Thought Experiment: Is Bitcoin a Ponzi scheme?

[iya]

After the fulfillment of the 21 Million BTC, there is no advantage whatsoever. The supply and demand will be purely market driven. It does make sense to provide an incentive to early adopters, but one that equalizes.

In most markets early adopters do not have an advantage, but additional risks.
Could you explain what's meant with "equalizes"?

One must at least accept, that the inflation scheme is not totally irrelevant, by reductio ad absurdum:
If the total block limit had been set to 1000, would we now have this discussion?

Here's the math for the approximate current energy costs, solely for the hashing power:

   (600 Ghash/s / 2 Mhash/Ws) * (0.2 $/kWh)
= (300 kW) * (0.2 $/kWh)
= 60 $/h
= 1440 $/day

Does the Bitcoin economy really warrant that kind of expense, to protect against double spending?

I've refined my preferred inflation scheme, to get rid of the problem with Moore's Law, which would have led to too strong inflation:

• #currency units awarded ~ energy spend on the proof of work
  when a host solves a new block, it gets coins proportional to the current difficulty = amount of work spend
  
• long term adjustment through a conversion factor:
  - the factor will be set to always approximate the real Watt*seconds spend during solving the hash
  - with more efficient or specialized hardware, the factor will fall
  - in case the hash is broken, the factor can be adjusted downwards or a new hash can be chosen
  - in case energy production gets a lot more efficient, the factor could also be adjusted
  

Everybody will understand that electricity can always be turned directly into bitcoins (even anonymously).
The result is that early adopters have the same conditions as late comers.

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[barbarousrelic]

'Early adopters having an advantage over later adopters' is not a sufficient characteristic to classify something as a Ponzi scheme.

[Dobry Den]

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).

Really? It's hard to understand for you how the rate of exchange could play a role in whether or not someone decides to give BitCoins a chance?

Tell me something, if I show you a brand new invention that you might not even fully understand how it works would you be more willing to buy one for a cheap price or buy one if it were really expensive? I mean geesh use some common sense will ya..

I've read your posts in this thread and you seem to be stuck in a rut.

Your problem is that you're attaching an arbitrary value to Bitcoin.

Conversion rate from Bitcoin to USD is arbitrary and irrelevant. It tells you nothing. Sure, you can look at the historical price of Bitcoin and see that it's enjoyed a steady rise to USD parity, but that's only because speculators traditionally stabilize speculation around the arbitrary value of USD parity because we're human and USD parity "seems like a good place to stop buying".

Even if one Bitcoin cost $1000, how can you pass a judgment on it beyond referring to historical price activity? Something that costs 1000 USD also costs 1 BTC. It doesn't matter what the conversion rate is in itself because it's market nominal.

By asserting that Bitcoin is overvalued right now, you're playing clairvoyant and suggesting that there's going to be a substantial price drop, but there's no predictable circumstance for that. Currency isn't overvalued just because "it seems high".

Furthermore, Bitcoin has no commercial market to entrench price or give meaningful value to price. Currency markets play much different once they start pushing volume in markets other than currency trades because the currency value becomes objectified with the acquisition and investment in goods/services.

[FreeMoney]

In most markets early adopters do not have an advantage, but additional risks.
Could you explain what's meant with "equalizes"?

Really? What exactly is the incentive for taking those extra risks if not some advantage?

[wb3]

I believe in order to properly quantify the BitCoin currency, it must be done as others are.

How many people (including businesses) use or accept it?  What is the availability(volume)?  What is the flow(# of transactions) of it?

Its value will be directly proportional to the other currencies using the same criteria as above. The BitCoin doesn't have to be pegged to any one currency but to all simultaneously. The ratio to the USD, YEN, EUD, etc... to the BitCoin can be determined on a global scale.

Just because a few pay 2:1 for the BitCoin doesn't mean the BitCoin is worth 2:1, it means there are people willing to take risks.

Is the trend line increasing or decreasing from the above calculations?, should determine whether those risks are justified or wishful.

It is believed that volatility will always exist in a "Xchange Market" for there will be Market Makers (enough influence to change the rate).

For Example:

There are about 5 Million BitCoins (the rate of increase is easily determined because it is programmed). If I own 1 Million of the BitCoins and sell them, the Xchange rate will fall drastically. But only a few nodes at time will register the transaction.  Now that I sold, the 1 Million, I know the market rate will go down (and I can predict the time to bottom based on the # of confirmations of the transaction). Then when the it bottoms, I can buy up at a rock bottom price. After a few of these, I will own the market. Now obviously, I would not buy up all BitCoins because I want a market in them. I just want to own enough of them to remain a Market Maker and control the system.

I will become the next Wall Street. Now there will be other Market Makers. But as many point out the elusive Game Theory, the Market Makers will work together to maintain their dominance of the Market.

Unlike current methods though, I can be a Market Maker being completely anonymously with my "partners."

The only way to avoid this (and it will happen if the BitCoin takes off) is to allow inflow to the currency but restrict outflow from the Currency.  Basically, You can check in; but not check out.  



BTW: this is why the Stock market is rigged. Watch the Market Makers, they control the prices by their purchases and sales of stocks. The "little guy" has no hope of competing with that, unless they know what the Market Makers are doing.

[grondilu]

wb3, manipulating a market as you describe it is probably much more difficult than you think.   Moreover, there is nothing wrong with it, ethically speaking.  If someone has managed to own more than one million bitcoins, somehow he has done something to deserve them.  It is his property and he does whatever he wants with it.

You believe in private property or you don't.  Don't try to compromise.

[wb3]

I don't think there is anything "wrong" with it, but a system in which it is accepted; will divide not unite. If you can do it, more power to you. If you can not, oh well your not in the group.

It is not that difficult, as you might think. Especially if this is a goal from the start of a currency.  Assume right now the BitCoin becomes an accepted currency on the ForEX with a parity to the dollar.  With only 5 Million available, Market Makers would appear very quickly.

Wouldn't it be a fair system, if you could buy BitCoins from another currency but not sell them for another currency. The rich will be on the same playing ground as the poor. The rich could still remain rich but not by manipulating currency but by productivity and efficient use of resources.

All current xchange markets have a list of Market Makers. They exist. Wells Fargo is a Market Maker. Chase is a Market Maker. BoA is a Market Maker.  *The Federal Reserve is a Market Maker. --> and if the BitCoin becomes a concern the FED could destroy the BitCoin by buying the BitCoin to achieve a controlling interest and run it into the ground, but why. They would control it easily, buy exchanging with themselves at no cost to manipulate the markets. Call it their form of a TAX on the BitCoin.

Right Now, it would cost me $500,000 to have a 10% controlling interest in the market. I would be able to gain a 10% value by buying and selling the BitCoin to maintain that 10% control over the expansion of the BitCoin all the way up to 21 Million.  So a $500,000 dollar investment is all it would take. But that is now, if I did it as soon as the Xchange market came online it would be chump change.

Again, there is nothing "Wrong" with it. It is just not "Fair." This is why I question "socialists." I don't think they really want it to be fair. They just want it to be "fair" to them.  But if they really want the grandiose idea to a next level in society, the system must be fair and eliminate the greed from the system so the system is driven purely by market forces (supply and demand). One group should not be able to manipulate the price of corn, oil, grain, clothing, etc...

BTW: I don't think it will ever be a fair system until we eliminate greed, vanity, gluttony, etc... from human nature. So every one should be trying to control as much as they can control, it is survival of the fittest.  There are wolves, and there are sheep.

[grondilu]

Right Now, it would cost me $500,000 to have a 10% controlling interest in the market.

I very much doubt so.  It might cost you 500$ to own about 0.01% of the total amount of bitcoins, but not 1,000 times more to own 10%.  It is NOT proportionnal.

PS.  Anyway what you say can be said about money itself, or even the very concept of "wealth".  It's not just bitcoin.   Some people think money is unfair at best, evil at worst.  I don't, but we all understand your concerns.  Nothing new here, people think that about money since the beginning of time.

[wb3]

Right Now, it would cost me $500,000 to have a 10% controlling interest in the market.

I very much doubt so.  It might cost you 500$ to own about 0.01% of the total amount of bitcoins, but not 1,000 times more to own 10%.  It is NOT proportionnal.

I don't get it. There are 5 Million BitCoins in existence as of now, I could buy 10% (500,000) and that is assuming parity (which it isn't even at). So in reality it would take less than $500,000.  10% of 5 Million is 500,000.  And then by simple manipulation, maintaining that 10% ration is not that hard just through buying and selling on the market. Especially with Dark Pools but even without them, transactions do not get confirmed to all nodes at once. It takes time, and as of now, a lot of time, for the transactions to reach all the nodes.

 

[grondilu]

I don't get it. There are 5 Million BitCoins in existence as of now, I could buy 10% (500,000) and that is assuming parity (which it isn't even at). So in reality it would take less than $500,000.  10% of 5 Million is 500,000.  And then by simple manipulation, maintaining that 10% ration is not that hard just through buying and selling on the market. Especially with Dark Pools but even without them, transactions do not get confirmed to all nodes at once. It takes time, and as of now, a lot of time, for the transactions to reach all the nodes.

As soon as you start buying, unless you find a immediate sell order matching your 500,000$ bid, you will empty the ask part of the order book and then raise the price.

I have no idea about how much it would cost to buy 500,000 bitcoins.  I guess it depends on how you proceed, and which time frame you target, but it would certainly cost much more than 500,000$.

[BitterTea]

Right Now, it would cost me $500,000 to have a 10% controlling interest in the market.

I very much doubt so.  It might cost you 500$ to own about 0.01% of the total amount of bitcoins, but not 1,000 times more to own 10%.  It is NOT proportionnal.

I don't get it. There are 5 Million BitCoins in existence as of now, I could buy 10% (500,000) and that is assuming parity (which it isn't even at). So in reality it would take less than $500,000.  10% of 5 Million is 500,000.  And then by simple manipulation, maintaining that 10% ration is not that hard just through buying and selling on the market. Especially with Dark Pools but even without them, transactions do not get confirmed to all nodes at once. It takes time, and as of now, a lot of time, for the transactions to reach all the nodes.

 

It doesn't matter when nodes see the Bitcoin transaction, it only matters when traders see the exchange activity. That is what will cause the prices to drop, not transaction confirmations.

[wb3]

Traders are but a "node" on the network.

If one Xchange sees it before another, there is even more money to be made. Heck, there are even xchanges that aren't exposing themselves to the "market".

The Key to any Xchange, is the proportional amount of BitCoins to Currency being xchanged. If only 1% of all BitCoins are being Xchanged as compared to the amount of BitCoin - BitCoin Transactions, the Rate means nothing. 

The nice thing is "anybody" can be an exchange, even off grid.

Your "Net" worth is nothing but the percentage of BitCoins you own compared to the # of BitCoins in existence.

[BitterTea]

Traders are but a "node" on the network.

If one Xchange sees it before another, there is even more money to be made. Heck, there are even xchanges that aren't exposing themselves to the "market".

The Key to any Xchange, is the proportional amount of BitCoins to Currency being xchanged. If only 1% of all BitCoins are being Xchanged as compared to the amount of BitCoin - BitCoin Transactions, the Rate means nothing. 

The nice thing is "anybody" can be an exchange, even off grid.

Your "Net" worth is nothing but the percentage of BitCoins you own compared to the # of BitCoins in existence.

No. Current exchanges operate "outside" of Bitcoin. I can see trades in real time on the exchange site, long before I'd be able to detect the trade in the block chain. This is because each exchanger basically has one wallet, with an internal accounting database (much like MyBitcoin). The only things that appear on the block chain from these exchanges are deposits and withdrawals in BTC.

[wb3]

You can't see xchanges in real time. Until they are added to the chain, they did not occur. Once added to the chain, the rate must change.

If for example, you are really interested in buy BitCoin, take a look at BitCoin Charts, buy foreign, sell local at MtGox, would be pretty profitable even though you would have to go from USD -> other foreign currency -> BitCoin -> USD at MtGox.  The xchanges are not in sync, neither will they ever be in sync. Because with BitCoin, anyone can be an Xchanger.

You must be reliant on the data from Confirmed Blocks, anything that is not confirmed, didn't happen.


The whole concept of the Dark Pool was to avoid the Volatility that must occur in this system. So by its own definition, the "Rate" doesn't reflect the real "Rate" of exchange, because of the Dark Pools.  People are getting Volume discounts based on amounts exchanged but that data is not fed into the system immediately.

Just take MtGox, can one buy in the Dark Pool for say 50¢ and sell in the open at 80¢ over an extended time. After a few of these transactions, you are well into the black and can afford to take bigger risks. Constantly being aware of a downward pressure due to the fact that more BitCoins are being "printed" but at a mathematical constant based on probability.

No, Market Makers are already here. And it doesn't take a degree in Economics to figure it out. But there is nothing "wrong" with it. It just isn't "Fair." 

IMO, the best way to judge the value is by the flow of BitCoin (the # of transactions occurring). But this can be misleading because people can exchange BitCoins between their own clients. So the true flow, will have to be the the ratio of transactions to product purchases which means businesses will have to report their transactions to get a view of the value. Businesses will do this voluntarily to get an idea of how to price their products. "Game Theory".  Illegal businesses won't report but rely on the ones that do, "The Prisoner's Dilemma."

[BitterTea]

You can't see xchanges in real time. Until they are added to the chain, they did not occur. Once added to the chain, the rate must change.

If for example, you are really interested in buy BitCoin, take a look at BitCoin Charts, buy foreign, sell local at MtGox, would be pretty profitable even though you would have to go from USD -> other foreign currency -> BitCoin -> USD at MtGox.  The xchanges are not in sync, neither will they ever be in sync. Because with BitCoin, anyone can be an Xchanger.

You must be reliant on the data from Confirmed Blocks, anything that is not confirmed, didn't happen.


The whole concept of the Dark Pool was to avoid the Volatility that must occur in this system. So by its own definition, the "Rate" doesn't reflect the real "Rate" of exchange, because of the Dark Pools.  People are getting Volume discounts based on amounts exchanged but that data is not fed into the system immediately.

Just take MtGox, can one buy in the Dark Pool for say 50¢ and sell in the open at 80¢ over an extended time. After a few of these transactions, you are well into the black and can afford to take bigger risks. Constantly being aware of a downward pressure due to the fact that more BitCoins are being "printed" but at a mathematical constant based on probability.

No, Market Makers are already here. And it doesn't take a degree in Economics to figure it out. But there is nothing "wrong" with it. It just isn't "Fair." 

IMO, the best way to judge the value is by the flow of BitCoin (the # of transactions occurring). But this can be misleading because people can exchange BitCoins between their own clients. So the true flow, will have to be the the ratio of transactions to product purchases which means businesses will have to report their transactions to get a view of the value. Businesses will do this voluntarily to get an idea of how to price their products. "Game Theory".  Illegal businesses won't report but rely on the ones that do, "The Prisoner's Dilemma."

You're still not getting exchanges like MtGox. All of those trades take place outside of the block chain, in a database operated by MtGox. When I sell you 100 BTC for $100, all that's taking place is an accounting record of that sale. Only when I withdraw or deposit BTC does the block chain become involved. I can't make this any clearer.

[wb3]

You're still not getting exchanges like MtGox. All of those trades take place outside of the block chain, in a database operated by MtGox. When I sell you 100 BTC for $100, all that's taking place is an accounting record of that sale. Only when I withdraw or deposit BTC does the block chain become involved. I can't make this any clearer.

I get it, and understand.

Let me ask, with that system. Goto http://bitcoincharts.com/markets/ and see how you could exchange to the positive (in the Black) by utilizing different Xchanges.  And those are just the ones most know of.

IRL, those transactions are immediately forecast for all other xchanges to prevent, pitting the xchanges against each other.


The differences in the xchanges are not set up to prevent, boarder crossing.

With a little research, I found that one can change USD -> Yen -> BitCoin -> USD  and come out ahead. That should not be possible.

[LMGTFY]

With a little research, I found that one can change USD -> Yen -> BitCoin -> USD  and come out ahead. That should not be possible.

I think you mean:
1. Exchange USD for JPY *now*,
2. Jump back in time to March 5th and exchange JPY for BTC,
3. Jack back to today and exchange BTC for USD.

Or is there a JPY figure that's more current than March 5th?

Arbitrage is certainly possible. It's possible, though harder, in far more liquid markets. But I doubt you'd find it to be as easy as you seem to suggest.

[wb3]

I have not done it. So as for experiment only, I will try it. I will use $20 as an example.

I will utilize the the exchange rates between IRL currencies with the Visa xchange rates.

And the Back to USD.

I will post the results.

I would think that if it can be shown to be done with $20, there is a problem because with volume discounts the problem is bigger.

After I am done, I will post the wheres and hows. I want to keep a certain JPY site secret for now.

[BitterTea]

If you're talking about arbitrage (making money from currencies mispriced in respect to one another), then you have discovered nothing new. In fact, arbitrage is one way that those pricing errors get fixed.

So, good luck to you, I guess?

[joe]

I had to actually read back and see what exactly my initial point of this argument was because I agree with your statement in bold. But my initial argument was that we are already at that stage where the exchange rate is too high and that it will have to come down first before the economy can grow at a faster potentially exponential rate and and that the sooner the hoarders realize this the sooner the influx of new goods and services will happen..

My point is that the current exchange rate is not realistic and already too high and all my posts was basically theory supporting why that might be true.

The high price of bitcoins is due to an expectation of future value. Remember that if we know the price of something will double next week, then it will actually double today, then not change next week.

The value of any item-- gold, stocks, bonds, currencies-- is always equal to the limit (calculus) of the expected value at time X in the future, in today's dollars, as X goes to infinity. Example: Gold is worth 1000$/oz today. A worker at a gold mine leaks information to his friend that there is a HUGE gold deposit equal to all the gold previously thought to exist (so supply will double). But it will take 2 years to mine all of this gold. Result: gold price immediately drops to 500$. It does not take 2 years to slowly drop down to 500$.

Proof:
We know that gold is trading at 1000$/oz prior to the information leak. Therefore, lim x->inf (EV(x)) = 1000.
We expect that 5000 years from now (x = 5000 years) value will be 1/2 of what the market previously expected. (Note: 5000 years was picked as an arbitrarily long time, beyond which the market has no additional expectations, good or bad, about the value of gold)
With no information past 5000 years, the new graph of EV(x) is equal to half of the old graph, for all values > 5000 years, since the only new information we have is that supply will be double the old expectation once all gold is mined.
Therefore, lim EV(x) = half of the previous limit = 500, which is equal to the gold price.