Bitcoin: What's the Appeal?

Here's the best and shortest explanation I have found about Bitcoin:

http://youtu.be/l9jOJk30eQs

I still don't fully understand it. I saw this video of a guy getting bitcoins from a kiosk. I thought this video was a spoof at first. Actually, is it a spoof?

http://youtu.be/apBrIEZeU2U

Anyway, is anybody here using Bitcoin? What's the appeal for you?

Good video.



Actually, think of it as an automated currency exchange. Cash goes in, bitcoins go into a bitcoin wallet. Or you give bitcoins to the owner of the machine electronically, and cash comes out. Bitcoins have no physical representation.



I do not and have never owned any bitcoins.

If I had been more foresightful, I would have gotten in early, when it was much easier to mine bitcoins, and applied as much computer hardware towards bitcoin mining that I could afford. Late February of this year would have been a good time to cash out.

Governments are starting to wake up to the potential disruptive effect bitcoin can have on fiscal policy, tax collection, and surveillance of money movements. Expect more regulation soon.

I can't see how anybody in their right mind would want to get involved in that. I don't understand Bitcoin all that well, and my professional background is engineering and computer science. While I'm probably capable of understanding the in's and out's of Bitcoin, I've never had any inclination to learn more about it because right up front, my gut feeling is "Stay away. Stay FAR FAR away." I trust my gut instincts about what will work and what won't after decades and decades of professional engineering and computer development experience. Bitcoin is right up there on my list alongside Facebook and Twitter and other passing fads that will disappear sooner rather than later. It's one thing to waste your time away on Facebook and Twitter, but throwing your money into a very risky pit called Bitcoin falls into a whole different league of stupid.

IMHO, bitcoin is a possible alternative to government issued paper money and might well retain purchasing power in a future in which paper money was rapidly inflating to worthlessness.

A merit of bitcoin is that governments cant print more of it.

It is however a new idea and might well fail or decline in value. It would be most unwise to put more than a small percentage of ones money into something so new and untried.

A SMALL holding of bitcoin is arguably sensible, just as one might might prudently keep a modest stash of foreign banknotes.
Similar arguments apply to a modest holding of gold.

Foreign banknotes, gold, or bitcoins, should IMHO be regarded as insurance or as doomer preps and not as investments. They pay no dividend, and carry risks of loss, theft, or devaluation.
Could be valuable though if ones national currency lost value or became inaccessible.

I don't own any, but to me, the use of cryptography to create a secure form of digital money fascinates me.

And on more of philosophical/political level, the possibility of having a medium of exchange whose creation is not controlled by central authorities--and all that this possibility implies--also has an appeal to me.

Not going to happen, though. Or certainly not unless something catastrophic happened to force through major changes in our monetary system. Perhaps some petty dictator suddenly discovers the world's largest oil reserve and decides to sell the oil only in Bitcoin--a new petro-e-dollar, if you will. It would probably take something crazy like that to really gain traction. Of course, said petty dictator would be taken down in short order by...well, we all know this how story line goes.

But for the majority of folks with serious skin in the game, I don't think Bitcoin is seen any differently by them than flipping houses. It's just another "thing" to buy low (or mine low) and sell high in a reasonably short period of time.

I just saw a video of some guys who went to a kiosk, inserted about $650 US, and got their bitcoins. They went and bought a taco from a food cart. The next day they came back to the kiosk to see how many bitcoins they had left in U.S. dollars. They had $560 left, and the kiosk was unable to give that cash back.

http://youtu.be/vnm4xFC2xNo

I superficially understand the explanations of how bitcoins work, but where the rubber meets the road, bitcoins look and smell like a scam. That disconnect causes me to revisit the explanations and wonder if the explanations are wrong or if something HUGE is missing from the explanations.

A bitcoin is the only non-goverment issued fiat money. As such it's a perfect international online currency. But it also lacks the security of a goverment backed currency. So if you get a three quarters of a million bitcoins stolen, you're largely SOL.

I'm not sure it's a scam per se, but OTOH when peeps in the bitcoin world talk about "mining" bitcoins, I have no idea what that means. Miners "mine" gold, silver, copper, iron et al... How do you mine bitcoins? Once mined, how are they spent?

Hmmm, maybe it is a scam...

Bitcoin is not backed by anything other than people believing that it has value. You could make that same argument about government-issued fiat money, but enough people believe in (for example) the US Dollar that its value is pretty well established.

One of the problems with bitcoin is that it's far more volatile in value than government-issued currency.

The best explanation of bitcoin mining I've seen is in the first video link posted by ireckon above. In short: bitcoin mining uses progressively more complex and computationally expensive cryptographic calculations to create new bitcoins and process transactions.

If you prefer a more thorough textual explanation:

I agree. In a few years people will probably not be looking back at Bitcoin saying, "What a scam that was!" More likely, they'll be saying something like, "Weeelllll, it sounded like a good idea at the time..."

This is not a perfect analogy, but to give you a simplistic analogy of what Bitcoin mining is like.

Take something that we're all familiar with--lottery tickets. A lottery ticket has a series of numbers on it. Imagine a Bitcoin as a digital lottery ticket with a unique set of numbers on it. According to the Bitcoin rules, only one lottery ticket can exist with that particular set of numbers.

When you "mine" Bitcoins, you're essentially just selecting a new set of numbers for a new lottery ticket, but before that ticket is considered valid by everyone else, the Bitcoin protocol requires that you have to put in some "work". Around the world, there are public lists of all valid Bitcoins and information about them, like a history of transactions, so it's like every lottery ticket ever issued is listed and publicly accessible. Say the work, or mining, involved multiplying all the numbers on every lottery ticket in existence. Obviously, as the number of lottery tickets expands, so does the amount of processing power required to finish the necessary "work". Once you have finished the work, your new lottery number is then distributed to all the servers and anyone who tries to claim that number in the future will be rejected.

Very, very simple analogy.

In the beginning, it didn't take much work to generate a Bitcoin because not many existed but now the work is beyond the horsepower of typical home PC's. That's why there are companies selling specialized hardware that are optimized for blazing through these Bitcoin calculations. There are whole data centers out there devoted solely to Bitcoin mining. As the number of Bitcoins increases, the work requirement acts as a feedback mechanism that slows the growth of the Bitcoin supply. There is also a hard maximum number of 21 million Bitcoins that can ever exist but we're still a long ways from reaching that limit.

When you "spend" a Bitcoin, you're just transferring ownership of that lottery ticket number from you to another person in a way that all these public servers are notified. So, you can't just reuse the same lottery ticket number over and over because the public registries have recorded that you don't "own" that lottery ticket anymore. It's like buying or selling a house. When you buy a house, you do a title search to make sure the seller owns the house free and clear and then you register the transaction with the appropriate government agency in your name.

You can even split one Bitcoin into fractional ones. It's mostly a bookkeeping thing with the public servers, so you can "spend" a tenth of a Bitcoin and still have nine-tenths of it remaining in your possession.

In terms of the value of a Bitcoin, think of them like stocks. They are constantly being bought and sold on exchanges and the prices varies as the supply or demand varies. The price swings can be very quick and dramatic, which scares many people but you can also make a killing in a short time if you get the timing right.

Hmmm, that sounds more like a Bank printing currency than a miner mining gold. A gold miner has a hard metal result for his labor; a bitcoin miner has a number. Ether rather than printed paper.

So to get a "free" Bitcoin, all's you have to do is come up with a number (between 0 and 21 million) that nobody has come up with yet? That sounds trivially easy for the people who started up Bitcoin, then it gets progressively harder and harder, and more and more expensive to buy the hardware needed to do the searches, finally converging to impossible.

Doesn't that sound like a "pyramid scheme", where the early adopters rake in the cash and the poor schmucks at the end are just making the early adopters richer and richer? This is all assuming that "owning" a bunch of numbers has value in the first place.

The more Bitcoin is explained to me, the more my jaw drops in awe that people would actually, intentionally, of their own free will, buy into this. A herd of lemmings could conquer Bitcoin owners in short order.

Lets hope the power doesn't go out for these poor lemming-wanna-bes. Poof Bitcoins!

It's not a perfect analogy, so no, it's not as simple as literally just picking any number between 0 and 21 million. You're using cryptographic principles to calculate a long string of letters and numbers for this new "lottery ticket" which is the end result of the "work" you're putting in.



Actually, the real world works similarly, too. Big companies and well connected people with government contracts are paid with dollars that have been created out of thin air. Since they are the first to be paid with these dollars, these dollars have more buying power. As soon as they are spent into the economy, the buying power of every single other dollar in existence is diluted a bit more by this new dollar. This causes prices to rise, which essentially means the dollars in my pocket are worth less today than they were yesterday and we're constantly getting fleeced by inflation caused by other people being able to use all these newly created dollars first.

Essentially, the only difference between a dollar (whether paper or a digital dollar in my bank account) and a Bitcoin is that a dollar has the coercive power of the Federal government behind it to mandate its acceptance to pay debts and to ensure its monopoly as the legal tender of the country.

The global monetary/financial system is really in a precarious state now. I think it's fair to call it a Ponzi scheme, too. Seriously, the Ponzi almost crashed in 2008 but governments and the big banks moved heaven and earth to prop it up and keep the house of cards from falling. I consider it a Ponzi because new money in the form of new debt MUST be continually be injected into the system or it WILL collapse.

And before someone points out inaccuracies in my explanations, it definitely does NOT accurately explain the details of Bitcoin.

I'm merely trying to give a basic explanation using concepts that most people will readily understand. Like the title search comment is not technically accurate with Bitcoin transactions, but it gives you an idea that there is a process used that verifies the integrity of that particular Bitcoin that you are spending or accepting.

If anyone wants to clarify any of my explanations, please add to the discussion.

I have a few questions. This forum seems like a good source of knowledge...

1. Bitcoin stops working if there is no electricity or Internet. Is that right?

2. Bitcoin mining is scheduled to stop in 2140. But, in only about 40 years, I'm thinking computers and the Internet will be completely unrecognizable as we currently know them. Do you see Bitcoin as being a currency that depends on how the Internet currently works TODAY?

3. Bitcoins are super volatile. The exchange rate an hour ago was $486 US. At the moment (one hour later), the exchange rate is $478 US. When will the volatility stop? When more people jump in?

4. 21,000,000 bitcoins will be the max in the year 2140. At the current exchange rate, that's $10,038,000,000 US. That's not a lot of money for a total valuation of a currency. Or am I thinking about this the wrong way?

There are a number of fallacies surrounding the arbitrary limits of this purely electronic fiat currency.

1. There is no limit to the # of transactable units. Once the 21,000,000 limit is reached, but more likely much sooner than that, bitcoins will be subdivided, much like dollars are subdivided into quarters, then dimes, then nickels, and so on. Each time a subdivision occurs, there will be a resulting deflationary adjustment as subdivided units increase in value, generally the opposite of what Quantitative easing does. So if 21,000,000 bitcoins are worth $500 each and they split, does anyone think the value of half-bitcoins will be $250 for very long? If the interest in the currency remains strong, they should go up in value quickly as demand rises to meet supply.

2. There is nothing backing the intrinsic value of bitcoins. No one has any reserve set aside to cover the current or future circulation of bitcoins. Think of a bitcoin as similar to a promissory note or IOU. It is one person saying they will honor the redemption value at some later date, without actually putting up any collateral to back the statement. In the event of default, there is no asset forfeiture to rely on. The only remedy would be to take civil action against the debtor, using the legal system to compel forfeiture of assets not contractually liened.

3. Bitcoins are unregulated, there is no safeguard against counterfeit. No electronic security system is 100% reliable, and you can bet that there will come a point in time when bitcoins, like any other electronic banking transaction system, will be compromised. Thousands of people are trying to hack the bitcoin system already. At least with dollar bills, I can elect to keep them in my safe at home, or a mason jar buried out in the back 40.

4. You must have access to technology to use bitcoins for anything. You can't carry bitcoins in your pocket or purse. They aren't real. If you have bitcoins when technology fails, your bitcoins are virtually gone.

As a purely digital currency, you require computing power to create and check the integrity of Bitcoins, and you need the Internet to widely distribute the registry of Bitcoins and to record transactions so if you're talking about going long term without electricity or Internet, then you're correct, Bitcoin is out.



That's a very difficult question to answer. I would be very, very surprised if Bitcoin were still around 40 years from now. I see it more as an example to everyone of what digital currency can be.



The outstanding number of Bitcoins is still small enough that buying or selling large amounts of Bitcoins can have dramatic influence on the price. I have no idea at what number of Bitcoins would help dampen these price swings. But even Blue Chip stocks can vary in price quite a bit even over the course of one day.

A huge Achilles heel for Bitcoin has been the quality of the Bitcoin exchanges and Bitcoin digital wallets to store them. There have been some high profile and costly thefts that have given a huge black eye to the whole Bitcoin concept. Probably the most high profile Bitcoin exchange, Mt Gox in Japan, just went bankrupt and shut down, taking many people's Bitcoins down with them. Mark R linked to an article that mentions the downfall of Mt Gox and how these incidents really knock down the price of Bitcoin in a hurry. Until a more mature, robust infrastructure develops to support Bitcoin, it's still really the Wild West in the Bitcoin world now. As the saying goes, "You pays your money and you takes your chances." But things mature very quickly in the online world, so the situation could stabilize quite quickly.



Well, it depends on how you view Bitcoin's role. If someone is interested in Bitcoin as a store of value or as an investment in itself, then think of it like how you would think of gold. As interest in gold increases, the price per ounce will go up and up. What used to be worth $200 near the peak of the Dot Com bubble could later be worth $1,800 for the same ounce of gold. But I don't think there's any chance that people will be trading in Bitcoin like that 40 years from now.

However, if you view Bitcoin as a widely used medium of exchange throughout the whole country, then maybe 21 million Bitcoins is too small a number to work efficiently in that role, even allowing for fractional Bitcoins. Pricing a pack of gum as 0.00000001 Bitcoin does not seem like something people will readily embrace.

Not any different than any modern currency.

With a total fixed number of Bitcoins, it's possible that a convention could arise that Bitcoins become primarily valued in something other than currencies. Perhaps priced in terms of gold since the overall supply of gold changes slowly, too. So then Bitcoin would be a digital representation of something with tangible value (gold). You can't print more gold therefore Bitcoin would also have a relatively stable value over time, although it's price in other fiat currencies could fluctuate widely.


Actually, Bitcoin is self-regulating in terms of checking the authenticity of Bitcoins and in how fast or how many Bitcoins are ultimately issued.

Despite the high interest in Bitcoins when its price zoomed to dizzying heights, I'm not aware of any instances of counterfeit Bitcoins being successfuly passed off yet. But plenty of Bitcoins have been stolen by hacking the software behind the exchanges and digital wallets used to store Bitcoins.

Bitcoins may be self-regulating, but the value of a bitcoin does depend too much on strange factors.

For example, the version update of the Bitcoin software affects a bitcoin value. For instance, if the software is not updated properly, the system won't work properly. Then, suddenly everybody will be reminded that the nerds on the back end are vital to the system. At that moment, the value of a bitcoin will plummet.

That brings up another point. There needs to be transparency with who is updating the software. Yeah, Bitcoin is open source, but still somebody needs to be updating the thing properly, right? What if the programmers all die today? Who will take over updating the software? These kinds of questions affect value.

Also, as previously noted, the value of a bitcoin is affected by the reliability of electricity and the Internet. If the Internet goes down for just one half hour across the USA, everybody will be leaving the Bitcoin currency in droves.

I'm a bit of a conspiracy theorist. These factors I brought up give a huge amount of power to one group, the pogrammers and engineers. People keep repeating the idea that bitcoins are self-regulating. That may be true IF we assume the system works properly at all times. The programmers and engineers have the responsibility of making sure the system works properly. Thus, they have god-like power within the realm of Bitcoin.

Up until about a year ago, I was really into the Bitcoin scene but moved away from them for a number of reasons.

Reading through the thread here, there is some good basic info but also info that is not correct.

If you really want to how Bitcoin works, along with all the pros and the many perils, go to any of the Bitcoin concentric websites. I recommend BitcoinTalk to start with. Here you can read and post questions in the forum to people who are actually involved and knowledgeable in Bitcoins.

What can you actually use Bitcoins for? I mean, what can you actually buy with them? I think I've read pizza and maybe tacos from some Mexican restaurant. Maybe a few other things. But by-in-large, they seem to be a useless "currency" because of the simple fact you can't really buy much of anything with them. Just a few scattered things here and there. If I were, say, selling my car and somebody asked if they could pay with Bitcoins my answer would be "no". And I'm pretty sure you'd get that same answer from 99% of the car sellers out there.

So, are people just speculating that Bitcoins may become useful for buying something you'd actually want sometime in the distant future?

Telinhiker, I prefer to discuss Bitcoin on a non-specific forum site such as this. In a site dedicated to Bitcoin, people tend to confirm each other without fear of too much criticism from outsiders. However, for Bitcoin to survive, it must be explainable to a wealthy old person who is not tech savvy. This site is above-average tech savvy. If Bitcoin can't be explained here and promoted with enthusiasm, then that is a huge red flag for me and any other potential investor.

bitcoin...shmitcoin...

Frankly,it does not matter to me where you want to learn. The point I made, is that not all the info posted here is correct. I only suggested another forum that is specific to Bitcoin so that any person becomes well informed of the subject at hand...especially if they are thinking of venturing into it.

To me this is no different then this forum. I am currently shopping for a certain brand of truck. Although I could post here for perhaps some general info. Instead I am posting on a specific related truck forum where people have purchased the brand of truck and can inform me what they like about the truck and also tell what they don't like about the truck. I would rather interact with that forum in order to make the most informed decision when and if I purchase.

Bitcoin is based around a public ledger called the block-chain. The ledger says who owns what; you can think of it as a list of account numbers and balances. You move coins between accounts by publishing a transaction with the source and destination accounts and how much to move. Every 10 minutes or so, the miners collect all the new transactions, validate them, and add them in a new block to the end of the public ledger. The clever part is that Bitcoin is distributed; there's no central entity that manages the ledger, and anyone can post updates to it. The Bitcoin protocol keeps it all sane.

"Mining" means three things. First, it means validating the transactions. That means they check the source and destinations exist, that the source account has the amount specified, and that the transaction has the proper authority to move the money. Authorities are expressed using strong public key cryptology. Because of this step, you can't spend coins that don't belong to you.

Second, the miner has to solve a hard puzzle called the "proof of work". Doing this is computationally expensive in a way that can't be faked. This step is used to automatically resolve disputes when two different miners try to post different but equally valid updates. In effect they are voting, and the proof of work makes votes expensive so no-one can stuff the ballot box.

Third, the miner gets rewarded for doing the previous two things with transactions fees, and some new coins that are created out of nothing. This is the only way new coins are created. The process is called "mining" because it's doing work to produce value, much as digging in a gold mine is.

The upshot is that bitcoins are valuable for much the same reasons gold is valuable: they both exist in limited supply, are hard to fake, and facilitate trade. They are both imperishable and finely divisible. Bitcoins have the advantage over gold that they weigh nothing and can be sent digitally around the world cheaply.

Pretty much. It's not useful in an EOTWAWKI scenario.

I expect Bitcoin will evolve with the Internet. The core ideas are mathematical in nature, and as such are eternal.

Presumably.

The exchange rate will change. Bitcoin are almost infinitely divisible, and there's no problem if each bitcoin becomes worth a million dollars. We'll just trade in micro-coins.

I have some. I'm a computer scientist; I got involved because partly because it is intellectually fascinating. It is a kind of internet of money, in that the core concept is really about ownership, with currency merely the first application. Other systems will be built on top of it. Part of the attraction is that it enables permissionless innovation.

Another part is that it's a trustless system (more or less), in a good way. With dollars, you have to trust the government not to print too many of them. You have to trust the bank to look after your account. With Bitcoin, it's all based on mathematics and open source code. It's decentralised. This is important because when money is managed by a central entity, that entity has enormous power, and history shows that the power always corrupts eventually. The buying power of a dollar is a fraction of what it was 100 years ago, and that's one of the better currencies.

For some people (not me), the attraction is its potential for anonymity. Although the block-chain is a public ledger, it only stores account numbers, not real-world names and addresses. In that regard it is like cash; but with the difference that it can be sent over the internet.

For some retailers, the attraction is that Bitcoin has lower transaction fees and that transfers are irrevocable. Credit card fees and charge-backs are a big expense for retailers.

So there is a lot of potential in Bitcoin, a lot of value. And a lot of people can see that value. That's why it's still worth something, even after a long run of bad Bitcoin news. The final attraction of Bitcoin comes from this belief that it has a future, and that demand for coins will increase, and therefore buying coins now is a good investment.

Arguably Bitcoin is not very important in America, where the existing financial infrastructure is pretty good. It should be more important in emerging countries, where a lot of people don't have bank accounts (but they all have mobile phones).

I don't consider it very relevant to the interest of this forum. As a possible investment, it's very high risk. No-one should spend more on it than they can afford to lose. As a hedge against financial collapse, or hyper-inflation, gold is surely more reliable. (Or bullets, or first aid supplies, or toilet paper, or whatever.)

People argue whether gold has intrinsic value -- to me it clearly does for certain industrial uses, which may or may not be around in the case of financial collapse, hyper-inflation or whatever. Ammunition (loaded or components), first aid supplies, toilet paper, and so on have intrinsic value. The intrinsic value of paper currency is extremely low, and bitcoin has none.

I own stocks so I must be an optimist .

From everything I've read, stocks are supported by QE and the Russell 2000 has a PE of about 100 -- way overvalued. For those who have 10 minutes -- Michael Pento mp3

What about that Mt. Gox disaster? Didn't people trust the owner with their Bitcoins, and then those subsequently went "poof"? And now Flexcoin is reportedly going down the drain. It seems you have to put a LOT of trust into Bitcoins, and apparently there have been some big losses due to this misplaced trust.

I don't see Bitcoin (or something similar) as the future. I see an Internet-based barter system as the future. It's de-centralized and still works without electricity, although just locally.

We currently have some Internet-based barter systems. However, bartering is not cool enough (yet) for it to catch a buzz like Bitcoin has. Bitcoin needs a couple more Mt. Gox's for a massive number of people (and the best programmers) to shift to something that is fundamentally different.

Come to think about it, Bitcoin could be traded in the barter system like any other good. Individuals exchange electricity, computing power, or any other good/service for Bitcoins. There is no cash exchanged. Note that the U.S. government considers Bitcoin to be property, which equals a "good" in the barter system.

Something like Bitcoin may have to remain in the barter system. As a practical matter, some type of currency may be necessary to pay for things like health care. Or maybe I'm brainwashed to think that way...

Such a small proportion of gold's value comes from its industrial uses that I don't see it as significant. Arguably, intrinsic value is a bad thing in a currency. It means it gets consumed, or otherwise taken out of circulation for reasons not related to the economy. So intrinsic value is a bit of a red herring, really. Other than that, we seem to be in agreement: for preparedness, stockpile toilet paper first, gold a poor second and bitcoin an even poorer third.

Some people try to make a similar big deal about Bitcoin not being fiat: it's not legal tender; there are no laws forcing a vendor to accept it. For others, the freedom is part of the attraction. The currency will thrive or fail based on its merits, not on force of law. (This line of discussion risks getting political.)

You're confusing bitcoins with an exchange that trades bitcoins. You don't need to store your bitcoins in an exchange, and indeed you shouldn't do that. Again, part of the attraction of bitcoin is that it gives you the freedom to be your own bank. (And with that freedom comes responsibilities.)

I think we developed from barter to currency for a reason. That reason hasn't gone away, and never will.

Again, Bitcoin is not currency according to the U.S. government. It's property. That automatically makes Bitcoin a type of barter system (exchange of services/goods). You can say the IRS designation does not rule the day. However, regular people like me must go with what the IRS says.

That's just so they can justify taxing it. They can't control it, so the second best thing they can come up with is to tax it. But really, who cares what the U.S. government labels it? (other than as it relates to the taxation scenario)

Wouldn't you be double taxed, i.e, sales tax on the bitcoin "property" then sales taxes on whatever you purchase with it.

I'm thinking there would be legal differences should you have fraud or a dispute. IIRC the laws are stricter on posta/credit card fraud due to theft of currency, but someone stealing your bitcoin would be a lesser crime based on the value of the property stolen.