I’ll bet you a dollar that quantum computing will not destroy Bitcoin.
Every year there’s some probability that Bitcoin will stop being a thing. Every year there’s some probability that cryptography-destroying quantum computing will start being a thing.
The probability of the first thing is much greater than the probability of the second thing.
Obviously my statement assumed that something else wouldn’t kill it first.
so basically bit coin is like a company stock that people occasionally accept for payment ?
Quantum computing gets held up as the great destroyer of crypto. However, as noted earlier, there is are no extant physical realisations of even the most trivial building blocks from which a quantum computer capable of performing the needed factorisations are built. The attack on crypto is based upon factorisation using Shore’s algorithm, which is in turn built atop the Quantum Fourier Transform. The existence proofs of the idea are built on quantum systems that cannot scale. The only existing quantum computer is the D-Wave, and some would suggest it isn’t actually a real quantum computer. (From the little playing about I have done with one I have an open mind on this, but would hesitate to claim it is one.) It cannot perform Shore’s algorithm, and it isn’t even clear it can really outrun a conventional computer. Its ability to solve a version of simulated annealing is interesting, but casting problems in a form it can usefully attack is non-trivial. My main cynicism about large scale factorisation ever being possible is the intrinsic noise in the system. For a successful factorisation every qbit needs to resolve to the right value. Repetition of the factorisation operation can help resolve things, but the entropy is not going to be small, and as the number of bits increases you will be fighting exponential growth in the number of repetitions needed. Which is just what you don’t want. Just as increasing the number of bits eventually defeats the largest scale conventional attacks, it will IMHO defeat quantum attacks.
Yeah, the reasoning is circular. But that is the nature of money 
The value of a Bitcoin is underpinned by the cost of production whilst there is a working exchange system. Chicken and egg. So long as there is utility in buying Bitcoins as a payment mechanism, the dollar value will be underpinned by the production cost. If you are buying something (or paying a ransom) the cost is actually in dollars. You don’t care what the exchange rate is, Bitcoin is no different to a Western Union money transfer. You dollars get converted to some bits somewhere, and your money pops out for the recipient somewhere else. It matters not to you if a Bitcoin is worth 0.000001$ or a billion dollars. But whilst there is utility in the trade there will be a price, and since they cost $xxx to make, the trade will tend to reflect that cost.
If you are somehow wedded to the idea that either Bitcoin is the way of the future, or simply that they have generally increased in value over time, you may pay more for them as you are now speculating on them. Much like any commodity. That level of sentiment will tend to increase the value - whilst it lasts.
As you say, once any of those basics is gone, the circular logic of its value vanishes. Once production ceases everyone holding onto Bitcoin has simply Bitcoins. For people using Bitcoins as a token to move real money about, they still don’t care what the exchange rate is. It could drop though the floor, and so long as they don’t get burnt on a falling value during a transaction they won’t even notice.
If you have a stash of Bitcoins you have two choices. Keep the faith and continue to try to trade with Bitcoins, or try to cash out. The only value of Bitcoins is its value as an exchange mechanism. And it isn’t alone in that market. Given one of its biggest attractions - anonymity - has gone, it doesn’t have a lot going for it. The total value of the Bitcoin economy becomes essentially its value as a money mover of not much better utility than Western Union. And that value includes the value of the service companies as well as the value of the Bitcoins in the system. It isn’t hard to see that a Bitcoin’s intrinsic value rapidly becomes close to zero.
One suspects that a significant holding of Bitcoins is by people hoping to cash out. Once there is any real movement to cash out the market will crash. Tulips.
For some people technology has become a substitute for religion.
You see an example of this in the faith-based view of Bitcoin, that it will magically free money from any connection with governments and underpin a libertarian / anarchic / techno-punk civilization.
This thread may be getting too focussed on Bitcoin, but, just to expand on what Francis Vaughan wrote, the ultimate steady state of Bitcoin is that there exist a fixed number of coins, and nobody can generate new ones. Ever. (You can still destroy coins if you wish.)
The network operates due to “miners” (could be 1, could be 10000, but there need to be some of them online at any given moment). Each one is some computing hardware which had to be purchased and constantly consumes resources because it needs physical hosting, Internet, electricity, air conditioning, office space, human operators, etc. What the miner receives in recompense are transaction fees, paid of course in Bitcoins.
Right now there is still demand for digital payment systems (note PayPal is still in business and turns quite a profit), so there is room for someone to develop a network that is really anonymous, really peer-to-peer, really scalable, really trustworthy, really easy to use, and has no or minimal transaction costs compared to Bitcoin, Western Union, PayPal, and so forth. (There are probably other desirable properties as well.) That would be closer to what the endgame would look like.
I mostly agree with most of your several posts’ collective POV. Ref the above snip, here’s a quibble / request for further elaboration on a nuance point.
Ref Bitcoin - Wikipedia the current supply of Bitcoins is ~16M of the eventual 21M limit. So in terms of volume we’re about 80% of the way to the end of mining. But (something I just learned) the difficulty of mining new coins is designed to increase exponentially such that it’s expected (planned?) to be another 100+ *years * until the last possible Bitcoin is mined. So measured in time we’re just 8 years into a 100-130 year journey to the end of mining.
Those facts lead to these tentative conclusions / questions:
ISTM your base contention that *current price >= current cost of new production * speculative sentiment *depends crucially on the newest coins being a material fraction of the total. That’s not true today and will be increasingly untrue going forward.
IOW, given a large enough existing supply, the presence or absence of mining doesn’t actually alter the floor price. And hence doesn’t affect the price at all.
2. I knew mining was intended to get more difficult over time before becoming mathematically impossible. I had not realized the decline was *that *slow and the end *so *far out. So we’re not looking at a brick wall transition from “material mining every day” to “zero mining”. Rather mining slowly, very very slowly, becomes an ever smaller factor in the Bitcoin universe.
So the fraction of economic activity within the Bitcoin universe supplied by mining will likewise decline at a very gradual and exponentially decreasing rate.
IMO that argues that this thought becomes invalid at the limit: *current price >= current cost of new production * speculative sentiment * so when new production = 0 the formula predicts zero value.IOW, practically speaking, the formula ceases to apply years or decades before we get to the “anything times zero is zero” anomaly.
Markets hate surprises. Markets dislike abrupt changes, even ones that are well-known well in advance. Markets are real good at absorbing slow gradual change. Especially change that’s extremely predictable long in advance.
Tentative bottom line: the end of mining will be a non-event of negligible significance to the Bitcoin universe.
Aside: the odds on Bitcoin living the necessary hundred years to see the end of mining are IMO very, very low. But if it does survive that long, even as only a very niche product, the end of mining won’t be a watershed event for the price/exchange rate.
Thoughts?
Here’s what I think is the primary factor propping up the value of bitcoin.
Most of the bitcoins that were mined have never been spent (and may have been lost). So the actual pool of liquid cryptocurrency is small.
Bitcoin is volatile and has no inherent value. So the primary reason to buy bitcoin is not because you are ‘storing’ your money. It’s because you have a specific thing you want to buy and you’re trying to reduce how much evidence there is tying you to the transaction. Thiswas the reason bitcoins are over $1000 a coin. An illegal site called ‘alphabay’ where apparently you could purchase ‘drugs, stolen credit cards, and other contraband’ on a large scale.
So here’s the reason bitcoin has value. In order for someone to make a purchase from alphabay (or the sites before and after it), they have to buy bitcoins, and there is a limited pool of bitcoins actually in circulation. Most are hoarded or lost. So the market price goes up. Now, an illegal transaction isn’t instant. Once the purchaser of illegal goods has the bitcoins in hand, he shops, ebay-like, on the online market and buys whatever. The coins go to the coffers of the drug market now and are kept ‘in escrow’. These markets have reputation systems as it’s in their best interest for people to get the unlawful goods they paid for.
After the illegal goods arrive, and the buyer confirms it, the coins are taken from the drug market’s accounts and paid to the seller. The seller then uses some anonymized method of converting the coins to cash and the coins now have returned to the pool of coins available to be purchased again.
Sometimes, large numbers of coins are stolen, and the thieves have to anonymize (launder) the stolen coins before they can sell them. This takes time. Sometimes, hackers demand a ransom be paid in bitcoins, and similarly there is a holding time by the hackers after they receive their ransom before they sell.
These ‘holding times’ are what give bitcoins value. If you think about it, reducing the holding times would mean that more unlawful transactions could be performed using a smaller number of bitcoins. This would act to lower the price of bitcoins. Tomorrow, someone might rob an online market again of a few hundred million in bitcoins but then be shot and their wallet file password is lost. This would permanently remove those coins from circulation and would raise the price of bitcoin.
While in the early days, there were legitimate users of bitcoin who were experimenting with the concept (you may have heard of people buying pizza with it, etc), for another reason the per transaction fee is now about $1. More than legitimate forms of payment now. Plus bitcoin has no protection against fraud. So at this point only a total zealot/moron would use bitcoin for legitimate purposes, I would assume that at least 99% of transactions now are related to crime.
Because of that, eventually I expect a crackdown. Eventually, lawful governments are going to declare that buying or selling bitcoin is in itself a crime, a felony worthy of federal prison time, and bitcoin will collapse from a lack of people using it.
which means it’s “deflationary,” encouraging hoarding and not spending.
I suspect that this is actually what will happen. Mining will become unprofitable, even in the face of the speculative margin that props up the current value does, and as you say…
However IMHO the entire edifice won’t survive once the prices stall.
Which may mean we are already past the tipping point where it all unravels.
Assuming there is some other economic driver that keeps the system alive. It is common to think one is making money in a rising market. Back in the days of “greed is good” we heard all about “wealth creation” which was nothing but speculative gains on worthless stock. Bitcoin is held up by a religion that this will make the players rich, or immune to governments, or both. They have a microcosm, where by their own internal metric they are rich, and they make continue to make money by mining.
However, as you note, it will squeeze miners, and once it becomes uneconomical, it becomes hard for anyone to stay mining for any reason other than a religious belief. Moore’s Law has been a big part of the continued mining. But the speed possible is topping out. Arrays of FPGAs or even ASICs are not getting much faster. And the power needed has never been part of Moore’s Law.
I regard it as a singularity. Once the production stalls, there is no useful way of predicting the value. IMHO, once the value becomes unstable it only has one direction to go, and the incentive for owners for Bitcoin to cash out to retrieve some small percentage of their value will drive the rate into the ground very quickly.
Stable markets can absorb slow change. But I don’t think Bitcoin is stable - not in the sense that it can sustain perturbation. The volatility of the price of a Bitcoin certainly suggests a lack of internal stability. The human habit of panicking and selling out has driven even the more stable markets into instability really quickly, and then even for markets of things that have a clear intrinsic value.
Of course this is all IMHO. However history is replete with money making schemes, and they all fail, so history isn’t on the side of the Bitcoin enthusiasts.
Read my post above. I already assume mining is almost meaningless at this point, and the current value is being propped for a different reason (delay times in escrow for black market transactions). Also, each bittcoin transaction now pays the miners a fee of about $1.
Yeah, delay times are an interesting thought.
The $1 is still paid in Bitcoin, not real money, so the question will also be whether it is possible to maintain the blockchain cost effectively. If there is enough black market stuff going on it may stave off the time of the collapse, but I really doubt it is enough to avoid it.
You just made a serious cognitive error there. You made a second one in assuming the miners have to find bitcoins or they will all quit. If every transaction pumps 1 real dollar (and yes, it’s a real dollar, read some economics books and work it out) to the miners, a smaller number of miners will remain mining. The mining system’s main purpose is actually to act like a voting system for verifying blockchain transactions. As long as a big enough pool remains such that 1 group doesn’t control a majority of the hashing power (which would give them the ability to falsify transactions), bitcoin continues to work. I don’t expect bitcoin to last forever, either, but the reasons you gave are not what would bring it down. The price of bitcoins is determined by supply and demand, and the demand is from black market buyers. Mining is completely irrelevant to determining the price of bitcoin, save the effect of mining reducing that price slightly.
I do not pretend to be well-informed about Bitcoin in specific. I’m mostly applying undergraduate & MBA economics to an academic case of a generic money. Plus some quick wiki/Google on Bitcoin specifics.
SamualA’s idea that the free float is much smaller than it seems is really a game-changer here. If indeed coins have been lost or stolen then abandoned in serious material quantity we’re in a very different state of play. As well, if that trend continues or accelerates it would be hugely influential on the spot price for Bitcoin.
Given the extreme friction in the slow clunky trade flow of dollars to buyer’s bitcoin to (e.g.) drug order to escrow to drug delivery to de-escrow to dollars again, the only way a smallish number of coins can support a largish dollar volume of drug sales is if the value of a single coin is huge.
This is essentially the same phenomenon as why the US wants to stop making $100 bills and wishes the EU would stop making $500s. When the bad guys need to move cash by the railroad carload just to handle a single day’s take, the authorities made their life harder.
There is one other economic factor outside the contraband (mostly illegal drugs) economy.
If indeed there’s a big business in China using bitcoin as a way to evade capital controls, that might A) swamp the Bitcoin drug trade, and B) survive efforts by western authorities to stomp out the drug trade. Plenty of US capitalists and defense hawks think massive Chinese capital flight in spite of the CCP’s attempts at capital controls is just, well, a capital idea.
Much as we saw during the “privatization” of the former Soviet Union into the hands of the Oligarchs, politics can make some serious economic insanity very profitable. Who cares how much you waste when you’re getting it for 2 cents on the dollar?
Late add ahead of the Chinese politics section:
If we assume the demand for drugs is inelastic (it mostly is) and we assume alternative drug trade money-moving systems are rare = barriers to alternatives entering that industry are high, then Bitcoin will survive even another MtGox event which would otherwise be fatal to trust in a more conventional currency as (even a temporary) store of value.
IOW: It’s the only game in town. Drugsters got use it.
Imagine the money to be made by A) owning a bunch of Bitcoin, then B) arranging for a large stash of somebody else’s Bitcoin to be lost forever. Like 5 or 15% of the free float. Instant 2 or 4 or 10x on your money. Kinda like the Hunt brothers’ attempt to corner the silver market. But moreso.
One “nice” thing about markets run of, by, and for crooks. You can count on lots of unexpected and unscrupulous events.
I’m not sure how many people in this thread realize that Bitcoin allows senders to voluntarily add a transaction fee to be given to the miner. The primary flow of funds goes to the intended receiver’s account, but a side payment can be added that would flow to the miner as a reward for the necessary service.
Right now, miners receive their reward in the form of newly “minted” Bitcoin, not explicit transaction fees. But even when that reward of brand new money vanishes, after all possible Bitcoin has been minted by the algorithm, there could still be incentive to mine based on these transaction fees. As long as payments to miners are believed to exceed the opportunity cost of hashing all those transactions, there would be no shortage of miners willing to do the work.
The limit on total Bitcoin doesn’t mean miners won’t be paid.
I appreciate the distinction that financial professionals draw between real vs financial assets (as well as intangible vs intangible assets).
However, in the posts I was criticizing earlier, there was no adherence to standard financial terminology. This would be totally fine by me, as long as the arguments were logically consistent. But I do not believe that such was the case.
Vice had a recent article about Bitcoin mining in China:
Ah yes, true, true. It is a morass of confusion and misunderstanding.
Updating this thread an interesting situation in Canada: