Well, couldn’t Bitcoin be considered similar? Like a Paypal account? It’s a way to connect one money-account with another?
As long as it’s legal, and as long as it doesn’t come with nasty service charges…and as long as I’m not the first one to try it out…I’m all in favor of it.
(I actually asked my banker if Paypal was okay to use. He said, “Sure.” So…I use it!)
Because Bitcoin purports to be a currency in it’s own right.
If I use a credit card, I am dealing in US dollars. If I use a Bitcoin, I am dealing with a currency with its own value.
Bitcoins have value for exactly two reasons: hype and speculation. The closest analogy is probably Tulip Mania, if you replaced the actual physical tulips with tulip IOUs.
The sales pitch for Bitcoins is that it will become a standalone currency, that people will use it to buy stuff online, transfer money overseas, move money anonymously and irreversibly. Because the supply is limited, ever-expanding usage will drive up the value astronomically. The problem is that all of this is a complete fantasy. Bitcoins have numerous fundamental flaws that make them completely unusable as a widespread currency:
The protocol doesn’t allow for more than 7 transactions per second.
Transactions are processed in blocks. Blocks are processed every ten minutes, by design. Want to buy a cup of coffee? Hope you like standing around making chit chat with the cashier!
Every transaction in the history of Bitcoin is stored in the blockchain, which peers have to have a copy of to validate transactions. It’s currently at something like 14 GB, with almost non-existent usage. Widespread use (at the level of Visa) would bloat it at a rate of something like 50 TB every year, thereby collapsing the peer to peer element as almost no one has the resources the store that much data.
They are like digital cash, in every sense of the word. Imagine shopping on eBay or craigslist with cash: mail strangers an envelope full of money and hope they send you the thing they promised. Computer gets hacked? All your cash disappears. Choose a bad password? All your cash disappears. There’s a reason we use FDIC-insured banks and credit cards.
In addition to paying fees to process transactions (miners can refuse to process transactions that don’t pay a minimum fee, and higher fee transactions get processed first), you also have to pay fees to convert them back into real money. And websites that want to accept them have to pay fees to the one service willing to take Bitcoins for dollars.
Did I mention you can’t actually trade them for cash? At least not in any substantial amount. All of the major exchanges have strict limits on how much money you can withdraw, to the point that if someone gave you a million dollars in Bitcoins it would take years to end up with a million U.S. dollars. And you’d probably tank the price selling them because the trading volume on the exchanges is incredibly shallow. On the plus side, a fake commodity you can’t actually sell is great for keeping the paper price nice and high.
They’re also an environmental disaster: as of a couple of months ago, miners were burning up ~140 gigawatt hours per day, to process transactions that could just as easily be processed by a single iPhone, because the protocol includes a pointless arms race to mine a fixed number of coins every day no matter how much computing power you throw at it. Decentralization brings enormous inefficiencies, at the cost of dubious anonymity. (And they’re not really anonymous – the history of every transaction is in the blockchain, and every exchange requires enormous amounts of personal information to cash out.)
There are much better solutions for e-commerce, microtransactions and money transfer that are far more efficient and secure. Bitcoins are a novelty fad, similar to Beanie Babies and Pets.com. Like all bubbles, they’ll persist long after rational people are sure they’ll die, but they’ll die all the same. It’s inevitable.
Hey don’t diss those beanie babies! They were cute and I loved collecting them.
I’m sitting on a gold mine I tell you! A GOLD MINE OF BABIES!
Hooookay! That was the step I hadn’t known! In that case, no, fuck it, I wouldn’t touch it with somebody else’s ten foot pole.
(But…I will make a point to ask my banker what he thinks.)
For what it’s worth, I was renting a tuxedo at Men’s Wearhouse and when they joked that they accept gold nuggets I responded with “how about BitCoin?” and they burst out laughing. So it’s clearly something people have tried before and actual retailers think it’s ludicrous.
Given the recent criminal convictions related to Silk Road, I’d avoid letting my bank know I even knew what a Bitcoin was. As far as banks are concerned, it’s a major red flag in terms of money laundering / drug dealing. Some people who have been able to get money transferred to their accounts from selling Bitcoins have reported having their accounts frozen while they’re investigated for money laundering.
FWIW, I mined some of my own bitcoins a long time ago, sold them on an online exchange, and wired the proceeds to my US bank account with no hassles, audits, drug dealers showing up at my house or otherwise. It worked exactly like online stock trading. That was before silk road and all the bad press so no telling if it’s harder now, but that experience - money in my bank - gave me very good reason to think bitcoins have value.
Giraffe raises some good points. In the big picture there are a lot of flaws in the idea. But, again FWIW, the bitcoin developers announced works in progress that would eliminate some or most of those limitations. Supposedly bitcoin nodes will no longer be required to download the entire blockchain for example.
Either way bitcoins DO have value, at the moment, and legit retailers and service providers are starting to accept them more and more. That is no guarantee they will continue to have value forever.
The Silk Road bust increased value because the news coverage introduced Bitcoin to a new audience.
I know for a fact that Bitcoin has value, because I have used it to buy take-away food several times, and I expect to do so again in the future. So it has value to me because I can buy food with it. And I find paying with Bitcoins more convenient than other options for on-line payment. (Now Paypal, there is something I wouldn’t touch with a ten-foot pole.)
Even if there was just me, the website where I order my food, and the company offering the service of converting between Euros and Bitcoins, the system could work, as long as we can agree on an exchange value. But of course the system works better when a large number of people all agree on the same virtual currency.
Giraffe mentions a number of objections to Bitcoin, some of them more valid than others. (For example, you don’t actually need to wait 10min for a transaction to br confirmed. It is possible within a few seconds to confirm that a payment has been made, with a degree of reliability high enough that it would be more effort to cheat the system than a cup of coffee is worth. If you’re making transactions worth thousands of Euros, then you should wait for a few 10-minute rounds of confirmation indeed.)
However, these are mostly technical objections, many of them related to the fact that the system is still young and going through some growing pains. But the OP seems to be more interested in the abstract question of how a currency can have value when it is not backed by anything concrete. And the answer to that is: people consider Bitcoins to have value because they trust that they can exchange it for other things of value, same as with any other currency.
Think I’ll order some spareribs with Bitcoins tonight, just because I can. 
Most of Giraffe’s information is incorrect or misleading. Corrections and comments.
Currently. That can be changed when necessary.
Unlikely to matter. Transactions can be authenticated as valid (ie, from the person who owns the account) in seconds. What you have to wait 10-40 minutes for is verification that the transaction wasn’t a double-spend. Since it will take huge amounts of computing power to successfully run a double-spend attack, no one’s going to bother doing so for a cup of coffee. If you’re dealing with amounts large enough to make a double-spend attack worthwhile, then you can probably stand to wait a half hour for it to go through.
Not all peers need to store the full chain. You can store a hash from an agreed-upon starting point and still participate in the network.
Bitcoin transaction fees are significantly less than credit card transaction fees.
Coinbase will let you convert $50k/day with a level 2 account. It would take 20 days to get your million out. Not quite years.
This is a valid complaint, but you have to compare it to other financial systems. Visa spends ~$1 billion each quarter to run its operation. Securing money is difficult and expensive.
You may be entirely right that Bitcoin is nothing but a fad, but I’d be more impressed with your analysis if you demonstrated that you understood better how it worked. I think it’s very likely that something like Bitcoin becomes the technological underpinning of future financial infrastructure. That doesn’t mean that Bitcoins will be worth anything in the future, though.
Lately I’ve been wondering if maybe bitcoins originated as a plot by the government to make illicit transactions easier to trace. Yeah, yeah, it’s completely anonymous if you only use each wallet once… But not if you use each wallet twice, which is necessary for the system to work.
People think they have value because they have value. And they have value because people think they have value.
Kinda odd, but true.
Why do (or I should say did) Beanie Babies have value?
Why do baseball cards have value?
Comic books?
Stamps?
Baseball cards, comic books. and stamps only have value when there are too few of them to meet collector demands. There are only 10 known Babe Ruth rookie cards but there are possibly a million collectors who want to own one, and it’s usually the guys with the deepest pockets.
They are also, unlike bitcoins, a physical item you can hold and examine and study and put on the wall if you want.
When hotels and restaurants and grocery stores and malls (etc etc) start posting “Bitcoins Accepted” signs then maybe people will be more accepting, or whatever.
Do you know how software changes work within Bitcoin? For a modification to be accepted, the majority of the mining network has to switch over to the new version, at which point anyone using the old version is now on a fork and their transactions will be ignored. This is a dangerous method for currency software: every time you roll out a software fix, there will be a period of uncertainty where you wait and see if it’s accepted or not. Attempting to increase the transaction size in version 0.8 had a backward compatibility issue, at which point a small handful of mining pool operators made the unilateral decision to roll back to 0.7. After that, anyone processing transactions on the newest version of the software was out of luck. So yes, the protocol can be changed, but it’s not as simple as Microsoft rolling out a new Service Pack for Windows. (And you’ll note that even they can’t keep users on the same version.) Once major money is involved, there’s no guarantee that people won’t manipulate this process in a way that serves their own self-interest.
Also, if you increase the number of transactions per second, the block chain bloats that much faster.
Explain to me why I would need a huge amount of computing power to do the following:
At Visa-level transaction volume, the block chain would be growing by ~100 GBytes per day. What is the minimum storage expectation of a node? And if you don’t have a complete record of the block chain, you open yourself up to attacks. Imagine if everyone’s bank balance was based only on what a file on a Bittorrent network agreed it was yesterday. You don’t think that would be potentially open to manipulation / exploitation? And the shorter the time frame, the easier it is to manipulate, which means you’re trading storage space for security.
Are they? Given that I’m paid in dollars, if I want to buy something with Bitcoins, I have to pay an exchange fee to convert them to Bitcoins (~1%), a transaction fee to send them to the merchant (??), who pays a central processor a fee to convert them back into dollars (~1%).
I believe credit card companies charge merchants 2%. As a consumer I pay nothing, although of course one could argue prices will be 2% higher to absorb the extra costs. In exchange I get full fraud protection and zero liability for loss or theft.
What’s the advantage of Bitcoins to the consumer?
OK. I don’t know anything about Coinbase. I know MtGox has a horrific backlog on account of most of their banks refusing to process transactions from them any more.
Which would be fine, if the security you got was proportional to the cost. It’s not. Having a huge network of centralized mining pools burning up electricity in an arms race only protects you from someone with a supercomputer forking the protocol. It’s not in any way necessary to make transactions more efficient or secure. A centralized system is infinitely more efficient (and as you note, still expensive at global scale).
I understand fine how it works. It was a fascinating proof of principle experiment that got hijacked by speculators and libertarians who are currently ignoring the unworkable aspects because they’re hoping to get rich (in U.S. dollars) by owning a virtual commodity undergoing a bubble of hype.
You mean like some of these?
You can pay for a wedding planner, pay college tuition, pay for a sandwich at Subway, and even pay your taxes online at the IRS website with bitcoins.
This can be easily detected by the store’s payment processor. They simply connect to the Bitcoin network and look for other transactions with the same source address as the one from which you are paying them. Unless you personally control a miner with a large share of the network’s total hashing power, it won’t be easy to arrange things in such a way that the store only sees the second transaction, but the first one is the one that ends up in the blockchain.
And even if you do get away with it, in the sense that the storekeeper accepts your payment as valid and you are already holding the goods you bought by the time he receives the alert that something is wrong, it will still become obvious within a few minutes that you have cheated. So basically this is similar to the old-fashioned method of just taking the goods, grabbing your money back, and running out of the store. Sure it’s possible, and it happens, but that doesn’t invalidate the concept of paying with dollar bills.
Yep, Bitcoin is basically a network protocol, like TCP/IP, and making non-backward-compatible changes to protocols which are in active use, is always tricky. That’s also why we’re still using IPv4 despite its flaws. Nonetheless, in the long term, open systems often win out over proprietary alternatives, and I am cautiously optimistic that there’s a good chance of that happening for Bitcoin as well.
Sadly, no such guarantees are available for the regular banking system either. I believe we’ve had a few examples of that in the not-too-distant past…
Your other objections have merit, but again, these are technical objections on the implementation details of Bitcoin in its current form. Perhaps, indeed, it will turn out that Bitcoin was just a promising but flawed prototype, and ten years from now we will be using some other open-source, decentralized, non-government-backed cryptocurrency.
But the OP’s question seems to be less about the technical details of Bitcoin, and more about whether it is possible in principle for such a grassroots currency to have value despite being backed by a government or by some real-world valuable commodity. And so far, Bitcoin seems to be doing a pretty decent job of demonstrating that this is indeed possible.
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When hotels and restaurants and grocery stores and malls (etc etc) start posting “Bitcoins Accepted” signs then maybe people will be more accepting, or whatever.
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Being able to use Bitcoins for real-world payment would be very cool, indeed. But even if it remains a currency for on-line payments only, and “merely” becomes a serious competitor for paying with Paypal or credit cards (a.k.a. “here are all the details you need to empty my bank account; please pinky-swear that you won’t take more money than what we agreed on”), I’d consider that a pretty big win already.
Okay then! I did not know of these places.
How do I get me some bitcoins? Mine computers? How? Maybe I have bitcoins on my own Win XP desktop PC?
Security, for one thing. The credit card system is ridiculously insecure; whenever you make a CC payment, you are handing the other party all the information they need to take as much money out of your bank account as they want, and that information remains valid for years and can easily be stolen by hackers or rogue employees. You can’t prevent getting robbed; the only thing you can do is watch your bank statements like a hawk and make a complaint whenever you see something wrong. It would literally be difficult to come up with a more insecure system than this, and yet it is still the most common form of making payments on-line. Clearly there’s room on the market for a replacement which does not have those flaws.
Convenience, for another. YMMV, but I find paying with Bitcoins from my PC more practical than credit cards or iDEAL.
Furthermore, most of the transaction fees you mention are needed because currently Bitcoin is still a niche thing. If you got paid in dollars but wanted to make most of your purchases with euros, or the other way around, you’d have the same problem. But perhaps at some point in the future, you will want to keep a large portion of your money in BC because it’s what you use for most of your payments, and your employer will have a lot of BC incoming every day because it’s what your customers prefer paying with, and at some point your employer will offer to pay you in BC directly…
