if bitcoin only served the "underground" economy...

[2112]

it would be like accusing the who e Linux ecosystem of having hubris and not being able to face innovation.

I can't fault you for repeating this Linux comparison, but it is completely wrong. The visibility of the code matters relatively little to the future, the thing that matters the most is what type of changes get accepted to the mainline branch. The next thing is the mainline developers attitude to the branch/fork developers.

For the experienced developers those are the two things that distinguish the Bitcoin project the most and make it unlike pretty much any other open-source project. Several of the core developers had long careers in the "large established companies that are comfortable with what they do" and transfered their experience to this project.

Those problems don't have an easy answer that can be summed up with single paragraph. It is easier to sum up what's wrong, and I liked the most the cypherdoc's summary: Bitcoin is like Mona Lisa: it is already perfect.

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[majamalu]

Commerce is the economy. Under favorable circumstances we can build higher-level abstractions on top of that commerce like "saving" deferred consumption, but those abstractions are only valid under the right economic conditions.

Since the future is inherently uncertain, saving makes sense in all circumstances.

What should matter is whether a particular concept is valid. It doesn't matter if it is more or less abstract. Isn't "capital" also a high-level abstraction?

[misterbigg]

What if Bitcoin gets replaced by another cryptocurrency. I think it is quite likely.

I can't "prove" it, but my intuition tells me that any fully decentralized cryptocurrency is going to have the same concept of using computing power to secure the network. In order for Bitcoin to get replaced, you'd need to convince all the existing miners to switch over to some new system. Or, your new currency would have to be so appealing that new entities would enter the mining market for this new currency (where they otherwise did not enter the Bitcoin mining market).

I don't think its possible for a new currency to be as appealing as Bitcoin from the outset, considering the ever growing array of goods and services that revolve around the Bitcoin economy. MtGox just grows and grows, new exchanges appear, and software evolves. A new currency will have none of these things, and compare very unfavorably.

So any other fully decentralized cryptocurrency is going to have a very rough time going against Bitcoin, no matter how well funded the entities behind it.

Now if a centralized cryptocurrency comes out, one that doesn't require the proof of work but instead is based on a trusted party, that would be dead on arrival (since its the equivalent to fiat, which no one in Bitcoinlandia likes).

Conclusion? Unless some vulnerability with Bitcoin is discovered, nothing will be replacing it.

[paulie_w]

pretty interesting discussion guys, but how about we get back on topic now? :-)

another opening question:

what kind of exchange value and stability would bitcoin need to have, for example, to successfully replace "System D" in a single small, third world country? let's ignore the technical challenges of people using it for the moment and speculate.

[MoonShadow]

pretty interesting discussion guys, but how about we get back on topic now? :-)

another opening question:

what kind of exchange value and stability would bitcoin need to have, for example, to successfully replace "System D" in a single small, third world country? let's ignore the technical challenges of people using it for the moment and speculate.

That would work right now.  Just look at what M-pesa has accomplished.  If a bitcoinspinner style client could be introduced to that low end kind of cell phone, perhaps with some kind of bu.mp app to identify counterparties, that alone would do great things to stabilize bitcoin itself.

[Strider Hiryu]

could it still reach those incredible highs of $1000/btc and beyond, in some years?

It will get there in about 50 years even with zero growth in the bitcoin economy.

[DeathAndTaxes]

For example, an (arguable) estimation of US total economic production is it's GDP of ~14T if I'm not mistaken. That's much more that the entire USD money supply. Granted, you must better define "money supply" as many things may be used as money... but if you take for example the M2 aggregation for USD, that's around ~10 bi according to wikipedia. More than 1000 times lower than the GDP...
EDIT: Oups, my mistake, USD M2 is actually close to 10T... so yeah, not that far from the GDP, but that's still just a coincidence. The M1 is lower. And bitcoin's 21M cap is the M0 of bitcoin. USD M0 is around 2,8T.

Anyway, my point is, money supply != economic production in a year. You can't compare "black market production" with bitcoin's monetary base of 21M and reach any meaningful number.

Halfway there.  You are right money supply != economic production.  However you can't say the relationship between GDP and money supply is coincidence.  The two are very much linked.

(Money Supply) * (Average Velocity of Money) = (Economic Production)
One reason the US money supply has grown so much is the depression combined with poor govt policies has caused a collapse in the velocity of money.  The two numbers are very close because velocity is only a little over 1 (each $1 in money supply is only changing hands once per year, think about how pathetically bad that is).

We can make educated guesses about the velocity of money in the bitcoin economy and thus solve the above equation for money supply.

[molecular]

For example, an (arguable) estimation of US total economic production is it's GDP of ~14T if I'm not mistaken. That's much more that the entire USD money supply. Granted, you must better define "money supply" as many things may be used as money... but if you take for example the M2 aggregation for USD, that's around ~10 bi according to wikipedia. More than 1000 times lower than the GDP...
EDIT: Oups, my mistake, USD M2 is actually close to 10T... so yeah, not that far from the GDP, but that's still just a coincidence. The M1 is lower. And bitcoin's 21M cap is the M0 of bitcoin. USD M0 is around 2,8T.

Anyway, my point is, money supply != economic production in a year. You can't compare "black market production" with bitcoin's monetary base of 21M and reach any meaningful number.

Halfway there.  You are right money supply != economic production.  However you can't say the relationship between GDP and money supply is coincidence.  The two are very much linked.

(Money Supply) * (Average Velocity of Money) = (Economic Production)
One reason the US money supply has grown so much is the depression combined with poor govt policies has caused a collapse in the velocity of money.  The two numbers are very close because velocity is only a little over 1 (each $1 in money supply is only changing hands once per year, think about how pathetically bad that is).

We can make educated guesses about the velocity of money in the bitcoin economy and thus solve the above equation for money supply.

Hmm, interesting. A question: when measuring "velocity of money", you'd count the money that changed hands in exchange for goods and services? I'm a bit unclear on this. Let's make an example. I buy raw materials from a miner for BTC 100, pay an employess BTC 50 to produce some good and sell it for BTC 200 to you. What would be the measurements for (Economic Production) and (Velocity of Money) in this example?

[molecular]

could it still reach those incredible highs of $1000/btc and beyond, in some years?

It could even reach these highs without serving any economy (think of gold)

[DeathAndTaxes]

Hmm, interesting. A question: when measuring "velocity of money", you'd count the money that changed hands in exchange for goods and services? I'm a bit unclear on this. Let's make an example. I buy raw materials from a miner for BTC 100, pay an employess BTC 50 to produce some good and sell it for BTC 200 to you. What would be the measurements for (Economic Production) and (Velocity of Money) in this example?

So in the example there is 350 BTC of economic activity.  The velocity would depend on how large the money supply was.  Lets assume the entire money supply is only 200 BTC.  The velocity would be 350 / 200 = 1.75.

More on velocity
http://en.wikipedia.org/wiki/Velocity_of_money

Now estimating the velocity of the Bitcoin economy would be difficult.  In any economy velocity can only be estimated and usually entities like the Fed have extensive data provided to them by businesses, banks, govt agencies, etc.  With the psuedo-anonymity of Bitcoin and lack of central oversight the traditional method of computing these stats won't work.  I would imagine if Bitcoin became large enough eventually there will be value in researchers trying to pin down economic data like velocity.

In traditional fiat economies when functioning properly Velocity will tend to have a v=1 as a lower bound and v=3 as an upper bound (so GDP is 100% to 300% of the money supply).  Velocity of < 0 indicates that a substantial portion of the money in the economy is simply idle (it isn't used for new goods or services).  Velocity of 0 would indicate no economic activity (or at least none using that currency).

[MoonShadow]

Now estimating the velocity of the Bitcoin economy would be difficult.

Honestly, it shouldn't be.  We already have a similar metric that is very accurate, called bitcoin-days-destroyed.

https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed

With a few cavets, namely the difficulty in seperating out transactions that only involve owners moving their bitcoins around from one address to another for whatever reason, Bitcoin-days-destroyed-overall is a very good indicator of the actual velocity of bitcoin at any given time.

EDIT: To be specific,  the rolling average of (Bitcoin-days-destroyed-overall-today divided by the daily-transaction-volume) should give a consistant ratio to a real velocity for bitcoin.  The problem I see is that we don't yet know what that ratio might be, or if it will change in the future as bitcoin's economy grows and changes.

[FreeMoney]

Now estimating the velocity of the Bitcoin economy would be difficult.

Honestly, it shouldn't be.  We already have a similar metric that is very accurate, called bitcoin-days-destroyed.

https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed

With a few cavets, namely the difficulty in seperating out transactions that only involve owners moving their bitcoins around from one address to another for whatever reason, Bitcoin-days-destroyed-overall is a very good indicator of the actual velocity of bitcoin at any given time.

EDIT: To be specific,  the rolling average of (Bitcoin-days-destroyed-overall-today divided by the daily-transaction-volume) should give a consistant ratio to a real velocity for bitcoin.  The problem I see is that we don't yet know what that ratio might be, or if it will change in the future as bitcoin's economy grows and changes.

That's not very similar. In terms of economic activity there is no difference between an old and a new coin.

I think BDD is useful and velocity is not.

[MoonShadow]

Now estimating the velocity of the Bitcoin economy would be difficult.

Honestly, it shouldn't be.  We already have a similar metric that is very accurate, called bitcoin-days-destroyed.

https://en.bitcoin.it/wiki/Bitcoin_Days_Destroyed

With a few cavets, namely the difficulty in seperating out transactions that only involve owners moving their bitcoins around from one address to another for whatever reason, Bitcoin-days-destroyed-overall is a very good indicator of the actual velocity of bitcoin at any given time.

EDIT: To be specific,  the rolling average of (Bitcoin-days-destroyed-overall-today divided by the daily-transaction-volume) should give a consistant ratio to a real velocity for bitcoin.  The problem I see is that we don't yet know what that ratio might be, or if it will change in the future as bitcoin's economy grows and changes.

That's not very similar. In terms of economic activity there is no difference between an old and a new coin.

I think BDD is useful and velocity is not.

Your welcome to your opinon on the relative merits of any particular metric, but my point ws that velocity under bitcoin should be easier to estimate than under any other currency.  BDD is realy very similar a metric to velocity, because if your volume is high but your overall BDD is not this means that a small number of people are moving the same bitcoins around rather quickly.  This is a high velocity by definition, although it's without context, and velocity is a useless metric without context.

[FreeMoney]

I think we mostly agree. Velocity is really incomplete, more data could give enough context, one version of that extra data would be BDD.

[DeathAndTaxes]

I think there may be some confusion.

Velocity =/= moving money around.

Velocity = GDP/MoneySupply.  There has to be real production or the velocity is zero.

If the entire bitcoin network consisted of nodes randomly transfering BTC to each other than regardless of the transaction volume the production would be 0 and thus velocity would be zero.

If I withdraw $500 from my checking account and then deposit it back that is not economic production (GDP) and thus it doesn't contribute to velocity.
If I buy a new xbox360 for $500 then likely Microsoft will build a replacement and that transaction does add to economic production (GDP) and thus raises the velocity of the economy (increase to GDP over no change in money supply).

[MoonShadow]

I think there may be some confusion.

Velocity =/= moving money around.

Velocity = GDP/MoneySupply.  There has to be real production or the velocity is zero.

No, that would just mean that velocity had no relationship to value.  But we already know that is not the case here, so it's a moot point. The kinds of transactions that should not be included in velocity, that would be included in BDD, are transfers between a person's own addresses (and any other kind of valueless transfer), exchange price speculation, and probably in-kind donations.  The problem is we can't work this out of our data set, since there is no way to know why the transfers are occuring.  This is generally true with fiat currencies as well, but it's entirely possible that these kinds of transfers represent a much larger share of bitcoin's "GDP" (which is a meaningless metric, in the context of a global economy that can't realisticly be separated from the national fiat economies in particular regions).  Of course, it's also likely that these same types of transfers will become an decreasingly significant portion over time, if Bitcoin continues to grow.  At some point, the variations in velocity metrics for bitcoin and fiat currencies become small enough that they can be ignored, and the velocities themselves compared against each other to determine a relative understanding of velocity.  Velocity of currency is always a unitless metric, and has no real meaning outside of the context it's being used.

[MoonShadow]

I think we mostly agree. Velocity is really incomplete, more data could give enough context, one version of that extra data would be BDD.

Yes, we likely agree.  BDD is an excellent economic metric, a very useful tool for analysis.  And one that has no corrolary in fiat currencies.  Velocity of bitcoin is most useful as a comparison tool against other currencies and across time.  BDD is a very useful tool for comparing one period of time against another, from within the bitcoin economy itself compared to itself.