Yup, all those people living paycheck-to-paycheck will hoard their money. Oh, wait, no they won't. It will go to food, clothes for the kids, the mortgage payment, and utilities, just like it does now.
People can only hoard discretionary income, and we generally call that "saving for the future", a less pejorative name for the same thing - deferred spending. There's no point in saving if you are not going to use it someday, since you can't eat or live in a bitcoin.
An automobile performs a useful function - moving people and stuff from one place to another. We assign it a "utility value" because of that functionality, and are willing to trade other stuff for autos. The value of an auto does not depend on any backing, it's inherent in how useful it is. The Bitcoin Network (client software, smartphone apps, computers and custom hardware that delivers and validates transactions, and a big database) also performs a useful function - moving money from one place to another. It's the same function that Western Union and PayPal perform. Again, people value the function the network performs, and are willing to trade other stuff in order to make use of it. The value of the network doesn't depend on any backing, it's inherent in how useful it is.
The "bitcoin" unit of account is used within the Bitcoin Network, but they are not the same things. Since you need some bitcoin units in order to use the Network, demand for the Network creates a demand for the units. Since their supply is relatively fixed, the more demand for the Network, the increased demand for the units drives up their price. How useful people find the Network depends mostly on it's features compared to the alternatives (speed, fees, availability, privacy, etc.).
The reason Satoshi Nakamoto has remained unknown is he/she/they have never moved their coins. They are still provably unspent at their original address. When people move bitcoins around, that gives you something to trace.
How you can avoid the tracing is by using paper wallets with a public key on the outside, and private key on the inside. That's essentially what the Casacius physical bitcoin tokens are. You can sell the paper wallet for cash, creating no block chain transaction. The next owner then makes a transaction to himself at a new address (because you knew the previous private key when you created it, thus can still spend the coins). But that new transaction the new owner made can't be traced back through the cash transaction - it's a break in the transaction history in terms of owners.
Even in a future where bitcoin was the dominant currency, you can still make paper wallets, and swap them for something else in person, thus you can preserve your privacy.
If all the Bitcoin miners used recent generation ASICs (the direction they are heading), the whole network would use about 6 MW of power. That's less than one big supercomputer, and about equal to one big bank skyscraper. There are 600,000 bank buildings worldwide, who in the aggregate use a whole lot more than 6 MW.
Supercomputers are general purpose machines, thus they have silicon for a big instruction set. The bitcoin "Application Specific Integrated Circuit" (ASIC) mining chips are custom designed to do only 1 calculation (SHA-256 hashing), and thus can do thousands of copies of the calculation in parallel. That's how relatively cheap mining hardware can out-compute the world's supercomputers *for that one task*. For any other computation, the ASIC chips are completely useless.
Except that only considers bitcoin in isolation. There are already at least 50 other crypto-currencies in existence, and every reason to believe more will be created in the future. That's because the idea of a "chained hash proof-of-work" system is already out there, and the Bitcoin software itself is open-source. New crypto-currencies will get started up constantly because the early adopters will reap large rewards, just like with Bitcoin.
Right now only LiteCoin is of significant size, but in the future it is likely others will grow, thus adding to the overall crypto-currency money supply.
The fallacy of the hoarding argument is that there are always spending needs, like food, clothing, shelter, gasoline, which are more immediate than the gains from moderate deflation. In short "I don't give a damn about the value next year, I'm hungry now." Thus an economy will still function.
> No, you need to convince enough people hosting bitcoin servers (read, *miners*) to devalue their currency...
That won't work. Miners pay themselves the reward for finding a block hash. They do this by including a "generation" transaction as the first one in a block, sending the reward (plus any transaction fees) to their own address. All the other nodes on the network (i.e. users running the client software) validate new blocks as they arrive with a number of tests. One of these is the reward = 50 bitcoins/(2^(int(block number/210,000))), in other words, the reward decreases by half every 210,000 blocks (about 4 years). If that reward amount was not checked, a miner could reward themselves with any amount of new bitcoins. That formula is also how the total number of bitcoins is determined, since 210,000 x (50 + 25 + 12.5 + , ,,) = 21,000,000.
Thus you have to convince all the people using client software to change the formula, because right now any block that creates too many bitcoins in the generation transaction is rejected, and not passed along to other nodes. They will not do that for obvious reasons because it would devalue their own bitcoin holdings.
> What tiny fraction of a percent of the world's population uses BitCoin?
0.022% of the world's population have an online bitcoin wallet.
Average bitcoin transactions (excluding change returned to the originator) has averaged $150M/day the past month. That works out to $54.75 billion/year, or 0.076% of world GDP. We don't know what fraction of those transactions were merely moving funds among the same person's addresses vs real economic transactions.
My quad-core i7 CPU takes about an hour to verify the block chain. ENIAC ran at 50 kIPS, and my CPU runs at 82,300 MIPS, thus assuming ENIAC had the same word length and instruction set (it didn't) it would take 188 years. Accounting for word length and instruction set puts it in the thousands of years range.
IBM punch cards are 7 3/8 x 3 1/4 x 1/143 inches in size, and hold 120 bytes of data each. My copy of the block chain is 13.9 GB, so it would need 115.9 million punch cards. Assuming you can store the cards in boxes like we used to, that take up about 4 x 8 x 18 inches each when stacked on shelves, and hold 2,500 cards/box, we need 46,000 boxes. A room height set of deep shelves can hold 24 boxes vertically (8 feet), and we can fit 1.5 stacks of boxes per linear foot of shelving, thus we need 1288 linear feet of shelving. Including aisle space and shelves on both sides, we get a width of 5 feet x 644 feet of rows = 3,200 square feet of floor space, which needs to be built to the standards of library stacks, since it is effectively a solid mass of wood, just like densely packed books are.
This many punch cards would be the equivalent of 185,000 board-feet of lumber, sufficient to frame about 20 conventional houses.
Well, 1.55 million people at least have online Bitcoin wallets, so that's a start. And bitcoins are definitely something people are willing to steal and commit fraud over, just like other currencies.
Note: wallet count is 900,000 for blockchain.org and 650,000 for coinbase.com . There may be other online wallets, but those seem to be the big ones)
There are currently 51 cryptocurrencies being tracked at http://coinmarketcap.com/ . Most of them are variations on the original Bitcoin software. They exist because the Bitcoin software is open-source. Nothing prevents someone from making an exact copy of the original Bitcoin, call it Bitcoin#2, and generate another 21 million coins, and making an integrated user client that reads both block chains (transaction databases). And then repeating that for Bitcoin#3, 4,...
Effectively that is what is already happening with the 50 other alternate currencies, and the only thing stopping massive coin inflation is lack of significant interest in all but the original bitcoin and litecoin. Thus the market will decide if it wants inflation or not, the world isn't locked into the 21 million coin limit of bitcoin.
On Tax Evasion:
The Underground Economy in the US is estimated at 20% of total GDP. In many countries it is much higher, and is referred to by the more polite "informal economy". The US version is divided into the "black market", i.e. illegal activities, and the "off-the-books" market, which is legal stuff, just not reported. It was that way before bitcoin existed, so nothing new here.
On Evil Uses:
From what I have seen, Bitcoin encourages better morality between people. Contrary to what people think about anonymity and Bitcoin, the public transaction ledger means *anyone* can inspect what is going on. So when an Auburn student waved a "Hi Mom - Send Bitcoin" sign at a football game, we could see how much was donated (a lot) and whether he lives up to his promise to give most of it to a homeless shelter. Governments that want to track bad guys merely need to run some Bitcoin network nodes around the world, and they can see where transactions are coming from in real time. The only way to truly hide is to do what Satoshi Nakamoto, the pseudonym for Bitcoin's creator, did - which is never move his stash of early coins. If it moves, it can be tracked. In fact, we know he never moved the original bitcoins he mined, simply by looking at the public block chain.
The Silk Road drug marketplace indictment combined with the bitcoin public transaction ledger allows us to calculate that it represented 4.5% of total bitcoin transactions over the period of it's operation. That's about the same proportion of cash US Dollar transactions used for drug purchases. This is entirely unsurprising.
The full block chain has been growing at an average of 700 MB/month the past year. At the cost of my last hard drive purchase, that is 2.5 cents a month. If I save mailing one paper check, that pays for two years of block chain storage (49 cents for postage, and 20 cents for check printing and envelope). I can deal with that flaw for a while. Eventually people will come up with a solution. The simplest would be dedicated block chain servers, who do nothing else but store a copy, and people subscribe to using it.
You are neglecting the "Network Effect", the reason there is only one big auction market or social network at any given time.
Bitcoin had about a three year head start on other cryptocurrencies, therefore the client software is better developed, more merchants accept it, more users have wallet apps on their smartphones, etc. Your statement about "nothing prevents a new one popping up" is true, and has already happened: http://coinmarketcap.com/
They list 53 coins so far, but the top two, bitcoin and litecoin, represent 98% of the total market value. It's definitely possible for another coin to be a better product, and eventually overtake bitcoin, but it won't happen next week. I expect it to take years to overcome the leader's head start.
> The inability to charge back is the #1 reason that prevents any consumer from perceiving it as a safe currency against vendor fraud.
Although they dealt in illegal products, the now closed Silk Road marketplace solved that problem. They had to, because vendor fraud is an especially high risk buying an illegal product online from an unknown seller. The solution was simple. The Silk Road held the payment in escrow until the buyer reported receipt and posted a positive review. A seller that racked up too many negative reviews (a) didn't get paid, and (b) stopped having customers. That was a good enough incentive that very few people got screwed over, reportedly less than with in-person deals.
It's true that bitcoin transactions are irreversible, but that does not stop you from using a third party who can send the money back. Think of it as programmable money. At an assembler language level, moving data from one memory location to another is not reversible when you only look at a single line of code. But nothing prevents creating more complex results by using longer programs. Similarly, you can build more complex payment methods on top of the atomic one way transactions. In fact, the bitcoin protocol has scriptable transactions with conditional events, though they are rarely used so far. People are too busy building payment networks and smartphone apps so you can more easily use it. They haven't had time to do fancy transactions.
Between BitPay and Coinbase (the two large merchant processors), they have 32,000 merchants accepting bitcoin. That's nowhere near the acceptance of bank cards, but it's growing fast. And these are not just mom and pop retailers, through http://www.gyft.com/bitcoin/ you can use them a 150 major national brands,
You have a choice to keep your bitcoins on their system, which is OK for small amounts, or transfer it to a personal "wallet" on your own computer. All bitcoin balances actually live on a distributed database called the "block chain", which every full copy of the client software audits independently. A wallet contains the private cryptographic keys that allow you to *move* a balance from your address to another one in the database. Thus wallet files are pretty lightweight, and can be backed up onto pretty much anything, including paper. Bitcoin wallets should be treated like house keys - have backup copies, but don't lose them, because then someone else can steal your stuff/bitcoins.
The distributed database is why bitcoin transactions are so cheap. A transaction is basically a message that says "Move X bitcoins from address A to address B", which is signed by your private key. The block chain database includes every past transaction, so everyone can audit your current balance simply by adding up all the past transactions for that address. If your balance is too low to cover the new transaction, it gets rejected. If it meets all the audit tests, it gets passed along to everyone else on the network. Since everyone now knows you spent your balance, you can't spend it again.
Bitcoin balances are tracked to 8 decimal places, so you don't have to deal in whole bitcoins. These days people are transitioning to reporting in millibitcoins (mBTC) since those are closer to dollars and other fiat currencies than a full bitcoin is these days.
> If anything, Bitcoin is a concordant currency, its value determined by agreement.
The Bitcoin network provides a useful service - moving money from one person to another. It does it faster and cheaper than many of the alternatives, therefore people value the *network*. In order to use the network, you need some of the bitcoin currency units. Thus demand to use the network also drives demand for the currency units. Since the number of units grows slowly (1.1% per month), but the demand measured by number of merchants and online wallet accounts grows fast (25-30%/month), the price of a unit is driven up by simple supply and demand at about 25% per month.
The number of units available to buy, and the demand for those units, both vary on a daily or even minute to minute basis, thus the market rate fluctuates. But seen on longer time scales of several months or more, it sticks to the expected average growth pretty well. Events like China caused in the original article create a predictable drop in demand (people can't use their Yuan to buy bitcoins) and an increase in supply (speculators dump their coins on the market before it drops), leading to the big drop in exchange rate we have seen.
But that is a temporary disturbance in the market. Once people return to their normal use of the network to move money around, supply and demand will come into balance at a "normal" price.
Since it's winter in the northern hemisphere, just think of the energy going into your mining hardware as partly heating your house. So basically it offsets the other heating system you have, and thus is free (minus wear and tear on the hardware).
That paper has factual errors. For example, on page 6 it says "...because bitcoins are mined in integer units, not satoshis". This is incorrect. The mining reward halves every 210,000 blocks (about 4 years). It dropped from 50 in Jan 2009 to 25 in Nov 2012, the current rate. The next halving, in about 3 years, will reduce it to 12.5 bitcoin units per block. The arithmetic series 50 + 25 + 12.5 + . . . = 100, and since it stays at that level for 210,000 blocks at a time, the total number of coins has a limit at 100 x 210,000 = 21,000,000.
The mining algorithm is a basic feature of the bitcoin system. If the paper's author got that wrong, I don't have much confidence in the rest of his arguments.
> The other thing is of course that Bitcoin is not a real currency and may crash at any time and without warning.
You are confused about the nature of bitcoin. There are two entities with that name. One is the "Bitcoin network", which consists of software, apps, computers that relay and verify transactions, and a big database. That network does the same job as Western Union or bank wires - moving value from place to place. But it does it much faster and cheaper. Therefore the network has value because of it's usefulness. The other entity is the unit of measure for address balances and transactions, also called "a bitcoin", in the same sense a unit of length is called "a meter". Thus an address may have a balance of "3.436 bitcoins".
However, balances have value only because of the network they are part of. So long as the network does its job better than the alternatives, people will want to use it. Since using it requires having a balance to make transactions with, that creates a demand for balances, thus they acquire value. The exchange rate may fluctuate from day to day, but the underlying value of the network is more steady.
That's not necessary. The major phone companies can sue the Indiana State Police for whatever the corporate lawyers can come up with. And those lawyers don't live in Indiana, so they aren't subject to being pulled over in a traffic stop by the local cops. Alternately, independent lawyers can start a class action on behalf of the phone customers for violation of their civil rights. The cops may not go to jail, but their employers may face big financial settlements.
Actually, they *are* empty when shipped, so if they are stolen en route they don't net the thief anything. Once arrived, the buyer "activates" it and it gets filled with Bitcoins by means of sending some to the correct address.
Slashdot Mirror
Yup, all those people living paycheck-to-paycheck will hoard their money. Oh, wait, no they won't. It will go to food, clothes for the kids, the mortgage payment, and utilities, just like it does now.
People can only hoard discretionary income, and we generally call that "saving for the future", a less pejorative name for the same thing - deferred spending. There's no point in saving if you are not going to use it someday, since you can't eat or live in a bitcoin.
> Bitcoin has no such backing. It is worthless.
An automobile performs a useful function - moving people and stuff from one place to another. We assign it a "utility value" because of that functionality, and are willing to trade other stuff for autos. The value of an auto does not depend on any backing, it's inherent in how useful it is. The Bitcoin Network (client software, smartphone apps, computers and custom hardware that delivers and validates transactions, and a big database) also performs a useful function - moving money from one place to another. It's the same function that Western Union and PayPal perform. Again, people value the function the network performs, and are willing to trade other stuff in order to make use of it. The value of the network doesn't depend on any backing, it's inherent in how useful it is.
The "bitcoin" unit of account is used within the Bitcoin Network, but they are not the same things. Since you need some bitcoin units in order to use the Network, demand for the Network creates a demand for the units. Since their supply is relatively fixed, the more demand for the Network, the increased demand for the units drives up their price. How useful people find the Network depends mostly on it's features compared to the alternatives (speed, fees, availability, privacy, etc.).
> provide him goods and services for free in exchange for his ideas
That's what crowdfunding does, in effect.
The reason Satoshi Nakamoto has remained unknown is he/she/they have never moved their coins. They are still provably unspent at their original address. When people move bitcoins around, that gives you something to trace.
How you can avoid the tracing is by using paper wallets with a public key on the outside, and private key on the inside. That's essentially what the Casacius physical bitcoin tokens are. You can sell the paper wallet for cash, creating no block chain transaction. The next owner then makes a transaction to himself at a new address (because you knew the previous private key when you created it, thus can still spend the coins). But that new transaction the new owner made can't be traced back through the cash transaction - it's a break in the transaction history in terms of owners.
Even in a future where bitcoin was the dominant currency, you can still make paper wallets, and swap them for something else in person, thus you can preserve your privacy.
If all the Bitcoin miners used recent generation ASICs (the direction they are heading), the whole network would use about 6 MW of power. That's less than one big supercomputer, and about equal to one big bank skyscraper. There are 600,000 bank buildings worldwide, who in the aggregate use a whole lot more than 6 MW.
Supercomputers are general purpose machines, thus they have silicon for a big instruction set. The bitcoin "Application Specific Integrated Circuit" (ASIC) mining chips are custom designed to do only 1 calculation (SHA-256 hashing), and thus can do thousands of copies of the calculation in parallel. That's how relatively cheap mining hardware can out-compute the world's supercomputers *for that one task*. For any other computation, the ASIC chips are completely useless.
Except that only considers bitcoin in isolation. There are already at least 50 other crypto-currencies in existence, and every reason to believe more will be created in the future. That's because the idea of a "chained hash proof-of-work" system is already out there, and the Bitcoin software itself is open-source. New crypto-currencies will get started up constantly because the early adopters will reap large rewards, just like with Bitcoin.
Right now only LiteCoin is of significant size, but in the future it is likely others will grow, thus adding to the overall crypto-currency money supply.
The fallacy of the hoarding argument is that there are always spending needs, like food, clothing, shelter, gasoline, which are more immediate than the gains from moderate deflation. In short "I don't give a damn about the value next year, I'm hungry now." Thus an economy will still function.
> No, you need to convince enough people hosting bitcoin servers (read, *miners*) to devalue their currency...
That won't work. Miners pay themselves the reward for finding a block hash. They do this by including a "generation" transaction as the first one in a block, sending the reward (plus any transaction fees) to their own address. All the other nodes on the network (i.e. users running the client software) validate new blocks as they arrive with a number of tests. One of these is the reward = 50 bitcoins/(2^(int(block number/210,000))), in other words, the reward decreases by half every 210,000 blocks (about 4 years). If that reward amount was not checked, a miner could reward themselves with any amount of new bitcoins. That formula is also how the total number of bitcoins is determined, since 210,000 x (50 + 25 + 12.5 + , , ,) = 21,000,000.
Thus you have to convince all the people using client software to change the formula, because right now any block that creates too many bitcoins in the generation transaction is rejected, and not passed along to other nodes. They will not do that for obvious reasons because it would devalue their own bitcoin holdings.
> What tiny fraction of a percent of the world's population uses BitCoin?
0.022% of the world's population have an online bitcoin wallet.
Average bitcoin transactions (excluding change returned to the originator) has averaged $150M/day the past month. That works out to $54.75 billion/year, or 0.076% of world GDP. We don't know what fraction of those transactions were merely moving funds among the same person's addresses vs real economic transactions.
My quad-core i7 CPU takes about an hour to verify the block chain. ENIAC ran at 50 kIPS, and my CPU runs at 82,300 MIPS, thus assuming ENIAC had the same word length and instruction set (it didn't) it would take 188 years. Accounting for word length and instruction set puts it in the thousands of years range.
IBM punch cards are 7 3/8 x 3 1/4 x 1/143 inches in size, and hold 120 bytes of data each. My copy of the block chain is 13.9 GB, so it would need 115.9 million punch cards. Assuming you can store the cards in boxes like we used to, that take up about 4 x 8 x 18 inches each when stacked on shelves, and hold 2,500 cards/box, we need 46,000 boxes. A room height set of deep shelves can hold 24 boxes vertically (8 feet), and we can fit 1.5 stacks of boxes per linear foot of shelving, thus we need 1288 linear feet of shelving. Including aisle space and shelves on both sides, we get a width of 5 feet x 644 feet of rows = 3,200 square feet of floor space, which needs to be built to the standards of library stacks, since it is effectively a solid mass of wood, just like densely packed books are.
This many punch cards would be the equivalent of 185,000 board-feet of lumber, sufficient to frame about 20 conventional houses.
Well, 1.55 million people at least have online Bitcoin wallets, so that's a start. And bitcoins are definitely something people are willing to steal and commit fraud over, just like other currencies.
Note: wallet count is 900,000 for blockchain.org and 650,000 for coinbase.com . There may be other online wallets, but those seem to be the big ones)
To augment your points:
On deflation:
There are currently 51 cryptocurrencies being tracked at http://coinmarketcap.com/ . Most of them are variations on the original Bitcoin software. They exist because the Bitcoin software is open-source. Nothing prevents someone from making an exact copy of the original Bitcoin, call it Bitcoin#2, and generate another 21 million coins, and making an integrated user client that reads both block chains (transaction databases). And then repeating that for Bitcoin#3, 4, ...
Effectively that is what is already happening with the 50 other alternate currencies, and the only thing stopping massive coin inflation is lack of significant interest in all but the original bitcoin and litecoin. Thus the market will decide if it wants inflation or not, the world isn't locked into the 21 million coin limit of bitcoin.
On Tax Evasion:
The Underground Economy in the US is estimated at 20% of total GDP. In many countries it is much higher, and is referred to by the more polite "informal economy". The US version is divided into the "black market", i.e. illegal activities, and the "off-the-books" market, which is legal stuff, just not reported. It was that way before bitcoin existed, so nothing new here.
On Evil Uses:
From what I have seen, Bitcoin encourages better morality between people. Contrary to what people think about anonymity and Bitcoin, the public transaction ledger means *anyone* can inspect what is going on. So when an Auburn student waved a "Hi Mom - Send Bitcoin" sign at a football game, we could see how much was donated (a lot) and whether he lives up to his promise to give most of it to a homeless shelter. Governments that want to track bad guys merely need to run some Bitcoin network nodes around the world, and they can see where transactions are coming from in real time. The only way to truly hide is to do what Satoshi Nakamoto, the pseudonym for Bitcoin's creator, did - which is never move his stash of early coins. If it moves, it can be tracked. In fact, we know he never moved the original bitcoins he mined, simply by looking at the public block chain.
The Silk Road drug marketplace indictment combined with the bitcoin public transaction ledger allows us to calculate that it represented 4.5% of total bitcoin transactions over the period of it's operation. That's about the same proportion of cash US Dollar transactions used for drug purchases. This is entirely unsurprising.
The full block chain has been growing at an average of 700 MB/month the past year. At the cost of my last hard drive purchase, that is 2.5 cents a month. If I save mailing one paper check, that pays for two years of block chain storage (49 cents for postage, and 20 cents for check printing and envelope). I can deal with that flaw for a while. Eventually people will come up with a solution. The simplest would be dedicated block chain servers, who do nothing else but store a copy, and people subscribe to using it.
You are neglecting the "Network Effect", the reason there is only one big auction market or social network at any given time.
Bitcoin had about a three year head start on other cryptocurrencies, therefore the client software is better developed, more merchants accept it, more users have wallet apps on their smartphones, etc. Your statement about "nothing prevents a new one popping up" is true, and has already happened: http://coinmarketcap.com/
They list 53 coins so far, but the top two, bitcoin and litecoin, represent 98% of the total market value. It's definitely possible for another coin to be a better product, and eventually overtake bitcoin, but it won't happen next week. I expect it to take years to overcome the leader's head start.
> The inability to charge back is the #1 reason that prevents any consumer from perceiving it as a safe currency against vendor fraud.
Although they dealt in illegal products, the now closed Silk Road marketplace solved that problem. They had to, because vendor fraud is an especially high risk buying an illegal product online from an unknown seller. The solution was simple. The Silk Road held the payment in escrow until the buyer reported receipt and posted a positive review. A seller that racked up too many negative reviews (a) didn't get paid, and (b) stopped having customers. That was a good enough incentive that very few people got screwed over, reportedly less than with in-person deals.
It's true that bitcoin transactions are irreversible, but that does not stop you from using a third party who can send the money back. Think of it as programmable money. At an assembler language level, moving data from one memory location to another is not reversible when you only look at a single line of code. But nothing prevents creating more complex results by using longer programs. Similarly, you can build more complex payment methods on top of the atomic one way transactions. In fact, the bitcoin protocol has scriptable transactions with conditional events, though they are rarely used so far. People are too busy building payment networks and smartphone apps so you can more easily use it. They haven't had time to do fancy transactions.
Does $100 million in merchant transactions make it real enough?
http://www.coindesk.com/merchants-love-bitcoin-bitpay-100-million-reasons-prove/
Between BitPay and Coinbase (the two large merchant processors), they have 32,000 merchants accepting bitcoin. That's nowhere near the acceptance of bank cards, but it's growing fast. And these are not just mom and pop retailers, through http://www.gyft.com/bitcoin/ you can use them a 150 major national brands,
If you are in the US, you can sign up with https://coinbase.com/ They just got $25 million of venture funding: http://www.bloomberg.com/news/2013-12-12/bitcoin-startup-gets-25-million-in-andreessen-led-funding-round.html so they are not a fly by night outfit.
You have a choice to keep your bitcoins on their system, which is OK for small amounts, or transfer it to a personal "wallet" on your own computer. All bitcoin balances actually live on a distributed database called the "block chain", which every full copy of the client software audits independently. A wallet contains the private cryptographic keys that allow you to *move* a balance from your address to another one in the database. Thus wallet files are pretty lightweight, and can be backed up onto pretty much anything, including paper. Bitcoin wallets should be treated like house keys - have backup copies, but don't lose them, because then someone else can steal your stuff/bitcoins.
The distributed database is why bitcoin transactions are so cheap. A transaction is basically a message that says "Move X bitcoins from address A to address B", which is signed by your private key. The block chain database includes every past transaction, so everyone can audit your current balance simply by adding up all the past transactions for that address. If your balance is too low to cover the new transaction, it gets rejected. If it meets all the audit tests, it gets passed along to everyone else on the network. Since everyone now knows you spent your balance, you can't spend it again.
Bitcoin balances are tracked to 8 decimal places, so you don't have to deal in whole bitcoins. These days people are transitioning to reporting in millibitcoins (mBTC) since those are closer to dollars and other fiat currencies than a full bitcoin is these days.
> If anything, Bitcoin is a concordant currency, its value determined by agreement.
The Bitcoin network provides a useful service - moving money from one person to another. It does it faster and cheaper than many of the alternatives, therefore people value the *network*. In order to use the network, you need some of the bitcoin currency units. Thus demand to use the network also drives demand for the currency units. Since the number of units grows slowly (1.1% per month), but the demand measured by number of merchants and online wallet accounts grows fast (25-30%/month), the price of a unit is driven up by simple supply and demand at about 25% per month.
The number of units available to buy, and the demand for those units, both vary on a daily or even minute to minute basis, thus the market rate fluctuates. But seen on longer time scales of several months or more, it sticks to the expected average growth pretty well. Events like China caused in the original article create a predictable drop in demand (people can't use their Yuan to buy bitcoins) and an increase in supply (speculators dump their coins on the market before it drops), leading to the big drop in exchange rate we have seen.
But that is a temporary disturbance in the market. Once people return to their normal use of the network to move money around, supply and demand will come into balance at a "normal" price.
Since it's winter in the northern hemisphere, just think of the energy going into your mining hardware as partly heating your house. So basically it offsets the other heating system you have, and thus is free (minus wear and tear on the hardware).
That paper has factual errors. For example, on page 6 it says "...because bitcoins are mined in integer units, not satoshis". This is incorrect. The mining reward halves every 210,000 blocks (about 4 years). It dropped from 50 in Jan 2009 to 25 in Nov 2012, the current rate. The next halving, in about 3 years, will reduce it to 12.5 bitcoin units per block. The arithmetic series 50 + 25 + 12.5 + . . . = 100, and since it stays at that level for 210,000 blocks at a time, the total number of coins has a limit at 100 x 210,000 = 21,000,000.
The mining algorithm is a basic feature of the bitcoin system. If the paper's author got that wrong, I don't have much confidence in the rest of his arguments.
> The other thing is of course that Bitcoin is not a real currency and may crash at any time and without warning.
You are confused about the nature of bitcoin. There are two entities with that name. One is the "Bitcoin network", which consists of software, apps, computers that relay and verify transactions, and a big database. That network does the same job as Western Union or bank wires - moving value from place to place. But it does it much faster and cheaper. Therefore the network has value because of it's usefulness. The other entity is the unit of measure for address balances and transactions, also called "a bitcoin", in the same sense a unit of length is called "a meter". Thus an address may have a balance of "3.436 bitcoins".
However, balances have value only because of the network they are part of. So long as the network does its job better than the alternatives, people will want to use it. Since using it requires having a balance to make transactions with, that creates a demand for balances, thus they acquire value. The exchange rate may fluctuate from day to day, but the underlying value of the network is more steady.
> Nobody is going to arrest them.
That's not necessary. The major phone companies can sue the Indiana State Police for whatever the corporate lawyers can come up with. And those lawyers don't live in Indiana, so they aren't subject to being pulled over in a traffic stop by the local cops. Alternately, independent lawyers can start a class action on behalf of the phone customers for violation of their civil rights. The cops may not go to jail, but their employers may face big financial settlements.
Actually, they *are* empty when shipped, so if they are stolen en route they don't net the thief anything. Once arrived, the buyer "activates" it and it gets filled with Bitcoins by means of sending some to the correct address.
When I send my nephew a birthday card with a check enclosed, I guess that makes me a money transmitter. Time to turn myself in.