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Author Topic: Cory Doctorow discusses the Pros and Cons of BitCoins  (Read 2146 times)
JesseChisholm
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June 21, 2012, 12:02:56 AM
 #1

Check out: http://boingboing.net/2011/05/21/bitcoin-skeptics-and.html

Boing-Boing is a site that hosts lots of "grid-computing" or "cloud-computing" projects.  Basically anything that can be divvied into small work chunks and passed out to a bazzilion personal computers to have the work done in parallel.  typically everyone's computer is an unpaid volunteer.

So it makes sense for them to be interesting in the topic of BitCoins ( where the computational intensity of being a banking system is shared by a bazzilion personal computers ).

I found quite interesting the comparison between BitCoins and Real Money:

BitCoin: designed to be quite difficult to make, and practically impossible to forge.

Real Money: designed to be as cheap as possible to make, and practically impossible to forge.

As near as I can figure the main reason to make BitCoins difficult to create is to pace their deployment over several years.

But with the removal of the mining option from the regular client, and the advent of the dedicated GPU parallel miners, and Mining Pools ... "proof-of-work" boils down to a case of The Rich Get Richer.

The rich (in Real Money) can afford the computer systems to dedicate to mining to become richer (in BitCoin).

I realize that no discussion here is going to change BitCoin or Real Money, but I find it a fascinating (im)balance in monetary systems.

-Jesse

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June 21, 2012, 12:13:49 AM
 #2

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If you want to limit supply, there are cheaper ways to do that, too. And proof-of-work doesn't, anyway (it just gives the lion's share to the guy with the cheapest/biggest hardware).
How the coins manage to come into existence is the least interesting part of how Bitcoin works since mining is just the first data point on a very long series of transactions those coins will make. In the Bitcoin economy seigniorage is only a temporary phenomenon so it doesn't matter in the long run how it is initially distributed. Those miners only get to spend their coins once.
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June 21, 2012, 12:13:57 AM
 #3

btw the correct spelling is Bitcoin  (protocol, payment system, node network) and a bitcoin or bitcoins (currency units)

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June 21, 2012, 02:29:44 AM
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The rich (in Real Money) can afford the computer systems to dedicate to mining to become richer (in BitCoin).

Right now the miner's profitability is at a higher level than it has been but let's say that this level is a constant for the purposes of this discussion.

So Bob the miner spends today $1,000 on (used) hardware, and gets 1.4 Ghash/s.

He'll earn 0.6 BTC per day, worth about $3.84 at the current exchange rate ($6.59).

His electricity for that rig (725 Watts) costs $2.61 per day, so his gross profit is about $1.23 per day (or 0.2 BTC per day).

Assuming the exchange rate and difficulty do not change over the next one year period, Bob will have taken in about $450 worth of gross profit.

Let's say he then sells his rig, at $800 (just 20% discount for being used another year), and is left with $250 worth of net profit.

So for a $1,000 investment, Bob got a 25% return.  This is not including his time invested.

In this example, Bob did better at mining than using that $1,000 to buy bitcoins outright.

But this is assuming the exchange rate didn't change.

Let's say instead over the next year the exchange rate went up a little over 50%, from $6.59 to $10.00 but let's also presume that the difficulty rises so that the profitability stays at about the same level it is now.

Presuming Bob sells enough bitcoins each month to pay for his electricity costs, he'll have roughly the same 0.2 BTC in profit per day.  So one year later, Bob will have the 0.2 X 365 = 73 BTC in profit, but at $10 per BTC that is a year from now worth $730 USD.

And at the end of the year his equipment can be sold for $800, so subtract $200 from the profit, leaving Bob with $530 for mining, or a 53% profit on his $1,000 investment.

Next take Joe the speculator.   Today Joe simply buys $1,000 worth of bitcoins -- at $6.59 he gets about 150 BTC.  A year from now at $10 per, his stash is worth $1,500 so he profited $500, or about 50%.

Bob went through the effort to mine, including the acquisition and disposal of equipment over the one year and came out no better than Joe.  The reason Bob did no better than Joe was because Bob's $1,000 was invested in hardware that doesn't gain in value.

If the exchange rate were to have gone even higher, Joe the speculator would have made more profit (and a greater ROI) than Bob the miner.

Now what happens in practice is that network-wide the mining capacity lags price so if the exchange rate goes up there are periods of time that margins for mining are generally higher.  But if Bob is in Bitcion for the long term he actually would prefer the exchange rate not rise, at least not while he still is invested in the hardware.  This also means that when the exchange rate drops quickly, miners are better off shutting down so as to not lose money on electricity.

The point of all this was to show how if the exchange rate goes up, speculating does better than mining.  If the exchange rate goes down, mining does better than speculating.  Mining can still lose money, but you can lose it a lot faster from pure speculation.

So this "rich get richer" has nothing to do with being able to buy the (relatively) expensive equipment that has caused a high barrier of entry that excludes the poor from mining.  Mining is quite simply just a less risky form of speculating on the bitcoin exchange rate.

But for putting money into speculation, you are exactly right.  A person who has only $25 to speculate will only get $25 richer if the exchange rate doubles.  Where the person who buys $1,000 worth of bitcoin will become a $1,000 richer if the exchange rate doubles.

But for the poor there is no barrier to entry for speculating.  You can buy $50 worth of bitcoins and pay nearly the same rate as that a wealthy person who speculates would pay, for example.

This cuts both ways though.

Eight months ago when the exchange rate was under $3 there were still people calling bitcoin a ponzi and complaining about those who were lucky and got in under $1.   But they weren't expressing concern over those who had bought at $30, $15, $8 and $5 who remained underwater yet or had sold at a loss.  There still are many people holding bitcoins today who are severely underwater on them yet.   Just as the wealthy tend to gain more (dollar gain per capita) on the way up. that same subset of the population were the ones who mostly saw losses on the way down.

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June 21, 2012, 09:14:11 AM
 #5

I found quite interesting the comparison between BitCoins and Real Money:

BitCoin: designed to be quite difficult to make, and practically impossible to forge.

Real Money: designed to be as cheap as possible to make, and practically impossible to forge.

That's quite an incomplete comparison between Bitcoin and 'real' money (strange name by the way, since Bitcoin is just as real money as the euro or dollar). The reality is more like this:

Bitcoin: not owned or controlled by a anyone, independent of banks and governments, nobody has control over your money or transactions, it's anonymous, transparent, transactions are fast and extremely cheap (virtually free), safe, secure, global (anyone can send and pay to anyone else in the world, no messing with currency rates), impossible to counterfeit, and nobody can create it out of thin air.

Fiat Currency: owned and controlled by banks and governments, they can seize your account and monitor or block transactions as they see fit, it's not anonymous (everything is linked to your personal details), not transparent, transactions are slow and they charge ridiculous fees, unsafe, very insecure, local (international transactions are even slower, more expensive, and involve more hassle and different currencies), relatively easy to counterfeit (it's almost common business) and banks can create it by the billions at the press of a button.

In theory, there's no difference between theory and practice. In practice, there is.
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realnowhereman
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June 21, 2012, 11:10:57 AM
 #6

Fiat currency is actually designed to be incredibly easy to forge (sorry... "print"); but government's use laws to stop you from doing it -- they want it to be easy so that they can print more when it suits them.

You, on the other hand, can't buy the paper, ink or anti-counterfeit technologies in the currency by law.  None of it is inherently "hard" though.  I've read (but as always can't find the link) that modern counterfeiters are perfectly capable of making currency indistinguishable from the real thing (and are often from countries without the laws that prevent the natives from counterfeiting -- how much does China care to stop its citizen's copying Euros?).  That might actually be why we're seeing such a push from governments to go cashless -- they know that there is a clock on physical cash.

Bitcoin is not legally impossible to forge; it's mathematically impossible to forge (with certain caveats on my casual use of the word "impossible").

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June 21, 2012, 11:34:02 AM
 #7

Fiat currency is actually designed to be incredibly easy to forge (sorry... "print"); but government's use laws to stop you from doing it -- they want it to be easy so that they can print more when it suits them.

This needs banging home to people. Over the last few years in the UK, I've seen the main GBP "growth" policy as basically being to water it down so it's more widely available. People don't seem to get their heads round the idea that when more money is printed, the money you've got is worth less. Coupled with no incentive to save, it's very difficult to see fiat currency as anything except a way to keep foreign trade balanced and banks happy.

The amazing thing about Bitcoin is that "monetary policy" is basically a feedback algorithm, based on supply and demand rather than political and inter-geographical agendas. That's a strength because it's *predictable* - much more so than a central bank deciding whether or not to "pump money" into an economy because it hasn't got any better ideas.

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June 21, 2012, 12:17:49 PM
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This needs banging home to people. Over the last few years in the UK, I've seen the main GBP "growth" policy as basically being to water it down so it's more widely available. People don't seem to get their heads round the idea that when more money is printed, the money you've got is worth less. Coupled with no incentive to save, it's very difficult to see fiat currency as anything except a way to keep foreign trade balanced and banks happy.

Couldn't agree more.

Even more amusing (and I use the word quite wrongly), is that the Quantitative Easing so far has been done by depositing loans in the banks' Bank of England account -- they are loans so that the charade that it can be undone continues.  This increases the capital that the banks have on their balance sheets (none of them have actually made use of it yet -- which was what the government claimed was the reason for doing it... "get credit flowing again" and all that).  At the same time the government raised the banks capital ratios, so that money couldn't be lent out.  In effect, the government have supplied the capital needed to meet the regulations they themselves introduced.

Then the game gets even more fun.  The government allows the banks to purchase government bonds and treat them as if they are capital (hence staying within the new capital reserve ratios).

Say what?  The government lent the banks magically created money so that the bank could purchase bonds.  The government spends the cash... which they printed and then borrowed and pays the banks interest on it.

Tell me that's not messed up?



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June 21, 2012, 12:38:44 PM
 #9

The rich (in Real Money) can afford the computer systems to dedicate to mining to become richer (in BitCoin).

Right now the miner's profitability is at a higher level than it has been but let's say that this level is a constant for the purposes of this discussion.

So Bob the miner spends ...



Very nice example!

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JesseChisholm
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June 21, 2012, 06:05:25 PM
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@hazek, thank you for the spelling corrections.

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JesseChisholm
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June 21, 2012, 06:10:31 PM
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@Kazimer, re: "Real Money"
You are correct, this term is not really reflective of what I meant. And too easily taken for something I didn't mean.

And in the sense that a currency is only as "real" as the value people put in it, then Quatloos (in the Star Trek universe) even qualify as "real".

But no, I was not counting "Fiat Currency" as typically in the set of "Real Money".

What I meant by "Real Money" is that it is backed by some physical commodity that has some kind of intrinsic value, like gold.

Most "Fiat Currency" is no longer backed by gold, even if it once was.
Some "Fiat Currency" were originally backed by "proof-of-work". (e.g., carving the stone into a coin)

But "Fiat Currencies", even those backed by gold, seek to get increase supply with the minimum of work expended, whereas Bitcoin is increasing the work expended (over time) to increase the supply.

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JesseChisholm
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June 21, 2012, 06:12:28 PM
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@Kazimer, @realnowhereman,
I stand corrected on the "hard/easy to counterfeit" aspect of "Fiat Currency".  Even if I wasn't trying to talk about "Fiat Currency".

Gold, though, is still pretty hard to counterfeit. Smiley
It isn't used as a direct currency much these days.

-Jesse

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JesseChisholm
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June 21, 2012, 06:14:10 PM
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@Kazimer,
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banks can create [Fiat Currency] by the billions at the press of a button.

Well, technically, bitcoin also is "created" at the press of a button.

It just takes lots of computer time to finish reacting to that button push.  Analogous to (but likely longer than) the printing time it take for the Fiat system to react to the button push.

-Jesse

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June 21, 2012, 06:38:23 PM
 #14

The proof-of-work isn't simply wasted watts to make things hard, it also plays an critical role in the cryptographic security model of the blockchain.  Without it, a trusted central server would be required to produce the currency as well as verify that all transactions are valid, thus reintroducing a central bank and central point of failure.

This system doesnt work without proof-of-work, and other methods of trying to do the same thing have been attempted as code forks and every one has been quickly broken by other community members just to illustrate the point.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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June 21, 2012, 06:46:57 PM
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Post is over a year old...


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June 21, 2012, 07:16:57 PM
 #16

What I meant by "Real Money" is that it is backed by some physical commodity that has some kind of intrinsic value, like gold.
One could argue if gold actually has any "intrinsic value".

If people say that dollars are backed by gold (which it isn't as you state correctly, but suppose it were) then what does that mean, really? What is gold backed by?

If people accept that gold doesn't need to be backed by anything, or can act as a means of backing other things, then I don't see why the same wouldn't hold for bitcoins.

Well, technically, bitcoin also is "created" at the press of a button.
Yeah, but (and I know you know this, but I just wanna clarify this to everybody) there's no difference for a bank to create one million, or ten million, or one billion. Money isn't even printed anymore. They just store a random number in a computer, and that amount of dollars suddenly came into existence. Magic.

Bitcoin cannot be created at will. Unlike fiat currency (or gold!) the exact amount of bitcoins in existence is known and public for everybody, and can be predicted for the foreseeable future.

In theory, there's no difference between theory and practice. In practice, there is.
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JesseChisholm
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June 21, 2012, 07:24:29 PM
 #17

The rich (in Real Money) can afford the computer systems to dedicate to mining to become richer (in BitCoin).

Right now the miner's profitability is at a higher level than it has been but let's say that this level is a constant for the purposes of this discussion.

So Bob the miner spends ...



Very nice example!

It is a good example.
But it only looks at Bob.  Not at the differences between Bob and Alice (The Rich).

In your example, the out of pocket expense for Bob is under $2K for that first year.
    ( $1000 + ($2.61 * 365.25 days in a year) )
        (before he can sell the PC and recoup some of that expense)
Bob's mined income for the year is about 219 BTC.
    (0.6 BTC / day * 365.25 days in a year)

That comes to about $9/BTC.
If Bob does get $800 for his old rig, the final cost is about $5/BTC; the profit you calculated.

Bob will only make a profit at all if he can sell the old rig for more than: $510.
(a good probability, but no guarantees in this economy. that's one of the risks Bob is taking.)

HOWEVER, and I think it is a big "however", that initial outlay of $1953 is a larger percentage of Bob's expendable income that it is of Alice's.

If you look at the same percentage of "expendable income" (or "investment capital" as Alice likes to call it) then the rig Alice gets is much more powerful than Bob's rig.

Alice's rig will likely produce at better than 1.4Ghash/s.

My contention is that for the same "percentage of expendable capital" Alice will harvest BTC at a higher rate than Bob will.
( and, therefore, at a better profit margin )

And therefore, my conclusion of: for the same level of personal pain, "the Rich get richer" than the non-Rich.

-Jesse

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JesseChisholm
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June 21, 2012, 07:30:50 PM
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True, the event is long over, but I was using the quotes/transcripts as a starting point for discussion in this thread.

The differences (especially for us Newbies) between the Bitcoin economic system and other economies is not intuitively clear.

-Jesse

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June 21, 2012, 07:40:31 PM
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Quote
Boing-Boing is a site that hosts lots of "grid-computing" or "cloud-computing" projects.  Basically anything that can be divvied into small work chunks and passed out to a bazzilion personal computers to have the work done in parallel.  typically everyone's computer is an unpaid volunteer.
Eh? Are you sure you are speaking about BOINC and about https://boinc.berkeley.edu/ wich is totally unrelated to this "boing boing" thing?
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June 21, 2012, 08:22:06 PM
 #20

DAG NAB IT!

My session timed out while I was typing my response and the entire thing got lost.

I had done "Preview" many times, but that did not (apparently) save a copy anywhere in the system.

Sigh.

I will attempt to recreate my thought process, but I will remember to Ctrl-A Ctrl-C before I click "Post" from now on.

-Jesse

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