Bitcoin Forum

I just heard about Bitcoin this morning and have spent an hour or so trying to get my head around it.

Maybe it's my age? I'm certainly not stupid and I'm not here to brag but last time I had my IQ tested it was 155. I have a fairly rudimentary understanding of economics and have managed to keep a succession of computers functional for about thirty years - but I really don't understand certain principles which must, I imagine, be fairly fundamental to the function of the system.

I have a certain amount of historical understanding of how fiat money acquired its value, albeit based currently on faith. But I don't grasp where the value of Bitcoin originates. If it comes from thin air, then how can it be sustained? If it is somehow the transmutation of energy from my electricity supply, by what process does that occur and how is that value sustained.

I also allowed a couple of computers to be used in the Seti@home project, so I don't have an issue with the use of networked CPU use. But I don't really understand what 'work' the Bitcoin client is doing - it has been knocking on a ceiling of 100% CPU usage since it was launched.

But taking a leap of faith from that, neither do I fully see how/why there should be a 50 Bitcoin credit for every new block other than it being something like a Premium Bond (lottery) which may reward persistent client use.

It is not my intention to be antagonistic or to instigate any kind of combative debate, I simply wanted to convey that to those who designed the system, it may seem perfectly elementary and early adopters and those of a particular aptitude may also find it simplicity itself. I find my own work, some of which involved video editing and prepress graphic design very easy but impossible to convey - I'm not a natural teacher.

Or should I just blindly comply as if putting a SIM card in my iPhone - not questioning how it works? Just accepting?

1) Do not mine, it is not profitable
2) Do not mine, it is not profitable
3) In order to get Bitcoins buy them or earn them
4) Some Bitcoins are generated every 10 minutes (6 million so far)
5) 21 million Bitcoins will be ever generated
6) You can receive Bitcoins anonymously
7) You can send Bitcoins almost anonymously

Thanks but I'm not sure how that helps my understanding.

Where is the question?

People want a currency that has the properties of bitcoin- Specifically the fact that bitcoin is:

Deflationary
Easy to transfer online
Fee free or low fees
Free from a central server that serves as a point of failure
Free from a central entity that can print more money on a whim
Secure
Quick transferring

etc

So as long as people want an easy way to transfer value securely, with the properties listed above, bitcoins have value as a commodity (Commodity currency? I never understood the distinction because currency is simply a specific commodity that is good for trading)


If you've got the generate coins option enabled, you're essentially wasting power- it would likely take you years to find a block and thus help the network.

The processing done by miners is used to secure the block chain- the more work is being done to validate transactions, the more an attacker would have to spend to compromise the network. Thus it is economically safer to simply be an honest miner than a malicious attacker.


The 50 bitcoins found by miners are paid to help bootstrap mining, making it profitable so that the network is safe in its infancy. Additionally, it serves as a good way to bring coins into circulation.


Never! Always ask questions, when people stopped doing that we got into the mess we're in now with the economy :)

It gets value the same way as gold: by being uniform, divisible, convenient to handle and scarce.

All the processing secures the transactions by making it impossible to double spend or change the transaction history without expending as much computing power as all the honest nodes combined. Those helping to secure the transactions get rewarded with the newly minted coins.

take a piece of fiat money out of your pocket.  look at it.

where does the value of it originate?  in your faith, and only there - even knowing it is completely manipulated and manipulable by forces outside your control.

now open up your Bitcoin wallet.  look at it.

faith is good - and faith in Bitcoin (that it is usable for transactions with others) is good.

but also, it is not under the control of outside forces.

better.

If you want to understand how Bitcoin works, read Satoshi's original paper. Then if you have specific questions about the paper, we can talk :)

From your post, I think you are asking these three questions:

1) Why is Bitcoin valuable?  faq (https://en.bitcoin.it/wiki/FAQ#Where_does_the_value_of_Bitcoin_stem_from?_What_backs_up_Bitcoin?)

2) What work is being performed when mining?

here (https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created?).

Miners perform a hash  (https://en.bitcoin.it/wiki/Hash)calculation on the set of data: (all previous transactions, plus a random number,) with the aim of finding a hash with a lower value than the current difficulty level. If the hash found is greater than the difficulty level, it changes the random number and tries again. It does this millions or billions of times per second.

It is not currently cost or time effective to mine unless you have spent a few thousand dollars on high-end video cards.

3) Why do people deserve to get coins when they mine a block?

Because it's the most equitable and practical way of distributing new coins, and it promotes security of the network.

The same thing that gives monetary value to gold, EUR, USD or any other currency. Your belief that in future, other people will accept that money as a payment for goods and services. And why would they do that? Because they believe that other people will do the same. Fiat currencies have easier time in achieving that position because governments can force people to use their fiat money, but once you reach the point where you trust it, because I trust it, because everybody trust it, it doesn't matter anymore how it started. Bitcoin has just recently reached a critical mass, where the faith in the system is growing exponentially, and I believe that some day in not too distant future, people will accept Bitcoin without understanding every single detail about how the system works. Just as they do with fiat currencies today.

But still, where did the first adopter come from, you might ask? In bitcoin they saw a superior currency, and believed (correctly) that a lot of people wound come to the same conclusion. Some might have been interested purely in technical aspects of Bitcoin, because once you manage to wrap your head around the system, you notice that it solves seemingly unsolvable problem in an elegant and novel way. Whatever the motivation, kudos to them. They got the ball rolling.

An hour?  It took me two weeks to get past basic questions!  :)


I'll try this one.  The network must reward whoever processes transactions, i.e., miners/processors.  In the long term, if Bitcoin is popular, users will find it worthwhile to include transaction fees, and those fees will support the processing.  Until that trend has a chance to become firmly established, the network will pay a fixed BTC amount per block, roughly 300 BTC/hour (more when the network hash rate grows, less when it shrinks and after the block reward goes to 25).  The hope is that this reward will go to electricity, but also optimizations probably leading to the development of highly specialized, efficient hardware (Bitcoin chips).  Whether this happens depends on the value of BTC (or a similar currency) in the near to medium term.  (One of my gripes is that whoever controls the chip fabs will control the economy, with probably more centralization than the central banks of today.  But such "control" over the economy may be less open to abuse.)

Note that "the network pays..." means that the software, which users choose to run, accepts or rejects blocks according to rules that implement this effect.


I feel your pain!  For the first week or two, my CPU (brain) was at 100% with the comp-sci and economics parts talking up a storm.  It is one of those rare developments that stimulates, and puts demands on, both.  The early adopters who most "get it" probably have both technical and financial backgrounds.  Those who don't will ultimately have to put some faith in those who do, if the project will succeed.

That confused me at first too. The client is downloading the block chain. That can take several hours, but once it's done the client will leave your CPU alone.

Also, someone should start a thread or make a web page about the purpose of mining. Too many people seem to think that bitcoins are "backed" by CPU cycles or some such nonsense.

OK, thanks for all the replies.

I am slightly wiser.

However, with regard to where the value of Bitcoins originates, I am still unclear.

It has been said a number of times and referred to in the FAQ that the value of fiat currency comes from gold.

This may be true, though in the UK I believe it is actually silver, hence 'sterling'.

That the currency has this credibility is due to hundreds of years that this was truly the case, though as anybody who has seriously looked into it will be aware, there is not nearly enough gold or silver to back up global currencies, most estimates, I believe, are that there is a discrepancy factor in the region of 11:1, i.e. if about 9% of the world's currency was withdrawn on the same day, the whole banking system would collapse as there would not be enough real collateral to sustain such a run. Nowadays, with the preponderance of cashless banking, this confidence trick has been played once more because there is not enough cash to cover the deposits. The twee argument that George Bailey makes in It's A Wonderful Life, that one neighbour's deposit has built another neighbour's home is, as much as I love the film, a bit of banking propaganda.

However, a global run on the bank is fairly unlikely. The faith in the currency is, I suspect, maintained not by the general belief that it is supported by precious metals but out of mere convention, it's what we are used to. We were born into it. The loss of credulity in money would be as devastating to the population and the powers that be as the discovery that there is no God would be to the billions of people whose lives orbit such credo (the gold/silver explanation is simply the BS which satisfies most people who start asking questions).

That is why money is so powerful and so instrumental. Quite how that kind of power/value can be injected artificially is not clear. Unless the process is comprehensible to the vast majority of people expected to adopt it, it is my view that merely insisting that the value exists, therefore it exists, therefore it exists, therefore it exists etc. is akin to peddling the status quo.

The value of bitcoins isn't being "injected artificially," it's been agreed upon by a group of individuals who see the benefits to using a decentralized, encrypted, electronic currency. The growing popularity has caused some incredible growth in the exchange rates, but ultimately its worth will be realized in the commerce it facilitates. I, and many others, I'm sure, doubt bitcoins will ever completely eradicate all other forms of currency, but believe instead it will come into its own with those who have become disillusioned with the current global economies.

Personally, I don't feel the need to convince anyone that bitcoins are valuable. I believe it. As a matter of fact, I believe it enough to trade you a pound of coffee for 1.95 BTC. Interested?

The last pretence of gold backing fell away in 1971.  Look for the video "Money as Debt" or the (lengthy) audio series "Wizards of Money" for an understanding of fiat.


Consider the work put into creating and maintaining the Bitcoin system and the currency's advantages (such as inflation immunity) as the source of that value.

Fairness was not the goal, a mechanism for a peer to peer network to agree on an authoritative record of transactions was the goal...creating blocks and extending the block chain is how transactions are recorded and agreed upon by all users of bitcoin.  And if you don't provide any incentive to mine, no one will and the system will not be adequately protected from attack.

You sound like me.  I seem to be quite a bit older than the average forum member here, am a long time GNU/Linux user, a lifelong student of Economics, and it took me about two weeks to wrap my head around Bitcoin.  For a few days, my brain refused to accept it as real, and I had to keep looking for the trick.  But there is no trick, it's exactly what it claims to be.  And it's elegant as anything I've ever seen wrought by the human mind.

Bitcoin derived it's initial value from the early users who, upon studying it, determined that it's virtues would lend it's use well towards being a medium of exchange.


You shouldn't bother with (generating/mining), your cpu is almost useless to this end.  The client, while generating, is repeatedly hashing a collection of recent transactions, attempting to solve a "block" by being the first to find a hash for that group of transactions that is below a target number.  The target number is chosen by the system every 2016 blocks in order to make the task difficult enough for the entire network to average one block every ten minutes or so.  It needs to do this because the issuing of a block is also how new funds enter into the system in a controlled fashion, as the computer that solves the block gets to keep a reward for doing so.  Which is currently 50 bitcoins.


It's an incentive for users to participate in the network, as the hashing (proof-of-work) system is also how the system defends itself from a malicious brute force cryptographic attack.

No, this system is elegant, but also very complicated.  Trust me, it's not you.


no you should not.  The system can be understood, it just takes a while for most to really grok it.  Don't put a dime into bitcoin until you understand it.  Keep searching the forum archives, read, and ask questions.  Once you do grok it, you will be an advocate.  Everyone is.

I heard Gavin describe bitcoin as "pure money" ...I think that is a great description of bitcoin.  I like to compare it with gold.  Gold has value because:

- there is a limited quantity (due to physics and the composition of elements on earth)
- it's difficult to counterfeit (almost impossible and fairly easy to detect fake gold)
- it is not subject to inflation
- it is relatively easy to handle (due to the limited quantity, a small amount represent a large value)
- it can be secured relatively easily (vaults and weapons)
- it can be divided without losing value
- it doesn't deteriorate
- its value is not controlled by any central authority (though various powerful entities could affect its value)
- there is a worldwide market for gold (if trade is impaired in one region, gold could be sold in other regions of the world)
- there is no counter party risk associated with holding physical gold

(the value gold has as a metal are inconsequential to the value it has as money...aside from the fact that it may have been initially bootstrapped as a money due to such non monetary uses)

Gold is a relatively pure form of physical money.

Bitcoin has value because:
- there is a limited quantity (due to mathematics and the physics that enable rapid computation)
- it's difficult to counterfeit (also due to mathematics...the block chain and miners protect against double spending...double spending is also easy to detect)
- it is not subject to inflation
- it is relatively easy to handle (far easier than gold in fact, it's all digital after all)
- it can be secured (but unlike gold, you don't need vaults or weapons and if you do it right, one would have to torture you to reveal a code in order to steal your bitcoins and theft of your computers would yield nothing of value for the thief)
- it can be divided without losing value (to 8 decimal places, more if necessary...and unlike gold, change is never a problem)
- it doesn't deteriorate (as long as you take steps to make adequate backups)
- its value is not controlled by any central authority (though various powerful entities could affect its value)
- there is a worldwide market for bitcoins (if trade is impaired in one region, bitcoins could be sold in other regions of the world)
- there is no counter party risk associated with holding physical gold
- it is digital, which means people do not have to be physically co-located to transact with it
- it is pseudo-anonymous
- transaction fees are low or non existent

Bitcoin is pure money.

To get even more "meta" : ask yourself why anything has value.

Tools, like hammers or cars or pants, have value mostly because they're useful and it takes effort to create them.

Some things have value because they're beautiful or rare.

Bitcoins have value because they are useful and rare.  As more and more people use them, they're useful for more and more things-- so their value will increase.  A lot of the current value of bitcoin is people who realize this and are trying to 'buy in early' -- they think that bitcoin will be used for more trading next year, so the value will be higher, so they want to get some now before the price rises.

I have no idea what the "right" value for bitcoin is, but I am very encouraged by all of the fantastic, innovative ways people are using bitcoin.  I expect most of those experiments will fail, and I hope that everybody realizes that there will be lots of failures along the way to what I hope will be a huge success.

i hate when people compare bitcoins to gold... gold has intrinsic value in manufacturing, chemistry, and even as a vital nutrient in the body supposedly.
bitcoin is something beyond gold, gold is an old archaic form of currency that has fallen out of favor.

Apparently I need some gold in my body. I've been feeling poor for a long time

This is not true in practice.  Not only is gold still trading like a money, it's value has nearly nothing to do with it's industrial utility.  Silver is vastly more useful in industry, is more rare in a refined state in the modern world, and is one-three-hundredth the market value per ounce.

er, i never said gold didnt have trade value. I said the a huge between gold and bitcoins is the fact that gold has intrinsic/industrial value while bitcoins dont.

I meant that it had been said a number of times in this thread in answer to my question. Perhaps I should have said originates from instead of comes from. I am not under any illusions about money being backed by gold which I would have hoped my post made clear. As I said, there simply is not enough gold to back the cash nor is there enough cash to back the electronic deposits. I read somewhere either in the wiki or on this forum as part of the background to Bitcoins that governments issue money. That simply is not true. In the US it is the Federal Reserve which issues money - and as has been comically stated ad nauseam, it is neither federal or a reserve. In England, it is the Bank of England. In Scotland, where I live, money is issued by three banks, the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank - they are all completely different in appearance!

In its simplest form, the banks issue the money as a loan to the governments who then have to pay it back in interest. That debt cannot nor will not ever be repaid. The resultant inflation is in effect a tax which we have to pay in order to pay back the interest. It's a bit like living off a maxed out credit card month in month out - nobody in their right mind would do this unless they had to.

And yes, I have seen Money as Debt and several other films which cover the same ground.

Er... I think you just compared Bitcoins with gold.

har.. har.. thanks for being completely obtuse.

I think you mean facetious.

So, basically, this is a system in which the value has been decided by the designer. That's only as valid as me putting an empty jar on eBay with a Buy It Now price of £250. It does not answer the question of where the value originates.

You offered me a pound of coffee for BTC 1.95. I don't have BTC 1.95, I would have to acquire BTC 1.95 to proceed with the transaction. As I have no sense of where the value is in Bitcoins, I cannot see any value in the transaction.

The real question is not why is a pound of coffee worth BTC 1.95 but why is a BTC 1 worth 0.513 pounds of coffee?

possibly, i should have said deliberately obtuse.. but facetious does make more sense.

I think I was being quite accurate. Dictionary.com (http://dictionary.reference.com/browse/compare):
Compare: to examine (two or more objects, ideas, people, etc.) in order to note similarities and differences

sure, but deliberately misconstruing what I'm saying is hardly helpful.

Then why do you hate it when people examine the similarities and differences. Surely, if there are differences, that is helpful.

And I was not misconstruing what you said, I was pointing out that you were making your point by doing what you object to other people doing.

Sounds a lot like US foreign policy!  ;)

No, the value is set by the marketplace.  The designer just created a system that is valuable.


For many of the same reasons that gold is worth a certain amount of coffee (and for those that think gold has in any way "fallen out of favor", I suggest you investigate the top holders of gold in the world).  The vast majority of gold exists in above ground stock stored in vaults and protected by armed guards.  Or, as Warren Buffet puts it: “Gold gets dug out of the ground… we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”  Yes, martians would be scratching their heads, unless they actually understood what money is.

Your 1 Bitcoin is worth my 0.513 pounds of coffee because I believe that I can spend that 1 BTC on some other good or service with the approximate same value as 0.513 pounds of coffee.  It has value because people believe it has value, as is the case with every other currency used in the world today.  It's just that this number of said "people" is much lower than you're accustomed to, that's all.

Consider this counter-example:  why is your 1 US dollar worth my bottle of Coca Cola?  After all, you're offering me some paper with ink on it, and I don't need the writing space or the visual appeal of the artwork, so I don't see why you're offering that in exchange for a beverage you can drink to quench your thirst.  But I accept the dollar for the trade because I believe that I can take it and put it in a vending machine to buy a Sprite.  And the owner of the machine accepts it because he believes he can use it to buy a lotto ticket, and the gas station attendant believes he can exchange it for some resistors for his hobby electronics project, and so on.

Paper and ink alone have uses, but millions of people have collectively agreed that specific chemical and physical combinations of them can be used as a medium of exchange with a set value.  They trust some higher authority (country government or your 3 Scottish banks or whatever) to be the only ones making the medium so that people can't simply print their own money.  Similarly, bitcoins are in actuality just tiny fragments of data sitting on data storage units worldwide.  Surely I don't believe that any random combination of 1000^* bits on my hard drive is worth $7, but thousands of people have collectively agreed that a specific combination of 1000 bits, arranged in such a way that I can prove they're mine, can be used as a medium of exchange to buy something worth $7.  We trust each other not to be printing our own money or using the same 1000 bits more than once, and in fact the system is designed to make that impossible.

Now of course, it's going to be a long time before I can stand in front of a machine in the break room, send it a Bitcoin, and have a soda pop out.  But that's only because as a money system, Bitcoin is still in its infancy.  The market is small, and most people in the world will not accept Bitcoin as a payment method because they don't believe in its value.  But at this moment, just enough people are willing to accept it that things are truly starting to get rolling, and as more people start accepting it, its perceived usefulness (aka value) will rise.

* arbitrary number used for the sake of example

EDIT:  I should add that the main reason people even gave it a value in the first place is because it has several advantages over traditional currencies, which have already been brought up earlier in the thread.  If it was simply another Paypal clone, nobody would care.  Since then, it's just been a matter of volume.  As more people are made aware of Bitcoin's existence, more people see its advantages and want to buy into it, which drives the price up.  Now of course there are the pure speculators looking to make a profit in their native currency, but we don't really have any good way of knowing what percentage of the growth is attributed to that.

OP it's pretty basic really.

It's value comes from the trust in it's features:
-limited supply
-digital form
-peer2peer decentralization
-security through cryptography
-easy and fast transfer around the glove
-easy and secure storage
-ect

Because people trust it will retain these obviously valued and wanted features it has intrinsic value. If it should ever lose them, Bitcoins will be worthless.

here let me say it in a way that is more clear.
I hate when people say bitcoin is just like gold.
Now shut up.

@ Nesetalis

Who the hell do you think you are, Bill O'Reilly?

I don't really care who you are, if you can't take a bit of banter - especially when you make a dumb statement the way that you did - perhaps you should take a few deep breaths before you enter a discussion.

Are you only so aggressive because you have your keyboard to hide behind? I don't respond to orders barked at me by anybody, let alone some anonymous person who doesn't seem to think before they rant.

Incidentally, I just read through the thread and didn't see any claims that Bitcoin is just like gold (I read some similarities and lots of differences - just comparisons), so I don't know what you are getting so irate about.

Anyway, don't blister your fingers angrily firing off another furious post.

If something is so complicated that only an intellectual elite can grasp it, I'm suspicious. Think derivatives. Nobody has been able to explain where the value comes from, other than saying that they believe in it, therefore it has value. That is not tangible. All the arguments about how secure the system is and how technically brilliant it is do not add one grain of proof that a Bitcoin has any value.

Until there is some explanation that somebody outside the murky world of financial speculation can understand, I think I'll invest in my local credit union.

Its hard enough for people to understand what some one is trying to say on the internet, without some one else coming up and trying to muddy your words. So, I put it as clear as i possibly could, if you don't like that, I don't care.
I told you to shut up, because you are being a pedantic annoyance, which is not helping the issue in the least.
also "Anyway, don't blister your fingers angrily firing off another furious post." is exactly the same as telling me to shut up. So, there goes your high ground :p if you ever had any.

As for who or what i was responding to? I simply believe its misleading and dangerous when people come around saying 'bitcoins are like gold' it doesn't matter if they then follow up and qualify that statement.

If you have a problem with that, fine, but how about next time you pose a counter argument instead of trolling me for not spelling it out as clear and as concise as humanly possible.

Ugh, this thread gives me so much headache.

So many people have explained where the value comes from. Stop saying nobody has.

-_-

I disagree.  The crux of the matter is whether you believe that a commodity like gold must have some intrinsic value other than its utility as money for it to be useful as money.  I believe that the metallic value of gold is utterly and completely irrelevant to its value as money (aside from the metallic properties that are directly related to its suitability as money...i.e. it doesn't corrode away).  I also believe that gold's utility as money *is* an intrinsic value, just as I believe bitcoin's utility as a money is its intrinsic value.  For these reasons and others, I think gold is perhaps the closest thing to bitcoin that currently exists and is thus useful for comparison purposes.  It certainly isn't like fiat currencies, or bank deposits, or agricultural commodities, or stocks or bonds.

Many Austrian economists would agree with your point of view, but not all.

OK, nobody has in a manner which makes any sense to me! See the topic subject.

But you can stop trying to explain now, I've only come back to stop my subscription to the thread because I'm bored with reading completely contradictory posts from different people with opposing ideas and being told that my questions have been answered.

If I start a thread, asking a question, forgive me for believing that I have the right to determine when it has been answered.

Anyway, everybody, especially Nesetalis, can shut up now. Topic locked.

Perhaps you need to narrow the scope of the question and try again.  What about the explainations that you have received do you not understand?  In addition, asking about valuations is subjective.  I.E. the answer is relative to the person being asked, and not an objective truth that can be explained.  The only objective truth concerning the "what gives Bitcoin value" is that something does.