# Bitcoin - a new kind of currency

#### IlyaKEightSix

Hell no. Here's an anecdotal tale: a game I once played called Diablo 2, once had a forum that provided its own fiat currency to try and have some measure of currency in the game called "forum gold". Know a way people got it? Bought it.

The reason that the dollar, or any other fiat money, has value, is that it has the backing of being recognized by the people and the government. Furthermore, the reason the dollar in particular has value is that it is also the world's reserve currency (though given the imbeciles in office, I do wonder for how much longer). A) this is not an adopted currency B) who the heck is it regulated by?

Aka how the heck am I supposed to keep my holdings from becoming worthless overnight?

If it can't address that, it's a fail currency.

#### TBeas

I am actively involved with bitcoins. We mine them, but are going to start trading them once mining becomes unprofitable. We are doing it as more of a hobby, and we realize it could crash at any moment, so we keep most of our holdings in USD. I am also using it as an opportunity to learn how to develop and test an automated trading bot.

I do not think BTC will take over the world or even last all that long, but we are going to profit off of this as long as we can.

#### Peter-Jan

Let me respond to a few bitcoin criticisms in this thread.

Unlike "forum gold" and Flooz, bitcoin is backed by mathematics. Technically a bitcoin is an encrypted solution to a problem which required a lot of computing power to solve. The "mining alghorithm" for bitcoin is set up to resemble physical gold mining: You spend resources digging for gold, you find it at random personal intervals but at a predictable system wide rate (currently 7200 new bitcoins daily). The amount of miners determine the total hashing power in the network and thus the difficulty in finding new bitcoins. Depending on whether you are bullish or bearish on bitcoin, you are better off buying bitcoins or mining bitcoins respectively.

I'm really bullish on Bitcoin - which is why I'm building a new secure exchange for it.

By the way, the spreads are still huge and there is a huge opportunity for arbitrage between exchanges. Trade volumes are currently about 1 million USD daily across all bitcoin exchanges with average fees of 1%. If any of you quants are interested in tapping into the arbitrage opportunity let me know - I will hook you up with a partner account with discounted commission rates.

Edit: Here's an intro video from www.weusecoins.com:

#### IlyaKEightSix

LOL! A bitcoin shill! Seriously? Wow. Too funny.

"Backed by mathematics..."

You realize you're on a quant forum, right?

Am I the only one shaking my head and laughing at the same time?

#### TRobinson

If the quantity of bitcoins approaches a limiting sum of 21 million and the only thing preventing an attack are the computations of miners, isn't the algorithm flawed to begin with? An exponential decay in the average reward for successfully cracking a block would lead to a similar decay in the number of people willing to mine for bitcoins as the effort:reward ratio becomes more and more ridiculous. Without the miners, it becomes easier and easier for people to exploit the system; allowing them to double spend and run negative balances etc.

Forgive me if I missed something during my 20 minutes of extensive research.

a game I once played called Diablo 2

RESPECT!

#### Peter-Jan

If the quantity of bitcoins approaches a limiting sum of 21 million and the only thing preventing an attack are the computations of miners, isn't the algorithm flawed to begin with? An exponential decay in the average reward for successfully cracking a block would lead to a similar decay in the number of people willing to mine for bitcoins as the effort:reward ratio becomes more and more ridiculous. Without the miners, it becomes easier and easier for people to exploit the system; allowing them to double spend and run negative balances etc.

Forgive me if I missed something during my 20 minutes of extensive research

You don't account for price changes. If total hashing power increases, mining becomes more expensive. Prices will have to go up to make mining still profitable. In practice servers are mostly a "sunk cost" (certainly at this point where a lot of hobby mining occurs) so when prices fall too low most miners simply keep the btc. It will be interesting to see how market demand, mining capacity and prices evolve.

The dynamics you describe also occur in the gold market. Mining of gold is much more expensive than it used to be - all the low hanging fruit has been mined long time ago. This doesn't make gold any less of a store of value - to the contrary, this feature is a key requirement.

#### TRobinson

You don't account for price changes. If total hashing power increases, mining becomes more expensive. Prices will have to go up to make mining still profitable. In practice servers are mostly a "sunk cost" (certainly at this point where a lot of hobby mining occurs) so when prices fall too low most miners simply keep the btc. It will be interesting to see how market demand, mining capacity and prices evolve.
Isn't that relying on the premise that the positive change in demand must always be >= the negative change in the average reward for mining? Otherwise a point will be reached where the demand for bitcoins is not great enough to force an appreciation and maintain the incentive for miners. Which would, again, result in the integrity of the whole system being jeopardised. I am still just working with the idea that the computations are the only things affecting the robustness of the system's security.

The dynamics you describe also occur in the gold market. Mining of gold is much more expensive than it used to be - all the low hanging fruit has been mined long time ago. This doesn't make gold any less of a store of value - to the contrary, this feature is a key requirement.
It's hard to compare gold here as it is a commodity with industrial applicaitons, i.e., its value does not rely entirely on its usefulness as a store of value or medium of exchange.

#### Peter-Jan

1. To get Bitcoin of the ground you are right there is the "catch 22" as you describe between miners being needed for giving btc value, and value being needed for miners to get an incentive. However, judging by Bitcoin's history, the long term trend is up for both. The only times hashing power decreases is right after the predetermined intervals after which the btc output per day drops (so normal behavior). The reason for this adoption is IMO it's usefulness as a store and exchange of value. See next point.

2. Gold was money long before engineers found industrial applications for it - heck, long before something called "industry" existed. Gold as money relied historically entirely on its physical attributes that made it ideal for exchange of value (you can melt it, it doesn't corrode, supply is quite constant, etc). Bitcoin copies those features and adds the technological possibilities.

Also note that this hashing network is already 13 Terahash / sec, quite an impressive amount of computing power. The idea that just copying Bitcoin and "starting again" would work is highly unlikely due to network effects.

#### TBeas

Bitcoins are very much treated as commodities more than anything else right now. I don't think more than like 2% of the users actually think it is a viable currency.

My friend and I were discussing why the price dipped and then stuck around $14, and we think it is because it is too much hassle to deposit/withdraw funds. We don't think it is entirely a coincidence that prices were higher when it was possible to use Paypal to transfer money. And yes the Bitcoin network is very large (166 PFLOP/s). Tons of computing power being thrown into this.$100m worth of BTC floating around, I'm just trying to get my piece.

#### Peter-Jan

There is the Dwolla scandal going on right now (they did chargebacks while claiming they never do) and the two largest exchanges are facing huge losses as a direct result of this.

Another day of fun in the bitcoin universe. It's like the Paypal wars all over again.

My friend and I were discussing why the price dipped and then stuck around $14, and we think it is because it is too much hassle to deposit/withdraw funds. We don't think it is entirely a coincidence that prices were higher when it was possible to use Paypal to transfer money. I agree with this. Which is why I also foresee in my business plan that governments will hunt down exchanges if they want to stop Bitcoin. Most likely though it won't come to that and we'll see them playing the chargeback game with payment provider after payment provider with always new ones popping up. #### Andy Nguyen$100m worth of BTC floating around, I'm just trying to get my piece.
How is your ROI so far? All the low hanging fruits have been picked clean and the return is not as attractive as before, I guess?

#### Peter-Jan

Andy, if you want to know how much different the prices are per exchange, see http://www.bitcoinwatch.com/

Keep in mind that some of those exchanges are really amateuristic making them unsuitable for arbitrage alghoritms, but those listed at the top of the list are best ones.

As you can see there's still a lot of potential for arbitrage, and as I said before I can give QN an account with discounted commissions if you want. We plan to have the lowest commissions anyway and access to the lowest commissions obviously means access to the most arbitrage opportunities for a given spread, you know that better than I do.

#### Andy Nguyen

I'm a bit skeptical after what happened to the online poker system recently. People build up tremendous virtual wealth that is locked up in the form of online currency and when the gov decide that it's illegal, people no longer can cash out.
At the end, if you are not in the USA, that may mean little to you as the laws do not apply.

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