How Bitcoin Could Become a Viable Currency

48 pointsby scottcanoniover 11 years ago

11 comments

lolcraftover 11 years ago

Here's my proposal: let's forget exchange rates. Let's not confuse them with inflation[0]. That's a red herring. Exchange rates are important for BTC's legal users now because there's not (yet) production in BitCoin's economy. Apart from drugs[1], BTC is pure store of value, and it should be analyzed as such.This is important for this discussion, because exchange rates ultimately won't matter that much. By "ultimately", I mean that phase of development when (if) BitCoin becomes a full currency, that is, when there's somebody, some corporation, operating and trading significantly in the currency. I won't lend the status of currency to any commodity which is not used this way.And what's clear is that both BitCoin and gold are shit currencies. Even conceding the exchange rate could stabilize enough for a modern day Rockefeller[2] to pull it to a success, you still would have to contend with the deflation inherent in this "currency".There's a reason why gold is traded in commodities markets -- and not as a currency. There's a reason why banks and states trade and store USD, instead of gold. You simply can't grow an economy like it's the 20th century with gold, or BitCoin. In fact, BitCoin is even more ruthless than gold. 19th century economies could at least pray for the discovery of a gold vein, to alleviate their deflationary comedowns. BitCoin denies even this possibility with the cold, germanic efficiency of a mathematical proof.[0] The exchange rate we run against our future selves, if you will.[1] Which doesn't count anyhow, since you would agree there's a risk markup on them for their illegal status, which makes dubious extrapolating any analysis from them.[2] An improbably apt group of entrepreneurs, who even more improbably would decide to bet their future fortunes on a currency designed by computer geeks with a penchant for goldbuggering.

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RoboTeddyover 11 years ago

> Let's say, for example, a vendor is considering whether to begin accepting bitcoin. She will need to be able feel relatively certain that, when she leaves the storefront in the evening, she will have nearly the same amount of value on balance when she returns the next morning.Fortunately, vendors don't have to take on any such risk. There are services (e.g. CoinBase, BitPay) that let sellers accept bitcoin without ever holding a bitcoin balance. These services effectively instantly convert bitcoin revenue into something less volatile (e.g. USD).

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j2d3over 11 years ago

I think BitCoin could be a great answer to the global dissatisfaction with the dollar as the world reserve currency. Why not use bitcoin as a non-political global reserve currency, and as an intermediary between national currencies, rather than as an everyday currency that intends to replace anything.

dragontamerover 11 years ago

<a href="http://blockchain.info/charts/tx-trade-ratio" rel="nofollow">http://blockchain.info/charts/tx-trade-ratio</a>Transaction to Trade ratio is going up. For whatever reason, a significant portion of BTCs (in some data-points... as much as 60% of BTC transactions) have been in exchanges.IE: BTC is probably going through a bubble right now, as any commodity. In the first few weeks of October, there were periods where MOST transactions were purely for speculation / trading.<a href="http://blockchain.info/charts/trade-volume" rel="nofollow">http://blockchain.info/charts/trade-volume</a>Trade volume is on the rise. I don't know why or how, but a group of investors has decided to start speculating on BTCs.------------------Instead, for BTC to be a "useful currency", people need to transfer BTCs between each other and stop speculating on BTC / USD exchanges. Whenever there is a rise of speculators, I'm going to bet on a bubble.

zalzaneover 11 years ago

One tidbit that continues to bother me regarding the long-term viability of bitcoin is how long the encryption processes it relies on will stay secure. IIRC bitcoin relies on ECDSA for signing and SHA-256 for hashing.Pretty much all forms of encryption have a shelf-life until they are broken, especially when you consider quantum computing on the horizon. What happens when ECDSA becomes viable to break, or when they start finding SHA-256 collisions? Would the currency just collapse, or is there some way provided to change the system's cryptography methods?

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jdmitchover 11 years ago

Is the volatility graph of Bitcoin in this article really representative?Some people have mentioned that in the huge price spike in April, there were not actually that many people buying, and then there is this article on Bitcoin spreads that calls into question whether Mt. Gox is the best measure: <a href="http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-spreads-violate-a-fundamental-economic-law/" rel="nofollow">http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-s...</a>

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mrbover 11 years ago

The article is right on one point: Bitcoin is volatile. No one denies that.However the article is wrong that "volatility must decrease for it to survive". If anything, the fact it has not only survived for 4 years, but succeeded by gaining market share and gaining value (1000x since 2010!) despite its volatility shows that the market does not care that much about volatility.

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DennisPover 11 years ago

Bitcoin has a market cap around $2 billion. To be a major currency, it needs a much larger cap, maybe a hundred billion. A major price increase would count as volatility but it's the only path from here to there.

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saejoxover 11 years ago

Volatility doesn't bother as long as i can convert it to USD as fast and painless as i do with USD/EUR or Gold/USD.But, i can't. So it's kinda worthless.

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chris_mahanover 11 years ago

Actual coins? That I can use at the store and in vending machines? That I can use at the restaurant to buy food?

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erikpukinskisover 11 years ago

Bitcoin volatility won't decrease for a long time. Right now we're in the first major phase of Bitcoin's evolution, wherein the global financial system slowly wraps it's collective brain around what Bitcoin is, how it behaves, and what it's good for.Even experts in cryptocurrency don't agree about any of those things, so global consensus about those three things is a long way off.A few basics are starting to emerge:* Bitcoin is good for transactions that governments don't want you to make.* Bitcoin is good for transactions between vastly different financial and legal systems.* Bitcoin is good for storing money in your brain.* Some subset of people feel Bitcoin is a good investment.But even now, there are many people with money, not to mention many financial experts, who are not so sure about these things. With every WSJ article we creep closer and closer to consensus, but it is still quite far off.That said, eventually the global financial markets will start to agree about these uses, and a generally accepted model will emerge. I suspect this will take at least 20 years, which is the length of time it will take for us to start having University Faculty who went through their entire undergraduate education with Bitcoin existing and at least partially understood by their professors.That model will be something like:<pre><code> Bitcoin market cap = I + f(V) </code></pre> where V = volume of global transactions for which Bitcoin is the best choicef(V) = the float required to make those transactionsI = the amount of capital for which Bitcoin is the best investment vehicleAnd of course we need models for each of these... V is going to be some portion of illegal transactions, some portion of inter-border transactions, etc. We really have no idea what this is right now.Until then the price of Bitcoin will be very chaotic, which will influence the I term, but not the V term. The V term is just a pure result of how many people have need for a Bitcoin-like currency, and what percentage of those people are aware of Bitcoin and have the technical means to use it.BUT, when the global financial markets do start to reach consensus on the model, then Bitcoin will stabilize. And I don't mean it will stabilize as a deflationary currency, I mean it will literally be flat. Because the financial markets have NO problem pricing deflation into their models and they absolutely will. The price will go up to where you can't make money investing in Bitcoin during a reasonable slice of a human lifetime, and then level off.And I suspect Bitcoin will stabilize MUCH more than traditional currencies. Because there will be no capriciousness of international politics or policy, the Bitcoin price model will be based on much more stable factors: global crime, global population, etc. And those things are much easier to model than things like U.S. foreign policy.So anyone who is thinking either A) Bitcoin has a chance at stabilizing in the next 10 years, B) Bitcoin will deflate forever, or C) Bitcoin will never stabilize, I just don't agree. It's just going to take a while.

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