The Next Step for Bitcoin: From Mining to Transaction Economy

[swusc2]

Some inferences made:

Miners control the majority of Bitcoins and the large majority of people involved in the Bitcoin community are strictly Miners looking to exchange Bitcoins into $

As it is now, the infrastructural growth of Bitcoin is a lot slower than the growth based on the number of people attracted to Bitcoin through mining. In this case, the value of the Bitcoin is substantially inflated since it isn't backed by stability or businesses but instead by the mining community size. As mining difficulty increases and the speculation inflated prices which only temporarily keeps mining attractive decreases, the increase in difficulty exceeds profitability and miners cash-out, the value of Bitcoin is going to substantially drop to meet the infrastructural value, which is considerably less.

A further issue that I see occurring is *if* this miner cash-out does occur, the high number, low value of Bitcoins congregate towards smaller groups of people, i.e., optimistic speculators, thereby further reducing the usability and value of Bitcoins. This makes rebounding considerably harder since the influx of new users will end up with a disproportionately less amount of currency compared to the people left from previous crashes.

Right now there are way too many people and not enough businesses to justify 6.6 million Bitcoins being at an exchange rate $16-17 per. Right now the great majority of value in Bitcoin resides in the ability to exchange it for $s and speculation.

We obviously need entrepreneurs, i.e., the people with lots of Bitcoins/Money/Connections/Programming ability to start up more Bitcoin related businesses so that infrastructural growth somewhat keeps up with popular exchange inflation. If the disparity between the two reaches some critical point where the people start moving away from Bitcoin, i.e. mining costs exceed profits, we will see more large crashes, such as the $30->$10 which occurred in just a few days, to come. If the parity increases to such a point where the difference in growth is in orders of magnitude, the proceeding crash may just set the entire market back.

"The Important Things to Take Away"
What we need right now is developers to make some very very user friendly sites, i.e. something in the likeness of Ebay in combination with escrow service that provides both buyer and seller protection (since Bitcoin makes punishing scammers considerably harder). Once people have a concrete and reasonably safe place to sell and exchange individual goods, we will see more large legitimate businesses spring up, where escrows will not be necessary for them and quality control and reputation will prevent the majority of scamming.

I'd like too but I neither have the money nor the programming experience or connections to pursue such an endeavor. Although I would greatly enjoy providing a developer with ideas.

People pay for convenience and safety! Right now Bitcoin is heading towards being a transaction based currency with no reasonable means of transacting.

[Atom]

Extremely well put, I could not agree more - We discuss this at length during todays episode of BitTalk with Atlas & Atom, and the flat reality is more and more goods and services are being offered for BTC, but there seem to be few takers.   If you've got thousands of bitcoins, help out the movement and go drop 10BTC at www.bitcoinclassifieds.net or one of the auction sites.

[swusc2]

Extremely well put, I could not agree more - We discuss this at length during todays episode of BitTalk with Atlas & Atom, and the flat reality is more and more goods and services are being offered for BTC, but there seem to be few takers.   If you've got thousands of bitcoins, help out the movement and go drop 10BTC at www.bitcoinclassifieds.net or one of the auction sites.

Thanks! Bitcoin Classifieds is nice but it could be better. The issue is still security, and indirectly related convenience. Bitcoin Classifieds is basically Craigslist; on the security point, unless you do the transaction physically, there is no direct form of security. And on the convenience side, to have that security you have to go to a third party escrow.

For example:

If there was say, "Amazon like site", where you can set up e-shops and sell products through the site. People deposit Bitcoins into the site, similar to an exchange and they use that credit to buy things that people are selling. This gives effectively just as much security as Ebay or Amazon does, although you still have to have trust in the website. It could be free to deposit and withdraw Bitcoins from the site and just charge maybe "X"% or a flat rate for when a purchase is done just for the security. For example, I can say for most people trust large, easy to use exchanges rather than attempting to sell Bitcoins individually. If you don't it at least should be an option just how Craigslist is an alternative option to Amazon and Ebay.

Some requirements:
-It is easy to navigate, i.e., good categories (looks nice also)
-Escrow similar protection integrated, i.e., depositing money before being able to buy, seller review system
-Well advertised
-Developers would have to be reliable members of the community

[Atom]

Lets do it then, pick your "dream team" off the forum and lets see if we can get something going

[enmaku]

Well, I'm working on another project right now (writing my own exchange) but when I'm done with it, I'll have re-purposable code for a ridiculously high-security web site capable of moving BTC in and out and tracking financial transactions to a much higher level than most merchants require. I could certainly re-use some of that code for a second site and it sounds like a good idea. I'm still quite a ways out from being done with that first project though... We'll see

I'm also more than happy to work with others, as long as they don't mind ASP.NET/C#; my PHP is *not* strong.

[tanerlorn]

You guys worry far too much about people using BTC to buy goods. Its not suprising to me at all that not many people are spending BTC. Besides a .02 donation to you, Atom, I haven't spent anything recently. Here is a great quote from bitcoinbull,

You've already assumed that people buy BTC in order to buy real goods.  They don't.  We know that because the volume on the exchanges (who trade BTC for USD etc) is far greater than the volumes merchants see (who trade BTC for goods).

So we know that most people buy BTC to store and transfer value, not goods per se.  They do so because bitcoin has many advantages over USD and gold (digital, decentralized, etc).  I agree it carries more risk, but with that risk also comes reward Smiley.  Bitcoin is like any other speculative asset (which can include any investment: currencies, real estate, commodities, tulips, etc) and is certainly one of the riskier (since it is newer).

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.  I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

Ask the financial industry if speculation isn't a "real economy".  Or ask a homeowner burnt buy the mortgage crisis.  Bitcoin is a very real economy of a digital good and could be sustainable for as long as we live in a digital age.

[swusc2]

You guys worry far too much about people using BTC to buy goods. Its not suprising to me at all that not many people are spending BTC. Besides a .02 donation to you, Atom, I haven't spent anything recently. Here is a great quote from bitcoinbull,

You've already assumed that people buy BTC in order to buy real goods.  They don't.  We know that because the volume on the exchanges (who trade BTC for USD etc) is far greater than the volumes merchants see (who trade BTC for goods).

So we know that most people buy BTC to store and transfer value, not goods per se.  They do so because bitcoin has many advantages over USD and gold (digital, decentralized, etc).  I agree it carries more risk, but with that risk also comes reward Smiley.  Bitcoin is like any other speculative asset (which can include any investment: currencies, real estate, commodities, tulips, etc) and is certainly one of the riskier (since it is newer).

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.  I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

Ask the financial industry if speculation isn't a "real economy".  Or ask a homeowner burnt buy the mortgage crisis.  Bitcoin is a very real economy of a digital good and could be sustainable for as long as we live in a digital age.

True but you have to consider this "I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating".

If Bitcoin is just a manner to store money and act as an in-between for transaction, then Bitcoin will never be an independent economic system but instead just the next Paypal.

[tanerlorn]

then mission fucking accomplished.

[Hunterbunter]

You guys worry far too much about people using BTC to buy goods. Its not suprising to me at all that not many people are spending BTC. Besides a .02 donation to you, Atom, I haven't spent anything recently. Here is a great quote from bitcoinbull,

You've already assumed that people buy BTC in order to buy real goods.  They don't.  We know that because the volume on the exchanges (who trade BTC for USD etc) is far greater than the volumes merchants see (who trade BTC for goods).

So we know that most people buy BTC to store and transfer value, not goods per se.  They do so because bitcoin has many advantages over USD and gold (digital, decentralized, etc).  I agree it carries more risk, but with that risk also comes reward Smiley.  Bitcoin is like any other speculative asset (which can include any investment: currencies, real estate, commodities, tulips, etc) and is certainly one of the riskier (since it is newer).

But the speculation is not that people will want bitcoins as collector items or to buy alpaca socks or virtual avatars or anything else.  I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating.

Ask the financial industry if speculation isn't a "real economy".  Or ask a homeowner burnt buy the mortgage crisis.  Bitcoin is a very real economy of a digital good and could be sustainable for as long as we live in a digital age.

True but you have to consider this "I speculate mainly that people will want bitcoins to store or transfer value not seizable by a central authority (which is to say that bitcoin is secure), and that others will continue speculating".

If Bitcoin is just a manner to store money and act as an in-between for transaction, then Bitcoin will never be an independent economic system but instead just the next Paypal.

Interesting. It's quite possible this may be the true and only strength of bitcoins. Purely as a wealth holder and speculation tool, and nothing else. A p2p swiss bank (with a stealable wallet ftw). I agree that security is the next step for better bitcoins, but I'm also starting to believe that will be where the experiment predominantly ends. The list of problems with bitcoins as a trade tool is as long as my arm - most of them remarking on the attractiveness of hoarding over trading stifling actual trade.

I'm actually starting to think the best economic trade currency is something that's *not* valuable at all, except as limited as time.

[Atom]

Frankly that's a couple depressing responses.

[swusc2]

Frankly that's a couple depressing responses.

Honestly just let them believe what they believe. There will always be people who just want to sit on their money and be idle. As long as there is opportunity to make money, entrepreneurs will see to it that they do make it and when the people sitting on their butts realized they missed out, it's all the proof they will need that they were wrong.

[lemonginger]

why depressing?

people seem to think bitcoins need to displace USD to be a "success". Bitcoins can be successful if they are only essentially a floating exchange rate used to both store value and transfer money and picked up by the industries that need it. You don't ever need to be able to spend bitcoins at the supermarket for them to be useful.

[swusc2]

why depressing?

people seem to think bitcoins need to displace USD to be a "success". Bitcoins can be successful if they are only essentially a floating exchange rate used to both store value and transfer money and picked up by the industries that need it. You don't ever need to be able to spend bitcoins at the supermarket for them to be useful.

Now the issue is if it potentially can why not try? Honestly the only responses so far is it's good as it is and I'm too lazy.

A success is what you want it to be. If you want it to be $16 and have an active community of 40000 sure you are right it is a success. Other people on the other hand have bigger goals.

[tanerlorn]

I am just saying, a LOT of people who have BTC right now are the type of people who want to store wealth. These people didn't get wealth by buying overpriced goods from inept merchants that may or may not be trusted by the community.

So don't be surprised if you start BitAccordions.com and have to shut down because of lack of demand.

[Hunterbunter]

Frankly that's a couple depressing responses.

Oh dear.

I haven't given up hope in BTC completely, but there are some fundamental issues that need to be overcome that aren't built into the bitcoins system by its designer. For example: how do you convince people that they only need 0.2BTC to live comfortably for the rest of their lives (which is true in a world used currency of btc)? How do you convince them to spend everything above this amount if they want their BTC to be worth *anything* (especially when I know that if others spend their money first, I benefit). If you can do that through persuasion, there's no reason to be depressed at all.

I'm not completely sure what santoshi's intention was with bitcoins - a store of wealth, or an actual currency. He's designed a store of wealth first, and currency second with the way it's limited (21M max) and mined (like gold).

The two things he addressed are: A digital transaction record that is difficult to control/shut down, and p2p hashing to create currencies and manage networks, which both excellently lend to stores of wealth.

Those are what bitcoins have given us, which are two stellar things imo, but because there is no inconvenience storing them (other than wallet security), their value is too high to trade. "I will get rid of my other stuff before I get rid of this" would be a common utterance in the minds of many, both now and in the future. The interesting thing about the Keysian way of thought is that it actually achieves greater economic activity (I don't want to hold onto $$), but the problem is it too easily disguises the tax on trade made by the controllers of currency, which is why everyone not in control hates it.

Fundamentally, a currency for trade will represent the underlying exchange of good, or promise to pay. Bitcoins are a gold bar, when trade without direct exchange of goods (barter) requires nothing more than an IOU. They are completely different things, and money is an IOU which can be traded in lieu of a good of value, but everyone agrees they can use them in the future ("backed by govt"). Everyone with bitcoins now, has essentially earned them without earning them in the traditional sense (working for them). Why would anyone pay them their own work for that?


PS Does anyone else find it ironic that this forum considers the word bitcoin to be incorrectly spelt?

[Nagle]

You guys worry far too much about people using BTC to buy goods.

If people aren't buying goods and services with it, it's not a currency. It's only a pyramid scheme.

[andes]

You guys worry far too much about people using BTC to buy goods.

If people aren't buying goods and services with it, it's not a currency. It's only a pyramid scheme.

People are not buying goods and services with gold, ergo gold it is a pyramid scheme too. So what?

You cannot send gold over the internet though, so bitcoins has more potential to become a currency for goods and services.

[Hunterbunter]

You guys worry far too much about people using BTC to buy goods.

If people aren't buying goods and services with it, it's not a currency. It's only a pyramid scheme.

People are not buying goods and services with gold, ergo gold it is a pyramid scheme too. So what?

You cannot send gold over the internet though, so bitcoins has more potential to become a currency for goods and services.

they used to, though, when it wasn't hoarded.

[swusc2]

Frankly that's a couple depressing responses.

Oh dear.

I haven't given up hope in BTC completely, but there are some fundamental issues that need to be overcome that aren't built into the bitcoins system by its designer. For example: how do you convince people that they only need 0.2BTC to live comfortably for the rest of their lives (which is true in a world used currency of btc)? How do you convince them to spend everything above this amount if they want their BTC to be worth *anything* (especially when I know that if others spend their money first, I benefit). If you can do that through persuasion, there's no reason to be depressed at all.

I'm not completely sure what santoshi's intention was with bitcoins - a store of wealth, or an actual currency. He's designed a store of wealth first, and currency second with the way it's limited (21M max) and mined (like gold).

The two things he addressed are: A digital transaction record that is difficult to control/shut down, and p2p hashing to create currencies and manage networks, which both excellently lend to stores of wealth.

Those are what bitcoins have given us, which are two stellar things imo, but because there is no inconvenience storing them (other than wallet security), their value is too high to trade. "I will get rid of my other stuff before I get rid of this" would be a common utterance in the minds of many, both now and in the future. The interesting thing about the Keysian way of thought is that it actually achieves greater economic activity (I don't want to hold onto $$), but the problem is it too easily disguises the tax on trade made by the controllers of currency, which is why everyone not in control hates it.

Fundamentally, a currency for trade will represent the underlying exchange of good, or promise to pay. Bitcoins are a gold bar, when trade without direct exchange of goods (barter) requires nothing more than an IOU. They are completely different things, and money is an IOU which can be traded in lieu of a good of value, but everyone agrees they can use them in the future ("backed by govt"). Everyone with bitcoins now, has essentially earned them without earning them in the traditional sense (working for them). Why would anyone pay them their own work for that?


PS Does anyone else find it ironic that this forum considers the word bitcoin to be incorrectly spelt?

The idea is that Bitcoin as a currency is just a medium barter good that is commonly used to barter. For example: if you trade gold for a bike, it is a lot easier to sell that bike for gold and then buy bread, than it is to trade a bike for bread. For someone who doesn't want Bitcoins for instance and only wants a bike for bread, it is worth nothing, but as long as it is widely used, is now worth something to the person who wants a bike for bread because it allows him to get it easier though a medium of exchange. The acceptance of medium of exchange is just based on the widely accepted use of that medium. The value of the medium is based on the number of people who agree to use it and other infrastructure such as the estimates worth of the economy.

And about the idea that people won't spend Bitcoins because if other people spend it, its value increases: it's just a social contract that people inherently make with any system. Otherwise no one would sell Bitcoins on exchanges and people would just hoard US dollars and never spend them. The issue is if no one spent anything then the value would never increase, in the worst case scenario someone breaks. And if anything if you start using the medium of exchange to start a business that makes money, it generates increase in value buy spending medium.

For something to have value it either has to be rare (gold) or almost universal (US Dollar). Gold was used to as money once because it is accepted as the "best" method for exchange, then the supply couldn't meet the amount to allow it to be more widespread method of exchange. Bitcoin on the other hand can be divided, although maybe at .0000000000000000000001 Bitcoins per square mile of land will not be the best currency because it would be just as hard to use as a single gold atom. Either it gets replaced by another currency as paper money replaced gold or Bitcoin increases the number of coins sooner or later. But that is just how goods work.

The thing to get out of this:
Whether or not Bitcoin becomes more of a transaction currency is based on whether or not the population using Bitcoin grows. And starting businesses that accept Bitcoin makes Bitcoin more accessible to people thereby increasing the number of people that are willing to consider using it.

[andes]

but because there is no inconvenience storing them (other than wallet security), their value is too high to trade. "I will get rid of my other stuff before I get rid of this"

You cannot understand bitcoins isolated from its context. This is a typical mistake I see over and over in this forum. Most people are so corrupted by the fiat monopolic currency mentality, that they cannot see beyond that reality.

Bitcoin will not grow in value for ever, that is impossible in a free market. If the bitcoin concept prooves to be succesful, many other similar crypto currencies will come along. As long as there is enough incentive to mine, there is no problem for other currencies to come along. Of course right now nobody knows if bitcoin will last, so no serious contender has come along yet. But expect more currencies (wich means more crypto currency supply) will come along in a not very distant future. As there is more competition and supply, bitcoin price will eventualy drop or become stable.

Bitcoin is an experiment in free markets; bitcoin and its philosophy are inseparable. You cannot understand one, without the other. If you see bitcoin through the lens of a monoplistic currency (that has to dominate the whole economy), you will invariable come to false conclusions. Instead, if you see bitcoin in the context of free market in currencies, you will start think more clearly.