Bitcoin is a Startup

http://blog.tlrobinson.net/bitcoin-is-a-startup

by tlrobinson • 13 years ago

57 79 13 years ago

blog.tlrobinson.net

MattyRad• 13 years ago

Here's a cool Bitcoin startup relevant to this article: https://robocoinkiosk.com/

snitko3• 13 years ago

I think this is the best way to address the issue of Bitcoin being a ponzi-scheme that some people raise. Explain that it's a software product that allows instant low-fee transactions without a centralized server, and those transactions can include complicated logic to serve various types of contracts, enforced without lawyers or authority, thus lowering the costs of business. And it's startup that you can invest into without going through the pain of hiring lawyers too.

fragsworth2• 13 years ago

Slightly off-topic, but I don't understand how it can survive long-term.

A 51% attack seems inevitable. The ability to short-sell bitcoins will eventually become widespread. Weigh the estimated cost of building a 51% attack network versus the estimated gains of short-selling all the bitcoins in the world.

Suppose you can make 10% of the market cap ($1.5B) of bitcoins by short-selling the entire market - a very low estimate. That's currently $150 million dollars. Is $150 million enough money to create a mass-production effort that builds enough ASIC miners to beat out half the network?

(hint: yes it is)

fluidcruft• 13 years ago

A 51% attack seems inevitable.

So, what are you going to do with your 51% of the network? Somehow double spend $150m before everyone upgrades their clients?

wmf2• 13 years ago

Just mine no transactions. After the network grinds to a halt the exchange rate will crater and then you can close out your short position.

tlrobinson5• 13 years ago

I think fragsworth was suggesting one could short Bitcoin (a lot) then launch a 51% attack to erode confidence in Bitcoin, thus dropping the price, and profiting from your short position.

netwerk• 13 years ago

I thought about how you would attack BitCoin and how to achieve that 51% of the work. My solution is basically to create network partitions (using some DDoS or something to prevent communication) and force a small number of good nodes to start working on your solution. Over time you can rejoin partitions where you will control 51% of the compute eventually converting all of the nodes.

randyrand2• 13 years ago

While I mostly agree with you - it's easier said than done. How exactly are you going to buy $150 million (or whatever the needed amount is) of ASICs without being noticed? The government could obviously do it - but at least in the near future that sounds far fetched.

Like wise as soon as your attack is noticed your IP addresses would be blocked by the other clients preventing you from adding to the chain.

Edit: after looking more into the 51% attack IP blocking wont really solve it since it only would take a handful of unique IPs to pull off.

Edit2: Couldn't we prevent the double spend part of the 51% attack (or at least make it more like 90%) by doing 2 things:

1) Merchants would only accept bit coins that have been in the block chain at least 6 blocks ago (this already is the recommended case)

2) Nodes reject any blocks received if they receive it over an hour (6 blocks worth) past receiving the 'sister' block in the competing (true) chain. This would prevent an attacker from 'reversing history.' What would be the drawbacks to this?

Edit3: like wise we could stop the "prevent other people from making transactions" part of it (the only other part) by doing this:

http://gavintech.blogspot.com/2012/05/neutralizing-51-attack...

I would love it if someone responded to this.

wmf2• 13 years ago

There has been a lot of discussion about various heuristics to invalidate block chain reorganization. The developers have enough real problems on their plate that I don't think they're interested in working on it.

Also keep in mind that a 51% attack may not rewrite history at all, in which case it wouldn't cause deep reorgs. It would cause some orphaning, but that would be mostly indistinguishable from the normal orphaning that goes on normally.

lectrick6• 13 years ago

Why would you spend that much money to crash the network... only to lose the entire amount of your money?

Also, knowledge about short-sells would help to stabilize the currency's value, NOT crash it. Just like it has for all other assets out there.

A 51% attack would cost far more than 150 million at this point.

jhuckestein• 13 years ago

I love Bitcoin and own some myself, but from the title I expected this article to be about how the "founders" of Bitcoin cash out from an early financing round and spend the rest of their days rich, regardless of whether the concept survives.

snitko3• 13 years ago

"Founders" don't need and probably won't cash out.

tlrobinson5• 13 years ago

Hah, that's certainly one angle I missed.

lingben• 13 years ago

Given time everyone will come to realize that bitcoin is a very complex and elaborate ponzi scheme. One that will rewrite the books on scams.

TDL3• 13 years ago

How is it a ponzi scheme?

volaski7• 13 years ago

I also think Bitcoin is somewhat like a Ponzi scheme, in ways I described below, but is it a scam? No. The definition of scam is: "A dishonest scheme". There is nothing dishonest about Bitcoin. Sure there are so many ways it could fail, but it is definitely not a dishonest scheme.

lectrick6• 13 years ago

[Bitcoin is not a ponzi scheme.](https://en.bitcoin.it/wiki/FAQ#Is_Bitcoin_a_Ponzi_scheme.3F)

If Bitcoin is a ponzi scheme, then startup investment (which requires you to be an "accredited investor" aka have a million dollars just lying around... literally, that's what it takes to achieve "accredited investor" status) is also a Ponzi scheme.

gnaritas4• 13 years ago

No they won't, because bitcoin isn't a Ponzi scheme or a scam. If you think bitcoin is a Ponzi scheme, then I suggest you don't know what a Ponzi scheme actually is and you're using the term inappropriately.

contingencies• 13 years ago

By that logic, humans are a startup.

kevinpet2• 13 years ago

Indeed. If everything is a startup, then we may as well discard the word since it conveys nothing.

dcc1• 13 years ago

I love Bitcoin, especially after being shafted by Paypal+Ebay

Anyone know any good bitcoin auction/selling sites? (i already use bitmit)

samweinberg• 13 years ago

This analogy can be applied to almost anything. According to this criteria, coffee could be considered a startup: the growers of the beans are the founders, the hipsters sipping their cold frappuccinos at Starbucks are the evangelists, and the price for one pound of coffee beans is its market price.

The only problem here is that coffee is a commodity, not a startup. Anyone can grow it and sell it. Likewise, bitcoins can be mined and sold by anyone. Bitcoin by design is decentralized, meaning that there is no central authority, such as a bank, mining new bitcoins. There is no company or government body that officially runs Bitcoin, only individuals (but in a distributed fashion). A startup is completely different, in that it has a governing body and is usually centralized.

Bitcoin in a sense is both a currency and a commodity, but is definitely not a startup.

drewcrawford• 13 years ago

The only problem here is that coffee is a commodity, not a startup. Anyone can grow it and sell it.

The better comparison is to oil. Oil is a commodity, in that anyone can buy it and sell it: but there is a fixed amount of it, and one can only acquire oil by taking oil from the fixed supply. Further, the earlier you got into oil, the more money you made, and the same is true of Bitcoin: the authors have made out to the tune of [100M or more](http://bitslog.wordpress.com/2013/04/17/the-well-deserved-fo...) simply by being the first miners.

So I don't know exactly what kind of definition you want to use for "startup", but bitcoin is certainly software, that was written by a small team of people, that solves a problem, that has made the authors wealthy in a very short amount of time. If someone like Rockefeller started out today, I think we would probably characterize his operation as a "startup", and the founders of Bitcoin are doing much the same thing that he did.

gojomo• 13 years ago

However, as soon as you mine (or buy) Bitcoin, and if you decide to hold them, you are now incentive-aligned with all other Bitcoin holders in desiring a future where Bitcoin is more valuable.

That's much like the incentive-alignment of founding (and early-investor) equity in a startup venture. You know what your share is, and want it to be worth more. So even separate from any salaries or formal-obligations, you can be expected to improvise to help collaboratively create the world where your shares are more valuable.

Other equity is similar: it's a claim on a certain package of legally-respected rights. (You can vote in board elections; you can collect dividends; you receive pro-rata value in case of liquidation.) Those rights might be worth a lot, in certain possible futures, or nothing, in others. If you're an employee-stockholder, you may be a bit more motivated that someone on a fixed salary. If you're an outside shareholder, you'll still "talk your book" and perhaps even direct other investments in ways that synergistically boost the startup.

People describe Bitcoin as crypto-currency or crypto-commodity, but its biggest impact may be as crypto-equity.

dragontamer• 13 years ago

And right before you buy it, you are incentive-aligned to crash BTC so that you can buy it cheaper than it's actual value.

Come on, markets are more complicated than that.

quantumpotato_• 13 years ago

Thanks for posting this. I see a lot of "X is Y" posts in news articles. http://en.wikipedia.org/wiki/E-Prime warned us about this - making false associations. X is NOT Y. Defining X === Y makes for weird neurolinguistics and corrupts your map of the world with bad pointers.

nutate2• 13 years ago

This comment is a startup.

jafaku• 13 years ago

Seems legit, I'll invest some upvotes in your comment.

dsuth• 13 years ago

Dammit, too late to get in on the ground floor :S

Ologn5• 13 years ago

Bitcoins are worthless. They never had any value, and never will.

Valueless meaning they are as worthless as Bernie Madoff fund shares, Dutch tulip bulbs, Pets.com stock and Flooz and Beanz, Reichsmarks and confederate dollars and so forth. People might have been temporarily fooled into paying money for these things, but ultimately people realized they were worthless. Like a forged painting or counterfeit dollar.

Today I wrote a blog post about why they were worthless ( http://www.vartmp.com/blog/2013/08/21 ). Some interesting things came out of it. One was I did some research on Bitcoin. I found out that some of the idea guys behind Bitcoin actually anticipated my arguments and give their refutation of them. They're well aware of the fault lines of the argument.

The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.

As the subjective theory of value (STV) is false, Bitcoin certainly will, like Dutch tulip bulbs or Webvan/Pets.com stock, ultimately collapse to become worthless or near worthless. But the collapse will not disprove the subjective theory of value by itself - STV advocates can just say people stopped subjectively valuing Bitcoin.

On the other hand, if Bitcoins continue to hold value over the long-term, the labor theory of value will be disproved. It is impossible for a currency with no backing to retain value over the long term.

Not to get tangential, but this includes the US dollar, which was gold backed until 42 years ago. And which has a value today - it can be considered scrip that is accepted by army PXs, post offices and the like for goods and services in kind. That is also accepted by the government for taxes and such. It has no worth beyond that however. Currencies have no inherent value, whatever the Bitcoin people believe.

As I said, one thing I discovered putting my blog post together today was that Bitcoin people had anticipated the arguments of its worthlessness. Their counter is that Bitcoin value is based on their philosophical ideas, which as I said, I consider baseless, and thus, I know that Bitcoins will sooner or later, and probably sooner than later, be worth $0.

I also discovered something else while putting together my blog post. I had the idea that I could financially gain from this insight. I could just short Bitcoins. So I looked into that a little.

Various small hurdles are in the way of doing this, but most are navigable. Bitfinex looks like they allow this, although they may only facilitate it. Just for the principle of it, I'm going to short one Bitcoin (current worth = $122) for now, and maybe more later.

Bitfinex says to short a Bitcoin I "need to [borrow] bitcoins from others lenders". Hopefully Bitfinex can arrange this for me, otherwise I guess I have to go looking myself.

There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300. In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash. As will Bitcoin. Keynes said markets can remain irrational longer than he could remain solvent, which is true. However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.

I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.

gwern• 13 years ago

In the seventeenth century, during the Tulip bubble in Holland, 40 tulip bulbs sold for 100,000 florins, or what would be equivalent to about one million euros today. It can go up, but ultimately it must crash.

Dutch tulip bulbs aren't even close to worthless right now, and they weren't worthless after Tulipomania either; for example:

Even the magnitudes of prices for valuable bulbs and their patterns of decline are not out of line with later prices for new varieties of rare bulbs. Single bulbs in the eighteenth century commanded prices as high as 1000 guilders. In this context, the 1000–2000 guilder price of Semper Augustus from 1623 to 1625 or even its 5500 guilder price in 1637 do not appear obviously overvalued.

This is partially because all unique new bulbs depreciated very quickly, from the 16th century on, as they were propagated and the supply was able to increase to meet demand. If you really want to compare Bitcoin to Tulipomania without embarrassing yourself, you should read some modern historical work on Tulipomania like Garber's Famous First Bubbles, and not an utterly obsolete polemical work by a hack. I've summarized some of the relevant facts in http://www.reddit.com/r/Economics/comments/1bm9fl/the_bitcoi... & https://plus.google.com/115274377971493973150/posts/1qWmh7Cq... if you have enough time to blog but not read books.

(I would address your 100k claim, except a quick search indicates it is coming from MacKay's history, which gets many things wrong such as mistakenly taking a rhetorical exercise - 2 tons of butter, one silver cup, etc. - for an actual transaction. It's purely rhetorical, as one can quickly imagine by seeing how many tons of butter a Picasso or a Ferrari would go for.)

There is no way a Bitcoin can be worth $122 over the long term. Not that it can't temporarily - it can climb to $200, even $300...I'm looking into how to short a Bitcoin via Bitfinex or the like. If anyone knows more about Bitcoin shorting or wants to go on the other side of the deal, I'd be happy to know.

You must be completely mad to short Bitcoin even if you were infinitely confident it was going to zero. Never has the expression "the market can stay irrational longer than you can stay solvent" been more applicable. (And you know that, since you even quote it!) The best I can say for your strategy is that at least the fraudulent aspect ("However, I feel pretty secure I could survive shorting one Bitcoin via an LLC or something.") may rescue it.

TDL3• 13 years ago

Although I wouldn't put as much stock in Garber's thesis (although I did enjoy the monograph) as you do, there definitely is value to his argument. I think it is also important to stress that the problem with the tulip bulb markets at the time was that there were people who were aggressively using leverage and they did not understand the ramifications of it's use.

Me1000• 13 years ago

In your blog post you assert that "Gold and silver were valuable 2000 years ago and are still valuable" but you never explain why. What properties does gold and silver has that makes them valuable?

Ologn5• 13 years ago

Gold's use as a currency is apart from its use as a commodity. It makes a good currency for several reasons - it is durable, storable, standardized, portable, easily divisible.

Beyond its use as a currency or as jewelery, I don't have much to say beyond what you could find at http://en.wikipedia.org/wiki/Gold#Applications . Dentists used to use it for crowns. It is used in photographic equipment. It is used in satellites. It is used in heat shielding. It is used in electronics.

Before the industrial revolution, gold was not used for industrial uses all that much - instead of good china for the dining room, people who could afford it would have golden goblets to drink from and the like. This, plus the lack of industrial mining methods, is probably one of the reasons why it is estimated that 80% of the gold ever mined has been mined since 1910 ( http://www.goldsheetlinks.com/production2.htm ).

naradaellis• 13 years ago

BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people. It is analogous to how USD is the only currency the USG will accept taxes in, which you have mentioned. Not to say that this black market might become unviable whatever reason down the track, but right now it's a big driver of value.

mahranch• 13 years ago

BTC can be used in electronic black markets - not many currencies can be used for that, and that fact gives BTC huge value to many people.

I think it should be noted that if the silk road were to get shut down or disappear, bitcoin's value will completely tank. It's basically the backbone propping bitcoin up. Those people using it for black market purposes will try to unload their coins, which will trigger others to unload their's as well. It will spiral out and the result is the bubble popping.

Unless bitcoin has a much stronger infrastructure than it does today, I highly doubt it would survive something like that. Which if you think about it, says something about bitcoin's fortitude.

bdr• 13 years ago

Beware scale-free arguments.

On the other hand, if Bitcoins continue to hold value over the long-term...

Is long-term one month? One year? Ten years? Why?

There is no way a Bitcoin can be worth $122 over the long term...

What about $12.20? $1.22? Why?

kaonashi• 13 years ago

You're definitely on the right track, but you're omitting the factor which binds the value of money to the value of labor: taxes. Taxes force (upon pain of inprisonment) people living within the territory of an issuing authority to offer their output for sale in that authority's IOU's (fiat). This allows states to provision themselves using their own credit (that credit then becomes the private sector's financial assets).

I'm not as bearish on Bitcoin as a type of payments system, but it can never supplant traditional currencies (at least not without formal state endorsement, and subsequent deflationary problems).

lectrick6• 13 years ago

According to some very sound economic currency theory, you're 100% wrong.

http://bitcoinsurvey.wordpress.com/

tl;dr About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume.

There is no way a bitcoin can crash unless its use in trade crashes.

The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.

Ologn5• 13 years ago

According to some very sound economic currency theory, you're 100% wrong.

I should first say that what that web site talks about is not a crank theory. They base their arguments on what many consider a very sound economic currency theory. I happen to disagree with the theory. But you're right in that the perceived value of Bitcoin is based on serious economic currency theory, which many prominent people consider very sound.

About half the current value of a bitcoin is speculation. The rest is fundamentally supported by its trade volume

How much of the value of Pets.com, Webvan, eToys, Kozmo etc. was supported by trade volume in 1999?

There is no way a bitcoin can crash unless its use in trade crashes.

I guess I agree - if people realize Bitcoin is worthless, they'll stop trading with it. The crash in price will be eventually followed by a slowdown in trading.

The paper money I use every day, which can burn instantly in a flame, has no intrinsic value either.

I've talked about this in other places in this thread. As five current US dollars could not buy one 1972 US dollar, as throughout history every government fiat currency in history has eventually collapsed in value (while gold has kept its value), as the current fiat experiment in the US is only 42 years old, in essence I agree over the long term. US currency is completely based on the power of the US government and its willingness to support its currency. Translated into what I have been saying, it means you can go to places like http://www.usps.com and send the government dollars, and it will send you valuable items in return. You are right though that over the long term, US paper money has no intrinsic value.

pixie_3• 13 years ago

I would argue Bitcoin has more intrinsic value than gold - it is easier to move, faster to move, more secure in its transit, harder to counterfit, and impossible to create more (than is already planned.)

It's intrinsic value comes from these very properties - similar to how gold's intrinsic value is that it's shiny, has been around for 2000 years, makes great jewelry, and some other things as well.

In this century though if you're looking for a digital, better kind of gold then Bitcoin is it - hands down.

Ologn5• 13 years ago

Cow's milk is a commodity. It does not make a good currency. It must be kept refrigerated, and even with this becomes useless in a short amount of time. Nonetheless, it is a commodity and is useful.

Gold is a commodity. It makes a good currency - compared to many commodities it is easy and fast to move, can be moved securely, is hard to counterfeit and has a limited supply. It was used millennia ago to make goblets and the like, and has industrial uses today.

Bitcoin is not a commodity. It has no underlying use. So it is not a currency either. Because currencies are based on commodities.

I have written about government fiat money in other posts in this thread so I won't go into that tangent in this reply.

kylebrown2• 13 years ago

The argument is whether the value of commodities or currencies are subjective, or whether they are ultimately derived from labor. Bitcoin partisans believe the former, I believe the latter.

And what about the labor which went into designing and coding the bitcoin software, the exchanges, and so forth? Do you think all that labor was worthless (we don't even have to include the "mining" capital and labor in this judgement)? Well, then the value of labor is apparently just as subjective as the value of commodities. So I don't follow how a premise involving STV vs LTV can be used to make a logical argument about the value of bitcoin, or any software for that matter.

Ologn5• 13 years ago

Labor goes into mining gold, extracting gold etc. But it can then be used for capping teeth, heat shields, photographic equipment etc., as well as for a currency.

Labor does go into "mining" bitcoins. People build Bitcoin ASICs, people pay people to drill oil to make the electricity that powers those ASICs etc.

But gold has a number of real use values. Bitcoin has no real use value. It is inherently worthless.

People have used all kinds of commodities through history as currency. Cows, rice etc. As precious metals like gold are portable, storable, easily divisible, standardized etc. they make good currencies. An ounce of gold is the same as another ounce of gold, while rice goes bad, cows die, and one cow may give more milk than another. But the value still comes from its underlying usefulness as an industrial metal etc. Bitcoins have no underlying value such as this.

oleganza4• 13 years ago

"As the subjective theory of value (STV) is false"

Here's simple counter-argument.

Gold was chemically always the same all these years. But it was valued differently in different places on earth and in different times. When you are in a post-war destruction, your gold may be worth less than a loaf of bread. Or not, depending on how you see your future.

Apart from moving units, Bitcoin is good for things like secure timestamping and mutual fund locking without counter-party risk. No other technology or commodity can do that.

http://blog.oleganza.com/post/52237596486/today-ive-timestam...

http://blog.oleganza.com/post/58240549599/contracts-without-...

oleganza4• 13 years ago

If you believe in "labor theory of value", Bitcoins require investment and labour to be created. All these computers from home CPUs to ASICs require some noticeable amount of work to be done to get assembled and then mine blocks.

Same thing with gold or anything.

Except, of course, labor theory was always wrong for a simple reason: the labor is expended because of expectation to satisfy a demand. So the value must already exist (or be anticipated) in a form of demand. Just because I waste my day and money doing some software won't create any value. There should be other people out there who could do something useful to them with my software, regardless of how much time I spent on it.

Costs and rewards are highly correlated on the market because of competition. If you make big profits, more people will go in and compete on the price with you. So it may seem that costs determine price, but it's the other way around. You expend work only in expectation of being paid for it afterwards (with some profit).

Bitcoin is a Startup

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