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 ET
NEW 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.
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 :
Could Bitcoin (or equivalent) Become a Global Reserve Currency?
(November 7, 2013)
Charles Hugh Smith
It’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 :
ECB: “Roots Of Bitcoin Can Be Found In The Austrian School Of Economics”
11/03/2012 @ 11:04AM
Jon Matonis, Contributor
The 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’;
Bitcoin: Destroyer of the
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 :
Bitcoin banned from Chinese banks amid fears of laundering
Regulators 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.
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 arise
Jane Cai in Beijing
PUBLISHED : Friday, 29 November, 2013, 8:40am
UPDATED : Saturday, 30 November, 2013, 2:03am
Julia 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.”
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 :
I’m Changing My Mind About Bitcoin
Dec. 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.
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.
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.
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.
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 :
Bitcoin Casinos Release 2012 Earnings
Jon 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?
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 pm
At 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?
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.
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.
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 money
It’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, 9:58am
Tucked 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”.
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.
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 .