Today's spectacular market volatilty at mtgox has put me in serious thinking mode about bitcoins. Initially I thought bitcoins were a sure asset, and doubted even its feasability as a currency, reasoning that people would hoard it mercilessly because of its theoritical deflationary nature. Truth is, bitcoin is brilliantly thought out as fundamentally just a currency. Bitcoins are nothing more than certificates that are proven true and confirmed when transacted upon. Sure you can store a whole bunch of these "certificates" for the long term but don't expect them to be surefire "investments".

Bitcoins true utility is for what it was designed for: anonymous no-middle-man transactions. When Bob wants to buy from Alice, he gets a certificate which Alice accepts as payment. Then Alice trades back the certificate. It would be better if there were a lot more people using it for this purpose than just hoarding..

As to mining, I believe it is a foolish proposition to try to make money just mining bitcoins. The harder you mine the less profitable it becomes to mine because of the automatic difficulty kicking in, making your investments in mining hardware futile. The bitcoin system rewards people who have computers on its network for its own purpose, but limits this reward when people are just hoarding coins and not paying the transaction fee when trading (at this stage)..

Be aware that there is also a negative feedback mechanism that kicks in when the price of bitcoin crashes like today: it makes mining bitcoins unprofitable, so it in turns causes miners to plug off their mining machines which in turn takes more time to produce the new coins which in turn causes the difficulty to lower making new bitcoins even less valuable because they are now easier to mine..

Conclusion: As long as there isn't a real thriving marketplace of actual goods and services trading in bitcoins willing to put in at least 0.1% of the transactions, there isn't going to be a stable price of BTC vs other currencies. If you are going to "invest" in mining bitcoins with hardware its because you believe in the system's long term usefulness and not for the quick buck. Personally I would only do this if I already have idle computing power. Likewise if you are going to "invest" in saving bitcoins its because you believe in its long term usefulness too and I mean looong term, eg years from now.

Thoughts?

Thanks for your answers, deepceleron (funny nick, maybe I'll use deepZ80 lol)

It took a lot less time to download and process the first 100k blocks than it is taking for the last 34k and I can tell that it takes longer and longer as the block count increases. I assume that there is some processing going on at the client, maybe checking the each block's authenticity, the latest blocks being much heavier than the early ones. I am concerned about future clients as the blockchain grows, which may even grow at an exponential rate.

I understand very well that the strength of the encryption of the blockchain is supported by all the mining that is being done. I also understand that mining is not a all or nothing endeavor so a client can "throttle" its mining rate according to how much cpu/gpu resources you give it. Wouldn't it be better for bitcoin if new clients mined something or at least leave the option open to the user, than absolutely nothing at all by default?

Ok, I understand now about the increasing transaction fees. Obviously as blocks get bigger, it is more costs more cpu power to confirm transactions, so more transactions fees will come about. By the time the sudden halfing of the 50 btc reward comes, the sum of transaction fees will be significantly larger than 50 BTC. Is there a way to find out how much transaction fees are being added per block?

A couple of newbie questions

I am installing the bitcoin client on a slow computer with a USB key to use as a backup wallet. But its downloading the block chain is already taking more than a day. At this rate it will take more than 2 days to finish. I have read elsewhere that the whole block chain is not really needed to receive and send bitcoins so I even though I don't mind waiting I am wondering if the new client will be implemented where the whole blockchain is not downloaded or am I am missing an obvious option? What about clients who are installing on small flash drive, or in the future when the blockchain grows much larger?

Another question: I also read that the fundamental strength of the bitcoin currency relies on all the power of cpu and gpu processing participating in the network, but I notice that the bitcoin client has mining turned off by default. Does that mean that a currently fresh bitcoin client is not participating in contributing computing power and if so, wouldn't it be better if it did, albeit in a minimal fashion with the option to turn off? I have seen websites that even try to use your browser javascript engine to do a few hashes as a way to recover some of their costs, I am therefore sure its possible to do very minimal processing on the standard client.

And finally, I see that when the system reaches 4 years of existence (sometime in 2113 I presume) the bitcoins rewarded for every block is going to suddenly half from 50 to 25. Wouldn't that create a sudden crisis or a potentially catastrophic shuffle in currency trading and mining?

Weeeeeell I was going to post some very interesting and adhoc comments in some of the other threads, but was unable to do so.

I understand the reason though, and kudos to the management of this forum... it must be a nightmare now.

I think its a terrible idea to have a BTC exchange right now like MTGox. Bitcoins are used more as asset than currency. A more reasoned way to trading bitcoins is to bid and sell them in an auction like on ebay specially in large quantities. As long as the marketbase for Bitcoins as currency is limited. Real time exchange will only cause rates to fluctuate wildly.