I think this is a lousy defense of Bitcoin. I cringe whenever I read "oh it's new technology of course people will be scared!" or worse yet, "you must be jealous because you didn't get in on the ground floor." I think it's a really cool technology but the economics don't make a lot of sense. There are a few major issues I see:
-What problem does it solve? Many claim that it's a more efficient way to transfer money, but after paying high spreads & fees on illiquid exchanges or a place like coinbase, it doesn't look so good. International wires are expensive but paying 30 bps each way in exchange fees plus enormous spread concessions to trade even relatively small amounts like $1mm USD are much more expensive.
-What backs it other than speculation? Scarcity itself does not imply value. I don't see a significant "bitcoin economy" out there. Yes, you can buy things with them, but most of these things are priced in dollars. Sellers are accepting bitcoins only because they can sell them for USD, EUR, etc. to speculators. They have no particular attachment to bitcoins themselves and could just as easily accept another crypto currency provided speculators were active enough in the market. How many people are paid a salary or renting an apartment for a fixed amount of BTC per month?
-Many bad actors in the market with little regulation. There have been numerous scams and untrustworthy exchanges out there. It's like taking a trip back to the depression-era bucket shops.
-Consumer unfriendly: the average "man on the street" can't secure his wallet file and even many technically sharp people have been ripped off. Non-reversible transactions aren't a positive for most users and requiring traders to use an escrow service further increases costs. Network can't handle high transaction volumes and sellers need to wait for confirmations or risk fraud, so the use case of everyone buying their morning coffee with bitcoin seems shaky.
-Extreme volatility and lack of liquidity make it a poor store of value or unit of record, two things that are extremely important in a currency. Yes most government issued currencies experience inflation, but I can keep my paycheck in the bank for months or years without its value changing wildly, and I know what a loaf of bread costs in USD within a tight range.
Some of these are fixable and I see some growth potential in micropayments or as a money transfer mechanism for people who don't have access to traditional financial institutions, but what is the general purpose use case? What can I do with bitcoin that I can't with paypal or even a bank account (many let you instantly transfer money these days for no/low fees to pay friends, landlords, etc.)?
Thanks for writing this. I agree with everything you said.
I'd also add the concern of Bitcoin lacking an inflationary mechanism. I can't see it ever becoming a currency without that. If it's lucky, it may be a transactionary vehicle before the next technology displaces it. But, like you pointed out, it doesn't have much of a utility for that purpose anyway - taking transaction fees, security and usability into account.
Emin Gün Sirer wrote [0] an excellent survey of the Mt. Gox scandal, and a measured evaluation of the problems with Bitcoin. I loved this part:
> What Nigerian scams are to your grandfather, Bitcoin exchanges are to the 20-30 semi-tech-savvy libertarian demographic.
He ends by recommending Dogecoin because the community doesn't take itself too seriously.
> If one must pick a cryptocurrency, the lowly dogecoin, of all things, is doing everything right. It's based on economic principles that provide the right incentives for a healthy economy. The community does not take itself seriously. Most importantly, no one pretends that Doge is an investment vehicle, a slayer of Wall Street, or the next Segway. No one would be stupid enough to store their life savings in Dogecoins. And people freely share the shiba goodness by tipping others with Doge. So, young people who are excited about cryptocurrencies and want to get involved: Dogecoin is where the action is at. Much community. So wow.
I just hope the hoardes of Bitcoin speculators don't ruin it for them.
> What can I do with bitcoin that I can't with paypal or even a bank account (many let you instantly transfer money these days for no/low fees to pay friends, landlords, etc.)?
For all its faults, the cryptocurrency renaissance (based off the Bitcoin protocol) is enabling the Silk Roads to flourish. You can't run those on Paypal. You can't donate to Wikileaks with Paypal either, for that matter.
In addition to your stated issues (which actually are probably fixable), there's the computational power requirement. That cannot be fixed. Bitcoin requires thousands of times (or more) more computational power to do a single transaction than any centralized currency system I can think of.
I remember before bitcoin people would say "Oh, I have a couple spare computers... I just threw folding@home on them for now". Now, people are going out of their way to throw cycles at this currency instead of problems that help scientific progress, and thus humanity.
Bitcoin is a cool idea and well implemented for what it is, but I think attention should be drawn to its exceedingly inefficient use of computational resources.
>What can I do with bitcoin that I can't with paypal or even a bank account (many let you instantly transfer money these days for no/low fees to pay friends, landlords, etc.)?
With bitcoin, you don't have to have a third party such as Paypal or your bank to transfer money over the internet. You don't have to trust a third party. It's very close to a face-to-face cash transfer, albeit with possibility of being traced by various methods, so not perfectly anonymous. Still far more anonymous than almost any other method.
It's interested to disagree exactly with what you agree and otherwise:
- "What problem does it solve?" It gives you freedom, true freedom! You send to whomever you wish and freely receive from anyone anytime from everywhere! No red tape involved, no fiscal infrastructure needed, no political settings getting in your way, no many other bigger-than-you problems. Freedom!
-"What backs it other than speculation?" (I'm sorry that I have to sound redundant, but...) Freedom! Anyone wishing to use a free currency will opt for it or something similar.
- "Many bad actors in the market with little regulation." Well, I admit that the other side of the coin named "freedom" is anarchy. It scares you and you seek shelter from the wild west land of virtual currencies, but other see opportunities in there and are willing to take necessary risks.
-"Consumer unfriendly: the average «man on the street» can't secure his wallet file and even many technically sharp people have been ripped off." The friendliness is an engineering problem, and the perception is a psychological one. Both can be addressed just like so many other like it. The average Joe just doesn't think now that the inflation or other aspects of fiat-currency is ripping him off, because the work in this regard was done.
-"Extreme volatility and lack of liquidity make it a poor store of value or unit of record, two things that are extremely important in a currency." After the MtGox exit the market is actually unusually stable! And the depth of the market only gets deeper and with it - the stability of it's price relative to other currencies.
You say you see potential with micropayments, but in the current setting, the "dust" transactions are penalized with transfer fees. According to http://bitcoinfees.com/ if the amount is lower than 0.01 Bitcoin an amount of 0.0001 Bitcoin is perceived. At the current price (~630 USD/Bitcoin) the penalty limit is $6,3 and if Bitcoin's price will go up so will this limit. If the Bitcoin will rise 10 times, that 0.0001 Bitcoin fee will be 63 USD cents which means that even if a Bitcoin is fungible up to eight subunit decimals, it will count only for fine-division of large numbers, not micro-payments.
So you may be skeptical regarding the Bitcoin, but IMHO - for the wrong reasons.
The thing is, the average consumer DOES NOT have access to with 30bps currency exchange fees. They don't have the access you do as an HFT guy does. For retail currency exchange and international transfers, especially for international remittances, the fees, paperwork, delays and bullshit are very high.
To do an international wire transfer from the US to Canada for example, costs $25-$50 and has a %3 currency exchange fee. Western Union is probably worse to some place like Brazil or the Philippines.
With Bitcoin exchanges, I can buy BTC at a total of %0.5-1 currency exchange fee, wait 10 minutes and pay pretty much no fees outside of that. We can both use our free and relatively bullshit free domestic transfer services to transfer money in and out of the exchanges. Because of the speed of transacting, the spread from delays are minimal.
I've thought that Bitcoin (or more likely, a future crypto currency) might be better served as a transaction backbone for payment processors, banks, and the like. It could still be used for transactions between two individuals, but the bulk of transactions would be for routine inter-bank processing.
This would have an effect of stabilizing the exchange rate, and could replace Fedwire/ACH for a large portion of transactions. However, I'm not convinced the current mining structure is optimal, and would certainly not be suitable for this usage.
I'm sure many Bitcoin advocates would disagree with me, but I believe that there should be some mechanism a la the federal reserve to stabilize the market and allow for reasonable inflation. I have no idea how this would be implemented from a technical standpoint, but I believe with some refinements, cryptocurrencies can serve a place in the economy, but I do not see them replacing the "fiat" by any means.
Two benefits that makes it all worthwhile: 1) you can transfer it to someone else (e.g. an heir) cost free, tax free, paperwork free, without the gov't even knowing you did it. Illegal, but you can do it and probably get away with it. 2) It can't be devalued by gov't action.
Apart from being a rather risky investment vehicle, the only use case that seems to be unique to Bitcoin is black market transactions.
It's an excellent intermediary currency for purchasing items such as illegal drugs. Or for services such as paying off ransoms, as demonstrated by the CryptoLocker trojan.
I had more optimism for Bitcoin before I saw people so aggressively evangelize it. I think it has great potential as a digital currency but some people are making into what's almost a totem.
Benjamin, you're conflating bitcoin the protocol with bitcoin the 'currency'.
This is an all too common mistake, so please don't feel too too bad about it. Bitcoin protocol does have some interesting things to offer us and I'm sure it will be built upon in novel ways.
Bitcoin 'currency' on the other hand is a non-starter and as time goes on we will see it discarded.
I hope more people would concentrate on the protocol but about 99% of what you hear and the energy of people is set on bitcoin 'currency'.
The problem with bitcoin is that no one is using it for its intended purpose - to buy things. People are using it as an investment or are speculating on it, which is not the purpose of a currency.
What you end up with is the anemic system that exists right now, where no one is advancing the actual bitcoin cause, everyone is just setting up exchanges to make money from transactions.
The absurdity of this kind of thought is just profound. Thinking like this may be useful as a means of encouraging hope when all hope is lost, but Bitcoin is nowhere near there yet. Most of all this kind of talk smacks of deep desperation - "why won't people love me?"
I understand fully why one might feel so desperate. Bitcoin may have the potential to be truly revolutionary. Bitcoin solves the problem of orchestrating an international currency in a manner that limits the implementation details to the design, not banking/payment industry/political types who historically - for one reason or another - end up building in significant rigidities to the system.
It doesn't take a PhD in Economics to see the potential benefits of eradicating PayPal and consumer banks (although it may take one to see the potential pitfalls). More than this though, Bitcoin opens the door to truly free capital flow. It is possible to work in the Western world for a month or two and move, say, far East, and live like a king on the savings for a year or more. Why can't we just buy the stuff over there cheaply and consume it at home? One major reason is the rigidities in capital flow - it is hard, risky business in the current system. As a large company in a Bitcoin world you don't have to worry about a great class of risks of international trade, dumping money into the Cambodian economy is no longer a question of FX risk and "can I get it back out?"
This is a great step forward on the way to homogenising international capital stores i.e. ceteris paribus, rich people buy where things are cheapest, like in Cambodia, thereby flowing capital to, and driving up prices in, Cambodia. Cambodians get richer and the West gets poorer. Bitcoin has the vague potential to be the great equalizer.
We have seen some evidence of this at work in the EU with the Euro, if you look past the troubling dynamics of transition. Imagine how very different the US would be if every state had a different currency and payment processing rules, the diversity in income would be profound.
An educated economist will see a great many problems with this utopian vision, but will likely agree the aim is noble and that the basis - Bitcoin - is the closest thing we have so far to a workable solution.
Bitcoin may be as revolutionary as the fanboys want it to be, even if they don't understand why. My personal thought is that Bitcoin will soon be seen as the thing that started it all, but the solution won't be Bitcoin itself. There are too many problems - no matter how many times you read that a fixed supply currency is the greatest thing since sliced bread, it really isn't. It's also woefully easy to steal and the mining/verification mechanism is far too resource intensive and encouraging of looney speculation making its value at any point in time completely impossible to reason about.
If you love BTC today, don't spout bullshit strings of meaningless words in some grandiose display of being ahead of the times. Make it stronger and better because if you don't history will judge this whole thing very severely in 10 years time, when it really is just a way of buying drugs and hitmen.
I think the issue is that bitcoin fanatics assume something is deeply wrong with our current system, or that banks are parasitic and not providing any value. Sure there are places it can be improved, but the current system works well for many people. Before credit cards we had to rely on informal credit. Sure, I could open a bar tab at a local place where I'm a regular, or the man at the corner store might let me run up a small bill. Your word was your bond, but if you left town, wanted to make a large purchase or weren't from the right family (or had the wrong color skin), it was a cash only world.
Right now I can travel to any corner of the globe and make transactions on credit with someone who knows nothing about me and has never seen my face. He's confident that he'll be paid and I'm confident that I have recourse in the event of a bad transaction. I don't have to carry large amounts of cash or worry about being robbed. If my card is stolen my liability is relatively small. That costs something, but people overwhelmingly see value in it and are willing to pay this cost.
[+] [-] hft_throwaway|12 years ago|reply
-What problem does it solve? Many claim that it's a more efficient way to transfer money, but after paying high spreads & fees on illiquid exchanges or a place like coinbase, it doesn't look so good. International wires are expensive but paying 30 bps each way in exchange fees plus enormous spread concessions to trade even relatively small amounts like $1mm USD are much more expensive.
-What backs it other than speculation? Scarcity itself does not imply value. I don't see a significant "bitcoin economy" out there. Yes, you can buy things with them, but most of these things are priced in dollars. Sellers are accepting bitcoins only because they can sell them for USD, EUR, etc. to speculators. They have no particular attachment to bitcoins themselves and could just as easily accept another crypto currency provided speculators were active enough in the market. How many people are paid a salary or renting an apartment for a fixed amount of BTC per month?
-Many bad actors in the market with little regulation. There have been numerous scams and untrustworthy exchanges out there. It's like taking a trip back to the depression-era bucket shops.
-Consumer unfriendly: the average "man on the street" can't secure his wallet file and even many technically sharp people have been ripped off. Non-reversible transactions aren't a positive for most users and requiring traders to use an escrow service further increases costs. Network can't handle high transaction volumes and sellers need to wait for confirmations or risk fraud, so the use case of everyone buying their morning coffee with bitcoin seems shaky.
-Extreme volatility and lack of liquidity make it a poor store of value or unit of record, two things that are extremely important in a currency. Yes most government issued currencies experience inflation, but I can keep my paycheck in the bank for months or years without its value changing wildly, and I know what a loaf of bread costs in USD within a tight range.
Some of these are fixable and I see some growth potential in micropayments or as a money transfer mechanism for people who don't have access to traditional financial institutions, but what is the general purpose use case? What can I do with bitcoin that I can't with paypal or even a bank account (many let you instantly transfer money these days for no/low fees to pay friends, landlords, etc.)?
[+] [-] majika|12 years ago|reply
I'd also add the concern of Bitcoin lacking an inflationary mechanism. I can't see it ever becoming a currency without that. If it's lucky, it may be a transactionary vehicle before the next technology displaces it. But, like you pointed out, it doesn't have much of a utility for that purpose anyway - taking transaction fees, security and usability into account.
Emin Gün Sirer wrote [0] an excellent survey of the Mt. Gox scandal, and a measured evaluation of the problems with Bitcoin. I loved this part:
> What Nigerian scams are to your grandfather, Bitcoin exchanges are to the 20-30 semi-tech-savvy libertarian demographic.
He ends by recommending Dogecoin because the community doesn't take itself too seriously.
> If one must pick a cryptocurrency, the lowly dogecoin, of all things, is doing everything right. It's based on economic principles that provide the right incentives for a healthy economy. The community does not take itself seriously. Most importantly, no one pretends that Doge is an investment vehicle, a slayer of Wall Street, or the next Segway. No one would be stupid enough to store their life savings in Dogecoins. And people freely share the shiba goodness by tipping others with Doge. So, young people who are excited about cryptocurrencies and want to get involved: Dogecoin is where the action is at. Much community. So wow.
I just hope the hoardes of Bitcoin speculators don't ruin it for them.
> What can I do with bitcoin that I can't with paypal or even a bank account (many let you instantly transfer money these days for no/low fees to pay friends, landlords, etc.)?
For all its faults, the cryptocurrency renaissance (based off the Bitcoin protocol) is enabling the Silk Roads to flourish. You can't run those on Paypal. You can't donate to Wikileaks with Paypal either, for that matter.
[0]: http://hackingdistributed.com/2014/03/01/what-did-not-happen...
[+] [-] euank|12 years ago|reply
In addition to your stated issues (which actually are probably fixable), there's the computational power requirement. That cannot be fixed. Bitcoin requires thousands of times (or more) more computational power to do a single transaction than any centralized currency system I can think of.
I remember before bitcoin people would say "Oh, I have a couple spare computers... I just threw folding@home on them for now". Now, people are going out of their way to throw cycles at this currency instead of problems that help scientific progress, and thus humanity.
Bitcoin is a cool idea and well implemented for what it is, but I think attention should be drawn to its exceedingly inefficient use of computational resources.
[+] [-] triangleman83|12 years ago|reply
With bitcoin, you don't have to have a third party such as Paypal or your bank to transfer money over the internet. You don't have to trust a third party. It's very close to a face-to-face cash transfer, albeit with possibility of being traced by various methods, so not perfectly anonymous. Still far more anonymous than almost any other method.
[+] [-] contulluipeste|12 years ago|reply
- "What problem does it solve?" It gives you freedom, true freedom! You send to whomever you wish and freely receive from anyone anytime from everywhere! No red tape involved, no fiscal infrastructure needed, no political settings getting in your way, no many other bigger-than-you problems. Freedom!
-"What backs it other than speculation?" (I'm sorry that I have to sound redundant, but...) Freedom! Anyone wishing to use a free currency will opt for it or something similar.
- "Many bad actors in the market with little regulation." Well, I admit that the other side of the coin named "freedom" is anarchy. It scares you and you seek shelter from the wild west land of virtual currencies, but other see opportunities in there and are willing to take necessary risks.
-"Consumer unfriendly: the average «man on the street» can't secure his wallet file and even many technically sharp people have been ripped off." The friendliness is an engineering problem, and the perception is a psychological one. Both can be addressed just like so many other like it. The average Joe just doesn't think now that the inflation or other aspects of fiat-currency is ripping him off, because the work in this regard was done.
-"Extreme volatility and lack of liquidity make it a poor store of value or unit of record, two things that are extremely important in a currency." After the MtGox exit the market is actually unusually stable! And the depth of the market only gets deeper and with it - the stability of it's price relative to other currencies.
You say you see potential with micropayments, but in the current setting, the "dust" transactions are penalized with transfer fees. According to http://bitcoinfees.com/ if the amount is lower than 0.01 Bitcoin an amount of 0.0001 Bitcoin is perceived. At the current price (~630 USD/Bitcoin) the penalty limit is $6,3 and if Bitcoin's price will go up so will this limit. If the Bitcoin will rise 10 times, that 0.0001 Bitcoin fee will be 63 USD cents which means that even if a Bitcoin is fungible up to eight subunit decimals, it will count only for fine-division of large numbers, not micro-payments.
So you may be skeptical regarding the Bitcoin, but IMHO - for the wrong reasons.
[+] [-] mahyarm|12 years ago|reply
To do an international wire transfer from the US to Canada for example, costs $25-$50 and has a %3 currency exchange fee. Western Union is probably worse to some place like Brazil or the Philippines.
With Bitcoin exchanges, I can buy BTC at a total of %0.5-1 currency exchange fee, wait 10 minutes and pay pretty much no fees outside of that. We can both use our free and relatively bullshit free domestic transfer services to transfer money in and out of the exchanges. Because of the speed of transacting, the spread from delays are minimal.
[+] [-] ewoodrich|12 years ago|reply
This would have an effect of stabilizing the exchange rate, and could replace Fedwire/ACH for a large portion of transactions. However, I'm not convinced the current mining structure is optimal, and would certainly not be suitable for this usage.
I'm sure many Bitcoin advocates would disagree with me, but I believe that there should be some mechanism a la the federal reserve to stabilize the market and allow for reasonable inflation. I have no idea how this would be implemented from a technical standpoint, but I believe with some refinements, cryptocurrencies can serve a place in the economy, but I do not see them replacing the "fiat" by any means.
[+] [-] genwin|12 years ago|reply
[+] [-] quasque|12 years ago|reply
It's an excellent intermediary currency for purchasing items such as illegal drugs. Or for services such as paying off ransoms, as demonstrated by the CryptoLocker trojan.
[+] [-] harrystone|12 years ago|reply
[+] [-] dcc1|12 years ago|reply
Nothing as interesting has come out since 90s, all we had since are "social networks" and "flappy bird" sigh
[+] [-] nhaehnle|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] officialjunk|12 years ago|reply
[+] [-] lingben|12 years ago|reply
This is an all too common mistake, so please don't feel too too bad about it. Bitcoin protocol does have some interesting things to offer us and I'm sure it will be built upon in novel ways.
Bitcoin 'currency' on the other hand is a non-starter and as time goes on we will see it discarded.
I hope more people would concentrate on the protocol but about 99% of what you hear and the energy of people is set on bitcoin 'currency'.
[+] [-] hendzen|12 years ago|reply
[+] [-] VMG|12 years ago|reply
Alternative crypto-currencies are less secure because they have less dedicated mining power and less developer support.
[+] [-] damontal|12 years ago|reply
[+] [-] debacle|12 years ago|reply
What you end up with is the anemic system that exists right now, where no one is advancing the actual bitcoin cause, everyone is just setting up exchanges to make money from transactions.
[+] [-] davesque|12 years ago|reply
[+] [-] clienthunter|12 years ago|reply
I understand fully why one might feel so desperate. Bitcoin may have the potential to be truly revolutionary. Bitcoin solves the problem of orchestrating an international currency in a manner that limits the implementation details to the design, not banking/payment industry/political types who historically - for one reason or another - end up building in significant rigidities to the system.
It doesn't take a PhD in Economics to see the potential benefits of eradicating PayPal and consumer banks (although it may take one to see the potential pitfalls). More than this though, Bitcoin opens the door to truly free capital flow. It is possible to work in the Western world for a month or two and move, say, far East, and live like a king on the savings for a year or more. Why can't we just buy the stuff over there cheaply and consume it at home? One major reason is the rigidities in capital flow - it is hard, risky business in the current system. As a large company in a Bitcoin world you don't have to worry about a great class of risks of international trade, dumping money into the Cambodian economy is no longer a question of FX risk and "can I get it back out?"
This is a great step forward on the way to homogenising international capital stores i.e. ceteris paribus, rich people buy where things are cheapest, like in Cambodia, thereby flowing capital to, and driving up prices in, Cambodia. Cambodians get richer and the West gets poorer. Bitcoin has the vague potential to be the great equalizer.
We have seen some evidence of this at work in the EU with the Euro, if you look past the troubling dynamics of transition. Imagine how very different the US would be if every state had a different currency and payment processing rules, the diversity in income would be profound.
An educated economist will see a great many problems with this utopian vision, but will likely agree the aim is noble and that the basis - Bitcoin - is the closest thing we have so far to a workable solution.
Bitcoin may be as revolutionary as the fanboys want it to be, even if they don't understand why. My personal thought is that Bitcoin will soon be seen as the thing that started it all, but the solution won't be Bitcoin itself. There are too many problems - no matter how many times you read that a fixed supply currency is the greatest thing since sliced bread, it really isn't. It's also woefully easy to steal and the mining/verification mechanism is far too resource intensive and encouraging of looney speculation making its value at any point in time completely impossible to reason about.
If you love BTC today, don't spout bullshit strings of meaningless words in some grandiose display of being ahead of the times. Make it stronger and better because if you don't history will judge this whole thing very severely in 10 years time, when it really is just a way of buying drugs and hitmen.
[+] [-] hft_throwaway|12 years ago|reply
Right now I can travel to any corner of the globe and make transactions on credit with someone who knows nothing about me and has never seen my face. He's confident that he'll be paid and I'm confident that I have recourse in the event of a bad transaction. I don't have to carry large amounts of cash or worry about being robbed. If my card is stolen my liability is relatively small. That costs something, but people overwhelmingly see value in it and are willing to pay this cost.