Watching amateur finance types flail

[unk]

My view is that the money spent on "security" (mining) will closely follow the stored value of all Bitcoins.

it hasn't so far. i've explained why in other discussions, and how it could lead to exploits. the incentives do not directly align the 'security' of the network with the wealth of the network. indeed, the suggestion that economic incentives discourage attacks on the legitimate network for a block chain is perhaps the only significant flaw in satoshi's original paper outlining the design of bitcoin.

The problem with doing "useful"  work like looking for large primes is that discoveries are more unpredictable. If you reward people for doing "shares" of work, dishonest participants a can say "nope, didn't find anything" without actually doing the difficult computation.

this is, again, not a property of 'useful' work, just a property of some kinds of useful work. there is nothing magical about sha-2, and it is incorrect to suggest that cryptographic proof-of-work cannot have positive side effects. all work has side effects, some negative and some positive.

The use of hashes also guards the transaction block against corruption: a single-bit error, deliberate or not, will be detected.

there is a difference between cryptographic proof of work and integrity checking. the same technology does not need to be used for both.

The hash function also allows the difficulty to be lowered if needed. Any task involving otherwise "useful" work can be pre-computed.

again, hashing is not the only thing that allows for difficulty adjustments, and it is also not the only thing that prevents precomputation, this has been discussed time and again in the development forums.

perhaps this is too harsh, but you very much sound as if you're reaching to defend the details of the current implementation of bitcoin at all costs, without understanding them fully. this is a very common attitude in the forum, but it's inexplicable to me. if bitcoin needs blind faith to survive and to be promoted, it's already failed. i don't understand why people refuse to evaluate its costs and benefits with open eyes, to consider changes to the protocol that would improve the technology, and so forth.

for example: the future costs of transactions is potentially a considerable problem, and nothing guarantees that bitcoin will be superior to its competitors in that respect. it is an untested, empirical question. bitcoin doesn't magically prevail because of some genius in the design.

indeed, decentralisation is almost always far more expensive than centralisation. a system like bitcoin is adopted not because of cost-minimisation but because lack of trust may be desirable. i am not clear that the extreme lack of trust that bitcoin establishes is in fact desirable to most consumers, but that is the question: do the significant costs of decentralisation pay for themselves in terms of a network structure that people want?

[relative]

Let's make it simpler. What is your single best argument that proves that Bitcoin can never be used by more than 1 million people?

for what?

[phillipsjk]

perhaps this is too harsh, but you very much sound as if you're reaching to defend the details of the current implementation of bitcoin at all costs, without understanding them fully. this is a very common attitude in the forum, but it's inexplicable to me. if bitcoin needs blind faith to survive and to be promoted, it's already failed. i don't understand why people refuse to evaluate its costs and benefits with open eyes, to consider changes to the protocol that would improve the technology, and so forth.

I guess part of my attitude comes from the fact I expect Bitcoin to fail in the medium term and be replaced by something better. Monkeying with the experiment too early will change too many variables, making the ultimate collapse more difficult to interpret. I don't really expect Google and world governments to set up datacenters dedicated to mining because I expect it to fail before it replaces a major currency.

I think using the hash as proof-of-work is elegant. It is useful to tie integrity checking to proof-of-work. I also think Bitcoin is useful, even if I wouldn't store all of my savings in it: I can't use other forms of electronic payment because I don't agree to the terms and conditions imposed on them.

for example: the future costs of transactions is potentially a considerable problem, and nothing guarantees that bitcoin will be superior to its competitors in that respect. it is an untested, empirical question. bitcoin doesn't magically prevail because of some genius in the design.

I think a sleeper issue, more than computing cost, is bandwidth*. A few months ago I saw somebody on the forum from Africa saying they had cheap power, but expensive bandwidth. In North America, few people actually have a "real" Internet connection: residential ISPs say you are only allowed to use half of the connection (no server hosting). Residential and commercial bandwidth caps of 250GB/month or less may become a problem before the block reward drops again for the first time (encouraging more pooled mining).

I believe this has been discussed in the development forum as well. Maybe I should read that section more often.

Edit: Unk, in searching your posting history, I was not able to find any instances where you explain that mining capacity does not follow stored value and the security implications. The closest I have found is you saying the cost of attacking the network only goes up linearly with mining capacity.

I remember reading on the forum that mining capacity seems to have a two week lag where capacity is added to match any price increase.

*Topic: Why bitcoin cannot grow past 4 million users.

[cmh]

I'm John Nagle, the person behind Downside. Over the last decade, we predicted, well in advance, the dot-com crash (company by company), the oil spike, and the mortgage crisis. We've also explored some financial scams - Enron, Madoff, and their ilk. Downside was written up in Business Week, CNN, Fortune, etc. Our track record speaks for itself.

I've been looking at the Bitcoin world. It's amusing watching the classic forms of financial trouble happen in miniature. I have no financial position in Bitcoins, so I'm looking at this neutrally.

The whole point is that bitcoin is something new. Trying to understand it strictly in terms of cash, banking, stock market, etc. is not going to work. It's also completely unlike previous forms of digital cash, but really not very many people understand that yet. As it becomes more widely understood, more people will want bitcoins. Where will they get them? The supply is limited.

[relative]

The whole point is that bitcoin is something new. Trying to understand it strictly in terms of cash, banking, stock market, etc. is not going to work. It's also completely unlike previous forms of digital cash, but really not very many people understand that yet.

we have lots of things to compare it to, not only previous e-currencies but other monetary systems throughout history and, quite frankly, other manias.
of course bitcoin has some new aspects, otherwise we wouldn't be talking about it, but "this is entirely new you can't use any existing method of valueation or compare it to anything" just isn't an argument.

if you think it is, look up what was being said during the "new economy" era and how many "page impression"-valued companies survived.

[cmh]

The whole point is that bitcoin is something new. Trying to understand it strictly in terms of cash, banking, stock market, etc. is not going to work. It's also completely unlike previous forms of digital cash, but really not very many people understand that yet.

we have lots of things to compare it to, not only previous e-currencies but other monetary systems throughout history and, quite frankly, other manias.
of course bitcoin has some new aspects, otherwise we wouldn't be talking about it, but "this is entirely new you can't use any existing method of valueation or compare it to anything" just isn't an argument.

if you think it is, look up what was being said during the "new economy" era and how many "page impression"-valued companies survived.

Thank you for providing an example of my point.

[relative]

*lol*

impressive, really.
the fact alone that someone even tries to dispute your argument proves your argument (in your mind).
that's some self-defense you built up here.


BUY BUY BUY

[harik]

People are so stupid. No one cares about your pathetic analysis. You know nothing about this technology, and the reason for the speculation and market bumps is because people like YOU.AKA People who don't understand what this is, and will probably never will. Just keep "speculating", god knows that's what you do best.    

http://en.wikipedia.org/wiki/Tulip_mania

There's always something "new" and "it'll work this time!" about whatever bubble.  Tulips, land in florida, dot-bomb stocks, CDOs, land in florida (again, now with air-conditioning!).  The current bubble-mania is Commodities, which spiked the price of grain and oil and sparked the Arab Spring.  Following closely on the heels of food is the student loan/for-profit-college bubble which is at it's early stages.

Bitcoins are as non-bubbly because of their "technology" as petsovernight.com was.

[phillipsjk]

I plan to use Bitcoin to lower my transaction costs. Paying by mail costs about $30. It doesn't take many transactions before using Bitcoin pays for itself.

[harik]

The Mickey Mouse exchanges we have in operation right now are just not going to cut it.  The first group to make a legitimate exchange will not only greatly increase Bitcoins chances of survival but likely make a nice profit as well.

Nobody is going to make a professional exchange for BTC.   At the hype-peak of ~33USD the entire "market cap" for BTC was under 200 million dollars.   That's less than the commission a goldman-sachs type institution makes on an average deal.

All the pro-markets have billions or trillions in volume.   With the micro-scale of BTC, you're lucky to get Magic: the Gathering nerds to break financial laws to exchange for you.   I've yet to see anything AT ALL in the entire bitcoin ecosystem that isn't rank-amateur.   From the hilariously basic scams to the mining pools to the exchanges, it's all done by people with no experience in these things.   Even the design of BTC itself suffers from serious naivety in financial matters - an inherently deflationary system can't grow.   Even if (and it's a big if) the exchanges manage to keep going, as the mining rewards dwindle to nothing over the next two years and more and more BTC is lost to deleted wallet.dat files, where is the currency going to come from for new entrants to the market?  Every new good will be chasing scarcer and scarcer BTC.

 

[cmh]

*lol*

impressive, really.
the fact alone that someone even tries to dispute your argument proves your argument (in your mind).
that's some self-defense you built up here.


BUY BUY BUY

You got me there!    I didn't realize the circle I'd gone in.

[relative]

All the pro-markets have billions or trillions in volume.   With the micro-scale of BTC, you're lucky to get Magic: the Gathering nerds to break financial laws to exchange for you.   I've yet to see anything AT ALL in the entire bitcoin ecosystem that isn't rank-amateur.   From the hilariously basic scams to the mining pools to the exchanges, it's all done by people with no experience in these things.   Even the design of BTC itself suffers from serious naivety in financial matters - an inherently deflationary system can't grow.   Even if (and it's a big if) the exchanges manage to keep going, as the mining rewards dwindle to nothing over the next two years and more and more BTC is lost to deleted wallet.dat files, where is the currency going to come from for new entrants to the market?  Every new good will be chasing scarcer and scarcer BTC.

let's leave the inflation-deflation debate out of this.
not beleaving in the deflationary-spiral BS isn't amateur. the rest of it is amateur, yes, but I don't hold that against bitcoin either.
my point is rather that I don't see a way it can grow anywhere near the order of magnitude the current trade price and monetary supply growths implies.

btw, a constant monetary base doesnt mean no inflation. compare M3 to monetary base in other monetary systems.
in a "grown-up" bitcoin economy there will be a (probably growing) multiplier, too.

[unk]

I hope you are smart enough to see that you contradicted yourself in your own post...peak...deflationary system can't grow. If something can't grow, then it can't have peaks. Empirical evidence from Bitcoin's history shows that a deflationary currency can grow...pretty fast even.

note that bitcoin at present is not deflationary. it's quite inflationary, with more bitcoins being produced per bitcoin than dollars, pounds, or any other major currency. that inflation won't stop for some time.

(as i've described elsewhere, both the 'deflationary spiral' crowd and the austrian crowd are making significant mistakes. i'm just pointing out something narrower here because too many people speak as if the operation of the bitcoin market, or the speculative gains or losses they've received, are somehow tied to the operation of deflation. they are not.)

[Nagle]

The Mickey Mouse exchanges we have in operation right now are just not going to cut it.  The first group to make a legitimate exchange will not only greatly increase Bitcoins chances of survival but likely make a nice profit as well.

I've yet to see anything AT ALL in the entire bitcoin ecosystem that isn't rank-amateur.

I tend to agree.

That's not the real problem, though. The real problem is that almost nobody is actually using Bitcoins as a currency. The speculators are playing a zero-sum game, and there's little motivation for anyone to use Bitcoins in a payment system. In fact, the volatility from speculation is a dis-incentive for merchants to accept Bitcoins.

If real-world merchants were to accept Bitcoins, they'd need volatility protection. This could be done via options, but that would probably make the speculation problem worse. A module for a shopping cart program which allowed quoting prices in Bitcoins, based on the current exchange prices plus a risk factor computed from volatility, could work. Bitcoin prices would be a little higher than other prices, and if and when the volatility came down, the spread would narrow. This would result in merchant pressure for market stability.

If there was some killer thing you could buy with Bitcoins, this might be worth doing. So far, there's nothing for sale for Bitcoins that anybody really wants badly. (Except maybe on Silk Road).

[bitcoinBull]

I tend to agree.

That's not the real problem, though. The real problem is that almost nobody is actually using Bitcoins as a currency. The speculators are playing a zero-sum game, and there's little motivation for anyone to use Bitcoins in a payment system. In fact, the volatility from speculation is a dis-incentive for merchants to accept Bitcoins.

BTC is like any speculative asset:  Its only zero-sum if it goes back to zero.  If it stays high its considered wealth creation, not zero-sum.

I agree with you that merchants are at a disadvantage.  That's why its obvious that bitcoin, a floating currency, will probably remain as a speculative value storage and transfer system more akin to gold and silver.  Also plainly clear that merchant activity is not the economic activity supporting the price of bitcoin,  but the exploding volume of trading which occurs on the exchanges.

Maybe it will also succeed along the lines of a conventional currency or micropayments system, maybe not.  But a lack of merchants says little about the health of the economy.  The growth in volume of trading on the exchanges does.

[chiropteran]

OP, can you clarify the following quote?

"When Ponzi schemes crash, they crash fast, and they crash all the way."

Bitcoins "crashed" from 30 down to $12, and then back up to $18.  How does that fit in with "they crash all the way".

Later, mtgox hack/faulire occured.  BTC "crashed" again down to $14~ on tradehill, but worked back up to around $16.  How does that fit with the quote?

It doesn't seem to me that BTC have crashed fast, or all the way.  Either they are crashing really really slow, or they are not crashing at all, or they are not crashing "all the way".

 Based on your quote, BTc can't be a ponzi scheme, since it's crash didn't follow the standard model for ponzi scheme crashes.

[lonestranger]

I'm John Nagle...

So what's wrong in the Bitcoin world?

First, it...screams "bubble" to anyone who's seen one. Bear in mind that the Bitcoin system generates no revenue. All funds must come from new investors.

Bitcoin is not a company or a stock so it never will "generate revenue" and will always fall short (for you) in this respect.

Second, Bitcoin is supposed to be a currency, but it's actually a speculative vehicle. If Bitcoin were a successful currency, there would be many merchants using it for small transactions, with perhaps some speculation on the side. In practice, the speculation dominates.  This is the real problem with Bitcoin.

You are correct. The excitement in this teeny, tiny micro-community is due to the anticipation of bitcoin's use as a currency.  There is risk in speculating that it will be adopted as a currency but there could be huge payoff too!  Your criticisms of bitcoin seem based more on analyzing charts than on appreciating its fundamentals.

Bitcoin is the first of its kind.

If you read this very good article you will learn that "Bitcoin isn't just a currency but an elegant universal solution to the Byzantine Generals' Problem[1], one of the core problems of reaching consensus in Distributed Systems." The "useless work" of mining (solving computations) is actually at the core of what enables bitcoin to "live out on the network" and maintain the fidelity of its ledger. It is a prototype of many decentralized applications that will now be forthcoming.

Bitcoin is (in theory) beyond the control of governments, so it can't be manipulated and inflated or killed by them. Unlike your other examples it is decentralized (as mentioned), and it is (or can be) private so it can move across police state or capital-controlled borders. 

Those are some of its technical points, but there is a certain morality at play here too. The invention of bitcoin is the response of humanity to the economic system that we were born into and which we now understand oppresses us and always has. A tiny financial class benefits enormously from the present system and seems to be so arrogant that they no longer attempt to hide their thefts from us, their victims. Something simply has to be done. So, you can be "amused" watching us little people struggle but what kind of man are you? What are you doing to right the wrongs of this parasitic class? Is the morality of an investment something you consider for your clients or do you have them invested in oil companies, Monsanto, uranium miners, defense companies, etc.?

[finnthecelt]

Bitcoin is (in theory) beyond the control of governments, so it can't be manipulated and inflated or killed by them. Unlike your other examples it is decentralized (as mentioned), and it is (or can be) private so it can move across police state or capital-controlled borders. 

Those are some of its technical points, but there is a certain morality at play here too. The invention of bitcoin is the response of humanity to the economic system that we were born into and which we now understand oppresses us and always has. A tiny financial class benefits enormously from the present system and seems to be so arrogant that they no longer attempt to hide their thefts from us, their victims. Something simply has to be done. So, you can be "amused" watching us little people struggle but what kind of man are you? What are you doing to right the wrongs of this parasitic class? Is the morality of an investment something you consider for your clients or do you have them invested in oil companies, Monsanto, uranium miners, defense companies, etc.?

Very well said, sir. Very well said. Many have confused the making of money as being a valid replacement for morals and ethics.

[lonestranger]

OP, can you clarify the following quote?

"When Ponzi schemes crash, they crash fast, and they crash all the way."

Bitcoins "crashed" from 30 down to $12, and then back up to $18.  How does that fit in with "they crash all the way".

Later, mtgox hack/faulire occured.  BTC "crashed" again down to $14~ on tradehill, but worked back up to around $16.  How does that fit with the quote?

It doesn't seem to me that BTC have crashed fast, or all the way.  Either they are crashing really really slow, or they are not crashing at all, or they are not crashing "all the way".

 Based on your quote, BTc can't be a ponzi scheme, since it's crash didn't follow the standard model for ponzi scheme crashes.

Hold on here. An immediate crash could occur if, for example, a flaw were found in the fundamental bitcoin logic such that it could be hacked. People would stampede out the door.

[Nagle]

Second, Bitcoin is supposed to be a currency, but it's actually a speculative vehicle. If Bitcoin were a successful currency, there would be many merchants using it for small transactions, with perhaps some speculation on the side. In practice, the speculation dominates.  This is the real problem with Bitcoin.

You are correct. The excitement in this teeny, tiny micro-community is due to the anticipation of bitcoin's use as a currency.  There is risk in speculating that it will be adopted as a currency but there could be huge payoff too!  Your criticisms of bitcoin seem based more on analyzing charts than on appreciating its fundamentals.

Bitcoin is the first of its kind.

Actually, it's the third or fourth. Digital era predecessors in pseudo-currencies include Beenz, DigiCash, and frequent flyer miles.  Going back further in history, look into how the house of Thurn und Taxis got rich after inventing postage stamps. (They also built and ran the postal system).

The main new thing about Bitcoin is the generation mechanism.  DigiCash was equally anonymous, and had a comparable anti-double-spending mechanism. But it used a central "bank" to keep the transaction list.

It's also an illusion that Bitcoin isn't centralized. Some of the policy, such as transaction costs, is embedded in the client. The constants that drive the coin generation rate were set centrally at launch, and are embedded in the early coins. Those locked-in policies favored early adopters and set a ceiling on the number of Bitcoins which is not that far away.

The current model for Bitcoin exchanges is over-centralized, because the "exchanges" also act as depository institutions, and are sluggish about handling withdrawals. In the real world, a broker can execute a trade on any exchange, and the exchange can't tie up funds. Even limit orders are cross-exchange now; this is done through a "consolidated limit order book", where all the exchanges work off the same limit orders.

This isn't a magical new development. It's a minor advance over previous technology.