First, a fixed number of bitcoins will not actually work. The smallest unit of value people will want to exchange is not one 21 millionth of all the units of value in the world. It will be significantly smaller than that. As the total size of the economy expands, the total value people will want to exchange as a fraction of the size of the economy will become smaller and smaller.
The question is, why would we want BitCoins to be the world's single currency? The world has hundreds of currencies today, and they seem to coexist quite well. In fact, if BitCoins became the world's single currency I would be gravely worried, since any flaw in the BitCoin system (deflation, the hashing algorithm is cracked, BitCoin clients hacked on a massive scale, etc) could have cataclysmic consequences. Using several currencies not only evens out the risks, it allows people to continue trading in alternative currencies when their main one fails. For example, in the world of today, people often resort to trading in US$ when their own country's currency fails.
If BitCoins work out, they will provide a safe and easy way to do transactions over the Internet and in real life, which will continue to work even if conventional banks or credit card companies fail. On a darker note, they will also provide a way to avoid taxes, launder money, transfer funds illegally between countries, and arrange payments for criminal goods and services.
Secondly, the way the system works affords no transaction anonymity. And for a currency to be 'real' this is a big deal.
I have long felt that in order for any currency to work, it must be able to be 'stolen'. In other words, you must be able to use it to engage in transactions that are not legally sanctioned.
Of course, the identity behind any given public key in the bitcoin network is something of a mystery. But it's not that hard to trace, especially since it's possible to compile a complete and unbroken history of all transactions any bitcoin has been involved in.
It's possible to trace a BitCoin transaction if you devote a lot of resources to it - but that's possible with ordinary cash too. Cash has fingerprints left by previous owners, trace amounts of chemicals, serial numbers which can tell the authorities where it was obtained, and so on. Tracing a BitCoin transaction is hard today - it probably requires deploying a large number of "listening peers" on the BitCoin P2P network and using statistical analysis, so you can zero in on the computer where a transaction originates. But more importantly, BitCoins can be made harder and harder to trace by improving the communication protocol between peers. The communications protocols are not set in stone; only the format for the BitCoins are.
It seems inevitable that for Bitcoin to become ubiquitous, that government gets involved. One day, somebody will rip someone else off, to the tune of a few thousand dollars' worth of Bitcoins. The wronged party will turn to the courts.
If the courts say "GTFO, it wasn't real money and it was your own stupid fault for not using real money", then Bitcoin is doomed as a mainstream option. If the courts say "Yep, you had a contract, you were ripped off, we'll use the power of the State to compensate you and punish the wrongdoer", then the goverment is involved in Bitcoin. State regulation, to the extent the maths allows it, will follow.
True, but I think BitCoins may work quite well even if they don't become mainstream.
In the Soviet Union, people were only allowed to trade using the Ruble. But the ruble was practically worthless outside of the Eastern Bloc, and there was a large illegal economy which used bartering and US$. Obviously, someone who was ripped off on the black market couldn't turn to the courts, since he/she would incriminate themselves. And yet, the black market system thrived in the shadow of the official, planned economy.
I think the BitCoin economy (the goods and services traded for BitCoins) will work the same way if it doesn't get officially accepted.
Deflation is by definition a general price decrease, whatever the reason for it is. The reason can be a decreased money supply, increased productivity, more people buying into the currency, or something else. But whatever the reason, a general price decrease may lead to money hoarding, which causes problems with not enough money being available for investments.
You're right about computers and electronics, but I think the main problem lies with investments, not consumer goods. When you can earn an effective interest by just sitting on a pile of cash, there's little incentive to invest your money, or to lend it out to businesses.
In the case of BitCoins, I think there's a risk deflation will cause some people to hoard their BitCoins instead of spending them, which would stunt the growth of businesses dealing in BitCoins.
It's not necessarily a huge problem, though - BitCoins don't have to replace the US$ or anything like that to be useful. I think it's useful as an addition to traditional currencies, not a replacement for them. For example, it provides an easy, safe and anonymous way to make micropayments over the Internet without relying on a central authority. (Sure, transactions can be traced with the current protocol if a government agency devotes enough time and money to it, but it's anonymous enough for most people's purposes.)
I suspect you're trolling, but for the benefit of anyone who's following this discussion:
Since one's transactions are propagated anonymously from node to node, it's very hard for an adversary to tell where it came from. Before the news of the transaction reaches the adversary, it may have passed through a dozen intermediaries. Unless the adversary is on the same network as you and sees you send the initial message, it takes a lot of resources to track the transaction back to the source.
I have no idea what you mean by making wallets anonymous. With BitCoin, transactions are pseudonymous if you use the same address for several transactions, i.e, someone can tell different transactions have the same source, but not who that source is. If you choose to create a new address for every transaction, they become completely anonymous.
Loans are possible in this system, but the bank can't give you more money that it has.
Technically speaking, ordinary banks can't do that either. They just lend out the same money several times. Someone deposits their money, the bank lends them out, the loaner buys something for the money, the seller deposits the money in the bank, the bank can lend them out a second time, and so on. The same money goes round and round to generate debts and assets far greater than its denominational value. "Fractional reserve banking" means that a bank's reserve is only a fraction of what it owes people. Fractional reserve banking is what allows banks to lend out the money people have deposited, which in turn allows the money to go round and round.
And a bank can do that just as well when dealing in BitCoins as when dealing in traditional currencies. The only limitation BitCoins have compared to traditional currencies, is that there is no central bank which can increase or throttle the money supply.
It's a fad unless it takes off in a big way. i can't see that happening for a long time or unless some black swan event ruins debt money.
I think another type of event could make BitCoins take off: if people start using it for a black Internet economy.
As long as you only trade services on the Internet, BitCoins make it very easy to avoid sales tax and income tax. For example, people could buy BitCoins for dollars and use them to pay for premium accounts on web forums. The web forum owner could then use the BitCoins to pay for web hosting. The web host owner could exchange some of the BitCoins for dollars, and use others to pay for sex services he frequents (image forums, webcam stripteases, etc). And so on. The pornographic industry alone should have the power to drive a thriving black Internet economy, and large parts of the porn industry is used to operating in a legal grey area.
Even for those criminals who earn and spend money in a conventional currency, BitCoins could make it a lot easier to transfer illegal money between countries. For example, a small-time drug dealer could sell his wares on the streets for US$, then buy BitCoins for the US$ and transfer them over the Internet to Central America, where he uses the BitCoins to pay his drug supplier. The supplier in turn sells the BitCoins for cash to other Central Americans, and the surplus of BitCoins owned by them would in turn drive other legal and illegal BitCoin businesses.
The current BitCoin client doesn't support anonymity, but it would be easy for two "shady" dealers to set up an encrypted communications link to exchange BitCoins. And even with the current client, the government would have to do a lot of work to track an individual's tax evasion. If each individual user only spends or earns a few dozen US$ in BitCoins per year, tracking them would hardly be worth the IRS' trouble, but it would still leave room for a huge black Internet economy.
Well, in all fairness, until governments switched to fiat money, banknotes were essentially IOU notes: they enabled the holder to redeem, from the government, the gold they had once exchanged the note for (or gold to a value equal of whatever goods they had once exchanged the note for). The earliest banknotes were issued by private banks and were essentially vouchers which enabled the holder to reclaim gold they had deposited (potentially at another bank far away).
Aside, of course, from the essential property that the bar be made of real gold, and not other materials that lack some or all of the properties of gold.
And are those properties determined by decree?
Just as people spontaneously find valid bitcoins more valuable than pseudo-bitcoins which lack some or all of the properties of actual bitcoins.
It didn't happen spontaneously - someone had to declare what a valid BitCoin is, and people had to listen to him. For BitCoins to retain their value, people have to keep agreeing on arbitrary definitions and the protocols used to exchange the coins.
Perhaps it's not a decree in the proper sense, but it's substantially different from the way gold gains its value.
If I wait 6 months the laptop I bought today will be cheaper, yet people buy them.
If I knew food was going to be cheaper next month, I still have to eat this month.
True, deflation wouldn't discourage consumption, at least not of essential goods.
But it would discourage investments. Why risk my money on an investment which may give x% interest, if I can gain the same increase by just holding on to my currency?
Problem is, if people hoard their BitCoins, businesses will see few purchases made in BitCoins, and not think it's worth the trouble to accept it as payment, and the new currency will fail.
Our of curiosity - what happens to the BitCoins when someone loses their wallet? Are the coins lost forever, and the total amount of coins in circulation decreases?
I'm not a lawyer and don't know if treason is a special case, so I'll use the rape/molestation charges as an example instead.
If it's clear that what Assange is accused of doesn't count as a crime under UK law, then the UK can't extradite him to Sweden. It's not enough that the UK has a similar-sounding crime on their books - the act itself must be punishable under UK law. That's how it works for most "normal" crimes.
1. The movie companies claim to lose money on piracy, despite their revenues continuing to increase steadily throughout most of the 2000's, and despite research showing that pirating often stimulates sales. And now it turns out they were using the marketing effect of piracy themselves - that it was "pretend" piracy doesn't make a difference to its marketing effect. 2. By pretending to pirate movies, they set a bad example and encouraged the behaviour they claim to be against, and even brand as immoral in their anti-piracy propaganda.
If a billionaire did that, people wouldn't be able to trade in BitCoins, the stores which accept BitCoins as payment would stop doing that, and the currency would become worthless.
Yes, but nobody has decreed the properties for a gold bar, or that only certain types of bars can be used for payment - people just spontaneously find bars made of gold more valuable than bars made of, for example, lead. But someone has decreed that a valid BitCoin needs to have certain properties and that only those should be accepted as payment.
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First, a fixed number of bitcoins will not actually work. The smallest unit of value people will want to exchange is not one 21 millionth of all the units of value in the world. It will be significantly smaller than that. As the total size of the economy expands, the total value people will want to exchange as a fraction of the size of the economy will become smaller and smaller.
The question is, why would we want BitCoins to be the world's single currency? The world has hundreds of currencies today, and they seem to coexist quite well. In fact, if BitCoins became the world's single currency I would be gravely worried, since any flaw in the BitCoin system (deflation, the hashing algorithm is cracked, BitCoin clients hacked on a massive scale, etc) could have cataclysmic consequences. Using several currencies not only evens out the risks, it allows people to continue trading in alternative currencies when their main one fails. For example, in the world of today, people often resort to trading in US$ when their own country's currency fails.
If BitCoins work out, they will provide a safe and easy way to do transactions over the Internet and in real life, which will continue to work even if conventional banks or credit card companies fail. On a darker note, they will also provide a way to avoid taxes, launder money, transfer funds illegally between countries, and arrange payments for criminal goods and services.
Secondly, the way the system works affords no transaction anonymity. And for a currency to be 'real' this is a big deal.
I have long felt that in order for any currency to work, it must be able to be 'stolen'. In other words, you must be able to use it to engage in transactions that are not legally sanctioned.
Of course, the identity behind any given public key in the bitcoin network is something of a mystery. But it's not that hard to trace, especially since it's possible to compile a complete and unbroken history of all transactions any bitcoin has been involved in.
It's possible to trace a BitCoin transaction if you devote a lot of resources to it - but that's possible with ordinary cash too. Cash has fingerprints left by previous owners, trace amounts of chemicals, serial numbers which can tell the authorities where it was obtained, and so on. Tracing a BitCoin transaction is hard today - it probably requires deploying a large number of "listening peers" on the BitCoin P2P network and using statistical analysis, so you can zero in on the computer where a transaction originates. But more importantly, BitCoins can be made harder and harder to trace by improving the communication protocol between peers. The communications protocols are not set in stone; only the format for the BitCoins are.
It seems inevitable that for Bitcoin to become ubiquitous, that government gets involved. One day, somebody will rip someone else off, to the tune of a few thousand dollars' worth of Bitcoins. The wronged party will turn to the courts.
If the courts say "GTFO, it wasn't real money and it was your own stupid fault for not using real money", then Bitcoin is doomed as a mainstream option.
If the courts say "Yep, you had a contract, you were ripped off, we'll use the power of the State to compensate you and punish the wrongdoer", then the goverment is involved in Bitcoin. State regulation, to the extent the maths allows it, will follow.
True, but I think BitCoins may work quite well even if they don't become mainstream.
In the Soviet Union, people were only allowed to trade using the Ruble. But the ruble was practically worthless outside of the Eastern Bloc, and there was a large illegal economy which used bartering and US$. Obviously, someone who was ripped off on the black market couldn't turn to the courts, since he/she would incriminate themselves. And yet, the black market system thrived in the shadow of the official, planned economy.
I think the BitCoin economy (the goods and services traded for BitCoins) will work the same way if it doesn't get officially accepted.
Deflation is by definition a general price decrease, whatever the reason for it is. The reason can be a decreased money supply, increased productivity, more people buying into the currency, or something else. But whatever the reason, a general price decrease may lead to money hoarding, which causes problems with not enough money being available for investments.
I don't think the debt problem will be so bad, though, since people can chose to take out loans in their own country's currency instead.
You're right about computers and electronics, but I think the main problem lies with investments, not consumer goods. When you can earn an effective interest by just sitting on a pile of cash, there's little incentive to invest your money, or to lend it out to businesses.
In the case of BitCoins, I think there's a risk deflation will cause some people to hoard their BitCoins instead of spending them, which would stunt the growth of businesses dealing in BitCoins.
It's not necessarily a huge problem, though - BitCoins don't have to replace the US$ or anything like that to be useful. I think it's useful as an addition to traditional currencies, not a replacement for them. For example, it provides an easy, safe and anonymous way to make micropayments over the Internet without relying on a central authority. (Sure, transactions can be traced with the current protocol if a government agency devotes enough time and money to it, but it's anonymous enough for most people's purposes.)
I suspect you're trolling, but for the benefit of anyone who's following this discussion:
Since one's transactions are propagated anonymously from node to node, it's very hard for an adversary to tell where it came from. Before the news of the transaction reaches the adversary, it may have passed through a dozen intermediaries. Unless the adversary is on the same network as you and sees you send the initial message, it takes a lot of resources to track the transaction back to the source.
I have no idea what you mean by making wallets anonymous. With BitCoin, transactions are pseudonymous if you use the same address for several transactions, i.e, someone can tell different transactions have the same source, but not who that source is. If you choose to create a new address for every transaction, they become completely anonymous.
Also the total value of their transactions.
https://en.bitcoin.it/wiki/Trade
Loans are possible in this system, but the bank can't give you more money that it has.
Technically speaking, ordinary banks can't do that either. They just lend out the same money several times. Someone deposits their money, the bank lends them out, the loaner buys something for the money, the seller deposits the money in the bank, the bank can lend them out a second time, and so on. The same money goes round and round to generate debts and assets far greater than its denominational value.
"Fractional reserve banking" means that a bank's reserve is only a fraction of what it owes people. Fractional reserve banking is what allows banks to lend out the money people have deposited, which in turn allows the money to go round and round.
And a bank can do that just as well when dealing in BitCoins as when dealing in traditional currencies. The only limitation BitCoins have compared to traditional currencies, is that there is no central bank which can increase or throttle the money supply.
Hm? What does the case of Jim Bell have to do with BitCoins?
It's a fad unless it takes off in a big way. i can't see that happening for a long time or unless some black swan event ruins debt money.
I think another type of event could make BitCoins take off: if people start using it for a black Internet economy.
As long as you only trade services on the Internet, BitCoins make it very easy to avoid sales tax and income tax. For example, people could buy BitCoins for dollars and use them to pay for premium accounts on web forums. The web forum owner could then use the BitCoins to pay for web hosting. The web host owner could exchange some of the BitCoins for dollars, and use others to pay for sex services he frequents (image forums, webcam stripteases, etc). And so on. The pornographic industry alone should have the power to drive a thriving black Internet economy, and large parts of the porn industry is used to operating in a legal grey area.
Even for those criminals who earn and spend money in a conventional currency, BitCoins could make it a lot easier to transfer illegal money between countries. For example, a small-time drug dealer could sell his wares on the streets for US$, then buy BitCoins for the US$ and transfer them over the Internet to Central America, where he uses the BitCoins to pay his drug supplier. The supplier in turn sells the BitCoins for cash to other Central Americans, and the surplus of BitCoins owned by them would in turn drive other legal and illegal BitCoin businesses.
The current BitCoin client doesn't support anonymity, but it would be easy for two "shady" dealers to set up an encrypted communications link to exchange BitCoins. And even with the current client, the government would have to do a lot of work to track an individual's tax evasion. If each individual user only spends or earns a few dozen US$ in BitCoins per year, tracking them would hardly be worth the IRS' trouble, but it would still leave room for a huge black Internet economy.
Well, in all fairness, until governments switched to fiat money, banknotes were essentially IOU notes: they enabled the holder to redeem, from the government, the gold they had once exchanged the note for (or gold to a value equal of whatever goods they had once exchanged the note for). The earliest banknotes were issued by private banks and were essentially vouchers which enabled the holder to reclaim gold they had deposited (potentially at another bank far away).
Aside, of course, from the essential property that the bar be made of real gold, and not other materials that lack some or all of the properties of gold.
And are those properties determined by decree?
Just as people spontaneously find valid bitcoins more valuable than pseudo-bitcoins which lack some or all of the properties of actual bitcoins.
It didn't happen spontaneously - someone had to declare what a valid BitCoin is, and people had to listen to him. For BitCoins to retain their value, people have to keep agreeing on arbitrary definitions and the protocols used to exchange the coins.
Perhaps it's not a decree in the proper sense, but it's substantially different from the way gold gains its value.
If I wait 6 months the laptop I bought today will be cheaper, yet people buy them.
If I knew food was going to be cheaper next month, I still have to eat this month.
True, deflation wouldn't discourage consumption, at least not of essential goods.
But it would discourage investments. Why risk my money on an investment which may give x% interest, if I can gain the same increase by just holding on to my currency?
Problem is, if people hoard their BitCoins, businesses will see few purchases made in BitCoins, and not think it's worth the trouble to accept it as payment, and the new currency will fail.
That sounds interesting, but do you have any evidence of hoarding?
Our of curiosity - what happens to the BitCoins when someone loses their wallet? Are the coins lost forever, and the total amount of coins in circulation decreases?
Good point.
I'm not a lawyer and don't know if treason is a special case, so I'll use the rape/molestation charges as an example instead.
If it's clear that what Assange is accused of doesn't count as a crime under UK law, then the UK can't extradite him to Sweden. It's not enough that the UK has a similar-sounding crime on their books - the act itself must be punishable under UK law. That's how it works for most "normal" crimes.
Weird.
Also a good point.
It's hypocritical for at least two reasons:
1. The movie companies claim to lose money on piracy, despite their revenues continuing to increase steadily throughout most of the 2000's, and despite research showing that pirating often stimulates sales. And now it turns out they were using the marketing effect of piracy themselves - that it was "pretend" piracy doesn't make a difference to its marketing effect.
2. By pretending to pirate movies, they set a bad example and encouraged the behaviour they claim to be against, and even brand as immoral in their anti-piracy propaganda.
People believe socialists want to ban social security where you live?
If a billionaire did that, people wouldn't be able to trade in BitCoins, the stores which accept BitCoins as payment would stop doing that, and the currency would become worthless.
Yes, but nobody has decreed the properties for a gold bar, or that only certain types of bars can be used for payment - people just spontaneously find bars made of gold more valuable than bars made of, for example, lead. But someone has decreed that a valid BitCoin needs to have certain properties and that only those should be accepted as payment.
I guess it depends on how you see it, though.