So I have read a bit about Bitcoin, including actively trying to read primers and so on, but I think my utter lack of education around economics^ is really hindering my understanding.
Plainly: Why do I care about bitcoin? What does it have that other currencies (US, EU, my own NZD) doesn't have? Why should I put my money into it, and how do we know it will not collapse and make your fake wealth even more fake?
^To help calibrate your measurements, the part of The Economist that actually talked about the economy utterly confounds me.
Edit: As another calibration, I had to google 'fiat currency' when someone brought it up below ;-)
As a merchant, it could hypothetically be easier or cheaper to deal with Bitcoin than other currencies online. (For example, note how aggravating/risky PayPal is.)
As a person who wants to hedge against inflation or hyperinflation, it has a fixed total supply and can't be directly manipulated by the government (nor does its value depend on the government's credibility).
As a speculator, there is the _possibility_ of making huge profits if you go ahead and get in early.
As a person who is afraid of government power, it _could_ take away a lot of the government's power if widely adopted. (If everything is "cash," they can't really tax you accurately; and with Bitcoin, they can't just print more money.) It would be really nice if the US government had to choose between, say, multiple decade+ occupations in the Middle East vs. spending on other things.
As a regular spender, there is the _possibility_ of easy digital transactions with less overhead expense (e.g. swipe your smartphone to pay for something, _without_, say, VISA taking off the top... though probably it would be some bitcoin processor taking (less) off the top).
A different way of looking at it is: it's basically analogous to gold, except easy to transmit, but not impervious to apocalypse or regulatory action that would take down the Internet. Basically everything I said above is an implication of this way to look at it. People who are slightly bullish on gold ought to be extremely bullish about Bitcoin, IMO, if they have the technical understanding to believe that it works (I do, and it does).
"As a merchant, it could hypothetically be easier or cheaper to deal with Bitcoin than other currencies online. (For example, note how aggravating/risky PayPal is.)"
As a customer, I don't care about how aggravating/risky PayPal is to you. I also don't care that you have trouble with any other merchant account. I'm going to use the payment option that gives me the most protection and is most convenient to me. Credit card companies and PayPal allow me to dispute charges for unsatisfactory service. Even though I've rarely used that in my life, it's a huge reassurance!
As I understand it, Bitcoin is like a cash transaction with very little recourse for the customer. Once the transaction is complete, you can't reverse it (I'm still learning about it so please correct me if I'm wrong).
There could come a day when a middle man comes between the merchant and customer to give customer protection but then you're pretty much in the same boat as we are now.
Note: I'm also a merchant, so I know the pains of PayPal and merchant accounts. Just reminding you to look at it from the customer perspective.
Bitcoin, like cash, does not prevent you from layering an escrow-like protocol on top of it; it's just that:
a) it's not built-in by default; and
b) it's a lot easier to get into business offering such a service (you just just need to have the trust of typical pairs of parties, rather than that PLUS all the stuff you'd have to put up with when setting up a whole new payment network).
Using Bitcoin does not condemn you to being at the mercy of every merchant you may ever buy from.
(FWIW, the above is why I don't understand the excessive promotion of "OMG LOL no chargebacks FTW!")
> (FWIW, the above is why I don't understand the excessive promotion of "OMG LOL no chargebacks FTW!")
That flexibility is great. I'd be perfectly happy to buy from a lot of merchants that I trust (say, Amazon.com) without the ability to chargeback. That will lower costs for them, which will be passed on to the consumer (if the overall market is competitive).
OTOH, merchants that aren't widely trusted may "have" to allow customers to purchase using an escrow-like service that allows chargebacks.
In fact, maybe the same merchant could offer both options; you pay a tiny bit more for escrow.
Good point. I trust Amazon enough to complete a purchase with Bitcoin. I think the term escrow would be too confusing for most customers but that'll probably work out as the platform develops.
I meant "escrow-like" in the sense that PayPal and credit cards (with their evil chargebacks!) are escrow-like: you don't use the term, you just know that you have recourse if you're stiffed and that the payments are reversible.
The difference is that you don't have to be as big (or as versed in financial regulation) to provide such a service: if you're trusted among the gambling community, you can provide "PayPal with Bitcoins" for them, because they trust you. If you're trusted among arts and crafts dealers and their customers, you can be the trusted party that enables chargebacks on Bitcoin in that area. Etc.
It's going to be exciting to see how these escrow-like services develop over the next few years. Specifically because, as you mentioned, you don't have to deal with a lot of regulation that comes a traditional product.
I wonder if companies like Strip/PayPal/Visa will try and lead the way or if they'll wait and be the acquirers.
How about this one, whenever I have to buy anything in USD (which is a lot, I only have AUD), I have the privilege of paying 4% more than the listed price due to currency exchange spread. Bitcoin would give me a 4% discount on everything, even still considering merchant gateways take another 1-2% from the merchant, for a 6% total.
The merchant gateway might not get to keep that 4%, it might even be eaten up by hedging against currency fluctuations, but either way unifying everyone onto one currency would remove those risks and costs. Merchants would only need to convert back once a year at tax time to pay their government.
Supposedly, savings for merchants can get passed on to customers. For example, I have heard that prices on bitcoinstore.com (which is a big consumer electronics site) are significantly cheaper than elsewhere. I haven't tried to compute that myself, so I don't know if it's actually true.
Also, when paying with Bitcoin, I don't have to reveal my name to the merchant. That can matter a lot for certain things. For example, I wouldn't want to make any kind of "adult" purchases using my real name.
Bingo! Adult websites have been technological pioneers and they can probably help drive Bitcoin forward with payments. I think it's the most promising method of getting bitcoin into the mainstream.
Accepting bit coin means reduced chance of fraud, so the merchant can offer a price reduction for payment in bitcoin. If I am selling iPhones and accepting PayPal then I have to charge legitimate customers more to cover fraud by dodgy customers.
As a merchant, it could hypothetically be easier or cheaper to deal with Bitcoin than other currencies online. (For example, note how aggravating/risky PayPal is.)
It's not. Given the volatility of bitcoin you're taking on a lot of currency risk since the value of the bitcoins you just got for your widget can change a lot in a few days. The extra cost of conversion and/or hedging is not worth it.
Especially when you consider all the other problems that bitcoin has.
There are bitcoin payment processors that allow customers to pay in BTC, and deposit the money in the merchant's account as USD immediately, thereby solving this problem (with a price).
I don't know what the state of the art is here, but presumably, that price is going to approach zero, since this is a competitive space, which is not the case with traditional payment processing.
As a game developer, the best value of bitcoin is that it is a hack-resistant and durable way to exchange currency.
Gold is nice, but we can make gold someday or someone can discover a bunch of gold somewhere and it all goes down.
The government backed value is good, but governments are controlled by people and they can be corrupt.
Other forms of tangible value is ok, but it suffers from all sorts of various problems that make them generally less good than gold ie. less elementally stable, too fragile, too common, etc.
The way bitcoins works from my understanding is that:
1. Anyone can make a bitcoin if they find a pattern that matches a description of a bitcoin.
2. Bitcoins are traded publicly with ledgers distributed. If you trade your bitcoin 1075 to me, there will be a record of that transaction on several servers around the world. This concept is perhaps similar to bittorrent.
The benefits to these two basic principles are mostly that which javert has stated.
----
As a side note, there are a TON of services to get you started with bitcoin, today, for free. I feel that as a technologist, you should try it out.
Now, on a very personal note, I find bitcoins very interesting, but I don't believe it can reach its intended goals. Governments need to be able to track spending to tax and regulate. Bitcoins makes things like money laundering very easy. If bitcoin reaches any real scale it will be shut down, fast.
how are you proposing they shut it down? the best they could do is shut down the exchanges, but goven they are located in the UK, Japan, France, US, Russia etc then you cant get them all shut down and even if you could you can still do person to person trades and I am willing to bet that a decentralised exchange appears not long after the current exchanges are shut down.
Maybe the "first-world countries" will criminalize all use of Bitcoin as Bitcoin continues to rise and their currencies continue to deteriorate. Respectable citizens and companies will not be able to use it (without massive deception to avoid detection).
However, all the other countries will increasingly adopt Bitcoin.
In 25 years, there is a global economic renaissance, except the first-world countries of the past are now the dregs of the global economy.
so govt criminalises bitcoin (i would love to see the law that makes it illegal, is it illegal to own, mine, trade with?) how do they shut down a de-centralised network? localbitcoins allows you to buy and sell in person, tor sites could easily provide an exchange service and with the introduction of things like ripple finding other BTC users will get easier, so saying shut it down is easier than actually shutting it down. Plus if we have learned anything it is that a bitcoin clone can pop up next week, there are already litecoins, if the govt law banning BTC is so braod that it brings in all virtual currencies then poeple like Amazon (just starting their own) or Canadian National Bnak who are douing the same would also be affected, it would stifle innovation for the legal markets but the grey market would bloom in response.
Bitcoin is crypto-currency rather than fiat currency. It requires no central issuer, which means no entity can create swings in the total supply. It's based on computational limits which gradually increase the supply of Bitcoin at a predictable rate. With government-issued currencies, there is a pressure with USD to inflate the currency steadily over time, so your dollars lose value as you save them.
Right now, most people don't advocate investing significant amounts in Bitcoin. One use case is just to buy Bitcoin when you need it to complete a transaction.
You don't know that Bitcoin won't collapse. If you keep your Bitcoin on a service, you don't know that service won't get hacked. These are risks you should take into account.
But you also don't know how much demand for Bitcoin will grow. If if becomes widely used, people who saved them early should make quite a bit of money.
In a modern economy, inflation acts as a tax on idle cash. This encourages people and organizations to keep their wealth in forms that help the rest of the economy. A thousand dollars under your mattress isn't doing anything for anyone, but in a bank account, equity, or bond it can be used by others to finance their business.
The higher the inflation rate, the more pressure there is to invest instead of hoard. Governments adjust the inflation rate via mechanisms such as making large loans to major banks ("printing money") or selling bonds. The goal is for the economy to experience constant slow growth at the minimum practical inflation rate.
>the part of The Economist that actually talked about the economy utterly confounds me
Recognize that the Economist is a fairly left-leaning, certainly Keynesian publication when it comes to economics. There's nothing wrong with that, and they regularly publish informative pieces, but it isn't the non-partisan publication that it sometimes claims to be.
How do you define "left-leaning"? In my view, The Economist is actually quite centrist, and to some extent right-leaning. For example, both the Democratic Party (US) and the Labour Party (UK) are left of The Economist on economic issues.
I also don't believe that most people reading the magazine could ever get the impression that The Economist claims (or appears) to be non-partisan. Every article reads like - and, in fact, more or less is - an editorial.
It depends who you call centrist and who you call right and left.
Quite a lot of people who read the economic section of the economist think that it represents consensus economic opinion, as opposed to the political sections, which are pretty well known to be faintly libertarian. Even if you exclude socialists the economic section is putting forward a strongly Keynesian point of view and while Keynesianism is popular it is not a consensus.
In that the Economist generally supports fiat currencies and central banking, the economic section is "left wing".
On the contrary, for economics in the context of academia (i.e. economists, rather than politicians) Keynesianism is the consensus view. Though the consensus is not as ironclad, as, say, evolution is for biologists.
Even monetarists (i.e. Milton Friedman) support central banking in the abstract (though they would oppose some of the policies of the current Fed).
> On the contrary, for economics in the context of academia (i.e. economists, rather than politicians) Keynesianism is the consensus view.
Wikipedia claims that it's been consensus among academics only since 2008, and before 2008 the consensus was the exact opposite: New Classicism and friends.
But anyway, the Economist is not aimed solely at academics and my memory of the Keynesianism there goes back further than 2008. Plus I don't know that I'd call monetarists Keynesians, per se.
Keynesianism used to be the consensus after WWII. Keynesian economists did, though, lose influence in the 70s due to economic stagflation.
The crisis of 2008 and its response didn't necessarily cause Keynesianism to "switch over" into the mainstream; in fact the reason that the US response to the crisis was to have a stimulus package and quantitative easing was because Keynesianism is and was part of the mainstream. Keynesianism certainly did become more prominent after the crisis.
Ben Bernanke, believe it or not, is a monetarist [1]. Monetarist ideas and Keynesian ideas are not necessarily mutually exclusive.
> the economic section is putting forward a strongly Keynesian point of view... not a consensus.
I think part of the reason for the confusion is that many people (including me) do not know enough about economics to know what it means to be Keynesian (vs Austrian or other schools, I believe?), in much the same way that most non-programmers have no idea what we mean when we are talking about object-oriented vs functional.
It doesn't help that most economic schools seem to be like religions: All the other guys are wrong, and ours is the only one that's right. Sure, you can look that up on Wikipedia, but if you don't know enough about the domain it's easy to not realize that there are alternatives (or what they are).
The same is really true of a lot of fields. Is C better than Haskell or Python? What Bayesianism and the Frequentists? Analytic philosophy or continental? Everyone seems to disagree a lot.
You just have to dive in and start reading I'm afraid. Pick a few books that oppose and compare the views for yourself.
Protip for hopeful startups: there's a really, really good chance I'll pay you money (whatever your thing is), if you accept bitcoin payments. I personally want to see bitcoin be successful, and I'll go quite a ways to realize that wish in whatever small ways I can.
Out of curiosity, what makes you want to see bitcoins be successful so much? A backend programmer I'm working with wants to include bitcoin payments in a site but I'm not convinced.
why wouldn't you accept payment for soemthing? Taking payments in BTC is very easy there are a multitude of copy and paste code snippets that will do it for you. Unlike taking paypal or visa there are no hoops to jump through.
I guess my real question is how many people actually use it. I know for a lot of people it has a tendency to sound a bit scamy when you first hear about it. I feel like for those people it might be a turn off. Feel free to prove me wrong though.
plenty, have a look at bitmit.net, an ebay clone that uses bitcoins for payment, then look at bitpay - a bitcoin payment processor, they provide services to 2500 companies, reddit just adopted it so that will increase the nuber of users, it is still in early adopter stage but that is still a large volume of users.
Virtual goods like Reddit gold seem like an obvious opportunity to accept bitcoin. There's no marginal cost, so you don't have to worry so much about the price of BTC plummeting one day.
The most obvious opportunity IMHO is a country with a country collapsing due to hyperinflation. Had Brazil suffered from inertial inflation today instead of the early 1990s, lots of people would have adopted BitCoin and the administration of Fernando Henrique Cardoso would never have had to introduce the Unidade Real de Valor under the Plano Real.
There must be a startup opportunity in simply creating a system that can be rapidly introduced and be communicated from person to person virally in a country with a failing currency.
I'm curious it possible for someone, or some investment fund, with enough cash to distort some countries currency enough to destabilize it enough to get the citizens of that country to dump the destabilized currency in favor of BitCoin.
While Facebook wouldn't allow it on their site a social game accepting BTC for in-game purchases would be a great fit for this model, provided there's a significant overlap between people who play social games and people who use bitcoin. If that is not the case such a game could serve as a subversive tool to get people who are into social games into bitcoin or a double subversive tool to get people already into bitcoin into social games.
When you trade money on forex, you lose the difference between the bid and ask (the spread). Between USD and EUR, the spread is tight, and banks use this to profit when you change money there, as most people don't have forex accounts. This is probably how bitcoin operations make money, as the spread (I'm guessing) is gigantic and volatile.
I bought some Bitcoins using MtGox about 4 months ago. The experience was pretty smooth. I had to send money to their bank in Japan and they credited my account. This increased the cost of aquiring bitcoins, because the bank also took a cut.
In general, I don't trust my wallet in the hands of strangers so I don't keep my bitcoins with MtGox. Instead I encrypted my wallet.dat with GnuPG and put copies of it in several locations.
Bitcoin Qt seems to be able to attach a passphrase to your wallet.dat as well, but I opted to go the manual route. I bought some bitcoins as an alternative to gold to balance my portfolio and hedge against inflation. In other words I plan to hold on to them for the forseeable future, so the inconvenience of dealing with the encryption manually is negligible.
Bitcoin adoption is increasing and reaching new businesses every day. The more people who get into this virtual currency, the better! For those who haven't joined the revolution yet, check out http://thebitcoinmaster.blogspot.com and get started!
Plainly: Why do I care about bitcoin? What does it have that other currencies (US, EU, my own NZD) doesn't have? Why should I put my money into it, and how do we know it will not collapse and make your fake wealth even more fake?
^To help calibrate your measurements, the part of The Economist that actually talked about the economy utterly confounds me. Edit: As another calibration, I had to google 'fiat currency' when someone brought it up below ;-)