Bitcoin is not a ponzi scheme. It's a technology with actual useful properties. The code is out there to see.
If you don't understand why these properties are useful to so many people, I welcome you to the third world countries where you can't start selling your product to the rest of the world (even if it's a great one), because PayPal doesn't work with your country and cc processors won't let you accept cards from other countries (fraud risk). It's not just that. It's also that you don't have to report to anyone and go through all the tedious paperwork to incorporate BEFORE you actually made a cent on your product. When you compare the ease with which you can start selling your product with Bitcoin, it's just amazing. Government regulations stifle innovation and entrepreneurship, Bitcoin let's you break free.
It can't be both? The declining rate of bitcoin generation certainly has ponzi-like properties. It seems like the primary motivation to mine is assuming that the value will go up as mining becomes more difficult.
So? Is Gold a ponzi scheme too? I don't see a problem with the declining rate of generation because you can divide Bitcoin up to some pretty small fractions. You have to really wrap your head around deflation, you know. It's a beautiful and healthy thing, it's just that we've been told it's not.
So you're saying it has ponzi-ish properties? Or not?
If you're always incentivized to hold something and never incentivized to spend it, it becomes more of an asset than a currency. Gold is an asset, too, but it has much broader market participation in addition to being "special" as a value store due to 6,000 years of tradition.
If you've got an asset with a lot of hype that's supposed to always increase in value, so you better get on board now unless you want to be a sucker, that looks a lot like a ponzi scheme to me. You can still make money on it, don't let me stop you. You're probably not going to refactor capitalism with it.
Additionally, (I'm assuming you're a little young and naive here, apologies if that's not the case), additionally I'd really suggest decoupling your personal political beliefs from investment decisions with real money. It never ends well.
No, I don't believe Bitcoin is a ponzi scheme at all. And I really don't think my age is relevant, you either have arguments or you don't.
But let's come back to that notion of yours
> If you're always incentivized to hold something and never incentivized to spend it, it becomes more of an asset than a currency."
Let's say all you got is 10btc and $0 in your bank account. And you need some food. You're probably gonna decide not to starve yourself to death because being alive tomorrow is more valuable to you than having more money and being dead. Thus you are going to spend your bitcoins (either directly or by exchanging them into fiat).
Now, what you probably wouldn't do is buy something you don't really need or want at the moment. And that's fine, in this case Bitcoin encourages responsible spending. Now, of course, you should understand why a deflationary currency grows long term - not speculation, but new products and services in the economy. If no one spends, then no new products and services appear, currency is not gaining in value. If it's not gaining in value anymore you have your incentives to spend back.
The major differences with a deflationary currency are this:
1. No one forces you to spend (like governments inflating your money), so you make decisions on your own.
2. Deflation is an ultimate tax that rich cannot avoid. If you make money, you will inevitably share it with the rest (their money gaining in value).
When it comes to thinking "this time is different" and "I have an idea to refactor the world economy", your age is VERY relevant.
Everyone thinks they have a simple way to fix everything when they're 22. By the time you're 30-40 it's amazing how much smarter the rest of the world got. You can take my word for it as regards politics and investment, or not, it's your money.
On the argument, you're implicitly admitting that you wouldn't spend bitcoins until you were completely out of dollars, because bitcoins will 'always appreciate'. That's kinda conceding my point as far as asset vs currency. You can sell stock for dollars if you're short on cash as well.
It seems that we agree on the effects of deflationary currency incentivizing not spending money. There's a few examples of that phenomenon happening in the real world, and none of them were really great for GDP growth (severe understatement). You know that spending by a lot of people is what adds up to that 14T GDP number, right?
> When it comes to thinking "this time is different" and "I have an idea to refactor the world economy", your age is VERY relevant.
Its really not. If you are trying to evaluate how good of an idea someone is likely to come up with, their scope of understanding of economics and past efforts in that field is relevant, and age is an extremely poor proxy for that. (It's exactly the same problem as using age alone as a proxy for to measure programming skill would be.)
If you have an actual idea in front of you, its better to just evaluate that rather than the source.
> Everyone thinks they have a simple way to fix everything when they're 22. By the time you're 30-40 it's amazing how much smarter the rest of the world got.
That's not universally true, and to the extent it is true, its significantly about increased focus on near-term self (or immediate-circle) interests rather than increased knowledge -- there's a reason why major advancements more often come out of work people do very early in their career.
" their scope of understanding of economics and past efforts in that field is relevant, and age is an extremely poor proxy for that. (It's exactly the same problem as using age alone as a proxy for to measure programming skill would be.)"
That's exactly the spot where I disagree. Understanding political-economy properly requires a certain amount of cynicism that can only come from observing the world for a while. Very different from programming skill. In programming, "this time it's different" can be true sometimes, we've only got 60-odd years of programming. In political economy, after 3,000 years or so, it's almost never the case.
For what it's worth, I didn't feel that way when I was 22.
> That's exactly the spot where I disagree. Understanding political-economy properly requires a certain amount of cynicism, that can only come from observing the world for a while
Cynicism hinders understanding, though it may be a product of understanding, and while cynicism may come from age, its a whole lot more related to particular experiences interacting with underlying personality.
> For what it's worth, I didn't feel that way when I was 22.
For what it's worth, I might have been more inclined to your simplistic paean to the magical powers of age and the value of cynicism when I was 22 -- or at least 17-18. At 40, not so much.
> It seems that we agree on the effects of deflationary currency incentivizing not spending money.
I'd say a deflationary currency incentivizes less spending, not no spending at all. That's the difference.
Now, your point about Bitcoins only being good for storing money, but not for spending. I don't really understand it. Bitcoin is in no way inferior to fiat currencies if you judge it by its properties. In fact, you can spend it much easier and faster than fiat. The adoption problem is a separate problem and it has to do with government regulations to a large extent and people not understanding the technology to a lesser extent. Both problems are temporary. But let's say Bitcoin is accepted everywhere, since we are talking about the idea of a deflationary currency vs an inflationary one. What would be the incentive for me to own any USD?
It could be. If someone spends money digging holes, it adds to the GDP, but is it good? Hardly so, because no one else profits from it and no additional value is created. The money are wasted, but it looks good on the paper. So why is GDP so important?
As for the miners, yes, they pursue their own self interest, of course. But what they are really doing is helping the network process transactions. So it's very similar to how Adam Smith described businessmen in a free market: they don't need to believe in higher ideals or something, they can be greedy and such, but they inevitably will do good.
$200? Hardly. Maybe if you look at Mt.Gox, it might look like you could get $190 per bitcoin. Howerver, there is no way to actually get that money to your bank account, since Mt. Gox hasn't been doing any banktransfers for months.
The price is high on Mt.Gox because people that have money on there can only get it out by buying Bitcoins and transfering those to other exchanges. This drives the Mt.Gox price up.
If you look a the exchanges that are actually solvent, the price is more around $160.
That's what disrupt means now. It used to mean a company is changing the way an industry does business. But then everybody started claiming they would do that, no matter how trivial the change, so now it means "there's a new company in this industry and it has a hip website."
By that time you won't need to sell. Besides, are you seriously gonna risk your money like that? Switching back to a currency system that can be frozen/confiscated, inflated, etc.?
The upper bound on how many coins he's mined is roughly 1 million (the best estimates I'm aware of come from https://bitslog.wordpress.com ). So you can just interpret the current exchange rate of X as X million. On http://bitcoincharts.com/markets/currency/USD.html I see Bitstamp at $169 right now (MtGox, as pointed out here, is not a useful benchmark anymore), so that's $169m in bitcoins.
(modulo all the usual reasons it's less than $169m: the estimate should be an upper bound and so the real amount lower, he may have lost his bitcoins, you can't cash out that much without crashing the price, he'd have to pay taxes on such an enormous amount, etc etc)
I know you can sell your coin when the price is high; but can you trade quickly enough to profit from such temporary surges (buy low then sell high only a dozen hours later) ? What is the average request processing time if you want to buy, say, 10 BTC on mtgox ?
An exchange will allow you to trade instantly; the moment your sell/buy orders go through, the btc/usd is available in your account for usage, however getting USD into the exchanges can take some time and in the case of mtgox, getting USD out is almost impossible (it's why the price at mtgox is about 10% higher than elsewhere). Your location matters most, if you're in Europe you could get money into Bitstamp within a couple of hours if you pay for a fast transfer and once it's in you can trade instantly.
Orders don't take long. Most of the time (i.e. when the exchange is operating normally and isn't down) they pretty much just happen so long as you know, the orders can match with other orders. If you buy 10BTC at market rates and tell mtgox that you don't really care what you pay for it, then it'll just go ahead and do it. There's not much waiting involved other than the web interface refreshing, which isn't strictly necessary since you could trade by API too if you'd prefer that.
buy & sell occurs at an exchange, which is instant as long as the exchange does it instantly. The exchange is keeping tracking of which account inside their exchange has what stuff. So it is just the exchange writing its records to database.
This has nothing to do with how long a bitcoin transaction (sending bitcoin from address a to address b) takes. bitcoin transaction occur in bitcoin network. The buy & sell is just internal to an exchange (eg. mt. gox) and occur outside of bitcoin network.
It's better to not use MtGox as a baseline price anymore, it's at about $20 higher then any other exchange due to the fact that you can't actually get your money out of it ATM. Check the btc-e graph for a better view:
One cool thing that has happened over that several months is that Mt Gox has drifted down to a market share of around 30% of the total trade volume (generally speaking; ocasionally this trend weakens on days with huge swings, but less often than before). It is good to see more healthy exchange competition.
I'm still hesitant to sell my (smaller) stash. The probability that bitcoin will explode is fairly low, but trading a small but real possibility of becoming a millionaire against a few thousand dollars is a difficult decision :)
Assuming you have $5000 worth of Bitcoin that's 25 bitcoins at the current $200 exchange rate.
So bitcoin has to go to $40.000 for you to become a millionaire.
Bitcoin at launch was $0.05. So value of bitcoin has doubled 12 times since launch, and the value of bitcoin has to double 8 more times for your to become a millionaire. So that's quasi-plausible. Not holding my breath, though :)
So take a decision now about when you'll sell, write it down, and stick to it. Mine has a 5 year timeline, or a specific value (a few orders of magnitude more than today) at which I'll sell.
If bitcoin replaces the dollar as the unit of account, currency of international trade, world reserve currency, and so on, it might be better simply to spend the bitcoins than to "sell" them.
If that ever happens, our homes are gonna be visited by flying drones. But you don't need that to happen for Bitcoin to make you rich. It could very well just stay as a high value, scarce commodity. A few whales buying in can make it happen.
Because nowadays any exponential growth is called a "bubble in forming". And because all stochastic exponential process eventually crash, or "underperform", it sounds really smart to "predict" a crash months or years in advance. Especially when using non-logarithmic axes, the predictions and the crash look really impressive.
You don't, however, often see these prophets of doom profiting from their predictions, because the exact timing of crashes isn't that easy at all.
Its actually generally a lot easier to profit buying a bubble than shorting it.There are a lot more points of increase than points of collapse.
Paulson made a fortune shorting the housing market,plenty of people predicted the collapse but Paulson picked the peak correctly.
The interesting thing is given his shocking trading performance since then he appears to have been lucky rather than smart.
Didier Sornette has some interesting theories(and dubious models) about bubbles,well worth a read.
Well, price has risen not because of businesses across the world adopting the currency but because of only Baidu saying they will accept Bitcoin. That does not justify 50% rise at all.
How do you know that that's why it's risen? Why does that not justify a 50% rise? Why does that imply the price will suddenly crash? Is this idle chat, or have you attempted to significantly short bitcoin somehow to take advantage of the financial gain from your certainty?
It's probably not just Baidu, but it definitely has something to do with chinese.
See this:
http://bitcoinity.org/markets/btcchina/CNY
(click 6 months and compare to USD) - the Chinese Yen volume was off the charts recently, and during the past day was approx. 40% of the USD's volume.
It seems as if Chinese began buying into Bitcoin.
China is leading this rally - so look there for answers. Baidu accepting bitcoins is a good example of what is going on there - this would not happen if the party did not want it - so many people think that maybe the Chinese government would like to give it a try, experiment, maybe not as the final move - but to test the grounds of alternative international currency.
Well, maybe because it only took such a small hit when SR went down and quickly recovered, whereas everyone expected it to greatly lose in value. It basically has proven it can exist without SR.
Also, there are two big new markets and countless smaller ones already.
I wonder if someone could build a new digital currency that starts let's say at 1 trillion units, and is expanded by 2 percent per year (that 2 percent being split so a slight increase happens every day, so it doesn't happen all at once, but after a year, the increase rounds up to 2 percent).
The problem would be seeding it and distributing it early on. But it could still be mined much like Bitcoin, with the difference being that the total amount will never be limited. Also, it should be easier to mine them, since the (non-finite) total (1 trillion) would be a lot larger than the 21 limit for Bitcoins. Someone should also do the math for this new currency's adoption rate, so all of the 1 trillion units (adjusted with the 2 percent inflation rate) get distributed in 3-5 decades.
Basically we don't want a few thousand people to get that whole trillion within 10 years. I'd also prefer if anonymity would be built it (look to Zerocoin for that). Perhaps it shouldn't be anonymous by default, but you should be able to "switch it on"). It should also be as easy to use and as secure as possible (the clients), so normal people can use it safely on all of their devices.
PPcoin is also slightly inflationary, although it offers you an interest rate higher than the inflation rate if you participate in the validation process (basically like mining except you "mine" with your ppcoins rather than with your cpu cycles):
Personally, I don't mind the inflation/deflation argument too much; one thing I would like to see, however, is a coin with a semi-centralized distribution model - an organization bound by contract to give X units to every person in the world. Ripple could have been it, but they went with keeping the coins to themselves instead.
The problem is that for a real currency you ideally want inflation to match the growth of the economy. Fixed inflation rates (including 0) are decidedly non-optimal.
There are arguments in favor of the fixed supply model. The usual economic one is this:
When you earn and stockpile currency units, what you are doing is producing more than you consume, so in real terms you are allowing others to temporarily consume more than they produce. This essentially means that you are investing the difference into society as a whole. Thus, it makes sense that if the economy grows by 2x, your currency units should grow 2x in value, as that's the way any other investment works.
I know too little about currencies but to me it looks like that our "real currencies" are inherently deflationary as well... At least this is how it is supposed to work - right? I mean what if governments weren't printing new money all the time? Then there would also be a limited amount of money available in a big pool... Wouldn't it depend on the growth rate of country to determine weather or not a currency is deflationary?
- Number of people is growing, same amount of money for the people, no new money is printed => deflationary?
vs.
- Number of people is shrinking, same amount of money for the people, no new money is printed => inflationary?
Printing money is basically intrinsic to our "real currencies" so if you remove that you have something quantitively different,effectively a new type of currency.
Technically currency is a medium of exchange and can be linked to anything,industrial production,gold,number of cows,someones else's currency etc ,so whether it is inflationary or deflationary depends on its social framework and design.
Now what is a deflationary currency inherently bad?Say I am Mr Big with my 2 million bitcoins, I can invest in your new business with a variable prospect of success or I can sit on my arse and watch the value of my money go up due to deflation,which am I more likely to do?
How do you deal with exiting debits in a deflationary spiral?
In deflationary systems money does not circulate and that is the death knell of commerce.
But bitcoin is circulating! Well yes,but its value is due to it being traded for speculation and extralegal activities (a lot of which Im actually sympathetic to) ,not as an actual replacement currency.
But why does a fixed supply make it deflationary? What happens when all BTC have been mined, will the price still go up all the time?
I guess it could go up if the Dollar goes down at the same time. The actual price is staying the same, but the Dollar is worth less, so it takes more to buy X. Not sure why that would be bad.
Also I suspect banks will create virtual bitcoin, as they do with money (lending BTC that they borrowed). Perhaps that will affect the price as well.
You mean, assuming there was only one Bitcoin: if a VW Beetle costs 1 BTC this year, and next year a Porsche is published (growing the economy by replacing cars with better cars), the Porsche would also have to cost 1 BTC because there isn't more than 1 BTC?
That seems incorrect. While impractical, there might be other solutions, for example the Porsche could cost 1 BTC+ 1 Carrot, or maybe it could cost 2 BTC anyway. The buyer just wouldn't be able to pay in one go.
Marginal effects don't really reduce well to narrow examples like that.
What I mean is that if you assume a healthy trade in something of limited abundance, you should be prepared for demand to drive up the value of that thing. It might not, but given the simple dynamics of supply and demand (microeconomics isn't really controversial), it is prudent to be aware of the possibility.
(I do sort of assume that people are mostly using bitcoins to complete transactions and speculate, I don't assume there is a healthy trade in them)
True, but there are things that governments can do to influence how infationary/deflationary their currency is. Bitcoin by design cannot be influenced in this way. Once the production of new bitcoins end (which is guaranteed by its algorithm), then it is highly likely there will be deflation, possibly a deflationary spiral.
It's extremely implausible for everyone to know that the value of ${commodity} will rise steadily, with no risk, for the foreseeable future.
Why? Think of the second-order effects of what you're saying--I expect the value of ${commodity} to rise indefinitely, so what do I do? Buy ${commodity}. Or, I own a bunch of ${commodity} and expect the price to rise indefinitely--what do I do if someone offers to buy my ${commodity}? Either sell for a higher price, or don't sell at all.
Both of these have the effect of bringing the future price increase into the present. If everyone expects a 10% increase in the next year, the price today will increase by roughly (10% - the risk-free interest rate).
Now, is the picture different for currencies? Yes. Economists call short-term prices "sticky," and sticky prices are why demand-side recessions are possible. If I'm earning $40,000 a year today, and my boss decreases my pay to $39,000 a year, I don't say "well, there was deflation this year, so I actually got a raise!" On the other hand, if I'm earning $40,000 a year, and my boss doesn't increase my pay at all, I don't say "there was inflation this year, so I just got a pay cut!" In the short term, sticky prices make things (like labor) cost more or less than they would in a frictionless market. That stickiness is why countries with deflationary currencies have problems.
Now then--bitcoin may be a currency of sorts, but are bitcoin prices sticky? No. Companies selling products for bitcoins overwhelmingly price their goods in dollars. At whatever time the transaction is conducted, the buyer converts that price into bitcoin and transfers bitcoin to the seller, who sells the bitcoin for dollars. A buyer will never say "yesterday your price was 1BTC, and today it's 1.2BTC--why have you increased your prices?" A seller will never say "yesterday you offered to pay me 1BTC, and today you're only offering 0.8BTC--no sale!" Both sides of the transaction are dealing in dollars, only using bitcoin as a medium to exchange those dollars. In other words, bitcoin is a medium of exchange but not a unit of account.
Is bitcoin likely to become sticky in the future? Well, if a large proportion of people were paid solely in bitcoin, and could live comfortable lives spending bitcoin instead of dollars, it's possible that we could have a cultural shift to thinking "I'm paid 333BTC a year" instead of "I'm paid $60,000 a year." And at that point, bitcoin's deflationary nature would be an issue. How likely are we to reach that point? Not very, not least because it's a self-limiting cycle--if the sticky-price/deflation combo is an issue in the bitcoin economy and not in the dollar economy, people have very little incentive to switch their accounting to bitcoin. But that's an entirely separate issue from whether bitcoin is or will remain a useful medium of exchange.
"bitcoin is a medium of exchange but not a unit of account."
Very true,however from an economic point of view it is a terrible medium of exchange,you have large spread costs,a difficulty sourcing and transferring product,issues of divisibility and and a massive level of price instability relative to the currency being exchanged.
Your example of buyer and seller also makes that point indirectly unless the bit coins are instantly convertible to dollars someone is going to loose out in any price move.
The cheapest way to pay someone in dollars is to actually pay them in dollars.
I never thought of that, you are right. In the current culture, inflation seems to make most people happy due to the inflated paycheck, even when they actually are at loss. But if we ever reach the point where people get paid in Bitcoin, maybe we will already have gone through a cultural shift, and people will finally understand money. Can you imagine a type I civilization still falling for the same lies? I can't.
Only if that currency is the basis for your economic system, and you wish to continuously stimulate artificial demand in your economic system through continuous currency debasement.
It has been theorized that though such continuous stimulus may lead to greater growth on paper, that growth is more likely to be malignant than it would be were the economy allowed to grow at a more natural rate. Furthermore, continuous inflation is also at least partially responsible for the business cycle. The price of money is the interest rate at which it can be borrowed, and constant inflation is what keeps interest rates low. When money's cheap, people tend to borrow more of it and are less careful about what they do with that money. Hence, due diligence declines, and economic bubbles become more likely.
I guess it comes down to whether you believe people are overly conservative with their money. Inflationary currency incentivizes investment, which is useful in a world with scarcity. But if you believe enough people spend too much on luxuries, deflationary currency wins out.
What it comes down to is whether you think the increased growth from perpetually easy credit is worth the malinvestment and economic bubbles that come with it.
How many legitimate real world services and products currently accept Bitcoins? I understand it is only the Chinese search engine. I also take it for granted that any major Euro/US-based organization (be it Google or Domino's Pizza) that starts accepting Bitcoins will instantly face very serious political repercussions. Given these facts it is astonishing that Bitcoin seems to be heading from strength to strength.
>How many legitimate real world services and products currently accept Bitcoins? I understand it is only the Chinese search engine.
The hundreds (thousands now?) of (mostly) small businesses accepting bitcoin for goods and services include gift card vendors. [1]
You can spend your bitcoins on gift cards (a form of virtual currency in itself) which you can use at some of the world's largest retailers, for example Amazon[2] or Walmart [3].
It's a two-step process, but you can use your bitcoins at Amazon or Walmart, today.
Bitcoin growth will be led by investors and speculators. Day to day transactional use will be a consistently lagging indicator that helps buttress the rising exchange rate floor. Until the whole thing falls apart (or not). Time will tell :)
I am too lazy to create a lmgtfy link for you, sorry. Google yourself. Lots of places accept Bitcoin. Although I am not sure how many people actually use it for shopping.
Bitcoin is deflationary and has enough actual use to support small trading volume even without speculators. It's perfect vessel for speculators and bubbles, but the long trend is pretty obvious. I suspect that it will grow until it has reached all of it's potential users and potential speculators.
It has actual use as currency for bad stuff, money laundering and avoiding currency restrictions like in China for example, so I think the exchange rate will grow for some time. I suspect that grey economy might support money supply worth of 200-300 billion at least. Government interventions might cut it into much smaller number though. Virtual currency has little value if you can't interact with the rest of the economy.
It's not path to cyberanarcist-utopia, but it's not clearly useless either. I think it might find it's niche or be replaced with something similar.
I've said it before and I'm sure I'll say it again: the biggest risk to bitcoin is a government (specifically the US government) deciding that they don't like it. Barring that, its growth will likely continue.
You don't need to be a prophet to guess that. Of course they don't like it. To me, it's not even a question. The question is, what are they gonna do about it and for how long will they manage to delay Bitcoin adoption.
My thinking is along the same lines. They're tacitly accepting it now, not because they accept it, but because they think it might collapse on its own. When they realize that it's not going to go away, I'm almost certain that the government will step in somehow and try to put the kibosh on bitcoin. How long that will be is anyone's guess.
- Bitcoin seems to be steadily growing. Well, as soon as they realize it is worth nothing, it will return back to non-existency.
- Yeah, this is definitely a fad. It is growing too fast. No way I am going to mine.
- So, mining at home is redundant now. Well, don't picture me buying into it! It can collapse any second.
- Haha, it collapsed. Good grief. No way I am buying all the leftovers. This will never recover.
- Recovering? This will be temporarily. Bitcoin has no future.
- A new peak? Well too late to step in, now. Just wait for the new burst.
- Yet another peak!? This is the last one. Buying now would be stupid.
- Bitcoin heading towards $(peak of some arbitrary rounded number), new bubble forming
Every time.