Bitcoin revealed: a Ponzi scheme for redistributing wealth | Hacker News Reader

Bitcoin revealed: a Ponzi scheme for redistributing wealth

washingtonpost.com

98 pointsjrochkind1118 comments

"Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins. So why are they still going? Well, they have dollar debts that they need to pay back, and where else are they going to get the money? They're stuck, in other words, in a catch-22: they can't afford to keep mining, but they can't afford to stop mining, either."

Huh? If miners are spending more on electricity than the Bitcoins they mine are worth then they should immediately stop mining (unless they are engaging in speculation)

If they weren't engaging in speculation they wouldn't have bought mining equipment in the first place.

You don't need to spend a bunch of capital on mining equipment to speculate. You can just buy Bitcoin. Usually you buy mining equipment because you think you can make BC cheaper than everyone else with operational efficiency.

In practice I think mining equipment has rarely been able to pay for itself without speculation because of so much demand to be a miner.

He's probably referring to the fact that marginal cost is still below marginal revenue, but long-run average cost is above marginal revenue. This situation is often covered in introductory microeconomics and the conclusion is that they will continue to operate in the short run but shut down in the long run.

Even if they are engaging in speculation, it would be more rational for them to quit mining and spend the money they would spend on electricity to buy bitcoin on the open market.

The reporter clearly doesn't understand the difference between fixed and marginal costs.

It's possible for Bitcoin mining to be profitable on a marginal basis while at the same time not profitable once you take into account capital costs. So you keep mining because you make money on a day by day basis but not enough to pay back the costs of acquiring your original hardware.

What others said. There's another possibility here too: mine at a loss now, then hold onto the BTC, in hope that BTC goes up in value. If you mine $10 worth of BTC a day, but it costs you $20 to do so, that's not a loss if a week from now the value goes up 4x.

Not saying that's what they are doing, but it is not unlikely that huge mining operations know more than the public about what might happing going forward.

Yeah that's what I meant by "engaging in speculation", but as someone else pointed out, it would be far more rational to stop mining and buy $20 worth of Bitcoin rather than spend $20 mining $10 worth of Bitcoin...

For small-time miners, yes. But wouldn't any large scale operation run the risk of moving the market? By mining, they continue to amass coins without having to worry about this, so maybe that is a factor.

Wouldn't you be better off using your money to buy $20 of BTC today?

The idea is that with mining you can generate BTC for less than it would cost to buy them.

Except that in your scenario why would anyone mine at $20 and hold when they could just buy at $10 and hold, doubling their return? With super-low transaction and storage costs, there's nothing special about the BTC I mined relative to the BTC I bought.

I believe this refers to the TCO which includes the up-front purchase cost as well as the operating costs, over the lifetime of the equipment. The up-front costs are already sunk and need to be repaid, hence they have to keep paying the ongoing costs in order to recoup as much as possible of their up-front debt.

Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future.

sooner or later the operating costs themselves will exceed the value of bitcoins mined.

For many people that is already happening, which is what the article is trying to say. cex.io and Cointerra already shut down.

That's one interpretation, but he did say "running their supercomputers", which implies they're running machines they already own at a loss. It's obvious that you'd run a machine you already own as long as it's profitable to do so.

"Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future."

I'm not sure what you're referring to. The block reward schedule (halving every 4 years)? How does Moore's law come into play?

I suspect this is happening to some oil producers as well.

Ex: if a large portion of an operation is a sunk cost, a producer may respond to lower prices by producing even more oil, in an attempt to maintain revenue (particularly if the producer is leveraged and has debt to maintain).

Edit: oops, busted for not RTFA

From the article:

"(This, coincidentally, is the same dilemma that oil drillers who borrowed a lot during the boom face now during the bust)."

Yes I think it is.

Quoting http://en.wikipedia.org/wiki/Economic_bubble

"Net Result of a Bubble: The one true constant with all bubbles is that they create excess demand and production. Once the bubble deflates, which it always does, a contraction or consolidation has to occur to alleviate the excess. Two examples are the dot-com bubble and the current housing bubble. In both cases there were huge consolidations, bankruptcies, and deterioration of asset values."

This statement sounds a bit more authoritarian on the topic than I like, but the "excess demand and production portions" are demonstrably true, in fact, I would almost take them to be a better definition of what a bubble is than "trade in high volumes at prices that are considerably at variance with intrinsic values", which is a difficult definition because what determines an intrinsic value?

I don't think such a thing really exists for several products that can experience bubbles.

> Of course sooner or later, due to Moore's law and the way bitcoin works, the operating costs themselves will exceed the value of bitcoins mined. But that is years into the future.

That point depends on the value of the bitcoins too. What the exchange rate is for USD if you're paying for electricity in USD, or how much electricity you can get for a bitcoin if you are able to pay for electricity in bitcoins. (Which I guess has to do with the cost of electricity too, of course).

These are not predictable things. Especially, apparently, the value of bitcoins lately.

But if the marginal cost is still less, they should still be mining regardless of whether there are debts.

Sunk costs have no bearing on the logic that "if miners are spending more on electricity than the Bitcoins they mine are worth then they should immediately stop mining".

You're falling for the so-called "sunk cost fallacy".

http://en.wikipedia.org/wiki/Sunk_costs#Loss_aversion_and_th...

What does have a bearing is whether they intend to sell or hold those Bitcoins. If they believe the value go up before they sell, then they would continue to mine speculatively.

It sounds a bit like a dollar auction http://en.wikipedia.org/wiki/Dollar_auction to me (ish).

What he's probably trying to say though is that miners are likely operating at near break-even, so they continue to mine in the hopes of their luck improving and being able to pay their debts (ie Gambler's fallacy).

There are a bunch of reasons someone would do something illogical. Mining bitcoin is essentially gambling, and problem gamblers will continue to sit and gamble even if they're losing money. (Doubly so if they owe money to someone else).

How many deaths of Bitcoin are we on now? I can remember 3, at least, the first of which was when it came down from its peak of $30/btc.

Personally, I hope this drives out most of the speculators. They have, in my opinion, done little for Bitcoin except make it difficult to use as an actual currency.

Bitcoin has died 33 deaths so far. Source: http://bitcoinobituaries.com/

Is this the new Apple Death Knell?

http://www.macobserver.com/tmo/death_knell

"Is doomed" is not a supposed death. Four articles on the same day claiming death do not constitute four supposed deaths.

The speculation has created a LOT more attention from bitcoin; it's possible speculation is the majority of bitcoin use, in which case hardly anyone would be paying attention to bitcoin without it. Which might be just fine, of course, it's just another thing the speculation has done for bitcoin.

I think the interesting thing the article points out is that bitcoin mining itself is inherently a form of speculation though -- you are counting on the value of the bitcoins you mine being at least as high as the money you had to expend to mine the bitcoins (hardwar, power, network access), or mining is a losing proposition.

The problem is that speculation created a lot of attention for Bitcoin as a get-rich-quick scheme, not as an actual utility.

And that's not necessarily true. It assumes that everyone mines bitcoin for the purpose of obtaining bitcoin, not to support the network.

> And that's not necessarily true. It assumes that everyone mines bitcoin for the purpose of obtaining bitcoin, not to support the network.

Like someone is intentionally donating money in hardware and electricity in order to support the project? How many dollars a month would you personally spend to do this? Maybe there's some rich people involved who have the money to spare? At the current cost of mining, how many dollars a month are are required to keep the economy going (I have no idea), and would it be possible to get that much as "charity" donations to support the bitcoin project (I have no idea either)?

If the Bitcoin network is valuable to someone, they would likely invest to keep it running and secure. I would be more than willing to pay to run my mining equipment (bought with previously-mined bitcoins, about $1/day to run) to keep the network up.

Speculation has driven the cost of mining way up, but the speculation isn't inherent to mining. If the network was run entirely on a "charity" basis, the costs to mine would be much, much lower.

If Bitcoin is actually a speculative lottery that was advertised as a payment system, that seems a bit ethically dubious.

Mining bitcoin is a speculative lottery. The bitcoins actually be transferred around were given originally to those who won that lottery, but after that, they're just traded like money. In the future, the winnings from the lottery is a percentage of each transaction instead of bitcoins, but that's relatively a long ways away. Basically, with each transaction, a person posts what percentage of the transaction goes to the winner, and the winner chooses which transactions to honor onto the blockchain. The giving out of synthetic bitcoins is a way to bootstrap this process and to make sure that there's no single point of ownership.

To be clear, the speculative lottery that I was talking about is the BTC-USD daytrading on the exchanges. A significant fraction of that speculation is due to press hype that is due to rapid price spikes caused by earlier speculation.

Mining involves some speculation about future difficulty and future exchange rates (since you have to pay for electricity in real money), but at least there are some fundamentals that you can build a model around. With simple calculations (that ignored transaction fees BTW) I was able to correctly predict when mining would and would not be profitable and mine accordingly.

33, by last count[0]. This will drive out the last set of speculators only to herald in a slew of new ones. Speculation has determined the price for the last 2+ years and will continue to do so into the foreseeable future. The problem is that the value of bitcoin is not fundamentally tied to anything except the cost of maintaining the network, and it's clear at this point that hashpower responds to speculation, not the other way around. I'm curious to see how some of the new cryptos perform, like Nubits and Bitshares, which have a split between the crypto commodity, subject to wild fluctuations in price, and a crypto currency which is pegged to e.g. the dollar, at least in theory. The problem is, as usual, the network effect with bitcoin - nothing is likely to supplant it without some big real-world demand. If it can't find any real use case other than black market transactions, we can easily count on another 33 deaths ahead.

[0] http://bitcoinobituaries.com/

While I agree about the speculators, they are not the reason BTC is hard to use as a currency. Rather, BTC is the reason BTC is hard to use as a currency. Let's see here:

- BTC tends to fluctuate a lot. I could buy a pizza with it today, or a car tomorrow, or a house in a week. Therefore, I am going to think twice about buying a pizza today.

- Tax implications of BTC are complicated. If you have never owned BTC, and this year decide to buy it to experiment with it, now you have additional paperwork to file about it. If you buy it via a BTC ATM, or some other cash method, you now have to keep track of all the records. (Presumably, places like Coinbase, etc. do this for you, I haven't checked). This is not insurmountable, but that's different than taking $20 out of an ATM and buying a slice of pizza.

- BTC is hard to acquire. Yes, yes it is. Coinbase requires a multi-day verification process.

- BTC is hard to keep secure. To do this properly, you have to know how to create an encrypted cold storage wallet and how to keep your computer safe so that when you unlock it, someone doesn't grab the wallet while you are using it. This is hard. It's so hard that intelligent people with domain knowledge get it wrong. I don't expect someone who is not a "computer person" to just get it. Coinbase and such are great for the "not computer persons", but are not secure (as in, you need to use 2 factor auth + strong password, which most people do not do; it's also not secure in that if someone does get into your account, you are done for. There is no reversal/insurance).

- BTC is weird when you are spending money. With fiat currency, I go on Amazon, punch in my credit card number, hit "buy" and viola! my order is all set. Theoretically, my credit card can get rejected later, but in practice it doesn't happen; if it does, I am familiar with the process. With BTC, I am suddenly shown number of confirmations, have to wait for minutes to know if my order went through, etc. Imagine buying Google IO tickets with BTC: by the time my confirmation comes through, someone else already paid with a faster method and got my reservation. (I know they recently changed it to a queue/invitation system, but my point stands for lots of purchases where the quantity is limited).

- BTC is weird to spend, again. If my BTC is in an encrypted cold storage wallet, as it should be, I now have to defrost it, decrypt it, push the BTC somewhere, then wait. Oh, and for some modes of spending, I then have to transfer BTC again, and wait again (localcoin for example).

So, where will BTC go from here? Well, I think it'll continue being a specialized currency. It's not great for buying pizza, and I don't think ever will be. It is great for transferring money in/out of restricted jurisdictions, or from person to person without leaving an obvious trail. That part works well. If you are a Snowden-type whistleblower and need your friend to get you money, this is as good a way to do it as any. Or if you are my grandfather who cannot get his money out of Ukraine due to the banks "not having enough USD on hand" to wire his balance to a US bank. Or if you want to make an anonymous donation. BTC is basically a faster and more secure version of stuffing cash into envelopes and mailing it.

> BTC is hard to keep secure.

It's very easy to secure.

Create keypairs offline. Print keypairs. Send coins to address(es). Store paper wallet in safe place.

This is still a huge hurdle compared to fiat, which is: Put in bank.

All currencies and value systems have their own inherent strengths and weaknesses, depending on how and where they're being used. Bitcoin is no different.

The all or nothing thinking when it comes to currencies reminds me of hearing people talk about religions.

Very impractical if you want to use bitcoin as currency

Security isn't ever easy. Sacrificing convenience is an easy trade.

Your mindset represent a trend that is rampant in the bitcoin community, and is a huge drag on bitcoin, in my opinion.

The mindset being that you're securing your life savings.

That mindset is prevalent in the bitcoin community, because many of them indeed hope that their bitcoin IS their life savings. They hope for the day when their bitcoin has appreciated to the point that it's a significant asset, worthy of significant pains to protect it. From that perspective, your mindset it rational and correct.

The problem is that when you advocate such complex storage and use methods, you are advocating unnecessary complexity for the people you are attempting to sway to bitcoin. The normal person who wants to send $50 to his mother in the Philipines, or wants to have $100 on his phone to buy beer and hotdogs with, does not need such complexity, and will quickly run the other way when bombarded by it.

Any normal person who looks in to bitcoin, is bombarded with crazy ideas that the self appointed bitcoin experts claim he must must jump through.

    * Use multiple addresses for privacy.  Nobody should reuse an address.
    * Use offline storage
    * Generate your addresses on computers not connected to the internet
    * Use a trezor.
    * Use a deterministic wallet
    * Don't use coinbase or circle, or the government will track you

This barrage of advice, which does indeed make sense for aspiring bitcoin millionaires and criminals, doesn't make sense for normal people, but nobody tells them that. Instead, they tab their browser over to facebook and resume their day, secure in the knowledge that bitcoin is not for them.

If you insist on making bitcoin the domain of nerds, only nerds will use bitcoin.

I'd never claim to be normal, but I'm neither a bitcoin millionaire nor a criminal.

If Bitcoin is "too hard" to figure out for someone, they probably shouldn't use it.

And Bitcoin is too hard to figure out for 99.99999% of the population, which is why it'll never reach mainstream adoption?

Probably so. It still doesn't take away from Bitcoin's underlying usefulness.

1. That is due to speculation.

2 & 3. Those are basically due to Bitcoin being so new. Governments don't really know how to deal with it yet.

4. That's true, though there will likely be a product that will solve that in the future (i.e. a USB key that contains your wallet and signs transactions for you).

5. The waiting for a confirmation is more a limitation of the service. There's no reason why Google IO wouldn't be able to reserve your ticket once it received the transaction (within a couple of seconds) and then give you the ticket once there was a confirmation.

6. You use a cold storage wallet to hold the bulk of your funds, then transfer them to a hot wallet as needed. (So, keep your $5k in BTC in your cold wallet, and transfer $500 to your hot wallet every week or something.) Decrypting a hot wallet shouldn't be much harder than entering a password.

All of these solutions are still worse than just using a credit card.

> Or if you are my grandfather who cannot get his money out of Ukraine due to the banks "not having enough USD on hand" to wire his balance to a US bank.

I'm guessing the exchange rate for ukranian currency to bitcoin (and then to USD) is not such to make this a particularly useful thing to do. But maybe?

In this particular case, it's mostly a problem of not actually being there physically to perform the transaction. The solution of "stuff it into an envelope and mail it" would actually work out incredibly well here, except it will never make it.

What's wrong with speculation? Pretty much every single transaction is a form of speculation. Bitcoin isn't pegged to any real resource, precious metal, or fiat currency. Its value is 100% dependant on the market and speculation is a 100% valid use of it. Maybe the bitcoin authors should have worried about that, if it actually matters. I'm always amused that speculators are ruining everything. When gas goes up, its speculators, but when it goes down its just a magical gift. The same way when a patient dies its because the doctor is an incompetent, but if the patient survives, it was Jesus.

Personally, I see speculation as a feature, not a bug. It brought attention to the currency and probably raised its value from a doge-coin-like joke to a legitimate way of exchanging value and having it become the defacto electronic currency.

I keep hearing these arguments from bitcoin supporters and its ridiculous. Currencies are constantly being invested into, speculated, etc. If your currency can't handle that, then your currency sucks. The people trying to make a profit aren't going away. Heck, they may be the vast majority of bitcoin users! I imagine bitcoin's volatility is just never going to go away. Any cryptocurrency is going to have the same issues. Using bitcoin is making a risky gamble. This is why we're not paying our mortgages with it.

You know you answered your own question right?

"What's wrong with speculation?"

"I imagine bitcoin's volatility is just never going to go away. Any cryptocurrency is going to have the same issues. Using bitcoin is making a risky gamble. This is why we're not paying our mortgages with it."

What a great "currency".

Blaming its problem strictly on speculation is ridiculous. I don't know how to address this. You're saying there needs to be some gentlemen's like code for bitcoin users to never invest it or it doesn't work? Yeah, your currency is broken then. Bitcoin is designed for profitability and investment, that's why people mine it!

This is like saying the ghetto is great, its just the criminals and poor ruining it. Uh, yeah, that's a problem with the ghetto. The criminals and poor aren't going away, as the ghetto favors them. The ghetto is not fine.

I feel like you've lost the thread of conversation. If you wanted to prove that BTC is good for nothing but speculation, job done.

Currency and speculation can't be separated. If anything, speculation makes bitcoin work. Its not hurting it. Its a feature, not a bug.

That article was terribly written, and snarky lines about libertarians and "It's too bad Bitcoin doesn't have a central bank to help stabilize its value" don't add humor or insight. He brushed over the importance of the underlying technology so he could assault it for being a representative currency.

I get the sense the author doesn't know any more about economics than he does about bitcoin. He basically just stated the differences between bitcoin and fiat currencies with a smug undertone of blind faith in Keynesianism, then concluded only a government is fit to regulate transactions between private parties.

Oil drilling revealed: a Ponzi scheme for redistributing wealth (washingtonpost.com)

I think there is actually some profound truth to your intended sarcastic comment, although you didn't intend it. There is an aspect of that in oil drilling.

But the difference is that, in the end, there are consumers who want oil for doing something with it (generating electricity and other work; making plastic), not just for trading for other commodities. The only thing you want bitcoin for is trading for other currency or commodities, it has no use value in itself.

>If Bitcoin were a currency, it'd be the worst-performing one in the world, worse even than the Russian ruble. ...

>But that's not much of a consolation to anyone who bought anywhere near Bitcoin's $1,100 top. Or near $1,000, or $900, or $800, or, well even yesterday's prices.

Looks like the usual Bitcoin trilemma:

- Price goes up? Everyone knows that appreciating currencies can't work.

- Price goes down? Obviously it was a bubble all along and my criticisms are vindicated.

- Price stays flat? Obviously its market cap is too low to support broader usage.

Was this same author praising Bitcoin as the best performing currency of 2011, 2012, and 2013? [1]

I don't want to sound like this all wine and roses; obviously, Bitcoin has its issues. I just hope that when the mob's "head is done spinning, its face is to the front".

(Disclosure: I'm behind understandingbitcoin.us, which is supportive.)

[1] Before anyone says it, I know: a good currency is one that's stable, and the author is criticizing the change in price, not the loss in value. Then why not criticize (or at least mention) the Swiss Franc's recent 30% appreciation?

> almost nobody uses it to buy anything other than drugs

This is a patently false statement. You can verify this yourself by looking at serveral Bitcoin survey results: https://docs.google.com/spreadsheets/d/1pz3BiQr8jEVM98PuZtSo... and https://docs.google.com/spreadsheet/ccc?key=0Avvn4_NlztWedEN...

I'll go ahead and use this fact as a good excuse to discredit Matt's entire shitty post.

As long as you admit it's an excuse to ignore an entire post because you are going to counter one sentence with an anonymous survey.

Unless that was the joke.

Given it was used by the author to ad hominem Bitcoin, yeah, it's a joke. Typed with tongue in cheek, of course.

"Ponzi scheme" and "redistributing wealth" in the same headline? Wow, that is a sure warning sign for the quality of the article.

Focusing on such a small period of times makes for a deceptive chart. Everyone knows that it's been volatile for a while. That's not news. You really need to look at the value over a larger period of time.

http://bitcoincharts.com/charts/bitstampUSD#rg1460ztgSzm1g10...

This one's already in the running for the most hedged and meaningless article of the year.

> If Bitcoin were a currency, it'd be the worst-performing one in the world, worse even than the Russian ruble.

> But Bitcoin isn't a currency.

Okay, it starts off with an admitted paradox of entailment. If 2 + 2 = 5, then Bitcoin is a Ponzi scheme for redistributing wealth. And besides all that, there are plenty of time periods over which Bitcoin would be the best-performing currency in the world.

> It's a Ponzi scheme for redistributing wealth from one libertarian to another. At least that's all it is right now. One day it could be more. Venture capitalists, for their part, are quick to point out that it's really a protocol, like the early internet, and its underlying technology could still be revolutionary. What are they supposed to say, though, when they've bet hundreds of millions of dollars on it?

This is a hedge that reveals the inane clickbait nature of the headline. The author isn't talking about Bitcoin, but rather about some group of people and firms involved with Bitcoin is some way. We could say "economics is a Ponzi scheme for redistributing wealth," because lots of people have utilized economics to implement Ponzi schemes.

> It has no inherent value, after all, because, despite companies trying to get free PR by saying they'll accept it, almost nobody uses it to buy anything other than drugs.

To make the claim falsifiable, the author would need to define "almost nobody." To make the claim accurate, that definition would need to be preposterous.

> Bitcoin miners, you see, borrowed money—and real money, as in dollars—that they could only pay back if Bitcoin prices kept rising, or at least didn't fall this much.

Bitcoin is not the first currency or technology around which foolish investments have been made.

> This means we don't need a bank to know that I've sent money to you and only you, but it comes at the cost of making it irreversible.

The irreversibility is likely a cost to some and a benefit to others. Since no one that I'm aware of has been forced to use Bitcoin, I don't see this as a problem. If you consider the irreversibility of a bitcoin transaction to be a significant cost, then do not make the bitcoin transaction.

That's an interesting perspective on why bitcoin price is falling, or rather why the fall is accelerated, but I don't see anything Ponzi about it.

In fact it might be a good time to buy bitcoin.

I don't think that the strong majority of people that buy bitcoins have any idea of what they are actually doing or what the bitcoin protocol is. Under that assumption it would seem that the price of bitcoin is dominated by "the other people are doing it" school of trading.

This is typical, most numbers in the financial space just go up and down because some people are willing to put more money in their belief than others.

The author pulls bitcoin out by one dimension of its pros and cons and then says it does unfavorably in that dimension.

It was not designed to be stable in that dimension (price relative to currencies), therefore it isn't stable in that dimension. It never will be, unless central banks start pegging their currency to Bitcoin, or start pegging Bitcoin to their currency (which they could do if they wanted).

Who else has the interest or capability in printing / destroying large amounts of fiat currency or ramping up / down large amounts of mining horsepower to balance out the volatile speculative nature of bitcoin?

So until some force acts to provide stability in that dimension, and that force likely only being a large central bank, there will be no stability, only the fluctuations of speculation.

Ultimately the question bitcoin is posing isn't should I store my money in Rubles or Bitcoins or leave it in my bank account, or in S&P's or USG Treasuries or etc.. It's should I conduct an electronic transaction in Bitcoins or Rubles or Visa USDs or Paypal USDs etc?

Does the bitcoin protocol foresee in a situation where the hashing capacity is drastically reduced? (It has admirably adjusted to the increase in hashing power but it is not unthinkable that a few very large miner farms going out of business would actually reduce the hashrate of the network to the point where the transaction speed would slow down so much that the whole institution becomes un-usable.)

The difficulty will be adjusted. I doubt any single large mining farm going out of business will be enough to have much of an effect on transaction speed, and it's unlikely that enough mining farms will go out of business within two weeks[0] to cause problems with the network.

[0] Two weeks is about the time for difficulty to be adjusted.

Yes, part of the plan is for miners to transition from mining-based activity to focusing on transaction fees. This would probably mean transaction fees will trend upward. I think it remains to be seen if this will be a profitable enterprise. Certainly, bitcoin trade volume will be a very important part of this equation, if it does not really take off as an actual currency, but remain as instrument to store wealth, that could spell disaster for bit coin.

If miners do turn away from bitcoin, the capacity will be drastically reduce which makes a 51% attack much more feasible, threatening bitcoin's existence. This is much more worrisome than transaction speed slow-down and in fact, as long as there is heavy volume, miners could make money off transaction fees so they are almost mutually exclusive events.

Despite all this, I think bitcoin is pioneering the field, and regardless of it lives or dies, it will have impacts in various facets of the future.

I think you mis-understood the question.

In some cases, a dramatic drop in hashing can cause "programmed self-destruction". http://arxiv.org/abs/1405.0534

Essentially, no. The difficulty is recalculated every 2016 blocks (~14 days). This can be a problem with small altcoins. If they are suddenly overhype, part of a pump&dump scheme or by another reason they have a big hashrate that suddenly decrease and they have now a very low hashrate and now the expected time to the next block is far away (and the next difficulty correction is even further). I'm sure there are a few horror stories like this, but I can't find one now. In this case, the coin is effectively dead, but probably it was dead before.

A similar but smaller effect is when the pools switch from coin to coin. They mine when the difficulty is low (or the price is high) and then switch away when the difficulty is high (or the price is low). One solution is to have auxiliary proof of work, were you pigiback from another coin that has a bigger and more predictable hashrate.

To solve a drastic change in hashrate, I think that the only solution is an out of protocol hard fork. Everyone agree to use the new official client that has a ad hoc change in the difficulty since the current bloc. (This is effectively a new coin, but if everyone pretends that it's the old coin, nobody will notice the difference.) It's a drastic solution and I'm not sure if it was used in the wild. Probably this is unacceptable for the Bitcoin community, but perhaps this can be possible with more centralized communities were the developers and creator have a strong participation, like dogecoin.

Does the bitcoin protocol foresee in a situation where the hashing capacity is drastically reduced?

Yes, the network difficulty adapts, which actually happens all the time.

See the red line: https://bitcoinwisdom.com/bitcoin/difficulty

Thank you, that was the thing I was looking for.

Miners don't necessarily need supercomputers to mine. Sure, perhaps miners who set up huge operations might be in trouble, but anyone with access to moderately strong computational power, including basic laptops or even cheap SoCs, can mine. It might be beneficial to have mining spread out among those running less powerful computers, assuming that the miners act independently, for then the risk of a single mining firm/group controlling a dangerously large percentage of computational power would decrease substantially.

The author also doesn't mention tipping, which will eventually be the dominant source of mining fees. In a drastic case, Bitcoin users could provide tips substantially larger than the current reward for block discovery/vetting. Should this be the case, the system could be self-correcting, and if the Bitcoin network is too dependent on large miners, the tipping system could act as a "bail out" in the near-term.

Miners need expensive and energy hungry equipment because this is what protects the Bitcoin network.

What tip volume and value do you envision that tipping fees will make up the main source of income for miners?

The volume of tips would have to increase drastically. In any case, the volume would depend on the price. Slightly off point, it might not be completely unrealistic to imagine a world in which miners do not derive their main source of income from mining. Perhaps miners could running mining programs on SoCs during the day while the miners themselves work other/additional jobs. While the number of miners mining in this way would have to be very large in order for this configuration to be possible, should this be the case, miners wouldn't be nearly as financially dependent on mining, and they could be more immune to fluctuations in the price

If you have to pay for the electricity, it's only economical to mine (Bitcoins) with an ASIC. The CPU and GPU mining is now so slow that you will get very few Bitcoins in average, and the cost of the electricity to run it will be grater than the money you can get from the Bitcoins. (To get a smooth outcome you should probably mine in a pool, but this decrease the expected average result only little.)

The current price of Bitcoin is irrelevant to its long term success.

And is still extremely high compared to where it was not all that long ago. If bitcoin would have gone on a monotonic increase from < $1 to where it is today everybody would be speaking about a miracle. We'll see where it goes in the long run, so far if anything bitcoin has been one of the most interesting things happening in this new millenium and I'm very curious where it is headed in the longer term, but I won't make bets either way.

I also find BitCoin to be interesting but I'm not sure if that interest has really spread that far from tech-oriented audiences.

The people who really support BitCoin can be rather fanatical in their expectations of what BitCoin will become and I don't see its current growth coinciding with those expectations.

It would be interesting to see how many people are using BitCoin as a daily currency, and what the changes to that number have been over time.

We see lots of places accepting BitCoin (and using services that instantly convert that to USD so they don't actually hold the BTC) but is there the similar growth on the buying side? Who's buying BitCoin and why? If BitCoins growth has largely come from people who are speculating / investing, or are doing illegal things with it, then growth rates aren't sustainable and these crashes become more and more likely.

As for the miracle, I don't think it's that out of the ordinary. Apple went from being worth $0 dollars to being worth over $600 billion. Being on the ground floor of either would have been nice, but when BitCoins were < $1, they were still more likely to be worth < $1 today than being worth $200.

I can say one thing for certain: BitCoin's price chart since it's high over a year ago does not give me any confidence it in. I have no desire to hold onto something like that in the hopes that it becomes worth more. It just seems like a ridiculous thing to do. I see no value in using it transactionally and negative value in holding it and I don't really see either changing. I don't wish BitCoin to be a failure, I just don't see it being the kind of success that so many people have bet on it being.

> I have no desire to hold onto something like that in the hopes that it becomes worth more.

Excellent, just like 'real money' then. See, if you're using bitcoin as a speculation device you're doing it wrong.

I don't even want to have a wallet to use Bitcoin as a transnational currency because of how volatile it is. The USD is a pretty stable currency, so why would I change that stability to something as volatile as Bitcoin, especially given that we don't think Bitcoin is a good speculative device?

I just don't see the use-case, except buying drugs.

Don't judge a Bitcoin by its price: http://whoo.ps/2015/01/08/dont-judge-a-bitcoin-by-its-price

To a large degree, but for continued utility, mining has to occur, and should the price drop below a rational point, that impairs Bitcoin's long term success.

The difficulty adjusts based upon the rate and which each block is solved. If everyone stops mining the next block becomes significantly easier to solve.

Yes, but it's not in real time. You'd extend the time to get to that next, easier block, and with the drop in mining power, that could take a significant amount of time.

A year ago people were saying it could go to $10,000/btc if it became widespread in China. Then China banned it.

Did it seem odd to anyone else that the author doesn't appear to understand the meaning of the word "deflation"?

It's an ok article, though technically inaccurate on a few fronts: The difficulty of mining is related to the number of coins mined (not the number of miners). The miners aren't the "central repo" of the ledger (it's distributed and anyone can download it). shrug

The claim that most people buy drugs with it is flat out WRONG.

From the article: "But in the long run, we're all dead, and Bitcoin might be too."

Google "bitcoin is dead".

Go on, I'll wait.

Here I'll make it easy: http://lmgtfy.com/?q=bitcoin+is+dead

They've been claiming that since at least 2011.

The fact is that it isn't dead or dying. It's still 10x what is was worth in 2012. Currency markets move and when you have to trade one currency for another. We just saw the first real bitcoin xmas last month. With some big names accepting btc for the first time. Those vendors want their fiat and have to sell it on the market to cash out. That's one of many factors right now which includes government auctions of seized bitcoins. As adoption increases and more can be done within the bitcoin ecosystem it will stabilize.

Bitcoin itself isn't dead, but for some it is, if your play was to get wealthy off of it. For those who haven't been following it long, but who saw the rocket ship of 2013 and wanted a ride, it may be dead for them. I'm perfectly okay with that, as speculation usurped what it can really accomplish.

The content of this piece presents nothing new, and has absolutely nothing whatsoever to do with "Ponzi schemes" or "redistributing wealth."

"...despite companies trying to get free PR by saying they'll accept it, almost nobody uses it to buy anything other than drugs."

I stopped reading right there.

I don't really want this type of drive-by snark from a newspaper, but I think there is some truth to what was written.

It's seems like any time a merchant announces they'll accept BitCoins, it will get pushed to the front page of /r/bitcoin and probably drum up some business because of it. I know of some local businesses who got online and print coverage for announcing that they're accepting BitCoin have hardly had any actual BitCoin activity.

I'd be interested to see if any of the big companies, e.g. NewEgg, Overstock, etc., have seen sustained business increases from accepting BitCoins.

The overwhelming majority of those companies also don't actually accept bitcoin. They've brokered a deal with an exchange. Bitcoin payments are made to the exchange and the exchange pays the vendor in U.S. currency.

So, the company isn't actually transacting in bitcoins.

By that token most companies do not take anything but their own currency. Currency hedging is something corporations do to align costs and revenues - companies generally are not trying to make money wagering on currency positions.

Absolutely. They are accepting BitCoin for the convenience of customers, not because they hold a positive opinion of it.

It's hyperbole but it has some truth to it.

Why would you go through the hassle and possibly loss of money to convert fiat to bitcoins then purchase things with bitcoins instead of just buying with fiat? You wouldn't, except that bitcoin is anonymous so you can use it to buy things privately. Most people really don't care enough about the privacy of an average amazon purchase to go through all this hassle.

When you're buying illegal goods, however, privacy is #1. And what is the most popular item on the most popular illegal goods marketplaces? Drugs.

Almost everyone I know that uses bitcoin is either speculating to make a quick buck, or using it to buy something on a darknet market. I'm sure there are people using it for everyday goods but it really doesn't make much sense to do that now unless you value your privacy very highly.

> that bitcoin is anonymous

It used to be anonymous. It's now highly traceable due to AML and KYC having been introduced into the Bitcoin ecosphere by regulation.

It's also useful for bypassing currency controls.

Some countries have an official exchange rate, but a very different black market exchange rate.

In Venezuela , local bitcoin sites are selling BTC for the equivalent of over $6000USD at the official exchange rate.

If you manage to exchange them without being robbed a few BTC can pay for a hell of a vacation.

They keep bringing that up as if it was a flaw.

What's wrong with people using BTC to buy drugs?

How is it better or worse than people buying drugs with any other currency?

Why is it "bad" for Bitcoin to be useful and first adopted in that niche?

>What's wrong with people using BTC to buy drugs?

Other than it being illegal? Nothing.

So the USD is also wrong, because most drugs are being paid for with USD?

No, the buying drugs part is what's 'wrong,' if you consider breaking the law to be a bad thing.

But you're right to point out that, in sheer usage, Bitcoin really has nothing on the USD when it comes to buying drugs. Still, when you're asking why anyone would consider buying drugs with bitcoin to be wrong, you have to understand that not everyone considers that to be a positive or even entirely neutral act. Most people consider a currency whose primary use case involves breaking the law to be a net negative for society.

not everyone considers that [buying drugs] to be a positive or even entirely neutral act

Most european governments do. Germany, UK, Spain, Italy etc. include revenue from drug trade (and prostitution) in their GDP.

Most people consider a currency whose primary use case involves breaking the law to be a net negative for society.

Do you really believe any law would be broken any less if Bitcoin didn't exist? Should we also condemn BitTorrent for the same reason?

> What's wrong with people using BTC to buy drugs?

The flaw that is raised isn't that BTC is used to buy drugs, but that it (in the view of those raising the complaint) doesn't have a strong use aside from buying drugs (and, while "drugs" are usually mentioned, the substance of the complaint appears to be more about drugs-as-popular-form-of-contraband rather than drugs-qua-drugs.)

And given the way governments tend to respond to things that (1) are primarily used to facilitate unlawful trade, and (2) become increasingly popular, its a real, if political, risk for the Bitcoin ecosystem.

doesn't have a strong use aside from buying drugs

And? Even if that was true, I don't see the point.

A large portion of internet traffic, quite likely the majority, is transporting porn or "stolen" movies.

Should we now condemn IP because it's mostly used for such despicable activities?

> Even if that was true, I don't see the point.

The point is in the paragraph after the one that you quoted a few words from the middle of.

lol this article is HORRIBLE

I like the part about it being irreversible...I recall a humorous back and forth between two politicians where one was arguing that we should outlaw all currencies that can't be logged or tracked and the other politician said "you mean like we do with cash? Oh well lets outlaw cash then!"

This is a much better article than you'd expect from the clickbaity title, seriously, take a look.

It's a crap article. I'm an early adopter and I've never bought drugs with btc, contrary to the article's unfounded claims.

Whoever created Bitcoin solved a problem: how is something of value sent from person A to person B across the internet. It might not be an elegant solution or a readily apparent one to the less tech savvy, but it's a solution that's been proven to work.

The price is immaterial. What matters is the blockchain technology and its underlying ramifications.

The Washington Post has posted articles with even more clickbaity titles very recently. http://www.washingtonpost.com/news/the-intersect/wp/2015/01/...

to be fair. that's actually an article about linkbait :P

I was a co-founder of TAV (we built and sold 3 TH/s of ASIC miners in Sept 2013). This journalist, Matt O'Brien, clearly has done little research on Bitcoin and is not familiar with mining operations. His article contains lies, fallacies, and personal opinions that do not reflect reality.

"What are [venture capitalists] supposed to say, though, when they've bet hundreds of millions of dollars on it?"

Fallacy number one. If VCs were merely praising Bitcoin with no (or very few) investments, the journalist would say "well why don't they put their money where their mouths are?". Now they do put their money on it, but he says "well what else are they supposed to say?".

"It's fallen 36 percent the past two days, as you can see below, with a 24 percent decline the past 24 hours."

This is hardly newsworthy. What he seems to forget or point out is that Bitcoin is and has always been volatile --no one denies it. There has been dozens of instances where BTC lost (or gained) 20% or more in a span of 24 hours. Today's drop is no different than the other ones.

"It's too bad Bitcoin doesn't have a central bank to help stabilize its value."

This is very ironic to write 2 days after the Swiss central bank themselves caused an appreciation of the CHF of 30% in mere hours, hurting Swiss exports badly.

"It has no inherent value"

Another journalist who fails to realize no fiat currency has any inherent value either. Currencies (whether fiat or crypto) have value because people demand/accept them (whether it is the IRS asking to pay your taxes in dollars or Newegg accepting Bitcoin). This is it. Nothing gives them "inherent" value.

"almost nobody uses it to buy anything other than drugs"

Utterly false. The journalist has no data, no source, nothing to back up this claim. This claim used to be made 4 years ago when Bitcoin was barely starting to get in the public eye, when the top exchange (MtGox) barely had a few thousand users, when there was no payment processors to help businesses accept Bitcoin, etc. But the reality is that the Bitcoin economy has grown very quickly over the last 4 years: today 82,000 merchants accept Bitcoin [1], numerous processors exist (Bitpay, Coinbase, etc), merchants like Newegg and Gyft experienced their best Bitcoin Black Friday sales ever [2], etc.

"Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins."

This is not true at all. There is zero reason for a miner to, say, spend $50,000 on electricity a month to mine X bitcoins when he could simply buy these bitcoins from the market for, say, $25,000. So if this was the case, it would make sense financially and logically for the miner to stop mining and buy the coins from the market. At the very least they would suspend mining activities. In fact this is precisely what happened to CEX.io [3] (they were likely inefficient and overspent in some areas, compared to other miners who continue operating because they are still profitable).

Nowadays any large smart professional miner does not have high fixed recurring monthly costs like colocation in a data center (these are very cost-ineffective facilities to run mining operations). Instead they set up shop somewhere, eg. in a warehouse retrofitted for cooling and power, see [4]. This makes electricity their highest recurring cost, so they can in theory stop mining any time and it would significantly reduce their operating cost on the spot.

[1] http://www.coindesk.com/state-bitcoin-2015-ecosystem-grows-d...

[2] http://blog.bitpay.com/2014/12/09/bitcoin-black-friday-2014-...

[3] http://www.coindesk.com/cex-io-halts-cloud-mining-service-du...

[4] This is KncMiner's facility: http://www.datacenterdynamics.com/sites/default/files/KnCMin...

The writer seems to have no understanding whatsoever of either Bitcoin or economics. Bitcoin is a Ponzi scheme only in an imaginary world.

Reply on news.ycombinator.com