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Author Topic: Thought Experiment: Is Bitcoin a Ponzi scheme?  (Read 11472 times)
Dude65535
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March 08, 2011, 03:24:51 AM
 #21

A higher price may discourage people from investing in bitcoins. However if bitcoin is useful and it is easy to convert other currencies in to and out of bitcoins people will use bitcoin.

It seems to me that people using bitcoin is more important than people investing in bitcoins.

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March 08, 2011, 03:40:21 AM
 #22

You're missing the point. Higher prices will turn off all those who aren't trading them yet. It's like when you look at stocks, everyone wants to find and buy that one super cheap stock that will explode in price when it becomes really popular. Once it's popular and the price already exploded mostly day traders buy it...

But you're looking at Bitcoin from only a speculative point of view.  As a currency, it doesn't matter what the absolute price is vis-a-vis the dollar or whatever.  People will be attracted to Bitcoin for a variety of reasons, including its low transaction cost and decentralized and pseudonymous nature.  My enthusiasm for it wouldn't be any less in the absence of mining.

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March 08, 2011, 06:52:08 AM
 #23

It can easily be thought of as a kind of ponzi scheme.

The claim that the crash in price if the long time miners sold their hoards indicates it is not a ponzi does not make sense to me, because ponzis too tend to crash very similarly. (The originators cash out instead of continuing to give back incoming money to other people.)

We need not speculate about new startups, we can experiment to obtain empirical results.

A number of currencies have been commissioned, and I have implemented IRC bot interfaces to them.

So far none of them have seen value in exposing their blockchain building operations to the public. They see the distribution nature of the protocol as useful for communicating among trusted partners, and prefer to keep difficulty at 1 (one), which they can well afford as long as they don't start attacking each other.

It looks like they plan to address value primarily by not "issuing" coins that are not in some way or other "backed". For example they are all committed to buying huge number of each others' coins, so each will be backed by a basket of all the others. Even that though they do not consider sufficient, they are also trying to work out policies to try to "ensure" that there is more "behind" them than just other such virtual/digital coins.

The way the IRC bots do their accounting is dictated by that requirement, for example. Each type of coin has an account at each type of coin. If you have let's say some CDN, and you tell the bot to exchange it for GMC, it sends the CDN to the gmcbank's CDN account and sends GMC from the cdnbank GMC account to your GMC account.

It can only do that if cdnbank has enough in its GMC account. There can be any amount of GMC in the other coin-type's GMC accounts, those are not relevant, only the GMC that is in cdnbank's GMC account can be used to "back" (aka buy) CDN.

Thus basically what the bots are doing is holding the stuff used to back the various coins. Each coin has it's own distinct collection of stuff to back itself with aka to buy back the coins it issues.

So basically the plan seems to be not to "cash out" by buying fiat currencies but, rather, to "back" themselves by buying fiat currencies to hold as "reserves" with which to back their own value; standing ready to buy themselves back.

Thus the lack of desire to open up "mining opportunities": they have no desire to bleed out their reserves by cashing in coins created by random miners. In essence they can have digital tokens manufactured at less cost by keeping difficulty low until many, maybe even all, coins have been manufactured.

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March 08, 2011, 04:53:48 PM
 #24

The difference between Bitcoin and a Ponzi scheme is that all possible outcomes of a Ponzi scheme are win-lose, while Bitcoin also has possible win-win outcomes.

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March 08, 2011, 05:37:13 PM
 #25

It can easily be thought of as a kind of ponzi scheme.

The claim that the crash in price if the long time miners sold their hoards indicates it is not a ponzi does not make sense to me, because ponzis too tend to crash very similarly. (The originators cash out instead of continuing to give back incoming money to other people.)

We need not speculate about new startups, we can experiment to obtain empirical results.

A number of currencies have been commissioned, and I have implemented IRC bot interfaces to them.

So far none of them have seen value in exposing their blockchain building operations to the public. They see the distribution nature of the protocol as useful for communicating among trusted partners, and prefer to keep difficulty at 1 (one), which they can well afford as long as they don't start attacking each other.

It looks like they plan to address value primarily by not "issuing" coins that are not in some way or other "backed". For example they are all committed to buying huge number of each others' coins, so each will be backed by a basket of all the others. Even that though they do not consider sufficient, they are also trying to work out policies to try to "ensure" that there is more "behind" them than just other such virtual/digital coins.

The way the IRC bots do their accounting is dictated by that requirement, for example. Each type of coin has an account at each type of coin. If you have let's say some CDN, and you tell the bot to exchange it for GMC, it sends the CDN to the gmcbank's CDN account and sends GMC from the cdnbank GMC account to your GMC account.

It can only do that if cdnbank has enough in its GMC account. There can be any amount of GMC in the other coin-type's GMC accounts, those are not relevant, only the GMC that is in cdnbank's GMC account can be used to "back" (aka buy) CDN.

Thus basically what the bots are doing is holding the stuff used to back the various coins. Each coin has it's own distinct collection of stuff to back itself with aka to buy back the coins it issues.

So basically the plan seems to be not to "cash out" by buying fiat currencies but, rather, to "back" themselves by buying fiat currencies to hold as "reserves" with which to back their own value; standing ready to buy themselves back.

Thus the lack of desire to open up "mining opportunities": they have no desire to bleed out their reserves by cashing in coins created by random miners. In essence they can have digital tokens manufactured at less cost by keeping difficulty low until many, maybe even all, coins have been manufactured.

-MarkM-



Could some one explain what markm's trying to say here?

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March 08, 2011, 05:44:02 PM
 #26

It's kind of silly to say that miners who sell bitcoins aren't giving anything back. When they sell coins they are giving the best version of money I've ever heard of and getting crappy old dollars in return.

Is Bitcoin only a ponzi if it fails? Is every currency system a ponzi or become one after it falls?

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March 08, 2011, 08:27:11 PM
 #27

The thing with a ponzi scheme is that it eventually will have to collapse, and when it does, everybody still in will lose everything. However with bitcoin you might see massive price increase, a bubble. But once it pops the price will only fall to a certain point because people will eventually start buying again once they feel the price is right. And also, if bitcoin is a ponzi scheme, so is all other currencies.

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March 08, 2011, 09:16:52 PM
 #28

Some people posting on this thread seem to believe bitcoins have no intrinsic value.  That is simply not the case.  Bitcoins can be readily transferred electronically, mathematics and a widely distributed system of trust ensure their limited supply, transactions are pseudo-anonymous, they are impossible (practically speaking) to double spend.  It's incredulous to me that people could even imagine that bitcoins have no intrinsic value in the face of these facts.  It's true that if hoarders dumped their hoards on the market, the prices would fall, but certainly not to zero...and the hoarders would have little rational economic incentive to do that (I mean, it's not like a run on a bank...due to intrinsic value, it is more like a stock and as prices fall, they would find a natural level of support).

In fact, given these properties, one could argue that bitcoins have far greater intrinsic value than gold (which has similar intrinsic value, but is stuck in the physical world).

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March 08, 2011, 09:26:00 PM
 #29

Some people posting on this thread seem to believe bitcoins have no intrinsic value.  That is simply not the case.  Bitcoins can be readily transferred electronically, mathematics and a widely distributed system of trust ensure their limited supply, transactions are pseudo-anonymous, they are impossible (practically speaking) to double spend.  It's incredulous to me that people could even imagine that bitcoins have no intrinsic value in the face of these facts.  It's true that if hoarders dumped their hoards on the market, the prices would fall, but certainly not to zero...and the hoarders would have little rational economic incentive to do that (I mean, it's not like a run on a bank...due to intrinsic value, it is more like a stock and as prices fall, they would find a natural level of support).

In fact, given these properties, one could argue that bitcoins have far greater intrinsic value than gold (which has similar intrinsic value, but is stuck in the physical world).

I strongly believe you are wrong in regards with the bold part because if the hoarders wont sell and the prices stays too high no one is going to buy and the BitCoin economy wont grow. The sooner these hoarders realize that and give in and start selling the better it is for the growth of the BitCoin economy thus they have a strong incentive to sell and lower the price to a more reasonable one.

And IMO and I'm pretty sure I'm not alone thinking like this, $0.90/BTC although looking great to someone new just finding out about BitCoins IS to high for the current volume and interest and especially the bid vs ask ratio.

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March 08, 2011, 09:27:45 PM
 #30

Some people posting on this thread seem to believe bitcoins have no intrinsic value.  That is simply not the case.  Bitcoins can be readily transferred electronically, mathematics and a widely distributed system of trust ensure their limited supply, transactions are pseudo-anonymous, they are impossible (practically speaking) to double spend.  It's incredulous to me that people could even imagine that bitcoins have no intrinsic value in the face of these facts.  It's true that if hoarders dumped their hoards on the market, the prices would fall, but certainly not to zero...and the hoarders would have little rational economic incentive to do that (I mean, it's not like a run on a bank...due to intrinsic value, it is more like a stock and as prices fall, they would find a natural level of support).

In fact, given these properties, one could argue that bitcoins have far greater intrinsic value than gold (which has similar intrinsic value, but is stuck in the physical world).

Gold have intrinsic value based on industrial and decorative application. Bitcoin, on the other hand, have no such use outside of money.

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March 08, 2011, 09:30:15 PM
 #31

There IS obviously a strong incentive for hoarders to sell at some point:  profit.

I mean, say someone owns 100,000 bitcoins, as many very early adopters probably do.  Didn't such a person have a huge incentive to sell while bitcoin reached parity?

Personnaly I own a few thousand bitcoins.  If bitcoin was to worth 10 euros per bitcoin, let me tell you that I'd sell some of them!

Of course I won't hoard the euros I bought, but I'd buy a few stuffs with them.
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March 09, 2011, 03:56:31 PM
 #32

if the hoarders wont sell and the prices stays too high no one is going to buy and the BitCoin economy wont grow. The sooner these hoarders realize that and give in and start selling the better it is for the growth of the BitCoin economy thus they have a strong incentive to sell and lower the price to a more reasonable one.

It is not you but the market that will decide what a "reasonable" price is, and the market currently thinks 0.88 is  reasonable.  The exchange rate is irrelevant to the desirability of BTC as a currency.  Just because it costs 83 JPY to buy one USD doesn't mean USD are too expensive.  If you have JPY but need or want USD, then you will trade at the market rate, then trade back out at a later date if you so desire.

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March 09, 2011, 04:26:54 PM
 #33

if the hoarders wont sell and the prices stays too high no one is going to buy and the BitCoin economy wont grow. The sooner these hoarders realize that and give in and start selling the better it is for the growth of the BitCoin economy thus they have a strong incentive to sell and lower the price to a more reasonable one.

It is not you but the market that will decide what a "reasonable" price is, and the market currently thinks 0.88 is  reasonable.  The exchange rate is irrelevant to the desirability of BTC as a currency.  Just because it costs 83 JPY to buy one USD doesn't mean USD are too expensive.  If you have JPY but need or want USD, then you will trade at the market rate, then trade back out at a later date if you so desire.

Please tell me where you've learned all this "wise" logic of yours. What research are you basing on your beliefs? Because you make no sense.


I base my logic on the Austrian school of economics and a lot of research on monetary policies and world wide current affairs.

People absolutely don't just buy USD with their JPY if there's a cheaper option. Why do you think the world is waging currency wars right now where they are each trying to win the race to the bottom of their currencies. Every major economic power with their own central bank right now is trying to devalue their own currency so that their exports are more attractive and they can raise more revenues through exports to cover their budget shortfalls.

BTC will have to get attractively cheap enough for more people to buy some more. I'm not saying people aren't buying them at the current price but what I'm saying is that there would probably be way more buyers if they were cheaper. I mean FFS look at the MtGox bid vs ask ratio, does it really not tell you anything???

I'm not saying I want the price cheaper, the market is! And the market currently thinks 0.88 is reasonable only because you have hoarders who have no serious competition and can afford to prop up their desirable price. I mean I don't blame them, they shouldn't be forced to sell lower if they don't want but all I'm saying is that this situation doesn't make the price reasonable and that it will have to come down if BTC wants to grow significantly before it can go up again. I mean FFS it's basic supply vs demand: Right now there's huge supply and low demand, what does that tell you? Prices have to come down, that's what. Any they will!


And please for the future if you're just having some thoughts in your head which you haven't actually done any research on keep them to yourself. Because making statements is not the same as presenting facts.

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March 09, 2011, 04:40:22 PM
 #34

Hazek,

Austrian economists have no problem with "hoarding", which they actually call "saving".

See: http://mises.org/money/2s9.asp
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March 09, 2011, 04:44:44 PM
 #35

Economists say always a bunch of garbage, Austrian included.

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March 09, 2011, 05:11:52 PM
 #36

Economists say always a bunch of garbage, Austrian included.

Well, the "garbage" of austrian economists is many orders of magnitude closer to reality than the garbage of "standard" economists and/or keynesists.

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March 09, 2011, 05:14:12 PM
 #37

Economists say always a bunch of garbage, Austrian included.

Well, the "garbage" of austrian economists is many orders of magnitude closer to reality than the garbage of "standard" economists and/or keynesists.

Look like we got ourselves into an unsubstantiated debate.

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March 09, 2011, 05:23:20 PM
 #38

Hazek,

Austrian economists have no problem with "hoarding", which they actually call "saving".

See: http://mises.org/money/2s9.asp

I commend you for actually doing some research but unfortunately you're applying the learned knowledge incorrectly. The article speaks about money and not local currencies which is what BitCoins are the most similar to atm.

If BitCoins were the reserve currency and all prices were expressed in BTC I agree with you, hoarding wouldn't have been a problem. But they're not. Prices are in USD and EUR and so forth and you need to first exchange your BTC for one of those fiat currencies before you can buy almost anything. Sure we already have a few services and goods that have it's prices expressed in BTC and those prices may very well fall if the price of BTC doesn't which btw is a function of supply and demand. But then what's the appeal of charging BTC for those services and goods if they could charge USD or EUR or other fiat currencies at a higher price? There isn't one.

So BTC economy will either keep it's exchange price and lower prices for goods and services offered for BTC which will eventually shrink the size of BTC economy or the exchange price will fall and which will raise prices and make the BTC economy more attractive inviting more goods and services in which will then slowly lower prices and this process will repeat until every good and service is priced in BTC after which moment hoarding wont be a problem anymore.

But if at any point along that path hoarders tighten too hard they'll drive goods and services out of this economy and put this process in reverse.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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March 09, 2011, 05:31:09 PM
 #39

Btw it's very hard to prove any of what I'm saying because there's a time component involved. But that's why the theory behind of it all is so important since it allows us to fairly accurately predict these future outcomes.

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March 09, 2011, 05:54:07 PM
 #40

But if at any point along that path hoarders tighten too hard they'll drive goods and services out of this economy and put this process in reverse.

They're not hoarding, they're saving. If there is "too much" saving, prices will get too high, and some people will sell. If they are unable to sell due to high exchange rates, their asks will come down. I guess I just don't see any problem here that won't be solved by market forces. I plan on hoarding some BTC, but I am also investing some into BTC companies and acquiring some more to sell to friends and spend on the BTC economy.

As a "hoarder", it's in my best interest for the economy to become as big as possible, not just for me to hold as much BTC as possible.
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