I think I see more clearly the trouble on this subject. When Mt. Gox started, it was only BTC-LRUSD, so it was always the case that counter-parties had the currency desired in the trades that executed.

But now, Mt. Gox has bent their exchange into trading between BTC and USD-like-thingys. So one side of trading is funding their account with BTC. The other side of trading is funding their account by one of a number of different means, all said to represent USD. Bank wires (most like USD), LRUSD, Dwolla, etc. But, once all this stuff settles in the trader's account, it's all just treated simply as generic USD-like-thingys.

So if Alice, Bob, and Gwen are the only Mt. Gox users; Alice deposits 50 LRUSD, Bob deposits $50 via bank wire, and Gwen exchanges with these two for her 6.25 BTC. Now Gwen has $100 in her account, but it's really $50 and $50 LRUSD. If she then goes to withdraw her entire balance via LR, Mt. Gox has to horse about behind the scenes and buy some LR with formerly Bob's $50 bank wire deposit, to give to Gwen.

And it is THIS which is creating the delay. Too many people came into the system with USD-like-thingys other than LR, to find matches with the people trying to now withdraw their USD-like-thingy balances to LR accounts.

I hope Mt. Gox isn't upset about that. They dug that hole themselves all right. They effectively chose to become a sort of exchanger by aggregating all the various USD-like-thingys they accept into a single tradeable entity. At that point they were working an averages scheme to avoid having to convert among the thingy types. Then, they got hit with demands in excess of their expectations.

Do I have that right?

<rant>
Oh, I forgot, also this private key is always stored encrypted. With a slow key scheduling cipher like blowfish preventing effective brute-force attacks on the passphrase used to lock it. This eliminates most, to effectively all, of the risk in the snatch-and-grab scenario of a having your key on a mobile client, and having a thief make off with the key file, or jack your laptop at the Starbucks.
</rant>

Based on my understanding of the way wallet.dat works, this might work awhile theoretically, but complications would sooner or later cause trouble, and I'd say it wouldn't be recommended.


Let's try this:

At time zero, you duplicate your wallet.dat and run two independent clients, A and B.

If you receive anything to addresses already given out before time zero, obviously both clients will see the income, assuming you don't do any spends.

For awhile, depending on the state of the wallet.dat's keypool at the instant it was forked, If you do a spend on client A, and ensure the client B has caught up with the blockchain before doing anything with it, you'll see the spend you made with client A and your balances on both A and B will remain consistent.

Eventually, your keypool will be exhausted and the client will replenish it with fresh keys. These keys will differ between the two clients. I think then, at this point, a spend on client A will show up in client B in an interesting way. It may show up as two spends, one matching the transaction you remembered making on client A, and the other as some other amount to an address you don't recognize. And, the balances between the two will become inconsistent.

What's happened there was that client A gathered up sufficient bitcoin from unredeemed inputs to make the indicated spend, and spent out the remainder to the next "hidden" address in client A's wallet.dat. But over on client B, it's wallet.dat doesn't contain this key. So it lends the appearance that "someone" reached inside and stole some bitcoin.

Worse, I think, is that if the two clients are not kept rigidly in-sync with the blockchain before new transactions are attempted, you might inadvertently double-spend some bitcoin from one of the clients. And I think this might be possible even if the balance figure seemed to show you had plenty to spend. So you'd get some transactions that would stick in the blockchain unconfirmed, as the chain adopts one or the other of the spends.

This stuff would either start to wreak general havoc, depending on how much transacting you do with your clients. It might be difficult to get the balances back into agreement, as some bitcoin would be held under keys only on client A, some under keys only on client B, and some under keys in common to the wallet.dat's of both A and B. A fine mess!

A better solution is to maintain independent wallet.dats, and spend a necessary balance between them as required. Leaving a home client for a mobile client? E-mail yourself a receive address from the mobile client, and spend a desired balance onto it from the home client. Then travel on.

Or, you could use an intermediary like a Mt. Gox account you own (assuming you trust them). From the home client, spend all or a desired amount into your Gox account. Then, from the road, withdraw the BTC from the Mt. Gox account to your mobile client. Do the reverse when you're back home and ready to use the home client again.

Be sure to have a backup strategy for the wallet.dats of each client!

As I finish writing this, MoonShadow makes a very excellent point about the theft potential for the mobile client. It's a similar risk as having you physical wallet stolen while out on the town. And, perhaps still more reason to start considering my not-yet-fully-formed-but-important notions I make in the rant below, and have elsewhere on this forum a number of times already.


<potentially misguided evangelistic rant>

To me, this exposes yet another way the architecture of wallet.dat and its notions of keys and keypools can get users innocently into serious trouble. You never know precisely what's going on under the hood of your wallet.dat. To me, it would be better if there was an option to make this internal system of keys which testify to the network about your ownership of bitcoin values, more like the way standard public-key crypto works in systems a-la OpenPGP. The client could have switches to allow users to choose the behavior they wished to use.

If wallet.dat were instead replaced with something a bit more like OpenPGP-style keyrings, you could choose to create a single static key for yourself. Your balance would accrue to this single key, and be spent away from this single key. You could copy this key from client to client and have access to the same balance (assuming the blockchain is up-to-date on the client). You could vault-away this key upon creation and not have to worry about making periodic backups of wallet.dat. You lose anonymity. Your transactions become more easily traced back to you, because "you" always show up under the same key in the blockchain. It's a tradeoff I think a lot of folks might be happy to make. This is an issue with the current official client. If the official developers have no interest, it certainly wouldn't preclude some other motivated devs to create a compatible client which introduces this operational difference.

</rant>

 

Keep posting your experiences.

I find this situation interesting and will try to look into this a bit more closely. If LR is operating as an exchanger (of paper currencies for their LR liabilities), I'm thinking that there are really not many situations were a "shortage" could be experienced preventing folks from simply exchanging back the way they exchanged in.

Just thinking about it offhand: Either a severe disturbance in the mix of currencies exchanged has taken place (much more XYZ in for LR; concurrently LR out for USD, and similar), or LR is operating on a fractional-reserve basis, and using a portion the demand deposits for other purposes (like any modern bank).

Rothbardians in the forum recognize fractional-reserve as a form of fraud, esp. when not disclosed. So then there is reason to be alert and keep pressing for more detail about this situation.

--edit 201107010007 UTC--

I haven't ever used LR myself, so I'm rather ignorant to the particulars, but in reading their materials I see that LR's organization depends on an independent network of exchangers who are willing to accept LR in exchange for the political or commodity-backed digital currencies they deal in. Apparently the shortage is in LR$ liabilities not USD itself?

So I am trying to mentally playout the transaction process from Mt. Gox.

Hypothetical:
Say I've got BTC, exchange it at Mt. Gox for LR$ (let's forget Dwolla for the moment). Now I want to move these LR$ off my Mt. Gox account into my own LR account. What has to happen?

And I have to mentally playout the side of the seller(s) which whom I had just traded inside Mt. Gox to get my LR$ balance. Presumably they funded their Mt. Gox accounts with LR$ (forgetting the other methods for the moment).

So for them, they used an indie exchanger to get from fiat-paper money or digital money to LR$, and sent LR$ from their account to Mr. Gox. THEN...Mt. Gox crossed our trade, so I got their LR$ and they got my BTC. So in this case these LR$ exist (they really came to Mt. Gox), so there should be no problem getting Mt. Gox to place them on my LR$ account (they have the funds).

Their could be processing delay. I heard scuttlebutt someplace that Mt. Gox and LR don't yet have a way to fully automate making this transfer. But, in this instance, why the "shortage"? There would be no real shortage (unless Mt. Gox did not keep the LR$ it received from my trading partner in escrow).

Possibly the fact the Mt. Gox is trying to use this amalgamated concept of "dollars" as the trade object against BTC means that they have to horse-about behind the scenes converting the various "dollar" inputs from one service (LR) to another (Dwolla, bank wire of USD, etc.).

How is my logic train here? Could this actually be a Mt. Gox problem, not a problem with the LR organization?

I'm no expert, but I've made comments elsewhere about key management in the current client. It seems that in practice, this is one area of the software that has proven to be a decided weak point. It does not yet have the polish of the rest of the system or the protocol.

In the above: while your wallet file wouldn't have to touch the outside world, the private-key in question would. So in a compromised machine, the entire balance attached at least to this key would become potentially vulnerable, and I think that is what you were saying. So the object would be...keep a system of securely generated savings keys and distributed "deposit" payments such that losing the balance of any single key is tolerable.

All the "help BTC lost/stolen" posts I've read here seem to have this common thread of either getting tripped up by a non-obvious-to-the-lay-user way in which wallet.dat works, or (possibly) getting unsecured private key material pinched by malware (I haven't read the earlier posts in this thread, but what I have read does not yet include any substantial evidence of any specific attack mechanism actually in use, so I'm guessing inadvertent user mishandling of wallet.dat is far more prevalent.

I hope the dev's don't try to re-invent the wheel when addressing future improvements to wallet.dat. I guess encryption of this file is a priority for a future release. I'm hoping that's only a stopgap to calm things down while the development effort struggles to catch up to usage needs.

It's my amateur opinion that wallet.dat needs to be rethought entirely.

I much prefer the notion to key management employed by GnuPG. All key material can be independently generated and addressed. The user interface provides you with total control over all aspects of your key material. Public vs. private key material are segregated within the software and are aggregated onto separate "keyring" files, allowing discriminating treatment, if paranoia/safety concerns dictate.

Plus, they do some clever things with the private key material, like encrypting it and using a cipher with a long setup time (i think it's BLOWFISH), so that brute-force passphrase searches are made impossible (as it takes a non-trivial amount of compute time to setup the cipher after supplying a test key).

Anyway...they do it VERY well, and in much use it's proven to be quite safe and reliable. The defaults are sensible to keep newbies out of serious trouble, but the power-users have ready access exacting control without resorting to weird kludges outside of the UI.

The anonymity features of wallet.dat could (and probably ought) to be built on top of a more GnuPG-like implementation of key management. And, I don't think this should be on by default. Rather, client-software documentation or a pretty UI section could explain the mechanism and what it's implications would be, and the user can then opt-in.

I keep mentally coming back to the picture of having others sign ownership of BTC over to me by using my public key, and my spending that BTC to others by signing ownership over to them with my private key. If I want/need more accounts, I can make more keys. But let me do it. Don't keep me guessing about what the software is doing with the key material under the hood.

Anyone with experience with GnuPG or any OpenPGP platform could just sit down with Bitcoin and know what to do, and how to stay secure about it.

Again, no expert, but my understanding is it might be the case that some element of transaction history is also stored within wallet.dat. In my view, these should be separated. Something is causing me to feel that keys shouldn't mix with receipts, not because it's dangerous, but because there may be some negative impacts for proper key handling.

The current client is sort of analogous to a car where new keys for the ignition are being made inside the steering wheel as you drive, linked to the odometer. You have to be sure to take the whole steering wheel with you when you get out, or you might find yourself not just locked out of the car, but unable to ever start it again! Oh, so you have a key backup that unlocks the door? Great... But the ignition key was changed inside the wheel while you were driving. Shall I call a cab?

Yeah, I love this and want to amplify the thought. Primary devs take note.

I understood roughly what the official client does with the wallet.dat when I began experimenting with it, but learning "specifically" what it does took concerted research effort trolling the forums on my part. It is not clearly written on the box, so to speak. So, because I'm curious, and I understand that I'm working with "experimental" software and need to be careful, I am aware of the need to have an ongoing backup strategy tailored to the needs of the wallet.dat and my spending habits when using the client.

Some of we tinkerers, e.g. myself, come from a background of experience using OpenPGP and X.509 to accomplish secure/authenticated communications. In this world, you, the user, have and must have total control of the creation and maintenance of your private key. Learning these systems taught me what I know so far about public-key crypto. I learned it would be a pain if you lost control over your personal private key and had to revoke it, then go out and accumulate signatures on a new key. Because of this we tend to attach ourselves mostly to just one key, and keep it carefully secure. It takes on a meaning then where it comes represent our official self digitally.

Coming into Bitcoin with that attitude is kinda dangerous without some more education. As it stands in the client currently, key management is automated and effectively comes with the label, "no user-serviceable parts inside."

Wallet.dat is a black-box to most of us. We can ask the client to generate new addresses (which causes new keypair generation within the wallet.dat), but this is all the control we have.

To avoid value destroying mistakes of the one this thread is all about, I think key management should be reconsidered. I'm going to vote for a more OpenPGP-style default design. This is essentially what you would start to get within wallet.dat if Joan's ideas (quoted above) were implemented as defaults.

I understand the benefits of using new keys as fluidly as they are in the client right now, it massively bolsters anonymity, a property I think valued highly at least by creator Satoshi and the development team working closely with him.

But bitcoin is starting to become viral, with n00bs arriving daily. User experience and easy access to education to help them bootstrap and go competently forward is going to become more important for the system's long-term health, when it expands beyond the tech-heads (yes, and cue the idea of most folk using an online wallet provider a-la Mybitcoin. Fair enough. Some will desire personal control, yet still with a safe and easy use experience. I don't think that's asking a lot.).

Perhaps I care less about the obfuscation of my transactions within the sea of the block-chain, and would rather everything come to/from a single key I make. I can still get more creative and make special-purpose keys to denote bitcoin received from different sources, or to obfuscate my transactions (as is the default now). The point it this aspect of the way bitcoin works should be controllable and transparent, and as easy PGP.

Finally...I'm beginning to come around to the notion that perhaps bitcoin will not become a major value store for day-to-day transacting, as we're often envisioning its future. But through developing systems like OpenTransactions, becomes the missing mechanism allowing more customary media of exchange to be tied together in a way that confers the benefits of bitcoin to the convenience and instantaneous-finality of more familiar forms of money.

For more on that, I highly recommend these mind-blowing shows:

http://agoristradio.com/?p=234
http://agoristradio.com/?p=246

@Luke-Jr

Hi! I just wanted to extend a note of gratitude for the efforts of yourself and your collaborators on the Eligius pool. You've done well bootstrapping this thing and it appears to be polishing up and gaining support nicely.

I'm still relatively new to the pooled mining scene, having just a few weeks ago stopped generating on my own.

I scoured this forum and other resources learning about the pooled mining scene and evaluating the pools to decide which I should join. Bitcoinpool had really looked the most interesting to me, and I was just about to set up there when they experienced their April security breach, leading to a number of accounts being compromised and having their payment streams redirected.

I think they are doing their best at bitcoinpool, but after watching them for a few weeks now, I still have reservations that they may they have architected the accounts system in a way that leaves it fatally vulnerable.

My guess here, some posts to their forum suggest they (had been, and if true maybe are still) are storing actual account passwords in their database, rather than salted hashes. One post suggested the attacker got hold of the accounts database, and was using the raw passwords stored therein to begin redirecting the payment streams; something that the best practice of using salted hashes would have prevented, if that was in fact what transpired. The website itself, where accounts are created and managed, has no security, and they appear to me (disturbingly) to eschew the basic value of securing account/registration sessions with SSL. Little niggles of this sort suggest they may have an incomplete understanding of robust security practices.

So then I see this very forum topic!

What a concept! Forget the account. Just point your miner at our server, mine away, and just tell us the bitcoin address where you want the credit sent. This is so brilliant it seems like one of those obvious things you wonder how no one thought about it sooner?

In the aftermath of their breach, I mentioned the Eligius approach on the bitcoinpool forum as an idea about shortcutting the inherent need to start carefully considering security once accounts come into play. The responses were skeptical; along the line that this would make it hard to trust the pool operator, because it would be difficult to verify that your work was being properly credited.

I admit to being ignorant about the mechanics of the various pooled mining credit systems, but at least I have been able to observe the diligent efforts you've put forth making Eligius completely up-front and transparent. You've proven that even without accounts, self-auditing and tracking is possible.

With the polish starting to shine on this pool, it's feeling less experimental now. But the novel feature of an accountless architecture has made ME feel safer testing and now fully adopting it for my use, than the other more well established pools available. So, thanks! I'm sure I cannot be the only one who feels like this.

Somehow I got onto this blog story about Bitcoin (probably via a linktrain originating via a @bitcoinmedia tweet). http://timothyblee.com/2011/04/18/the-bitcoin-bubble/

I love crypto, and bitcoin stands at a neat crossroads of applied crypto and economics. I consider myself a student of the Austrian School, so I've been following bitcoin's fate with interest. I'd like it to "win" somehow, and perhaps it can. I must say I'm also a skeptic (as much as I love its technology). Here was a bit from the above blog I couldn't resist resharing:


I remain interested to see how bitcoin can deal with this. Since my post above, we've seen bitcoin compute power and value in USD terms trail off, then lurch back to a point now modestly above parity again. Wild ride.

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Hey everybody! I have 0.02631579 BTC to contribute. It's probably only worth that!

I have been lurking around here for a few months now, and it has been interesting for me, watching the forum activity.

I noted with interest the aggregate hashing level surge and now recently settle back some. It had been around 185 GHashes/s in early February, before Steve Gibson's Security Now! podcast featured it. Around that time too, it was just making it's most significant push toward USD parity.

I don't know what the high in hashing rate was, but I think it got as high at 700 GHashes/s. High enough that in its redesign, bitcoincharts.com decided to present the figure as Tera-Hashes/s, thinking it would soon get that high. As I write, it's settled back to 475 GHashes/s.

I think the higher-profile media coverage of bitcoin has obviously been a driver in this, and too in its recent pop above dollar parity. Quite a few new people have come into the community, regardless of their motivation. Even off the highs, the current hashing rates show a 2.5-fold increase the in the amount of computing power in the network so far in this first quarter of 2011. That's impressive.

I think many people in the recent hash rate and parity pop were new folks merely curious as to what this bitcoin thing was all about. They read up, came in, played about a little, maybe tried a miner or briefly joined a mining pool, then...got bored and left the network.

To me, this is really not a big deal for bitcoin's future. These are short-term trends. I myself, joined in the 4th quarter of 2010 after catching some minor comments about the system in the forum on mises.org. It was a curiosity for me, and I was (and still am to a degree) very skeptical about its potential for ultimate success, bitcoin being a unique sort of decentralized fiat currency. However, it has some unique elements that are also very similar to a commodity money like gold. It's a weird fusion. And so I just couldn't turn away. I wanted to see how this could play out. It's really innovative.

There is much potential for this system to develop, as has been mentioned by many here. There are also significant competing factors which threaten it. To name one: Just the past week or so, VISA announced plans to develop an electronic person-to-person payment system to compete with PayPal and Square (seeing as PayPal has been so successful in diverting the fee-stream of a certain class of transactions away from companies like VISA and toward itself).

Some of bitcoin's aims are, admittedly, very different. But long-range, the real story will be one of convenience. Barring a major currency devaluation situation (a still small yet increasing risk), dollars are just so damn convenient. We're increasingly cashless, opting-in to VISA and the like because for many of us, the value proposition is just right. This should make bitcoin competition stronger, as we might see with VISA's new project.

Anybody intrigued by bitcoin must first acquire some. The best way to do this is by buying BTC in one of the many new markets which have sprung up. But these markets are not very efficient yet. They're rather non-uniform, and often the process can require multiple stages, with fees taken at each stage. Basically, there is a lot of friction moving USD into BTC and back. And USD-BTC is the most popular pair trading! The situation is worse in the minority of other trading pairs. In this era of super easy and streamlined bank-card transactions, where they are almost universally accepted online or in-store same as cash, this is a HUGE barrier.

Use the model of an average Joe on the street. First he has to be made aware of bitcoin, convinced of its suitability, and persuaded to buy some. He must have a minimum tech-saavy, because this will require some internet skill, and a little bit of PC skill. There's a tiny speed bump.

Now, he might be fully on-board with the idea. But, faced with the panoply of various sites and OTC markets, PayPal or LR interfaces, the possibility of needing to create at least one or more new online accounts, comparing fees which are likely charged, it's not easy for him to know that he's getting a good value. He hasn't even bought anything yet, and already it's making his head swim.

Now with a supply of BTC, he can delve into the marketplace and begin buying goods and services. Well, it's still early days, and still not a lot of merchants exist who are willing or promoting trade denominated in BTC. These merchants generally must transact back out of BTC to acquire inventory, or pay overhead expenses and taxes and such just to operate. To average Joe, this comparative lack of easily available and diverse products and services makes BTC less attractive compared to the amazing universe of stuff on offer in his traditional fiat currency.

So while this more-important aspect of the bitcoin economy slowly starts to take shape, there is not yet much one can do with their bitcoin. It is no small wonder the easiest option was one of the first developed, and the one with the current greatest state of sophistication: FX speculation!

I think that many of the new bitcoin users were at least in part attracted to the system by the prospect of speculation, especially in the current quarter, where we witness that very symbolic pop above dollar parity. There isn't all that much one can do yet with his BTC, so why not slosh about in the FX market?

To me, I think all this stuff is great. I love markets and free exchange. Their may not be much more to do with BTC than FX right now, but interest can attract the entrepreneurs who will start to offer the things that other BTC users would like to exchange BTC for. Development will attract more development, once we achieve a critical mass (which I still don't think has happened yet, and which new competition of the sort I mentioned up-top is increasing the required mass).

As that develops, it makes no sense to me to see BTC above or significantly close to USD parity (again, barring a major dollar devaluation). Why? It's expensive (in time, knowledge, and fees) to buy BTC with USD, and it's less marketable for goods and services. Parity starts to make sense when the size of the non-FX bitcoin economy matches the amount of currency in circulation. With 5.7M BTC in circulation, do you figure there is 5.7M USD worth of products and services available in the BTC economy right now?

Merchants just want to sell their merchandise, so they'll tend to offer their goods/services in whatever their customers present which is also highly-marketable for them, so they can cover their costs of doing business. With government legal-tender laws distorting the market, the most marketable money tends to be the fiat stuff offered and blessed by the government.

Given the friction of moving into or out of BTC, if there is simultaneous pricing on the part of the merchant, the money which has the least friction will be the one selected by the consumer to buy the product. Merchants who hope to do much more than curiosity-level business in BTC must, therefore, offer their wares at a discount in BTC.

(Thinking on the page here) For businesses to do as well transacting in BTC as they do in government fiat cash, I think it might require them to go off-book, as their taxes are due and payable in government fiat. Even if they could settle all of their overheads in BTC, there would still be a need to buy fiat for settling up with the government. It might be possible to make this work, but then, if it were easy to avoid the fiat problem, we'd all still be using gold and silver commodity money (or these days, modern electronic/plastic substitutes backed by same). Gresham's law: bad money drives out good, is true whenever the government is involved. That might mean such businesses might have to be comfortable with the prospect of being illegal. Bigger business won't do this (gov't may be unable to touch the money, but they'll certainly touch the owners, the employees, the suppliers, and even the customers).

I cannot be sure, but I would argue that a vast majority (maybe >90%) of the daily transactions in BTC are FX right now. (And most of the rest might be gambling.) Basically, there is an awful lot of churn. Bitcoin is more like an oxbow lake on the river of traditional fiat exchanges. A good amount of money is coming in and going out, but it's mostly FX and not sticking around to facilitate much exchange of real goods and services.

We're back-sliding in hash-rates because a lot of the new users who were attracted by speculative interest and mere curiosity, have come inside the BTC economy, looked around a bit, and got bored and left. Perhaps they did some real business in BTC, but I think most of them found their traditional fiat currencies were more valuable to them for everyday use. They're still more marketable. This is what wins.

How does it get better? It's the everyday use that builds the economy. Advancements on the software end will help. As discussed here and elsewhere, new clients tailored to use case:

o  bandwidth efficient and mobile clients which don't try to verify the whole block chain

o  generator/miner clients which do verify the whole chain or more of it than consumer client while communicating efficiently (transfers of the chain are very slow right now)

o  merchant clients or APIs where transaction process is integrated into point-of-sale and accounting software

o  Entrepreneurial business which seeks to streamline the ease of getting into and out of BTC, so that if you see a merchant offering in BTC, buying in bitcoin is no harder than buying in foreign currencies abroad with plastic today. As a US citizen traveling in Europe, for example, with your VISA credit or debit card, if you see something you want priced in euros, you just plunk down your very same VISA card. The financial institutions behind the card buy the euros required to complete the transaction behind the scenes, charging a markup or FX fee you decided you were willing to accept, and your experience of the transaction was absolutely no different that swiping that same card at a Wal-Mart back home! Nearly frictionless (except for the fee, but certainly so in time and knowledge).

o  A fiat money meltdown.

Given all the foregoing, I'm kind of surprised to see that at the moment bitcoin is still trading for $0.76 USD per BTC. When I joined the network, the price was nearer $0.25 USD/BTC. Of course the "right" price is whatever the market says it is at any given moment. But I do wonder how much more the real economy in bitcoin has grown over the past four months or so. Does the move in BTC match the real growth of the BTC denominated economy? Arbitrageurs in the bitcoin FX markets will slowly take out the value waged by the speculators on that question.

Unless and until we get advancements on these fronts, expect periodic wild swings in the value of bitcoin on the FX markets as future rounds of media attention attract waves of new bitcoin explorers who pile in, take a look around, and maybe get bored and pile back out again.

The key for the future of bitcoin will be to try give some real tangible reasons for the largest possible fraction of each wave to stick around as the media tide again ebbs. What fraction can we expect? I don't have a clue, but the smaller that fraction turns out to be, the longer bitcoin will have to persist as a curiosity. Any positive fraction, however, is good.

We have to accept, too, that the real progress will be made by bitcoin entrepreneurs (which includes not just businesspeople but those who contribute their skill toward developing the software). Most of us are consumers. Our function will be supplying the gas to make the engine go, but first we have to have an engine in which our fuel runs "better" in some way. Else, we'll just tend to stick with the engine we have.

In the case of BTC, this is all very academic. However, the above makes no sense.

"Precocious" commodity? Commodities cannot act, they are lumps of stuff. These lumps may have value to others in various ways, the value placed by those folks changing from moment to moment.

Who's precocious? That'd be the central bankers behind the issuance of all the major fiat currencies. They may or may not like how this market or that market is acting, and so step in with their heavy dull cudgel of open-market operations to lopsidedly inject more fiat currency into the marketplace, to the loss of all who are not first to get the new money.

Who are central-bankers to decide what the relative value of a thing is? Don't like how the market is acting? The market price is an emergent phenomenon arrived at by the sum total of free and open transactions done by the participants, who wanted to do those transactions at the time, or they would not have taken place.

So what you're really saying is that you don't trust the people who are participating in establishing a commodity's price by transacting in the market for that commodity. You would rather have an expert, the central planner at the central bank, observe and then by his fiat decide what is best for everyone.

As to liquidity, the market solves this (that is to say, in the market this is solved)^[1] by volatility. The only correct price is the one printed on the tape. And then only for that instant. If there are too few transactions taking place to keep this stable, then there is opportunity for speculators who believe for their own reasons that the price doesn't reflect the true value in the transaction. The more extreme the swing, the more speculation is attracted until there is enough transacting happening to dampen out the price oscillations.

Lack of liquidity/volatility could be a sign of uncertainty about conditions affecting the transaction, or a lack of interest in the thing being transacted. These are phenomena emergent out of the business actually taking place, and who are you to tell (via a peg) the market's participants what to do?

BTC's value has roughly tracked its popularity and notability. There was a very short spike toward $0.50 USD some time ago, when its popularity and notability were much lower. Lack of liquidity drove that. What happened? Speculators noticed. Most of them (as it happened) decided that the price on the tape couldn't possibly be efficiently reflecting the true worth of BTC at that time, and so just as quickly as it popped up due to lack of available BTC supply, supply soon rushed into the marketplace and cleared out the demand that created the spike.

The market is never wrong, because the market price is merely a report of instantaneous conditions.

^[1] Economists are wont to talk about the market as a thing unto itself, capable of its own actions and independent behaviors. This is a mistake. However, phrasing the market in that context is convenient shorthand when what you mean to discuss is really the summation of actions taken by the participants in a market.