Bitcoin Forum

I have been getting excited about bitcoin, but now I'm not so sure about it.  Think about if bitcoin is successful.  If many merchants decide to accept bitcoin.  What will happen?  Well....the big banks will still be the big banks and hold the most bitcoin.  Sure, a few early adopters will get rich much like the founders of Google and other companies got rich, but the rest of us?  Not so much.  We'll just be paying more with bitcoins and less with dollars.  Our lives might be a bit easier since payments are easier, but as we've seen lately we still need banks and we'll still get gouged with fees.  We'll just be getting taken advantage in terms of bitcoins rather than dollars. 

Now, onto the Fed situation.  Yes, bitcoin is deregulated.  I know many think this is a chief benefit of bitcoin, but nobody really knows.  Opponents of bitcoin would argue that deregulation is going to make the currency very volatile and as most people are risk-averse, this means most people would rather not live in terms of bitcoins.  Maybe bitcoins will be stable.  Who knows? 

My point is the main change that would result from wide adoption of bitcoin is the unknown.  Our lives won't get much better.  We'll just be in for a surprise.  Now I like reading a good thriller as much as anyone else so this isn't the worst thing in the world, but it certainly isn't the utopia some people make it out to be.

Well, then no country will be able to inflationate the currency by printing loads of money like they do now...

That is true.  However, the USA sets a target of a little inflation for the reason that they want to encourage spending and keep the economy moving.  With a deflationary currency, as you know, people are more inclined to save since their savings are growing in value. 

I am tempering my enthusiasm for bitcoin because I don't know how it will deal with recessions.  There is a role for the government in those economic times and bitcoin doesn't provide for that.  We shall see, though.

That is a good thing. Governments only makes recessions worse!

Hyperinflation.
Everyone will want to get rid of their remaining fiat currency as quickly as possible. Many people will end up with bags of dollar bills and nothing to eat.
Maybe the governments will step in and offer to buy fiat currency at a fixed rate (and subsequently destroy the bills and coins) using tax Bitcoins, so fiat currency holders won't end up starving.
The transition period will feel like after a world war. After a few years the wounds will have healed, power and welth will have shifted to new owners, just like a few years after the world wars.

Philipp

I'm tempering my enthusiasm for bitcoin because scarcity is not enough to create value.  Yes bitcoin has scarcity built-in by design but that is the only thing it seems to have.

Disclaimer: I am not an economist :)

If there was widespread adoption of BTC, as in more than 50%, wouldn't the frame of reference change? IE, goods and other currencies would be priced relative to BTC, making BTC the standard and therefore stable? And fluctuations would in practice mean that other currencies are unstable vs BTC.

The main thing here is developing a market for bitcoins.  I am actually optimistic about this happening.  I saw an article about a small restaurant in NYC now accepting bitcoins.  This is crucial.  It needs to go beyond small techie products to really gain traction.  Given network effects, I think bitcoin can succeed in this area.  I am actually quite confident bitcoin will be around in 5 years, but whether or not it will change things much I'm not so sure.

Certainly it will become more stable than it has been lately and we won't see 50% swings, but I worry about how it will fare in bad economic times.  When the economy is bad, how can a bitcoin economy encourage spending?  Hoarding seems to be the end result which would destroy the bitcoin economy.

I see a lot of ways that if bitcoin became a standard form of payment, we could quite easily end up right back where we started with unreasonable banking fees and terms.  (The banks would be built on top of the bitcoin framework.  They'd issue credit cards, home loans, etc.)  The only difference would be that your fees would be charged in bit instead of dollars.  At least the emergence of this thing would give us some chance at breaking up the current banks' monopoly powers, at least for a while.  All human developments tend to end up the same.  Empires are built, they get out of hand, they collapse, then they're rebuilt.

Another comparison might be the Web itself.  In 1995, it looked like the WWW would give the little guy a level playing field to compete against the giants.  Here we are, not even 20 years later, and basically two companies own it all.

A market will give it liquidity but it won't give it value.  At least not a stable value.

When commodities are used as money, they have usefulness in industry, and also usefulness as a medium of exchange, and both things contribute to their value.  The commodity value will at least act as a floor for the value of the money, although the total value might rise quite a bit above that depending how much usefulness it has as a medium of exchange.  Liquidity and broad adoption affect how much medium-of-exchange value is added on top of the commodity value.

But if a currency has no usefulness other than as a medium of exchange, no exchange ratio is any better or worse than any other exchange ratio.  It has no stability and this in turns makes it a bad store of value, which kills it as a medium of exchange also.  When it loses its usefulness as a medium of exchange, there is nothing left and it has no value at all.

It is not much different from the stock of a dot-com company that will never realize earnings.  Yes, people might trade it and exchange things of value for the stock, in hopes that there will be a greater fool, but with no value other than the greater-fool value, in the long run it is going to be worth nothing.


I am curious what economic theories you subscribe to, if you think encouraging spending is the solution to a bad economy..

You're basically mentioning coase's theorem right? Doesn't matter how the initial resources are split up, in the end the wealth distribution turns  up the same?

Well, my guess is that bitcoin on its own may not create a new world. But however it will enable a few things that were not possible before.  Cross border trade on basis of trust without keeping big banks in the loop. There will be new institutions and escrow in their place, but they may not be the same guys. Plus, guvs and bank will not have the ability to print money. They gotta earn it or beg, borrow or steal.

The prevention of future inflation gotta be worth something, right? When you cannot print money and give it to your crony, when you actually gotta take money from someone else and give it to your crony, it's a lot more difficult to say you're doing it for the public good.

Hyper inflation may boost financial literacy forcing more people to drill into the idea of what money is, what a company is, what a loan is, what a share is, etc.

Clearly that's a Keynesian idea, but it's just an example.  I'd rather not get into politics.  The key point is the bitcoin economy is decentralized and we don't know what that will do in the long run.

I tend to think of Coase's Theorem in terms of property rights in a micro framework, but, yes my suspicions are that bitcoin will not alter the wealth distribution aside from creating a few rich people.  Another response earlier provided a good example of how the same result has occurred with the internet.  I don't see evidence yet that bitcoin represents a fundamental shift aside from an adventurous monetary policy change.

Governments and others with power use normal money to control the majority of people. It would be much harder for them to do that with Bitcoin, so it would at least happen a lot less often. Banks are an anti-democratic force and Bitcoin is a democratic force, spreading power to everyone. Bitcoin allows the funding of free speech like Wikileaks which allows people to organize on large scales to change the world.

Why would I keep my Bitcoins in a bank when the peer to peer network already functions as a bank?

I don't get it... you're doubting bitcoin has value? Isn't that crystal-clear already? Even thieves are after them! :D

Scarcity alone is not enough, but being scarce + being desired by some people is enough to attribute value to any resource.

Can you explain how you came to the hyperinflation conclusion?

To the OP: if bitcoin really succeeds, like, becoming the main currency of a nation, such nation would be able to prosper considerably as a result of it.
The damage caused by central banks is tremendous. Lots of capital is destroyed on economic cycles they cause, and besides that, money printing is an endless source of financing to governments. All this at the expense of hard working people.
Much less wealth would be destroyed by governments if they could not inflate the monetary base as they can today.

Yes they have value because they are desired.  Tulip bulbs were valuable because they were desired, and desired because they were valuable.  My problem is that if a thing is ONLY desired because other people want them, then no rational price exists.  Tulip bulbs could be $100 or $1000 or $10,000 and none of these prices is any more rational than any other price.

Actually, there is a rational price, which is the commodity value.  If it has no commodity value then it is zero.

Even if the rational price is zero, it can still have numismatic value.  Old stamps have value because people want them, and people want them partly because they have value to others but also because they derive joy from owning old stamps.  I'd say this is not rational value but it is value nonetheless.

In the case of bitcoins I think people derive a similar kind of non-rational value from believing that they are escaping the system.

"I spent $1000 on this rare T-shirt as an investment and all I got was this lousy T-shirt"

Graduate degree in econ and the OP is what you have to show for it? The education system have failed you miserably or the troll university you attended have done you much good.

the way i see it:
main disadvantage: infinite inflation - which isnt necessarily always good.
main advantage - decentralizing the currency can do a lot of good to a lot of people, mainly outside the usa and Europe

naorai

If bitcoin really succeeds, I guess it will be regulated in a way that it becomes at least very difficult to use it anonymously. A 'worst case' scenario which comes to my mind:

The government creates a new law which makes it mandatory to register all your bitcoin addresses at a newly founded bitcoin regulation office. They'll put all those addresses into a database which then can be accessed publicly via the internet so that everybody can check if an address is properly registered or not (the names of the address owners will not been published, but some governmental institution like e.g. the tax authorities will of course have acces to them). Then it will be made illegal to transfer money to or receive money from non-registered bitcoin adresses. So if you create a bitcoin address without properly registering it, it's not only illegal, you'll also have trouble to find people to accept bitcoin transfers from this address (because they will check the public address database before e.g. accepting you as a customer in your shop).

To make things easier in everyday life, the government could start to distribute a 'secure bitcoin client' which automatically complies to these rules. For instance, if you create a new address, the client registers it immediately. If you send money, the client automatically checks the public database and only allows the transaction if the receiving address is also a registered one.

Given the existence of such a government database which relates all legal bitcoin addresses to the actual names of the owners, the architecture of the bitcoin network will turn the currency into a perfect tool for surveillance. If authorities want to have a list of the things which I bought on the internet within the last ten years, they don't have to bother with getting data from online payment services etc. They just look up my bitcoin address(es) from my database and check the blockchain ...

Yeah, but which government? You're forgetting BTC is an international, Earth currency, not one directly tied to a country.

Also, there's nothing stopping you from sending money from an "unregistered" address to a "registered" one. How can the receiver "refuse" to accept the payment (well, unless you're using the "authorized" client)?

Very curious to know your training in economics.

Let's just assume e.g. the US government. Of course, this would only affect US in the first place. But they could for example offer foreign (web) shops to register some receiving address to the US list of 'legal' addresses in order to allow US citizen to legally transfer money to them. This would be no big deal for a foreign web shop to do, because they can still keep all their other addresses away from US regulation so they loose nothing from this. But on the other hand they can open their shop for a big market with 300 millions of people by doing so. If this works, the US government could establish their regulation concept without hurting international trade too much, even if other nations would not cooperate.

But I can easily imagine that other governments will like bitcoin regulation and surveillance a lot. So I don't see any reason why there should not be similar regulations in most countries of the world or even international agreements on bitcoin regulations (like for money laundering).

I don't say that this scenario will happen. I'm only saying that it's not unlikely to happen.

I agree.  Bitcoin will not survive if it remains anonymous as drug/gun trade would tarnish its reputation and adoption.  Governments would ultimately aggressively pursue bitcoin users.

reputation of "the bitcoin" only matters as much as the integrity of the currency, not what its used for.

People need to quit associating the use of the bitcoin with "illegal" stuff as a bad thing, or just say the same thing about all currencies

Bitcoins - are used to buy to buy drugs and guns, and good stuff too, like video cards and everything else in the trade section
Euros - are used to buy to buy drugs and guns, and good stuff too, like video cards and everything else in the trade section
USD - are used to buy to buy drugs and guns, and good stuff too, like video cards and everything else in the trade section

What a currency is used for means nothing as to the integrity of the currency

It's not about the integrity of the currency, it's about the real world in which the currency operates (or doesn't).

If someone on ebay asks you to pay using Western Union, they are almost certainly trying to defraud you.  Western Union itself is completely legit and has good integrity.

And that's not even considering law enforcement's potential presumption of guilt by association with bitcoin.  It's not hard to imagine a scenario where using a bitcoin exchanger tends to get you audited by the IRS even if you are 100% legal.  It would be wrong, but it's the world we live in, not the world as we wish it were.

The best thing is that banking secrecy will have real meaning.  Plus Ben Bernanke can't just steal the value of everyone's savings by counterfieting more money.

So what?

Choice, that's what.

The solution to this is to peg the value of the coins to something with stable value like gold. I think this should be possible without introducing any form of centralized authority.

Any mechanism to do that is susceptable to manipulation.  US $ were pegged to gold, until someone decided to get greedy (Morgan, Loeb, etc.) when they made the Fed.

The beauty of BitCoin is that no central authority can manipulate it.  When enough people use it for transactions, it will stabilize.  Right now it is in pure speculation mode.

I thought about this for a while and I definitely see where the distribution of wealth in a bitcoin economy will be different.

There are those who are close to the fount of money, today - banks. Tomorrow, it will be those with great hashing power. Whether they will be the same is an open question.

But after the greatest part of the bitcoins are generated, then future money will be given to those who are providing services to those in possession of coin. Mining will become unprofitable.

Who will be the new institutions here? The ones with the greatest trust. No one knows, but the first few reputable banks/clearing houses in the bitcoin world can get a HUGE competitive advantage. One aspect people have repeatedly mentioned is that most people will not need banks to do transfers and can do transfers themselves if they pay a moderate fee to miners.

In the world of governments, if large resource producers want only gold or bitcoin, then the entire sovereign bond market changes. Every government comes into the situation that the euro nations are in now - you cannot print your own money. Default is the only option out. This will make people very careful in lending to governments.

First of all; I do not believe in the conspiracy theory about the Fed that it was somehow created to enrich bankers or some nonsense like that. The original purpose was merely to be an insurance policy against bank runs. A lender of last resort.

I do however think that "power corrupts" and that creating such an entity inevitably leads to the abuse of the power it has been given. This is what happened to the Fed (and I do think it should be abolished).


That is true, but I believe it is possible to make it stable in value without any form of central authority. If this is the case then it would not be possible to manipulate the mechanism.


It might become stable eventually within some broad range, like +/- 10-20%, but I don't think that is good enough to have a viable currency. Long term planning based on the value of bitcoins would be impossible.

You're the second person ITT to make the hyperinflation conclusion but neither of you have mentioned how to arrive there. Can you explain how you got there because I'm not seeing it? How is the currency going to be devalued to that point?

I think we can just assume he's mixing up his words and meant deflation.

I think the uncertainty of the future regarding security and Bitcoin is not enough to stop the draw of being part of money 'owned by no one' and that unites the world in a way that is of literal biblical proportions.
http://media.giantbomb.com/uploads/2/25701/1789249-kent_brockman1_super.jpg
"It's in Revelations people!"
This alone makes the question of 'so what' .. not really mattering.  The so what comes in the satisfaction of doing things different.   I think

If Bitcoin becomes more successful, it will be declared illegal, just like Liberty Dollars.

I believe they mean that, if bitcoin strongly succeeds somewhere, the current currency in use there would be replaced, and as consequence it would lose value, making all prices quoted on it to go up.
It would only cause hyperinflation like that if bitcoins adoption grows really fast in that nation, what I find very unlikely.

Not a hyperinflation of Bitcoins, a Hyperinflation of all remaining fiat currencies. When bitcoin succeeds people will want to buy them, resulting in lots of dollars being put onto the market, thus the value of the dollar will fall.

Philipp

IMO if bitcoin succeeds bitcoin adaption will grow very fast. Once bitcoin becomes something acceptable to the general public there will be a breakthrough. When people see bitcoin gainign value versus fiat currencies, and there's no trust problems holding them back, they will sell fiat currencies. Which will accelerate the inflation of fiat currencies, which will provide a stronger incentive to keep your saving in bitcoins instead of fiat currencies, in turn accelerate fiat currency inflation. This is a positive feedback loop. Self-reinforcing. Self-accelerating. I wouldn't give the fiat currencies more than a few days once it starts.

Philipp

Well..okay..

I agree 100% with Vector76 re. "Rational Value" or perhaps "Intrinsic Value"..but "Rational Value" works so..okeedoke.

I dunno if it's a "Typo" or an intended Description to refer to the (Paraphrased) 'Perceived Value Of Escaping The System'.

For me..as far as I can tell..and frankly BTC is still absolutely "Overly Complicated" for about 99% of the "GenPop" (but this is Evolution we're witnessing so..'Say-La-Vee')..however that being said 'Near As I Can Tell' the Aspect of "Escaping The System" is...Completely Realistic and Genuine.

I am not 'trying' to sound confrontational etc..

I mean we all know that 'PayPal' is now literally..engaging in Censorship and Other Forms of "Political Control".

But As A Person who is..I admit here and now..Deeply Depressed..Anxious..and as a Country Boy Who's..Not..Afraid of the Dark..Frankly--Terrified--of what is Daily Occurring in this now Overt Push to Corporate Security State..with an Undeniable..and blatant destruction of all Civil Liberties..well?

Well? In this Situation..I find the "Possibilities" of even a Remote Chance At Enhanced Privacy..and More Importantly..I mean for me its "The Whole Deal And Why I'm Here On A 'Forum' Which For Me Is Like Hwy 5 At Rush Hour And Why I Live In Remote Woods Of NorCal To Begin With.."..well..more importantly.."AUTONOMY"..to be "Worth The Cost Of Much Hassle".

And I do believe it's this very real "Autonomy" and the Promise of a "Chance" at Autonomy that:

1) Offers People Like Myself The "Rational Value" you speak of. Because "Autonomy"..tragically..has Become..a Straight-Up Precious "Commodity".

2) Is the "Why" In "Why The Rage Of Government And Chuck Schumer(sic?) Et Al Is Very Real And Has Already Been Unleashed."

I don't know if you've seen this "Moment" of which I speak..but it happens pretty often..so a "Facsimile" I'm confident has been witnessed by some of you:

A "Security Professional" who is part and parcel of the "Destruction Of Liberty Industry" (There is no "Threat From Without" that is "Greater" than the Current Threat From "Within"..sorry.) stating as he "Justifies" the latest intrusion and destruction of Liberty:

"Autonomy and Privacy Aren't Really 'Rights'!"

For me? That "Attitude" is Defeated to a large Degree by the very "nature" of this Particular "Digital Currency". Thus it's Worth the Hassles because that Rational Value of Autonomy has become a Precious Commodity to..well..more of us than the State would..nay..'Will'..Ever..Acknowledge.

Hey Folks..this is very real. I have..and you have as well..Heard the Various Adjectives and Slanders being Tossed about regarding "Bitcoin" and amongst those We have all heard the word "Terrorism"...more than a few times..and worst of all? From "Senators" and "Officials" and Agents of the state.

To Me? That's The Gist Of It. To many People at the "Top".."Autonomy" is now an Overt "Threat". The sad and Inevitable Mindset of "Consolidation".

Perhaps that's it in a nutshell? "Consolidation" is to a large degree defeated by this Equation. Independent..Individual..'Banks' at the actual 'Citizen Level'? C'mon. The State has been Openly Trying to make That Impossible for Decades.

Oops!

Right now the Federal Reserve and the banks of the world have a monopoly on the commodity known as money/currency.

They can print as much of it as they want.

There needs to be an alternative to the fiat monopoly money system. Bitcoin gives us some hope for that to take place...

Well, how virtual money might work if the world run in a worldwide bankrupt? Without real money i can't imagine companies still running power, computers, networks and without them how the virtual money might work? Outside such scenario governement are probably not liking such virtual money because it's propably easy to hide revenues from tax or to use it for controversial purpose... i suspect they might control or ban such virtual money in the futur because they might lose some control on people if they don't do it... ? i recently heard about qiwi money that is banned mostly everywhere but russia...

The only thing that would change is that people would no longer need to rely on their goverment to provide confidence in the currency.

Currency is nothing more than a confidence game.

Hedghog

You would have to make the world belive that virtual bitcoins are better then fiat money.

Doubt it will ever surpass gold or silver.

This is all assuming the bottom never falls out of the bitcoin market, which is not a sure thing. I will tell you one thing. If I had been in this from the start I would have cashed out about half my holdings when the Bitcoin hit $30, a couple hundred thousand now sure beats the possibility of nothing in the future. But that's what we get for trading in a speculative market.

The titel is "If bitcoin succeeds....so what?". In that case holding a bitcoin sure beats the possibility of nothing in the future.

Philipp

So what if the government bans bitcoins?  It isn't like they can actually enforce it.

Well, to me it isn't that clear. Let's say the government (defined as the first government to ban Bitcoin) bans bitcoin. Such a ban probably would take the form of not allowing exchanging that country's fiat currency for bitcoin. It is likely to come under the guise of consumer protection and accompagnied by denouncing of bitcoin as a pyramid scheme, money landering system or whatever.
Let's assume that other governments follow. Sure they can't ban some geeks from exchanging some €, $ or whatever bills for bitcoins in unviersity hallways, they can't stop currency trades via Silkroad or BlackMarket. But they can shut down the major exchanges like MtGox or TradeHill and the OTC markets like bitmarket.eu and destroy any alternative coming up.
The bitcoin system will still be operating, but it would just be some niche thing. It won't gain mainstream adoption.

Yes, the governments have failed against P2P filesharing. But that was not only a new thread, they were also unprepared for any attack on IP in general (and governments had to be convinced first to fight P2P at all).

With bitcoin the situation is a bit different: Governments are used to defending their currencies. The defenses are in place just waiting to become active, they are tried and well-trained. There's efficeint international cooperation of lw enforcement in such areas, and they're not afraid to put political pressure on countries for being too lax when in comes to money laundering or tax evasion.

The war machine is there, and at least somewhat ready. I'm sure some governments will decide to put it in motion against bitcoins some day. I hope it is too late by then.

Philipp

That's correct. But they set a target of little inflation by sucking up much of the increased value in the economy by printing money.

No, that's false. A deflationary currency does not cause your savings to grow in value. A bitcoin today includes the right to hold onto that bitcoin and watch it appreciate in value. Thus the value of a bitcoin today includes the value of that right.

If you don't see why that is, consider a simple thought experiment. Neutronium sells for $1,000/oz today. And we all know it is going to deflate and will sell for $5,000/oz in a year. Does that seem possible to you? Wouldn't people who don't need their money for a while buy up lots of Neutronium today, knowing they could sell it for $5,000/oz in a year? So wouldn't the price today be really close to $5,000/oz?

If Neutronium will be worth $5,000/oz in a year, then its value per ounce today is the sum of the present value of $5,000 in a year plus any additional value from being able to sell it in less than a year should one wish to. The value of something today must include the present value of its future appreciation.

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