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Author Topic: Putting bitcoins into perspective  (Read 651 times)
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July 06, 2011, 12:01:35 AM

Today's spectacular market volatilty at mtgox has put me in serious thinking mode about bitcoins. Initially I thought bitcoins were a sure asset, and doubted even its feasability as a currency, reasoning that people would hoard it mercilessly because of its theoritical deflationary nature. Truth is, bitcoin is brilliantly thought out as fundamentally just a currency. Bitcoins are nothing more than certificates that are proven true and confirmed when transacted upon. Sure you can store a whole bunch of these "certificates" for the long term but don't expect them to be surefire "investments".

Bitcoins true utility is for what it was designed for: anonymous no-middle-man transactions. When Bob wants to buy from Alice, he gets a certificate which Alice accepts as payment. Then Alice trades back the certificate. It would be better if there were a lot more people using it for this purpose than just hoarding..

As to mining, I believe it is a foolish proposition to try to make money just mining bitcoins. The harder you mine the less profitable it becomes to mine because of the automatic difficulty kicking in, making your investments in mining hardware futile. The bitcoin system rewards people who have computers on its network for its own purpose, but limits this reward when people are just hoarding coins and not paying the transaction fee when trading (at this stage)..

Be aware that there is also a negative feedback mechanism that kicks in when the price of bitcoin crashes like today: it makes mining bitcoins unprofitable, so it in turns causes miners to plug off their mining machines which in turn takes more time to produce the new coins which in turn causes the difficulty to lower making new bitcoins even less valuable because they are now easier to mine..

Conclusion: As long as there isn't a real thriving marketplace of actual goods and services trading in bitcoins willing to put in at least 0.1% of the transactions, there isn't going to be a stable price of BTC vs other currencies. If you are going to "invest" in mining bitcoins with hardware its because you believe in the system's long term usefulness and not for the quick buck. Personally I would only do this if I already have idle computing power. Likewise if you are going to "invest" in saving bitcoins its because you believe in its long term usefulness too and I mean looong term, eg years from now.

There are several different types of Bitcoin clients. Server-assisted clients like rely on centralized servers to do their network verification for them. Although the server can't steal the client's bitcoins directly, it can easily execute double-spending-style attacks against the client.
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July 06, 2011, 04:17:17 AM

I consider Bitcoins a short-term to intermediate-term investment. There needs to be more liquidity in the market for me to consider Bitcoins a long-term investment and feel safe about it at the same time. But I do think the potential is there.
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July 06, 2011, 04:37:06 AM

Though not perfected, I still back Bitcoin in long term for it is just a better solution for people to make transactions, and that will hold true I think.  Security needs to become a personal thing, and people need to stop worrying so much about the program.  The exchanges however, well it would be nice if a big name someone stepped in on just this one aspect.

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