
Top Bitcoin questions I’ve been asked - brown
https://medium.com/p/a9d53ce3688a?2
======
dperfect
From the article:

"...one fundamental building block that BTC needs right now: legitimacy"

"Imagine if you were able to provide governments assurance that every BTC
wallet that cashed out into USD had a thorough KYC procedure performed on the
transaction"

I'm afraid this kind of legitimacy will never be obtained for Bitcoin - not
because it's impossible, but because many (most?) of Bitcoin's strongest
proponents are pushing for the exact opposite goal.

On one hand, we have people wanting to "fix" Bitcoin by providing more
transparency - through decreased anonymity. On the other hand, we have people
trying to "fix" Bitcoin by providing increased anonymity at all costs.

Personally, I believe both goals are admirable, but the conflict may
ultimately hurt Bitcoin's chances of long-term success and mass adoption.

It comes down to this question: do we want Bitcoin to become "legitimate" and
fit in to the current landscape of government regulation, law enforcement,
consumer protection, etc., or do we want Bitcoin to fundamentally disrupt all
of those ideas and stand as something all of its own? The first option ensures
greater chances of (quick) widespread adoption without rocking the boat too
much, while the second option flies in the face of systems of power and
influence that have been in place for thousands of years.

~~~
fragsworth
But it is not a mutually exclusive dichotomy of either legitimate or
subversive. It can be (and already is) both. Some users, especially legitimate
merchants, will have to follow the letter of the law. Other users, however,
who are willing to break the tax law, can and will - just as people break
those laws with cash transactions.

I can pay someone in bitcoin for work or services, not report it, and it is
_just_ as under-the-table as paying in cash.

~~~
rtpg
A big difference is that bitcoin has the public ledger.

With cash, if both parties are complicit to keeping it secret, you can keep
your acts secret. Bitcoin is very much not like that, and you have to try a
lot harder to hide what you're doing.

------
abalone
It's interesting all the "how is this useful" examples she gives are for
international commerce: money transfers, doing business with international
customers, countries where cards are harder to accept.

I'm still waiting to hear concrete examples of how Bitcoin would compete with
credit cards in a First World market. There's a lot of talk about how
"expensive" and "inefficient" the credit card system is (it's almost a
mandatory part of any intro to Bitcoin). But so far I've heard nothing
concrete. Anyone have a good link I should read?

~~~
doctorfoo
Some weeks ago I tried to buy a mobile top-up online - my bank card was
repeatedly rejected for some unknown reason (after having to re-enter my
entire address and card numbers multiple times). More recently, I decided to
try Bitcoin for this, and was able to buy a top up voucher code with no
problems.

This may be a rare example, but it highlights something key: The merchant is
getting cash. They have no need to perform fraud checks. They have no worries,
and can make the customer's life easier as a result.

I've struggled with traditional card payments many times in the past. Using
Bitcoin is pure bliss in comparison.

I see a future where Bitcoin wallets are browser add-ons, and payments really
can be one-click on _any_ website.

Kids who may not have bank cards yet is also a hugely overlooked area imo.

~~~
abalone
Of course merchants would prefer cash. It doesn't have the consumer
protections cards have. But that's not a reason for consumers to adopt it.
Just the opposite.

I agree with you that your example is probably a rare one. Which is why I'm
still searching for an answer as to how this is all supposed to supplant the
card system.

~~~
FatalLogic
It's not simply a question of what the consumer wants. Look at it from the
other side.

The merchant _may_ be very strongly incentivized to use Bitcoin because it
cuts payment fraud to zero. This saves the merchant the direct cost of payment
fraud, which averages 1-2% of revenue in the US (therefore up to 50% of profit
margin in some industries). Note that 1-2% is an average -- some industries
have higher rates of payment fraud, and they will therefore have greater
savings.

As Bitcoin payments require no fraud prevention, they also save the merchant
the cost of lost business from customers deterred by cumbersome fraud
prevention methods, and losses due to legitimate customers who are rejected
when fraud prevention gives a false positive.

Therefore, merchants will have the option of reducing prices for items
purchased with Bitcoin.

This leads to a simple question: do there exist any industries where the
merchant's savings could be big enough that they could reduce prices
sufficiently to encourage a significant number of customers to pay with
Bitcoin, while still earning a higher margin than they would from other
payment methods? I think there probably are, but we're a long way from seeing
this question answered by the market. Relatively few merchants accept Bitcoin,
and many of them offer no special discounts.

Relevant news: [http://gigaom.com/2014/04/02/paystand-takes-on-paypal-
with-a...](http://gigaom.com/2014/04/02/paystand-takes-on-paypal-with-a-new-e-
commerce-service-that-accepts-bitcoin/)

~~~
abalone
Source? Wikipedia summary on credit card fraud puts it at just 0.07% [1] The
"2%" figure is more what average card processing fees are. But most of that is
passed back to the consumer in the form of rewards and benefits. Part of the
reason it's hard for cash to compete for significant purchases, or anywhere
cards are accepted.

As for the idea that merchants will do differentiated pricing for cards...
couple problems with that.

First, it's historically a really tough case. It's generally not worth the
risk of losing a sale. But let's put that aside.

Second, you've got the competitive landscape wrong. The Durbin amendment
changed everything. Did you know that debit card interchange is now regulated
down to 21 cents + 0.05%? And they come with some consumer protections and are
"built in" to most bank accounts and all the infrastructure's in place. That's
what Bitcoin or any new method that competes on price is competing with. So
that narrows the opportunity to almost nothing.

[1]
[http://en.wikipedia.org/wiki/Credit_card_fraud](http://en.wikipedia.org/wiki/Credit_card_fraud)

~~~
FatalLogic
>Wikipedia summary on credit card fraud puts it at just 0.07%

Yes that's true, Wikipedia does say that, but please think about that number
for a minute.

0.07%

With all the wailing and moaning we hear about credit card fraud and identity
theft every day, does that figure sound plausible? Would anyone really care
about fraud if the cost was actually that low?

Regarding the accuracy of that figure, I'll refer you to one of my previous
comments:
[https://news.ycombinator.com/item?id=7506761](https://news.ycombinator.com/item?id=7506761)

Certainly it's true that Bitcoin has none of the consumer protection features
of credit cards, and that will be a major deterrent to consumers in many
situations. It's also true that differentiated pricing isn't something that
every merchant will just want to casually drop in.

As for the Durbin Amendment, you seem to know more about this than me, so I'll
ask you a question: Since it was introduced, has there been any significant
reduction in the percentage of revenue that merchants lose as a result of
identity theft (card not present) or 'friendly fraud' (chargebacks)?

~~~
abalone
Thanks for reading the report behind the Wikipedia summary. I just did as well
and I agree it's more the in ballpark of 1%. You should update Wikipedia.

The bigger question here is whether bitcoin can actually improve on this or
just change the type of fraud that happens. If for example it shifts the
burden from merchants (who absorb most of it with cards) to consumers (who can
never recover lost bitcoins) then it's not going to gain traction. It's got to
appeal to both sides of the market.

~~~
FatalLogic
Yes, to gain traction, Bitcoin would have to be used in a way that appeals to
both sides of the market. Both sides have to somehow share in any savings that
it brings.

It also has to be significantly better than the status quo. There are many
markets where using Bitcoin currently doesn't have a significant advantage
over the existing payment options, I think. In fact, I'm fairly sure there is
often a net _greater_ cost spread across both parties if they use Bitcoin, if
you consider the case where someone exchanges other money for bitcoins in
order to pay with bitcoins, and the merchant exchanges the bitcoins for other
money.

However, and this is an important point, _Bitcoin does not have to be suitable
for all markets worldwide to establish a presence in some markets_. In fact,
it doesn't even have to appeal to every merchant operating in a market - just
to some of them, perhaps those with the lowest profit margin. If Bitcoin is to
succeed as a method of payment, then I expect a scenario where Bitcoin gains a
small bridgehead in niche markets, which then slowly expands to some other
markets.

Markets that suffer the largest burden of ID theft/chargeback fraud as a
percentage of profit seem to be the most promising candidates for that
bridgehead. An online merchant with a 4% net profit margin, who is also in a
high risk market where they're losing 1% of revenue (i.e. 25% of profit) to
fraud, might consider offering a 10% discount to customers who use Bitcoin,
for example.

I'd guess the reasons that we don't see so this happening very often, so far,
are: lack of familiarity with Bitcoin on the part of merchants, lack of
sufficient volume to make it worthwhile to add a new payment method, and
finally, some early adopters are still willing to spend bitcoins for
ideological reasons or because they made an enormous profit by buying in
early, so there's no need to offer those people an incentive.

Table of average net profit margin by industry, Retail (Internet) has an
average 3.37% margin:
[http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html)

~~~
abalone
I don't see the logic of a seller offering a 10% discount to save 1%. That
makes no sense.

~~~
FatalLogic
Yes, you're right, that should have been a _1%_ discount, not 10% - thanks for
the correction

------
FigBug
Something I've been wondering about Bitcoin: If Bitcoin is going to be used as
a currency, you'll need to be able to get loans, short term like a credit card
and long term like a mortgage. But isn't taking a loan in a deflationary
currency very risky? Kinda like short selling, possible to lose/be in debt an
infinite amount of money?

Assuming Bitcoin becomes widespread, how do you convince people to take a
salary that goes down every year? It's going to take a lot of re-education --
a completely different way of looking at money.

~~~
stevenwagner
To be a bitcoin believer, its not necessary to think it will displace fiat.
Bitcoin is deflationary like gold, so it shouldn't be much different then the
gold commodity market or returning to a gold standard. For most of the united
States growth and prosperity, it was on the gold standard.

~~~
dllthomas
_" For most of the united States growth and prosperity, it was on the gold
standard."_

Like the Great Depression, yes.

------
moonhorse
Great pos! The more I learn about bitcoin, the more I feel like it still has a
long way to go. There are a few hurdles that can not be easily solved now:
10min transaction time; deflationary (this pretty much means it would have a
hard time to act a real "currency" based on nowadays economic thinking); the
resources wasted in mining and the potential consolidation of mining; the
programmable aspect is very limited today. What is your take of it?

~~~
sneak
> There are a few hurdles that can not be easily solved now: 10min transaction
> time

For almost all practical applications for which bitcoin is being used, this
doesn't actually come in to play very often.

> the resources wasted in mining

It's not wasted if it's being used to process bitcoin transactions.

> and the potential consolidation of mining

Now you've got one - this is a huge threat to bitcoin today. It'll be
interesting to see how it plays out over the next 6-12 months.

~~~
ars
> For almost all practical applications for which bitcoin is being used, this
> doesn't actually come in to play very often.

Not exactly. If you have all your coins in a single transaction, you will get
change - which can take 10 minutes to confirm before you can spend it again.

Yes, you can solve this by splitting up your money, but it's not something
people expect.

> It's not wasted if it's being used to process bitcoin transactions.

Yes it is being wasted. Waste doesn't mean "unused", waste means "using more
than necessary". Due to the hashrate arms race, tremendous amounts of power
are being wasted doing nothing useful.

Bitcoin is powered by electricity, a better currency would spend something
else instead.

~~~
vertex-four
> Due to the hashrate arms race, tremendous amounts of power are being wasted
> doing nothing useful.

But they are doing something useful. They're preventing someone from turning
up and performing a 51% attack, thus ensuring the security of the network. You
could suggest that there's better ways of doing that, but our ideas so far
haven't panned out.

Interestingly, how it works at the moment is that essentially, through the
mining of bitcoins, every bitcoin holder's bitcoins are devalued to pay for
the security of the network. Therefore, if a significant amount of bitcoin
holders decided that they could deal with less network security, they would
use a coin which provided less network security (by paying miners less).

As it is, at the moment, we're not sure exactly how much security we need.
Therefore, we're willing to pay for as much security as possible; nobody wants
their bitcoins to be worthless tomorrow because they didn't pay enough to
protect the network.

~~~
conroe64
> You could suggest that there's better ways of doing that, but our ideas so
> far haven't panned out.

Can I ask, have you heard about Peercoin, which uses a combination of a proof
of work and a proof of stake system rather than just a proof of work system?
Do you have an opinion as to why such as system wouldn't be at least as secure
as bitcoin?

~~~
vertex-four
My understanding is that it's currently unproven, and certain ideas we used to
have about it have already been disproven. I'd love to see an actual academic
paper on what it would take to break the network.

There's also the fact that wealth inequality - specific groups of people
owning significant amounts of money - will break the network's assumptions.
This could be a good or bad thing, depending on your point of view.

Additionally, minting a proof-of-stake block locks your stake for 520 blocks.
Most reasonable people would be angry that they can't access their money for
that long. There's a workaround of reserving a certain amount of coins so that
it can't be used for proof-of-stake, but that doesn't actually solve the
problem, and generally means that the poor will reserve all their money and
never generate a proof-of-stake block.

And that leads on to another issue with proof-of-stake; the rich get richer,
as a rule that's explicitly built into the system. Probably not _much_ richer,
but it's against common ideology.

The other thing that most cryptocurrency enthusiasts won't like about Peercoin
is that it's eternally mildly inflationary. While some will understand that
this is essentially payment for security, others will argue that those who use
the network more should pay more (via transaction fees), rather than a "tax".

I suspect that it will see a mild increase in use when they prove that they
can get rid of centralised checkpointing, but I think there's a very
significant core group that will not be able to get past the ideological
issues and lack of academic research.

------
ufmace
The inflation one is the only one that's really fundamental to the currently.
Part of the core of the Bitcoin system is that the validity of everything that
happens is proven by being accepted by all of the nodes that make up the
system, rather then by some special authority figure. There are authority
figures that publish the node software, but they can't force anybody to go
along with any change they make. They have to tell the world what their
changes do, and hope that everybody is willing to upgrade.

Part of the rules of the system that are enforced is how new coins come into
existence, and the current rule for that is the fixed reward per block mined,
with logarithmic decrease in reward amount. It is possible to change that, but
the fundamental nature of the system is that the coin creation has to be
controlled by an algorithm shared and repeatable among all nodes, and so
cannot ever be based on any arbitrary or external factors.

Even making a change that remains within those limits is risky. To keep the
currency in existence, there must be broad agreement among all of the people
running nodes as to what the rules of the currency are. If the core developers
decide to make a change in that, and 20% of nodes refuse to upgrade, it would
be a disaster. And so they aren't likely to risk doing anything that might
piss off a significant fraction of the users.

So love it or hate it, the fixed inflation system isn't going anywhere.

~~~
mahyarm
Remember although, you can release an altcoin that doesn't release coins
logarithmically like bitcoin does. You can release one that has a linear %1
permanent inflation rate for example.

~~~
Nursie
Or possibly one that rises in proportion to hash rate... ? That might be
interestimg.

------
andreicek
First comment, go easy on me.

Have you seen
[https://www.youtube.com/watch?v=vnm4xFC2xNo](https://www.youtube.com/watch?v=vnm4xFC2xNo)
?

I think the second guy at the end of the video raises an important question.
Why use this over any other currency? If you are worried about the "control"
of the said currency why not use a more "free" one like Swiss francs?

I am worried that Bitcoin will never be used as a standard if a regular,
Facebook user, can't manage to get his hands on it, and afterwards use it.
It's a catch 22 in my opinion.

Sure it's easy for IT people to use it, but my mom doesn't even know about
PayPal for instance. And I am sure she is not the only one.

------
bluedevil2k
My personal top question - as I understand it, to earn new bitcoins, you must
mine them by verifying the ledgers from previous transactions. The first one
who solves this puzzle gets the bitcoins. Question - why doesn't the fastest
computer win every time? If the puzzle is a number crunching puzzle and
computers are all doing the same thing, shouldn't the winner always be the
same computer?

~~~
ufmace
The answer is that the puzzle is huge and non-determininstic. The puzzle is to
take a block of data - all of the transactions that haven't been confirmed yet
- and append a value to it that makes the hash of it below a given number.
That number is called the difficulty, and is dynamically set. Systems trying
to solve it simply keep trying different values and running the hash to see
what the value is.

Any particular guess-and-hash operation has a certain probability of finding a
solution, and that probability is the same for all systems, no matter how fast
or slow they are running. Faster systems just guess-and-hash faster, and thus
have more opportunities to succeed. That difficulty is set dynamically based
on the estimated total rate of operations, or hashrate, of the entire network,
so you can think of the system overall doing a certain number of hashes per
second. A solution is essentially a random event that one particular hash will
satisfy. So the higher the hashrate, the higher the probability that you will
succeed, but it's still a probability. You never have a guarantee that you
will succeed, no matter how fast you are, and even slower systems have a
chance.

That's why there are these malware-created networks of low-power systems doing
bitcoin mining. They're all pretty slow, but with enough of them working, one
of them will succeed every once in a while.

~~~
infruset
I think you have to add that everyone is solving a different puzzle, I.e. if
I'm not mistaken, an identifier of the miner (I would guess her public key, I
can't really check right now) is included in the string she hashes (plus they
may not all have the same list of pending transactions). otherwise you would
still have the problem that if people use the same software for guessing the
random string, the fastest would always win.

~~~
ufmace
True, but not really relevant to this. Even if they were all the same, it
wouldn't change things. The fastest would indeed win if all hashing devices
started at the same nonce value and all incremented it in the same way. (the
nonce is the extra data put into the block solely to make the block's hash
meet the requirements) But precisely because of that, there is no reason for
any device to try nonces in a deterministic way.

maaku's explanation makes clear a very good point - trying any particular hash
only tells you whether that one succeeds or fails; it doesn't tell you
anything about whether any other value will succeed or fail. Any particular
hashing device will maximize its chances of winning/finding a solution by
trying nonces in such a way that it is unlikely that any other device is
trying the same ones, but that it never tries the same one itself twice.

I don't know offhand how many mining algorithms are out there and how they go
about picking nonces, but I'd bet they do something like pick a strongly
random starting value and then increment it by a fixed, small amount each try.

But yes, all of the miner's blocks are generally different. Each block that a
miner is working on must have special Coinbase transaction that awards a
specific number of new BTC to a chosen address. If you are an independent
miner, that would be your address, but pool miners generally use a pool
address. I don't actually know how the latest pool mining algorithms work, but
I think they all have more elaborate systems for how payouts work.

------
jafaku
> The money supply for BTC increases slowly. This is discouraging transactions
> because (if you believe in the currency and its future) you should hoard
> your BTC. The amount of new BTC going into circulation is low, barring any
> disaster (e.g. Germany banning BTC, Kraken hacked), it just makes sense to
> hold because what you have today will be worth more tomorrow.

Just another Dogecoin shill with unproven claims. What you said is absolutely
false. In donations alone, bitcoiners have spent more (millions of dollars
worth at the time) than dogecoiners have spent in everything.

Dogecoin is not even in the top 5 anymore:
[http://coinmarketcap.com/](http://coinmarketcap.com/)

It was just a short lived fad, like many other copycoins. Ever heard of
Infinitecoin? Probably not. Yet it also entered the top 5 at one point.

~~~
logicallee
I didn't read the article but the part you quoted is basic economics. If some
currency has usage but a limited supply - even if it's just cigarettes in a
prison - its price will go up. When this happens, it gives a hurdle rate on
spending. If relatively few cigarettes are making it into a prison, but there
is no other convenient form of currency, you might well hold off trading some
of yours because it will be worth more in a couple of weeks. Gold certainly
can suffer from this effect and is a main reason that growth was unlocked when
paper got off a 100% gold standard: if the economy needed money, you no longer
had to mine it.

This is NOT a normative statement, just a fact. Bitcoin spending is going to
be curtailed (fact) by a limit on the speed of increase of the money supply,
just as spending is spurred (fact) by easy credit and inflation.

(Inflation for a fact spurs spending, because if inflation is 7%, then holding
onto money costs you 7% per year, whereas spending it on anything can let you
retain that value.)

These are not normative statements but completely uncontroversial (and
intuitive) economics.

~~~
jafaku
Yeah yeah, "basic economics". I'm getting really tired of all these unproven
theories. Economics at this point has turned into a pseudoscience just like
Psychology. Academics publishing untestable bullshit and people like you
citing them ad nauseam, instead of showing some actual evidence.

You are absolutely wrong in your comparison with cigarettes, because in prison
you don't have enough liquidity of cigarettes. On the other hand, you can buy
all the Bitcoin you want and use it to buy whatever you were going to buy
anyway, and even get a discount.

~~~
logicallee
No, you can't "buy all the bitcoin you want" \- it's simply not true. Look,
Facebook's acquisition of Whatsapp included $4B in cash. If Whatsapp had said,
"but you need to pay us in bitcoin, we'll set the price at the current trading
price", then too bad, Facebook couldn't have said yes, because it would be
impossible to source that many bitcoins. The total value of all bitcoins in
existence is $5B today, and I doubt it could buy up 3/4 of them, including
ones that were lost or refused to sell, for any amount of money. Just as there
is no amount of money (in any currency) I could give you that you could spend
to get 95% of all the dollars in existence into one room to give to someone -
because some people will hold out. You just can't get them all. Stores, banks,
the rest of the economy, everyone uses dollars. You can't just get 95% of the
ones in existence. More precisely, it is "impossible" to get 95% of all
dollars into one room. A hundred trillion dollars' worth of other currency and
values of various kinds wouldn't come close to letting you buy up 95% of all
dollars in existence - at any price.

And there are a LOT of dollars in existence.

There are comparatively VERY few bitcoins in existence.

So this simple example shows that it is absolutely false that you can buy all
the bitcoins you want. If Facebook announced that it needed $4B in bitcoins at
today's price, then most people would instantly start hoarding it, the price
would jump to $10,000 per bitcoin, and ordinary people would be unable to buy
it at any price.

~~~
jafaku
Well _obviously_ if you fix the price of Bitcoin at a certain point in time,
later on it's gonna be a lot more expensive, especially if someone throws 5B
at it.

Besides you are trying to find an edge case to argue about common cases, which
is stupid and lame.

~~~
logicallee
No, I'm showing you how the laws of economics work by appealing to your
intuition.

The part you quoted before ("This is discouraging transactions because (if you
believe in the currency and its future) you should hoard your BTC. The amount
of new BTC going into circulation is low, barring any disaster (e.g. Germany
banning BTC, Kraken hacked), it just makes sense to hold because what you have
today will be worth more tomorrow.") is totally completely uncontroversial -
and this is super easy to show, not only just in historical terms or by
looking at how people actually behave, but if you simply think it through
yourself. It's just obvious and uncontroversial.

