Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of around 2 percent to three percent
As long as consumers are paid in their local currency and vendors pay their employees, their taxes, and their other costs in local currency, then bitcoin as a payment technology has similar costs as credit cards. Those costs are reflected through exchange fees and bid/offer spreads.
Let's walk through a transaction. I want to buy something that costs 1 bitcoin. The going rate on the bitcoin exchange is $825 bid by $830 offered. I take my cash to the exchange and convert it to bitcoin. Assume exchange fees are .5%. To buy 1 bitcoin I pay $834.15 (fees included). I transfer the bitcoin to the vendor, who then does the reverse transaction. He recieves $820.875 (fees included). The cost for transaction was $13.275 (834.15 - 820.875) which comes out to 1.59%. That is cheaper than the oft quoted 2.5% rate for credit cards but is very much in the same ballpark. If you factor in that some credit cards give you 1% cash back then bitcoin and credit cards are back at basically even in terms of net transaction costs.
With bitcoin as a payment technology, the transaction costs flow to the bitcoin exchanges, market makers, and dealers. A dealer is sort of like an exchange combined with a market maker. The dealer quotes you a price to buy or sell bitcoins and you transact directly (not on an exchange). The dealer, like a market maker, makes money on the bid/ask spread. The only reason I'm going on about this is because one of a16z's big bitcoin investments is in a company called Coinbase, which is a bitcoin dealer. When you buy or sell bitcoins with Coinbase, Coinbase always takes the other side of the transaction. They make money on the bid/ask spread, and in some cases ("instant exchange") they charge you a 1% fee on top. It's a pretty clever business.
Just putting this out here so that everyone understands how the guys out there touting bitcoin for payments plan to make money from the people using bitcoin for payments.
I got tired arguing with people with vested interest in Bitcoin that Bitcoin is not cheaper. You see a lot of people on Reddit getting super excited buying junk at Overstock and saying: "The banks got nothing!" without realizing that: 1) Coinbase sold their bitcoins at Bitstamp. 2) When more people sell than buy, Coinbase needs to wire money from Bitstamp to their European bank account and then to their US one; 3) Overstock gets an ACH daily from Coinbase; 4) If you got your bitcoins from Coinbase, an ACH was made for the purchase and if Coinbase gets more buys than sells, it needs to daily wire money from their US bank account to their European one, and then from it to Bitstamp. In other words, this over complicated process involves a lot more banking activity than credit cards! I get 1.5% cash back without any limits from my PayPal Debit Card and Coinbase charges me 1% + $0.15 to buy bitcoins.
> Bitcoin isn't free, but it's far, far, cheaper than credit cards, and gives far less money to banks.
You're not listening: BitCoin is WAY more EXPENSIVE than a credit card TODAY.
* People know how credit cards work
* Everybody accepts credit cards
You are comparing a payment medium with an asset/currency/payment-method/protocol. It's not a fair comparison (for BTC) because it's a really awesome technology which could evolve in many different things.
BUT saying that BTC is cheaper/easier than using a credit card TODAY is a simply not TRUE.
Dwolla has free micropayments (up to $10). Amazon offers special pricing for micropayments (5% + $.05) and so does PayPal (although it requires a separate account). If BTC price goes too high, the dollar costs of Bitcoin transaction fees will get pretty high as well. Anyway, here's an interesting article to read: http://www.bloomberg.com/news/2014-01-02/bitcoin-is-an-expen...
Like others, you seem to be assuming that bitcoin is static and not being improved and that transaction fees won't be lower with continued technological improvements.
Simplistically: Each transaction can optionally include a fee as an incentive for Bitcoin miners to include the transaction in the block they're calculating. Right now, blocks can produce new "mined" Bitcoins, so the reference implementation doesn't frequently add a fee as the incentive to calculate a block is still quite high. As the "mining" (new Bitcoin creation) rate declines to zero, fees will become more important as an incentive to continue calculating new blocks.
Sure, you'd either have to convert part of it to fiat for taxes, or carry a currency risk and pay the taxes separately (as I do.)
In the future, you'll probably be able to pay your expenses in bitcoin and then the issue becomes moot (you use your bitcoin earnings for expenses and your fiat earnings for taxes.)
OF COURSE you owe taxes every time you realize a gain. I pay taxes on every bitcoin I earn, including any I use to pay for expenses. Nothing I wrote implies that you don't have to pay taxes on all money earned with bitcoins.
However, just because you earn money with bitcoin doesn't mean you can't pay for the taxes on those bitcoins with money you earned in fiat.
Your points are fair when you look at national payments (with the current adoption), but the math changes when looking at international money transfer.
This is absolutely correct. One other key point: Marc and his portfolio companies (among others) are deliberately evading regulations. Those regulations have real costs, which is why they are worth evading at all. Were companies like Coinbase to actually comply with U.S. law, they'd each have to spend $20 million on money transmission licenses and associated bonds (not including legal fees). These costs are not presently taken into account with a 1% fee structure.
Huh. An 'unfair competition' lawsuit by someone with a nominally competing payment product ('FaceCash') ...
After reading your CrunchBase profile, where I saw that you have your own competing product, and looking at the list of defendants in that lawsuit, may I just say that while I don't bear you any ill will (and in fact I wish you well), I don't hope that you win this.
That doesn't mean much since I base that opinion on so little, but here's my thinking, in case it's useful to you in communicating to others:
We need innovation in this space in the worst way possible. The VCs are showing up, and I'm nervous about their interaction with BitCoin. But however unsavory or unfair their motives or tactics, in the fight between traditional 'money transmitters' and bitcoin, the VCs find themselves on the side of the angels, fighting against premature regulation of a potentially world-changing technology.
BitCoin is a completely new and different thing, and it provides a lot of capabilities to companies that use it that those companies would otherwise have to do themselves -- and that central banks have to do, as well.
Sure, if BitCoin didn't exist, you'd have to do a lot of things yourself that the BitCoin network now makes trivial. But why should those companies be forced by law to pretend that BitCoin and its network don't exist? And don't have the properties that they have?
I don't support thinkcomp's lawsuit for various reasons, but...
Sure, if BitCoin didn't exist, you'd have to do a lot of things yourself that the BitCoin network now makes trivial. But why should those companies be forced by law to pretend that BitCoin and its network don't exist? And don't have the properties that they have?
I don't think this is a good interpretation of the situation. Bitcoin does not natively provide anti money laundering which is one of the primary purposes of money transfer regulation. Bitcoin also doesn't provide consumer protections that many people want.
1. I think that there are anti-money-laundering regulations that don't require $20m in bonds, like the know-your-customer laws that many exchanges are complying with.
2. Many people want consumer protections, but they'd probably, if asked, 'want' it for cash as well. And in fact, they do have them -- customer service, anti-fraud laws and criminal prosecution, small claims court and lawsuits. Those protections are necessary to, essentially, protect the consumer from the money transmitter. But in this case, the Bitcoin network exists, and provides a novel invention of something that can, through the use of keys and such, be transferred every bit as irrevocably as handing cash from one person to another -- and provide an excellent, public 'paper trail', which can act as proof of purchase/payment, as well.
So my point is, the world has changed, and it's very, very good that the old-world regulations aren't yet completely crushing that change.
Cash++ springs into being, and companies are being formed to add a user-friendly skin on top of this amazing Cash++ network, but endangered existing players want to make the barrier to entry for any company that taps into Cash++ be the onerous, $20mm bonds required of traditional money transmitters.
There's a lot of complexity here. Aside from the list of defendants, you may find some of the lawsuit filings of interest. And you may be surprised as to which companies are really for and against over-regulation of the payments space.
True, but the alternative vision is that we cut out the USD<->BTC exchange process entirely. For instance, I could get paid in BTC, then I go to Target and pay for their goods in BTC, whereafter they keep the BTC. But Andreessen Horowitz wouldn't like that, of course.
If you noticed though, the article constantly referenced the ability of both consumers and merchants to NOT possess any actual bitcoins. The actual bitcoin is so volatile, not to mention the gold-standard-like deflationary nature of them, that convincing most people that holding onto actual bitcoins rather than fiat currency does not seem to be a16z's goal (which is a good decision on their part). So its hard to argue the merits of the article while basically rejecting one of its main points (that you dont need to hold any bitcoins for it to still be super cheap).
You can already get paid in BTC too [1] so you don't even have to convert USD -> BTC in the first place. Why wouldn't a16z like that? Wouldn't they love that? If BTC becomes that commonplace then all of these companies they're invested in will skyrocket.
Unless your salary is denominated in BTC, i.e. you make the same BTC every paycheck, I'd argue you're still being paid in USD and just using a third party service to hide the exchange from you and deliver your paycheck in BTC.
By making transactions in Bitcoin, you lose legally-mandated formal protection such as chargebacks and FDIC insurance.
Despite what Marc says in the article, I find this is a big minus for Bitcoin on a day-to-day transaction scale. Traditional banking is pretty robust against bad actors, but if I put my Bitcoin in the wrong place for just a second... it's gone.
A great deal of infrastructure is needed to solve these problems, which is partly why it's a good bet for Marc to invest: if successful, there is potential for an uncompetitive oligopoly even compared to traditional banking.
I guess I am missing something. How do you get your money to the exchange and how do you get it back? If you are buying 1 bitcoin for $830, how do you get your $830 to the exchange? Do you give them your credit card number? Your paypal account? Don't they then have to pay the 2-3% to the credit card processor? And then I guess if you sell one bitcoin, how do they get your $825 to you? Do they send you a check? Do they wire it to you? Do they pay the costs for that transfer back to you? Or do you just assume you will keep the bitcoin and use it to buy something? And then how are we calculating the value of it vs. $? Do merchants use the same exchange rate or do they get to decide on the fly what exchange rate they are going to use? How do we know we are not losing at least 2% on that?
I think the obvious flaw in your argument is that the market is very underdeveloped for BTC exchanges. As with any other market, as competitors file in the bid/ask spread will be squeezed significantly. See the currency market.
Also...as positive network effects kick in as Marc said, and more merchants accept it, there will be less incentive to convert to USD. That's where the real value is. As the network of merchants grows, then the transaction costs go to 0 - i.e. in a BTC to BTC world.
I expect companies to come up with products/services that allow you to 'lock in' prices without having to do conversions immediately (kinda like options).
So you can expect to see much more innovation in this space.
Either way...what is clear is that the current spread is the worst that it will ever be because as the network grows that will shrink.
That's a very valid observation and one of the reasons that bitcoin will accumulate real value as money reserve over time. It will start its mass adoption as an 'intermediate currency', until people get fed up with exorbitant fees and just leave their money as bitcoins. People will understand that there is an inherent trade off between trust and volatility in bitcoin, which is a positive thing.
Eventhough companies like coinbase are well positioned to profit from exchange rates, bitcoin is poised to generate much more value than that.
If what you say is true, and will be true in the future when Bitcoin goes more mainstream (I don't think it will hold true for the long term) I'd still rather give my %'s to Bitcoin companies than the banks. And I think a lot of consumers are similarly motivated to do the same.
If what you say is true, and will be true in the future when Bitcoin goes more mainstream
I wasn't making a prediction. I was just doing the math for bitcoin-as-payment-technology plugging in what I think are reasonable values.
I'd still rather give my %'s to Bitcoin companies than the banks
This is a popular sentiment on HN and I'm not quite sure I understand it, but if Coinbase (or similar) companies get big enough the banks will just buy them.
wrong, with credit cards you have a 2.5% fee with every single transfer you ever make. A pays B pays C pays D, each step has a fee. With Bitcoin ONLY the people who do fiat exchanges pay a fee, A pays B pays C pays D, only A and D pay a fee. This has massive economic implications if bitcoin starts getting penetration.
Actually, depending on your respective tax authority's treatment of Bitcoin taxes, it's more like:
A pays B (A now owes taxes on realized gains)
B pays C (B now owes taxes on realized gains)
C pays D (C now owes taxes on realized gains)
However, as a commodity with limited supply, BTC may still be a good store of value.
Basically what you guys need to realize is Bitcoin only makes sense when you completely disregard "the system". If nobody pays any taxes, nobody does AML/KYC, and everybody uses BTC ubiquitously, then yes, it's a cheaper and more efficient system. What irks me to no end as a proponent of Bitcoin is how many people are into Bitcoin nowadays purely as a get-rich-quick scheme or because it's en vogue. There are real, significant societal conversations that need to be had on a massive scale before Bitcoin makes sense for the average person, and most people just aren't willing to bring that conversation to the forefront. Too busy raising VC.
Yeah, you described pretty much the worst case scenario where everything goes through fiat. But once Bitcoin penetration is significant and people start getting paid in Bitcoin (already happening) and accept it as payment (also already happening), all these exchange fees go away.
With fiat you're stuck with the fees forever.
Also your 0.5% assumption is wrong. You can place a buy ad on LocalBitcoins and actually buy at below the market rate. Also, coinsigner.com.
You can place a buy ad on LocalBitcoins and actually buy at below the market rate.
Maybe in your town, but for me the spread on LocalBitcoins is hilariously huge. I just punched in my city (Chicago) and got $818 bid by $850 offered. That's a $32 spread, which is much larger than I see on any of the online exchanges.
edit: Actually I think you are talking about the equivalent of a resting order (placing an ad) which isn't what I'm talking about. My scenario involves crossing the spread, which in the localbitcoins case would mean answering an ad.
edit 2: I encourage everyone who hasn't seen localbitcoins to go check out the ads there. "Hilariously sketchy" is about the best way I can describe it.
I hope so too - but I think it's unlikely because Bitcoin is decentralised by design.
When money supply is controlled by central authority, it can be used as a tool to control prices and volatility. It's still early days but the inflation-targeting independent monetary policy experiment happening in some developed economies over the last 2 decades seems promising.
I'd be interested if anyone were willing to start a "centralised" Bitcoin governed by benevolent dictators for life. I'd rather put my savings with people who understand monetary theory and how to use big data to inform supply decisions than a system prone to cycles.
There is no reason anyone would want a computer in their home.
- Ken Olsen, 1977
I have traveled the length and breadth of this country and talked with the best people, and I can assure you that data processing is a fad that won’t last out the year.
- Editor of Prentice Hall business books, 1957
There's no chance that the iPhone is going to get any significant market share.
- Steve Ballmer, USA Today, April 30, 2007
I think there is a world market for maybe five computers. -- Thomas Watson, chairman of IBM, 1943
I do not hesitate to forecast that atomic batteries will be commonplace long before 1980. - David Sarnoff, chairman of the Radio Corporation of America, 1955
Machines will be capable, within twenty years, of doing any work a man can do. - Nobel Prize winner Herbert Simon, 1956
By the turn of this century, we will live in a paperless society. - Roger Smith, chairman of General Motors, 1986
I believe OS/2 is destined to be the most important operating system, and possibly program, of all time. - Bill Gates, Foreword to the OS/2 Programmer's Guide, 1987
Segway will be to the car what the car was to the horse and buggy. - Dean Kamen, December 2, 2001
Quoting these statements are a little absurd. More so, when you consider that all of these statements are in the [their respective] present tense, and not making a declaration or prophecy of any kind.
Let me rephrase some of these for you to illustrate:
- There is no reason [in present time, that I know of as to why] anyone would want a computer in their home. - Ken Olsen, 1977
- I have traveled the length and breadth of this country and talked with the best people, and I can assure you that [from their current understanding of current applications of data processing that] data processing is a fad that won’t last out the year. - Editor of Prentice Hall business books, 1957
- There's no chance [that I am going to admit to my share holders] that the iPhone is going to get any significant market share. - Steve Ballmer, USA Today, April 30, 2007
- I think there is a world market for maybe five computers [currently/at this time]. -- Thomas Watson, chairman of IBM, 1943
This might be me being hyper-pedantic, but I'd argue that not even USD is a particularly good store of value. If you have a significant amount of money it should probably be in at least low-risk stocks or re-estate. Not just sitting in a regular savings account in a regular bank.
But, I do get the point that at least the USD dollar doesn't lose/gain 50% value in a few hours by wild speculation every month.
I wasn't thinking of USD, I was thinking more about something used for a couple of millenia as a value storage, but yes sure... Compared to today's BTC even the USD seems okay.
Like, you do realize that no one in the history of mankind has a use for something which "stores value" for millennia right?
And that timescale is so ridiculously huge that gold, silver and everything else does inflate away. We might be a type II Kardashev civilization in 1000 years. The volume of gold available will be absurdly large by then either way.
I wrote 2 paragraphs but I erased them, I'm sure you understood what my exact point was, but since your comment is not constructive at all, making stupid assumptions, comparing possible Kardashev civilizations with history, I will just post a link[1]. If you care follow it, if not, I don't have anything more to add.
I could see the opposite: use of bitcoins for transacting and some of the other interesting applications Marc mentions. But it strikes as being a horrible value store given the volatility and lack of any underlying value.
It's not risky in and of itself. It's risky because scammers are getting _really_ good at scamming people on localbitcoins. I've seen stories of criminals printing up fake receipts from Chase. I've also seen stories of con artists who will trick a completely unrelated third party into sending cash to your localbitcoin's bank account, then telling you "cash sent", meanwhile the rightful owner of the cash has no idea their money is being used for these purposes and will inevitably open up a fraud suit with their bank. And then there's people paying with counterfeit bills. Not exactly a walk in the park. Then again, I guess this is all to the buyer's advantage, but this higher risk is reflected in higher prices than what you'll find on vetted online exchanges.
You should stop saying "with fiat", unless you mean it to include Bitcoin, which is very much a fiat currency. It has value only to the extent that you say it has value.
Fiat currencies are to be contrasted with currencies that have intrinsic commodity value -- like gold, or livestock. Bitcoin has no intrinsic value.
The only difference between a governmental fiat currency and a distributed fiat currency (like gold) is that there is no government backing the latter. This has no bearing on the existence of fees for transfer and storage. If you're willing to carry physical currency around and store it in your mattress, payment via US dollars is fee-free as well.
A 'Fiat' currency is one which the government of a country has declared to be the official currency...by government fiat.
That does not include Bitcoin.
Gold is not a distributed fiat currency. It is just Gold. You can exchange gold for currency, or you can make payments directly with it, if the person is willing to receive them.
"A 'Fiat' currency is one which the government of a country has declared to be the official currency...by government fiat."
No, it is not. You are falling prey to a rather politicized definition of the term. All non-commodity currencies are fiat money, but not all fiat currencies are backed by a government.
The word "fiat" is Latin for "let it be done" or "it shall be". It implies only that something happens by decree. The party making the decree does not have to be a government, or even a person of authority.
Well...actually, a fiat currency is one declared and issued by the state as legal tender. It's typically not redeemable for anything else, as a gold-backed one (USD from 1944 to Nixon) is.
And really, a currency like gold is valuable because it has a fixed supply and is universally accepted. Bitcoin has a fixed supply and is rapidly moving towards universal acceptance. It's totally different when a government chooses to make a dollar worth approximately X much and then prints 85 billion of them per month.
So, yeah, gold isn't a fiat currency. And Bitcoin isn't one either.
> It has value only to the extent that you say it has value.
I think there are a few definition of "fiat"* (one of which, as you mentioned, is lacking "intrinsic value"). I agree though that the word "fiat" adds only ambiguity to this discussion.
In exchange for not having transfer fees, you get no protection against fraud or theft. Not such a great 'advantage' for the average person, is it? Oh, I know, you can use escrow and other services to guard against that. But guess what? They're not free!
Not sure why people are voting your question down, it it not an uncommon question. The answer no. Bitcoin, like most currencies, does not have any intrinsic value.
To understand how a currency works (and why intrinsic value isn't required, difficulty in counterfeiting is the only requirement ) Will be covered in a text or class covering microeconomics.
This is the best article/explanation I've found to explain how currencies, which have no value in themselves (like paper dollar bills), have a "fundamental value" based on the trade volume and the rarity (read: lack of counterfeitability):
The shocking truth is that almost nothing has an "intrinsic value". But things DO have "subjective values." The consensus of a lot of those, plus some rarity, shapes the "market value." Gold? It is shiny (whoop-de-frickin-doo) and it conducts electricity (and in that capacity can be replaced by many other metals) and it doesn't corrode easily. Its "value" is almost entirely subjective. Not much "intrinsic" about that, certainly not nearly enough to justify its $1200/oz market price.
The historical reasons for Gold and Silver being used as a store of value (and as a currency) are:
1) Divisibility : it is easy to divide a large amount of the metals into smaller amounts (ingots->coins)
2) Durable : as noted, it doesn't corrode. You can bury it in the ground for a thousand years, and it comes up shiny and new
3) Rarity : There isn't that much around. All the gold mined since the beginning of history would fill an Olympic sized swimming pool.
The intrinsic value of gold as a store of value are from lack of competition. It's the best thing for the job, simply by being best at those three criteria. Add in cultural history and it's a lock.
Other things have higher usage as a store of value - prime agricultural land - but it's hard to sell 1/150th of an Acre to buy some bread. Other things as just as durable (rocks) but don't have rarity. Some rocks are durable and rare (opals, diamonds) but aren't easily divisible.
It's easy to get existential about Gold - 'it's just a shiny metal, WTF?' but countless societies have valued it highly as a store of value and as a trading currency, and that is not likely to go away anytime soon, because of a lack of alternatives. Societies and economies need stores of values, and Gold continues to fit the bill.
The fact that Gold is worth $1200/oz says more about the $ than it does about the oz. It's the $ market price that you're commenting on.
I was not commenting on its value history. I was trying to convey that this value is almost entirely subjective, which goes against what one would think "intrinsic value" means. "Expected value" might be better, but that would weaken the argument against Bitcoin.
Once again there's this ridiculous "intrinsic value" / "value" dichotomy.
So then what, is your definition of "intrinsic value" that a recognized government accepts it as their official currency and exchanges bail bonds for it?
The bitcoin network's transaction verification mechanism, and all the hash power behind it (users) does give bitcoin "intrinsic value". Its true value comes from network effect.
The intrinsic value in Bitcoin is whatever someone is willing to do for it. Just like with beads, USD, or gold, it has intrinsic value if someone is willing to trade their possessions or labor in exchange for it.
(not a native english speaker)
I would think the intrisic value would be the value that the item holds, even if no one is willing to trade using it.
For example, water has an intrisic value : I can drink it.
All that barrel does is stop counterfeiters and tax evaders. Neither of those things are "intrinsic value". And Bitcoin is FAR more difficult to duplicate (you can't even forge or counterfeit it, you have to "double spend" it in a tricky operation requiring owning at least 50% of the network, good luck with that) than any other currency.
Basically, a currency cannot drop to zero value unless ALL trade in it stops. If you think about it, this makes sense. So that is its "intrinsic value". The trade volume props up this minimum. There is of course "speculative value" laid on top of that, but where one stops and the other begins is anybody's guess.
>All that barrel does is stop counterfeiters and tax evaders. Neither of those things are "intrinsic value".
If anything can be said to have 'intrinsic value', being free from prosecution is surely one of those things. Dollars can buy you freedom from prosecution for non-payment of taxes. That's a lot closer to 'intrinsic value' than anything bitcoin can put up.
If your argument is that I'd have to convert bitcoin to dollars in order to pay taxes, that's a nonargument. I am sure they would take Bitcoin directly if pressed. Just ask the FBI, who is now in possession of the largest bitcoin cache on the planet... I suppose you think they're just going to erase all of them because, you know, they're not "backed" by anything?
The FBI is doing what it always does - it's auctioning them off. They might sell for a $1, they might sell for $1000. But they're not being given any special status beyond "appears to be a product people buy".
If they'd seized a bunch of legal movies or video game licenses they'd also do that.
>If your argument is that I'd have to convert bitcoin to dollars in order to pay taxes, that's a nonargument.
It's not a 'nonargument'. It's true, and very relevant.
>I am sure they would take Bitcoin directly if pressed.
That's speculation. You have no reason to believe they'd accept bitcoin. As of right now, they do not. That's all we have to go on.
>Just ask the FBI, who is now in possession of the largest bitcoin cache on the planet... I suppose you think they're just going to erase all of them because, you know, they're not "backed" by anything?
Is there a reason for making this absurd strawman? Where has anyone ever suggested that people should erase their bitcoins because they're not backed by anything?
None of those that come to mind have anything to do with support of the currency, so far as I can tell. You will have to be substantially more specific.
Lybia, Iran and Iraq. This topic comes up every day, and every day someone who doesn't know history will show "skepticism". I don't have a copy/pasteable text in hand, and I'm not gonna write one from scratch. Just learn some history please, for the sake of mankind.
Petrodollar. Denominating oil prices in other currencies would cause oil producing countries to stop importing dollars (accepting payments in dollars), which would cause all those dollars to return back to the US and cause a hyperinflation. Furthermore, as if that wasn't bad enough, the Fed wouldn't be able to print dollars at the rate they currently do (the money would have nowhere to go), which would cause the country to default because the government wouldn't be able to repay its obligations.
The war in Iraq and the coup in Libya were done purely out of economic self-preservation, and not because a few savages with AK47s would pose a serious threat to the western world.
If we take 'intrinsic value' to mean 'having some use other than to simply trade away again to someone else, or being backed by something with intrinsic value', then the dollar has intrinsic value in that it is backed by freedom from being prosecuted by the US government for non-payment of taxes.
>If we take 'intrinsic value' to mean... being backed by something with intrinsic value
Hypothetical situation: Water holds "intrinsic value" to me, for obvious reasons (in much the same way as your freedom from US government prosecution). I know a guy who will trade me some water from some snail tails. Therefore, snail tails are "intrinsically valuable".
I reject your definition of "intrinsic value". Sounds sorta' like "regular value" to me.
The degree to which you believe the guy will make good on his promise to always buy snail tails in exchange for water is the degree to which you believe snail tails are backed by water. We can be pretty sure the US government will generally make good on its promise to take US dollars in exchange for not prosecuting you for non-payment of taxes.
>I reject your definition of "intrinsic value". Sounds sorta' like "regular value" to me.
I don't like the term 'intrinsic value' at all, since it sounds like it's suggesting some type of absolute value, which I don't think very many people (at least, not the ones having these conversations) really believe exists. I think the way they mean it is more in line with the way I defined it, to distinguish between something some people buy for its own sake versus something people only buy so they can trade it away to someone else, who is in turn only buying it so he can again trade it away. The latter still clearly has value to those people who take it in trade, and 'intrinsic value' is a convenient term to distinguish between the two.
If I have a comparable amount of confidence in my snail tail guy as I do in the USG's hunger for USD, then snail tails are suddenly "intrinsically valuable"?
I agree that intrinsic value is sort of a nebulous thing to begin with, and I'm not convinced that the idea even makes sense to at all (as you've suggested), but your definition just seems confusing at best, and perhaps even useless (though if it's useful to you, then have at it).
>If I have a comparable amount of confidence in my snail tail guy as I do in the USG's hunger for USD, then snail tails are suddenly "intrinsically valuable"?
According to the definition I gave, yes. If you're thinking of 'instrinsic value' as meaning 'absolute value', then yes it's just as absurd to say snail tails have intrinsic value as it is to say anything else has intrinsic value. It certainly sounds absurd to say "snail tails have intrinsic value" for any definition of "intrinsic value", but then, it's absurd to be as certain some guy is going to trade snail tails for water as you are that dollars will buy you freedom from prosecution for non-payment of taxes.
>but your definition just seems confusing at best, and perhaps even useless (though if it's useful to you, then have at it).
Ya, I have no idea if it's useful or not. There are certainly people who are suspicious of using goods as currencies if they don't have 'intrinsic value', according to that definition. I don't know if that suspicion is well placed or not, but it is there.
The topic of debate is whether bitcoins have intrinsic value. Taxes are not the deciding criteria here. If the government did away with taxes, currencies (whether it be USD, Euro, BTC, etc) would still have value as an instrument used in barter.
'Intrinsic value' meaning 'objective value' is a useless concept because all value is subjective.
What I think people generally mean when they say 'intrinsic value', especially when talking about currencies, is something more like 'having some uses other than to simply trade away again to someone else, or perhaps being backed by something which has intrinsic value'.
Dollars have intrinsic value according to that definition, because they are backed by the fact that there are many people who must give the US government dollars in order to avoid being prosecuted for non-payment of taxes. That's where taxes come in. Without taxes, and perhaps some other things like legal tender laws, dollars would have no 'intrinsic value' according to this definition, just like BTC.
Both USD and BTC could still have value, even if they don't have 'intrinsic value' according to that definition.
In that case, no currency has intrinsic value. If we went back to the days where I'd trade you 2 bags of rice for a fish, those things have value and other use.
Why does everyone fall back to the default argument that the USD is "backed" by the US govt. It is in theory but what does it really mean? The USD is no longer backed by physical gold. If the world decided the USD was useless tomorrow, does "backed" mean you walk up to Capitol Hill and they will give you something in exchange for your dollars? Unlikely IMO. It's backed by debt that the Fed just creates out of thin air. All this talk about "intrinsic value" is nonsense.
I just gave you my definition of intrinsic value and explained exactly why the dollar has intrinsic value according to that definition. If you want to argue that what I said was wrong, you can either prove my definition is contradictory or useless, or you can prove the dollar doesn't fit the definition that I gave. Simply stating 'no currency has intrinsic value' suggests to me you didn't read, or didn't comprehend, my comment.
>If we went back to the days where I'd trade you 2 bags of rice for a fish, those things have value and other use.
Yes, so according to the definition of 'intrinsic value' that I gave, they have intrinsic value.
>If the world decided the USD was useless tomorrow, does "backed" mean you walk up to Capitol Hill and they will give you something in exchange for your dollars? Unlikely IMO.
'Backed' means the IRS is going to accept dollars in exchange for not prosecuting you for non-payment of taxes. That is the crucial point. People value not being prosecuted for non-payment of taxes. The state of being free from being prosecuted has 'intrinsic value' to people. The IRS, at least as of right now, guarantees people that if they pay the IRS the dollars the IRS says they owe the IRS, they will be free from being prosecuted for non-payment of taxes. If the IRS stopped taking dollars in exchange for guaranteeing people freedom from prosecution for non-payment of taxes, then dollars would cease to be backed by the US government. It is certainly true that not all people (like people living in foreign countries) have to worry about being prosecuted by the IRS in the first place. But there are millions upon millions of people who do have to worry about being prosecuted by the IRS. There are enough to establish that the dollar is backed by freedom from being prosecuted for non-payment of taxes.
So are they giving you something in exchange for your dollars? That depends on how you look at it. Either they're giving you freedom from prosecution in exchange for your dollars, or they're not taking your freedom from prosecution away from you. Whichever way you look at it, the argument is the same. To the extent that you believe the US government will continue to accept dollars in exchange for not prosecuting people for non-payment of taxes, you believe the dollar is backed by the US government.
>It's backed by debt that the Fed just creates out of thin air.
What does it mean for something to be backed by debt? Am I guaranteed to be able to buy the debt someone owes someone else with my dollars, like when banks sell mortgages to other banks?
> the dollar has intrinsic value in that it is backed by freedom from being prosecuted by the US government for non-payment of taxes
Do you realize how little sense you're making?
It's like you wanted to insert meaningless buzzwords like "freedom", not to mention that there's no freedom from being prosecuted for non-payment of taxes.
Well, in that case Bitcoin's intrinsic value is that it's backed by the freedom of storage, transfer, global acceptance and low fees, immunity to being counterfeited, immunity from inflation caused by printing, etc.
>not to mention that there's no freedom from being prosecuted for non-payment of taxes.
What? If I pay my taxes, I won't be prosecuted for non-payment of taxes.
>in that case Bitcoin's intrinsic value is that it's backed by the freedom of storage
Storage of what?
>transfer,
It doesn't matter how easy it is to transfer something to someone else if they don't want it. That thing must be seen as valuable for some other reason for anyone to care how easily it can be transferred.
>global acceptance
Who across the globe is guaranteeing they'll accept a certain number of bitcoins in exchange for a certain amount of something else?
>immunity to being counterfeited
If I generate a random RSA public key and use it to sign some randomly generated blobs of useless bits, do those blobs of bits and their signature have intrinsic value because it's hard to counterfeit them?
>immunity from inflation caused by printing
These things you're listing make bitcoin a more suitable currency than some other arbitrary thing that doesn't have those properties, all else equal. It doesn't mean bitcoin has intrinsic value, as I've defined it, and it certainly doesn't mean bitcoin is a good currency overall.
First of all, I can pay taxes in Bitcoin. There's a company that handles it for me.
Second of all, your dollar's "intrinsic value" being an American criminal law makes zero sense. It's geography-specific. Suddenly if I'm not from US, that "intrinsic value" disappears. So much for that dumb definition.
> It doesn't matter how easy it is to transfer something to someone else if they don't want it. That thing must be seen as valuable for some other reason for anyone to care how easily it can be transferred
There are multibillion global transportation industries out there, and they don't care what they transport (as long as it's legal). People pay them because they provide ease of transportation at a reasonable price per pound.
I'd say ease of transportation is much more valuable to the majority of the world than some "freedom from prosecution" by some government that can't touch them.
>First of all, I can pay taxes in Bitcoin. There's a company that handles it for me.
That company doesn't pay the US government in bitcoin. They just buy dollars on your behalf. Every dollar owed in taxes must be paid in USD.
>Suddenly if I'm not from US, that "intrinsic value" disappears. So much for that dumb definition.
It doesn't 'disappear'. There are still millions upon millions of people who need USD to pay their taxes. That's where the backing comes from. It doesn't matter if not everyone has to pay taxes in USD. Quite a lot do, and they need to buy dollars from other people in order to do so.
>There are multibillion global transportation industries out there, and they don't care what they transport (as long as it's legal).
I'm sure the people that hire them to transport goods value what's being transported.
>People pay them because they provide ease of transportation at a reasonable price per pound.
What point are you trying to make?
>I'd say ease of transportation is much more valuable to the majority of the world than some "freedom from prosecution" by some government that can't touch them.
Freedom from prosecution is pretty important to the people in the US that owe taxes to the US government. But you're comparing apples to oranges.
Ease of transportation is a feature of bitcoin. But ease of transportation does not itself give anything value. You are easily transporting your words to my computer. That doesn't mean they're valuable. Ease of transportation makes bitcoin a more suitable currency than something that is equal in all other ways but is harder to transport. But something having some features that make it suitable as a currency doesn't mean it is actually a good currency.
On the other hand, freedom from prosecution is something you can buy with USD. It's not a feature of the piece of cloth called the USD that you can pay taxes with it. It just happens to be that way. And I would say that a guarantee that your money will be worth something [because people will always have to buy it in order to escape prosecution from non-payment of taxes] is more important than ease of transportation.
You're still confusing the burden to pay taxes under the penalty of law in one particular country with value.
You have a fundamental misunderstanding of what "value" means.
> That company doesn't pay the US government in bitcoin.
But I don't care. I paid in Bitcoin.
> That's where the backing comes from
I doubt dollar "intrinsic value" comes from the fact that you have to pay taxes in it. It can spiral into a 10000%/year inflation and lose most of its value, and you will still be able to pay taxes with it.
In fact, you've been required to pay US taxes in dollars for the last 100 years. It didn't stop the dollar from losing 97% of its value.
Again, you're confusing value with some criminal law.
> I'm sure the people that hire them to transport goods value what's being transported.
What? You can't transport something that has no value? Like an empty box?
> Freedom from prosecution is pretty important to the people in the US that owe taxes to the US government
Ah, red herring. I was talking about "majority of the world", and you switched back to the Americans, as if that somehow proves that most of the world doesn't give a crap about US criminal codes, which, according to you, somehow back the value of the dollar.
> Ease of transportation is a feature of bitcoin
Which adds to its value, like features of... everything.
Trying to play with words will get you nowhere.
> But ease of transportation does not itself give anything value
We already went over this. Multibillion transportation industry.
> You're still confusing the burden to pay taxes under the penalty of law in one particular country with value.
You have a fundamental misunderstanding of what "value" means.
It is true that it's stretching it to say taxation gives an 'intrinsic' value to us dollar. Really I would say that the phrase 'intrinsic value' should be reserved for things that are useful for some survival purpose directly, like food, water, shelter, machetes, etc.
However, taxation does mean that there is a continued guaranteed demand for us dollars, placing a floor on the price. There is also the fact that having a store of something considered to be legal tender gives you some extra rights to protection from the criminal justice system in that country.
So 'intrinsic' is perhaps too strong a claim, but it's guaranteed to have at least some value as long as the US government endures, which is still a pretty good guarantee.
>You're still confusing the burden to pay taxes under the penalty of law in one particular country with value.
Let's say I'm a schoolyard bully. An honest one. I hand out slips of paper that say "Keep your lunch". If I tell you I want your lunch, and you give me a "Keep your lunch" ticket, you get to keep your lunch that day. If you don't have one, or don't want to give me your "Keep your lunch" ticket, I take your lunch. Clearly if you believe I'm capable of taking your lunch, that slip is going to have value for you. Agreed?
Now let's say you're three grades above me, so you aren't worried about me taking your lunch. But there are still plenty of people who are worried about me taking their lunch because they're smaller than me. That ticket still has value for them. You know you can trade it to them, and they'll take it. Therefore it has value for you, even though you have no direct use for it. The fact that I am willing to take that ticket in exchange for not taking someone's lunch backs the value of that ticket, even if you yourself don't need the ticket to stop me from taking your lunch. You can trade it to others who will use it for that purpose. Now do you understand?
>But I don't care. I paid in Bitcoin.
I know you don't care. But they had to buy dollars. Someone has to buy dollars in order to pay your taxes. That's the whole point. Someone has to buy dollars in order to pay your taxes. Someone has to buy dollars in order to pay your taxes. Someone has to buy dollars in order to pay your taxes.
>I doubt dollar "intrinsic value" comes from the fact that you have to pay taxes in it.
The fact that you have to pay taxes in dollars is one of the biggest reasons why people trade in dollars rather than some other random currency.
>It can spiral into a 10000%/year inflation and lose most of its value, and you will still be able to pay taxes with it.
I never said it was the perfect currency. I never said it got 100% of its price from the fact that you can pay taxes in it. You are completely missing the point, and I'm guessing it's because you just don't understand what's going on in this debate.
>In fact, you've been required to pay US taxes in dollars for the last 100 years. It didn't stop the dollar from losing 97% of its value.
What did I say that would lead you to believe this contradicts what I think?
>Again, you're confusing value with some criminal law.
No, you just have no idea what they have to do with each other.
>What? You can't transport something that has no value? Like an empty box?
Do people normally transport things that have no value to them or anyone else?
>Ah, red herring. I was talking about "majority of the world", and you switched back to the Americans, as if that somehow proves that most of the world doesn't give a crap about US criminal codes, which, according to you, somehow back the value of the dollar.
See the first two paragraphs of this reply.
>Which adds to its value, like features of... everything.
It is more akin to a multiplier. If it has value, it makes the value greater. If it has no value, then no one cares how easily it can be transported, because no one wants it to be transported to them.
>We already went over this. Multibillion transportation industry.
The transportation industry is moving things that people value for reasons other than the fact that they can be transported easily. If people didn't already value the things they have shipped, they wouldn't pay to have them shipped. If I had some worthless box of cat excrement, it wouldn't suddenly be worth something because I could cheaply ship it to a foreign country. If I had a worthless unit of cryptocurrency, it wouldn't suddenly be worth something because I could cheaply send it to someone in a foreign country. If no one wants it, they don't care how cheaply I can get it to them. They don't want it. Do you get it?
The idea is that bitcoin gives you the option of value-added services, like conversion and what not, but you definitely don't have to use them. With fiat you don't have that option.
I accepted bitcoin for some freelancing work and I didn't convert it.
I'm a Bitcoin believer but I feel a little embarrassed after reading this. I'm impressed that Marc Andreessen can get an entire Dealbook page to advertise a pet technology without any fact checking. (Is that the point of Dealbook? I almost never read it.)
> Even Netflix, a completely virtual service, is only available in about 40 countries.
The implication is that mere payment logistics are inhibiting Netflix's internationalization. What about copyright and regional distribution restrictions?
> Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.”
I don't understand this. He did say it....here is the paragraph in it's entirety from his address to the Senate:
Historically, virtual currencies have been viewed as a form of “electronic money” or area of payment system technology that has been evolving over the past 20 years. Over time, these types of innovations have received attention from Congress as well as U.S. regulators. For example, in 1995, the U.S. House of Representatives held hearings on “the future of money” at which early versions of virtual currencies and other innovations were discussed. Vice Chairman Alan Blinder’s testimony at that time made the key point that while these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.
He was using Vice Chairman Alan Blinder's testimony to prove the point that while those innovations may pose risks there are areas which they may hold long-term promise.
So not sure what you mean by he didn't say that.
Marc's original statement is indeed accurate, per the transcript of Bernanke's speech. [1]
He's paraphrasing Alan Blinder's 1995 testimony in the context of the history of virtual currencies. It is more accurate to say, "In 1995, Alan Blinder stated that virtual currencies hold long-term promise, particularly if..."
My larger point is that whenever you see the Bernanke "bitcoin statement," it implies that he is a Bitcoin advocate. He may very well be a Bitcoin fanboy in his private life, but there is not public evidence that this is true.
Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem.
Wait, isn't Paxos arguably the first practical solution to BGP? [0] [1] It's been in production use at Google since at least 2006. [2]
Furthermore, Paxos actually has a proof that timely consensus will be reached. Do we have the same level of rock-solid mathematical certainty about Bitcoin yet? The Eyal-Sirer paper [3] from late 2013 raised some concerns about a new mining strategy that might lower the attack threshold from 50% to 33%. Ed Felton's group at Princeton responded with some interesting analysis from game theory [4], but AFAIK there is no rigorous proof yet that the selfish mining equilibrium isn't a real threat.
If Bitcoin is The Way of the Future (I hope it is), we need to be sure about these things. Hand-waving statements about how Bitcoin isn't vulnerable because no one has found an exploit yet [5] are ridiculous and dangerous.
Paxos is Byzantine Fault Tolerant. A malicious node is a special case of failed node.
"The objective of Byzantine fault tolerance is to be able to defend against Byzantine failures, in which components of a system fail in arbitrary ways (i.e., not just by stopping or crashing but by processing requests incorrectly, corrupting their local state, and/or producing incorrect or inconsistent outputs)."
That is a correct definition of BFT, but as I said, Paxos does not tolerate Byzantine faults. Here's a direct quote [0] from Leslie Lamport, the author of the Paxos algorithm.
Assume that agents can communicate with one another by sending messages.
We use the customary asynchronous, non-Byzantine model, in which:
• Agents operate at arbitrary speed, may fail by stopping, and may restart.
Since all agents may fail after a value is chosen and then restart,
a solution is impossible unless some information can be remembered by an agent
that has failed and restarted.
• Messages can take arbitrarily long to be delivered, can be duplicated,
and can be lost, but they are not corrupted.
So, to be clear, Paxos tolerates processes that crash arbitrarily, but not processes that send malicious or incorrect messages.
For a consensus algorithm that does tolerate Byzantine faults, see Liskov's Practical Byzantine Fault Tolerance [1].
Ah - when the term Paxos is used it is usually in reference to the original, non-BFT algorithm. Also, Google's implementations of Paxos (in Chubby, as well as Megastore) are non-BFT, and I am not aware of any use of Byzantine Paxos in production elsewhere.
Interesting, and makes sense. Why would you need the full BFT Paxos among trusted participants?
Still, the claim that Bitcoin represents "a breakthrough in computer science" on the Byzantine Generals Problem rings false to me. First, we already had BFT algorithms, just no compelling need for them. Second, if this is really a computer science breakthrough, where's the proof?
Don't get me wrong, I think Bitcoin is an enormous breakthrough in engineering terms. It's just too important now to not have the proven properties we're relying on.
> The bitcoin system is based around the "block chain", whose main purpose is to implement a distributed timestamp. With a known set of participants, this is a solved problem (Paxos algorithm); on the public Internet with undefined participant list, it's hard.
> but AFAIK there is no rigorous proof yet that the selfish mining equilibrium isn't a real threat.
It's very easy to detect and respond to. Point your miners at the large pools, and check if they are building off of non-public blocks. Respond accordingly.
How do you know they're building off of non-public blocks if they're doing so in secret collusion?
For what it's worth, Felten et al have a somewhat convincing (if not yet rigorous) argument that members of a so-called selfish mining pool have more incentive to defect than to continue cheating [0]. But, if a single entity controlled all of the 33%, defection is not a risk, and this entity could still claim an outsized share of the mining reward according to Eyal-Sirer.
Who are the miners? Mining pools? Mining pools don't do the actual mining, they contract that out to their users. Anyone can run mining software pointed at any of the major pools and see what blocks they are building off of. There's no way for a mining pool to "build a blockchain in private."
If not mining pools, then perhaps the concern is large hosted operators? There's only one of these that qualify, although there is insufficient data about their exact size (CEX.io, part of GHash.io, but only an unknown percentage of their hashpower is hosted).
Mining is sufficiently decentralized so as to make large-scale selfing mining detectable, and the economics are such that small-scale selfish mining is unprofitable. I'm not claiming this will always be the case - there is sufficient cause to be concerned for the future as we are trending towards more centralization and hosted mining, not less - but it is certainly not a real concern now.
Andressen is making bitcoin out to be a decentralized paypal, when it was more intended to be a form of currency. It makes more sense as a long term investment or speculative bet than it does a way to transfer money from point A to point B.
An analogy would be if person A and person B conducted a transaction by converting their money from dollars to euros or vice versa (assuming A and B are both in the same country). Depending on the current exchange rate, this could be a good or a bad thing for both of them. If the dollar is weak, both parties stand to lose. If the dollar is strong then it won't last because the market will quickly be flooded with people trying to get in on the deal.
There is no way of controlling or predicting the bitcoin exchange rate. If I send money to someone in my country with paypal they are going to whack me with fees, but at least I know what the fees will be in advance. I can plan on it as a business. Having to deal with an unknown and uncontrolled exchange rate just doesn't sound fun. This is assuming that bitcoin stops having wild price swings over time and stabilizes to the level of established global currencies.
It just doesn't make sense to perform a currency conversion when transferring money to someone who uses the same currency as the sender. This article was amazing and pmarca opened my eyes to uses of bitcoin that I never would have imagined. But the only thing I can't imagine is this new currency living up to the utility that is expected of it.
Bitcoin the protocal, however, is freaking awesome. I expect to see a lot of startups taking advantage of some of the non-monetary uses, up to and including micropayments. It could be a very long time before bitcoin paychecks are mainstream. But electronic transactions of all kinds are going to be getting easier soon.
The micropayments claim is a red herring. If Bitcoin were to actually take off for micropayments, it would no longer scale, and/or the operation of Bitcoin nodes would be limited to people with very serious hardware. At that point, we're back to the game that is currently being played by banks, just with different players in charge.
So it's understandable that many people hope that such a transition will happen and that they will end up in charge after that transition.
For the society as a whole, however, Bitcoin does not have an inherent advantage that is sustainably scalable.
You're assuming no progress will be made in bitcoin scalibility in the near future, and comparing it to another technology stack that arguably hasn't seen any meaningful innovation in 40 years (since the advent of the debit/credit card.)
If there really hasn't been any meaningful innovation in that other technology stack, then the situation looks actually looks worse for the long-term fate of Bitcoin, because it means that the other technology stack could easily improve given the incentive.
That doesn't mean that Bitcoin will disappear or anything like that. It's just not going to become the prevalent unit of account as a currency.
Oh no question, MasterCard et al are going to change their tune greatly in the coming years due to this new competition, and we're all going to benefit from this.
"Bitcoin the protocal, however, is freaking awesome. I expect to see a lot of startups taking advantage of some of the non-monetary uses, up to and including micropayments."
I agree with all of this except the implication that micropayments are a non-monetary use.
I've become a big Dogecoin proponent. I believe that Dogecoin will add another dimension to our online experience, and open up avenues for content creators to be rewarded that did not exist before.
Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally like cash – if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.
Doesn't this reveal the flaw in the "Bitcoin is the solution to the Byzantine Generals' Problem" argument? My understanding is that the bulk of transactions costs associated with most payment systems is associated with chargebacks. Some result from fraud by the payer and some by the payee. Regardless, a digital bearer instrument doesn't eliminate these failure modes; it simply avoids them entirely. If the BGP is about solving the problem of fraud, then Bitcoin hasn't solved it. It's simply avoided it.
This is the closest that I have seen to an answer:
<i>Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.</i>
I don't know enough about how the costs of payment fraud breakdown to know what percentage of the administrative costs of the system result from stolen card numbers. I can imagine it being a big percentage, but I can also imagine it being relatively small since solutions to it might be have the same characteristics of scalability as the fraud itself whereas the other failure modes associated with credit card fraud require more comprehensive human involvement both in their perpetration and in their redress.
For the moment then, it looks as if Bitcoin is an improvement to existing costly solutions to the BGP, but not an absolute solution. But that's better than no solution at all, which is how it seemed.
I'm not an expert, but I read the paper. So you don't need an intermediary to confirm that a particular digital transaction took place between two people. By analogy to the original problem as stated, that's like saying you don't need an intermediary to confirm that a message with particular content was delivered between two generals. You still need an intermediary to confirm that the recipient is going to act on it as intended.
And I believe the history of Silk Road and its would be successors is evidence that an intermediary is still required post-Bitcoin. So you don't have to worry about the money not being there. You still need an escrow agent.
>By analogy to the original problem as stated, that's like saying you don't need an intermediary to confirm that a message with particular content was delivered between two generals.
No, that's not analogous. Bitcoin prevents double-spending. It doesn't just deliver messages.
You're talking about a whole other level of cooperation. It's true that Bitcoin doesn't guarantee that, but no one said it did, and that doesn't imply it doesn't really solve BGP.
Bitcoin does have a built-in feature, multisig transactions, that makes a more-trustworthy form of escrow possible.
Well I found a partial answer to the question I asked right in Andreessen's essay, but it's not the one you give here.
I guess I think of the authentication of sender and content for recipients as being equivalent to the elimination of double-spending, and I don't see either as being responsible for the failure modes of fraud in digital payment systems. As a practical matter, recipients don't have has to question whether a particular person actually has the credit to complete a given transaction right now, and I'm not aware of double-spending credit as being a big problem for credit card payment systems. Who cares about solving that problem when we have a perfectly workable solution right now?
But sure, I get the point about other forms of fraud might be harder -- namely, stealing account information necessary to initiate transactions.
The question there is whether that problem too goes away in a world in which credit numbers are kept as private keys on a physical device (like a smartphone) and exchanged with merchants via something like SSH. Is the overhead of Bitcoin still worth it?
There is some academic interest in ability to use bitcoins scripting language to build "smart contracts."
In practice, escrow isn't necessarily needed. In a typical consumer transaction the merchant is more trustworthy than the consumer (think me ordering from amazon). Amazon could just steal my money but that'd quickly destroy their brand. OTOH amazon accounts are free and so amazon is much more worried about me defrauding them. If amazon accepted bitcoin I'd pay them without worrying about escrow.
Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin – tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.
I was thinking the same thing. If you want to impose costs on people who send you emails, you can just strip out the proof of work component of bitcoin (which indeed predated it), and use that as a challenge/response system.
Personally, I prefer websites that take as a form of payment the riskiest tranches of securitized subprime mortgages or cosmetic surgery loans, while amplifying risk with my fundamental misunderstanding of default swaps.
> The criticism that merchants will not accept Bitcoin
> because of its volatility is also incorrect. Bitcoin can be
> used entirely as a payment system; merchants do not need to
> hold any Bitcoin currency or be exposed to Bitcoin
> volatility at any time. Any consumer or merchant can trade
> in and out of Bitcoin and other currencies
> any time they want.
I'm having trouble understanding this point of view because it implies that someone, somewhere is always willing to buy in to BTC, no matter the circumstances. So, two questions:
1. Is BTC somehow immune to currency crises like many government-backed currencies have experienced?
2. If BTC is not immune to crises, have any parties emerged that will act to "defend" BTC in a crisis?
One of the big reasons that the US moved towards central banking and eventually paper currency is stability.
Any finite commodity is subject to rapid swings when supplies are constrained. In recent memory, copper, silver and electricity are all commodities whose price went crazy when either demand got wacky high, or supplies got very limited.
In history, the economy was traditionally very vulnerable to economic shock in the fall, because when agriculture dominated the economies small banks were starving for capital as they waited for the harvest (and payment of crop loans). Any hiccup would rapidly cascade through the system and lead to bank runs.
With the fiat system, capital is made available to smooth the bumps. Instead of a depression and widespread bank failures in 2008, the central banks flooded the markets with capital and blunted the impact of the crisis and avoided panic.
This is true, but the end of your post implies that recessions have become rarer and less pronounced in a fiat system. They haven't. In other words, sure, central banks "flooded the markets with capital and blunted the impact of the crisis and avoided panic", but what system was in place that allowed the manic colossal 1995-2008 housing bubble to take place? Did it not have anything to do with central banking policies, say, I dunno, incredibly low interest rates for a decade?
The interesting part about your post is that it is in response to OP asking if people would be willing to buy BTC at any price (to which you responded no). But you gave the perfect example of mass psychology encouraging people to hoard an asset they believe to be safe: in this case, in 2008, it was the USD. Despite 'printing' (yes, I get it, it's not literally printing) massive amounts of USD, the world ate it up because the USD it the world's reserve currency and they (correctly) assumed that if the US is in trouble, every one else's currencies were in waaaaay worse shape. Thus the insatiable demand for something that was becoming 5x less scarce.
Now, if Bitcoin ever reaches that level of belief in its capacity as a store of value (for example, based on the fact that for the first time ever you have a currency/scrip/asset/commodity whose entire supply is predetermined, fixed and immutable politically, could you not conceive that it might to have buyers flock to it? (not asking if it's probable, only if it's possible; I'd agree that at this stage this isn't the case)
I think bitcoin is like any other commodity. People may indeed flock to it, but the relative stability of the current system is what makes it great -- can can predict with some level of certainty what $1 will be worth in say 10 years.
That's important because it makes longer term capitalization of things like homes possible. If the world was still using gold or BTC as currency, lending would be like it was in the gold era as well -- things like 30 year mortgages that make homes affordable would not exist.
As far as crises go, 2008 was a painful market contraction, but not a panic. Contrast an event like the Panic of 1907, when banks collapsed and many people lost life savings, mostly due to a shortage of short term cash. The nation averted disaster becuase JP Morgan happened to be in town and had enough money and clout to intervene.
In 2008, the Fed pumped money into the markets to allow banks to stay solvent. FDIC made depositors at the few failed banks whole. Thanks to the corrupt perversion of the banking regulations, the "too big to fail" banks required even more extraordinary aid. People were hurt and lost money -- but they did so because their assets lost value, not because their bank went out of business.
Our monetary system isn't perfect by far. But it's much better than the old style gold standards that BTC is reminiscent of.
Your examples are not examples of the problem with gold standards, but the rather the problem with fractional reserve banking, which is virtually non-existent with BTC (I disagree with Bitcoin proponents that say FRB isn't possible with BTC-- it'll simply be market based and potentially auditable through the blockchain). My point with 2008 is that it was a problem created by banks/government, which, whether corrupt or whatever, is essentially centrally planned. So I meant to say that while the current system was "saved" by the central planning, you must couple it with the fact it was caused by it, too (or, caused by a failure of it, if you'd prefer).
Basically you just ask for a varying amount of Bitcoin based on the current value and immediately turn the Bitcoin received into US Dollars. Coinbase is a good example of a service that makes this easy.
As an example, you want $10 for a widget. At 10AM that might be .001 Bitcoin, at 1PM that might be .0015 Bitcoin. You still get your $10. If there is a Very Bad Event, then that $10 widget might cost 7000 Bitcoin, you are still getting your $10.Or close to it.
Generally your big risk is the value of Bitcoin falling through the floor in a matter of minutes and your system (or third party provider) failing to keep up with such a change.
To answer your questions.
1. No. Bitcoin's value fluctuates pretty wildly and there's dozens of things that could cause the currency's value to implode. I think the challenges and risks for Bitcoin are different from government-backed currencies, but it is by no means immune to a crisis (has already had a few).
2. No. I'm sure some organizations and individuals would prop up Bitcoin. But there's no central authority with policy-making power acting on behalf of Bitcoin.
Generally I think Bitcoin is going to make it. There's a lot of interest in the currency from the financial sector, and a lot of money flowing into companies that deal as service providers for the currency. Basically, enough people have a vested interest in it that it is worth taking seriously. But that's just my guess at the moment.
1. no, but stability will increase with mass adoption. It's not tied down to one specific geographic market as nation-state currencies. Once it's based on global trade then it requires global instability, which is a higher threshold. USD has a similar global stability because of that vs other currencies.
2. no, how would this would decentrally? You could pay into an insurance policy maybe, that pays out in alternative currencies?
I don't see how this is realistic; the needs for bitcoins will be endogenous to the people using it, whereas the supply increases based on arbitrary constants (until it stops increasing altogether).
That says to me that the more people that use it, the more volatile it will become (especially after the supply freezes). When it becomes less volatile, it's merely because the needs coincidentally line up with the supply (i.e. when transaction volume drops -- fewer people 'using' it).
Coinbase (and others) provide merchant services, whereby they accept a small (1% if I recall) fee to convert BTC into USD, at the current spot price. So users can pay for a product in BTC, and the merchant receives USD at the spot price of when the transaction occurred (minus fees).
This eliminates BTC price fluctuation from a merchant who does not want to speculate.
> I'm having trouble understanding this point of view because it implies that someone, somewhere is always willing to buy in to BTC, no matter the circumstances.
Why does it imply that? You could also say that the existence of cash USD implies that someone somewhere is always willing to buy in to USD, no matter the circumstances. Obviously, this won't literally always be the case, and there are always circumstances where people won't accept USD.
>The criticism that merchants will not accept Bitcoin due to its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.
I don't understand this. Someone is taking the risk right now. Currently it's the exchanges and merchants directly, because they rely on the exchanges. With high volatility merchants wouldn't be getting about the same amount in 1 hour turnover time right now.
Everything in the process should be synced according to current exchange rates. Obviously technology makes this possible, but the technical implementation effort would be huge for widespread adoption.
BTC as it stands now seems to be somewhat stabilizing, but anything is still possible until it becomes more widespread and trusted. Kind of paradoxical.
> I don't understand this. Someone is taking the risk right now.
Correct.
> Currently it's the exchanges and merchants directly, because they rely on the exchanges.
Incorrect. There is the solution: https://bitpay.com/ , which automatically does conversion for a small fee. Buyers pay in bitcoin, but sellers receives fiat money(e.g. USD). The risk is taken by bitpay, sellers always receive fixed amount in fiat money, and buyers have the window of 15 minutes to make BTC payment.
"Fiat money" is as I've seen it used a political message, used most often to assumptively introduce the idea that government-backed currency is suspect. But fiat currencies are simply currencies that aren't backed by collateral. To the extent that you believe it's a currency and not a tradable instrument that happens to have interesting barter and liquidity characteristics (right now), Bitcoin is a fiat currency as well.
> But fiat currencies are simply currencies that aren't backed by collateral.
That's the looser definition, the narrower one (from which the name comes) is that that it is currency not backed by collateral but backed by a government's designation of it (by fiat) as legal tender.
Given the absence of significant non-representative non-government-issued currencies prior to modern cryptocurrencies, the looser definition was essentially equivalent to the narrower and naming definition, so there was really no real reason to concern oneself with the difference. Now, though, especially in the context of discussions of cryptocurrencies, its probably better to stick with the narrow definition of fiat to avoid confusion and adopt a different term when something like the broader definition is necessary.
So what's the term for something shadier than fiat currency, something not backed by collateral NOR by government dictate? It should convey all the scorn directed at "fiat currency", but moreso.
About that idea, I say that its false, and relies on misunderstanding of at least what "backed by" means for a currency, and probably a strained view of what are "established laws" of economics, as well.
If a currency is "backed" by something, it means the issuer is willing to exchange it for another resource, usually at a fixed ratio. For example, a gold-backed dollar (when they used to exist) could be exchanged for a certain weight of gold. There is no such thing for Bitcoin.
Bitcoins can be exchanged for the ability to add a new transaction to the blockchain, at the very least. It might be abstract and of questionable value but there is certainly such a thing.
And this is getting a bit whimsical, but why is the gold valuable?
Gold is valuable because once upon a time the government accepted gold as a tax payment. The use of gold as money lasted for so long that people began to think that there was some kind of magic behind gold. Most of today's gold prices are based on belief in that magic.
Within the Bitcoin community, there is a strong need for a term that means "normal money, the kind that gets printed by governments, as opposed to gold, Bitcoins, stock certificates, commodities, and other fungible stores of value".
The community has been using the term "fiat currency" for that. It is, effectively, a new meaning of the word (although VERY closely tied to the older meaning). Unless you have a better term (and can persuade others to use it) you may need to accept this new meaning for "fiat currency" in order to effectively communicate with others.
'Fiat money' in derivation and use means something more and somewhat different than simply 'unbacked by other collateral'. For example, the word 'fiat' alludes to a decree – as in a legislative or military 'fiat' – that the money is valuable and should (or must) be used.
It so happens that the biggest implementation change between plain 'money' (which for a while implied collateral backing) to modern 'fiat money' was the removal of official asset backing, leaving only the government decrees that such money was 'legal tender'. And the theory of why this works relies on the traditional role of government, to enforce behaviors or collect taxes. (Academics discussing 'fiat money' use the term simply as a contrastive category, without the political-implications-of-suspicion you've seen elsewhere.)
But Bitcoin doesn't map easily into the 'fiat money' categorization, either way. No legal authority bootstrapped Bitcoin into money by decree, nor requires its use. Bitcoin is not redeemable by some issuer for some other backing asset... but by Bitcoin's design there is no issuer who could even contemplate such a policy.
And also by design, Bitcoin's limited-supply and counterfeit-resistance make it potentially self-backing, in a manner similar to gold. Gold was the traditional backing for non-fiat monies... and even though gold could circulate as currency, gold was not itself backed by other collateral. The reductionist definition of 'fiat money' as "simply currency that isn't backed by collateral" would make not just Bitcoin but also circulating gold a 'fiat money' – a fairly useless categorization at odds with historical meaning.
So is Bitcoin a 'fiat money'? I could buy the answer 'no' – Bitcoin doesn't affirmatively fit the old category or usage. I could even buy the answer 'mu' – it's so different that it neither fits nor not-fits the old category, so the question is meaningless or irresolvable. But the answer 'yes' requires both an oversimplification of the 'fiat money' term, and premature conclusions about whether Bitcoin will achieve its design goals.
"'Fiat money' in derivation and use means something more and somewhat different than simply 'unbacked by other collateral'."
No, it really doesn't. The "non-governmental money" meaning is the colloquial use that has evolved in the various goldbug/btc nutter forums (I cringe every time I see people flinging around the phrase "convert to fiat" as if it meant something), but "fiat money" means exactly what tpatcek says it does: a money that is not backed by a commodity.
"For example, the word 'fiat' alludes to a decree – as in a legislative or military 'fiat' – that the money is valuable and should (or must) be used."
The word "fiat" is not a military allusion. It is Latin. It means "let it be done", or "it shall be". It is widely used in academic literature (not just economics) to denote any situation that arises by decree. The use is quite old, and it is understood that the entity making the decree does not have to be special or powerful.
This is a case where some people read some economics literature and misunderstood the academic jargon, then started to abuse it.
Sorry, but repeated insistent assertion doesn't convince, compared to the many, many published sources which define and use it differently, and how I've observed it used over many decades, including in primarily academic/policy sources dating to before the era of internet forums.
Some examples of credible 'fiat money' definitions:
Oxford dictionaries: "inconvertible paper money made legal tender by a government decree"
WordNet, Princeton: "money that the government declares to be legal tender although it cannot be converted into standard specie"
Financial Times Lexicon - "Paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver, but made legal tender by fiat (order) of the government."
American Heritage Dictionary of the English Language, 4th Ed. - "Legal tender, especially paper currency, authorized by a government but not based on or convertible into gold or silver."
The legal decree has been an necessary (and usually primary) part of the term for a long time; here's "The Shorter Oxford English Dictionary on historical principals" in 1933:
"fiat money, U.S. money (such as an inconvertible paper currency) which is made legal by a fiat of the government."
It seems you and tptacek dislike the mild slur connotation for 'fiat money' that's grown in some communities since the mid-late 20th century - concurrent with fiat money becoming the dominant form worldwide. You would like to yank the semantic rug out from under these disfavored goldbugs (and now bitbugs), by retconning/refactoring the term into something more simple, with no allusions to what they dislike.
But with over a hundred years' of use where the legal-mandate was a crucial part of its meaning, and a derivation from a word meaning 'authoritative decree', you're going to lose this, both on the matter of past meaning, and its perpetual evolving meaning – especially that the very idea of non-decree currencies is again becoming more salient.
(You're also misinterpreting fiat if you think it means any decree, as opposed to one from an authority with the power to make things so. Look it up! But that's a digression.)
Oh, god. I'm not "misinterpreting fiat"...it's a Latin word, and I gave you the translation.
Cite dictionaries all you like...you'll also notice that all but one of those definitions center on paper money or coins, which is an equally irrelevant detail, unless you mean to imply that US dollars are not actually "fiat money" if they aren't ever printed on little bits of paper.
In other words, stop being a pedant: Bitcoin isn't backed by a commodity of any intrinsic value. The value is decreed by the people who accept it for trade, and Bitcoin shares this property with all other "fiat money". I don't need to convince you of this fact, I'm just here to remind you that you all sound completely ridiculous when you use words incorrectly.
Fiat is now an English word, derived from the Latin, which does not mean the same thing as its Latin origin. But really, look it up. if you don't believe me. That's why we have dictionaries, to help people confused about words!
Dictionaries are not written by goldbugs, and while dictionary definitions vary from each other and from prevalent usage over time, when dozens of sources over 80 years all emphasize the same decree aspect, and you are in fact complaining about people widely using it that same way, then both linguistic prescription and linguistic description agree: that is in fact what it means to competent English speakers.
I fully agree that 'fiat money' also has a strong denotation of 'unbacked', because at its origin and through its history, that always been one of its qualities. But that is in addition to, and often reliant upon, the government fiat – not exclusive of the fiat.
Really, the best clue to the term's origin and traditional use was the oldest I quoted, from a non-American source 80 years ago. It describes 'fiat money' in almost exactly the dimensions that you accuse goldbugs of making-up in recent years, which suggests that instead you are making things up.
And yes, Bitcoin isn't backed by a commodity of other value, and yes, it shares that property with fiat money. If you'd simply said that – it is similar to fiat money in this particular way – you'd be on firm ground. The deception you've attempted is the idea that lack-of-collateral-backing is the defining quality of 'fiat money'.
If people using 'fiat money' in its longstanding sense sound ridiculous to you, it's your stubbornly-eccentric definition that should change.
> But fiat currencies are simply currencies that aren't backed by collateral.
Apparently the definition is open to interpretation, at least if the wikipedia article[0] can be believed:
Fiat money has been defined variously as:
* any money declared by a government to be legal tender.
* state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
* money without intrinsic value.
That's what happens when people hijack words that mean one thing and then use it to mean another; there's a transition period where confusion rules and people argue about definitions. Bitcoin is a fiat currency by the standard meaning of the word, but Bitcoin'ers don't use it that way, it's their fault for creating a new meaning in their community for the word. Fiat doesn't mean government backed, now it does to them, soon someone will add a new definition in a dictionary somewhere and the debate will rage for decades.
Well, in my comment I simply wanted to distinguish between state-run currencies and bitcoin.
> But fiat currencies are simply currencies that aren't backed by collateral
I've checked wikipedia, and one of the definitions for the term "fiat money" is "state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.". Bitcoin clearly doesn't fall under this definition. So your statement is not quite true.
Because one definition doesn't fit doesn't preclude the other from fitting. Bitcoin fits the third definition on your wikipedia page, so it is fiat currency.
How "automatically"? Seconds? Minutes? Hours? In other words, how much time passes between the customer paying X bitcoins, and those are converted into Y USD?
Instantly. Zero exchange risk for the merchant (Bitpay considers their hedging strategies as part of their core-competence-- they don't always convert to USD/Euro/GBP [1], they sometimes stay long bitcoin). All payments for the day are aggregated (in USD/Euro/GBP [1]) and sent to the merchant (as long as it's more than $20, I believe. So it's much quicker than credit cards (and don't forget money from credit cards can be automatically pulled from the merchant account up to 120 later, whereas these ones are irreversible.) [1]Note: This is why it's easier to say "fiat" when referring to national currencies. :)
Bitcoin matters, but it won't survive "as is" ("thanks" to hoarders and speculators). It just brought attention to a problem, which will get solved more elegantly.
Many have tried, but people keep using what they are used to. Same with Bitcoin. People will keep using their convenient credit cards regardless if they are a superior or a subpar technology. Until Bitcoin diehards get this simple fact and quit spreading delusions that Bitcoin is replacing cash, credit cards, and Western Union, people will not take them seriously.
> The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
But bitcoin doesn't do this at all. This is what makes Bitcoin amazing, but it doesn't solve this issue yet. Bitcoin is interesting since it is a minor revelation from providing this, but it seems incorrect to assert that this is the cool thing about Bitcoins right now.
The reason I feel bitcoin is a scam is due to such misunderstandings. Bitcoin is not what makes any of this possible, the research happening for 20+ years in the background is.
Bitcoin is just a marketing term, a specific implementation of those principles that derives its power just from the number of clients installed across the world with it. All the arguments that Andreessen gave are not Bitcoin's, but are rather characteristic for all altcoins out there.
When you leave the research out, all you end up with is a term which denotes the first runner in a long-tailed race - http://coinmarketcap.com/ . And when you compute the long-term value, being today's winner of the race in terms of marketing and clients user-base is totally different than the open-sourced research that happened and what Andreessen invoked.
Fiat currency is sustained by our obligation to pay taxes in it and the legal tender notion that the law offers to it. Bitcoin is not offering such uniqueness, nor in the law nor by being the only system which provides the features involved in the article. It's only power comes from the specificity of its installed client-base, and anyone who sustains otherwise is either too less technical to notice the difference or comes close to border-line fraud to manipulate its interest in this bubble, at least in my book.
Your argument is, paraphrased, "bitcoin is bad because it is new and does not fit well into current conceptions of money and current payment systems."
Well, first of all, most of this friction only happens when trading bitcoin for fiat. It's the fault of the existing system.
I can send any amount of Bitcoin in 5 seconds, anywhere in the world where there is an Internet connection or a reasonably good cellphone. So can any kid (who can't get a credit card), so can any third world unbanked person. You simply cannot do that trick with any other currency.
Cryptocoins, led by Bitcoin, truly are "of, by, and for the Internet".
I would be 100% behind bitcoin if its value would stabilize. I would totally put a little into coins and keep an eye out for when I can use them if I had any faith they would hold their value.
"Fiat currency is sustained by our obligation to pay taxes in it..."
I often see this argument, but it neatly ignores, for example, the Argentine Peso, which is losing 46% of its purchasing power (last few months, annualized) vs. US Dollars (or tomatoes, or cars, or whatever you want, on average), yet taxes are just as high as they ever been (higher, in fact: 35% tax just implemented on all cars above a certain threshold, for example). So where is that value-sustaining-tax effect I hear so much about?
Come to think of it, in 1989 when the Argentine Austral's value went to essentially zero (1-1 with the USD to 1-10,000 in a little over a year), taxes weren't low... so what happened? In fact, you could still pay taxes just fine with all that worthless paper with a bunch of zeros on it. Why didn't taxes and legal tender give it value?
I think it's safe to refer to most cryptocurrency methodologies as "Bitcoin" when talking to the masses. Making a casual relationship between misunderstandings of technology and a given implementation of it doesn't make a truth.
> Fiat currency is sustained by our obligation to pay taxes in it and the legal tender notion that the law offers to it.
The USD clearly ignores that property. It is used in many places where people have to convert it to pay taxes.
> the legal tender notion that the law offers to it
USD is debt (or is it credit) based so saying it holds value because it can be used to pay debts is a bit weird. It exists to pay debts yes, but whether that conveys its value is questionable.
> It's only power comes from the specificity of its installed client-base
Things are valued based on how much people are willing to pay for them, ECON 101.
A lot of people are interested in it because it is unique. You also have a ton (I am curious how many) of Gen Y's with Bitcoins who don't understand investing at all.
> anyone who sustains otherwise is either too less technical to notice the difference or comes close to border-line fraud to manipulate its interest in this bubble
There are two things people say.
* "Bitcoins can only go up due to the increasing interest" - That is just silly, interest can cause selling sprees just as easily as it can cause buying sprees (Now is my chance!).
* "Bitcoins won't fully crash due to the increasing interest" - IMHO this has merit, there appear to be enough people who have faith in Bitcoins to keep the system running for the foreseeable future.
So while you may lose 95%+ of your value, you won't lose 100% of your value, which many other forms of investment run the risk of.
However it is still a silly thing to have a significant percentage of your assets in, unless you are actually a risk seeking individual.
The part about bitcoin entirely as a payment system makes no sense, because both the consumer and the merchant need an existing payment system, to convert into and out of bitcoin for this to work, in which case bitcoin is just a middleman doing no work. I suppose some payment systems are localized and bitcoin can work as a global bridge, but that seems like a trivial legal hack that will be shut down soon.
The merchant needs a payment system that they trust, and the customer needs a payment system that they trust. But the payment systems don't really need to know or trust each other. He's saying that Bitcoin turns payment from a many-to-many problem, into a one-to-many problem.
Except, you're not getting around the problem here either - I need to find a real money payment system that the bitcoin exchange and I both trust and and the merchant needs to find a real money payment system that they and their bitcoin exchange both trust. You're doubling the problem no matter how you look at it, because the problem of you sending money to the bitcoin exchange is the exact same problem as you sending money to the merchant.
You're doubling the problem no matter how you look at it, because the problem of you sending money to the bitcoin exchange is the exact same problem as you sending money to the merchant.
No, because we've introduced loose coupling. I need to figure out how to turn USD into BTC. My wordpress guy needs to figure out how to turn BTC into UAH. Either of us can swap out our solution and the other doesn't care.
Suppose we used Paypal instead. If Paypal decides they hate Ukraine, we can't transact anymore.
Similarly, if you build your company's internal architecture using JSON over HTTP with a common json schema, you have doubled the problem. The Scala side needs to turn java data structures into JSON, and the Python side needs to turn them into python objects. Doesn't mean it's a bad way to go.
No, you haven't introduced anything, because sending money to a bitcoin exchange is exactly as hard as sending money to a merchant.
I already conceded the global bridge argument, but that's just a legal loophole. Authorities can easily legally treat depositing money into a bitcoin exchange as sending money abroad and make it just as hard.
If armed men want to stop you from using bitcoin, they can. On the other hand, if Paypal doesn't do business in Cambodia, I can still hire a web designer there.
Except that's exactly the problem that existing payment systems solve that bitcoin fails to solve. What problem do you see bitcoin solving as far as payment system goes for people who are not using bitcoin otherwise? People can buy from untrustworthy merchants quite easily right now. And bitcoin costs more - you pay the bitcoin exchange and the payment system and your merchant pays the bitcoin exchange and his payment system.
This is my issue with A16Z's claim also. So Bitcoin eliminates one of the failure modes of digital transactions -- namely, confirming that a particular ID indeed is associated with a particular account value -- in a way that avoids the need for intermediaries. That's great, but that's not the most important failure mode, and only part of what is needed to solve the Byzantine Generals' Problem. The generals need not only to authenticate the sender and content of the message, but confirm receipt and intent to act based on that content to the sender. It's that second step that I don't see Bitcoin solving. We still need intermediaries to handle chargebacks that result from fraud by either buyer (I didn't authorize this) or seller (this isn't what I agreed to pay for).
> in which case bitcoin is just a middleman doing no work
So you're saying that, pessimistically, all Bitcoin could do is disrupt the credit/debit card companies? That's very pessimistic, and still a very big deal.
It sounds to me like what we need is a single place where I can deposit my credit card info, which I trust is secure, and then all the merchants transact with me by doing some version of auth against that web service/api without ever exchanging any credit card numbers. For consumers this is great, since they never have to update their credit card info on 10 million places. It's good for businesses, too. That kind of service would undercut one of the main premises behind bitcoin usefullness.
No that doesn't work either because you need an existing payment system to deposit money into a bitcoin account at an exchange. You can't disrupt something by requiring your customer to use it.
Some variation of "no or very low fees" appears 5 times in this article. Marc is doing a good job (re)setting the expectation that transaction fees are not going away. a16z's bitcoin companies are just going to utterly gut the existing payment industry's 2.5%
How so? Currencies are only an abstraction layer on top of goods and services. Instead of directly trading my goods and services for yours, we use a currency--a common "interface" for doing so. The currency doesn't have intrinsic value; the reason it has value at all is because you can exchange it for a wide variety of goods and services. That's why people want dollars, but not Monopoly money.
It isn't though - it's a way to illustrate Bitcoin's usefulness as a currency as "worse than gold."
I'd put bitcoin's inherently deflationary nature, inability to perform chargebacks, vulnerability to selfish mining, incentivizing the waste of electricity, or a myriad of its other problems far higher on the list than the fact that it has no intrinsic value. Outside the above argument, its lack of intrinsic value isn't that common a criticism, nor is it really relevant.
The crypto currency market = "winner take all" market ("all" >= 80%). That said, if the capital costs (mostly mining hardware) and operating costs (mostly electricity, with some rent and labor) leave room for a low-cost producer to enter the market (and the switching costs are not too high). Time will tell. Evolution will do its magic and the fittest will survive (at least until the wheel turns round again). Regardless of who "wins," crypto-currency-based disruptors are a comin' to a status quo near you. And that's a good thing.
Aren't transaction costs being "paid for" by all those people running mining rigs? All that processing power used to confirm your transaction cost someone real money. Transaction fees ostensibly pay for this, but I haven't seen anyone do the math on how much to charge to make transactions break even. As the difficulty gets higher and higher, miners will have to rely on these fees to make any profit.
As a side note, is it possible to build mining rigs optimized for transactions vs. mining? or is that the same job?
It's the same job. The way that transactions are processed is that they are included in the block that is mined. At the moment there is an extra 25 BTC reward for mining a block in addition to the transaction fees of those transactions you have included but over time this extra reward will diminish to 0.
So, one big reason for merchants to accept bitcoins is the high fees charged by credit card processors? So, suppose they cut the fees? Does that kill bitcoin ?
No, there are other things about Bitcoin that are highly desirable from a merchant's perspective even ignoring fees.
1. There are no unilateral charge backs with Bitcoin and
2. You don't have to worry about keeping sensitive customer information safe. It is impossible for you as a merchant to be responsible for fraud against your customers due to stolen credit card numbers if they are using Bitcoin. It has the same properties of a Cash transaction minus the in person requirement and the potential for easy theft. In fact if you do it right it would be nearly impossible for dishonest employees to steal money from your business.
Taken in isolation it's easy to say well that isn't such a great advantage but when you look at Bitcoin vs anything else on the whole the advantages are clear.
But why would I want Bitcoin as a consumer? I want chargebacks if the merchant screws me over, I get a rebate/miles/points with every purchase, and some cards offer warranties and return protection. AmEx does a pretty good job at flagging fraudulent activity, and I'm off the hook for any related charges. Plus, there's still a risk of losing Bitcoin. The right bug/malware/vulnerability on my laptop or my smartphone can mean my BTC is lost or stolen. We all know that security is hard, and at best inconvenient -- and that people are lazy.
If there are clear advantages to the vendor, it should be reflected in the price to the consumer. A 1% discount may get me interested, considering they'd save more than that on cc transaction fees alone.
Bitcoin also allows anyone to accept payment which could vastly increase the range of products and services available: we can imagine that a lot of individuals and small businesses who do not have access to credit card payments will be able to offer their services and get paid.
On any payment network the fees are a result of the risks of credit card fraud. Card processors can't cut fees without losing money. It's an efficient market as it is.
Wouldn't then all the fraud risks move to those businesses which take consumer credit cards and exchange them for bitcoins. So why would the aggregate fraud cost in the system be any lower ?
Also, I seriously doubt that 2.5% fee is all cost. Visa/Mastercard, etc. are massively profitable - they have plenty of room to cut those fees
Visa processed ~4.2T of payments last year (page 32) and earned ~5B of net income on ~11.7B of revenue (page 29). By my calculations that is ~0.1% off the top of the transaction net of costs to do business. Not much.
I thought the credit card fees were mostly to cover the escrow-like service they provide, in which you can challenge a merchant who fails to keep their end of the bargain but insists on billing you anyway?
Proof of useless work based, to be precise: the only reason work tokens are hash computations instead of say push-ups or soap bubbles is the ease of bookkeeping. So it always puzzled me why that aspect matters.
The fact that the work is useless is essential to the security of the system. It's a proof of sacrificed opportunity. If the proof of work was actually useful and monetizable, you might be able to pay for your mining via its utility, and that would completely destroy the security assumptions underlying bitcoin.
I'd say that gold is infinitely divisible in practice, as much or moreso than bitcoin. There is what, a USD dollar or two worth of gold leaf in Goldschläger? You can trivially get down to flakes of gold worth fractions of pennies.
The only problem is the cost of division (making leaf is somewhat labor intensive, but not prohibitively so by any stretch).
The hard limit is $1e-20, according to wolfram alpha. IIRC bitcoin will only get you down to e-8.
So with our currency if it becomes wildly deflationary with a single penny buying a car--how do you buy a cup of coffee? That is the practical problem with deflation. With bitcoin it can always be made smaller.
Governments can always invent a new denomination. Mostly its been in the other direction (take off orders of magnitude)
But the scenario you're citing isn't the central issue when it comes to deflation. Deflation leads to a negative spiral because it pays off to defer any kind of spending - thereby slamming on the economic brakes. Notable example is Japan in 90s - deflation has been a major factor in its meagre growth then and even into the 2000s. The BoJ's unwillingness to adopt a sufficiently expansionary monetary policy likely exacerbated the problem
anyone has experience with remittance from US to countries that don't have a local bitcoin exchange? How would it work in such case since the receiver can't convert the money to the local currency?
this may be a stupid question, but how does the cap of 21 million coins affect bitcoin? does it not matter because each bitcoin is infinitely divisible?
As long as consumers are paid in their local currency and vendors pay their employees, their taxes, and their other costs in local currency, then bitcoin as a payment technology has similar costs as credit cards. Those costs are reflected through exchange fees and bid/offer spreads.
Let's walk through a transaction. I want to buy something that costs 1 bitcoin. The going rate on the bitcoin exchange is $825 bid by $830 offered. I take my cash to the exchange and convert it to bitcoin. Assume exchange fees are .5%. To buy 1 bitcoin I pay $834.15 (fees included). I transfer the bitcoin to the vendor, who then does the reverse transaction. He recieves $820.875 (fees included). The cost for transaction was $13.275 (834.15 - 820.875) which comes out to 1.59%. That is cheaper than the oft quoted 2.5% rate for credit cards but is very much in the same ballpark. If you factor in that some credit cards give you 1% cash back then bitcoin and credit cards are back at basically even in terms of net transaction costs.
With bitcoin as a payment technology, the transaction costs flow to the bitcoin exchanges, market makers, and dealers. A dealer is sort of like an exchange combined with a market maker. The dealer quotes you a price to buy or sell bitcoins and you transact directly (not on an exchange). The dealer, like a market maker, makes money on the bid/ask spread. The only reason I'm going on about this is because one of a16z's big bitcoin investments is in a company called Coinbase, which is a bitcoin dealer. When you buy or sell bitcoins with Coinbase, Coinbase always takes the other side of the transaction. They make money on the bid/ask spread, and in some cases ("instant exchange") they charge you a 1% fee on top. It's a pretty clever business.
Just putting this out here so that everyone understands how the guys out there touting bitcoin for payments plan to make money from the people using bitcoin for payments.