Bitcoin : Where can it fail ?

[epigrad]

A few notes:

- The idea its "secure" is absurd - the crypto properties of it are mainly for the "Math must be done for bitcoins to be created" part, and the "Your name isn't attached part". But the actual "money"? For most people, as secure as leaving $20 on the table with a note that says "Do not touch!", or kept in a PayPal account with your cat's name as the password.

- I'm not sure why "regular" people would ever use it - the vast majority of merchants will take dollars, and you're paid in dollars (or whatever). Why convert back and forth, and pay fees? I honestly think that "Criminals and Internet Libertarians" are as big as its market is ever going to get.

- It's *really* fun to hang around in Bitcoin forums and watch the speculation and the echo chamber. It's like listening to Goldbugs, but with video cards.

[Dark567]

Once the first big hack occurs, I can't see anyone holding onto them. The value will plummet.

I wonder if I can find anyone willing to lend me bitcoins so I can short sell....

[Technical Ben]

Suprised it's not posted here already...
http://www.theregister.co.uk/2011/06/19 ... pse_again/
So, were your predictions correct?

[Randomizer]

Yeah, I just saw something on one site that purportedly contained a ton of email-login-password combos (although the passwords were apparently scrambled) for Mt.Gox about an hour ago, posted yesterday. I guess those were probably the real logins, then?

Bitcoin has certainly gained a lot of attention but the number of people actively developing the code doesn't seem to me to be that many. There's six listed on the homepage and Satoshi, the guy that came up with it, last made a commit on github in December. From what I've read the protocol isn't finished (though what parts exactly haven't been done or how important they are I've no idea) and the software itself is considered "beta" software. Honestly I'd think people serious about investing in Bitcoin would be apt to invest time and expertise into this one piece of software which is the foundation of their entire newfangled monetary system. Obviously not everyone interested in Bitcoins has those skills, but surely there must be a significant number who do.

Of course, that's a separate issue from the Mt.Gox thing. It makes me wonder about mybitcoin, though, which is an online wallet service. If people can get into Mt.Gox and screw around, I'd theorize they can get into mybitcoin and steal everyone's coins. Not that I would've used them for anything worth over a couple bucks anyway, and even then only as a temporary measure until I'd downloaded the official software.

[Xeio]

Yeah, I just saw something on one site that purportedly contained a ton of email-login-password combos (although the passwords were apparently scrambled) for Mt.Gox about an hour ago, posted yesterday. I guess those were probably the real logins, then?

They were real passwords, they were hashed. A significant number are vulnerable to a google search, though the ones starting with '$' are reasonably secure.

Of course, that's a separate issue from the Mt.Gox thing. It makes me wonder about mybitcoin, though, which is an online wallet service. If people can get into Mt.Gox and screw around, I'd theorize they can get into mybitcoin and steal everyone's coins. Not that I would've used them for anything worth over a couple bucks anyway, and even then only as a temporary measure until I'd downloaded the official software.

Essentially, yes. I mean, it's a similar problem to with any online system related to money, though most of the bitcoin ones at this point are just thrown together by the community around bitcoin. Even if the software is secure (and there have already been a few minor hiccups at times with it) every additional third party involved is another attack vector.

[Thibaw]

Dan Kaminsky took a look at bitcoin and claims that it does not scale very well.

Check out the slides at his blog:

http://dankaminsky.com/

[Iceman]

It's really a matter of Bitcoin having no native backing.

In order for any form of currency to function, there has to be some end 'taker' or buyer of that currency. Someone has to back it.

For the central bank of an issuing country, currency is a liability on their balance sheet, while the other assets they own are well...assets.

The owned assets must back that liability such that if the entire currency system were to unwind, loans would all be repaid and assets would be returned in exchange for the currency.

When a central bank releases currency, they do it by buying securities, when they wish to reduce currency, they sell assets.

The country issuing currency also stands to say that products as services from the issuing country can be paid for with that currency. So The currency has a specified area of usefulness in which it can be exchange for goods and services in a way mandated by law.

So, where does Bitcoin then fail?

- No assets back Bitcoin in anyway. There's no Bitcoin foreign reserve or secret cache of gold.

- There is no mechanism to ensure Bitcoin will be accepted currency. Acceptance of Bitcoin is completely voluntary and its value will always be based on someone else voluntarily taking it. There is no Endgame to it.

These to me make it fundamentally not function.
Any issues regarding security, scalability, inflation etc... are very much secondary to these issues of it holding no asset backed or utility value.

[Vash]

It's really a matter of Bitcoin having no native backing.

In order for any form of currency to function, there has to be some end 'taker' or buyer of that currency. Someone has to back it.

For the central bank of an issuing country, currency is a liability on their balance sheet, while the other assets they own are well...assets.

The owned assets must back that liability such that if the entire currency system were to unwind, loans would all be repaid and assets would be returned in exchange for the currency.

When a central bank releases currency, they do it by buying securities, when they wish to reduce currency, they sell assets.

The country issuing currency also stands to say that products as services from the issuing country can be paid for with that currency. So The currency has a specified area of usefulness in which it can be exchange for goods and services in a way mandated by law.

So, where does Bitcoin then fail?

- No assets back Bitcoin in anyway. There's no Bitcoin foreign reserve or secret cache of gold.

- There is no mechanism to ensure Bitcoin will be accepted currency. Acceptance of Bitcoin is completely voluntary and its value will always be based on someone else voluntarily taking it. There is no Endgame to it.

These to me make it fundamentally not function.
Any issues regarding security, scalability, inflation etc... are very much secondary to these issues of it holding no asset backed or utility value.

So, what's the difference between Bitcoin and governments with 98% of GDP in debt? Sorry, it's a terribly ignorant question, but I figure I would learn a lot from it. I am supposing that the government still has assets, but are there really enough?

[Dark Avorian]

It's really a matter of Bitcoin having no native backing.

In order for any form of currency to function, there has to be some end 'taker' or buyer of that currency. Someone has to back it.

For the central bank of an issuing country, currency is a liability on their balance sheet, while the other assets they own are well...assets.

The owned assets must back that liability such that if the entire currency system were to unwind, loans would all be repaid and assets would be returned in exchange for the currency.

When a central bank releases currency, they do it by buying securities, when they wish to reduce currency, they sell assets.

The country issuing currency also stands to say that products as services from the issuing country can be paid for with that currency. So The currency has a specified area of usefulness in which it can be exchange for goods and services in a way mandated by law.

So, where does Bitcoin then fail?

- No assets back Bitcoin in anyway. There's no Bitcoin foreign reserve or secret cache of gold.

- There is no mechanism to ensure Bitcoin will be accepted currency. Acceptance of Bitcoin is completely voluntary and its value will always be based on someone else voluntarily taking it. There is no Endgame to it.

These to me make it fundamentally not function.
Any issues regarding security, scalability, inflation etc... are very much secondary to these issues of it holding no asset backed or utility value.

So, what's the difference between Bitcoin and governments with 98% of GDP in debt? Sorry, it's a terribly ignorant question, but I figure I would learn a lot from it. I am supposing that the government still has assets, but are there really enough?

Notice the second point, that one is really important. A government of almost any country (except some really micro-countries) has the ability to force a pretty large array of businesses [read:anything within it's borders] to accept that currency. So people trust that they can use that currency even if it's not fantastically stable.

[Iceman]

So, what's the difference between Bitcoin and governments with 98% of GDP in debt? Sorry, it's a terribly ignorant question, but I figure I would learn a lot from it. I am supposing that the government still has assets, but are there really enough?

Perfectly valid question, and I probably should have pre-emptively answered it, but I don't want to then wander really far off topic.

To try and simplify it as much as possible...the debt owed by a country is NOT secured by its assets. - This can seem odd to some people, because a Bond from a company is secured by the assets of that company. The Debt of a country though is secured only by its expected revenues, or cashflows, that it generates from taxes and so forth.
So when you have a US Bond, you're being promised future revenue the country earns...you do not have any claim to the Assets of the country.

So there's kind of two Steps.... A Bond (Gov't Debt) is a promise to pay you Currency...
Currency is a promise to give you...something. (Goods, services, gold, securities etc...)

So the country can owe you tons and tons of currency...but that currency can still have value, provided people are exchanging enough goods and services for it, and providing it is still backed up by the Central bank.

http://en.wikipedia.org/wiki/Federal_Re ... ance_sheet

This is what the US Central bank's balance sheet looks like right now...

About 3 Trillion in Assets, 1.2 Trillion in Liabilities. (Some of the Assets here are very questionable TARP related stuff, it would have been much cleaner to show this in 2007 it was about $850 Billion on each side, but that's a whole other discussion)


The Important part here is the 'Currency in Circulation' part of liabilities. - There is just over 1 Trillion in currency circulating. That should seem low...The US M2 'Money Supply' is over 9.7 Trillion...so why does the Central Bank say there's 1/10th as much?

Because banks lend money and multiply it by the inverse of the reserve rate. So, the US Central bank releases $1 trillion in currency to the world. People deposit that money...the banks then lend it out even though they still show you as having it.
(Only 10% of the money a bank shows in Deposits is actually there at any one time...which is why a 'run on the banks' is dangerous)

So, if money were to all rewind itself, everyone paid back their loans, and banks didn't lend, and you all withdrew money from every bank...there'd be just over $1 trillion, not $10 trillion
You could then take that hard currency to the Central Bank, and they would exchange it for the assets they hold.

Obviously this does not occur, but small bits of it occur all the time. A bank that wants currency will sell securities to the Central Bank, and if the Central Bank wants to lower circulation they will sell securities to the banks instead and retire the currency. This is done on a daily basis on some level, and on a slightly larger scale at any government debt auction.

So to get back to your question...while the US government owes in the area of $13 trillion to people (Over half of it is 'owed' to itself) and $10 Trillion of Money supply is floating around, the actual obligation of the Central Bank is only $1 Trillion in currency. (Actually $860 Billion, because the Treasury is in physical ownership of about $150B of it)

Since the Central Bank has $3 Billion in assets (And again in reality more, since they've got things intentionally undervalued, like $11 Billion in gold really worth over $300 Billion)
They can still pay all their obligations, even though the government is in debt.

The way they become related of course is that if a government becomes so indebted that it either is printing money to pay it (Increasing circulation Liability), or simply causing inflation due to higher rates, then the currency value drops.
That's why people care about the Debt to GDP thing...Is the country so in debt...that it's not even producing enough goods/services to let you spend all the money it owes if you bought everything it made that year. The two aren't really correlated logically, because they ignore the physical assets in a country. (Country based on mining Diamonds might have GDP higher than its total capital assets, while a service based country might have $300 Trillion worth of office buildings and technology in it)
But they do make it easy to compare one country's debt load to another's while accounting for size of that country's economy.

So back to the Bitcoin part,

No one is backing Bitcoin's coins...There are no assets, there is no legal obligation to anyone. A Central bank's assets set a floor for the value of its currency and a last resort means of exchanging it. Bitcoin does not have this...there is no terminal value...even theoretically....for Bitcoins. And if it's terminal value is 0...its present value is 0.

[Thibaw]

The value of fiat money does not come from backing. Noone guarantees you a certain amount of goods or gold or anything for your dollar.

The value of fiat money comes from trust, i.e. everyone is accepting it now, so you trust that anyone will be accepting it tomorrow. And there are laws that force people to accept it as a currency. But history has shown that if the trust is gone, the laws wont help and people will start trading with foreign currencies or gold or cigarettes and alcohol.

RIght now several hundred enterprises accept bitcoin. This is building trust. If this number continues to rise then bitcoin might one day be just as good as any other fiat money.
I can only see technical issues ending that story.

[Zamfir]

Noone guarantees you a certain amount of goods or gold or anything for your dollar.

In my cases, those noones are called the European Central Bank, whose official goal is to keep the value of my euros as close to a 2% inflation trajectory as they can achieve, based on official surveys of the changes in the purchasing power of euros. I don't know how much more explicit a guarantee you can expect. If anything, people complain that the guarantee is too hard, too fixed.

It's clearly a lot more explicit than promising to give me a fixed amount of gold. I don't care about gold in itself (except for my wedding ring), but about the purchasing power of that gold. Putting in a gold middleman doesn't make the guarantee harder.

[Thibaw]

Zamfir, no. The euro, just like the dollar, is no longer backed by anything. The ECB is under no obligation to give you any fixed amount of goods or services for your euro.

This leads to a lot of confusion. Our currency system is based on trust and promises, not on legal obligations. You are right when you say, that the ECB is a very trustworthy institution and when they aim to keep inflation below 2% we can expect with a very high degree of confidence that inflation will indeed be low. And you are also right, when you say that a backing by gold has other insecurities and does not make the system safer, no question. I agree. But fundamentally, my statement is 100% true: "No one guarantees you a certain amount of goods or gold or anything for your dollar or euro."

And bitcoin is very similar to this system. Only this time the correctness of an algorithm and the unbreakability of a cryptographic problem controls the amount of bitcoin. And enthusiastic early adopters that offer goods and services for bitcoin create some value. Public trust in these two mechanisms ("Is the software safe?","Will people accept bitcoin tomorrow?") is very low compared to euro or dollar.

[WarDaft]

Personally, I don't think Bitcoin can ever fail, not as a supplementary currency at least.

That is, as a peer to peer network phenomenon, it will never go away (unless made illegal, like Napster.) It will however almost certainly not become a major currency.

It will crash. Many times. When it does, some people can buy large amounts of it's currency cheaply. It is then in those people's interest to restore it's novelty. This can be done with primarily time and minimal expense. They then have a worthwhile investment for their effort and patience if they can carefully sell their hoarded values after the (even partial) Resurrection of the currency.

This depends only on the existence of naive optimists hoping for the existence of an economy "not ruled by tyrannical bankers." Like that will ever be in short supply.

So it will go up and down, over and over, nearly endlessly. Short term optimism will always eventually overcome long term failure in something like Bitcoin, which only need be trusted by an effectively unboundedly naive subset of the global populace. In fact, I suspect that over time, this will be discerned by people of means and strived towards.




And yes, I know at least one poster on this page has witnessed me suggest a Bitcoin like system. I have not at all changed my mind about that topic, because I honestly feel my intent was never actually properly communicated in the first place (it was, after all, posted in the Computer Science forums, and should have been treated like a Computer Science query, rather than an economics proposition... it never was.)

Edit: I see that this is actually not a thread I clicked on but was rather linked too. I apologize. This necro may also have something to do with roughly 8 shots of vodka in under an hour (it's hard to tell exactly how much in a big glass, but the bottle's noticeably lighter now, and it was a 60oz-er)

[fifiste]

Well if the currency is needed to pay your taxes then it is - backed up by a "we won't stick you into jail for tax evasion service".

A nation is usually quite interested in keeping it's currency going as a valid mode of exchange.
So for bit-coins to have a more secure future some organization comparable to power of a good sized national government should have visible and understandable interest in providing its services/goods in exchange for bit-coins or using its power to force others to use bit-coins. (Or else!)

That's kind of how all such relations work two ways - I either give you something you want if you give it to me, or the second way I won't break your legs/put you in jail/bomb your country if you give it to me (all can also be viewed as something that you want a service of not getting your legs-broken )

[Yakk]

WarDaft, what about tulip bulbs? They where a sound investment that went up and down.

It can easily enter into the culture that stuff like bitcoins is a good way to lose your shirt. And while there may be other pyramid schemes that resemble bitcoins, there might be as likely to be a bitcoin bubble as there will be a tulip bubble today.

Ie, possible (for there to be a tulip bubble), but not likely.

[Tyndmyr]

Well, here's the thing with bitcoins. It's kind of an interesting idea, but it all depends on having miners. Without miners, the system ceases to work, because nobody's doing the math for the transactions. Bitcoins are finite. At some point, mining operations will necessarily cease. At that point, their plan is little more than "???".

So, while it's a sort-of functional currency atm, and it would certainly have been profitable to get into initially, it's got long term issues.

[aoeu]

Well, here's the thing with bitcoins. it be kind of an interesting idea, but it all depends on having miners. Without miners, the system ceases to work, because nobody's doing the math for the transactions. Bitcoins be finite. At some point, mining operations woll necessarily cease. At that point, their plan be little more than "???".

So, while it be a sort-of functional currency atm, and it woll-did certainly have been profitable to get into initially, it be got long term issues.

Actually, the spec had transaction charges in it since the beginning.

[Naurgul]

I don't think this is the problem. Bitcoin is more like a finite resource than a currency. As a medium of exchange, it has the same strengths and weaknesses as gold, for example. If you're in the camp of people who think gold can be a good currency, then you'll also think bitcoins will make a good currency. If you think that gold is not a good currency, then by extension you'll also think bitcoins are no good.

[Tyndmyr]

Well, here's the thing with bitcoins. it be kind of an interesting idea, but it all depends on having miners. Without miners, the system ceases to work, because nobody's doing the math for the transactions. Bitcoins be finite. At some point, mining operations woll necessarily cease. At that point, their plan be little more than "???".

So, while it be a sort-of functional currency atm, and it woll-did certainly have been profitable to get into initially, it be got long term issues.

Actually, the spec had transaction charges in it since the beginning.

At a certain point, someone will add transaction charges, yes. To the best of my knowledge, this was little more than a "at this point, we'll change to run off fees". No real definitions on how large the fees will be, or who can charge them. The more people you have mining/doing verification, the more secure the network, so there's an obvious tradeoff here that will suddenly be made explicit, and the costs of utilizing the currency will rise, while the overall pool of currency will remain finite.

It basically has to become irrelevant at that point. Further growth is impossible, and disadvantages pile up.

[Xeio]

At a certain point, someone will add transaction charges, yes. To the best of my knowledge, this was little more than a "at this point, we'll change to run off fees". No real definitions on how large the fees will be, or who can charge them. The more people you have mining/doing verification, the more secure the network, so there's an obvious tradeoff here that will suddenly be made explicit, and the costs of utilizing the currency will rise, while the overall pool of currency will remain finite.

The idea is that computing power of the network decides what fees are acceptable. So basically each miner decides how much they want to charge, and refuses to process any transactions below that amount. In theory that would create an average, and if you pay more or less your transactions will take longer or shorter to process since miners would prefer high transaction fee amounts...

[Iulus Cofield]

Bitcoin price bubble soars to record as investors grow nervous

As of Friday, a single Bitcoin traded at around $135, with the currency nearing $147 earlier in the week — up from about $20 at the start of February.

They're now trading for $160-$180.

[sardia]

One perspective on this is the media is unintentionally influencing the price by talking about it. I still recommend getting out, especially with such a nice bubble pushing up prices. No need to get greedy.

[PeteP]

It's not failing, but I would consider it a negative feature: The creation of new blocks is based on wasting computer resources. Adjusting the difficulty basically means ensuring that the whole network on average needs 10min per block, at the end one miner finds an acceptable hash and the work done by rest of the network is discarded (and all previous hash attempts done by the miner). And it's a security feature an attacker which invests more resources than the entire rest of the network can cause some trouble, so you can't just reduce the difficulty.
It's an interesting method and if Bitcoin is big enough, reasonably secure. But I dislike a concept which requires wasting resources.

[Naurgul]

Gold mining also wastes resources if you think about it like that. If the utility of bitcoin as a store of value or medium of exchange exceeds the effort required to "mine" it, then it will be mined and it's a net benefit. There's so many valid criticisms of bitcoin, why focus on this particular aspect?

[Yakk]

Yes, gold mining wastes resources. This is one of the reasons why gold is not a significant way to store value in this day and age.

[PeteP]

Gold mining also wastes resources if you think about it like that. If the utility of bitcoin as a store of value or medium of exchange exceeds the effort required to "mine" it, then it will be mined and it's a net benefit. There's so many valid criticisms of bitcoin, why focus on this particular aspect?

Well I'm not a supporter of the gold standard, but gold mining only uses as many resources as necessary to get gold. We do it in the most effective way we can. The purpose of the block algorithm is to require time, if we have a computer which is ten times faster , we just make block creation ten times slower. That would be like building steel walls in mines, to slow the process down.
And the process isn't for the creation of bit coins , nor do they derive value from requiring a huge amount of resources. The 25 Bitcoins per block (the number halves all 4 years) are just a temporary incentive. Mining is a bit of a misnomer, you don't perform calculations to create new coins, you create hashes for a new block till you find one which fulfills the difficulty requirements and get a Bitcoin reward. (Well I assume you know that, but the words are a bit misleading. Though the word mining kinda works because most people do it to get Bitcoins.)

Why I consider that a bad thing? Imagine Bitcoin were a really big currency and thus a lucrative target for any attacker. Then find the entity in the world with the most computational resources (including all resources said entity could possible get by teaming up with others). The Bitcoin network would have to continuously use more resources than said entity can command, to be safe from an attack. I consider that bad in the same way I consider starting an endless busy waiting loop in several of our best super computers as bad, it wastes resources.

[elasto]

It makes me assume that this is what the world's biggest botnets are doing when not carrying out DDoS's. Certainly if I had millions of computers under my control I'd be using them to create Bitcoins which I then funnelled anonymously to my central account.

People need to stop using Bitcoins! When you use Bitcoins the terrorists win!

[Naurgul]

Yes, gold mining wastes resources. This is one of the reasons why gold is not a significant way to store value in this day and age.

I hope Bitcoin fails because the effort of mining exceeds the value of the mined bitcoins but honestly I don't see it happening. Gold is much more difficult to carry around and gold mining wastes resources in a non-adjustable sort of way but still gold sees significant use as a store of value today. Bitcoins are much easier to exchange and store, not to mention that the difficulty of mining them gets adjusted automatically. They are much more resistant to this sort of thing, unfortunately.

Gold mining also wastes resources if you think about it like that. If the utility of bitcoin as a store of value or medium of exchange exceeds the effort required to "mine" it, then it will be mined and it's a net benefit. There's so many valid criticisms of bitcoin, why focus on this particular aspect?

Well I'm not a supporter of the gold standard, but gold mining only uses as many resources as necessary to get gold. We do it in the most effective way we can. The purpose of the block algorithm is to require time, if we have a computer which is ten times faster , we just make block creation ten times slower. That would be like building steel walls in mines, to slow the process down.
And the process isn't for the creation of bit coins , nor do they derive value from requiring a huge amount of resources. The 25 Bitcoins per block (the number halves all 4 years) are just a temporary incentive. Mining is a bit of a misnomer, you don't perform calculations to create new coins, you create hashes for a new block till you find one which fulfills the difficulty requirements and get a Bitcoin reward. (Well I assume you know that, but the words are a bit misleading. Though the word mining kinda works because most people do it to get Bitcoins.)

Why I consider that a bad thing? Imagine Bitcoin were a really big currency and thus a lucrative target for any attacker. Then find the entity in the world with the most computational resources (including all resources said entity could possible get by teaming up with others). The Bitcoin network would have to continuously use more resources than said entity can command, to be safe from an attack. I consider that bad in the same way I consider starting an endless busy waiting loop in several of our best super computers as bad, it wastes resources.

I think you are not separating the mechanism design part of it from the actual game. The process was made to emulate gold mining: god mining requires some form of trial and error that is reflected in the find-the-hash process. Also, the more effort is put from various parties in mining gold, the less gold each party actually mines because of all the conflict over finite resources: this is reflected in the raising difficulty thing.

For the people who created bitcoin, these qualities were desirable so they designed everything around that. Now, you can disagree that these qualities are desirable (I do) but you can also disagree with the particular way they implemented these requirements (I don't). Which one is it?

It makes me assume that this is what the world's biggest botnets are doing when not carrying out DDoS's. Certainly if I had millions of computers under my control I'd be using them to create Bitcoins which I then funnelled anonymously to my central account.

You mean like this?

People need to stop using Bitcoins! When you use Bitcoins the terrorists so-called free-market libertarians win!

Fixed that for you. Although at this point I think it's quite probable that the inventors of Bitcoin might have introduced it just to remind the world why the gold standard was a failure in the first place.

[KnightExemplar]

It makes me assume that this is what the world's biggest botnets are doing when not carrying out DDoS's. Certainly if I had millions of computers under my control I'd be using them to create Bitcoins which I then funnelled anonymously to my central account.

People need to stop using Bitcoins! When you use Bitcoins the terrorists win!

Botnets make money from ad-click fraud. Its unlikely that bitcoin farming (a CPU intensive task that will reveal yourself by causing all of the fans to go nuts) will be worth it for a botnet.

------------

Bitcoin will hopefully only be the first of many future cryptocurrencies. I think the overall idea of them is that they can be useful. However, as currently implemented, Bitcoins are far too speculative to be useful right now. The exchange rate has gone from $20 / Bitcoin to $200 / Bitcoin in just two and a half months. With the emphasis on limiting Bitcoins to an arbitrary number... it seems unlikely that Bitcoins are prone to artificial scarcity and speculation. Yeah yeah, I know they can be divided into "Satoshis" and 8-decimal places... but too many people are expecting Bitcoins to explode in usage right now.

Fortunately, there are plenty of other clones that are up and coming. Litecoins focus on RAM-heavy computation (ie: scrypt), which forces a full computer to carry out the calculations, and is harder to make GPUs work at full speed on it. They also offer faster confirmation speeds compared to Bitcoins. Namecoins use DNS-like scheme so that bitcoin addresses are easier to communicate. And when Bitcoin fails, I think we can all look upon the ashes of it, and then invent something better. IE: iPhone and Android weren't the first smartphones or PDAs. The Palm Pilot was. But the iPhone and Android built on top of that experience.

[Yakk]

Yes, gold mining wastes resources. This is one of the reasons why gold is not a significant way to store value in this day and age.

I hope Bitcoin fails because the effort of mining exceeds the value of the mined bitcoins but honestly I don't see it happening. Gold is much more difficult to carry around and gold mining wastes resources in a non-adjustable sort of way but still gold sees significant use as a store of value today.

No, not really.

~13 billion dollars per year is produced, against a world GDP of 70 trillion, or 0.02% of world GDP.

World publicly traded financial assets is about 200 trillion dollars, while the total value of all gold ever mined probably tops out at around 10 trillion dollars. So all the gold in the world could buy 5% of the world' stock markets. Throw in real estate and non publicly traded assets and non-stock assets, and you are probably talking about 1% or less of the world's store of value.

I guess if we compare it against money (MZM or M3), we end up with it being a greater portion of the world's currency store of wealth. But storing wealth as dollars or euros is also a relatively silly thing to do once you have a non-trivial number of said dollars or euros.

[Naurgul]

I fail to see the point. You are comparing the total value of gold with the total value of all economies on the planet? I'm not sure I get why a good store of value would need to cover a big percentage of that. I never claimed that gold is such a good store of value that it's better to stop everything else and buy gold, did I? Is it even possible to have one thing do that? Perhaps it would be wiser to compare it with other things instead of the total?

PS: Congrats on that nice round number you got under your name, by the way. 10000.

[Yakk]

I was measuring its ability to store value as a percentage of how people choose to store value.

People choose to store value in land, in stocks, in cash, in bonds, in gold, and in a myriad of other ways. The value of each store of value is dependent on what other people think it is worth, as a store of value.

Of all of the value stored by people in the world, 1%-2% is in gold. A similar amount is in US$ MZM and Euro M3. Most of it is in stocks, bonds and real estate, which are all much more popular ways to store value compared to cash and gold and precious metals. Heck, I'm guessing that education is a more popular way to store value!

Gold has the huge advantage of being a historically important store of liquid value, and it even has a use to give it a price floor. As a fraction of the world's wealth, I'd guess that gold has plummeted as other more productive and somewhat liquid assets have shown up ... but that is harder to track down than the above figures.

[Zamfir]

As a fraction of the world's wealth, I'd guess that gold has plummeted as other more productive and somewhat liquid assets have shown up ... but that is harder to track down than the above figures.

An added complication is that those somewhat liquid assets often had less liquid predecessors, that were of course still wealth. Just harder to value. Land and business ventures were often 'owned' by families who couldn't even conceive of selling it or even putting a number on its value. Like the current illiquidity of slave markets has as result that modern families don't put their children on their balance sheet.

Even worse, lots of gold was historically tied up in similar non-marketed ways. Religious decorations or the Peacock Throne are not straightforward financial assets, even when they can be liquidated by literally melting them.

[HungryHobo]

now I'm kinda regretting I didn't get 50 bucks worth of bitcoins back when they were 2 bucks each.

[Yakk]

I have a similar feeling about not putting 50 bucks on black 17 at the casino over the river last night.

Sure, I wasn't there, but I heard it came up. And that's what, 30:1 payoff?

If I hung around and later that night put the kitty on red 4, that would have been a much better investment than bitcoins.

[Naurgul]

Posterior probabilities, how do they work?

But seriously, when is the crash coming? I feel intimidated just looking at the current curve.

[KnightExemplar]

Posterior probabilities, how do they work?

But seriously, when is the crash coming? I feel intimidated just looking at the current curve.

Someone brought up the point elsewhere that if Mt. Gox's trading algorithms were delaying sell orders a bit, they could manipulate the market to march upwards. Not indefinitely of course, but there is a lot of trust that the Bitcoin community has put into an unregulated exchange. Although, currently, there are naturally more bitcoin buyers than bitcoin sellers: http://bitcoincharts.com/markets/mtgoxUSD_depth.html . So I don't think Mt. Gox is manipulating anyone.

But seriously, the actual USE of bitcoins has me worried. Why is the number of transactions remaining nearly constant? Bitcoin prices going up in price as transactions rose from Sept. 2012 through Feb. 2012 makes sense. Bitcoin prices going up in price between Feb. 2012 and today makes no damn sense at all.

http://blockchain.info/charts/n-transactions

And of course, as Bitcoins march upwards in value, their output volume crashes, so I'd like to convert this into USD and maybe get a measurement of the Bitcoin Economy... at very least, the bitcoin economy as measured in BTC is grinding to a halt.

http://blockchain.info/charts/output-volume

There is an API to access this data btw, if you're interested in your own analysis. I'm interested in output volume * exchange rate, which would roughly measure the bitcoin econmy in terms of USD... because measuring things in terms of BTC is stupid right now. Its way too volatile and means nothing.

[Iulus Cofield]

And the crash has come already:

Bitcoin Plunges

After soaring past $250 earlier, it's tumbled all the way down to current levels around $150.

Bitcoin is now 44 percent off its intraday high of $266.

At its low of the day ($105), it had lost 61 percent of its value from the peak.

The chart below shows Bitcoin prices from April 9 through today.

The virtual currency briefly staged a sizeable comeback this afternoon before getting slammed again.
...

I'm wondering how well Bitcoin can recover as an actual currency. Surely there must have been far, far more Bitcoins trading hands in the last few months in speculative trading than in actual purchases. How many people who were actually using them still have any? Will they buy back in when the exchange rate drops back down to January/February levels or will they switch over to the other electronic currencies?

[KnightExemplar]

That wasn't a crash. That was a blip. IMO, it was a guy testing out the "pump and dump" strategy.

If you watch the charts, you'll notice that 3,000 BTC were sold at the beginning of the decline (in three separate 1000 BTC batches). A few hours later, some guy bought 3,000 BTC after the crash. My theory is that one dude wanted to make a ton of cash. If all four trades were executed by the same guy (or by the same organization of people), those people made approximately $225,000, and lost no bitcoins in the process.

On the other hand, Mt. Gox themselves could have placed the 3000 BTC order themselves, in an attempt to stabilize the market. Historically, exchange operators see themselves as guardians to the price. Similar moves were done by the NYSE during the Great Depression for instance.

Either way, Mt. Gox is prone to market manipulations.

----

Anyway, a true crash would be a return to the February value of BTC of ~$20 / BTC. What happened yesterday can hardly be considered a crash.