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Why I’m Putting All My Savings Into Bitcoin (falkvinge.net)
116 points by mazsa on May 29, 2011 | hide | past | web | favorite | 190 comments



Bitcoin has aggravated the "layman talks out his ass about economics" problem again.

1. Gold is a proof of work system just like bitcoin. When someone accepts gold as payment for some other commodity or service they are doing so under the assumption that the value will be stable because it takes at least X amount of time/labor/ingenuity/money to "create" more gold by mining it. This is what backs non-consumption commodities.

2. Fiat currencies ARE backed. They are just usually backed by a service and not a commodity. The USD for example is backed by several things: the fact that it is the reserve currency for buying oil (all oil is sold in US dollars), the fact that dollars are avoid-prison coupons for tax burdens (how most fiat currencies have been backed), confidence that the US will inflate less than other regimes and meet its obligations, confidence that the US will enforce debt obligations denominated in USD with their military if necessary.

I'm getting pretty tired of ALL CAPS hyperbole about gold and fiat currency.


I don't know much about economics, but...

Gold isn't really a non-consumption commodity. It's used in things like jewelry and compter circuits.

In other words, it doesn't just work because everybody agreed that it's a good mechanism for trade. It works because it actually has underlying value. Or, at least, I can't rule out that possibility, because it DOES have underlying value.


But it has much less underlying value than other consumption commodities. Copper is more more useful than gold, for example.


That gold is overinflated doesn't diminish the fact that it has a utility outside of it's use as a financial instrument.


True, but if you break down the value of gold then it's maybe a dollar an ounce from practical uses and 1500 dollars an ounce from the fact that it's a seven-thouand-year-old asset bubble.

Or, to put it another way, suppose tomorrow I figure out a way to replace gold with some much cheaper tin-copper alloy in all its industrial applications. That's not gonna decrease the value of gold all that much. (Note that I don't really count jewellery as an industrial application -- gold is used in jewellery because it's valuable, not because it looks any prettier than other metals).


gold is used in jewellery because it's valuable, not because it looks any prettier than other metals

I'm not so sure about that. Gold is used in jewelry because (a) it looks cooler than silver/tin/copper/etc.; and (b) because it is really rare.

So I'm proposing the chain is:

Looks good & rare -> Valuable

I think if you were missing either "looks good for jewelry" OR "rare", it wouldn't be valuable and it wouldn't work as a medium of exchange.

This is a historical perspective. These days you could also use:

Used in industrial applications & rare -> Valuable

but I doubt that would drive the value of it up to where my former hypothesis does, if it's right.


Gold is used in jewelry because: * It is malleable * It is resistant to corrosion/tarnish


The thing that makes it most unique WRT jewelry is that it's pretty.

It's easy to make jewelry out of wood, glass, and lots of other things.


Look at Platinum. More expensive than gold, largely commercial use (jewelry is about 25%).


Also comparatively harder to work than gold.


The paper used to print dollars also has intrinsic value, but you wouldn't want to argue that it's a good choice as currency just because you can burn it.


Okay, now i'm veering into positions where i don't have a sound enough background in economics to be totally confident in the statements i am going to make. I'm sure there's economic research on this, and i'd further hazard a guess that there's probably not agreement on the subject:

Sorry, let me be more clear. The criteria for a sound investment as an asset is different from the criteria determining soundness in a currency (from the perspective of an individual holding an asset or currency).

I say that on the basis of a variety of discussions on what money is and what it's supposed to represent. The point of making sound investment is that you have faith that even if plans go horribly awry, you are exchanging your money and interest for an asset of some concrete worth (at least in the ideal).

The point of currency is to provide a broad-based and stable mechanism to ensure liquidity in economic markets. The whole point of US dollars and what the Fed is trying do is provide a solid fundamental basis upon which the US economy can function.

We can argue about the intrinsic worth of currency, but i don't think that's the point of currency. So, do i think gold is a good investment? No, i think it's way over-inflated, but if you have a big pile of gold, you'll be able to do something with it. Do i think gold is a good currency? Absolutely, positively, one-million-times NO. I think that using gold back currencies is being pushed by people (shysters) who want to further inflate the value of gold, and by people who have bought the bad arguments that the shysters have been pushing.

tl;dr: good asset != good currency


I think you're trying to distinguish between properties that make something a good way of transporting value over time and properties that make it good as a medium of exchange. You're right that these things aren't necessarily the same because they are overlapping, but not congruent, sets of properties.


But gold is way more rare than copper!!!


Gold isn't really a non-consumption commodity. It's used in things like jewelry and compter circuits.

Yes, but... (you know the drill) World gold reserves are 60 times its annual production, which means that gold is mostly a non-consumption commodity.


Yes, and there is a simple reason why gold is mostly a non-consumption commodity: because it is more useful as a monetary commodity. It has a distinct combination of physical properties which give it monetary properties. It is durable, malleable, divisible, rare, compact, portable, easily recognizable, and beautiful.

There are many good reasons to use steel instead of gold for flatware, kitchen sinks, and refrigerators, in spite of the fact that steel corrodes and gold does not. This does not make gold "useless", it just means that gold has better uses.

Emeralds are very durable and far more rare than gold, but they are generally unsuitable as a monetary commodity because they are not malleable and easily divisible.

One distinct advantage of gold over bitcoin is that transacting in gold does not require a network connection of any kind, nor even the existence of computers.


Thank you, sir, for the coinage 'avoid-prison coupons'. (Your comment is currently the only source Google finds for that particular phrase.)


But surely the condition that it's hard to make more of something is necessary but not sufficient to make that something a good "money" candidate. People expect e.g. gold to continue to be money-like mostly because of its multi-thousand year history as money. So in that very large respect, gold is quite different from bitcoin.

I am interested in bitcoin, though, because of the obvious fact that it has something that neither gold nor dollars, euros, etc. have - it can be used anonymously over the internet. So it's possible to see it becoming popular enough to be "money", which is something important you can't say about something that is merely scarce. (I have to admit that I don't think it's likely, though, and I think investing all of your savings in it is a terrible idea.)


... can be used anonymously over the internet

Bitcoin transactions are easily traceable, so to achieve anonymity you must take care to avoid associating your IP address with spend locations.

You can use gold over the internet as well, using a system such as https://loom.cc to handle the accounting. But again, to achieve anonymity you must take care to avoid associating your IP address with spend locations.


That flares up every few months. It's pseudo-intellectual herpes.


Several countries are trading oil directly with each other in non-USD currencies now.


This violates two simple, and obvious, tenets of investing:

1. Don't put all your eggs in one basket.

2. If it sounds too good to be true, it probably is.


Actually Luigi, you're missing the best and most fundamental rule:

3. Past performance is no guarantee of future returns


Personally, my most fundamental rule is this:

4. Invest in stuff that has value.


This is the right strategy (IMO) not only because of near and long-term returns, but because it produces a better mentality. Trend or fad chasing may also produce substantial returns, but it produces scatter-brained people, often addicted to the beeps of their assorted gadgets, and detrimental to their health and well-being and the well-being of those around them.

I'd rather be a carpenter in the Catskills making 35K / year and producing beautiful products that enhance life than a Forex trader taking 10x that amount but simply sloshing capital around.


Doesn't financial services have value?


Due to the volatility of the bitcoin market I'm betting we are going to see a next blog post by the author "How I lost all my savings using bitcoin"


Re: 1

Perhaps. But if you know what you're doing, wide diversification may not be wise.

"How many insights do you need? Well, I'd argue: that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man—Warren's a lot more able than I am and very disciplined—devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.

So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple."

-Charlie Munger

http://ycombinator.com/munger.html

Re: 2

"Too much of a good thing can be wonderful."

-Mae West


The Berkshire Hathaway quote illustrates the diversity point here. Berkshire made a lot more than 10 investments, just those 10 returned most of the money. If they knew in advance what those 10 would be they would have only made those 10 investments, but they didn't so they diversified.


this. hindsight bias and the need to create a narrative about chaotic outcomes drives much economic discussion.


The purpose of diversification is in case your insight is wrong. In case bitcoin crashes faster than he's able to pull his money out, or in case demand slackens and prevents him from pulling his money out (being able to transform money from bitcoins to dollars is necessary until all the places he would spend money accept bitcoins too), being diversified would prevent him from losing everything.


I know nothing about Bitcoin.

And I agree that you probably shouldn't put all your eggs in one basket.

But that doesn't mean that wide diversification is the right strategy.

I think some of the greatest successes have occurred because of an obsessive focus (e.g. Apple, Pixar, 37signals, Trader Joes, Chipotle, Berkshire Hathaway, top professional athletes).


Apart from the fact that you're comparing the obsessive focus of a business plan to that of a portfolio, you realize that Berkshire owns NetJets, Dairy Queen, Borsheim's jewelry, insurance companies, and the Burlington Northern Railroad, right?

"Obsessive focus on being awesome" is not a non-diversified investing strategy.


>"Obsessive focus on being awesome" is not a non-diversified investing strategy.

I disagree. I think focusing on only owning/investing in "All-Stars" is a non-diversified investing strategy.

"Berkshire's CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required."

-Warren Buffett's 2010 letter to shareholders: http://www.berkshirehathaway.com/letters/letters.html

In the tech world VCs and angels seem to want this too. If they only invested in Google, Facebook, Twitter, Groupon, LivingSocial, Amazon, Spotify, etc., I think they'd be perfectly happy.

IMO, DST seems to be implementing this strategy, at least to some extent.


I disagree. I think focusing on only owning/investing in "All-Stars" is a non-diversified investing strategy

Only if you want to abuse the term "diversified investment strategy" to the point where it becomes meaningless.

When we say you should have a diverse portfolio it does not mean "diversely spread between good assets and crap assets". You should only buy good assets. But you should buy multiple good assets, largely to protect yourself from the fact that what you think is a good asset may in fact be crap.

Look, I understand you're trying to be contrarian here, but "diversify your assets" isn't a point that leaves a lot of room for contrarianism.


I think it's less useful, when picking a strategy, to know what percentage of great successes were caused by obsessive focus than to know what percentage of obsessive focuses caused great success.


Andrew Carnegie would respectfully disagree with your first tenant:

"Put all of your eggs in one basket -- and watch that basket!"


For every Andrew Carnegie, there are lots of others who watched their basket and saw it destroyed. They just don't go around giving advice.


Yes they do. They're the ones who go around saying "Don't put all your eggs in one basket".


Don't put all your eggs in a basket you know nothing about.


Actually, don't put any eggs in a basket you know nothing about.

Don't put all your eggs in any basket even if you think you have perfect knowledge of it.


How about we stop investing with eggs, eh? How about that?


Eggs have pretty good long-term yields. One egg produces one chicken. One chicken produces an egg every day. At this rate you'll have 10^23 chickens in just a few short years.


In my experience people who write blog posts like this don't have enough eggs to really worry what happens to the basket. It's either someone with very little life savings or a pump and dumper.


Falkvinge is the founder of the Swedish Pirate Party, so my guess he's willing to personally risk to promote the world's first viable decentralized currency.


The basket many people are holding all their eggs in, is the USD. That has depreciated significantly in the last few years, with a very good chance that it'll continue to do so.

My home currency isn't the dollar but my app is priced in dollars and that sucks. I'd far prefer to have Euro earnings and earn a few bitcoins a month as a speculative investment.


The basket many people are holding all their eggs in, is the USD

Not many people, or at least not many people with nontrivial amounts of money, have all their assets in US dollars. Most folks own shares and/or property. As you say, US-dollar cash assets are a poor investment right now since interest rates are lower than inflation.

Still, keeping all your money in US dollars (in a big brown bag inside a zoo, perhaps) is a lot less nutty than keeping all your money in bitcoins. Even if nothing else, the US dollar has a history of relatively low volatility over the past couple of hundred years, whereas bitcoins have a history of insanely high volatility and dates back to (uhh, goes and checks) 2009.


The US dollar hasn't existed nearly that long in its current form. The current currency regime began in 1971 when Nixon ended the policy of buying back each dollar with 1/35 of an ounce of gold.

Major changes to the nature or definition of the US Dollar occurred over the past 200 years:

- In 1945 the Bretton Woods agreement made the US Dollar the world's reserve currency

- In 1933 private ownership of gold in the US was outlawed. Gold was forcibly confiscated for $20 per ounce. The price was then raised to $35 per ounce.

- In 1913 the Federal Reserve System was created

- In 1861 fiat "Greenbacks" were issued


That depends on what you mean by "few". Here is a chart of the US Dollar index since 2002. http://futures.tradingcharts.com/chart/US/M?1306686035 The major depreciation trend stopped in 2004 and since then has bounced around in a trading range.


Would you have preferred your app to be priced in bitcoin instead?


I think thats already answeres in his comment.

he would prefer most of his apps in Euro and a few in Bitcoin


Does investing in foreign stocks hedge against this?


Investing in any stocks hedges against this. For instance, I have shares in General Electric. That means I indirectly own part of all GE's assets. Some of their assets are in US dollars, but the vast majority of their assets are tangible things -- factories that make jet engines and diesel locomotives and dishwashers and... whatever the hell else we make. If the US dollar drops in value, the US dollar value of these real assets goes up correspondingly.


That's only true for some stocks, and GE is a bad example. The majority of GE's assets are not tangible things but rather debt owed to GE Capital. As of 2010 only 9% of GE's assets were tangible property, plants, and equipment. http://www.ge.com/investors/financial_reporting/index.html


In fact, Warren Buffett said this in an interview: Owning talent is the only way to hedge against depreciation of your currency (equivalently inflation).


Holding stocks can definitely hedge against a devaluation of currency. Even domestic stocks or others prices in the currency you're seeking to get out of can work, but are significantly worse at doing so than one priced in a "safer" currency. There are investment firms that specialize in investing in the stock of foreign companies.


"with a very good chance that it'll continue to do so."

That's not what extraordinarily low interest rates in the bond market say.


China's been buying a lot of dollars to hold their own currency down. I assume that won't continue forever. When it does stop, the USD will drop & Yuan will rise. Also, Pimco, biggest bond trader in the world, has dumped all their treasuries. I'm with them :)

My guess is that the USD is seen as a safe haven during these risky times, but not a long-term store of wealth. That's why treasuries are (temporarily) high.


2a. If there's money involved, it's probably a scam.


They are only heuristics, not iron law of investment. Even so, don't put all your eggs in one basket pretty much apply to all situations.


"There is currently about USD 50 million in the bitcoin system, and just over six million coins in circulation, valued at $8 each. Up until now, demand has largely been driven by enthusiasts. The value of a bitcoin can’t be held constant — if 12 more million dollars is exchanged into bitcoin, the value of a coin will rise to $10. The more people who want to use the system, the more people will need to exchange a portion of national currency for bitcoin, and the more money will go into the system. The more money there is in the system, the more a particular bitcoin will be worth."

This statement lacks economic sense. The total market capitalization of bitcoin ecosystem is $50m doesn't mean that $50m has been transacted. If I accept your offer of $800 per bitcoin, the market cap based on this transaction will become $5 billion instead.

Therefore, the author has severely over-estimated how much money that people have put in to the market. He is probably thinking "So there are $50 million investment here, my savings are so insignificant that I don't have to count the risk."


Thanks I didn't catch that myself. Sounds awfully much like real estate where suddenly everyone was feeling rich because some idiot bought a house for too much money. (in this case aggravated by the fact that the idiot put zero money down.)


Take away the interesting technical aspects, and BitCoin, to me, looks like a pyramid scheme.

The BitCoin economy is like a small country with a novel monetary system. Now, a big country, say the USA, wants to join because it sees benefits in that system. Normally, such a transition would have the USA print new money. In this case, the answer to "OK, sounds useful, how do we introduce this kind of money into our economy?" is not "together, we pick an exchange rate, then you can 'print' a BitCoin for every X dollars you destroy", but "you buy it from us, who got there earlier".

There also are huge problems integrating this "nobody can check where money flows" scheme into current economies. Income tax? Forget it. Indirect government control over inflation and interet rates?. Forget it.

In the end, I think some of the ideas of BitCoin may live on, but I do not see it live for more than a couple of years. Meanwhile, it will make quite a few people rich.


> Take away the interesting technical aspects

BitCoin consists only of technical aspects. The rest is just noise that people do around them.


All human-created phenomena are social phenomena. "It's just tech" is said only by those who fundamentally don't understand this or want you to ignore those social aspects for their own gains.

Contrary to what lots of the Bitcoin aficionados might like people to think, the social aspects of it are the only part that really matters outside of a crypto mailing list. And they're also the reasons it's insane to expect people to actually use it.


Bitcoin is as much social phenomena as neodymium magnets.

Lots of people buy bitcoins but thats just consequence of the fact that bitcoins are excelent at being scarce and seem to be excelent at staying scarce and at some other things.


Yeah but it's a pyramid scheme that makes you tons of money! /s


> nobody can check where money flows

The government actually provides a system with exactly that property.

> Indirect government control over inflation and interet rates? Forget it.

A lot of people see that as a benefit.


I recommend reading up on the MMM company.

http://en.wikipedia.org/wiki/MMM_%28Ponzi_scheme_company%29

there is also a Russian movie called PiraMMMida that came out a few months ago, which is the fictionized version of history. Now that movie, is pretty much exactly how bitcoin tends to be covered by the fanboys.

And as the movie points out, it comes down to pure greed, people give up real money in order to buy worthless paper, which they are hoping to unload before it depreciates...but they never do, because they keep seeing big returns...until the point when the whole "economy" crashes and you are left with nothing. An important point, is that these people knew that the currency was worthless, but because of their greed they continued buying it up and promoting it to others.


Bitcoin is not a company. It is a currency. It doesn't promise anything.

The fact that it is an ingenuous social engineering hack is merely an effect of the money supply.


BitCoin doesn't promise any returns, and doesn't distribute anything to new people who sign up. It is only a Ponzi scheme if the real world's economy is a Ponzi scheme. I don't know if it is.


You're right. While bitcoin has certain similarities to Ponzi schemes (i.e. the fact that the people who start the scheme get rich while the folks who come later lose their money) I think it's really more accurately described simply as an asset bubble.

Except, y'know, without any actual underlying asset. I don't think I've ever seen an asset bubble in something that was literally worthless before. Even the tulip bulbs of the Dutch tulip mania (http://en.wikipedia.org/wiki/Tulip_mania) could be planted in your garden and would look quite pretty, even if not ten years' salary worth of pretty.


The worth is in the design, adoption, and utility. Anonymous currency has MUCH utility. And this currency, unlike the paper issues by states, is backed by math.


Money is just a tool, and BitCoin is a particular variant of that tool. It has unique properties that can be used for lots of things. Therefore I wouldn't say that they are worthless.


It has unique properties that can be used for lots of things

Well, no, it doesn't have any unique properties. For instance, as I've said before, I'm running an alternative currency called "bitcoin prime" which has these two properties:

1. Every string of bits that is a bitcoin is also a bitcoin prime, and

2. Every bitcoin prime extant as of April 1, 2011 belongs to me (all subsequently mined bitcoins prime belong to whoever mined the relevant bitcoin).

Mathematically there's no difference between bitcoin and bitcoin prime. And that's just one of an infinite number of possible bitcoin alternatives which can be arbitrarily declared, at any time, to exist.


You can also arbitrarily launch a new search engine at any time, but that doesn't mean that you will become the next Google. Likewise launching a new social network won't automatically make you the next Facebook. BitCoin already has a strong network of nodes securing the transactions behind it.

Your algorithm only piggybacks on BitCoin, you wouldn't be able to run your scheme without the existing BitCoin infrastructure. Also, the existance of bitcoin prime wouldn't enable you to send bitcoins, so bitcoins would still be unique.

In fact I would like to see you run your scheme. How would you transfer 1000 bitcoin prime to somebody else? Since you don't have the private keys of the real owners of the bitcoins, I don't think you could do it.


Hrrrm. This redefinition, while trivially possible, seems irrelevant. Possession of assets is first and foremost a practical matter. (I think you understand this, but for the benefit of the discussion…)

In the case of primary real-world goods, possession comes from being able to physically access the state of various matter and energy: I physically own a house to the extent that I can reliably live in it and make modifications to it and so forth. I physically own food to the extent that I can make use of it by eating it. Other people can alter the game by acting as environmental forces to change the set of available interactions.

In the case of fiat currency and economic goods, practical ownership (including but not strictly identical to theoretical legal ownership) is similarly determined, but with more of a focus on laws of people rather than the laws of physics; the former are backed by the latter, but usefully form a separate conceptual layer.

The case of Bitcoin is also analogous, but there is now a focus on the laws of mathematics as they apply to the state space in which the Bitcoin system operates, and in particular to the practicalities of computing—a strong cryptographic attack could still destroy the system.

So the reason that owning all the early Bitcoins prime is not useful is the same reason owning all the virtual dollars in a parallel system to the US banks is not useful despite being able to invent whatever such system you want. Because no one will recognize this, the amount this changes your set of available physical interactions with regard to primary goods is very small. (I haven't taken weird social goods into account in the above, but I think a similar argument applies since they also require external recognition.)

That said, I think the GP poster would do well to clarify what ey meant by “unique properties”, and perhaps whether (as I interpret it) “unique” is meant to be “of the set of currently active systems, for some fuzzy activity threshold”, thus excluding Bitcoin prime and the infinite variations thereof.


pets.com stock doesn't count? ;)


I know you're being facetious, but just to clarify it for everybody: no, stock in a company never counts, because pets.com was an actual company with actual assets. For instance, they owned that sock puppet.

Bitcoins have literally zero value.


Actually, while the Bitcoin system itself does not arbitrarily distribute any money to new clients, there does exist a Bitcoin Faucet[1] to help newcomers try the system out, allowing various people to acquire a few free cBTC once.

[1] http://freebitcoins.appspot.com/


Real world economy is a kind of a ponzi scheme, in my opinion. With the central bank being at the top, and other banks below it, followed by the financial sector, and all the people who become rich by "speculating" on money instead of actually producing something useful

EDIT:

Please read this in context before you downvote. We're talking about bitcoin. If bitcoin is a kind of a Ponzi scheme, then it's no different from the "scheme" present in the current monetary system.


That's not really how the real world economy works. The real world economy is all about people producing and consuming things. Banks, even central banks, are just a thin layer of icing on top of the cake.


That is not true. They get to issue new money and decide who gets to spend that new money before the circulation of that new money causes general prices to raise.

Those who get the new money first live at the expense of those who don't.

The central bank doesn't need to produce anything to create this new money.


Sure it is about producing and consuming things. No one can argue about that. But remember that we don't exchange goats for cows, and milk for banana juice anymore. You produce things because you believe you will make enough money so you can then buy something else with it. So you can regard money as an intermediary economic good which everybody wants. The problem however is that some participants to this market, like the central bank for example, get to have access to virtually unlimited supplies of money, which puts you at great disadvantage.


I agree with you. However you have to realize that whenever you make such controversial statements (controversial with respect to mainstream view) you will get downvoted, because people don't like to have their worldview shaken, and their orderly views disrupted. For most people it is much easier to accept something based on what it appears to be than to think of what it truly is.

Also, unlike the current monetary system in USA and most of other countries, the bitcoin network has no central control and after a certain point no more currency will be produced. In contrast, in the current monetary system more money gets pumped as needed.


If such silly thing as gold became money and paper printed by governments became money then a tool possessing qualities that bitcoin possess is bound to become money eventually.

Only two real risks. Crypto weakness or Bitcoin 2.0

Gold is intrinsically similarly useless as bitcoin. We used it as money only because it was durable and rare. We used paper as money because strong, trustworthy entity declared that its supply will be limited and controlled. Bitcoin has this basic necessary quality but also much much more.


>Gold is intrinsically similarly useless as bitcoin.

That is incorrect on many levels. Gold has applications in MANY things. I bet the device you used to type out that comment has a bit of gold in it.

The comparison to BitCoin and paper money makes more sense, but it doesn't. This is because BitCoin has no one backing it. If the dollar drops, well the US is backing it; and they will be forced to deal with the consequences. If someone pulls the rug out on BitCoin- might never happen, but who knows- then no one is responsible. BitCoin is a fun game, and that is all it should be. Such rapid deflation will not go on forever.


> That is incorrect on many levels. Gold has applications in MANY things.

We still have a more gold that it is put productive uses. Gold reserves/production ratio is 60. No other commodity comes even close. So most of the world's gold is similarly useless as bitcoin, and more will be if some day gold will be re-monetized.

But, maybe, a better analogy would have been, dollar (outside of USA) is similarly useless as bitcoin.


There are a lot of raw resources that we have excess of; some call it reserve. To try and explain the reason gold is so much is a ridiculous task. Practical uses(better than copper in some applications) and non-practical uses(it looks good on me). To compare BitCoins to gold is a horrible analogy to even begin with.


All curious over here. What other commodity a reserves/production ratio of at least 5? (the usual ratio is, at best 1)

So?


>Gold has applications in MANY things.

Yes, but that's not what makes it so valuable. This was discussed elsewhere but copper, for example, has many more industrial uses than gold but because it's not this one special metal it isn't worth as much. Essentially, there are real applications for gold but those alone do not account for its high value.


Take Macs for example. The hardware does not warrant the price tag; same for the OS. Most of it is marketing and perceived/symbolic value(I'll use these terms interchangeable). Gold gets its value from many sources.

Gold is expensive not only because of its applicational value(medical, space, electronics) but also its perceive value(jewelry, shiny, ect). BitCoins are perceived value.

Also, gold is used in different conditions than copper. Remember copper oxidizes which increase resistance and can even stop a circuit from functioning.

I think the price of gold is ridiculous- 1,500GBP a lbs- but it still has real value with some of that perceived- social status- value tacted on.

http://www.youtube.com/watch?v=lONRZNCuZc4 starts around 1:30

I am not a gold advocate, but a raw resource enthusiast. Copper and its alloys are 100% recyclable and very easy to do! However, gold is not as easy to recycle as copper; and usually very harmful. I think mining is horrible, but there are reasons to the madness. ...until there is a better way.

http://pubs.usgs.gov/gip/prospect1/goldgip.html


Your analysis makes sense without the tortured analogy to PC fanboyism. Macs are not in asset bubble, they are a product people enjoy, and pay a premium or aesthetics or peace of mind or lack of competition from an equivalent product, not because they hope to trade the Mac for something else later.


Just like gold :)


> Such rapid inflation will not go on forever.

Isn't it deflation if you can buy more with the same amount of the currency?


Corrected. Sorry about that.


> If someone pulls the rug out on BitCoin- might never happen, but who knows- then no one is responsible.

How might someone go about doing this?


I'm not that intelligent, but a few folks on the BC forums and other places have brought up some great points:

1. Government shutdown

2. BitCoins P2P network is very vulnerable to denial of service attacks; ones that actually cost money!

3. Public Node can be tracked; no more anonymity.

4. Technical merits of the crypto implementation have not been fully tested; is there a possible flaw?

5. Social engineering and one-time inflation.

6. Unreliable and opaque banking organizations; no one is backing it.

There are many more, and they could all be fixed if bit coin was a centralized currency system, but it is not. It is too soon to say "BitCoin is ridiculous and will never work", but someone with a motive and means can definitely make a miners life hell.

https://en.bitcoin.it/wiki/Weaknesses http://forums.xkcd.com/viewtopic.php?f=8&t=69178

Here are some things BC has going for it though!

1. Distributed with no single point of failure.

2. No "mint"; could be a bad thing.

3. No individual company can be arrested and shut down.

4. "Anonymity"


2. BitCoins P2P network is very vulnerable to denial of service attacks; ones that actually cost money!

The guys developing Bitcoin should take a look at the Phantom protocol then, which is supposedly very resilient agaisnt DDoS attacks.


Actually quite easily. If your nation bans the trading of bitcoins for the official state currency, then you have a problem. Regardless of the fact that bitcoins can be transferred w/o outside observation is irrelevant if you can't purchase or trade for goods and services. And at that point, you're either black market, or you're fucked.


Well, as long as not all nations ban trading bitcoins for official state currency it doesn't completely screw things over. I simply trade my bitcoins for Vietnamese dongs or whatever and then exchange my dongs for dollars.

No, the collapse is more likely to happen on its own. At some point the massive increase in value must draw to a close. What happens then? Big bitcoin holders no longer have an incentive to hold onto their millions of dollars' worth of bitcoins "Hmm, time to sell some of these bitcoins". Millions of bitcoins hit the market and find no buyers at the quoted price. All of a sudden the price is a lot lower, folks panic, drives prices even lower.

In an asset where the only incentive to hold the asset is the massive increase in value, panic selling happens as soon as it looks like the massive increase has gone flat. The steeper the increase, the steeper the decrease. That makes bitcoin unlike gold.


Right, but then you are operating on a black market basis, because you're laundering money. If the problem gets bad enough the US starts banning dongs, or applying pressure on their government or what not.

Worse yet, laundering money on this basis will almost certainly come with an increased cost to trade through another currency, especially if there is legal risk to the parties doing the laundering.

It's not like laws will stop financial trading or traders, but if you're declaring your taxes as you're legally obligated, presumably there's still a paper trail indicating irregularities if you're funneling your bitcoins through dongs.


I've read that it's actually illegal for them to use your tax return as evidence against you in a criminal case, due to the Fourth Amendment.


Even if so, it is not going to excuse someone from increased scrutiny that leads to further evidence.


>If the dollar drops, well the US is backing it; and they will be forced to deal with the consequences.

http://en.wikipedia.org/wiki/Hyperinflation

Currencies made by governments routinely lose >99% of value in few weeks. How this "backing" helps if you lose everything? In my country it happened 15-20 years ago.

Also even US dollar drops every year.


There is no solution to the problem that currencies can become worthless. It is a fundamental aspect they have, because any commodity, artificial or otherwise, can become worthless. If change stopped, this might cease to be true, but in a world where in 100 years we may be seriously talking about the needs of our uploaded consciousnesses in the war against the bad AIs, or we may be a hunter-gatherer society again (and I'm using a 100-year-horizon just to highlight the problem but it's true on shorter timescales too), there simply isn't any safe, reliable value store.

woodall didn't say dollars won't hyperinflate. (S)He said the US "will be forced to deal with the consequences". Not the same.


Srsly. One of the many, many problems with government debt is that there is no collateral.


The government doesn't need collateral, they use yours.

Seriously, government debt is backed by the fact that the government has the legal right and the practical ability to confiscate as much of its population's wealth as it feels like. I don't like US government debt at all, but it's nowhere near the point at which the don't have the ability to pay it back.


Are you sure? He government can try to tax everything and use my PlayStation and house in Ohio to settle a debt to a Chinese citizen, but if it ends up destroying the US economy, there won't be any new wealth creation to tax, and that is where most government revenue comes from.

It is far more likely that US government will do what it and every other government always has done: either inflate the currency or default or declare war or some mixture thereof.


If the Feds start confiscating Ohioan playstations to payback chinese citizens, how long would it be until the states themselves revoke thair consent to be governed by the Feds? (See American Revolution, Articles of Confederation, and Confederate States of America),


We use paper as money because a strong entity said they would accept those pieces of paper for tax payments. Rather than going to jail.


We originally used paper money, because it was backed by something (banks, gold, etc). Nowadays most (all?) paper money has been centralized to government control.


There's another risk, actually: government legislation/intervention.


This insight, I think, is key. Imagine the power conferred by controlling a nation's currency. People don't just let that sort of power go. The first 1000-fold increase in value has pushed Bitcoin into the spotlight. The next 1000-fold increase will be far more noticed and hence far likelier to attract some counteractions by governments.


This is just FUD. Why don't you go trash sub-prime lenders before you trash bitcoin? Don't buy bitcoin. Buy Euro instead!


A few points:

1. There is a difference between "This is useful, I will use it," "This is useful, many people will use it, I think it is going to succeed," and "This is useful, I will invest in it." I have recently started using a text editor called Byword. I quite like it. But I am not rushing out to invest in it.

2. There is also a difference between "I will invest some of my money in it," I will invest all of my money in it," and "I will invest all of my money and all of the money I can borrow in it."

If we take a thousand people and instruct each of them to invest their life savings and everything they can borrow into a single, randomly chosen investment, some will get very rich, richer than anybody who avoids borrowing money for speculative investments, and much richer than people who take a balanced portfolio approach to investing.

But that doesn't mean it's a good strategy.


Does anyone know of any balls-out investments that paid off (or didn't)?

(I'm referring to "if this investment doesn't pay off, I'm jumping out a window" risk.)

I'm just looking for interesting stories, and that sounds promising.


Here's one that went the other way: Nick Leeson had been accumulating losses from unauthorized bad trades. He attempted to cover his losses with a massive wager that the Tokyo stock market would not move overnight. Alas, the Kobe earthquake hit him!

The beginning of the end occurred on 16 January 1995, when Leeson placed a short straddle in the Singapore and Tokyo stock exchanges, essentially betting that the Japanese stock market would not move significantly overnight. However, the Kobe earthquake hit early in the morning on 17 January, sending Asian markets, and Leeson's trading positions, into a tailspin. Leeson attempted to recoup his losses by making a series of increasingly risky new trades (using a Long-Long Future Arbitrage), this time betting that the Nikkei Stock Average would make a rapid recovery. However, the recovery failed to materialize.

http://en.wikipedia.org/wiki/Nick_Leeson


Here's the thing: due to the nonlinear value of money, if you're betting that something is going up massively then you're pretty much just as well off betting some of your money as you are betting all of it.

If I have ten million dollars, and I really think that tulip bulbs are going to go up by a factor of a thousand, it's still dumb to invest all my money in it hoping to get ten billion dollars. Instead, I invest half my money in it, because the difference between having five billion dollars and ten billion dollars is (in practical terms) small, whereas on the losing side the difference between having five million dollars and being completely broke is very large.

There's one exception to this: entrepreneurs frequently put all their money into their own company. Why? Because nobody else will, and because if the company doesn't get that money then the company will collapse. Wise? Maybe, maybe not, but it's wiser than sticking all your money in some random asset which, if not bought by you, would be bought by somebody else.


George Soros shorted $10 billion worth of British Pound and then made $1 billion in a single day. I don't know what would have happened if things had gone the other way but I think he was mostly-in, if not all-in.


Bob Parsons had already made tens of millions from an earlier startup, and he put all of his money into starting up GoDaddy, to the point where he would have been broke if it had been failed and he was almost out of funds to keep it going, before it turned profitable.

He wrote an article about it but I can't find it right now.



Those stories could be made any day. Take any volatile stock and stake out an extremely leveraged position on it for a day (or a few hours). If the stock moves in the direction you've bet, then congratulations, you've just made a bunch of money on a gamble. If not, you've lost everything.


I was asking for specific examples that have already happened. The point is to hear a fun story, not to learn any valuable or deep insights.


Here you have: Betting $136k on one roulette spin http://www.youtube.com/watch?v=1jBbE7neKT8


Seems to happen a lot with bigwigs.

Soros shorting the pound. Buffett investing in Visa.

Bitcoin is going to go through the roof, speculators or not. The guy in the article is taking a calculated bet that will pay off.


Let's be clear that this is Rick Falkvinge, founder of the first Pirate Party. His title is now "political evangelist". It's not surprising that he's in favour of a currency that is free from government control.

(Not that I disagree with him in general, I just thought this is something to take into account reading this article)


Not to mention that he probably already owns a lot of bitcoins and has a massive vested interest in seeing them become worth more.


This article is crazy, and actually fills me with a little bit of schadenfreude.

Asset bubbles run on the bigger fool principle, and they end when you run out of bigger fools to sell to. If folks have really started cleaning out their bank accounts and borrowing money to buy bitcoins (an amount of bitcoins which, incidentally, you probably could have picked up for twenty bucks just six months ago) then it seems to me that the world is about to run out of bigger fools.


Far from it because right now this is only being discussed in Hacker News... not in USA Today or FarmVille. However one defines "fools", I don't see a shortage. That said, I'm not invested, only observing here.


However one defines "fools", I don't see a shortage.

In this particular case, foolishness is denoted merely by their willingness to pay high prices for bitcoins. While there may be out there in the general population plenty of people objectively more foolish than this guy, they're less likely to fall for this.

This is the other big problem I have with bitcoin: it seems to exist in a very insular, very geeky world filled with people who don't really understand the non-geek world out there. Bitcoin will never really jump from the geek world to the real world, because the general population won't even understand its supposed benefits, much less give a damn about them. A few geeks may be able to talk their poor grandmas into buying some, but that's about it for general market penetration.


But then, so was 15 years ago that whole Internet thing "too geeky", very insular with no connection to the non-geek world out there. So I suppose the BTC crowd sees that as a promising beginning.


This person lost all credibility to me when he said that he borrowed money to invest. I'm a huge admirer of Bitcoin's technical aspects, but I would never even think of borrowing money to invest in anything, let alone bitcoins.


Leveraged positions are common, but leveraging yourself to the maximum possible and not leaving yourself a safety net, as is implied by the article, is crazy. I assume the author is speaking hyperbolically.


Knowing Rick, this is exactly the kind of thing he would do. You gotta give him credit for putting money where his mouth is, though. He previously took all his savings, and a bank loan to start the Pirate Party, and that worked out pretty well.


There's nothing more dangerous than a confidant gambler. Taking one high risk may wipe you out or make you rich, but taking a series of high risks will almost certainly wipe you out. His past success has nothing to do with this wager he's making now. It's like playing russian roulette 10 times in a row.


Yep. But it is those kind of people that end up making a difference in this world (for better or worse).


Leveraged positions are common, yes. They are also behind nearly every market bubble (and subsequent crash) in history.


Bitcoin is a market which has buyers and sellers. Just because one more idiot is willing to buy $10, or $1000 for a coin does not mean there is a market to SELL $50M worth.

This market sounds easy to get into and hard to get out of - especially in a hurry.

...saying that. I think the value of a bitcoin is probably going to go up. Everyone loves a bubble.


bitcoin is somewhat interesting, I've been experimenting with it recently. One thing to note is that transfers aren't instant until your client catches up with the network -- when you first connect you currently have about 127k blocks to download before you are current.

At first I had some trouble understanding why you couldn't just had a client and create easier coins. The thing is, you can, but the network won't recognize them. The key to the system's security is that as long as 50% of the bitcoin nodes agree on that the current difficulty level is you can't inject 'fake' money into the system.

Right now moving money into and out of the system is a bit difficult. Mining is not worth the electricity it costs you, unless you have a GPU and join a mining pool. The 'value' of a bitcoin is very volatile, as tracked on the http://bitcoincharts.com site.


> The key to the system's security is that as long as 50% of the bitcoin nodes agree on that the current difficulty level is you can't inject 'fake' money into the system.

Isn't it quite easy to spawn a few million malicious nodes?


You have to have the computing power to beat 50% of the network - given the current size of the bitcoin network that's certainly not trivial.


The individual in control of the DeepBit mining pool already has about 50% of the network's computing power.

http://www.bitcoinminer.com/post/5328668205/deepbit-50-perce...


Unless you're a malicious entity who doesn't mind using a botnet.


Investing in Bitcoin is akin to investing in a startup. There's a chance the startup will become wildly successful and you'll make a tonne of money from it. But you also have to be prepared for the more likely chance that you will lose everything you put in.

Investing all your savings in anything is a risk. Investing everything in a risky startup seems the height of madness... unless you don't have a lot of savings, I guess.


"[Bitcoin is] an entirely new kind of currency that can’t be seized or frozen by governments" Simply not true. At the end of the day you need to change Bitcoins back to real money. The money that actually has some value because it (is supposed to) represents goods. The stuff you need in order to survive and live (food, clothes, ...). Goverments can declare these "banks" that change bitcoins back to real money illegal - mabe because bitcoins can be used to launder money (because it's advantage is, that "you can transfer any amount anywhere instantly without any authority knowing or interfering"). In this case all your money is worthless. But you can still write nice blog entries and get other people to buy the stuff from you ;)


People accept bitcoin as direct payment for things already, removing the need to switch back to dollars. Granted it's not a big selection


But can you pay your rent in BTC or at the grocery store... As long as the essential things are not available via Bitcoins it is not an independent system and thus successible to goverment intervention. And even then. People tend to trust currencies issued by the government more and money is just an artificial thing based on trust.


You still need to switch some back to dollars, to pay sales taxes or VAT on the sales, and eventually to pay income taxes.


Its hard to accept the author dismissing the threat of bitcoin being banned and then admitting it is difficult to buy bitcoins. If it is difficult to buy bitcoins, its most likely hard to get useable currency from bitcoins. Until you can buy groceries or other real life things in bitcoins, I'd say it is a a very real threat.


You can buy groceries with Bitcoin: http://bitmunchies.com/


Bitmunchies probably pays its suppliers using usual currency. I'd guess its is just a way to trade money for bitcoins and that they don't really convert those bitcoins to dollars to pay their suppliers. Just a guess.


He seems very impressed with the privacy: "In fact, nobody knows that he got it except me and him", "nobody can ... look at your account balance".

But every transaction is public. Is there anything stopping the NSA (or Amazon, or me) from subscribing and adding up his current balance? Sure, it'll be linked to his bitcoin address, not his name, but that can't be all that hard to map, can it?


You create a new bitcoin address for every transaction. Some money goes to the actual recipient, and the "change" goes back to your new address. In addition, you can attempt to "launder" bitcoins by executing bogus transactions from yourself to yourself.

Posting a static bitcoin address on your website and saying "send money here" is not considered best practice.


> "Posting a static bitcoin address on your website and saying "send money here" is not considered best practice."

Can you explain why?


It breaks anonymity. Transactions are public and that static address is public, so anyone can tell how much money that static bitcoin address has received.


"The secondary uptake wave after enthusiasts is not going to come from those who use legacy banking daily and are comfortable with it. It is going to be people who don’t want or are not allowed to use the legacy banking system for their everyday transactions."

This is also the point when governments will start aggressively working to shut it down.


Interesting side effect of these bitcoin discussions is the back & forward of "this is a scam" --> "This is insane social engineering hack" --> "This is no different from any other money" :

Makes you think about what money is. We're so used to it that it seems trivial but if someone explained to you about their idea for this new thing called money you would probably think it was stupid, pointless and a way of scamming a goat for some stupid round things.

So much of our world wouldn't exist without money.

Serious question: Is there currently some easy way of buying and holding bitcoin without having to know anything about it, install anything, compile anything or be able to justify it or explain why to your wife? Perhaps some relaible online wallet?


MyBitcoin and Mt. Gox are OK, but are only for exchange. As far as I know, there isn't a web app for trading and mining yet. With browsers moving toward supporting hardware acceleration, it won't be long. The desktop client is pretty unfriendly to normal people; the whole scene reminds me of BitTorrent a few years back.


I don't want to mine. I want to buy $100 of bitcoin, without having to do much more than put $100 in paypal and forget about it.

Just an incentive to learn a bit more about it.


"I predict that it has at least another thousandfold increase to go in the coming few years"

Clearly a 'Bernard Madoff 2.0' pyramid scam. Only profitable for the early adopters, pay by the last suckers whom enter.


Bernard Madoff ran a Ponzi scheme, not a pyramid scheme, and Bitcoin cannot be classed as either.


You're right, Bitcoin is actually more like a penny stock pump-and-dump scheme.


Except there doesn't appear to be a whole lot of dumping going on. I suspect the majority of Bitcoin investors are more interested in seeing how far Bitcoin can go rather than dumping all their coins the moment they've made a reasonable profit.


Yes, that is the interesting bit. A lot of people are not in Bitcoin for the money primary. They are hoarders or altruists.

Once some person tries to cash a $50,000 BTC account it will go down. The market depth is simply not there it seems. The money supply is not regulated vs. the trade volume, right?


I predict that the dollar has at least a thousandfold increase to go in the coming few years. Therefore I have shown that the dollar is a Ponzi scheme?


My primary worry would be liquidity.

-Because the demand to buy bitcoin is low, the likelihood being able to sell the bitcoin whenever he wants (ideally at height of bitcoins worth) is also low. This is the same reason that penny stocks are difficult to make a profit it. While the value may go up significantly, you can't realize this profit until you find someone to sell it to (and in order for them to buy it, they have to think it's going to go up even further).

-Currently there aren't too many companies that accept bitcoin for products or services.

-Any currency is only as valuable as the people using it believe it is (ie. the dollar is only a piece of paper, but because the seller believes that its worth is equivalent to a candybar, he will trade it).

-Once people realize that they cannot use bitcoin for goods or services, the likelihood is that there will be a mass exodus, and the price will fall rapidly as people want to sell their un-useable bitcoin for a currency that still has value. With so few buyers, the discount will likely have to be pretty hefty in order to attract other buyers into a falling investment.


> In the past three months, the value has hundredfolded

If this trend continues, my $8 invested for 1 bitcoin will be worth $800 million in a year!

Seriously?


$800 millions should be enough to live comfortably by for a lifetime; no need to go all-in on bitcoins.


The fundamental question is whether enough merchants will accept it in exchange for valuable goods and services that people want. A currency is as valuable as the tangible benefits you can trade it for. It seems unlikely that it will replace the major systems of exchange, nonetheless, I still hold a small amount of my portfolio in bitcoin denominated assets because you never know. Twenty years ago no one could have predicted the impact of the internet on the banking system. Hell, ten years ago most people were still reluctant to use the online banking services offered by their financial institutions. And now we are at a point where a cryptography based ecurrency is the content of this discussion, which seems to be evidence of the validity of the concept. It's just a matter of whether it will catch on.


These endless bitcoin articles seem to have less and less to do with hacking or startups. I suspect there are more appropriate forums for debating economics.


This reminds me of those penny-stock pump-and-dump articles/spam emails I used to receive.

"Why I'm Putting All My Savings Into BITC". As soon as the pump scheme drives up the stock, you dump it and move onto the next thing.

I'm not saying mazsa is doing this, just that it could serve the same purpose. "Now that I'm fully invested in bitcoins, please buy it up so I can sell it later at a better price."


It seems to me that a key move to stabilizing bitcoin would be finding a high demand product that can only be purchased with bitcoin. That along with offering retailers incentives (aside from the "no fees" aspect). A group of heavily invested bitcoin owners would be wise to organize such efforts.


That would have to be something that cannot be resold. Still, a company which sells its product (which would have to be unique within its market segment) for "real" money today would have to say goodbye to all those dollar-wielding one-dot-oh customers and hope they come back tomorrow with bitcoins.

Why would a company do that?


I feel I have that product, but cannot reveal what it is yet, because I have to add it on to my site, which isn't public.


The history of bitcoin is 14 months. How stable has it been over that time? It's only been in the news 2-3 weeks. I see the three bc/$ figures given, but it says nothing of stability. Other than that, it's fairly sensible. I'll stick with my 4.2%+ tax free isas.


This is probably a very bad idea. It's too early to tell where Bitcoin will go, and whether it will achieve widespread acceptance as a currency. Putting all of your savings into something highly speculative isn't very wise, unless you can afford to lose them.


Can I short bitcoins? If this guy is buying, I'll take the other side of that deal.


Even if this were an otherwise good investment, I want know know: What stops the guys who run bitcoin from simply shutting it off?

EDIT: And before people reply, "it is P2P", someone runs the web site. Someone owns the code repository. Or some group. There will always be a small group with power to muck with the system. What stops abuse?


> Please make it possible to use milli- and microbitcoins as soon as possible

Bitcoin supports transactions as small as 0.00000001 (1e-8).


The GUI doesn't support transactions of that size.


What shall we call those? Micro-cents?


nanocents I guess


That's 10^-11, this is 10^-8.


Summary question for the author: http://bit.ly/aorWMz


"They built a house of straw. The thundering machines sputtered and stopped. Their leaders talked and talked and talked. But nothing could stem the avalanche. Their world crumbled. The cities exploded. A whirlwind of looting, a firestorm of fear. Men began to feed on men. On the roads it was a white line nightmare. Only those mobile enough to scavenge, brutal enough to pillage would survive. The gangs took over the highways, ready to wage war for a tank of juice. And in this maelstrom of decay, ordinary men were battered and smashed. Except for one man armed with an AK-47, and a Honda full of silver"


Where's that quote from?


I have no idea, but you'd be surprised how little silver a Honda can actually carry.


Its a Mad Max quote adopted by the Fuckedcompany.com BBS.


what else? The Road Warrior.




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