Bitcoin by analogy
brikis98.blogspot.com
brikis98.blogspot.com
Disclosure: I wrote this last year.
No matter what security measures people devise for Bitcoin or anything else on the web, they will never be perfect. Look at heartbleed! What protects us is the system: laws, repercussions, investigations, insurance. Once you have laws and police to protect the banks, the banks are happy guaranteeing you your money back if you are a victim of fraud or theft. Bitcoins biggest selling point is also its Achilles heel. I'll keep my money in the bank until Bitcoin is legislated and protected.
...provided tax payers bail them out, at least that has been so in the recent past. So banks dont really protect your money.
There indeed existed regulatory separation and barrier between the risky side and the non risky side. A client of a bank could choose which side to be on. But bankers thought this was too much of an imposition on their creativity. It still would have been fine if the removal of the barrier was not forced on other banks and countries, which I hear they were.
Realistically, I'm much much much more likely to lose money stored in a Bitcoin wallet I maintain than money stored in a bank, and I'd imagine that's probably also the case for most people.
Oh absolutely. What I was commenting on is that the source of this protection is not the bank alone, but the expectation that someone will pull it through if it went bust.
In some theoretical sense, sure. On a practical level, I pay my taxes either way, in the banking system my money is insured, in the bitcoin system my money isn't insured.
This is really just not true. It's also less and less true as time goes on. There are now cases of small businesses hit by Zeus malware suing their banks for not covering the fraud losses. Its also getting more difficult for defrauded customers to get Visa to issue chargebacks; eg, my mom was told she would first have to file a court claim against a sketchy moving company which stole her credit card deposit. In China, UnionPay (the Visa of China) simply doesn't do chargebacks for customers, that's why TaoBao (eBay/amazon of China) offers escrow services.
Furthermore, watch any American Greed episode, it's on its sixth or seventh season on CNBC. Tell all the victims profiled on that show that their losses to investment frauds, mortgage frauds, ponzi schemes etc., that their money is guaranteed by the bank. It just isn't.
True, bitcoin is a Wild West. But fraud happens very often through the legacy banking system as well.
I think Bitcoin has a ton of great uses, but fraud protection is not one of them for consumers at least.
[1] http://blog.tyrannyofthemouse.com/2011/07/bitcoin-overview-p...
My intuition is that there's a difference between the proof of work for the purpose of the block chain versus mining coin that's glossed over in this article. Any description I remember seeing conflates the two. Is there something more going on there?
I suppose then transaction costs will necessarily rise to cover the discrepancy, though it seems like an efficient market so they'll probably just replace the reward.
Blocks will continued to be mined at a constant rate (in mainline BTC, 1 per 10 minutes) indefinitely. The proof-of-work required for the next block to be considered valid--basically, how small a percentage of the hash search-space your hashed block has to land within--is based on the difference in timestamps of the blocks that came recently before it; effectively, the faster blocks make it into the chain, the harder it becomes to mine another, and the slower blocks make it in, the easier it becomes to mine another.
On the other hand, the BTC that the miner gets from a block is basically an implicit transaction included in the block, and acts just like any other one signed inside the block, transferring a given amount of money "out of thin air" into the account of the miner. Like any other transaction, the validity of this transaction for any given amount is a matter of policy set by the consensus of the network of bitcoin clients. The policy on the BTC network for how much money is valid to claim in an "out of thin air" transaction is a function of the block's timestamp/blockchain depth; as more blocks get mined over time, the amount of money it's valid to claim in the sourceless transaction in your block diminishes to zero. These implicit transactions will still, technically, be happening every time a block is created--they'll just be for a below-quantum (1 satoshi) amount of BTC, and thus discarded in accounting.
In the distant future, blocks will still be being mined one-per-ten-minutes, but their timestamp/block-id will translate into them no longer having any implicit value. They will, however, still have the explicit value of the transaction fees invested into them by the transactions they sign.
As they say in DOGEland; 1 DOGE = 1 DOGE. As long as this is true, DOGECOIN will have value.
However, there is an important difference. By my estimation it is approximately one hundred quadrillion times more likely that all offline wallets can be rendered simultaneously unusable at parity value (i.e. that an offline wallet containing 100 bitcoins no longer contains 100 bitcoins, without any interference to the offline wallets) than that the same occurrence can happen with gold. (Anywhere in the world that there is 100 grams of gold, it turns into not-100-grams-of-gold.) Such an occurrence would have to happen through other than literal means: physical theft, legal, etc, and on an individual basis. Can't happen on a protocol basis.
However, the same is not true of bitcoin. The entire P2P bitcoin infrastructure, or the software, might have fatal flaws - and at the end of the day, the "true" location of an offline wallet is in a blockchain, which in a sense is a social construct. A bitcoin does not have a physical sense of existing outside of the blockchain.
This is not a minor point. No software is secure, and there have been close calls in the history of the development of bitcoin. There is no physical law that prevents the breaking of the entire bitcoin model, or that ensure the network - and one and only one unforked network - will always operate.
Whereas, there are very strong physical laws keeping gold stored at a location from turning into anything other than gold without anybody touching it.
Secondly, there are also strong physical laws that imply the scarcity of gold. Again, in the history of bitcoin there have existed flaws that made bitcoins less scarce: . In the past three hundred years nobody has come much closer to "printing" (e.g. synthesizing) gold. It needs to be "mined" - an analogy for getting it with difficulty.
"On 6 August 2010, a major vulnerability in the Bitcoin protocol was spotted. Transactions weren't properly verified before they were included in the transaction log or "block chain" which let users bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins. On 15 August, the vulnerability was exploited; over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the Bitcoin protocol." [1]
So there are a few major concerns that keep bitcoin from being a good analogy with gold:
1- Bitcoins do not have a guaranteed phsyical lifespan and location and can disappear at the whim of a network.
2- Bitcoins do not have a guaranteed scarcity and can appear at the whim of a network.
In both of these senses it is quite analogous to a fiat currency. It just does not have some of the physical properties that gold does.
Nevertheless, insofar as the protocol mimics gold in several important ways (including scarcity, storage of at least parity value [0.5 btc remains 0.5 btc in a wallet, just as 0.5 grams of gold remain 0.5 grams of gold], fungability, and mining) there is good reason to believe it can take a very similar role.
If it does, then a good target price for btc is approximately $300K per bitcoin today, which would enable it to take on a total money supply role similar as the total US money supply, or a price similar to the price of the total amount of all gold ever mined (at total spot prices). (Actually bitcoins are considerably more useful than gold for many reasons, including secure storage and transfer; nobody sends gold across continents to render payment, but this is easy with bitcoin. So the total value-as-money of all gold could be a bit lower than the total value-as-money of all bitcoins.)
That is a very large "if" however. I have absolutely 0 faith whatsoever that bitcoin the current protocol can last even 3 years, let alone 10, 20, or 100. If God himself said, "You know what, I shall will the bitcoin protocol into working perfectly forever" and were to fully meet all of its design constraints with no further input from anyone - if offline wallet became equivalent to a safe with gold in it, if transfers worked exactly as handing someone some gold does, and if scracity worked exactly as advertised --
then there is no reason the general protocol could not come to represent more money and velocity than dollars or gold do today. If that were to happen on an international scale, then the 21-million bitcoin limit (ever) would be a problem: to some extent the price of gold will always be kept in check by the ability to mine further gold. The price of gold can't be infinite (or close), as that unlocks further physical gold mining operations and brings the price down at least to an extent. However, if there is a hard limit on the number of bitcoins, then the value of a bitcoin can tend toward infinite without any corrective increase in the amount of the money supply. (The u.s. dollar money supply can increase even more easily, and the economy is never starved for dollars.)
In that case, many people would hoard bitcoins, and it would face a serious impediment to adoption as a currency: too much scarcity. A currency is no good if you can't get your hands on any at all, and the world economy has a rather large need for liquidity.
A good replacement for cash should be able to take on a total-money-supply role in the tens of trillions - that implies values of $1M or so per bitcoin given its absolute limit. But it is fairly obvious that it would be difficult for bitcoins to take on that value while continuing to service the world economy.
The truth is that there should be a bitcoin-like protocol that contains real-world regulatory action: if such a coin were pinned to the dollar, ($1/coin) and surges were met with lending (creation out of thin air and lending the created coins to borrowers) so that it would be spent and brought back down in value, the protocol would be able to replace fiat currencies much more easily.
In addition such a centralized money would be able to finance the operation of its authority, by means of collecion of the interest rates charged on new money.
As long as bitcoin will become absolutely scarce (unlike gold, which does not have hard physical/protocol absolute limits on the rate it can physically enter the economy, or dollars, which purposefully are the opposite in nature), nobody will ever lend bitcoins out for productive uses. (The hurdle rate, of natural deflation, would be far too high.)
Therefore there is a gaping hole of a market opportunity right now for someone to create a central bank of internet money, a kind of private federal reserve like skype (as opposed to a pure p2p system - which in this analogy, voice calls, never existed).
There are several good reasons that skype won out over some sort of truly p2p voice conversation network, and many of the same facts will allow a private skype-like bitcoin network to prevail over a pure p2p bitcoin.
if someone is interested you can email me. let's open a central bank of internet money together that can at its whim print and lend out more money, and does so whenever, and to the extent that, the real-world price of the currency is too high.
by strategically meeting the money supply needs of people who do not have to mine it or pay for it, it is also far easier to get the currency adopted. today, someone who hasn't mined bitcoins, and isn't paying for them, won't have any.
the same isn't true for dollars (they can just get some lent by a bank or government).
We can do better than bitcoin. Unlike the bitcoin people, we can also have massive revenues to spend on further development and security. (Again, inflation of the money supply is a secret tax.)
Let's do it.
[1] http://en.wikipedia.org/wiki/History_of_Bitcoin#Creation
Not exactly. Gold is a commodity that has a useful value. It can be used by my dentist to fill my teeth, it can be used to conduct electricity, as well as do other things. Then - it is also scarce, easily transferable, fungible, verifiable. Thus it makes a good currency. But underneath all of that there is value. Bitcoin has no value. It's why the price can halve in five months. If gold's price halved in five months (of course that would not happen) electronic manufacturers would buy gold like crazy and the price would go up. Bitcoin is dependent upon the last sucker that will be holding the bag.
If the US announced that it would also accept taxes in bitUSD, and sold a few biT-Bills in exchange for dollars...
But gold actually does suffer very similar huge declines in value[1], in similar time frames: 50% in less than 1 year in the early 1980s, 30% in 9 months last year. (The actual 'loss' was much larger, because the total 'market cap' of all gold is currently about 1000x that of bitcoin).
Gold is prone to these huge swings in value precisely because its 'useful value' is a small fraction of the market price. The intrinsic value is generally estimated at below 15% of the price[2].
Therefore, the main factors influencing gold's price are not industrial and commercial use, but speculation, as well as transferability, fungibility, and verifiability -- in this it is quite similar to... guess what? Bitcoin.
[1]http://www.macrotrends.net/1333/gold-and-silver-prices-100-y...
[2]http://www.forbes.com/sites/louiswoodhill/2011/05/11/what-is...
I have never bought gold, other than in jewelry, I suppose, so I could be wrong about this. As I understand it, transferring gold is actually quite difficult, unless you trust the person. Don't you need to weigh it and test it for purity? Bitcoin transactions over long distance are enormously easier than a gold transaction over long distance, I would imagine, too.
But there is, its the law(s) of thermodynamics. Entropy is derived from thermo, information theory from entropy, and cryptography from information theory. So the theoretical security of bitcoin is absolutely rooted in physical scientific law.
> I have absolutely 0 faith whatsoever that bitcoin the current protocol can last even 3 years.
It's already going on 4 years, since the last critical bug you mentioned (August 2010). But you do have a point, that the software is not formally verified for correctness. (If it was, then we'd have the practical guarantee that the implementation of the protocol is as sound as the design of the protocol in theory.)
However, you aren't making a fair comparison to the security of gold. You're comparing gold in an idealized scenario to the real-life in-practice security of bitcoin. But the security of gold in practice is also flawed, e.g. the case of counterfeit bars with lead in the middle and gold on the outside. Also, the physical nature of gold brings risks from which bitcoin is immune: it occupies physical space and so is impossible to hold secretly, and moving it securely requires an armed escort (even that doesn't eliminate risk, only reduces it).
In an apples-to-apples comparison you have, on one hand, the potentially/likely buggy, imperfect software which implements Bitcoin. And on the other hand gold with all its real-world in-practice flaws (true supply masked by a paper market, physical inconvenience & risks, etc).
> The truth is that there should be a bitcoin-like protocol that contains real-world regulatory action: if such a coin were pinned to the dollar, ($1/coin) [...] the protocol would be able to replace fiat currencies much more easily.
There's substantial ongoing effort to create exactly this. But generally the proposal is for the "real-world regulatory action" to be the deterministic output states of a decentralized "contract" enforced by the laws of computer code running on a p2p network. Rather than the whims of a centralized group of emotionally charged and politically biased humans.
that is not true. Checkout https://btcjam.com. Investors have funded over $4M in loans so far, growing quickly. Loans can be linked to USD (if your revenue is in Fiat) or BTC (if your revenue is in BTC, for example for a miner). In other words, you get a loan denominated in USD, but paid in BTC and you are removing any exposure to the volatility. If the BTC price has doubled when you repay your loan, simply pay half the amount of BTC.
The bitcoin price doesn't matter for the linked loans. Bitcoin is more than just a store of value - it is also a means of sending value across the world for very low fees - and in this case, giving credit to people who can't easily obtain it at affordable rates.
(disclosure: I work at BTCJam)
This is only true if the loans are a ponzi scheme and not being spent on goods or anything else :)
I'm sure you don't care, you'll get your fees right up until the moment that you don't. As far as investigating or thinking about this as a personal individual, even if you are an employee, you can look at it this way, especially how the situation would change if BTC experiences even worse deflation (if it were to be adopted as a serious money supply without the supply increasing):
What is the average per annual interest rate on all loans on BTCJam? A cursory look reveals "invest your bitcoin and earn 19.3% APR". Assuming your fees and other friction amounts to just an additional 2.5%, then we are at 21.8% - meaning, that if you have a business opportunity that you have a 98% expectation of generating a 21% return within 1 year, ($100,000 in, $119,000 out in year 1), you cannot finance it with this type of bitcoin loan. And this is today, during a far from certain period for bitcoin and by no means a heavily deflationary one.
We are not currently in a great deflationary period for bitcoin. If bitcoin were to tend toward $300K per btc - so that it represents value around the value of the gold supply or other world money supplies - from its current value of $450, in, say, 10 years (an eternity for the Internet) that would represent a 666x increase in value.
Annually, that would translate to a 91% APR. (1.91^10=646) So the only way for anyone to borrow bitcoin, spend it on an investment, and then both return bitcoins - with an interest rate! - and still have some personal profit from the investment, is that if the risk-adjusted return from the actual real-world investment is 91%. But that makes bitcoins impossibly expensive to denominate the loan in.
What if we denominate the loan in dollars? Well, during a deflationary period, anyone would be nuts to lend bitcoins and receive 91% less back the following year, recouping just a little bit in interest rate. The interest rate would have to be around 91% just to cover the new value of the bitcoins being returns. Essentially, a lender of bitcoins would be short selling them. A huge risk. It might well be the case that they lend out 100 bitcoins, and a year later get back 1 bitcoin. If they had held onto the bitcoins instead of lending them out, they would have enjoyed a +10,000% return on the real value of that specific holding. Instead, the real value of the holding has remained steady at 110%, since it was denominated in dollars.
This establishes a very difficult hurdle rate. Currently bitcoin does not experience such a deflationary period (indeed, it is worth less than it was at xmas and before), which makes lending denominated in usd considerably easier.
At other times however it will be far more difficult.
Essentially, bitcoin lending works "ok" as long as bitcoin itself is not taking a large role as a money supply. If it does, then due to the impossible of scarcity (again, reasonable target is $300K/bitcoin under this scenario) lending will grind to a halt where lending is used for real-world production of value.
Lending may still occur under literal ponzi schemes. (Borrow 10 bitcoins, promise to pay back 12 in a month...which you do - how, because in the meantime you've borrowed 14 bitcoins, promising to pay back 16 in a month...which you do - how, because in the meantime you've borrowed 18 bitcoins.... );
I think if you take a good, hard, look, at the source into the way in which these bitcoins are being paid back, you will find more than one literal ponzi scheme under BTCJam. There is scarcely other explanation for the lending behavior of many of the entities there. (Despite
For example,
We allow investors who think and breathe in USD (or other fiat currencies, for that matter) to invest all around the world 'using btc', without exposing them to btc. The returns we generate are so high because we have borrowers whose only alternatives are pay-day loans with 3000% APR (checkout wonga.com) or credit-card interest (checkout brazil's crazy 120-200% APR on outstanding credit card debt) If we provide 30-40% APR interest for them, that is a huge win, they can refinance their high interest debt and repay at a much lower rate. At the same time, that is how investors can make 19% a year after some defaults.
You had said: "The bitcoin price doesn't matter for the linked loans" - well, sure, for USD loans by people who arne't using up their BTC investment holdings.
In this sense you can use anything that has a spot price, including rice, pork bellies, or gold, to make a 'loan' that is really denominated in USD.
Presumably, nobody is actually borrowing the pork bellies for some investment purposes qua pork bellies. It's just a medium of exchange.
On the other hand, even if you denominate a bank loan in USD and have to make it in pork bellies, to be received back in pork bellies at a future price, - this raises the problem of actually having to source those pork bellies.
It may not be a problem if it is possible/easy to buy BTC. On the other hand, hoarding behavior may make the purchase of the BTC a bit more difficult to acquire so that, like pork bellies, it's a rather poor medium of exchange for actually making the USD loan.
Regarding my suggestion that you look at whether some BTC loans are ponzi schemes (relying on previous investors being paid off and happy, to secure ever larger loans and reputatoins by the same party), what did you find personally (not speaking as an employee or on behalf of your company of course)?
I'd be interested in your thoughts.
Heavy elements are scarce because of the way they are formed. But they are even more scarce in the earth's crust because heavier elements tend to sink to the core during planet formation. This means that gold and other heavy elements are probably a lot less scarce in metallic asteroids.
Now if I see that NASA is planning to capture a small asteroid in a few years[1] and there are private companies thinking about asteroid mining[2], then I start to wonder whether gold is still going to be valuable in a decade or two.
[1] http://articles.orlandosentinel.com/2013-04-05/news/os-nasa-...
Then he quotes from Marc Andreessen: "It's not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value." This shows that Andreessen has no concept of what value is (I'll give him the benefit of the doubt and assume he's not being disingenuous).
It's also not a falsifiable argument. People trade with Bitcoin (most importantly trade significant paper currency for Bitcoins) so he says it has value. If people stop doing that, then by his definition it has no value. "It's valuable because it's valuable". I know precious metals will retain their value over the long term. Bitcoin certainly will not.
Only commodities have value, from a widget in a factory, to a bucket of water pulled up from a backyard well. It is why a precious metal such as gold has been a currency for thousands of years. Gold had value 3000 years ago, gold has value today, gold will have value a century from now. It is why the US keeps hundreds of billions of dollars worth of gold in Fort Knox.
This is a giant Ponzi scheme. If anything is a sign of a bubble, all the VC's talking up this bogus Bitcoin Ponzi scheme is. Notice nothing they say is falsifiable either - a solid statement is me saying plain as day that Bitcoin will be worthless. They are just making vague assertions about how something is valuable if it's perceived as valuable, which at the end of the day means absolutely nothing.
That posts like this skeptical of the Bitcoin Ponzi bubble are downvoted into oblivion on HN are yet another sign of the irrationality of this bubble. If I said I thought Google stock will stagnate and go down, my post would not be downvoted (actually this is just a theoretical example, I have no crystal ball on it, but I believe Google stock will continue to rise and do well). That this post surely will be downvoted to oblivion is just another sign of how the whole thing is a scam. The damned things have no value, and all that it will mean in the end is a hard lesson for all the suckers who shell out real money for worthless backordered ASIC miners and fat Bitcoin wallets.
What value does money have? If you say that money has value because some one accepts it as payment then Bitcoin has value because there are companies that accept it as payment. If the world goes to shit, what can I do with Bitcoin?, Nothing. What can I do with Money?, Nothing.
Does this mean that a 'Tin of Beans' or a 'Tracker Bar' is valuable because we will always be able to use it? No matter what happens to the economy?
One needs to pay taxes only because the government enforces tax law. Fiat (in latin) means "by decree", as in "this money has value by government decree." Its value is backed by the government's ability to enforce legal code. (or on a meta-level, by people's belief/faith that law enforcement officers & public employees will succeed in working as agents & beneficiaries of their government). Money by government decree should be called government-fiat.
But the fiat definition of money actually works well for bitcoin too. Except instead of being decreed by government's legal code, bitcoin is decreed by cryptographers' computer code (Lawrence Lessig's slogan that "code is law" was prescient indeed). Its value is backed by the ability of computer code to enforce the information-theoretic laws of cryptography. (or on a meta-level, by people's belief/faith that financiers & tech users will succeed in working to further their interest & investment in a p2p crypto network). Bitcoin is crypto-fiat.
IMNSHO there are two types of fiat money: gov-fiat and crypto-fiat (bitcoin an instance of the latter).
> Bitcoins are only valuable as long as you can convince someone else that they are valuable.
Well it turns out that this is surprisingly easy: you just put your money where your mouth is. Its a simple strategy which has worked exceedingly well for bitcoin, in quite a short time.
That will only happen when everyone uses Bitcoin or something better.
A pyramid scheme is where each person who buys in sells parts of their own share to the next mark, usually kicking up a fee to the person who sold their share to them. The returns at the top come from the exponential growth of fees from the bottom.
Bitcoin is only really superficially like either of them, mostly because there is no direct kickback aspect of it. If it's any kind of scam it's an asset price bubble.
Surely that's only true if you're trying to use BTC as an investment to make capital gains in USD with? If your BTC stays within the BTC community and is traded directly for goods/services without conversion to USD then there's no such requirement.
Now, as it stands the vast majority of transactions are actually basing BTC's value on USD. I think this is a misstep, but perhaps a necessary one.
What I'm saying is: you're right as long as people see BTC as a vehicle for USD gains. But the grand idea is to replace USD entirely. When we start seeing people routinely selling things for fixed BTC amounts, regardless of the 'exchange rate', then bitcoin will have succeeded.
At present it's largely just a proxy for USD, as Warren Buffet has noted. But this is just the first stage.
What if, now hear me out, we just stop redeeming those notes for gold. Those suckers will be holding nothing but paper.
Money is whatever people agree to exchange.