I’ve been hearing about this new internet currency, and after reading FAQs and watching YouTube videos of people “mining” for it, I still don’t grasp the concept. Can someone explain what bitcoins are and why it exists?
This popped up in that article about the drug-vending site, didn’t it? I hadn’t heard of it before.
Bitcoin is kind of like a mixture of Paypal and Bittorrent. A bitcoin itself is a number generated by a complex computer algorithm. Mining is the process of solving these algorithms. The numbers could be a lot easier to solve, but the creator of the bitcoin program wanted to limit the rate at which bitcoins were brought into existence. When a bitcoin is generated, a random party involved in generating the solution to the algorithm receives the bitcoins in the bitcoin database.
The bitcoin database is how it’s like Bittorrent. The idea is that the database is distributed across thousands of computers. If someone tries to fraudulently create bitcoins or steal them, they’ll be unsuccessful since they can’t adjust the records of thousands of computers at once. When a bitcoin transaction occurs, a bunch of computers examine the transaction and agree that it’s legitimate and it’s entered into the database.
Why bitcoin exists is a bit trickier. The simplest idea is that it’s a very secure means of transferring money across the Internet. A good use for such a system is as a substitute for Paypal. Probably the most popular use right now is that, since Bitcoin is completely anonymous, it’s a great way to buy illegal stuff off of the Internet, like LSD. Some people have crazy ideas for the future of Bitcoin, like as a single-world currency that central banks can’t inflate. Kind of like “credits” from futuristic movies and books. Those people are insane though.
Yeah, I first heard of it from the Gawker article about the online drug store.
People think they can make money off of bitcoins too. This guys says he’s putting all his savings into the currency:
http://falkvinge.net/2011/05/29/why-im-putting-all-my-savings-into-bitcoin/
Bitcoins were worth USD$8 when he wrote the article, now it’s up to $29 per bitcoin as of this post.
Is this for real?
I have a friend who is totally obsessed with bitcoin mining. It is for all intents and purposes a real and useable currency because they have a growing list of vendors who provide goods and services in exchange for them. As described above individuals can dedicate some of their computers processing time to trying to solve complex mathematical problems which, when solved, generate a bit coin for the person who solved it. The program is completely open source and transparent as to how it goes about generating new coins to add to the economy. My friend is up to 50 something bitcoins now and is planning to build a computer just for bit mining 24x7.
Wouldn’t it be easier to just buy the coins than to mine them? I read it gets harder and harder to generate coins the more coins there are and the more people are mining. Also, the expensive hardware and energy costs must start really cutting into profits at some point.
It’s true that a few weeks ago, Bitcoins were being exchanged for US dollars at about 1 Bitcoin to 1 USD. A week ago it was 1 BTC to 8 USD. Later it was 1 BTC to 31 USD. It had crashed back to 1 BTC to 20 USD a little while later. I don’t pay much attention to it since it isn’t my thing, but it’s semi-popular in video gaming circles 'cause gamers like computer stuff and they have the high-end graphics cards that excel at Bitcoin mining. I’m deep into that scene so I see it every so often. I know people who’ve tried bitcoin mining and even earned some through a mining team, but no one who has cashed out.
The idea is that since the supply of Bitcoins is finite at 27MM (or whatever), in order to accommodate the demand for currency of a Paypal-size system, the value of Bitcoins needs to inflate dramatically. Like, if the market needs $10 Billion to function and wants to use the Bitcoin system, then each coin needs to be worth about $370. If you get in on it at less than the non-made-up figure, you might be in a position to make some money. Think of it like being a venture capitalist. Bitcoins are basically equity in the future Bitcoin system. If you have a good chunk during the IPO, you’re going to do great. If no one cares about the system and it dies out, you lose. Unlike most venture capital opportunities, this one is open to the average public and the investment requirements are very low. Either buy some coins while they’re cheap or try to mine them. I’m not trying to tell you to get in on the Bitcoin game or not. I have no idea if it’s a good idea or not. Just explaining why some people do.
Volume will be capped at just under 20 million but that’s the theoretical limit. Coins that get lost through abandonment or user error for example will be leave the system and won’t be replaced. So the real limit will be some percentage of 20 million but I have no idea. Even with that lower number, not all Bitcoins are necessarily for sale though. That’s a further restriction of supply. Now, the interesting part is that Bitcoin has enormous utility for people looking to launder, hide, secure or transfer money without friction. I’m not talking about small time pot dealers either. Organised crime, crooked businesses and governments. Many of those people will be looking to shift funds into Bitcoin for the unique properties it has so I think an increase to $370 is a very conservative estimate. The term for that is deflation though. Inflation is when the buying power of a currency goes down.
Oops. Just under 21 million.
Bitcoins are digits on computers.
These digits are a currency. They have value as a kind of money. Value is determined from supply and demand.
The supply is ultimately limited by the computer program. It uses computer encryption across many different computers to ensure the accuracy of the database. The demand is from people who want to use the currency. Right now most of the demand would seem to be from speculators who think the value of the currency will increase in the future (i.e., they think many other people will step up to buy the currency when the time comes that they decide to sell it).
There are essentially two stages. The start-up stage rewards people who offer processing power for the system to use. Those supporters of the system receive from the program as their reward extra bitcoins – this is called “mining”. But this stage doesn’t last forever. There are diminishing returns: the pre-programmed rewards for mining taper off the longer the system is running. This would ordinarily mean that the system would collapse, but the whole thing is based on the foundation of a fantastic hypothesis, a wild guess, an astounding leap of faith. This is the second stage of the process. Their guess is that by the time the returns to mining are insufficient to draw speculative demand into the system, real sustained demand for the computer currency will be strong enough that the system will receive free support from its many users.
So why would people continue to use and support it? Why would the currency continue to have value?
Fiat currencies don’t have value in themselves. They have value based on what people can reasonably expect to receive in the future in exchange for the currency. The more people who accept the currency, the more useful the currency is as a medium of exchange. There are plausible, but still highly speculative, reasons why people might want to use bitcoins instead of government currencies. For one thing, the total future supply of bitcoins is drastically limited by the program, theoretically more limited even than gold. As opposed to government fiat currencies which lose their value from inflation, a bitcoin has the potential for continual deflation: bitcoins might become more and more valuable over time, thus encouraging people to participate in the system as an alternative method of savings.
That advantage, however, relates also to a potential drawback. People have to use the currency for real transactions for it to have non-speculative value. If the demand remains mostly speculative, then that demand is merely a bubble. Bubbles burst. The value of the currency could collapse, or speculation could make its value highly volatile, which might push away normal users. To avoid that risk and volatility, bitcoin should have a stable population of people who use the currency for normal exchange purposes, rather than just trying to get rich. So what long-term uses are there for bitcoin, to provide a sustainable long-term non-speculative demand? Why use the system when alternatives like Paypal are available? Well, this could be a real problem. The most obvious reason is black markets, for which the anonymity of bitcoin is a huge bonus.
This could be a real legal drawback. I’m no computer person, but I would guess that a truly determined government could crush the system. I guess that would depend on the ability of the system’s support computers to hide what they’re doing from any unfriendly authorities, but really, the technology is beyond me. I don’t really know about this.
There are other wrinkles. The developers of this system are quite sharp and haven’t made any ridiculous money claims, but just to make it clear: Bitcoin would never be a complete substitute for a standard government-issued currency. The government is not going to allow taxes to be paid in bitcoins instead of dollars/euros/yen/whatever, nor will the heavily regulated banking sectors use anything other than the official currencies. Moneylending is theoretically possible (although legal enforcement of contracts could be tricky), but people who invest professionally are going to continue to use official currencies to interact with the official financial institutions. However, bitcoin could conceivably become a vibrant alternative currency, and part of any reasonable investor’s well-rounded portfolio.
Whatever happens, it’s going to be a hell of a lot of fun to watch. Grab your popcorn. Horrific explosion or transcendent lift-off, this is going to be an amazing show.
AFAIK, this is not possible, and the network was designed to be impossible to shutdown in this manner short of prosecuting everybody who possess a bitcoin/the software. It’s completely decentralized and bitcoins are essentially untraceable. The same design features that make it impossible to tamper with the bitcoin money supply make it impossible to shut down.
They can’t do much to the personal end of it because it’s so decentralized (and I believe (read it somewhere and can’t find the cite now, so not claiming for sure) that the originators specifically placed the original start-up computers in countries where laws forbid messing with them).
However, lots of governments have power over businesses - if every government passed a law outlawing taking Bitcoin as valid payment, there wouldn’t be a valid market any more, and it would survive or fall entirely based on the black market.
Not saying that would make it fail, but a lot of people who are ok with untraceable currency aren’t quite as ok with dealing exclusively with the black market, and I think that would shrink their available user-base quite a bit.
That brings up a whole nother legal wrinkle: Tax enforcement! Not just for black market goods, but for the everyday variety of stuff, too.
If bitcoin is successful, we can pretty much guarantee that some clever types will keep a chunk of their income off the legal radar for tax-avoidance purposes. How will the tax authorities respond? How will the law-makers respond? Given the nature of the technology, what options of legal enforcement are available? I really have no idea. They can’t pull a Napster and shut down a central server. Would they outlaw use of the program? How would that even work?
This is just a fascinating combination of law, technology, and economics. No telling how it plays out. Truly an exciting new money.
I’ve been thinking about this. RICO is a pretty powerful weapon in the American government’s arsenal. Bitcoin could be considered a conspiracy whose chief aim is money laundering and the facilitation of the trade in contraband. Anybody with the client or a wallet file in their possession could be charged the same way child porn or classified material could land you in trouble. I’m not sure if RICO itself could be used in this way even if Bitcoin is declared conspiratorial but something similar can be enacted. Bitcoin hasn’t gathered the kind of support it needs yet to be able to fend off legal threats like that. One loudmouth in your congress could try to make a name for himself and slip a law through that would face no real opposition. How many things could you say that about with American politics today?
Most governments are pretty clear about income taxes. You earn a living, you owe them a cut. They really don’t care what currency you get paid in, you owe them a percentage, and owe it to them in the legal tender of that government. So, if you got paid in bitcoin, or ran a business in bitcoin that made a profit, you will still be required to pay taxes on that income. If you want to stay legitimate you simply work out what the equivalent value is in your local currency, file a tax return and pay your taxes. If this requires you to convert bitcoin into local currency, well so be it. If on the other hand you decide not to declare this income, well you are now quite clearly outside the tax laws, and subject to the usual dogged attention of the tax department of your country. One notes that of all the arms of government they are the least sympathetic and most persistent. A constant pressure to convert bitcoin into government issued currency to pay taxes may act as a significant downward pressure on its value. Other taxes would probably work similarly. Sales, value added, goods and services taxes, various duties, are not legally avoided because you were paid in bitcoin.
You will also run afoul of the usual money movement laws if you move bitcoin around with large effective values without notifying the government.
In all, governments can smother bitcoin within the current legal framework. It is illegal to avoid taxes, and use of bitcoin without paying the taxes due will land you in trouble quickly. Anything from fines right through to long stretches. If every bitcoin transaction requires a portion be converted to normal currency it becomes seriously inconvenient to use, at least for legitimate trade. Use for illegitimate trade risks it becoming defacto evidence of intent to commit fraud.
The other critical issue with bitcoin is that, unlike every other currency, it is not backed by any government. There is no regulatory framework and nobody to bail the currency out when if fails. This historically leads to sudden catastrophic failures of currencies. The history of money is littered with failures of currency that are due to nothing more than a sudden and self perpetuating loss of confidence in that currency. As with anything, there are no buyers in a falling market, and the notion of cashing out when the failure occurs meaningless.
The other flaw in the bitcoin idea is that it is supported by a fixed supply of tokens. Sort of like conch shells. However this is fallacious, as bitcoin isn’t the only possible set of numbers. There is nothing to stop a rival to bitcoin being established to mint a different set of numbers. Maybe like allowing beaver pelts as well as conch shells to be traded. Any rival to bitcoin diminishes the value of a bitcoin. Any success of bitcoin will attract rivals. Eventually the intrinsic value of a bitcoin is the only value it has. Government currencies have an intrinsic value in that they are backed by the value of the government that issued it. Bitcoin’s value is asymptotic to zero. Only for as long as there is a perception that it has value does it have value.
No one’s questioning that.
But the encrypted, non-localized nature of the currency is an interesting twist. You can’t deny that it makes government oversight more difficult. You also can’t deny that this makes governments very antsy. We’ve already seen examples of legal heavy-handedness in other private currencies. At minimum, there would be more tax evasion at the margin, as the ease of certain kinds of evasion would substantially increase, given a completely hidden database dispersed across a worldwide network.
Governments don’t just tax, and put the currency in a hole in the ground. The money goes right back out in spending. If the whole enterprise comes off successfully, the decrease in demand from taxation would be counterbalanced by the increase in demand from people who receive payments from the government (either directly or indirectly). People who like to transact in bitcoin will continue to like to do so, even after tax day. They’ll get their bitcoins back. There is one requirement: If we make the first initial assumption that people will prefer, for whatever reasons, bitcoin transactions, then the tax exchange is not an issue.
Despite the potentially high volatility, there are very plausible reasons why people would like bitcoins. No transaction costs, no storage costs, and it’s impossible for the money to be seized (given the proper precautions). That doesn’t guarantee success, but they seem like nice features. The only real natural enemy of the thing is the government itself.
Again, the encryption. It is impossible for the government to know which parties were involved in a significant transaction, unless said parties weren’t cautious with their computer use, or their subsequent spending is notably conspicuous. That’s troubling for governments, since they don’t like large secret money transfers. I’m not pulling an example out of left field here. This has already been an issue.
The currency e-gold got shut down by the US government because too many secret transactions were taking place. But e-gold was a company with a central server. Bitcoin isn’t. The feds cannot crash this party in the same way because there’s no one in charge of the whole system to indict for money-laundering. And keep in mind that there’s no limit to your number of bitcoin accounts. People can keep one where they have everything perfectly itemized for the taxman, and another where the password is hidden away on a random page of a random book on a random shelf of your personal library. Plenty of people will follow the law of money transfers, but some won’t. It’s an interesting question to wonder how many, and what the government response will be.
This isn’t right.
First, as I’ve already pointed out, it isn’t true that all currencies are backed by the government. Private companies like GoldMoney have created their own currencies, backed by their own vaults of precious bullion. This is a private gold standard. It doesn’t have all the benefits of real banking, but it still counts. Transactions are made with these private currencies, after which all the usual tax laws apply. But if you’ve ever looked at one of those sites, you can see that they demand quite a lot of information up front from users for tax and money transfer purposes. Nothing is anonymous. The companies can’t get away with secret dealings, for fear of the government.
These private currencies aren’t so popular, sure. There are various reasons for that, including The Law. Yet again, think back on e-gold and their travails, and the danger from the US Department of Justice that comes from having a centralized site. Other negatives of these digital gold currencies include storage fees, transfer fees, paperwork requirements and all the rest. Bitcoin is different. I suspect that bitcoin could be fairly volatile, with big swings in value. But gold is already volatile, too. That by itself doesn’t make a currency worthless, although it does make it harder to use.
Second problem: you can’t accuse bitcoin of the risk of failure in any conventional way. Government currencies don’t fail in a void. They fail because the world eventually comes to realize that the supply of the currency is no longer as limited as was previously thought. Bitcoin doesn’t have government support, no, but it also doesn’t have any mechanism whereby the supply can be arbitrarily increased. There is no possible authority that can debase the currency. 21 million is the limit of the program, and the program can’t be shut down. It could be made illegal, I guess, which would decrease demand for the currency and thus drive down its value. But that’s not the typical way a currency fails.
Absent a revolution in decryption, bitcoin won’t fail from a lack of confidence in its supply, just as gold wouldn’t fail given the limited supply in the material world.
This is also incorrect. You’re entirely neglecting network value.
Currencies are not an open market, with easy market entry. They have high start-up costs because of the network itself. Look at Paypal. Paypal wouldn’t be so useful if there were only one store in the world that accepted it. The value of having a Paypal account increases with every merchant that accepts it. When it was just eBay, I didn’t bother with it. It was only after nearly every other web-merchant I came across also accepted Paypal that I finally broke down and joined the network myself. The value of a currency is its usefulness in transactions, and the more places where transactions can be made, the more useful the currency is.
Contrary to what you suggest, there would not be any continual demand for more alternative digital fiat currencies, because those alternative currencies will have to start up from a network of nothing, which is to say, a useless network. The bitcoin program itself is free, but the start-up costs in expanding the network are still extensive. Bitcoin is first, so it might offer something worth using. But after bitcoin? Merchants would have just about zero incentive to keep track of yet another currency, with yet another floating exchange rate, with yet another program’s functions to learn, if that new currency doesn’t offer any additional advantages over bitcoin. Once a single good network is set up, as bitcoin seems to be trying to do, any other johnny-come-lately has a huge network disadvantage.
It’s not impossible for another one or two alternative currencies to spring into being, if bitcoin is successful. But there is a genuine network limit, because of the cost of implementation. Alternative currencies will not continue springing into being until the value of bitcoin drops to nothing. If bitcoin fails or underperforms, it will be for other reasons, most likely legal.
Which is essentially saying that an important use case is tax evasion and fraud. The governments are pretty good at prosecuting these. In particular you find yourself having to explain how you come to own goods and property that you have no track of receiving money for. The old expression was “having no visible means of support”.
Buy buying them from the market with government coin. The point about the tax is that they are forced to sell the bitcoin to satisfy a legal requirement, the purchase of bitcoin is voluntary. This asymmetry exerts downward pressure.
This has the risk that it falls afoul of Greshams Law. If people prefer bitcoin, they will preferentially spend government issued currency. It also has a problem is that people need to make that transition. If the main reason to prefer bitcoin is to avoid taxes and government oversight it will not become generally popular.
Again admitting that a primary purpose is fraud. It sounds mostly like an attempt to provide a replacement for the old Swiss Bank Account, so beloved by the criminal and corrupt dictator. However if this is a key use, you have the problem that the value of the bitcoin is determined simply by the confidence that other criminals and dictators have in the system, and eventually you find that the value of the bitcoin is simply guaranteed by other criminals and dictators. So long as some of these guys are buying into the system, they support the value. Again it can easilly crash. The moment no-one want to buy in, it becomes worthless.
They don’t. Again it seems that fraud and illegal operations are the primary use case.
That become interesting. So what is the intrinsic value of bitcoin?
Fraud again. Is there any legitimate use at all?
Exactly. It has an intrinsic value. If the currency melts down you still get the gold. Probably only 10c in the dollar, but there is some underpinning. In general private banks found that they needed to hold onto enough negotiable currency to survive any forseeable run. As the banks failed the governments stepped in to back them, and stabilise confidence in the currency. The payback was that the governments set rules about the lending ratios allowed, and set rules about how the banks were allowed to invest. The S&L failure was a perfect example of what happens when the next tier down fails.
No, they fail because no-one thinks the currency has any intrinsic value. Inflation occurs when a government prints money. But a currency failure occurs when everyone realises that the currency is actually valueless. It comes down to confidence. So long as someone will back up the currency it stands. Banks fail when there is a run on their funds by depositors worried that the bank will fail and they will lose their money. Shares fail when shareholders worry that the company is not worth what they thought it was as try to cash out all at once. Currencies fail when the populace no longer will accept that currency in exchange for goods or services, mostly because they are worried that they won’t be able to spend it for a like value good or service. These are all positive feedback systems. A lot of managing money is about keeping the systems stable.
Doesn’t matter. It is the exchange rate with hard (government backed) currency that determines it value. Once the value begins to fall, if no-one steps into the system to start buying, the value will plummet to zero.
However it seems that bitcoin is a decentralised system with no one in charge. Indeed apparently no employees.
So given that the prime use case is fraud, and that governments will probably act to make it illegal if it becomes a problem, exactly how many vendors will accept bitcoin? And why would they? It seems it becomes a headache, with yet another currency to worry about, harder bookkeeping, and a clientel that seems to be almost totally composed of criminals.
That is the utility of the currency. The value of the currency is what you can buy with it.
Why? If bitcoin is a successful venture, and competes successfully with government backed currency why is it in some way special and impossible to compete with? The startup costs are identical to bitcoin. If bitcoin works, it is like any other business venture. It attracts imitators.
Which is a very powerful argument as to why bitcoin comes to the market with a very hard task ahead. Merchants have one currency at the moment. You are asking them to take on a second one. Suddenly all the above issues come into play for the first time. Not the second. The first one is always the hardest. And given that we seem to have found that the only use case for bitcoin is fraud and criminal activity, there is scant incentive to take that step.
Probably the main thing that kills bitcoin is the sheer scale of the worlds money system. 23 million numbers is pathetic. It seems they are indivisible too. How do I buy random articles with them? Seems they are only useful for very high priced articles. This means that for almost all merchants they are useless.
There are billions of currency transactions a day. Trillions of dollars are exchanged on a daily basis between banks. How do 23 million tokens fit into this? The answer is that they don’t. They are almost useless. If bitcoin wanted to compete they would need billions of tokens, and a server system capable of managing them.
The reason it will fail is that no-one has any reason to trust that the little numbers they generate will retain any value. You buy the numbers from a shadowy group of people that control servers distributed out of government oversight, and trust that they will continue to support the system. You trust them to maintain a system where your little numbers can be sold again for real currency. Most of all, you trust them not to run the servers in a fraudulent manner. If ever this trust is lost, the system fails almost instantly. When it does, the real currency invested in the system lives with the last people to successfully cash out. When you couple this with a use case where the majority of potential users are criminals, you don’t have a situation where trust figures very large.
Posting to subscribe. I thought it was some new Nintendo thing, but it sounds like the cutting edge of Internet commerce. Exciting stuff!
Hard to believe. Money laundering is already an integral part of the thriving drug trade. It doesn’t seem like they’re too successful in stopping it.
Not exactly. The only way for bitcoin to work in the first place is for the pressure to be overcome in the first place.
I don’t mean to be circular, because I don’t know if it’ll work in the first place. But if does, then it does. If people find enough value in bitcoins to jump the first hurdle, then the hurdle will be jumped. If not, then not.
No, it doesn’t.
Gresham’s Law applies in a very narrow context, with government mandates about legal tender, statutes giving legal equality to two different qualities of money. It’s not at all a general rule about currency preferences. The concept you might be struggling for is the law of one price.
There’s no admission of any kind there. There are only possibilities.
Fraud is one of the possible uses. It’s one of the more theoretically interesting possible uses, but if it’s the only one people prefer, then bitcoin won’t work. There are plenty of other ways to launder money. Bitcoin needs demand from other quarters in order to work.
None.
Fiat currencies don’t have intrinsic value. Their value is derived from what people think they can be exchanged for. (The “fiat” in this case comes from computer programmers instead of the government, but it’s still not commodity money backed by a real material good.)
I listed several other notable legitimate uses. To repeat myself: there is a lack of storage fees, a lack of transfer fees, and a programmed limitation in supply (which use, I obviously must explain, is that it makes bitcoins a potentially good savings vehicle). These are potentially significant.
Intrinsic value doesn’t have anything to do with anything.
The value of a currency, just like the value of anything else, is based on supply and demand. People value paper not for the intrinsic value of the paper, but based on the belief that the paper can be exchanged for something desirable in the future. Yes, the lack of confidence can destroy the currency (which is yet more evidence that intrinsic value is irrelevant – if the value were intrinsic, it wouldn’t be affected by confidence so much). But what causes the lack of confidence? Naturally, a lack in confidence in a currency is caused by fears of an inability to limit the supply.
This is always, without exception, the cause of a currency failure. Every. Single. Time. There has not been a single currency failure in the past where lack of confidence wasn’t first sparked by previous manipulation that was feared to increase the supply, which then fanned further fears that the supply had increased beyond sustainability. It has never happened otherwise. Traditional currencies fail when people fear that the supply isn’t well controlled.
No, it isn’t.
Supply and demand determine the value of currencies, along with damn near everything else. The value of a computer currency can be measured against government currencies. Or it can be measured by how many computer games it will buy. Or it can be measured by how many tons of steel it will buy. Or it can be measured by how many sensual massages it will buy. Or it can be measured by how much gold it will buy. Anything at all can be used as a yardstick of value. Even if you were to measure against a government currency, you wouldn’t be measuring “value” in some mystical form. There are gobs of government currencies, and they all have different values in relation to each other, in a constant state of flux. One computer currency wouldn’t be any different.
You’re right that the limited supply wouldn’t preserve the value of the currency if the demand disappeared. Why? Because the value of anything is determined by supply and demand, as I said. And yes, the demand could disappear.
Historically, what caused demand to disappear? Quite obviously, the belief that the authorities were unable to control the supply. This happened over and over again.You bring up the bank run, when it disproves your own point. Why did bank runs happen? When depositors felt that the bank had issued too many notes that couldn’t be redeemed. Fears of too much supply lead to the shock in demand.
You cannot possibly be serious with this question.
You answer the question yourself. Why would you ask a question, with the implication that it’s easy, and then immediately in the next paragraph answer the question to point out how hard it is? In future, please read your own posts more carefully.
You’re not a traveller, I see. Big international airports will often take both dollars and the native currency. Or if you did any gallivanting around Europe before the euro, you would have seen merchants in border towns doing just fine with a couple currencies. A place like, say, Salzburg, had plenty of stores that accepted both marks and schillings. This kind of thing happens all the time.
So what would be the advantage of that with a computer currency? To answer the last question, yet again: Bitcoin comes with no transaction fees for the users or merchants. It also has a programmed limitation in supply, which introduces the possibility of continual deflation, which makes it a potentially valuable savings vessel. It has no storage or management fees, unlike every single other security in the world that isn’t stuffed under your mattress. All of these are new, interesting things that have never been seen before. So yes, it’s possible that the significant network costs will be overcome one time in order to establish this new digital currency. Maybe. I dunno. But it’s possible.
There will be the fee for transferring to the government currency to pay taxes. Yes. But given a robust worldwide network of goods and services (a big hypothetical, but still possible), then you’re talking about a maybe once-a-month nominal currency exchange fee. That would be an insignificant cost when compared against the relatively big chunk of change that traditional institutions charge for every overseas transactions (and in the US, the relatively big chunk of change that credit cards take in every transaction). And no, it will not attract so many imitators, for the very reasons you already laid out. After one network of no-fee currency transfers is created, there would likely be no demand to create a second.
…I should’ve read from the bottom.
You don’t know even the first thing about bitcoin. You hit the “Submit Reply” button, but you don’t know even first bloody thing.
First, pedantically, it’s 21 million. Second, and more importantly, the bitcoin system is divisible to eight decimal places. There aren’t 21 million tokens. There are 2.1 quadrillion tokens that will be available. This isn’t obscure information, either. It’s available in all the public releases about the system, which a person would behoove themselves to learn before attempting to comment on it.
As far as I can tell, bitcoin is attempting to be the internet version of cash.
Sure, you can get paid under the table and use cash for all your transactions, and if you are small enough, it is awfully hard for the government to track or tax you.
But the IRS has a lot of experience with this. You can’t just get away with not paying taxes, especially if you’re a big shot drug dealer or gangster. Ask Ben Franklin about that: “Nothing is certain in life except death and taxes.”
The use case I can see for bitcoin is essentially the same as cash in non-electronic society. Drugs, strippers, and other items, like sex toys, we’d rather not leave a paper trail for, and other quick, minor, anonymous purchases.