Thoughts on Bitcoin

http://blog.samaltman.com/thoughts-on-bitcoin

by patrickod • 13 years ago

239 194 13 years ago

blog.samaltman.com

jey2• 13 years ago

Why distinguish between legal and illegal transactions? I guess the assumption is that value grounded in illegal transactions is inherently volatile due to the risk of it getting shut down?

alecbenzer• 13 years ago

people that make their money in the underworld still need money that can buy regular things, and so whatever is used to track exchange still needs to be pegged to dollars or whatever

I guess the implication is that "illegal stuff" isn't a large enough market to cover people's general needs.

jforman3• 13 years ago

Because the value illegal actors find in Bitcoin isn't in its role as a currency, but rather in its role as an anonymous method to globally transfer wealth.

Even if millions of people use Bitcoin for that use case, it doesn't mean Bitcoin will ever have staying power for the "reserve currency" use case.

thaumasiotes4• 13 years ago

The term for "a method to transfer wealth" is "currency". (And in fact, "currency" is used metaphorically to indicate methods of transferring anything at all.)

modeless• 13 years ago

If a receiver of bitcoins sells them for dollars right away, that isn't necessarily money laundering or tax avoidance. I don't know if you've tried to transfer money overseas lately, but banks tend to make it difficult and expensive. An international wire transfer is not a trivial thing to set up; in many cases it still involves faxes.

If bitcoin succeeds only as a payment network, where users convert from and to dollars at both ends, it can still provide a very valuable and legal service.

sjtgraham2• 13 years ago

International transfers are not intrinsically difficult or expensive, the real cost is in pennies. The reason why cross border payments are priced like they are is due to the lack of incentive, either economic or regulatory. BTC is a massive economic incentive for banks to charge more in line with the their true costs. Even if BTC fails as a currency itself, its greatest success might be catalysing innovation on prices and products at the incumbents.

rsingel• 13 years ago

Well, there's a lot of paperwork and time involved. Most U.S. banks raised their international wire fees to ~$60 at the end of October to comply with more regulations.

crystaln• 13 years ago

Have you ever had to deal with a large number of international transactions?

They are - in fact - difficult and expensive.

emin-gun-sirer• 13 years ago

The post assumes that Bitcoins will fail if they are not suitable as a store of value. It overlooks the fact that a currency can succeed as a medium of exchange, even if it is not suitable as a store of value.

madcat123• 13 years ago

Exactly true. But even government-issued currencies are not suitable stores of value over longer time-periods due to their inflationary nature; that's why we have retirement funds etc, the game being trying to out-do inflation.

Bitcoins are inherently deflationary in nature, making them theoretically a superior store of value over longer term (e.g. retirement) than any fiat currency.

gnaritas4• 13 years ago

Being a good store of value is in fact a detriment to being a good medium of exchange. A currency should not be a good store of value, it should be a predictable store of value that inflates very slowly so as to discourage hoarding and encourage spending. PPC looks like a better currency than BTC for this very reason.

termain• 13 years ago

Is PPC PrimeCoin, PeerCoin or something else?

leokun• 13 years ago

I'm going to buy a bitcoin after the bubble has passed. What do we think the real price is. Like $10 or $100? What's the projected bottom? I'm hoping for less than $10, because cheaper is better. The thought that I would never be able to afford an entire bitcoin has a negative psychological effect, which may be silly.

What I like about alt-coins is how one can use that for games. Imagine making a game where a custom alt-coin, a bitcoin-fork coin that has no value outside of the game, used for transactions. Seems like a cool idea to me anyway.

skizm2• 13 years ago

To be honest I think the bottom is going to be around $500. Pretty much everyone I know who is even the slightest bit interested in bitcoin is waiting for this crash to happen so they can jump in. Just a guess though.

terhechte• 13 years ago

Yes, I've been thinking this for a long time. How should it crash if everybody is just waiting to join. As soon as it goes below a certain margin (say $600) people will flock to it, and it will go up again. At some point it will probably stay level for a couple of months, just like it did at $70. This time maybe at $400 - $600 somewhere. Actually, we may just be seeing that just this moment.

thinkalone• 13 years ago

Looks like the last time it traded below $500 was November 17th[1] - so everyone you know who is interested has only become interested in the past two weeks?

[1] http://bitcoincharts.com/charts/bitstampUSD#rg30ztgSzm1g10zm...

tlrobinson• 13 years ago

Most alt-coins are thoroughly uninteresting and far less secure from 51% attacks than Bitcoin itself. It may be better to use the concept of "colored coins" on top of the Bitcoin blockchain to transact in other currencies.

wmf3• 13 years ago

Here's an attempt to answer that question: http://falkvinge.net/2013/09/13/bitcoins-vast-overvaluation-...

nullc2• 13 years ago

a bitcoin-fork coin that has no value outside of the game, used for transactions. Seems like a cool idea to me anyway.

Unfortunately, without the right economic motivations the system isn't secure. Many altcoins have been exploited in the past. Perhaps as part of a game thats okay, but it might be hard to balance things so that the game didn't become entirely about exploiting its currency-thing.

jonny_eh• 13 years ago

Even if it just becomes the primary mechanism for moving money around, that's a multi-billion dollar industry. Think Western Union, ACH, Paypal, etc. To me, that seems like a safe(ish) bet.

Being able to buy bubble gum, well, we'll see :)

analog31• 13 years ago

Will it be cheaper than PayPal? A believer in Murphy's Law might speculate that the package of services needed to make Bitcoin reliable enough for regular consumer use, will also involve a level of fees comparable to PayPal.

sjtgraham2• 13 years ago

I think this is spot on.

All sorts of people I rarely speak with have been coming out of the woodwork to ask about Bitcoin. These people are invariably regular folks that have heard about this thing that has been appreciating at an unbelievable clip. This is extremely alarming for me.

fat0wl2• 13 years ago

Same. I've tried to warn them about this whole mess (even if the value is appreciating I think it's at best a risky investment and at worst partaking in an immoral scheme).

This article reiterates 2 of my favorites points --

1. the lack of real-world transactions, coupled with

2. the fact that these transactions are usually done via 3rd party processor or immediate conversion back to USD. If vendors had faith in it as an actually currency, they wouldn't feel the need to do so. This is not true adoption, this is simply an attempt at expanding one's market by accepting a tradable item.

Glad to see some more sobering articles emerging as I've been wondering why no one has coherently written these things. Most of the negative BTC articles on HN are poorly written and used as a straw man.

ahmadss• 13 years ago

Re: #2 - Vendors need to pay rent, suppliers, and employees - all of whom presumably don't accept BTC. So that's probably why you see Coinbase, BitPay, and others that default to converting BTC to fiat the moment of transaction.

muyuu• 13 years ago

It is. However it has nothing to do with the protocol, it's just a fact that a lot of people are extremely money driven.

This can happen to housing, precious metals, bitcoin or anything else. Doesn't mean that the concepts of housing, precious metals or bitcoin are flawed. It's just people that are flawed, but we carry on with that reality.

notdrunkatall4• 13 years ago

I've been watching bitcoin since $30, bought at $80, and sold last night. I think that Stefan Molyneux (or however you spell it) is right on when he says that bitcoin is "a revolutionary protocol for information synchronization." However, it is by no means unique, and as we've seen, anyone can start their own bitcoin-type cryptocurrency. Apparently, the Canadian government is working on their own, and I don't think it will be long before other central banks begin to follow suit by adapting the bitcoin protocol for their own purposes and presumably solving some of its myriad problems in the process. And of course, when given the choice between a new-and-improved cryptocurrency that's guaranteed by a central bank and the old one that's guaranteed by nothing, Joe Blow is going to pick the former. Bitcoin is an amazing idea and I do believe that the idea behind it it will revolutionize transactions, but it won't be alone for long, and once the improved versions begin showing up, those who've held on to bitcoin because it's an amazing idea (it is) without realizing that bitcoin itself has only a very thin economic moat are probably going to have a bad day.

I've been trading and investing stocks for about 7 years now, and I think I've learned a thing or two in that time, but one of the most important things I've learned is that if holding onto something is making me uncomfortable, it's time to sell. Holding my bitcoin was making me uncomfortable as of a couple of days ago, so I sold. On the other hand, I've also learned that if everyone is expecting something to do one thing, it usually does the opposite, and it seems that pretty much everyone agrees that bitcoin is in a bubble. If it does crash, I'll get back in, but if it doesn't, I won't regret selling. I've been on the emotional rollercoaster of watching relatively large sums of money invested in a volatile asset fluctuate wildly, and I'd rather not go through that again. Just my two cents.

3pt141593• 13 years ago

I just put a sell order in for a percentage of my bitcoins because I think that there will be a pull back, but with that in mind I have the following response:

Some of us don't want the help of a government. The revolutionary thing about Bitcoin is that it is a (nearly) zero trust method of transacting. The value is in the fact that there is no central bank to be afraid of. Most of the wealth my parents have lost in their savings was due to inflation and debt backed asset bubbles. Both of which are symptoms of a debt-prone central banking system. There might be arguments that these central banks stabilize the economy for the betterment of everyone, but that is irrelevant when it comes time to choose a currency. Do you want inflation, meddling, and regulation? Serious question. The uninformed should say "yes" and the informed might want to say "no".

As for whether or not people are right about Bitcoin being a bubble, I think that bitcoin has a highger likelihood of 20 year success than Twitter and a lower market capitalization. It's a bubble when the baby boomers get involved with their dumb money. When there are ETFs that get traded on the exchanges that are backed on Bitcoin. Then it can be a bubble. Right now, its just an inelastic supply curve and a couple million dollars.

chad_oliver2• 13 years ago

I agree with the majority of your post, but I'm not convinced that inflation should be included in your list of bad things ("do you want inflation, meddling, and regulation?"). A moderate amount of inflation is a very good thing, and this isn't really even open to debate among economists. Its importance has been empirically and theoretically proven many times.

Inflation is important because economics is all about creating incentives. We have property rights because it gives people an incentive to work hard and takes risks. We have patents because they give people an incentive to explain how their invention works. We have a market economy because it means that if a company wants to gain market share, it has to create value for the consumer. In the same way, central banks try to maintain low levels of inflation (~3%) because it encourages people to invest their money in profitable ventures, rather than just leaving it under the mattress. Investment is the way wealth is created, so it should be pretty obvious that deflation is bad for the economy.

Notice that I'm talking about the economic health of the country, not the individual citizen. If you're only concerned about immediate short term benefits, you should push for zero taxes, high deflation, and the gold standard. But that's penny wise and pound foolish. You're shooting yourself in the foot. Better by far is to support actions which improve the economy, because a rising tide lifts all boats.

dlsx• 13 years ago

Your post is so true. My parents still have all their money tied in to their mortgage because the government said it's good for them. Maybe I don't value US currency, because I don't value my US government which is completely broken from head to toe.

But, it isn't just an issue for people in the USA. It's a blessing for people who live in more oppressed region of the world. Look at what happened in Iceland and how the bankers stole from the people.

People don't like the idea of their wallet being on someone else's hard drive. And that's exactly how the current system is ran. Your money is in a vault, and you have to go through an even worse time to get it than I do. And I don't pay fees, and so on etc.

sillysaurus22• 13 years ago

I wanted to buy right when it hit $850 a few days ago. I redeemed my $11k mutual fund, but the wire transfer took until Friday to go trough. By the time I was able to buy bitcoins, they were $1111 on coinbase. Bought anyway. Got 9.89BTC.

Just lost $2k of that investment, according to the markets. Though it seems to be recovering somewhat. Ow.

Anyway, I'm long on bitcoin. Maybe it will crash and I'll lose everything. Twice it's crashed, then the recovery has eclipsed the previous peak by several X. So I don't know.

I do know that if banks hasn't been so slow, then I would currently be telling the story of "I was able to grow $11k into $13k." One problem BTC solves is moving money around instantly. It doesn't close for Thanksgiving holiday.

Mtgox needs to become wiser as well. There's currently no trade fees, because they wanted to participate in BTC Black Friday. That kind of thing encourages people who are holding onto $15k coins to sell all of them if they think the market will go down. An extra 0.4% on that much money is significant. Mtgox really shouldn't be so willy nilly.

nkuttler3• 13 years ago

I hope those 11k aren't all your savings. I have coins, am bullish long term, but buying bitcoin is speculation, and bitcoin can fall back to $0.01, even if I don't think it's likely.

Udo4• 13 years ago

Though it seems to be recovering somewhat. Ow.

As with most investments, you need to think medium and long term. Barring some kind of final(!) crash, there isn't anywhere to go for BTC but up. Mainstream media and ordinary people are just now starting to talk about it. Stay with your investment, and don't sell before it at least doubled. If it crashes temporarily, that's fine too: chaos is a ladder.

Within reasonable confidence, I'd say: Whatever you do, do not sell at a loss. That's the moment when it becomes a loss. Don't lose your nerve.

Personally, I had a bit over 100 BTC. When it reached $20 the second time, I sold it because I could use the money and also because I became nervous. While it wasn't the biggest money mistake of my life, it's certainly a whopper in retrospect. Don't be like me ;)

jakejake• 13 years ago

welcome to the roller coaster ride! i was playing the bitcoin market with a small amount of money and had automated orders buying at $90 and selling at $120. It kept accumulating coins fairly consistently for a few months. My "sell everything" order kicked in at $140 but the value just kept rocketing up to $1000!

Even though I made money obviously I'm a bit sad about it. But it just shows that nobody can see into the future. I thought at the time that $140 would be a ridiculous profit.

My advice if you plan to go long is to just resist watching the value because it will drive you crazy and you'll make stupid moves as you try to guess which way the graph is going to go.

kingnight• 13 years ago

I'm curious how people plan on paying Capitol gains taxes on profits or reporting losses.

throwaway9848• 13 years ago

For the love of god, be sensible - sell half on Monday and put it back into a traditional retirement investment. You'll still do well if BTC goes up. There is no reason to put 100% of your retirement funds into any single asset.

brown9-2• 13 years ago

It scares me that not a word in here has anything to do with wanting to own units of this "currency" for any sort of utility or actual use, but just blind belief that the "value" will continue to go up.

gnaritas4• 13 years ago

but it won't be alone for long

It isn't alone now[1].

and once the improved versions begin showing up

They already have[1].

[1] http://coinmarketcap.com/

ljd• 13 years ago

I actually think the decentralized nature of bitcoin is what gives it all it's value. The fact that no bank can control it, inherently holds value. Currency manipulation is a really big problem right now, and knowing that you can buy a currency that won't be artificially controlled by it's issuer is an asset in itself.

Having the currency centrally controlled again isn't special and it doesn't deviate enough from a credit card transaction for anyone to use it.

notdrunkatall4• 13 years ago

What gives Bitcoin its value right now is speculators, and what speculators are betting on is widespread adoption. If that never materializes because some other currency has taken its place, bitcoin's value will decline.

And it is only a small subset of the population which ascribe value to monetary decentralization. I count myself among them, but I don't delude myself into thinking that the majority feels the same way.

nayefc2• 13 years ago

A central authority needs to control money supply. This is crucial in all advanced economies. It has to be capped somehow (currently, it's obviously exploited), but a decentralised currency will never work.

sanderjd• 13 years ago

Different strokes for different folks. I think its decentralized nature is its least valuable aspect. If the only thing it accomplished were smoother and cheaper internet, small business, and interpersonal commerce, it would be incredibly valuable. The novelty of it (which I think has a lot to do with its decentralization) is currently causing too much volatility to make it useful for actually buying and selling things. A more boring government-backed (or -regulated) variant would be more useful and extremely valuable.

CamperBob25• 13 years ago

The fact that no bank can control it, inherently holds value.

But the fact that anyone can roll their own competing currency inherently kills value, doesn't it?

wpietri• 13 years ago

That argument doesn't make much sense to me.

If first-world currencies were being drastically manipulated in ways that cost currency-holders lots of wealth, then I'd expect to see currencies decline relative to things that are directly valuable, like commodities. But that's clearly not the case:

http://www.economist.com/news/economic-and-financial-indicat...

The price of gold is down, too:

http://www.bullionvault.com/gold-price-chart.do

Further, I think a government can pretty easily influence the price of bitcoin: the bitcoin market is still relatively small, so somebody with billions of dollars to spend should be able to heavily manipulate the price.

But even you were right about it being proof against government manipulation, I think it would still only be better for people seeking stability if the volatility of bitcoin were lower than government-backed currencies. But bitcoin is insanely volatile compared to first-world currencies.

sliverstorm7• 13 years ago

Honestly, bitcoin is less and less decentralized every day. Nobody runs bitcoin-qt anymore (it's all online wallets and lightweight clients), and mining power is steadily consolidating as the capital-intensive ASICs take over. The more widespread BTC adoption becomes, the more the network will be owned by those with the capital to purchase large quantities of GH/s

foxhedgehog• 13 years ago

"the Canadian government is working on their own"

is there a citation for this?

sprice• 13 years ago

Maybe http://en.wikipedia.org/wiki/MintChip which isn't really going anywhere

asciimo• 13 years ago

The metric of "legitimate transactions" is interesting, but I don't see an easy way of tracking it. http://coinmap.org/ tracks brick-and-mortar retailers that accept bitcoin. Maybe there should be an opt-in registry, like a global Bitcoin YellowPages?

michael_nielsen2• 13 years ago

The following graph shows the estimated volume of transactions:

https://blockchain.info/charts/estimated-transaction-volume?...

You see immediately from the graph that the growth in number of transactions is relatively slow, considering all the media attention, and certainly far, far slower than the increase in the exchange rate.

Note that this graph is not the same as the number of "legitimate transactions" mentioned in the OP. But it's at least consistent with the point of view suggested in the post.

dustyleary• 13 years ago

The graph is log10-scale, so it's difficult to see a 50% or 100% increase in volume.

It's definitely not a 5x or 10x increase though.

michael_nielsen2• 13 years ago

You can remove the log scale:

https://blockchain.info/charts/estimated-transaction-volume?...

I used the log scale to make the point that transaction volume is relatively slow-moving on a log scale. That is certainly not the case for the exchange rate!:

https://blockchain.info/charts/market-price?showDataPoints=f...

Incidentally, the volume graph has a notable spike in December 2011. I've Googled and asked around a bit, but don't have a good understanding of what caused the spike.

VienneseCPA• 13 years ago

The author's central point is still very misguided: "Specifically, watch legitimate transaction volume--I'd suggest only buying if it shows signs of seriously ramping up."

Markets are based on expectations about the future, which is tangentially related to present reality. Present reality is that many smart, well-funded people are working on merchant adoption.

By the time legitimate transaction volume ramps up the price will have baked it in months ahead of time.

Not saying today's price is unsustainable, but I would recommend buying as many bitcoins as you would bet on black at the roulette table during a weekend in Vegas. If you're not a betting person, get off HN and go read Reader's Digest or something.

licnep• 13 years ago

This graph may provide a better picture of the number of transactions (excluding popular addresses like satoshi dice):

https://blockchain.info/charts/n-transactions-excluding-popu...

This one shows a much higher growth. (Although this kind of data doesn't mean much, and i agree bitcoin isn't being used much for actual transactions)

nullc2• 13 years ago

Unfortunately that graph is not terribly useful, even ignoring the "legitimate" filter— it both overstates transaction volume because lots of "non-transaction" events create transaction (e.g. consolidating wallets) and because it doesn't show transaction volumes of Bitcoin value which happen invisible inside systems (many Bitcoin wallet services will clear transactiosn between customers internally)

andrewhillman• 13 years ago

"The fact that the few merchants willing to accept bitcoin generally convert to dollars right away suggest an underlying lack of faith in bitcoin—or at least a problem with the volatility."

Its not a lack of faith l, it's lack off trade acceptance. If merchants accept bitcoin they need to convert back to dollars because that's what their business calls for. In other words, if they could pay their bills with bitcoin, then bitcoins would flow back and forth without an issue, removing your suggestion that this is about lack of faith.

pinarsezer• 13 years ago

The fact that the few merchants willing to accept bitcoin generally convert to dollars right away suggest an underlying lack of faith in bitcoin—or at least a problem with the volatility.

Few merchants accept gold either. Yet gold reserves in the world amount to US $8.2 trillion in value.

Edit: removed part on volatility

crististm• 13 years ago

Given the choice I think they will not have a problem in picking gold instead of bitcoins. Gold has some history behind it, and compared to bitcoins is more liquid and less volatile.

(volatile for about 3000 years - do you mean available?)

doki_pen• 13 years ago

I don't know why it is required that it is used in legitimate purchases. No one questions the value of gold, yet not many people use it to make purchases. I suspect bitcoins value will follow the same pattern as gold, once it is stable. When the world is full of uncertainty, it's value will rise. When things are steady, it's value will fall.

biot• 13 years ago

  > No one questions the value of gold, yet not many people
  > use it to make purchases.

Gold is purchased and used to make art, jewelry, electronics, medical devices, and so on in addition to being hoarded as an investment / currency reserve. Those products have real tangible value. Very few people are interested in buying bitcoin just to use the bitcoin address as artwork, for example. Tulip bulbs had more actual value. At its peak, one tulip bulb cost around €25,000 and WAS being used for legitimate purchases: milk, cheese, cows, wine, etc. Even after the price of tulip bulbs crashed, you could still at least plant them and grow flowers. If bitcoin reaches that price and crashes to next to nothing, what could you use your bitcoin for?

DennisP2• 13 years ago

Although this is true, gold's total value is much higher than could be supported by those uses alone.

MacsHeadroom• 13 years ago

A secure blockchain has a plethora of uses beyond money. Currently the Bitcoin blockchain is the only blockchain to offer the kind of security necessary for innovations such as Proof of Existence, http://www.proofofexistence.com/about

In the future the same blockchain could be used for automated arbitration, estate planning, "smart" property ownership/transference.

Less than 1% of the value of gold has anything to do with its industrial/artistic uses.

betterunix• 13 years ago

"No one questions the value of gold"

http://www.marketwatch.com/story/why-buffet-thinks-investing...

pbreit• 13 years ago

I agree. I think it just need a a sizable niche like illegitimate txns, tax avoidance or cross border txns to stick around in some capacity.

XorNot8• 13 years ago

People question the value of gold all the time. That's why gold has a market price, and why people are commenting on it being way-overvalued and basically guaranteed to be in for a fall due to economic recovery - probably keyed to the Asian markets where a lot of money fled to gold.

The thing is, you don't follow commodity price news.

matthiasb• 13 years ago

Have you check Bitcoin sales on Craiglist?

http://austin.craigslist.org/search/?sort=rel&areaID=15&subA...

rrich• 13 years ago

Funny thing about that are the people selling the shovels. I had no idea BFL was selling firmware upgrades to increase hash rates on existing ASIC miners. Simply brilliant.

richiverse• 13 years ago

My biggest issue with bitcoin is that it should be redeemable for something tangible other than $USD. The first virtual currency that addresses this and is directly convertible to watts or calories will be the currency to beat.

nkuttler3• 13 years ago

Huh, tangible like what? I can exchange bitcoin for EUR just fine. Or for dinner. Or bullion.

DennisP2• 13 years ago

That could easily be accomplished by bitcoin using the "colored coins" proposal. All it needs is for an electric utility to issue colored coins that it's willing to redeem for watts.

logicallee• 13 years ago

you just defined 'currency'. basically, your issue with bitcoin is that it can't be exchanged for goods and services.

this is quite the chicken and egg problem. but basically when people 'believe' it's a currency, they will accept it as one - thereby justifying that belief since it will be true due to all the other people accepting it.

dollars are only a worldwide currency because people and institutions think it's one - and if it were to stop being treated as currency it would stop being accepted as one. totally tautological - but there's currency for you.

johnrob• 13 years ago

Why should anyone feel compelled to follow or invest in bitcoin? The time to buy bitcoins is when you need them to get something you want (as it should be for any currency).

gnaritas4• 13 years ago

Why should anyone feel compelled to follow or invest in bitcoin?

To make money speculating of course. :)

aristidb• 13 years ago

After all the insane articles that claim things like "Bitcoin is a ponzi scheme" or "Bitcoin is anonymous", it is quite nice to read a well-informed and sane article.

allochthon2• 13 years ago

From the article:

low transaction costs for worldwide commerce would still be great.

I'm late to the whole bitcoin phenomenon, but here is what I really like about crypto-currencies. My US credit union (not even a commercial bank) charges me 40 dollars for an international wire transfer to Canada, and the bank on the other end will charge me 15 dollars. If this were done in bitcoin or a similar currency? Nothing, as far as I can tell, if you do it through the right exchange. And that's how it should be.

I suspect that banks don't even know to be worried at this point.

pbhjpbhj3• 13 years ago

I just looked at transaction costs on 2 exchanges and they were both at 0.2% for < $1000. One offered reductions for higher value transactions, the other was fixed.

Kraken and BTC-E resp.

allochthon2• 13 years ago

I might have been a little quick to jump to a conclusion, there. ;) But is there anything currently stopping someone from opening up an exchange whose only fees are an initial membership fee?

ezl• 13 years ago

I normally love SA's writing, but this opinion piece is really narrow minded and I think misses the point.

cs702 had a fantastic comment a few days ago in another thread [1]:

    Bitcoin befuddles experts who analyze it from a narrow perspective,
    because  it is not just a new medium of exchange or a new store of
    value: it is also a new kind of point-of-sale payment system (one
    that doesn't require payment processors), a new kind of global
    financial transfer system (one that doesn't require financial
    institutions), a new kind of time-stamping certification system
    (one that doesn't require notaries or county clerks), a new kind of
    contract-enforcing mechanism (one that doesn't require lawyers), etc.

    With rising global adoption, many new kinds of applications are likely
    to be created to take advantage of the Bitcoin network, the design of
    which even specifies a built-in script for defining and executing new
    types of transactions involving any arbitrary number of parties.

    In short, Bitcoin is a technology platform -- one that is benefiting
    from network effects.

    It may fail as "money" (in a narrow sense) and still succeed as a
    global platform.

Even from SA's narrow perspective, it's not clear why "legitimate transactions" is a requirement for success. As long as there is a large enough community of people who want to use it to transfer value for any reason, it'll continue to sustain itself.

The one takeaway he offers in closing is spot on though: "Just as it’d be stupid to convert all your dollars to bitcoin, it’d be stupid to not pay attention."

[1] https://news.ycombinator.com/item?id=6810839

3pt141593• 13 years ago

Is buying contraceptives in a Muslim country a legitimate transaction?

What does it matter what your government says is legal or no. The currency will take off even if it is just used for illegal transactions its entire life.

nkuttler3• 13 years ago

This is one of the biggest problems with so many publications, they focus on a single aspect of bitcoin. I've started to think of many discussions about bitcoin as equivalent to "But email is worse than a letter, it will fail", "Email can never replace parcels", "But is email a letter or a postcard?", etc.

It's just absurd, bitcoin is something completely new, and nobody knows yet how we will use it, and what it can replace.

001sky• 13 years ago

This is a great comment, thanks for sharing it here. There seems to be a demand for a synthetic currency that is not subject to monopoly and manipulation by a political authority. Right or wrong, people do seem to be putting there money where there mouth is. The way this author puts it, its like bit-coin is a combination of gold, farmland, london real-estate, post-war modern art, and Square/stripe all rolled into one. If nothing else, BTC is "on trend" in multiple dimensions. And connecting the dots in an interesting way...

jval• 13 years ago

Sorry, I think the legitimate transactions idea is actually one of the stronger parts of this piece.

As long as there is a large enough community of people who want to use it to transfer value for any reason, it'll continue to sustain itself.

That's precisely the problem.

A community of speculators will only remain stable or increase in number where the price of the asset continues to grow. In the case of Bitcoin, the price can only grow if legitimate transactions increase, or if more people speculate. With every increase in price the number of people willing to speculate decreases, to the point where you run out of greater fools to sell the asset onto, causing a crash.

That means that an increase in legitimate transactions is really the only way to sustainably grow the value of the network, because it is the only method resistant to falls in price.

CamperBob25• 13 years ago

A currency without the major use case being legitimate transactions is going to fail.

Couldn't he have said the same thing about a protocol like BitTorrent?

jmilloy• 13 years ago

He means legitimate as in "I gave you bitcoins for a concrete purpose" rather than "recognized as legal by a government." People are using BitTorrent for an actual purpose, so it's different.

teawithcarl• 13 years ago

Sam - 你忘记了中国的影响。

The price is bitcoin is proportional to the "hot money" flowing out of China. Doesn't matter if that's an illicit market, it's still the most significant factor.

Whether or not one believes that hot money is going to stop/slow should strongly influence your estimate of the price of bitcoin.

That said, it's top heavy at $900-$1100, and reasonable people should be selling a portion of their holdings.

TomGullen• 13 years ago

Why is it reasonable to sell a portion of their holdings? What does that actually achieve for the holder?

collabacode• 13 years ago

Relevant Futuram clip:

http://www.youtube.com/watch?v=KbCk1XNfTs4

VintageCool• 13 years ago

Question: why isn't gold the international reserve currency?

parasubvert2• 13 years ago

Chapters 1 and 2 of Karl Polanyi's The Great Transformation provide one popular theory as to why it collapsed around World War 1, from a cultural anthropology perspective.

http://uncharted.org/frownland/books/Polanyi/POLANYI%20KARL%...

Liaquat Ahamed's _Lords of Finance: The Bankers Who Broke The World_ provides another congruent account, from a more detailed historical/economic perspective, as to why gold was abandoned.

http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/0...

tpeng6• 13 years ago

The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to US M2 velocity of 1.6 ($18 billion * 1.6 ~= $28.5 billion). Since global ecommerce transactions are about $1 trillion / yr this implies that bitcoin should penetrate 2.85% of ecommerce. Big assumption here is that bitcoin does not work for real-world transactions as the confirmation time is > 15 min. This may be oversimplified because a lot of real-world transactions don't need to be real time. I'm also excluding time value effects which you can insert back in if you like.

From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).

Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.

im3w1l3• 13 years ago

I think much of BTC's valuation come from expectations that money velocity and market penetration will increase.

EDIT: Sorry I meant to say the velocity will decrease.

tpeng6• 13 years ago

A higher money velocity => lower BTC/USD, but yes, the current price implies a huge future growth of the bitcoin economy. This is what sam is saying and I agree. I happen to think that we will not see that growth/adoption, but that is a different question.

foobarqux4• 13 years ago

I don't understand what you are calculating but it's circular in any case: You can't use the current price of bitcoin to derive a value.

tpeng6• 13 years ago

Price-implied expectations

http://www.amazon.com/Expectations-Investing-Reading-Prices-...

tsaoutourpants• 13 years ago

His article is premised on this:

"The estimates I’ve heard from smart people that really follow bitcoin are that legitimate transactions are up only about 2-3x from a year ago"

That's hardly scientific. I've used Bitcoin for several purchases of "legitimate" things, and look to continue to do so whenever possible.

ajiang• 13 years ago

Well, not to belabor the point, are you saying that your anecdotal evidence is better than his anecdotal evidence? Or that we shouldn't take the perspectives of Sam Altman's experts' opinions too heavily?

aaron6952• 13 years ago

The tulip craze is a myth, I'm surprised people still buy into it.

It's stupid that tulips would go that high, and funnily enough it didn't happen.

TreyS• 13 years ago

Citation?

gwern2• 13 years ago

Read the Wikipedia article on Tulipomania, or _Famous First Bubbles_.

OP should too, actually, since his comment that

The price of tulip bulbs has yet to recover from its 1637 peak.

betrays several fundamental misunderstandings of the tulip market at the time. Of course the top tulip bulbs depreciated. That is like saying 'a patent has never recovered its peak value' or 'Windows 3.1 never recovered its March 1992 peak'.

scotty79• 13 years ago

We've already seen few bubbles on bitcoin. Investing overshadows usage of bitcoin as a currency. Everybody knows that.

One title I haven't seen: "X no longer accepts bitcoin."

RuCrazy• 13 years ago

Will it hold?

codex• 13 years ago

Heaven help us if Bitcoin becomes the world reserve currency without some central authority like the Fed controlling the money supply. Bad things would happen without counter cyclical fiscal policy.

spydum• 13 years ago

Can't help but wonder how many tech savy career drug dealers have just decided to become day traders after watching their btc soar in value.

vijayboyapati• 13 years ago

Sam sees the flaw in his own argument - when he mentions gold and the possibility of its use a store of value. But he doesn't understand the full significance of his own comment. Moldbug has by far the most compelling (imo) theory on the origin of money and why bitcoin (and gold) float far above their use value. These two posts cover it very well:

http://unqualified-reservations.blogspot.com/2011/04/on-mone...

http://unqualified-reservations.blogspot.com/2013/04/bitcoin...

I highly recommend them to anyone trying to understand the economics of bitcoin

calinet6• 13 years ago

Really fascinating articles, thank you.

brisance• 13 years ago

Tax is a big deal, of course, but even nations can't always compete with the popular sentiment tidal forces enabled by the internet.

How has the Internet outrage about NSA spying affected the US government?

headgasket• 13 years ago

Great read! I just posted an essay from way back (2008) on bubbles to hacker news: https://news.ycombinator.com/item?id=6831300

re-reading it gave me some perspective.

Good luck and Cheers!

rebelidealist• 13 years ago

A major legitimate use is wiring money internationally at a low cost.

kolev• 13 years ago

Just like investments in Bitcoin startups are binary, so are investments in Bitcoin itself. Put some USD into it and don't worry too much about it. People waste millions on lottery tickets with much smaller chances of success, so, I'm tired of all these negative articles, just because Bitcoin dropped 20-30% and then almost fully recovered in a day. Sell off if you wish - there are enough people to buy your Bitcoins cheap. And by the way, the tulip craze is an obvious myth.

Thoughts on Bitcoin

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