Maybe I'm missing the point of bitcoin. I read through the Bitcoin FAQ and it sounds an aweful lot like they're trying to create a system where I can exchange my dollars for bitcoins and use them in transactions.
Am I wrong to be confused? Am I supposed to buy in to bitcoins with confidence, given the wild swings the currency is experiencing?
I'm not trying to take some random dig at bitcoin. My statement about their volatility is based in fact. I want to be educated on the matter. I find the idea fascinating, but it seems that providing stability should be a goal near the top of the list. Am I wrong about that?
You're not wrong to be confused. How anyone could transact for goods and services in such an extremely volatile currency is a mystery to me (assuming it remains as volatile as it has been).
Especially on the supply side. Let's say I'm running a coffee shop that takes orders in USD and in BTC. Let's say I want to sell a cup of coffee for $3 or 1 BTC. Or is it $3 or .0001 BTC? Or is it $3 or 1000 BTC? How do I, as a simple seller of goods and services in exchange for BTC, know how to price my items when they can be acquired via other currencies for relatively fixed prices, and huge arbitrage opportunities constantly exist?
A suggested "solution" is to post prices in USD but perform the transaction in BTC (based on the latest exchange rate) under the hood. This shifts the problem to the buyer, who doesn't know how much will be taken out of their wallet.
They had that system in Russia when the rouble was fluctuating more. All prices were posted in "comparative units", which were basically USD. You'd then pay using the day's exchange rate.
You could price the cost in USD, and use bitcoins only as a means of transferring wealth. People would pay an amount of bitcoins calculated dynamically from the market rate, and then you'd convert the bitcoins you receive into dollars as soon as the transaction was confirmed.
I suspect that we'll begin to see web services that handle this sort of conversion automatically. Give them a Dwolla account, and they'll provide you with a Bitcoin address that will automatically dump the equivalent market rate of dollars to your Dwolla account.
How fast does the market move? If someone buys my coffee based on the posted USD/BTC conversion rate as of 12:00:00, and I convert those back into dollars at 12:00:01, how much variance am I likely to see between the original USD price and the USD amount that I finally collect?
Any service that converted between BTC and USD would probably require at least 1 confirmation - i.e. it would take 10 minutes before the USD were sent to your account.
The market value could change in that time, perhaps by 10% or more when the market is unusually volatile. However, assuming that these rises and falls average out over the long term, a web service could guarantee the quoted rate.
So the user would buy the product using $20 worth of bitcoin, which would manifest itself as $20 (minus a percentage fee) in the merchant's account within 10 minutes. Any hit (or gain) due to fluctuating exchange rates would be taken by the web service sitting in the middle. Over time the fluctuations would average out - at least that would be the hope - or at least covered by the transaction charge.
I think the FAQ (and all the other "Bitcoin is a better Paypal" stuff) was written before the bubble started. At this point speculation has pretty much destroyed most of the interest in using Bitcoin as a payment system.
Then what does it become? That's an even bigger risk than volatility, isn't it? That the whole thing will just devolve to a giant market gambling pool?
Providing stability? I don't know how you can begin to do that for an asset whose fundamental value no one knows, not even remotely.
My recommendation: set up an order on Mt. Gox for some amount you'd be willing to pay, like $12 or $13, and leave it there. The way things are going, odds are the price will come back down to that range sooner or later. Of course, I could be wrong. On the other hand, it could drop even further than that; the $12 or $13 number is just based on the recent history.
I have a hard time believing the intrinsic value of anything is zero.
A bitcoin is list of signed transactions that is encoded within a chain of blocks verified by a proof of work. A list of transactions is only considered a valid bitcoin if it is accepted by the largest existing block chain.
So a bitcoin must follow certain rules if it is to be considered to be valid, and this means it has certain intrinsic properties. For instance: if you have the private key that signed the last transaction for the bitcoin, you can extend the bitcoin with a new transaction, and that bitcoin will still be considered valid.
So I'd argue that being able to cryptographically transfer a bitcoin is an intrinsic property of the bitcoin, and therefore something that gives a bitcoin intrinsic value (assuming you think this property is useful).
I have a hard time believing the intrinsic value of anything is zero.
Well shit man, I have some random bytes I'd like to sell you. How much are you willing to pay for 'em?
So I'd argue that being able to cryptographically transfer a bitcoin is an intrinsic property of the bitcoin, and therefore something that gives a bitcoin intrinsic value (assuming you think this property is useful).
Like I've said before (and nobody has yet taken me up on this offer), I'm selling Bitcoin Prime. This has the following properties:
1. Every string of bits that is a bitcoin is also a bitcoin prime
2. All bitcoins prime currently in existence are owned by me.
Does my huge stock of bitcoins prime have any intrinsic value? I think not. But if anyone disagrees them I'm more than willing to part with my entire collection for a hundred US dollars. (I reserve the right to invent bitcoin double-prime as soon as our transaction is completed...)
My point: even if a bitcoin is a string with some unique properties you don't actually own that string of bits in any useful sense, you only own it by convention with other bitcoin users. Bitcoin is just one of an infinite number of possible equivalent systems, and just happens to be the only one in which there's any real money floating around at the moment.
You may have a point with the random bytes. That is as close to worthless as makes no difference.
But regarding your "Bitcoin Prime": your system isn't backed by proof of work. My point is that bitcoins are not just a set of random bytes, or even a chain of signed transactions. They are also secured by a proof of work chain, and without this they are not bitcoins, by definition.
So even though you can come up with a set of bitcoin primes, one for each bitcoin, there's no proof of work backing your system. You can't reuse the proof of work that backs bitcoins without knowing all of the private keys, so you'd have to start from scratch.
I have a hard time believing the intrinsic value of anything is zero.
Think of the contrast between “value for use” and “value for exchange”. A gold coin, even if you have no interest in exchanging it, can be pretty to look at, or melted down for jewelry. A share of stock, even if it is not being traded, gives you voting rights and possibly dividends. Fiat currency has damn close to zero use-value, but at least you can use it to pay taxes to the country that issue it.
By contrast, without a market for bitcoins, a bitcoin is just a record of spent CPU power.
Not quite. The CPU power spent on a bitcoin guarantees that a certain level of work must be performed to reverse an existing transaction. In other words, an inherent property of a bitcoin is that it is hard to double-spend.
Creating a token of information that cannot be spent more than once is hard to achieve without relying on a central trusted authority, so I'd argue this inherent property of bitcoins is useful and valuable.
Those factors affect a bitcoin’s exchange value: for the purpose of exchange, a bitcoin is arguably more valuable than, say, an original haiku. But the difficulty in double-spending bitcoins is irrelevant if there is nothing to spend one on in the first place.
(On the flip side, there are things whose use-value exceeds their exchange-value. If, for example, I am hungry and I have one fresh fish, I would derive benefit from cooking the fish and eating it, but if I’m not standing in a fish market, it’s probably not worth the effort for me to sell it.)
The overall bitcoin protocol has some use-value: even if people stopped trading bitcoins, the protocol for running the system would be a worthy object of study for cryptologists. But you can derive that kind of benefit from the protocol without owning a single bitcoin.
If we can agree that the protocol has value, then the only question is whether or not an individual bitcoin exists outside the protocol. I'd argue it doesn't. You can't point to a sequence of bytes and say "that's a bitcoin".
Instead, a bitcoin exists only as an agreement between the CPU-majority in the network. They agree that user A solved a block, and therefore is entitled to new coins, and they agree that user A transferred that coin to user B, and so forth. But there's no piece of data that specifically represents a bitcoin. Outside of the bitcoin network, bitcoins don't exist, and therefore it's meaningless to talk about them in isolation.
Am I wrong to be confused? Am I supposed to buy in to bitcoins with confidence, given the wild swings the currency is experiencing?
I'm not trying to take some random dig at bitcoin. My statement about their volatility is based in fact. I want to be educated on the matter. I find the idea fascinating, but it seems that providing stability should be a goal near the top of the list. Am I wrong about that?