A Bitcoin for Your Thoughts

Tyler Durden's picture




 

The best performing currency year-to-date has no home country, no central banker and no physical scrip; it is the online-only ‘Bitcoin’ and as we noted recently, it is becoming more mainstream.  BTC, as the currency is known, up 130% year to date in dollar terms, thanks to rising demand from a wide variety of adherents, which ConvergEx's Nick Colas notes, includes libertarian activists, small businesses, online drug dealers and gambling sites.  That makes the Bitcoin a controversial subject, to be sure, but Nick notes we can also learn from this unique case study a lesson in global economics.  Bitcoin ‘Money supply’ growth is capped at a slow rate – far below its current levels of demand.  That makes it prone to boom-bust cycles.  It also has no sovereign sponsorship, which means it works outside any nation’s security apparatus.  Lose your bitcoins to hackers?  Tough luck – there is no FDIC in these parts.  Still, Colas concludes, in the creation and growth of the Bitcoin it is not hard to see the online future of currency, especially as real-world alternatives continue to struggle with sluggish economies.

 


Via ConvergEx's Nick Colas,

Every journalist knows that the epithet “Secretive billionaire” catches most readers’ attention like the landing hook on an F-16 making a carrier landing.  If someone is rich and not in the public eye, what are they hiding?  Are they crooks?  Or just so happy with their lives that they don’t want to inspire any more jealousy than necessary?  Inquiring minds (always) want to know...

 

Let me introduce you to Satoshi Nakamoto, secretive central banker.  OK, truth is that he (it is probably a man) only uses that nom du guerre when writing research papers; no one knows his real name.  And he isn’t so much a central banker as a technologist and architect of something called Bitcoin.  Yeah, I hadn’t really heard of it either until I read an article on zerohedge about a “Bitcoin ATM” yesterday.  I spent most of the day reading about Mr. Nakamoto and his virtual monetary construct, and there is much to learn from this first online success story in the world of stateless currencies.

 

Here’s a primer on the “Who-what-wheres” of Bitcoin:

  • The elusive Satoshi Nakamoto published a research paper back in November 2008 outlining the structure for an Internet-only currency he dubbed bitcoin.  Confidence in global currencies and financial system were at low points around the world.  Why not try something new?
  • Rather than have one central database of user balances and transaction history, Nakamoto’s design distributed the database to a network of third parties.  Each one keeps the “Ledger” of owners and also runs hugely complex programs to solve cryptographic puzzles.  Crack the puzzle, and you get fresh bitcoin currency for your trouble.  The puzzles have grown so complex that people interested in working on them now band together online to share their computing power and hopefully earn a few bitcoins for their trouble.
  • The overall supply of bitcoin in the system therefore grows at a slow and pre-ordained rate.  There are currently 10.8 million bitcoins in the system, and this will cap out at 21 million coins in just over 125 years (2140, to be precise).
  • To use bitcoin, you need a “Wallet” which allows you convert your local currency into BTC and back again.  There are many available options online, as well as BTC “Exchanges” to execute the conversions.  The distributed database which manages the system is anonymous, so there’s no central record of what you own or where you spent your money.

 

So what we have is a stateless currency, with essentially no government oversight, run by a bunch of nerds cracking puzzles, with an anonymous architect who (by the by) hasn’t been heard from in over a year.  Yes, in other words a recipe for massive success.  Some recent statistics:

 

  • Those 10.8 million bitcoins in circulation are worth $345.6 million as of today. (See this and other stats here: http://bitcoinwatch.com/).  The velocity of this money is astounding: 1.6 million bitcoins have changed hands in the last 24 hours, or over 10% of the existing money stock.
  • The U.S. dollar value of a Bitcoin is up from just shy of $5.00 a year ago ($4.87, to be precise) to $31.09 today.  It has appreciated by over 100% from the end of 2012 alone, when the quoted price was $13.48.   And back during most of 2010, you could buy all the BTC you wanted for less than a dime.
  • Over the last 24 hours, there have been +61,000 transactions using BTC.  This is almost double the 30,000 transactions in January 2013, and more than 6x that of March 2012.
  • That distributed ledger of BTC owners has one pitfall: it takes about 8 minutes to clear a Bitcoin transaction.  The good news is that this is down from the +10 minutes of just a few months ago.

 

So at this point your BS-meters should be quivering – what’s going on here?  Huge swings in value combined with growing adoption for a system which (aside from anonymity) seems more a step back than a great leap for mankind.  The answers are part pulp fiction, part elegant case study on the real utility of “Money.”  A few points here:

 

  • While Bitcoin may not get much mainstream finance love, the FBI and various U.S. legislators are paying close attention.  Turns out that some bitcoin-accepting online vendors (look up “Silk Road market”) with good anonymity software allow customers to buy illegal drugs using the similarly no-names-please Bitcoin.
  • Online casinos who wish to cater to U.S. customers accept Bitcoins, again for the anonymity of the currency.  The folks that run BTC “ledgers” do release aggregate financial information – where the money is going.  And it is going to online gaming, with an unknown number of U.S. customers in the mix.
  • At the same time, scores of legitimate businesses are also beginning to take BTC, in addition to dollars and euros.  You can buy everything from socks to sneakers to precious metals to baklava online, all with Bitcoins.  See here for a more complete list: https://www.spendbitcoins.com/places.
  • When incremental adoption meets relatively fixed supply, it should be no surprise that prices go up.  And that’s exactly what is happening to BTC prices.  What’s interesting to note is why BTC prices plummet, which they did in the back half of 2011.  The cause was a very short-lived hack attack on one Bitcoin “Wallet” company out of Japan, which caused the price to drop from $27 down to $2 in a few months.  Confidence in money as a store of value is the ultimate driver of its value, both in the cyber and real worlds.

 

I have no idea which way Bitcoins will trade in the next 2 days or 2 years, but the whole process of starting a new Internet currency is a great case study in how real people use real currency.  Limiting supply has clearly been a huge plus for the BTC.  Becoming known as a currency for illegal drugs and gambling is more problematic, of course.  But let’s not forget that the U.S. Treasury printed 3 billion $100 bills in the 2012 Fiscal Year.  Most of those (the Federal Reserve estimates 80%) go overseas and many of them simply facilitate the global drug and arms trade, not to mention tax evasion and human trafficking.  So the BTC’s growing role in the same types of business might qualify it for “Reserve currency” status sooner than anyone thinks.

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Thu, 02/28/2013 - 19:10 | 3288039 francis_sawyer
francis_sawyer's picture

Time to make a 'golden' shirt [out of bitcoin "1's" & "0's"], & wear it to the disco to attract & impress all the Indian pootie...

Thu, 02/28/2013 - 19:16 | 3288074 Mark Carney
Mark Carney's picture

Hmmmm, bitcoin, something that is electronic, non tangible and could disapear anytime...... think ill stick to gold and silver buillon.

 

Thanks

Thu, 02/28/2013 - 19:20 | 3288099 Ahmeexnal
Ahmeexnal's picture

Which part of PONZI do these retards fail to comprehend?

Thu, 02/28/2013 - 19:25 | 3288131 johngaltfla
johngaltfla's picture

Bingo AH!!!

 

If, more like when, the governments of the EU and US decide to shut this door, all funds will be seized and redistributed to participants at THE GOVERNMENT/CENTRAL BANKSTER designated exchange rate as determined by THEM!

 

I love the concept but if we had an economic world based on FREEDOM, then and only thne would it work.

Thu, 02/28/2013 - 19:31 | 3288157 Shell Game
Shell Game's picture

"I love the concept but if we had an economic world based on FREEDOM, then and only thne would it work."

 

Same is true of a gold standard.  In this Brave New 1984, there would be no monetary freedom no matter the currency or store of value medium.  Honest money = no/minimal government.  Better honest money = gold-backed and minimal government.

Thu, 02/28/2013 - 20:09 | 3288282 Iocosus
Iocosus's picture

What I cannot grasp is who creates the currency and/or takes my dollars in exchange for a bitcoin? Is this essentially not the same principle of creating currency out of thin air?

Thu, 02/28/2013 - 20:14 | 3288298 XenoFrog
XenoFrog's picture

It's the ultimate in fiat currency.

Thu, 02/28/2013 - 20:40 | 3288401 Pseudo Anonym
Pseudo Anonym's picture

not true.  fiat is by decree.  btc is voluntary, nobody mandates its use.

Thu, 02/28/2013 - 20:43 | 3288411 XenoFrog
XenoFrog's picture

Fiat money doesn't have to be by decree. It is also an accepted term to describe a currency that holds no intrinsic value.

Thu, 02/28/2013 - 20:47 | 3288426 Pseudo Anonym
Pseudo Anonym's picture

the term >fiat< is a dictate; by definition.  the fact that it's arbitrary doesnt mean not tangible

Thu, 02/28/2013 - 20:56 | 3288448 XenoFrog
XenoFrog's picture

And bitcoin's structure doesn't reflect a dictate? 

Thu, 02/28/2013 - 21:01 | 3288467 Pseudo Anonym
Pseudo Anonym's picture

fiat is a dictate to >use<, for example, usd.  it's not the inherent structure.  it is the command of the fed: you will use usd to pay taxes; and nothing else, you slave!  that's what fiat is, a command to use, or do something.  btc is a voluntary use

Thu, 02/28/2013 - 21:19 | 3288495 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

 

 

Bitcoin competes with 

* Swiss numbered accounts 

* Deflationary PMs

* Money transfers like Western Union, Paypal, SWIFT

* Markets for arbitrarily imposed goods and services, imposed from the killers of Aaron Swartz

* Cannot be seized (unless you break RIPEMD; then break SHA256; then break a private key--> the amount of paranoid intelligence built into it is unthinkable for the average ZHer who holds the simpleton view of a world with gold, chickens, & middle age scenario next week).

I could go on, but I want ZHers OUT OF BITCOIN.  Don't buy it and raise the price; I want to have 2100 bitcoins, which means that in the entire planet only 10,000 people can have a stash similar to mine.  

Please proceed with random ranblings about ponzi scam CIA-devised and whatever lunacy you come up with. Just be on the sidelines and watch the real show.  

Whenever you desire to move a large amount of PMs, you'll understand bitcoin.  Until then, please GTFO and just ignore us.

Thu, 02/28/2013 - 21:28 | 3288538 Pseudo Anonym
Pseudo Anonym's picture

that's your problem right here:

I want to have 2100 bitcoins, which means that in the entire planet only 10,000 people can have a stash similar to mine

you will be poor just as you are poor now.  the value of something goes up if everybody has a little bit and competes with everybody else for more. it's the circulation that makes it valuable as money for trading.  it has to flow everywhere.

Thu, 02/28/2013 - 21:30 | 3288544 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

tell that to the 0.001%

Thu, 02/28/2013 - 21:33 | 3288554 Pseudo Anonym
Pseudo Anonym's picture

on the std. distr. curve, which 0.001% do you refer to?

Thu, 02/28/2013 - 21:44 | 3288572 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

The ones that hold all the land, patents, debtslaves et al.  

And btw, what the fuck are you taking about gaussian curves?  Wealth follows power-law distributions, not gaussian distributions.  

Seriously, if you don't grasp this, how can you ever grasp the magnitude achieved in bitcoin?

This year there will be less BTC created than people living in San Diego.  Think about that for a minute.

Meanwhile, http://www.quickmeme.com/Bitcoin-owners-safe/?upcoming

 

Thu, 02/28/2013 - 21:53 | 3288618 Pseudo Anonym
Pseudo Anonym's picture

review your previous comments before you post meaningless %. we were talking btc.  what is the stat. probability that you will have 21K coins and only 9999 individuals in the world will be able to mine the rest?  as far as "your" 0.001%, where do they come into the btc debate?  do "they" have any?  i dont know.  do you know?

Thu, 02/28/2013 - 22:04 | 3288641 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

There will only be 21M bitcoins ever made.  They are 238 times scarcer than an ounce of gold--when all are mined.  

Now if you please, study first, ask basic questions later.

Fri, 03/01/2013 - 00:13 | 3288964 Pseudo Anonym
Pseudo Anonym's picture

pfft.  what are you talking about? btc are scarce my ass. pico transactions, i.e. (10-12) of one btc are possible.  21M btc x (10-12) fractions is a lot of money.  in 125 years, a national treasure could be 100 btc

Fri, 03/01/2013 - 04:23 | 3289320 gold-is-not-dead
gold-is-not-dead's picture

I'm so glad ZHs still can't coprehand what BTC is. I thought people around here are with a vision and knowledge. Well, this makes me even more confident that the majority will join this party fashinably late.

 

http://www.youtube.com/watch?feature=player_embedded&v=mjmuPqkVwWc

Fri, 03/01/2013 - 05:52 | 3289375 Prisoners_dilemna
Prisoners_dilemna's picture

My thoughts exactly. I told myself, if anyone is intelligent enough to comprehend bitcoin it will be the ZH crowd. And they all have more dry powder than I do. Im sunk. The ship has sailed.

Now after reading the comments, and ignoring the trolls Im thinking I may be part of the vanguard yet.

Fri, 03/01/2013 - 07:00 | 3289418 gold-is-not-dead
gold-is-not-dead's picture

true.... lets just sit tight and wait for the endgame, and that is $1 = 1 satoshi... :)

Thu, 02/28/2013 - 23:21 | 3288910 Pseudo Anonym
Pseudo Anonym's picture

so what? what is your point? 

This year there will be less BTC created than people living in San Diego.

small btc transactions b/w sellers and purchasers can be executed in pico-btc (10-12).  there's enough btc for everybody in this world to use and trade

Thu, 02/28/2013 - 21:13 | 3288497 smlbizman
smlbizman's picture

i will admit that i am completly ignorant of how bit coins work....but my bat senses tell me something just is not right.....i dont understand how these 1010101010, are different from bennys 1010101010....i am a simple man and holding a 1oz coin feels real, were bitcoins feel  like the dollar, like religion, like george michael...where you have to have faith.....and anything that runs on faith tends to be an illusion....

Thu, 02/28/2013 - 22:47 | 3288515 Pseudo Anonym
Pseudo Anonym's picture

the diff is that benny can create, in less than a nano-second, infinite number of his judefetzen; btc not so many, just 21 million coins in over 125 years can be mined.

Thu, 02/28/2013 - 22:23 | 3288652 jayman21
jayman21's picture

Bitcoin is designed to be deflationary.  You will continue to see prices go down and number of transactions go up if you hold bitcoins.  The other fiats are based on growth and inflation.  If you are a saver, you will welcome bitcoins.  If you are a debtor, then you are going to hate bitcoins.

 

Right now, you can get bitcoins by buying them or setting up a mining machine to help with the bittorent network.  Keep an eye on the story.  This one will be very interesting if the dollar ever goes.  The one thing I hear is every currency had the dollar to soften the blow up.  If the dollar ever goes, I think everyone will wish they have bitcoins.  Some on thier phone and most of the rest of the bitcoins in a safe place.

 

 

Fri, 03/01/2013 - 07:13 | 3289326 gold-is-not-dead
gold-is-not-dead's picture

BTC will be the reserve currency of the world. Everyone who thinks different will just loose money. No violence is strong enough to solve the math problem.

Fri, 03/01/2013 - 01:24 | 3289178 AndrewJackson
AndrewJackson's picture

Wow, you hit the nail on the head. Exactly what I was thinking. These are no different than benny bucks when everything is boiled down. All of the bitcoin enthusiast will tell you that they are different because of anonimity, limited supply, decentralized, etc BUT they are still a bunch of 1's and 0's conjured up by man at the end of the day. 

Fri, 03/01/2013 - 05:40 | 3289368 Prisoners_dilemna
Prisoners_dilemna's picture

Man didnt create math or the phenomenon of electricity any more than man created gold. But we dont trade gold dust, we formed gold into coins. We dont create 1 & 0s, we form them into a beautiful arrangement whereby they become usable in the same way as gold. Some argue gold has no intrinsic value. Yet its still the preferred money when legal tender laws dont interfere. Bitcoin might also not have any intrinsic value unless you like to collect small memory cards with unique electron patterns on them. Yet they perform as money in a way far superior to fiat curencies and on par with gold. Dont get hung up on the electronic voodoo aspect. The problem with bennie bucks, and milton friedman would agree, is that electronic or not, the currency can be inflated. Bitcoin can not be inflated. Gold can not be inflated. So how is bitcoin like FRNS?
Read into bitcoin more and you will come to understand and hopefully appreciate its nature. I suggest starting here and clicking the introduction tab on the right side of the page. https://en.bitcoin.it/wiki/Main_Page

Thu, 02/28/2013 - 21:14 | 3288496 Pseudo Anonym
Pseudo Anonym's picture

btw, gold coin could be fiat money too.  for example, the fed could stamp out a gold coin with a circumcised dick on it and issue a command: from here on, in usa, you will pay your taxes with a gold coin with a circumcised dick on it and nothing else!  by fiat.

Thu, 02/28/2013 - 21:34 | 3288559 CH1
CH1's picture

Wow, as soon as you mention Bitcoin, the enitre paid troll contingent shows up!

Fri, 03/01/2013 - 04:45 | 3289337 gold-is-not-dead
gold-is-not-dead's picture

paid by who? I made my own wealth on btcs... no one helped me...

Thu, 02/28/2013 - 21:18 | 3288508 TraderTimm
TraderTimm's picture

Its actually the ultimate in hybrid payment system/currency.

Thu, 02/28/2013 - 22:04 | 3288642 espirit
espirit's picture

So... the more players, the higher the value? Do tell.

Fri, 03/01/2013 - 00:42 | 3289119 TraderTimm
TraderTimm's picture

I see what you're trying to imply - but no, it isn't about the valuation of bitcoin in < insert badly managed sovereign currency >.

But again, what was the point of your post?

Thu, 02/28/2013 - 20:45 | 3288415 A Nanny Moose
A Nanny Moose's picture

Every day, except for today, I see ads for the bitcoin generator. I fail to see what value is added in to create such currency units, unless the heat from all those microprocessors is harnessed to produce energy.

I would rather invest in IPv6 addresses

Thu, 02/28/2013 - 21:20 | 3288513 TraderTimm
TraderTimm's picture

This statement is like saying "Why doesn't my car fix potholes in the road when I'm idling, its just sitting there doing nothing."

The work that the mining nodes are doing is something, it secures the network among other things.

Thu, 02/28/2013 - 23:31 | 3288932 A Nanny Moose
A Nanny Moose's picture

Not at all, since it is generally accepted that the productive value of an automobile lies solely in its ability to get me to work more efficiently over long distances, than say, a bicycle.

The work that the mining nodes are doing is something, it secures the network among other things.

Define please. I fail to see the how Bitcoin can produce additional security for a network. I suppose this lies in your definition of "secure," and of "network." Explain please? What network? Whose dime is paying for it?

Fri, 03/01/2013 - 05:07 | 3289350 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

>>>I fail to see the how Bitcoin can produce additional security for a network. I suppose this lies in your definition of "secure," and of "network." Explain please?

The only way to attempt dishonest trasactions in bitcoin, or to momentarily stop the network, is to achieve 51% of the network.  You have to pick up a very open fight with the internet; a fight that will generate headlines and draw more people into bitcoin.

http://www.weusecoins.com/globe-bitcoin/

 

>>>What network?

Bitcoin is open-source software with no hidden secrets.  You can download it now and become part of the network. This leads to your next question...

 

>>>Whose dime is paying for it?

 

Anybody that participates in securing the honesty of the network gets statistically their fair share of the new bitcoin created.  2013--2016 are the last years of "bitcoin high inflation", when the networks monetary base increase by >8%/annum.  

The problem with mining bitcoin today, is that it has become so professional and specialized that it takes more capital than energy; you have to get your hands on an ASIC machine--a processor that can NOT sum 1+3 (non-programmable), but that computes the Bitcoin security codes in hardware.

Fri, 03/01/2013 - 05:13 | 3289353 Prisoners_dilemna
Prisoners_dilemna's picture

https://en.bitcoin.it/wiki/Main_Page on the right side you'll see introduction and other links. start there.

The question you asked is beyond my patience to attempt a succinct answer in a comments box using a touch pad tablet.
If ones even possibly.

I dont think you know it but the question you asked has a pretty technical answer, it appears you have minimal knowledge of bitcoin systems, and dont know even the basic jargon.

Id have more luck explaining the evils of fiat currency to a statist. Please follow that link I provided.

Fri, 03/01/2013 - 04:54 | 3289343 Prisoners_dilemna
Prisoners_dilemna's picture

The idea for a cryptocurrency was conceived long ago.

Satoshi wrote the bitcoin code. There is an 11 page pdf he authored explaining the system. The bitcoin algorithm was designed by satoshi to mimic gold mining. At first people doing the mining, which requires energy inputs and a mining machine, were striking rich veins of btc. But after mining so many bitcoin, the algorithm halves the reward. Now when miners use electricity to solve complex hashing operations they are only finding nuggets. Evemtually bitcoin mining will resemble huge pit mines, monster computer working to extract 1.5 btc.
I am not sure how to say it but mining bitcoin is hardly equivalent to cntrl+p. Mining is resource intensive. Just like mining gold there are capital expenditures and energy costs to mine the btc. Maintenance must be performed on the mining computer.
https://en.bitcoin.it/wiki/Mining
As to the second half of your question I suggest you visit mtgox.com or any other bitcoin exchange. Buying and selling bitcoin is no different then buying and selling canadian loonies or yen. Except you can do it in your living room, you can transact pretty much instantaneously with anyone anywhere in the world. The transaction will be mostly.annonymous with varying degrees based upon your own knowledge of encrytpion tools and other internet privacy practices.
Google buy local bitcoins. There are websites now hooking people up for face to face transactions so they can be bought with cash rather than buying using a CC or checking account.
Mtgox.com
Localbitcoins.com

Hopefully my answer helps your understanding. 1 hr of reading bitcoin forums and wikis should help you understand that bitcoin miners are no more creating something out of thin air than goldminers.

Bitcoin is not inflatable or counterfeitable but neither is it a perfect substitution for gold. It does require network access. On the flip side you will have trouble carrying 50oz AU out of USA and to your central american villa. Bitcoin, you could carry billions worth and no one would know.
The real issue with bitcoin are found here.
https://en.bitcoin.it/wiki/Weaknesses
Anything else is an ussue of misunderstanding and misinformation.

Thu, 02/28/2013 - 19:32 | 3288159 lemonobrien
lemonobrien's picture

you could even apply laws of treason.

Fri, 03/01/2013 - 05:10 | 3289352 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

"The actions of that DELL SD203 were unspeakably treasonous, your honor!"

Thu, 02/28/2013 - 19:42 | 3288191 CH1
CH1's picture

all funds will be seized

And where do you suppose these funds can be found?

Thu, 02/28/2013 - 20:14 | 3288301 CCanuck
CCanuck's picture

Does Bitcoin offer a list of companies, or people that accept bitcoin.

The govvie will start there, not hard to find.

Thu, 02/28/2013 - 21:24 | 3288526 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

then they migrate to TOR and that's it, nothing to find, nothing to do.  Inverted totalitarians will be forced to be honest dua to cryptocurrencies.

Thu, 02/28/2013 - 21:30 | 3288537 francis_sawyer
francis_sawyer's picture

I'm not certain, but I'm pretty sure all the companies who traffic CHILD PORN, HASHISH, & MILITARY GRADE WEAPONRY  have to register themselves with the government before doing business in bitcoins... 

Thu, 02/28/2013 - 22:10 | 3288655 Bunga Bunga
Bunga Bunga's picture

Surprise, the company counterparties who do CORRUPTION are sometimes within the government by nature.

Thu, 02/28/2013 - 22:15 | 3288674 EscapeKey
EscapeKey's picture

You mean like drug barons do when they trade in US Dollars?

Do NOT follow this link or you will be banned from the site!