Bitcoin Mining for Fun and Profit

[HB Reader]

Dwolla has been down all day.  I wonder if that is related to a record number of transanctions to/from Mt. Gox?

Yeah, I noticed it was down early this afternoon.  It could be all the traffic.  It also looks like the bitcoin price took a pretty good dip this afternoon.

[moda0306]

I've googled bitcoin and lazily scanned this thread, and I still can't find it, but can someone tell me what underlies the value of bitcoin?  Is it redeemable for dollars, gold, or valuable in and of itself in some way? 

I really don't understand this at all.

[Pointedstick]

I've googled bitcoin and lazily scanned this thread, and I still can't find it, but can someone tell me what underlies the value of bitcoin?  Is it redeemable for dollars, gold, or valuable in and of itself in some way? 

I really don't understand this at all.

They're a lot like dollars: worthless on their own, but useful as a medium of exchange or for speculation (a lot more useful for speculation, it turns out ). You can trade them for all major currencies and buy many products with them. The algorithmic limit of 21 million of them ensures that some measure of deflation is built-in and IMHO is causing it to act like a speculative commodity more than a currency.

[moda0306]

I've googled bitcoin and lazily scanned this thread, and I still can't find it, but can someone tell me what underlies the value of bitcoin?  Is it redeemable for dollars, gold, or valuable in and of itself in some way? 

I really don't understand this at all.

They're a lot like dollars: worthless on their own, but useful as a medium of exchange or for speculation (a lot more useful for speculation, it turns out ). You can trade them for all major currencies and buy many products with them. The algorithmic limit of 21 million of them ensures that some measure of deflation is built-in and IMHO is causing it to act like a speculative commodity more than a currency.

Except dollars have the backing of our government, which requires us to pay taxes in them.  Limited supply is nice and all, but a limited supply of something non-counterfeitable doesn't make a currency on its own. There has to be some underlying value there.

Was their some guarantee by the inventor of bitcoin that it be exchangeable for other currencies to get it to gain tractioon, or did it some how poof into value simply due to its non-expanding nature and non-counterfeitability?

[Pointedstick]

Except dollars have the backing of our government, which requires us to pay taxes in them.  Limited supply is nice and all, but a limited supply of something non-counterfeitable doesn't make a currency on its own. There has to be some underlying value there.

Was their some guarantee by the inventor of bitcoin that it be exchangeable for other currencies to get it to gain tractioon, or did it some how poof into value simply due to its non-expanding nature and non-counterfeitability?

If the U.S. government stopped requiring payment of taxes in dollars, I'm going to hazard a guess that most Americans would still use them. IMHO the "efficient medium of exchange" part of an existing or aspiring currency is much more important than "must have some underlying value". Dollars have no underlying value. Being forced to pay your taxes in them is not value, it's a threat of violence. Bitcoin supporters point to the solutions to hard cryptographic problems as the underlying value but I don't buy it since that's a good for which there's no real demand outside of the Bitcoin system itself. There is no use value. It's all exchange value--just like every other fiat currency.

And as a medium of exchange, Bitcoin exhibits a variety of positive traits. Bitcoins are incredibly easy to transfer, for example. Electronically transferring dollars is hard and requires banks, wire transfers, ACH transactions, long settlement periods, you name it. Bitcoins can be received instantly and settle in 10 minutes. Bitcoin also has basic anonymity built in. Anyone can create new payment addresses at will, none of which are tied to a physical address or individual user anywhere.

The big flaw so far is that the deflation has been too strong. Bitcoins are going up in value so fast that the economy is being driven by speculation. It's too unstable to be a currency at the moment. Time will tell if it levels off, or retains its volatility.

[stone]

I saw a TV program about mobile phone talk time credits being the predominant medium of exchange for many people in Kenya. The sent talk time credits to each other by SMS. Every market stall would redeem such credits for actual legal tender cash if you wanted.  They only used the system because no financial services were available for poor people such as them. At least phone credits have some real value. What is more the value is rooted to the monetarily stable value of talk time credit; as such it isn't volatile. That is a true medium of exchange system rather than being a speculative pyramid selling arrangement. I suppose the phone company gets a windfall though.

[moda0306]

PS,

I agree with that assertion, but there is still at least some mechanism, beyond our underlying production, that gives dollars, specifically, a store of value over time.  It's the drain at the bottom of the pool that causes us to know we value filling it.  Alternatively, if we significantly increased taxes, most Americans would hoard dollars more to pay those taxes (though since our taxes are based on income, they have a natural counter-cyclicality built in... this probably applies more to some sort of "flat tax" system that isn't counter-cyclical to income).

Most fiat currencies are backed by government recognition, taxes, and the fact the government at least does some things that the public values and facilitates production.  I know what happens if I don't have dollars.  Bitcoins, on the other hand...

I'm curious how this system came to value at all. Seems to me that if something can't function as some sort of store of value (even if it's a "get out of jail free card" like the U.S. dollar), that it's going to be tough to develop as a medium of exchange.

I'm almost thinking this is maybe the computer geek equivalent of gold in the eyes of people who like jewelry for no other reason, mostly, than its rarity.  In the book "Influence: The Psychology of Persuasion," the author points out how many stupid, stupid things people do in the face of scarcity, or supposed scarcity.  Maybe, as I write this, I'm starting to understand why it has value.

If anything, this is an extremely interesting social experiment.

[stone]

Remember cowrie shells were used as money. http://en.wikipedia.org/wiki/Shell_money

.In western Africa, shell money was usual legal tender up until the mid 19th century. Before the abolition of the slave trade, large shipments of cowry shells were sent to some of the English ports for reshipment to the slave coast. It was also common in West Central Africa as the currency of the Kingdom of Kongo called locally nzimbu.
As the value of the cowry was much greater in West Africa than in the regions from which the supply was obtained, the trade was extremely lucrative. In some cases the gains are said to have been 500%. The use of the cowry currency gradually spread inland in Africa. By about 1850 Heinrich Barth found it fairly widespread in Kano, Kuka, Gando, and even Timbuktu. Barth relates that in Muniyoma, one of the ancient divisions of Bornu, the king's revenue was estimated at 30,000,000 shells, with every adult male being required to pay annually 1000 shells for himself, 1000 for every pack-ox, and 2000 for every slave in his possession.
In the countries on the coast, the shells were fastened together in strings of 40 or 100 each, so that fifty or twenty strings represented a dollar; but in the interior they were laboriously counted one by one, or, if the trader were expert, five by five. The districts mentioned above received their supply of kurdi, as they were called, from the west coast; but the regions to the north of Unyamwezi, where they were in use under the name of simbi, were dependent on Muslim traders from Zanzibar. The shells were used in the remoter parts of Africa until the early 20th century, but then gave way to modern currencies.
The shell of the large land snail, Achatina monetaria, cut into circles with an open center was also used as coin in Benguella, Portuguese West Africa.

In front of me now on the wall is a Nigerian wooden carving covered in Colonial copper coins together with cowrie shells .

[stone]

every adult male being required to pay annually 1000 shells for himself, 1000 for every pack-ox, and 2000 for every slave in his possession.

the pack-ox and slave part would be an asset tax 

[MachineGhost]

The big flaw so far is that the deflation has been too strong. Bitcoins are going up in value so fast that the economy is being driven by speculation. It's too unstable to be a currency at the moment. Time will tell if it levels off, or retains its volatility.

Yep, deflation causes hoarding and the manic rush to hoard causes price bubbles.  I don't believe Bitcoins can exist long-term as a workable currency any more than the various gold standards could, but Freicoins gets no respect.  We'll have to see if Bitcoins participants mature after some colossal crash and realize the advantage of Freicoins which is essentially non-state, electronic, decentralized, fraud-proof, semi-anonymous, exchangable fiat money with a built-in (wait for it...) asset tax.

[stone]

I think the big thing will be what gets used for global commodity trading. The Chinese are trying to sort-out/mess-up the use of USD for that. http://www.euroasiaforum.org/gscs2013/default.asp

Long term, I agree with MachineGhost that the demurrage aspect of Freicoins gives those much more hope than bitcoins. Bitcoins will just get sat on and concentrated to ride the deflation until it becomes apparent that they are never going to be widely enough distributed to work as currency and then they will vanish in a puff of hyperinflation.

[Libertarian666]

PS,

I agree with that assertion, but there is still at least some mechanism, beyond our underlying production, that gives dollars, specifically, a store of value over time.  It's the drain at the bottom of the pool that causes us to know we value filling it.  Alternatively, if we significantly increased taxes, most Americans would hoard dollars more to pay those taxes (though since our taxes are based on income, they have a natural counter-cyclicality built in... this probably applies more to some sort of "flat tax" system that isn't counter-cyclical to income).

Most fiat currencies are backed by government recognition, taxes, and the fact the government at least does some things that the public values and facilitates production.  I know what happens if I don't have dollars.  Bitcoins, on the other hand...

I'm curious how this system came to value at all. Seems to me that if something can't function as some sort of store of value (even if it's a "get out of jail free card" like the U.S. dollar), that it's going to be tough to develop as a medium of exchange.

I'm almost thinking this is maybe the computer geek equivalent of gold in the eyes of people who like jewelry for no other reason, mostly, than its rarity.  In the book "Influence: The Psychology of Persuasion," the author points out how many stupid, stupid things people do in the face of scarcity, or supposed scarcity.  Maybe, as I write this, I'm starting to understand why it has value.

If anything, this is an extremely interesting social experiment.

It really isn't hard to understand how bitcoins came to have a value, however temporarily.

Just think "electronic Beanie Babies", and everything will become clear.

[Libertarian666]

I think the big thing will be what gets used for global commodity trading. The Chinese are trying to sort-out/mess-up the use of USD for that. http://www.euroasiaforum.org/gscs2013/default.asp

Long term, I agree with MachineGhost that the demurrage aspect of Freicoins gives those much more hope than bitcoins. Bitcoins will just get sat on and concentrated to ride the deflation until it becomes apparent that they are never going to be widely enough distributed to work as currency and then they will vanish in a puff of hyperinflation.

The next reserve currency, most widely used for trade, will be a freely redeemable gold-standard Chinese currency.

You read it here first.

[Storm]

I'm out at $89.50 for a ~5000% profit.  Now I have to wait until Mt. Gox stops thinking I'm a money launderer and lets me transfer the money to Dwolla.  I also probably have to transfer only about $4,000 a day so that I don't set off any warning bells with the banks or the feds...

This has been a fun ride, but I think it's a little overblown at the moment.  I will either invest more money when it collapses or I'll just kick myself if it goes to $100,000 a bitcoin because I lost my chance to be rich!

[MachineGhost]

I think the bagholders are going to be the exchangers themselves.

[dualstow]

...or I'll just kick myself if it goes to $100,000 a bitcoin because I lost my chance to be rich!

I think the $100,000 ones will be called bytecoins.

[MachineGhost]

I'm out at $89.50 for a ~5000% profit.  Now I have to wait until Mt. Gox stops thinking I'm a money launderer and lets me transfer the money to Dwolla.  I also probably have to transfer only about $4,000 a day so that I don't set off any warning bells with the banks or the feds...

The limit is $1K a day, $10K per 30 days.  Tough cookies.

Remember, it ain't real money until you have FRN's in your cold, dead hands.

They sure taking their sweet ass time validating my dwolla account.  I just added it again but this time with the Yubikey.

[HB Reader]

I'm out at $89.50 for a ~5000% profit.  Now I have to wait until Mt. Gox stops thinking I'm a money launderer and lets me transfer the money to Dwolla.  I also probably have to transfer only about $4,000 a day so that I don't set off any warning bells with the banks or the feds...

The limit is $1K a day, $10K per 30 days.  Tough cookies.

Remember, it ain't real money until you have FRN's in your cold, dead hands.

They sure taking their sweet ass time validating my dwolla account.  I just added it again but this time with the Yubikey.

Yes, I had to withdraw my money at $1000 per day to Dwolla.  It was kind of a pain, but it worked.

[AgAuMoney]

I think the bagholders are going to be the exchangers themselves.

Most of them are just providing a market for people to exchange amongst themselves and taking a cut when it happens.  Hard to see how they'll be hurt too badly.

[Storm]

I think the bagholders are going to be the exchangers themselves.

Most of them are just providing a market for people to exchange amongst themselves and taking a cut when it happens.  Hard to see how they'll be hurt too badly.

Right, my guess is that the exchanges are making out like bandits with all of the volume.  It's also very easy to transfer Bitcoin and USD in, and very difficult to transfer it out due to the $1,000 a day limit, so they get to float all the money in a money market account.  Also, MtGox was hacked before so I believe they take security more seriously now, and only keep a small amount of actual Bitcoin in their online wallet.  The vast majority of the Bitcoin would be kept in an offline only wallet.

[flyingpylon]

Interesting post on Bitcoin by Karl Denninger:

http://market-ticker.org/akcs-www?post=219284

I think someone here called him "the angriest man on the Internet" a while back... too funny.

[MachineGhost]

Most of them are just providing a market for people to exchange amongst themselves and taking a cut when it happens.  Hard to see how they'll be hurt too badly.

They have to hoard Bitcoins to be able to have a ready supply on hand for exchanging into other currencies that client's want.  If they did not, they couldn't do any exchange transanctions because Bitcoins are not created on demand or are unlimited in quantity.  It's every man for himself after the diminishing supply that is available.

Hey, that's exactly what went wrong with the gold standards!

[Storm]

It hit $105 today - how high can it go?  Since I sold mine early, that's a pretty good counter indicator and you should probably buy now... 

[MachineGhost]

It hit $105 today - how high can it go?  Since I sold mine early, that's a pretty good counter indicator and you should probably buy now... 

Better to get out while there is liquidity.  Lack of buyers makes it hard to sell on the way down.  Although technically I guess that is the exchanger's risk to take.  Sucks to be them!

[Storm]

$147 - this looks like the blow off top, but it's really hard to tell.  There is almost no supply, and the next wall of asks is at $150...