If you lose your wallet, you lose your bitcoins. This means that losing data from your hard drive is equivalent to losing your bank account.
I get the idea that people ought to back up regularly, but look at the reality of the situation. How many times have you heard a friend or relative bemoan the loss of important photos or files because they didn't back up their computer?
I assume that the eventual goal of bitcoin is to be accepted by the mainstream public. Unless I'm misunderstanding something (which is entirely possible), we'd be asking people to accept the idea that their money is only as safe as the data on their hard drive.
That does not mean cash is unworkable, that only means people will learn to keep their money in a safe place. Might take some time, but they'll learn all the same.
I only carry a small amount of cash at any time. If bitcoin is only as secure as cash, then no one will maintain any more bitcoin currency than a few hundred dollars.
It would be irresponsible to entrust tens or hundreds of thousands of dollars to the integrity of your hard drive and its backup(s).
Or is bitcoin not meant to become a currency that people would hold in values larger than a few hundred dollars?
A common strategy is to keep a separate secure "Savings Wallet".
Here's one way to do it:
Make a new wallet with a receiving address you note down somewhere, compress/encrypt the wallet file with the strongest password you'll remember, shred evidence of the unencrypted file, put the encrypted file on a few USB sticks, and hide them. You can put one in a safety deposit box, if you wish.
Now this is the beauty of Bitcoin:
You can continue sending money to the receiving address of your Savings Wallet without ever opening it and firing it up. Someday, perhaps after the financial apocalypse, you can decrypt your wallet file, open it, and your client will start downloading all the transaction history from your peers which will eventually accumulate all the savings you've sent to it. Then, you can start spending them.
See, you learned! You learned not to store all your cash in one place (on your person, or in your home). Surely you will also learn to store or bitcoin stash in an appropriate electronic analogue of the safe deposit box. Like dropbox, only with real encryption.
Are you saying that you would keep the bitcoin equivalent of, say, USD$100,000 in this hypothetical secure location?
For bitcoin to become a viable alternative currency, everyone's wallet needs to be distributed as widely as a torrent file, and secure enough that only the owner can ever open it.
It's a lot easier to go to the SEC offices (or the offices of our elected reps who appointed them) with pitchforks than it is to get to the folks running mybitcoin.
I think that Mt. Gox needs to place limits on how quickly the 'official' bitcoin exchange rate can rise or drop. This would help to limit the intra-day volatility that is the defining feature of bitcoin speculation. Since the trading volume is so low right now, savvy professional traders can manipulate the market up or down with only a few thousand USD. This makes the current bitcoin economy impractical for most ordinary merchants and consumers.
If people want to trade in dark pools or OTC exchanges at rates different from the 'official' rate, that's fine. And in situations where there is an actual reason for the price to shoot up (like PokerStars announcing they will start accepting bitcoins), those side markets are where we would see the 'real' price. The official rate on Mt. Gox would lag behind because of the restrictions in place, but I think that would be a small price to pay for an end to the bot- and speculator-driven volatility in the exchange.
You can't force people to fill bids and asks at pre-freeze prices, as that would just lead to participants being horribly arbitraged against (and even if Mt. Gox were the only way of trading Btc for USD, it would still be a terrible idea); so the only other option is to suspend trading. Well, now what? Btc will still be traded; the market price will still move; but you won't be able to see it happening on Mt. Gox anymore. The effect would be to harm the liquidity of holders of Mt. Gox accounts, not to reduce volatility; and in fact, by reducing volume, volatility would likely increase. The site would lose its business in a few days or hours.
My theory of what could rapidly reduce volatility in Bitcoin: liquid markets in futures and vanilla options. It's an easy way of generating more volume. It provides price stability to businesses accepting Bitcoin as payment. Empirical evidence exists that the more options purchased by hedgers, the less volatility exists in the underlying: http://www.terry.uga.edu/finance/docs/pearson.pdf.
Since the author didn't bring this up, I think that the biggest technical problem with bitcoin is that it takes 10 minutes to verify a transaction. It can't be used in real stores until someone figures out a way to get that down to under a minute.
You can include a transaction bounty (traditionally 0.01 BTC) with your payment which the verifiers receive if they're the first to verify your payment. Effectively, this puts your transaction at the top of the priority queue. When you're connected to a healthy number of peers, this can bring down the verification time down to seconds.
Another approach is to have "trusted sources" which are Bitcoin banks/ewallets. If your customer is using a Bitcoin bank like eWallet to send a payment, you can pretty much assume that the transaction is valid based on the source, without verification.
Either way, this is merely a short term problem. As more Bitcoin infrastructure springs up (more banks, more verification hubs, more incentive on transaction fees rather than mining, when mining gets too expensive) then these problems will be organically mitigated. If the Bitcoin infrastructure were to remain the way it is now forever, it won't scale for many other reasons (like requiring peers' wallets to store significant transaction history that could grow at the rate of gigabytes per hour with "real world" volume).
You can include a transaction bounty (traditionally 0.01 BTC) with your payment which the verifiers receive if they're the first to verify your payment. Effectively, this puts your transaction at the top of the priority queue. When you're connected to a healthy number of peers, this can bring down the verification time down to seconds.
Isn't transaction verification tied to block generation, and isn't block generation limited to about 1 every 10 minutes?
The generating of new blocks is what sets the transaction "in stone". And the more blocks past a transaction's inclusion, the harder it is to reverse that transaction - more blocks = more certain you have actually received the money.
Prior to being included in a block, it's entirely possible for the payer to issue the same money to multiple recipients. Once it's in, it's assured that only one is included, and others are therefore invalid. So it's in recipients' best interests to wait for a few blocks before totally accepting something as "paid".
It is. Transaction fees are (theoretically) supposed to provide incentive to be a block solver, and the solver can choose what transactions to include and what to ignore, so it's in their best interest to include ones that have fees. As usage increases, this means more and more work for the solvers, so they're more likely to drop things they can't make money on.
edit:
When someone sends you a transaction, it registers more or less immediately. It is only the confirmations in the blockchain (that happen every ~10 minutes) that give you confidence that the coins were not double spent.
I was really just commenting on the technical side. From a technical standpoint bitcoins are far more convenient than checks; which have been successful by any measure.
There is no reason there couldn't be a law that says "it is illegal to attempt to defraud merchants by trying to double spend bitcoin."
From a technical standpoint, if you send me a payment and I have no reason to mistrust you (similar to my accepting a check for payment), seeing the payment show up in my account immediately is pretty satisfactory.
Further if it becomes a problem, services similar to clearcoin could pop up; allowing users to 'store' coins in a trusted third party, like a generalized escrow-service that companies could trust.
So unlike clearcoin which has coins transfered per-transaction, they might offer a service where you can just store your coins there, and business will trust unconfirmed transactions from clearcoin; thus they wouldn't have to trust you.
Really though, I doubt it will become any more of a problem than bad checks are.
Which still brings us back to the fundamental flaw of bitcoin: it is a fiat currency without a fiat.
If bitcoin transactions are only trustworthy in jurisdictions with laws governing such transactions (i.e., none), it is safer and more convenient to simply use the local currency. And of course, governments will not voluntarily protect transactions in competing currencies.
Bad checks are an enormous problem. One of the reasons that merchants favor credit cards, despite the high transaction fees, is that the incidence of non-payment fraud is both lower and less costly. If Bitcoin is susceptable to nonpayment fraud, it is a non-starter as far as widespread adoption is concerned.
Are you saying that you think a court would dismiss a civil suit over a bitcoin transaction, or did you just fail include the scare quotes around "the government"?
Government antipathy could range from being uninterested in prosecuting criminal fraud to actively outlawing the currency. If it's outlawed, you've no more chance getting a civil suit through than the nitwits who call the cops when someone stole their marijuana.
Government is not a singular entity. The courts will generally judge a civil lawsuit, even if executive branch hates the subject with a passion. In fact, many of the lawsuits are against the government, and they get heard. All you need to do is show that you were wronged, and you can sue, and have your day in court. Of course if you open yourself up to criminal prosecution (which could be if legislative outlaws bitcoins, directly or not) then it's best not to pursue that route.
But that doesn't matter, government is not the only entity that can resolve conflicts. Online reputation management, trusted third-party processors (escrow), the mob, and insurance companies can all reduce fraud to manageable size.
This is easy to do - a payment proxy company will spring up that will accept buyer's bitcoin payment and remit a different bitcoin to the seller, minus their commission. That payment company will pool the risks, develop profiles for users they trust more, develop technical and other expertise to predict and prevent fraud etc. The seller will then work only with reputable payment proxies to instant payments, or directly with buyers who don't mind waiting.
That's largely solved by intermediaries, though. Much of our current economy can be re-created on top of Bitcoin. In this case, a credit card like intermediary would guarantee the transaction once they saw it, providing insurance against duplicate spending, so the recipient can get their money regardless.
Intermediaries kind of defeat part of the purpose of a decentralized system, but very very importantly, they're optional with such a system.
I think you would realize that there are only...25 articles in the archive, and that this was the only article that actually analyze the Bitcoin currency market.
I was wondering about this myself. There's a fixed total supply of bitcoins, and a non-zero rate of loss can be expected - this doesn't seem like a good long-term combination.
The Bitcoin protocol allows for 8 decimals worth of divisibility, meaning that there are actually 2.1E16 or 21 quadrillion
"units" (aka "Satoshi's") available.
I get the idea that people ought to back up regularly, but look at the reality of the situation. How many times have you heard a friend or relative bemoan the loss of important photos or files because they didn't back up their computer?
I assume that the eventual goal of bitcoin is to be accepted by the mainstream public. Unless I'm misunderstanding something (which is entirely possible), we'd be asking people to accept the idea that their money is only as safe as the data on their hard drive.
Do I have this all wrong?