BBO Discussion Forums: alternative currency - BBO Discussion Forums

On a podcast yesterday someone was discussing something called bitcoins and I'd never heard of them before.
http://en.wikipedia.org/wiki/Bitcoin

I've read the article but still can't quite wrap my mind around how it actually works. Apparently there is yet another one on the horizon which is less technical but otherwise has much the same structure, I'd have to listen to the podcast again to get the name.

It would seem as though banks...and possibly governments..might get a little restive about a currency not under their control. Supposedly an earlier version of this sort of thing was closed down in China but bitcoins are becoming increasingly accepted and used there now. Anyone have any knowlege or thoughts about this?

onoway, on 2013-November-30, 01:02, said:

I have a fair amount of experience with Bitcoin.

Bitcoin is digital "cash", by which I mean it is a digital currency that has many of the same characteristics as dollar bills, euros, yen...

Most notably, bitcoins try to provide anonymity. While coins are linked to a particular account name, they can be spent without the need to provide any kind of identifier.
Like cash, bitcoins can also be stolen without any way to reverse the transaction and get them back.
Bitcoin also has the interesting characteristic that the growth rate over time is fixed.

From my perspective, there are three broad classes of people who are using bitcoins.

1. Ideologues
2. Speculators
3. Criminals

The set of ideologues includes cypherpunks, gold-bugs, libertarians, Birchers, cranks who have an issue with the fed, you name it. Some of these individuals are simply interested in the coolness factor. Others have a pathological distrust for "fiat" currency.

The set that I label speculators includes both traditional speculators as well as Wall Street types. Lots of people are entering the bitcoin market with the intent of taking the currency out of circulation, driving up the price, and then making a profit. You also see a number of start ups trying to layer value added services on top of bitcoin.

Last and not least, you have a lot of folks using bitcoin as a currency of choice to buy and sell illegal goods. The "Silk Road" marketplace is the best know example.

You'll notice that I don't have a category that corresponds to "legitimate users". The reason for that is quite simple:

The price of bitcoins is incredibly unstable. Their value often fluctuates by 50% of the course of a week.
There are so many speculators chasing so-few bitcoins that the currency is currently subject to hyper deflation with occasional crashes as speculators cash in.


http://bitcoinwisdom.com/

Add in the enormous transaction charges to turn bitcoins into real currency as well as the fact that there are some well known examples of computer viruses being used to steal digital wallets and you have something that is (currently) completely impractical for legitimate transactions.

A Welsh guy threw away a hard drive this summer -- on the hard drive were bitcoins, which he had mined a number of years ago, and which were not worth a lot. But in the past couple of month the value of them has gone through the roof, and he realised that his collection was worth £4. It will probably be impossible for him to retrieve it from under tons of rubbish in the landfill.

Which raises the question... when you destroy money I think (but not sure) that you are kind of making a donation to your government, who wins when bitcoins are destroyed?.

I spent more than 5 minutes readin and still have no clue where can I buy the money, seems like before that I need the wallet.

Fluffy, on 2013-November-30, 06:47, said:

You have to use some sort of program and "mine" for them... I think you run the program all the time and you will, at rare intervals, receive a bitcoin. But the whole thing confuses me. From whom does the bitcoin come? How is it recorded that you have one?

I have read quite a few articles about bitcoins in the last few years, and I still don't understand how it works.

I don't understand bitcoins either. I have no interest in either drugs or on-line gambing, and this seems to be mainly where they arise. I'm pretty sure that I can't fet a cup of coffee at Starbucks using bitcoins, even if I had some. A thought or two:

There is a lot I don't understand about the dollar. Quantitative easing is a mystery to me. Probably I could understand it, but I have never put in the effort. But here is what I do understand: The U.S. government takes responsibility for the dollar. We can argue about how well they are fulfilling this responsibility, but we know where the responsibility lies. Similarly with the euro, the peso, etc. I have no idea who takes responsibility for the bitcoin. The value goes up, the value goes down, how this happens I have no idea. There is something called the Bitcoin Institute and I believe that I heard a representative from this institute on NPR one time. I didn't understand, or at least I didn't understand well enough to want to go out and buy some bitconis.

It could be that someday we will all be using bitcoins. Wake me up when it happens. But really don't listen to me, I was in my thirties before I got a credit card. And I still don't know how to tweet.

Fluffy, on 2013-November-30, 06:47, said:

Fiat money has no intrinsic value. Basically, it represents government debt. If you destroy it, you reduce the government's debt. Thank you very much.

As for bitcoins, all I know about them is that I've heard the name.

1. Bitcoins are valuable because

(a) People do not yet know how to counter fit them
(b) There is a limited quantity
© There is supporting infrastructure to demonstrate who owns a bitcoin at a given point in time

In turn, this means that bitcoins can be used as a medium of exchange, a unit of account, and a store of value.

With this said and done, see my earlier comments about the dramatic fluctuation in the value of a coin over short periods of time.


2. There are two ways to get bitcoins. First, you can purchases them in exchange for real currency using services like Mt. Gox This can be tricky if you live within the US because there are no exchanges in the US and none of the major online banks allow transactions with Mt. Gox. As a result, you normally need to go through a few cuts outs to buy bit coins. Alternatively, you can participate in what's known as bitcoin mining.

Bitcoin is based on what's known as a blockchain. The blockchain is a record of all bitcoin transactions and establishes who owns what bitcoin at a given point in time. Validating the blockchain requires performing computationally expensive operations. If you use a computer to perform these operations, you have a chance a getting a fraction of a new bitcoin when it enters the system.

3. The number of bitcoins in the system is limited. There is limited number in the system right now. New ones are going to be generated according to a pre-ordained schedule over the next 25 years or so. If small numbers of bitcoins are destroyed, bitcoins become more scarce and the price should rise. If a large enough number of bitcoins are destroyed, it might be possible to degrade the effectiveness of the currency. (Bitcoins are very divisible, but if you destroyed enough of them such that the smallest unit is worthworth $100, they aren't all that practical...)

blackshoe, on 2013-November-30, 08:46, said:

This is, of course, complete nonsense...

Richard,

So far you seem to be the most knowledgeable about this so let me ask you (or anyone who knows). Is there any entity that takes responsibility for the bitcoin's value and, if so, in what manner? I realize that the value of any currency is partly a matter of faith or psychology. I have heard that some in the criminal industries use artwork as a medium of exchange. Gold has a value per oz that probably far exceeds its actual value as a metal. And the dollar has its place in the world partly because of faith, a faith that may be getting a bit shaky with recent political clashes. But there is a difference. A Picasso is worth whatever someone will pay for it and there is little to be done about it. We at least believe that our government, if wise, can support the value of our currency. So, maybe to put things simply, should I think of a bitcoin as more like a dollar of more like a Picasso (or maybe a Warhol)?

I am not sure I have even asked a clear question but maybe you can see what I am getting at.

kenberg, on 2013-November-30, 09:53, said:

There is no entity that backing bitpoint by pegging its value to some other currency.

To the extent that there is any intrinsic value to the currency, it is governed by the willingness of people to exchange bitcoins for dollars or yen.
In theory, the value of a bit coin should be proportional to

1. The total number of bitcoins in circulation
2. The velocity of the bitcoin market (how often the coins turn over and get used to purchase something)

I think the best analogy for bitcoin is gold.

Difficult to counterfit
Very little intrinsic value
Can be exchanged for currency
Prone to bubbles and other wild fluctuations in value

The main difference with gold is that the number of bitcoins is strictly limited while the amount of gold is dynamic and quite uncertain.

kenberg, on 2013-November-30, 07:38, said:

I heard a story a few days ago about a startup trying to make things like that easier. http://pizzaforcoins.com/ allows you to order a pizza delivery. You pay them in bitcoins, they pay the pizza place in cash.

student with bitcoin sign at football game gets 24k in donations.


A QR code is a visual representation of any kind of information (frequently a URL for a website). In this case, the code represented a Bitcoin wallet.

On Reddit, Bitcoin fans managed to enhance the QR code from the screen in order to identify his wallet, so that people could donate money to him.

http://finance.yahoo...-153845085.html

I think that this world and I no longer understand each other.

As I understand bitcoin is all about math....math in all its wide and varied forms.

mike777, on 2013-December-02, 20:45, said:

So they tell me.

The upcoming Joint Mathematics meeting in Baltimore has talks such as Symplectic Geometry Today. Recent Results and Open Questions. Maybe the speaker will apply this to bitcoins.

But I was more thinking of a kid waving a sign at a college football game and then people sending him $24,000.

I have hope I could understand Symplectic Geometry if I put my mind to it. Sending $24,000 to this kid is harder to grasp.

But then: What, me worry?

Also, I see from the article that a bitcoin is now worth $1,100. That's a lot of pizza.

Vampyr, on 2013-November-30, 07:06, said:

This sounds a little bit like a real world version of TinyMUD! You just need to be able to spend coins to build structures that in turn create their own coins and the game is pretty much in place.

Bitcoin fever catching on.

Mr. Greenspan said, "It's a bubble." “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is.”

32519, on 2013-December-08, 09:44, said:

I strongly agree with Greenspan that there is a speculative bubble going on with Bitcoin which is aggravated by a deflationary spiral. With this said and done, I think that traditional economic models can be used to define Bitcoins intrinsic value.

MV = PY is a basic identity which is used in Macroeconomics.

P is an index that describes the price level (dP/dT measures inflation)
Y is real GNP

M is the size of the money supply
V is the "velocity" of the money supply which basically measures how often dollars "turn over" and exchange hands

If you apply this framework to Bitcoin

P is the change in the price of a bitcoin (Note that the price fell by 50% in the last couple days when the government of China cracked down on bitcoins. It recovered some, but the price is swinging dramatically over short periods of time)

Y is the size of the bitcoin economy. What is the value of the goods and services that are being bought with bitcoins.

M is the number of bitcoins in circulation

V, once again, is the velocity














M is the money supply
P


Both sides of the equation are statements which describe real GNP.