
The economics of Bitcoin - michael_nielsen
http://marginalrevolution.com/marginalrevolution/2011/04/the-economics-of-bitcoin.html
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hugh3
Here's my thinking on how this will play out.

There's a finite number of people in the world. Each of them hears about
Bitcoin for the first time exactly once. At this point one of two things can
happen -- either they say "What? That sounds stupid" or they say "Well, that
sounds pretty stupid, but there's a _chance_ it might take off, so I might as
well be an early adopter and acquire a bunch of 'em".

People in Group A can be safely ignored for now. People in Group B serve to
drive up the price of Bitcoins, since they say "Shit, if I spend a few tens of
dollars now then I could be a zillionaire in the future!" The Group B people
also now become Bitcoin evangelists, assiduously spamming and astroturfing all
over the damn place in an effort to convert more people to the Bitcoin fold.

The trouble is, eventually you run out of new people. People who made the
initial decision to join Group A are very unlikely to have second thoughts and
jump on the speculative bandwagon six months later, since they'll later on say
"Well shit, I'm not gonna pay a hundred bucks for what I could have got for
five bucks a few months ago". And of course the penetration of the Bitcoin
meme outside tech geek circles is likely to be incredibly low, since most
people won't even understand what the hell it's supposed to be about, let
alone how to use it.

Anyway, like every speculative bubble in history it'll burst when you run out
of bigger suckers. This will probably happen fairly soon due to the the
limited size of the target market, but not before everybody gets sick and
tired of hearing about it. End result: a lot of wasted CPU cycles and a
reasonably small transfer of wealth from the gullible to the canny. Life goes
on.

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japherwocky
Don't you get annoyed at how much money bankers make just because they control
the infrastructure of transferring account balances around?

I like it because I think it's a clever solution to rampant
government/institutional corruption..

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hugh3
Banks make money primarily by borrowing money from people who have it and
lending it to people who need it -- this is a sensible business model
regardless of what kind of currency you're using.

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japherwocky
I think the banks could make plenty of money without forcing me to deal with
paper checks.

My point is, there are lots of other reasons to use bitcoin.

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arohner
Like many other people, I was skeptical about the need for bitcoins.

The thing that finally made me think BitCoin could potentially have value is
internet weed dealers.

Let's say there are three people, A, B,C. A sells weed (or other illegal
substances) over the internet. Previously, they'd have to accept a currency
that can be easily tracked. Now, they will only accept BitCoin.

B wants to buy weed. B exchanges USD for Bitcoin with C, a bitcoin miner, and
then trades BitCoin for Weed with Person A. A then converts his bitcoins back
to dollars, either selling them himself, or selling them to C.

Once there is a market for weed denominated in bitcoin, bitcoin has real
value, and markets for all kinds of legitimate activity can sprout up.

Of course, this is all a form of money laundering, but at least the value is
rooted in something.

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richardw
The restricted nature only serves to ensure that people don't produce an
infinite amount of them, which would destroy any value they have. However,
rarity doesn't create value, it only helps to preserve value due to the
absence of any single authority that can devalue it. The actual currency value
derives from what you can do with it, namely purchase services or products.

Currently, that's where I see a lack. There seems to be more interest in
trading the currency than using it for products or services. For a universe
equal to $5 million, there's not much to buy. I'm a bit wary of putting my app
for sale on the shrooms-and-heroin page, y'know?

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pjkundert
Agreed. Marx called from 1844; he wants his "Labor Theory of Value" back.

Simply because something is rare, doesn't mean it is valuable.

~~~
eru
Though if it's rare, it can stay valuable, once it becomes so.

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hugh3
And how many times in history has this happened? Maybe once, if you want to
count precious metals and stones... though these have a certain aesthetic
appeal, and in any case have been considered valuable for all of recorded
history.

Every other valuable asset in the world is either useful or backed by a
recognised government.

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eru
Doesn't need to be a government. Just a trusted party that provides conversion
into other assets.

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hugh3
In which case you have a currency backed by the underlying assets of the
trusted party. A "one free donut" voucher from Krispy Kreme is almost as good
as owning a donut, since I'm fairly confident that they'll be able to produce
the donut upon demand. Whether "donut vouchers" deserve to be called an asset
separate from "donuts", however, is pretty debatable -- the value of one is
clearly tied to the value of the other.

This is, of course, nothing like Bitcoin, which isn't backed by any actual
assets of any trusted party. In fact, it is entirely incompatible with the
massive inflation which is Bitcoin's most appealing feature for its early
adopters.

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eru
Why should massive inflation be an appealing feature for early adopters?

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hugh3
Sorry, I meant massive deflation.

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eru
Makes more sense. Thanks.

