Bitcoin - the first cryptographic commodity, NOT currency

[HappyFunnyFoo]

Bitcoin - it's the first cryptographic commodity, NOT currency:

Bitcoin is a great concept and I'm mining away, but it functions like a cryptographic commodity, not a currency, since it holds all of the properties of a commodity:

1. Like a commodity, a finite quantity of bitcoins can be mined, similar to gold or oil being generated at a fixed rate.  Bitcoin's value is in part derived from scarcity.

2. Like a commodity, price is a derivative of inherent value and unique properties possessed by said commodity.  Bitcoin's inherent value is the incredible ability to produce untraceable (assuming the user is competent), irrevocable exchanges of possession, digitally, and, of course, the underlying value of all bitcoins in circulation is BOTH a function of the power requirement needed to generate the next block and the billions of dollars' worth of computing power (increasing exponentially over time) that would theoretically be needed to 'break' the block chain.

e.g, price per bitcoin is roughly = [value of untraceability + (cost of killing the entire block chain + power requirement to win coins from guessing the next block)]

By comparision, oil's value is
its industrial usefulness - you can manufacture gas or plastic out of it, for example; the value of beans comes from their edibility and high nutritional value.  And, of course, you can build things out of wood.  Bitcoin's value and unique properties are no different - they can be swapped between two locations discretely.

3. Also, like a commodity, bitcoin is virtually indestructible (assuming the user is competent and takes basic steps to back up their wallet, split their assets amongst multiple wallets, etc).

4. Commodity valuations are typically deflationary when measured against any circulated money, e.g. the price of oil or gold increases over time, just like bitcoin.  Also, like commodities, bitcoin price goes through bubble valuation phases.

5. The rate at which someone can make a valid, verifiable transaction is too slow for bitcoin to function in modern-day commerce.  I can buy a cup of coffee with some spare change in just a few seconds, and the transaction is verifiable within a couple of seconds.  Bitcoin is really not verifiable until a few blocks have been generated, and nobody is going to wait in line 10-20 minutes per customer (assuming people are storing little wallets on cards one day).  The block generation rate would have to be under 5 seconds for bitcoin to be usable in physical commerce and at least be usable like paper money.

6. While bitcoin is poorly-suited as a medium of exchange for physical commerce (point 5), it's also bad in and of itself as a medium of exchange for large transactions, since its anonymity means it's easy for buyer or seller to scam one another without a solid executed written contract, or solid third party mediator, both of which nullify the benefits of anonymity provided by bitcoin.

To summarize, bitcoin derives its value from commodity-like properties, and is a fairly poor medium of exchange in physical or e-commerce.  It makes much more sense to me to call it a commodity.  It's the first crypto-gold in existence.

I also think it's the greatest idea since sliced bread.

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[dtmc]

interesting thoughts. But currency is a defined as a medium of exchange. So couldn't anything of value temporarily take on the role of currency? Just because it has a different speed at which it could be exchanged compared to dollars, doesn't rule it out being a currency?

[jojkaart]

About the need for an intermediary for large transactions. I think with bitcoin you can get around it. For example, if you're buying things in massive amounts, it would be possible to do transactions as the goods are delivered instead of one big lump sum. For example, someone has ordered 1000 truckloads of sand to be transported somewhere. They could easily have someone at the location verifying the sand is arriving and transfering 1/1000th of the total for each truckload that's been verified. This would of course only be necessary when trust is lacking.

The same would work for mass purchases of goods as well as services rendered. Only when the purchase cannot be divided into several parts would a trusted third party be needed.

Sounds to me this way could easily be cheaper than using the services of a third party as a mediator.

[indio007]

For anyone that thinks bitcoins aren't  currency they are out of it. Anything is currency as long as it has value.
What do the call it ? A good and valuable consideration that would support a simple contract. Even a promise is in this category.
A bitcoin has intrinsic value. It gives  the right to a non-reversible secure transaction. Many people think that is valuable.

This is the reason why i said there needs to be a "legal" sub-forum. There are many issues to iron out amongst bitcoin users.
I would say people are very ignorant about money and it's laws.

Such as the difference between paying a debt and discharging one.

[dtmc]

exactly. another reason why dividing to the 8th decimal place is a nice idea ^

[Meni Rosenfeld]

5 is wrong, transactions are propagated in seconds. You don't need to wait for a confirmation in a block to buy coffee.

6 is wrong. Bitcoin has many advantages over alternative currencies and payment methods. Anonymity is just one of them, and if it's less relevant to large transactions it doesn't mean Bitcoin is "bad" for them. And it's of course excellent for small and medium e-commerce.

[Richard at Wendel Services, LLC]

Proving the case for a virtual commodity is hard I think. Intrinsic value is hard to prove without it having another use other than as a medium of exchange. Gold even has other uses (jewelry, circuitry) other than it's currency value. I don't invest in gold because I have no other purposes for it's intrinsic uses. Bitcoin is only a medium of exchange. If you take a bitcoin out of the bitcoin market, you have no other use for it...in fact, a Dollar bill is more useful out of it's market than a bitcoin is (notes, fire).

[indio007]

Uhm bitcoins do have other uses outside the BTC market. You could use bitcoins simply as proof of a transaction for anything. You just correlate the bitcoin to one of the objects like say the assignment of a mortgage. The transaction data itself is what is useful.

[Confucius]

Wow I spent so long writing a reply, my session timed out and all the text I wrote was gone... sadface.gif

Points 1-4 I mostly agree with, however they are different from a commodity in that they don't have intrinsic value in the numismatics sense, but they have other unique properties possibly desirable, such as divisibility, security which could be said to be common with precious metals, but most importantly transportation ability and storage. So they are similar to a commodity but different. IMO it is purely semantics and unless someone points out otherwise I'm ignorant to the consequences.

http://en.wikipedia.org/wiki/Intrinsic_value_%28numismatics%29
https://en.bitcoin.it/wiki/Myths#Bitcoins_have_no_intrinsic_value_%28unlike_some_other_things%29

5. The rate at which someone can make a valid, verifiable transaction is too slow for bitcoin to function in modern-day commerce.  I can buy a cup of coffee with some spare change in just a few seconds, and the transaction is verifiable within a couple of seconds.  Bitcoin is really not verifiable until a few blocks have been generated, and nobody is going to wait in line 10-20 minutes per customer (assuming people are storing little wallets on cards one day).  The block generation rate would have to be under 5 seconds for bitcoin to be usable in physical commerce and at least be usable like paper money.

See: https://en.bitcoin.it/wiki/Myths#Point_of_sale_with_bitcoins_isn_t_possible_because_of_the_10_minute_wait_for_confirmation

1) You could opt to trust corner-store type purchases. Could be said cost of effort for double-spend attack outweigh the benefits.
2) lazy.. see link
3) "Create a network of transaction hubs. These entities would communicate using a common API. They would float short-term loans between each other to facilitate instant transactions."
Implies a man in the middle trust based system. Could be said that negates purpose of Bitcoins which is not to rely on third trust and authorities. However I believe this can be used for appropriate applications. I believe that is the great thing about Bitcoins, trust CAN exist between parties to have beneficial outcomes.

6. While bitcoin is poorly-suited as a medium of exchange for physical commerce (point 5), it's also bad in and of itself as a medium of exchange for large transactions, since its anonymity means it's easy for buyer or seller to scam one another without a solid executed written contract, or solid third party mediator, both of which nullify the benefits of anonymity provided by bitcoin.

For example, if a third party mediator did exist that both parties agreed to trust (government? Non-profit body?) then this third party mediator could keep details of the real identities associated with the addresses being agreed to be paid/received. Both the seller and buyer trust this mediator and disclose full identity details to said mediator. Of course identities would be strictly verified. Now the mediator can interrogate block explorer to see if the funds have been transferred from the agreed paying address to the agreed payee address. Next, the mediator would interrogate the other party, for if the goods are sent, service delivered etc, which of course are thoroughly verified.

Another example, the government lets you pay your tax in BTC, and they make you disclose what address they expect to receive the BTC from, and they know exactly who you are as an individual. Now if they don't see the funds coming from the address you agreed to pay the tax, your in trouble. If you loose your wallet or whatever, a new address is associated with your identity. One flaw in this is that I read that it is only *nearly* impossible to have the same public address as someone else, implying there could be incorrect entries in regards to ambiguous ownership.

EDIT: Of course no-one wants to pay tax with or on Bitcoins lol!

I believe different layers of application can be applied to this paradigm (if one could call it that?) such as trust based transactions, e-wallets (already exist), and other appropriate applications.

[vector76]

Uhm bitcoins do have other uses outside the BTC market. You could use bitcoins simply as proof of a transaction for anything. You just correlate the bitcoin to one of the objects like say the assignment of a mortgage. The transaction data itself is what is useful.

But you only need 0.00000001 BTC to prove a transaction, so BTC are not nearly scarce enough to support a non-exchange use for notarizing transactions.  

In other words, the entire global demand for notarizing transactions will consume such a tiny fraction of the supply that the supply is "infinite" from a practical standpoint.  You would be better off charging people for the air they breathe because the supply of oxygen is technically finite.

[Bitter Ender]

To summarize, bitcoin derives its value from commodity-like properties, and is a fairly poor medium of exchange in physical or e-commerce.  It makes much more sense to me to call it a commodity.  It's the first crypto-gold in existence.

I've been thinking about this and I agree. Gold used to be money, which was used in everyday transactions. But it has long been disassociated with fiat currency which is the workaday currency. Today gold has proven to be a good long-term investment and speculative vehicle, but is useless as ordinary money.

One basic problem is volatility, gold is worth half-again what it was worth a year-ago in terms of the dollar, and also real goods. With the Bitcoin, the volatility problem is far, far worse. The vast price swings day-to-day make it impractical to price goods or services in Bitcoins. It has been an astonishingly good investment for early adopters, a pretty-good speculative vehicle, but as a medium of exchange it has very very limited applications.

[talldude]

Another example, the government lets you pay your tax in BTC, and they make you disclose what address they expect to receive the BTC from, and they know exactly who you are as an individual. Now if they don't see the funds coming from the address you agreed to pay the tax, your in trouble. If you loose your wallet or whatever, a new address is associated with your identity. One flaw in this is that I read that it is only *nearly* impossible to have the same public address as someone else, implying there could be incorrect entries in regards to ambiguous ownership.

You can't verify that a specific person sent the money to you by matching addresses. That's just the way the system works. See this discussion: http://forum.bitcoin.org/?topic=2273.0

The workaround to this problem is that the recipient sets up a new receive address for every client. That way, when money shows up in the account, the recipient knows who it's from.

[Confucius]

You can't verify that a specific person sent the money to you by matching addresses. That's just the way the system works. See this discussion: http://forum.bitcoin.org/?topic=2273.0

The workaround to this problem is that the recipient sets up a new receive address for every client. That way, when money shows up in the account, the recipient knows who it's from.

Good point, I straight away assumed the received address meant the 'senders' address, rather it is just the address those BTC were at previously.
The workaround you said is a viable idea, however I'm not sure what the theoretical limit of number of unique addresses per machine is, but I suppose for transactions like these they probably own many computers.

[Meni Rosenfeld]

The workaround you said is a viable idea, however I'm not sure what the theoretical limit of number of unique addresses per machine is, but I suppose for transactions like these they probably own many computers.

Depends only on storage space and can easily be a billion.

One basic problem is volatility, gold is worth half-again what it was worth a year-ago in terms of the dollar, and also real goods. With the Bitcoin, the volatility problem is far, far worse. The vast price swings day-to-day make it impractical to price goods or services in Bitcoins. It has been an astonishingly good investment for early adopters, a pretty-good speculative vehicle, but as a medium of exchange it has very very limited applications.

Bitcoin is volatile now because there is so much uncertainty about it, and probably because of lack of financial instruments relating to it. As it becomes more established it will be much less volatile.

[Confucius]

The workaround you said is a viable idea, however I'm not sure what the theoretical limit of number of unique addresses
Depends only on storage space and can easily be a billion.

I was thinking more in terms of how many can be generated per machine if they were created from some specific attribute. I did some research and your correct its merely a size restriction which of course is a laughable matter.

[Gabi]

Mh.. is gold a currency or a commodity?

[aleiprecht]

A currency is a government sanctioned token used as payment. As such I have to assume that Bitcoins are a commodity. On poster said it is a proof of transaction token. I guess that hits the nail on its head.

just my 0.02 btc

[evileric]

Mh.. is gold a currency or a commodity?

Easy test: Do you get any bills from any companies which are denominated in Oz of gold? No.

Are there some coins which are plated in, or made FROM gold? Yes.

Both are commodities IMHO. The volatility problem of BitCoin is a serious one.. until the market calms down to the point where coins have a relatively fixed value or appreciate at a relatively sane rate it is completely impractical to use this as a currency, much better as a medium of exchange

As for the practical applications for this kind of a digital commodity.. Vice has, and always will be the best early adopter: Drugs, Guns, Porn, Gambling. Once these guys dive in with both feet it will be fantastic and could morph into a real currency.

[talldude]

You can't verify that a specific person sent the money to you by matching addresses. That's just the way the system works. See this discussion: http://forum.bitcoin.org/?topic=2273.0

The workaround to this problem is that the recipient sets up a new receive address for every client. That way, when money shows up in the account, the recipient knows who it's from.

Good point, I straight away assumed the received address meant the 'senders' address, rather it is just the address those BTC were at previously.
The workaround you said is a viable idea, however I'm not sure what the theoretical limit of number of unique addresses per machine is, but I suppose for transactions like these they probably own many computers.

There's 26 characters in the alphabet, so that gives us 52 characters upper + lower case. Then add in 0-9 which totals 62 characters for any place in the address. The address is 34 characters long. Thus, we have 62 possibilities on 34 places, or 62^34 different possibilities of addresses (8.7*10^60). In other words, they aren't going to run out, and the chances of having two identical addresses are practically 0, even if there are billions of billions (10^18) of addresses in the wild which will take practically infinity to create (even at 1 billion addresses per second, it would take 30 years).

The workaround is the currently accepted method of making sure that the sender is the right person, and from a technical standpoint it will work for as long as BTC is around.

[cothoms]

When explaining BTC to all of my investor friends, I describe it as a crypto-commodity, for many of the reasons listed above (that, for redundancy's sake, I won't repeat).  In the end, though, potato/potahto.  Semantics aside, this is an extremely exciting idea that is beginning to catch the eye of the public.