Bitcoin is not like gold

Duke of Marmalade

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I hope in future we'll figure out an algorithm that avoids the intense work.
I feel like screaming:eek: With this statement I have downgraded my understanding of BTC to 1%:oops:

I thought the proof-of-work was completely flexible, the difficulty level is adjustable. If an easier algorithm was used we would need to adjust its difficulty level to get the same result. I thought the object was to target that it would need 10 mins on average for the whole mining power to add the next block. It is the combination of the 10 min requirement and the current mining power that determines the electricity usage. This is independent of the algorithm that got that result, I thought.
 

fpalb

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I feel like screaming:eek: With this statement I have downgraded my understanding of BTC to 1%:oops:

I thought the proof-of-work was completely flexible, the difficulty level is adjustable. If an easier algorithm was used we would need to adjust its difficulty level to get the same result.
Yes, for the current proof-of-work which is SHA256 hashing, obviously if you change the hashing to some other hashing algorithm, in theory it will be no different in terms of power usage. The type of change I mentioned was moving away from proof-of-work entirely. This is a drastic change, and I'm not even saying it's likely or that we'll figure out an alternative that works, but it's possible that someone does maybe something like proof-of-stake: https://en.wikipedia.org/wiki/Proof-of-stake

In PoS-based cryptocurrencies the creator of the next block is chosen via various combinations of random selection and wealth or age (i.e. the stake). In contrast, the algorithm of proof-of-work (PoW) based cryptocurrencies (such as bitcoin) rewards participants who solve complicated cryptographical puzzles in order to validate transactions and create new blocks (i.e. mining).

I thought the object was to target that it would need 10 mins on average for the whole mining power to add the next block. It is the combination of the 10 min requirement and the current mining power that determines the electricity usage. This is independent of the algorithm that got that result, I thought.
Correct as long as the algorithm is also a proof-of-work one
 

Duke of Marmalade

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Ok. It seems to me that if you introduce a random selection process considerable flexibility arises. It could still be a PoW system but set the difficulty at just sufficient to meet the integrity objective and then after 10 mins select the winning miner randomly.
 

Duke of Marmalade

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What about the dog that isn't barking?

I refer to those governments (mostly Arab) with huge amounts of wealth invested in gold and currencies. Do they invest in BTC? Not on your nelly, they want some "intrinsic" value. Oh I hear B/S et al screaming that fiat currencies are a complete sham. Then why does Iran hold so many dollars? It knows the dollar value is far from bullet (nuke) proof but nonetheless it recognises that the self interest of America is to preserve confidence at home and abroad in its currency.
 
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Firefly

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I think this is one area where the "powers that be" have a legitimate cause (and excuse) in stopping bitcoin.

That so much energy is being spent mining (or whatever it's called) is just ludicrous.

It has been argued that a cost of globalisation / capitalism has been the pollution of our environment. I think the use of such amounts of energy on mining bitcoins is most absurd and indefensible.
 
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ant dee

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It has been said before, some (a lot?) of the power used on bitcoin mining comes from hydro power plants, renewable sources etc that would otherwise not operate because the local demand from electricity there is not enough. Miners approach and buy the extra power. Probably they are bribing a few Chinese officials but hey that's no harm to the environment.
 

noproblem

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When people /investors buy gold i'd imagine very few get the actual physical asset. So, my query is, if everyone got out of gold tomorrow, demanded their money back in cash, is it not true to say there wouldn't be enough held gold in the world to cover that cash? Of course they could go mining again to cover this but where's the value in that if no one wants it? Also, would there be enough gold underground to cover the cash invested in it?
 

Duke of Marmalade

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When people /investors buy gold i'd imagine very few get the actual physical asset. So, my query is, if everyone got out of gold tomorrow, demanded their money back in cash, is it not true to say there wouldn't be enough held gold in the world to cover that cash? Of course they could go mining again to cover this but where's the value in that if no one wants it? Also, would there be enough gold underground to cover the cash invested in it?
I don't think that is true. It might have been true with a gold standard i.e. governments undertaking to buy back their currency for a set amount of gold. If there is fractional reserve banking then the calls on the currency could be a multiple of its base and it was presumably only the base that the Government held gold reserves for, but I am not sure if they did even that, and I am also not sure whether M2 was covered by the gold standard. These days I don't think there is much, if any, multiplication of the calls on gold brought about by the fractional reserve process. It would need people to be in substantial gold debt.

Actually I am pretty sure it was only M0 (notes and coins) that were backed by the gold standard.
 
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cremeegg

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When people /investors buy gold i'd imagine very few get the actual physical asset. So, my query is, if everyone got out of gold tomorrow, demanded their money back in cash, is it not true to say there wouldn't be enough held gold in the world to cover that cash?
I don't think that is true.
I dont think its true either, but the fact that the question can be asked undermines the rational for investing in gold certificates etc. completely, unless you hold the physical gold.

But I didn't think Bernie Maddoff was a fraud either.
 
B

BreadKettle

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I think this is one area where the "powers that be" have a legitimate cause (and excuse) in stopping bitcoin.

That so much energy is being spent mining (or whatever it's called) is just ludicrous.

It has been argued that a cost of globalisation / capitalism has been the pollution of our environment. I think the use of such amounts of energy on mining bitcoins is most absurd and indefensible.
You realise it uses less electricity than the production of cash and coins, and only a small fraction used to mine gold?

Should we also ban Google, as they use more again? Where do you want to draw this line of what you deem to be an allowable amount of energy to be used to produce something?
 

cremeegg

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I am with bread kettle here. We are supposed to be horrified by the amount of electricity used in mining bitcoin, yet no one has even given a figure for the amount of electricity actually used. More electricity than Ireland, Venezuela, the moon, isn't an argument its a shout for attention.
 

Firefly

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I am with bread kettle here. We are supposed to be horrified by the amount of electricity used in mining bitcoin, yet no one has even given a figure for the amount of electricity actually used. More electricity than Ireland, Venezuela, the moon, isn't an argument its a shout for attention.
The point I am making is that with the focus on the environment, the powers that be now have another reason (the other being the rampant use of bitcoin by all sorts of criminals (so much for ethical investing eh?)) if they want to pursue bitcoin's demise.
 

Leo

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I am with bread kettle here. We are supposed to be horrified by the amount of electricity used in mining bitcoin, yet no one has even given a figure for the amount of electricity actually used. More electricity than Ireland, Venezuela, the moon, isn't an argument its a shout for attention.
The energy use figures are widely published, they're even quoted earlier in this thread. Much of our media just prefers dumbing details like this down for mass consumption.

So long as the miners continue to see a return, energy usage won't be a real issue.
 

cremeegg

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A bitcoin question.

What gives bitcoin its value.

I understand the scarcity aspect, (like gold), I understand the security, anonymity and ease of use aspects, (I say understand, I mean accept at face value, because life is too short to follow then query the explanations, I'm not as brave as the Duke). I understand the network aspect.

However none of these, to my mind, make bitcoin worth more than a debit card linked to a bank account with no money.

I even understand the, "not controlled by a Central Bank" aspect. Although I do not see that as a bad thing. The price fluctuations of bitcoin would not occur if there was some centralised control.

What I do not understand is what the worth (as opposed to market price) of a bitcoin is based on.

A Euro or USD represents a claim on the output of the Eurozone or US economy. What does a bitcoin represent.
 

Firefly

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A bitcoin question.

What gives bitcoin its value.

I understand the scarcity aspect, (like gold), I understand the security, anonymity and ease of use aspects, (I say understand, I mean accept at face value, because life is too short to follow then query the explanations, I'm not as brave as the Duke). I understand the network aspect.

However none of these, to my mind, make bitcoin worth more than a debit card linked to a bank account with no money.
What about those single use, virtual credit card things? I think P-TSB used to sell them - you can load them with say 100 quid and use them anonymously? Sure, that's the same thing isn't it?

I understand the scarcity aspect, (like gold) but I can't reconcile that to the level of quantitive easing. It's not like the Weimer republic we have here!
 

newtothis

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Gold has an intrinsic value - bitcoin has none
Sorry to drag this back to the oriiginal point (or maybe that's a good thing?), but whilst gold does indeed have an intrinsic value (becuase of its use in industrial applications, for example), why is it relevant to anything whether Bitcoin has an "intrinsic" value? For example, what is the intrinsic value of a €50 note? I don't know what each one costs to produce, but I'd be willing to bet it's a long, long way from €50. Bitcoin is much more like cash than gold. Before anyone jumps on me, it's not the same as cash, just more similar to it than it is similar to gold.

It also does clearly have a value: currently very high and potentially next to zero in double quick time, but your constant claim it is valueless is simply not true.
 

fpalb

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A bitcoin question.

What gives bitcoin its value.
...
A Euro or USD represents a claim on the output of the Eurozone or US economy. What does a bitcoin represent.
To make the case for whether bitcoin can be considered money, I need to go into the fundamentals of the concept of money itself and its history, and what could be more appropriate on a site called askaboutmoney.com :)

Defining Money
Money is defined by its function, not its form. From wikipedia: "The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value.... Any item or verifiable record that fulfills these functions can be considered as money.

Also via wikipedia: "Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money." So for much of human history, what was money was not necessarily dictated from a position of power, but instead emerged from ground up.

Even just considering gold and euros as two types of money, we can say some things about money:
1) Money does not need to have physical form (most euros exist as entries in a digital database)
2) Money does not need to be endorsed or backed by a government (gold)
3) If something can fulfill the functions of money, that is enough to use it as money, it does not need to serve any other purpose (basically the intrinsic value argument, euros are only useful as money)

What properties are useful for fulfilling the functions of money, why did gold win?
So the history of money is that various civilisations used all sorts of things, some where commodity moneys, things used as money that also had other utility other than being money such as bronze, salt and gold. Other things didn't have much or any commodity value such as cowry shells, rai stones, tally sticks.

Why did gold emerge as the clear winner over everything else that people tried? The first answer you usually get is 'because it has intrinsic value, it has industrial uses, and it's desirable for jewelry". Fine, but lots of things have intrinsic value, and many are more useful and important than gold, like food. Diamonds are arguably more desirable in jewelry and also have industrial uses, but they are not used as money to the extent that gold is.

The reason I propose is that gold, of all naturally occurring things in the world has the best combination of properties that help make something fulfill the functions of money:
  • portablity
  • fungiblity
  • robustness
  • verifiablity
  • scarcity
  • divisibilty
Do you agree that the better something is in terms of all of those properties, the better it can work as both a store of value and medium of exchange? Can you find any other element in the periodic table that has a better combination? Can you think of anything else in the natural world that does? If not, do you think this is a coincidence?

Thought experiment: Is it possible that gold became used as money purely because it was the best thing to use as money and that the industrial and decorative uses are coincidental?

Why did gold get mostly replaced by fiat?
Horses were the main mode of transport for 1000s of years, the best naturally occurring thing that people could use for the function of transport. Then people eventually figured out how to create a a purpose-built technology that fundamentally improved on it and that was pretty much the end of horses.

Eventually people figured out purpose-built technologies for money too. Fiat, and especially digital fiat drastically improves the portability, verifiabilty and divisibility aspects of gold, making it way more practical to use as a medium of exchange. The trade offs are that fiat is not as robust (your digital accounts have counter-party risk) and more importantly fiat does not have absolute scarcity, meaning that fiat is worse as a store of value.

Bootstrapping and confidence
Whenever you accept money as payment or use money to store value you do so with the expectation that at a future date someone else will accept it as payment from you i.e. you never accept money to consume it (or we would consider it barter not money). That means you need to have enough confidence that there will be continued widespread demand for the money.

When all monetary systems start they face a bootstrapping problem, why would the first person accept something as money when they don't know if anyone else will in future? While something might actually be capable of fulfilling the functions of money, if it cannot reach a critical mass of users it may never actually be used as money.

I think for gold it makes sense that the intrinsic value helped bootstrap it. It's less risky to accept something as money when you know it will always at least have industrial uses in future. For fiat it can be bootstrapped by the government endorsing it as legal tender, coercing the population to use it by forbidding other money and forcing payment of taxes in it.

The conclusions drawn from the above lengthy post are:
1) Money is anything which can function as money
2) Something with the combination of properties that mean it can best fulfill the functions of money will emerge as money and eventually succeed over worse forms of money.
3) Gold became the main global money because it had the properties which made it better than anything else at being money (intrinsic value is coincidental, but helped bootstrap it).

The Bitcoin thought experiment
Then we arrive at Satoshi's proposal:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and one special, magical property: - can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it. Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it. I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something. (I'm using the word scarce here to only mean limited potential supply)
And that is what bitcoin ultimately is, putting the above thought experiment into practice in real life and seeing how it plays out.

I think there's more to discuss here, we can go further into the properties and abilities of our various different money systems and make a comparison of which one is best at what. I think each has it's own set of positives and negatives and the choice of what is the best money is different depending on the circumstances.
 

Duke of Marmalade

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The Bitcoin thought experiment
Then we arrive at Satoshi's proposal:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and one special, magical property: - can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it. Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it. I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something. (I'm using the word scarce here to only mean limited potential supply)
This was Satoshi's riposte to the argument that BTC value was counter to Mises' Regression Theorem. The MRT, as I understand it, asserts that money must in the final analysis be traced to some commodity value (salt, gold whatever). The riposte - "it can be usd for payment" ergo it has value. Circular? Well yeah.

I have read the White Paper again. Interestingly Satoshi was not in the least inspired by Shortie Syndrome - the obsession that Cental Banks are evil elitist manipulative fraudsters. Rather he was obsessed with the need to transact at a distance without needing a "trusted party" (the banking system). Unlike B/S he had no issue with the trusted party per se (he trusted them) but he claimed it caused unwanted delays in settlement and also incurred too high transaction fees (ironic considering today's BTC fees). In other words BTC was invented to make long distance payments quicker and less transactionally expensive than conventional banking facilities. Even if these advantages exist they are surely not enough to support a price rise from 1,309 BTC to the $ (its first exchange transaction Oct 2009) to 17,000 $ to the BTC today.

You list out the requirements of a money system and for sure BTC has them, as do fiat currencies. But it lacks at least two key requirements that fiats have.

1. Mises' Regression requirement - that it traces back to something of "real" value. Sorry, the circular argument that it is money because it is money doesn't cut it for me.

2. With fiat money we have a reasonable assurance of what the price of real things will be at least in the short to medium term. If we were to have a poll of what do we think the inflation rate will be over the next year it would show how remarkably trusting we are on this front. To put it in pictures, a company should have no difficulty in recruiting a contractor for one year at say €8,000 per month but I doubt whether even you would contract to work for a year for 0.5 BTC per month.

Getting back to that circular argument, Satoshi argues that if BTC gets any value whatsoever for whatever reason ergo it meets Mises' criterion and is suitable as money. I contend that almost all of the "value" it currently has is speculation that it will get even bigger and I doubt whether Satoshi would argue that speculative value is a basis for sound money.
 

Duke of Marmalade

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fpalb thinking more about Satoshi's thought experiment. My guess is that he or they came up with this clever solution for peer to peer transfers- bitcoin - doing all the things you claim it does and I am not questioning the truth of those claims.

But then there was the missing link - Mises' Regression Theorem or rather Plain 'Ol Common Sense (POCS) - how can it serve as money if it has no (intrinsic) value? He wanted any value at all, you can see that in his musings "value, any value". And then out of necessity he squared the circle and he admits it was circular. He postulates that if even some folk are prepared to accept it as a transaction for real goods then, there you go, it has some value ergo (here's the big leap) it has value for everybody and is a self fulfilling medium of exchange i.e. money.
 
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