Where does one buy and sell bitcoins?
Crane
Right, but the ability to actually use bitcoins depends on people actually accepting them for real goods and services. And if they can’t rapidly exchange bitcoins for other currencies they won’t do that. If the value of bitcoins is relatively stable from minute to minute then that’s not such a big problem. But if bitcoins aren’t stable then people will require a premium before they accept them. The size of the premium you’re willing to pay depends on how highly you value the anonymity of bitcoins.
And of course the other problem is, why bitcoins and not some other fiat currency? There are currently dozens of bitcoin knockoffs floating around, probably hundreds by now. What makes genuine bitcoins valuable and not my knockoff lemurcoins? The fact that you can buy real drugs for bitcoins, but real drugdealers won’t accept lemurcoins or deltasigmacoins.
There’s no particular reason for retailers of real goods to use a currency like bitcoin. If they automatically sell the bitcoins at the end of every transaction they will have to charge an arbitrage premium since they guy buying bitcoins and selling dollars has to get his cut. How much is anonymity worth? A few pennies? A few dollars?
There are dozens of electronic exchanges but the best known is mt.gox.
Bitcoin doesn’t have to be stable. Where did you get that idea? Electronic transactions take milliseconds. If the value fluctuates a few bips in that time I don’t think anyone is going to be very concerned. Many vendors already take bitcoin and they don’t seem concerned so your point is moot.
As for using other digital currencies, you’re exactly right - which is why they are proliferating. 50 new ones just since March I think. So maybe bitcoin will end up being a historical footnote, but the concept of the digital currency is here to stay.
Over time, the difficulty of the problem is increased to match the increased capacity of computing power on the network.
In a nutshell, the “problem” to be solved involves a hashing function, which computes a number based on the data in the record of the last transaction. The problem is to add X bytes of random data to the end of this transaction such that the number is below some very small value N. Currently, the only method to solve this problem is trial-and-error: You add X bytes of random data, compute the number, and see if it is low enough. As computers get faster, N is lowered by all machines on the network such that it still takes around 10 minutes to solve the problem.
In technical terms this is called a “proof of work” scheme. It prevents people from posting transactions at a speed faster than a consensus of the network allows, and makes verification “democratic” in that the transactor has no idea which computer(s) will end up verifying the transaction (i.e. he can’t get in cahoots with a single verifier to cook the books; he would need to compromise at least a majority of the network to have a chance, since disputed transactions are “voted” by the network).
But the inherent contradiction in what you lay out here is that the base currency remains the dollar. If you get paid in dollars, great. But if your goal when being paid in bitcoins is to convert to dollars quickly you’re just showing that you don’t actually value bitcoins, you just accept them because some sucker offers them.
It strikes me as similar to how some news aggregators consider themselves as doing journalism when all they’re really doing is feeding off someone else’s work. If the originator - The Washington Post for news or The Federal Reserve for dollars - can shut you down by altering their policy then you don’t have a currency, you have a vulnerability.
There is - in the end - a great deal of power in two phrases: “Full Faith and Credit” and “Legal Tender for all Debts, Public and Private”. These apply to $US. They do not apply to bitcoin or any other digital currency. If I pay my mortgage in dollars, the bank will take it - in fact has little option other than to take it. If I try to pay in bitcoins they can tell me to fuck off and I have no recourse.
I’m not saying it’s not interesting. It is. But to treat it as somehow superior, or somehow more secure or useful, is foolishness at an astonishing level. The IRS certainly is looking into it, however. Bitcoin transactions will be - if they’re not already - fully taxable. But you’ll have to pay those taxes in dollars.
And God alone won’t help you if you count on the anonymity of bitcoins to avoid those taxes. To (mis)quote one of my favorite movie characters…
“[Bitcoins] may have forgiven you, but the state of Mississippi’s liable to be a little more hard-nosed about it.”
In some respects it IS in fact superior. It’s anonymous and untraceable. THAT if nothing else makes it so. Why is that so hard to see?
No one with any intelligence is saying it’s superior in ALL respects. I certainly haven’t said that - have I? I’ve specifically said that it’s something you use for some purposes when it suits you. I’ve specifically said that’s it’s an overlay on the existing system and functions in a similar way but has somewhat different mechanics since there is no central bank for bitcoin and the number of bitcoins is fixed.
These are not hard concepts to grasp. It is just another tool to use in conducting commerce. And it WILL be used. It IS being used and major banks and institutions all over the world are and have taken notice and are beginning to adapt. You can ignore the phenomenon as long as you like. That’s fine. The dollar isn’t going anywhere. Neither is yuan, ruble, yen or any other major currency. Maybe bitcoin will disappear but as I’ve said, digital currencies as a class also aren’t going anywhere.
And to expand on this point, all those men with guns also mean that the government of the United States can wet its beak in an economy with an annual output of $15 or $16 trillion. It’s certainly not just Ben Bernanke printing monopoly money sprinkled with fairy dust, and then somehow making everybody use it.
It may all come tumbling down with the first quantum computer. Of course, so might all of our conventional money transfer protocols.
At the end of the day, all those men with guns don’t mean shit when it comes to the value of currency. People will not pretend a dollar is worth more simply because a guy with a gun tells them so.
The value of your currency is worth exactly as much as the confidence people have in it. Even the most worthless currencies can have extraordinary muscle behind it, for example the Zimbabwe dollar, which had no shortage of thugs to enforce its use and yet nevertheless became worthless.
Bitcoin’s problem is not the lack of military or police enforcement. Bitcoin’s problem is that it just isn’t ubiquitous enough yet. It will take some time for people to accept currency that isn’t printed by a government, but there’s no particular reason to think the concept itself is a loser.
In fact, a hundred years from now I’d be surprised if something like Bitcoin hasn’t become a major form a currency. Two hundred years from now, I’d be surprised if national currencies exist in their current form at all. There are huge advantages to using a currency which is insulated from whatever particular political crisis is happening today.
But the confidence people have in the dollar surely has something to do with the fact that the U.S. government has the authority and means to tax a $15 trillion economy.
The value of a currency is ultimately determined by supply and demand. What $16 trillion economy means is that there is an incredible demand for the currency. Why? Because you need a certain amount of currency to support economic transactions. The bigger the economy, the more economic activity. The more activity, the more transactions. The more transactions, the more currency you need. THAT is where the value of the dollar comes from.
Well, that and the fact that the dollar is a reserve currency - meaning that it is also used to settle transactions internationally.
People think that money is this mysterious concept, but it really isn’t. The value of money is determined by the supply of money and the demand for money. At it’s root, it’s really pretty simple. Sure, it’s infinitely more complicated than that when you start getting into the nitty gritty, but the basics are ridiculously simple.
I don’t understand bitcoining, but this case was more analogous to owning a few ten-million mark notes from the Weimar inflation as a curiosity, losing them, and then finding out the present German government would redeem them for ten million euros each.
Think about it: If this were the case, no currency would ever experience hyperinflation and become worthless. This can’t possibly be the main reason modern, government-backed currencies retain value. It can’t even be a substantial part of the reason.
The reason government-backed currencies retain value is the same reason gold retains value: People expect it to. There’s centuries of expectation bound up in US currency that people will want to trade their goods and services for it. Gold is the same way, with the exception that gold has a slight intrinsic value because of its inherent properties which make it useful in industry. (A currency with an intrinsic value is a bad thing, BTW, because it raises the possibility of people taking currency out of the economy and using it to plate their electrical connections or something.)
So bringing this back around to Bitcoin: Bitcoin is already working as a medium of exchange, including being liquid with regard to established currencies such as the US dollar, the Euro, and probably others. That’s a verifiable fact and not up for debate. Compared to the US dollar, there’s a greater chance of it losing all value, but that’s not guaranteed, either. The technical details are interesting, but they haven’t solved the biggest problems: The market is too small, leading to massive spikes in value followed by massive drops whenever a few of the larger traders make moves, and there have been some big thefts of Bitcoins recently, leading to something of a confidence problem.
However, the confidence problem is offset by the fact some people really believe in the Bitcoin ethos of a currency not controlled by governments, and they want Bitcoins to succeed in order to make a political (even a moral) point. They’ll keep it going as long as they can, and if it collapses they’ll likely form a new digital currency scheme with much the same underlying philosophy.
The power to tax has nothing to do with the value of an exchange medium. Literally nothing. How that taxing power is exercised matters only to the extent that it interferes with making transactions. The US dollar is so strong because people trust it. That trust was built on a promise that doesn’t even apply and isn’t even necessary anymore. You can bet that if the US has some kind of severe political turmoil, our dollars won’t look nearly so attractive. The dollar’s only as strong as the government is stable. But nothing about the concept of currency REQUIRES a government. In fact, economic systems spring up all over the place without government currencies at all. One example is in multiplayer video games, where “gold” is the currency. Games like Diablo 2 had an in game currency of “stones of jordan,” an in game item that people hoarded for the purpose of using them as money to buy other things. Anything in the game could be bought with “SoJ’s” just as anything in real life can be bought with enough dollars. It wasn’t bartering. People listed the cost of their items by advertising the price in SoJ’s.
The hypothetical “perfect” currency would be impossible to counterfeit, limited in supply, and universally accepted. That’s it. Whether one country taxed transactions on that currency using a different scheme from another country’s tax would be irrelevant. Nothing is theoretically lacking in the concept of something like Bitcoin overtaking national currencies, or even eventually replacing them.
Except for it being deflationary.
You’re not addressing the problem of deflation. It’s not a scaling problem, which can be fixed by using ever-finer fractions of a bitcoin. They’ve got that covered.
The problem is that a deflationary currency gains value over time, while an inflationary one loses value over time.
For example, let’s say I have 100 sigmabucks (with deflation rate of 10% per year) and 100 pleobucks (with an inflation rate of 10% per year) today. I want to by some steak today and some steak one year from now. The steak today costs either 10 sigmabucks per pound or 10 pleobucks per pound. The steak one year from now will cost either 9 sigmabucks per pound or 11 pleobucks per pound. Which currency should I use to buy steak today?
It doesn’t matter how small fractions we can use, if a currency is deflationary, all else being equal, it’s better to hold on to it. If a currency is inflationary, all else being equal, it’s better to spend it now. A currency that’s hoarded rather than spent is a currency in name only.
Of course, bitcoins aren’t really deflationary now, they’re simply volatile. But that’ll settle down at some. And then the deflationary problem will start to set in. People will begin to hold onto bitcoins like they do gold, as a hedge against inflation. But they won’t spend it unless they have no good alternatives.
And that’s why bitcoins won’t survive (in the long run (when we’re all dead anyway 
) ) as transactional currency. I do expect it to survive as a fungible asset.
You want anonymous currency, look in your wallet. And the only centralized control of it is the Fed’s over the inflation rate.
One of the big things that bitcoins could be good for is a way for private individuals to send money easily to each other. In the US there are no good ways of doing this. Banks are starting to make sending money between individuals easier so in a few years this might not be a big advantage.
We have checks and money orders.
You send checks though the mail which takes a few days. Then you have to go to the ATM or bank to deposit the check. Money orders have the same problem plus they cost money. We should be able to send money to private individuals as easily as we can send emails. Bit coins allow for easy transfer of funds between individuals. Chase has been running ads recently about there new service that allows you to send money quickly to private individuals. They show people paying the baby sitter using their chase app on the phone. For the chase thing both people have to sign up with the chase service and one of the people has to have a chase account. There is a new joint bank venture call clearXchange that is trying to make this easier. PayPal exists to address the issue of how to send money between individuals.
Other countries have banking systems that make person to person transfers much easier.
An article about what a pain it is to send money to private individuals.
http://www.nytimes.com/2012/02/25/your-money/why-its-so-hard-to-transfer-cash-to-your-friends-your-money.html?_r=0
Of course men with guns won’t be able to prop up the value of a dollar by fiat during an inflationary period. If we decided to dump a bunch of dollars on the world economy without a corresponding increase in the amount of goods and services available, then the law of supply and demand says that the value of the dollar will decrease.
But it is why national fiat currencies still retain some value even after multiple rounds of inflation–you can pay your taxes with them, and men with guns will make you pay your taxes. This is how national currencies can inflate and inflate and inflate and still people accept them at a steeper and steeper and steeper discount instead of refusing outright to accept wastepaper.
The biggest trouble with Bitcoins is, why Bitcoin? If anyone can set up their own electronic currency then what’s special about bitcoin that makes people want to accept it rather than lemurcoin? People accept it because other people accept it. It is a medium of exchange that doesn’t have to have any intrinsic value behind it. I get that. But there are an infinite number of virtual currencies possible, which suggests to me that the equilibrium value of any virtual currency is zero.
Compare Bitcoins to ISK or WoW gold. I can imagine these sorts of virtual currencies functioning as real world currencies, even for people who don’t play WoW or Eve, because there are people who do. Of course it is against WoW’s terms of service to trade gold for dollars, but it’s easy to imagine a game where this is allowed and encouraged, see Diablo from the same company. Anyway, there’s a fictional scene in “The Guild” where Zaboo doesn’t have a place to stay, and Vork allows him to stay but charges him rent of 500 gold per month.
But the point would be, this gold is completely controlled by Blizzard, and they can inflate away it’s value or delete it or do whatever they want with it. But they don’t do that for the same reason that national governments try not to destroy the value of their national currencies.
The real reason Bitcoins are not going to take off is that a very small number of people already own most of the Bitcoins that are ever going to exist. So what’s the advantage for the rest of us of trading billions of US dollars for those bitcoins when we can use other currencies? I mean, I can create one lemurcoin tomorrow. I own it. I will trade fractions of a lemurcoin for goods and services. But why would anyone use a currency that I own all of? Bitcoins are distributed a bit more widely than lemurcoins, but not that much more widely.
Of course currencies can exist without government backing, this is how money evolved from key goods like gold, bushels of grain, cowrie shells, cacao beans, cattle, whiskey, cigarettes, and so on. Then we have representation of these goods–I will pay you with a piece of paper that says I owe you 10 cacao beans rather than real cacao beans, and as long as this piece of paper is trusted by you it is as good as 10 actual cacao beans (minus a trust discount). And then we can do away with the fiction that the credit has to refer to any particular good (like, you know, gold ingots) and just use fiat currency.
But I just don’t see how Bitcoin can survive. Let’s say Bitcoin is successful short term. That means it gets imitated by other electronic currencies and the value of all of them trends to zero. Bitcoin itself can’t be inflated, but obviously electronic currencies as a class can be since all you need to do is add more electronic currencies.
Yes, expectations are the key. The reason everyone in the US accepts US dollars is that they expect US dollars to have a value and to be able to exchange them for goods and services in the future. Why can’t they expect this for bitcoins? But governments have powers to tax and regulate that people expect to continue in the future. Obviously if we all agree to stop pretending that the United States government exists, then it will stop existing. But we probably aren’t going to do that tomorrow, or the day after tomorrow. But it seems much more likely that tomorrow or the day after tomorrow we’ll stop pretending that bitcoins are worth anything, and the day that happens bitcoins won’t be worth anything.
And this knowledge that belief in bitcoins could evaporate overnight makes it much more likely that bitcoins will in fact evaporate overnight.