Cryptocurrency: is it worth it?

[Cynic]

So a friend of mine, a libertarian, has been pushing Bitcoin and agorism at me. I ignore most economic statements made by her because of her being a libertarian.

But, I am interested in seeing how this kinda service pans out. I'm tempted to put 200$ in a bitcoin acct and see how it works.

According to mtgox.org,(mtgoxUSD) 1 bitcoin = 10.7 USD

Another currency trader (bitmarketusd) 1 bitcoin = 8.3 USD

I mean this just seems to lead to shady trading practices. Buy low, sell high. But how the fuck is a currency offered at two difference trading rates at the same time?

I know different banks do give different currency trading rates, but not a discrepancy of several dollars/EU/etc..

I'm interested in virtual dollars because of things like Second Life, and books like "Cryptonomicon", "Down and out in the magic kingdom."

What's the deal here?


Reference urls

Bitcoin
Mt Gox
Currency rates

Bitcoin's website has some in depth faqs and newbie guides. Unfortunately, to me, it all goes over my head.

[Morat]

As far as I can be bothered to understand, it involves calculating shit until all the bitcoins are "found", at progressively decreasing rates. There's a fixed amount of it. So it's a commodity currency, like gold. Only not, because instead of being "not worth as much as a commodity as it is as currency", it's just "totally worthless as a commodity". So it's fiat? Well, no, because fiat currencies are backed by important things, like nation-states, instead of irrelevant things, like four goldbug hackers ranting incoherently about property rights. Also, fiat currencies can actually adjust for changing economic conditions, but hash functions on computers can't.

Presumably it's offered at different rates because there's no real volume of trade or organization, and the bitcoin users are collectively incompetent. Or bitmarketusd has some kind of ridiculous transaction fee. I don't know.

To ensure that they aren't just duplicated endlessly, there's some kind of transaction log encoded on each bitcoin. Why crazy libertarians obsessed with privacy and government overreach are willing to have their financial data freely available is beyond me.

I don't know, maybe the transaction log can be rendered irrelevant by disposable computers, and then it'll be a great way to launder money.

[name_here]

It's like it combines the worst features of Fiat and Commodity currencies. With a side order of being digital data without associated governmental organizations that will wreck the shit of anyone who invents some out of thin air. Apparently they're planning to solve that by having every computer store a complete transaction record of all bitcoins, along with a bunch of redundant partial copies, because computers have finite processing power but infinite hard drive space and bandwidth. Or something.

Anyways, the biggest problem is apparently a lack of any sort of controlling body that does things like say, "1 bitcoin = 10.9 USD", which is just asking for trouble.

[Vebyast]

Morat, I'm sorry, but I can only assume that you're trolling or a strawman. I will therefore oblige you by doing my best to refute every statement in your post.

To explain Bitcoin, you start with this thing called the "block chain". Each block corresponds to a set of transactions; to see what a block looks like, check out Block 128257. Bitcoin works using a chain of these blocks hooked together by these things called "hashes". A hash function is a thing that maps a large amount of data down into a short, extremely random chunk of bits. Hashes are useful because they are deterministic (if you hash the same thing twice you get the same chunk of bits, so you can use them for comparing objects without actually comparing them) and extremely random (a tiny change to the input file produces a huge change in the output of the hash function, which means that the chances of two different things hashing to the same value is tiny).

The "block chain" works like this: compute what you want the data in the block to be. In particular, assemble all the transactions that people have asked for in the last ten minutes. Then add random bits to the end of the block until the block's hash starts with a bunch of decimal zeros. This will take a long, long time, thereby providing "proof of work". This means that finding blocks is hard, which means that no one person can control the entire system. We still need to encourage people to build the block chain, though, so what we do is reward people that find blocks by letting them generate a few free bitcoins out of nowhere and we give them a small proportion of each transaction they execute as a tip. If they give themselves more bitcoins out of nowhere, we just ignore that block, it doesn't become part of the block chain, and nobody will accept those bitcoins (making them worthless).


Now that we all understand bitcoin, let's refute your statements:

You can adjust for changing economic conditions
Look up something called "fractional reserve banking". Basically, you make a bank, then lend out some proportion of your money while pretending you still have all of it in your vaults. The economy is now double-counting some bitcoins. Someone takes their money and deposits them back in your bank, and you lend some of them out. And so on. You can modify the money supply by changing the number of times you use a bitcoin, which in turn allows the banks to adjust for the economy.

Your financial data is not public
There's this magical thing called "public-key cryptography". Every "bitcoin wallet" has a "public key" and a corresponding "private key". It's like the hash function, but with a twist: you can only compute the hash of some data if you have a private key, but given a wallet's public key you can prove or disprove that the data was hashed using that wallet's private key. So, to transfer a bitcoin: take the bitcoin, add some data to it that says that you've transferred it, "sign" it using your private key, and publish your public key. Then you send that transaction off to be included in the block chain.

The key here is that you don't have to have just one wallet, or even just two. In fact, you can (and are encouraged to!) have a different wallet for every single transaction ever. For example, check out this payment: that's one person sending money to one other person and including a small transaction fee for the person that builds the block that transaction is included in. If that transaction didn't exist, proving that all of those accounts had belonged to the same person would have been impossible. So your financial situation is plenty secure.

Exchange rates aren't broken
The places advertising 5USD per Bitcoin are either scams or out of business. Looking at http://bitcoincharts.com/markets/, all of the really egregious offenders haven't handled a single transaction in almost a month. All of the people that are actually running are trading bitcoins at pretty much the same price.

Bitcoin is worth something
Bitcoin is valuable because people believe that it is valuable. For example, you can use it to pay someone to write a webpage for you. That means that it's valuable, end of story. Similarly, the only reason the bills you carry are valuable is because you believe that the government can shoot anybody that thinks they aren't. If it were suddenly discovered that the US government's entire arsenal had been turned into balloon animals the dollar would plummet.



There, that's my troll-inspired ranting for the day out of the way.

[Doom]

That kind of spread is pretty insane, very indicative of a rigged (or extremely slow moving) market.

The whole point of buying crap like that was if you didn't trust the current paper currency experiments going on. Unfortunately, bitcoins sounds like a totally new experiment, one with the same underlying flaws (no finite limit on the units, no underlying commodity value), and no conceivable benefit to you unless you're sure you can unload these things when you want to. Electronic transfer of other currencies is already easy enough, I don't see any advantage to bitcoins.

There are all sorts of things you can 'buy' to protect yourself from whatever it is you're worried about. But random computer bits, no matter how unique? Red flags all over that.

[name_here]

Poking around the site I discovered that they're of the opinion that any hash can correspond to only one input. While it's unlikely to be a problem, that statement is completely wrong, and any hash theoretically corresponds to an infinite number of potential inputs, because hashing turns arbitrary-length inputs into specific-length outputs.

[K]

What a wonderful scam. All the fun of counterfeiting with none of the legal troubles.

[Vebyast]

But random computer bits, no matter how unique? Red flags all over that.

Just going to point something out: every single secure computer operation in the world depends on unique random bits. Bitcoin is exactly as secure, information-theory-wise, as your browser's connection to your bank.

one input

Doesn't matter here, because any input works. The hashing is only so that you can prove that you spent a bunch of cycles looking for a valid block, which is so that you can't take over the blockchain.

That kind of spread is pretty insane, very indicative of a rigged (or extremely slow moving) market.

Given that only one of the numbers you're looking at has been updated in the last month, yes, it is moving extremely slowly. The two that are actually doing something are currently at 11 and 12 USD/BTC, and one is small enough that you could probably force the two to converge all on your own.

[Count Arioch the 28th]

What a wonderful scam. All the fun of counterfeiting with none of the legal troubles.

You know, I wish I could exploit the fact that most Americans are cowards that think the world is falling down around them to make some bucks like the bitcoin guys. Some days it don't pay to have a conscience...

[Doom]

Actually, most Americans are idiots trained to think the system is wonderful and good, and don't even come close to realizing what's being done.

Just going to point something out: every single secure computer operation in the world depends on unique random bits. Bitcoin is exactly as secure, information-theory-wise, as your browser's connection to your bank.

Perhaps, but I don't pay $12 every time I check my bank account online. And yet that's what a bitcoin is worth, supposedly.

This seems about as good as paying $12 for a pebble that, while individually unique, is no different than the ones I find in my lawn all the time. The scarcity is just not here.

Given that only one of the numbers you're looking at has been updated in the last month, yes, it is moving extremely slowly. The two that are actually doing something are currently at 11 and 12 USD/BTC, and one is small enough that you could probably force the two to converge all on your own.

Perhaps, but with slow markets like this, the market makers rule. If I tried to bring the prices together, I'd quickly learn the bid isn't close to the ask....and with such a slow market, I'd have little choice but to take the weak bids (that would drop the more I hit them).

In short: yuck, there's nothing here that strikes me as legitimate.

[name_here]

See, the problem is that they've revealed a basic lack of understanding of hash functions. So if they don't know what they are talking about why should I trust anything they say?

Also, bank accounts totally get hacked. It's just that the hackers get tracked down because they have to tell the bank software the money belongs in another account and the movement of money gets recorded.

[Count Arioch the 28th]

Actually, most Americans are idiots trained to think the system is wonderful and good, and don't even come close to realizing what's being done.

Actually, most Americans are just like you: reactionary, freaking out, and kind of stupid.

[Doom]

Heh, such pointless hostility; I can only presume it comes from quintessential disoriented bitterness about something in the past.

[Count Arioch the 28th]

All hostility over the internet is pointless. I hear tell that the internet is actually not serious business....

[DSMatticus]

I seriously don't get the point of bitcoin. It takes the problems of every system it can possibly imagine and scrambles them together to make some incredibly useless hybrid. It's a fiat currency with no central authority to correct for economic downturns.

You can probably make money off it, in the same way you can make money off any good whose value is rapidly going up. Buy low, sell high, hope you pick the right time, good luck. But the right time has probably already past, because you're on here asking about it.

[Vebyast]

The scarcity is just not here.

The scarcity is artificial. Everybody running Bitcoin has agreed to conform to a protocol that prohibits creating more than 50 bitcoins roughly every ten minutes and has a way to prove, in the mathematical sense of the word, that everybody else is conforming to the same protocol.

Alternatively, the US Dollar is only worth anything because people think they're worth something. They believe that USD are worth something because the US Military is ready to flatten anybody that doesn't agree. Bitcoins are only worth something because people think they're worth something. They believe that BTC are worth something because A) other people believe they're worth something, making them useful as currency and B) there are mathematically-valid reasons to believe that they are secure and anonymous. Two years ago, when nobody had implemented them and nobody was using them, you'd have been completely correct; now, though, there are something like 70 million dollars in the bitcoin economy.

There are also examples of things comparable to Bitcoin working in the real world. For one, check out the alternate British banknotes, which are not legal tender and are not accepted for taxes but are still traded freely. Another would be the Iraqi Swiss Dinar, which was the primary currency for 20% of the country for fifteen years despite little legal backup and no new banknotes being printed. If people believe that a currency is worth something, it might as well be worth something.

So if they don't know what they are talking about why should I trust anything they say?

You shouldn't, because they're not the ones that wrote the paper or the program. Instead, you should read the original paper and think about it yourself. Maybe work through some of the math, too, especially the proofs about public-key cryptography.

Also, bank accounts totally get hacked.

Banks get broken into by social engineering, SQL injections or implementation bugs, or identity theft. They don't fail when someone executes a man-in-the-middle attack on their website. Bitcoin is immune to anything like an SQL vulnerability, and social engineering it is significantly more difficult. It is demonstrable - in exactly the same way that that the expected value of a die roll is demonstrable - that the only attack that works on the Bitcoin protocol is private key theft.

I seriously don't get the point of bitcoin. It takes the problems of every system it can possibly imagine and scrambles them together to make some incredibly useless hybrid. It's a fiat currency with no central authority to correct for economic downturns.

This is why I own exactly one bitcoin (speculating. Just a little. ). The fiat currency and no central authority parts I don't really care about, but I'm not sufficiently convinced that a deflationary currency works without a way to correct downturns. I'd jump right in if I saw evidence that users or banks could control the economy and if the currency was slightly inflationary. As it is, though, I suspect that Bitcoin will eventually be replaced by another currency using identical technology but with slightly different parameters for money generation and possibly with a mechanism for economic control.

[Nebuchadnezzar]

Apparently one can buy drugs with Bitcoin

[RobbyPants]

Apparently one can buy drugs with Bitcoin

Yeah, the first time I've heard of bitcoin was yesterday on the radio, when they were talking about buying drugs online.

[mean_liar]

Actually, most Americans are idiots trained to think the system is wonderful and good, and don't even come close to realizing what's being done.

Actually, most Americans are just like you: reactionary, freaking out, and kind of stupid.

I love you Count.

I want you to be happier but some part of me fears that as you become so your wit could lose its pleasing edge.

[Count Arioch the 28th]

Actually, most Americans are idiots trained to think the system is wonderful and good, and don't even come close to realizing what's being done.

Actually, most Americans are just like you: reactionary, freaking out, and kind of stupid.

I love you Count.

I want you to be happier but some part of me fears that as you become so your wit could lose its pleasing edge.

They say behind every great comedian lies a lot of pain.

[Koumei]

I like how those crazy Anarcho-Libertarians on the site are claiming it's not about buying drugs (it totally is), it's "people anxious to escape a centralized currency and trade". Because it could totally be a site for selling biscuits or postcards or coffee, and do just as well, right?

But it's amazing: money isn't real in the first place, yet they've gone and made an even less real one!

[Vnonymous]

If you do things right you can make some serious money off of Bitcoin. The project has gotten enough momentum that the person in charge has been called in to speak for the CIA. They've also increased massively in value - the bitcoin faucet gave out 10 bitcoins at one point, which if you held on to until today would earn you something like 100 usd. They are essentially fiat dollars, yes, but fiat dollars in the form of computer data, which makes them infinitely more useful than fiat dollars from a given nation around the world(of course a given nation from around the world could happen to be Zimbabwe or Somalia so)

I'm actually personally going to be making money from bitcoins soon, because they are a form of currency that is completely untrackable and unmonitored by the government, and even when they do start looking, it is going to be as easy to stop as p2p filesharing. A friend of mine gets a student allowance that is cut off when he goes beyond a certain amount of savings - he's going to be paying me to turn that money into bitcoins, which will allow him to save money in a way the government can't actually track. The bitcoin market could collapse in the meantime, but I think bitcoins are going to become more and more valuable over time, barring them being made illegal by the government for some reason.

[Maj]

It's a fiat currency with no central authority to correct for economic downturns.

For some reason my instinctive response was, "We don't have economic downturns. All you have to do is believe!"

[Doom]

For some reason my instinctive response was, "We don't have economic downturns. All you have to do is believe!"

It's a good response...it's comparable to when you first try to smoke a cigarrette, and your body chokes and becomes nauseated.

Back to bitcoins:

A friend of mine gets a student allowance that is cut off when he goes beyond a certain amount of savings...he's going to be paying me to turn that money into bitcoins, which will allow him to save money in a way the government can't actually track.

While generally saving is good, using a bit of fraud is questionable (although isn't it odd that he's given money provided he doesn't keep it...). That said, I, personally, don't see the need to assume the risk of using an unproven method of savings free from government spying, as you could always just buy bullion.

That said, if in a few years bitcoins turns out to be an amazing thing that really becomes accepted and pays off, I'll happily acknowledge I was wrong. Those that assume the risk of assuming this untried (and scary, in my opinion) method of savings deserve their rewards for taking the risks.

[DSMatticus]

For some reason my instinctive response was, "We don't have economic downturns. All you have to do is believe!"

Now that's hardly fair. I was going to say more, but I have the strong feeling Doom and I will derail this thread arguing over economics if I do.