Bitcoin.

[Matt H]

So, I'm surprised this hasn't had a thread yet, considering all of the media attention this has had in the last week or so.

A good description and background of it, courtesy of The Economist.
http://www.economist.com/news/finan...-may-make-dent-financial-world-mining-digital

IN 1999 an 18-year-old called Shawn Fanning changed the music industry for ever. He developed a service, Napster, that allowed individuals to swap music files with one another, instead of buying pricey compact discs from record labels. Lawsuits followed and in July 2001 Napster was shut down. But the idea lives on, in the form of BitTorrent and other peer-to-peer filesharers; the Napster brand is still used by a legal music-downloading service.

The story of Napster helps to explain the excitement about Bitcoin, a digital currency, that is based on similar technology. In January a unit of Bitcoin cost around $15 (Bitcoins can be broken down to eight decimal places for small transactions). By the time The Economist went to press on April 11th, it had settled at $179, taking the value of all Bitcoins in circulation to $2 billion. Bitcoin has become one of the world’s hottest investments, a bubble inflated by social media, loose capital in search of the newest new thing and perhaps even by bank depositors unnerved by recent events in Cyprus.

Just like Napster, Bitcoin may crash but leave a lasting legacy. Indeed, the currency experienced a sharp correction on April 10th—at one point losing close to half of its value before recovering sharply (see chart). Yet the price is the least interesting thing about Bitcoin, says Tony Gallippi, founder of BitPay, a firm that processes Bitcoin payments for merchants. More important is the currency’s ability to make e-commerce much easier than it is today.

Bitcoin is not the only digital currency, nor the only successful one. Gamers on Second Life, a virtual world, pay with Linden Dollars; customers of Tencent, a Chinese internet giant, deal in QQ Coins; and Facebook sells “Credits”. What makes Bitcoin different is that, unlike other online (and offline) currencies, it is neither created nor administered by a single authority such as a central bank.

Instead, “monetary policy” is determined by clever algorithms. New Bitcoins have to be “mined”, meaning users can acquire them by having their computers compete to solve complex mathematical problems (the winners get the virtual cash). The coins themselves are simply strings of numbers. They are thus a completely decentralised currency: a sort of digital gold.

Bitcoin’s inventor, Satoshi Nakamoto, is a mysterious hacker (or a group of hackers) who created it in 2009 and disappeared from the internet some time in 2010. The currency’s early adopters have tended to be tech-loving libertarians and gold bugs, determined to break free of government control. The most infamous place where Bitcoin is used is Silk Road, a marketplace hidden in an anonymised part of the web called Tor. Users order goods—typically illegal drugs—and pay with Bitcoins.

Some legal businesses have started to accept Bitcoins. Among them are Reddit, a social-media site, and WordPress, which provides web hosting and software for bloggers. The appeal for merchants is strong. Firms such as BitPay offer spot-price conversion into dollars. Fees are typically far less than those charged by credit-card companies or banks, particularly for orders from abroad. And Bitcoin transactions cannot be reversed, so frauds cannot leave retailers out of pocket.

Yet for Bitcoins to go mainstream much has to happen, says Fred Ehrsam, the co-developer of Coinbase, a Californian Bitcoin exchange and “wallet service”, where users can store their digital fortune. Getting hold of Bitcoins for the first time is difficult. Using them is fiddly. They can be stolen by hackers or just lost, like dollar bills in a washing machine. Several Bitcoin exchanges have suffered thefts and crashes over the past two years.

Ripple effects

As a result, the Bitcoin business has consolidated. The leading exchange is Mt.Gox. Based in Tokyo and run by two Frenchmen, it processes around 80% of Bitcoin-dollar trades. If such a business failed, the currency would be cut off at the knees. In fact, the price hiccup on April 10th was sparked by a software breakdown at Mt.Gox, which panicked many Bitcoin users. The currency’s legal status is unclear, too. On March 18th the Financial Crimes Enforcement Network, an American government agency, proposed to regulate Bitcoin exchanges; this suggests that the agency is unlikely to shut them down.

Technical problems will also have to be overcome, says Mike Hearn, a Bitcoin expert. As more users join the network, the amount of data that has to circulate among them (to verify ownership of each Bitcoin) gets bigger, which slows the system down. Technical fixes could help but they are hard to deploy: all users must upgrade their Bitcoin wallet and mining software. Mr Hearn worries that the currency could grow too fast for its own good.

But the real threat is competition. Bitcoin-boosters like to point out that, unlike fiat money, new Bitcoins cannot be created at whim. That is true, but a new digital currency can be. Alternatives are already in development. Litecoin, a Bitcoin clone, is one. So far it is only used by a tiny hard-core of geeks, but it too has shot up in price of late. Rumour has it that Litecoin will be tradable on Mt.Gox soon.

A less nerdy alternative is Ripple. It will be much easier to use than Bitcoin, says Chris Larsen, a serial entrepreneur from Silicon Valley and co-founder of OpenCoin, the start-up behind Ripple. Transactions are approved (or not) in a few seconds, compared with the ten minutes a typical Bitcoin trade takes to be confirmed. There is no mystery about the origins of Ripple nor (yet) any association with criminal or other dubious activities.

OpenCoin is expected to start handing out Ripples to the public in May. It has created 100 billion, a number it promises never to increase. To give the new currency momentum, OpenCoin plans eventually to give away 75% of the supply. Existing Bitcoin users can already claim free Ripples and eventually anyone opening an OpenCoin account will also receive some.

The 25% retained by OpenCoin will give it a huge incentive to make sure that the Ripple is strong: the higher its value, the bigger the reward for OpenCoin’s investors when the firm cashes out. On April 10th several blue-chip venture-capital firms, including the ultra-hip Andreessen Horowitz, announced that they had invested in OpenCoin.

If Ripple gains traction, even bigger financial players may enter the fray. A firm such as Visa could create its own cheap instant international-payments system, notes BitPay’s Mr Gallippi. And what if a country were to issue algorithmic money?

At that point Bitcoin would probably be bust. But if that happened, its creators would have achieved something like Mr Fanning. Napster and other file-sharing services have forced the music industry to embrace online services such as iTunes or Spotify. Bitcoin’s price may collapse; its users may suddenly switch to another currency. But the chances are that some form of digital money will make a lasting impression on the financial landscape.

So, what do you think? Currency of the future in a world of monetary uncertainty, a good idea with poor implementation, or an inherently deflation prone system with a finite lifespan?

 

[znelbok]

In the US a governmental body has accepted that it exists and has opened the door for more use of it.

There is also going to be ATM's that will convert bitcoin to hard currency soon

Have a look here for a podcast on the crypto of bitcoin

http://www.grc.com/sn/past/2011.htm

Scroll down to episode 287 - BitCoin CryptoCurrency for an excellent coverage of the technology. Steve Gibson is an expert in the field of security and has a real knack for explaining the difficult.

His podcast covers the first two comments in some of the last episode.

Mt Gock(?) has bitcoin up as high as $186US but it fluctuates a lot.

Don;t bother trying to mine your own unless you are prepared to pay for a specialized machine as mining has pushed the complexity up very quickly (refer to the podcast to understand how that all works).

I believe there is a real future for it and it will be a really great option before the governments get a hold of the technology to tax us when using it.

Lightcoin is another currency that has been mentioned lately as well.

Mick

 

[hach_bee]

In the US a governmental body has accepted that it exists and has opened the door for more use of it.

There is also going to be ATM's that will convert bitcoin to hard currency soon

Doubt it. It's gunna die out way before then. Far too unstable to ever really survive. Another interesting commentary by Scott Pape:

Bitcoin is a virtual currency that isn't tied to any one country, government or central bank. And the reason you may have heard about it is that the value of Bitcoins has skyrocketed by more than 1,000 per cent this year: from $15 (early January) to $260 (Wednesday), back to $170 (Thursday).

Yet don't write this off as some sci-fi movie - right now people are using Bitcoins to buy Porsches, pizzas, houses and hash. So this week I scrounged around the back of the cyber-sofa to get to the bottom of the Bitcoin boom.



Which was easier said than done - by its very nature the internet is a faceless beast, and Bitcoins are designed to be anonymous and untrackable. So it took me the best part of a week to hunt down Cameron Garnham, a longstanding and prominent member of the Australian Bitcoin establishment.


And he wasn't what I was expecting. Garnham is a 25-year-old from the outer suburbs of Melbourne who lives at home with his mum and dad. I spoke to him on the phone this week:



Barefoot: "So how many Bitcoins do you have in your virtual wallet?



Cameron: "Well, I wouldn't ask you how many dollars you have in your bank account ...



Barefoot: "I don't care, I'll tell you."


Cameron: "No, no, let's not go there."


Cameron is a self-confessed tech geek who's been involved in trading Bitcoins for about three years, which in Bietnamese (a term I admittedly just made up) makes him an elder statesman.



In that time his only reference point has been seeing the price go from a few bucks to $170. So when I asked how high he thought it could go, he said matter-of-factly "It's not inconceivable that it could be $2,000 by the end of the year."

So Should You Get on the Bitcoin Bandwagon?



Well, there are three camps when it comes to Bitcoin.



The first camp is the get-rich-quick crowd. And as with all gamblers - whether it's tulips or tech stocks - history shows they'll eventually do their Bitcoin.



The second camp is the cynical financial types who believe this is a classic financial bubble which will soon pop - and this is where I find myself.

Bitcoin is more interesting to speculators than shopkeepers - the price gyrates too much for it to ever realistically be a medium of exchange. How could you price something in Bitcoins when it moves up and down 30 per cent in a day?


The Bitcoin bubble will soon be pricked, and when it does people will be sitting on huge losses they can't get out of. That's because a Bitcoin, like a bar of gold, has no utility or income-producing ability. You can't eat it and you can't rent it out to your brother-in-law. The only way you make money out of it is with the 'greater fool theory': you need to find a greater fool than you to pay a higher price. If you can't find another fool - guess what - you're it!

Of course the argument for owning gold (and now Bitcoin) is that it's a safe place to store your wealth in times of economic upheaval. That's why gold has surged as governments around the world have printed billions of dollars, and why Bitcoin has boomed after the banking crisis in Cyprus.


The financial world is indeed a dangerous place. No-one knows what the outcome of this economic experiment will be, but it'll likely end in tears. Yet regardless of what currency we're using in 20 years' time - whether it be Bitcoins, banknotes or freshly slaughtered chickens - people will still exchange them for an icy can of Coke or a Four'N Twenty pie.



In other words, the safest place to 'hoard' your money is in strong, profitable businesses that will compound your cash.




Then there's the third camp: the true believers - people who've lost faith in the banks, the central bankers and the governments of the world and believe that Bitcoin is a revolution.



I think Cameron fits into this camp. Yes, a 25-year-old from Melbourne has been swept up in it, and it all sounds a little far-fetched: virtual money that's really just computer code created by geeks?

Then again, a bearded bloke called Ben Bernanke has created $2.1 trillion since the financial crisis of 2008, and each month he prints a further $US85 billion, all in the name of stimulating the US economy.



I doubt Bitcoin will be around in 20 years' time, but the idea of a peer-to-peer currency may well turn out to be truly revolutionary. The internet has disrupted nearly every other industry in the world. Why not global commerce?

 

[speedyjonzalas]

I had considered throwing a few hundred bucks at it last year and wish I had. Think I could have mulitplied that by 10 if I sold them recently.

I heard of one guy who invested about $30k last year and sold them all recently for about about 3-400k... madness!

The volatility of it all has me a bit shocked though, was considering investing earlier last week but now once again I'm a bit less inclined. Probably stick with shares as they are doing well again.

 

[Matt H]

I honestly consider it to be more of a commodity than a currency. It's use as a medium of exchange seems to be trivial compared to the level of speculative trading. The limitations of currency creation and the deflationary implications stemming from that mean that the market will never be stable.

Deflation is a nasty thing to happen to a medium of exchange.

I had considered throwing a few hundred bucks at it last year and wish I had. Think I could have mulitplied that by 10 if I sold them recently.

I heard of one guy who invested about $30k last year and sold them all recently for about about 3-400k... madness!

The volatility of it all has me a bit shocked though, was considering investing earlier last week but now once again I'm a bit less inclined. Probably stick with shares as they are doing well again.

Yeah, but you can say that about any kind of speculative bubble. I watched the first bitcoin bubble burst in late-2011. That was from a high of ~$30USD to less than $2USD. If only, right?

 

[Rob_74]

The Zuckerberg Twins are in Bitcoin, they know how to time the market (ala facebook)... bitcoin must be a winner.

 

[Matt H]

Technical data from mt.gox

mt.gox is the main exchange for bitcoin trading, I think around 80% of total bitcoin trades are made there. Notoriously bad trading software that lags whenever trading volume spikes. They've tried to blame it on DDoSing in the past but it turns out they're just crap.

 

[speedyjonzalas]

Just wish I had a spare few thousand as I do reckon its worth throwing some cash at it.

I may win the lottery Thursday then I can buy some.... or perhaps not, seeing as I'l be rich anyway :lol:

 

[LJohn]

The value is tied to the current computational power of systems trying to mine, or at least that's what I heard. It's getting increasingly more expensive to mine a bitcoin.

You can technically do it at home but before you can pay your power bill in BTC or convert it easily to hard currency, it will cost money to mine.

I don't understand the computational side to great depths either but gather there must be some finite number that will be mined, after which I'm curious to see what happens. I'm also assuming that since it will be increasingly harder to mine there will be an exponential decay in new bitcoin creation.

 

[dog boy]

I am slightly confused by this whole bitcoin thing. What I know is if you have a fairly fast computer with a high end Gpu you can mine bitcoins, this is done by your computer processing some big algorithms and doing work. However much work you computer does over a time period gets awarded in "blocks" a certain number of blocks make up a bitcoin. (I think I have all that right)

What I don't understand is, what is the point in having lots of computers all over the world solving these algorithms to be awarded this currency? who hands out this currency and who decides how much is given out. Is the work the bitmining computers do advantageous in anyway? I just cant see what anyone gets out of it apart from having your computer aimlessly work to generate a currency someone has created from nothing.

 

[Rob_74]

I am slightly confused by this whole bitcoin thing. What I know is if you have a fairly fast computer with a high end Gpu you can mine bitcoins, this is done by your computer processing some big algorithms and doing work. However much work you computer does over a time period gets awarded in "blocks" a certain number of blocks make up a bitcoin. (I think I have all that right)

What I don't understand is, what is the point in having lots of computers all over the world solving these algorithms to be awarded this currency? who hands out this currency and who decides how much is given out. Is the work the bitmining computers do advantageous in anyway? I just cant see what anyone gets out of it apart from having your computer aimlessly work to generate a currency someone has created from nothing.

Wiki has answers to this:
http://en.wikipedia.org/wiki/Bitcoin

but i understand it is a peer to peer network so you need some incentive to have people set up this network which needs to do the transactions and solve the encryption algorithms - hence the miners earning the bitcoins in return for doing this. without the peer to peer network you would have no way to authenticate anyone's transaction. The number of bitcoins created each block decreases over time. There is a hard limit of 21 million bitcoins to be created by 2140!.

 

[LJohn]

It takes a long time and a lot of computational power to mine 1 bitcoin. It's also down to luck. One home computer is going to be outmined and probably won't see any reward. People do it in pools. One of my friends used his computer to mine coins for a group for a while. Until he saw the power bill. Turns out you need a pretty fast, efficient machine at the moment to make any sort of profit.

 

[3viltoast3r]

You need to do some maths to see if it is worthwhile - You need your computer to be faster/more efficient to earn more than the power it costs. I wish a year ago I had of built a system..

 

[Matt H]

So over the long term you'd need a production function that accounts for the increasing complexity of the algorithms and the power required to solve them, that also includes expected increases in computing power (moore's law would work I guess). Classic case of decreasing returns to scale when GPU cooling issues occur. A cost function that depends on the price of electricity and then a revenue function that depends on the market exchange rate of bitcoins. It's actually kinda fascinating from a micro perspective, especially if prices fall to the point where a shutdown condition condition occurs.

So someone can feel free to work all that out - I've got study to do. :lol:

 

[Matt H]

The whole bitcoin market would be WAY more interesting if the supply was unrestricted. The way bitcoins are mainly used, I'd consider them more of a commodity than a currency anyway. That'd be a textbook example of a perfectly competitive market, and supply would increase to the point where the price of bitcoin is equal to its marginal cost of production. That would fix the deflationary problems, but what probably tie the price too much to the cost of computing power.