Doesn’t Moore’s Law mean that Bitcoins are inherently becoming worth less and less? Someone writes a program to mint Bitcoins on the next generation of GPUs and all of the sudden, it takes half as much processing power to make one, wouldn’t that also halve the value of one?
The equations being solved are the ones that prove that the person claiming to transfer the bitcoin actually owns it, and (possibly) helping establish the ownership chain for the new owner.
So, the answers aren’t interesting from any theoretical viewpoint. They’re just the machinery that makes the system work in the first place, so they get awarded fractions of bitcoins for their efforts.
Eventually no new bitcoins will be available, and these guys will have to get paid by taking a commission from the transfer, or something like that.
The value of a bitcoin is set by what people are willing to pay for it, not by the effort it takes to mine one. The same is true for gold and diamonds and dollars.
But what people are willing to pay for it depends, in part, on how much effort it takes to mine one.
…and tulips. Got it.
Right – at present, it’s more of a speculation than a currency or investment. However, it is a “poor man’s Cayman account”, a way to stash money that might be needed on a rainy day (and might or might not be there).
My crystal ball tells me that in the long run, bitcoins will continue to rise, but will experience a number of dramatic selloffs. It’s nothing but a bubble, from one standpoint. On the other hand, I believe there are a lot of people who might want to bury some money in such a way they can get it at any time, from any place. I bet Ed Snowdon wishes he’d bought a bunch!
PS: My crystal ball routinely lies.
I bet they’ve thought of that.
In any case, a cryptographic hash is used (like a checksum, which is also a hash) to validate that the hashed data wasn’t altered, not to identify it uniquely. In addition to this basic hash capability, crypto hashes also do their best not to reveal any details of the hashed information.
But I don’t know any technical details about how bitcoins use crypto.
The guy who made a mint on ‘Pet Rocks’ when I was a kid would beg to differ.
Can you elaborate? Because I think it’s the opposite.
The effort to mine coins is a function not just of how complex the algorithms are, but how fast the other guys are, because only the first few answers get paid. So the argument really works in reverse: the more bitcoins are worth, the more miners will pay to get faster gear to beat out the competition. The value of bitcoins therefore dictates the cost of (successful) mining. This would be true regardless of the complexity of the algorithms. Ideally, processors would be blindingly fast and the algorithms simple. That wouldn’t reduce the value of bitcoins a bit. On the contrary, it would increase their tradeability, lower the overhead. This would be especially true after mining ceases.
So, I don’t see how the cost of mining bears on the value (presuming it’s low enough for miners to bother). Perhaps I’m missing something, though.
The pet rock analogy is amusing, but breaks down a bit because a pet rock is a commodity rather than a currency. The tulip analogy is better, even though it’s also a commodity, but during the tulip bubble, the value of the tulip was based on it’s trading value, not its value as a flower per se. They were traded, unlike pet rocks.
BTW, current value is $1K per bitcoin, after having risen to $1200 a day or two ago. I had intended to buy some when the price was $120, but it didn’t work out (long boring story). Ah nuts. Even then, I’d only invest “mad money” in bitcoins, as pure speculation: a long shot that might win big. Now I’m considerably more hesitant.
I see bit coins as filling the same niche as gold as a currency. Besides the novelity aspect, it seems to appeal to the same “I don’t trust the government/banks” mind set as those that buy gold as hedge, with the added appeal of “IT’S ALL DIGITAL!!”
But when push comes to shove, there will be 3 main downfalls.
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I can’t tip my waiter with it.
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It’s infinitely traceable. Anyone with their own wallet can see every single transaction that happens. That’s how the system keeps things honest. But that also means that as soon as someone figures out how to access/hack that info, then the anonymity is gone. I’m betting that all kinds of government agencies, the world around, are working on that right now.
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Hackability/lost wallets - Much like cash, you can “lose” bit coins. If your hard drive crashes, and you didn’t back it up, you no longer have access to your bit coins. They are technically still out there, but like a coin at the bottom of the ocean, no one can use them. Not a huge deal if you have a couple hundred dollars worth of bit coins, but who wants to keep their life savings in a format that a house fire could destroy.
Well, it’s terrible for a lot of purposes. But as long as it’s good for some, then it still might be useful, just not in a general sense. So far, bitcoin has proven to be useful (as a currency, rather than as a speculative gamble) for transactions that the government doesn’t approve of. One initial popular use was to buy drugs on a variety of shady websites. I’ve read that the recent run up has been due to efforts by wealthy Chinese people to circumvent Chinese government currency controls.
Not all currencies need to be stable to be useful. Arguably, currencies only need to be stable over the time period that you expect to hold them. So, if the primary use of bitcoin is to transfer around legal barriers to the flow of money, you don’t need to hold it long at all. It’s possible to let the speculators play in their volatile sandbox of an economic experiment and still effectively use it as currency.
The fact that the more popular uses are of questionable legality may mean that it gets shut down by governments, but it doesn’t mean it’s without use. Hell, by traffic volume, a majority of the use of the internet is probably against copyright and/or indecency laws somewhere, but it’s obviously quite useful.
Bitcoin uses SHA-256.
If a world population of 10 billion people each made a bitcoin transaction once per second, there would be on average around one hash collision every 2^43 years.
So, not worth worrying about.
If someone breaks SHA-256 and can create collisions at will, then the whole thing obviously falls apart. But worrying about a random one causing problems is like worrying that you’ll asphyxiate because all the oxygen molecules in the air happen to be on the other side of the room you’re in.
I was basing the question on collisions on this quote by friedo:
I was assuming that that meant that there are only 21 million target numbers, and thus that when all of them have been found, there are no more. But if this is the way the limit works, then collisions are inevitable: Once 10.5 million of those 21 million have been found, then every successful mining calculation has a 50-50 chance of finding a collision with an existing coin. And the Very Last Bitcoin would take, on expectation, 21 million times more effort to find, because of all of the collisions you’d find first.
Oh, and on price vs. effort, what it comes down to is that if they’re easy to find, then people won’t want to buy them at all, because they could just find their own instead. Now, this is mitigated somewhat by sunk costs, but even so, if there are enough people out there who’ve made the initial investment in mining equipment, you’d expect to see a price war that would drive the price down to not much more than the marginal cost.
Actually, that’s the Brave New World for Malware - taking over your computer so half your CPU cycles are devoted to Bitcoin mining, instead of spamming.
I’m not sure how it works, but bitcoins become both scarcer and harder to mine as more of them are created. So you have to keep buying better GPU clusters if you want to mine bitcoins at the same rate. Eventually they’ll all be mined and you have a static amount of them to go around.
This “static money supply” problem is my main gripe against bitcoins. And goldbugs. I wish them the best of luck though.
I won’t claim to understand all of it, but a bitcoin is not a hash value. In fact, a bitcoin doesn’t really exist as an entity.
What exists is a record of all transactions, grouped into chunks called “blocks”. A block contains a record of a bunch of transactions that have occurred along with a special value called a “nonce”, which is a solution to the following equation:
SHA256(SHA256(SHA256(block[sub]n-1[/sub])+nonce)) < difficulty
Where block[sub]n-1[/sub] is the previous block and difficulty is a value that’s adjusted according to the total cpu power available to keep the generation of blocks relatively constant.
So, in that case, it’s ok if there’s a hash collision in that overall function (because that value doesn’t have to be unique). It’s even ok if the nonce for multiple blocks is the same, because the solution depends not only on the nonce, but on the previous block. It’s also ok that there are multiple solutions to the above, since it’s just a race to find the first one.
As a reward for being the first to find a nonce that solves the problem, you get to put yourself in as the first recipient of a bunch of bitcoins, which are created in that block. The amount of bitcoins you receive is currently 25, and it will get cut in half at regular intervals. Eventually, it will go from 0.00000001 to 0, because there are only 8 decimal places of precision in the current protocol. The sum of all coins created up to that point is the 21 million or so bitcoins that will be created.
I made an error in my last post:
SHA256(SHA256(SHA256(block[sub]n-1[/sub])+nonce)) < difficulty
should be:
SHA256(SHA256(SHA256(block[sub]n-1[/sub])+blockdata+nonce)) < difficulty
The hash you’re computing includes all the data from the current block as well.
Isn’t there a point where it becomes unprofitable to mine/create more bitcoins? Won’t the computer, electricity, etc. cost more than whatever fraction of a coin you can find? I suppose the price of the coins can rise accordingly, but will that happen before too many people are dissuaded from mining?
But one of the other requirements is that people have to want it in the first place.
Let’s say instead of whatever complicated computer equation is being used, bitcoins were based on solving crossword puzzles. Those take some effort. But what value is there in a pile of solved ones? Who would want them?
Since the difficulty factor is adjusted dynamically, as the value of the mining reward goes down (either because you’re getting fewer due to halving, or because they’re worth less), fewer people will bother to look for solutions to the hash equation and the amount of electricity/etc. required will go down.
It’s also possible to pay a fee to the miner to make your transaction be “first in line” in the block, like a tip, or a credit card exchange fee. So, as the mining reward becomes smaller and eventually vanishes, anyone who’s using the network to send bitcoins can pay to keep it going. This is also dynamically determined by how much the people making transactions want to pay. Presumably, if it gets to the point where no one is willing to spend money or computing power to send bitcions, then it’s failed completely.
The only requirement of a currency is the belief that you can later exchange the currency for goods and services.
Who would exchange a day of work for a few pieces of paper? Only someone who thought that those pieces of paper could be later exchanged for something with real intrinsic value.
All currencies are, to some extent, a mass delusion. They work as long as everybody believes they work. They break down as soon as the delusion is shaken.
There is amusing story about Rai Stones–those giant stone disks (semi-formerly) used as currency among the Yap. For obvious reasons, the stones are not actually moved when they are transferred from one party to another. It is simply agreed that there is a transfer of ownership. One such stone fell from a boat to the bottom of the ocean. It was impossible to retrieve, but it was agreed that the stone was there, and so continued to be used as currency.
Suppose a submarine came along and snatched the stone away with no one knowing. Would it make any difference to the Yap?