound like a troll.
> Bitcoin is powered by electricity, a better currency would spend something else instead.
Can't you say the same about everything? Why does Bitcoin's energy consumption bother you so much, while you have cars, factories, and everything else still using fossil fuels, coal, etc.? Is your computer running on dark matter energy or what?
Wrong. The number of hashes is going up. But the energy consumption hasn't changed.
> Again with that?
You really think that calculating exact hashes is a useful activity?
Please separate the action of securing the network from the action of calculating useless numbers.
They are not the same thing. Yet you seem to think they are.
> You are starting to sound like a troll.
After a single comment? You have a pretty low bar.
> Why does Bitcoin's energy consumption bother you so much ... everything else still using fossil fuels
Because it could easily be better. The other things can only be better with difficulty. That makes it a waste.
It might be too late to change now, but that doesn't make it good.
You think moving electrons around is a useful activity? No? Then turn off your computer, you are wasting energy!
Then we could say the computing ressources are not wasted.
A good proof of work function needs two things (among other desirable properties I will elide):
1) For some difficulty factor D, you should be able to generate an instance of the problem that takes time proportional to D to solve
2) The solution should be verifiable in time much less than D (preferably constant time)
So until you can show me a foolproof way to generate protein folding problems, genetics problems, or SETI problems, etc. that have these properties (I haven't found one myself), it seems quite difficult to make a "useful" PoW.
Now, theoretically, if you found a "useful" problem that had property 1, but not property 2, you could convert it into a viable PoW using efficient zero knowledge proof techniques [0], but at the moment that isn't really viable.
On the plus side, the problem does not necessarily be "proportional to D", in fact, finding a better function would be incentivized. Since the computer cycles would produce a "real" value (curing cancer), the upper limit for these coins would be the amount of money society would spend on a cancer treatment.
/speculation
But they are doing something useful. They're preventing someone from turning up and performing a 51% attack, thus ensuring the security of the network. You could suggest that there's better ways of doing that, but our ideas so far haven't panned out.
Interestingly, how it works at the moment is that essentially, through the mining of bitcoins, every bitcoin holder's bitcoins are devalued to pay for the security of the network. Therefore, if a significant amount of bitcoin holders decided that they could deal with less network security, they would use a coin which provided less network security (by paying miners less).
As it is, at the moment, we're not sure exactly how much security we need. Therefore, we're willing to pay for as much security as possible; nobody wants their bitcoins to be worthless tomorrow because they didn't pay enough to protect the network.
Can I ask, have you heard about Peercoin, which uses a combination of a proof of work and a proof of stake system rather than just a proof of work system? Do you have an opinion as to why such as system wouldn't be at least as secure as bitcoin?
There's also the fact that wealth inequality - specific groups of people owning significant amounts of money - will break the network's assumptions. This could be a good or bad thing, depending on your point of view.
Additionally, minting a proof-of-stake block locks your stake for 520 blocks. Most reasonable people would be angry that they can't access their money for that long. There's a workaround of reserving a certain amount of coins so that it can't be used for proof-of-stake, but that doesn't actually solve the problem, and generally means that the poor will reserve all their money and never generate a proof-of-stake block.
And that leads on to another issue with proof-of-stake; the rich get richer, as a rule that's explicitly built into the system. Probably not much richer, but it's against common ideology.
The other thing that most cryptocurrency enthusiasts won't like about Peercoin is that it's eternally mildly inflationary. While some will understand that this is essentially payment for security, others will argue that those who use the network more should pay more (via transaction fees), rather than a "tax".
I suspect that it will see a mild increase in use when they prove that they can get rid of centralised checkpointing, but I think there's a very significant core group that will not be able to get past the ideological issues and lack of academic research.
Of course, lacking a better proposal, it could be that this is the best we can do. I don't have to like everything about every piece of technology in the world...
This argument makes no sense to me. If Bitcoin's deflationary nature prevented it from acting as a currency, it would also prevent USD/CAD/dogecoin/etc. from acting as currencies because people would chose to buy Bitcoin instead of spending their inflationary currency on anything else.
Every time you spend USD on something, you can instead buy an equivalent amount in Bitcoin. Not buying bitcoins can effectively be thought of as buying them and spending them.
In fact, the truth is that no one knows if Bitcoin will be inflationary or deflationary within the next year due to its current small market cap and risky nature. But in an hypothetical world where Bitcoin does become a stable and deflationary currency, why would any selfish actor chose to hold an inflationary currency?
This is exactly what happens. No one holds currency.
People don't generally have their assets as cash, just what they need to be liquid. They hold their assets as a mix of stock (incl. funds, bonds, options), real estate, etc.
In fact, the majority of people have practically no cash at all because they lend it to a bank (i.e. putting it in a checking or savings account) who invests it or lends it for a return! The bank only holds a small portion of what they say is in the account.
Perhaps a deflationary currency would have a negative overall impact on the economy, but that's not what I'm arguing about.
I think that a good currency really has couple properties: fungible, no inherent value (i.e. not a good value store).
(This could be viewed as a weakness but I think is actually a strength in this circumstance).
If the currency is a value store, it changes the dynamics of spending it. I feel this is the reason that salt (going back in time) is not a particularly good currency either. Imagine it this way -- if all of a sudden salt was more useful (perhaps it's a hot summer, and meat is spoiling), then all of a sudden there's an extra inertia on all transactions, i.e. the cost of all goods changes.
The point of a currency is to facilitate transactions. If there's any sort of speculation around the inherit value of the currency (as per bitcoin -- the knowledge that demand will increase and supply will be lost) then it increases friction in spending.
I would certainly have to think a lot harder all the time if I were spending stocks or tiny pieces of land.
You said it yourself: people don't hold cash. They sell their assets before buying something with cash. And it doesn't seem to prevent them from spending. With Bitcoin, it would be the same thing except the whole "sell your assets before you buy" process could be skipped.
Of course I oversimplified a lot here. People don't literally sell their stocks/real estate before they buy something. But I'm sure they would if those assets allowed them to.
To pay our taxes?
Getting really tired of these arguments. Transactions take 0-2 seconds. The resources are not wasted, they are used to secure the network and are way lower than what VISA or any other big company use. And It's deflationary because people like me are suffering from this form of theft called inflation, and we desperately needed something like Bitcoin. Besides, without an economic incentive why would people risk money? Nowadays economic thinking is pretty much a pseudoscience, just like Psychology.
Mining isn't (primarily) for currency issuance - it's decentralization of secure transaction processing. Which still isn't something everyone considers important, of course.
Of course bitcoin's major advantage is that it's already here and working.
Certainly. Using it to distribute the currency, before there's the critical mass of people wanting to make transactions enough to pay your miners seems a perfectly good fit once you're already needing to mine, though.
"There are (theoretical) systems that allow cryptographically secure transactions to take place without so much thrashing though. Even verifiable offline transactions."
Verifiable offline transactions with no centralization? Can you link to some?
Nope, because they all have centralisation, as I said, the thrashing is the tradeoff!
And no, not everyone values decentralisation, sorry. I ddon't consider it an important aspect of a currency or payment scheme. Good for you if you do. Personally I value consumer protections and ease of use way more.
Part of the rules of the system that are enforced is how new coins come into existence, and the current rule for that is the fixed reward per block mined, with logarithmic decrease in reward amount. It is possible to change that, but the fundamental nature of the system is that the coin creation has to be controlled by an algorithm shared and repeatable among all nodes, and so cannot ever be based on any arbitrary or external factors.
Even making a change that remains within those limits is risky. To keep the currency in existence, there must be broad agreement among all of the people running nodes as to what the rules of the currency are. If the core developers decide to make a change in that, and 20% of nodes refuse to upgrade, it would be a disaster. And so they aren't likely to risk doing anything that might piss off a significant fraction of the users.
So love it or hate it, the fixed inflation system isn't going anywhere.
Have you seen https://www.youtube.com/watch?v=vnm4xFC2xNo ?
I think the second guy at the end of the video raises an important question. Why use this over any other currency? If you are worried about the "control" of the said currency why not use a more "free" one like Swiss francs?
I am worried that Bitcoin will never be used as a standard if a regular, Facebook user, can't manage to get his hands on it, and afterwards use it. It's a catch 22 in my opinion.
Sure it's easy for IT people to use it, but my mom doesn't even know about PayPal for instance. And I am sure she is not the only one.
Does that make sense?
Any particular guess-and-hash operation has a certain probability of finding a solution, and that probability is the same for all systems, no matter how fast or slow they are running. Faster systems just guess-and-hash faster, and thus have more opportunities to succeed. That difficulty is set dynamically based on the estimated total rate of operations, or hashrate, of the entire network, so you can think of the system overall doing a certain number of hashes per second. A solution is essentially a random event that one particular hash will satisfy. So the higher the hashrate, the higher the probability that you will succeed, but it's still a probability. You never have a guarantee that you will succeed, no matter how fast you are, and even slower systems have a chance.
That's why there are these malware-created networks of low-power systems doing bitcoin mining. They're all pretty slow, but with enough of them working, one of them will succeed every once in a while.
The block includes a nonce, a random number which is changed for each try until one gives a hash < target. That nonce is picked at random independently by the miners, so that also makes the blocks they are working on different.
maaku's explanation makes clear a very good point - trying any particular hash only tells you whether that one succeeds or fails; it doesn't tell you anything about whether any other value will succeed or fail. Any particular hashing device will maximize its chances of winning/finding a solution by trying nonces in such a way that it is unlikely that any other device is trying the same ones, but that it never tries the same one itself twice.
I don't know offhand how many mining algorithms are out there and how they go about picking nonces, but I'd bet they do something like pick a strongly random starting value and then increment it by a fixed, small amount each try.
But yes, all of the miner's blocks are generally different. Each block that a miner is working on must have special Coinbase transaction that awards a specific number of new BTC to a chosen address. If you are an independent miner, that would be your address, but pool miners generally use a pool address. I don't actually know how the latest pool mining algorithms work, but I think they all have more elaborate systems for how payouts work.
Just another Dogecoin shill with unproven claims. What you said is absolutely false. In donations alone, bitcoiners have spent more (millions of dollars worth at the time) than dogecoiners have spent in everything.
Dogecoin is not even in the top 5 anymore: http://coinmarketcap.com/
It was just a short lived fad, like many other copycoins. Ever heard of Infinitecoin? Probably not. Yet it also entered the top 5 at one point.
If you are going to use coinmarketcap, at least filter out the non-mineable coins, Dogecoin is in the top 4.
This is NOT a normative statement, just a fact. Bitcoin spending is going to be curtailed (fact) by a limit on the speed of increase of the money supply, just as spending is spurred (fact) by easy credit and inflation.
(Inflation for a fact spurs spending, because if inflation is 7%, then holding onto money costs you 7% per year, whereas spending it on anything can let you retain that value.)
These are not normative statements but completely uncontroversial (and intuitive) economics.
You are absolutely wrong in your comparison with cigarettes, because in prison you don't have enough liquidity of cigarettes. On the other hand, you can buy all the Bitcoin you want and use it to buy whatever you were going to buy anyway, and even get a discount.
And there are a LOT of dollars in existence.
There are comparatively VERY few bitcoins in existence.
So this simple example shows that it is absolutely false that you can buy all the bitcoins you want. If Facebook announced that it needed $4B in bitcoins at today's price, then most people would instantly start hoarding it, the price would jump to $10,000 per bitcoin, and ordinary people would be unable to buy it at any price.
Besides you are trying to find an edge case to argue about common cases, which is stupid and lame.
The part you quoted before ("This is discouraging transactions because (if you believe in the currency and its future) you should hoard your BTC. The amount of new BTC going into circulation is low, barring any disaster (e.g. Germany banning BTC, Kraken hacked), it just makes sense to hold because what you have today will be worth more tomorrow.") is totally completely uncontroversial - and this is super easy to show, not only just in historical terms or by looking at how people actually behave, but if you simply think it through yourself. It's just obvious and uncontroversial.