BitCoin - Good Idea or Disastrous Failure?

For the uninitiated, Bitcoin is a popular peer-to-peer payment network that works as an on-line form of currency.

I’ve spent some time recently looking at it because, quite frankly, I had a hard time believing any such currency could work without either a physical transfer or some centralized authority validating transactions (like with electronic payments from your bank). Basically, the currency relies on cryptography to verify an account with address number A (actually a crypto public key) is actually sending bitcoins to B, and the entire network shares the full ledger of transactions (the blockchain) such that changes to this ledger are verified by computers on the network. This verification involves the solving of a complex cryptographic problem based on the details of the transaction (one that, with modern computing, takes an average of 10 minutes to solve). Once a computer on the network solves the problem, the results are published and added to the blockchain ledger. Computers have an incentive to do this verification because solving one of these problems earns you a reward in bitcoins which are simply created and added to your account in the blockchain ledger; this is dubbed “mining” in the bitcoin world. Other computers on the network abandon their work on the previous problem and try to solve the new cryptographic problem based on this new addition of bitcoins to the previous solver’s account.

This building of the blockchain helps to bury transactions into the ledger such that it is extremely difficult to reverse transactions or double-spend coins. I admit I don’t have a complete grasp of the details, but the concept of transaction verification was the one I was most curious/skeptical about, but now I’m fairly convinced that, technically, the system works.

But on the practical side, Business Insider has been tracking the use of Bitcoins and has found several problems. This piece is a good summary; first off, the currency is a haven for criminal transactions, which leads to other problems:

Second, the currency is extremely volatile:

The distribution of the currency is almost comically unfair:

And minor “accidents” carry a huge price:

The author attributes this to libertarianism gone mad: “About 44% of the online crypto-currency’s users self-identify as Libertarians,” and he sees many of the basic principles of libertarianism (distrust of government control, preserve anonymity, no taxes) embedded in the concept.

So I thought I’d throw it open to the group. Do the central (libertarian) concepts of an on-line currency like Bitcoin–online anonymity and de-centralized control in particular–really work for a currency? Are the problems reported just growing pains, or do they signal a fundamental problem with the concept?

I don’t understand the cryptography behind it, but people who are knowledgeable about such things and whose judgement I trust tell me that the underlying structure really is sound and I accept that judgment.

Obviously, a currency like this will hold a huge appeal for criminal activity. That demand is going to stay strong for the foreseeable future and unless a superior alternative both presents itself and achieves critical mass, Bitcoin will likely persist for awhile.

However, Bitcoin has a legitimate use that really is quite significant. Since transaction fees are pretty much negligible, users can trade currencies without getting screwed by banks on exchange rates. Volatility doesn’t really matter when making those kind of exchanges. That seems to me to be the most attractive usage for typical people.

What I don’t know is how the currency could ever find a way to stabilize. As it is now, I wouldn’t be willing to hold onto a sizable amount of it out of fear I’ll wake up tomorrow and find half of it gone.

One question I had about bit coins, is why they are viewed as being perfect for clandestine transactions. If I understand correctly every transaction of every bit coin is published in public. This doesn’t sound very clandestine to me.

Perhaps I’m missing something?

I don’t know if it’s a good idea OR a disastrous failure. Probably somewhere between the two.

Currency, at it’s core, is just a medium of exchange so we don’t have to barter for goods. We could make used kleenex a currency if we wanted, although it wouldn’t be a great medium of exchange for a variety of reasons (mainly: ew).

I think Bitcoin’s biggest problem right now is a lack of acceptance - I can’t use bitcoins to buy anything at my local grocery right now. Beyond that though, the problems you list are endemic to most currency.

Cash is anonymous, which is why criminals like it. Volatility occurs with many other currencies (usually in banana republics, but could happen almost anywhere). Unequal distribution is unsurprising - that distribution almost mirrors the distribution of wealth in the united states, and isn’t necessarily a problem of the currency itself. And if I drop my wallet with a bunch of dollar bills in the fire, I’ve lost money due to accident.

I don’t think Bitcoin is a long standing idea anyway, though. As much as the libertarians think this will be a success, if people really start trading their bitcoins as a significant means of exchange, the governments of the world will find a way to de-anonymize it, tax it, and regulate it. Plus, it’s going to stagnate once there are no more bitcoins to mine - you need some monetary expansion to make a currency work. And like I said before, very few merchants will take bitcoins now.

I don’t think it’s fundamentally flawed, but neither do I think it’s the panacea that backers seem to think it is.

Because the account numbers are anonymous. So, while you can see the transaction of account 237684328 to account 283798789574, you don’t know who those people are. Much like numbered Swiss bank accounts were used by criminals before the Swiss quit allowing you to open one.

The real trick is converting bitcoins into goods or services you want to actually use. I think that’s where the anonymity will break down (much like it would break down if you tried to access your swiss bank account in person).

More fighting of my ignorance:

Why is this the case? Presumably you have to go somewhere to change your dollars into bit coins and your bit coins into dollars. Why would this be any cheaper than changing dollars into euros?

Most people getting into Bitcoin seem to have a decent idea of the risks. The chance of throwing out a hard drive with data worth millions is just part of the game, as is the more likely case of having your wallet stolen by criminals.

The more interesting part is the resources devoted to mining. All of this is to preserve the security of the chain, and all of it is basically a gigantic waste. The creation of new Bitcoins is just a transfer of wealth from already-existing owners. Says the Economist, “Its computational underpinnings have collectively reached 100 times the performance of the world’s top 500 supercomputers combined: more than 50,000 petaflops.” But it’s even worse than that. “As equipment gets faster, in short, mining gets harder.” Race to the bottom. People get better hardware to reach the end of the race first, devoting more and more resources to an end result that does not produce anything of lasting value in the world other than supporting the currency itself.

I guess some people would say the very existence of the currency itself is worth it. But that’s an awful lot of processing power devoted to what is essentially nothing more than spinning your wheels faster than the other guy down the street.

There are other potential problems, like that any participants have to keep the whole chain on file. It’s already 11 gigs long now. The system is supposed to be flexible enough to be able to change with the times…

But that flexibility might represent a possibility of an exploit. The bigger it gets, the bigger the bulls-eye painted on its ass.

It’s pretty easy to imagine some exploit that pulls the rug from the whole enterprise. Or maybe the whole thing really is secure and adaptable. In that case, it’s also pretty easy to imagine the whole thing sucking down electricity indefinitely as it bounces along.

The only reason why there’s no fee at present for intra-Bitcoin transactions is that miners get rewarded with the creation of new Bitcoin. After the creation of new coins winds down, it’s likely that miners will start charging people to process any transactions.

More than that, there will always be fees for transacting from Bitcoin into national currencies. You can’t pay your taxes with a crypto-currency.

I don’t really see how it can be anything but a good idea, if for no other reason than because it’s a fascinating experiment. Will it ever be a viable currency? Surely not, but that’s hardly the point.

Frankly, if you had $6.5 million in Bitcoins, you’re pretty much asking for it regardless of what you do with your hard drives. If I had $6.5 million in my wallet I’d have nobody but myself to blame if I lost it.

Here’s the real question: what happens when Google launches its own currency? An entity with $100 billion in assets could create much more stable fake money (even if it’s still fiat currency).

ETA: I have to say I find the story about $220 million in drug money being stolen by a hacker rather charming.

Well, anyone can launch a fiat money. Hell, arcades do it all the time, it’s just that their tokens are only accepted by their game machines.

The real issue here is trackability and oversight. Like it or not, a currency - whether accepted by the masses or not - that is not subject to oversight is hideously vulnerable to con men and swindlers. For however much person of different political and economic persuasions may attest, having oversight of the money supply is a good thing.

Beyond that, right now bitcoin is subject to a ferocious amount of valuation pressure that creates a near-classic bubble situation. Over Thanksgiving I had the dubious joy of having dinner with two young men who were all crazy for bitcoin and how it would change the world and that they knew these guys who were sitting in their basements becoming millionaires on it. They simply could not be dissuaded that it was a troubling thing.

Well, c’est la vie et c’est la guerre. Those in early may profit and devil take the hindmost, I’d wager. I certainly don’t put my clients into bitcoins. I can’t think of an easier way to make compliance land on me with both feet.

Major banks have started paying attention to bitcoin and other digital currencies, but as pointed out, there are a limited number of bitcoins so mining will come to an end soon. I forget the current projected date but I think it will be 2016 at the latest, although I’m not sure - plus that is a moving target.

There are also well over 50 other competing currencies. In fact I started another threadone here - Ripple XRP - that is currently being given away in return for donating time on your computer at Computing for Good (see thread for details). It takes the idea of computers doing work but work that is actually useful and giving you something in return for that work.

There is some self-interest involved on the part of the promoters since they will retain about a third of the XRPs that have been created. So if the value of the currency rises, they will still control a third of it. But right now, it seems to be one of the more viable options to bitcoin.

Personally I think it’s pretty clear that digital currencies are here to stay and will become increasingly important. They were creating so much fuss in China that an official edict came down stating that Chinese banks couldn’t exchange them for Yuan. As a result people started using the fake invoice route to convert Yuan into dollars to buy bitcoins at the more favorable rate. A classic arbitrage situation. At least I think that’s what was going on. Honestly I never actually understand much of what goes on in China.

It should also be noted that more and more businesses are starting to accept bitcoin. There is virtually no volatility risk for them since that immediately exchange the digital currency for dollars or other hard currency. It’s just another medium of exchange, but one that has the immeasurable benefit of being completely anonymous and untraceable (assuming that you know what you’re doing).

These two points, IMO, are the Achilles heel for its use as a real liquid currency. Some sites I’ve been to say it takes days to download the whole chain, and the resources devoted to mining seem to be a classic (almost built-in) example of the law of diminishing returns.

My question then: Is this sort of inefficiency inevitable in an enterprise like Bitcoin, where anonymity and de-centralization are sacrosanct? In short, does the experience of Bitcoin argue against apply libertarian economic principles at-large?

Sounds like an urban legend.

Per the OP: “Basically, the currency relies on cryptography to verify an account with address number A (actually a crypto public key) is actually sending bitcoins to B…”

So, who encrypts the form and who provides the key? Who controls the format of the data? Who pays for the computer time?

If multiple ordinary computers can solve the problem in 10 minutes then a clever geek with a faster computer can beat the other guys . So, why bother? What is being accomplished? Can the clever geek steal the bit coins?


I’m not up to speed on all the economic theories, but isn’t a fixed-supply currency inherently deflationary? And aren’t deflationary currencies pushed out by inflationary ones in the long run?

Something like, people will hold onto bitcoins because they expect the value to increase over time, but will spend their inflationary currency to extract the value now. Currencies “exist” only by being spent. So bitcoins will become a fungible asset (like gold) rather than a transactional currency (like dollars).

I don’t think the security issues (which are problems of many currency/assets) are as much a problem as the built-in economic problems.

I don’t understand the question. What you have with digital currencies are systems that overlay and/or bypass the existing hard currency systems. You use one system when it suits you and the other when it suits you. They aren’t mutually exclusive or in any way contradictory.

And if you think that the limitations of bitcoin can’t be worked around, you just aren’t using your imagination, but I can assure you that plenty of other people can and will.

“libertarian economic principles”?

I thought they wanted the gold standard.


bitcoin is by definition deflationary and will have to become a fractional currency - by which I mean that you will eventually use milli or micro bitcoins for transactions. That’s been understood from the beginning.

The thing is that there is no bitcoin economy so it doesn’t matter. The Republic of Bitcoin doesn’t experience a devastating depression as a result because there is no R of B.

It’s essentially a virtual tulip bulb or beanie baby. Bitcoins have no inherent worth of value other than some small set of people think they do. Now before anyone chimes in to say that is how fiat currencies work, fiat currencies have a number of differences:
[li]Universally accepted[/li][li]Stable[/li][li]Has the backing of a strong economy[/li][li]You can use it to pay your tax obligation[/li][/ul]

Bitcoin is none of these things.

That some shady people and hobbyists use Bitcoins to conduct financial transactions makes it no more valid as a currency than if they decided to anonymously trade in oranges. Except you can eat oranges.

Like most speculative bubbles, people seem to think that it’s “the next big thing”. That encourages people to invest in it “just in case”. But eventually, something will freak them out, and the bottom will fall out.

As you point out, all financial systems are based on trust, i.e., fairy dust. Bitcoin is no different. When you say fiat currencies have the backing of an ‘economy,’ what exactly does that mean? It just means that there is a central bank that can create and destroy the currency at will and thus artificially increase or decrease the supply as needed. It means that there is a demand for the currency for use in transactions thus giving the central bank power over supply and thus the value of the currency.

In that respect, one might regard digital currencies as superior since they are beyond that sort of manipulation.

Right, but “that sort of manipulation” is what makes government backed fiat currency more reliable. The government backs it, which means that hard faced men can force you to use the currency at literal gunpoint. Don’t want to pay your taxes with Federal Reserve Notes? Fuck you, these armed treasury agents will MAKE you pay your taxes with Federal Reserve Notes. The power to force people by literal armed force–cops, soldiers, and prison guards–to use your currency and punish you if you don’t is what makes fiat currencies retain their value.

Yes, the same central bank can flood the market with dollars, and inflate away the value of your dollar holdings while they laugh all the way to the bank that they conveniently own themselves. The reason they aren’t as likely to do that as some Russian mobster or Nigerian scammer is that the government uses dollars and doesn’t want to see the whole thing come tumbling down.

Of course, if someone could figure out a way to steal all the bitcoins there wouldn’t be any point to doing it, because if you could steal all of them they wouldn’t be worth anything.

I personally can’t see bitcoin itself working as a real future currency, because the early adopters already own almost all the bitcoins that will every be used. That’s highly deflationary, which means no one will ever want to spend bitcoins which means no transactions will be carried out using bitcoins. Maybe it will continue as the favored currency for drug dealers and child pornographers and arms dealers and other people who absolutely positively need an anonymized currency but still live in a world free enough that the Powers That Be can’t just look over your shoulder, see you’re using bitcoins, and send you behind the chemical sheds.

But you’re missing the point. As I’ve already said, it’s not like anyone says you have to choose. Want to buy your plane tix with dollars, hey, knock yourself out. Want to use milli-bitcoins, that’s cool too. We don’t care as long as we get paid. We don’t even care why you want to use one instead of the other. If you give us dollars they go into our bank account. If you give us milli-bitcoins, we exchange them immediately for dollars and laugh all the way to the bank. It’s 6 of one, square root of 36 of the other.

edit: as for the deflationary aspect, the idea that no one will spend bitcoins is clearly false as they are already being used. Sure they are deflationary, but who cares. It will just become a fractional currency. As I’ve also already said, that’s been understood from the very beginning