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Author Topic: Illiquidity, Theft and Deletion  (Read 905 times)
Shinobi
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June 15, 2011, 03:16:48 AM
 #1

I've been reading a lot about Bitcoins lately, and I'm impressed at what seems to be an extremely well thought out idea. I still don't understand a few things that I'm surprised is not the focus of more conversations here, though perhaps I'm missing something:

1. How do most of you expect to realize your bitcoin value when it is so incredibly illiquid? Upon trying to purchase bitcoins it became immediately apparent that one needs to jump through hoops to enter the market, with such process taking eons in light of the incredible volatility of this market (something I imagine is caused by relatively low trade volume). Without a means of quickly injecting cash into the market to capitalize on swings - and as importantly - having to suffer gouging exchange rates in order to do, what really is this other than a round-robin of folks who are mining coins and throwing them back and forth with each other?

2. Without a centralized clearing house or "overseer", what is to stop people from simply stealing from each other, and eroding general faith in the currency? To me this currency can be seen to take the worst aspects of printed money (irreplacability) and combines it with the worst aspect of digital storage (lack of security and permanancy without extremely sophisticated means). In order to use bitcoins it is, by definition, necessary to make "open" one's wallet, and to do so - in the digital context - to many more people than pulling out a dollar bill at the local store.

3. What is to prevent a collapse of the currency from permanent deletion? Should someone with 100,000 BTC erase his/her wallet, does this not necessarily reduce the availability of the absolute amount of moveable currency? There must be a point, assuming aggregation of wealth over time by fewer and fewer people that such a scenario could drastically wipe out a large portion of the currency.

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June 15, 2011, 03:31:41 AM
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You can't steal a bitcoin or counterfeit it. There are means of security. And besides, if you are defrauded, no different from real life and the internet.

You make a good point regarding illiquidity. The limit of the supply of credit will limit adoption.

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Shinobi
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June 15, 2011, 03:44:37 AM
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"You can't steal a bitcoin"
So, if I was able to gain access to your computer and authorize a transfer, how would this be unwound? The anonymity of the trade itself prevents any real forensics, right? Given the difficulty of injecting capital into the system, I imagine that this stolen bitcoin could be laundered to people trying badly to buy in. Is there something I'm missing?

"if you are defrauded, no different from real life and the internet"

How so? Most fraud that is successfully resolved is due to the ability of a clearing house to detect and unwind the transaction because of the nature of the route of payment and because of the lack of anonymity of the transaction. Who would you turn to if the theft I mentioned above was committed? From what I understand, there is no central or rulemaking authority to enforce its reversal. Am I missing something on this point?

I am very interested in this, but I just don't quite see how this can't play out badly if not for economic collapse, for security of assets.

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June 15, 2011, 04:02:49 AM
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I would not suggest you run bitcoin on a computer that has untrusted people around. Do you let people who may steal from you into your home where you keep valuables they may steal?

Fraud is everywhere. Go to an open market or garage sale and buy something, no returns are usually accepted. Buy something through one of the many international trading sites like alibaba and pay with western union, you may very well be defrauded. If you don't trust a company you're working with then don't buy through bitcoin.

Think of bitcoin like cash, keep your pile of cash safe from thieves, and only buy from companies or people you feel are trustworthy.

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MoonShadow
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June 15, 2011, 04:03:21 AM
 #5

I've been reading a lot about Bitcoins lately, and I'm impressed at what seems to be an extremely well thought out idea. I still don't understand a few things that I'm surprised is not the focus of more conversations here, though perhaps I'm missing something:

1. How do most of you expect to realize your bitcoin value when it is so incredibly illiquid? Upon trying to purchase bitcoins it became immediately apparent that one needs to jump through hoops to enter the market, with such process taking eons in light of the incredible volatility of this market (something I imagine is caused by relatively low trade volume). Without a means of quickly injecting cash into the market to capitalize on swings - and as importantly - having to suffer gouging exchange rates in order to do, what really is this other than a round-robin of folks who are mining coins and throwing them back and forth with each other?


Bitcoin itself is highly liquid, it's just that the exchange of bitcoin to/from any other currency isn't.  Try exchanging a Euro for a US$ in downtown Detroit without going to the airport.  If your business model doesn't require the exchange of your bitcoins with other currencies every time, then the liquidity of Bitcoin will become apparent as, slowly but surely, all your suppliers or their competitors begin to accept Bitcoin themselves; and thus you can remove one more step from the supply chain.  By accepting Bitcoin, you can partially remove credit card companies from your online business model.  Once your suppliers do the same, you can also partially remove the fiat currencies themselves as well.  We are still probably decades away from the point that an online successfully accept only bitcoin as online payments.

Quote
2. Without a centralized clearing house or "overseer", what is to stop people from simply stealing from each other, and eroding general faith in the currency? To me this currency can be seen to take the worst aspects of printed money (irreplacability) and combines it with the worst aspect of digital storage (lack of security and permanancy without extremely sophisticated means). In order to use bitcoins it is, by definition, necessary to make "open" one's wallet, and to do so - in the digital context - to many more people than pulling out a dollar bill at the local store.


It's still early, and as such the clients that are already available are a bit primitive.  There is much to be done in the area of security, we know this.  Currently, leaving your client running on your PC with the bulk of your bitcoins in the same wallet.dat file is like walking through downtown in a crowd with your wallet on your shoulder.  If you are not capable of securing your wallet.dat file to a decent degree, then don't buy any bitcoins.

Quote

3. What is to prevent a collapse of the currency from permanent deletion? Should someone with 100,000 BTC erase his/her wallet, does this not necessarily reduce the availability of the absolute amount of moveable currency? There must be a point, assuming aggregation of wealth over time by fewer and fewer people that such a scenario could drastically wipe out a large portion of the currency.

The currency is infinitely divisible in the protocol and to the eighth decimal place in the current client.  The destruction of BTC, in large or small amounts, just results in the slight value increase of those that remain in circulation.  They are, after all, just numbers.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
kantian_semaphore
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June 15, 2011, 04:07:12 AM
 #6

Hi Shinobi,

You are seeing things correctly.  Theft is possible, and recovery of what is stolen is if not impossible, infeasible.  You should think of bitcoins like cash.  There is nothing to unwind when someone steals your cash, no recourse -- you either find the thief and make him pay back or be punished in the judicial system, or nothing.  Similarly, just as with cash, stealing is possible if someone can come into relatively intimate contact with your stuff -- the fact that your stuff is digital and the trespass over a network (most likely -- though physical theft of a computer system is also possible) plays merely to the ease or difficulty of the thing -- not to the nature.

So, let's talk briefly about security of assets.  To prevent theft and to allow recovery, it is possible to store your bitcoin wallet on a secure encrypted drive that would be, if not impossible, infeasible to access without your consent.  You can back up the encrypted volume and rest relatively sure that if your main disk crashes, you can restore from the backup.  Really, again, just as with cash -- don't store it by the fireplace, keep some of it in a vault, and you'll be more or less OK.  Your comments about the clearing house and how it relates to theft don't really add up -- I think you don't yet understand how the bitcoin system works.  You want to go read the FAQ and focus on the notion of the blockchain, how it works, and how it is secured by the distributed bitcoin system.  It took me a few hours of reading and pondering, but now I get it.

Your suggestion that a great amount of bitcoin wealth could be destroyed in one go is again possible, but just as with any currency, unlikely.  It's *possible* that Bill Gates' foundations would all bet all of their money on one go of a Vegas roulette wheel, or that they would store all of their assets in bonds and locate them all in one building that could go up in flames.  But this is very unlikely.  If someone had enough bitcoin wealth that their assets made up a large part of the total asset base, it's highly likely they would distribute the wealth among several wallets, and across multiple computers and locations.  Again, just as with any kind of money, a psychotic anti-self-interested party could purposely spend tons of money simply to destroy wealth (buy a billion dollar bills and burn them all, say).  Bitcoin fares no better, but no worse, in these cases.  (If anything, it fares better, because the loss of the digital assets could be replaced simply by allowing the bitcoin blockchain reward to last longer than it currently does, or similarly, to allow more decimal places in the bitcoin unit count.)

As far as the relative liquidity of the currency goes, you should think of it as a digital medium of barter, and like the older style bartered goods, it comes with a level of inconvenience at the moment.  This is a function of the small size of this nascent market (if the market were large enough, you wouldn't worry about exchange, but rather, buying things with your coins, which is itself quite easy) and of the growing pains in dealing with the transfer of funds back and forth into a "risky," "hacker culture" medium like bitcoin (seen through the eyes of, say, PayPal).

This isn't a complete answer, but I hope it helps.

-KS



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June 15, 2011, 07:01:12 AM
 #7

Wow KS,

Thank you. You explained away some of my concerns beautifully.

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Patheos
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June 15, 2011, 07:22:46 AM
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3. What is to prevent a collapse of the currency from permanent deletion? Should someone with 100,000 BTC erase his/her wallet, does this not necessarily reduce the availability of the absolute amount of moveable currency? There must be a point, assuming aggregation of wealth over time by fewer and fewer people that such a scenario could drastically wipe out a large portion of the currency.

I have actually had this very same concern.  What if a large number of Wallets were POWNED by a virus or something?  Would that be enough to destroy a large enough % of the total bitcoin network?  If 5MM coins were destroyed and the total became 16MM from the original 21 we are supposed to have would that make everyone's coins increase in value, or would nobody even really know.  There is not currently a way to track how many coins are really in circulation and how many have been lost.  If my machine were to crash today and I did not have a backup of my wallet they would be gone for good.

Contemplating the powers of BitCoin.
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June 15, 2011, 07:29:56 AM
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3. What is to prevent a collapse of the currency from permanent deletion? Should someone with 100,000 BTC erase his/her wallet, does this not necessarily reduce the availability of the absolute amount of moveable currency? There must be a point, assuming aggregation of wealth over time by fewer and fewer people that such a scenario could drastically wipe out a large portion of the currency.

I have actually had this very same concern.  What if a large number of Wallets were POWNED by a virus or something?  Would that be enough to destroy a large enough % of the total bitcoin network?  If 5MM coins were destroyed and the total became 16MM from the original 21 we are supposed to have would that make everyone's coins increase in value, or would nobody even really know.  There is not currently a way to track how many coins are really in circulation and how many have been lost.  If my machine were to crash today and I did not have a backup of my wallet they would be gone for good.

Eventually the value of the remaining coins would increase if there were less of them in circulation.
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June 15, 2011, 07:53:15 AM
 #10

My main question is how would people even know that some of the coins are no longer in circulation?  I guess scarcity and the supply/demand will take force, but the loss of coins to the BTC economy could be a bad thing.

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June 15, 2011, 09:54:05 AM
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My main question is how would people even know that some of the coins are no longer in circulation?  I guess scarcity and the supply/demand will take force, but the loss of coins to the BTC economy could be a bad thing.

No it wouldn't. The only problem will be when the maximum resolution reaches a limit, i.e there won't be enough decimal places to represent fractions of a dollar. That's a long way from happening though, and as far as I understood it, the maximum number of digits can be increased.
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June 15, 2011, 01:33:42 PM
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My main question is how would people even know that some of the coins are no longer in circulation?  I guess scarcity and the supply/demand will take force, but the loss of coins to the BTC economy could be a bad thing.

It would be obvious enough by searching the blockchain.  Coins no longer in circulation will be very old transactions.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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