The current Bitcoin economic model doesn't work

[kjj]

Myth. The exchange value will be determined by the people willing to buy and sell bitcoins, and mostly affected by the volume of commerce done in bitcoins.

That's even worse. Now we won't even be tied to the electricity anchor at all. The price will be ridiculously volatile with no limits whatsoever. It will be a speculator's heaven and a spender's nightmare.

You're forgetting that eventually mining rewards will consist in transaction fees.

Not quite. Transaction fees are not a reliable estimate for the coin's price because they cost nothing. Does it cost you anything to fire up Bitcoin.exe and join the network? No? Me neither.

Snip.  It goes on and on and on like this for a while.

Dude, pretty much every one of your points is founded on the wildly incorrect premise that some other currency is fixed and stable in some way.  No currency in use today has this "anchor" that you seem to think is so important.

[DrSammyD]

Clearly suggester doesn't know what "Time Preference" is. Goods now are worth more than the same amount of goods later. Everybody has different amounts of time preference, so we don't know exactly how much of an increase in goods later is worth the goods attainable now. Just know that if you increase the amount of goods now, you'll have to increase the goods later proportionally. Risk also plays a part in this, since it's not "known" whether or not that proportional increase will be reached.

"Only an idiot would spend bit coins now if he knew that the price would double"

Except you know, if she has want's and needs such things as food or entertainment. It's called having a high time preference. People want to consume goods and are willing to spend their coins for it at some price (amount of goods). The lower the price, the higher the time preference. Also, why would you ever be able to buy bitcoins? Clearly some people want to trade bitcoins even at $7. But no, those people are idiots.

Suggester also doesn't understand what marginal utility is. The more of something you have, the less valuable each extra individual unit is to you. e.g. I have 1000 gallons of water. The first 100 gallons I use to drink, the second 100 gallons I use to bathe. If I only had 100 gallons, I would forgo bathing, and continue to drink. Therefore the first 100 gallons > second 100 gallons. The same applies to bitcoins. I'm more willing to spend 100 bitcoins if I have 1000, than I would be if I had 500 bitcoins because that 100 bitcoins is worth more to me. So hoarding and increasing your stockpile doesn't make sense into infinity because as you increase the amount you have, the less utility you are acquiring.

Also, the higher the value, the more you can buy with it, and the more you can buy with it, the more incentive you have to spend it. Yes, some people have really low time preference, and so they save their bitcoins. But everybody has a price. At some price, they will spend their bitcoins, thus increasing their availability and lowering the amount people are willing to pay for coins certis paribus . Supply/Demand.

Quit thinking that your grand ideas are what will save bitcoin. They won't. People calculating their own value and actions is VASTLY superior to your ability to predict markets and manipulate software to change the rules of this game in the middle of it. Stability is important, not the particular % of growth in the money supply.

[RLutz]

Hey, I'm a software engineer who after seeing all the constant posts on Slashdot about bitcoins, decided to come see what all the fuss was about. After reading the FAQ, I immediately wanted to come and make a post containing the exact points that "Suggester" has made.

I would totally be excited to get involved in both mining and using BTC as currency if it weren't for the flaws he's outlined. I won't restate every point he made in his original post, but my own thoughts are as follows.

BTC will work fine once it gets enough people using it and accepting its worth (maybe a few slight modifications are needed), but the biggest problem is reaching that many users of BTC. As a potential user who is "late to the game" I see a system that hugely favors the early adopters--it just doesn't come off as "fair", and as such, I'm not too anxious to get involved. Why should the early adopters be rewarded with incredible wealth while I get a pittance?

Anyway, I'm not an expert economist, but I'm guessing my thoughts after reading and understanding how the bitcoin system works are going to mirror those of countless others who stumble upon BTC this late in the game and then investigate how it works. If you want the currency to succeed, you need to attract myriad people, and the only way I see that you're going to do that is to avoid coming off as a "ponzi" scheme, which, even if BTC isn't, it certainly comes off as one at first glance (huge rewards for early adopters, little to no incentive to adopt as time passes).

edit: I know the retort is going to be, "Bitcoin isn't about mining, it's about having a stable currency for exchange." And to that I say, "I agree!" Which is why you need to remove the huge incentive that early adopters get. With that gone, I wouldn't even want to mine, I would just want to immediately get involved in utilizing the currency for its intended purpose.

It isn't so much that the system is flawed, but that from a psychological perspective, people have a real problem getting involved in a currency system that looks like a ponzi scheme--my gut reaction is to reject a system that provides substantial wealth to early adopters, while providing significantly less incentive for new adopters to get on board.

[Anders]

Why should the early adopters be rewarded with incredible wealth while I get a pittance?

But if you buy bitcoins today for $7 and sell them after three years for $100,000 isn't that enough reward for you? Sure, the value of a bitcoin after 3 years may still be $7 or even zero, but there is a also a chance that it really reaches to extremely high values.

[RLutz]

Why should the early adopters be rewarded with incredible wealth while I get a pittance?

But if you buy bitcoins today for $7 and sell them after three years for $100,000 isn't that enough reward for you? Sure, the value of a bitcoin after 3 years may still be $7 or even zero, but there is a also a chance that it really reaches to extremely high values.

Right, but it still doesn't fix the gut reaction problem that even small children have. Split a candy bar with two kids 70/30, and the kid with the 30 isn't going to say, "Sweet, three tenths of a candy bar!" He's going to say, "Why did he get twice as much as me?!"

I think at a base level, we all have that concept of "fairness" in our decision making processes, and so long as that isn't rectified, I don't see BTC gaining a level of appeal necessary for its success.

[kiba]

It isn't so much that the system is flawed, but that from a psychological perspective, people have a real problem getting involved in a currency system that looks like a ponzi scheme--my gut reaction is to reject a system that provides substantial wealth to early adopters, while providing significantly less incentive for new adopters to get on board.

What's the incentive for early adopters to promote and use bitcoin?

[zef]

Hi Rlutz welcome to the forum.  

I wouldn't dismiss bitcoins as a currency because these perceived "flaws" just yet.  From what i see, its commonly mentioned that early adopters are rewarded disproportionately, its a pyramid scheme, etc, but as posters has noted already, these complaints completely discount the huge risk that early adopters are bearing.  If you speculate on something that fails, you lose, and its hard to tell if something will win or lose when its just getting off the ground.  The reward should be proportionate to the risk taken.  Starting a new currency like bitcoins is a huge risk in terms of success or failure, it's something most people would consider impossible and or/a waste of time.  I think its brilliant that early adopters have a chance of big rewards, it gives new comers great incentive to get involved with using or earning coins NOW - to catch the wave - so to speak. Removing this incentive means there is less interest in this new money, and less growth.

This may seem unstable now, but bitcoin is a tool for exchange, the more people have it, the better chance there will be to build a thriving economy with it, once speculation stops being so novel, and mining stops being so profitable, it will start being used the way it was intended, because there really is no better use.

This is not to say that getting in "late" is bad though.  Mining is not the only way to make coin, trading goods and services is an excellent way to earn your way into the economy. This will eventually be the primary method of earning coin.  The currency is young now, and the infrastructure is still building up to this, but it will eventually happen.

People tend to have this notion - if I do something where someone will gain more than me, then I wont do it - Even if that thing is a win win.  It's not a very constructive way to think about things, but I agree, it may dissuade a lot of people.  People also tend to be overly concerned with "fairness", unfortunately there is no objective way to measure this.  One may consider a free-market unfair because wealth and earning power are distributed unequally at any point in time, while another person may consider it the fairest, because each individual is free to take action to increase their wealth in any way they see fit.  One may consider bitcoins unfair because there are already people with so much more coin than them, others may consider it very fair because there is no one in charge of distributing new money, its just based on your participation in the network.  Unfortunately I don't think there can be a single solution to this problem, its personal.

[kiba]

If you have a deflationary growth economy, everybody win, even if you're a latecomer. 

[stic.man]

jesus what is with all the bitching about being "late to the game?"

you snooze you lose, why does this argument keep coming up?

[stic.man]

and also like stated above if this works out well they'll be worth potentially thousands more.

a return in the tens of thousands of percents is pretty solid

[smooth]

Right, but it still doesn't fix the gut reaction problem that even small children have. Split a candy bar with two kids 70/30, and the kid with the 30 isn't going to say, "Sweet, three tenths of a candy bar!" He's going to say, "Why did he get twice as much as me?!"

I think at a base level, we all have that concept of "fairness" in our decision making processes, and so long as that isn't rectified, I don't see BTC gaining a level of appeal necessary for its success.

It doesn't stop people from continuing to sign up for and use Facebook.  Not only is Zuckerberg getting a lot more out of the deal than any of Facebook's users, but he's also way more of an asshole than any of Bitcoin's early adopters.

Give people compelling enough value and they will overlook fairness.  When the pie (or candy bar) is really small people will bicker forever over how to divide it.

[kiba]

"I am not going to adopt bitcoin because it unfairly reward early adopters...boohoo!"

10 months later.

"Damn! I should have invest in bitcoin!"

[markm]

The fact that so many people who already adopted the original bitcoin imagine mining a new but similar currency to be a waste of time might allow late-comers a window of opportunity each time they start yet another similar currency, because it seems possible that not a lot of huge mining corporations will immediately jump on their blockchain and mine a few million coins of it "just in case it does take off".

Thus simply start yet another one yourself, or jump on one of the ones the bitcoin-plutarch-cabal considers beneath their notice and large mining pools seem like they might actually be able to resist the temptation to throw lots of processor power at.

Maybe it will only take a few iterations to accomplish something or maybe it will have to get close to "one blockchain-based currency per person" but hey, is it really so much more wild a gamble than Satoshi's gamble of gosh knows how many programmer hours gallons of skullsweat etc?

There are more and more new blockchain-based currencies springing up all the time. If original bitcoin is not quite to your taste pick another or create one tailored to your precise tastes.

-MarkM-

[jerfelix]

BTC will work fine once it gets enough people using it and accepting its worth (maybe a few slight modifications are needed), but the biggest problem is reaching that many users of BTC. As a potential user who is "late to the game" I see a system that hugely favors the early adopters--it just doesn't come off as "fair", and as such, I'm not too anxious to get involved. Why should the early adopters be rewarded with incredible wealth while I get a pittance?

There is only $45 Million dollars worth of Bitcoins in the world.  If you think you are "late to the game" and also there's some "incredible wealth" out there, I think you are mistaken.

There are 11,000 people registered in this forum.  Probably most are like me, with just a little bit of Bitcoin.  Some registered users probably have none, but on the contrary some bitcoin holders probably aren't registered in the forum.

The first 960 participants registered prior to 11/1/2010.  Back then there were about 4 Million bitcoins issued (so a current value of about $28 M).  Even if 280 of them split the 28M, that's only an average of $100K each.  Not exactly "incredible wealth".  Or even if only one person has the vast majority of coins issued prior to 11/1/2010, that's only one person getting very rich ($28 Million).
 
I suspect that you could apply the 80/20 rule.  20% of the 11,000 own 80% of the current $45M wealth.  Splitting $36M over 2200 people won't exactly make them all rich.  That's $16K a person.   Maybe the top 20% own 80% of that wealth.  So 440 people split $28M.  That's 64K per person, for 440 people.  Still no incredible wealth.  And if you apply 80/20 one more time, you have 88 people splitting $22M.  That's 88 people getting $250K each.  Still not a lot of money, but respectable.   And 80/20 one more time gets you to 18 people splitting $18M.   So it made 18 millionaires. 

18 millionaires seems about right.  And that's if they didn't dump their bitcoin when the value quadrupled, the first time, or the second time, or the third time.


Besides, there is SOooooo much money and opportunity in other services, and there are soooo many more people that still need to be introduced to Bitcoin.  You are hardly late to the game!

[Suggester]

And thus, of course, you also sincerely hope no one will actually listen to what you advocate here and act on it?

Part of me wants that yes. But I would've felt guilty had I not warned everyone and told them the way out of this Ponzi scheme. I feel better now, and still hoping to get away with as much cash as I could.

Dude, pretty much every one of your points is founded on the wildly incorrect premise that some other currency is fixed and stable in some way.  No currency in use today has this "anchor" that you seem to think is so important.

Really? I don't remember the last time my electricity bill skyrocketed 10 times in a month.

People want to consume goods and are willing to spend their coins for it at some price (amount of goods). The lower the price, the higher the time preference. Also, why would you ever be able to buy bitcoins? Clearly some people want to trade bitcoins even at $7. But no, those people are idiots.

With the exception of people being forced to sell their coins for an emergency and the exception of "hit-and-run" transactions, most buyers buy now on hope that the coin's price will rise and most sellers on the expectation that it will drop. How otherwise can you justify a ten-fold increase in a single month? It wasn't a sudden surge in child porn anonymous sales I suppose. No, it was speculation. Virtually the whole bitcoin market is speculation.

Suggester also doesn't understand what marginal utility is.... hoarding and increasing your stockpile doesn't make sense into infinity because as you increase the amount you have, the less utility you are acquiring.

Hmm, I wonder how we ended up with quite a few millionaires and billionares on this planet then. Weird. Perhaps they don't understand marginal utility either. Why don't you explain it to them DrSammy? Maybe they'll give up their hoarded money to charity.

Also, the higher the value, the more you can buy with it, and the more you can buy with it, the more incentive you have to spend it. Yes, some people have really low time preference, and so they save their bitcoins. But everybody has a price. At some price, they will spend their bitcoins, thus increasing their availability and lowering the amount people are willing to pay for coins certis paribus . Supply/Demand.

I'm pretty tired of having to repeat this, but let's say it one more time: Yes they will sell at some point, but to another investor who'll keep the coins till the price is right before selling them again. That's a Ponzi scheme by definition.

Stability is important, not the particular % of growth in the money supply.

That just shows you understood nothing of what I said. Stability doesn't come except with a supply proportionate to the demand. Otherwise you'll continue to see these roller coaster prices and/or perpetual deflation.

Hey, I'm a software engineer who after seeing all the constant posts on Slashdot about bitcoins, decided to come see what all the fuss was about. After reading the FAQ, I immediately wanted to come and make a post containing the exact points that "Suggester" has made.

You didn't even need to see the historical price graph to figure the current design has issues? I see you're smarter than quite a few folks here

As a potential user who is "late to the game" I see a system that hugely favors the early adopters--it just doesn't come off as "fair", and as such, I'm not too anxious to get involved. Why should the early adopters be rewarded with incredible wealth while I get a pittance?

You join now on the hope that in a year or two you'll be a relatively "early adopter" and then grab a new "late adopter's" cash for your coins which would be even scarcer by then. In other words: Pyramid Scheme

What's the incentive for early adopters to promote and use bitcoin?

The incentive is to get other fools to join the pyramid so they can fatten their wallet even more before running away with their money.

I wouldn't dismiss bitcoins as a currency because these perceived "flaws" just yet.  From what i see, its commonly mentioned that early adopters are rewarded disproportionately, its a pyramid scheme, etc, but as posters has noted already, these complaints completely discount the huge risk that early adopters are bearing.  If you speculate on something that fails, you lose, and its hard to tell if something will win or lose when its just getting off the ground.  The reward should be proportionate to the risk taken.  Starting a new currency like bitcoins is a huge risk in terms of success or failure, it's something most people would consider impossible and or/a waste of time.  I think its brilliant that early adopters have a chance of big rewards, it gives new comers great incentive to get involved with using or earning coins NOW - to catch the wave - so to speak. Removing this incentive means there is less interest in this new money, and less growth.

Another great definition for a Ponzi scheme. And totally true. I mean, the first few people purchasing the ticket are indeed taking more risk since the scheme isn't popularized just yet! The only problem with that, however, is that with bitcoin everyone is an "early adopter" at some point if he holds on to his coins long enough (as long as the system didn't collapse yet).

it, once speculation stops being so novel, and mining stops being so profitable, it will start being used the way it was intended, because there really is no better use.

I explicitly outlined in the first post why that scenario would be much worse than the current one. You're hoping for the total removal of the electricity-cost anchor. That's a nightmare.

This is not to say that getting in "late" is bad though.  Mining is not the only way to make coin, trading goods and services is an excellent way to earn your way into the economy.

You forgot to add: "provided the coins' price doesn't drop in half before you get the chance to sell/reuse them".

If you have a deflationary growth economy, everybody win, even if you're a latecomer. 

Unless enough people realize the trick and escape the ship before it sinks. But if we live in a world of zombies then sure, it won't fail until it snatches enough victims so that it has no space for any new naive newcomers. We're talking hundreds of millions of potentially stupid (or speculative) people.

[kiba]

Unless enough people realize the trick and escape the ship before it sinks. But if we live in a world of zombies then sure, it won't fail until it snatches enough victims so that it has no space for any new naive newcomers. We're talking hundreds of millions of potentially stupid (or speculative) people.

Must be a ponzi scheme! http://bitcoinweekly.com/articles/reactions-to-bitcoin

That comic was not created by me. I paid somebody to create it and I paid somebody 22 times total for content on http://bitcoinweekly.com. I have one current employee, several freelancers, and two cartoonists over the lifetime of Bitcoin Weekly. I am even employed by somebody else. Some spectulative economy, eh?  

Did ya know the marketplace is buzzing with so much activities that moderators have to subdivide it into sell and buy? You said virtually the whole market is speculative, right? So, is that 95%, 85%, 75% or what? How would you measure it?

Let end it with a bitcoin bubble comic: http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value

[Suggester]

That comic was not created by me. I paid somebody to create it and I paid somebody 22 times total for content on http://bitcoinweekly.com. I have one current employee, several freelancers, and two cartoonists over the lifetime of Bitcoin Weekly.

I hope you paid them after the price crashed not before

I am even employed by somebody else. Some spectulative economy, eh?  

If you received your bitcoin sallary around the 12th of April you probably wouldn't mind the speculative economy. If you got it around the the 10th of May though you would've been on my side now.

Did ya know the marketplace is buzzing with so much activities that moderators have to subdivide it into sell and buy?

So? I never said it wasn't growing. I said it was a Ponzi scheme. A growing Ponzi scheme is still a Ponzi scheme. Moreover, Ponzi tickets were a valuable commodity at a time.
Tell me, how would a commodity buyer or a service provider like to price their goods/services to a roller coasting currency? I personally would never sell anything in BTCs unless I can liquidate it into fiat within 24 hours. Make that 12 hours if the transaction was huge.  How does that serve a "medium of exchange" purpose? Hell, you can't even go on vacation for a week without worrying your coins might be worth next to nothing by the time you come back. That's poison for any currency.

You said virtually the whole market is speculative, right? So, is that 95%, 85%, 75% or what? How would you measure it?

I don't need to "measure it". Suffice is to see the price skyrocket 10 fold in a month before crashing 50% within 10 days. I don't think that was due to the increase of genuine demand on bitcoin, do you? The bitcoin market didn't expand 10 times in a month before suddenly shrinking to half in 10 days. The current design has turned this beautiful idea into a speculators den.

[kiba]

That comic was not created by me. I paid somebody to create it and I paid somebody 22 times total for content on http://bitcoinweekly.com. I have one current employee, several freelancers, and two cartoonists over the lifetime of Bitcoin Weekly.

I hope you paid them after the price crashed not before

I am even employed by somebody else. Some spectulative economy, eh?  

If you received your bitcoin sallary around the 12th of April you probably wouldn't mind the speculative economy. If you got it around the the 10th of May though you would've been on my side now.

Did ya know the marketplace is buzzing with so much activities that moderators have to subdivide it into sell and buy?

So? I never said it wasn't growing. I said it was a Ponzi scheme. A growing Ponzi scheme is still a Ponzi scheme. Moreover, Ponzi tickets were a valuable commodity at a time.
Tell me, how would a commodity buyer or a service provider like to price their goods/services to a roller coasting currency? I personally would never sell anything in BTCs unless I can liquidate it into fiat within 24 hours. Make that 12 hours if the transaction was huge.  How does that serve a "medium of exchange" purpose? Hell, you can't go on vacation for a week without worrying your coins might be worth next to nothing by the time you come back. That's poison for any currency.

You said virtually the whole market is speculative, right? So, is that 95%, 85%, 75% or what? How would you measure it?

I don't need to "measure it". Suffice is to see the price skyrocket 10 fold in a month before crashing 50% within 10 days. I don't think that was due to the increase of genuine demand on bitcoin, do you? The bitcoin market didn't expand 10 times in a month before suddenly shrinking to half in 10 days. The current design has turned this beautiful idea into a speculative den.

Actually, I paid my writers through all the turbulence. I dropped the payment rate there and there, but I don't remember much raising prices. The price deflation was extreme  that I was not sure if I keep pace with the salary.

I don't have any regret at all. Growing the bitcoin economy is a marathon and my business is not a sprint.

[Meni Rosenfeld]

@ Rlutz - FAQ added.

@ Suggester - As I said, I agree that Bitcoin is currently highly speculative which is unhealthy. The way to solve this is to get more mainstream shops to accept Bitcoin payments. Why do you keep obsessing about speculation as if that's all there is to Bitcoin?

In a pyramid, each person can own at most one ticket and can sell as many copies of that ticket as he likes. This will necessarily collapse as we run out of people without tickets. In Bitcoin I can have as many bitcoins as I can get, and I can send each only once. Thus it's like any other commodity.

In a ponzi, there is someone running the show who promises high returns on investment. In Bitcoin - even in its current unfortunate highly speculative state - there's no one at the top, and there's nobody (except some crazies) promising returns. It's you who evaluates the situation (perhaps based in part on the opinions of some people) and expects them to rise. If your evaluation turns out correct, more power to you.

[Suggester]

I don't have any regret at all. Growing the bitcoin economy is a marathon and my business is not a sprint.

And what exactly is the problem in joining a sane, stable marathon? I have yet to see a single economic or technical argument against my suggestion. I think most "skeptics" are simply happy with the current system because they want to earn huge early-adopter profits when more patsies join in.

I'm even beginning to seriously doubt that Satoshi (not his real name) specifically designed the system that way so he could get away with whatever he made at the very beginning before the network went public. The dude could simply be a millionaire now. You guys are just hoping to become mini-Satoshis when more people jump on board.