Pitfalls of Bitcoin

[MountainMan]

I see several pitfalls in the Bitcoin concept. The big one is the lack of stability in relative value. I have faith in the durability and stability of the BitCoin network in the long run. I'm just wondering how it will surpass the volatility and uncertainty inherent in being tied to an alien market.

Because of the nature of the internet and the way people are using BitCoin right now, we see BTC pegged to the exchanges as the primary measure of value. Currencies should, in my view, be pegged to markets. A set of transactions creates a basis for measuring value. I buy your pizza each week at the rate of 1 BTC per week, and thereby establish the cost of your pizza as 1 BTC and the value of 1 BTC as 1 pizza. The value of the BTC is defined by the pizza market. The pizza market, of course, is going to be valued differently by different currencies, thereby defining the rates of exchange for all three.

The problem with the BTC exchanges is the fact that they abstract the currency away from its native market. This means that the BitCoin value is being governed by the market of another currency... currently, I believe, the USD. It's not being measured in pizzas or gold or hours worked. It's being measured in "how many suckers can I get to sell at $.5 and buy at $10."

Obviously this will change over time as more people begin to use BitCoin and more wealth is defined in terms of its value in the BitCoin network. The problem is, how do you get through the USD-BTC interregnum?

To put it simply, why would anyone use BTC as a currency when it's currently in the role of a commodity? If someone does, they will probably lose out on the value of their bitcoins as a commodity, even if the price is fair relative to the exchange rates at the time. That's a negative experience likely to be encountered by a majority of users until BTC stabilizes.

The second aspect is this: why would anyone ever stop using bitcoins as a commodity? Right now, it's a measure of how much the speculators are gambling, rather than a measure of value related to commerce. The BTC network needs to determine its own market value, rather than tuning in to alien markets.

Is there a way to manage valuation of bitcoins in a measured, predictable way?

The only solution I see is to somehow draw out transactions over a period of time, during which changes in value (either in pizza ingredients or BTC valuation) are averaged or mitigated somehow, resulting in a fair exchange of value... I get good pizza at a fair rate, you get a fair profit, even if the exchange rate goes nuts.

The point of this all is: buying a pizza for 10000 bitcoins is absolutely nuts when just a little while later bitcoins are valued at over $10USD. Unless that pizza is made of tiger meat pepperoni and the tears of angels, there was definitely a huge disparity in the exchange, and this disparity is a major pitfall for the Bitcoin network as a whole.

Bitcoins have intrinsic value. They're secure, pseudo-anonymous, and convenient. You aren't paying a middleman, you aren't gambling that the buyer's payment might get refunded and you'll never see your product or your money ever again. The features built into the system speak for themselves.

I think that those things create value, and alongside the cost to produce, with a healthy (bitcoin) market, should combine to create a conventional BTC value outside of its relationship to the USD or other traded currencies.

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[Duffman]

[nitpick]

Bitcoins have intrinsic value.

no, they don't.  in a different thread I said they didn't have intrinsic value 'cause they were unnatural, but then I thought of radioactive things and changed my reasoning to it being 'cause bitcoins are imaginary.  imaginary things have no intrinsic value.[/nitpick]

[Grant]

no, they don't.  in a different thread I said they didn't have intrinsic value 'cause they were unnatural, but then I thought of radioactive things and changed my reasoning to it being 'cause bitcoins are imaginary.  imaginary things have no intrinsic value.

Yes they do, read my signature.

[Duffman]

Yes they do, read my signature.

The utilization of money to create money through economic activity is the intrinsic value of money.

utilization is extrinsic.

[ChloeST]

bitcoins are not imaginary, you can imagine all the fake bitcoins you want, but they will never be useable in a transaction

[Duffman]

bitcoins are not imaginary, you can imagine all the fake bitcoins you want, but they will never be useable in a transaction

why would I imagine fake bitcoins?, I need real ones dammit.

[Grant]

utilization is extrinsic.

No, because it is this very utilization that is the primary use of money that's why it is intrinsic. Many people confuse, in equities the terms: "Book-value" and "intrinsic value". In currencies this same confusion is very existent:

"I don't like bitcoins because they're not backed by anything"

That's similar to saying:

I don't like tech stocks, because they have very low Book-value (measured in tangible assets on book) compared to market value, they're virtually not backed by anything.

Thus, a stocks intrinsic value is the managements ability to utilize capital to maximize shareholder value with as little captial and assets as possible, rather than looking at current "assets under management", likewise a currencys intrinsic value is "the utilization of it to do business" rather than looking for either "tax payers or commoditys to back its liquidation value".

[Duffman]

No, because it is this very utilization that is the primary use of money that's why it is intrinsic.

no utilization, no value.  it is an extrinsic value.  and I do not dislike bitcoins because 'they're not backed by anything' btw.  I'm not gonna keep going in this circle, go ahead and post the same thing again if you want.

[Grant]

no utilization, no value.  it is an extrinsic value.  and I do not dislike bitcoins because 'they're not backed by anything' btw.  I'm not gonna keep going in this circle, go ahead and post the same thing again if you want.

I dont plan to post it anymore times. Other than i agree with you "No utilization = no value", to me its the utilization that holds the true value.

[DasDing]

All value is extrinsic, any perceived intrinsic value is a result of cultural bias and ideology.

[MountainMan]

Ok, so the use of BitCoin has intrinsic value (the aforementioned security, etc.) Back on topic maybe?

[Donald_Norman]

Bitcoins have intrinsic value if anything else does. It's properties are advantageous

[MountainMan]

Ok, well and thoroughly derailed.

http://en.wikipedia.org/wiki/Intrinsic_theory_of_value
http://en.wikipedia.org/wiki/Intrinsic

Such that the features of the BitCoin system allow a currency unit to be traded securely and conveniently, with various and sundry positive side effects, and such that those features are a valuable, inherent, and essential part of the BitCoin system, BitCoin has intrinsic value.

If you want to argue the nihilistic point of view or get into some sort of solipsistic argument in which nothing external can have intrinsic value, then please... start a new thread.

Let's try to get back to what BitCoin can do to get back to being a currency, rather than primarily a commodity? I'd find that infinitely more interesting.

[Not Drinking The Kool-Aid]

I'll keep this short. I think you are deeply confused.

"I think that those things create value, and alongside the cost to produce, with a healthy (bitcoin) market, should combine to create a conventional BTC value outside of its relationship to the USD or other traded currencies."

No matter *how* you define BitCoin (asset, commodity, currency, or total BS), it's always going to have some value relative to other currencies, assets and commodities. I would argue the correct value is 1BTC=$0.

If you're imagining that it will become the primary measure of value on Earth (the way the dollar is now, for most people), you need to put down the bong and back away from your computer before you damage yourself financially.

[repentance]

Let's try to get back to what BitCoin can do to get back to being a currency, rather than primarily a commodity? I'd find that infinitely more interesting.

People are going to keep trading it as a commodity for as long as doing so returns more value than spending it as a currency.  Even when there are many more goods and services available to spend Bitcoins on, it will often make more sense to purchase them using hard currency than to buy them with Bitcoins because of the potential for Bitcoins to be worth more a few hours or days later.

[MountainMan]

Yeah, no. I'm not saying it becomes the primary measure of value in the universe. I am saying that there is potential for a singular market in which BitCoin becomes the standard of exchange. It would define its own measure of value. Not the other way around - it doesn't become valuable unless people perceive it as having worth. Right now, people are mostly gambling with it, instead of using it as a currency, which I see as a net negative.

Imagine people constantly adjusting their prices in USD to accommodate minor changes in the foreign exchange markets. Chaos would ensue... amply demonstrated by the wild daily swings in the BTC exchanges, and the silly argument over payment of 1 BitCoin here in the forums, etc.

I'm not arguing that BitCoin replace the dollar or anything like that... that would be ridiculous. I see BitCoin replacing, or at least reforming, various services that are currently dominated by PayPal, Credit Card companies, and banks. If BitCoin stabilizes, then people will be able to use it confidently as a means of exchanging value.

Any other flaws in the network either destroy it (susceptibility to quantum or other paradigm shift computing revolutions) or can be mitigated or sidestepped entirely by the community as a whole (invalidating and rolling back gamed blockchains, forking, third party services, escrow, and so on.)

The only problem I see long term is how does the BTC network go from where it is now to people using it regularly and confidently without the prospect of losing a significant % of the value in a transaction simply by paying early?

[Pleaseuserealmoney]

To be honest, I'm deeply skeptical of bitcoin...

[repentance]

I see BitCoin replacing, or at least reforming, various services that are currently dominated by PayPal, Credit Card companies, and banks. If BitCoin stabilizes, then people will be able to use it confidently as a means of exchanging value.

The infrastructure which underlies the financial services you've mentioned is enormous and I don't believe that it can be duplicated at no cost.  While Bitcoin is well suited to being a means of exchange in grey and black markets, the kind of confidence you're talking about probably depends on it operating within a regulated environment and there are significant barriers to entering the regulated financial services industry.

I also think that many people seriously underestimate how much Bitcoin will have to evolve before accepting it becomes attractive to merchants.

[MountainMan]

A Point Of Sale system would be easier to implement with BitCoins than normal currency. I think people underestimate the flexibility and ease of use this presents to developers. That offsets the cost of entry into regulated markets significantly, because security and regulation compliant software can be developed and implemented at a fraction of the cost. What remains is licensing fees and proper registration.

BitCoin is not itself a disruptive technology. The internet is, and BitCoin is part of how the internet is disruptive. I think people do overestimate BitCoin's significance, but at the same time, we're nowhere near the saturation point in terms of how people will use, value, and perceive BitCoin. There's huge potential here, even if it is driven underground.

[repentance]

A Point Of Sale system would be easier to implement with BitCoins than normal currency. I think people underestimate the flexibility and ease of use this presents to developers. That offsets the cost of entry into regulated markets significantly, because security and regulation compliant software can be developed and implemented at a fraction of the cost. What remains is licensing fees and proper registration.

Merchants will be looking for any Bitcoin POS system to integrate seamlessly with their existing EFTPOS  platform, to offer a similar level of automatic record-keeping, and which offers excellent merchant support.  All of these things can be developed but it's naive to believe that merchants will be falling over themselves to adopt Bitcoin before it can reliably offer the same advantages as other payment processing systems at a lower cost.  Ideally, it needs to be able to handle both transactions where identifying the customer making the payment is essential (by tying the transaction to a customer reference number) as well as those where that information is unimportant.  It also needs to be as hassle-free as possible from the viewpoint of both the vendor and the customer and it's nowhere near that point yet.  

As the majority of merchants will be more interested in adding Bitcoin to their currently accepted payment methods rather than only accepting Bitcoin, the issue of easily converting Bitcoin to local currency in near real time will also need to be solved.  The current standard for settlement of credit and debit card transactions is overnight cleared funds and merchants are going to need the capacity for being able to get funds from conversion into both their local currency and their Bitcoin accounts at least that fast without any hassle.