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Source link: http://archive.mises.org/17294/a-clear-concise-look-at-bitcoin/

A Clear, Concise Look at Bitcoin

June 15, 2011 by

BitCoin, the world’s “first decentralized digital currency”, was devised in 2009. Unlike other virtual monies it does not have a central clearing house run by a single organization. Nor is it pegged to any real-world currency yet it can be used to purchase real-world goods and services however it is also just as fiat as it is not pegged to any solid commodity.

Inflation is a central point for the next 20 years as 300 coins are mined every hour on average. “Every four years, though, the minting rate is set to fall by a half. It will drop to 25 coins per block in 2013, to 12.5 coins in 2017, and so on, until the total supply plateaus at 21m or so around 2030.” The very definition of inflation until the plan of their plateau becomes a reality perhaps 20 years hence. Ceteris paribus even though it never is.

The instability is also key at this moment as just this last Friday Bitcoin suffered a massive crash from falling from just over $32 to just over $10 for each Bitcoin. Congratulations to all of the profit takers. I expect more of the same due to this small and fragile market.

Not to mention a Bitcoin developer admitting that with sophisticated software the system is not so anonymous anyway and the Silk Road folks signaling their willingness to work with “authorities” if necessary.

Caveat emptor.

Update: More cause for concern, a half a million dollar hack. The original post.

Update II: Popular Bitcoin exchange Mt. Gox was hacked and the price dropped to mere pennies. That won’t be happening to gold unless alchemy turns out to be a reality.

{ 139 comments }

Phoenix June 15, 2011 at 7:41 am

There’s some pretty interesting back-and-forth on the topic of Bitcoin on Quora:
http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea

Onus Probandy June 15, 2011 at 7:58 am

What solid commodity is, say, gold pegged to?

Ignore for a moment the thousands of years of history that make us trust that gold holds its value. What exactly makes it different from bitcoins? The value of everything is arbitrary, and decided by the market.

As to supply inflation: well that’s no worse than gold either. Gold was mined rapidly at first, then slower as it became harder to find.

Bitcoins are issued according to a formula. To issue more you have to persuade every user of Bitcoins and every miner that producing more is a good idea. There is no central authority that can impose that inflation.

Wasn’t it Friedman who said he’d prefer that the fed issued notes based on an equation? Bitcoins would have given him what he asked for.

Bitcoins, once they stabilise (which will happen as the bitcoin economy grows away from speculation and towards production) will be exactly what the goldbugs of today want: a store of value outside central control.

Your last paragraph is very mixed up about the facts. I’d suggest deleting it.

Joshua June 15, 2011 at 8:02 am

Gold is a commodity. Why would it be pegged to anything? I understand what you are trying to say, but you are comparing apples to oranges here.

Ignoring thousands of years of evidence seems to be a bad idea when you are trying to examine something.

You say the last paragraph in this was mixed up, but you get confused from the get go.

Onus Probandy June 15, 2011 at 3:06 pm

Why not assume that I’m not an idiot, and know full well that gold is a commodity. What then could be my reason for asking the question “what is gold pegged to”? If your argument is that gold doesn’t need to be pegged to anything because it is valuable in itself, then that is my argument too: bitcoins are valuable in themselves.

I am not comparing apples and oranges, the point is that both gold and Bitcoins are a store of value. The fact that one is made of rare metal and one is made of rare numbers is irrelevant.

I’m not ignoring thousands of years of evidence; I’m suggesting that to compare fairly we must look at gold on day one; and Bitcoins on day one. Gold has a thousand years of history making it established, Bitcoin is hardly going to equal that in 12 months.

I have no problem with gold; it serves an excellent purpose. My problem is with people who think gold has any more implicit value than anything else in the world. Its value is determined by what people are willing to trade it for… just like bitcoins.

If you don’t like them, that’s fine, don’t buy them, but lets not pretend that there is any logical reason why they are fundamentally any different from gold.

Matt Gilliland June 15, 2011 at 4:57 pm

Gold is functionally tangible, non-inflationary, and has worth in itself apart from demand as currency. There are massive differences.

And I say this as a bitcoin user.

David Bratton June 15, 2011 at 5:10 pm

“bitcoins are valuable in themselves.”

No, they are not. They are only valuable in exchange.

Jimmy June 16, 2011 at 2:48 am

This is silly. It cannot be disputed that bitcoins are subjectively valued – this is demonstrated with every trade involving bitcoins (http://mtgox.com). The question is, how do you know the reasons as to why a particular individual has subjectively valued bitcoins?

Perhaps because of their useful value in exchange, perhaps for their novelty, perhaps for the psychological satisfaction of being able to own a limited commodity (maximum 21,000,000 possible). Who knows?

Anyway, it doesn’t matter either. After all, the monetary exchange value of gold is greater than the “value in themselves” of gold (oooh, shiny! me want). So it is with bitcoins. Bitcoins are their own commodity defined by cryptographic and mathematical boundaries rather than the physical boundaries of gold/silver.

bitbutter June 18, 2011 at 5:11 am

The question of whether a thing is ‘valuable in itself’ is a red-herring imo. The subjective value of all goods (gold, bitcoin, waffles) derives from the good’s expected serviceability in satisfying the subject’s wants–be that through trade or direct consumption.

Juno Moneta June 19, 2011 at 4:02 pm

BitCoins may have value in and of themselves as a means to make consensus in highly distributed large-scale systems, which would otherwise never be able to reach consensus. Bitcoin also makes it possible to fully decentralize the DNS (Domain Name System). In that case, every Bitcoin Domain Name already comes with a cryptographic key pair. That means it also allows us to solve the PKI (Public Key Infrastructure) problem – every name you connect to has an encryption key associated with it that can be verified without trusting a central authority. In case network traffic monitoring prevents people from accessing information either at all or anonymously, Bitcoin makes it feasible to pay for internet relays that anonymize or reroute traffic – that is, it makes it easier to remove central control and fight censorship. The list goes on, you’d be hard-pressed to find any decentralization schemes that would not benefit from Bitcoin integration.

Joshua June 17, 2011 at 8:08 am

Oh, I’m sorry. You’re right. There’s absolutely no difference between gold and bitcoin.

So how do I go about taking physical delivery of bitcoins?

Peter Surda June 17, 2011 at 9:31 am

You just give the recipient a storage medium. There are attempts on making this more practically usable, such as Bitbills.

Inquisitor June 15, 2011 at 9:05 am

“What solid commodity is, say, gold pegged to?:”

It is a commodity in its own right. One with very desirable monetary characteristics, and thus ideally suited to filling the void.

James Dahlberg June 15, 2011 at 9:34 am

Bitcoins are a commodity all the same.

From Wikipedia:

A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.[1] A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. Examples are petroleum and copper.[2] The price of copper is universal, and fluctuates daily based on global supply and demand. Stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

How does the definition not fit?

Onus Probandy June 15, 2011 at 3:10 pm

“It is a commodity in its own right. One with very desirable monetary characteristics, and thus ideally suited to filling the void.”

It certainly is. I agree.

Bitcoins too are a commodity in their own right, one with very desirable (for certain purposes, more desirable than gold) monetary characteristics, and thus ideally suited to filling the void.

anon June 15, 2011 at 8:00 am

Here is a great chance for people who are associate with Mises Inst. to analyze a new phenomenon regarding money and perhaps improve on the theory of money, and what do they do?

They post ignorant garbage all over the place. First Kramer on rockwell blog, then wenzel on his blog now this nonsense.

“Nor is it pegged to any real-world currency yet it can be used to purchase real-world goods and services however it is also just as fiat as it is not pegged to any solid commodity.”

Do you know what fiat means. No, it doesnt mean something that isnt pegged to a solid commodity. It means it is used by decree. So whose decree is making bitcoin used by many people?

“Inflation is a central point for the next 20 years as 300 coins are mined every hour on average.”

That is true. But did you think on this about a minute before dismissing it, like a religous zealot? The system has a specific type of inflation built into it but why? Maybe the creator wanted to mimic gold? Maybe even the term “mining” is taken from that? And maybe if the whole supply of bitcoins was created at the beginning and kept constant there would possibly be no way to disperse the money in the economy?

” “Every four years, though, the minting rate is set to fall by a half. It will drop to 25 coins per block in 2013, to 12.5 coins in 2017, and so on, until the total supply plateaus at 21m or so around 2030.””

This is also wrong, the total supply will reach 21 million in the year 2140. Today there is 6.5 million bitcoins. So the supply will rise 323% in 129. What will be the increase in dollars in that time do you think? Or even gold. I would bet anyone that gold supply will increase more than 323% in 119 years.

“The instability is also key at this moment as just this last Friday Bitcoin suffered a massive crash from falling from just over $32 to just over $10 for each Bitcoin. Congratulations to all those profit takers, I expect more of the same due to this small and fragile market.”

Instability is quite common is shallow markets but forex and option markets are developing in bitcoins. This means there would be easier ways to speculate. And speculations is a very good thing that decreases the volatility of any commodity.

“Not to mention a Bitcoin developer admitting that with sophisticated software the system is not so anonymous anyway and the Silk Road folks signaling their willingness to work with “authorities” if necessary.”

The anonymity issue is flat out wrong. And who care about what silk road does. Do you think the success of this project depends on a drug market?

Shay June 15, 2011 at 10:24 am

Indeed, this is total garbage. “A clear, concise look at Bitcoin” and then a terrible run-on sentence in the first paragraph. The rest makes no excuse for having any structure, just the petty reaction of the author to Bitcoin. By the title, I thought that someone had actually bothered to take the time to make am even-handed, reasoned critique. It’s clear that like the last author, this one feels threatened by Bitcoin and is lashing out at it.

Authors, take the time to figure out your emotional reaction, deal with it, then spend the time to post something respectable as to the real problems with Bitcoin. There are plenty of us readers who would read such a piece and think about it, but aren’t interested in garbage like this. Step up!

Justin Ptak June 15, 2011 at 11:29 am

You might want to click the link to the Economist article embedded in the first sentence.

Shay June 15, 2011 at 12:52 pm

If this linked article was a central piece of this blog posting, then it was terribly identified. The way it’s currently linked, one would expect it to be a link to the Bitcoin website or a Wikipedia article about it.

Emilio Wittenberg-Schlatterz June 18, 2011 at 4:30 pm

Thank you for writing this rebuttal. When I read the headline on Twitter, I couldn’t wait to read what the title offered. I clicked straight over and found a shocking another shockingly bad article that failed to deliver on the promise of the title.

The lack of critical analysis of Bitcoin, one of the most important pieces of software to emerge since the Linux Kernel, from Mises is very surprising. In every other sphere, this institute is using web technology extremely effectively, but in the matter of Bitcoin, they seem to have a blind spot.

This is doubly odd, because fact based economics is the blood of the Mises institute, and Bitcoin is as much an economic phenomenon as it is a software innovation. This is the first time I have been disappointed in the articles coming from here. The articles on Bitcoin have lacked insight, a deep view of history, imagination, hard facts and good analysis. The article in The Economist on Bitcoin was better than anything I have read here on the subject, and that really is a grave insult.

I hope that very shortly, an article of the high standard that we expect from the academics here is published. It simply will not do to keep posting these ridiculous pieces that read like the rantings of religious fanatics.

Once again, Mises is ahead of the game when it come to the digital revolution; its published articles on copyright are just one example. The same sort of rigor, prescience and insight needs to be applied to Bitcoin.

Finally, warning people off of Bitcoin without any evidence, investigation, facts or basis for doing so is shameful.

Peter Surda June 15, 2011 at 9:09 am

Justin,

Inflation is a central point for the next 20 years as 300 coins are mined every hour on average.

I find it funny how Keynesians complain that Bitcoin is bad because its production is too slow and Austrians complain that it’s bad because the production is too fast. Since it’s virtual, it produces inflation by definition. It’s also irrelevant. The speed decreases over time in absolute numbers. It was designed to mimick the scarcity of raw material, and the designer chose a logarithmic progression. I don’t think there is a particular reason why logarithmic progression should be superiour from economic point of view, it’s probably just mathematically the simplest method to achieve the goal. After a certain threshold, the production of new Bitcoins in relation to the amount of already produced Bitcoins will be lower than with gold production. Assuming Bitcoin is still around at that time, under ceteris paribus conditions it will become a safer hedge against the loss of purchasing power than gold.

The instability is also key at this moment as just this last Friday Bitcoin suffered a massive crash from falling from just over $32 to just over $10 for each Bitcoin.

Yes, and then subsequently it rose to $24 and now fluctuates around $19, which based on the historical development is more closely connected to the mining difficulty. Some people lost money and some gained. That’s how markets work. Compare that to what happens on “free” stock exchanges, the panic, horror, the stopping of trading, reversal of transactions, government calling for more regulation. The “Bitcoin black Friday” was surprisingly uneventful. By Monday it was over. If I had been on a weekend trip, I might have just as well been completely oblivious to it.

Not to mention a Bitcoin developer admitting that with sophisticated software the system is not so anonymous anyway and the Silk Road folks signaling their willingness to work with “authorities” if necessary.

Like I said before, apart from parties involved in a trade using Bitcoins, noone has any specific knowledge about the identity of those people, so if anyone other than the party to a transaction claims to “work with authorities”, it’s completely meaningless. Bitcoin transactions are publicly visible, so it was obvious from the start that information can be extracted through data mining and there is a theoretical possibility of determining the identity of a person behind that transaction. The discovery that Bitcoin is not completely anonymous is nothing groundbreaking.

Furthermore, you misrepresent what Garzik said. I have not read the Economist article very thoroughly so maybe they got it wrong too. He said that the exchanges are getting registered as proper trading businesses (in fact, as far as I know, they have been since the beginning). Suppose that instead of saying this, he would have said “well, screw the government, the exchanges are going to ignore it”, how would that come through? Furthermore, he’s a developer and as far as I know has no control over the exchanges (which are run be third parties), so his opinion has no legal relation to what the exchanges do. In fact I think his performance was brilliant and would like to thank him for doing a great PR job. Seen from the perspective of a casual TV viewer, he completely diffused the allegations and objections.

Altogether the post is misleading. There is nothing really important in it. The issues mentioned are not specific to Bitcoin and there is no particular reason to present them in a negative light.

Frank June 15, 2011 at 1:06 pm

Thank you for saying what I would say better than I would say it.

Rick Hull June 16, 2011 at 11:18 am

Peter,I think that part of the problem is that many Austrians have (perhaps rightly so) made an intellectual investment in gold. Perhaps there is a financial interest as well. Since I agree with the Austrian argument in favor of gold, I also embrace substitutes that share the most important qualities. Silver, platinum, palladium, etc. They each have individual characteristics that make them more or less useful for certain monetary (trade-enabling) roles. This is ok to me.

I would say that I have an intellectual appreciation for gold, but I do not have an intellectual *investment*, per se. For those who appreciate gold, novel substitutes are to be enthusiastically analyzed and perhaps accumulated. For those invested in gold, novel substitutes are a threat.

I share your contempt at the poor handling of the subject, so far, in Austrian circles. I find the knee-jerk reactions surprising and evidence of an unhealthy dogmatic approach.

Peter Surda June 16, 2011 at 2:10 pm

You might be right. I, for example, do not have an “intellectual attachment” to gold, but I do own some (and do have any specific plans on selling it). Maybe Mises and Rothbard never saw Star Trek and did not realise what the concept of replicator would make to commodity-based money.

I don’t think Bitcoin is a threat to gold (from the point of view of hedge against inflation), so maybe the Austrians can relax. It’s threat to fiat, to the banking system and payment processing companies (credit cards, paypal, etc).

sweatervest June 17, 2011 at 10:08 am

Of course if the replicator actually did exist we would not just be thrust into the wonder of Star Trek, but all problems of production would essentially cease altogether and money itself would cease to have a role to fulfill.

Bitcoin may indeed be a threat to fiat systems, and that is, I think, a virtue of it. But we should not confuse that with bitcoin being a sound money, for one government fiat money can threaten and destroy another government fiat money, but that of course does not mean government fiat money is sound!

I think the biggest problem with Bitcoin, as with all fiat currencies government controlled and not, is that they can be created and destroyed too easily. It is a problem with gold, too, that it can potentially created and destroyed (used as a reactant or product in a chemical or nuclear reaction) but this is so expensive it is simply not a concerning matter today. Only after continued technological improvement and corresponding price deflation (as happens with a fixed money supply) will the prices of buying and operating expensive technology to create or destroy gold would actually compare to or go beneath the amount of gold that is created/destroyed in the process would this become a serious problem (perhaps a little earlier than that), and rest assured that *will* become a problem with gold if society ever gets there. Hopefully by then a more robust commodity will have been discovered!

But we are already past that point with computer bits, which can be created and destroyed quite easily (or at least changed). Unless those computer bits are titles to something else, all it takes is a software error (or clever hacker) to corrupt memory and spontaneously create or destroy bitcoins and redistribute wealth in the process. This is just a much a problem with the electronic systems of major banks as it would be with bitcoin, but if a bank used electronics to do transactions involving money backed by a real commodity it could always accompany an electronic transaction with a real transaction (i.e. wiring money would be followed by a banker moving your gold, or some other commodity, to another’s account) and check its electronic records against its real deposits. It takes far more work, but in the event of a bank run any bank that neglects this will be in serious trouble (i.e. not able to meet any of their customer’s expected demands, and this *will* eventually happen with the U.S. banking system!). This kind of instability may be acceptable for small transactions (or if you are forced by law to do it in the case of government fiat) but big businesses would never keep large quantities of money in bitcoins out of fear that millions or billions of dollars would simply disappear overnight (or that millions would spontaneously appear in some other person’s account and devalue his own).

There is nothing unjust about bitcoin and it would be unjust to forcefully shut it down or stop people from using it. It will just never catch on as a principal medium of exchange because it is too unstable. It may function as a transition off of government fiat, but only as a transition.

That bitcoin is not inflated as a rule is certainly an improvement over government fiat, but even if the supply is not purposefully inflated or deflated it is still at high risk of fluctuating in supply.

Amin June 19, 2011 at 3:13 am

It is completely impossible for bitcoins to be created through a computer glitch leading to spontaneous inflation. All bitcoins are created and stored in the database permanently in a highly redundant fashion.

J Cortez June 15, 2011 at 9:23 am

The “Austro” hate on Bitcoin is misdirected and misses the reason for Bitcoin’s existence. As I understand it, the point of Bitcoin was to have a currency that isn’t subject to central bank inflation, was outside of government hands to avoid taxation, and that could be harder to trace than the current batch of government created currencies.

A crash in price doesn’t mean that somehow the particular item in question is without value or will be without value. There have been crashes in price going back since the beginning of markets, but it doesn’t follow that somehow markets are flawed.

Dick Fox June 15, 2011 at 9:32 am

BitCoin is Friedman style monetarism on steriods. It should drive a stake in monetarism but I am sure that those like Frank Shostak will always be around to give it a new incarnation.

anon June 15, 2011 at 10:32 am

No it is not.

Friedman believed in controlled inflation because he thought the economy needed it.

Bitcoin uses controlled inflation because there is no other way for them to introduce bitcoins as new money to the economy.

According to Friedman the money supply should have increase forever.

Bitcoin supply will stop increasing after a certain date.

If there wasnt any government meddling in money maybe bitcoin couldnt have rivaled gold or silver. But that is not the case.

There are two risks that will effect the fate of bitcoin. One is the control of the supply. If it increases according to plan there is no problem.

And the other is the political risk of government somehow shutting it down, or confiscating it, but among all the alternatives, including gold, bitcoin seems to be the one alternative with the least political risk

Frank June 15, 2011 at 1:12 pm

Friedman also believed someone should have a monopoly over the money supply and, by extension, the act of inflating. No one has a monopoly on the bitcoin supply. It takes the same amount of work for Dick Fox to “mine” a bitcoin as it would for Ben Bernanke to “mine” a bitcoin.

Similar conversation happening over at Wenzel’s blog.

Bogart June 15, 2011 at 10:15 am

I hate prognostications about things like Bit-Coin. The only test will be that of the market place.

As for the volatility, that is a good thing. The market is a learning process and valuations are the trickiest things a market does. So with all of the emotion around this new currency there will be poor valuations and therefore unstable prices.

My intuition is that eventually Bit Coin will cease to be private and the hands of government will filter their way into it. And at some point someone will counterfeit the currency. One of the most important reasons that the commodities gold and silver have stood the test of time has been the difficulty of getting more of the stuff into the market place.

The other reason has been that gold and silver have multiple uses outside money. These multiple uses help to keep the value consistent. The Bit Coin being the second electronic currency, to the US Dollar, does not have alternative uses.

anon June 15, 2011 at 10:25 am

Actually, I am beginning to think that this bitcoin phenomenon is a litmus test for the Austrians.

I have long thought that many people associated with the institute just memorize what Mises and Rothbard wrote and repeat the same things just as religious zealots. There is actually no effort to improve upon the theory of money of Mises and the only discussion among associated people are the measurement of the money supply, thus if there is deflation or inflation and whether fractional reserve banking should be legal or not which is actually an issue of ethics and not economics.

These times offer incredible opportunities for the science economics to advance and the mainstream is full of charlatans and Mises Inst. is missing the boat. You can lean on classical legends for so long.

Sovy Kurosei June 15, 2011 at 12:07 pm

For a subject that I thought would be openly supported by Mises.org there are a lot of detractors on this website. Also a lot of ignorant opinions that five minutes of Google-fu ought to dispel. Like the cost of production of a bitcoin being non-existent expressed below.

Joe June 15, 2011 at 3:10 pm

The bitcoin issue is one of the reasons I’ve backed off from the forums and reading this site. For me, it’s the litmus test to see if the Austrians are being too zealous or not.

I haven’t found anyone that has said “This might work. Let’s see what happens”. Instead, we just see an outright rejection based on strawmen and shaky ground.

I don’t think I have any proof that it will become a wildly popular medium of exchange. I’m still not convinced it will. But I still haven’t seen any arguments against it stand. Each time we get stories about its increased usage, the backlash about how it will fail grows.

People should argue wisely so that they don’t risk having to look like fools later.

bitbutter June 18, 2011 at 5:22 am

Agreed. ‘Official’ coverage of Bitcoin on Mises.org so far has been very disappointing, ill-informed, dismissive. It’s off-putting.

Yohan June 15, 2011 at 10:26 am

This article is pretending to be an unbiased look at Bitcoin but is just a slur and dishonest.

“Inflation is a central point for the next 20 years as 300 coins are mined every hour on average.”

The author knows the Austrian’s main fear is monetary devaluation, so in this out of context statement tries to make it seem that Bitcoin is just another fiat money that will be devalued over time. Never mind the fact that Bitcoin will see less devaluation than even Gold.

“just this last Friday Bitcoin suffered a massive crash from falling from just over $32 to just over $10 for each Bitcoin. Congratulations to all those profit takers, I expect more of the same due to this small and fragile market.”

At the time of posting this article Bitcoin had doubled back to over $20, which the author does not mention. Volume is consistantly 50-100k at any given time on the main exchange. But the point of Bitcoin is not these moves up and down in the early stages of this entirely speculative market.

Bitcoin could be a fantastic weapon to assault the current fiat currencies, and break the centralised hold of the financial systems clearing house method, with its peer to peer de-centralised exchange system.

But instead we have technological ignorance and dismissiveness on behalf of elderly Austrians who have only recently discovered how email works.

J. Murray June 15, 2011 at 10:58 am

Money enters the money when the cost of monetary production is less than the value that commodity being used as money holds. Bitcoin fails on this account because the costs of production are non-existent, leading to inflation for the foreseeable future and the physical cessation of production sometime in 2030. Bitcoin will manage to devalue itself faster after the first 30 years of existence than the Federal Reserve accomplished in 100. A low-to-no cost “asset” doesn’t lend itself well to money nor does a system that places a hard-cap on supply one either. Bitcoin is no better than the Federal Reserve or other schemes like the Friedman 3% autopilot. They disconnect costs with benefits and pretend mathematics is a useful substitute for natural interactions.

It may be a weapon against fiat currency, but it’s a poor weapon for a market to function off of. It’s more of a currency of violent criminals, who are the ones that typically are attracted to such markets in the first place. Unaccountability can be used against the government, but it can also be used to scam your victims when all you have to do is switch user-names and continue on without much trouble. Bitcoin would unlikely survive in a world that didn’t have central banks because, frankly, it’s going to behave like a central bank for the foreseeable future. People don’t want to deal with a currency with that level of volitility to do business with. Federal Reserve Notes are more stable and predictable, and I hate the things for their instability and unpredictability.

The price rebound is also a major problem with the currency. That level of volitility indicates that the market and supply is so miniscule that it can easily be captured by small groups. Dropping from $32 to $10 shows a mass coordinated sale, and the increase to $20 shows a mass, coordinated buy, likely from the same individual, who can just hide behind anonimity. If this were a legitimate currency, this kind of volitility wouldn’t just happen since it would require real goods and services for exchange. All you need to do to destroy Bitcoin is to use the fiat money it’s supposedly trying to remove from the equation. Buying one worthless asset with another to impact the price.

James Dahlberg June 15, 2011 at 12:00 pm

The costs of production is infinite. Please forgive me if I take your comment as advocating we need the supply of money to increase with the supply of goods and services. The fixed quantity just as well may be a huge benefit over gold.

And to talk about volatility, look at the dollar’s in relation to silver. It is all relative. Volatility will slow with the development of bitcoin denominated exchanges, options, and futures.

Peter Surda June 15, 2011 at 12:18 pm

J. Murray,

Money enters the money when the cost of monetary production is less than the value that commodity being used as money holds.

I am starting to hold the opinion that anyone who uses the term “money” should be ignored. As defined by Austrians, It’s an utterly confusing, meaningless and circular concept.

Bitcoin fails on this account because the costs of production are non-existent, leading to inflation for the foreseeable future and the physical cessation of production sometime in 2030.

I posted on another thread my estimates of costs of production of Bitcoin. It was not “non-existent”. Furthermore, the cost per unit of Bitcoin increase over time as more people become miners, and as the block size of a new coin decreases. I looked briefly at the source, and if I’m not mistaken, the block size will reach zero in 2137. Statistically, it’s possible that the maximum number is reached before that though, and mining will probably become unprofitable earlier.

Bitcoin will manage to devalue itself faster after the first 30 years of existence than the Federal Reserve accomplished in 100.

I think I already said specifically to you that this is only relevant if the size of the market was fixed. But it’s not, Bitcoin competes against other currencies and is pushing them away.

A low-to-no cost “asset” doesn’t lend itself well to money nor does a system that places a hard-cap on supply one either.

As I said before, the costs are not “low to no”. In the example I mentioned the costs were in millions USD.

Bitcoin is no better than the Federal Reserve or other schemes like the Friedman 3% autopilot.

It depends on which point of view you take. The point of view I’m taking is the one of the market. If Bitcoin is useless, its value will drop to zero. If it’s useful, it has the potential to become a medium of exchange for some situations.

It may be a weapon against fiat currency, but it’s a poor weapon for a market to function off of.

Why?

It’s more of a currency of violent criminals, who are the ones that typically are attracted to such markets in the first place.

I see neither empirical evidence, nor a deductive reason why this should be the case.

Unaccountability can be used against the government, but it can also be used to scam your victims when all you have to do is switch user-names and continue on without much trouble.

I think you have neglected to make yourself familiar with the whole spectrum of what bitcoin does. Bitcoins themselves are validated by mathematical algorithms. You do not need to trust a specific person (“issuer”) to verify its authenticity. Furthermore, if you do not trust the trading party to be honest, you can use an escrow service. Also, you cannot just “switch user-names and continue on”. The transaction is recorded and it will follow you. You need to be very careful in order for it not to be connected to your real world identity somehow in the future.

Bitcoin would unlikely survive in a world that didn’t have central banks because, frankly, it’s going to behave like a central bank for the foreseeable future.

First of all, central banks are not going away anytime soon. Furthermore, since it is decentralised and noone is forced to accept its rules, this argument makes no sense. Openness, voluntary participation and network effects work against disruptions. It’s the same FUD that was in the past used against linux:

Q: Who do you go to sue when your linux stops working?
A: Well, good luck suing Microsoft.
Q: What if someone sells you a “non-authentic” linux?
A: Well then you’re an idiot.

People don’t want to deal with a currency with that level of volitility to do business with.

As the total volume of market increases and high-frequency trading is implemented, the volatility will decrease.

Federal Reserve Notes are more stable and predictable, and I hate the things for their instability and unpredictability.

They are also more regulated and inflated and designed to benefit the government and banksters, rather than you.

The price rebound is also a major problem with the currency. That level of volitility indicates that the market and supply is so miniscule that it can easily be captured by small groups.

I addressed this above.

Dropping from $32 to $10 shows a mass coordinated sale, and the increase to $20 shows a mass, coordinated buy, likely from the same individual, who can just hide behind anonimity.

I already explained the issue of anonymity. The question that I have is why is this a problem? It’s free market. Anyone can trade and speculate.

If this were a legitimate currency, this kind of volitility wouldn’t just happen since it would require real goods and services for exchange.

If this happened with government fiat, it would cause a financial crisis, the governments blaming it on Soros and ramping up regulation of the trading. With Bitcoin, nothing really happened.

All you need to do to destroy Bitcoin is to use the fiat money it’s supposedly trying to remove from the equation.

But this is precisely what didn’t happen. There was a fluctuation, but there was no destruction. Bitcoin is back on the long-term price predictions.

Buying one worthless asset with another to impact the price.

If your goal was to destroy Bitcoin rather than earn money, the only result would be that you would end up giving fiat to Bitcoin users, thus making them richer. After the “attack” was over, Bitcoin would climb to the equilibrium and continue to be used.

Concerned Friend June 15, 2011 at 9:07 pm

“I am starting to hold the opinion that anyone who uses the term “money” should be ignored. As defined by Austrians, It’s an utterly confusing, meaningless and circular concept.”

Out of curiosity, how so?

Peter Surda June 16, 2011 at 4:50 am

Concerned Friend,

in order to explain, let me turn the question around. What is the praxeological relevance of “money” as defined by the regression theorem? I’ve been trying hard to find one, and asked others, without success.

Concerned Friend June 16, 2011 at 5:50 pm

Interesting point, and I honestly find it hard to answer, but with regards to the regression theorem, my general understanding of it is that it proposes that all money starts off as a commodity with direct use value. The high marketability of the commodity increases such that it ceases to be used (or at least predominantly used) for it’s direct use, and more for its exchange value, as a community characterized by voluntary exchange begins to quote the value of goods to be exchanged in terms of the commodity-money.

Now my question arising from this understanding (of which I could have completely misinterpreted): can a direct use be found in Bitcoin? Does not the idea of circumventing the current monetary system (i.e. “sticking it to the man”) through the use of Bitcoin be regarded as a direct use in itself, even if measured by the unmeasurable concept of psychic revenue? And if Bitcoin enters market use in such a manner as to become a true “commodity-money” traded because of exchange value, does it not fit the criteria of “money” as defined by most adherents to Austrian Economics, and more importantly the money regression theorem?

augusto June 15, 2011 at 9:22 pm

Murray,

Could you please explain what you mean by:

“Bitcoin would unlikely survive in a world that didn’t have central banks because, frankly, it’s going to behave like a central bank for the foreseeable future. People don’t want to deal with a currency with that level of volitility to do business with. Federal Reserve Notes are more stable and predictable, and I hate the things for their instability and unpredictability.”

How can FRNs be more stable and predictable than bitcoins? The mathematical formula used for mining new bitcoins is open to scrutiny, the rate of production of new bitcoins is well known, and so on. On the other hand, all it took for the dollar to go completely ff-track was a sudden decision to decouple it from gold – a decision taken by a single person, with enormous power.

This was also Friedman’s contention, if I am not mistaken: monetary inflation, that is, the printing of money, is not essentially the problem, as long as it is constant and predictable. That is why his proposal was for a fixed, automatic, inflation rate. Everyone would be able to include inflation in their financial calculations. What we have today instead is inflation that varies wildly.

David C June 15, 2011 at 10:50 am

My take on bitcoin is that I’m not sure if it would make a good store of value. But I think it might be useful for transactions. Usually, with a currency, both of these must be combined, but with bitcoin I think there may be an exception.

Contrary to myth, bitcoin will maintain a minimum commodity value. How do I know? Because I can take the few ounces of gold I have and use it to back every bitcoin and future bitcoin in existence. Maybe it would be a few micro-grams, but I would still have a minimal backing. And why would I do that? Because even if bitcoin is not a good store of value, it is useful for transactions, and that’s why other people are backing it too. So in that sense, bitcoin is range bound, it will not go to zero, and will not go to infinity, it will always have a transaction value, and that transaction value will always clear.

So to me the fact that it will always have a transaction value, and the fact that it will always clear, and the fact that it does not have a centralized point of failure, means that bitcoin is going to be around for a long time.

And one more thing that is extremely important, when governments screw with the currency, they almost always accompany it with things like capital controls, legal tender laws, limited withdraws, forced exchange rates, and so on. Bitcoin has none of that getting in the way, meaning the market will probably be extremely flexable about bitcoin use.

Carl June 15, 2011 at 12:23 pm

Agreed, my initial thoughts are not that it can be something that holds value, a long term investment or bank account, but instead a type of “cash” that can be used on a transactional basis.

Paul June 15, 2011 at 11:14 am

I’m not planning on investing anything in Bitcoin. But hey, it’s not like Bitcoin manufacturers are going to force you to use them or else. I think it’s kind of silly that it’s even an issue. If someone else wants to use these Bitcoins, they should go right ahead and do so.

Shay June 15, 2011 at 12:56 pm

And if someone wants to put forth arguments as to why Bitcoin is a bad idea to use, even if it’s voluntarily, then they should go right ahead and do so as well. Being informed is useful.

Colin Phillips June 15, 2011 at 11:58 am

One thing we seem to be forgetting is that bitcoin is the first attempt of this idea of decentralised, constrained currency issue. Even if bitcoin fails to win the world, we will have learned a lot about how the markets react to Currency 2.0.

We should be trying to learn as much as possible about the unexpected and unseen consequences of bitcoin. It’s the Austrians that are always talking about the unseen, and now we are presented with an unprecedented opportunity to find the myriad of “unseens”!

And if Currency 2.0 crashes, then just imagine what Currency 2.1 might be like?

Peter Surda June 15, 2011 at 2:27 pm

I couldn’t agree more. Rather than trying to establish themselves as pro- or anti-, Austrians should foremost analyse Bitcoin, as proper scientists. Stopping at the conclusion that Bitcoin is not money is in my opinion wholly inadequate. While I find it difficult to hide my enthusiasm for Bitcoin, I have tried to provide a balanced analysis and present a reasonable argument why Bitcoin cannot be dismissed outright. I don’t have anything against gold, I own gold too. But I also have Bitcoins.

Concerned Friend June 15, 2011 at 8:41 pm

I would be careful to make such statements using “Austrian” as if all austrian economics adherents are inherently dogmatic and all unilaterally oppose Bitcoins. Such all-embracing statements are typical of collectivists.

Not that you are one.

Peter Surda June 16, 2011 at 4:14 am

Point taken. But I still have to wonder, where are the neutral and well researched Austrian posts regarding Bitcoin? Or could it be that most of them got tricked by an obscure definition (“money”) which is either a meaningless tautology or a simple recollection of historical facts with no predictive capability?

Check out this debate from more than a year ago.
I asked what Bitcoin was if it was not money nor fiat. There were essentially three types of reaction: I don’t care, it’s not money so it’s bad, and you’re an idiot. Since then, the importance of Bitcoin grew, but the reactions I see from other Austrians did not substantially change.

What I call for is an unbiased scientific treatment of Bitcoin and if the pros and cons are to be debated, they should be assessed realistically and based on facts. Is that so much to ask?

Donald Rowe June 15, 2011 at 12:52 pm

What a scam. Get in early, get in hundreds of times then and “mine” like mad in parallel to “win” as many of the the auctions of the newly created bitcoins. Then dump them for “real” money.

Or lose them when you lose sight of your laptop.

See here, http://forum.bitcoin.org/index.php?PHPSESSID=f84d1d2124448abe1de4fa0a8e9ca631&topic=16457.0;all for “how to lose $500.000 with bitcoin”

James Dahlberg June 15, 2011 at 2:02 pm

It is not cheap to mine bitcoins. See the comments above.

Joe June 15, 2011 at 3:14 pm

It’s easy to lose them like it’s easy to lose your wallet.

What you can do is create backups of your bc and put that in different secure places.

Onus Probandy June 15, 2011 at 3:22 pm

It’s just as easy to lose $500,000 worth of anything.

Gold under the bed can be stolen.

Gold certificates in the safe can be stolen.

Gold in an online account can be hacked and transferred out.

Bitcoins stored on a wallet on a laptop can be hacked and transferred out.

What’s your point?

Donald Rowe June 15, 2011 at 3:37 pm

The point is, why go to such a technological solution that is no improvement over gold?
I don’t mean gold coins jingling in a purse tied to your waistband, just honest certificates, which the US dollar could be given the appropriate political will. (Which is not likely to materialize.)

If we are to invest the effort in developing a high tech “money,” let’s do it right and improve upon the basic concept of money in the process.

bitbutter June 18, 2011 at 5:34 am

“The point is, why go to such a technological solution that is no improvement over gold?”

Gold costs many times more to store. Gold cannot be transferred entirely in the digital domain, directly between traders, with effective anonymity. These sound like improvements to me.

Peter Surda June 18, 2011 at 6:28 am

The point is, why go to such a technological solution that is no improvement over gold?

Governments attack gold, and that leaves a market gap which Bitcoin can fill. So, logically that means that Bitcoin is an improvement over gold.

J. Murray June 15, 2011 at 3:53 pm

The difference is that if a mugger takes your bitcoins, you don’t even have the luxury of fighting back, let alone getting a look at the guy. Computers are remarkably easier to break into and steal information from than physical locations. With a computer, you don’t need to know layouts, personnel movements, where the assets are stored, methods of entering the residence, methods of accessing the storage facility (safes are not simple to crack), proper timing to avoid witnesses, all kinds of headaches. Additionally, computers eliminate the proximity protection as most criminal activities are centered around small pockets in cities, primarily poorer areas as this is where criminals typically live, since it’s not worth the attempt to drive to the other side of town to steal stuff. Computers have no proximity problem, so anyone has access to anyone else at any time, allowing for a much larger pick of potential targets. Bitcoins are digital cash left in a locked box out on the street next to the mail box with a prominent label “cash inside” written across it.

Additionally, if you do choose to use some other source to store the bitcoins, like a virtual bank, you’re dealing with entities that have little to no asset base in cases where a bank robbery happens. At worse case, should a bank be robbed and have significant assets stolen, there’s the ability to sell off physical assets to repay the debts. This is assuming that the thieves aren’t captured, and such thefts rarely succeed.

In electronic theft at a bank, you can notify the bank of the unauthorized charge and the bank can simply not transfer the asset to the requesting party. A bitcoin is stolen immediately without any form of approval transfer required. Someone stealing your bank information only steals a means of requesting funds. Someone steals your bitcoin bank information, they steal the coins outright. There isn’t this layer of protection between digital information and real assets. Everything is digital, so the matching system is lost. Anyone familiar with asset security at corporations will tell you that it’s never wise to have only one point of approval for a transaction to complete. Physical assets require a version of three way matching. Bitcoins don’t.

That’s the biggest problem with bitcoins and theft, people are TOO anonymous. A bank heist or a mugging gives you the opportunity to see the culprit, catch license plates on vehicles, utilize finger prints, DNA samples, all sorts of things. Hackings are notoriously difficult to deal with because there aren’t any of these identifiers. You just hope the IP trace wasn’t a spoof, and even then, it doesn’t help much.

So, ya, theft happens, but it’s so much harder to steal a physical asset than a digital one. You’ll have to either physically overpower me for whatever I happen to have on hand or hope it takes more than a month for me to figure out someone accessed my bank account illicitly since this is usually how long a bank holds a transaction before clearing it out to the requesting entity.

Peter Surda June 15, 2011 at 4:17 pm

J. Murray,

since I already reacted multiple times to your posts without any meaningful feedback, I’ll make myself short.

The difference is that if a mugger takes your bitcoins, you don’t even have the luxury of fighting back, let alone getting a look at the guy.

Next time the government confiscates someone’s gold, I’ll remind you to get a good look at “the guy” and ask if you want to fight back.

J. Murray June 15, 2011 at 6:28 pm

OK, fine, I’m being unreasonable because I’m not accepting this as the greatest invention in the history of man. From now on, whenever someone gets excited about something, I’ll never question it and take the full idea at face value as promoted and jump in with both feet.

Peter Surda June 16, 2011 at 2:06 am

J. Murray,

there’s a difference between being skeptical and being biased or simply wrong.

integral June 16, 2011 at 8:16 am

@Peter Surda

Yes, and you are being biased in this. Replying to the idea of being mugged by a scammer or burglar with a “well when the gubmint comes for you, you can try to resist an we’ll see what happens” is just you immediately constructing a situation in which Murray’s argument would not hold (ie, when they’re tearing your balls off with a pair of pliers you’ll tell them where your gold is right quick) while ignoring all those situation where it does hold, like stolen identity/unauthorized transfers and direct burglaries etc.

So yes, when the government puts the needles to you holding gold or cash hidden somewhere is as useless as holding bitcoin, as in you can do just about nothing to resist. (Except let the secret die with you.)
But in the more usual case of, for example, stolen identity, the transactions can be traced, stopped or reversed, and of course there are banks that have a guarantee and will give you back some money in this situation if it can’t be reversed, whereas there is no good, or indeed any from what I understand, mechanism for this with bitcoins, because they’re almost ‘untraceable’ by design.

Peter Surda June 16, 2011 at 9:56 am

integral,

no, you and J. Murray are biased. My only point is that Bitcoin gives you more options and an open source foundation and that means it has a comparative advantage. There is no “digital gold”. There are only digital gold substitutes, which still require the physical gold to exist somewhere in order to be useful.

There is no deductive way of concluding whether gold or Bitcoin are “better”. It’s a normative issue. We can, however, analyse both in the context of the environment and market participants.

…the transactions can be traced, stopped or reversed…

Again, you’re missing the point. You can add new features onto Bitcoin that will allow you to achieve the same goal, should you wish so. You can use escrow services or warn the recipients which blocks are “stolen”. For example, there have been situations in the past where Mt. Gox froze an account because there was a suspicion it ended up with stolen Bitcoins.

What you are criticising, in other words, are specific uses of specific implementations of Bitcoin. None of the problems described by you are inherent to Bitcoin. That’s the whole point of it: it’s a common platform, and people are building services upon it. You can cherry pick whichever services match your requirements the best. A lot of them are probably not very mature yet, but I doubt that banks and credit cards were very mature within two and a half years after the first one was created.

Think of Bitcoin vs. government fiat as linux vs. Windows. Windows is still around, but linux is everywhere. Strictly speaking, linux is just a OS kernel and on its own useless. But people can build stuff upon it. With Windows, you get big chunks of inflexible stuff. It might work for some, but it’s not good enough for everyone and that creates a market gap.

integral June 16, 2011 at 12:52 pm

You are now moving the goalposts. The issue in this thread of discussion was in regards to security of physical assets like gold or cash and I would suppose also the established methods of electronic banking vis-a-vis bitcoin.

Your point earlier was that it was just as easy to lose something of a value of 500 000 dollars worth of a physical or (electronic type banking) assets as it is to lose 500.000 dollars worth of bitcoins. I beg to differ, and as I understand it so does Murray. Now your point is that you have ‘more options’ with bitcoins.

In other threads we have discussed various points where you have claimed that bitcoin is superior or preferable compared to physical assets. Yet now, apparently your only point is “it’s like the linux of currencies”.

Every solution you’ve suggested to one problem so far has been solutions that causes bitcoins to lose it’s superior attributes in another area.

To say that there is “no digital gold” is like saying there’s no “physical bitcoin”.
Fine, so you need a physical or digital substitute. This can’t be said to be a comparative advantage for either bitcoin OR gold.

Am I to understand that the only pro of bitcoins at this point is that it is a decentralized framework? How does making it open source give it a comparative advantage?

When someone loses 500.000 dollars worth of bitcoins without any capability to retrieve them, this is a problem inherent to the bitcoin system.
“Oh, but if he only used this and this solution he would have been fine” is your retort, but this means that the very security that the person wanted needed at the time was NOT INHERENT IN THE SYSTEM.
So the bitcoin system is inherently insecure unless YOU KNOW WHAT YOU’RE DOING OR YOU’RE EXTREMELY UNLUCKY.
In otherwords, bitcoin in and of itself is NOT SECURE in the sense most users of currency consider secure in regards to holdings of assets.
Do you honestly believe that this will not be considered a dealbreaker? Noone knows what vallet those 500k ended up in. Noone knows where they were then split up and sent to. That is a problem inherent to the bitcoin system.

The moment you say that a problem is not a problem because you can use certain services, that does not mean the problem is not inherent in the system. It means that it IS inherent in the system, it is not HANDLED by the system, and you need third parties to HANDLE that flaw.

You ARE being biased, and the sooner you can see that the better.

Peter Surda June 16, 2011 at 3:32 pm

Your point earlier was that it was just as easy to lose something of a value of 500 000 dollars worth of a physical or (electronic type banking) assets as it is to lose 500.000 dollars worth of bitcoins.

It wasn’t me making that statement but Onus.

Now your point is that you have ‘more options’ with bitcoins.

That was my point from the beginning. I’ll just skip this because I think that is a genuine oversight on your part.

In other threads we have discussed various points where you have claimed that bitcoin is superior or preferable compared to physical assets. Yet now, apparently your only point is “it’s like the linux of currencies”.

I claimed since the beginning that Bitcoin can have comparative advantage in some areas. I don’t think I would make an argument that Bitcoin is “superiour” or “preferable”. That sounds awful lot like a normative statement and I try to avoid those.

Every solution you’ve suggested to one problem so far has been solutions that causes bitcoins to lose it’s superior attributes in another area.

In a way, you are right. The issue is relative advantages in specific situations on market, not deductive claims. I thought I made that clear, but obviously not.

To say that there is “no digital gold” is like saying there’s no “physical bitcoin”. Fine, so you need a physical or digital substitute. This can’t be said to be a comparative advantage for either bitcoin OR gold.

It can be an advantage, because in one case, you need gold, in another case, any storage medium will do (plus you have copying and encryption). In some situations, having inflexible physical properties is a disadvantage.

Am I to understand that the only pro of bitcoins at this point is that it is a decentralized framework? How does making it open source give it a comparative advantage?

Those two (decentralisation and open source) are separate features, but only in combination do they present a comparative advantage. You could say that gold is open source (since its properties and composition are publicly known), but you can’t decentralise it. Government fiat has neither: it’s centralised and noone knows how much is produced and where exactly it is “injected” into economy.

When someone loses 500.000 dollars worth of bitcoins without any capability to retrieve them, this is a problem inherent to the bitcoin system.

It is a problem of a specific user and specific implementation. Bitcoin does not have anything which would make it inherently more possible to steal or less possible to reclaim. Even now, since the Bitcoin transactions are publicly visible, there is still a chance that an identity of some of the people who end up with the “stolen” Bitcoins will be revealed, and then it is possible to backtrack until you find the actual perpetrator. Once you have that, even if he does not have the Bitcoins anymore, you can sue him for damages and if it goes through the court, he’ll owe you money and you can enforce it from him.

As people already mentioned, the market is already reacting to this and suggestions for security services are springing up. What else do you want? That sounds very much like the “argument” that markets can’t fix everything and therefore you need government.

this means that the very security that the person wanted needed at the time was NOT INHERENT IN THE SYSTEM.

That’s like saying that if you buy a car with an alarm and immobiliser, but leave the door wide open and the keys inside and someone takes it and drives it to another country, then that invalidates the inherent security that you bought it for.

In otherwords, bitcoin in and of itself is NOT SECURE in the sense most users of currency consider secure in regards to holdings of assets.

If this is your point, then nothing is in itself secure and the debate is meaningless.

Do you honestly believe that this will not be considered a dealbreaker?

Only if you react emotionally rather than rationally.

Noone knows what wallet those 500k ended up in.

Everyone knows that. Just the identity of the person is yet unknown.

Noone knows where they were then split up and sent to.

Everyone knows that. Please make yourself familiar with the workings of Bitcoin.

The moment you say that a problem is not a problem because you can use certain services, that does not mean the problem is not inherent in the system.

Let me repeat, if this is your argument, you can make that about anything.

You ARE being biased, and the sooner you can see that the better.

If I am, it is up to you prove where I commit logical errors. So far this has not happened.

integral June 17, 2011 at 3:34 am

@Peter Surda
You’re correct, Onus made that claim, not you. You were talking about government coming after the holder.

Ok, so we’re now at the point where BitCoins only possible advantage over either fiat or gold is a combination of open source and decentralization.

What comparative advantage does the combination of open source and decentralization give bitcoin?

On 500k loss:
Yes, it is inherent to the bitcoin system. If the ‘infrastructure’ for tracking down the transactions isn’t there yet, then the problem is inherent to the system. (And it is a problem according to Gavin Andresen, who leads the Bitcoin project, so I expect he’s more ‘familiar’ with the system than either of us.)

Why would a rational everyday person use bitcoins if he can be burglarized in a way that the stolen property is at the moment infeasible to recover because of how bitcoins are designed?
It doesn’t matter whether it is a rational or emotional response, it matters how potential market users WILL respond.

Again, yes these problems can be fixed, but they haven’t yet. They’re still inherent in the bitcoin system. You’re still being biased.

Peter Surda June 17, 2011 at 4:51 am

What comparative advantage does the combination of open source and decentralization give bitcoin?

For example: faster development schedule, ability to react more quickly to customer requirements, independence from encumbents, smoother interoperability, more predictable foundation, lower transaction costs and so on. Even if you don’t like Bitcoin or do not want to use it for other reasons, you can benefit from increased competition.

If the ‘infrastructure’ for tracking down the transactions isn’t there yet, then the problem is inherent to the system.

The two parts of the sentence contradict each other. Furthermore, as I said previously, there have been cases in the past when theft was tracked down and dealt with.

They’re still inherent in the bitcoin system.

They are neither inherent nor specific to Bitcoin. It all comes down to comparative advantages.

integral June 16, 2011 at 2:45 am

Because everyone knows the government can’t possibly confiscate your computer and storage devices that contains your bitcoins just as easily as your gold…

Peter Surda June 16, 2011 at 3:21 am

Sure they can, but you can encrypt and backup the private keys in your Bitcoin wallet. You do not even need to store them in the country where you live at all. And, while you are in custody, your wife or business associates can access one of the copies and transfer the Bitcoins to a new address, so even if someone gets the decryption code by torturing you, it’s useless: you can’t disclose what you don’t know.

My point is that the advantage of Bitcoin is flexibility. If you’d like, you can protect your Bitcoin wallet same way as gold: put it on a storage medium and in a safe. But you can also copy and encrypt it, furthermore, in order to add new Bitcoins to an existing address, you do not need the private key. It’s like if once you have some gold in a safe, you could add more gold without accessing the safe.

integral June 16, 2011 at 8:04 am

Or you can tell your wife or associates to move your paper-cash or gold to a safe place, or keep them out of the country and use some kind of certificate.

Either way, you need to tell them to move the “hardware”, at which point the third entity can move in on them. It is marginally easier with a USB stick, but then it’s exactly what this third entity will be looking for.

Peter Surda June 16, 2011 at 8:54 am

Integral,

Or you can tell your wife or associates to move your paper-cash or gold to a safe place, or keep them out of the country and use some kind of certificate.

All of this requires physical access, and cannot be encrypted or copied. It’s still the same problem. In the past in oppressed countries, they had samizdat and were stuffing the hard currency into their mattresses. Now they have internet. Guess which one works better?

Either way, you need to tell them to move the “hardware”, at which point the third entity can move in on them.

But the hardware can be anywhere in the world and none of the people “using” it need to physically access it. The cost of storing a small amount of digital data at home are not significantly different from storing it in ten countries simultaneously. Also, in order to do a Bitcoin transfer, you do not need to “move” the old storage medium. You just need to get the private key associated with an address in your wallet and then the transfer can occur through a way that is not physically connected to the old storage medium.

integral June 16, 2011 at 11:03 am

Peter Surda,
Unless you use a digital certificate.

And also, you need physical access to your hardware to get ahold of your private key and wallet. Unless you’ve already shared your private key with your trusted party, which is a serious breach in your security. You may also need to communicate your distress to your trusted party, another breach in your security.
This isn’t rocket science.

Peter Surda June 16, 2011 at 2:47 pm

Integral,

And also, you need physical access to your hardware to get ahold of your private key and wallet.

You need a physical access to something. It does not have to be the medium holding the wallet, or even anything running on electricity. Computers can be made to react to any input.

I can, for example, write a program that runs somewhere in the cloud that monitors a webcam of some public website (e.g. one that you do not own) and reacts to people wearing a t-shirt with the text “I love fiat money” (or any unlikely text). Then in order to initiate the transfer, you just need to go that place wearing such a shirt and stand in front of the camera for a couple of minutes. That would then trigger the transfer of the Bitcoins to a new address and post a picture on someone’s website with the label “My vacation in Honolulu” which would contain a copy of the new keypair obfuscated by steganography. Your fathers’ mothers’ brothers’ ex-roommate (or whoever) then sees the picture and collects the Bitcoins.

This is quite cheap to do and I did not even spend much time on the design. For a government to crack this, they need a huge amount of resources. If everyone does it, a crackdown on any specific user will become less and less likely.

Joe June 15, 2011 at 5:25 pm

Put the bc on a USB key

augusto June 15, 2011 at 9:26 pm

USB keys can fail unexpectedly for a number of reasons. But you don’t open your gold vault to find out your coins have turned into caramel. ;-)

Joe June 16, 2011 at 10:17 am

Yes. But you can make multiple copies of the bitcoins. This can’t be done with gold.

Ron June 16, 2011 at 12:25 am

From what I understand, bitcoins are FAR safer than gold. What you would do is store your wallet encrypted and backed up in multiple places. Someone hacking your machine would still not know your encryption key. The wallet would be useless to them. But you’d still have your backup.

integral June 16, 2011 at 2:46 am

How is this safer than having your gold locked in a safe, vault, or even buried somewhere only you know about?

Peter Surda June 16, 2011 at 3:31 am

I’ll tell you a story. My great-grandfather had some gold buried in his garden. Then he got accused of some vague nonsense (treason or something, he was never told exactly) and locked up in solitary for several years. Meanwhile, he was tricked to disclose that he has the gold. Soon afterwards, the police came, dug out the gold and it was gone.

Moral of the story: no security is absolute. What you want is flexibility and multi-layered security. Since Bitcoin is virtual, you can achieve that much easier than with gold. You can obscure and protect it with as many layers as you want. Think of it like having a safe in a safe in a safe in a bank in a bank in a bank, simultaneously in multiple instances.

integral June 16, 2011 at 7:55 am

@Peter Surda
First off, flexibility does not mix too well with security.
An example of this would be a safe that can be accessed by using a key and a combination lock.
It would be far more flexible to allow the safe to be accessed by EITHER a key or a combination lock, but then someone only has to either find your key or break your knees, instead of having to do both.

As for having a safe in a safe in a safe in a bank in a bank in a bank, this does not seem like a flexible system. It sounds like a situation where you would need to show your identification to 3 different banks and remember 3 different combination locks (or carry 3 keys).
Sure, it’s more secure, but either you have to recall these 3 locks, in which case your basic human being needs an easy combination of numbers and letters which is easily guessable/brute-forceable, or he needs to have this combination written down somewhere.
The security of your system is no stronger than its weakest link, and no matter how many layers of security you have, the weakest layer will always be you, the user. That’s what cost your great-grandfather his gold, and that’s how they’ll get your bitcoins in the same situation.
It doesn’t matter that your great grandfather had encrypted his BitCoins three times and “lol, can’t be hacked because he’s behind three firewalls” if he’s leaving his computer and passwords out in the yard every night.

So no, I don’t see this solution as any stronger or more secure as burying the gold in your backyard. If you tell the wrong people where it is and how to “get” it, you lose it anyway.

Peter Surda June 16, 2011 at 8:46 am

Integral,

you’re missing the point. With Bitcoin, you have a broad array of of choices, out of which you can based on your own requirements pick those that are the most suitable and arrange them into a combination you want. Bitcoin itself is just a possible solution to a tiny fraction of the problems associated with media of exchange and value, albeit an important one. With physical objects, you are much more limited.

You can, for example, have a small amount of Bitcoins in an easily accessible online wallet or on your mobile phone with lower security and a larger amount of Bitcoins in very secure difficult to access facilities. Think of it like cash on steroids plus safe on steroids. So a normal guy receives his salary and business revenues onto current account and uses that do do day to day transactions. If there’s anything leftover, he can save/invest it. Again, in order to send Bitcoins to an address, you don’t need the private keys of that address. If you’re up for a big investment, you probably don’t mind having to spend a bit of extra time getting the transaction done.

your basic human being needs an easy combination of numbers and letters which is easily guessable/brute-forceable, or he needs to have this combination written down somewhere.

I have had no problems in remembering randomly generated alphanumeric keys for 20 years even if I don’t use them. Maybe some other people’s memory works differently, but I don’t think it’s anything unusual. People can learn to quote long texts or sing songs by heart. So just “encode” the passphrase into a text that you remember. Furthermore, the “locks” do not need to be passphrases, they can be physical objects too, or biometric checks.

The security of your system is no stronger than its weakest link…

This is only true if there is no interdependence between the security measures.

That’s what cost your great-grandfather his gold, and that’s how they’ll get your bitcoins in the same situation.

As I said several times already, in the case of Bitcoins, once you realise the security is compromised, you can transfer them. The equivalent would be if the other members of my family, once they realised great-grandpa is not coming back soon, dug up the gold and buried it elsewhere. While this is technically possible, again it’s much more difficult with gold. In order to do that properly, you need to first prepare a new replacement site, then transport it and secure it. All kinds of things can go wrong, plus again you need physical access to both sites, time to transport it and so on. With Bitcoin (if it was available at that time), great grandma just had to write a letter to a cousin on another side of the planet, saying, for example “great grandpa is very ill”, and the cousin would know “damn they got to him”, he could do the transfer into a new account within a relatively short amount of time. Now, great grandpa does not know how to access the new address and neither does great grandma. Even if they are compromised, the confiscation cannot proceed because it would require access to the cousin.

If you don’t think virtual aspects of a good have the potential to be more useful and valuable than the physical ones, then maybe you should trade your computer for an abacus and stop posting here.

integral June 16, 2011 at 9:24 am

@Peter Surda
While I can neither confirm nor deny your ability to remember randomly generated strings of characters for 20 years or if this is a spectacular display of ewanking, I can confirm that this is considered yet another weakness in software security. By using the same randomly generated string for 20 years (and yes, I KNOW that you wouldn’t be that stupid) it is no longer a randomly generated string, and is by continued use becoming increasingly insecure.
In order for it to be considered ‘secure’ in some banking systems, for example, it has to be changed once a month.
Most people do not use randomly generated strings, fresh or 20 years old, in their passwords. We know that from good old fashioned IT experience. Most people DO in fact use easily guessable passwords and most people cannot remember a randomly generated alphanumeric key from 5 minutes ago, let alone 20 years.

Now, I’m going to continue a bit about your grandpa:
Basically, you’re saying that he, using your super secure triple layer system, would write a letter to his grandson, or something like that. Good.
At this point, someone techsavvy enough to set up a triple layer security system should probably be aware that the Government, and most other players in this situation are in possesion eye-glass technology. Hell, some of them might not even NEED glasses to read.

So lets say that the government reads the letter, decides to not follow up on it because hey, they’re smart enough to find out that the old man has a fortune in BitCoins, but not smart enough to keep his family under surveillance.

The grandson immediately gets on his computer, gets hold of his grandpappys wallet, and then slams face first into a triple layer encrypted wallet that will take like a million years to bruteforce open.
10 minutes later swat teams arrive because grandsonny’s been accessing the same servers that his grandpa used.

Since you’ve said this before (about transferring bitcoins under duress), I’ll say to you that the ability to have a third party move your holdings is a HUGE hole in your security. The more trusted the trusted party is, the more likely the trusted party will also be targeted during that kind of an operation. And again, if your grandpa has a grandson, why don’t they just kidnap him as well, and cut one of his ears off in front of the old man? That would get ME talking. Even if it wasn’t MY grandson.

I know it sounds like I’m harping on this security issue a lot, but quite frankly the BitCoin will only have a value as a form of currency because of the same reasons that the dollar has that value. Trust.
If people don’t trust the bitcoin, if they don’t consider the bitcoin safe compared to say the dollar or a bag of golddust hidden in the boiler, then why should they move from dollar to bitcoin?

As it is, the bitcoin will remain a currency for technophiles who love the idea of high security encryption and reams of passwords. For everyone else who lacks your rainman-like abilities, passwords and encryption are a hassle that will either lead to them being the weakest link that eventually gets shafted in a breach, or they’ll just scrap the entire idea.

The great things about BitCoins are also the things that will make it less than desirable for the common user. And the biggest issue for any currency is whether people are using it in the market.

Peter Surda June 16, 2011 at 10:25 am

Integral,

10 minutes later swat teams arrive because grandsonny’s been accessing the same servers that his grandpa used.

Hello, different country. Unless the grandson’s name was Osama, this is not going to happen very often.

Also, the example with the letter was just a very crude one. You have many options of obfuscation. For example, the grandson sees that his grandpa’s character has not been online for over a week, use this to conclude he’s been compromised. Grandpa might even trigger this pro-actively, when he notices that he’s being followed, so he just pretends he has too much work and stops playing.

Which only brings me to repeat the same thing all over again: you can’t do any of this with physical assets. That creates a comparative advantage. Not an absolute one (!!!), but a comparative one.

integral June 16, 2011 at 11:15 am

Peter Surda
Hello, different country. Unless the grandson’s name was Osama, this is not going to happen very often.
Yeah, and the government coming to dig up your gold happens all the time.
Face it, the government that goes after your money in this way is going to take your family as well if it’s necessary.

Which only brings me to repeat the same thing all over again: you can’t do any of this with physical assets. That creates a comparative advantage. Not an absolute one (!!!), but a comparative one.

And I repeat again: In the case of a government coming to take your assets, your proposed solutions flawed. Every security measure that secures your wallet in one way compromises it in another. Since we agree that the only situation in which bitcoins could have a comparative advantage compared to physical holdings, that’s the situation I’m looking at, and quite frankly, if a government is willing to abduct someone and hold them hostage or even engage in physical force until they give up their holdings it doesn’t matter how physical or intangible their holdings are. It doesn’t matter what security procedures they have in place because they are still the weakest link.
It doesn’t matter that a USB-drive is lighter than a gold bar because it still has to be picked up.

Peter Surda June 16, 2011 at 2:24 pm

Integral,

Yeah, and the government coming to dig up your gold happens all the time.

Depends where you live of course. In less free countries this is not unusual. For some obscure reason, US seems to be also quite hostile towards competing currencies. I think in the 30s private gold possession (with minor exceptions) was forbidden. Lately, private minters and digital currency issuers have been under attack. Even here on Mises.org some of the cases were mentioned. Paradoxically, this made the situation more favourable to Bitcoin; had that not been happening, there might have been a useful international digital gold standard by now.

Face it, the government that goes after your money in this way is going to take your family as well if it’s necessary.

Of course. I did not say the advantage was absolute, but relative: you have more choices to protect yourself, and it is more expensive to overcome the barriers, and might even result in a total failure: as an act of desperation, the victim can destroy the keys, thereby making the affected Bitcoins unusable and the remaining ones more valuable.

In the case of a government coming to take your assets, your proposed solutions flawed. Every security measure that secures your wallet in one way compromises it in another.

In a way, you are right, it’s a tradeoff. But the point is that you have many more choices than with physical assets, and you can pick those that fit your requirements the best.

if a government is willing to abduct someone and hold them hostage or even engage in physical force until they give up their holdings it doesn’t matter how physical or intangible their holdings are.

What do you mean by “it doesn’t matter”?

It doesn’t matter what security procedures they have in place because they are still the weakest link.

As I said, the issue is flexibility and the ability to decentralise, rather than any specific measure in isolation. Just like, for examples, when members of resistance cells do not know members of other cells.

It doesn’t matter that a USB-drive is lighter than a gold bar because it still has to be picked up.

Again, if you look at it in isolation, you are right, but that’s not the whole picture.

James Dahlberg June 15, 2011 at 4:06 pm

To your first point, I consider it a feature. I’ll take a bitcoin robbery over someone breaking into my apartment. Pound for pound, the latter example is more violent. That is even assuming it is doable, as securing your bitcoin file is much cheaper than bars, guns, gates, and the like.

To the second point, the bank can buy insurance. I wouldn’t store money at a bank without insurance.

Joe June 15, 2011 at 5:24 pm

“That is even assuming it is doable, as securing your bitcoin file is much cheaper than bars, guns, gates, and the like.”

You can replicate and hide it. You can encrypt your wallet(s). This means that even if they take them, they have to decrypt them. It’s just another thing you can do to add a little more security to it.

Dusty Drifter June 15, 2011 at 8:23 pm

I accept that BitCoins are a conceptual commodity. I accept the “mining” algorithim capping the number of BitCoins as well and good. I also accept that there is no problem with people voluntarily deciding to use them, invest in them etc. The problem I have with them is their supposed value, as competitors inevitably jostel for position. This is where I see them as inferior to gold, silver, palladium etc:
To my knowledge, there are limited amounts of commodities that truly meet the requirements of being good money. As far as I see, gold, silver, palladium etc have one up over BC’s because they are real and tangible. Perhaps just as importantly, because they are real the species of physical monies are limited, whereas the species of virtual monies are not.
To elaborate, it is physically impossible to profitably create physical element (insert periodic table name here) using artificial means. It is however profitable to be able to hack the system of BC’s and add phoney BC’s to the market. Reality cannot be “hacked”. In addition, using a 100% reserve banking system coupled with physical commodities does the same job as the BC system, with the added plus of there being no “Bag holders” should the system lose interest or the governent shut it down. BitCoins have value only as Bit Coins. Physical commodities have many. Also without internet, BitCoin is not viable. People still can trade gold etc even with prohibition.
Following from before, while there are limited numbers of real commodities of value to trade in, there are an infinate number of BitCoin styled systems that could, and I estimate will be created. Why would I invest in BitCoin which has gone parabolic, when I could wait and invest in a competing BitCoin clone at its start? What happens to the value of the original BitCoins when BitCoin clones spawn in their multitudes?
I am not biased against BitCoins, I just don’t see how they trump PM’s as a vector of wealth. I also worry about the bagholder situation coming to pass. I can easily see that there is much money to be made investing in BitCoin as it is still fledging, my concern is its similarities to a “pump and dump” penny stock routine. A part of me wants in, but I feel obligated to stay out; I don’t want to be part of a system that leaves a bunch of people holding an empty bag, even if they knew full well that could happen, and accept that outcome. Same reason I don’t gamble. I thought we were trying for progress here. Unbacked currencies have been tried, failed and left bag holders. While I can appreciate Bit Coin’s unique anonymity in exchange, why not cut to the chase and go for a 100% reserve, freely associated, independant, physical commodity based banking system? Why not at the checkout have the price come up in grams or miligrams, oz’s or grains, the WEIGHT of the purchased goods in gold, silver etc with the option to pay in whatever species you have, within a tolerance of the market spot price? It need only move bank vaults occasionally, and could all be done digital and easy too. If my reasoning is flawed or I am missing something, I am happy to engage in meaningful and constructive debate!

Jimmy June 16, 2011 at 3:03 am

Gold, the God that FAILED.

I consider myself a strict Rothbardian. But let’s be real. Gold failed. It failed precisely because it’s physical nature limited its divisiblity, allowed for the disaster that is paper intermediaries, and made it ripe for state capture and manipulation. We went from a gold-based monetary system TO the state fiat system. Bitcoin is the technologic development that gives us hope to overcome the state grip over the monetary system and return honest money.

Bitcoin is itself the commodity. It has and continues to develop network effects (merchants, exchangers, payment processors) that will undoubtedly give it a strong first-mover advantage. After all, why did gold win out over platinum?

integral June 16, 2011 at 8:47 am

Gold ‘won out’ over platinum because it was easy to refine and manipulate, whereas platinum was first made ‘malleable’ in the 1800s.
Of course, platinum coins are still being produced, but platinum has far better uses in industry vis-a-vis quantity.

Bitcoin itself being the commodity is not an improvement on a fiat currency. After all, “the dollar is itself the commodity”, right?

I’m not sure what you mean by divisibility of gold, are you talking about not being able to cut gold into small enough pieces, so you had to use paper to signify certain amounts of gold instead?

Peter Surda June 16, 2011 at 9:35 am

Bitcoin itself being the commodity is not an improvement on a fiat currency.

Bitcoin is an improvement over government fiat because it is not centralised and its features are based on publicly disclosed mathematical properties. Whether it has a chance against gold depends mainly on: what will the governments do, will there be a problem that’s difficult to fix, and will a better contestant appear.

integral June 16, 2011 at 10:22 am

Agreed, with an addendum,
It’s success will also depend on it’s acceptance in the market. Ie, if people and businessses start using it globally, or even if just a city goes nuts for it.

Peter Surda June 17, 2011 at 5:06 am

It’s success will also depend on it’s acceptance in the market. Ie, if people and businessses start using it globally, or even if just a city goes nuts for it.

I agree, but I’m not worried too much about this. The potential is there and since it’s open source, anyone can try to provide a good service build upon it.

Martin OB June 16, 2011 at 9:13 am

Dusty,

Exactly, you brought up the core issue, competition and substitutability. As I see it, bitcoins are virtual collectibles. They have intrinsic value as long as people recognize their brand name and prefer them over competing virtual moneys, that is, other brands of bitcoin. They may also get some of their backing from the goods and services bitcoin enthusiasts started to offer in exchange for bitcoins, not because they wanted to hold bitcoins, but because they wanted to promote their use. It would be interesting to debate about which of the two factors was preponderant. In any case, brand recognition is essential. In contrast, the value of gold is based on generic, observable, non-reproducible properties, not brand recognition, which makes gold intrinsically more stable as money. The same applies to any other precious metal.

I understand why many Austrians are somewhat hostile to BitCoin. It has to do with the way it is presented, kind of “hey, Gold didn’t work, let’s try something new”. Promote your virtual collectible money all you want, but boy, if you touch gold, it becomes personal. That’s what the Krugmans of the world are doing all the time, trying to discredit gold.

Anthony June 15, 2011 at 10:45 pm

Maybe bitcoins are great for dedicated hackers and other computer security experts… it seems they are not so great for 99.9% of the world’s population.

The guy who had is coins stolen (half a million USD…) was a early adopter, took precautions, backed up is wallet, and overall was a cautious, computer savvy person. It is easy to say “oh just buy another computer and load linux on it and set up multi-layer encryption and use dozens of separate wallets all with separate access procedures” but this is well beyond the capabilities of most experienced computer users, never mind most people.

I was interested in bitcoins until I read about the theft in Daniel’s comment above… I am not interested any more.

Ron June 16, 2011 at 12:38 am

He may have been computer savvy, but he didn’t encrypt his wallet. That was his mistake. Maybe the client software needs to automatically encrypt wallets by default, which would be an easy thing to add. But the fact is, he didn’t need to “load linux and set up multi-layer encryption and use dozens of separate wallets.” That’s nonsense. He just needed to encrypt his wallet and have a backup somewhere.

integral June 16, 2011 at 2:50 am

He did have a backup somewhere. He had backups loads of places. The problem with backups is that your security towards hardware failure increases, while your security towards attackers decreases.

Peter Surda June 16, 2011 at 3:33 am

That’s why you should use encryption, and use it properly.

integral June 16, 2011 at 8:01 am

In which case you need to store your key and password, because if you lose those you lose everything, no matter how many backups of your wallet you have.
So you then need to make sure you won’t lose THOSE in a hardware failure, which means backing them up, either on other hardware or on paper, and you’re back where you started.

These are classic software security problems.

Peter Surda June 16, 2011 at 9:10 am

The password you can remember, and so can members of your family or business associates. If you don’t think that spending a bit of time on learning a brief combination of characters or a short text is worth the risk of having your life savings lost then maybe you’re doing something wrong. So, encrypt, remember, and make multiple distributed backups.

These are classic software security problems.

However, these are also solutions to problems which cannot be solved when protecting something physical. You can’t encrypt or copy gold, so you’re stuck with fewer options.

The fact is, you are presenting an increased number of options as something that does not matter, because these options can be used in a bad way. I wonder then what is the point of the debate in the first place? Then there is no reason why gold or anything else should be treated as having an advantage either. If you want, you can treat Bitcoins as purely physical media, just like gold (for example through Bitbills). But you don’t have to, you can treat them as digital too. You can’t do that with gold.

integral June 16, 2011 at 10:13 am

Well, experience tells us that people are in fact not willing to do that. They’d rather hoard their gold and paper dollars.

I’m saying, again and again, that no matter what form you store your commodities in, they are only as safe as the lest safe link in your security system, and both the case of (concealed) gold and the case of bitcoins, the least safe link is you.That someone can put a gun to your head and take your gold from you is not a reason to use bitcoins instead, because you run into the exact same security problem.The only pro to bitcoins vs gold bullion I’ve seen so far is digital utility, and if you cannot see the problem with saying it’s impossible to devise a digital gold certificate standard and yet believe that a piece of paper can be linked to a digital hash value that can be guaranteed to have a certain value of bitcoins, without one or several central authoroties, like a bank or mintery to both produce and guarantee these bitbills, then I agree that there is no point in a debate.Let me reiterate that to make it absolutely clear:
It is possible to, using only small private minteries and production facilities, to create and circulate bitbills that they can guarantee are tied to a hashvalue (bitcoin) and can back that guarantee. <- according to you.
It is impossible to, using only small private minteries and production facilities, to create and circulate digital certificates that they can guarantee are tied to a given amount of gold and can back that guarantee. <- according to you.Now, I'll be honest with you. You seem to be really enthusiastic about bitcoins, and I am too really (decentralisation is my pet peeve), but if you can't see the problem here then we're not going to make much progress regarding this issue.

Peter Surda June 16, 2011 at 4:02 pm

Well, experience tells us that people are in fact not willing to do that. They’d rather hoard their gold and paper dollars.

This is just a wild guess. Did you measure the proportion of gold owners whose gold was stolen, versus Bitcoin owners whose Bitcoins were “stolen”? Over what period of time?

the least safe link is you

Again, while this is correct in isolation, in combination with other features I think Bitcoins have a comparative advantage.

if you cannot see the problem with saying it’s impossible to devise a digital gold certificate standard

I do not recall saying that it’s impossible. It certainly is possible and it has been done several times. But the US is on a crusade against digital gold for some reason or another, and even if it wasn’t, as long as governments interfere with free trade, a decentralisation is unlikely. On a free market, a decentralised digital gold might purely hypothetically occur, but I don’t think free market is coming anytime soon.

The problem with DGC is that if the government raids the issuer (which, indeed, happened several times already) and confiscates the gold, due to centralisation, the DGC becomes worthless. This is not the case with Bitcoin, since there is no centralisation, and no specie to confiscate.

and yet believe that a piece of paper can be linked to a digital hash value that can be guaranteed to have a certain value of bitcoins, without one or several central authoroties, like a bank or mintery to both produce and guarantee these bitbills.

If this was my argument (it isn’t), the answer would be that with Bitcoin/Bitbills, the issue of trust is decentralised and open for scrutiny. The DGCs sometimes actually provide pretty good scrutiny too (audits and so on), but are centralised and therefore more prone to being shut down. Plus confiscation of the specie makes the DGC worthless.

then I agree that there is no point in a debate

You misunderstood my point, I’m afraid.

It is possible to, using only small private minteries and production facilities, to create and circulate bitbills that they can guarantee are tied to a hashvalue (bitcoin) and can back that guarantee. <- according to you.

Well, I would not call it “guarantee”. I would say that the claims are verifiable. The Bitbills are not “tied” to a hash value: they contain it. The public key is on the visible side of the Bitbill, and the private key is hidden inside the card behind a hologram. Assuming the issuer indeed destroys the original key after printing the Bitbill, for all reasonable purposes, the Bitbill is not tied to a Bitcoin address, rather it is it’s only manifestation. Like if it was possible to disintegrate a gold coin and create a note in its stead (and vice versa).

It is impossible to, using only small private minteries and production facilities, to create and circulate digital certificates that they can guarantee are tied to a given amount of gold and can back that guarantee. <- according to you.

I did not say this is impossible (it certainly is possible since it happens), but problematic. It’s problematic because US does not like it, and because it’s centralised. In order to decentralise it, an issuer would need to guarantee the redeemability of another issuer’s certificates even if anyone (including government) confiscates the other issuer’s gold. That does not sound like a good business strategy.

if you can’t see the problem here then we’re not going to make much progress regarding this issue.

I believe you are mistaken. Maybe I had not explained my position clearly enough until now. Please find an attempt for clarification in this very post.

integral June 17, 2011 at 4:15 am

@Peter Surda
Yes, experience does tell us that people are terrible at software security. And only marginally better at hardware security.
Check here http://www.youtube.com/watch?v=PaetdLsQZNo for a demonstration of people keeping their information safe.

I definitely think we’re using different ideas of decentralization.

In your example of the bitbill, it sounds as if it would be easier for people to use IOUs.
I also don’t see how the bitbill would be printed. Would there be a standard, or would any piece of paper with a value written on it be acceptable? How would these bills then be reprocessed when they get old or worn, you just write the hash value on to another piece of paper and tear up the old one?
How would those bills be verified? Should vendors manually type the hash-value into a computer for each bill and somehow check if it’s legit?
Who issues the bitbills?

Let’s say someone confiscates the physical gold. Ok, so now the certificates have as much backing as the bitcoin. Why should the users care? As long as people accept the certificate, it’s still usable as money.

Peter Surda June 17, 2011 at 4:45 am

Integral,

In your example of the bitbill, it sounds as if it would be easier for people to use IOUs.

Bitbills are not IOUs. They are a single (presumably) copy of a specific Bitcoin address. The issuer does not need to promise anything after issuing the Bitbill. If you destroy them, the Bitcoins are gone. Think of Bitbills as coining of gold. It puts Bitcoins into a standardised physical representation.

How would those bills be verified?

They use QR codes, you can use a simple webcam or a mobile phone to check them. Not much more complicated than a barcode scanner. Furthermore, since other implementations still would use the same digital standards (public/private key), Bitbills by different issuers are freely tradeable against each other, like in the past when national currencies were backed by gold.

Have you even looked at their website?

Ok, so now the certificates have as much backing as the bitcoin. Why should the users care?

The usability of the DGCs depends on the existence of gold, and a continuous service provided by the issuer. Why otherwise would the issuer bother with the gold? With Bitcoins, there is no need for the issuer to provide any service beyond the act of issuance.

Network effects might still allow an unbacked DGC to have value, but due to centralisation, the processing infrastructure is typically shutdown simultaneously with the expropriation of gold, so there is no way of using them. It’s just a bunch of bytes with no way to transact them, incompatible with other DGCs.

nate-m June 16, 2011 at 2:54 pm

That’s why you should use encryption, and use it properly.

The fact that you can say that means that you do not comprehend the scope of the problem. Encryption is almost impossible to do correctly. It’s not that encryption doesn’t work.. it does. It’s not that it’s impossible to use correct… it can. The problem is that it’s a huge problem. :)

Peter Surda June 16, 2011 at 3:38 pm

Ok, maybe I was overly optimistic. The point remains however that the specific issue has a way of mitigating it.

Anthony June 16, 2011 at 8:02 pm

Peter,

The problem with encryption is that your files need to be unencrypted to use it. While in use they are stored in your system memory where anyone can get them if your system is compromised…

And if you think that you can prevent your system from being compromised just by running an updated antivirus and firewall and sticking to “legitimate” websites, you are wrong.

Peter Surda June 17, 2011 at 1:51 am

Anthony,

The problem with encryption is that your files need to be unencrypted to use it.

Yes and no. You do not need to decrypt the files in order to receive Bitcoins. So that already is a point of advantage. Furthermore, in order to pay, while the private key must be in decrypted form, it can happen anywhere and you do not have to disclose the location or key it to anyone. This is another point of advantage (e.g. with credit card payment, you need to disclose the credit card number either to a payment processor or to the recipient). Also, you can split your wallet into as many addresses and make as many copies as you want.

If you want to keep your wallet locally, you can use a live linux distro on a readonly medium and an encrypted USB. If you’re paranoid, you can also build intrusion detection into your computer case and use a separate keyboard. If you don’t want to keep it locally, you can outsource it to a third party specialist you trust. Or you can keep the USB stick with the keys in a bank safe, and if you want to do a transfer, bring a dedicated netbook with 3G access to the safe, do the transfer and put the stick back to the safe.

The point is flexibility rather than any specific measure in isolation.

Onus Probandy June 16, 2011 at 8:52 am

He uploaded his unencrypted wallet to a number of online storage locations.

This is the equivalent of keeping your gold in a locker at the gym.

integral June 16, 2011 at 10:15 am

Which does not bode well for someone less savvy about bitcoins. (He was an early and enthusiastic joiner, if the thread is to be believed.)

Yohan June 15, 2011 at 11:03 pm

The guy who had his Bitcoin stolen was not taking precautions (read the story further). He had 4 different mining software running on his computer 24/7, connected to the internet. He was also a member of various mining pools and such with usernames and passwords. He also uploaded his wallet.dat file to 3 different backup services. (an admin of a backup service can run a file check for files with any name)

The day before he got cleaned out his mining pool payout address got hacked and changed, yet he never bothered to transfer his Bitcoin to another wallet for safety.

This was not just some average user sending and recieving Bitcoin, he was doing things the normal person does not do. He was doing advanced things but not bothering to do advanced security.

The fact that he cannot get his money back from such a theft is a ‘good thing’. Good in that the security and irreversibility of the system is sound. If someone was able to interfere with such a transfer, means the State could do the same thing anytime.

integral June 16, 2011 at 2:58 am

Unfortunately in making the system safe against the state, it now has characteristics that make it less attractive than a physical standard (gold coins or other free market currencies or even state fiat money) to regular perusers of currency. One of the biggest requirements of using a commodity as money is that most people accept the commodity in trade, and with a weakness like this I think that introducing BitCoin to the general public, as well as larger corporations will be difficult. My parents, for example, won’t even use a bank card. My mother would prefer to receive her wages in cash.

Jimmy June 16, 2011 at 3:07 am

The system is hardly static. Development of the bitcoin ecosystem has been remarkable. It will only be a matter of time before the tools are created to make the system as easy and as secure as possible.

integral June 16, 2011 at 7:57 am

Which, unfortunately, has been the software business biggest hurdle for the last 20 years.

Onus Probandy June 16, 2011 at 8:50 am

And who exactly has told you that the promoters of Bitcoin want to make your parents do anything?

Your example for why bitcoins won’t be used by the general public and larger corporations is that your parents won’t use bank cards. This is despite bank cards being widely used by the general public and larger corporations.

I’m sorry, but designing a monetary system around what your parents will or won’t use is a ridiculous idea.

integral June 16, 2011 at 9:47 am

And I’m sorry, but designing a currency that the global market won’t accept with the goal of it functioning in the global market is a retarded idea.
Why the hell would you design a train-track that only accept whales and cougars? Oh sure, for your specially designed Whale and or Cougar shaped trains that only you use they’ll work out great, but so what? Most people take trains because they’re useful, not because they’re shaped like whales and cougars.

I’m talking about the feasability of Bitcoins as a global currency used in every day life. THAT’S what money is for. It’s not so you can circle jerk about giving the finger to the state. People use money to buy things. When people are willing to accept dollars or bitcoins for their services and goods, THEN it’s functioning in the market as money.
At the moment the only viable market is among other hardcore bitcoin afficionados. By that rational, freaking baseball cards are a viable global currency.

So you have to ask yourself, what does the everyman want out of his currency? What does a corporation want out of a currency? How can bitcoin supply that?

If bitcoins only pros are anonymity and a low and mathematically predictable rate of inflation, why would the everyman or a corporation give a damn, when you consider the cons, which is a hell of a security hassle and anonymity? (Corporations care VERY much about a little thing called accounting, and the everyman considers the use of a dollar bill as anonymous as randomly generated addresses, not to mention the security dilemmas that would end up staring a large financial department in the face)

Never did I in my wildest dreams consider that someone would design a market currency by not taking the market and potential users of the currency into consideration.

Ron June 16, 2011 at 7:45 pm

Again, your grandparents aren’t the global market. The global market accepts bank cards despite what your grandparents do. You seem to be missing the point on a lot of different issues.Back to security, yes, the weakest link is always you. If someone can trick you into giving them your gold or your bitcoins, then you’re out of luck. It’s still safer than gold. If you’re paranoid you’ll forget your key and need to write it down, you can always put the key in a physical safe or whatever. When you put your gold in a safe, and someone manages to illicitly gain access to the safe, then they immediately have your gold. They have to know what the key is for, they must gain access to your wallet, and they must do this before you find out your key has been compromised and you get a chance to re-encrypt your wallet.

integral June 17, 2011 at 3:48 am

And again, the global market is not dependent on decentralization or anonymity, and either of those can be gotten through other means than bitcoin. Yes, most people accept bank cards because it makes everything EASIER. IT also makes your money less secure. (Ie, if someone jacks your card they’ll take a lot more money from you than you normally carry in your wallet.)
This indicates that the everyday user prefers ease of use to security, anonymity and decentralization. Not a very good indicator for what the BitCoin is designed to be.

Also, getting access to your computer is easier than getting access to your safe. Carrying out a piece of paper and your harddrive is easy. You think a modern burglar wouldn’t know what a complex key on a piece of paper kept in the most secure part of the house, your safe, would mean in a bitcoin economy?

Peter Surda June 17, 2011 at 4:32 am

Integral,

And again, the global market is not dependent on decentralization or anonymity

It does not depend on it, but these features create a comparative advantage.

Peter Surda June 16, 2011 at 9:26 am

The argument is completely missing the point. You can use Bitcoin in a completely offline physical way, e.g. through Bitbills. If one can use a banknote, one can also use a Bitbill.

Think of Bitcoin as a platform rather than a complete solution. Think of it as of linux. If you say, for example, my mum doesn’t have a computer so she can’t use linux, that is quite irrelevant, because it could still be running on her mobile, TV, washing machine, car or water heater.

integral June 16, 2011 at 9:53 am

And at that point, what characteristic does the bitcoin have that is superior to the dollar?
Only the mathematically predictable inflation rate, at which point your normal everyman might as well get a gold coin or invest in some commodity which is not in fact designed to inflate.

Peter Surda June 17, 2011 at 5:08 am

I think I answered this elsewhere in the meantime: decentralisation and open source.

Daniel M. Ryan June 16, 2011 at 11:09 am

I think I know why Bitcoin has induced skepticism vis-a-vis gold. This simple thought experiment will show it:

Imagine that the government has forbidden exchanges in both gold and Bitcoin, and is capable of perfectly enforcing the ban. [Please, suspend your disbelief with respect to the latter point; it's a thought experiment.] After the ban, what can you do with your gold? What can you do with your Bitcoin?

The point I’m making is informational. It would be part of a neutral analysis of gold vs. Bitcoin, just as gold’s imperfect fungibility vis-a-vis Bitcoin would be. (Digital gold has to be stored somewhere, as others have noted.)

integral June 16, 2011 at 11:19 am

They would both have to be stored until a viable use for them is discovered, I suppose. (Let’s say we wait until either becomes legal tender again)
Bitcoins are easy to store in a small space, but it’s hardware will decay over time.
Gold is harder to store in a small space but will not decay.

Peter Surda June 16, 2011 at 1:57 pm

If you want, you can etch a private key of a Bitcoin address onto a gold bar :-).

integral June 17, 2011 at 3:36 am

OR you can etch the binary value of your wallet onto the gold bar instead :P

Peter Surda June 16, 2011 at 2:31 pm

Hypothetically, the argument makes sense.

So, if someone really thinks this, I’d like to remind him or her how “successful” the governments have been in the “war on drugs”. I think this should be enough to diffuse the objection.

Daniel M. Ryan June 16, 2011 at 3:11 pm

The point I was trying to make is that gold has a prior value, one that exists even if there’s no such thing as a medium of exchange. With Bitcoin, there isn’t any such prior value because it’s specifically designed to be a medium of exchange. The Bitcoin skeptics here seem to consider this prior-value differential decisive.

Trouble is: the counterpoint – that Bitcoin is a pure medium of exchange, whose value is not affected by non-monetary uses of it – has already been commandered by pushers of fiat money! It’s this kind of crossover noise that can make someone blurt out, “Ye gods! Fiat money!”

Of course, Bitcoin is free-market money whose value is determined solely by the subjective marginal utilities of its voluntary users as balanced by the subjective marginal costs of acquiring some (e.g.: mining, purchases, trade.) What I’m trying to do is point out why some Austrians are saying Bitcoin is a lot like fiat money. What the two have in common is that their value is solely derived from being a medium of exchange.

And yes, my example was hypothetical: it was actually meant to be pedagogocal. If I get going on realism, I might get both side yelling at me :)

James Dahlberg June 16, 2011 at 3:50 pm

The bootstrapping process is just taking pace at a speed difficult for us to comprehend. Two years and the commodity has already a price history with which to build off of.

Yohan June 16, 2011 at 1:23 pm

User rezin777 on the bitcoin forum makes a lucid point

“It points out the fundamental flaw in people’s ability to protect themselves. Probably because they’ve been relying on other people to do it for them for far too long. Bitcoin banks and insurance companies will come about that make Bitcoin as safe as any other property. But these securities come with a price. I’d rather not pay the price, because I am perfectly capable of securing my own property. Thankfully with Bitcoin, it’s my choice.”

Critics of Bitcoin and the theft issue, are no doubt used to the State being their provider of security, and despite libertarian rhetoric, are not willing to take responsiblity for providing their own. Bitcoin is a litmus test, it throws the blanket of the State away.

As Hoppe shows, a true free market will lead to providers of security springing up. We have already seen this with quite a few Bitcoin protection services planned. And as rezin777 says, this security will come at a price, and it will be up to us whether we want or need to pay for it.

The fact that 500,000 can be transferred, with no recourse, comeback, or manipulation of the system, is actually proof of the security of Bitcoin and it’s anonymous exchange mechanism.

Iain June 16, 2011 at 2:25 pm

Wow, Bitcoin is not fiat at all. Its value is based on the free interaction of individual actors in the market, not on “fiat” or power.

integral June 17, 2011 at 3:35 am

By that rational, dollars are not fiat either.

Daniel June 17, 2011 at 4:10 am

Rationale

What he means is that there ultimately is no legal tender law for bitcoins

Peter Surda June 16, 2011 at 4:30 pm
Anthony June 16, 2011 at 8:15 pm

The difference is that the man from Taiwan actually DID something to lose the money… this is a completely different case then someone taking it from your account when you are sleeping.

Peter Surda June 17, 2011 at 1:16 am

The poor guy with stolen Bitcoins also “did” something: he left his computer running while he was sleeping.

Sammi June 20, 2011 at 2:19 am

And, the value of a Bitcoin drops to a penny with a hack of Mt. GOX.

Colin Phillips June 20, 2011 at 2:51 am

Yeah, it’s very interesting, the full story is here: http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm

The good news for bitcoin holders is that Mt. Gox claims to be able to reverse the trades involved in the hack (which will move the Mt.Gox initial trading value of Bitcoin back up to about $17, at least as an opening price when the exchange does reopen).
The good news for Mt.Gox’s competition (e.g. Trade Hill http://www.tradehill.com/?r=TH-R13947) is that they now grab a huge chunk of market share in one fell swoop.

This is the free market in action – a supplier is exposed to supply less security than they claimed – in order to remain in business at all, they must improve their services, and those who can do so better/faster than they can get rewarded for doing so.

P. Lotor July 18, 2011 at 1:30 pm

The op does not use the word “fiat” correctly. Bitcoin is absolutely NOT fiat currency. Fiat is by decree. The government decrees you must accept dollars, no one decrees you must accept bitcoins.

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