Almost every week some reader asks me to write about Bitcoin, currently the most popular so-called crypto currency and the first one to possibly reach something like critical mass. I’ve come close to writing those columns, but just can’t get excited enough. So this week when yet another reader asked, it made sense to explain my nervousness. Bitcoin is clever, interesting, brilliant even, but I find it too troubling to support.
But first, why should you believe me? You shouldn’t. Though I’m year after year identified by the Kauffman Foundation as one of the top 50 economics bloggers in America, that only means I get to hang out occasionally with the real experts, eating Kansas City barbecue. Unlike them I’m not an economist, I just play one on TV. So don’t take my word for anything here: just think about the arguments I present and whether they make sense to you.
For those who don’t follow Bitcoin, it is both an electronic payment system and a currency invented by someone somewhere (nobody really knows who — the inventor uses a pseudonym that makes some folks think he/she is Japanese but again nobody really knows). Bitcoin’s design purposefully keeps control out of the hands of central banks and governments, avoiding the threats of shutdown and confiscation.
Creating new Bitcoins can only happen once data miners have solved an algorithm called SHA256. It’s simply “here are some bytes, find a SHA256 hash of this byte array that is less than this tiny number. To make it more difficult, we progressively make the tiny number, tinier.” There can be only 21 million Bitcoins ever found or mined, though once found ,Bitcoins can be divided into 10^8 small subparts called shitoshis which are what’s actually used for buying things.
Bitcoins are not backed by any underlying commodity or government. There’s no full faith and credit clause behind them, but on the other hand Bitcoins are inflation-resistant because of constrained supply and can’t easily be counterfeited, either.
What makes Bitcoins have value is our assigning value to them. If I sell my house for a Bitcoin that doesn’t make a Bitcoin worth as much as my house but it creates a plausible value that can be confirmed if I can in turn use the Bitcoin to buy something else of equal or greater value to my house. And that’s the direction this currency seems to be heading, because it is being accepted some places for commerce.
If accepting Bitcoins for payment makes no sense think of those people who start with something mundane then trade and trade and trade until they have turned a paperclip into a house. This is no different.
Much of the attraction of Bitcoins comes from the efficiency with which they can be traded (by e-mail, even anonymously with no postage, taxes, or other fees attached) and their resistance to government meddling. Bitcoins are the bearer bonds of cyber currencies.
All this is good we’re told. Bitcoins are in some ways analogous to gold, which is also seen as having enduring intrinsic value.
So why then do I have doubts? I’ll lay out a bunch of reasons here in no particular order.
1) Bitcoins consistently cost more to generate, find or mine, than they fetch on the open market. People way smarter than me have figured this out and you can see their analysis here (it’s for Litecoins, not Bitcoins, but the same forces are at work). So maybe Bitcoins are analogous to gold, but gold that’s worth less than the cost of production.
This is further confirmed by the robust cottage industry in Bitcoin mining hardware. Mining Bitcoins means running millions of calculations until one of a finite number of successful answers is found. These calculations were first done on CPUs then GPUs then FPGAs and now ASICs. For under $200 you can buy a screaming little Bitcoin mining machine but it won’t earn you $200 in Bitcoins unless they dramatically increase in value down the road. This happens from time to time (the increase in value) but it still doesn’t make sense to build when you can buy for less. So Bitcoins as a production commodity make no sense.
You have to ask yourself why people would sell Bitcoin generators? Why don’t they just use the generators themselves to find more Bitcoins? Because it consistently costs more than a dollar to mine a dollar’s worth of Bitcoins, that’s why and the comparison to gold falls apart.
This is a familiar story with mining. Remember during the California Gold Rush the great fortunes made were those of Crocker (a banker, not a miner) and Stanford (a storekeeper and again not a miner). The only great American fortune ever based on gold mining, in fact, was that of William Randolph Hearst, whose father started the Homestake Mining Company that endures today. Notice, however, that Hearst (the son) wisely decided to diversify his fortune into media and starting small wars.
2) Bitcoins, while possibly uncrackable are definitely not unhackable. Mining Bitcoins requires the validation of 90 other random miners before your Bitcoins are judged real and assignable, but what’s to keep me from owning 90+ Bitcoin mining accounts and gaming the system? Admittedly it’s not that easy: In practical terms I’d need a majority of the world’s mining nodes to make that scam stick and in a rapidly growing market that kind of concentration is difficult to achieve. But it can be done — especially if nation-states are involved. What if China or Russia or the NSA threw its financial and computing power into BitCoin hacking — how long would it take them to accumulate more than 50 percent of all mining nodes? What if Amazon Web Services simply assigned all unoccupied EC2 cores to this task? This is plausible enough that I think we have to expect it will be at least tried.
The Bitcoin hack, then, isn’t cornering the market in a classic sense but cornering enough nodes to control the voting.
3) Bitcoin, as the first crypto-currency, is the one that will be tested in court. Simply outlawing Bitcoins in one country won’t have that much effect on the concept, but given there are other crypto-currencies around, it might hurt Bitcoin, itself. I’d assign the tactical advantage to Litecoins, which are cheaper than Bitcoins and may be able to leverage its second-mover advantage and take the day. Google didn’t invent the search engine nor did Microsoft invent the spreadsheet, remember.
The Winklevoss brothers, who reportedly own one percent of all Bitcoins, should be concerned about being too concentrated in the currency.
4) But my biggest concern about Bitcoin stems from what’s otherwise seen as the currency’s greatest strength — its rational foundation and apparent immunity from government meddling. To hear Libertarians talk about it, the success of Bitcoin will free us forever from the IRS, Treasury Department, and the Federal Reserve. Bitcoin, as a currency without an associated bureaucracy, is immune to political meddling so no stupid government monetary programs that backfire or don’t work are possible. Bitcoin supposedly protects us from ourselves.
That’s fine as far as it goes, but the Bitcoin algorithm has left no place for compassion, either. Governments and treasuries in times of crisis sometimes make decisions that appear to go against the interests of the state . We saw many of those around 2008 — admittedly heroic measures taken primarily to fix dumb-ass mistakes. Bitcoin, for all its digital purity, makes such policies impossible to implement, taking away our policy safety net.
Maybe that’s actually a good thing, but I for one am not yet willing to bet on it.
Another fascinating article. I haven’t been following the Bitcoin phenomenon all that much but you’ve piqued my curiosity…
Your statement that the Bitcoin algorithm has left no place for compassion reminds me of something that the great economist Thomas Sowell once wrote:
“Many have argued that capitalism does not offer a satisfactory moral message. But that is like saying that calculus does not contain cabrohydrates, amino acids, or other essential nutrients. Everything fails by irrevelant standards.”
Hahaha! Brilliant quote.
Awesome quote is awesome.
Oh god Bob you actually believe the government did what it did in 2008 for the good of the people? I yi yi……Bob that is naivete on a criminal level.
They did it for the good of their constituents which includes the voters and the banks as well. As a free market conservative, I’d rather let the banks fail. But we must keep in mind the pressure the banks were under to make housing “affordable”, which meant make bad loans and distribute the risk among other investors and taxpayers. Remember “government backed loans” and “affordable housing” was what caused the problem in the first place.
More like banks and mortgage brokers were intoxicated by the ability to sell off any mortgages they originated to people bundling them into MBS. They weren’t under pressure, except to make more money.
Source: https://www.businessweek.com/stories/2008-11-12/sex-lies-and-subprime-mortgages
Mortgage brokers weren’t subject to the Community Reinvestment Act. But that didn’t stop them from making a metric fuckton of bad loans.
The same bubble popped in commercial real estate. The same bubble popped in other nations (which aren’t subject to our laws!).
Fanny and Freddie played a role, to be sure, but they were playing catch-up after the fire had already been lit. Their share of home loans was declining through the bubble.
To just say “subprime” is to blame it on the poor and ignore the immense greed, hubris and stupidity at play amongst the Masters of the Universe in our financial system.
Of course they were motivated by financial gain, like any other business. The point is the government should never have gotten into the “affordable housing” game in the first place which removes the financial disincentive of bad loans. Back in the 50s, before affordable housing, the bankers had to balance financial incentives against financial disincentives. If someone, whether the government, or some other “insurance”, takes away their motivation, i.e. financial disincentive, to make responsible loans, of course they’ll make them.
You baby boomers like the bail outs cause they push things off so the next generation gets to deal with it. Now some of the next generation is in congress, aka the tea party. When they shut down the government you baby boomers moan about how we’re trying to destroy the system. This is a system where the government bails out the rich from their stupid “mistakes”, that allows baby boomers to accumulate more and more debt while kids out of college can’t get jobs. Of course, they borrowed large amounts of money that doesn’t bailed out and can’t be written off. I don’t know about bit coins but they make more sense than dollars, which is a more accurate comparison than gold. How can dollars be worth much when the government prints a trillion of them a year?
Frank, Tea party members are generally White, Republican, Older Male with Money (http://digitaljournal.com/article/289821) hardly the next generation, meet the new boss, same as the old boss.
.
Bobs point (IMO) is that governments can bail out companies, spend when business is not, go into debt when required and inflate the currency to decrease this debt. Look what’s happening to Greece when the lose the ability to do any of these things. These policy levers when used appropriately can benefit a country and its people.
.
You forgot to mention the reckless and irresponsible behavior of the greek political class over the last few decades that brought Greece to the situation it is in today.
Indeed, they partied like drunken sailors.
.
My point was solution based not cause analysis.
I’m not sure that the Greek political class were a whole lot worse than those of many other countries. The problem for Greece has been that its financial difficulties, common to many European nations, are exacerbated by an endemic culture of tax evasion throughout society. For any government, if you can’t raise tax then you have to borrow, even for sensible expenditure.
There’s five or six tea party senators that were born within a few years of 1970. I don’t know if I agree with everything they stand for or what that is. Some older voters might support that. Economically this country is well down the path of no return. That they can’t stop qe makes this crystal clear. It’s like 2007 when real estate hedge funds started to blow up.
and the Tea Party absolutely hates Obamacare. But they love the heck out of Medicare.
Sheesh, old people. Go figure.
Yeah there’s nothing quite like shutting down the government to prevent enactment of a law that was passed by Congress, signed by the president, campaigned on in two successful presidential elections (where an overwhelming number of young people voted for you-know-who)… the Tea Party ain’t the next generation.
That wasn’t my point, but there’s plenty of laws that get ignored. Like the bail outs, laws were twisted around to achieve whatever the powerful wanted. The sort of argument that you’re making that young people voted for Obama so they support Obamacare, this is typical twisted logic. Does anyone under 30 understand Obamacare? Personally I don’t have a problem with Obamacare except that government programs have tended to fail lately. That also explains bitcoins.
You’ll be happy to know that this was just part of the financial bailout, then, providing a steady stream of rents to self-entitled arrogant aristocrats, just like anything else that comes out of the USG.
Wow! Mr. Clarke’s comment is chock full of Democrat [sic] Party talking points. Let’s break it down:
1. All sitting congresses have the constitutional authority to tax and spend money on whatever they determine. They can also have the power to revise or repeal any prior act that they chose. The Vietnam War, for example, was ended because Congress refused to continue funding it.
2. All law that emanates from Congress is passed by Congress and signed by the president. Obamacare is in no way special because of this. Nor was Obamacare a ballot initiative during the last two elections, as is implied in your comment and in comments from Obama himself. These words are just rhetorical fluff. Obamacare is in no way inviolate.
3. It isn’t just Tea Party opposition (whoever you think they are). Obamacare was opposed by 100% of all Republicans, moderate and conservative, plus 34 house Democrats. Perhaps there would be less backlash now if all Republicans hadn’t been deliberately iced out of the legislative process and allowed to provide constructive input. Perhaps Obamacare wouldn’t be the monstrosity that it is if the president and Democrat [sic] leaders had slowed up long enough to allow someone… anyone… who voted for the bill to actually read it. People have now read it and recognize what a boondoggle it is. That is why 60% of Americans now oppose it.
And, of course, since you come out with the truth that the US is in fact an aristocratic government, that the only people whose decisions matter are 530-odd self-entitled arrogant social climbers who have made every possibly avenue of recourse against them illegal — “Oh, you want to fire me? Wait until the end of my scheduled shift. I have more of your factory to wreck and the safe isn’t empty yet.” — what *is* wrong with Obamacare? America is an authoritarian nation, or it wouldn’t react so violently when people claim it isn’t in face a democracy, or that a biennial beauty pageant of the self-entitled classes isn’t democracy.
You are for Medicare though, right?
I mean thats as bad as Obamacare but old people love it because its medical care for old people.
Are you kidding? Old people love Medicare? They may be dependent on it, but I don’t know anyone who loves the system. Most would rather have their own private insurance, and many supplement their Medicare coverage because it is inadequate. Feeling that you need something because it is all you’ve got and loving it are two very different things. Health care providers certainly don’t love Medicare, except those who are defrauding or gaming the system.
Medicare is the biggest single reason why the health care industry was screwed up to begin with. I’m not advocating that Medicare should be taken away from the folks who paid into the system and who are now dependent on it. But the fix for one bloated, corrupt, inefficient government program can never be another bigger bloated, corrupt, inefficient government program.
Even if you buy into a ponzi scheme, at least you know who you are dealing with – there’s a Madoff, or someone identifiable behind it.
If you buy into bitcoins, the entire scheme is faceless and anonymous. So if it all collapses one day, due to some flaw nobody had thought of, or due to some deliberate manipulation behind the scenes, you don’t even have anyone you can point a finger at, except yourself.
To anyone who is thinking in investing in bitcoins, I have a much better investment for you. Did you know that the Brooklyn Bridge is up for sale?
I refer to this sorta-currency as the BiteCon. there is an unease that reminds me about Joe’s Left Pocket Bank… your deposits go in the left pocket, loans out of the right pocket, you always know where your money is with Joe’s Left Pocket Bank.
Until Joe skips town. and uses Delete.Me.
who’s to say the anonymous generator of this system doesn’t one day decide the time is ripe, and all of a sudden there are no BiteCons left, and the trail ends at some shifty bank someplace, where the computer is mysteriously dead overnight?
like James Lileks, I wonder what the Flooz exchange rate is in BiteCon….
It is not quite as faceless and anonymous as you might believe.
You can look at the source code of the software and check for yourself how it works, and that there is nothing weird going on.
The developers of the Software are, except for the original creator, all well known.
It is also not possible to change anything “behind the scenes”, as everyone on the network has to follow the same rules as everybody else, otherwise your transactions will be regarded as non-standard and ignored.
Of course there is still the chance of a horrible bug hiding in the software, but so far the network has withstood and overcome all obstacles that appeared.
So yes, it is still risky and might fail, but everyone can check that the software, logic and math behind it are sound.
I find it hard to believe you could be considered an economics blogger, let alone a top one. Maybe they consider your verbiage economics in the sense that high tech entrepreneurship is economics.
That being said, when you discuss actual economics, as you do in your penultimate paragraph above, you are extremely weak. Do tell how the state went against its own interests in bailing out the banksters?
Although it may not be possible to hack the Bitcoin system directly, I have no doubt that hackers are already earning Bitcoins illicitly through botnets. It’s probably a lot more profitable than using zombie computers to send spam emails and a lot less dangerous than harvesting passwords and credit card numbers — after all, Bitcoins are anonymous and must therefore be incredibly easy to launder.
Right now, Bitcoin looks like little more than a bubble with geek appeal. When you actually look, the list of products and services you can buy with Bitcoins tends toward the very seedy and second-rate. This leads me to believe that most of the people who want to acquire Bitcoins are doing so for speculative purposes.
If there’s little reason to acquire Bitcoins except the hope that you will one day be able to flip them over to someone else at a profit, then one day there will be no one left to flip to — and the bubble will burst.
There are indeed people mining Bitcoin via Botnets, however, this is not as lucrative as it seems.
Since a lot of computational power is needed to mine them, you need thousands of infected machines to just mine a few.
A part of a Botnet was just taken down, and the estimated worth of Bitcoin mined daily is about 2500$, but this number is declining fast as the difficulty is rising, because the real miners use dedicated hardware which is by several orders of magnitude more efficient and powerful. source: https://www.theinquirer.net/inquirer/news/2297658/symantec-researchers-sinkhole-bitcoin-mining-zero-access-botnet-horde
Also they are not really that suited for money laundering, as by now every exchange is required to implement anti-money-laundering and know your customer guidelines.
So it is not possible anymore to buy or sell them anonymously.
The fact that bitcoins cost more to generate than they fetch on the open market seems like more of an advantage than a disadvantage. It means that nobody can just create them out of nothing in the way that governments and banks print money, and this gives bitcoins some protection against inflation.
The ability to generate them at a high cost should be only enough to increase their supply in response to increasing demand for their use, a bit like setting a very high interest rate. Of course, this can’t completely stop speculators and investors from causing volatility in bitcoin’s value just like with any small currency.
What was missed in this article is that the cost of mining is self adjusted both up and down. This means if mining is unprofitable for many people who then stop mining, the mining cost will go down until equilibrium is reached. This has happened in the past when the value has fallen.
Bob, thanks for putting something other than a “witty” comment about the government shutdown in my Twitter feed this morning
I’ve been playing around with bitcoins (BTC) for about a year and think they are fascinating. One technical correction, the smallest unit (.00000001 BTC) is referred to as a satoshi not shitoshis.
I am a huge fan and appreciate you writing about BTC, especially since you are not that jazzed by them.
I think you’ve missed the biggest threat, that while no governments can control bitcoin, they can control the exchanges that allow converting of BTC into fiat currencies such as the USD.
Regarding your points #1 seems off. Mining bitcoins has never made sense based on present economics but the rise in value has made it work out. There are currently huge transactions costs in trading bitcoins, fraud is rampant (another big problem) since BTC transactions are irreversible and most other payment forms are not. So mining is the best way to get BTC safely and anonymously. This is a problem but not what you talked about.
You are correct on #2, but if it has negative expected value EV (your point 1) then I don’t expect governments or AMZN to jump in. If it does turn around to have a positive EV then a lot more folks will get in, making it even harder to break the network with a 50%+1 attack.
I think your #3 goes even further than you give it credit for. If someone steals the money in my bank account I have some recourse. But if someone steals my BTC I am just outta luck. This is a real issue to broad acceptance and like I said, makes transaction costs very high.
I’m still a fan, I think the idea of a real “digital gold” is sound and while issues of an appreciating currency (i.e. BTC is inherently deflationary – a big economic problem) are problematic the issue of divisibility will help for awhile. I also love it for micro transactions and the anonymity it can provide online in this age of increasingly shrinking privacy.
Thanks again for your work, I love your blog!
So the economics of mining is currently upside down, but isn’t this tied to Moore’s Law? As the mining hardware becomes more and more capable does it trigger Bitcoin inflation? With sufficiently powerful hardware, mining becomes virtually free. Perhaps there’s something built into Bitcoin to account for this?
Yes, there is — see paragraph 4, and no, steadfast devotion to the religion of Progress will only save you until it doesn’t.
Yes, there is something built into the protocol.
No matter how much processing power is available on the network, there is a target time of 10 minutes for each new transaction block that is created. The difficulty of the calculations needed to secure the network rises as more powerful hardware comes online.
This also has the effect of making an attack even harder and more expensive.
So while you can mine faster than everyone else when you have the newest hardware first, you are back at the same speed as everyone else as soon as everyone has the hardware.
Bitcoins or dollars, either way you’ve got to trust that some entity (be it the Internet or a government) will be operational in order for you to use your currency. Despite the sorry state of affairs in America (or Greece, or China), I think I have to stick with the government, where there are (at least theoretically) some actual people leading it whom you can hold responsible. Or, more cynically, where’s the safety in an Internet currency when the government can control your access to the Internet?
The nominal (face) value of US money can be controlled by the government. The real (trading) value of US money is controlled by the people using it. Whenever the people discover that the government has debased their money, its trading value will decrease. This usually is referred to as inflation. It should be referred to as a crime. The Constitution requires that people (in this case government officials) who counterfeit money should be punished.
.
In modern times the US government ignores the Constitution by letting the Federal Reserve System (a secretive institution owned by an international banking cabal) create money out of thin air. The Constitution requires that Congress coin money — create it out of some physical material, such as gold and silver. The reason the founding fathers required that money consist of some physical material, preferably precious metals, was to prevent inflation. They considered the continued issuance of unbacked paper currency to be one of the most serious scourges to affect mankind. The reason being that this practice always results in the complete destruction of the currency.
According to this, only 75 people control 90% of the Bitcoins:
http://blog.p2pfoundation.net/how-the-bitcoin-1-manipulate-the-currency-deceive-its-user-community-and-make-its-future-uncertain/2013/06/30
Yeesh sounds almost like the real economy…
Yeah, that’s the ticket! Let’s have the US money supply be controlled by BHP Billiton, Koch Industries, and their affiliates in Russia and South Africa, rather than by officials who if not directly elected, are at least nominated by the President and confirmed by the Senate.
It would be interesting to see the transaction rates of Bitcoins. Are they fluidly moving about, or are most of them held on hard drives with no intention of use? Or are the majority being traded about in speculation instead of productive trade?
I have 0.05 Bitcoins on a hard drive somewhere in one of my boxes of old computer parts. They’ll likely be there until the bits go bad. I’m guessing they’re not the only ones abandoned.
Also, how many Bitcoins would it take to get thestartupchannel.net finally up and running? I can send you the hard drive, Bob.
Here, have a look at this:
https://www.bitlisten.com/
https://www.bitcoinmonitor.com/
or
http://blockchain.info/de/unconfirmed-transactions
One issue I find missing here is related to “Bitcoins are not backed by any underlying commodity or government.” – If your bitcoins are stolen or lost, they are gone forever. There is no authority to appeal to in order to right various wrongs. Certainly the same outcome occurs if you lose your gold, but theft (on the rise) has no recourse.
shitoshis –> satoshis
Is this a bit of a Freudian slip, showing us what you really think about bitcoins ?
Perhaps this is the source of the confusion: https://www.kuro5hin.org/story/2013/4/6/15132/99619 .
Probably. It is now fixed… or at least changed.
It’s not changed here as of today (Oct 5th): ” 10^8 small subparts called shitoshis which are what’s actually used for buying things.”
1.) People selling the shovels get richer than the ones digging out the gold. Is has always been like this. Eventually mining and costs will reach an equillibrium where it is barely profitable, currently it is not because everyone tried to get in on the goldrush at once, and now they are scrambling to break even because of the immense computing power having come online at once, and they’re running their machines at a loss to scrape together at least a few coins. However, as people drop out because of the unprofitability, the mining difficulty adjusts, and it becomes more profitable for the remaining miners.
2.) Yes, a 51% attack is possible. However, as pointed out by one of the lead developers, it would be obvious and easy to defend against. See http://gavintech.blogspot.co.at/2012/05/neutralizing-51-attack.html
The cost of mounting such an attack would be immense, and only have a temporary effect. A prolonged attack would only lead to the attacker being singled out, and left alone to mine and control his own currency, while everyone else continues to work on the network they consider to be the right one.
3.) It will not be “Bitcoin”, it will be “virtual cryptographic currencies” addressed by courts and regulators, since they are probably smart enough to realize that all of the current Bitcoin-based currencies are nearly identical.
It is also highly unlikely to be banned outright, as it is a technology which has a lot of potential and can be used in beneficial ways, and anyone banning it might be at risk of giving an advantage to others who embrace it.
A ban by one country would affect all virtual currencies, Litecoin just as much as Bitcoin, but as long as it is not banned by every single country in the world, the damage would only be temporary.
4.) Your fourth point is really the most debatable. Yes, it is free from interference of governments and treasuries, and many view this as a good thing.
What exactly are these “heroic measures” and policy safety nets you mention? More importantly, did they really have a positive effect? Looking at the current state of both the US and EU in the areas of debt, economic growth and employment, it is highly debatable that these heroic measures led to the desired outcome.
Should a glaring problem with Bitcoin arise, the developers and the miners securing the system have the possibility to change the code and alter the way the system works, so it is not like it is completely ungoverned.
[…] source: I have my doubts about Bitcoin […]
[…] I have my doubts about Bitcoin Source: https://www.cringely.com/2013/09/30/doubts-bitcoin/ 0 […]
“This is woefully uninformed”
https://news.ycombinator.com/item?id=6480464
While it may be anonymous, the transaction is stored forever in the bitcoin blocks, it is forever traceable, unlike cash.
It has to be this way, otherwise the protocol doesn’t work. You have to make the ownership of the particular Bitcoin “wallet” anonymous, and buy its first BitCoins anonymously.
If its cheaper to buy them on the market, then wouldnt this drive the market price up, causing it to eventually meet or surpass the price of mining. Well, of course! If mining had good profits, wouldnt this drive in more competition till the mining profit margins were thin. Well, of course!
Its called a satoshi, not a shitoshi. Have a nice Shiterday.
https://en.bitcoin.it/wiki/Satoshi_Nakamoto
> Bitcoin, for all its digital purity, makes such policies impossible to implement
Actually, it is possible… If more than 50% of mining-power agree on a policychange (like say, change the inflation rate or what ever), then the protocol can change.
If there is a threat which would wipe out bitcoins, it would for most miners make sense to accept a new policy, bec. otherwise their own bitcoins would be worth nothing.
So there would be also those “heroic” measures in a bitcoin world. But it wouldnt depend on just one person (or small group) to find consensus, but on a very broad range of participants…
Sorry Bob, but your understanding of bitcoin is woefully inaccurate. Please fix it. If not, at least remove this line from your bio: “When it comes to information technology, Cringely knows what he is talking about.”
[…] by qkdhfjdjdhd [link] [3 […]
“Bitcoins can be divided into 10^8 small subparts called shitoshis”
Way to misspell “satoshis”, to put the word “SHIT” in there. Looks like you are pretty open minded!
Bitcoins are mostly used to buy drugs and other illegal items anonymously online.
I wonder if you can use them to launder money? So what if it costs more than a dollar to generate a dollar’s worth of bitcoins. You’ve made dirty money clean. I bet a lot of the bitcoin mining operations are doing just this.
I recently bought a small ASIC miner (Butterfly Labs “Jalapeno”) and I have already recovered my investment and in fact I have nearly doubled my money in BTC that I’ve mined, so your point number 1) is simply incorrect.
He said that you won’t recover the investment in your hardware for mining bitcoins “unless they dramatically increase in value down the road. This happens from time to time (the increase in value)”. You were just lucky that the value rose and did not plummet as it did recently.
Mr Cingely et all,
At the same time this article was written, the FBI seized Silk Road, a dark Web site used for transactions. The main currency used was Bitcoins.
http://abcnews.go.com/US/silk-road-website-dealt-drugs-guns-assassins-bitcoins/story?id=20446005
According to some sources, there are 11+ million Bitcoins and 9.5+ million were just seized by the Federal Government.
http://qz.com/131084/silk-road-collected-9-5-million-bitcoin-and-only-11-75-million-exist/
I could hazard a guess and suggest that the Federal Government does not want Bitcoin to exist. I am wondering what happens to these Bitcoins?
1) Obviously the fed does not want Bitcoins to exist.
2) The Federal Government is now in possession of them.
3) Will they dispose of them like they do other property seized by the US Marshal?
4) Do they keep them like the cash they seize in illegal enterprises?
5) Can people petition to get their Bitcoins back?
6) Could they be declared null and allowed to be re-mined?
7) If almost 10 million of the 11+ million Bitcoins are in the hands of the Federal Government, does it have a future at all?
I’m intrigued to see how this shakes out.
@Wally Glenn – 9.5 million bitcoin circulated through Silk Road during the time it operated. It could have been the same bitcoin recirculated 9.5 million times, or 2 bitcoins recirculated 4.75 million times, etc. It’s doubtful it was 9.5 million bitcoin recirculated once each. Dread Pirate Roberts had apparently 26,000 bitcoin when arrested.
These facts are from the article you posted.
And why does this “circulation” detail matter?
It only matters because the article misrepresented the circulation number as the amount seized ( which was actually only 26,000 bitcoins ).
26,000 of 11 million bitcoins in existence have been seized NOT 9.5 million of 11 million
The main problem I have with the current batch of crypto-currencies is the same as the problem with mining gold: a lot of effort is put into finding something that has no ‘inherent’ value, and which is only valuable because everyone agrees it is.
If anyone can come up with a way of making proof-of-work on an @home distributed computing system equivalent to bitcoins that would be great. Or number of bytes hosted and served on a p2p system, etc.
This is my problem as well… I’d rather see bitcoins distributed as a “Nobel Prize” or as a reward for some other work done to benefit the greater good as voted on by a large group on the internet or even as “app” sales.
As it stands you get rewarded with bitcoins for wasting electricity.
The ‘inherent value’ of normal money comes from government and its laws, but the same government can destroy much of that value. They can do this by seizing some of it or by printing too much more of it or from economic mismanagement.
Apart from its questionable government protection, it’s also only valuable because everyone agrees it is. It’s just paper or bits in a computer.
According to the The US Government is in the process of seizing any wallets that did business with Silk Road in the United States and transferring the contents to their own wallet.
http://techliberation.com/wp-content/uploads/2013/10/SilkRoadProtectiveOrder.pdf
So far they have seized $3.6 million in Bitcoins. The value of the currency dropped.
https://www.bbc.co.uk/news/technology-24381847
Cringely talked about this before.
https://www.pbs.org/opb/electricmoney/
Not quite. He talked about the history of money, credit cards, and other forms of electronic payments. He did not talk about electronic currency. But thanks for the link, it was an interesting review. In reading it I noticed Bob assumed that credit cards were used with the idea of always obtaining “telephonic approval”. But I can recall shopping in the 80s, where the clerk would only run the card through an imprint machine. If the bank later refused payment, I suppose the issue was somehow resolved by the bank in such a way that it would not discourage merchants from accepting cards. In other words, broken communications lines should not stop trades from happening.
[…] » I have my doubts about Bitcoin […]
So what if you are wrong about mining as a form of wealth generation? Maybe it is instead a form of money laundering. I can pay for electricity and a computer with a powerful coining video card with totally legal but traceable funds. I can then mine bitcoins at something of a loss but those legitimate bitcoins are no longer traceable to me provided I don’t spend them stupidly. So long as the lose isn’t too high this beats the pants off hiring a lawyer to launder money semi legally. In some ways it reminds me of classic invest funds in a cash generating venture to collect untraceable money even if at a lose form of money laundering.
“I can pay for electricity and a computer with a powerful coining video card with totally legal but traceable funds.” If you have legal funds to begin with, why mint bitcoins with them at a loss?
The purpose is to make that value anonymous, borderless, no longer taxable, and significantly less seizable. No need to go Swiss or Caribbean to access them. So long as certain privacy measures are followed. My measures will not be shared with snide 3rd parties.
The problem is that if you know about these tricks, so do the criminals and hence the government. Like the TOR network, eventually you will want to emerge. (By the way, your bank will be glad to set up a fully non-taxable checking account. Most income-free investments are non taxable.)
…….Bitcoin algorithm has left no place for compassion, either. Governments and treasuries in times of crisis sometimes make decisions that appear to go against the interests of the state . We saw many of those around 2008 — admittedly heroic measures taken primarily to fix dumb-ass mistakes. Bitcoin, for all its digital purity, makes such policies impossible to implement, taking away our policy safety net.
Barf. The less govt “heroics” the better. You have to be a true statist to believe that nonsense.
“Data Miners” are explicitly not Bitcoin Miners. Bitcoin Miners perfrom a function which is not data mining. Bitcoin Miners recieve information about Transactions, and relay a given ‘solved’ signal. Data miners spider along, categorizing information in databases. To call one the other is fudsky. Stopped reading at “Consistently cost more to create. This is a lot of incorrect information.
Nit picking. “Consistently cost more to create” refers to the fact that there is a production limit to the number of bitcoins that can be approached asymptotically. The more that are made, the harder it becomes to make another. The cost refers to the cost of energy. Also, while you are correct about the use of the term “data mining”, it’s ok within the context of the article since it doesn’t cause confusion. The result of a bitcoin calculation after all is “data” in a general sense.
[…] See on http://www.cringely.com […]
Then again, you had your doubts about Microsoft
[…] Bitcoins examined (images via Robert X. Cringely’s “I have my doubts about Bitcoin“) […]
[…] first column on this subject was a cautionary tale pointing out the two great areas of vulnerability for Bitcoin: 1) the US […]