Bitcoin’s nearly parabolic rise in price this year has, not surprisingly, led to a similar rise in expectations. What does the future hold for bitcoin? Could bitcoin replace gold? Or might it grow even bigger:
Ron Paul: Bitcoin could ‘destroy the dollar’
By Jose Pagliery
December 4, 2013: 12:01 PM ETNEW YORK (CNNMoney)
Imagine a world in which you can buy anything in secret. No banks. No fees. No worries inflation will make today’s money worth less tomorrow.The digital currency Bitcoin promises all these things. And while it’s far from achieving any of them — its value is unstable and it’s rarely used — some have high hopes.
“There will be alternatives to the dollar, and this might be one of them,” said former U.S. congressman Ron Paul. If people start using bitcoins en masse, “it’ll go down in history as the destroyer of the dollar,” Paul added.
It’s unlikely that Bitcoin would replace the dollar or other government-controlled currencies. But it could serve as a kind of universal alternative currency that is accepted everywhere around the globe. Concerned about the dollar’s inflation? Just move your cash to bitcoins and use them to pay your bills instead. Tired of hefty credit card fees? Bitcoin allows transactions that bypass banks.
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And who knows, maybe bitcoin really will be the “destroyer of the dollar”. But such a possibility raises a fun question: Can a fixed-supply digital currency like bitcoin “destroy” the dollar by supplanting it the world’s reserve currency? Sure, it’s possible:
oftwominds.com
Could Bitcoin (or equivalent) Become a Global Reserve Currency?
(November 7, 2013)
Charles Hugh SmithIt’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.
Could a non-state issued digital currency like Bitcoin become a global reserve currency? The idea came up in my recent conversation with Max Keiser on the Keiser Report during our discussion of reserve currencies.
The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.
While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it’s a worthy thought experiment to ask if a digital currency could also act as a reserve currency.
Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency’s acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.
It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn’t created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.
The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.
There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.
To act as a reserve currency, another trillion or two would be needed, as nations would hold these quatloos as reserves. (Nations hold an estimated $7 trillion in USD reserves, about $3 trillion euros and $1 trillion or so in yen, pounds and other currencies.)
But issuing quatloos in these quantities would remove any scarcity value. Thus the issuer of the quatloo would have to carefully issue more quatloos only when demand justified the need for more monetary “grease” for the global economy.
If on the other hand skyrocketing demand/scarcity drove the value to the stratosphere, holders of the quatloo would rejoice, but this volatility would present its own set of risks for those seeking to use the quatloo as a reserve against currency volatility in the home-country currency. If a digital currency can leap ten-fold in a short time, then might it not drop with equal volatility?
Volatility is the enemy of reserves; the holder of reserves needs a liquid (meaning it can easily be sold or traded in size) currency that predictably retains its value. A volatile currency poses risks, as do currencies that cannot be traded in size without drastically influencing the market value of the currency.
These conditions pose a steep challenge for any digital currency, but they are not insurmountable. Even as a niche currency, non-state issued digital currencies could play a role in the global economy, especially if government-issued fiat currencies destabilize/ devalue due to massive money creation by desperate central banks and state treasuries.
Is scarcity enough to back a non-state issued currency? Bitcoin offers a real-world experiment.
So yes, in theory, bitcoin or any other digital fixed-supply currency could become the new dominant global reserve currency if the US really does descend into a hyperinflationary death-spiral and if total value of the new reserve currency becomes worth trillions of dollars (at today’s prices) and also becomes more stable than any of the alternatives. In other words, yes, we could see a new non-state-backed digital reserve currency, but that currency would have to have properties not yet exhibited by bitcoin or any other fixed-supply currency and all other major currencies would have to fail. And such a scenario might not actually do anything to reduce inflation anyways but, in theory, it could happen.
So why is it that so many bitcoin enthusiasts are predicting that the dollar’s deathblow has finally arrive? Well, in part it’s because there are a lot of Libertarians. Also, a lot of Libertarians bought a lot of bitcoins:
Forbes
ECB: “Roots Of Bitcoin Can Be Found In The Austrian School Of Economics”
11/03/2012 @ 11:04AM
Jon Matonis, ContributorThe ECB (European Central Bank) has produced the first official central bank study of the decentralized cryptographic money known as bitcoin, Virtual Currency Schemes. Ignoring for a moment the ECB’s condescending and derogatory use of the virtual currency phrase and scheme phrase, the study produced at least one landmark achievement.
In claiming that “The theoretical roots of Bitcoin can be found in the Austrian school of economics,” the ECB forever linked Bitcoin to the proud economic heritage of Menger, Mises, and Hayek as well as to Austrian business cycle theory. This recognition is also a direct testament to the monetary theory work of Friedrich von Hayek who inspired many with his 1976 landmark publication of Denationalisation of Money.
Bitcoin fully embodies the spirit of denationalized money as it seeks no authority for its continued existence and it recognizes no political borders for its circulation. Indeed according to the report, proponents see Bitcoin as “a good starting point to end the monopoly central banks have in the issuance of money” and “inspired by the former gold standard.”
Economists from the 19th and mid-20th centuries can be forgiven for not anticipating an interconnected digital realm like the Internet with its p2p distributed architecture, but modern economists cannot be. From their own conclusions (on page 48) which inaccurately lump Bitcoin together with Linden Dollars, here is what the modern-day economists at the ECB are still not getting:
1. ECB concludes that if money creation remains at a low level, bitcoin does not pose a risk to price stability. This is incorrect on two levels. One, the creation of new bitcoin is capped at 21 million with eight current decimal places so it grows through adoption and usage rather than monetary expansion. And two, as with gold, silver, and other commodities having a monetary component, price stability is a function of the market not central planners;
2. ECB concludes that bitcoin cannot jeopardize financial stability due to its low volume and limited connection with the real economy. Conversely, bitcoin will tend to increase financial stability and overall soundness. Bitcoin’s connection with the real economy is only a concern for the regulated and taxed economy, whereas bitcoin independently may thrive in the $10 trillion shadow or “original” economy. Besides, with its repeated market interventions, no one has done more to jeopardize financial stability than the ECB itself;
3. ECB concludes that bitcoin is currently not regulated and supervised by any public authority. It would be more accurate to say that State-sponsored regulation is largely irrelevant because of the inherent design properties of a peer-to-peer distributed computing system. But happily, this is still a conclusion that I can agree with and recommend that it remains the case;
4. ECB concludes that bitcoin could represent a challenge for public authorities, given the legal uncertainty and potential for performing illegal activities. While public authorities will certainly be challenged by the introduction of a monetary unit that cannot be manipulated for political purposes, bitcoin in some cases does have the ability to provide tracking capability that far exceeds that of national cash or money substitutes. What authorities will find most troubling though, with bitcoin, is that money flows between individuals and businesses will no longer be exploitable for purposes of unlimited identity tracking and unconstitutional ‘fishing expeditions’;
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Bitcoin: Destroyer of the dollar... yuan?
The ECB’s report on bitcoin discussed above was published over a year ago. A lot’s changed with bitcoin over the last year, most notably the price. But there have been plenty of other changes too. For instance, a state-owned Chinese telecom, Jiangsu Telecom, recently announced a decision to accept bitcoin as payments. And just a few days later, the most popular search engine in China stopped accepting Bitcoins as payments.
Why all the sudden bitcoin policy swings in China? Well, in part, it’s because the one of the other big bitcoin changes over the past year has been the growing recognition of bitcoin’s potential for affecting the “real” economy. It’s not that bitcoin is now widely used for legal commerce...that’s still a niche use for digital currencies. Instead, as the author of the above article predicted over a year ago, much of the concern over bitcoin’s impact on the “real” (non-underground) economy is due to bitcoin’s growing applications for underground commerce that can affect the “real” economy in real ways. Especially an economy like China’s with strict capital controls a lot of very wealthy people with a lot of money. Money they would like to launder and then move out of the country.
So a big part of the reason we saw a state-backed telecom announce the acceptance of bitcoin followed by a rejection bitcoins by Baidu just days later is that this happened in between:
The Verge
Bitcoin banned from Chinese banks amid fears of launderingRegulators say individuals are still free to use the virtual currency at their own risk
By Amar Toor on December 5, 2013 04:04 am
Chinese regulators have banned financial institutions from using Bitcoin, warning that the virtual currency could be used for illegal activities and speculation. China’s central bank, the People’s Bank of China, announced the decision in a statement released Thursday, though it stopped short of banning Bitcoin altogether. Individuals are still free to use the digital currency in China, albeit at their own risk. Bitcoin prices fell in response to today’s announcement, dropping to as low as $970.62 on Thursday after trading at over $1,100 prior to the central bank’s decision.
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China has long implemented tight currency controls, so it’s not surprising that regulators would be wary of Bitcoin, which has yet to be regulated in any country. In its statement, the central bank said it would closely monitor the risks that Bitcoin poses, adding that it would take measures to prevent the currency from being laundered for illicit activities.
“As Bitcoin transactions can be done anonymously and are not restricted by location, it’s difficult to monitor capital flows and it therefore facilitates money laundering and financing for terrorist activities,” the People’s Bank of China said.
“There have been criminal activities using Bitcoins, such as trading of drugs and guns,” the bank added. “Relevant cases are under investigation.”
Yes, China just banned financial firms from trading in bitcoins over money-laundering and capital control concerns. For a country like China that has long limited the flow of money crossing its borders bitcoin presents an new and rather potentially powerful threat to China. Why? Because China’s long-standing policy of artificially suppressing the value of the yuan via capital controls has resulted in A LOT of capital in the hands of people that want to move it out of China. Now. And the Chinese government has merely promised to eventually allow them to move all of that money out of the country. Eventually. Maybe in 2020 at the earliest:
South China Morning Post
China promises to loosen capital control, but no rapid progress expected
Despite pledge to speed up deregulation, economists raise concerns over funds outflows and speculative activities that may ariseJane Cai in Beijing
xuejun.cai@scmp.com
PUBLISHED : Friday, 29 November, 2013, 8:40am
UPDATED : Saturday, 30 November, 2013, 2:03amJulia Yang’s spirits rose when the Communist Party said this month it would accelerate the deregulation of the mainland’s capital account to facilitate cross-border investment.
“I will sell one of my apartments in Beijing to escape the property tax that will be launched sooner or later,” said the accountant, who owns two flats. “I will buy some US stocks or look into properties in Europe, where investment opportunities should be better.”
Hastening the yuan’s convertibility under the capital account was one of the key reform proposals decided on at the third plenum of the party’s Central Committee, according to a document released on November 15. Targets for what amounts to partial convertibility are planned to be achieved by 2020.
When the capital account is fully opened, foreign direct investment, portfolio investment and other cross-border investment can be conducted without restrictions on converting yuan.
Yang’s plans partly justify the concerns expressed by many economists. They say the pace of capital account opening up will be slow because policymakers are worried about large capital outflows in the initial years of opening up and speculative capital activities that could cause financial turmoil in the absence of sound regulatory measures.
“Many people have high hopes of capital-account liberalisation but I think the new leaders will be cautious in advancing the reform,” said Lu Ting, an economist at Bank of America Merrill Lynch.
Central bank governor Zhou Xiaochuan says the central government will simplify administrative measures governing foreign exchange, draw up a list of sectors where direct investment will be prohibited and expand quotas under the qualified domestic and foreign institutional investor programmes by 2020.
However, Lu said, reforms on more important fronts, including loosening controls on cross-border lending and equity portfolio investment, would “remain quite slow”.
Opposition to rapid capital-account liberalisation has been strong since it was first put on the central government’s agenda in the 1990s. Although central bank officials generally advocate speeding up the process, many academics are against it, bearing in mind lessons from the 1997 Asian financial crisis, when foreign speculators undermined the financial stability of countries with open capital accounts following a credit binge.
Fan Wei, an analyst at Hongyuan Securities, said: “I think the process will be prolonged. Academics, represented by those from the Chinese Academy of Social Sciences, strongly oppose it.”
Yu Yongding, a top economist at the academy, told a forum this month: “So far I don’t see any necessity for the government to accelerate capital-account liberalisation.”
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As the above excerpt indicates, if China’s capital controls are liberalized money will flow more easily both in and out of the country but at the moment there is just much more money ready to flow into China than out of it. And the lifting of those capital-controls isn’t going to come any sooner than 2020 and possibly much later. Hence the concerns about bitcoin.
But keep in mind that China only barred its financial institutions from trading in bitcoins. Individuals are still free to buy and sell all the bitcoins they want. And that presumably includes individuals with a lot of money. And gambling problem. A lot of money and gambling problem in Macau:
Business Insider
I’m Changing My Mind About Bitcoin
Joe WeisenthalDec. 1, 2013, 4:40 PM
I’m changing my mind about Bitcoin.
I used to think it was a joke or at best a currency for clowns.
Now, I no longer think that. Now, I don’t know what its future is.
Here, let me explain.
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Provided the market is liquid enough, and the transaction infrastructure is robust enough, both the buyer and the seller should be able to conduct a mutually agreeable transaction at a fair U.S. dollar-based price, with Bitcoin simply providing the anonymity needed for the actual swap.
The same argument applies to the deflationary aspect of Bitcoin. If I’m buying weed online, what do I care if others are hoarding it, or if the price has gone up five times in the last day? So long as at the current price, the seller and me are able to come to a mutually agreeable price when translated back into U.S. dollars, the price rise just isn’t that big of an impediment. In fact, the price rise might actually be helpful (more on this later).
Even if you don’t think drugs, online gambling, and other illegal activity is enough to sustain a “currency,” the same principle applied above could apply to something more important: money laundering or circumventing capital controls.
This is what the excitement about Bitcoin in China is all about. In the Bitcoin community, there’s tons of talk about how the future of Bitcoin is in China, and there does seem to be tons of trading volume happening there. Here’s the potential: China has lots of rich people, but a fragile banking system, and strict capital controls, meaning it’s difficult to get your wealth out of the country. One way rich people get their wealth out of the country is by laundering it through Macau. Mamta Badkar wrote a great explainer of how this works.
Basically, your Chinese millionaire gives millions of dollars to a “junket” operator in the mainland. That junket operator then provides them with millions of dollars worth of chips at a casino in Macau. The millionaire then plays numerous hands of some game (probably baccarat) then at the end of the session cashes in the chips in Macau’s currency, the Pataca. Then those Patacas are deposited into a bank in Macau, and voila, the millionaire has just escaped China’s capital controls, having successfully moved millions outside of the Chinese banking system.
Bitcoin, theoretically, promises an even easier path to do this. Rich person buys a bunch of bitcoins, transfers them to a Bitcoin wallet associated with a financial institution outside of China, sells the bitcoins into some new currency, and then voila.
Economist Tyler Cowen wrote a long post about Bitcoin and its potential in China last week:
Right now, you can think of the value of Bitcoin being set in the same way that the value of an export license might be set through bids. If/when China fully liberalizes capital flows, the value of Bitcoin likely will fall. A lot. To the extent the shadow market value of the yuan rises, and approaches the level of the current quasi-peg, the value of Bitcoin will fall, by how much is not clear. Or maybe getting money out through Hong Kong (or Shanghai) will become easier and again the value of Bitcoin would fall. If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall. A lot. You will recall that the Chinese government shut down the virtual currency QQ in 2009; admittedly stopping Bitcoin could prove harder but still they could thwart or limit it.
If you are long Bitcoin for any appreciable amount of time, it seems you are betting that the Chinese economy will do poorly and capital controls will remain. Then more people will be increasingly desperate to get more money out of the country. Or you may be betting that the Chinese use of Bitcoin to launder money will increase due to the mere spread of the idea, through social contagion. According to this source, the value of Bitcoin is up by a factor of 66 this year in China.
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Note that the Macau casino junket industry is dominated by the Triads so the junket operators are probably pretty good at providing a full-service experience.
Continuing...
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Now, earlier I mentioned that the rising price of Bitcoin, rather than being a hindrance, could actually be helpful.Here’s why. See, while everyone talks about Bitcoin, there are actually a ton of crypto-currencies. The website CoinMarketCap.com lists 42 different ones, and helpfully lists the total “market cap” of each. The “market cap” is just the price of each coin multiplied by the number of outstanding coins there are for each.
Here’s a look at the top eight among them. Bitcoin, at over $10 billion, is the biggest. Feathercoin, at over $19 million, is still pretty substantial.
Now each one of these coin systems are pretty similar, but they have slightly different characteristics. The second biggest one is Litecoin, which advertises that transactions are faster, and that the mining system is fairer than bitcoins.
Theoretically, any one of these would suffice if you’re a rich person in China looking to get your money outside the border. But in practice, several of these wouldn’t suffice. For you to get your money out of China you need to be able to buy coins in size, and then be confident that once you’ve switched them to a wallet outside of the country, that you’d be able to sell those coins in size for roughly the same price.
If you wanted to move $1 million worth of Feathercoin, you’d be trying to move over 5% of the entire Feathercoin market. It’s highly unlikely you’d be able to find that kind of liquidity in any reasonable period of time. You’d be taking a gigantic risk that when you wanted to sell your Feathercoin, that there would be no buyers, and you’d be totally screwed.
Now that Bitcoin has, notionally, billions of dollars in the ecosystem, moving $1 million (just ~1,000 bitcoins) is less likely to cause any kind of splash. You can probably obtain the coins and sell them without much disruption. So although theoretically the competing coins can technically do the job of getting past the border, you really need the network effects of a system with a high “market cap” to make it work. So in a sense, the rising price makes it easier for the whole system to operate. Rather than being discouraging to the Bitcoin ecosystem, it enables it, because there’s enough money in the system to absorb the needs of buyers and sellers doing transactions.
Felix Salmon wrote a post titled Waiting for Bitcoin to get Boring in which he argued that Bitcoin bulls should be more excited by long periods with little volatility rather than the periods like recently where the price goes ballistic. But while that seems intuitive if you think of Bitcoin like a “currency” that needs stability, it doesn’t necessarily jibe with the thinking above. Higher and higher bitcoin prices enable transactions in size. It’s because Bitcoin has gone parabolic, and the number of dollars associated with it are now over $10 billion that it could become a plausible avenue for rich Chinese to start thinking of it as a way for them to get money out of the country. Rather than the high price being a hindrance, the high price expands the market.
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So will bitcoin replace casino junkets in Macau as the method of choice for rich Chinese in need of some cleaning services? Only time will tell!
Or maybe gamblers can take their bitcoins to casinos directly and just skip the junket. That’s the idea behind Bitmarker, a new company that’s trying facility the use of bitcoins for the financing interest-free loans from casinos.
Either way, if bitcoin is going to launder in the “big leagues” the bitcoin economy and the total value of bitcoin is going to have to grow by many orders of magnitude.
Gambling on bitcoins can involve a lot of gambling online with bitcoins
Bitcoin’s potential to compete with the casino industry isn’t limited to its potential for money-laundering. Bitcoin also has another feature that makes it a potent competitor with the online casino industry. It’s a feature that makes bitcoin great for money-laundering but not so great for use as actual money: bitcoin transactions are irreversible. It turns out that irreversibility may make bitcoin difficult to use for general commerce, but irreversibility and quasi-anonymity also make bitcoin close to the perfect online poker chip.
Bitcoin’s near-perfect poker chip-status is a reality that’s become self apparent by the fact that Satoshi Dice, the most popular online bitcoin gambling site, has been single handedly generating around half of the total bitcoin transactions for over a year:
Forbes
Bitcoin Casinos Release 2012 EarningsJon Matonis, Contributor
1/22/2013 @ 11:35AM
It is earnings season on Wall Street and it is reporting season for some of the leading bitcoin casino operators. Three significant Bitcoin-related gambling sites have reported their earnings and statistics for calendar year 2012. Some of the data is fairly revealing giving us a fascinating glimpse into the worldwide growth of bitcoin and gambling.
First up is the venerable SatoshiDice, which is the leading bitcoin gambling site in terms of amount wagered. Responsible for more than 50% of daily network volume on the Bitcoin blockchain, SatoshiDice reported first year earnings from wagering at an impressive ?33,310. During the year, players bet a total of ?1,787,470 in 2,349,882 individual bets at an average monthly growth rate of 78%. Earnings were calculated from eight months of data covering May to December, 2012.
With servers based in Ireland and promoted by Erik Voorhees, SatoshiDice is considered a blockchain-based betting game and it is self-described as the “most popular Bitcoin game in the world.” Similar to random number generation, the site uses a method to produce a number between 0 and 65,535 which is then wagered on by making a bitcoin transaction to one of the static addresses representing different payouts. The odds are calculated to give the house an edge of 1.90% with full transparency because all dice rolls and earnings statistics are verifiable using the blockchain.
Operating expenses were minimal in 2012 and the company also paid monthly bitcoin dividends to ‘public’ shareholders which represent 10% of the total 100,000,000 outstanding shares. To invest in the operator and bet on the house, SatoshiDice shares are traded on the MPEx bitcoin stock exchange under ticker symbol S.DICE (see August 19th, 2012 Prospectus). At the current exchange rate of $17.00 per BTC, SatoshiDice is a company valued at $8.9 million.
Voorhees emphasizes that until the site’s legal status is clear, all balances and accounting will be maintained in play-money bitcoin, because “it’s better to keep it completely separate from real life.” For all of the venture capitalists out there, here is how SatoshiDice started. Where is the next big one?
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With privacy, efficiency, growth, payment irreversibility, and cost savings as demonstrated by the above, it’s only a matter of time before the mainstream casino operators of Gibraltar and Malta realize the benefits of a gaming economy that leverages the ideal digital casino chip.
Keep in mind that SatoshiDice began generating a majority of bitcoin’s daily transcations within 10 days of its launch last year and was still generating about half of the total number of bitcoin transactions as of August if this year. If that sounds like an absurdly high percentage of the total transaction volume for just a single site, keep in mind that bitcoins really aren’t used for much else at this point. The top 100 bitcoin accounts constitute ~20% of the total number of bitcoins minted. The top 500 accounts hold ~35% of the total. The top 927 accounts hold ~50% of the total. And, perhaps more importantly, the concentration of bitcoins held by these big accounts has barely changed over the course of the bitcoin boom. A huge share of old-school bitcoin holders are simply not interested in trading their vast bitcoin hoards for goods and services. As a consequence, bitcoin gambling — which primarily trades just bitcoins back and forth — has become the dominant type of bitcoin transaction.
Does bitcoin have a gambling problem?
The fact that a single gambling site generates close to half of the total bitcoin transactions might seem like just another interesting fun-fact about bitcoins and little more. But there are some serious consequences to the bitcoin gambling phenomena on bitcoin’s potential to grow and become a true alternative currency (and also become a venue for big time money-laundering).
For example, SatoshiDice pays an enhanced “transaction fee” to bitcoin miners, giving the SatoshiDice transactions priority over waiting transactions. When a huge percentage of the total bitcoin traffic has priority in transaction clearing it risks potentially clogging the bitcoin system with spam transactions that create delays for non-gambling transactions. SatoshiDice even once contributed to the much fear “forking” event (the double spending of bitcoin). In other words, the more bitcoin is used for gambling, instead of commercial transactions, the less useful bitcoin becomes for commercial transactions. At least, that’s one potential outcome.
Or maybe bitcoin has a gambling solution
There’s another argument that could be made that bitcoin gambling is actually creating a stronger, more robust bitcoin ecosystem that will have to exist in order for bitcoin to have the transaction processing capacity to compete with credit card transactions. That’s because SatoshiDice, and bitcoin gambling community in general, also acts as a powerful financial incentives to jump into the bitcoin mining game bay providing a steady stream of transaction fees. If the demand for bitcoin transaction clearances exceeds the supply by too much the whole system grinds to a halt. And if bitcoin is ever going to compete with credit cards, it’s going to have to get a lot bigger and a lot faster. Maybe about three orders of magnitude faster:
The Washington Post The Switch
Bitcoin needs to scale by a factor of 1000 to compete with Visa. Here’s how to do it.By Timothy B. Lee
November 12 at 3:38 pmAt the heart of Bitcoin is the blockchain, a global, shared record of every Bitcoin transaction that has ever occurred. It gets its name from the fact that every 10 minutes, on average, the peer-to-peer Bitcoin network adds a new “block” containing records of recent transactions.
The blockchain is shared among the numerous computers that participate in the transaction-clearing process known as “mining.” To avoid overloading those computers, Bitcoin software currently limits each block to one megabyte in size. The result: right now, the Bitcoin network is only capable of processing around 7 transactions per second. For comparison, the Visa network is designed to handle peak volumes of 10,000 transactions per second.
So far, that hasn’t been a problem because Bitcoin users are only generating around 1 transaction per second. But if the Bitcoin economy continues to grow, it’s only a matter of time before that limit becomes a problem.
Can the Bitcoin network be tweaked to handle the much higher transaction volumes that could occur in the future? To answer that question, I talked to prominent Bitcoin developer Mike Hearn. He helped me understand the current limits on Bitcoin performance and how Bitcoin’s development team plans to overcome them.
Timothy B. Lee: Can you briefly describe the current limits on how many transactions the Bitcoin network can accommodate?
Mike Hearn: There are two different kinds of Bitcoin client: Full nodes and “light nodes” we call simplified payment verification (SPV) nodes. Light nodes don’t care how big the blocks are. And full nodes have a hard physical limit [of one megabyte per block.]
So one megabyte every 10 minutes, dividing by the average size of transactions [gives us] the current limit [of] about 7 per second.
How close are we to that limit right now?
If you look at a chart of the number of transactions per day, we’re peaking at 70,000 transactions per day. We’re not even at one per second [e.g. 86,400 transactions per day] yet. It’s grown. It’s grown pretty nice and fast. If you plot the overall graph from the system. It has this nice little exponential slope. We’re quite a way from hitting these limits. It’s a little bit fuzzy as well, for various reasons. We’re not in any danger of running out of capacity right now.
What’s going to be required to get beyond 7 transactions per second?
We just need to take away the limit and get people to upgrade their nodes. The reason it hasn’t been done yet is that we’re still trying to figure out whether there should be a new limit or no limit at all. [If there’s no limit,] how do we ensure someone doesn’t mine an artificially bloated block that’s just there to annoy people?
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Note that debates over topics like “whether there should be a new limit or no limit at all. [If there’s no limit,] how do we ensure someone doesn’t mine an artificially bloated block that’s just there to annoy people?” are, in part, debates over whether or not bitcoin gambling should be allowed.
Continuing...
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Gavin [Andresen, Bitcoin’s lead developer] is working on some of the work that’s needed for this to be done. He’s working on reforming the fee system. The design we’re heading toward is that there won’t be any limit, but by default miners will refuse to process blocks that are ridiculously big.
Can you explain how Bitcoin fees work and why the system has them?
You can attach a fee [e.g. a payment to the miner processing the transaction] to any transaction in Bitcoin. Originally when Bitcoin was new, all transactions were free, and over time the rules were adjusted so you can still send free transactions but they’re slower. Fees act as a kind of a throttle for preventing flooding the network with bogus transactions. If every transaction was always free, you’d get people bouncing coins back and forth all the time.
The main issue we have at the moment is the way that fees are set and negotiated across the network is very basic. They’re not really negotiated. The minimum fee size was picked by Gavin less than a year ago. It was picked at a time when the Bitcoin price was much lower than today. Because the numbers are fixed in the software, they’re not specified in terms of dollars, they’re specified in terms of Bitcoins. So Bitcoin transactions have become more expensive for no good reason. Gavin is working on changes to how that works.
Nodes will watch the transactions that get broadcast on the system, and then they’ll watch how long transactions take. So they’ll say “if you want to get processed in 3 blocks, you should pay this much.” The idea is that miners set the fees they are willing to charge, and nodes observe the operation of the market and estimate observed behavior. My hope, if other things have been done correctly, is that fees will fall significantly.
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As the above article points out, there is currently a fixed number of bitcoins that gets paid to the mining team that successfully generates the each successive “blockchain” of validated transactions (currently 25). Eventually, once all 21 million bitcoins are “mined”, there will no longer be any bitcoins awarded and instead it will be solely transaction fees that finance the bitcoin mining industry. But for now, every 10 minutes or so a “lucky” bitcoin mining team is awarded 25 bitcoins. On a day like November 29th, 2013, bitcoin was awarding the equivalent of 25 ounces of gold to a mining team every ten minutes on top of any transaction fees that would have been paid by the users.
And bitcoin miners aren’t the only one’s making large amounts of money (or at least making lots of bitcoins): In July of 2013, the owner of SatoshiDice, Erik Voorhees, became the first “Bitcoin millionaire” after selling SatoshiDice to an undisclosed buyer for 126315 bitcoins (worth ~$11.5 million at the time and a lot more now). Erik Voorhees, an ardent Libertarian and staunch opponent of the Federal Reserve, discovered bitcoin in 2011 after moving to New Hampshire to become part of the Free State Project (which calls for +20k Libertarians to move to New Hampshire and get the state to secede). During his experiences with bitcoin Mr. Voorhees learned many lessons. One of the lessons he learned was that “America is a lie” and “America is not the land of free markets and free people that it was advertised to be in Government schools when I was growing up”.
We don’t know yet if any of Mr. Vorhees’s substantial SatoshiDice fortune will be put towards future Free State Projects since he’s not interested in trading his 156,315 bitcoins “for fiat toilet paper”. But should he ever decide to cash out and finance a new country he’ll probably have a lot of similarly minded bitcoin millionaires to join him.
There’s gold in them mines! Want to buy some mining equiptment?
There’s another sector of the bitcoin economy that’s been making quite of bit of money lately. And not just bitcoin “money”: but actual money money. It’s mostly miners’ money:
South China Monrning Post
Bitcoin miners find it increasingly hard to make moneyIt’s becoming increasingly tough to earn money from making bitcoins; it’s the makers of souped-up computer equipment that are minting it
PUBLISHED : Sunday, 10 November, 2013, 3:26am
UPDATED : Thursday, 28 November, 2013, 9:58amTucked away in an airconditioned data centre in Silicon Valley is a hotchpotch of black boxes, circuit boards and cooling fans owned by 27-year-old Aaron Jackson-Wilde, a modern-day prospector looking for bitcoins.
Since discovering the digital currency a few months ago, Jackson-Wilde has paid about US$2,000 for his “rigs”, which are powered by specialised computer chips. They are designed to help operate and maintain the bitcoin network — and, in return, generate a small reward in a process known as “bitcoin mining”.
...
In a key twist that keeps inflation in check, the difficulty of the cryptographic maths that leads to newly minted coins grows as more computers join the network.
That has led some technology professionals to target a new market in souped-up computers and specialised chips aimed at the growing ranks of bitcoin “miners”.
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The goal of bitcoin miners is to pull in more than what they spend on their rigs — some cost over US$20,000 — and the electricity they need to keep the machines running 24 hours a day.
It has become so hard to make a profit that comparisons to the 19th century California gold rush, when money was often made selling shovels to naive prospectors, have become a running joke among bitcoin miners.
“It’s the guys who sell the equipment who are making the money, not the bitcoin miners,” said Jackson-Wilde, a manager at a company that makes motorcycle batteries.
CoinTerra believes spending on new bitcoin mining chips could easily hit US$100 million a year for the next three years, assuming no change in prices. While that is peanuts for large semiconductor companies like Intel and Qualcomm, it is a lucrative market for small developers.
About 11.9 million bitcoins, worth US$2.4 billion at recent prices, have been minted since the currency began circulating. Based on recent activity, the network is on track to create around 1.4 million new bitcoins annually over the next three years, the equivalent of more than US$280 million a year at recent exchange rates.
Reflecting growing competition, Jackson-Wilde says his gear — which features model names like Erupter, Jalapeno and Spartan — now pulls in a tiny fraction of the bitcoins it used to, but he expects another US$10,000 worth of next-generation equipment to put him in the black.
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Keep in that the value of the 1.4 million bitcoins slated to be minted over the next three years and awarded to miners will be worth a lot more that $280 million today even after the recent price meltdown following the bitcoin trading ban for Chinese banks. There’s a potential fortune to be “mined” over the next few years, and the higher the bitcoin bubble gets the bigger that ~10 minute award gets and the greater the competition for more bitcoin computing power.
There’s gold in them hills! Let’s set up a casino to mine it.
And, of course, the greater the price of bitcoin, the more temptation there’s going to be for schemes. Schemes like getting a supercomputing mining center and then setting up gambling site so you can mine your site’s own transactions and all the other transactions (which are still mostly gambling transactions that pay fees).
And, of course, someone is already doing that: Massive Luck Investments — a Hong Kong based investment firm that owns betcoin.tm, a SatochiDice clone — recently decided to plunge into the bitcoin mining business. It involves multiple generations of mining machines planned for sale to the public and even a privately held multi-petahash/second cutting edge system for the in-house mining. The advanced chips appear to be targeted towards a cloud-mining operation. Based in China. Using two supercomputing centers. For one of the supercomputing centers, the “Shanghai supercomputer center will be responsible for the overall facility design and staff training”. At least that’s all what they announced this April. Part of that announcement included:
“The Chinese government provides preferential policies to attract FDI [foreign direct investment] in certain high tech areas that benefit the Chinese economy,” said the Massive Luck exec. “They require traditional CPU-based traditional computing power to address the acute shortage of it. Shanghai supercomputer center will be responsible for the overall facility design and staff training.”
Could a supercomputing center dedicated to bitcoin mining that’s designed by the Shanghai Supercomputing Center and run by the owners of a SatoshiDice clone really be in the works? The Chinese government does have an ambitious program to build super-computing sites. The recent ruling by the Chinese government didn’t restrict private bitcoin activity at all and before the bitcoin bank ban, signs were pointing towards an embrace of bitcoin by Beijing. Businesses like this could be handy if the Chinese elites really do have an interest in expanding their opportunities for getting a head start on the lifting of capital controls.
But bitcoin miners with less-than-supercomputing capabilities shouldn’t fret quite yet. Betcoin.tm users have already charged betcoin.tm with not actually implementing the mathematically “provably fair” gambling protocols and are alleged to have been attacking betcoin’s competitors with denial-of-service attacks and generating fraudulent bets using scripts to puff up their numbers. As SatoshiDice founder Eric Voorhees put it “Bitcoin is absolutely the Wild West of finance, and thank goodness”. Yes it is. So this particular bitcoin adventure could end up being mostly good PR. Then again, maybe there really are supercomputing centers in China getting set up to mine bitcoins. That might bode well for the investors in the supercomputing center, but what do possible public-private partnerships with Chinese supercomputing centers say about bitcoin’s potential to live the dream and slay the Beast when you have to own a supercomputing cluster to even begin seriously competing in the Great Digital Gold Rush? We’re not at that point yet, but if bitcoin takes off, it’s coming. And in race of computing speed and power guess who wins.
The story of betcoin.tm and Massive Luck Investments is an example of what is possible nowadays: Bitcoin mining is an unregulated competition and if a public or private organization wants to allocate supercomputing resources towards the bitcoin mining markets they just might go ahead and do that. And maybe there will be public-private partnerships using very powerful computing resources. Why not, especially if bitcoin takes off? Bitcoin has the potential to enrich governments and their private partners too. Don’t forget that bitcoin had a pretty positive reception during the recent US Congressional hearings and China’s government really didn’t do all that much to restrict bitcoin’s usage. And there’s no reason the world’s Big Brothers have to hate digital cryptocurrencies. Especially if the governments of the world continue to seize significant percentages of bitcoins in single criminal busts. Contrary to popular opinion, Big Power (government) may not have much to fear from this digital government-slayer.
We’ll have to wait and see how all of this turns out. Bitcoin could fizzle out in months or just keep parabolically chugging along for years to come. And if bitcoin doesn’t end up slaying the twin beasts of Big Money and Big Power and doesn’t assume the mantel as the new global currency for a post-government crypto-golden age others will keep trying. Some dreams don’t die easily, especially the collective nightmares.
And regardless of whether or not bitcoin succeeds in becoming the gotta have currency, one thing is clear: Big Electricity has got to be loving this new processing-intensive digital cryptocurrency craze. Absolutely loving it.
@Pterrafractyl–
Excellent work! The whole bitcoin phenomenon is amazing to me.
This thing is S‑O-O‑O full of holes, loopholes, built-in weaknesses and scams that it is amazing to me that anyone dares to get involved.
Maybe the Erik Voorhees’s of the world can game this to their liking, but this so-called currency has, as I said in FTR #764, all of the weaknesses of the fiat currencies that bitcoiners criticize and NONE of the advantages/safeguards.
Talk about “caveat emptor,” sheesh!
Best,
Dave
@Dave: Part of what makes the bitcoin phenomena so amazing is that the “value” of the bitcoins are deeply intertwined with the cost of electricity and there seems to be very little recognition of this reality. The bitcoin mining problems are designed to be artificially difficult in order to ensure the entire bitcoin mining community can’t easily alter the blockchain (which introduces opportunities for double spending and other shenanigans). So bitcoin users, as a whole, can’t reap all the benefits from improvements in computing power...if there was a breakthrough tomorrow that made it much easier to “mine” bitcoins the algorithm would simply make the mining much more difficult. So the price of bitcoin has to rise or the cost of electricity has to fall if the bitcoin economy is going to pay for itself as it grows. More efficient use of electricity (via better processor technology) won’t help. And at the current price of ~$900/bitcoin, the bitcoin economy is not paying for itself:
Note that there are also transaction fees getting paid out from all the gambling sites so that presumably helps cover some of the mining cost. But since mining awards are scheduled to get cut in half until they disappear around 2040 (when all 21 million bitcoins have been minted) the transaction fees are going to have to grow to pay for larger and larger shares of the total cost or bitcoin’s value is going to have to continue skyrocketing. It raises the question of why anyone would even bother with bitcoin in the long run since that artificially enhanced mining difficulty potentially translates into very real electricity costs that are totally unnecessary. Even assuming one is totally dedicated to the bitcoin idea, why not just switch over to a bitcoin clone with easier mining instead of handing all that money over to Big Electricity?
@Pterrafractyl–
Much of the technical aspect of “bitcoinery” is over my head–I’m an old guy, well into middle age when the internet phenomenon broke.
Vis a vis bitcoin, just remember who appears to have developed–NOT the probably fictional “Satoshi Nakamoto.”
As discussed in FTR #760, bitcoin appears to have been developed by Lantiq, part Siemens (read “BND”), part Golden Gate Capital, composed of alumni of Bain Capital (read “Underground Reich.”)
@Dave:
Part of what makes bitcoin rather fascinating is that we’re seeing a kind of real life test of Libertarian ideals and this experiment is only going to get weirder and more revealing as time goes on. The bitcoin model for denationalized currency is being promoted as a fight for the “little guy” to fight against “The Man” (central banking systems run by goverments) to create a truly “free” currency that will usher in an era of global prosperity. But the technical design of bitcoin is almost exactly what one would imagine if banking cartels got together and wanted to create a system that sort of looks like its structured around a one-man-one-vote ideal but is actually run on a one-dollar-one-vote system. It’s great real-life metaphor for Libertarianism.
Here’s a brief description of how bitcoin’s “mining” system and why its potentially a bankster’s dream: One of bitcoin’s strengths is that, as a distributed system, bitcoin is theoretically very hard to game. That’s because there are so many different people that are participating in “mining” it’s very difficult for people to mess with the “validation” process.
“Validating” bitcoin transactions is, in a way, a triviality. All you have to do is ensure a person isn’t spending the same bitcoin in separate transactions simultaneously — the much feared “double spending” attack. It’s just basic accounting. That’s it. A single crappy computer hooked up to the internet could potentially accomplish this task on its own. But that single computer could only do this if that computer was somehow designated as “the” computer that validates bitcoin transactions, acting as a sort of central clearinghouse for bitcoin.
One of the challenges involved with the system of selecting a single computer is that the people running the computer might somehow secretly mess around with the public ledger of transactions and, more importantly, there’s the question of how the bitcoin community decides who gets to run that central computer. Because bitcoin is supposed to be a stateless system run by protocol, and not dictate, there aren’t clear mechanisms for deciding who gets to be the bitcoin clearinghouse.
Bitcoin’s solution to these problems is where the MADness enters into the system and where the banksters or governments or anyone else with serious resources could collude to take it over: Bitcoin validates all transactions in batches. These batches of validated transactions are the “blocks” in the bitcoin “blockchain”. Because there’s no central bank, or no clearinghouse to oversee and prevent “double spending” the bitcoin system has to rely on a protocol instead. And the protocol chosen by Satoshi Nakamoto is one that basically allows anyone to become the bitcoin’s central bank...but only for a single “block” of transactions. Now the whole network is the central bank! Score one for the little guy, right?
Well, it turns out that the particular mechanism Satoshi Nakamoto chose to decide who “wins” the right to validate a given block of transactions is the “proof-of-work” algorithm. It’s an algorithm designed to create a cheat-proof system whereby you could have an arbitrary protocol for choosing only one person amongst a large pool of candidates. You could use a random number generator to select the lucky winner, but the random number generator system can potentially be rigged, creating a vulnerability in the system.
So, instead of randomly deciding a winner, the proof-of-work algorithm is centered around the scheme of giving everyone a really difficult problem to solve. The problem is so difficult that the odds of having two people solving it nearly-simultaneously are really low. The person that solves the really really hard problem first becomes the winner. Behold! A completely distributed and cheat-proof system that doesn’t rely on any central banks, governments, private corporations or any messy democratic decision-making! It’s a self-organizing system that anyone can participate in with no barriers to entry. The Everyman’s currency.
Yes, instead of the messiness of government and collectively creating rules, bitcoin is run by system that rewards users based on the raw computing power that they put towards “racing” to win the right to validate each block of transactions. A pure test of computing power and that’s it. A true one-dollar-one-vote system outside of government control. What’s not to love?
So virtually all of that computational power dedicated to bitcoin mining has NOTHING to do with managing bitcoin except that it determines who wins the race for the right to validate each block and collect the fees. And the race is completely unregulated. If a single user set up a supercomputing center that had 10% of the total computing power dedicated to bitcoin mining, that user could expect to win the right to validate about 10% of the blocks issued on a given day. It’s that straight forward.
How could such a system not end up being dominated by the groups with the deepest pockets on the planet or access to the most advanced technology if the bitcoin system ever truly succeeded in becoming a major currency/commodity? And what are the odds that we aren’t going to see a “selfish-miners” scenario turn into a transaction-fee-rigging scenario once the oligarchs are running the world’s fastest computers? Unless bitcoin undergoes some very fundamental changes where its no longer a system that awards those that are able to muster the greatest resources it’s hard to see how bitcoin doesn’t remain a bankster’s dream and a wonderful metaphor for the Libertarian utopia.
Here’s a nice piece on how the creation of a giant energy sink is central to how bitcoin is supposed to work:
Note the scheme described above: The cost of electricity is a systemic design consideration that bitcoin’s creators realized would regulate the pace at which bitcoins were mined. The thinking goes that as computers get more powerful, per Moore’s Law, the cost of mining bitcoin will fall back into reason – and then the race will begin again in earnest.
So, under perfect market conditions with large amounts of competition, bitcoin mining would basically end up transferring the value of all awarded bitcoins and transaction fees right into to the electricity sector (because profit will be minimized under ideal market conditions). The banksters are going to be buying a lot more power plants if bitcoin really takes off.
Then again, since bitcoin mining is on track to eventually require a supercomputing center just to realistic have a chance of winning your investment back, bitcoin mining could become an extremely imperfect market over time with very few serious competitors due to the enormous costs needed just to get started. And, sadly, perhaps that kind of market imperfection is what we should hope for at this point. It’ll enrich the banksters but at least it might cut down on the electricity consumed. It’s sort of a “Heads: the banksters win. Tails: the power company wins and the environment loses” kind of situation.
Also, note that switching over to a different “proof-of-work” algorithm that doesn’t benefit from specialized chips like litecoin uses might make bitcoin mining more fair, but it’s not necessarily going to fix the underlying problem.
Uh oh! It looks like that Chinese ban on bitcoin banking might extend to 3rd party payment systems too. That potentially makes bitcoin commerce rather difficult in China. And, perhaps more importantly, it’s a signal that the Chinese government just might want to crush the cryptocurrency craze. Not good news for bitcoin:
A cryptoragnarok triggered by profit-maximization? Uh oh:
Note that the gambling site that appears to have already been hit by double-spending attacks by GHash.io isn’t “Bitcoin Dice”. It’s the same “Betcoin Dice” discussed above in the OP. No word on the status of BetCoin’s 4 petahash/second supercomputer, but if that’s going to happen it had better happen soon because 4 petahashes(4,000,000 Gigahashes)/second ain’t what it use to be.
Another interesting dynamic tension we’re seeing in these 51%-attack threats is the tension between the fact that a bitcoin mining monopoly is an existential threat to the bitcoin system but monopolies and oligopolies are also what seem to naturally form in bitcoin because that’s what’s most profitable. So it’s hard to see how the 51% threat is going away any time soon because it appears that the profit-maximizing situation for a bitcoin miner is to be a part of the mining pool that has the maximum market share that doesn’t trigger a negative “51% threat”-backlash. That’s one hell of a market equilibrium to maintain: profit is maximized when the blockchain mining is just about ready to spill over into systemic-crisis territory.
Still, as many point out, the desire not to undermine the value of bitcoin might be enough to allow for self-regulation by the bitcoin community. We’ll see. There’s still the question of what happens when a mining guild comes along with a desire to actually kill bitcoin. In an altcoin world, the better-than-bitcoin alternatives might not mind a cryptoragnarok or two.
One thing that will change the dynamics of Bitcoin will be the rise of other cryptocurrenies, like quark, litecoin and ripple. Once Bitcoin becomes too expensive for people to either mine or own the other cryptos will rise in value and popularity. Having said that, part of the scarcity comes from the difficulty in purchasing crypto’s from reliable sources, the risks of getting robbed are high.
A peak into the future of bitcoin: Corporate mines and network peering (where major miners set up dedicated connections to each other to ensure optimal network performance). The bitcoin mining industry won’t be killed by these trends, but the dream of currency controlled by ‘the little guy’ isn’t looking too good:
The CEO of Butterfly Labs makes an important point: As the rewards for bitcoin mining drop off to zero (by ~2040), the transaction fees are going to be the only thing financing bitcoin mining. And at that point, “miners will gravitate towards transactions with higher fees attached to them, which will be processed before those with smaller rewards”. How that tension between cheap transactions and the profit-maximizing desire of corporate miners gets resolved is a pretty big ‘unknown’ for a transaction platform that’s making low-transaction fees a key selling point. Especially when the system is also set up to incentivize the creation of mining cartels that could collude to ensure high wait times for lower fees. The much-feared “51% attack” isn’t the only threat posed by a bitcoin oligopoly.
Got 600 2.8 GHz quad-core servers sitting around that your aren’t doing anything with? Well, why not mines some bitcoins! With all that process power you should be able to earn your first whole bitcoin maybe at some point in 2016 if you’re lucky
“The network would operate just fine with only 1 percent of the current computing muscle devoted to it...It’s consuming resources that should be allocated differently.”:
It looks like it might be time for a good old fashioned identity crisis.
One of Bitcoin’s existential crises from the very begging has been the embrace an unregulated potentially-winner-take-all system that favors those that make the biggest investments. It’s still one of Bitcoin’s existential crises:
One of Bitcoin’s other existential crises revolves around the simultaneous and mutually exclusive needs for a steady price to allow for the bitcoins to emerge as a reliable, steady store of value that will making bitcoins attractive to merchants coupled with the need for rapidly rising bitcoin prices in order to attract investors in the new currency. So there’s always been a hope that someday the price of bitcoins will level off, just not today.
Interestingly, that particular existential crisis appears to be interacting with the “winner-take-all” mining crisis in a way that might actually be making both existential crises worse. Why? Because the cost of mining is rising so rapidly that a growing number of miners are forced to sell their bitcoin holdings just to staying in the mining game, thus ensuring a steady supply of bitcoins for sale that puts a lid on prices. At the same time, the adoption of Bitcoin by a growing number of merchants is also ensuring a steady supply of bitcoins for sale because those bitcoins they accept just get immediately resold for cash. In other words, instead of the seeing bitcoins hit $100,000 in the future before leveling off, Bitcoin might already be flatlining:
Keep in mind that this dynamic will eventually change because the amount of bitcoins paid out to miners (3,500 mined a day at this point) keeps getting reduced as the total supply of bitcoins gets closer and closer to 21 million, which should happen around 2040. So as we get closer and closer to 2040, the mining-race crisis that’s forcing mining sell off 70–90% of their mined coins actually ease as the payout keeps shrinking unless. of course, the bitcoin fees also get increased to compensate for the loss of the mining payout and it’s very unclear what those fees will look like and how that could impact demand.
And then there are the existential crises that definitely won’t go away in 2040 until Bitcoin goes away.
So close, yet so far for Scotcoin:
While it doesn’t look like Scotland is about to adopt a digital cryptocurrency any time soon, there is a new national digital currency in the works. A non-crypto dollar-backed currency. Brought to you by the central bank of Ecuador:
While the possibility that Ecuador will suddenly switch away from the dollar to another currency is going to be something to watch, another fascinating possibility is that the non-Ecuadorians locals living just across the border in Peru and Colombia could start using it too since they’ll still be able to spend these things in the local cross-economy. And the more regions that start using these digital dollars greater the appeal and the more it can spread (just like with bitcoins). So, given the dollar’s global utility as a store of value compared to other national currencies, is Ecuador positioning itself to become a sort of focal point for a growing digital dollar economy? If so, you have to wonder who would be more pissed: the bitcoiners, or the banks. The answer isn’t obvious.
Good question:
There’s still some time left in the year, so might the rouble overtake bitcoins as the worst performing currency? We’ll find out soon!
Wow. Well, it was probably inevitable, but we’ve finally learned the purpose of 21 Inc, a new Bitcoin venture brought to by a number of Silicon Valley’s cyberlibertarians like Mark Andreesen, Peter Thiel, and Max Levchin, as well as the chip manufacterer Qualcomm: They want to turn the ‘internet of things’ into a giant Bitcoin mining machine. And in order to get you to sign up to your devices for this Bitgoin mining service, which costs you electricity, 21 Inc is going to give away for free the various devices, like a toaster, that people can use for whatever but that also double as Bitcoin miners. The idea is that if you give people these devices for free along with the promise of some share of the bitcoing mining revenue, people will be willing to use them and thus pay the cost of electricity for all the processing that goes into the mining. Plus, presumably, these free devices hooked up to the internet will also be sending all sorts of the usage data on the devices back to 21 Inc.
So, if this really look off and a substantial portion of the Bitcoin mining sector was taken over by the ‘Internet of Things’, the money in Bitcoin mining would suddenly start coming not from the actual value of the bitcoins mined and/or transactions fees earned. Those would be too diluted to be a substantial income flow. Instead, the value of Bitcoin mining would come from the value of derived from the collection of information from the bitcoin mining devices by companies like 21 Inc.
The Bitcoin phenomena just keeps getting better and better. Or something:
“The devices may be free, but their true cost will probably be based on the value of the information they allow manufacturers to extract (and add to the system as a whole for efficiency’s sake) by having you and your behaviours linked to your devices, and those devices linked to everyone else’s devices and behaviours as a result.” It’s a different kind of ‘Fremium’.
And since it looks like one of the primary purposes behind this whole scheme is to get people to voluntarily accept vampire devices that leach extra electricity in order to cover the cost of bitcoin mining and the whole enterprise could lead to an ever growing amount of electricity being spent on every single “blockchain” transaction, keep in mind that when we’re talking about Bitcoin “mining”, we’re not actually talking about any sort of useful computations that have anything at all to do with processing the bitcoin transactions. The only purpose of all the incredible amounts electricity consumed is to decide which person gets to “win” each round of the Byzantine Generals’ Problem and decide which set of transactions will go into the next entry in the blockchain. And it’s not even doing that very well:
There were all sorts of great points made in that article, but perhaps this is the most important one in light of the new 21 Inc business model:
Yikes. And yes, the method of using a computational guessing game for solving the Byzantine Generals’ Problem that is celebrated as one of Bitcoin’s greatest innovations is arguably one of its greatest weaknessnes. And despite all that we just might see 21 Inc, backed by some of the biggest Libertarian oligarchs in Silicon Valley and Qualcomm, attempt to turn the coming “Internet of Things” into a giant Bitcoin electricity vampire/spy-network (which also happens to be quite beneficial to the Kochtopus, FYI).
In additiono, thanks to this new ‘Internet of Things Mining Bitcoins (and maybe spying on you)’-business model, we now all have to come to grips with the fact that George W. Bush, who famously prioritized the elimination of vampire electronic devices sapping electricity in standby mode as part of his 2001 national energy saving campaign, is now prescient. That’} on you, Bitcoin!
So get ready for a fabulous new world of free toasters that pay you in trickles of bitcoin fractions while sucking up your electricity and spying on you. But as the PandaStrike article also notes, also get ready for all the non-crazy new innovations involving decentralized networks that track ownership (which is basically what Bitcoin is) that don’t have Bitcoin’s flaws. At this point, the biggest thing holding back the Bitcoin revolution is Bitcoin and its idiosyncratic mega-flaws like its deflationary bias and being a giant energy suck. If you’re going to set up a new standard it had better be timeless and not be prone to self-imploding. Otherwise it’s sclerotic.
At the same time, Bitcoin-esque technologies without Bitcoin’s flaws are just a matter of time. A distributed ownership system based on existing Bitcoin technology would probably work find if its just used by a small community of people and doesn’t turn into a global computational arms race and isn’t handling some critical social infrastructure like the financial system. Today’s Bitcoin just doesn’t scale well. But there’s no reason to assume decentralized ownership systems or some other Bitcoin-esque services won’t be sprouting up all over in the future. There are plenty of uses.
So, since the existing Bitcoin paradigm is so flawed but has so many deeply vested interests with very deep pockets dedicated to Bitcoin’s success, it going to be interesting to see how hard Silicon Valley’s Powers That Be work to ensure that Bitcoin, with its current vampire power-sucking paradigm, continues hold its dominant status in “cryptocurrency” markets. So much of the Bitcoin phenomena is about all the money being made off the waste, like the fortunes made selling mining-optimized machines or super-computing centers. And if the 21 Inc business model is viable, there’s going to be a whole lot more Bitcoin waste to be monetized. Especially once it’s turned into a personal data collection platform. Just imagine, an entire data collection industry that’s based on learning things about you by giving you devices that you will use and when you’re not using them will sit there burning electricity in an attempt to win a pointless mathematical race.
But it was probably inevitable. The chip manufacturers and Silicon Valley bigwigs have figured out that Bitcoin has a lot of money-making potential as it exists today with its giant computation mining race as a key feature of the system. One of the main features of Bitcoin’s absurd “mining” race is that the level of resources consumed by the mining participants are going to be directly proportional to the value of the mining reward/transactions fees that they can expect to collect, so the more the Bitcoin “economy” grows, the more people you can potentially wrangle in to accepting your ‘free’ Bitcoin mining devices. And, again, all of this ‘mining’ is simply a race to see who gets to decide what the official next set of transactions is in the blockchain and get an award and/or transaction fee. Thanks to companies like 21 Inc, Bitcoin’s systemic energy leak could be magnified and transformed into an Internet of Things data-privacy leak and now our free toasters spying on us but paying us for the spying in the form of a trickle of digital currencies that hopefully covers the cost of electricity.
It doesn’t have to be this way.
Ghana has a new industry. It’s hard to say if this is actually good news for Ghana, but it’s news: Ghana got its first Bitcoin farm:
“Ghana Dot Com’s Bitcoin farm is said to have produced its first bitcoin on the eighth of last month. The Bitcoin mining project is being spearheaded by one of the respected computer scientists, Professor Nii Narku Quaynor. The professor also happens to be the Chairman of Ghana Dot Com. According to him, the company is committed toward encouraging the adoption of Computer Sciences in the country and it is also in their interest to take the same approach towards cryptocurrencies.”
Yes, a giant electricity-sucking black hole where almost all the work is done by machines. It’s just what an economy suffering from years of chronic electricity blackouts needs to prepare its economy for the future.
Here’s a fun article that attempts to provide a range for Bitcoin’s net electricity consumption for “mining” by the year 2020. As the author makes clear, given all the variables that could impact the current trends for both Bitcoin’s popularity, advances in technology used for mining, and the mechanics behind the “mining” process itself, making a prediction four years out is inevitably going to involve a large range of possibilities. So what did the author conclude: Well, if you use his most “optimistic” assumptions (optimistic in terms of minimizing electricity consumption), the total electric consumption for Bitcoin might be around 417 megawatts, which would be around the electricity generated by small power plant. On the high end? 14600 megawatts, which would be around the electricity consumed by Denmark:
“This is by no means a comprehensive analysis and these numbers should be taken with a pinch of salt, but the conclusion is an important one: If the network of bitcoin miners keeps expanding the way it has done, the increased efficiency of mining devices is most likely offset, leaving us anywhere between a slight growth or an explosion of the total energy consumption.”
So Bitcoin’s carbon footprint is slated to get either a little worse or A LOT worse by 2020. But not any better even under the most optimistic scenario, which is unfortunate since that optimistic scenario doesn’t look all that optimistic:
Keep in mind that bitcoins are “mined” around every 10 minutes, so that’s half the annual consumption of an American household (uh oh) every 10 minutes. Optimistically.
But there was one source of optimism in that article: The author’s suggestions at the end:
Now, there’s probably all sorts of technical reasons that would complicate a system where just a fractions of mining processors are selected at any given moment. But at least the author is trying to address this issue, which is more than the rest of the Bitcoin community seems to be doing. Who knows? Maybe there’s a clever strategy that could not just prevent an explosive growth in energy consumption but actually reduce the electricity load from where it is today. It’s at least worth looking into, so it’s nice to see someone doing it if Bitcoin is going to keep chugging along.
But it’s also worth keeping in mind that there’s a very straightforward solution to Bitcoins long-term energy woes: Green energy. If human civilization had already switched over to sustainable green energy sources no one would care how much electricity Bitcoin uses. Keep in mind that the above estimates were just for 2020. It’s only getting worse from there barring some radical overhaul of how the mining process is done. So if Bitcoin wants to do something to address both its growing energy problems and the image problem that’s only going to grow too, shouldn’t the Bitcoin community become champions of green energy? How about a Bitcoin green energy lobby?
In other words, Denmark’s annual energy consumption patterns might not just be an ominous near-term symbol for Bitcoin. When you factor in how the country actually generates its electricity, Denmark’s electricity consumption patterns are also Bitcoin’s long-term solution. So let’s hope the Bitcoin community invests some bitcoins in convincing the rest of the world to adopt the solution it needs. It shouldn’t be a tough sell.
Bitcoin is no stranger to competition. In particular superior competition. Being the first mover for something that is collaboratively maintained and difficult to upgrade, like a cryptocurrency, is inevitably going to bring a lot of superior competition. At the same time, being the first mover for something that is collaboratively maintained and difficult to upgrade also confers incredible benefits to the first-mover. Especially for something like a cryptocurrency. And that’s part of what’s going to make Bitcoin’s struggle to maintain its King of the Cryptocurrencies status so interesting to play out: the longer the cryptocurrency phenomena exists and grows, the harder its going to be to dislodge Bitcoin as the most popular cryptocurrency simply because it has the largest user base and there’s an immense advantage there. But at the same time, the longer the cryptocurrency phenomena exists and grows, the crappier Bitcoin gets, in terms of features, compared to its increasingly superior competition:
“Monero not only bakes anonymity features into the cryptocurrency itself, but implements a few features that Bitcoin still can’t offer. It uses a technique called “stealth addresses” to generate addresses for receiving Monero that are essentially encrypted; the recipient can retrieve the funds, but no one can link that stealth address to the owner. It employs a technique called “ring signatures,” which means every Monero spent is grouped with as many as a hundred other transactions, so that the spender’s address is mixed in with a group of strangers, and every subsequent movement of that money makes it exponentially more difficult to trace back to the source. And it uses something called “ring confidential transactions,” which hides the amount of every transaction.”
So Monero is basically better than Bitcoin in every way. At least in terms of the one big property Bitcoing users generally value: anonymity
An effectively truly anonymous cryptocurrency that doesn’t like a giant, ever-growing digital paper-trail. So why still use Bitcoin? Inertia. That’s pretty much it. And don’t dismiss inertia. It’s an incredibly powerful force.
Still, when it comes to cryptocurrency applications that either require as much anonymity as possible and/or don’t necessarily require the use of the most widely used cryptocurrency it’s hard to see why alternatives with clearly superior features like Monero aren’t going to erode Bitcoin’s market share over time. For instance, let’s say you wanted to utilize some of the hacking code released by the “Shadow Brokers” and you want to use this code to unleash a wave of hacks that turn computers around the world into cryptocurrency mining machines, isn’t Monero, with its skyrocketing value and vastly improved anonymity, the superior choice? It seems like it. And the people who just unleashed a Monero-based virus using the Shadow Brokers’ leaked NSA code appear to agree:
“Proofpoint researchers have identified more than 20 hosts set up to scan the Internet and infect vulnerable machines they find. The researchers are aware of more than a dozen active Adylkuzz control servers. The botnet then mined Monero, a cryptocurrency that bills itself as being fully anonymous, as opposed to Bitcoin, in which all transactions are traceable.”
So now you know: if you’re writing a virus that will turn your victims’ computers into cyryptocurrency mining machines, consider the advantages of Monero. And the same goes for your ransomware virus like WannCry. Not only will it be harder to trace your ransom proceed back to you, but if you’re attack is a spectacular failure and hardly anyone sends you money no one will know. As opposed to the WannaCry ransomware attack which was such a spectacular failure in terms of getting ransom, as evidenced by Bitcoin’s traceable blockchain used to pay the ransom, that some are speculating it wasn’t intended to make money but instead embarass the NSA:
“In fact, WannaCry has caused so much damage with such little profit that some security researchers have begun to suspect that it may not be a money-making scheme at all. Instead, they speculate, it might be someone trying to embarrass the NSA by wreaking havoc with its leaked hacking tools—possibly even the same Shadow Brokers hackers who stole those tools in the first place. “I absolutely believe this was sent by someone trying to cause as much destruction as possible,” says Hacker House’s Hickey.”
If WannaCry’s originators wanted to make money they must be near tears. In terms of a political attack, however, it certainly got the job done. And yet think about how much more effective it would be as a political attack has the spectacular failure of WannaCry’s ransom collection not been so easily traceable on Bitcoin’s blockchain:
And keep in mind that, while using only four bitcoin addresses makes it a lot easier for researchers to track their ransom payments, it’s not like it would be particularly difficult for researchers to detect new accounts set up to send $3000 worth of bitcoins to newly created addresses had the people behind WannaCry gone through the effort of setting up unique addresses for each victim. It’s still highly traceable. Because that’s how Bitcoin works. Transactions are visible even if the ids behind the accounts are potentially kept hidden.
So if your company is stockpiling cryptocurrency in anticipation to being forced to pay in a future ransomware attack (companies do this these days), you might want to consider Monero. Ditto if your company is planning on writing some ransomware. Sorry Bitcoin.
Bitcoin is coming to hundreds of U.S. banks this year, says crypto custody firm
NYDIG
PUBLISHED WED, MAY 5 2021 7:24 AM EDTUPDATED AN HOUR AGO
Hugh Son
@HUGH_SON
https://www.cnbc.com/amp/2021/05/05/bitcoin-is-coming-to-hundreds-of-us-banks-says-crypto-firm-nydig-.html