Bitcoin

[choff]

Lately I've been watching way too much Max Keiser, he looks sort of like Howdie Doodie on speed, and he keeps pushing Bitcoin. From what I can see, this is nothing more than a digital certificate with a transaction block attached, but since Cyprus it's gone from under $50.00 to pushing $150.00. So what do other people think, Ponzi scheme or take down for fiat currency? Should I rush out and buy one, or is it too late and time to grab some Litecoins instead, are gold bugs dumping gold for Bitcoin, will people use Bitcoins to buy up silver, is it any crazier than Credit Default Swaps, and will the Feds crack down and ban it before sovereign currencies are displaced?

[choff]

Actually Charlie McCarthy, got my dummies mixed up.

[kcdodd]

I'm highly skeptical of it.

[ladajo]

Ponzi Pyramid.

[hanelyp]

Bitcoin is apparently dependent on exchanges, implemented as peer to peer networks, to validate who owns which bitcoin or fraction thereof. Since bitcoin owners are identified by public keys, any successful attack of said keys could take over a bitcoin account. The ease of breaking a cryptographic public key gets easier over time as more powerful computers become available.

[necoras]

Full disclosure: I have a few bitcoins from a few years back when I was mining them (mining is done by the network and is how new coins are generated along with creating new blocks. There's more information publicly available on the official wiki).

Now, onto the wall of text.

Bitcoin is apparently dependent on exchanges, implemented as peer to peer networks, to validate who owns which bitcoin or fraction thereof. Since bitcoin owners are identified by public keys, any successful attack of said keys could take over a bitcoin account. The ease of breaking a cryptographic public key gets easier over time as more powerful computers become available.

This is incorrect. Bitcoin itself is completely peer to peer. A transaction takes place between two wallets, both of which have one to many long string identifier addresses. You can use the same address repeatedly, or generate a new one for every transaction. That transaction is then published to every machine in the network, integrated into a "block" of transactions, and then added into the global "block chain." Every computer in the network has a copy of the block chain. No one computer can make up transactions because the rest of the network won't confirm a transaction that isn't valid. I don't know the cryptographic details of what makes a transaction valid, but it would require control of 51% of the network to make it work, because you have to convince more than half of the network that the transactions in a block are valid for it to be added to a block chain. (This actually caused problems recently when a new version of the bitcoin client generated a block that wasn't recognized as valid by older versions of the client. The block had to be rolled back, along with all transactions in the block.)

Now, if you want to turn your Bitcoins into dollars, or vice versa, then you need an exchange. There are many, MtGox being the largest in terms of btc to dollar transactions. These have been hacked occasionally, though not recently that I know of. However, this is no different than if your bank was hacked and had its money electronically transferred out. If you don't have your bitcoins actually in an exchange, you don't lose any money if it's hacked. That said, bitcoins act like cash. If you lose your wallet file (like if your hard drive crashes, or if you get a worm/virus that copies away your wallet file) then you lose your money, just like if you lose your physical wallet.

It's no more a ponzi scheme than was Berkshire Hathaway stock. If you bought it at $10 a share, you're filthy rich now. Bitcoins are the same way, but some people bought (or just as likely mined) tens of thousands when they were worth $.10. So yeah, if it takes off then the early adopters will be filthy rich.



All of this said, the current value inflation is almost certainly a bubble. There was one back when I was mining that peaked out around $30 per btc. It popped and the value dropped to a few dollars. Will the current bubble pop? Probably. I'll be selling off a decent portion of mine soon. When? Who knows. But that's in the short term. Long term bitcoin is only as legitimate as people make it. If more and more people use it, then it has more value. If the userbase dwindles off then it becomes valueless. Currently the huge value is due largely to 3 things: anonymous drug purchases, anonymous online gambling, and speculation.

If people do begin using it globally long term then it will probably be a pretty good investment. There's a cap on the number of bitcoins that can be generated. In 30 years it's possible that 1 btc will be equal to tens or even hundreds of thousands of dollars. But that's only if people are still using it as a currency then. I'll hang on to a handful but only because the potential payoff is outstandingly high for a very low comparative gain today. I'll also be continuing to put most of my retirement savings into my 401k. If you're really looking at it as an investment I'd buy one now on the off chance that it explodes over the next decade or two. If you want to be more cautious, wait until the value hasn't moved more than a few percentage points for several months and buy several at that point. It's simply too volatile at this point, and the future too uncertain, to seriously consider putting a lot of money into it.

[hanelyp]

... That transaction is then published to every machine in the network ...

Ouch. Doesn't sound scalable. Not just bandwidth, but every node keeping a complete ever growing transaction log. And seems like that means bitcoin transactions can't be made without a working network connection.

[choff]

My concern would be this, you create 21 million bitcoins total, but these are subdivideable by 100 midterm, then subdividealbe again by another 100, so you end up with 210,000,000,000 bitcoin bits. In example, you want to pay for an item priced at 1000 bitcoin bits, and you try to pay with 1000 bitcoin bits from 1000 seperate bitcoins. Does the network have to trace back and verify every single bit, computational power will increase between now and 2140, but will it be enough, or does it not work this way.

[kcdodd]

Also, I really don't understand the claim that it can't be manipulated. I think that is really underestimating human desire and ingenuity.

[paperburn1]

Also, I really don't understand the claim that it can't be manipulated. I think that is really underestimating human desire and ingenuity.

Bit coins can be stolen/hacked away.
http://news.netcraft.com/archives/2013/ ... fraud.html

[necoras]

Ouch. Doesn't sound scalable. Not just bandwidth, but every node keeping a complete ever growing transaction log. And seems like that means bitcoin transactions can't be made without a working network connection.

Yes, and yes. To get started using bitcoin you must first download and integrate the block chain into your client. This is done automatically every time you run the client. It can take upwards of a day the first time you run it. Once you have it initially setup it's constantly being updated, so it isn't really an issue.

Bitcoin transactions are real time, and require a working internet connection. The only way to do a transaction offline would be to put a set number (or fraction) of bitcoins into a wallet file, save that file to a physical media (flash drive, sd card, etc.) and physically hand that to someone else. That person can at any time load that wallet file using their client and use those bitcoins.

My concern would be this, you create 21 million bitcoins total, but these are subdivideable by 100 midterm, then subdividealbe again by another 100, so you end up with 210,000,000,000 bitcoin bits. In example, you want to pay for an item priced at 1000 bitcoin bits, and you try to pay with 1000 bitcoin bits from 1000 seperate bitcoins. Does the network have to trace back and verify every single bit, computational power will increase between now and 2140, but will it be enough, or does it not work this way.

Bitcoin currently tracks 8 digits of precision. That is you can send a minimum of .00000001 btc. If you send .0000001 btc, that's a single transaction, not ten transactions of .00000001 btc each. It's no different than paying for something in 100 pennies vs $1. Nobody has to track the pennies as pieces of a particular dollar.

Also, I really don't understand the claim that it can't be manipulated. I think that is really underestimating human desire and ingenuity.

The way "the network" works is that you have millions of individual versions of the client trying to solve a mathematical equation. They're all trying to take all of the transactions since the last time the problem has been solved, crunch them through an equation, and come out with a number under the current difficulty limit. The difficulty limit is generated by all of those millions of clients so that it takes on average 10 minutes to solve that equation. As soon as one of them does so, it announces to every other client "I got it!" All of the other millions of clients check its work, and vote yea or nay on whether it's a valid new block. If it is, everyone starts trying to solve the equation again with a new set of transactions. If it's not accepted everyone throws it out and continues with the first set of transactions.

To hack the network you need a way to convince better than 51% of those millions of individual clients that your new block is correct. This is theoretically possible due to things called mining pools. A central server hands out pieces of the equation to thousands or tens of thousands of individual clients to solve. If anyone in that pool solves the equation, everyone gets a fraction of the bitcoins which were created as a result. If more than 51% of all of the mining clients are in a single pool, then that pool could make up its own blocks and force them out, because more than 51% of the network would simply accept that new result.

However, that's really really hard to do, and everyone knows about it. Everyone knows which, if any, pool people are participating in. If one pool starts to get too big of a piece of the pie miners will often switch to another. It's much easier to send mass phishing e-mails and hope that people are stupid. It's also easier to hack into exchanges and "wallet banks" and steal the wallets from there. So it's much more likely that any given person will lose money due to either a)personal stupidity or b)a massive hack at a bank than because the entire network has failed. That said, as I mentioned before there was recently a forking of the block chain due to a glitch in a new version of the client. It was rolled back and didn't end up being much of an issue.

[choff]

Moore's law allows for a doubling of computational power on a regular interval. Bitcoin is a deflationary currency(growth follows gold supply growth curve), unless currency velocity increases or economy contracts. Are these recent exchange disruptions really DDoS attacks or is spike in transactions a problem for volunteer networks. If value continues parabolic will end up central bank reserve currency, since only bankers dumb enough and rich enough to afford and use by that point. Mad Max talks like Bitcoin adopters will replace/overthrow central banks and control system, which doesn't solve fundamental problems with system. I might spend mad money on one bit coin and a little on litecoin, but still undecided, early adopters have me beat.

[necoras]

Bitcoin is indeed a deflationary currency. That's a known issue. However it can be subdivided as much as necessary for daily use, unlike a dollar. Since it's effectively infinitely divisible it should always be usable by anyone with enough wealth to have access to a computer.

It looks like the current disruptions are hack, and DDoS attacks. The network itself spends exponentially more computational power on solving the next block problem than recording transactions.

In my opinion bitcoin's unlikely to take over all transactions in the world, or to become a reserve currency. Also, it's intended to be a currency, not an investment vehicle. If your goal is to get rich quick, then yeah you're out of luck. Go make fusion practical . If you're interested in it as an actual long term currency, it's an intriguing idea and something to watch.

[choff]

If I did, it wouldn't so much be get rich quick, as hedge in case of currency collapse, once again, watching Max Keiser vid's way too much.

[paperburn1]

http://www.washingtonpost.com/blogs/won ... coin-next/
bitcoin is next can't have an independent currency, then games like WOW and EVE are suspect as well.