After a spectacular crash, Bitcoin makes a surprising comeback

http://www.economist.com/node/21563752?fsrc=scn/tw/te/pe/monetaristsanonymous

by nextstep • 14 years ago

143 103 14 years ago

relix• 14 years ago

Estimated around the end of this year, the amount of Bitcoins mined per day will be halved according to the schedule. If I understand correctly, this means that the cost to mine one BTC will double, roughly, if the mining capacity stays the same.

On top of that, some companies are, or should be coming out with ASIC-based miners, which are orders of magnitude faster in mining bitcoins than GPU's, at lower energy usage, increasing the total mining capacity.

Does the cost of mining one BTC influence the price of one BTC? Will these events have an influence on the price (if they were not already 'priced in')?

jamesaguilar4• 14 years ago

I can answer the last question easily. If the supply of bitcoins rises faster than the real value of the debt they represent, their nominal value against the dollar will fall.

maaku2• 14 years ago

Except that this generation rate halving in price is a predictable, known event, and therefore already factored into the price of BTC.

SagelyGuru• 14 years ago

This argument does not hold regarding the rate against the dollar. The rate of supply of dollars is massively outstripping the real value of the debt they represent.

richcollins• 14 years ago

How do bitcoins represent debt?

Devilboy• 14 years ago

> Does the cost of mining one BTC influence the price of one BTC?

Difficulty adjusts automatically to match the total mining hashrate - there's always about 10 new blocks mined per hour. So if more people are mining the difficulty goes up.

What is changing is the number of BTC you get for mining a block. Currently each block is worth 50 BTC. Soon that will drop to 25 BTC. If many people find mining to be uneconomical they will stop their mining rigs and the difficulty will drop.

What will change is the influx of new bitcoin into the market, instead of 500BTC per hour we'll get 250BTC per hour (on average). Will that make the price go up? Maybe.

mrb8• 14 years ago

The system targets 6 blocks per hour, not 10.

nikcub• 14 years ago

On that note, has anybody heard of any data or estimates on the proportion of Bitcoin mining that is done with botnets? I keep hearing that a large proportion of the bigger botnets in the world are being used to mine Bitcoins (when they aren't being leased out for DDoS attacks).

That changes the economic dynamic since the cost of mining is the cost of assembling the botnet (ie. cheap)

pixie_3• 14 years ago

The cost of mining doesn't influence bitcoin price because creating 50 new bitcoins isn't going to inflate the currency by any perceptible amount. The price does influence those who might want to get into mining. Eventually no new bitcoins will be generated from mining. At that point miners will make money solely from transaction fees when creating a new blocks.

oillio• 14 years ago

50 new bitcoins are created every 10 minutes. That is 7200 coins a day, 2,628,000 a year. This is massive inflation and definitely has an effect on the currency.

No one really knows what the effect of halving of the mining rate will be. The currency is young, relatively small, and not yet very efficient (from an economic standpoint). However, everyone know the event is coming up. It MAY already be priced in. We won't know until the end of the year.

There is a small risk that this event may cause some disruptions in the underlying bitcoin infrastructure, however. The idea goes: Many miners are running full tilt going into the event. They know their income will half, so they want to get as much out of mining as possible before it happens. This drives up the difficultly level.

After the event, many of these miners may drop off as their operations suddenly become unprofitable (they are already running at the edge of profitability by revenue per kilowatt hour metrics).

When the miners drop off, it takes some time for the difficulty level to adjust (up to two weeks). Before the difficulty level adjusts, the time between transaction blocks will begin to grow, which slows down the confirmation of transactions. In a worse case scenario where a large volume of processing power leaves the network simultaneously, it could take several hours to get transactions confirmed for a few weeks after the event. Will this actually matter, or even be noticed? Again, noone knows for sure.

wmf2• 14 years ago

Does the cost of mining one BTC influence the price of one BTC?

The opposite. The exchange rate determines how many miners are willing to compete for each mined BTC. You can see that difficulty tends to increase a few weeks after the price increases (keep in mind that difficulty has a 1-2 week delay built in). http://bitcoinx.com/charts/chart_large_lin.png

carsongross• 14 years ago

Surprising? What's surprising about it? That there's no governmental issuing authority? (It is not true that there is "no issuing authority whatsoever", the issuing authority is the spec.)

This won't surprise anyone with a grasp of economic history that extends beyond 1945.

icebraining2• 14 years ago

Is it not surprising that a (almost purely) speculative commodity traded by very few people overall recovers that fast from a major crash?

mrb8• 14 years ago

No, it is not surprising. If you look at the Bitcoin forums to understand the community, it is very clear that a large core of users are really here for the long term. They truly believe in the concept of a decentralized digital currency.

This core group of users (including me) were completely unswayed by the crash of 2011 H2. We all knew that it was nothing more than a correction of the insane valuation bubble of earlier that year.

frozenport• 14 years ago

It took me about 5 days to sync a new Bitcoin wallet. Until they fix this problem Bitcoin can never be a serious player.

AndrewDucker• 14 years ago

Don't use the standard wallet. Multibit syncs a lot faster.

tlrobinson• 14 years ago

Or more likely, most "average" users won't host their own wallets, they'll use a third-party service (i.e. a bank)

kalleboo• 14 years ago

It always seemed odd to me that the protocol expects everyone to always have the full blockchain (currently over 2 GB of data). The response is always "when it becomes a problem we'll fix it", but isn't it already a problem for mobile use etc? The other problem I never see mentioned is the slow speed in getting transactions confirmed (for me it takes maybe 30 minutes)

wcoenen2• 14 years ago

The original bitcoin paper described a "Simplified Payment Verification" which doesn't require the full blockchain. This is used by Bitcoin Wallet for android.

Another alternative is to work with a trusted server. This is used by Bitcoin Spinner for Android.

hackerboos• 14 years ago

As I understand you can download the latest Bitcoin transactions (the latest spend of each coin) and discard the rest of the transaction history. The problem being though is that you have to trust some third party to give you the correct information.

Dylan168073• 14 years ago

You don't need the block chain to use bitcoin. Honestly, there only needs to be one complete copy in total across the entire world. It's just a quirk of the current client that it insists on such a download in an era where it takes more than a few minutes.

akurtzhs• 14 years ago

Try Electrum http://electrum-desktop.com/ It uses servers with the full blockchain to verification and has another neat feature - deterministic wallets. You keep the seed around and you can recover the wallet.

With the original client, having the appropriate port open/forwarded helps as well, and my understanding is that part of the slow sync is the inefficient database design. It's on the list of #TODOs.

username• 14 years ago

agreed. If people can't understand bitcoin in at least some basic way they will not use it. Faq's on bitcoin are full of questions which nobody has ever asked. Even bitcoin enthusiasts can't explain bitcoin, because they don't understand it either. constantly changing account/addresses? i don't like it, would rather one account and have payments tagged with sender info. i still have not managed to find out if bitcoin supports this. can't make sense of messaging aspect, labeling, verification , don't understand mining. Ordinary folks will not buy into this if it can not be explained in two short sentences, no matter how logical or robust or brilliant bitcoin might be.

scotty79• 14 years ago

I've seen some time ago comparison of popularity of passing fads and useful inventions.

Useful invention graph looked like this http://3.bp.blogspot.com/_2IAWpIwOiOc/SuvD_xiOfTI/AAAAAAAAAD... (example was IT) and graph for the passing fad dropped down to almost zero after initial peak (example was Macarena dance, if you remember that you are old ;-) ).

So far bitcoin seems like useful invention.

quorn3000• 14 years ago

I'm old enough to have thought at the time of the Macarena that it was a fad.

sammyo• 14 years ago

No one here has attended a wedding or bar mitzvah? That silly dance is far from dead, which is not all that important depending on your social set but does give some doubt on the analysis.

Jach• 14 years ago

AKA: http://en.wikipedia.org/wiki/Hype_cycle (And for your curiosity: http://bitcoincharts.com/charts/mtgoxUSD#tgMzm1g10zm2g25zv is where the chart in the article comes from.)

mrb8• 14 years ago

This article is surprisingly good. I like the mention of Bitcoin being the "world's first" decentralized digital currency. This is a clear way to convey to the reader that Bitcoin very is different from everything else. I use the same term in my Bitcoin introduction: http://blog.zorinaq.com/?e=66

The Economist author only made one error: Bitcoin is not the only decentralized digital currency. Some forks exist (eg. Litecoin), although they have very little traction currently; see the Alternate Cryptocurrency board: https://bitcointalk.org/index.php?board=67.0

kloncks• 14 years ago

Correct me if I'm wrong, but aren't the others just merely clones of the original Bitcoin, using the same source code? I would still call Bitcoin the only currency, as it's the base they all share.

ahi• 14 years ago

In this case, multiple currencies can share the same code base, in the same way The pound and the dollar share most of th same rules Of fiat currency.

mikeash• 14 years ago

It seems like there's a bit of terminology overloading going on. You have Bitcoin the protocol, which all these things are using, but you also have Bitcoin the currency, which is separate from the other currencies using the same protocol but with different networks (or block chains or whatever you call it).

nollidge• 14 years ago

Totally off-topic: the "vertical-align: top" on line 30 of your style.css is making any non-bold, non-italic body text get vertically misaligned with neighboring bold or italic text in Chrome 22 on Windows 7.

mrb8• 14 years ago

Removed. Thanks!

aristus• 14 years ago

"...a sort of eBay for drugs hidden in a dark corner of the web known as Tor..."

Dylan168073• 14 years ago

What's the issue with that? The .onion sites definitely make up a dark corner.

curt• 14 years ago

Someone in the comment section of the article linked to a fascinating chart: http://24.media.tumblr.com/tumblr_mb77t0ygoF1qfrvjzo1_1280.p...

It shows bit-coin value to USD, gold, silver, and crude. It's fairly stable against the commodities but drastically spikes in value against the dollar. Our Fed at work...

lmm• 14 years ago

So bitcoins are a commodity like unto gold, silver and crude, and behave the same way. Cool, but for practical use as a currency it would be better if they were correlated with USD/EUR/JPY, food, labour and other things that normal people want to buy.

worldsayshi• 14 years ago

Ahem: http://en.wikipedia.org/wiki/File:Gartner_Hype_Cycle_for_Eme...

Synaesthesia• 14 years ago

Bitcoin has already gone through two massive crashes like that. Still kicking.

wamatt2• 14 years ago

While I'm rather ambivalent on Bitcoin, I feel the article should show transaction volume as well, in order for us to make an informed assessment on its future prospects.

Displaying a prominent graph of only BTC/USD as proof of recovery, without an indication of liquidity and total market size, seems insufficient.

wcoenen2• 14 years ago

Chart of transaction volume: http://blockchain.info/charts/n-transactions

A lot of the recent increase can be attributed to gambling at http://www.satoshidice.com

hollerith• 14 years ago

>http://www.satoshidice.com

Now that is clever.

mrb8• 14 years ago

You can see the volume (and exchange rate) on the largest USD/BTC exchange (MtGox) here combined on one graph: http://bitcoincharts.com/charts/mtgoxUSD#czsg2011-01-01zeg20...

But a better indicator that Bitcoin activity is increasing is the number of Bitcoin transactions on the network itself. Bunch of interesting charts here: http://blockchain.info/charts Especially: http://blockchain.info/charts/n-transactions-excluding-popul... showing the # of transactions has tripled in the last 4 months.

wamatt2• 14 years ago

Thanks (and @wcoenen), that's interesting.

Thinking further on the risks of bitcoin, is it possible that the algorithm itself could have a yet to be discovered weakness, allowing for a trivial solution?

(similar to what happens when some forms of crypto are broken)

michaelt• 14 years ago

  But a better indicator that Bitcoin activity is 
  increasing is the number of Bitcoin transactions on 
  the network itself.

Is it better? If I shifted some bitcoins around between several of my own wallets, that would create transactions - but would that be a meaningful indication of anything?

nicpottier2• 14 years ago

Are there any digital wallets out there that are: 1) trustworthy 2) allow easy funding (credit/debit card/paypal)

Until that's the case I just don't see this taking off. I'm fairly motivated to buy a few just for kicks, but if I can't be bothered I can't see the general population doing so either.

I see MtGox takes wire transfers, which is almost good enough, but not quite. Didn't they also suffer a breach not so long ago?

lewispollard2• 14 years ago

I used MtGox a month ago to see what all the bitcoin fuss was about and their UK bank was inexplicably closed during that time. They've been contacting me with updates via email but the money I wired to them still hasn't been credited to my MtGox account which is really frustrating.

diggan• 14 years ago

Have you bothered to contact them yourself?

jerguismi2• 14 years ago

Contact both your bank and mtgox.

mrb8• 14 years ago

https://www.bitinstant.com is trustworthy and by far has the most funding options, which are the most convenient. Eg. in the US you can deposit cash in a CVS, 7-11, Walmart, and have it credited to your wallet almost instantly.

ianpurton2• 14 years ago

I run StrongCoin e-wallet https://www.strongcoin.com, which has been operating for over a year now very successfully. I also run https://www.bitcoinary.com a peer to peer site for exchanging coins in numerous ways including Paypal.

nicpottier2• 14 years ago

Bitcoinary is genius, super cool! Signed up and will be doing a trade shortly. Thanks!

hbz• 14 years ago

"Therefore ARE servers only hold encrypted private keys and neither we or anyone else can access them. Only you."

Misspellings on your landing page don't inspire confidence.

alexbosworth• 14 years ago

I've used bitcoinary with success to get bitcoins for Paypal USD (with some paying attention to who is selling them: browsing their history + feedback)

http://blockchain.info/ is a great wallet, I use it on my iPhone and Chrome

pixie_3• 14 years ago

Blockchain.info's wallet is very good. They store your private key encrypted and can only be decrypted client side with your password. They'll also email your encrypted wallet backups when your wallet changes.

bgaluszka3• 14 years ago

I'm wondering, what if government bans using of Bitcoin (or such a digital currency in general)? Not that it will try to block it just that it will be illegal to use it (i.e. for companies to receive Bitcoins). Will it still be used and/or useful?

jrockway• 14 years ago

The government banned sharing copyrighted materials and everyone stopped sharing movies, right? (It was similar to the experience they had with banning drugs. Now nobody uses drugs, I hear.)

bgaluszka3• 14 years ago

Yeah, that is what I was thinking about. And if that would happen to Bitcoin it wouldn't be interesting that much, right?

iwwr• 14 years ago

You can make bitcoin a legitimate payment mechanism. Despite the advertised anonymity it's fairly easy to track down a particular identity from the web of transactions. If people moved on mass into bitcoin it would make their financial history pretty impossible to hide.

bgaluszka3• 14 years ago

I hope that would be the case :)

tokenadult• 14 years ago

This statement from the last paragraph of the very interesting Economist magazine article submitted here is thought-provoking: "Bitcoins tend not to be very secure, says Richard Booth, a consultant at RSA, a cyber-security firm. As some users have found to their cost, hackers can sometimes steal Bitcoins from users’ online vaults. In the latest raid, on September 5th, hackers stole $250,000 in Bitcoins from Bitfloor, a large American exchange, causing it to shut down its operation." What does that say about the overall reliability of Bitcoins as a new form of currency?

A while ago I wrote that perhaps the greatest contribution the Bitcoin experiment will make to humankind is to teach you and me and our neighbors more about the realities of economics. And later I added that the Bitcoin experiment will also contribute to greater understanding of attack surfaces and online crime. Many of the ideas about how to mine Bitcoins, store Bitcoins, and trade with Bitcoins as a medium of exchange illustrate both the strengths and weaknesses of any other medium of exchange in a world full of human beings. Seeing the discussion of Bitcoins here on Hacker News reminds me of early online discussions in the 1990s of online payment systems such as PayPal, and the arguments beforehand that PayPal wouldn't have to invest a lot of time and effort (as it eventually did) building defenses against theft and fraud. If a weakness in a system is attached to a lot of money, the way to bet is to bet that someone will go looking for that weakness, even if you haven't thought of it.

AFTER EDIT: Here is a question for all the security-knowledgeable persons who participate here on Hacker News, a question once asked of the inventor of Pretty Good Privacy (PGP). How expensive do you think it would be for the United States National Security Agency (or a comparable organization from another national government) to crack a Bitcoin store, given that we know that some Bitcoin caches have already been cracked?

xtracto• 14 years ago

"In the latest raid, on September 5th, hackers stole $250,000 in Bitcoins from Bitfloor, a large American exchange, causing it to shut down its operation." What does that say about the overall reliability of Bitcoins as a new form of currency?

This can be compared to the Wild West times when gangs used to break into banks and steal lots of money. It is not that the money was weak, but that those storing it did not have proper security.

As bitcoins become more popular, you will have more and more competent individuals start offering storage services for these.

king_jester• 14 years ago

Banks of today have not become competent, only they have fixed those flaws that occurred the most in the past. Given that banks continue to have high visibility breaches and leaks of user information, it is not clear that time is what's needed for Bitcoin to get better security.

scott_s• 14 years ago

I'm a bitcoin skeptic, but I think that the problems you mentioned in the first paragraph have more to do with the poor security of those individual vaults, not bitcoin itself.

But, it does bring up an interesting point: as far as how I know bitcoin works, once you steal the bitcoins, they're stolen. This is different from fiat currency, at least online. If someone breaks into Bank of America's servers and figures out how to transfer a bunch of money from other people's accounts to their own, Bank of American can undo it. As long as the person does not get a cash or cash-equivalent, then it should be reversible. I invite the people who are more familiar with bitcoin to correct me, but as I understand the protocol behind it, once a bitcoin transfer from one owner to another owner is made, it's not (forcibly) reversible.

TazeTSchnitzel• 14 years ago

Exactly. Bitcoin transfers are irreversible. Which means, effectively, they are closer to physical money than electronic balances in this respect.

w1ntermute• 14 years ago

> What does that say about the overall reliability of Bitcoins as a new form of currency?

As xtracto said, there isn't something inherently insecure about Bitcoin. In fact, AFAIK, there have been no exploits to date of the actual math behind Bitcoin itself. The issue has been breaches of the various institutions dealing in Bitcoins.

When a bank is broken into and cash is stolen, you wouldn't say that dollars are insecure ― you'd say that the bank is insecure. This is no different, except it's occurring online.

gr3yh47• 14 years ago

FTA: "On the website Silk Road, a sort of eBay for drugs hidden in a dark corner of the web known as Tor[...]"

Tor isnt a dark corner of the web...

ericb• 14 years ago

Better tag line: Bitcoin is the world's most ingenious botnet monetization scheme.

jt2190• 14 years ago

I'm curious if this last sentence from the article is true:

  > It turns out that a currency can thrive even when 
  > no one is making laws for it.

Were the laws were so weak or hard to enforce at one time that, effectively, there were no laws? Can we look at currencies from that period of time to give us a sense of how bitcoin will work?

(Another poster pointed out that the spec is making the rules, and not a government, so it may be wrong to compare bitcoin with an un/poorly regulated currency.)

hbar• 14 years ago

Gold? (even today)

praptak• 14 years ago

But gold is shiny and solid and bitcoiny teeth implants haven't quite the appeal.

pixie_3• 14 years ago

Bitcoin follows laws - the laws of mathematics. Which unlike government laws are a lot harder to cheat.

mfringel• 14 years ago

All this tells me is that it hasn't hit governmental radar in any meaningful way, yet.

If Bitcoin was annoying enough to be a real problem to the powers that be, the computing resources necessary to hijack the main chain would be online in a very short period of time.

nirvana• 14 years ago

Would you mind describing that attack in a bit more detail?

lambda• 14 years ago

Bitcoin uses a proof of work system to determine the valid chain of transactions, as well as who gets the initial currency payout. Basically, anyone who controls more than 50% of the CPU power in the Bitcoin network can control the currency.

If you want more details, I'd recommend reading the Bitcoin paper: http://bitcoin.org/bitcoin.pdf

Some of the various forks have tried to work around this by having trusted nodes and the like, but then you lose the decentralized nature and are vulnerable to the trusted nodes going rogue.

tvladeck• 14 years ago

One thing that I wonder about with respect to Bitcoin is the issue of taxation. Governments can support the dominance of their currency within their borders by compelling their citizens to pay taxes in the national currency.

And on the "supply-side", in the US at least, federal spending is a significant portion of GDP, so you will always have a large amount of dollars floating around being used as a means of credit, exchange, and value.

And finally, having control of interest rates is a powerful tool to support economic growth - I would be fearful of a world where policymakers did not have that ability.

After a spectacular crash, Bitcoin makes a surprising comeback

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