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omar
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Bitcoin digital currency
« on: May 15th, 2011, 4:42pm » |
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I was writing a paper titled "Sound Money Without Commodities" and while researching the current state of digital currencies, I came across Bitcoin. A digital currency based on cryptography and a peer-to-peer infrastructure. It's the coolest thing I've seen since Arimaa 
http://www.bitcoin.org/
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ddyer
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Re: Bitcoin digital currency
« Reply #1 on: May 16th, 2011, 2:49pm » |
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As a technical demonstration, this is indeed cool. As a practical matter, it's a terrible idea. The basis for the
"currency" is essentially burning a lot of electricity and computer time.
This is sort of like defining the "transit of america" as the basis of your currency, and awarding one "transit" if you drive your car from coast to coast. It's hard to fake, but it is a pure waste. If you base your currency on gold, you can at least make things out of the gold you end up with.
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| « Last Edit: May 16th, 2011, 2:51pm by ddyer » |
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Isaac Grosof
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Re: Bitcoin digital currency
« Reply #2 on: May 16th, 2011, 10:06pm » |
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I think a currency should just be something that is easy to trade, hard to fake, and universally accepted. Bitcoin only fails on #3. After all, a dollar isn't intrinsically worth anything.
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Fritzlein
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Re: Bitcoin digital currency
« Reply #3 on: May 17th, 2011, 12:49am » |
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on May 16th, 2011, 10:06pm, 722caasi wrote:| After all, a dollar isn't intrinsically worth anything. |
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On the contrary, a dollar can be used to pay taxes owed to the government of the United States of America. You can't pay your taxes with bitcoins or gold coins or loaves of bread or World of Warcraft gold or anything else except dollars. This is the intrinsic value of the dollar.
The U.S. government is responsible for safeguarding the value of the dollar, in part by controlling the supply of dollars, in part by enforcing accounting laws, but also in part by making sure dollars can be ultimately used for something. You and I can "lose faith" in the dollar, but we will still need dollars on April 14th, a reality that is unaffected by our faith or lack of faith. If, in contrast, everyone loses faith in bitcoins, what are bitcoins good for then? It will not matter that the software controls the supply of bitcoins and enforces accounting laws for bitcoins; the software can't ensure that there is any demand for bitcoins in the way the U.S. government can ensure that there is demand for dollars.
The fact that one can quote a current exchange rate between dollars and bitcoins hardly reassures me; there is also a current exchange rate between dollars and World of Warcraft gold pieces. But I'm not going to amass my retirement savings in the form of WoW gold. Yes, millions of people play WoW at the moment and yes, they are willing to give dollars for gold at the moment, but WoW is a social phenomenon that might not exist twenty years from now. At the very least WoW has a lesser chance of existing than the social phenomenon called the United States of America. And I rate bitcoins as likely having an even shorter lifespan that World of Warcraft.
It seems that the allure of bitcoins to many people is a lack of faith in governments to be good stewards of their currencies. Certainly there is ample historical record of governments debasing the currencies they issue. It is reasonable to expect that the U.S. will soon debase the dollar. But a new currency that is based on nothing but the hope that other people will honor it sounds like a collective hallucination to me.
The question of what money ultimately is fascinates me, which is part of the reason I enjoyed reading the science fiction trilogy The Baroque Cycle. And it's a fun read even if you don't care what money is.
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| « Last Edit: May 17th, 2011, 1:04am by Fritzlein » |
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megajester
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Re: Bitcoin digital currency
« Reply #4 on: May 17th, 2011, 1:29am » |
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on May 17th, 2011, 12:49am, Fritzlein wrote:
On the contrary, a dollar can be used to pay taxes owed to the government of the United States of America. You can't pay your taxes with bitcoins or gold coins or loaves of bread or World of Warcraft gold or anything else except dollars. This is the intrinsic value of the dollar.
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Which is why you can't release a fiat currency without being a government. If you really want to get something started you have to peg it to something, either an existing currency or a precious metal.
Gold makes sense because it's internationally accepted, not controlled by any one government, and is always the last man standing when state currencies go to the wall. ("BitGold, it's the gold standard reloaded!"). However everybody's geared to quote prices in currency, so I can see a market in "BitDollars", meaning I hold a reserve of X million dollars, for which I issue bitwhatever with "BitDollars Inc. promises to pay the bearer on demand 1 USD" written on them for everybody to trade P2P.
If a P2P system can be shown to work and be impervious to hacking I reckon it would be better than stuff like Facebook credits, where you're basically trusting a monolithic corporation with your money (even more suspect than national governments). It's like going to a casino and buying chips to do business with, except they never give you any chips they just say "Yep OK you've now got 100 dollars worth of chips. Just tell us when you want to use them and who you want to give them to, so we can WOTCH U."
Which is why P2P networks would be preferable. But seeing as how governments have spent most of the past 50 years getting people to use banks so they can monitor all their transactions, a P2P currency would undo all their hard work. It does not surprise me that every single online digital currency listed on Wikipedia is either dead or was never alive to start with (please correct me if I'm wrong).
PS: If you want to get your head around money check out "The Ascent of Money" by Niall Ferguson. Though that book Fritz mentioned sounds really interesting!
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| « Last Edit: May 17th, 2011, 1:32am by megajester » |
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UruramTururam
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Re: Bitcoin digital currency
« Reply #5 on: May 17th, 2011, 1:59am » |
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on May 17th, 2011, 12:49am, Fritzlein wrote:
On the contrary, a dollar can be used to pay taxes owed to the government of the United States of America. You can't pay your taxes with [...] gold coins |
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As long as they are US coins - you can, although you probably would not like to.
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Fritzlein
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Re: Bitcoin digital currency
« Reply #6 on: May 17th, 2011, 2:12am » |
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on May 17th, 2011, 1:59am, UruramTururam wrote:As long as they are US coins - you can, although you probably would not like to.
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Ha ha! You are right. I recently convinced my stepmother to trade in her 1920's silver dollars for about $20 each, that being the melt value of the silver in them. I guess she could have also used them to buy things (or pay taxes) for $1 each, but it never even occurred to me that they were still currency rather than merely precious metal.
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| « Last Edit: May 17th, 2011, 2:13am by Fritzlein » |
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ddyer
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Re: Bitcoin digital currency
« Reply #7 on: May 17th, 2011, 11:00am » |
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on May 17th, 2011, 1:29am, megajester wrote:
Which is why you can't release a fiat currency without being a government. If you really want to get something started you have to peg it to something, either an existing currency or a precious metal.
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On the contrary, anyone who has a reasonable ability to make promises and be believed can issue a fiat currency. It happens all the time. Ever buy a phone card? It's just a promise to deliver phone minutes sometime in the future, backed by nothing. People buy and sell phone cards all the time, just as though they were money. the are money. Do you save frequent flyer miles? It's just a promise to deliver a free flight under some completely ill-defined conditions, some time in the future. You can even get "miles" by using your credit card for other things. You can even BUY "miles" for cash. Ever do a favor for a friend and be told "I owe you one". Your friend just issued currency.
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Fritzlein
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Re: Bitcoin digital currency
« Reply #8 on: May 17th, 2011, 11:18am » |
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on May 17th, 2011, 11:00am, ddyer wrote:| Do you save frequent flyer miles? It's just a promise to deliver a free flight under some completely ill-defined conditions, some time in the future. You can even get "miles" by using your credit card for other things. You can even BUY "miles" for cash. |
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Yes, "miles" are a hilarious currency. People seem unfazed by the fact that airlines can honor "miles" at whatever rate they want: a flight can cost 25,000 miles or 100,000 miles or 1,000,000 miles depending on what the airline decides. If you are worried about governments debasing their currencies, why trust airlines not to? But the weirdest part is that when miles are offered for cash, it is usually at five times their value or more, say $50 for 1000 miles. Thus if you buy a flight with miles that you bought for cash, you will end up paying five times more than if you bought the flight for cash directly. So we have a demonstration that people not only have faith in nebulous promises, but also that people are bad at math.
And while we're at it, note that Omar has issued his own currency called "Arimaa points", the value of which depends on our faith in Omar to redeem them on demand. I am willing to hold Arimaa points because I trust not only Omar's promise to exchange them for cash, but also because I trust that I can at least use them to enter Arimaa events, which is a thing of value to me.
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| « Last Edit: May 17th, 2011, 11:35am by Fritzlein » |
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megajester
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Re: Bitcoin digital currency
« Reply #9 on: May 17th, 2011, 2:51pm » |
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on May 17th, 2011, 11:00am, ddyer wrote:
On the contrary, anyone who has a reasonable ability to make promises and be believed can issue a fiat currency. It happens all the time. Ever buy a phone card? It's just a promise to deliver phone minutes sometime in the future, backed by nothing.
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Er, yes it is. By consumer law. Which simply underlines the fact that a fiat currency or indeed any other "promise based" unit of value is impossible without a government to back it up.
on May 17th, 2011, 11:00am, ddyer wrote:
Ever do a favor for a friend and be told "I owe you one". Your friend just issued currency.
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Now let's not get pedantic. I thought it should go without saying that I was talking about how to set up a universally recognized unit of value that's capable of supplanting real world currency. A philosophical debate on the meaning of the word "currency" is beside the point.
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Isaac Grosof
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Re: Bitcoin digital currency
« Reply #10 on: May 19th, 2011, 10:06pm » |
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I think it is possible to set up a new currency without being a government if you have a guaranteed tie in to an established currency/good/service. Specifically, the creators of bitcoin have guaranteed the tie in of computer processing time to bitcoin via the mechanism of coin mining. If the creators were sufficiently wealthy and guaranteed the exchange back again, then the bitcoin currency would have a fixed value, equal to the going rate of computing time, and so it would be just as hard a currency as gold, because it would have actual value.The only problem would be if the creator of the currency couldn't pay for the computing time in the event of a run on the currency. However, if the creator used the processing time instead of wasting it as he currently does, he could make enough money initially in bitcoin production to pay it out again later.
In conclusion: an internet based currency is possible, if it is based on guaranteed exchange for a service of real value, such as computer processing. This makes it a hard currency, like gold, not fiat.
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UruramTururam
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Re: Bitcoin digital currency
« Reply #11 on: May 20th, 2011, 12:01pm » |
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on May 16th, 2011, 10:06pm, 722caasi wrote:| I think a currency should just be something that is easy to trade, hard to fake, and universally accepted. |
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Heh, only you say? The problem is that to be a currency something needs to be widely accepted. For a newly introduced electronic money a kind of wide acceptance is necessary as there is no one to enforce the usage of bitcoins as legal tender. In the USA if you pay in dollars the seller in fact has to accept that. In Poland there is no way not to accept the payment in zloty and so on. For internet-based currencies there is no enforcement - thus an agreement is needed. I can predict that if the large services like youtube or facebook started to accept and promote bitcoins - they may become quite a strong currency. Otherwise they are just a bit more than our Arimaa points introduced by Omar to reduce money transfer fees in our community.
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Fritzlein
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Re: Bitcoin digital currency
« Reply #12 on: May 20th, 2011, 2:17pm » |
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on May 19th, 2011, 10:06pm, 722caasi wrote:| In conclusion: an internet based currency is possible, if it is based on guaranteed exchange for a service of real value, such as computer processing. This makes it a hard currency, like gold, not fiat. |
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Even a currency that is backed by gold is not itself gold. It is just a promise to exchange currency for gold on demand. There is a long and inglorious history of issuers of "hard" currency successfully gaining universal acceptance of their currency and then breaking their promises to exchange it for gold on demand. It is beyond me why anyone would distrust the dollar now because it is "backed by nothing" and trust it more if we went back to the gold standard. In either case the government is making a promise to ensure the value of the currency, and in either case breaking the promise provides short-term gain and long term misery, but in neither case is the money any more or less real than the promise is real.
And even if gold itself were money, and we settled debts by moving around bits of physical gold rather than making marks in a ledger (or bits in database), our currency would still be reliant on an implicit promise that other people will value gold in the future. Ddyer calls gold real because you can make things out of it, but if gold had no psychological value and was priced purely on its industrial uses in electronics and whatnot, it would sell for less than $200 an ounce, not $1500. (That's right; gold is worth less than it costs to dig it out of the ground. We dig it up because of a pathological conviction that it has an intrinsic non-use value, which isn't even a coherent thought.) If you take dollars out of the equation, and equate gold to other things like hamburgers, you would see that (if gold were our currency) we would be suffering prolonged deflation. And tomorrow people could lose their enthusiasm for gold as quickly as they came by it, causing the relative price to plummet, causing (if gold were our currency) massive inflation. In short, the implicit promise by other people to value a commodity higher than its industrial worth is another promise that can be broken, undermining even a physical currency.
In my opinion, just as democracy is the worst form of government except for all the others, the dollar is the worst form of currency except for all the others.
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| « Last Edit: May 20th, 2011, 2:27pm by Fritzlein » |
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Eltripas
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Re: Bitcoin digital currency
« Reply #14 on: May 23rd, 2011, 12:23am » |
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on May 20th, 2011, 2:17pm, Fritzlein wrote:
(That's right; gold is worth less than it costs to dig it out of the ground. We dig it up because of a pathological conviction that it has an intrinsic non-use value, which isn't even a coherent thought.) . |
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I thought gold was valuable because of its use in jewelry.
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