
How Bitcoin Could Become a Viable Currency - scottcanoni
http://finance.yahoo.com/blogs/the-exchange/bitcoin-could-become-viable-currency-163337407.html
======
lolcraft
Here's my proposal: let's forget exchange rates. Let's not confuse them with
_inflation_ [0]. That's a red herring. Exchange rates are important for BTC's
legal users _now_ because there's not (yet) production in BitCoin's economy.
Apart from drugs[1], BTC is pure store of value, and it should be analyzed as
such.

This is important for this discussion, because exchange rates ultimately won't
matter that much. By "ultimately", I mean that phase of development when (if)
BitCoin becomes a full currency, that is, when there's somebody, some
corporation, operating and trading significantly in the currency. _I won 't
lend the status of currency to any commodity which is not used this way_.

And what's clear is that both BitCoin and gold are shit currencies. Even
conceding the exchange rate could stabilize enough for a modern day
Rockefeller[2] to pull it to a success, you still would have to contend with
the deflation inherent in this "currency".

There's a reason why gold is traded in _commodities_ markets -- and not as a
currency. There's a reason why banks and states trade and store USD, instead
of gold. You simply can't grow an economy like it's the 20th century with
gold, or BitCoin. In fact, BitCoin is even more ruthless than gold. 19th
century economies could at least pray for the discovery of a gold vein, to
alleviate their deflationary comedowns. BitCoin denies even this possibility
with the cold, germanic efficiency of a mathematical proof.

[0] The exchange rate we run against our future selves, if you will.

[1] Which doesn't count anyhow, since you would agree there's a risk markup on
them for their illegal status, which makes dubious extrapolating any analysis
from them.

[2] An improbably apt group of entrepreneurs, who even more improbably would
decide to bet their future fortunes on a currency designed by _computer_ geeks
with a penchant for goldbuggering.

~~~
anologwintermut
The fact that Bitcoin is deflationary is purely a product of the
software/protocol. Given consensus to change it, one could make it
inflationary easily. E.g. by having blocks always pay out 25 btc as a reward
or even have successive blocks pay out increasing rewards.

~~~
nhaehnle
It would still be inferior to modern fiat currency from a macro-economic
perspective, because whatever your rule is going to be, it will not adapt to
the development of the economy.

Think of it this way: The abundance of money should somehow correlate with the
abundance of real resources. When this correlation breaks down, bad things
happen to the economy.

In modern fiat currencies, the supply adapts _automatically, without
government intervention_ to the development of the economy, via the mechanism
of bank loans. When a bank makes a loan, the money supply grows. When a loan
is paid back, the money supply shrinks.

Bitcoin cannot work that way by design, which makes it a bad choice for a
common-use currency - at least from the perspective of macro-economic
behavior.

~~~
aaren
I hadn't thought of that before. So bitcoin is like gold in this regard, when
gold was used as currency.

It occurred to me that bank notes today are the ancestors of a receipt that
promised you a certain quantity of gold. Cash is just a promise - an
abstraction from the underlying thing of value.

Whilst bitcoins are limited, you can create as many promises as you like - you
just need an extra layer on top of bitcoin. Does this solve the loaning
problem?

You would still have bitcoin as the base, like the gold standard but with none
of the physical limitations of actual gold and with people still being able to
easily transact in bitcoins.

I'm not sure whether having two things that you can pay with - bitcoin /
promise of bitcoin - would be implementable. Would it require another crypto
layer on top of bitcoin, with some parallel blockchain?

Gold standard:
[http://en.wikipedia.org/wiki/Gold_standard](http://en.wikipedia.org/wiki/Gold_standard)

This is an interesting read about bank notes:
[http://www.bankofengland.co.uk/banknotes/pages/about/history...](http://www.bankofengland.co.uk/banknotes/pages/about/history.aspx)

~~~
nhaehnle
I think it's possible that introducing reserve banking on top of Bitcoin could
solve the lending problem for a while, just like it solved the lending problem
on top of gold - for a while.

In the end, though, the same problems would crop up again after a while: bank
runs, the attempt to deal with bank runs via a central bank, the tendency for
downward spirals in countries with a trade deficit, and so on. Eventually,
countries would have the same incentives to get out of a "Bitcoin standard" as
they had with the gold standard.

------
RoboTeddy
> Let's say, for example, a vendor is considering whether to begin accepting
> bitcoin. She will need to be able feel relatively certain that, when she
> leaves the storefront in the evening, she will have nearly the same amount
> of value on balance when she returns the next morning.

Fortunately, vendors don't have to take on any such risk. There are services
(e.g. CoinBase, BitPay) that let sellers accept bitcoin without ever holding a
bitcoin balance. These services effectively instantly convert bitcoin revenue
into something less volatile (e.g. USD).

~~~
lingben
that does not address the volatility issue at all - even if bitcoin are
converted immediately to dollars or euros, because they fluctuate so wildly,
no business would be able to know if the amount they receive will even cover
their cost or if suddenly they are charging way way 'too much'.

~~~
RoboTeddy
Potentially they could internally set their prices in dollars, and multiply by
the exchange rate to get their current bitcoin price.

------
j2d3
I think BitCoin could be a great answer to the global dissatisfaction with the
dollar as the world reserve currency. Why not use bitcoin as a non-political
global reserve currency, and as an intermediary between national currencies,
rather than as an everyday currency that intends to _replace_ anything.

------
dragontamer
[http://blockchain.info/charts/tx-trade-
ratio](http://blockchain.info/charts/tx-trade-ratio)

Transaction to Trade ratio is going up. For whatever reason, a significant
portion of BTCs (in some data-points... as much as 60% of BTC transactions)
have been in exchanges.

IE: BTC is probably going through a bubble right now, as any commodity. In the
first few weeks of October, there were periods where MOST transactions were
purely for speculation / trading.

[http://blockchain.info/charts/trade-
volume](http://blockchain.info/charts/trade-volume)

Trade volume is on the rise. I don't know why or how, but a group of investors
has decided to start speculating on BTCs.

\------------------

Instead, for BTC to be a "useful currency", people need to transfer BTCs
between each other and stop speculating on BTC / USD exchanges. Whenever there
is a rise of speculators, I'm going to bet on a bubble.

------
zalzane
One tidbit that continues to bother me regarding the long-term viability of
bitcoin is how long the encryption processes it relies on will stay secure.
IIRC bitcoin relies on ECDSA for signing and SHA-256 for hashing.

Pretty much all forms of encryption have a shelf-life until they are broken,
especially when you consider quantum computing on the horizon. What happens
when ECDSA becomes viable to break, or when they start finding SHA-256
collisions? Would the currency just collapse, or is there some way provided to
change the system's cryptography methods?

~~~
gwern
Bitcoin was designed to be quantum-resistant and upgradeable:
[https://en.bitcoin.it/wiki/Myths#Quantum_computers_would_bre...](https://en.bitcoin.it/wiki/Myths#Quantum_computers_would_break_Bitcoin.27s_security)

~~~
maaku
Bitcoin was most certainly not designed to be quantum-resistant or upgradable
(don't trust the wiki for these sorts of things). Thankfully we have
discovered ways in it could be upgraded to be quantum-resistant without
horribly breaking legacy nodes, but that's a very different statement.

~~~
gwern
'Discovered'? If I may quote Satoshi
[https://bitcointalk.org/index.php?topic=202.msg2133#msg2133](https://bitcointalk.org/index.php?topic=202.msg2133#msg2133)
:

> True, if it happened suddenly. If it happens gradually, we can still
> transition to something stronger. When you run the upgraded software for the
> first time, it would re-sign all your money with the new stronger signature
> algorithm. (by creating a transaction sending the money to yourself with the
> stronger sig)

Hardly sounds like he's going 'guys! this is a serious problem but I just
realized that we happen to have a work-around available!'...

~~~
maaku
That post doesn't address the underlying problem. How is the new signature
opcodes introduced? How is consensus reached among a mix of nodes that may or
may not understand the new signature scheme?

Back in 2010 this could have been handled by hard-forking and requiring
everyone to upgrade. In fact in the very early days there were various hard-
fork changes that were not even well documented at the time - you simply
upgraded your client and things worked. That is no longer an option: the
bitcoin ecosystem is simply too big.

Since then we've worked out ways in which soft-fork changes can be introduced
which do not result in consensus errors. This was first tested in the wild
with pay-to-script-hash in 2012. P2SH outputs are treated as anyone-can-claim
outputs by older clients. More recently there has been work on proposals for
adding Lamport signatures without the introduction of new opcodes. This is all
definitely new work.

~~~
gwern
> Back in 2010 this could have been handled by hard-forking and requiring
> everyone to upgrade.

...and it still can, since if QC breaking your bitcoins isn't enough
motivation to upgrade, nothing is.

> This is all definitely new work.

Yes, if you insist any solution has to be soft-forking, then I suppose that's
valuable new work which Satoshi did not expect...

------
jdmitch
Is the volatility graph of Bitcoin in this article really representative?

Some people have mentioned that in the huge price spike in April, there were
not actually that many people buying, and then there is this article on
Bitcoin spreads that calls into question whether Mt. Gox is the best measure:
[http://www.forbes.com/sites/beltway/2013/09/03/how-
bitcoin-s...](http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-
spreads-violate-a-fundamental-economic-law/)

~~~
aqme28
The spreads are so weird because of the difficulties with fiat currencies. Mt.
Gox allows you to deposit/withdraw BTC no problem, but it charges a notorious
premium if you want to withdraw USD. As a result, the BTC-USD prices are
elevated by the premium.

Sites like Coinbase or Bitstamp that don't charge as much to deposit or
withdraw will probably be a more accurate way to judge BTC-USD.

------
mrb
The article is right on one point: Bitcoin is volatile. No one denies that.

However the article is wrong that "volatility must decrease for it to
survive". If anything, the fact it has not only survived for 4 years, but
succeeded by gaining market share and gaining value (1000x since 2010!)
_despite_ its volatility shows that the market does not care that much about
volatility.

~~~
agorinto
I would say volatility must decrease for it to thrive. Bitcoin needs to
transition from a currency for speculators to a currency for consumers.

~~~
mrb
Correct: thriving, not surviving. (I would not have made my remark, had the
author used "thriving" in place of "surviving").

And we are not yet at the point where Bitcoin needs to reduce its volatility
to further grow. My prediction is that there is still room for Bitcoin to grow
(and it will), over the next 1-2 years, and yet volatility is going to remain
just as pronounced as today. I say this because so far, its adoption curve
shows no sign of slowing down.

~~~
XorNot
Yet it looks exactly like the peak -> crash curve of its own history. People
we claiming the same thing of real estate in the US in 2008 as well. Yet the
correct analysis is still that there's no real reason for Bitcoin too grow -
it can't extinguish tax obligations, and any move by governments to tax BTC
profits will tank it because payment will have to be made in their currency,
not BTC. No one has any reason to hold onto BTC if they're not speculating.

------
DennisP
Bitcoin has a market cap around $2 billion. To be a major currency, it needs a
much larger cap, maybe a hundred billion. A major price increase would count
as volatility but it's the only path from here to there.

~~~
robotcookies
It doesn't have to be a major currency. No one (I think) is suggesting it
replace the dollar. Maybe it can be a minor currency that works along with the
dollar. There are certain things you can do with bitcoins that you can't with
fiat.

~~~
DennisP
$100 billion would only be about the size of the Australian dollar. That seems
like a feasible level to me.

------
saejox
Volatility doesn't bother as long as i can convert it to USD as fast and
painless as i do with USD/EUR or Gold/USD.

But, i can't. So it's kinda worthless.

~~~
letney
Ah, but that's improving rapidly. Coinbase does BTC->USD in less than 24 hours
and USD->BTC instantly (with level 3 verified accounts).

------
chris_mahan
Actual coins? That I can use at the store and in vending machines? That I can
use at the restaurant to buy food?

~~~
dublinben
I think a BTC-denominated debit/credit card would actually be the real sign of
its mainstream viability.

The transaction speed is an issue for physical purchases too. Only checks take
longer to clear, and they're pretty marginal.

~~~
ufmace
That would kind of defeat the purpose of Bitcoin. The main advantage is the
transaction system, rather than the store of value.

The transaction speed isn't really much of an issue as long as the block
reward is much higher than the value of your transaction. For most modest
transactions, like food and consumer goods, just seeing the transaction come
across the network is good enough. It's possible to beat this, but doing so
requires a large enough effort that nobody would bother doing it to get lunch
when they could be getting dozens of block rewards worth thousands of times
more instead. Waiting for one confirmation takes around 10 minutes and is
likely to be good enough for anything of less value than buying houses and
cars and other things that are 5+ figures in USD.

~~~
Groxx
It would defeat the purpose of Bitcoin if it replaced Bitcoin. Since it would
be built on top, it's just a service on a cryptocurrency foundation instead of
whatever your government prints.

In that case a credit/debit card could basically be an immediate guarantee of
payment (3rd party guarantees, collects small % to cover abuse/running costs.
basically credit cards now, minus chargebacks), as opposed to what Bitcoin
provides.

------
erikpukinskis
Bitcoin volatility won't decrease for a _long_ time. Right now we're in the
first major phase of Bitcoin's evolution, wherein the global financial system
slowly wraps it's collective brain around what Bitcoin is, how it behaves, and
what it's good for.

Even experts in cryptocurrency don't agree about any of those things, so
global consensus about those three things is a long way off.

A few basics are starting to emerge:

* Bitcoin is good for transactions that governments don't want you to make.

* Bitcoin is good for transactions between vastly different financial and legal systems.

* Bitcoin is good for storing money in your brain.

* Some subset of people feel Bitcoin is a good investment.

But even now, there are many people with money, not to mention many financial
experts, who are not so sure about these things. With every WSJ article we
creep closer and closer to consensus, but it is still quite far off.

That said, eventually the global financial markets will start to agree about
these uses, and a generally accepted model will emerge. I suspect this will
take at least 20 years, which is the length of time it will take for us to
start having University Faculty who went through their entire undergraduate
education with Bitcoin existing and at least partially understood by their
professors.

That model will be something like:

    
    
        Bitcoin market cap = I + f(V)
    

where V = volume of global transactions for which Bitcoin is the best choice

f(V) = the float required to make those transactions

I = the amount of capital for which Bitcoin is the best investment vehicle

And of course we need models for each of these... V is going to be some
portion of illegal transactions, some portion of inter-border transactions,
etc. We really have no idea what this is right now.

Until then the price of Bitcoin will be very chaotic, which will influence the
I term, but not the V term. The V term is just a pure result of how many
people have need for a Bitcoin-like currency, and what percentage of those
people are aware of Bitcoin and have the technical means to use it.

BUT, when the global financial markets do start to reach consensus on the
model, then Bitcoin will stabilize. And I don't mean it will stabilize as a
deflationary currency, I mean it will literally be flat. Because the financial
markets have NO problem pricing deflation into their models and they
absolutely will. The price will go up to where you can't make money investing
in Bitcoin during a reasonable slice of a human lifetime, and then level off.

And I suspect Bitcoin will stabilize MUCH more than traditional currencies.
Because there will be no capriciousness of international politics or policy,
the Bitcoin price model will be based on much more stable factors: global
crime, global population, etc. And those things are much easier to model than
things like U.S. foreign policy.

So anyone who is thinking either A) Bitcoin has a chance at stabilizing in the
next 10 years, B) Bitcoin will deflate forever, or C) Bitcoin will never
stabilize, I just don't agree. It's just going to take a while.

~~~
RoboTeddy
Could it be argued that:

    
    
      Gold Market Cap = I + f(V)
    

with V ≈ 0, since gold isn't used for many transactions? (AFAIK)

Why hasn't gold stabilized entirely? Are there reasons why it's affected by
capricious international politics or policy, but Bitcoin won't be?

If I had to guess, I'd say that Bitcoin, like gold, will be affected by e.g.
future economic delveragings that cause people to expect that the government
might print money.

~~~
erikpukinskis
> Are there reasons why it's affected by capricious international politics or
> policy, but Bitcoin won't be?

Well not being used for transactions probably makes it less stable. Gold is
mostly just an investment, which means it can vary a lot based on the other
available investment vehicles. Bitcoin has many real world uses, which I think
will add stability.

