It's a kind of distributed Ponzi scheme that lacks the ordinary intent and centralized accounting associated with them.
It's different from startup in that a startup's shares increase in value, at least theoretically, on the likelihood of future dividends from the company. Startups can have bubbles or be Ponzi schemes too, but if they're indeed successful, they can earn money, and that money (or at least the bet that it will materialize) is a basis for sound investment by passive third parties who have capital.
Bitcoins increase in value only if you can sell them to future owners who are willing to pay more than you did. It's not quite a Ponzi scheme, but it has all of the important characteristics of one: old money is paid back from the new, and the value increases only on the hope that you can involve more new money.
And if there are less future owners who are willing to buy then it decreases in value.
You make it sound as if there is a set amount of buyers and transactions and the only way bitcoin can have value is if its price goes up which isn't the case.
As long as people are willing to accept bitcoins as having value then people are willing to buy it at a certain price. What that price is is determined by the market. It isn't necessary for bitcoin to either go up or go bust.
"old money is paid back from the new, and the value increases only on the hope that you can involve more new money."
Old money isn't necessarily paid back from the new. Money has already exchanged hand. Those that hold bitcoins hold a value of whatever the market considers worth. That may be 0, that may be 1m. That isn't any different from anything else. I.e. those who have dining tables hold such a value as the market is willing to pay.
And of course the value increases only if more people are willing to buy than sell i.e. involve more money.
I'm making no such assumptions; I don't think I'm making the argument you think I'm making.
As for "money has already exchanged hands," that can be true of any Ponzi scheme as well. When we talk of "old" and "new" money in a Ponzi investment scheme, we don't mean two literally segregated categories. You might have some old money and some new money at the same time.
I honestly don't see why. Most of the people involved in the major Bitcoin businesses, or in promoting Bitcoin publicly, are reprobates. Have you spent any time reading bitcointalk.org? Hal is very different from them.
ignore them. The vast majority of people, on this board and otherwise, view the attainment of money as the single main goal of their life[1]. If you look at the comments they made towards you, one basically says 'why would you bash bitcoin when you already have mined bitcoins?' as if as long as you already have your stake, theres no moral ambiguities with the situation. Apparently criticism can only come from the "angst, self-hatred, jealousy" of poor people.
Personally I think you have valid criticisms. If I just want to convert dollars to btc and vice versa, why do I care what chain I am on? Bitcoin is just a brand, but the technology can be forked and new chains can be created. Granted you wont have a convenient exchange to use, but do you really think a Mexican druglord is going to transfer billions of dollars to you through mt gox for btc?
Perhaps the govt never stepped in to curtail bitcoin because they realized that speculation and greed would ruin this chain (and then possibly be in position to influence the next chain).
The tech is great but the pyramid scheme implementation is a critical flaw. Does anyone believe that the intrinsic value of having an alternative currency like btc outweighs the money being made by the prospectors?
> Perhaps the govt never stepped in to curtail bitcoin because they realized that speculation and greed would ruin this chain (and then possibly be in position to influence the next chain).
I'd bet this is one of those situations where it's better to assume human ignorance than conspiracy in the context of government.
Or the seventeen others founded on the same technology. It's important to distinguish the Bitcoin software from the particular block chain in whose private keys naive people are now speculating.
I'll give it a go. The early distribution of bitcoins seems to have been enough to motivate lots of relatively early adopters to promote it aggressively, maybe out of ideology or maybe just out of greed. Their claims, which fueled the recent speculative frenzy, have always been that Bitcoin would have a continuous, exponential growth against all other currencies. "It always goes up." "Get in before it's too late."
I can see how relatively small amounts of money could be invested into Bitcoins as speculation or just play. Several tens of millions of dollars have presumably been transferred to Bitcoin holders so far, in the aggregate. But many people are investing on claims that a single bitcoin will eventually be worth $10,000, $100,000, or $1 million. For that to happen, the world would have to transfer massive wealth to the early adopters, as this early adopter explains:
Why would anyone do that rather than setting up an alternative? Massive delusions are possible, but it seems far more likely that the claim that a bitcoin will be worth $10,000 will start to seem ludicrous to everyone, as it obviously is.
After that, why would anyone buy a bitcoin for $100, or even $30 or $10? There's little practical use for them other than drugs or illegal gambling. And they're hardly worth speculatively buying at $100 just so that they could be sold at $120 or $150.
It's got to die eventually, unless everyone decide that they don't mind depreciating the value of everything else just so that the early adopters of this scheme can have untold wealth dumped into their laps. It's a fascinating technology, but that doesn't mean the speculative delusion will last forever.
Pyramid scheme? Just so. Of course, to some degree so is gold -- but gold has a much wider existing distribution (compared to Bitcoin), a much deeper history, and backers far more significant, both intellectually and financially, than the childish ideologues of bitcointalk.org.
I'm sorry, but your comment seems blinded a bit by ... I'm not sure what the right word is? angst, self-hatred, jealousy? There's a lot of negativity in general coming from the HN crowd towards BTC, I'm guessing because everyone here was more than capable of installing the original Satoshi client and mining early on, but chose not to or didn't hear about it. With BTC now on the rise, of course it all seems so obvious, and oh so unfair.
Everyone had the chance to mine in the earliest of days, that's certainly true for me and I sometimes kick myself about it. Hindsight is 20/20.
Well, rather than armchair psychology, you could consider the points I made themselves. Do you think there is a good reason for the world to transfer massive wealth to those who currently own bitcoins, rather than setting up an alternative (assuming that the fascinating technology of Bitcoin solves a problem that anyone except ideologues have in the first place)?
I considered your points. You pretend as if the claims of early adopters are to blame for fueling the recent "frenzy". Really? Are you really saying a group of early adopters are entirely to blame for a market appraising a formerly unknown asset?
If you lacked the vision, the luck, the timeliness, etc. of an early adopter, fair's fair. Pay them their respects. I still kick myself for not having my wits about me when I first heard about Bitcoin.
As for your alternative, I don't see why not. You could create a clone of Bitcoin today, why not do it yourself? They did that with Litecoin, too. In fact the author of Litecoin created it because he felt "wronged" the same way you do now. He felt as if too many people missed the boat with Bitcoin, and clearly people should have a second chance of early adopting such a revolutionary concept.
As you'll see from my comment history, I was playing with significant money in Bitcoin early on. I have at least paper gains that are quite satisfying. Nothing I'm saying is personal or is based on any kind of jealousy. It's weird of you to assume that it is.
I call BS here absent a Bitcoin signature proving your supposed ownership of "significant" Bitcoins. If anything is weird, it's that someone who was supposedly interested enough in Bitcoin to buy or mine a significant amount "early on" has spent the vast majority of your past umpteen comments bashing Bitcoin. I think it's sour grapes, and it surprises me that so many on HN, who cheer on every Instagram knock-off that's sold for millions of dollars, are so bitter toward the person or persons who invented and built a truly revolutionary technology that has the potential to vastly change the way we do business.
I'm not "bitter" at Satoshi Nakamoto, or really at anyone. I'm trying to do what I can, as I have from the beginning, to prevent people from falling for a scam. I'm not alone in doing this, and many other good analysts are doing the same thing. Is it worthwhile to try to apply arbitrary, amateur, and frankly embarrassingly bad psychology to all of them?
It is unfair of jnbiche to close discussion by simply saying sour grape, but you seem to be too determined - maybe even evangelical looking at your nick - perhaps its something to do with leftist ideology?
In any event, the article raises two points.
1 - the currency is deflationary.
I'd argue that it is an inherently stable currency no different than gold. Many economists may say that a hard currency is not a good basis for an economy, but many economists say it is. That includes Hayek who won a Nobel for his theory of how best to allocate resources.
So to say that bitcoin will fail because it is deflationary is at best an opinion. You're free to hold it but that hardly makes bitcoins a scam.
2. Something better may come along.
That is basically saying bitcoins may fail, therefore it is a scam. In that case, most of the companies YC funds are a scam. They too disproportionately reward the founder and the first employees. You may say but they create a hard product of value or offer a service. Firstly, I'd say bitcoins is a product. It is not tangible, it is only 0s and 1s, but it is a product created out of applied mathematical theories and formulas and computational power. I'd also say it is a service for obvious reasons.
Even assuming you disagree with the latter points, lets go back to the YC funded company. Lets say they create something like google - a service - facebook - a service - wordpress - a product. Lots of people invest in these - making the founder and first employees rich beyond means - then something better comes along. Are you suggesting google is a scam? Oh but google has value. Say who? It provides a service - so does bitcoin.
The world already has done so. And of course there is a good reason. Like with every creation, they made this possible, they took the risk, maybe even high risk since the government could have gotten involved, and now they are rightly being rewarded for it.
What do you suggest, we tax them 90% so that we can all be equal?
My dislike of BTC is if it prevents an anonymous cryptocurrency from being deployed -- either by displacing it (like craigslist displaces better alternatives), or by collapsing and scaring everyone away.
If it's just a proof of concept of cryptocurrency in general, it's cool. It might remain a decent currency for certain uses in addition to other more transactional currencies, though.
Everything you've described can be applied toward any type of asset.
1. Early adopter wants more buyers in their market to drive up share price? Check.
2. Price bubbles up and crashes due to high expectations? See number 1? Check.
Unlike any asset I'm aware of, this one is open-source and completely transparent.
> There's little practical use for them other than drugs or illegal gambling.
I think these types of statements will be looked back at contemptuously years from now, even if bitcoin fails and is replaced by something else. This is a completely new field. How can you imagine bootstrapping a currency like this? It can't start with nobody receiving any coins, or it couldn't be used. You could give all the coins to a single entity and have that entity distribute (like Ripple is doing) but this is even less fair than Bitcoin, especially since OpenCoin is keeping half of the coins they're minting.
Practically speaking, there is plenty of use for Bitcoins. I don't have to give anybody my personal information to transfer value, which is impossible to fathom in any other existing commodity. There's even more use for them as it grows and concepts which have not been fully implemented (smart property and the like) are developed into/around the protocol. Every month a great new idea pops up, like fidelity bonded ledgers or some zero-knowledge proof system which makes bitcoins pop into and out of existence without a linear path -- all without a central entity and only some crazy tricky math and sometimes game theory.
Gold itself has had a nasty history too. Remember, it was bootstrapped (relatively speaking) off a market of financing war and has been periodically seized by governments for that end. I personally think gold is much more secure of an asset now, as we have to trust that nobody will seize a majority of the hashing power in the bitcoin network for our coins to be valuable, whereas with gold we only have to trust that they are scarce. It's something like NSA vs. Science, really.
Every bubble could be its last bubble and just like the early adopters who were smart enough to cash out in 2011 when they saw the opportunity, there are some who were smart enough to cash out during this last bubble. This is why it is absolutely pointless to call it a ponzi scheme. The economic base does not depend on new users financing it. Massive bubbles do, which is why they should be ignored/hedged against.
On "little practical use," I mean today. Why does anyone buy a bitcoin today? The only reasons that I can see are (1) ideology, (2) illegal activities (including the circumvention of gambling restrictions), or (3) speculation, hoping to sell it to someone who will pay more later.
I think the technology is great. The technology itself gives absolutely no reason for those who don't own bitcoins (in the main block chain) to buy them for any value.
Are we talking about "anyone" buying a bitcoin, or some people? The latter is what truly matters, as it's not immediately useful for anybody. It'll have to grow into its niche.
Want to transfer value to someone half-way around the globe without dealing with Western Union, paying huge international fees, or giving your personal information out? I invested in a Chinese company which went on to pay my investment back and I still collect weekly BTC dividends. I never had to pay more than a dollar in fees the entire time, or give anybody my information (except the tax man).
Circumventing government controls is part of the value, the other part is removing the balkinization of finance which has made a global economy impossible or extremely unaffordable. Imagine being able to 'settle' a gold transaction with someone within 10 minutes, knowing it's not fake gold, half-way around the world, and being able to spend it immediately after back in the 1800's. What is this USD you speak of?
How about simple person to person micro-transactions? Tipping on reddit is a great example. I think it'll find a great niche there. Want to send someone a few cents for reading a good blog post? No problem
Secondly it also excels in that I can send money to someone I don't know for a service, and while they could disappear and run without me having much recourse, they can't steal/lose my bank details or credit card number. There's a different level of risk, one that pays off with small transactions rather than large. Credit cards are the other way, I'm unlikely to call mastercard to reverse a $0.2 transaction, and lots of the consumer protections (in the UK) only apply on certain size transactions.
To pay for something, I have to give someone enough information to take money out of my account. To send bitcoins to someone, it's up to me to send it.
Currently, the maximum transaction rate that Bitcoin can theoretically handle is about 7 transactions per second. Increasing that limit will require a hard fork that breaks all existing clients. A chunk of the community and at least one of the developers is really hostile to the idea, partly because it increases resource usage - every node needs to receive every single transaction and store it forever. At the current, fairly low, transaction rate limit that's 52 gigabytes of new transactions every year.
The other reason is that they feel that, without transaction rate limits, mining won't be profitable when the rate of coin subsidy drops off. Some argue that we need the competition for limited block space in order to drive fees up enough to keep mining profitable. Those same fees kill microtransactions.
Since a hard fork would require agreement from essentially everyone involved in Bitcoin, there's essentially no chance of this limit being increased.
> Since a hard fork would require agreement from essentially everyone involved in Bitcoin, there's essentially no chance of this limit being increased.
The bitcoin network underwent a hard fork a couple weeks ago due to a bug in the implementation of the on-disk database.
The developers reached out to the mining pools and got the vast majority downgraded within 8 or 12 hours. A day or two later a new version was pushed out that mimicked the old behavior up until the point that a supermajority of nodes were upgraded, and then switched to the new behavior.
Forks have happened before, and the community is close-knit enough to resolve them. Everyone's primary goals are a) being ideologically neutral and b) keeping the network running, in equal measure.
For me, the main thing that says "more like a pyramid scheme than like a currency" is that the number of BitCoin in circulation is limited.
Suppose that BitCoin becomes so popular that a country wants to join in. The normal way to do that is to have the central bank exchange your current currency with newly minted 'new' currency. With BitCoin, that isn't possible. The only way to join in is to somehow get BitCoin from existing owners. That will make the BitCoin exchange rate go up. The ones benefitting from that are those who already are 'in'.
Another way to look at this: if this becomes the world's currency, that 1 BTC you mined years ago for $1 of electricity on that $500 PC will be worth 1/21M-th of the wolrd's wealth, and will keep its worth forever.
It wouldn't be right to assume that because Google has many smart people, everything they do as a result is smart. Google is hardly an innovative company anymore. In fact, they seem mostly to be coasting on existing models and paying lots of people mostly just so that they don't work for existing and potential competitors.
I think this is a fallacy stemming from the fact that Google's initial products were so unbelievably successful and important that they are likely to be permanently hard to top. I do not agree with you that Google is no longer innovative, and I particularly disagree with the notion that they are so uninnovative that they'd believe they lack the technological prowess to compete with Groupon.
Oh, I don't mean to suggest that at all. I'm just trying to suggest that an offer from Google doesn't, to me, at present imply that the offeree has any special merit. Google is cash-rich and can use cash strategically.
It's a huge myth that Bitcoin is beyond the reach of governments. There are three reasons for this.
First, Bitcoin isn't actually decentralized. It's not a true open-source community of developers; the core group is tiny, and few others are knowledgeable about the protocol, which is poorly documented. Remove the mainline client and you'd destroy Bitcoin. The exchanges are hugely centralized. Exceedingly few people use Bitcoin for anything else other than buying and selling dollars, and there's only one place to do that in any volume - an unregulated Japanese exchange of questionable legality.
Second, Bitcoin is extremely vulnerable to denial-of-service attacks, both network-based (even the original developers were aware of this) and as a result of the higher-level Bitcoin protocol itself. The best analyst on these matters, someone using the label "ComputerScientist" at, among other places, Ben Laurie's blog (links.org) estimated that it would cost less than $1 million to topple the system without even any cleverness - just by obtaining a majority of the "legitimate" hashing power of the network.
Third, though this is more speculative, most people don't like to engage in financial crime; it's not psychologically the same thing as downloading a CD or a television show. Nobody thinks they're supporting significantly illicit activity by downloading some music that otherwise would have cost them $7. People can be easily persuaded -- rightly -- that they're supporting money laundering, significantly illegal and immoral purchases, and so on using Bitcoin. Indeed, because Bitcoin is essentially unneeded for legitimate transactions (and probably can't compete in the long term on transaction fees with other legitimate payments systems), its primary use aside from speculation is currently illegal activity, and there's no reason to think that will change.
Those are the most superficial points of the post; everything else he says is spot on, particularly the disconnect between the claim the the protocol is easy to update and the nearly impassable practical obstacles to doing so for a contentious update.
He's studying the protocol yet doesn't know when generation ends or that each coin can be divided down to the eight decimal place. It doesn't give me confidence he has done a thorough job.
The author also writes:
--
Due to the
cryptographic nature of transactions, it's simply not possible to have
realtime transactions with bitcoin as the network scales (it already
take 5-10 mins on average for the network to see a single
transaction).
--
When transactions were never meant to be real-time.
The only criticism that is valid IMO is this:
--
Having the ability to upgrade algos is really, really important IMO.
As it stands, the entire bitcoin economy would go to zero, nearly
instantaneously, if SHA-256 is broken. There MUST be a way for the
network stay ahead of crypto changes and improve security over time.
Rotation of currency, as in the real world, must be designed in.
--
But he offers no means of doing this while maintaining a decentralized network.
I think you've misunderstood his focus. He's describing the network protocol, not the overall "Bitcoin system" that's sometimes called the "Bitcoin protocol." He explicitly points out that the economic details are beyond the scope of his argument.
You could tie an upgrade of the protocol to a consensus by a majority (or perhaps supermajority, if you're clever) of mining strength. Or you could try to give up the total decentralization of Bitcoin, given that it's an illusion anyway and the source of most of the expense, security problems, and unwieldiness that will come to haunt the protocol.
That's a good point, but if he studied the protocol, he should still know when bitcoins stop being generated and how divisible they are.
---You could tie an upgrade of the protocol to a consensus by a majority (or perhaps supermajority, if you're clever) of mining strength.---
The problem then would be that a >50% attack could overtake the entire network by inserting malicious code in the upgrade.
As it is now, the damage that a >50% attack could do is somewhat limited as long as it doesn't persist for too long.
---Or you could try to give up the total decentralization of Bitcoin, given that it's an illusion anyway and the source of most of the expense, security problems, and unwieldiness that will come to haunt the protocol.---
Decentralization is the only way a program that would be as targeted by law enforcement as bitcoin can survive.
Bitcoin's not at all resilient in the face of an attack by a government.
You're right about limiting damage from a 50% attack, however. Of course, you could agree in advance on an amount of time the majority of hashing power would have to assert that an upgrade was needed, but it's possible that would raise other problems. It may be that there's no good way to handle upgrades without an out-of-band mechanism, but if so, that counts as a strike against Bitcoin, not one in its favor.
I haven't seen a good argument for why the blocks need to be prevented from being found in advance or why the proof-of-work has to depend on the contents of a particular new block (rather than simply authenticating that block).
If that requirement is removed, anything that's (1) useful, (2) hard to do, and (3) easy to check could satisfy. Searching for Mersenne primes could work, for example.
That said, the need for proof-of-work comes only from Bitcoin's arbitrary design criterion of full decentralization. It's an academically interesting criterion but one that is almost certainly too expensive in practice for nearly all applications. Eliminate full decentralization and, even if you allow practically useful forms of decentralization, you get a much simpler, easier-to-defend, secure, and cheaper system. Even if Bitcoin plods along under its current speculative bubble, there's very little reason to think it will be able to compete successfully with other payment systems on transaction fees, because in the long term, those transaction fees will need to pay for all the proof of work.
I think you may have missed the point of the comment to which you were replying. What's the humor of the comic, in your view? I can't discern it myself.
It does seem to need a punchline. Perhaps a zoom out to a larger group of people saying "Bitcoin Rally!" sitting on piles of Bitcoins that they're compulsively counting.
It's different from startup in that a startup's shares increase in value, at least theoretically, on the likelihood of future dividends from the company. Startups can have bubbles or be Ponzi schemes too, but if they're indeed successful, they can earn money, and that money (or at least the bet that it will materialize) is a basis for sound investment by passive third parties who have capital.
Bitcoins increase in value only if you can sell them to future owners who are willing to pay more than you did. It's not quite a Ponzi scheme, but it has all of the important characteristics of one: old money is paid back from the new, and the value increases only on the hope that you can involve more new money.