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What are Bitcoins?
Disrupter
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Registered User regular
So, today a friend of mine IMd me asking "have you ever heard of bitcoins?". My response was, no. Then I began looking into the entire concept. I think I might have a decent grasp on what its all about, but I might be way off. So can someone explain to me what is exactly happening?
Here is how I interpreted it
Basically getting away from the specific details of it, crazy algorithms need to be used to verify a transaction online without worrying about doublepayments or other potential issues. You need to be absolutely sure person A had the currency and that they sent it to person B, and then change the secure digital wallets of person A and person B. This takes a lot of processing power. So the answer is to use a peer-to-peer network to have everyone contribute to this process. To incentivise people help facilitate this, doing so successfully rewards you with some of the currency itself. Thus the value of a bitcoin is dependent on the power of the peer-to-peer network running the system. If more power is mining, more bitcoins are created and we have inflation compared to the US dollar.
Is this remotely correct? Or am I crazy? It makes sense in theory, but I may have completely misunderstood the stuff I read.
Here is how I interpreted it
Basically getting away from the specific details of it, crazy algorithms need to be used to verify a transaction online without worrying about doublepayments or other potential issues. You need to be absolutely sure person A had the currency and that they sent it to person B, and then change the secure digital wallets of person A and person B. This takes a lot of processing power. So the answer is to use a peer-to-peer network to have everyone contribute to this process. To incentivise people help facilitate this, doing so successfully rewards you with some of the currency itself. Thus the value of a bitcoin is dependent on the power of the peer-to-peer network running the system. If more power is mining, more bitcoins are created and we have inflation compared to the US dollar.
Is this remotely correct? Or am I crazy? It makes sense in theory, but I may have completely misunderstood the stuff I read.
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I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
The computational difficulty of "mining" bitcoins goes up with the number of bitcoins in play, up until all possible coins are created and the currency supply becomes fixed. In theory, if the world economy ran on bitcoin that would be awful (consult an introductory macroeconomics textbook for details), but of course that's never going to fucking happen. In practice, it means the founders and others who started early have more bitcoins than they can turn into real money without destroying the little economy they have going, whereas if you try mining now, you won't recoup electricity costs.
The value of a currency is, of course, based on what you can get for it. For a while (still?) the big driver for bitcoin was a handful of websites using it as a more-or-less untraceable way to pay for drugs. This caused a hilarious bubble that has since mostly popped.
While the Bitcoin protocol itself is pretty impressive, most sites using it for, e.g. Bitcoin to USD exchanges can be pretty amateurish.
Oh, and most of the bitcoin community can be charitably described as "eccentric" and uncharitably described as "completely fucking insane".
Hard to see why it's failing spectacularly. The only good thing about BitCoins is that they serve as a great example for why going back on the gold standard is an abhorrent idea.
Unless you're using Namecoin or any one of the other applications for such. Some glorious assholes are also starting up numerous "SERVE AS A SERVER FARM, GET POINTS) platforms, some of which are open and will eventually see daylight around 225, so expect to see people trading server time like we're in the motherfucking nineties.
Really? Cause I know of at least one dude who takes Buttcoin for his open source calipers and other tools.
If you're looking for legal uses, Buttcoin is really only attractive to non-ec types. Open sourcers, voluntarists, people selling seeds, that sort of thing.
Yeah and I know a guy that will trade eggs for a gallon of milk. It's not an effective legal tender or really any usable currency, there is slightly near 0 point in using it -- might as well use real money.
This thread made it over to the forum at bitcointalk.org. I created an account here to try to clear up Bitcoin misconceptions. The initial reaction at our forum to some of the replies here was along the lines of "don't bother with them, they've made up their mind, and are not looking for discussion".
However, I took a different view. You see, like some of the commenters above against Bitcoin I originally rejected it too. As time went on I found I was wrong, and believe me, if I can be immodest, I'm a smart guy.
So, I'm visiting for a bit and will be glad to answer questions. I'm not doing this because I need to win people over here to promote a sort of "ponzi scheme" which is what some mistakenly think Bitcoin is about. I'm here to try to offer the truth and be accurate. If people want me to leave I'll certainly do so. I'll never argue. That's not my interest here.
Okay, so the first thing to understand about Bitcoin is it is complex on many levels. I'd consider it impossible to fully grasp in only a few hours, possibly even days. To do so one would have to have an above average understanding of math, cryptography, programming, computer networking, economics, and the nature of "money". It's probably safe to say even long term adherents to Bitcoin like myself only understand some areas of it expertly, and have a more general understanding of the rest. For example, even core programmers working on Bitcoin (it's open source) who understand programmatic aspects of it expertly, may feel less knowledgeable about its economic ramifications.
So, I'll list some key things to know first off, and be happy to answer questions.
1. Bitcoin is not controlled by any central authority; it's completely decentralized.
2. Bitcoins come into existence (as defined by the protocol, which everyone agrees to by using it) through a process called "mining" which involves using a computer to solve a problem of varying difficulty.
3. There will only ever be 21 million bitcoins generated; the problem difficulty is adjusted automatically so bitcoin creation follows a fairly stable and known inflation rate. [1]
4. Bitcoins obtain a value because people want them for different reasons, and they are scarce. (the same reasons as gold)
5. Bitcoins, if used properly, can provide anonymity for their use
6. Bitcoins can be used to transfer any amount of value around the world, almost instantly, by anyone, with little or no cost, and without asking anyone's permission
7. The Bitcoin code has been reviewed by many qualified experts (again, it's open source) and serious flaws, in terms of bugs, have yet to be found.
8. It's unlikely any entity, such as a government, could entirely prevent the use or growth of Bitcoin without shutting down the entire Internet.
[1] https://en.bitcoin.it/wiki/File:Total_bitcoins_over_time_graph.png
Can you expand upon this? Gold is valuable for a lot of tangible reasons beyond its scarcity. What are the different reasons one would want a bitcoin? Is there any use aside from their value as a currency?
I was originally under the impression that the bitcoins were used in the process of executing a secure transaction from one wallet to another, which would give them an inherent value. But if that is not the case, and the difficulty of the algorithm is simply artificially inflated to control an economy then I am not sure I understand what the value of a bitcoin actually is.
8->
My, oh my that forum. I should invest in tinfoil hats.
I understand their thinking, but their thinking isn't grounded in reality (it works in the purest sense of the word works). Unfortunately practicality and reality take precedence when I, you know, buy things that aren't illegal drugs or niche products in a terribly obtuse fashion.
Plus, you know, there's the whole "needing to deal with a virtual currency" conundrum, in that it doesn't work like real money, hardly no one accepts it, and all that fancy stuff.
Yes it works as a currency, but, again, practically you might as well trade virtual sea shells. It's niche and powered by fandom, more or less.
Edit: The link, for those interested (whichever interest that may be).
Yes, anyone can generate bitcoins by running freely available software. However, by now most people don't try because the competition is too high. Bitcoin started January 3, 2009. During that year and some of 2010 it was possible to generate bitcoins using a standard desktop PC. Not many people were participating.
The dollar value of bitcoins used to be in the low cents range. As the price rose above $1 people began to compete more seriously for the chance at winning the computational problem first and receiving the 50 mined bitcoins. People became professional miners, building dedicated (racks of) computers with high computing power. It's now about 1 million times harder to "win" the problem than it was early on. The chance of a desktop PC being first to solve the problem is remote. Miners now use dedicated "mining rigs" with GPUs for example. (graphical processing units have high computational power)
To obtain bitcoins now it's easier and cheaper to buy them, work for them, or trade for them. People do all of these things.
There is no one list of every bitcoin vendor (that I know of) because Bitcoin is not centralized. However, the following are probably the most comprehensive.
https://en.bitcoin.it/wiki/Trade
http://thebitcoinreview.com
On your first point please keep in mind no one person or group of people speaks for Bitcoin. For example, I've seen some notable forum personalities come and go. The future of Bitcoin will become what it is (I'm not saying I know for certain what that is) because of the quality of Bitcoin, regardless of any participants that may come and go.
Your other points are about the current usability of the bitcoins. What I say to that is keep in mind that things change. For example, bitcoins are currently more usable, and more accepted now than they were in late 2009. One of the errors I made upon initially judging the merits of Bitcoin is focusing on near term hinderances to its success. What I neglected to do was consider whether the fundamentals for how it works allowed it to survive over a longer term.
Hi @Disrupter, you're the main reason I'm replying here. You asked a question, and I appreciate people not afraid to do that.
Your first question about what gives bitcoins value is a good one. Even some (notable people) who consider themselves knowledgeable on monetary issues seemed to have gotten this wrong. For example, they think that because bitcoins are not backed by anything they cannot have legitimate value.
First, let's discuss gold's value. It's true there are a few practical uses for gold, but none that would really justify its current price. As a metal it's not hard enough to be useful, and copper is a better electrical conductor. To be certain, what gives gold its current value is not its practical usefulness, but its *perceived* value. People use it for jewelry or similar application because of its perceived aesthetic beauty. It's that combined with the fact it is very scarce that gives it its high value.
I make that point to show gold is not inherently valuable. People assign the high value that gold enjoys.
What are the reasons people would want bitcoins? Good question.
One reason is speculation. It's likely the majority of people storing bitcoins at this point do so somewhat conscious of speculation. They believe the value of bitcoins will rise, possibly substantially, so it makes sense to have them.
Speculation alone is one key reason bitcoins have value. Obviously 21 million bitcoins isn't enough for one US state, let alone a nation, or the world. So as bitcoins gain acceptance, yet remain scarce, it's certain to put substantial upward pressure on the price. This is where the "ponzi" attribution gets mistakenly assigned.
But Bitcoin has other valuable qualities. For example, try to send $10,000 across the ocean to someone in Europe. No matter what method you use (Western Union, Bank transfer, etc.) you will experience a time delay (from a few hours, up to a day or more) and significant cost (see Western Union fees). It's very unfortunate that you may also get put on a terrorist watch list (this actually happened to Americans). Your account may also be arbitrarily frozen by authorities.
Bitcoins bypasses all of that. As mentioned above bitcoins can be sent almost instantly with little or no cost, and without asking anyone's permission. Money transfer and associated fees is a multi-billion dollar a year industry. Bitcoins could garner value on this alone.
Another key reason people desire bitcoins is their ability to provide payment anonymity. What if you thought donating to Wikileaks (or somewhere else) was something you wanted to do? Credit card companies blocked Wikileaks donations, but they couldn't stop bitcoin donations. What if you wanted to avoid paying taxes for some exchange? I'm not saying to do any of these things, but bitcoins do make it possible.
The Obama administration effectively stamped out online poker playing in the U.S., but it's now possible to do that with bitcoins. In other words, bitcoins allow people to use money more freely as they might want to. People can literally be their own bank.
A final reason to value bitcoin is the known inflation rate. Gold has outperformed dollars for this reason, and bitcoins have outperformed gold.
These are real reasons to value bitcoins from the top of my head. I may have missed some.
Edit: Yep, I missed one - micropayments. It's fitting on this "Penny Arcade" forum, but the Internet would benefit if many content creators or publishers could accept micropayments for different things. Payment proccessing fees make this currently non-feasible, but bitcoins make micropayments easily possible.
That is all, please carry on.
chair to Creation and then suplex the Void.
Sure, when I say "micropayment" I mean it in the most micro sense of the word
For example, what if you have the ability to program in Javascript and you create some wonky spaceship game in 30 minutes. You might like people to pay you a penny or even half a penny, maybe even one fourth of a penny for it. That's a super micropayment! If 1 million people bought your game that would be $2,500 to $10,000 you could get, but it's currently not possible because processing fees would consume all profits. Bitcoin makes it possible.
And BTW, many merchants currently pay upwards of 3-4% in credit card fees for *all* credit card transactions. That eats directly into their profit margin.
http://www.zerohedge.com/news/greek-banks-run-out-safe-deposit-boxes-eerie-calm-takes-over-country-24-hours-d-day
Everyone knows of the financial crisis, and its current severity in Europe. Greece may be kicked out of the euro currency. Their debt is unmanageable. Greek citizens - the ones that still have money - are looking for ways to hold onto their wealth. They don't know if they will abruptly return to the drachma or just what will happen.
Because of the way bitcoins work you can store and transfer them easily. Imagine a rich Greek citizen had 20 million euros. He could convert it to bitcoins and save his "wallet" with that stored value on a USB stick.
In history during times of crisis countries have implemented capital controls to keep money from fleeing the country. What if you were a wealthy US citizen that wanted to escape/migrate to a neighboring country. Imagine trying to hide and transfer heavy sacks of gold (or cash or whatever) across the border. You probably wouldn't be successful. But with Bitcoin it's possible to memorize your wallet private key. You could cross the border naked and still be carrying billions or more worth of value. Alternatively, you could just send the amount over the network somewhere and have it waiting on the other side.
Bitcoin makes things possible that current money systems simply don't.
_____________
Another consideration is Libertarians. As described above bitcoins have monetary qualities of usage privacy and controlled inflation which can't be manipulated. It's for these reasons that Libertarian types like gold and silver coins.
There are millions of Libertarian type people in the U.S. that, if they understood bitcoin, would support it on principle alone. Bitcoin has the same desirable monetary qualities as gold, but is more suitable as a currency. You can't pay online with gold, and trying to use gold/silver in actual bulky physical exchange is possible but certainly not ideal.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
How would one convert that $10k worth of bitcoins back into money you could use to pay your bills/taxes/whatever? Sure you can transfer that money real quick, but if you then have to spend a few days looking for either a buyer or a number of buyers who would give you the appropriate legal tender, wouldn't the cost of your time begin to dwarf the WU fees?
It's mostly a validity check IIRC (programming wise). If Person A uses bitcoin to pay for XYZ, and to pay for GHI you use it to test who has proper rights to the coin. Something like that.
Yes, but to test who has the ownership you have to have a complete history of the ownership of the coin and the entire transaction history of the coin. It's an ever growing chain. The more transactions that take place the larger the chain gets.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
What's in store for bitcoins in the future is not certain, but it could very well be that one day you could pay for typical goods, services, taxes etc. in bitcoins. This doesn't mean Bitcoin becomes the de facto mainstream currency, like U.S. dollars are currently, (although it could be) but it might be a currency used alongside others. This gets into legal speculation about the future of bitcoins, and they are now essentially in legal gray area, which I won't go into now. I will say there are lawyers now actively supporting Bitcoin too.
But I think your question is more about the near term. Yes, since bitcoins are in a very early stage of adoption it's helpful to be able to exchange them for other currencies that are better accepted.
This becomes easier and cheaper every day. In fact, a new European exchange (bitcurex.com) just came online a couple days ago. There are many ways to exchange currency such as localbitcoins.com for meeting in person, or specialized service like fastcash4bitcoins.com, but the most used way is a proper Bitcoin exchange of which there are many. MtGox is the largest one and offers many deposit/withdraw options. Intersango is the largest one in Europe. Just take a glance at this page to get an idea of how much exchange activity there is now in Bitcoin:
http://bitcoincharts.com/markets/
So, yes, you have a very real point that there exists time delays and fees associated with moving/exchanging bitcoins as described. However, I will say it's actually possible to now make money by taking advantage of the differences in exchanging bitcoins versus fiat currency over distance, and I believe people do.
Bright group.
You've directly touched on one of the largest concerns about Bitcoin: scalability.
In fact, we were just discussing it on our forum the other day. I'll level with you all. The truth is Bitcoin is an experiment. There is just no way to know for certain how things will play out. I wouldn't advise anyone to invest more than they could afford to lose in Bitcoin. However, I'm compelled to also say I wouldn't advise people store all their wealth in any of the world's current fiat currencies; my advice is to own precious metals like gold/silver. But I digress...
I was saying no one knows for certain what's in store for Bitcoin, too many variables, but many smart people are involved with it. I'd say most people, including myself, believe Bitcoin (or something very similar) will continue to exist in the future; at what level of use, who knows, but I have ideas. There doesn't seem to be any one thing that is a decided deal breaker.
Concerning scalability a sort of official debate is here:
https://en.bitcoin.it/wiki/Scalability
The current technical answer has to do with the fact the problem of the blockchain (what stores the entire transaction log) size was anticipated beforehand. Transactions are arranged in a Merkle tree allowing them to be "pruned" as no longer needed from long term storage after a time. Developers are working on this. I think my own answer is also valid:
https://bitcointalk.org/index.php?topic=93662.msg1035101#msg1035101
But one thing is for sure, as was mentioned in our thread on the topic, if/when scalability becomes a problem it necessarily means Bitcoin is a success.
The original point had to do with anonymity. This is a big misconception about Bitcoin, as it is not inherently anonymous. Certain steps have to be taken to ensure anonymous transactions, but they are certainly possible and in fact done. A good description about Bitcoin anonymity I heard goes: it reverses the payment system; in the current system you can see everyone's identity, but you can't see their bank balance or their transactions. Bitcoin is the opposite, as you can see everyone's account balance and the transactions, but you don't know who they belong to.
A cursory glance tells me that most people trying to turn people's ears are investors to some degree (own businesses operating on bitcoin<->currency).
I read about it, but my technical knowledge is not deep enough. I'm very curious about the whole thing
That is my understanding. They are equivalent to something like "credit cards" that aren't tied to any currency denomination. Think of it like if Visa and Mastercard paid with monopoly money that they gave a value too, and each retailer sets its own unique price based on how they value the money. Pretty much just any acceptable payment at that level.
Of course, as the network gets larger it become much harder for anyone to pull together the processing capability to compromise the network - the real risk would be a distributed malware trojan that quietly infects a few hundred thousand machines before turning on to flood the network with bogus authentications and fake coins for a period.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
You misunderstand me, the trojan isn't to phish bitcoin users, it's to create zombie computers who's combined processing power will outvote the legitimate network. The legitimacy of any bitcoin transaction is validated by asking other parts of the network to confirm the ownership chain of the coin. If a large precentage of the network is rogue then that confirmation system breaks down.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
The reason they were worth $30 is the same reason that any single Bitcoin has a value.
Because some idiot somewhere thinks it's valuable
we also talk about other random shit and clown upon each other
Actually most trojans used another route. They used the infected machine's power to mine for coins in a large network of zombied PCs or the tried to steal / break the security / private key to one individual's digital wallet.
I am a Bitcoin advocate, but I'm not trying to trumpet Bitcoin in any biased way. If there are negative aspects to Bitcoin I'll be as candid about them as the positive ones. My goal here is to be truthful, objective, and accurate. People can then make up their own mind, but at least their information will be based on (hopefully) accuracy, rather than misconceptions.
Yes, I agree Bitcoin can be beneficial this way too. I've heard stories of banks running out of physical cash upon demand because they are so used to digital transactions.
Okay, your first part is talking about extinguishing tax obligations, but that's not necessarily what Bitcoin is based on. Tax policy is a political issue. For example, let's say people only traded gold and silver coins instead of dollars. If the political will was to tax income and commerce it could still be done. People would simply owe a certain amount of gold, etc. come tax time. With bitcoins the same is true. If bitcoins are ever used widely taxes can still be levied, and collected in bitcoins. That's part of the future legal speculation I mentioned is uncertain at this point.
But let's say the law is not favorable to bitcoins, forcing them more "underground". That still doesn't kill off Bitcoin, but rather changes the dynamics of who uses them. There will likely always be people that want to trade bitcoins because they uniquely allow some things which traditional fiat currency does not. And remember, bitcoins are not local to one government's laws or political whims. They are global. So being outlawed in one location doesn't equal being outlawed everywhere, and that would likely put pressure on regimes that did outlaw them.
As for exchange of bitcoins to other currencies, I believe that will always be available as long as bitcoins have any value at all.
Okay here you've touched on a larger debate, essentially one of Keynesian vs. Austrian economics. I actually have what I feel is good insight to that debate; it's a reason for my chosen username. However, I want to keep this thread on topic about Bitcoin. Perhaps if anyone desired I might discuss it in a new thread.
But specifically as regards Bitcoin the point is not so important because Bitcoin doesn't have to set governmental policy, such as tax or economic policy. Bitcoins simply exist to allow people the choice to use them freely as they might like to. This means people can choose to use them alongside other currencies, for example.
This is an interesting point, which I'm glad you brought up.
As stated earlier bitcoins were once in the cents range. Some people had access to many thousands of them. At current prices it's certain there now exists "bitcoin millionaires". Newer adherents bemoaned missing out on earlier prices. Trust me. It is still way early days for Bitcoin. I believe anyone with as few as 10 bitcoins (about $100 worth) has a good chance at becoming equivalent to a millionaire. I don't say that with Ponzi motivations. That's just my honest assessment of the math along with my consideration of possible outcomes.
As for any "fabulously wealthy" individuals Bitcoin might create I'd say look no further than the current dollar system. Nobody has complete knowledge of the dollars created by the Federal Reserve. It's speculated that some individuals have trillions.
I would say it's true many people involved with Bitcoin now have some sort of project related to it as well, often capable of making a profit.
But that's healthy, encouraged, and to be expected. Bitcoin is fostering a new economy, a financial system, and businesses for that economy. There is a lot of infrastructure that needs to exist to allow for more mainstream use.
I'm glad you are skeptical. That's healthy when it comes to Bitcoin, because it's a true free market and very much like the Wild West. There are scammers as well as constructive participants. There is no authority, so people have to be cautious.
At the same time also understand many people support Bitcoin for different reasons. For example, I was inspired by a recent comment by the owner/developer of WalleBit, a Bitcoin eWallet. Just read the first (short) 3 comments on this page:
https://bitcointalk.org/index.php?topic=91431.20
tl;dr version:
Bitcoin, because of the freedom of use it provides, and integrity for holding value which can't be manipulated by inflation - two qualities lacking in all fiat currencies of the world - can be beneficial to many people. Many believe that's a noble cause to support.