Yeaah. Andreas seems to be a true believer in bitcoin as a currency, but he fails to mention some of the serious deficiencies of bitcoin.
He says transactions happen instantly, but they donât. They have to be agreed on and added to the block chain. This can take upwards of 10 minutes making bitcoin impractical for a wide variety of uses. On top of that, if people start actually using it as a currency, this number will skyrocket. The blockchain is already huge (it takes days to download the whole thing).
Related to the blockchain size, Andreas seems to throw out peer-to-peer a lot. The fact of the matter is though, there arenât all that many full peers and growth in that number is almost certainly going to stagnate if/when the blockchain becomes so large that you need an array of drives just to store it or transactions come in so fast that you need specialized hardware and/or multiple CPUs just to verify transactions. Most people using bitcoin however go through a centralized exchange. In this, bitcoin is not that much different from our current system except weâre paying to buy them in our local currency, transmitting them around for free and, for most people, converting it back into various countryâs currencies.
Then there is the fact that the value fluctuates dramatically. Having bitcoins means tomorrow you can wake up with 30% less money than the day before. This is hardly conducive to being a replacement for a world reserve currency like US dollars. And while Andreas seems to think Chinese investors were buying bitcoin as an alternative to keeping their money in Renminbi, evidence suggests they were buying it in order to transfer it to another exchange and convert it to a hard currency in order to get around the limit sthe Chinese government places on getting money out of the country.
The he talks about the âcostâ of doing money transfers, but in order to get your bitcoin transfer to happen faster, you have to pitch in some fraction of a bitcoin to speed things along. And while that is typically a flat rate, it isnât all that much different from your ACH/EFT charge which is also independent of the amount transferred.
Donât get me wrong, bitcoin is neat, but it has a long way to go.
The bit coin protocol could be revised somewhat so that we donât need to have the entire blockchain on each computer - just the balances of each wallet and the transactions conducted in the last week would do. The blockchain could become a âdiffâ with a handful of authoritive servers holding the complete history, and the majority just stoing the hash of the past history
Yeah⌠that would seriously disrupt high frequency trading. Wait ⌠why is this bad again?
But Bitcoin cannot change in any respect because there is no consensus on who decides change and no mechanism for agreeing on consensus.
So the issues you raise will continue to be issues. There is no way to change the protocol to eliminate them.
People could in theory move to a secondary currency and use bitcoin to back that currency. That would limit the number of actual bitcoin transactions. But micropayment type systems are very hard to establish. And once you move from trading actual bitcoins to trading scrip that is redeemable for bitcoin you have all the counterparty liquidity and fraud issues.
I have been watching Internet currencies for 20 years now. Several of the ones that got big turned out to be Ponzi schemes. The currencies allegedly backed by gold werenât. As soon as people swap their bitcoin for bitcoin backed scrip it opens the door to Ponzification.
Not that this should in any way discourage you from investing your life savings and kids college funds in BitCoin backed scrip. Walmart will always want tellers and greeters.
If everyone was forced to pay in bitcoins and if most high frequency trades resulted in transfers of money.
Yeaah. Andreas seems to be a true believer in bitcoin as a currency, but he fails to mention some of the serious deficiencies of bitcoin.
Personally, I think this video of his, from a lunch discussion w/ an investing club goes much more in depth on technical details and risks: https://www.youtube.com/watch?v=JP9-lAYngi4
He says transactions happen instantly, but they donât. They have to be agreed on and added to the block chain. This can take upwards of 10 minutes making bitcoin impractical for a wide variety of uses.
For regular transactions (buying a coffee, etc), 10 minute confirmations are pretty arenât a huge issue - youâre already seeing payment processors take the double spend risk. For more substantial transactions, you should wait for the confirmation. In general, Bitcoin is a lot safer/more reliable than existing transaction methods. Now, thatâs not to say there arenât a bunch of ways that crypto currencies could be much improved over Bitcoin as a daily medium-of-exchange - but I think faster confirmations is relatively minor. At the same time, I donât think thereâs a reason Bitcoin needs to be (or should, or even can be) the everything currency.
Related to the blockchain size, Andreas seems to throw out peer-to-peer a lot. The fact of the matter is though, there arenât all that many full peers and growth in that number is almost certainly going to stagnate if/when the blockchain becomes so large that you need an array of drives just to store it or transactions come in so fast that you need specialized hardware and/or multiple CPUs just to verify transactions. Most people using bitcoin however go through a centralized exchange. In this, bitcoin is not that much different from our current system except weâre paying to buy them in our local currency, transmitting them around for free and, for most people, converting it back into various countryâs currencies.
In terms of encouraging full-nodes, I think a Proof of Stake approach is interesting. MasterCoin and others doing some interesting stuff w/ distributed exchanges (properties, contracts, etc). I think itâs still too early to tell how things shake out, but blockchain size is one thatâs explicitly addressed in Bitcoinâs design - transactions are hashed in a Merkle Tree and historical/spent transactions can be stubbed out. The fact that the blockchain design forces a public, distributed ledger though is a huge differentiator than existing exchanges.
Then there is the fact that the value fluctuates dramatically. Having bitcoins means tomorrow you can wake up with 30% less money than the day before. This is hardly conducive to being a replacement for a world reserve currency like US dollars. And while Andreas seems to think Chinese investors were buying bitcoin as an alternative to keeping their money in Renminbi, evidence suggests they were buying it in order to transfer it to another exchange and convert it to a hard currency in order to get around the limit sthe Chinese government places on getting money out of the country.
Value fluctuation isnât an intrinsic problem w/ the design of the currency, itâs just a function w/ how small the market currently is. Letâs put it in perspective. Current Bitcoin daily trade volumes are about $6M and has a market cap of roughly $12B. By comparison, AAPLâs average trade volume is ~11.8M shares (~$6.5B), roughly 1000x and its market cap is just shy of $450B (38x). Looking at the charts, you can move BTC prices up/down 10% simply by trading $2M worth of Bitcoin. If/as Bitcoin grows in transaction volume and market cap, fluctations will decrease. The current US MB is about $3.8T (318x).
If you watch the video I linked at the top where thereâs a discussion of the interaction of remittances and currency flight/exchange I think heâs pretty well versed in how Bitcoin is being used.
Donât get me wrong, bitcoin is neat, but it has a long way to go.
Interestingly despite my disagreement with most of your arguments, I quite agree, as would, I think Andreas.
That being said, I think itâs worth noting Bitcoin doesnât have to be perfect - it just has to be interesting/better enough than what currently exists. Personally, Iâm pretty bullish on Bitcoinâs potential as store-of-value. It has the most mature infrastructure, capital & investment base, and mindshare, and while there are a lot of alt coins that are innovating in other areas (specifically on the transactional/computation ends), I havenât seen any thatâd necessarily make it a better âdigital hard assetâ (or at least enough that itâd overcome Bitcoinâs aforementioned non-technical advantages.)
IMO, the biggest challenges facing Bitcoin atm:
- Personal Security - figuring out how to keep wallets safe w/o re-introducing un-neccessary counter-party risk. Weâre seeing some interesting cold storage solutions and other innovations, but I think thereâs still a lot that needs to be worked on for establishing best practices. People are terrible at computer security, and then multiply that by money? Thatâs a bad combo.
- Systemic Security - Bitcoin is inherently susceptible to 51% (less even) attacks and weâre seeing all sorts of funny business happening w/ the mining pool (GHash.io)⌠Bitcoinâs attacks and weaknesses are well documented, and I think itâll be getting itâs mettle tested in major ways in the near future.
- Regulation/Exchanges - both MtGox and BTC-e are looking pretty shakey right now (not to mention whatâs going on w/ BitInstant, CampBX etc) - most of the existing/early exchanges are sort of historical accidents and itâs unclear between whatâs going on in the regulatory environments and the intrinsic ability for these exchanges to scale, where thatâll go. I donât know if any of these are enough to âkillâ Bitcoin outright, but certainly they could introduce a lot of risk.
- Financialization - thereâs no reason that the existing financialization against existing markets/currencies canât be applied to the Bitcoin market and w/o a doubt youâre seeing lots of market manipulation funny business going on already. Youâre also seeing derivatives markets pop up, and lots of off-blockchain exchanges, etc. Thereâs probably no way to stop that but⌠I just canât see it ending well
Bitcoin stores its blockchain in Merkle Trees and is already designed to account to be able to snip out historical transactions. Thereâs also been a fair amount of discussion on scaling: https://en.bitcoin.it/wiki/Scalability
I think thatâs stuff is pretty well in hand and some of the least risky aspects.
Thatâs empirically untrue. Bitcoin is actively developed by a team of core developers and has continually rolled out updates to the software and protocol that have been adopted by miners (w/ backports, upgrade deadlines, etc).
Iâm a bit mystified on why you would spread misinformation on something thatâs so easily refuted.
Ignoring the fact that there arenât unfixable issues with blockchain growth, as Dogecoin or the proliferation of altcoins have shown, they arenât hard to establish at all (maintenance is another issue).
The idea of counterparty risk/fraud for using Bitcoin-to-newcoin is also silly. Thereâs a simple solution and itâs called proof of burn and it happens all the time. Hereâs one from yesterday, in fact. That doesnât guarantee your newcoin wonât still lose all its value if it turns out no one wants it, but the same applies to your US Dollars or your Argentine Pesos as well.
The second a coffee shop auths a credit card, the card issuer puts a hold on the funds until settlement or until the shop clears the transaction. They are guaranteed to receive those funds except in the case of a chargeback. This happens in less than a second. From a vendor point of view, I fail to see how Bitcoin is safer or more reliable than this.
By comparison, Iâve done transfers on bitcoin that have taken upwards of an hour before enough people had confirmed the transaction (10 iirc). Of course, I didnât pay a transaction fee and it would have been faster had I, but then if it takes an hour with the current level of transactions, I hate to think what Iâd have to pay in the future in order to get processed quickly.
As a merchant, I can sign up with Coinbase right now and get instant exchange into USD with no transaction/currency conversion fees on my first $1M (1% thereafter) with no chargebacks. I can also use BitPay in a similar manner.
Both processors take on all double-spend risk and provide instant conversion into fiat. Both pricing and lack of chargebacks provides plenty of incentives for merchants to adopt Bitcoin.
Yes of course you are completely right. Please invest all your money in BitCoin right now.
The changes to the software canât change any of the principles that the scheme is built on. So Bitcoin will always be fundamentally deflationary. Once the limit is reached the amount in circulation can only decrease.
Proof of burn would be a one way transfer out of bitcoin. It is not possible to unburn it. So the new currency isnât actually backed by bitcoin. Burning bitcoin is as meaningless as burning down a house of the same value.
But what would I know, I have only seen a dozen similar schemes fail. This could be the one!
No need for facts when logical fallacies shall suffice, eh?
Considering that the blockchain, the technology that enables the distributed public ledger (and solves the Byzantine Generals problem) was invented by Satoshi Nakomoto, I doubt youâve seen any digital currency thatâs a âsimilar scheme.â Bitcoin, AFAIK is the worldâs first decentralized digital currency.
Thatâs not an argument for itâs longterm success. The existential risks are many (daunting even), so who knows what Bitcoinâs lifespan will be.
Your posts so far have contained a lot of snark, some blatant inaccuracies, but little in the way to show in terms of facts or clear arguments - Ponzi scheme backed by gold? Again thatâs quite the non-sequitur knocking down a strawman argument about generating alt-blockchains. Whyâs that an argument against Bitcoin? Iâm sure it all made sense when you typed it.
I could elaborate on how the blockchain could be forked/extended or why proof of burn is interesting in terms of counterparty trust, but since discourse doesnât seem to be your primary goal here, Iâll just pretend thereâs a killfile and stop arguing on the Internet.
Thanks for the answer - what is your view on the deflationary aspect of bitcoin? It seems to me that the system needs a variable supply of bitcoin to match the economic productivity. Suppose the videoâso predictions come true and a billion people do start using bitcoin and each has a wallet with $1000 worth of currency - then we have 1012 dollars represented by at most 21 million coins - so each coin would have to be worth 50,000$ - the currency seems to be deflationary and thereâs no way to devalue the bitcoin - maybe bitcoin will be the reserve virtual currency with later digital coins pegged to its value?
The easier question first:
Currently, the smallest unit of account in the Bitcoin system is a satoshi (8 decimal places, 0.00000001 BTC). The total money supply is sub-divisible to 2.1 quadrillion (10^15), which is somewhat arbitrary (one nice property is it does fit as an IEEE double-precision floating-point number, which isnât used by the core network, but does make program interaction easier). If you run this against current global M1, that comes out to 2 cents/satoshi. Itâs basically a non-problem, although it seems to come up frequently. (If necessary, the protocol can be extended to subdivide to more decimal points. There arenât intrinsic problems - bitcoin values are stored as 64-bit signed ints by clients, which is good to 9.2 quintillion (10^18)).
Most people have switched to mBTC (milli) for pricing and eventually people will switch to uBTC (micro) all the way down to satoshis if it comes to it, so again, practical conversion to fiat isnât a problem. If 1BTC = $50K, then if you want to carry around $100 then youâd carry 2 mBTC or 2000 uBTC. Payment processors and wallets all do automatic conversion, so you may just end up pricing everything in local fiat even if your transactions are in Bitcoin.
The âdeflationaryâ aspect is the trickiest to answer. Thereâs a good summary page on the Bitcoin wiki on the money supply. What may be a surprise to some is that Bitcoin money supply is currently inflationary (11.11% this year) and in fact will be mildly inflationary for the next decade or so before it gets to <1%. The BTC/block rate halves about every 4 years and the growth rate goes down asymptotically until the last coin is mined out in 2140. Between now and then everyone (or the majority, at least) could agree to extend/alter the blockchain, or probably more likely, people could abandon Bitcoin for transactional use.
I used to think the deflationary aspect was a big deal - it encourages hoarding, slows spending/money velocity, and itâd be a real bummer to pay back loans denominated in a deflationary currency⌠but now Iâm not so worried by it.
In the short term, the S-curve for Bitcoin adoption for transactional processing is just ramping up. It makes sense purely based on utility value of saved transaction fees. Payment processors provide instant fiat conversion so merchants and consumers suffer basically no currency risk. And while the current money supply is currently inflationary, the price of Bitcoin itself is mostly being driven (up) by conversion/transfer of wealth from existing fiat currencies into the Bitcoin network (aka speculation).
Since Bitcoin supply is algorithmically controlled (instead of arbitrary control by a centralized bank), it actually works well as a store of value. This of course complicates both the âmedium of exchangeâ and âstandard of deferred paymentâ aspects.
Personally, I think after the intial rush and *coin infrastructure get built out, other options, like Freicoin (demurrage), Peercoin (proof of stake, inflation), or even Dogecoin (wow, much coin) may all be better day-to-day transactional currencies. A lot of people are putting work into all kinds of crypto-coin exchanges, so Iâd expect switching to different currencies to be pretty painless and maybe common/automatic.
Now, in an ideal world, a perfect currency would grow at exactly the right rate to provide optimal money velocity against actual economic activity (productivity, trading, energy, etc), but sadly in reality today, thereâs no part of that which wouldnât be gamed for individual gain (and at cost to the system/other participants). Itâd be interesting if there was some sort of intrinsic algorithm for scaling, but as we can see by how some of the Chinese exchanges have been faking trade volume, thatâs also really tricky thing. This is actually one of the things on my list to do research on, but I havenât stumbled on anything too interesting yet thatâs tackling any of this.
Unlimited rice puddingâŚ
I saw the core of the BitCoin scheme back in 1995 when Adi Shamir asked me to take a look at MicroMint, which he had just invented with Ron Rivest. It was then extended by Adam Back as a proof of work scheme to mitigate spam.
The distributed ledger system is an interesting technical hack. But it doesnât solve the byzantine generals problem. It defers it. Once the actual mining stops the block chain will become very costly.
We have gone down this path many times. The spike in bitcoin came the Feds raided Liberty reserve which was the latest incarnation of GoldAge which was a âgold backedâ e-currency that (among other things) supported a Ponzi scheme called the High Yield Investment Program (HYIP). You can see the spike in BitCoin happen just a month before the bust. Either someone tipped off the mob to get their money out of Liberty Reserve or they moved their money for other reasons and that forced the feds to move in and mop up.
You seem to believe that anyone who sees the magnificence of the internals of BitCoin cannot but fail to be overwhelmed in awe and get offended that Iâm not.
What you are buying into here is the expression of an ideology, not the technical realization. One of the tests to see if it is an ideology is to see if those involved can handle the least skepticism or criticism.
We have already seen multiple bitcoin frauds perpetrated on bitcoin users. The sheep marketplace turns out to have been a merchant fraud operation but there is no law enforcement to turn to. Theres a group still trying to follow the alleged perpetrators and their alleged $220 million through the blockchain, completely oblivious to the fact that the perps are likely running the very infrastructures they are trying to track through. The Silk Road guy is up on federal charges of attempting to arrange a contract murder, paying for it with BitCoin naturally.
I donât see any value whatsoever being created by BitCoin. But the mining is certainly burning huge amounts of carbon fuels for no purpose.
Thank you Mark for at least giving equal time to Bitcoin from someone who actually understands it. It is certainly a breath of fresh air after the last run of Bitcoin-related stories where Cory felt trolling Bitcoin was a more useful activity.
As for those that donât understand Bitcoin, you certainly arenât alone - but I do recommend keeping up, because it wonât be long before you start to see it in all kinds of places. The adoption rate is truly staggering with plenty of headroom left.
Most arguments are grounded in technical misunderstandings, and the rest are firmly shouted from the mountain top of âhey, we always do it THIS way, so NYAH!â. But like all bad arguments, theyâll soon be plowed under by the enlightened millions who actually understand how computers work and precisely how the existing legacy financial system is crafted to benefit a handful at the very top.
It isnât trust in computation. Itâs trust in people operating machines doing computations. The people can turn the machines off. The people can instruct the machines to do arbitrary things (within limits, ASIC blah blah blah). And so on.
My favorite blog and daily read just posted my name. Best day everâŚ
Yes, naughty Cory, telling us bad news that we might not want to hear. Skepticism is only appreciated when it is directed at fiat money!
I am not the only person in the crypto protocol design community who is skeptical of BitCoin. Ben Laurie wrote an extensive technical takedown a while back. I earn my living from designing crypto protocols, I donât recognize your name. You have the right to an opinion but you donât have standing to accuse other people of not knowing theirs.
People are always upset about suggestions that an investment scheme might be a Ponzi scam or a no-revenue penny stock that has been bid up and up might be a bubble. And very often they refuse to believe the truth after the bubble has popped. There was a businessman who hired the entire ZeekRewards marketing team to promote his lame video conferencing service after the Secret Service had shut the site down and the owner admitted fraud charges. Five months later two of them made a guilty plea and agreed to refund the $10m each they had taken. But there are still people on the boards complaining that the Secret Service is to blame for the site being shut down.
ZeekRewards was actually rather larger when it was shut down than BitCoin is today. And the design of Bitcoin seems to rather cleverly combine aspects of a penny stock and a Ponzi scheme.
The clearing price of BitCoin will always tend to some value less than the expected cost of mining coins. The reduction in the number of coins per block means that the expected cost doubles every 210,000 coins minted. This is actually the clever part of the design. The bubble is designed to expand but no so fast that it would pop.
At the end of the day, the value of a fiat currency is derived from the fact that it can be used to pay taxes and if I donât pay my taxes the state can (and will) confiscate physical goods to make up the difference.
