Bitcoin: What is it, in Plain English

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Leesbro63
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Bitcoin: What is it, in Plain English

Post by Leesbro63 » Mon Jun 20, 2011 1:28 pm

[Note: restarted thread, check posting dates]

What, in plain English, IS bitcoin? And how can I as an investor or consumer benefit?

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Post by bhmlurker » Mon Jun 20, 2011 1:36 pm

As someone who's involved in bitcoin right now, I can tell you it is:

1) Unstable. Exchange rate vs USD has been fluctuating massively in the past month.

2) Unsafe. Trading websites have been attacked repeatedly by hackers and forced to shutdown for hours/days at a time. You may not be able to change your money back to USD quickly.

3) Illiquid. There isn't a whole lot you can buy with bitcoins right now.

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Post by Random Musings » Mon Jun 20, 2011 1:54 pm

Interesting article on Bitcoin with additional links.

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Post by greg24 » Mon Jun 20, 2011 1:57 pm

Its an attempt a a digital, universal fiat currency rather than a state-sponsored fiat currency. Supposedly avoids political turmoil that can inflict currencies, but obviously has its own unique problems.

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Post by sscritic » Mon Jun 20, 2011 2:01 pm

Bitcoin is sort of like that fake Federal Reserve experiment you did in your high school economics class, except it's real and a bit more utopian. The bank in the experiment--in this case the pseudonymous creator of Bitcoin, Satoshi Nakamoto--offered up a limited number of currency units to be purchased by investors, who could then trade the currency with each other or use the currency for transactions. Maintaining the currency's value would require the bank to forge more units to allow for the market to expand or to take units out of the market to control inflation. Theoretically, an automated system for creation and maintenance of the money supply could handle the risk of inflation in the absence of a central bank to control the money supply. At least that's what Milton Friedman argued, when he called for the abolition of the Federal Reserve.

That basic formula with the utopian "decentralized" caveat drives the Bitcoin model. Nakamoto forged the original 50 units of Bitcoin (BTC) currency in 2009 supplying a small number of users with the money and outlining an algorithmic system through which more units could be created. Each unit bore a unique code that, instead of being printed on notes, was saved onto a hard drive. Essentially, creating more units required drafting more codes using cryptographic techniques called hashing and forced work. Nakamoto outlined a formulaic and democratic process for how this would work in such a self-policing way that relied both on users and on the predefined process that would cap the total supply of Bitcoin. Users would store their currency on their machine's hard drive in a digital wallet with a unique address. If a thief stole the wallet--or essentially, hacked the file's code--the money was gone. Just like real cash. However, in a sea of faceless, nameless, and otherwise unidentifiable proxy IP addresses, thieves would be tough to catch. (It's worth consulting an excellent, more in-depth explainer on how Bitcoin works published last week in The Economist.)
http://www.theatlanticwire.com/technolo ... ite/38860/

Here is the economist link:
http://www.economist.com/blogs/babbage/ ... l-currency

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Post by nisiprius » Mon Jun 20, 2011 2:08 pm

I am impressed by the stunning brevity of the period between bitcoin's introduction and the emergence of issues whose nature I don't fully understand but which seem to be extremely serious.

Wikipedia works quite well as a self-organizing social structure that produces authoritative work without a central authority, but it's not so easy when what's at stake is money and not just the joy of contribution.

Maybe it isn't so easy to operate a currency. Maybe those central bankers with their treasuries and armies and navies behind them actually know something after all.

I think my frequent flyer miles may be a more stable currency than bitcoins.

(I just went back and changed all occurrences of "Bitcoin" to be all lower-case... is that correct?)
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Post by FNK » Mon Jun 20, 2011 2:23 pm

Computer professional here. ;-)

Bitcoin is an attempt to create digital currency with the following characteristics:

- Validity is assured not by a government printing difficult to forge notes and auditing banks, but by distributed computer algorithms. Basically, a coin or a transaction comes with a "proof of work" which is incredibly difficult to compute.

- Amount in circulation is governed by an algorithmically predetermined rate, not by a government.

- Anonymity close to physical cash.

I personally don't play it. I looked at it when it was early in the game and I had a chance to mint some coins on my computer, and decided it was not going to take off. When it did take off, I was miserable that I missed the boat, but figured that trying to cram all transactions in the world into a single world-wide chain is not going to scale. There are arguments that it will, but I'm not buying them.

So it's an interesting project, I'm watching it with curiosity but not participating. I spend my spare computing cycles at the RC5-72 challenge of http://distributed.net instead, which suffered massively when bitcoin was introduced. ;-)

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Post by Noobvestor » Mon Jun 20, 2011 2:30 pm

I like Alex's summary best.

See also: viewtopic.php?t=76493&mrr=1308586478 8-)
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Post by Alex Frakt » Mon Jun 20, 2011 2:55 pm

nisiprius wrote:I am impressed by the stunning brevity of the period between bitcoin's introduction and the emergence of issues whose nature I don't fully understand but which seem to be extremely serious.

Well, there is money to be made (stolen) so it shouldn't be that surprising.

The latest in bitcoin follies:

Hackers have written a trojan (what most people would call a virus) specifically to steal the bitcoin info stored on your computer. http://www.symantec.com/connect/blogs/a ... s-are-ours

Anyone can "mine" bitcoins by letting your computer run crytographic problem solving exercises in the background. Symantec has noted that bitcoins are approaching a value where it will be profitable for botnet controllers to switch from DDOS-attack extortion to bitcoin mining. Once that occurs expect even wilder fluctuations in bitcoin value, and possible government intervention, as the Eastern European crime syndicates decide how to cash in their chips.
http://www.symantec.com/connect/blogs/b ... net-mining

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Post by DaveB85 » Mon Jun 20, 2011 3:18 pm

Alex Frakt wrote:Anyone can "mine" bitcoins by letting your computer run crytographic problem solving exercises in the background. Symantec has noted that bitcoins are approaching a value where it will be profitable for botnet controllers to switch from DDOS-attack extortion to bitcoin mining. Once that occurs expect even wilder fluctuations in bitcoin value, and possible government intervention, as the Eastern European crime syndicates decide how to cash in their chips.

Bitcoin mining will become less and less profitable because each coin requires more work than the previous coin.

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Post by Alex Frakt » Mon Jun 20, 2011 3:40 pm

DaveB85 wrote:
Alex Frakt wrote:Anyone can "mine" bitcoins by letting your computer run crytographic problem solving exercises in the background. Symantec has noted that bitcoins are approaching a value where it will be profitable for botnet controllers to switch from DDOS-attack extortion to bitcoin mining. Once that occurs expect even wilder fluctuations in bitcoin value, and possible government intervention, as the Eastern European crime syndicates decide how to cash in their chips.

Bitcoin mining will become less and less profitable because each coin requires more work than the previous coin.

Which means that all new ones may eventually go to criminals filling up unsold cycles on their botnets. They've got the computing power and don't have to worry about the electric bills

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Post by Oicuryy » Mon Jun 20, 2011 3:47 pm

Bitcoins remind me of beanie babies -- cute collectables that people buy in hopes of selling for a profit. But these beanie babies are digital. They can be transferred over the internet with a few mouse clicks. There are even a few web sites that accept them as payment for goods and services.

The cuteness is in the way bitcoins are created. Anyone can create them by running a peer-to-peer computer program. The program tries to solve a cryptogram. Solving one creates some bitcoins. The network of programs limits both the rate at which bitcoins are created and the total number created, thereby assuring a scarcity.

There are lots of ways you can get involved. You can try creating some. Or you can buy some for the fun of collecting. Or you can try to buy low and sell high. Or you can get some and try to find a place to spend them.

I thought Alex might put up his bitcoin address on the Bogleheads donation page. But it sounds like he is not a fan.

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Post by nisiprius » Mon Jun 20, 2011 4:36 pm

Could an outfit with supercomputers like Lawrence Livermore National Laboratories or the NSA potentially amuse themselves by doing disruptive things to the bitcoin economy? Or are the botnets bigger and more powerful than the supercomputers these days?
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Post by Alex Frakt » Mon Jun 20, 2011 5:11 pm

nisiprius wrote:Could an outfit with supercomputers like Lawrence Livermore National Laboratories or the NSA potentially amuse themselves by doing disruptive things to the bitcoin economy? Or are the botnets bigger and more powerful than the supercomputers these days?

How about shorting bitcoins and leaving hints in the right places that the NSA is harvesting them so they know which numbers to track as they eavesdrop on all internet communications.

Come to think of it, they probably are.

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Post by FNK » Mon Jun 20, 2011 5:14 pm

The algorithm for creating new coins appears to be fairly robust. If you throw a lot of computing power at it (be it your botnet or computing farm), you will get some coin for yourself and cause the difficulty factor to increase next week. Massive computing power does not seem to be the weakness. In fact, it's the strength of the entire system. ;-)

The fact that each new batch must also register all the previous transactions seems very tricky to me. I'm not sure is a robust way to run an economy.

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Post by jeff mc » Mon Jun 20, 2011 5:33 pm

nisiprius wrote:...(I just went back and changed all occurrences of "Bitcoin" to be all lower-case... is that correct?)

yes. yes, it is. always.

i wish people would ask more questions similar to this.

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Post by interplanetjanet » Mon Jun 20, 2011 6:43 pm

Morgan wrote:The botnets are larger. Distributed computation is more powerful than any supercomputer.

http://voices.washingtonpost.com/securi ... p_s_1.html

A bit of background, I used to do computing support for a well known large bioinformatics research project.

Distributed computating is a great fit for some problems, a so-so fit for some, and a lousy one for the rest. For operations that are trivially parallelizable and processing can be farmed out to a number of independant nodes with no or minimal communication between them, it works very well.

Problems that involve non-localized access to a very large quantity of data have scaling issues. Problems that require something along the line of high speed shared memory between execution threads will fare tolerably well in a computing cluster with a local, low latency interconnect, but botnets do not have anything close to low latency between nodes. Even though the aggregate CPU power of some of these botnets outstrips "conventional" supercomputing clusters, they are not going to be effective for working many classes of problems.

Cryptographic solving is usually quite parallelizable, though. :roll:

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Re: Bitcoin: What is it, in Plain English

Post by infecto » Mon Jun 20, 2011 7:18 pm

Alex Frakt wrote:A ponzi scheme for internet libertarians or a way for criminals to launder money. Or both.


Not that btc is the next big thing buts thats a bit of an ignorant statement. First, its crude to call those that use btc are internet libertarians or criminals. Its also a difficult comparison to say its a ponzi scheme. I am not here trying to sell the idea of btc or to even say its a good idea but calling it a ponzi scheme would be the last thing I would call it. Lastly, using the the normal definition of money laundering, I am not even sure how btc could make it much easier. Yes the transactions are near impossible to trace but so is cash and thats why btc does nothing to make laundering easier. Now if by btc you mean strip club, I understand how it can be used to launder.

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Re: Bitcoin: What is it, in Plain English

Post by infecto » Mon Jun 20, 2011 7:24 pm

Morgan wrote:I'm far less certain that bitcoin is a ponzi scheme. It may be in a bubble to be sure, but there's a 1% chance that this is the Next Big Thing.

The key to currency is the connection between the medium of exchange and value. Far from the Silk Road connection being a disadvantage, it could prove to be the backbone of the system. I anticipate the black market are the early adopters, and I don't believe for a minute that the US government is powerful enough to shut it down. That's what makes it interesting. As for the theft, this is an unreasonable argument to pose against bitcoin, I don't hear the same argument being used against physical currency.

I think it is likely to fail simply because of the unknowns, but I think lessons will be learnt and a new currency will be established without the caveats of the first attempt.


Agreed, and really the Silk Road exposes are overblown. Its just the typical overblown media story. Sure you can buy illegal drugs on the Silk Road but I could drive 15mins and do the same thing. Its also a much smaller site then people think.

I also think it will fail but its an interesting project to watch.

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Re: Bitcoin: What is it, in Plain English

Post by Alex Frakt » Mon Jun 20, 2011 7:45 pm

infecto wrote:Not that btc is the next big thing buts thats a bit of an ignorant statement. First, its crude to call those that use btc are internet libertarians or criminals. Its also a difficult comparison to say its a ponzi scheme. I am not here trying to sell the idea of btc or to even say its a good idea but calling it a ponzi scheme would be the last thing I would call it. Lastly, using the the normal definition of money laundering, I am not even sure how btc could make it much easier. Yes the transactions are near impossible to trace but so is cash and thats why btc does nothing to make laundering easier. Now if by btc you mean strip club, I understand how it can be used to launder.

I call it a ponzi scheme because it is backed by nothing beyond the hope that other people will continue to accept it. I find it amusing that so many bitcoin fans are the same people who rail against fiat currency. At least governments have the option of taxation to back their currencies.

Cash is better than bitcoin for small-scale, local money laundering and/or tax evasion. But switch to the large-scale, international money movements that characterize organized crime or even small-scale, but non-face-to-face, illegal transactions and dealing with cash becomes a very large problem. If bitcoin actually becomes widely becomes accepted as a medium of exchange, expect governments to move in with a heavy hand.

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Re: Bitcoin: What is it, in Plain English

Post by Hedonic Regression » Mon Jun 20, 2011 8:22 pm

infecto wrote: Its also a difficult comparison to say its a ponzi scheme.


Bitcoin strikes my 'ponzi' reflex due to being so front-loaded to those who got in early, and turns them into evangelists to get more people interested in bitcoin so that the value will go up and their 'investment' will pay off.
Half of all bitcoins that can ever exist will be minted in the first 4 years of operation, there are 21.5 million bitcoins that can ever exist and 6.6 million have already been mined, mostly while bitcoin was obscure and mining was relatively cheap given how much bitcoin are now worth. That means there was/is a huge incentive to get in early and mine those coins. As more competition comes online and the value of mining new coins approach the marginal cost of computation the only way to earn bitcoin will be to provide goods and services, as opposed to just getting them for what was previously near-free.

The early ease of mining bitcoin which progressively slows down was built into the system. It doesn't make sense to me why the bulk of bitcoin should come into existence when the fewest people will be using it.

What I have enjoyed about bitcoin is how it has made me think about the nature of gold and national currencies in a fresh way.

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Re: Bitcoin: What is it, in Plain English

Post by FredPeterson » Mon Jun 20, 2011 8:24 pm

I hope everyone will keep accepting my US dollars....

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Post by VennData » Mon Jun 20, 2011 8:30 pm

Theoretically the market price of money has information about all the prior transactions in it. Money is information so any system like this must reference all the money that existed before.

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Post by FredPeterson » Mon Jun 20, 2011 8:35 pm

VennData wrote:Theoretically the market price of money has information about all the prior transactions in it. Money is information so any system like this must reference all the money that existed before.


Every btc has a history of who transacted it. Its part of its hash.

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Re: Bitcoin: What is it, in Plain English

Post by nisiprius » Mon Jun 20, 2011 8:42 pm

Hedonic Regression wrote:What I have enjoyed about bitcoin is how it has made me think about the nature of gold and national currencies in a fresh way.
Someone could do a comedy sketch about the man who first discovers gold trying to convince his tribesmen that it's valuable. "Ugh. Good for hatchet? It heavy all right, but no hold edge."
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Post by avalpert » Mon Jun 20, 2011 8:45 pm

VennData wrote:Theoretically the market price of money has information about all the prior transactions in it. Money is information so any system like this must reference all the money that existed before.


Huh, why? Why would it need to convey anything other than the current transaction?

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Post by Leesbro63 » Mon Jun 20, 2011 8:46 pm

I'm sorta sorry I posted the original question!

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Post by Guest422 » Mon Jun 20, 2011 8:48 pm

Reminds me of cryptonomicon, great read by the way

http://en.wikipedia.org/wiki/Cryptonomicon

Cryptonomicon is a 1999 novel by American author Neal Stephenson. The novel follows the exploits of two groups of people in two different time periods, presented in alternating chapters. The first group is World War II-era Allied codebreakers and tactical-deception operatives affiliated with the Government Code and Cypher School at Bletchley Park, as well as disillusioned Axis military and intelligence figures whom they encounter. The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency, with a longer range objective to distribute Holocaust Education and Avoidance Pod (HEAP) media for instructing genocide-target populations on defensive warfare.
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Post by Alex Frakt » Mon Jun 20, 2011 9:20 pm

kevintmckay wrote:The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency...

The key difference is the novel featured an imaginary electronic currency backed by real assets. OTOH, bitcoin is a real electronic currency backed by imaginary assets.

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Re: Bitcoin: What is it, in Plain English

Post by Alex Frakt » Mon Jun 20, 2011 9:29 pm

Morgan wrote:religious zealots of the libertarian bent

This is completely OT, but you need to look up the definition of libertarianism and/or review colonial American history. Many of these folks may not have wanted to be told what to do by any government, but they made up for it by interference, to the point of murder, with the individual liberties of people under their control.

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Re: Bitcoin: What is it, in Plain English

Post by interplanetjanet » Mon Jun 20, 2011 9:33 pm

Hedonic Regression wrote:The early ease of mining bitcoin which progressively slows down was built into the system. It doesn't make sense to me why the bulk of bitcoin should come into existence when the fewest people will be using it.

I think that it makes a lot of sense - the most difficult time that a new electronic currency will have is right at the beginning. Without the relatively easy production of currency units by early adopters, the system probably wouldn't have gotten off the ground.

The market is still very thinly traded by any measure. As such it's not something people would want to hold much in the way of assets in, without the hope of appreciation.

I'm not saying it's the "right" way to do things, but I can see the logic in it.

-Janet

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Re: Bitcoin: What is it, in Plain English

Post by infecto » Mon Jun 20, 2011 9:44 pm

Alex Frakt wrote:
infecto wrote:Not that btc is the next big thing buts thats a bit of an ignorant statement. First, its crude to call those that use btc are internet libertarians or criminals. Its also a difficult comparison to say its a ponzi scheme. I am not here trying to sell the idea of btc or to even say its a good idea but calling it a ponzi scheme would be the last thing I would call it. Lastly, using the the normal definition of money laundering, I am not even sure how btc could make it much easier. Yes the transactions are near impossible to trace but so is cash and thats why btc does nothing to make laundering easier. Now if by btc you mean strip club, I understand how it can be used to launder.

I call it a ponzi scheme because it is backed by nothing beyond the hope that other people will continue to accept it. I find it amusing that so many bitcoin fans are the same people who rail against fiat currency. At least governments have the option of taxation to back their currencies.

Cash is better than bitcoin for small-scale, local money laundering and/or tax evasion. But switch to the large-scale, international money movements that characterize organized crime or even small-scale, but non-face-to-face, illegal transactions and dealing with cash becomes a very large problem. If bitcoin actually becomes widely becomes accepted as a medium of exchange, expect governments to move in with a heavy hand.


I find it amusing that people like you make absurd statements about the people who use btc. Dont like it all you want but its pretty amusing to constantly see people use silly comparisons. I still think its going to fail but its fun to read all the tin hat theories.

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Post by infecto » Mon Jun 20, 2011 9:46 pm

Alex Frakt wrote:
kevintmckay wrote:The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency...

The key difference is the novel featured an imaginary electronic currency backed by real assets. OTOH, bitcoin is a real electronic currency backed by imaginary assets.


As long as I am free to exchange it into USD along with other currencies, we could easily derive some basic value for it which can then be used to price goods.

At the end of the day it really is a glorified transaction system.

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Re: Bitcoin: What is it, in Plain English

Post by Alex Frakt » Mon Jun 20, 2011 11:21 pm

Let's try again.
Leesbro63 wrote:What, in plain English, IS bitcoin?

A private electronic currency. What distinguishes it from other private currencies is that it is managed by peer-to-peer software, there is no central exchange, bank or reserve. It is also not backed by any physical or legal assets, a necessary side-effect of its distributed structure. These two factors mean:

- transactions can be completely anonymous and untraceable
- it can't be shut down by any government* (unlike previous failed private currencies like e-gold, e-Bullion, and the Liberty Dollar)
- prices (exchange rates if you prefer) can and do fluctuate wildly

*However, if a government decides they are being used unlawfully or in connection with unlawful activity, they can go after anyone who facilitates converting them into national currencies as the US has recently done with the offshore payment processors for gambling sites. This is very likely to lead to a crash in the exchange value of the currency.

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Post by Tuxx » Tue Jun 21, 2011 10:06 pm

Another ponzi scheme.

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Re: Bitcoin: What is it, in Plain English

Post by Tyrobi » Tue Jun 21, 2011 10:14 pm

Alex Frakt wrote:
Leesbro63 wrote:What, in plain English, IS bitcoin?

A ponzi scheme for internet libertarians or a way for criminals to launder money. Or both.


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Post by nisiprius » Wed Jun 22, 2011 6:13 am

So, when does it start?

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"Now, for the first time, the Bradford Exchange is offering authenticated, limited-edition, bitcoins designed by Thomas® Kinkade®, Painter® of® Light®. These beautiful collectible thumb drives are loaded with $1,000 in bitcoins, yet cost you only six monthly payments of $89.95 plus shipping and handling. Look at the warm color and intricate detail. Plug them in, and the cottage windows and the gas lamp actually light up. No two are identical, each is an individual original work of art, because every one of them is highlighted by a genuine dot of actual paint individually daubed onto it personally by a Thomas Kinkade studio master artist. These Thomas Kinkade bitcoins are sure to be heirlooms cherished by your family in years to come."

"Edna Pfalheimer, age 95, said that the two strangers took her to the bank, where she withdrew $9,165 in cash and gave it to them. 'They showed me the bitcoins,' she said. 'I didn't have my reading glasses on but they looked real pretty. They said that the dollar was collapsing but that bitcoins were safe because the government didn't control them. They said the package contained $1 million in bitcoins that the Reverend Dr. Garcia had sent out of Bolivia, but they would sell them to me for $10,000 because they needed money in a hurry to help him escape. They were real nice. They were real disappointed that I didn't have $10,000, but I did the best I could. But they must have made a mistake, because when I opened the package, there was nothing in it but a brick. I hope they'll contact me so I can give them back their brick.'"
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Post by dnaumov » Wed Jun 22, 2011 6:43 am

Alex Frakt wrote:
kevintmckay wrote:The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency...

The key difference is the novel featured an imaginary electronic currency backed by real assets. OTOH, bitcoin is a real electronic currency backed by imaginary assets.

By that logic, the dollar and the euro are paper currency backed by imaginary assets. As long as I can trade goods somewhere using bitcoin, it is as much a real currency as any other.

Morgan wrote:ohai, new infos from today:

http://www.bbc.co.uk/news/technology-13857192

"Prices on the main exchange, Mt.Gox, fell from $17.50 (£10.80) to almost zero when a large number of stolen Bitcoins were dumped on the market."

Except that no money was stolen from Mt.Gox accounts and the bitcoin/USD rate is back up at almost 15$ again. As usual, the media doesn't like facts getting in the way of making fat article titles.

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Post by nisiprius » Wed Jun 22, 2011 7:36 am

Someone please knowledgeable please comment on the fact that Mt. Gox was apparently able to roll back transactions.

In the world of traditional currency, a bank couldn't say "Oops, someone robbed our bank. So we'll just roll back all of our transactions to before the robbery occurred." And, presto! have the physical cash teleport back from the robber's burlap sack into their vault, along with the $50 of grocery money I withdrew from the ATM machine at the same time.

If bitcoin transactions are supposed to be money-like, I find it at least puzzling that Mt. Gox can alter something that has already occurred after the fact.

If Mt. Gox can do that, why couldn't it alter existing transactions to direct them into a bad guy's pocket? The bad guy buys my 10K gold wedding ring from me with bitcoins, then Mt. Gox rolls back the transaction and the bad guy has both the ring and his bitcoins back. Why not?

If trusting bitcoins requires trusting Mt. Gox only to alter evil transactions, how is that different from the boring old world of authoritarian money?
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Post by sscritic » Wed Jun 22, 2011 8:00 am

While some need a definition of bitcoin, others need a definition of a ponzi scheme. Look at both; do they match?

Alex Frakt wrote:A private electronic currency. What distinguishes it from other private currencies is that it is managed by peer-to-peer software, there is no central exchange, bank or reserve. It is also not backed by any physical or legal assets, a necessary side-effect of its distributed structure. These two factors mean:

- transactions can be completely anonymous and untraceable
- it can't be shut down by any government* (unlike previous failed private currencies like e-gold, e-Bullion, and the Liberty Dollar)
- prices (exchange rates if you prefer) can and do fluctuate wildly

wikipedia wrote:A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

I don't see the connection. Bitcoin investors are not being paid returns (interest) by a central authority (e.g., Charles Ponzi) nor are they promised any returns by that central authority. The central authority is not claiming to be earning profits to be returned to the investors.

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Post by dnaumov » Wed Jun 22, 2011 8:33 am

nisiprius wrote:Someone please knowledgeable please comment on the fact that Mt. Gox was apparently able to roll back transactions.

In the world of traditional currency, a bank couldn't say "Oops, someone robbed our bank. So we'll just roll back all of our transactions to before the robbery occurred." And, presto! have the physical cash teleport back from the robber's burlap sack into their vault, along with the $50 of grocery money I withdrew from the ATM machine at the same time.

If bitcoin transactions are supposed to be money-like, I find it at least puzzling that Mt. Gox can alter something that has already occurred after the fact.

Bitcoin exchanges can trivially revert/cancel their internal transactions, which often have built-in delays precisely for security reasons. However, if an actual bitcoin network transaction has occured, there is no way to reverse it.

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Post by nisiprius » Wed Jun 22, 2011 8:37 am

dnaumov wrote:
nisiprius wrote:Someone please knowledgeable please comment on the fact that Mt. Gox was apparently able to roll back transactions.

In the world of traditional currency, a bank couldn't say "Oops, someone robbed our bank. So we'll just roll back all of our transactions to before the robbery occurred." And, presto! have the physical cash teleport back from the robber's burlap sack into their vault, along with the $50 of grocery money I withdrew from the ATM machine at the same time.

If bitcoin transactions are supposed to be money-like, I find it at least puzzling that Mt. Gox can alter something that has already occurred after the fact.

Bitcoin exchanges can trivially revert/cancel their internal transactions, which often have built-in delays precisely for security reasons. However, if an actual bitcoin network transaction has occured, there is no way to reverse it.
So what happened at Mt. Gox when the value crashed? The hacker created only "internal transactions?"
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Post by dnaumov » Wed Jun 22, 2011 8:48 am

nisiprius wrote:
dnaumov wrote:
nisiprius wrote:Someone please knowledgeable please comment on the fact that Mt. Gox was apparently able to roll back transactions.

In the world of traditional currency, a bank couldn't say "Oops, someone robbed our bank. So we'll just roll back all of our transactions to before the robbery occurred." And, presto! have the physical cash teleport back from the robber's burlap sack into their vault, along with the $50 of grocery money I withdrew from the ATM machine at the same time.

If bitcoin transactions are supposed to be money-like, I find it at least puzzling that Mt. Gox can alter something that has already occurred after the fact.

Bitcoin exchanges can trivially revert/cancel their internal transactions, which often have built-in delays precisely for security reasons. However, if an actual bitcoin network transaction has occured, there is no way to reverse it.
So what happened at Mt. Gox when the value crashed? The hacker created only "internal transactions?"

Yep. They didn't actually get committed to the bitcoin network due to the built-in exchange delays. However, as the bitcoin/USD exchange rate is affected by bid/ask spreads in real time, the unfinished massive sell order transactions temporarily affected the exchange rate with heavy downward pressure.

The few cases where people have actually lost very serious amount of bitcoins (in one case it was 500,000$ worth of them), pretty much all of them were due to insufficient security on the user side. The bitcoin wallet.dat file is stored on the user's computer and if an adversary gets hold of this file, he can trivially take your money with no way for you to get it back. There is also a known trojan out in the wild which specifically hunts and targets wallet.dat files on PCs it infects. This is why you are supposed to encrypt the wallet.dat when it's not in use, not to mention adequate virus protection. Every single user who has lost money has failed to do so.

If you leave 500,000$ in 100USD bills on your kitchen table every time you leave the house and then one day come back to find your house robbed and all money gone, I don't think I have to explain why leaving the money on the table was not a bright thing to do :)

On a sidenote, why do you think regular banks have transaction delays of 1-3 business days when there is no "obvious reason" for them to not be instanenous in the age of the internet?

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Post by SP-diceman » Wed Jun 22, 2011 10:08 am

It’s the 2011 version of The Holland Tulip Mania.

The more things change, the more they stay the same.

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Post by Alex Frakt » Wed Jun 22, 2011 10:50 am

dnaumov wrote:
Alex Frakt wrote:
kevintmckay wrote:The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency...

The key difference is the novel featured an imaginary electronic currency backed by real assets. OTOH, bitcoin is a real electronic currency backed by imaginary assets.

By that logic, the dollar and the euro are paper currency backed by imaginary assets. As long as I can trade goods somewhere using bitcoin, it is as much a real currency as any other.

Therein lies the rub. How many merchants in my community accept bitcoins?

Also note that the dollar is backed by the real assets of the United States government. They (we) still hold gold and lots of other precious metals and there is plenty of real property they could sell off to back the dollar if push came to shove. Not to mention taxing powers.

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Post by dnaumov » Wed Jun 22, 2011 11:06 am

Alex Frakt wrote:
dnaumov wrote:
Alex Frakt wrote:
kevintmckay wrote:The second narrative is set in the present day with descendants of the first narrative's characters employing cryptologic, telecom and computer technology to build an underground data haven in the fictional Sultanate of Kinakuta. Their goal is to facilitate anonymous Internet banking using electronic money and (later) digital gold currency...

The key difference is the novel featured an imaginary electronic currency backed by real assets. OTOH, bitcoin is a real electronic currency backed by imaginary assets.

By that logic, the dollar and the euro are paper currency backed by imaginary assets. As long as I can trade goods somewhere using bitcoin, it is as much a real currency as any other.

Therein lies the rub. How many merchants in my community accept bitcoins?

Also note that the dollar is backed by the real assets of the United States government. They (we) still hold gold and lots of other precious metals and there is plenty of real property they could sell off to back the dollar if push came to shove. Not to mention taxing powers.

Even ignoring the actual trading and merchants altogether, as long as I can exchange bitcoins for traditional currency, it has value.

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Post by Alex Frakt » Wed Jun 22, 2011 11:11 am

sscritic wrote:While some need a definition of bitcoin, others need a definition of a ponzi scheme. Look at both; do they match?

Alex Frakt wrote:A private electronic currency. What distinguishes it from other private currencies is that it is managed by peer-to-peer software, there is no central exchange, bank or reserve. It is also not backed by any physical or legal assets, a necessary side-effect of its distributed structure. These two factors mean:

- transactions can be completely anonymous and untraceable
- it can't be shut down by any government* (unlike previous failed private currencies like e-gold, e-Bullion, and the Liberty Dollar)
- prices (exchange rates if you prefer) can and do fluctuate wildly

wikipedia wrote:A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

I don't see the connection. Bitcoin investors are not being paid returns (interest) by a central authority (e.g., Charles Ponzi) nor are they promised any returns by that central authority. The central authority is not claiming to be earning profits to be returned to the investors.

Ponzi in the sense that it cost the creator and first rounds of participants almost nothing for the first 10% or so of all the bitcoins that will ever be produced. And the system is engineered to ensure the value of bitcoins will continuously rise as long as people accept them as there is a maximum number of bitcoins and each new one costs more to create than the last. Oh and the fact that you don't actually get anything when you buy or create a bitcoin other than the hope that someone else will accept it at a later date. Again, the cynics will say the same about the dollar, but they are flat out wrong; the US government must accept dollars for all payments (e.g., taxes) and they require that dollars be accepted in repayment of all debts, including private debts like mortgage payments and pretty much anything that comes to you in the form of a bill.

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Post by Culture » Wed Jun 22, 2011 12:35 pm

I think everyone is missing the true value of bitcoin. It is not necessary that everyone will willing to abandon the dollar/euro/etc and adopt bitcoin. It is merely necessary that a small number of people (say 0.1% of the worlds population) be will to put a small amount of currency ($10-$20) into bitcoin in order to facilitate micro-purchases on the internet. If this happens, and the platform is robust (technologically), it will be a success.

Would you really worry about purchasing $20 worth of bitcoin in order to make a purchase from a Russian internet vendor in order to not worry about your credit card number being stolen? Or to make in-game purchase in online games?

Agree it is very unlikely to substantially replace real currency.

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Post by avalpert » Wed Jun 22, 2011 3:08 pm

Culture wrote:I think everyone is missing the true value of bitcoin. It is not necessary that everyone will willing to abandon the dollar/euro/etc and adopt bitcoin. It is merely necessary that a small number of people (say 0.1% of the worlds population) be will to put a small amount of currency ($10-$20) into bitcoin in order to facilitate micro-purchases on the internet. If this happens, and the platform is robust (technologically), it will be a success.

Would you really worry about purchasing $20 worth of bitcoin in order to make a purchase from a Russian internet vendor in order to not worry about your credit card number being stolen? Or to make in-game purchase in online games?

Agree it is very unlikely to substantially replace real currency.


You mean like paypal?

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Post by SSSS » Wed Jun 22, 2011 3:23 pm

avalpert wrote:
Culture wrote:I think everyone is missing the true value of bitcoin. It is not necessary that everyone will willing to abandon the dollar/euro/etc and adopt bitcoin. It is merely necessary that a small number of people (say 0.1% of the worlds population) be will to put a small amount of currency ($10-$20) into bitcoin in order to facilitate micro-purchases on the internet. If this happens, and the platform is robust (technologically), it will be a success.

Would you really worry about purchasing $20 worth of bitcoin in order to make a purchase from a Russian internet vendor in order to not worry about your credit card number being stolen? Or to make in-game purchase in online games?

Agree it is very unlikely to substantially replace real currency.


You mean like paypal?


Paypal is problematic due to the massive fees & the fact that they will freeze your account at the drop of a hat, locking up your money for months or forever. And if you have a bank account linked, Paypal can drain all your money from it at their leisure under the pretense that they received a (bogus) abuse report. Paypal also reveals your real identity to the other party on all transactions, making it useless when you want to conduct business anonymously or pseudonymously.

For those confused/frightened by bitcoin but rightfully wary of Paypal, Dwolla seems like a good potential alternative.

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