Is Bitcoin a Legitimate Currency or a Potential Scam?

[russ_watters]

[Re-arranging for better flow:]

Why do you keep insisting its an investment? Where did you get this idea?

As I said, Bitcoin is different things to different people - which I think is one of its biggest problems right now. The idea of using it as an investment is all over the popular media coverage and is discussed in a lot of internet discussions of it, including this one. So I'm not sure why would would need to ask where I got the idea.

More generally though, even if it is just a currency, people invest in currencies - some on purpose and everyone else just by the mere fact that they use them. Knowing what your currency is going to be worth tomorrow or a year from now is critical in your decision-making on how to use a currency. People don't tend to think about it that much for dollars or euros precisely because these currencies are stable. Wtih Bitcoin being wildly unstable, it is critical for any user to seriously consider its future value.

The value of a beanie baby is based off of what somebody will pay for it. Thats it. It doesn't matter how much it cost to make, it doenst matter what you think is a fad or speculation. If somebody is willing to pay, it has that value. If nobody is willing to pay then it is valueless. Intrinsic has a specific meaning, no debate is required. A particle's spin is intrinsic angular momentum, the Earth's rotation is not. You have not been using the word correctly and it confuses the discussion. And then when I call you out on your improper usage of the word, you don't want to argue what it means... Ha!

You misunderstand my reason for saying that. I'm quite content that I'm correct given that one of the sources I already cited uses the word the way I did and another discusses the issue without using the word (and googling key words from it leads you right to "intrinsic value"). But I've seen discussions of this get sidetracked by people wanting to argue over the word instead of discussing the issue. It's a red herring that I don't want to waste time on.

The idea that something - anything - is worth whatever someone is willing to pay for it is true at a basic level, but it is so vague as to be useless here. What we need to be discussing is why someone is willing to pay a certain value for it. What measures and methodology do they use to decide what they are willing to pay?

-With a Beanie Baby or a Bitcoin, guessing at what the next person might pay is all there is - and there is really no basis at all for the guess beyond their confidence in the value.
-With a share of Boeing stock, the earnings of the company (current and projected future) pay a large part in determining what people will pay (P/E ratio, for example).
-With a house, the fact that you can live in it, its size and location pay a large part in determining what people will pay for it.

For a share of Boeing stock or a house, there are real, physical, tangeable things that impact its value. Beanie Babies and Bitcoins don't have that.

My grandpa lost a lot in 99 and 08.

But probably a lot less than he gained in the 1990s and 2000s and when he lost, he only lost a fraction of the total value and then only temporarily. That's the point here: Becaue the value of stocks are based on something tangible, they almost never lose all of their value. Beanie Babies did because their value was based only on what the next person was willing to pay and when the next person realized he wasn't willing to pay anything, they crashed completely.

Quite easily. I already explained to you what a proof of concept is. When/if bitcoin fails the lessons learned from that will be implemented in the new protocols.

As I mentioned in my previous post... I measure its success as a proof of concept. Its like the wright brothers flight at kitty hawk. It was short, expensive, transported no cargo and only carried a person a small distance. By your metric here that flight was a failure. By my (and others) metric, it was a success. A success as a proof of concept. [emphasis added]

I absolutely agree that the Wright Brothers' flight was a successful proof of concept. But you just highlighted critical differences between it and the Bitcoin launch that make Bitcoin wildly - possibly even criminally - irresponsible. Yes, the Wright Brothers took no passengers on the first flight? Why? Because it was dangerous and they didn't want to hurt anyone if it didn't work! But Bitcoin was released on the public with no (as far as we know) testing, using the general public as the guniea pigs to work out the bugs. And guess what: real people have gotten hurt.

If the makers wanted it to be a proof of concept, they should have run the code on an isolated network somewhere, not released it to the public.

I hope the inventor is rich. He created a new innovative technology that has facilitated free trade and empowered individuals.

Er, well, no - you just said it was just a proof of concept and you stated correctly that a proof of concept costs money, it doesn't make money. I'm not sure the users of Bitcoin really recognize that they are paying the inventor to be his crash test dummies!

Successful as a proof of concept for cryptocurrency. A proof of concept doesn't need to be successful in the market to be a success, that is not how proof of concepts work.

Well, we certainly agree on the second part except of course that a proof of concept should never, ever be sent to a market. Still, based on the paper and comments from users it appears that Bitcoin isn't just a piece of technology, it is an attempt at creating a new economic system. Perhaps that's why it wasn't just tested in a lab - they needed it to be released to the public to see if the market would work. And in my opinion, the success of the piece of technology is much less important than the failure of the economic system.

Nope. As you mentioned before, wealth is not a zero sum game. When trade is facilitated through new economic means then both parties in the trade can win.

We're not talking about "wealth", we're talking about Bitcoins. Some markets/transactions/vehicles are zero sum and others aren't. Currency exchanging is zero sum because the purpose of a currency is to be a carrier vehicle for the value of something else, not to have a growing value itself. The thing you do with the Bitcoin may be a positive sum activity, but the Bitcoin (or dollar) you use to facilitate it is not.

Worse, Bitcoin has two things dragging its value to negative sum:
1. As in the case of Beanie Babies, the maker of Bitcoin has pulled a considerable amount of value out of the market while starting it.
2. Bitcoin mining requires a huge amount of energy, which makes the real value added to the market of each new Bitcoin created much, much smaller than the current market price. Also, FYI, the end of mining (probably in around 2017) is a good place to put a bet on the demise of Bitcoin, if it doesn't happen sooner. Since the value is propped-up by excitement and much of it is due to mining, people will pay a lot less attention to it when the mining stops. And lack of attention is what kills fads.

Regardless, BitCoin has been successful at getting wider adoption. The amount of stores and people using BitCoin to facilitate trade has gone up, not down. BitCoin is already a success.

Setting the bar a bit low, aren't we? Of course any number greater than zero is an increase!

So what? I think using PayPal is a bad idea. Still, there is a market need for PayPal and it does get used. I use it sometimes when I have too.

Um...ok. So you think PayPal is a bad idea, but not bad enough to keep you from using it? Aren't you arguing against your own success criteria for Bitcoin? Anyway, well, I think that Bitcoin is a bad idea and as a result, no later than 2017, no one will use it.

How do YOU know why BitCoin was invented?

I read the original paper. Take a look;
https://bitcoin.org/bitcoin.pdf

Just read the first two paragraphs in the introduction and you can see why BitCoin was invented. You need not agree to understand.

I don't know why it was invented, but I know never to trust someone who is hiding something - you never know what else they are hiding.

Not that its relevant though, because BitCoin is not and was never designed to be an investment vehicle.

Perhsps not, but there an awful lot of people who stand to lose an awful lot of money because they are treating it like one.

Your comparisons to mutual funds, beanie babies and magic cards are not relevant at all...

You are aware of where the comparison to Magic cards comes from, aren't you...?

The better comparison would be to gift cards, paypal, western union and RPG ingame currencies. But of course its new and innovative so no comparison is complete accurate - BitCoin is the first of its kind.

I agree there are some comparisons to be made there and I agree that because it is somewhat unique it takes bits and pieces of comparisons from many things and none are necessarily perfect. I never claimed any were. But clearly, an investment collectible is one of the things it is like...

...and btw, RPG ingame currencies and objects are traded in the real-world. What do you think happens to their value when the games become obsolete and lose popularity and/or the plug is pulled on their universes? They revert back to their intrinsic value: zero.

 

[Adderall]

I think Pythagorean, you're talking about the best way to extract wealth from short-term fluctuations in stock prices? And russ_watters, you're talking about the best way to extract wealth from the aggregate growth of companies, right? Since bitcoin doesn't change, I don't see it as being capable of growth as such.

Personally, I think making money off bitcoin is as immoral as making money from poker; it requires the eventual misery of another.

 

[Pythagorean]

I think Pythagorean, you're talking about the best way to extract wealth from short-term fluctuations in stock prices?

That's one way people are going about it. Arbitrage was the more successful strategy when I was living near a friend who had been successful with bitcoin, but that was about a year ago.

 

[Adderall]

That's one way people are going about it. Arbitrage was the more successful strategy when I was living near a friend who had been successful with bitcoin, but that was about a year ago.

Ah, so that's called arbitrage. But how else one would extract wealth from bitcoin trading other than arbitrage, though?

 

[Pythagorean]

As you said, short-term fluctuations; day-trading. People jump in when it takes a hit for obvious social reasons, too, hoping long-term enthusiasm will drive it back up. Of course, you really have to know the bitcoin culture well to be able to justify such speculation.

 

[phinds]

Ah, so that's called arbitrage. But how else one would extract wealth from bitcoin trading other than arbitrage, though?

No, the way to have made money on bitcoin, as on any cabbage patch doll fad is to have bought early and sold after a big run-up. Arbitrage is about very modest gains but lots of them. If you don't understand it, look it up.

The problem of course is knowing that it's still early enough to buy in and then getting out when you have made a profit, not hanging on until the crash.

 

[Pythagorean]

For Bitcoin, Arbitrage was quite successful (a year ago, anyway) because of the big differences between merchants (they aren't unified). On the order of 10k/month for the people I knew. The people that are making money off of it are using bots and using a variety of long-term analysis to account for transfer delays. Of course, the ones that are successful aren't sharing their policy.

 

[russ_watters]

Isn't that partly what undid MtGox?

 

[nsaspook]

Isn't that partly what undid MtGox?

Even if what undid MtGox would have been criminal activity at a 'real' exchange it's massive 'loss' of bitcoin currently can't be charged as a criminal act and is not listed as a liability on it's bankruptcy filing, only the cash.

Now you can see your 'limbo' bitcoin but it's just a digital mirage..
http://www.pcworld.com/article/2109...exchange-lets-users-see-bitcoin-balances.html

“The site shows the coins, but it indicates it has no real meaning with respect to claims,” said Aaron G., an investor who did not want his last name to be used. His balance indicates about 464 bitcoins (roughly $286,700 according to average bitcoin prices on other exchanges).

“So, just numbers on a screen—just as ‘real’ as they were before Gox went down,” he said in an email interview.

 

[Pythagorean]

My understanding was that when Mt. Gox first started freezing USD withdrawals, it drove down their bitcoin price and made an excellent opportunity for arbitrage. But I think there was already trouble at Mt. Gox at this point.

 

[russ_watters]

Perhaps - I think at this point what happened and the cause/effect relationship may be unclear:

What seems clear is that the value disconnect caused arbitrage trading, but the question is, did that cause or result from the disbursement slowdown? Or was it a feedback loop?

It makes me wonder if the MtGox still has all the bit coins it supposedly lost and just lost track of who owns them or bought and sold at what value.

 

[Pythagorean]

My impression is feedback loop: there was already and issue and arbitrage exasperated it.

There's some indication that Mt. Gox was really a poorly run company:

But beneath it all, some say, Mt. Gox was a disaster in waiting. Last year, a Tokyo-based software developer sat down in Gox’s first-floor meeting room to talk about working for the company. “I thought it was going to be really awesome,” says the developer, who also spoke on condition of anonymity. Soon, however, there were some serious red flags.

Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.

By the fall of 2013, Mt. Gox’s business was also a mess. Federal agents had seized $5 million from the company’s U.S. bank account, because the company had not registered with the government as a money transmitter, and Mt. Gox was being sued for $75 million by a former business partner called CoinLab. U.S. customers complained of months-long delays withdrawing dollars from the exchange, and Mt. Gox had tumbled from the world’s number one bitcoin exchange to position number three.

[...]

But Karpeles was obsessed with a new project: The Bitcoin Cafe.

[...]

One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.

[...]

According to a leaked Mt. Gox document that hit the web last week, hackers had been skimming money from the company for years.

[...]

After Mt. Gox was hacked for the first time in summer of 2011...

http://www.wired.com/wiredenterprise/2014/03/bitcoin-exchange/

 

[russ_watters]

I've read that article and that's a lot of my point. The opening line of the Bitcoin paper is:

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.

Then the premise is restated later:

What is needed is an electronic payment system based on cryptographic proof instead of trust,
allowing any two willing parties to transact directly with each other without the need for a trusted
third party.

Needed? The technology for making a cryptocurrency is not all that complicated, but the questions of whether people want a peer-to-peer currency and how it could function in a real economy aren't addressed at all. The economic system is the big issue here, not the technology (though the inclusion of mining in the technology is part of what makes me suspicious). This starting premise is an hypothesis itself that needs to be proven. Bitcoin enabled a test of it and the result is clearly a total failure:

Bitcoin did not eliminate the need for banks, it just enabled any sufficiently ambitious nerdy kid to become one. The bottom line is that in order to start using Bitcoin without a major investment in mining infrastructure, you have to buy them from someone. And unless you want to store them on your home computer, you have to store them with a company. And in order to know how much to buy/sell them for, you need to have accurate, real-time information on their value. These are the reasons banks and credit cards and stock exchanges exist in the first place! The Bitcoin community quickly recognized this and that's why the vast majority of activity happens in the exchanges.

I keep going back to this: People lost savings at MtGOX, which means they trusted MtGOX with their savings!

The idea that someone could trust a company with near zero track record and zero regulation to be their bank is near insanity and the quotes from users show it is based at least in part on a counter-culture activisim/paranoia/mistrust of authority. No doubt, the banking crisis of 5 years ago added fuel to that fire, but people turned away from the slightly shaken trust in previously rock-solid banks, to faith in a near complete unknown.

A quick bit on the technology though:

The system is secure as long as honest nodes collectively control more CPU power than any
cooperating group of attacker nodes.

Doesn't that mean that a worm that siezes control of a sufficiently large number of computers could completely destroy Bitcoin? Just as bad, doesn't it mean that Bitcoin users could band together and "overthrow" it? What fraction of Bitcoin users are angry MtGox customers?

 

[Pythagorean]

Needed? The technology for making a cryptocurrency is not all that complicated...

Technically true, but the technology alone is useless without security, and that requires more technology that is intimately linked to the mechanics of cryptocurrency. I also think your (valid) complaints about how it will work with economy can only be solved by technological implementation.

One can't deny that cryptocurrency is currently unstable (and that assertion probably varies for different cryptocurrencies) but it's not terribly surprising either. If it is to be successful (as I predict it will) it will require some degree of institutionalization and policy design. And the only way to get to that point with such an inherently organic social structure, is to go through this trial period... and there's going to be a lot of heartache involved. Of course, I wouldn't touch Bitcoin, personally. I wouldn't even to try to ride the wave and get out early. But I can appreciate that some people are in tune to Bitcoin and know how to turn a profit out of it.

I also agree that using it as a bank is a horrible idea. I expect Bitcoin to fall dramatically before it stabilizes (if it's even going to be a surviving cryptocurrency) so there's really no justifiable long-term investment in Bitcoin currently. If I would have been one of the lucky ones, I would already have cashed out most of my funds long ago.

Of course, I don't agree that the long-term value of cryptocurrency is zero. It's both a currency and a service (anonymity). But you'd really have to have a good business head and a good grasp of cryptocurrencies role in society to know which cryptocurrencies are most likely to survive this chaotic state.

 

[nsaspook]

One of the problems Bitcoin [sic] solved was the 'Double-spending' attack on decentralized accounting systems but using the native Bitcoin protection method is slow at a large exchange that needs handle many real-time transactions so MtGox effectively created a internal crypto-currency altcoin that appeared externally to investors as bitcoin that it used to manage bitcoin/cash exchanges quickly because it was the central and only authority to account for those ---coin (backed by the bitcoin that it now says were stolen or lost) transactions. IMO one of reasons 'bitcoin' at Mtgox fell so low compared to other exchanges before it completely crashed was that most people finally saw they really were not trading bitcoin anymore.

People stuck with that ---coin are now calling it goxcoin and want to use it.
http://www.humint.is/goxcoin

I have my own ideas of what it should be called.
http://www.cafepress.com/+bohica_bend_over_coin_purse,881034800

 

[Adderall]

No, the way to have made money on bitcoin, as on any cabbage patch doll fad is to have bought early and sold after a big run-up. Arbitrage is about very modest gains but lots of them. If you don't understand it, look it up.

The problem of course is knowing that it's still early enough to buy in and then getting out when you have made a profit, not hanging on until the crash.

I believe I understand the difference. Both consist in extracting wealth from trades without adding anything to, well, ANYTHING. I find fad-profiteering to be a bit more nakedly avaricious than arbitrage, but I find both to be morally murky.

I gleefully engage in arbitrage in video games. Back when I played MMOGs (yes, those MMOGs) I would constantly take advantage of market imbalances to make as much in-game currency as possible (e.g. make a no-skill combination with plentifully available reagents and sell the result +200%). This is fine in a video game, where it doesn't matter how wealth is distributed, and where you can just quit if you don't like the rules. In real life, how wealth is distributed matters greatly (I understand the difference between wealth and income) and whether you engage in fad-profiteering or arbitrage, I don't see how this ends well for anyone but the successful (fad-profiteering is still worse than arbitrage, I think).

 

[phinds]

I believe I understand the difference. Both consist in extracting wealth from trades without adding anything to, well, ANYTHING. I find fad-profiteering to be a bit more nakedly avaricious than arbitrage, but I find both to be morally murky.

...

In real life, how wealth is distributed matters greatly (I understand the difference between wealth and income) and whether you engage in fad-profiteering or arbitrage, I don't see how this ends well for anyone but the successful (fad-profiteering is still worse than arbitrage, I think).

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

 

[russ_watters]

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

No, but if someone is stupid or not all there mentally it makes me feel bad to take advantage of them.

 

[phinds]

No, but if someone is stupid or not all there mentally it makes me feel bad to take advantage of them.

Although I agree w/ you, that seems to me to be bringing in gratuitous complications outside the normal realm of what we are discussing.

Of course you COULD argue that anyone who speculates in cabbage patch dolls or bitcoins IS "stupid or not all there mentally"

 

[AlephZero]

Memo to MtGox - keep searching down the back of the sofa... http://www.bbc.co.uk/news/technology-26677291

 

[nsaspook]

Memo to MtGox - keep searching down the back of the sofa... http://www.bbc.co.uk/news/technology-26677291

It might be part of these bitcoins.
http://www.coindesk.com/gox-money-moving-through-block-chain/

Large amounts of bitcoins previously handled by Mt Gox, which have lain dormant for years, have started moving on the block chain.

Was it really 'lost'?

 

[Adderall]

Of course you COULD argue that anyone who speculates in cabbage patch dolls or bitcoins IS "stupid or not all there mentally"

I know you were joking but I kind of non-ironically agree with russ_watters about money and stupid people. That literally is what online poker is - taking money from stupid people. Even at low stakes, it just feels weird.

I 100% agree these bets are risky and not guaranteed for any outcome. I guess I feel that people can't be trusted to be safe or to effectively manage their own bankrolls. The US gov't doesn't trust people in every day life, considering seat belt & speed limit laws. I would be comfortable letting people blow their wad on inane nonsense like cabbage patch dolls if they at least had to undergo some sort of psych evaluation first.

 

[TylerH]

I know you were joking but I kind of non-ironically agree with russ_watters about money and stupid people. That literally is what online poker is - taking money from stupid people. Even at low stakes, it just feels weird.

I 100% agree these bets are risky and not guaranteed for any outcome. I guess I feel that people can't be trusted to be safe or to effectively manage their own bankrolls. The US gov't doesn't trust people in every day life, considering seat belt & speed limit laws. I would be comfortable letting people blow their wad on inane nonsense like cabbage patch dolls if they at least had to undergo some sort of psych evaluation first.

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view? By what objective reasoning could you justify subjecting everyone of the opposing view to some arbitrary standard to act on their view?

 

[Adderall]

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view? By what objective reasoning could you justify subjecting everyone of the opposing view to some arbitrary standard to act on their view?

You misread my post. I wrote inane, as in silly and stupid. Also, I said it would be nice if people were periodically evaluated to make sure they are in control of their own decisions. I understand libertarians won't think the seat belt law is useful precedent, but it is an example of the US gov't deciding on some "arbitrary" (not arbitrary) standard limiting what we can do with our own property.

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

Yes thank you, I have lived in the real world before. I'm not outraged. I'm not even advocating banning gambling. I'm merely pointing out that modern psychology has shown repeatedly that people are easily manipulated and influenced. I could go into detail if you think psychology is pertinent to this discussion. And I think it must be; how can you say no one is forced to make bets when it can't be demonstrated what is driving their decision making?

 

[nsaspook]

Viewing bitcoin as simply gambling is good for bitcoin.

This is why I find the some of the “counter-economics” bitcoin boosters using the government legal systems to get their money back ironic if indeed they want independence from the costs of consumer protection. Surely they must see the governments position on gambling. If you lose for any non-(overtly)criminal reason we don't care , if you win for any reason we just want a share and don't really care about how you got the money. As long as bitcoin is seem by the government mainly as a gamblers fools game with the electronic equivalent of S&H stamps Bitcoin can live in it's little corner without much regulation but if it starts to actually become widespread people will expect consumer protection from some authority that can exercise force on perceived 'wrong doers'.
http://www.coindesk.com/life-under-bitcoin-regulation-worse-than-investors-think/

Look at PayPals state requirements. https://www.paypal-media.com/state_licenses.cfm

 

[russ_watters]

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view?

Yes, but what if you had made a ton of money off of Beanie Babies? How would you feel about it today? I was too young at the time to have done it, but I remember talking to a friend's mom and being dumbfounded by her belief in what she was doing. It made an impression on me.

 

[Adderall]

It seems the IRS views bitcoin as gambling also.

 

[nsaspook]

It seems the IRS views bitcoin as gambling also.

The Taxman cometh but only takes cash not bitcoin for the price of freedom.


This means in case of an audit and you own bitcoin you must disclose your transactions and maybe the keys to those transactions (as digital receipts) to prove ownership so they can verify amounts using the Bitcoin networked blockchain database.

 

[nsaspook]

The IRS action also means bitcoins have lost 'Fungibility'. One bitcoin is not the same as all bitcoins because the tax consequences of using one over the other now involves a cost basis calculation using the cash value at both the buy and sell transactions unlike a 'fungible' stack of $20 bills from 1980 you hid in the basement used to buy a new car today.

The MtGox Bitcoin top 500 trading patterns.

http://bitcoin.stamen.com/

 

[nsaspook]

Interesting defense.

http://www.forbes.com/sites/andygre...onetary-instrument-moves-to-drop-all-charges/

“Count Four, which charges Mr. Ulbricht with participating in a money laundering conspiracy…must be dismissed because the allegation lacks an essential element: that the ‘financial transactions’ alleged involved ‘monetary instruments,’” the motion reads. “Bitcoins, the exclusive means of payment on Silk Road, do not qualify as ‘monetary instruments,’ and therefore cannot serve as the basis for a money laundering violation.”