General Bitcoin discussion thread (May 2011)

http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea

"Financial experts on Quora all agree that Bitcoin is either a horrible or an excellent idea." Several long, thoughtful comments on BC.

Has anybody seen any reply to Tyler Cowen's argument that Bitcoin's monetary velocity is unstable?

The arguments I have encountered focus on Bitcoins' strengths as a medium of exchange, but not (as Cowen points out) as a store of value, as one currency among a monetary universe composed of many money-like substitutes. Why hold non-negligible amounts of Bitcoin (as opposed to cash for its state-enforced liquidity, or any less-liquid but higher-return financial instrument of choice - recall Fisher's equation here)?

The mainstream Keynesians like to talk up liquidity preference. The post-Keynesians and modern monetary theory types talk about fiat money demand as driven by the state (to pay taxes, etc.). Well, Bitcoin cannot do that, either - it is fiat money without a fiat. We know all about Bitcoin's stable money supply. What determines its money demand? Demand for anonymous money? But the supply of anonymous-money-substitutes is not limited to Bitcoin.

(An alternative way to phrase the problem, via a standard result from international macro - flexible exchange rates and high rates of currency substitution imply unstable exchange rates; the more perfect and costless the substitution, the more unstable the exchange rate, with the rate becoming indeterminate as cost goes to zero. This is the point made by the paper Cowen mentions. Currencies in use in the world tend to correlate remarkably well with geopolitical boundaries, regardless of whatever optimal currency areas that may exist, for reasons that have less to do with their intrinsic economic properties than with state measures; states have central banks and central banks can defend currencies, so the problem presented by rampant currency substitution is really only limited to weak states in military turmoil. Bitcoin is another matter, though - it doesn't suffer any of the vagaries of bad central banking, but it can't claim any of the strengths either.)

edit: "unstable exchange rates" is not quite clear. "Exchange rates highly elastic to changes in money demand and supply" might be better.

Undergound drug market built on Bitcoin: http://www.wired.com/threatlevel/2011/06/silkroad/

Slashdot: Increased Power Usage Leads to Mistaken Pot Busts for Bitcoin Miners

Something just occurred to me: is Bitcoin unnecessarily causing itself grief by being promoted as "money"? Once you get it classified as money, all sorts of political (not to mention emotional) baggage gets attached: the government wants to regulate it and such.

What if you kept everything the same, but promoted it as a "social status codification mechanism" or something like that? That is, make Bitcoin ownership a way of accumulating social status (among some sub-community -- Bitcoiners, if nothing else). The more coins you have relative to others, the higher your rank. Of course, nobody knows how much any person has, just how much each address has. But as long as there's the option to reveal your ownership, you have the potential for status.

If it were promoted this way, and had always been regarded this way, it would be harder for its opponents to conceive of it as competing with national currencies and therefore be harder to justify banning or taxing. After all, you don't have to report "accumulation of social status" as income on any tax form, right? You would be able to "trade" the status to buy things -- but since Bitcoin is, at root, a public database ("money is information"), any such transaction can be equivalently represented as someone gaining and someone losing social recognition.

One could no more justify taxing "status payments" than they could justify taxing "promotion to manager" or "popularity".

Just a thought...

Just to toot my own horn: I finally got my liquid-cooled mining rig set up. Picture and details here.

http://falkvinge.net/2011/05/19/the-information-policy-case-for-flat-tax-and-basic-income/

Rick Falkvinge, founder of the Pirate Party movement, argues that Bitcoin will make income taxation impossible as monetary transactions become invisible to the government. He proposes to replace income taxes with a value added tax, and a basic income scheme to take the lowest earners into account.

I've been thinking of allocating some of my bitcoins to bounties/prizes for various things of LessWrong interest. For example, at the beginning of this month I started a prize for promotional videos for cryonics. Anyone have suggestions as to what would be good ideas for the future?

I bought a hd5850 because mining is still profitable. it might not remain so for much longer though because the difficulty has been ramping up severely. obviously over time in should reach an equilibrium based on electricity/component costs.

Unfortunately, once one looks behind the curtain of the system, one conclusion seems inevitable: it was deliberately designed as a pyramid scheme to enrich early adopters, not as a currency to trade goods and services. This Quora discussion explains it at some length, but basically, because a) the total currency supply is limited, b) it gets harder and harder to mine bitcoins over time, there’s now a small elite of bitcoin owners. The wealthiest own hundreds of thousands of bitcoins. Nobody will match them in wealth at this point without a prohibitive investment of money and time, and the gap between rich and poor will continue to widen indefinitely as a new bitcoin owner must spend dollars to purchase mere fractions of a coin (or contribute to its growing ecological footprint by becoming a “miner” who wastes computing cycles on the generation of coins).

http://intelligentdesigns.net/blog/?p=108 - blog of Erik Moeller of Wikimedia (personal blog, not official).

I would not, personally, attribute malice to the founders and say that it was deliberately a pyramid scheme. Though functionally being one may not be good.