Why Bitcoin’s Erratic Price Doesn’t Matter | Hacker News Reader

Why Bitcoin’s Erratic Price Doesn’t Matter

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70 pointskristianp59 comments

The price does matter. Keeping a network with 250 PHash/s running costs 219 million Dollars per year (1 GHash/J mining efficiency, 100 $/MWh energy costs) and probably quite a bit more if you account for other costs like hardware, rental or cooling. If your block reward is worth nothing you will have a problem keeping the network running. Scale back the hash rate and you get vulnerable. Increase the fees - with 100k transaction per day you are looking at costs of 6 Dollars per transaction for electricity only - and you damage one of the main selling points of Bitcoin, cheap transactions. And this again is prohibitive for Bitcoin adoption in underdeveloped countries which are often suggested as a core market.

I have a hard time believing that scaling back the hash rate gets you vulnerable. $219 million dollars per year ($7/second) in cryptographic operations to support a maximum of 7 transactions per second - the bitcoin network's current maximum is... a bit ridiculous

The hardware is out there. If you reduce the hash rate and therefore the operation costs tenfold you end up with a 25 PHash/s network on the one hand and unused hardware worth 225 PHash/s on the other hand. Significantly reducing the network hash rate without getting vulnerable seems a pretty hard problem to me.

I did not make the numbers up - hash rate and transaction volume [1], mining efficiencies [2] and energy costs [3]. Actually I think I underestimated the costs quite a bit.

[1] https://blockchain.info/stats

[2] https://en.bitcoin.it/wiki/Mining_hardware_comparison

[3] http://www.statista.com/statistics/263492/electricity-prices...

Are you saying it's worth the time of the owners of the hardware to break bitcoin? Why? When a mining pool recently reached 50% of hashrate, they didn't use it to break bitcoin. Just because something isn't cryptographically secure anymore (e.g. 51% owned by 1 single party) doesn't break anything. Likewise I doubt the $200 million worth of hardware needs to be used on the hashrate.

The cheapest hardware listed on the page linked before is 2.5 GHash/s/$. This yields hardware worth 100 million Dollars as a lower bound. But I did not think so much about hardware costs when I said that it is probably underestimated but because I picked the efficiency from the top of the range and energy costs from the bottom.

And it does not necessarily break anything but the security of Bitcoin is build on the assumption that it is very hard for any single entity to posses the majority of the hash rate. If you take the 100 million Dollars of hardware, reducing the hash rate tenfold will make the network attackable with only 10 million Dollars which seems pretty cheap to me. And being vulnerable does not imply the attack is actually executed, it only means it could happen anytime. But do you want your money in a system that could be attack anytime?

As I mentioned, 51% of the network did get controlled by one single entity. The question "do you want your money in a system that could be attacked anytime" has two answers: "Yes" or "I don't want any money." There is no perfectly secure third alternative.

They controlled 51 % and decided not to abuse their power. But the idea behind Bitcoin is that you don't have to trust any single entity and if you allow this to happen this idea goes straight out of the window. You could just as well throw out all the expensive cryptographic stuff, send them your transactions and let them manage them in an Excel sheet and hope they will not abuse your trust.

> You could just as well throw out all the expensive cryptographic stuff, send them your transactions and let them manage them in an Excel sheet

Hmm, that's not really how these attacks work. When a miner doesn't mine according to the rules, their blocks are invalid and rejected by the network.

edit: Unfortunately you have now given me an opportunity to admit that Excel is probably capable of running Bitcoin-equivalent software, though.... I would prefer not thinking about this.

There was a 51% attack against a gambling site before http://arstechnica.com/security/2014/06/bitcoin-security-gua...

But you don't actually mean "You could just as well throw out all the expensive cryptographic stuff, send them your transactions and let them manage them in an Excel sheet and hope they will not abuse your trust." You think you mean this, but you simply don't.

It's a nice ideal but none of it is true. The broken system we have, where 51% decided not to abuse their power, works. A trivial replacement without any cryptography relying on the honor system demonstrably (and obviously) doesn't.

That is not an insignificant difference. While you would like the cryptography to be provably secure, it simply isn't (51% control-by-one-group actually happened), and it wasn't a disaster. It was still far better than the alternative. The world is not black and white.

The original point was that lowering the hash rate is dangerous. As it turns out it is even dangerous at the current hash rate and distributions of this hash rate seen in the past. There have already been at least attempts of abuse. And again, the idea of Bitcoin is to remove the need of trusted entities. If you accept entities with more than 50 % of the hash rate, this idea is just gone. You have to trust them. Nobody says it can not work, but there is no guarantee that it will work.

And I did of course not seriously suggest to use a spreadsheet or even a shared spreadsheet. I set up a server here at home and write a bit of code that collects Bitcoin transactions and updates balances in my database. This is as secure as Bitcoin with me having more than 50 % of the hash rate. If I am a nice guy everything is fine, if I have a bad day you are screwed. Okay, not exactly but close enough.

And to finally come back to lowering the hash rate - if you make 50 % of the hash rate as cheap as 10 million Dollars any larger company or almost any state could just buy a few pieces of hardware and destroy Bitcoin. They would just have to generate empty blocks as fast as possible. You will have a hard time moving your coins to an exchange to cash them out. And even if you manage to do that, Bitcoins won't be worth anything in that scenario. Everybody just lost almost all of their money and this is just what Bitcoin was supposed to prevent.

So what is their incentive to do so? (That causes them to actually do so)? You are insecure because anyone can just kill you with a rock when you're not looking. So what - nobody is going to do so.

A really rich kid may just do it just for the lulz. A state may do in order to fight tax evasion, money laundering or drug sells. A bank or somebody like PayPal may do it to get rid of a competitor. And destroying Bitcoin was only a random example, somebody could as well blackmail you to pay a high fee to get your transactions processed. Or they could just double-spend coins for financial gains. There is a endless number of scenarios.

But actually this is all not really important. One of the main intentions of Bitcoin is to remove the need to trust a bank or a state. With more than 50 % of the hash rate in more or less a single hand you now have to trust a random guy on the Internet.

And even if the mining pool owner and all the miners are perfectly good people, there is now still a single target for an attacker. If I understand the internals of a mining pool correctly, there is a central server collecting transactions and handing out work items to the miners. If somebody gains control over such a system, he may be able to do bad things without anybody even noticing for some time.

This is the scariest thing about BitCoin, this efficiency bubble. What happens when the world's miners decide that a different crypto-coinage is more profitable?

I don't believe that the difficulty parameter in BitCoin adjusts very fast (every 2016 blocks or ~14 days) and you could have transaction speed disruptions. If a block doesn't solve in 10 minutes but instead an hour, you'll have a lot of very unhappy people waiting for transactions to seal and they'll abandon the network after selling off their assets. That's just the time aspect, you mention the transaction fee aspect, and that will drive people away as well if they start to creep near what legacy financial systems charge. The declining block reward in BitCoin guarantees that transaction fees will increase because of the limited capacity of the consensus network's data-storage/transaction block.

At present:

* Bitcoin is doing badly in terms of electricity cost versus block rewards. If it keeps going down, the miners are going to switch off.

* All altcoins are doing worse.

Because the altcoins are basically alternatives to Bitcoin, but their value has gone down even more than Bitcoin's.

(I could be wrong - are there any that haven't, which have non-negligible exchangeability and/or trading volume?)

The erratic price prevents it from being a store of value or a unit of account. So it is a currency that clocks in as a medium of value transfer only. Even then, the transfer involves another currency on either end in almost all cases.

> The erratic price prevents it from being a store of value

Not true in itself. Consider the stock market: it's value has been unstable for the past two decades, yet it is still one of America's most popular stores of value. Consider also gold and housing, two other popular stores of value that also have unstable pricing.

The erratic price does however prevent it from being a unit of account.

I don't know if stocks themselves are really stores of value. There are synthetic products based on the value of certain stocks (index funds, hedged futures, options, etc.) that are stores of value, though. Which makes me think that you could probably build stable stores of value on top of BTC if you wanted, without losing the decentralization of BTC. You could even take the price of one of those products as a unit of account.

Most stocks are a poor store of value. That is why people widely diversify. This makes Bitcoin more of a hedge against failings of our bank systems.

The value in the stock market requires many different stocks so the risk from volatility can be averaged away. That's why every good investor spreads their portfolio across different stocks in different markets. If there was just one stock traded on an exchange very few people would use it as a way to store their investment value.

Housing is a store of value in a way that gold and bit coins aren't; if the price of housing crashes to 0 you can still live in the houses. Also, the price of housing is highly likely to only crash to the cost of building a new house - wear and tear + scarcity costs for land.

There is a speculative component in house prices, and this is a concern for anyone who is "storing value" in them, but there are fundamental uses for housing far beyond the fundamental uses for gold.

Equities have a value story too. The dividend on stocks represents a future earnings value which is tradable. Also Equities provide voting rights which have value.

Fiat currency has a value story; the states monopoly of violence provides it with the ability to collect tax from economic activity where that monopoly holds true. Tax revenues are a future income stream that has value; hence the underpinning of fiat.

Bitcoin has rarity and speculation only.

Are you sure you can live in a house worth 0? - most places with low house prices also have no jobs, broken infrastructure (electric, water, roads, shops etc.) and high crime. For a house to drop to 0 the location would have to be really bad and you wouldn't and perhaps couldn't live there anymore.

No idea why you're getting down-voted. The assumption that houses are some kind of special asset because they always give a dividend of "you're able to live there" ignores an almost infinite number of exceptions to that.

Well, the key difference is you pay property taxes on a house. And as long as you keep doing that, and paying all associated upkeep, you can hopefully see appreciation. Oh, and you can live in it.

The point is, there's no analog to the digital nature of placing a conversion value based on the bits of a certain integer value stored in a distributed blockchain.

The latest round of blockchain technology is showing, bc is good for a lot more than currency. In fact, there are many things that BC can do much better even than it can be a currency.

My point is, I bet on the long-term value of bc technology, but actually not on the long term value of Bitcoin as a digital asset.

For example, very soon enough you will be able to cheaply, easily, and freely store your USD or whatever currency you want on a blockchain, and use it to spend and trade freely. Choose any blockchain and conversion rate / resolution you want and issue a legally binding IOU. Of course the trick is handling redemption!

Totally agree that block chain technology is very interesting and I think valuable. I think that particular block chains will gain value as they begin to underpin particular applications, but of course if the value of a block chain becomes an impediment to the application the users may disrupt that application and move to new blockchains.

For my education could you expand on your thoughts around "The point is, there's no analog to the digital nature of placing a conversion value based on the bits of a certain integer value stored in a distributed blockchain". I think that you are making an interesting point here but I haven't quite grasped it so am intrigued.

I think there's a lot being said about blockchains because of Bitcoin, but other then Bitcoin I haven't seen any appreciable or desirable uses of them. At the end of the day, you're spending a lot of power and CPU cycles on something very transient.

EDIT: This is distinct from various toy applications of the "you could do this with a blockchain..."

If bitcoins didn't have value, then the network would have no way to fund network security, and all the other applications would go away too.

Therefore, speculating on the viability, power, and relevance of the state.

Yup - agree. In fact, almost all of us are betting our lives on that.

>Also, the price of housing is highly likely to only crash to the cost of building a new house - wear and tear + scarcity costs for land.

Or to the NPV of the future cash flow generated from renting it.

> Bitcoin has rarity and speculation only.

The implied point here (I think) is that bitcoin is a bad store of value because it has rarity and speculation only, not real value. This is incorrect though: consider the counterexample of gold. Gold is the oldest store of value around, but it really only has rarity and speculation going for it. Around 90% of the gold in the world is either sitting in a vault somewhere, or used as jewelry [1].

So for your implied point to be true, either (a) gold must be a bad store of value, or (b) there is something that distinguishes gold from bitcoin.

[1] http://en.wikipedia.org/wiki/Gold

I am not frightened by someone with a bitcoin mining rig, so I won't give them a share of my farm. They can mine their bitcoins at me all day every day, but I shall not hand over one potato! (Unless I feel sorry for them)

I am frightened of someone with a machine gun (or half a dozen mates with battle axes) and I would probably agree to share my farm produce with them in exchange for them not killing me and my family and for them preventing other people from killing me and my family.

This was the partially the origin of gold's value. The monopoly of production and distribution of gold and the tie to radical threatened violence. In addition gold is pretty and can be used in electronics, but these are minor components in its value. Mostly we retain the cultural memory of a time when digging up gold was done by slaves owned by folk who had a propensity to murder, and therefore having gold enabled the deployment of murder.

Bitcoin might have the same sort of association to value as gold once did if one day state actors decided that it was an appropriate proxy to violence. Non state actors are may also decide to use it that way - "honour your bitcoin debt or find a horses head on your pillow!" However, if they do/did then they would find that eventually state actors would step in and take over control. The problem for bitcoin is that it is not good as a fiat currency by design, so those that have the capability to do violence are unlikely to adopt it as a fiat currency in the long term.

It is not good because it is deflationary due to the finite supply of bitcoin and the increasing difficulty of finding new ones. This is a bit worse than the situation with gold because we might find a big load of new gold somewhere, while we know exactly how many bitcoins we might ever extract, and we can say more or less when we will get the last one.

This is bad news for contracts underpinned by violence, because it means that the longer the contract is the harder it will be to fulfil it, because the greater the demands on the supply of the items required to fulfil. Thus, if I sign up to take a loan from my bitcoin obsessed local feudal overlord to build a barn or other item enabling wealth creation then I will have to know that I will produce more wealth from it in the future than I could if I were to have it today. Otherwise the value of the contract to my lord will be negative, so he/she won't hand over the loan.

So bitcoin as a fiat currency will be a disincentive to wealth creation. Like gold eventually ended up being when the early mines got worked out and extraction got really hard.

This is not to say that crypto-currency might not be adopted by state actors, but it is to say that bitcoin won't be adopted by state actors or a functioning underground economy either. This means that it is a bit less good than gold as a store of value now, and a huge lot less good than gold as a store of value in the past. Gold is living on borrowed time as a value store, bitcoin has no time as a value store.

Investors have historically demanded a large premium before storing value in the stock market. "To quantify the level of risk aversion implied if these figures represented the expected outperformance of equities over bonds, investors would prefer a certain payoff of $51,300 to a 50/50 bet paying either $50,000 or $100,000."

https://en.wikipedia.org/wiki/Equity_premium_puzzle

Housing prices were stable until the mid-90s.

Except for the 1930's. And didn't California have a bumpy ride in the 1990's?

There were definitely blips and long-term appreciation. Here's a paper [1] on housing prices around the world, pretty interesting stuff. I guess my point was, having seen some of these graphs, there is a pretty clear transition in the 90s where the "role" of housing in the economy seems to change (although the graphs in the paper I referenced show the growth starting as early as the 60s, so who knows).

[1] http://piketty.pse.ens.fr/files/Schularicketal2014.pdf

Bitcoin is not a currency, it will never be a currency. Why? Capital gains tax, that's why. Bitcoin is a commodity, period.

While the anarco-libertarians may see paying taxes as optional, people who actually have something to lose pay their taxes... These capital gains complications of using bitcoin as barter essentially eliminate the usefulness of this commodity, as opposed to cash, for anyone of serious importance in the developed world, and since that won't happen, there will be little push for any adoption beyond a fringe group.

Without serious investors holding bitcoin, there benefits of transactions via bitcoin with currencies trades at both ends are problematic, because nobody wants to be left holding the coins.

It will be useful as a substitute for wire transfers, it will be useful as a store of value in the developing and under-developing economies, but other than that i see no long term use for bitcoin that makes it significantly different from gold. The benefit of gold being that there is significantly less chance of theft.

Solve the capital gains problem and maybe we'd have something, but i cannot imagine a scenario in which that happens beyond a bank removing FIFO capital gains after every transaction... which would frustrate most users.

The benefit of gold being that there is significantly less chance of theft.

That's not possible. Simple counter-example: create a Bitcoin address, then engrave the private key in a gold bar and destroy the digital copy.

Does this make sense as a counterexample?: Take a picture of the gold bar, you have now stolen the Bitcoins without taking the bar.

Yes, the counterexample is very good. (If we accept its premises that without the information the bitcoin cannot be stolen - this is not true due to 50% attack and other reasons. Gold cannot physically disappear but bitcoin can logically disappear by network consensus or a new version of the bitcoin network that no longer accepts it and which people adopt for some reason. This was done early in bitcoin's history.)

But if we accept the premise, then anyone physically close enough to take a picture (let's wrap the gold bar in a dust cover, so that this entails unwrapping it) can physically steal it. i.e. if you prevent someone from physically stealing it, such as keeping it in a vault, then to a good approximation you've also prevented them from unwrapping its dust cover and reading the engraving.

I guess exceptions would be if you have workers who work in your vault but go through metal detectors to make sure they haven't stolen the gold, or the gold is somehow physically too heavy to move in one piece quickly, or somehow you can react to it being stolen and prevent the gold from actually leaving, but not if it remains in the vault. This is getting silly though- it's just as easy to engrave something and then hide it in cast iron that is very hard to get into without tools.

I think physical protection from theft is very close to physical protection of a piece of engraving.

Also the idea that Bitcoin can't be easily stolen is foolish. It is theoretically hard to steal...that hasn't been born out in practice.

Whereas gold is actually, physically heavy. Not only do you have to be local to steal it, you actually need a good deal more then just being there. Moreover, physical security has the benefit of having straightforward to follow principles - i.e. no one's breaking into a sealed vault by walking through the walls because of the time it takes the vault door to open and close.

As opposed to the digital realm, where you can steal cryptokeys by listening to coil whine.

Another problem with storing Bitcoin is that you do not know when it has been stolen. You might be sleeping soundly having your keys in cold storage but someone might already have a copy.

Not so with gold. Either you have it or you do not.

Mind you I have some bitcoins(hopefully still intact) and no gold.

That is analogous to someone having the key to your house, but you don't know it until they've stolen your gold. I don't think it's substantially different. On the other hand, if you have a brain wallet and have never even put your device online, you could have bitcoin sent to an address that has a level of security impossible to achieve for any physical asset.

> That is analogous to someone having the key to your house, but you don't know it until they've stolen your gold.

I don't think that's an apt analogy because, at the very least, a thief still has to physically enter your home, putting them at a much greater risk of detection as well as risk of arrest, personal injury or death while attempting to burglarize a home. There is also additional risk in the effort required to locate and break/steal a physical safe. Further, the population of potential attackers is much wider with bitcoin compared to gold since it is impractical for bots or thieves abroad to steal physical gold from your house.

I'm pretty averse to complicating my tax situation and capital gains are the reason I don't transact much with bitcoin. It's worth mentioning that if the IRS considered it a currency, while taxes wouldn't apply for small amounts of transactions, they would for large gains, and at a higher tax rate.

On the other hand, tax authorities globally have taken a variety of approaches. To take one liberal example, Denmark doesn't tax personal bitcoin gains at all.

http://en.wikipedia.org/wiki/Legality_of_Bitcoin_by_country

I don't know what you're talking about with gaining tax, but I've paid sales tax on every bitcoin transaction I've made. I don't see why bitcoins in particular are inherently any more tax evasive than cash is.

The major use of bitcoins currently seems to be as a store of value: http://www.coindesk.com/analysis-around-70-bitcoins-dormant-...

The erratic price could also hurt the economy, if Bitcoin was widely adopted.

Customers will be careful in spending their Bitcoins, if they believe that the price will be higher tomorrow. Likewise business would either overprice, rather than running the risk of losing money, if they cannot convert their Bitcoin to something more stable fast enough. Both are elements that could lead to decreased spending.

The erratic price could also hurt the economy, if Bitcoin was widely adopted.

The price wouldn't be as erratic, as it would be normalized against all the goods in the economy. Just as gold was when it was money.

The way I think of bitcoin and cryptocurrencies is as a huge thing looking for a ledge to hold on to. It's pretty likely that it will fall off and crash but if it manages to cling to the cliff and get to stable ground, it's a big deal.

So, value store, unit of account.... some other gainful employment this technology can create by blending it together with other things.... Any way for bitcoin to be useful at this point helps it cling to the cliff.

>The erratic price prevents it from being a store of value or a unit of account.

Which doesn't matter. That's the entire point of the author's article.

It's unfortunate that the majority of HN comments are about "currency" and "medium of value" in response to this particular article. The author tried to talk about The Other Interesting Thing that seems to be flying under everyone's radar: the authentication of information by distributed digital consensus instead of a central institution.

That's why the author tried to use the Linux analogy. While many folks were measuring success via the meme/joke "2001, 2004, 2014, etc is the Year of the Linux Desktop!", Linux has quietly "won" on the backend servers, on Android phones, on cable DVR boxes, in Raspberry Pi, etc. The desktop as a health indicator of "Linux success" becomes irrelevant.

Linux: ignore "desktop war" and substitute "servers, internet-of-things, embedded devices"

Bitcoin: ignore "currency vox populi" and substitute "decentralized trust of information."

To meta analyze why the discussion about Bitcoin's "other" tech possibilities is always derailed by "currency" and "fluctuations", I think it's due to:

--The word "coin" embedded in the name "bitcoin"

--5 years of breathless hype stories (on HN and elsewhere) around bitcoins rising

--Silk Road money laundering, etc

Since bitcoin is so tainted now with "currency", we need a mental reset. Here's what the author is saying the world wants:

The time is ripe and the underlying technology exists (internet reach, cryptographic hashes, etc) for the adoption of a decentralized authentication of information platform.

Let's think about it. If we were to list the technical requirements for a "decentralized authentication of information" service, it would include things like cryptographic hashes, block chains, a transaction API, etc. Basically, it would end up looking a lot like Bitcoin!

We could call the service GitHogAnyInfo (to riff on the names of decentralized source code Git Mercurial). Or call it ConsensusInfo or whatever. Just call it any name that does not have "coin", "doge", or "money" embedded in it. If you do that, everyone's brain shuts down and we get trapped in the discussion about "currency fluctuations".

For example, look at these:

https://www.globalsign.com/en/timestamp-service/

https://www.digistamp.com/technical/how-a-digital-time-stamp...

Neither of those services have "currency" anywhere in their description. Can a bitcoin-as-info-platform instead of bitcoin-as-currency compete with, or replace services like those? That's the thesis the author is trying to convey. That's the angle the SV investors are envisioning.

Problem is currency is one of the highest value possible uses of decentralized information authentication. Blockchain storage is at a premium, and money is one of the smallest size, highest info dense, highest utility uses of that scarce storage space. Everyone likes to wax poetic about other uses of Bitcoin, but it's not clear any of it is a good idea given the storage costs. Currency is likely the killer app.

http://hashingit.com/analysis/33-7-transactions-per-second

http://hashingit.com/analysis/35-the-future-of-bitcoin-trans...

Greater adoption gives it more "moneyness", which in turn means we measure things against it more and more. As adoption picks up and it acts more as a medium of exchange, the value of it normalizes not only against other currencies but other goods.

I think this article is pretty much on point.

Bitcoin's price isn't really what matters, even bitcoin specifically doesn't really matter. What matters is whether or not the technology will have wide adoption, how that looks, and what sort of effects that will have.

The price of bitcoin is a side game. The volatility makes for flashy daily "news" as fortunes blink in and out of existence but that doesn't ultimately matter.

Money is the original network effect technology. I also suspect that banks and the entire financial system is incredibly fat and lazy. This enormous industry could be usurped.

paywall?

someone pasted it here -

http://www.reddit.com/r/Bitcoin/comments/2q0jb4/why_bitcoins...

Sorry if anyone feels offended, but why exactly does this article have any relevance on Hacker News?

I can understand people submitting pieces about their own apps or startups but why does anyone think that we need more "financial product XYZs price is underestimated, I'm bullish, BUY BUY BUY" articles.

There are also occasional articles about rocks on Mars, strange bacteria commanding killer fungi, and vikings in Arctic Canada. It's not that Bitcoin is the one odd topic that somehow squeezed in, it's more that hacker news likes to stray outside it's original scope a bit. Personally I enjoy that.

Comments misinterpreting the article are not relevant to HN as well

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