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Bitcoin’s Four Drivers: Part 3 – Merchant Trade

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Swarm Economy

Swarm Economy

Are you aware of how much of your money each month goes to Visa and MasterCard? Odds are you’re not. For me, it’s about a thousand euros a year. Probably about the same amount for you. Couldn’t you use that for something better?

Visa and MasterCard have succeeded somewhat in a regulatory capture, preventing people like you and me from seeing how much we actually pay them, and more importantly, preventing us from having a way to avoid paying them. Several countries have laws against credit card fees that come on top of the merchants’ sale price; that means that there’s no way to get a better deal by paying cash or avoiding the credit card companies in another way.

But there are other drivers than you and me. Also, these regulatory captivity laws usually don’t prohibit discounts when paying in a certain manner; only markups.

(Metanote: There was an unplanned break in this post series due to the events at the MtGox exchange; I did not want to polyannically divert attention from the recovery efforts. The rest of the posts continue every other day from now on, barring something equally disruptive, knock on wood.)

BITCOIN’S FOUR DRIVERS
This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the third article, on merchant trade. The others are unlawful trade, international trade, and investment (coming July 5).

So if you and me aren’t the ones being able to make decisions that drive Bitcoin, who will?

Well, once the transactions are low-friction enough, merchants will. But this requires the merchants escrow mechanism I described earlier. Here’s why:

Credit card companies typically charge between 3 and 5 per cent per transaction. That’s per transaction. On your gross revenue, credit card companies have skimmed some 5% from the top. (Here, it becomes easy to calculate how much you give them. How much do you spend annually? Out of that, how much goes through credit card clearing?) Bank debit cards are about similar. As is, for that matter, banks’ cash handling.

Seeing that the typical operating profit margin is about 5% for a good merchant — that is, revenue minus costs and operating expenses — this means that merchants stand to double their profits by promoting Bitcoin in favor of credit cards and bank debit cards.

There’s a lot of profit to be made here in cutting out the clearinghouse middlemen. I predict small mom-and-pop stores will be the first drivers, out of enthusiasm for the technology, and once it hits usability critical mass, merchant economies of scale (Walmart, Carrefour, MediaMarkt, 株式会社髙島屋, etc.) will move to promote its adoption.

Now, of course, these gains are somewhat short-to-midterm. Competition on a functioning market will ensure that, once adoption is wide enough, profit margins will start to push down towards the five-percent norm again. Interestingly, this will make credit card purchases yet more uninteresting as they will make no profit at all — Bitcoin stands to effectively kill both Visa and MasterCard because of exactly this.

Growth Potential

So how much does this driver move into the Bitcoin ecosystem, then?

The current value of the Bitcoin ecosystem is about 100 megabucks. I’ve been speaking about how unlawful trade stands to bring in about 60 gigabucks, and international trade about 600 gigabucks. This third driver is hard to estimate. Let’s estimate that 10% of all credit card trade can convert to Bitcoin trade, given the ridiculously healthy profitability of it from the merchant’s side. I have a hard time finding authoritiative data on credit card transaction volumes — I have only fragmented data, like an old number for transaction volume for the United States alone (1.5 terabucks). But extrapolating this by economy size and inflation, we can estimate that the world total is in the ballpark of 6 terabucks. If merchants were to aggressively pursue this profit driver, and achieved a 10% conversion mid-term, it would mean another 600 gigabucks in the Bitcoin ecosystem, and the full 5-6 terabucks long-term (one or two decades).

Thus, with these drivers so far, we’re looking at a growth from 100 megabucks to about 1.25 terabucks, give or take, in the foreseeable future. That’s an 12,500 multiplier. This doesn’t mean that the value of a single bitcoin will rise by 12,500x in this predicted profit-driven scenario, as market forces are more complex than that, but it gives an indicator of the realistic potential ballpark.

Next and final driver: Investment. Bitcoin has probably been the best investment instrument available anywhere in the past 12 months.

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About The Author: Rick Falkvinge

Rick is the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy. He has a tech entrepreneur background and loves whisky.

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Contributors take own responsibility for their comments.

67

  1. 1

    I have followed all your articles on BTC so far. They are all very insightful and interesting. Thanks.

    It still remains to solve the issue regarding what people can actually do with btc ?
    At present, they can only be traded on the exchanges markets.

    Even if a large number of merchants would adopt btc as a form of payment ( finding it convenient according to your article ), they still will need a way to change btc into real cash. Unless, of course, the chain does not stop here and they would be able to buy from their suppliers paying with btc, go shopping for their personal needs and pay with btc and so on….

    At present, btc move from the exchange market to people who buys them. From these people could move to merchants , providing there would be enough to notice this movement which, at present , is not the case, Than from merchants btc can only move back to the exchange market.

    Thus for merchants adopting btc as a form of payment , ( aside from the advantages you have illustrated in this article ) could be considered as a form of investment, a speculation if you like.
    This tends to limit the number of merchants interested in btc for obvious reason.

    It is my opinion that , in order to boost btc economy, the final place where btc have a real tangible value, cannot be the exchange market alone.

    There is nothing wrong in trying to make some extra money in speculation, but this bounds btc potential.

    For example e-commerce, would be advantaged from adopting btc as a form of payment. Once the transactions are made, we will have these e-merchants loading up with btc and while they will unload their available stock of goods. Than, what ? They have to go to the exchange market and buy back fiat money in order to fill up theirs werehosues.

    If btc economy is confined into this boundaries, it is very unlikely that we would see it booming up like many are expecting.

    The underling concept of btc ( being a currency that allows to avoid double spending on transactions cutting of all the middle man ) remains intact even inside the boundaries I have outlined above. Merchants would have benefit from a cost free transaction on theirs sales even if they would have to buy back real cash at the end of the game.

    We need to have some alternative ways for merchants to spend their btc rather that buying back fiat money. Or , at least , a way to spend some of the btc they would accumulate. Perhaps a way that would allow them to increase their sales more and more like Advertising on the internet paying with BTC……

    • 1.1
      samantha79

      “It still remains to solve the issue regarding what people can actually do with btc ?
      At present, they can only be traded on the exchanges markets.”

      no, no, no. where does this falsehood come from? a better question would be what *cant’* people do with bitcoins.. a question that is becoming more and more difficult to answer.

      https://en.bitcoin.it/wiki/Trade

  2. 2
    Ben Abuya

    Michele, that’s true and Bitcoin is currently fighting a very difficult network effect. However, every little bit helps, including speculation. Because of the speculation, there is a growing number of people who have some bitcoins, and all these people are potential bitcoin customers.

    You mentioned that retailers need a way to spend the bitcoins they earn directly, but I believe this is not a problem but an opportunity for bitcoin. There are already many btc denominated b2b services, such as website design and programmming.

    Since these retailers will have a strong incentive to spend their bitcoins directly instead of exchanging them for fiat, they will be willing clients to other bitcoin businesses, and this will greatly strengthen the bitcoin economy. All those bitcoins looking for a home will also incentivize other b2b businesses to accept bitcoins.

    • 2.1

      Hi Ben, thanks for your answer.
      I agree with what you are saying but may main concern about BTC is the fact that the beginning and the end of a BTC has to do with fiat money in any case.

      I mean, mining does not bring any sort of benefit for the individual. Therefore you need to buy using fiat money BTCs and at the end of the game someone needs to sell BTcs for fiat money. This is far from being an ecosystem that can survive outside today’s economy which is based on fiat money.

      Again, only the money saved on the transactions would be the only benefit by using BTC instead of fiat currency.

  3. 3
    Stephen Gornick

    You left out the other benefits that will drive merchants to preferring bitcoin:
    – no involuntary chargebacks. A credit card charge can be reversed easily. Bitcoin is irrevocable.
    – No “settlement” delay. With a credit card, funds need to go through settlement and it can be days before the merchant can use those funds for spending. With Bitcoin, the funds clear for spending in about an hour. For businesses (and individuals) where cash flow is extremely low, this difference is way more important than the 4% credit card fee even.

    As far as the regulatory capture topic … in the U.S. the “Cash Discount Act” guarantees the right to offer a discount for “cash, check or similar means rather than a credit card”. That’s why some gas stations can have two prices, one for cash, one for credit card. So even if the merchant were to pass on a fraction of the savings, e.g., your $100 purchase for $100 if you pay with VISA/MC or $99 if you pay with bitcoin. It will be just a matter of time before we as consumers prefer to use Bitcoins for online payments then as well.

    • 3.1

      Also left out, is the low barrier to implement bitcoin payments. Implementing creditcard, paypal or other online payment systems are often expensive, cumbersome and come with long delays.
      Setting up (additional) bitcoin-payment on an existing or new site, requires no accounts to be opened, contracts to be signed, certificates signed, closed-sourced libraries to be integrated and so on. If “accepting bitcoin” is as easy as checking a checkbox on your average OpenSource e-commerce platform, people will consider that. Low-budget, small mom-and-pop online stores will be able to add a payment system, next to the creditcards and paypal, for (almost) free. A free, no-strings-attached benefit over your competitors, who does not want that?

      • 3.1.1
        Sten

        The question that remains to be answered is, how do these on-line stores settle sales tax and profit tax and how do they pay their employees salary settling the tax?

      • 3.1.2
        Stepehen Gornick

        Correct, bitcoin is agile money. For simple needs there are simple solutions. It took me just 8 seconds to help a friend get set up for accepting bitcoins — thanks to her having a smartphone and http://www.InstaWallet.org

      • 3.1.3
        Scary Devil Monastery

        On any “official” transaction – i.e. where a company is a legal entity and it is required for it to verifiably settle claims made by the authorities, then the company will have to show records of sales and wages paid – and thus pay taxes accordingly.

        The real hornet’s nest, as Rick describes in his earlier Bitcoin articles, is that there is no way for the government to know how much a private individual has in his Bitcoin wallet. Thus no ability to tax or even perceive any under-the-table transaction, Bitcoin “bartered” for services, or goods purchased from across the border.

        Assume a web developer sets up a homepage in a Tax haven and charges via that website. There is no way the tax authorities will even be able to tell what income he has, if any. If he does his spending the same way, likewise.

        And as Bitcoin transactions are by their very nature highly anonymous it can easily for the average consumer be set up in such a way that every citizen in effect carries his own tax haven around with him on an USB flash drive.

  4. 4

    All the other benefit mentioned above, were not left out because a lack of knowledge on BTC, Simply they did not fit into the contest. Not even the Author of this Article has reminded in this writing those benefit that you guys have mentioned above.

    This said, thanks for reminding us anyway.

    Left out on your comments, is an answer to my provocation :

    I mean, mining does not bring any sort of benefit for the individual. Therefore you need to buy using fiat money BTCs and at the end of the game someone needs to sell BTcs for fiat money. This is far from being an ecosystem that can survive outside today’s economy which is based on fiat money.

    Thanks.

  5. RT @falkvinge Bitcoin’s Four Drivers: Part 3 – Merchant Trade http://is.gd/plxYbO #bitcoin

  6. 5
    P

    I don’t defend the credit cards, it is just that they claim that the costs for the retailers of managing cash is of the same size as their transaction fees. It sounds like a PR-spin, has anyone fact checked this claim?

    • 5.1
      Stephen Gornick

      There are costs to cash and they are not insignificant. In addition to needing sufficient bill and coin inventory on hand to be able to make change, there is the labor costs for handling (e.g., counting and reconciling), security issues and exposure to crime.

      And even though the payment is received to the merchant “at par” (i.e., the merchant gets the entire 3.0 BTC of a 3.0 BTC payment) there are costs such as converting it to fiat for payments to suppliers, security risk, and exposure to crime.

      In the long run though, givne the three: cash, credit card or bitcoin it is likely that bitcoin will be the least expensive method — by an order of magnitude when at large scale.

    • 5.2

      This is true, at least the costs are in the same ballpark. The banks charge significant amounts for handling cash, which is a driver for credit cards in the first place.

    • 5.3
      Stoffe

      It’s true, but only because that banks charge fees for cash just like credit cards companies charge for processing their cards. It should come as no surprise that they have landed around the same cost and that none of them are making any moves to be more competitive than the other.

      This is not only due to malice/greed, of course, banks absolutely hate cash (and physical encounters of any kind) so they do also have the incentive to discourage cash by being at least as expensive as the competition. But it’s saying something about our economic systems that non-government entities can skim that much money of virtually all our transactions (and again and again). We also have to ask ourselves: do they really provide that much of a service? Not in any way denying that banks and card companies has done a lot for enabling me to buy and sell stuff, but is it really 5% worth of service?

  7. 6

    We all agree on this, I guess. BUt my discussing was addressed to something different which is how BTC ecosystem can be brought to life …….see this discussion just started if you like
    http://forum.bitcoin.org/index.php?topic=25691.0

  8. RT @falkvinge Bitcoin’s Four Drivers: Part 3 – Merchant Trade http://is.gd/plxYbO #bitcoin

  9. 7

    Shameless plug: https://bit-pay.com …we just announced this service (still in beta) yesterday. We’re trying to make it easy for merchants to begin accepting bitcoin.

  10. 8

    In new york there has been a couple brick and morter shops accepting bitcoin, surely enough for them to pay their bills they must trade our beloved currency to their native currency to pay the rent and other bills. I too see that bitcoin will trend towards mom and pops, however using bitcoin and the fact its decentralized, it will be hated by many.

  11. 9

    I think your estimates for VISA and MC revenues are too high. See:

    http://finance.yahoo.com/q/is?s=MA+Income+Statement&annual
    http://finance.yahoo.com/q/is?s=V+Income+Statement&annual

    So combined their yearly revenu is under 14 billion USD.

  12. [...] by bitcoin [link] [3 comments] Tweet This Post Monday, July 4th, 2011 [...]

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  14. 10
    noone

    “Now, of course, these gains are somewhat short-to-midterm. Competition on a functioning market will ensure that, once adoption is wide enough, profit margins will start to push down towards the five-percent norm again. Interestingly, this will make credit card purchases yet more uninteresting as they will make no profit at all — Bitcoin stands to effectively kill both Visa and MasterCard because of exactly this.”

    Yeah, like VISA and MasterCard — among the largest of financial companies on the planet — are going to sit on their butts, moaning “Oh no, what can we possibly do?”

    A far, FAR, more reasonable prediction is that _IF_ bitcoin becomes widespread, bitcoin’s processing power will be owned and operated by VISA or its equivalent.

    • 10.1
      Scary Devil Monastery

      “A far, FAR, more reasonable prediction is that _IF_ bitcoin becomes widespread, bitcoin’s processing power will be owned and operated by VISA or its equivalent.”

      Not likely. yes, VISA could very well try to become the biggest Bitcoin miner around…but you can assume as tacit fact that this isn’t going to happen. They won’t remodel their business to become the world’s biggest data park which they’d have to if Bitcoin becomes mainstream.
      Far more likely their initial response will be to lobby for blocking Bitcoin transactions (which will fail) and after that, frantically set up services allowing them to skip some Bitcoin every time the service is used.

      Otherwise if cryptocurrency becomes common, VISA is headed for the same graveyard where they buried the Blacksmith’s guild.

      • 10.1.1
        noone

        What planet do you live on?

        VISA and Mastercard and other financial companies _ARE_ some of the largest processing centers around today. Really, how do you think they are processing N-thousand transactions per second? On something comparable to a GPU you have in your basement?

        Get real. I mean, Get Farking Real dude! Open your eyes and look around.

        Furthermore, if VISA woke up tomorrow and perceived a risk to itself in bitcoin, it would begin hiring a team of engineers, and inside of a few weeks or a month, they would have the basic design ready for ASIC or even a fab (hint: bitcoin is a trivial design problem). In under six months they would be deploying hardware that would SQUISH the current bitcoin processing network. into complete insignificance.

        I would guess a net expenditure would under $100 million, and they would own about 90% of the power of the network. Probably way more, as the current processing base of bitcoin is GPU hardware running in the basement on Mom’s electric bill. Once these people start earning a miniscule fraction of the “usual” amount, they will give up. In droves. Go ahead, imagine a world where the bitcoin difficulty is 10, 20, 50, 100 million or larger.

        At this point, VISA has a choice:

        1) they can continue to use bitcoin for some profit purpose. Anything’s possible, I guess. I would imagine they would look into the far future and wonder about sustainability. A continuing pile of transactions that must be retained in perpetuity? Think never-decreasing-costs. This leads to:

        2) They can destroy the enemy by subverting the network. Read Nakamoto; the finest con’s are the ones where the mark is told in advance how they will lose … but the mark buys in anyways.

      • 10.1.2
        Scary Devil Monastery

        @noone

        “What planet do you live on?”

        The planet of reality. You DO realize that the world’s most powerful super computer complex today is, in fact, the distributed computing going on courtesy of “ordinary” users? (SETI@Home and Folding@home outperform any three of the world’s most massive computer farms many times over as long as the data they’re given to crunch can be broken into problems of manageable size)?

        If Bitcoin does take off VISA would have to invest in a computer park several times that which the massed resources of CERN,
        Processing N thousand financial transactions does not require a vast investment in processing power – VISA could run the actual calculations required for their business on a single server – and would have if they didn’t have the need for data repositories and intermediates.

        To compare i work for one of the world’s largest companies and the business of that company for the Nordic region can and is run on one single mid-sized server located in the UK.. The financial number crunching is, to put it in one word, not rocket science. A high-end GPU today has far more processing power than is needed to run the numbers for a rather massive company.

        Bitcoin calculation is another animal entirely. crunching large primes and real-time graphics calculation requires extraordinary CPU/GPU horsepower. So if you want a suitable candidate for who could become a major player in Bitcoin my advice would be to look at hollywood-based companies such as Industrial Light and Magic. and any other company requiring the use of supercomputers.

        “Get real. I mean, Get Farking Real dude! Open your eyes and look around.”

        I think I have a better idea of what VISA possesses in hardware than you do, that’s for certain. And you have (painfully obvious) little to no clue to what extent ten million consumers with high-end computers (or hacked PS3′s) trump any single company today when it comes to computer cycles.

        In order to invest heavily in hardware and maintenance any company needs to justify the cost. Monopolizing the Bitcoin market might be an incentive but that’s not a realistic option. At best VISA could be a major player which is a far cry from being, as they are now, one of the top three credit card providers in the world.

  15. 11

    This is the first post in this series in which I find myself in disagreement with you. It seems you have fallen prey to the same fallacy of reasoning that many bitcoin detractors do: Thinking of it as a credit transaction rather than as cash. Lumping all the credit card transactions on the planet with all the cash transaction is akin to adding all the commercial paper transactions and stock certificates to the world’s cash money supply. For the purposes of examining cash transactions, they simply can’t be mixed. They have different risks and respond to different economic pressures.

    Actually, they DO mix, but only in so much as a significant portion of those cash transactions are, in the 1st world anyway, processed as debit card transactions through the same commercial clearing houses as the credit card transactions. Therefore for those transactions, and for them alone, your observations about merchant service fees is correct. Your continued statement that bitcoin is free, however, is NOT accurate either: Bitcoin now, and for the foreseeable future, will have to be converted into the local fiat currency for the merchant to pay the businesses bills and to buy the materials or goods s/he sells. So long as that is true, every conversion transaction has a fee attached to it that is NOT insignificant. Also, it has already been mentioned by others elsewhere that as “mining” of bitcoins becomes less lucrative, the only way block chains will continue to be resolved and the system to therefore remain self-auditing is for each bitcoin transaction to have a processing fee added, very much like merchant service processors now do for debit card transactions. So again, bitcoin is not only not “free” if the merchant wants each transaction to be confirmed within a reasonable amount of time of the transaction occurring, it has, built in, the same costs as current card processing systems. It also has the added cost, and inconvenience, of the need for exchange. It’s sole advantage is that the processing fee may be significantly lower than the 1%-2% merchant service clearing houses charge. Or it may not, if it is discovered that escrow is necessary to protect merchants and customers. Escrow agents too will require a fee for their services. In the later case, it is easy to see how the cost to the merchant of accepting bitcoin could easily approach that of the local fiat currency.

    • 11.1
      Walter

      You are right that Rick is confusing credit with debit transactions. I can do all my purchases right now via my debit card and pay no fees. How is bitcoin going to improve on this?

      If bitcoin were to become a ‘real’ currency, credit card companies would quickly pile in and lend bitcoins via credit purchases just as they do now with real money. This would also result in the production of more notional bitcoins through the leveraging of the bitcoin base, something which bitcoin enthusiasts think is impossible, but isn’t. It happened under the gold standard and will happen with bitcoin if it catches on. The only way to prevent it would be through government regulation, and that’s supposed to be anathema to bitcoin fans.

      Lending at interest and the leveraging of the base money supply is a fact of life in a money-based economy, regardless of whether the currency used is the zloty, the shekel, the dollar, or the bitcoin.

  16. 12

    I think the estimates given here are way to high. The annual revenue for VISA and MC combined is under 14 billion USD. See:

    http://finance.yahoo.com/q/is?s=V+Income+Statement&annual
    http://finance.yahoo.com/q/is?s=MA+Income+Statement&annual

    • 12.1

      You are correct. However, the revenue for the clearinghouse in the US is not the same as the money needed for the transaction to take place.

      If 100 euros are in a transaction, and the clearinghouse takes 5%, then the clearinghouse has 5 euro in revenue. However, the 100 euro needed to exist to begin with for the transaction to take place.

      Therefore, assuming an average fee of 4%, you need to divide this number by 0.04, giving 350 billion.

      Then, that is in VISA and MasterCard only, not counting private label credit cards nor second-tier brands like Diner’s and Amex. Also, it is United States only.

      But I absolutely give you that my numbers are estimates based on fragmented data. I aim to hit an approximate ballpark.

    • 12.2

      You are correct. However, the revenue for the clearinghouse in the US is not the same as the money needed for the transaction to take place.

      If 100 euros are in a transaction, and the clearinghouse takes 5%, then the clearinghouse has 5 euro in revenue. However, the 100 euro needed to exist to begin with for the transaction to take place.

      Therefore, assuming an average fee of 4%, you need to divide this number by 0.04, giving 350 billion.

      Then, that is in VISA and MasterCard only, not counting private label credit cards nor second-tier brands like Diner’s and Amex. Also, it is United States only.

      But I absolutely give you that my numbers are estimates based on fragmented data. I aim to hit an approximate ballpark.

  17. 13
    Steven Mooij

    @Rick: I’d have expected a ‘political evangelist’ like you to at least mention the risks of Bitcoin not working at all or not being able to scale, when projecting it to a future with 10% of all credit card trade. What’s your position in Bitcoins?

    • 13.1

      That’s two questions.

      For the first — I will expand this series to a full SWOT analysis. I have done weaknesses (“hurdles”) and strengths (“drivers”), and will move on to opportunities and threats.

      For the second, my position in Bitcoin, I have been transparent with that: I have moved all my savings into the currency. I believe in this and I have gone all-in.

      • 13.1.1
        Steven Mooij

        Thanks for the reply. These answers didn’t really follow from the article, that on its own reads more like a Bitcoin advertisement.

        I’m going to read the ‘W’ of your SWOT…

  18. 14
    Walter

    Currencies with no intrinsic value derive their spending power from the fact that governments will accept the currency in payment of tax liabilities. Bitcoin will fail as a currency for that reason alone, i.e. no government, and certainly not the US government or any G7 government, will accept it in payment of taxes. Low transaction costs won’t change this basic fact.

    Bitcoin has no intrinsic value. And please spare me arguments that making it difficult to obtain them through grinding calculations gives them intrinsic value. Bitcoins are nothing but bits on a computer. I can’t eat them, I can’t use them as raw materials in manufacturing goods. They don’t even contain useful computer data like an app or an mp3 file.

    Bitcoin’s value right now is driven entirely by speculation according to the ‘greater fool’ theory of investment, i.e. people have been ‘mining’ them or buying them in the belief that some greater fool will come along and buy them at a higher price in the future. They do not pay dividends or represent ownership in anything of value. Bitcoin is speculation of the purest sort, an investment in nothing. Nothing worth buying is available for sale in bitcoin. I can’t use them at the grocery store, I can’t pay any of my bills with them, and my employer won’t pay me in bitcoin. They have only a novelty value as a currency. And the novelty is wearing off.

    Now that the early hype about bitcoin has passed it looks like the people who are likely to care about this currency already know about it. So what is the result? Bitcoin is doing a slow fade on the mtgox exchange. Every day it goes down a little bit more.

    I hope you find a greater fool in time, Rick.

    • 14.1
      Scary Devil Monastery

      “Bitcoins are nothing but bits on a computer. I can’t eat them, I can’t use them as raw materials in manufacturing goods. They don’t even contain useful computer data like an app or an mp3 file.”

      You just described every electronic transaction “backed” by “real cash”.
      Or for that matter every scrap of paper issued by a government mint. A simple decision made by a local government can effectively abolish or increase the amount of cash in your wallet or on your loan. Such decisions may possess all the rationále you would like but in the end it’s a fiat decision made by exterior forces.

      For the same reason your “net worth” in any currency fluctuates on a daily basis. If that’s your criticism regarding Bitcoin then that criticism holds equally true for any form of currency imaginable.

      And the driving force behind the vast majority of such currency fluctuations is and remains nothing more than speculation.

      What is needed for a currency to become established is one thing and one only – a big enough consumer base. That is the achilles heel of every currency in existence. Including Bitcoin.

      I agree that Bitcoin currently looks shaky and some reasons you provide are sound. But those reasons are just as appliable to any form of “real” fiscal transaction – from bonds to hard cash.

      • 14.1.1
        Walter

        Wow you didn’t even read the very first sentence of my post:

        Currencies with no intrinsic value derive their spending power from the fact that governments will accept the currency in payment of tax liabilities.

        I should say purchasing power rather than spending power. Bitcoin isn’t accepted by any government for the payment of tax liabilities. Thanks for playing, better luck next time.

      • 14.1.2
        Scary Devil Monastery

        “I should say purchasing power rather than spending power. Bitcoin isn’t accepted by any government for the payment of tax liabilities. Thanks for playing, better luck next time.”

        The Swedish government won’t accept USD to pay taxes with either. Your point being?

        If what you are in possesion of is Bitcoin, physical goods, USD or Yuan you can certainly cover your taxes with it as long as there is an exchange rate. That exchange rate is based almost entirely on supply and demand.

        Your argument assumes that if you live in sweden the only way you can pay your taxes is if all your income is in SEK.
        I suggest you think about what that would mean for any company with a local office.

        No, seriously, thank you very much for trying.

        Try giving some thought as to what a “currency” actually is according to basic market economy.

    • 14.2
      Mårten

      Walter, your say “Currencies with no intrinsic value derive their spending power from the fact that governments will accept the currency in payment of tax liabilities.”

      I think it’s more accurate to say they “derive SOME of their spending power”,,, It’s true requiring tax to be payed in a certain currency ensures there will be a certain demand, but that doesn’t mean there can’t be other drivers that creates a demand.

      In the end, it comes down to whether people accept bitcoins in return for other items, as long as they do (for whatever reason) there will be a demand for bitcoin,

      • 14.2.1
        Walter

        Requiring taxes to be paid in a certain currency creates demand for that currency by every single person who has income, sells retail goods, owns land, or has capital gains, i.e. EVERYBODY living in that country.

        You respond to that with the argument that bitcoin can be accepted as currency too ‘by whatever reason’. The onus is on you to tell me what that reason is. ‘By whatever reason’ is a cop-out.

        Taxation forces me to demand my local currency. I must get it to pay my taxes. I must have it just to buy everyday goods and services because they are often subject to a sales tax that I must pay in the local currency. If I own land but never buy or sell anything and don’t have income then I must find a way to get the local currency to pay my property taxes.

        Bitcoin, otoh, is not acceptable for payment of taxes anywhere on earth. I do not use bitcoin and I never will.

      • 14.2.2
        Mårten

        Yes, as I said, taxes create a demand, but other things can create demand as well.

        Gold is considered valuable, not because taxes are demanded to be paid with it. You might think gold has value “in itself” because the industry use it. But if we go back in history, aside from being used as currency, the only use for gold was as jewelry. Just like bitcoins, gold was a novelty (you couldn’t eat it or pay taxes with it, some people just thought it looked cool). That in itself didn’t justify the high value it later got. Why did people start using it as a currency? Probably because it was practical, it had properties that made it a good currency. Using it as a currency increases demand, demand increases value.

        Today bitcoins would be even more practical than gold.

        These “bitcoins four drivers” posts describe four things that might create additional demand for bitcoins. And there are lot of other reasons why people would want to use bitcoins mentioned elsewhere. If there is demand for something of limited supply, it becomes more valuable, and being valuable is one property of a good currency.

        You don’t have to use bitcoins if you don’t want to. But that won’t prevent others from doing it.

      • 14.2.3
        Scary Devil Monastery

        “Bitcoin, otoh, is not acceptable for payment of taxes anywhere on earth. I do not use bitcoin and I never will.”

        Neither are physical assets. But if you liquidate stock you can certainly pay taxes. If you convert USD to SEK you can pay your swedish taxes. If you convert bitcoin to USD you can certainly pay your taxes.

        Carrying a portfolio of bitcoin is no different than carrying a portfolio of BP stock or national stock bonds.

        A successful blogger today pays his/her taxes by converting eyeball time from visitors watching ads into hard cash.

        Your point simply isn’t valid. If it were we’d be sitting on a paradigm where the only tradeable commodity would be government-aproved currency – which just isn’t true.

  19. [...] It is regrettable that this article comes just in the aftermath of the MtGox suspension, as the momentum of the currency has been considerably shook up. However, new services continue to pop up at an accelerating rate. I am therefore confident that the current faith dip is quite temporary; there is so much present investment in Bitcoin. BITCOIN’S FOUR DRIVERS This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the fourth article, on investment. The others are unlawful trade, international trade, and merchant trade. [...]

  20. 15

    I find this switching to Bitcoin excuse of there being a 5% credit card processing charge a load of rubbish. I don’t think that reason suffices. I fail to see how the 5% is a barrier to entry, when countries worldwide charge VAT on things, so in all it makes everyone equal, unless new tax changes make small businesses bankrupt who can’t afford to lower their prices.

    Maybe I’m ignorant because I don’t know anything different. I’m from the UK, and not a place like Romania, that ensures that there aren’t any good legal jobs, as they squander public money on the mafia.

    No transaction fees is a benefit, but you can’t say that transaction fees are killing business. I fail to see how transaction fees are putting people off from starting a business.

    Yes Bitcoin is a good alternative for people who don’t like credit card fees, but the competitive advantages businesses get for accepting it, is a fad and won’t last for long.

    If we both setup offshore webhosts on the same date and invested $100,000 into the business, you accepted Bitcoin, and I accepted LibertyReserve; the difference in fees in handling transactions, wouldn’t be enough to give you an advantage over me in the long term.

    When the Bitcoin bubble bursts in the same way the dot com bubble did, because the market became populated, having the Bitcoin logo on your shopfront window won’t be a compeititive advantage any longer. When that happens, I guarantee you that more retail and online stores will go back to the mainstream way of Visa and Mastercard.

    Bitcoin’s nature is Ponzi Scheme 2.0, except that the investors don’t get scammed, just that the currency will devalue at some point in the future.

    Also, the credit card payment processors are not a stopgap to industry, they’re not a gatekeeper of money. I don’t see Visa making changes that dictate what businesses will be successful or not, like Google does. Apple makes 55% the revenue that Visa/Mastercard/Amex makes. Those payment processors don’t have oppresive regeims. And I’m sure that people use those payment processors for a reason besides transferring 0′s and 1′s over the internet as someone buys a coffee in Starbucks. Surely there’s some extra benefit they provide. Of course there is!

    These comments from Ars Technica will be useful
    =========
    nom3ramy wrote:
    They have the huge advantage of allowing people to make exchanges without corporate/government oversight/tracking/repressions.
    +Griz wrote:
    I fail to see how this is a “huge advantage” for anyone unless they’re selling drugs or child pornography, or laundering money for people selling such illegal goods.
    =========
    +Griz wrote:
    I find it hilarious how all these bullshit scams are popping up and suddenly the idiot libertarians who bought into this nonsense are finding out the hard way that anonymous untraceable transactions aren’t always a good thing.

    there’s also at least one casino thing that’s almost certainly a scam, and I think someone has actually created a site that supposedly lets you short sell bitcoins

    it’s like they’re running through the centuries-long process of discovering why currencies need regulations etc in just a few weeks.
    ===============
    http://arstechnica.com/tech-policy/news/2011/06/bitcoin-the-decentralized-virtual-currencyrisky-currency-500000-bitcoin-heist-raises-questions.ars?comments=1&start=160#comments-bar

    • 15.1
      Mårten

      I don’t think you or Griz are particularly well informed.

      You should think of bitcoins as digital cash that can be transfered directly between two persons over the Internet while the validity of the transaction will be ensured by the p2p network.

      Yes, it can be used for bad things like any other currency, but it’s arguably a lot less anonymous than real cash (everyone in the network have a list of every transaction ever made!) so a drug dealer, etc, using bitcoin and not normal cash isn’t particularly clever (although it’s smarter than using credit cards perhaps).

      “I fail to see how transaction fees are putting people off from starting a business.”
      Anything that cost money makes it harder it to become profitable which is necessary for any business to succeed. That should be obvious?

      Lets say it actually is a bubble as you claim, and it bursts, how would having the Bitcoin logo on your shopfront window be a disadvantage? you would still have attracted a lot of customers from the “fad” and if you don’t like it any more just remove it. (I’m not familiar with “liberty reserve”?)

      ———————–
      Here are a few other reasons normal people would want to use bitcoin:

      Bitcoin has the big advantage of being decentralised menaing there are no middle men that can intervene in a transaction or take large transaction fees. If you want to donate money to wikileaks, a central authority (like the US government) can’t stop individuals doing so by putting pressure on the middle men like they have done now.

      Bitcoin has a limited supply, you can’t inflate (“print” new bitcoins) like all governments with a fiat currency is doing, and when they do, they get richer and everyone else (who own their currency) get poorer. In that sense bitcoin is a lot safer.

      If you take proper precautions (this do require some computer skills at the moment though) bitcoins are safer to carry around than real cash (or gold etc) since you can encrypt it with a password and you can back it up. That’s two things you can’t do with traditional money. If you loose the USB stick with your bitcoin wallet, no worries, only you know the password and you can retrieve the wallet again from one of your backups. You can still loose it of course, if you are careless, but thats true for anything.

      Still, it’s a new idea and the encryption scheme might have weaknesses not discovered yet or something unexpected might happen that makes it less appealing and thereby less valuable.

      I would consider it a high risk investment, but not necessarily a bad one.

    • 15.2
      Scary Devil Monastery

      “Bitcoin’s nature is Ponzi Scheme 2.0, except that the investors don’t get scammed, just that the currency will devalue at some point in the future.”

      That might very well be the case. or it might not. Making a categorical statement about the future of bitcoin is as shaky as the predictions by the finest researchers and marketers at IBM when they predicted that the world’s demand for computers would be about half a dozen in total.

      Or that digital communication would be used only by major research institutions, the odd tech-geek and the military.

      Your assumption is that bitcoin will devalue in the future. Certainly. The same holds true for purchasing stock or for any other form of currency you want a portfolio in. If everyone woke up tomorrow morning and found gold to be an unattractive smelly metal with dire moral implications then the worth of gold would plummet rapidly. If no one wanted to do business in USD the dollar would become worthless.

      If bitcoin is ponzi 2.0 then that argument is equally valid for 99% of what we consider an “economy” as well.
      I’m not saying that argument isn’t valid. Just that it isn’t practical.

      • 15.2.1
        Walter

        The Swedish government won’t accept USD to pay taxes with either. Your point being?

        Now you’re just being stupid. Each national government forces its citizens to use its own official currency for taxes. That’s what gives each currency value.

        Yes one can convert bitcoins into the local currency to pay one’s taxes. Your point being? Who cares? I need the local currency and have to dump my bitcoins in order to pay taxes. I NEED the local currency to pay taxes. I DO NOT NEED bitcoin for anything. That’s how demand is created. That’s the point.

        I can guarantee you that I will never use a bitcoin in my life, and neither will 99.9% of the people on this planet.

      • 15.2.2
        Mårten

        “I can guarantee you that I will never use a bitcoin in my life, and neither will 99.9% of the people on this planet.”
        Umm, lets see, 7,000,000,000*(1−0.999)=7,000,000. I think even 7 million would be more than enough actually.

      • 15.2.3
        Scary Devil Monastery

        “Now you’re just being stupid. Each national government forces its citizens to use its own official currency for taxes. That’s what gives each currency value.”

        I fail to see where I’m being “stupid” when what you actually started out with was an argument which puts the USD in the same “bucket” as the Bitcoin. And that was the argument I countered.

        “Yes one can convert bitcoins into the local currency to pay one’s taxes. Your point being? Who cares?”

        Back up a few steps and read your own commentaries regarding “who cares”. It was basically the core of your argument that bitcoin couldn’t be used to pay taxes with. Neither can the USD, in Sweden. By your own argumentation that makes a USD worthless and something, to extrapolate from your further points on the matter, that 99% of the world’s population will never use it?

        Your personal opinions on bitcoin are, to be frank, irrelevant when what we are debating – or rather, the argument YOU started – was a comparison betwen bitcoin as a valid currency or a government-backed one.

        I’m not selling bitcoin and to be honest although I may toss some surplus cash into the currency for the novelty of it, I don’t intend to go down the Rick route of sinking all my stock in it. Not necessarily because I consider my stock portfolio a “safer investment” by any means but simply because I can’t be bothered to. My time is more gainfully invested elsewhere.

        “I DO NOT NEED bitcoin for anything”

        I don’t “need” a credit/debit card for anything either. But both I and the vast majority of the world’s population has recognized the inherent ease of use and time-savings inherent in electronic cash. What VISA and Mastercard actually do is to facilitate an exchange of bits of data which then translates into SEK, USD or Yuan according to an exchange table. In practice you already use a version of bitcoin whenever you make a transaction in any other currency than your local one. Buy any books or services priced in USD or Euro from Amazon.com or an online service lately?

        If you don’t like the currency, fine. When you say that 99% of the world never will you are, in fact, making a prediction of the same type as the one made by IBM concerning world computer use or by the US banks in the 1800′s.

        That you are guaranteeing what 99% of people on this planet will or will not do means you are either a financial prophet who should by rights be a multi-billionaire in a few years due to your unfailing predictions…or you are demonstrably making a total ass of yourself.

        You have powerful opinions on cryptocurrency, well, fine. But I’ll advice that your opinions would be better received if they were backed by fact and logic in lieu of merely snide comments.

        There is a lot of perfectly valid criticism of bitcoin, certainly. Where an “ordinary” currency has several key steps between the consumers and it’s “value” (banks, national banks, credit institutes and governments, etc) cryptocurrency is directly impacted by consumer faith in the same way a set article or physical product is. I.e. fluctuations aren’t mitigated by social inertia but will have a direct effect.

        Which means, for instance, that where a plain vanilla currency could fluctuate in worth between the extreme points of 50-200% within, say, 5 years or a decade, cryptocurrency could undergo the same fluctuation from one week to the next. And will do so until a critical mass of users is reached which allows for large-scale mitigation of effects.

        In effect what that means is that investing in bitcoin right now is much like investing in the currency of a small third world country which from what can be observed has been doing booming business lately.

        Currency speculators do this all the time, shuffling large amounts of money into local currencies in the hopes that the currency will gain strength after which the money can be exchanged back at a profit. This is a risky business but one which every major financial institute is already engaged in.

        Yes, bitcoin can fail. Cryptocurrency as a whole is harder to dismiss – we’ll end up with one or more versions eventually. Making a prediction that it will fail is today at best an assumption no more valid than trying to predict the exact weather a year from now.

  21. 16
    Walter

    @Scary Devil Monastery

    You really completely miss the point. Yes stocks and physical assets have value. But they have value because there is a demand for them. For some people that value is highly speculative but there still exists something called ‘fundamentals’ which give those assets an underlying intrinsic value. Stocks have value, for instance, because they represent ownership in companies that produce goods for sale that people want and find useful and will pay for.

    Bitcoin however has no underlying intrinsic value whatsoever. None. I think we both agree on this. My point was solely about ‘fiat currencies with no intrinsic value’. Not about stocks, retail goods, land, or anything else. I’m really getting tired of having to repeat that point but you insist on ignoring it. No it does not follow from my argument that nothing has value unless the government accepts it for payment of taxes. That is patently absurd and a total straw man. Try to think, for a change, instead of just embracing the bitcoin concept because you have a gripe against governments.

    • 16.1
      Mårten

      @Walter
      “Bitcoin however has no underlying intrinsic value whatsoever. None.”

      I think that is evidently false, You might not find them valuable but they must be valuable to some. if they weren’t people wouldn’t have been able to trade them and use them as currency. It requires some initial “intrinsic” value for that to happen.

      Even if the value was tiny and only because some people thinks crypto-money is cool, that is enough to creates a small demand and, since it’s a limited supply, value, For every other good out there that is the ONLY basis there is for their value, someone wants it for some arbitrary reason. Sure sometimes the incentive might be higher, like we all need food or we won’t survive, but people value a lot of other things (like gold) that isn’t strictly related to our survival, etc.

      People will use bitcoins for transactions as long as they are perceived as beneficial and secure.

      However if someone discovers a flaw in the bitcoin crypto protocol that makes them insecure people would abandon them, just as they would abandon dollars if anyone could easily steal or print them in their basement… and I don’t know enough to promise that won’t happen, but if it doesn’t I think bitcoins has a fair chance of succeeding. Not over night, but in the long term.

      • 16.1.1
        Walter

        They have no intrinsic value. Their value is purely speculative. You need to understand the difference. Intrinsic value doesn’t mean related to our survival. It includes more than that. You are just trying to make up your own definitions of words. You’ve become tedious.

      • 16.1.2
        Mårten

        Dear Walter,
        - “They have no intrinsic value.”
        Saying something doesn’t make it so. I tried to explain why I think it does, but you don’t seem to get it.
        - “Their value is purely speculative.”
        No, if it where true i would agree with you, but I don’t think it is. People are speculating in bitcoin, yes, and that influence its value, true, and it might be overpriced, indeed, but the same can be said of any currency.
        - “You need to understand the difference.”
        I think I do.
        - “Intrinsic value doesn’t mean related to our survival.”
        Precisely my point!
        - “It includes more than that. You are just trying to make up your own definitions of words.”
        No, but it is possible I have misunderstood some meaning of the word, English is not my primary language. By intrinsic I meant this:
        https://secure.wikimedia.org/wiktionary/en/wiki/intrinsic
        https://secure.wikimedia.org/wikipedia/en/wiki/Intrinsic
        - “You’ve become tedious.”
        oh no.

      • 16.1.3
        Mårten

        Dear Walter,
        - “They have no intrinsic value.”
        Saying something doesn’t make it so. I tried to explain why I think it does, but you don’t seem to get it.
        - “Their value is purely speculative.”
        No. If it where true i would agree with you, but I don’t think it is. People are speculating in bitcoin, yes, and that influence its value, true, and it might be overpriced, indeed, but the same can be said of any currency.
        - “You need to understand the difference.”
        I think I do.
        - “Intrinsic value doesn’t mean related to our survival.”
        That was precisely my point!
        - “It includes more than that. You are just trying to make up your own definitions of words.”
        No, but it is possible I have misunderstood some meaning of the word. English is not my primary language. By intrinsic I meant this:
        https://secure.wikimedia.org/wiktionary/en/wiki/intrinsic
        https://secure.wikimedia.org/wikipedia/en/wiki/Intrinsic
        - “You’ve become tedious.”
        oh no.

    • 16.2
      Scary Devil Monastery

      “Bitcoin however has no underlying intrinsic value whatsoever. None.”

      Neither does the dollar, if we want to be blunt about it. If you ask the US government what backs the dollar the basic premise is that you can exchange it for services worth, well, a dollar.

      “I’m really getting tired of having to repeat that point but you insist on ignoring it. “

      Because, to be blunt, you are running a circular argument here. Currencies are worth exactly what the majorty of the users claim it’s worth. If the major stakeholders flood the market with “free” dollars, the US goes into hyperinflation. For example, if China sells off all their US bonds at once.

      That doesn’t change the fact that inside the US a dollar is still worth…well, a dollar. Government backing does not guarantee value, nor does a government have much control over the real worth of it’s currency. This is determined by the faith the users of said currency hold in it.

      “Try to think, for a change, instead of just embracing the bitcoin concept because you have a gripe against governments.”

      I don’t recall tossing either governments or government-backed currencies overboard. For the record, I don’t own a single bitcoin. Nor have i invested in any other form of cryptocurrency. I may decide to buy one or two just for the hell of it sometime, but I am not a bitcoin advocate.

      I am pointing out that the risks of a cryptocurrency is, in fact shared with many of the other items the financial sector and people as a whole tacitly accept as currency or representative intermediaries.

      And that anyone who makes claims about what people will or will not commit to using ten-twenty years from now will most likely be wrong.

      There are certainly holes in Rick’s reasoning. But he’s dead right in many of them. A bitcoin is an IOU. All currencies are. Worst case that makes the bitcoin similar to the bad loans issued by Fannie Mae and Freddie Mac, the bonds of which were then exchanged between banks and the value of which collapsed the very second the general public lost faith in them.

      Note, however, that despite knowing that it’s a risky venture to “invest” in loans this still forms the basis for the majority of the US shadow economy even today, right after the 2009 crash.

      My standpoint is relatively simple – anything which you can use to purchase services or goods with is a de facto currency. After that the only question is how stable that currency is. My position is that bitcoin is far more stable than the vast majority of intermediates we use to transfer wealth with.

      I assume you’ve listened to the lamentations of Bernanke during 2009 and the analytics by bank managers who had to realize that 90% of the liquidity and net worth of the banks vanished into thin air as soon as public faith in their assets waned. Simply because both the banks and the government were, in fact, calculating their net worth on a basis of completely faith-based property values. In effect the dollar was (and still is) only a number on a piece of paper whose only relevance was in determining the “value” of the IOU. In order to not suffer a general collapse of both the dollar and the entire financial system the US government had to reinvest massively in private corporations using – dollars. Backed by nothing more than the pure faith of the consumers.

      Back in the 1800′s the only way to do this would have been to ensure the public that the banks could still hand out a gold or silver coin against the claim of a “dollar’s worth” of bills. Today that metal has been replaced by fiat which is to say, faith.

      It’s held as tacit fact that the majority of fiscal exchanges are already in fact not in “real” money but in various forms of IOU with a far more flimsy basis than cryptocurrency. As those IOU’s have a direct impact on the national currency that undermines the currency as well.

      I honestly don’t know where your unshakeable criticism comes from. Yes, bitcoin is shaky. So is any other currency and to be fair, in all practical effects a “currency” is any item, datapacket, coin or bill which can be xchanged between two people in exchange for a service or article.

      It’s also rather hard to argue with someone whose starting point is an flawed argument backed by an insult. It tends to set the trend for the rest of the debate in a very negative way. How about we agree to withhold the ad hominems and focus on constructive criticism? I’ll accede to the fact that cryptocurrency has many problems. The arguments you have provided so far otoh apply to almost any other form of currency conceivable.

      I’d focus on the problem issue by taking up verifiability, transparency and oversight instead if I were you. I’ll even provide a few venues for you to start with.

      1) A single computer user is, in general, a far softer target than a responsible bank. I’d be looking for trojan malware explicitly aimed at taking control over a user computer and specifically his bitcoin client.. The driver to create such malware will be vast, if cryptocurrency becomes widely accepted.

      2) Once someone is “robbed” of his bitcoin wallet there is in fact, due to the same anonymity and security Rick sets as one of the powerful drivers for bitcoin, no real way of getting it back. Bitcoin in that regard can be considered “money under the mattress” for all intents and purposes. Just that instead of a physical intrusion into your home it will be a black hat zombie master puppeting your computer.

      3) Scalability. I’m not sure in which of rick’s threads about bitcoin I found the oposition but there is, right now at least, an upper limit to how many nodes running bitcoin clients the average network can support. You may end up with a have/have-not situation entirely based on which region has sufficient IT infrastructure, worst case.

      4) Exchange rate. As I said earlier “normal” currency has a certain inertia which restricts and mitigates value fluctuation in any but the most extreme of cases. Cryptocurrency in the current model has no such mitigator and although you might set an average value on the bitcoin over the course of a year the net “worth” week by week may be very unpredictable. At the very least you need a user base large enough to mitigate those fluctuations. When Rick sank his savings into bitcoin the net worth actually shifted. With a small user base, anyone seen to invest in large chunks or divest himself of bitcoin will cause a visible market effect, without having to be Bill Gates to do so.

      5) Faith-based. Just like any other currency. If criticism number 1 and 2 go into effect people will not want to carry significant assets in bitcoin even though they might find it convenient for micro transactions. The same effect as in the run on the banks in the 20′s. Even though the currency might recover the actual exchange sites might well close up shop and thus stop exchange into alternative currencies until a new exchange opens.

      6) ANY number of scams or gray-area schemes in order to exploit the system. The aforementioned black hat zombie master could as easily task his botnet of overtaken computers with low-key bitcoin mining, converting other people’s CPU cycles into a dedicated bitcoin mining machine for his personal use. Any software company with more heavy-duty processing power than it requires could become a major player.
      And in small seedy basements in Calcutta and Hongkong people are going to hook up arrays of cheap PS3′s in order to crunch data and mine bitcoin.

      7) Lack of defenses. Any of the above and more we already know examples about in real life. MOST people have learned intrinsic common sense when it comes to protecting your atm card, the keys to your car, and not to hand over your account numbers to random (but “obviously” trustworthy) strangers. As soon as it concerns computers however, the vast majority of John/Jane Doe are basically completely clueless. Although they would dearly love to apply common sense in IT as well they just, frankly, have no idea that having a decent 3rd-party firewall and a blacklist of their own is the computer equivalent of possessing a decent door lock.

      I’m neither trying to sell you bitcoin nor persuade you it’s the golden future. I’m saying that predictions that “it will fail, fail, FAIL!!” is a decidedly premature conclusion.
      And that although there are good arguments against bitcoin I can’t see that the one’s you are raising aren’t equally valid for every “real” bill i have in my wallet as well.

  22. 17
    Walter

    Dear Mårten

    You just destroyed your own argument with that link to a definition of ‘intrinsic’. Bitcoin clearly has no intrinsic value according to that definition because value is not a property that is inherent or internal to bitcoin. Value is extrinsic to bitcoin and assigned to it only by speculators. Not that long ago it was ‘valued’ at zero. Then it was valued at about 32 USD. Today it is valued at about 14 USD. That’s not intrinsic value, my friend, that’s speculation.

    Yes I should have been more careful and said something like 99.9999999999 percent of all people will never use it. There’s certainly no chance that anywhere near 7 million people will use it. At full distribution (~21 million bitcoins) that would leave only 3 bitcoins per user. At $14 per coin that’s only $42 per user. The only way 7 million could possibly use this currency effectively is if it went up to about $50,000 per coin. I am absolutely certain that will NEVER happen. But that is what’s driving the speculation.

    • 17.1
      Mårten

      Now we might be getting somewhere. You are almost right, except when you say “Not that long ago it was ‘valued’ at zero”. Thats not true. Immediately after it was discovered some people where willing to invest computer hardware, time and electricity to “mine” them, just for fun. To those people bitcoins had at least some small initial value equal to what they where willing to spend to get hold of one. That initial value is what made it possible to start trade with them. Indeed the current value is in some part due to speculation (but the same is true for gold). It might be overpriced, I’m not trying to convince you to buy them.

      “At full distribution (~21 million bitcoins) that would leave only 3 bitcoins per user.”
      You can split bitcoins into smaller parts, the smallest is 0.00000001 i believe. From wikipedia: “To ensure sufficient granularity of the money supply, bitcoins are divisible down to eight decimal places (a total of 2.1 × 10^15 or 2.1 quadrillion units).” So owning only 3 bitcoins is not a problem. At $50,000 that means the smallest fraction is worth $0,0005. And you just made them sound a lot more appealing actually. ;)

      All I’m saying is, if the technology lives up to it’s promises (and again, I don’t know if it will) bitcoins could become a good transaction medium.

      • 17.1.1
        Walter

        Again you miss the point. The granularity of bitcoin isn’t the issue. The issue is that, no matter what the granularity, 1 bitcoin will still have to be worth about $50,000 for 7 million people to use them, while today bitcoin is worth about $14. There is simply no way bitcoin will ever be worth $50,000 each. That’s my point. Never going to happen.

        Secondly, for bitcoin to go from $14 to $50,000 would be massively deflationary. No one in their right mind would spend a bitcoin on anything if he honestly believed his $14 bitcoin will be worth $50,000 some day.

      • 17.1.2
        Mårten

        I agree with part of that. I would also be very surprised if bitcoins sold for $50,000 anytime soon, if anyone thought so with any certainty the prices wouldn’t be around $13 right now. But for your assumption to be valid bitcoins would first need massive adoption, I suspect that will take a long time. Over time prices should increase though, and that’s what the speculation is about (of course there is also the risk of bitcoins failing, keeping prices down).

        Your statement that they can’t become more valuable in the future simply because they are worth less today is completely false as has been shown innumerable times in history!

        What do you think the first diamond was worth? Dimonds are neither particularly rare nor have any special use. There are cheaper gems with “better” refractive properties. Diamonds main function is as a display of wealth and they only serve to make the (often highly immoral) people monopolizing the production richer. Yet they are worth a fortune. It would make a whole lot more sense for bitcoins to become valuable.

  23. 18
    Walter

    @Scary Devil Monastery

    Credit cards = a typical example of a straw man argument from you.

    I said absolutely nothing about needing credit cards. I was talking about the need for local currency, whatever your local currency happens to be. Taxation means you need currency, not credit cards. By bringing credit cards into it you show that you are either dishonest or muddle headed. Which is it?

  24. 19
    Scary Devil Monastery

    “By bringing credit cards into it you show that you are either dishonest or muddle headed. Which is it?”

    Neither. Rather the one failing to pursue his own logic would be you. Both the need for local currency in ordinary consumption and for taxation, a credit card does, in effect, fulfill every criteria you care to name. The straw man argument is where you start out with one argument, have it thrown over, then go right back and claim I was the one who put it up in the first place. Read what you actually wrote yourself before you start assigning “straw men” to my account.

    You can any type of liquid asset as the basis for taxation – bitcoin, credit/debit card accounts, foreign currencies – as well as physical assets.

    And you can pay your taxes with it once you convert to local currency. If the medium you possess can be converted into local currency one way or another you can use it to pay taxes. Your specific example was particularly poor::

    “Taxation means you need currency, not credit cards.”
    This may come as news to you but you can use a credit/debit card to pay your taxes. A lot of people do just that. The card is simply an intermediary to your local physical bills and coins…just like bitcoin in that regard. Or any other type of foreign currency used for direct debiting. You can store your entire savings in an american bank in the form of USD and still use a bank transaction by way of your credit card to pay your swedish taxes so…

    This is the counterpoint to your central argument – that bitcoin is inherently “worthless”. Well, but so is a picasso. No goods or currency has any other real value but that “assigned” to it by the users making the exchange.

    You also either don’t realize or are trying to muddle the issue – any medium used as currency establishes it’s real-world value in the moment where it is used in any sort of transaction. This is how currencies fluctuate, after all. Now think it through.

    Cryptocurrency will have value for as long as people are willing to exchange it to something else – services, goods, or other currencies (derived value). In order for cryptocurrency to achieve such value all you really need is a critical mass on how many users there are.

    “Yes I should have been more careful and said something like 99.9999999999 percent of all people will never use it. “

    Again with the die-hard ultrapositive statements! You are either on top of a working crystal ball – or you lack some rather fundamental understanding of just how well even the most flimsy of “currencies” thrive in the modern market. In Wall Street the potential futures of hedged bets on whether a bad loan will default or come through is a billion dollar market which ought to tell you something. Much of the modern economy today is based on papers which are more flimsy by far, with no guarantees beyond a rubber stamp added by seedy shadow banks.
    In the 1800′s stamps were used as a fiat currency in many places held for better value than the government issue currency.

    Every last argument you’ve used so far is based on purely personal opinion in direct contradiction to historical fact, or even what we TODAY use as exchanges or as a basis of wealth.

    If you wanted to criticize cryptocurrency I provided some REAL hazards in a comment above – but the ones you’ve proposed so far just don’t cut it as what your arguments really mean is that our modern economy is doomed to fail as no one would be using anything other than gold coins, bills or government bonds to barter with.

    The real world already doesn’t look like you describe it.

    • 19.1
      Walter

      Utter rubbish.

      • 19.1.1
        Scary Devil Monastery

        “Utter rubbish.”

        Another entirely personal opinion. Though I must applaud you for writing the very first intellectually honest commentary yet on the thread.

        Oh, and by the way I’m sure most economists would be interested in hearing you develop how their daily work is “Utter rubbish”. You should send your comments in to a few financial gazetteers along with your predictions. Be warned you may end up in the entertainment section. :)

      • 19.1.2
        Scary Devil Monastery

        Edit:
        “Though I must applaud you for writing the very first intellectually honest commentary yet on the thread.”

        Should of course be “…your very first intellectually honest…”

  25. 20
    moore

    i have read several references on yahoo and also suffered the internet
    for loans and have come to realize that it all accumulated to nothing
    as i was been scammed or been turned down, but after all that i went
    through i tried one more reference on yahoo by Mr Thomasson levers
    about ENGLISH WORLD LOANS and they turned out to give me the loan i
    had wanted all along. The moral of my reference here is not only for
    you to contact them, but to also know that there is a God up in heaven
    that atches us even in the deepest of our problems, so the bottom line
    is contact the above named company and your story will turn too.
    the email is [email protected]

  26. [...] reasonable enough number to be in the right ballpark. Based on my four earlier estimates (one, two, three, four), I think it is reasonable that bitcoin captures a 1% to 10% market share of this [...]

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