Bitcoin...

Discussion in 'Markets & Economies' started by thehuckler, May 29, 2011.

  1. thehuckler

    thehuckler New Member

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  2. thehuckler

    thehuckler New Member

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    Has anyone been riding the bull?
     
  3. Captain Kookaburra

    Captain Kookaburra Well-Known Member Silver Stacker

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    Had a look at this bitcoin thing a week or so ago.

    On the surface of it. this is really a form of money backed by processor cycles. So they can't be created too quickly (at least with current IT gear).

    They represent used resources, as opposed to actual usable resources (i.e. precious metals).

    I don't believe bitcoins completely fit the definition of money as I have seen it defined.

    I like the idea, but I can't see it as being much better than fiat that has an inbuilt creation limit.

    Great for anonymity, but not great as true money.

    I'd rather look at something like goldmoney, which is backed by real usable (as opposed to used) stuff, but maybe not so anonymous.
     
  4. StackHat

    StackHat New Member

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    They will never be able to be created too quickly as the rate at which they are created is controlled by a complexity mechanism. Every 2 weeks the complexity of the block verification process is adjusted to ensure that the current processing power of all nodes combined will result in an average solve time of ~10 minutes per block.

    If the compute power goes up the complexity goes up too. This has already been seen with the addition of graphics card hash processing blowing standard CPU hashing out of the water. It is no longer practical or feasible to calculate hashes on a CPU and you can't buy a 58xx or 59xx Radeon graphics card for love or money.


    They do, but the value I personally think comes from the people willing to trade in the currency. If I can get goods for my currency I am happy, and as more people appear to be accepting BTC (although at a slow rate) I am happier to put more FIAT into it. I also believe using it as an alternative to PayPal will become a real reality due to it's transaction cost model (extremely low, or free), and the need to 'cash out' BTC to fiat will decline over time.


    I see this as a major benefit. At any single point in time you can determine exactly how much BTC is in circulation. As all transactions are public you can also see what kind of money is changing hands and with what frequency. Surely this beats any form of FIAT with printing essentially happening behind closed doors.

    The creation limit is often used as a criticism of BTC because the limit is 21,000,000 BTC.. but the currency is accurate to 8 decimal places resulting in a huge capability to handle fractional transactions.

    Another criticism I often see is that newcomers think the only way to get into BTC is to 'mine' it which is probably the slowest way to get your hands on it (unless you have a lot of money to invest in hardware up front). A far quicker way to get into BTC is through money exchange / or offerings goods and services in exchange for BTC.

    My concerns about the currency are the following (but I am still happy to invest some FIAT into it):
    * The exchange is centralised and potentially open to manipulation, especially at the current time with some people holding larger stocks of BTC. Luckily, watching transaction histories you can get a feel for how much BTC is moving, but it is difficult to gauge the true value that is being cashed out to FIAT at (at least I have found this hard to determine).

    * Currently BTC is heavily pegged against USD by users, so essentially people are using the USD -> BTC conversion to ensure they are retaining the same value for their sales. Until a better understanding of BTC's value is determined over time.. this will always be a bit of a concern. This isn't so much a fault of the currency though, and more a reluctance to stray too far in the earlier stages by users (I believe)

    * Service offerings on the network are becoming more and more centralised (eg. pooling due to the massive increase in block hashing complexity). This to me works against the idea of the network being stablised by it's distribution as has been seen by the DDoS of deepbit in recent days. If more and more of the bitcoin services are centralised and based on 'providers' rather than the network, it works against the security that being distributed brings. This can especially be seen in payment gateways.. as payment verification from the merchant side can be difficult, providers are offering gateway solutions to simplify (but centralise) the processing. Once again, not a major fault of the currency.. because the distributed method will always remain if these services do vanish... but if people build their own solutions on these services it can be problematic down the line.

    /end rant
     
  5. Captain Kookaburra

    Captain Kookaburra Well-Known Member Silver Stacker

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    First of all ... Welcome to Silver Stackers. :)

    Awesome first post..

    There is an awful lot of mathematics involved in the bitcoin mechanisms. I am a fan of complex mathematics. Which would make this an attractive proposition for me.

    However ... something to consider ... Normal people (not you or me), think that they understand the money system they use.

    They struggle to see the truth about hard money vs. fiat money. They don't want to shift to something they don't understand. Bitcoin as a currency is something that will be 10 times harder for me to explain to people I know than the hard money concept.

    I like it, but I'm going to struggle to sell it.

    I'm 100% in agreement that it would be a terrific replacement for PayPal. The sooner the better I reckon.

    Ck.
     
  6. fishball

    fishball New Member Silver Stacker

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    The major problem is that the first comers onto BitCoin have obtained proportionally more BitCoins for their processing power.

    As the number of players increase, the less random bitcoins are allocated to new players and then they will eventually run out (since BitCoin has a limit on number of BitCoins in circulation last time I checked).

    I'd rather put my CPU processing power to better uses such as the betterment of mankind by doing Protein Folding or Mersenne Primes...
     
  7. StackHat

    StackHat New Member

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    Cheers :) Long time reader, first time poster.

    Completely agree about people being reluctant to shift into something they don't understand. I am always happy to try and explain what is happening in the bitcoin process (to the best of my knowledge!) to people so they can get excited behind the technological side of it.. but it more often then not ends up with a glazed look and "so I can just make money with my computer, how does that work?"

    When you think about what PayPal is.. it's not too far off. As soon as your fiat swaps into a PayPal balance you trust that it will be able to be cashed out at the same rate. Bitcoin really needs to stabilise a bit more before people will regularly use it in the same way.

    A lot of people generating BTC seem to get excited by how bullish the currency currently is especially against the USD, but for me the spikes represent instability which deters people from entering.. and ultimately slows the adoption of BTC (on the flip side people jump in to make a quick buck, but don't usually hang around)

    When I first saw mention of BTC the first thing I thought about was silver trading.. surely the anonymous nature of BTC will help prevent all manner of shipping accidents where quantities of bullion are lost at sea! ;) :lol:
     
  8. 2ds

    2ds New Member

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    I see bitcoin as very similar to fiat currency with a few of the issues solved. Sure it's not backed by anything either but it's more resilient to manipulation too.

    My original post on here about it a couple of weeks ago has quite an interesting video with a couple of the main players in the bitcoin scene at the moment.
     
  9. StackHat

    StackHat New Member

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    The processing secures the network as the block verification relies on 'proof of work'. Granted the current difficulty is likely resulting in excess use of CPU processing, but I feel your post infers that you need to be using CPU cycles to use Bitcoin which isn't true.

    When you install the client you can choose to 'generate Bitcoin'. What this is doing is using CPU cycles to create hashes. If you don't enable this you can use the Bitcoin network for trading as much as you like without using processor cycles for computation.

    As for coins running out, you need to investigate why the coin discovery (mining) mechanism exists. Currently people using CPU cycles for the network to generate block hashes are doing so for a calculated reward. At the time of writing this, the reward is 50 BTC. The reward mechanism will expire over time when the number of BTC hit 21 million, but the block hash generation still needs to continue when the 21 millionth BTC is generated so the network can work.. but why would anyone do it if there is no longer a reward?

    As part of every transaction on the network there is a 'transaction fee' portion which people can allocate to their transaction when sending. This transaction fee is given as reward to the person who generates the block hash for a collection of transactions. In future when the 'mining boom' ends it is foreseen that people will continue to run computational nodes to collect the transaction fees. As the transaction rate is slow at the start of the currency (now) the transaction fees alone would not be enough incentive to generate hashes to keep the network going, so the 50 BTC reward is a good way to 'kick start' the processing capability and distribute the currency as reward for involvement.

    Even if everyone bails out because of the computational requirements to find a valid hash are too high (they perceive it as too high) the network will adjust the complexity down at the next 2 week interval to ensure people remain interested.

    If you watch the transaction log on the network you can see when block hashes return valid and the amount that is rewarded. If the amount exceeds 50BTC (the current reward) the value above 50 is the amount from transaction fees that user collected for solving that block (currently the most you will see is about 0.2 because people know they don't need to add a transaction fees to get the transaction through quickly).


    I guess the cliff notes are, you don't need to use your CPU cycles to use Bitcoins to send/receive money ;)

    -edit-
    To give an idea of just how much processing power is currently involved in hashing on the network.. I ran a CPU client on an i7 950 processor for about 24 hours and earned roughly 10c AUD ;)
     
  10. thehuckler

    thehuckler New Member

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    Three things that suck.

    I can't exchange AUD for Bitcoins.

    The value of Bitcoins is absolutely dependent on market sentiment. (If the US government passed a law prohibiting merchant use of Bitcoins you would see the value take a huge dive).

    Joe Bloggs won't understand it until he understands our current currency problems (Great point btw Ck).

    -=-=-

    Everyone's major quarrel with Bitcoin seems to be: "Nowhere accepts it, why would I buy it"?

    I think the Bitcoin argument runs far deeper than that for many people but I understand the layman perspective.

    I would like to see it succeed but I don't expect it to compete with anything, any time soon.

    -=-=-

    You've got to take your hat off to the developers.

    Just wow.
     
  11. StackHat

    StackHat New Member

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    All good points.

    Only one I can really help with is exchanging AUD -> BTC :D

    http://www.bitcoincharts.com/markets/
    http://bitcoin-otc.com/vieworderbook.php?sortby=buysell&eitherthing=AUD
     
  12. fishball

    fishball New Member Silver Stacker

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    Good point about not really having to use CPU cycles to generate coins if you just want to use it.

    However from a financial point of view the whole BitCoin system is flawed.

    The BitCoin system is gamed by it's creator and a handful of early adopters. They 'mined' most of the bitcoins currently in existance and make people believe that BitCoins have value. The fact that the distribution of wealth is heavily biased towards early adopters just screams alarm bells to me.

    Furthermore, BitCoin is not as robust or strong as the creators argue. If an attacker can assemble enough CPU power to become a node they could in theory just screw the whole system up. Who has a lot of CPU power? The government. Icky.

    Furthermore, BitCoin is an inherently deflationary currency. When BitCoins start to be circulated in the real world for tangible goods and services, the relative coin value increases. If we consider that BitCoin gains popularity among the markets, we will see speculators enter the market and hoard BitCoins because they are a good return investment. This creates artificial scarcity of BitCoins and halts trading of BitCoins as nobody wants to spend any. But we all know that this is in fact just another bubble phase and will burst and suddenly the market will be flooded with BitCoins from speculators who want to exit. This 'cycle' will repeat itself if BitCoin doesn't crash and burn but even then, it will demonstrate to the market that BitCoin itself is in fact not as stable and robust as claimed. It is in fact very volatile and fluctuates a lot. We will see less and less people use BitCoins because they will be risk averse and this downward spiral will be the end of BitCoin.

    Even if we believe that all their hashes and algorthims are perfect, and ignoring distribution bias, it still doesn't work very well in reality. It violates various basic economic principles and I don't see a happy ending for BitCoin (except maybe for their founders who cash out before it burns).
     
  13. StackHat

    StackHat New Member

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    I agree that it feels that the originators have disproportionately more BTC for their effort and is often used to suggest that BTC itself is a pyramid / money making scheme (it may well be?). They additionally took on no risk to acquire the coins but it could be argued the effort they contributed was generating the network. Either way it will always remain a bit of a stigma around using BTC.

    Interesting suggestion about the government using computing resources to disrupt the network, not one I had considered. Judging by the amount of compute currently involved it would interesting to see what theoretical attacks would be possible... I need to spend some time researching/thinking about this one :lol:

    The deflationary currency argument is fairly common and I am not sure where I sit with it personally, but it's out of my league to debate with any value (with no formal economic qualifications). I can't see any formal currency traders ever dipping their toes in, but that doesn't mean current holders of large quantity of BTC couldn't use their 'weight' to manipulate the market.

    I can forward you to the following and hope that it may offer a differing view with some merit.
    https://en.bitcoin.it/wiki/Deflationary_spiral

    Another point with adoption that I haven't seen raised here is the reluctance of existing markets to adopt. A great example is eBay with it's vested interest in PayPal. I have read (but not confirmed) that they will not accept BitCoin as a payment method. With this kind of problem existing for adoption (eBay would be a primary reason many adopted Paypal in the first place) it may be difficult to gain traction in the mainstream without a large, well known champion.
     
  14. Agauholic

    Agauholic New Member

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    darn it... bitbay.com is taken
     
  15. thehuckler

    thehuckler New Member

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    Nearly another dollar increase in the last 48 hours!
     
  16. thehuckler

    thehuckler New Member

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    And another...
     
  17. jnkmbx

    jnkmbx Well-Known Member

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    It's far from perfect :p

    I reckon it's a fad.
    If I truly believed it was the future of currency, I would put 3 PCs with CUDA enabled cards I have here to work on mining.

    I think the principles are flawed simply because it allows early adopters to gain an advantage.
     
  18. hawkeye

    hawkeye New Member Silver Stacker

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    That's my feeling too. If you are one of the first few people to have bitcoins and you hold on for awhile they will keep on increasing in value especially as prices go steadily down to 8 decimal places and at some point no-one else will be able to create any and can only get them off existing holders. After awhile you will be the equivalent of a millionaire.

    People may criticise fiat, but one of the things about Gold is that more can be mined from the ground so people don't have to get money(gold) off existing holders if they don't want to. With bitcoin, the price of the money would get ever more expensive through deflation and there would be no alternative way for people to obtain it.

    Interesting prototype but will wait for something better to come along.
     
  19. StackHat

    StackHat New Member

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    What does mining gold really have to do with fiat?

    Do people in the real world really go out and mine more gold when they don't want to trade for fiat? I don't know anyone personally that has gone and mined more gold to trade for fiat instead of just getting a job and earning the money off someone who already has fiat to offer them.

    Sure a mining company can go out and mine for gold (as they can do it in a profitable way), but it could be argued that this is just those with the wealth gaining more wealth?

    The option to mine your own gold is there in the real world, but is it really a practical option for you or me to avoid engaging in the current fiat system?

    You could also argue that not knowing the quantity or limits on a commodity is a risk. If a massive silver deposit was found tomorrow that could be extracted with ease, what would happen to the silver price? How do you know how much silver people are currently holding that could potentially be dumped into the market at any time?

    -edit-

    Should also mention in regards to a question about about trading AUD for BTC further up there ^, to go from AUD -> BTC is relatively easy as mtgox.com now accepts AUD
    https://mtgox.com/

    Getting back out from BTC -> AUD may be a little more difficult (at this point in time), ie. trading out through PayPal, finding a buyer directly.

    So buyer beware I guess :)
     
  20. hawkeye

    hawkeye New Member Silver Stacker

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    The point is that under any system, apart from Bitcoin, the currency can be expanded if necessary. The currency supply does need a certain amount of elasticity, as does any product. The total supply of any product shifts with supply and demand and money should be no different in this regard. Fiat is intended to be the perfect solution to this but, as we all know now, it just gets abused like every other time in history.

    Gold doesn't have to be mined, it can be recycled from jewellery and other things as well. The point is that the supply of gold as money just like fiat is flexible (just not as much), unlike Bitcoin which is inflexible.
     

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