I think this is the best way to address the issue of Bitcoin being a ponzi-scheme that some people raise. Explain that it's a software product that allows instant low-fee transactions without a centralized server, and those transactions can include complicated logic to serve various types of contracts, enforced without lawyers or authority, thus lowering the costs of business. And it's startup that you can invest into without going through the pain of hiring lawyers too.
Slightly off-topic, but I don't understand how it can survive long-term.
A 51% attack seems inevitable. The ability to short-sell bitcoins will eventually become widespread. Weigh the estimated cost of building a 51% attack network versus the estimated gains of short-selling all the bitcoins in the world.
Suppose you can make 10% of the market cap ($1.5B) of bitcoins by short-selling the entire market - a very low estimate. That's currently $150 million dollars. Is $150 million enough money to create a mass-production effort that builds enough ASIC miners to beat out half the network?
It will almost certainly cost more money to obtain 51% hashrate than you could gain from a short position, by the time mining rewards aren't enough of an incentive.
Even the NSA doesn't have enough computing power to achieve 51%.
I agree with the first sentence, but I'm pretty sure the NSA could do it.
Until recently it would have only cost a few million dollars to fab enough ASICs for a 51% attack. I haven't seen a recent analysis, but it's probably still only in the 10s of millions (possibly 100s of millions)
The NSA probably specializes in general purpose computational power, they couldn't afford to compete with ASICs at this point. But they probably could destroy any alt-coin alternative to bitcoin in a heartbeat, especially Litecoin which is designed to be mined by general purpose hardware.
> The NSA probably specializes in general purpose computational power,
I would agree that this is likely in the sense that the bulk of their expenditures on computing power are likely directed at general purpose computing power.
That doesn't really mean that they couldn't have expended fairly vast amounts on special purpose computing, as well.
> they couldn't afford to compete with ASICs at this point.
Given that the NSA is kind of concerned about monitoring things (especially things used by people who are particularly concerned about avoiding government monitoring), and given the degree to which people with that interest have been the focus of bitcoin, on what basis do you assume that they didn't get in on the ground floor with ASICS as they became available (or earlier)?
>The NSA probably specializes in general purpose computational power, they couldn't afford to compete with ASICs
this is an absurd statement because the us military, nsa, and cia design their own custom chips and have a black budget to finance the operations and some of the most talented and experienced mathematicians, scientists, and programmers to back them up. when the central banks actually find bitcoin to be a threat they will crack the encryption, do a 51% attack, or conduct some other discrediting attack on its validity and security. I am short term bullish on bitcoin though I am hoping for the best for btc or other decentralized digital currencies.
This is naive. There's no natural process that ensures the network stays well distributed. If Bitcoin takes off, then why would the next hardware miner maker sell the product? Maybe they find it better to just run a significant portion of the market rather than deal with clients.
10 years from now, what if we have a handful of bitcoin mining firms, similar to the current role played by market makers like Getco or Knight?
You can't just dismiss this point. You need to come up with some process that makes it more valuable for someone to be a small player in the network than to go all-in.
> It will almost certainly cost more money to obtain 51% hashrate than you could gain from a short position
If true, that means it wouldn't be an action of a rational attacker bent on financial gain, but not all attackers are rational, and financial gain isn't the only conceivable motive for an attack on bitcoin.
> Even the NSA doesn't have enough computing power to achieve 51%.
How, exactly, are you assessing the quantity of the relevant type of computing power available to the NSA in order to make this claim?
NSA builds general purpose computing in massive scales. The bitcoin network is beyond the scope of all of the world's supercomputers combined. I don't have some irrational belief that the NSA has a bunch of ASIC SHA256 devices laying around. They're too late.
I think fragsworth was suggesting one could short Bitcoin (a lot) then launch a 51% attack to erode confidence in Bitcoin, thus dropping the price, and profiting from your short position.
I thought about how you would attack BitCoin and how to achieve that 51% of the work. My solution is basically to create network partitions (using some DDoS or something to prevent communication) and force a small number of good nodes to start working on your solution. Over time you can rejoin partitions where you will control 51% of the compute eventually converting all of the nodes.
While I mostly agree with you - it's easier said than done. How exactly are you going to buy $150 million (or whatever the needed amount is) of ASICs without being noticed? The government could obviously do it - but at least in the near future that sounds far fetched.
Like wise as soon as your attack is noticed your IP addresses would be blocked by the other clients preventing you from adding to the chain.
Edit: after looking more into the 51% attack IP blocking wont really solve it since it only would take a handful of unique IPs to pull off.
Edit2: Couldn't we prevent the double spend part of the 51% attack (or at least make it more like 90%) by doing 2 things:
1) Merchants would only accept bit coins that have been in the block chain at least 6 blocks ago (this already is the recommended case)
2) Nodes reject any blocks received if they receive it over an hour (6 blocks worth) past receiving the 'sister' block in the competing (true) chain. This would prevent an attacker from 'reversing history.' What would be the drawbacks to this?
Edit3: like wise we could stop the "prevent other people from making transactions" part of it (the only other part) by doing this:
There has been a lot of discussion about various heuristics to invalidate block chain reorganization. The developers have enough real problems on their plate that I don't think they're interested in working on it.
Also keep in mind that a 51% attack may not rewrite history at all, in which case it wouldn't cause deep reorgs. It would cause some orphaning, but that would be mostly indistinguishable from the normal orphaning that goes on normally.
I love Bitcoin and own some myself, but from the title I expected this article to be about how the "founders" of Bitcoin cash out from an early financing round and spend the rest of their days rich, regardless of whether the concept survives.
Bitcoin ecosystem by design rewards the early adopters, since the more people use Bitcoin, the higher the value will go up. I also got the feeling that if Bitcoin does fail, it will go down in history as another Ponzi scheme. Which made me rethink about Ponzi scheme. Everyone in Bitcoin community genuinely believes that Bitcoin will succeed. I am sure it was like that with Ponzi scheme too. Theoretically Bitcoin can succeed, but there are many variables in the world. Maybe it was like that with Ponzi scheme too, you never know what will happen in the future. Lastly, I think it's unfair to label bitcoin as "just another ponzi scheme" as it is not intended for any bad will and theoretically could work (however with so many chances of failing)
"Investing in a successful company by design rewards the early adopters, since the more people buy that stock the higher the value will go up."
Other than that, the only thing you mentioned is that "people want it to succeed". There are far more important pieces that are needed for something to be a Ponzi scheme and you haven't described how Bitcoin suffers from those attributes.
I am using the term "Ponzi scheme" with no judgment attached. I've met many entrepreneurs and people who are working on Bitcoin related businesses and that was the impression I had, which made me rethink this whole "Everyone who was tricked into Ponzi scheme was a gullible idiot" idea that the society has--when something is uncertain and looks like a great opportunity, the ones who jump in are the people who believe in their intellect. The real dumb ones don't do that. Secondly, you and I both know government issued currency and Bitcoins are very different things. Government issued currency is centralized and is driven by very different factors than a completely decentralized currency such as Bitcoin. Lastly, gold mining has nothing to do with the point I was trying to make.
In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.
A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency.
The fact that early adopters benefit more doesn't alone make anything a Ponzi scheme. All good investments in successful companies have this quality.
I never said "Bitcoin is a Ponzi Scheme". I just saw some similarities in how people behave around Bitcoins and Ponzi Scheme and described my point of view. It's not so much different from talking about how multi level marketing and ponzi scheme have similarities, and how evangelism in christianity and ponzi scheme have similarities. Just because they have commonalities, doesn't mean "Christianity is a Ponzi Scheme"
You think it's a ponzi scheme because you think early adopters have all the bitcoins. I would argue Bitcoins are much more spread out than you realize. Mining pools started in 2010 - that's when a large number of people work together to mine coins - each person only earns a fraction of a coin as a result. In 2010 when this started there were only 2 million coins - and not just in one guys wallet, but many - and many many people lost their wallets in the old days as well. Today there are almost 12 million coins - and I assure you those 10 million new coins are even more evenly distributed.
I was talking more in terms of unit value of Bitcoins. I think a lot of people invest in Bitcoins like they invest in stocks. As of today Bitcoin price is $122.10 but it used to be much lower. The more people start using Bitcoins the more valuable it will be, and the early adopters will benefit from it, which incentivizes them to hold onto their Bitcoins instead of letting them go once they have benefited short-term. It's important that the early adopters see the long term value otherwise it will be like a draining bucket.
Early adopters being rewarded is not sufficient to make something a ponzi scheme. In fact early adopters of many trends and technologies are often rewarded. There is nothing about Bitcoin that is similar to a ponzi scheme. I recommend you take the time to read up on what ponzi schemes are:
It's not. Rewarding early adopters is not enough to consider something a Ponzi scheme but it's enough to make people who don't know what a Ponzi scheme is to call it one.
I also think Bitcoin is somewhat like a Ponzi scheme, in ways I described below, but is it a scam? No. The definition of scam is: "A dishonest scheme". There is nothing dishonest about Bitcoin. Sure there are so many ways it could fail, but it is definitely not a dishonest scheme.
If Bitcoin is a ponzi scheme, then startup investment (which requires you to be an "accredited investor" aka have a million dollars just lying around... literally, that's what it takes to achieve "accredited investor" status) is also a Ponzi scheme.
No they won't, because bitcoin isn't a Ponzi scheme or a scam. If you think bitcoin is a Ponzi scheme, then I suggest you don't know what a Ponzi scheme actually is and you're using the term inappropriately.
This analogy can be applied to almost anything. According to this criteria, coffee could be considered a startup: the growers of the beans are the founders, the hipsters sipping their cold frappuccinos at Starbucks are the evangelists, and the price for one pound of coffee beans is its market price.
The only problem here is that coffee is a commodity, not a startup. Anyone can grow it and sell it. Likewise, bitcoins can be mined and sold by anyone. Bitcoin by design is decentralized, meaning that there is no central authority, such as a bank, mining new bitcoins. There is no company or government body that officially runs Bitcoin, only individuals (but in a distributed fashion). A startup is completely different, in that it has a governing body and is usually centralized.
Bitcoin in a sense is both a currency and a commodity, but is definitely not a startup.
> The only problem here is that coffee is a commodity, not a startup. Anyone can grow it and sell it.
The better comparison is to oil. Oil is a commodity, in that anyone can buy it and sell it: but there is a fixed amount of it, and one can only acquire oil by taking oil from the fixed supply. Further, the earlier you got into oil, the more money you made, and the same is true of Bitcoin: the authors have made out to the tune of [100M or more](http://bitslog.wordpress.com/2013/04/17/the-well-deserved-fo...) simply by being the first miners.
So I don't know exactly what kind of definition you want to use for "startup", but bitcoin is certainly software, that was written by a small team of people, that solves a problem, that has made the authors wealthy in a very short amount of time. If someone like Rockefeller started out today, I think we would probably characterize his operation as a "startup", and the founders of Bitcoin are doing much the same thing that he did.
However, as soon as you mine (or buy) Bitcoin, and if you decide to hold them, you are now incentive-aligned with all other Bitcoin holders in desiring a future where Bitcoin is more valuable.
That's much like the incentive-alignment of founding (and early-investor) equity in a startup venture. You know what your share is, and want it to be worth more. So even separate from any salaries or formal-obligations, you can be expected to improvise to help collaboratively create the world where your shares are more valuable.
Other equity is similar: it's a claim on a certain package of legally-respected rights. (You can vote in board elections; you can collect dividends; you receive pro-rata value in case of liquidation.) Those rights might be worth a lot, in certain possible futures, or nothing, in others. If you're an employee-stockholder, you may be a bit more motivated that someone on a fixed salary. If you're an outside shareholder, you'll still "talk your book" and perhaps even direct other investments in ways that synergistically boost the startup.
People describe Bitcoin as crypto-currency or crypto-commodity, but its biggest impact may be as crypto-equity.
Thanks for posting this. I see a lot of "X is Y" posts in news articles. http://en.wikipedia.org/wiki/E-Prime warned us about this - making false associations. X is NOT Y. Defining X === Y makes for weird neurolinguistics and corrupts your map of the world with bad pointers.
Bitcoins are worthless. They never had any value, and never will.
Valueless meaning they are as worthless as Bernie Madoff fund shares, Dutch tulip bulbs, Pets.com stock and Flooz and Beanz, Reichsmarks and confederate dollars and so forth. People might have been temporarily fooled into paying money for these things, but ultimately people realized they were worthless. Like a forged painting or counterfeit dollar.
Today I wrote a blog post about why they were worthless ( http://www.vartmp.com/blog/2013/08/21 ). Some interesting things came out of it. One was I did some research on Bitcoin. I found out that some of the idea guys behind Bitcoin actually anticipated my arguments and give their refutation of them. They're well aware of the fault lines of the argument.
The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
As the subjective theory of value (STV) is false, Bitcoin certainly will, like Dutch tulip bulbs or Webvan/Pets.com stock, ultimately collapse to become worthless or near worthless. But the collapse will not disprove the subjective theory of value by itself - STV advocates can just say people stopped subjectively valuing Bitcoin.
On the other hand, if Bitcoins continue to hold value over the long-term, the labor theory of value will be disproved. It is impossible for a currency with no backing to retain value over the long term.
Not to get tangential, but this includes the US dollar, which was gold backed until 42 years ago. And which has a value today - it can be considered scrip that is accepted by army PXs, post offices and the like for goods and services in kind. That is also accepted by the government for taxes and such. It has no worth beyond that however. Currencies have no inherent value, whatever the Bitcoin people believe.
As I said, one thing I discovered putting my blog post together today was that Bitcoin people had anticipated the arguments of its worthlessness. Their counter is that Bitcoin value is based on their philosophical ideas, which as I said, I consider baseless, and thus, I know that Bitcoins will sooner or later, and probably sooner than later, be worth $0.
I also discovered something else while putting together my blog post. I had the idea that I could financially gain from this insight. I could just short Bitcoins. So I looked into that a little.
Various small hurdles are in the way of doing this, but most are navigable. Bitfinex looks like they allow this, although they may only facilitate it. Just for the principle of it, I'm going to short one Bitcoin (current worth = $122) for now, and maybe more later.
Bitfinex says to short a Bitcoin I "need to [borrow] bitcoins from others lenders". Hopefully Bitfinex can arrange this for me, otherwise I guess I have to go looking myself.
There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300. In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash. As will Bitcoin. Keynes said markets can remain irrational longer than he could remain solvent, which is true. However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.
I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
> In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash.
Dutch tulip bulbs aren't even close to worthless right now, and they weren't worthless after Tulipomania either; for example:
> Even the magnitudes of prices for valuable bulbs and their patterns of decline are not out of line with later prices for new varieties of rare bulbs. Single bulbs in the eighteenth century commanded prices as high as 1000 guilders. In this context, the 1000–2000 guilder price of Semper Augustus from 1623 to 1625 or even its 5500 guilder price in 1637 do not appear obviously overvalued.
This is partially because all unique new bulbs depreciated very quickly, from the 16th century on, as they were propagated and the supply was able to increase to meet demand. If you really want to compare Bitcoin to Tulipomania without embarrassing yourself, you should read some modern historical work on Tulipomania like Garber's Famous First Bubbles, and not an utterly obsolete polemical work by a hack. I've summarized some of the relevant facts in http://www.reddit.com/r/Economics/comments/1bm9fl/the_bitcoi... & https://plus.google.com/115274377971493973150/posts/1qWmh7Cq... if you have enough time to blog but not read books.
(I would address your 100k claim, except a quick search indicates it is coming from MacKay's history, which gets many things wrong such as mistakenly taking a rhetorical exercise - 2 tons of butter, one silver cup, etc. - for an actual transaction. It's purely rhetorical, as one can quickly imagine by seeing how many tons of butter a Picasso or a Ferrari would go for.)
> There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300...I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
You must be completely mad to short Bitcoin even if you were infinitely confident it was going to zero. Never has the expression "the market can stay irrational longer than you can stay solvent" been more applicable. (And you know that, since you even quote it!) The best I can say for your strategy is that at least the fraudulent aspect ("However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.") may rescue it.
Although I wouldn't put as much stock in Garber's thesis (although I did enjoy the monograph) as you do, there definitely is value to his argument. I think it is also important to stress that the problem with the tulip bulb markets at the time was that there were people who were aggressively using leverage and they did not understand the ramifications of it's use.
In your blog post you assert that "Gold and silver were valuable 2000 years ago and are still valuable" but you never explain why. What properties does gold and silver has that makes them valuable?
Gold's use as a currency is apart from its use as a commodity. It makes a good currency for several reasons - it is durable, storable, standardized, portable, easily divisible.
Beyond its use as a currency or as jewelery, I don't have much to say beyond what you could find at http://en.wikipedia.org/wiki/Gold#Applications . Dentists used to use it for crowns. It is used in photographic equipment. It is used in satellites. It is used in heat shielding. It is used in electronics.
Before the industrial revolution, gold was not used for industrial uses all that much - instead of good china for the dining room, people who could afford it would have golden goblets to drink from and the like. This, plus the lack of industrial mining methods, is probably one of the reasons why it is estimated that 80% of the gold ever mined has been mined since 1910 ( http://www.goldsheetlinks.com/production2.htm ).
You forgot that the supply of gold is limited. So if gold is durable, storable, standardized, portable, easily divisible and the supply is limited, then it's exactly like Bitcoin. Only gold is actually less portable, less durable, much less divisible and its supply is less limited than the supply of Bitcoin.
Now tell me, what Bitcoin doesn't have that Gold has (except for the industrial use, which you admitted didn't event exist before the industrial revolution, and, frankly, can only be attributed to a fraction of actual gold's price)?
Bitcoin can be used for secure timestamping and mutual funds locking without third parties. These are non-monetary features that Bitcoin provides. So it has some of them, just like gold.
BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people.
It is analogous to how USD is the only currency the USG will accept taxes in, which you have mentioned.
Not to say that this black market might become unviable whatever reason down the track, but right now it's a big driver of value.
> BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people.
I think it should be noted that if the silk road were to get shut down or disappear, bitcoin's value will completely tank. It's basically the backbone propping bitcoin up. Those people using it for black market purposes will try to unload their coins, which will trigger others to unload their's as well. It will spiral out and the result is the bubble popping.
Unless bitcoin has a much stronger infrastructure than it does today, I highly doubt it would survive something like that. Which if you think about it, says something about bitcoin's fortitude.
You're definitely on the right track, but you're omitting the factor which binds the value of money to the value of labor: taxes. Taxes force (upon pain of inprisonment) people living within the territory of an issuing authority to offer their output for sale in that authority's IOU's (fiat). This allows states to provision themselves using their own credit (that credit then becomes the private sector's financial assets).
I'm not as bearish on Bitcoin as a type of payments system, but it can never supplant traditional currencies (at least not without formal state endorsement, and subsequent deflationary problems).
> According to some very sound economic currency theory, you're 100% wrong.
I should first say that what that web site talks about is not a crank theory. They base their arguments on what many consider a very sound economic currency theory. I happen to disagree with the theory. But you're right in that the perceived value of Bitcoin is based on serious economic currency theory, which many prominent people consider very sound.
> About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume
How much of the value of Pets.com, Webvan, eToys, Kozmo etc. was supported by trade volume in 1999?
> There is no way a bitcoin can crash unless its use in trade crashes.
I guess I agree - if people realize Bitcoin is worthless, they'll stop trading with it. The crash in price will be eventually followed by a slowdown in trading.
> The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.
I've talked about this in other places in this thread. As five current US dollars could not buy one 1972 US dollar, as throughout history every government fiat currency in history has eventually collapsed in value (while gold has kept its value), as the current fiat experiment in the US is only 42 years old, in essence I agree over the long term. US currency is completely based on the power of the US government and its willingness to support its currency. Translated into what I have been saying, it means you can go to places like http://www.usps.com and send the government dollars, and it will send you valuable items in return. You are right though that over the long term, US paper money has no intrinsic value.
Webvan died because its expenses VASTLY outstripped its earnings at the time.
But oddly, you didn't mention Flooz at all, which would have been a better (though still failing) argument than all of the dotcom bust stocks you mentioned.
Flooz was killed first by a lack of adoption, and second by an FBI case due to a Russian crime syndicate using them for money laundering. And of course, it was centralized, which means it could be shut down.
Bitcoin is growing in adoption, suffers from no central authority, cannot ever be shut down, may facilitate money laundering although the US government seems to only be prosecuting obviously nefarious cases such as the Liberty Reserve case and the Ponzi scheme guy and leaving bitcoin itself alone due to its potential economic value. Cash also facilitates money laundering, and I don't see that getting shut down anytime soon.
> if people realize Bitcoin is worthless, they'll stop trading with it
And if people realize the US Dollar is worthless, they'll stop trading in it too. If you're saying that the value of something is what people believe it is, then this argument holds for anything of any value, which is always subjective.
I would argue Bitcoin has more intrinsic value than gold - it is easier to move, faster to move, more secure in its transit, harder to counterfit, and impossible to create more (than is already planned.)
It's intrinsic value comes from these very properties - similar to how gold's intrinsic value is that it's shiny, has been around for 2000 years, makes great jewelry, and some other things as well.
In this century though if you're looking for a digital, better kind of gold then Bitcoin is it - hands down.
Cow's milk is a commodity. It does not make a good currency. It must be kept refrigerated, and even with this becomes useless in a short amount of time. Nonetheless, it is a commodity and is useful.
Gold is a commodity. It makes a good currency - compared to many commodities it is easy and fast to move, can be moved securely, is hard to counterfeit and has a limited supply. It was used millennia ago to make goblets and the like, and has industrial uses today.
Bitcoin is not a commodity. It has no underlying use. So it is not a currency either. Because currencies are based on commodities.
I have written about government fiat money in other posts in this thread so I won't go into that tangent in this reply.
You went from the 'bitcoin has no intrinsic value fallacy' right to the 'bitcoin is not a currency fallacy' - seriously read the Bitcoin FAQ or something. All your points have been discussed to death for the last 4 years. You think after 4 years, hundreds of startups, and millions of dollars invested in Bitcoin that you are the only one who 'realizes' Bitcoin is a scam? Wake up, bitcoin is legit now. It's been vetted by larger forces than your 'blog.'
> The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
And what about the labor which went into designing and coding the bitcoin software, the exchanges, and so forth? Do you think all that labor was worthless (we don't even have to include the "mining" capital and labor in this judgement)? Well, then the value of labor is apparently just as subjective as the value of commodities. So I don't follow how a premise involving STV vs LTV can be used to make a logical argument about the value of bitcoin, or any software for that matter.
Labor goes into mining gold, extracting gold etc. But it can then be used for capping teeth, heat shields, photographic equipment etc., as well as for a currency.
Labor does go into "mining" bitcoins. People build Bitcoin ASICs, people pay people to drill oil to make the electricity that powers those ASICs etc.
But gold has a number of real use values. Bitcoin has no real use value. It is inherently worthless.
People have used all kinds of commodities through history as currency. Cows, rice etc. As precious metals like gold are portable, storable, easily divisible, standardized etc. they make good currencies. An ounce of gold is the same as another ounce of gold, while rice goes bad, cows die, and one cow may give more milk than another. But the value still comes from its underlying usefulness as an industrial metal etc. Bitcoins have no underlying value such as this.
But the industrial value of gold only accounts for a fraction of its price. The recent gold bubble/run-up shows that pretty clearly (the price changed much quicker and independent of its potential industrial uses). So the fact that gold has traditional and industrial uses doesn't really help to justify its "value" or its current price (especially when price is far above industrial demand).
Its true that bitcoin doesn't have an underlying value as an industrial metal (obviously). But it does have an underlying value, primarily that it is distributed/un-seizable e-cash. This differentiates it from previous e-currency systems maintained by a central authority: paypal.com, libertyreserve.com, e-gold.com, notice these are all tied to an authoritative domain name, whereas bitcoin is not.
The intrinsic property of being decentralized/p2p, enables the notable use-value of purchasing controlled substances from the tor hidden node Silk Road. There is no other way to purchase items from that market. This sort of use-value is comparable to the use-value we could assign to something like Facebook: that there is no other way to view the original content which others have posted there. Or to USD since there is no other way to pay taxes.
I think it'd help your argument if you compared bitcoin to other virtual economies/currencies (facebook or facebook credits, paypal, eBay etc). Its obvious that bitcoin is not like gold and won't be valued for the exact same reasons. But see if you can come up with unique reasons why facebook and paypal (note that shares in neither company pay dividends) should have value whereas bitcoin should not.
As I mentioned in other replies already, Bitcoin allows certain non-monetary uses that are not possible with any other technology. E.g. registering your document with a timestamp with no counter-party risk. Or mutually-locking funds without a 3rd party. Or using a third party arbitrator without giving it full access to the funds (only a fee and a right to decide where the funds go: to party A or party B).
Bitcoin is not just a payment protocol. It's a global unbreakable consensus mechanism allowing enforcement of complex contracts without any guns or policemen.
"As the subjective theory of value (STV) is false"
Here's simple counter-argument.
Gold was chemically always the same all these years. But it was valued differently in different places on earth and in different times. When you are in a post-war destruction, your gold may be worth less than a loaf of bread. Or not, depending on how you see your future.
Apart from moving units, Bitcoin is good for things like secure timestamping and mutual fund locking without counter-party risk. No other technology or commodity can do that.
If you believe in "labor theory of value", Bitcoins require investment and labour to be created. All these computers from home CPUs to ASICs require some noticeable amount of work to be done to get assembled and then mine blocks.
Same thing with gold or anything.
Except, of course, labor theory was always wrong for a simple reason: the labor is expended because of expectation to satisfy a demand. So the value must already exist (or be anticipated) in a form of demand. Just because I waste my day and money doing some software won't create any value. There should be other people out there who could do something useful to them with my software, regardless of how much time I spent on it.
Costs and rewards are highly correlated on the market because of competition. If you make big profits, more people will go in and compete on the price with you. So it may seem that costs determine price, but it's the other way around. You expend work only in expectation of being paid for it afterwards (with some profit).
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[ 3.0 ms ] story [ 168 ms ] threadA 51% attack seems inevitable. The ability to short-sell bitcoins will eventually become widespread. Weigh the estimated cost of building a 51% attack network versus the estimated gains of short-selling all the bitcoins in the world.
Suppose you can make 10% of the market cap ($1.5B) of bitcoins by short-selling the entire market - a very low estimate. That's currently $150 million dollars. Is $150 million enough money to create a mass-production effort that builds enough ASIC miners to beat out half the network?
(hint: yes it is)
So, what are you going to do with your 51% of the network? Somehow double spend $150m before everyone upgrades their clients?
Even the NSA doesn't have enough computing power to achieve 51%.
Until recently it would have only cost a few million dollars to fab enough ASICs for a 51% attack. I haven't seen a recent analysis, but it's probably still only in the 10s of millions (possibly 100s of millions)
I would agree that this is likely in the sense that the bulk of their expenditures on computing power are likely directed at general purpose computing power.
That doesn't really mean that they couldn't have expended fairly vast amounts on special purpose computing, as well.
> they couldn't afford to compete with ASICs at this point.
Given that the NSA is kind of concerned about monitoring things (especially things used by people who are particularly concerned about avoiding government monitoring), and given the degree to which people with that interest have been the focus of bitcoin, on what basis do you assume that they didn't get in on the ground floor with ASICS as they became available (or earlier)?
The only reason for ASICs is mining (either legitimate or as an attack)
this is an absurd statement because the us military, nsa, and cia design their own custom chips and have a black budget to finance the operations and some of the most talented and experienced mathematicians, scientists, and programmers to back them up. when the central banks actually find bitcoin to be a threat they will crack the encryption, do a 51% attack, or conduct some other discrediting attack on its validity and security. I am short term bullish on bitcoin though I am hoping for the best for btc or other decentralized digital currencies.
10 years from now, what if we have a handful of bitcoin mining firms, similar to the current role played by market makers like Getco or Knight?
You can't just dismiss this point. You need to come up with some process that makes it more valuable for someone to be a small player in the network than to go all-in.
If true, that means it wouldn't be an action of a rational attacker bent on financial gain, but not all attackers are rational, and financial gain isn't the only conceivable motive for an attack on bitcoin.
> Even the NSA doesn't have enough computing power to achieve 51%.
How, exactly, are you assessing the quantity of the relevant type of computing power available to the NSA in order to make this claim?
http://gavintech.blogspot.com/2012/05/neutralizing-51-attack...
Like wise as soon as your attack is noticed your IP addresses would be blocked by the other clients preventing you from adding to the chain.
Edit: after looking more into the 51% attack IP blocking wont really solve it since it only would take a handful of unique IPs to pull off.
Edit2: Couldn't we prevent the double spend part of the 51% attack (or at least make it more like 90%) by doing 2 things:
1) Merchants would only accept bit coins that have been in the block chain at least 6 blocks ago (this already is the recommended case)
2) Nodes reject any blocks received if they receive it over an hour (6 blocks worth) past receiving the 'sister' block in the competing (true) chain. This would prevent an attacker from 'reversing history.' What would be the drawbacks to this?
Edit3: like wise we could stop the "prevent other people from making transactions" part of it (the only other part) by doing this:
http://gavintech.blogspot.com/2012/05/neutralizing-51-attack...
I would love it if someone responded to this.
Also keep in mind that a 51% attack may not rewrite history at all, in which case it wouldn't cause deep reorgs. It would cause some orphaning, but that would be mostly indistinguishable from the normal orphaning that goes on normally.
Also, knowledge about short-sells would help to stabilize the currency's value, NOT crash it. Just like it has for all other assets out there.
A 51% attack would cost far more than 150 million at this point.
Other than that, the only thing you mentioned is that "people want it to succeed". There are far more important pieces that are needed for something to be a Ponzi scheme and you haven't described how Bitcoin suffers from those attributes.
When the government of a country prints money for itself, is it engaging in Ponzi?
Gold mining (which is quite analogous to Bitcoin mining) is also a ponzi scheme, then?
You're using the term incorrectly, a Ponzi scheme isn't what you seem to think it is.
Is Bitcoin a Ponzi scheme?
In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.
A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency.
The fact that early adopters benefit more doesn't alone make anything a Ponzi scheme. All good investments in successful companies have this quality.
http://en.wikipedia.org/wiki/Ponzi_scheme
If Bitcoin is a ponzi scheme, then startup investment (which requires you to be an "accredited investor" aka have a million dollars just lying around... literally, that's what it takes to achieve "accredited investor" status) is also a Ponzi scheme.
Anyone know any good bitcoin auction/selling sites? (i already use bitmit)
The only problem here is that coffee is a commodity, not a startup. Anyone can grow it and sell it. Likewise, bitcoins can be mined and sold by anyone. Bitcoin by design is decentralized, meaning that there is no central authority, such as a bank, mining new bitcoins. There is no company or government body that officially runs Bitcoin, only individuals (but in a distributed fashion). A startup is completely different, in that it has a governing body and is usually centralized.
Bitcoin in a sense is both a currency and a commodity, but is definitely not a startup.
The better comparison is to oil. Oil is a commodity, in that anyone can buy it and sell it: but there is a fixed amount of it, and one can only acquire oil by taking oil from the fixed supply. Further, the earlier you got into oil, the more money you made, and the same is true of Bitcoin: the authors have made out to the tune of [100M or more](http://bitslog.wordpress.com/2013/04/17/the-well-deserved-fo...) simply by being the first miners.
So I don't know exactly what kind of definition you want to use for "startup", but bitcoin is certainly software, that was written by a small team of people, that solves a problem, that has made the authors wealthy in a very short amount of time. If someone like Rockefeller started out today, I think we would probably characterize his operation as a "startup", and the founders of Bitcoin are doing much the same thing that he did.
That's much like the incentive-alignment of founding (and early-investor) equity in a startup venture. You know what your share is, and want it to be worth more. So even separate from any salaries or formal-obligations, you can be expected to improvise to help collaboratively create the world where your shares are more valuable.
Other equity is similar: it's a claim on a certain package of legally-respected rights. (You can vote in board elections; you can collect dividends; you receive pro-rata value in case of liquidation.) Those rights might be worth a lot, in certain possible futures, or nothing, in others. If you're an employee-stockholder, you may be a bit more motivated that someone on a fixed salary. If you're an outside shareholder, you'll still "talk your book" and perhaps even direct other investments in ways that synergistically boost the startup.
People describe Bitcoin as crypto-currency or crypto-commodity, but its biggest impact may be as crypto-equity.
Come on, markets are more complicated than that.
Valueless meaning they are as worthless as Bernie Madoff fund shares, Dutch tulip bulbs, Pets.com stock and Flooz and Beanz, Reichsmarks and confederate dollars and so forth. People might have been temporarily fooled into paying money for these things, but ultimately people realized they were worthless. Like a forged painting or counterfeit dollar.
Today I wrote a blog post about why they were worthless ( http://www.vartmp.com/blog/2013/08/21 ). Some interesting things came out of it. One was I did some research on Bitcoin. I found out that some of the idea guys behind Bitcoin actually anticipated my arguments and give their refutation of them. They're well aware of the fault lines of the argument.
The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.
As the subjective theory of value (STV) is false, Bitcoin certainly will, like Dutch tulip bulbs or Webvan/Pets.com stock, ultimately collapse to become worthless or near worthless. But the collapse will not disprove the subjective theory of value by itself - STV advocates can just say people stopped subjectively valuing Bitcoin.
On the other hand, if Bitcoins continue to hold value over the long-term, the labor theory of value will be disproved. It is impossible for a currency with no backing to retain value over the long term.
Not to get tangential, but this includes the US dollar, which was gold backed until 42 years ago. And which has a value today - it can be considered scrip that is accepted by army PXs, post offices and the like for goods and services in kind. That is also accepted by the government for taxes and such. It has no worth beyond that however. Currencies have no inherent value, whatever the Bitcoin people believe.
As I said, one thing I discovered putting my blog post together today was that Bitcoin people had anticipated the arguments of its worthlessness. Their counter is that Bitcoin value is based on their philosophical ideas, which as I said, I consider baseless, and thus, I know that Bitcoins will sooner or later, and probably sooner than later, be worth $0.
I also discovered something else while putting together my blog post. I had the idea that I could financially gain from this insight. I could just short Bitcoins. So I looked into that a little.
Various small hurdles are in the way of doing this, but most are navigable. Bitfinex looks like they allow this, although they may only facilitate it. Just for the principle of it, I'm going to short one Bitcoin (current worth = $122) for now, and maybe more later.
Bitfinex says to short a Bitcoin I "need to [borrow] bitcoins from others lenders". Hopefully Bitfinex can arrange this for me, otherwise I guess I have to go looking myself.
There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300. In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash. As will Bitcoin. Keynes said markets can remain irrational longer than he could remain solvent, which is true. However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.
I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
Dutch tulip bulbs aren't even close to worthless right now, and they weren't worthless after Tulipomania either; for example:
> Even the magnitudes of prices for valuable bulbs and their patterns of decline are not out of line with later prices for new varieties of rare bulbs. Single bulbs in the eighteenth century commanded prices as high as 1000 guilders. In this context, the 1000–2000 guilder price of Semper Augustus from 1623 to 1625 or even its 5500 guilder price in 1637 do not appear obviously overvalued.
This is partially because all unique new bulbs depreciated very quickly, from the 16th century on, as they were propagated and the supply was able to increase to meet demand. If you really want to compare Bitcoin to Tulipomania without embarrassing yourself, you should read some modern historical work on Tulipomania like Garber's Famous First Bubbles, and not an utterly obsolete polemical work by a hack. I've summarized some of the relevant facts in http://www.reddit.com/r/Economics/comments/1bm9fl/the_bitcoi... & https://plus.google.com/115274377971493973150/posts/1qWmh7Cq... if you have enough time to blog but not read books.
(I would address your 100k claim, except a quick search indicates it is coming from MacKay's history, which gets many things wrong such as mistakenly taking a rhetorical exercise - 2 tons of butter, one silver cup, etc. - for an actual transaction. It's purely rhetorical, as one can quickly imagine by seeing how many tons of butter a Picasso or a Ferrari would go for.)
> There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300...I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.
You must be completely mad to short Bitcoin even if you were infinitely confident it was going to zero. Never has the expression "the market can stay irrational longer than you can stay solvent" been more applicable. (And you know that, since you even quote it!) The best I can say for your strategy is that at least the fraudulent aspect ("However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.") may rescue it.
Beyond its use as a currency or as jewelery, I don't have much to say beyond what you could find at http://en.wikipedia.org/wiki/Gold#Applications . Dentists used to use it for crowns. It is used in photographic equipment. It is used in satellites. It is used in heat shielding. It is used in electronics.
Before the industrial revolution, gold was not used for industrial uses all that much - instead of good china for the dining room, people who could afford it would have golden goblets to drink from and the like. This, plus the lack of industrial mining methods, is probably one of the reasons why it is estimated that 80% of the gold ever mined has been mined since 1910 ( http://www.goldsheetlinks.com/production2.htm ).
Now tell me, what Bitcoin doesn't have that Gold has (except for the industrial use, which you admitted didn't event exist before the industrial revolution, and, frankly, can only be attributed to a fraction of actual gold's price)?
I think it should be noted that if the silk road were to get shut down or disappear, bitcoin's value will completely tank. It's basically the backbone propping bitcoin up. Those people using it for black market purposes will try to unload their coins, which will trigger others to unload their's as well. It will spiral out and the result is the bubble popping.
Unless bitcoin has a much stronger infrastructure than it does today, I highly doubt it would survive something like that. Which if you think about it, says something about bitcoin's fortitude.
> On the other hand, if Bitcoins continue to hold value over the long-term...
Is long-term one month? One year? Ten years? Why?
> There is no way a Bitcoin can be worth $122 over the long term...
What about $12.20? $1.22? Why?
I'm not as bearish on Bitcoin as a type of payments system, but it can never supplant traditional currencies (at least not without formal state endorsement, and subsequent deflationary problems).
http://bitcoinsurvey.wordpress.com/
tl;dr About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume.
There is no way a bitcoin can crash unless its use in trade crashes.
The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.
I should first say that what that web site talks about is not a crank theory. They base their arguments on what many consider a very sound economic currency theory. I happen to disagree with the theory. But you're right in that the perceived value of Bitcoin is based on serious economic currency theory, which many prominent people consider very sound.
> About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume
How much of the value of Pets.com, Webvan, eToys, Kozmo etc. was supported by trade volume in 1999?
> There is no way a bitcoin can crash unless its use in trade crashes.
I guess I agree - if people realize Bitcoin is worthless, they'll stop trading with it. The crash in price will be eventually followed by a slowdown in trading.
> The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.
I've talked about this in other places in this thread. As five current US dollars could not buy one 1972 US dollar, as throughout history every government fiat currency in history has eventually collapsed in value (while gold has kept its value), as the current fiat experiment in the US is only 42 years old, in essence I agree over the long term. US currency is completely based on the power of the US government and its willingness to support its currency. Translated into what I have been saying, it means you can go to places like http://www.usps.com and send the government dollars, and it will send you valuable items in return. You are right though that over the long term, US paper money has no intrinsic value.
That's great. You disagree with it... without any counterarguments. What's the sand smell like that your head is buried in? :)
> How much of the value of ... webvan
Webvan? Dude... Webvan?
http://en.wikipedia.org/wiki/Webvan
Webvan died because its expenses VASTLY outstripped its earnings at the time.
But oddly, you didn't mention Flooz at all, which would have been a better (though still failing) argument than all of the dotcom bust stocks you mentioned.
http://en.wikipedia.org/wiki/Flooz.com
Flooz was killed first by a lack of adoption, and second by an FBI case due to a Russian crime syndicate using them for money laundering. And of course, it was centralized, which means it could be shut down.
Bitcoin is growing in adoption, suffers from no central authority, cannot ever be shut down, may facilitate money laundering although the US government seems to only be prosecuting obviously nefarious cases such as the Liberty Reserve case and the Ponzi scheme guy and leaving bitcoin itself alone due to its potential economic value. Cash also facilitates money laundering, and I don't see that getting shut down anytime soon.
> if people realize Bitcoin is worthless, they'll stop trading with it
And if people realize the US Dollar is worthless, they'll stop trading in it too. If you're saying that the value of something is what people believe it is, then this argument holds for anything of any value, which is always subjective.
It's intrinsic value comes from these very properties - similar to how gold's intrinsic value is that it's shiny, has been around for 2000 years, makes great jewelry, and some other things as well.
In this century though if you're looking for a digital, better kind of gold then Bitcoin is it - hands down.
Gold is a commodity. It makes a good currency - compared to many commodities it is easy and fast to move, can be moved securely, is hard to counterfeit and has a limited supply. It was used millennia ago to make goblets and the like, and has industrial uses today.
Bitcoin is not a commodity. It has no underlying use. So it is not a currency either. Because currencies are based on commodities.
I have written about government fiat money in other posts in this thread so I won't go into that tangent in this reply.
And what about the labor which went into designing and coding the bitcoin software, the exchanges, and so forth? Do you think all that labor was worthless (we don't even have to include the "mining" capital and labor in this judgement)? Well, then the value of labor is apparently just as subjective as the value of commodities. So I don't follow how a premise involving STV vs LTV can be used to make a logical argument about the value of bitcoin, or any software for that matter.
Labor does go into "mining" bitcoins. People build Bitcoin ASICs, people pay people to drill oil to make the electricity that powers those ASICs etc.
But gold has a number of real use values. Bitcoin has no real use value. It is inherently worthless.
People have used all kinds of commodities through history as currency. Cows, rice etc. As precious metals like gold are portable, storable, easily divisible, standardized etc. they make good currencies. An ounce of gold is the same as another ounce of gold, while rice goes bad, cows die, and one cow may give more milk than another. But the value still comes from its underlying usefulness as an industrial metal etc. Bitcoins have no underlying value such as this.
Its true that bitcoin doesn't have an underlying value as an industrial metal (obviously). But it does have an underlying value, primarily that it is distributed/un-seizable e-cash. This differentiates it from previous e-currency systems maintained by a central authority: paypal.com, libertyreserve.com, e-gold.com, notice these are all tied to an authoritative domain name, whereas bitcoin is not.
The intrinsic property of being decentralized/p2p, enables the notable use-value of purchasing controlled substances from the tor hidden node Silk Road. There is no other way to purchase items from that market. This sort of use-value is comparable to the use-value we could assign to something like Facebook: that there is no other way to view the original content which others have posted there. Or to USD since there is no other way to pay taxes.
I think it'd help your argument if you compared bitcoin to other virtual economies/currencies (facebook or facebook credits, paypal, eBay etc). Its obvious that bitcoin is not like gold and won't be valued for the exact same reasons. But see if you can come up with unique reasons why facebook and paypal (note that shares in neither company pay dividends) should have value whereas bitcoin should not.
Bitcoin is not just a payment protocol. It's a global unbreakable consensus mechanism allowing enforcement of complex contracts without any guns or policemen.
Here's simple counter-argument.
Gold was chemically always the same all these years. But it was valued differently in different places on earth and in different times. When you are in a post-war destruction, your gold may be worth less than a loaf of bread. Or not, depending on how you see your future.
Apart from moving units, Bitcoin is good for things like secure timestamping and mutual fund locking without counter-party risk. No other technology or commodity can do that.
http://blog.oleganza.com/post/52237596486/today-ive-timestam...
http://blog.oleganza.com/post/58240549599/contracts-without-...
Same thing with gold or anything.
Except, of course, labor theory was always wrong for a simple reason: the labor is expended because of expectation to satisfy a demand. So the value must already exist (or be anticipated) in a form of demand. Just because I waste my day and money doing some software won't create any value. There should be other people out there who could do something useful to them with my software, regardless of how much time I spent on it.
Costs and rewards are highly correlated on the market because of competition. If you make big profits, more people will go in and compete on the price with you. So it may seem that costs determine price, but it's the other way around. You expend work only in expectation of being paid for it afterwards (with some profit).