The only other type of non-inflating "currency system" I can think of is the market for collectibles (baseball cards, limited edition artwork, etc.). But collectibles have intrinsic value while bitcoins only have value inasmuch as they are useful for transactions.
So, TLDR I am concerned about the long-term viability of bitcoins
Intrinsic value - FALLACY! Behold, the Subjective Theory of Value - http://en.wikipedia.org/wiki/Subjective_theory_of_value
Concerned about long-term viability of bitcoins? Maybe your concern should be with learning logic and economics first.
As a corollary to your point, other world currencies are going to be considerably more inflationary than Bitcoins the longer this experiment last. Then converting bitcoins to a national currency with a more profitable interest rate is an inevitability. bitcoins will be sucked into financial services rather than building out a viable economic platform for the currency.
That strikes at the heart of it, IMHO. The current currency distribution model is good at least in the sense that the newly "printed" currency is allocated for the most part by banks with (ostensibly) some degree of investment saavy. Here, we are asking "network operators" doing the proof-of-work algorithms to essentially act like banks and distribute bitcoins into larger circulation. That seems likely to cause problems.
Second, how else do you bring coins into the market? Be forced to buy them from the system's founder? I doubt that would catch on. Reserve a set number for each person onthe planet and give it to them when they ask for them? I don't think I could count all of the problems with that idea. Hand them out some arbitrary number of some supply in a first come first serve manner? I don't see how that would be an improvement.
The system needs people to generate blocks in order to provide the security of the system, but generating blocks has costs associated with it (hardware, electricity). Why not reward those block generators that are providing the system's security with new coins for each block they generate, at least until the number of transactions per block grow to a point that block generators can charge transaction fees?
Block generators aren't just generating blocks for the fun of it...they want bitcoins so they can spend them, which means those bitcoins will go to others, who can then further spend them, etc. Anyone can do it. GPU mining is profitable for most who wish to make the investment. There's no central authority choosing who gets to generate new blocks. Each person chooses whether they want to generate blocks or not.
If you don't want to generate blocks, but still want bitcoins, then you offer goods/services for bitcoins.
So far no one has thought of any less arbitrary way to introduce bitcoins into the network while continuing to support the security of the network at the same time.
And the term "proof-of-work" is misleading. They're generating blocks in such a way to deliberately make it difficult for someone else to attack the network by generating replacement blocks in an attempt to double-spend their bitcoins. They're not doing these calculations as an attempt to prove they're not some malicious node. Block generators do the work of creating a block, and if someone wants to double-spend their money, they have to generate that block and every single block that's been generated afterwards with at least the same total difficulty of the other blocks. This can only theoretically be accomplished if they have more processing power than the entire bitcoin network, and even then it would take a long time to do unless they had a lot more. Otherwise they just fall further and further behind as the bitcoin network block generators increase in power and the difficulty increases. Contrary to the opinions of some, these calculations are not wasteful, but are a necessary part of the system's security.
However, I doubt any economy will be purely based on bitcoins. If successful, the bitcoin will merely be a useful way to do painless and anonymous internet transactions, and not the only money out there. And if bitcoins get too rare for internet transactions (because people are hoarding them) it would be very easy for someone else to start another bitcoin-like currency.
You do realize that bitcoins are extremely divisible, right?
You have heard of Time Preference, right? People aren't going to stop buying goods and services altogether because they believe they could buy more in the future. Sure they'll actually save more than they would with a money that loses value over time, but they still have necessities they want to buy, and toys they want to play with now rather than later, old goods that wear out, need new cars, want a new house (or another house), etc. Why do you think people want money in the first place? To live a long destitute life and maybe spend it if they don't die first?
People have used gold as money for thousands of years...how come suddenly current generations are trying to stock up on it more than previous generations? This surely couldn't have anything to do with the insane economic environment created by the various governments, their central banks, and the giant businesses practically created by those governments!?
Bitcoins will never become "too rare" for internet transactions. The protocol currently supports the total bitcoin supply being divided into 2,100,000,000,000,000 units, and that can always be changed if most bitcoin users think they need it to be divided further.
For example, on the surface it looks like a bad deal to lend someone bitcoins when almost all bitcoins have been generated. You will most likely receive a very low interest rate. Why wouldn't you just convert to some other currency (say USD), lend money out in that currency, and capture a higher interest rate? The answer is that because since bitcoin inflation will be nonexistent by that time, its exchange value against USD would increase by precisely the amount of US inflation.
(Sorry for my ignorance. I tried looking it up, can't seem to understand what it really is.)
They are working on a real problem though. Paypal kind of works, but isn't ideal.
To address from a different angle, the phenomenon where you say electricity is being "wasted" to produce a bitcoin is analogous to the creation of a US dollar. Not to the using of it or acquiring of it. You can buy and acquire a bitcoin fairly quickly and cheaply, CPU/electricity-wise. Much more so than if you had to "mine" it. Much like dollars. Much cheaper/easer/faster to "buy" a dollar than to construct one out of thin air. (A legal one, anyway.)
In short: pure-digital currency, created out of thin air, backed by cryptographic algorithms, aligned with a libertarian/anarchic philosophy, and designed to avoid many problems associated with traditional national paper currencies. It has flaws and quirks which critics will jump on, but then so does say the US dollar and the US Federal government and banking system, so arguably somewhat of a case of pick your poison, or lesser of two evils.
Gold was valuable before it started being used as money. It started being used as money because it has several valuable properties: it's rare, it's portable, it's fungible.
Why would someone start using bitcoin? Who will accept a bitcoin in trade, and why is that bitcoin more valuable to them than $1?
If you look at some of the charts from the trading websites, you can see they weren't all that valuable right away. But as more people learned of bitcoin and the way the system is designed with it's anonymity and security, as well as it's hard money qualities, it started to catch on.
A single U.S. penny used to be able to buy lots of bitcoins. At this moment, not even $1 USD can buy a whole bitcoin. It's generally expected that it will take many USDs to buy a single bitcoin before too long.
Take this second thing, get rid of actual physical gold or actual paper dollars, and you basically have what Bitcoin is. Pure electronic, pure virtual, and not backed by any single bank or national government. Paper was to gold somewhat like Bitcoin is to paper. A step further in the same direction, just more extreme, with a couple of cool additional features and potentially scary quirks. (Counter: arguably the US Federal government and world banking system has some "scary quirks" but we're effectively forced to accept them.)
Gold was valuable before it was money. Bitcoin is not.
These first movers that are paying real money for bitcoin, seem to only be doing so because they think other people will use it in the future. There's a name for that, it's called a bubble.
To have a sustainable currency, the medium of exchange should be valuable, even if no one else is using it as money.
In prisons, cigarettes are often used as a form of accepted currency. Weird but, as you said, cigarettes have functional value before and beyond their arbitrary assigned role as currency. Now take these little pieces of green-ish papers in my wallet, with the funny markings on it. I heard a rumor that others will take it as a unit of payment, even though in reality, it's just a little piece of paper with some markings on it. It's actual functional value could maybe be that of a piece of tissue paper to wipe my ass. Except it's not very good at it. So I wouldn't even use it for that. The US government says, "Forsooth and yeah verily, these pieces of paper shall be the currency we use!" and couple that with a promise to accept it themselves as a unit of payment, and therefore, poof, it now has value.
Last point, if you parachute onto a tiny uncharted Pacific island and contact a lost tribe there, and offer them $20 USD for their food, they will most likely say, "Sorry, we only take melons and womenfolk as currency. We don't take US dollars, and we don't take American Express." Lesson: what is accepted as currency varies by individual and culture and time period. It's totally arbitrary.
You run the software and makes bitcoins for you. Almost like earning money in your sleep. And of course once you have "earned" these bitcoins by installing the software you have a psychological inclination to assign actual value to them.
Of course like most things academic it falls flat on its face on execution. My software did not work. I had to spend half an hour diving through forums and wikis to find some obscure command line argument that may make it work, although I am still not sure it is working properly. Of course 99% of ordinary people would have just given up.
So the folks at bitcoin have ensured that only persistent nerds like me use their service.
Bitcoin FAQ - https://en.bitcoin.it/wiki/FAQ
Bitcoin Wiki - https://en.bitcoin.it/wiki/Main_Page
How Bitcoin Works - https://en.bitcoin.it/wiki/How_bitcoin_works
Installing Bitcoin - https://en.bitcoin.it/wiki/Getting_started
HowTo Mining Bitcoin: Fedora 14: http://bit.ly/fb54ye and Ubuntu: http://bit.ly/ewVzhu
The Bitcoin Faucet (free bitcoins) - https://freebitcoins.appspot.com
Buying bitcoins - https://en.bitcoin.it/wiki/Buying_bitcoins
Bitcoin 6-Month Price Chart - http://bit.ly/hzVKpq
Bitcoin Community Portal - https://en.bitcoin.it/wiki/Bitcoin:Community_portal
Recent Posts here on the forum - http://www.bitcoin.org/smf/index.php?action=recent
that example isn't reason enough for me to use bitcoin.
But for the long term, When the list of payment methods reads:
Visa / MC / AmEx / Bitcoin (receive 2% discount)
The bitcoin miners only process the transactions. They don't care about fraud and chargeback.
I'll wait for bitcoin 2.0 :)
Last time this came up on HN BitCoin's FAQ had a question directly asking what useful thing it backs to. I say "asking" because the answer was basically no answer at all. I see it is no longer there. This is because if they can't answer it, it is better for them not to bring the question up at all, so I guess it's a good move for them.
Currencies have to back to something. Dollars back to being able to pay the various governments of the US not to throw you in jail for breaking various laws (tax, fines, etc); a dollar is useful even in Africa to someone not subject to those laws, because you can trade it to somebody else who has that use. The way an economy works allows the value of a dollar to appear to become severed from its backing and just float in space, propped up only by mutual consensus, but this is an illusion. When the backing goes, so does the currency. History's full of examples, just look up "hyperinflation".
(Also note the difference between backing and rarity. Anybody can make something rare, backing means it's actually worth something even on its own.)
Bitcoins provide an interesting technology platform around which to build a currency, but trying to use them directly as currency is only slightly different than using Monopoly money, and the differences aren't relevant.
How ironic that someone would say such a thing, and then immediately post a few paragraphs displaying their own misunderstandings of what a currency is.
Do you know what a "hard money" is? Bitcoin is a digital hard money.
You talk so much about backing...backing is nonsense. Gold isn't backed by anything. It's just matter, like everything else. The value of that specific form of matter is in the eye of the beholder. Lookup the Subjective Theory of Value. Then go to http://mises.org
I'm not a goldbug precisely because I don't think gold is worth anywhere near what people think it is. The "durable value" it had in the decoration field is gone. If it were ever actually put to the test it would collapse to a much lower value reflecting its actual industrial and decorative values which are nothing like what they used to be.
The subjectivity of value is why backing is so important if your currency isn't to collapse. Something's got to stop the subjective system from just deciding the value is 0, aka, hyperinflation. Or, more accurately, realizing the value is zero.
It's easy to wave some academic theories around and act intellectually superior, but call me when you've actually got a functional currency that corresponds to what you claim is possible and even remotely resembles the real world market size of even Microsoft Points or Eve Online's currency. BitCoin is not it, and it won't ever be it.
This isn't the result of free markets, but a result of the actions of violent institutions.
The "durable value" it had in the decoration field is gone. The durability isn't a matter of decoration. The durability matters most in that it's not going to rot/rust away, so that an ounce of gold remains and ounce of gold rather than turning into half an ounce of gold.
If it were ever actually put to the test it would collapse to a much lower value reflecting its actual industrial and decorative values which are nothing like what they used to be.
You're forgetting it's value for trading and as a good store of value, which are most like among the biggest reasons it is valued by most people.
The "backing" is also subjectively valued...everything that is valued is valued subjectively. The universe doesn't set some standard value for things that humans are supposed to agree with.
but call me when you've actually got a functional currency that corresponds to what you claim is possible and even remotely resembles the real world market size of even Microsoft Points or Eve Online's currency. BitCoin is not it, and it won't ever be it.
Bitcoin just started as a grassroots project that is growing and growing quickly. You'll be hearing more news about it's further successes, I'm sure. Maybe after a few years of watching it grow, you'll decide you're ready for it.
In particular, the section from about 10:30 discusses how Brazil combatted inflation by essentially replacing their currency with something that everyone agreed was valuable.
You lost me here. Thats the favorite website of Internet economists. It is unable to explain real economic/business cycles.
The differences are relevant. Monopoly money makes a perfectly acceptable currency for the game of monopoly. It would make for a currency between neighboring households as well except for the fact that it is easy to copy and therefore impossible to trust.
In this way you can say bitcoin is backed by the mathematical certainty that hashing functions are hard to reverse.
They don't want inflation. One of the impeti for this initiative is to have a currency that some politicians can't decide to print more of.
But at the same time, they can't just issue 90% of the total money that will exist right at the beginning. No one's going to buy into a currency where the vast majority of the "wealth" goes to a few early adopters.
So it makes sense to have the money supply grow fast at the beginning, when the currency is hopefully getting more popular as well, preventing inflation, and then to gradually slow down the money supply growth to achieve the goal of preventing inflation.
In all of your statements you're conflating a protocol, and voluntary social agreement, with a central authority.
Anyone is free to fork the software and change the rules to create their own protocol for people to use! If they like the rules, they join...if they don't like the rules, they don't join. Freedom.
Maybe it is worth it to implement my idea of writing something that tries to get free cycles out of EC2 Spot instances by predicting when the price will rise and spinning up instances before it does. (They don't charge you for fractional hours if they kill you due to a price increase.)
EDIT: I think it's actually gotten a little less favorable to generate bitcoins. My cheap VPS peaks at 1M hashes/sec, which according to http://www.alloscomp.com/bitcoin/calculator.php used to mean it would take around 250 days to generate a block, as I recall. Now, the value of a block has 4xed, but the average time to generate a block at 1M hps is now 1300 days, which is more than 5x as long.
To me at least that seems more defining as a currency rather than simply say a digital good.