Bit Coin...Ponzi Scheme?

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LogansRun's picture
LogansRun
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Bit Coin...Ponzi Scheme?

I have no clue, but Chris Duane makes a pretty good argument.

BC Ponzi Scheme

Just by looking at the charts, I'd say that BitCoin is, if not a Ponzi Scheme, becoming a bubble that will pop.  

And if no one knows who the originator of the program seems to be, why would anyone trust this system?  

I see a trap being set.

I know this post will get someones underwear in a bind.....but one's beliefs don't trump one's logic.

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Phil Williams
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You beat me to it

LR,

I was just about to post the video from Chris Duane. I've read a lot of smart people endorsing bit-coin, but I wouldn't touch it with a ten foot pole. It's $48.00 a coin now. In 2011 it crashed to .01 cent. I mean seriously, who the hell would feel comfortable with a currency that is that volatile, and can only be accepted in very few places. Those places can very easily stop accepting bit-coin anytime they wish. Mining digital coins on your computer? What a load of BS. I agree with Chris on this, ponzi scheme, with the creators extracting the wealth.

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Phil and team PP...

Bitcoin is not a ponzi scheme.  I have written extensively about it on other threads here..   and I have thought about it a lot.  I understand exactly why you have come to this conclusion based on a cursory view of it, and while Chris is a smart guy who's heart is absolutely in the right place.. I have to disagree with him here.  By saying all this, I am not suggesting that it can't fail, that it can't ultimately be disrupted in some way, or that the free market itself may not ultimately reject it... but I am saying that there are very good reasons for it to exist - it is elegant, unique, and the free market is reacting to it in a much more positive way than you are in your comments above... why do you think?

First off... Bitcoin is no more a ponzi scheme than Gold itself.  You are confusing the fact that Bitcoin is going up in its dollar value with it being a ponzi scheme.  The reason it is going up in value is the same reason that Gold has been going up in ($) value for the better part of 12 years now... it is a form of money that people like, and it has limited availability - simple as that.  You are witnessing a rare sight and you don't know it.. .deflation in action.  A currency that is gaining buying power because it cannot be printed.  

Speaking of printing... part of the elegance of Bitcoin is the fact that it is "mined" using CPU power.  You have to download the program, the entire so-called "blockchain" that contains the entire digital DNA sequence, and they put your CPU to work on the business of creating new crytpo keys (noting that Bitcoin is peer-to-peer, digital crypto currency).  So in a sense, there is embedded energy in Bitcoin. 

You must understand that Bitcoin is a limited good.  The program itself insures that only so many Bitcoins will ever be mined.. and this asymptotic supply behavior is key... it cannot and will not be inifinitely printed or "mined"... it has scarcity integrity built into its digital DNA .. so it is EXACTLY like Gold and Silver in that respect.  More than 1/2 the Bitcoins that will ever be mined, have been mined.  It was designed for this deflationary behavior (what you call ponzi behavior).. and is divisible over eight orders of magnitude.  

What you interpret as ponzi, I interpret as lots of smart people all over the world realizing that Bitcoin has a great future in a world of infinitely printable fiat currencies... sure, there are speculators in there.. but I don't interpret this as fundamentally speculator driven. 

Note:  The earlier collapse in Bitcoin price that you see on a chart was a scare that went through the Bitcoin ecosystem as a result of the mass hacking of digital purses that were held online by one of the big servicers.  Everything I have read says that for ultimate security, you want to hold your Bitcoins (meaning their crypto keys) on you own, locally.. with thumbdrive backup.

I understand that it is completely intangible... but get over it.. so is the US dollar.  The vast majority of money held today is completely digital.. very little of the pie slice is physical currenty.. and that is just green paper, backed by nothing, as we all know.  Why would you be so happy to own a bunch of digital dollars (come on.. I know you would be  : )   but feel like your Bitcoins are a ponzi scheme?   The dollars are the ponzi scheme... really. 

Bitcoins are the first free market, alt. currency that has really gained some critical mass.  Other local currencies like Burlington (VT) bread, Ithaca Hours, etc have come and gone.  One of the endearing features of Bitcoin is what I have described;  the method of its creation is completely transparent... unlike things like Ithaca Hours... and Bitcoin's rate of emission will decrease over time (controlled, planned deflation).  It is entirely possible that a single Bitcoin, bought today for $40 or so.. will buy you the equivalent of $1000 merchandise or services in a few years from now.. I am not kidding.  There is a limited supply of Bitcoins.. and a big world out there that would like to have a way to transact without Gov't interference of oversight, without taxation, without sending a vig to the &#%$ing Bankers, etc.  Bitcoin does all that, and it rewards you with a probable, deflationary increase in buying power if you just sit and hold.  

Regardless of what you think... the increasing price of Bitcoin is the free market speaking... and you are not listening carefully enough in my opinion.  Note:  I have no Bitcoin at present.. but keep kicking myself for not acting earlier.       

       

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LogansRun
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Jim, if you believe in it so much...

why haven't you bought?  You obviously have some reservations, so I'd like to know.

I for one, will not get involved with a monetary system that's "made up", and has no historical intrinsic value.  Especially one that has so little information about who is in charge/who designed it/etc.....

But, it's a "to each their own" situation.  I wish you luck if you do buy in....

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Logans

Honestly.. I have spent all investable assets on Gold and Silver..  I could make a small investment in Bitcoin.. and I probably still will.. but it will be small.  If I were advising someone, I would suggest no more than 1% of investable assets.  I am not in any way suggesting that one should trade Gold or Silver for Bitcoin.. I will not.  The other reason is that I am not a computer techie.. I am reasonably proficient with computers, but I really don't want to know what makes them tick under the covers.. and I have yet to find someone to advise me on the best form of digital purse for holding Bitcoins.. just practical stuff.    

What I am suggesting is this:  Bitcoin is acting EXACTLY as Gold or Silver should be, or would be, if you had a free market.  I am very interested in Bitcoin from the standpoint of monetary theory..  and while you guys seem repelled by it.. I am entranced by the elegance of it, and by the way that the free market is reacting to it.

There are only three forms of money in the world today that have scarcity integrity:  Gold, Silver, and Bitcoin.  Please correct me if you think I am wrong on this and we can discuss further

Like others, Trace Mayer of http://www.runtogold.com/ being one, I came to my understanding of Bitcoin using a lens honed on Gold and Silver.  If you understand Gold and Silver vs. unbacked fiat money, then I think Bitcoin is a revelation of sorts.  

1)  At present it is a completely free market.  Think about this - there are no derivatives... no futures... no paper representations.. no fractional reserve nature.. no ETF's.  There is only Bitcoins.  There are no bankers playing in the game (or if they are.. they are buying up Bitcoins.. which furthers the deflation for now).

2)  It is free market.  Think about this;  I have seen commentators call Bitcoin "fiat"... but it is absolutely not fiat currency.  It is completely intangible like fiat, yes.. but fiat is forced on you by your government.. you have to pay you taxes in it, and are thus forced to earn it, transact in it to some extent. etc.  Nobody has to use Bitcoin.. free choice, and yet the number of transactions per day, the total market capitalization, continues to climb.  Some guys are working Bitcoin atms (http://www.americanbanker.com/bankthink/tabletop-bitcoin-atm-is-huge-for...).. and so on, and so on.  

I would argue that I am attracted to Bitcoin through logic... what I would like to hear from the naysayers is why the freemarket is getting it so wrong?  I have explained why I think they are right, and why Bitcoin is attractive.         

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Thanks for

that very comprehensive and informative piece on Bitcoin. You have justified away the cynicism that I had towards it previous to your post.

There is definately something Scottish about you!

Cheers.

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Bitcoin.. an analogy

I keep posting because of my endless fascination with Bitcoin, and the ongoing free market reaction to it.  As I said before, I have great respect for Chris Duane.. he is maybe even one of my heros, if you will.  Still, I think he is wrong in his assessment of Bitcoin.. and I think that my experience in the computer industry gives me a different perspective on the potential value of intangible things like software.. and that is what Bitcoin is;  an idea made into software. 

So here is the analogy:  Bitcoin is the Linux of money.  If you don't know what Linux is.. I have already lost you.. but also I have made my point as to why so many folks don't understand Bitcoin.  

http://en.wikipedia.org/wiki/Linux

Linux (Listeni/ˈlɪnəks/ LIN-əks[6][7] or /ˈlɪnʊks/ LIN-uuks)[8][9][10] is a Unix-like computer operating system assembled under the model of free and open source software development and distribution. The defining component of Linux is the Linux kernel, an operating system kernel first released 5 October 1991 by Linus Torvalds.[11][12]

Linux was originally developed as a free operating system for Intel x86-based personal computers. It has since been ported to more computer hardware platforms than any other operating system. It is a leading operating system on servers and other big iron systems such as mainframe computers and supercomputers:[13][14][15][16] more than 90% of today's 500 fastest supercomputers run some variant of Linux,[17] including the 10 fastest.[18] Linux also runs on embedded systems (devices where the operating system is typically built into the firmware and highly tailored to the system) such as mobile phones, tablet computers, network routers, televisions[19][20] and video game consoles; the Android system in wide use on mobile devices is built on the Linux kernel.

The development of Linux is one of the most prominent examples of free and open source software collaboration: the underlying source code may be used, modified, and distributed—commercially or non-commercially—by anyone under licenses such as the GNU General Public License.

 

In some ways,  Microsoft Windows is to Linux as the Dollar is to Bitcoin.  Early in the life of Linux, very few thought it would ever succeed, gain critical mass, or threaten the Windows monopoly in any meaningful way.  They were wrong.  They were wrong because they did not understand the power of an idea;  the crowdsourced power of freeware coupled with the immediate, world-wide reach of the internet.  An ecosystem developed around Linux (just as is happening now.. still in the earliest stages.. for Bitcoin) including companies like RedHat that services the "free" software.. and Linux gained a foothold.  Everyone could see the benefit of software that costs nothing... and I make the case that, once they understand it, more and more people will appreciate and want to hold at least a little bit of a form of money that is designed to NOT LOSE VALUE, but rather to, in the longer run, gain value due to scarcity.       

 

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Fair Enough/Good Luck

But I question whether it's truly a "free market" monetary system.

Here's the latest video from Chris D., where he discusses the CIA's interest in BitCoin.  And being as I was in the intelligence community for quite a few years, if the CIA has interest in it, it's not "Free Market" any longer.  Try to trust me on this one. 

If they had been approached by the Secret Service, FBI, or Federal Reserve Police (FRP), I'd question still, but not as much as seeing an interest from either the CIA or NSA.  

Oh, as was brought up by CD in this video, the "flash crash" of bitcoin just happened to take place around the same time as Bitcoin was to meet with the CIA.  

Coinsidence?  No such thing in this town.  Or as Nate Hughs  has said: 

It may not be a math­e­mat­i­cal fact of the uni­verse, but strate­gi­cally it’s an excel­lent habit to ques­tion coin­ci­dence, or in gen­eral when ever some­thing hap­pens have the habit to ana­lyze why.  Or be will­ing to have the why sur­prise you down the road.  If you assume there are no coin­ci­dences, it should help you mit­i­gate many poten­tial unpleas­ant sur­prises.

 

 

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CIA...

First off.. did I say I had spent all my money on Gold and Silver?.. well.. that was true, until I had to use it all to pay off gambling debts.  All gone.. .really.. for real.  Gone.  

I am sure they are interested in it from the standpoint of cryptography, and it is here that one really could find some cause for longer term concern, because (as discussed in a previous PP.com thread) there will come a time when more powerful computers, and especially quantum computers (should they come to pass) will render current cryptography obsolete.  What then?  See this;

http://blog.ezyang.com/2011/06/bitcoin-is-not-decentralized/

and this;

http://blog.ezyang.com/2011/06/the-cryptography-of-bitcoin/    

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Who made bitcoin?

Jim,

Thanks for your replies, I have learned more about bitcoin, and I have learned a lot from your posts over the years. You can still count me among the naysayers though. My major issues are:

1. Who made it up?

2. Who got the first millions of bit coin?

3. Did they have to "mine" it, or did they just give a bunch to themselves and their buddies

4. Can the originators create bitcoin at will? I know they say they can't, but it seems so opaque, how can you be sure?

5. Is the free market buying it because it is going up in value? I would imagine it would be pretty easy to manipulate the bitcoin market. Get bit coin bid up, and let greed take over. Good old pump and dump.

To each his own, but for me it's still no way in HELL. 

Phil

   

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Correction

I need to respond in order to correct a glaring false statement in your post.

Phil Williams wrote:

In 2011 it crashed to .01 cent.

This is simply not true.  In 2011, BitCoins peaked at a value of $28.919 per BC and then dropped to a minimum value of $2.04999 per BC.  While this is a HUGE drop from the previous peak, your exaggeration was off by over 20,000%!  This is assuming you meant $0.01 and not $0.0001 which is 1/100 of one cent (what you actually wrote).  If we are going to have an honest discussion about BitCoins, let's try to stick to the facts.
 
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Bitcoin Flash Crash

According to the chart from Chris Duane and the article below it did crash to $.01. Sorry about writing .01 cents not $.01, my mistake, but seriously who cares. Not trying to deceive or make something up.

http://www.neowin.net/news/bitcoin-market-crashes---drops-below-001-per-bitcoin-due-to-hack

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Spaceman...

The posters here are parroting what they heard from the 1st Chris Duane video... he embedded some kind of purported video of a "flashcrash" in progress.. which has a narrator reading off the "ticks" down to near zero. I don't know where it came from.. and in my opinion this is just one of several areas where Chris resorted to hyperbole to try to make his case against Bitcoin. 

The main reason for Bitcoins initial fall from the $30 mark was the major loss due to hacking of a digital wallet, which went viral quickly - note the date here and the timeframe of the drop ;    http://www.welivesecurity.com/2011/06/16/bitcoin-wallet-hacked-heisted-5...

The final drop from about $3 down to just over $2, on Nov. 14, 2011, was on a volume peak that is yet to be equalled, even with the arguably deeper and more liquid markets (more Bitcoin in circulation) of today.   

 

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Bitcoin is another fiat currency

Conjured up out of thin air? I think so. Can more bitcoin alogorythms be created? Definately and an infinite amount. DOes coin mining have any value?  No!  Who controls bitcoin? Unknown....Things that make you go Hmmmm! Are the transactions in bitcoin completely private? If you believe that one I have a couple of bridges for sale. TPTB will have full view/records of anything ever done on a digital network period! Can anyone gaurantee that the inventor(s) does not have a key that can fully decypher bitcoin alogorythyms? Hey isn't it funny that we have a new currency that may be able to compete with TPTB fiat franchise and they are not doing anything? I would have expected at least a couple of drone strikes. I am also seeing a lot of Puff pieces in the media about this exciting new digital form of money. Can this be the "One World Currency" they are pushing for?

 

Just saying......

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Brother John response to Chris Duane video

Goldrunner said,

Conjured up out of thin air? I think so. Can more bitcoin alogorythms be created? Definately and an infinite amount. DOes coin mining have any value?  No!  Who controls bitcoin? Unknown....Things that make you go Hmmmm! Are the transactions in bitcoin completely private? If you believe that one I have a couple of bridges for sale. TPTB will have full view/records of anything ever done on a digital network period! Can anyone gaurantee that the inventor(s) does not have a key that can fully decypher bitcoin alogorythyms? Hey isn't it funny that we have a new currency that may be able to compete with TPTB fiat franchise and they are not doing anything? I would have expected at least a couple of drone strikes. I am also seeing a lot of Puff pieces in the media about this exciting new digital form of money. Can this be the "One World Currency" they are pushing for?

1)  Yes, Bitcoin is completely intangible and conjured out of thin air..  Nobody argues that it is not.  So is Lunux (see above).  So is today's US dollar for the most part, save for the small percentage that is printed on paper.  The value of Bitcoin is imparted by the marketplace.. and that value has been going up.   You are welcome to believe that the marketplace is dumb and you are smart.  I do not believe though that there is a case for saying that the Bitcoin market is manipulated.. certainly part of the population of traders are there to speculate, as the recent, post Duane video volatility attests to.      

2)  Bitcoin can be made much more anonomous than it already is if you use a so-called VPN service like cryptohippie to cover your tracks... most of us should probably be doing this anyway;

  https://secure.cryptohippie.com/

3)  No matter what you say, Bitcoin is not fiat.  You need to look up the meaning of "fiat".  

http://en.wikipedia.org/wiki/Fiat_money

"Fiat money is money that derives its value from government regulation or law".  Using our words in a precise way, it is correct to say that Bitcoin is anti-fiat money.. it is used by the free will of participants.  

4)  Nothing is perfect.  In a dystopian future, the Gov't could outlaw Gold and leave Bitcoin alone.. they could outlaw Bitcoin and leave Gold alone... who the heck knows.  I certainly don't.  Hedge your bets. 

 

!

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I care
Phil Williams wrote:

...but seriously who cares. Not trying to deceive or make something up.

My apologies for the accusation of deception.  You made a claim that was contrary to the data available from Mt. Gox.  Without a citation, you're stating that you own that information that was in clear contradiction to what my source proved.

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i had the same questions - sharing what I found

I did a ton of reading on bitcoin last night and hope I can shed a little light (or at least my $0.02) on some of the questions posed. Although I'm a CS major I'm not a math or cryptography specialist so some of this spins my head but there's a lot of very solid math supporting bitcoin's claims. Twenty four hours ago I had the exact same questions as Phil and goldrunner1 and I hope I can be a little helpful. And even more so, I hope I'm accurate in my understanding:
PS. I love Jim H's thoughts on this and mean this post to simply fill in some of the questions I didn't see answered yet.

Phil asked:

 

1. Who made it up? Yeah, that's sketchy. Supposedly some anonymous guy who moved on to other things. I know some programmers that would love to invent something like this then not care to babysit it afterward and move on. Who knows what the case is here. But even if we had a name and identity, what would it prove? How do we know it's even accurate.

2. Who got the first millions of bit coin? No doubt the initial wave of programmers did. They were the first miners and had to set the stage with the first currency to get things flowing. And from what I gather of the algorithm it's harder and harder to mine coins as you go on (like searching for prime numbers) so reversing that logic, the first X amount were probably relatively easy. Maybe my understanding is wrong though.

3. Did they have to "mine" it, or did they just give a bunch to themselves and their buddies. The coins are based on hashes that take serious computing time to generate. Every one would have to be mined. Handed out / fake hashes wouldn't pass the sniff test on the bitcoin network.

4. Can the originators create bitcoin at will? I know they say they can't, but it seems so opaque, how can you be sure? I think the value here is that the project is open source so legitimate backdoors would be noticed.

5. Is the free market buying it because it is going up in value? I would imagine it would be pretty easy to manipulate the bitcoin market. Get bit coin bid up, and let greed take over. Good old pump and dump. No doubt this is a concern. I think at this point everyone is expecting volatility and everyone jumping in at this stage is doing so as a speculator. I'm no expert in such matters but this doesn't seem like a good "store of wealth" idea until it has some legs under it. And there's always the possibility the government starts regulating it somehow, either making crypto-currency illegal or forcing you to declare it like an FBAR.

Goldrunner1 asked:

Can more bitcoin alogorythms be created? If you mean more crypto-currency spin-offs LIKE bitcoin, absolutely. If you mean some way of side-stepping the mining process or running your own version on the side to trying to pass them off as bitcoins, the algorithm wouldn't allow it and the open source nature of the program would prove to like minded programmers that it's true.

DOes coin mining have any value? The time, computing power, and electricity needed to generate the coins theoretically is not worth the coin value (from what I've read). But all 21 million coins do need to be generated eventually and as scarcity drives up value they would likely pay off.

Who controls bitcoin? The bitcoin system itself runs without control much the way PGP does (PGP is a peer-peer encryption algorithm and has a lot in common with bitcoin). Bitcoin exchanges, "wallets", etc on the other hand are run by companies who do have an interest in profit and reporting to the government. Any time there's a break-in, hack, theft, etc it is with these points where bitcoin interfaces with users and fiat currency.

Are the transactions in bitcoin completely private? Same gist as above. The bitcoin system itself absolutely is private. But it's when you need to interface with the fiat world that privacy breaks down. To buy bitcoins one needs to pay for them somehow and to cash them out one likely needs to transform them to fiat (in most legit cases requiring bank account info). The privacy comes in later once the system has legs and you can buy realworld goods and services without transferring them to fiat.

Can anyone gaurantee that the inventor(s) does not have a key that can fully decypher bitcoin alogorythyms? This is my favorite question from a mathematical point of view. Ideally the open source nature would allow talented mathematicians to sniff this out. I'm talking like WWII code-breaker style mathematicians and guys like that love a good problem to solve. Being open source, the community *should* have poked a hole in it by now. What if they aren't good enough to but the CIA has? Would the CIA blow the whistle. I'm guessing no. I love the conspiracy angle but I have to put my faith in open source on this one.

re: "One World Currency"...  I admit after finishing reading "The Creature from Jekyll Island" recently my "New World Order" spidey sense went off too. The plus here is the supposed privacy. The One World Currency would necessarily have to be trackable to you every step of the way to prevent "terrorism" or whatever. Bitcoin doesn't match that scenario and that's why for sure the govt is investigating it heavily, worried it'll be used for illegal activities. IMHO, this is why you back it. If you are an honest yet privacy minded person, bitcoin seems to fit the bill.

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few more thoughts..

a few things I forgot...
I do intend to purchase some just as a trial (like literally 1 or 2) but haven't done so yet. I suppose I'm waiting for the price to come down again. Though I do have wallets setup just in case.

I completely agree that better code-cracking supercomputers and/or quantum computing could totally break the algorithms and that would prove pretty bad. I don't know what they'd do in that case except put out a bitcoin2.0 based on a better cryptographic hash and somehow try to safely convert folks old coins to new. And if they increase the hash, does that mean more than 21M coins? No idea.

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Intangible to Tangible

Everything we talk about on this site is about moving your intangible paper assets to tangible assets. Land, livestock, gold, silver, etc...why would anyone want to take their risky fiat money and turn it into digital money.

At least if the dollar crashes you can use the paper to start a fire and stay warm for a few minutes!wink

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Honest money system

Jim your right by definition bitcoin is not a fiat currency but it has a lot of undesirable qualities which make it no better than a fiat currency. In hind sight I should have stated bitcoin is not much of an improvement if any improvement at all over a purely fiat currency system. I did not state bitcoin is manipilated but rather inferred that it can easily be manipulated and provided some possible weaknesses. Just so you know I think the concept of bitcoin is brilliant and one day in a utopian world when we have it all figured out it might be a good thing. But with our current geopolitical climate and with all the malfeance we've been experiencing in finance/banking/currencies there is no way this concept could lead to anything that would benifit us.

Another question I should have thown out there is or can bitcoin ever represent an honest money system. And I would argue certainly not for the very reason that it can be gamed, manipulated and conjured at least as easily as our current fiat system. What is even more scary is this system can be easily scaled up to a global system. From what I've read and been seeing this fits the criteria for where they want to heard us. In a world with High Frequency Trading where they have systems that can front run your stock trades in nano seconds how hard would it be to extrapolate what they could do with bitcoin. Once the bitcoin system proves itself and gains acceptance governments/financial oligarchs can easily forbid the confidential peer to peer trades with a few simple laws. Servers could be programmed to watch for and recognize bitcoin trades. Every transaction becomes transparent to TPTB and traceable. There are no coincidences. So would it be in my (our) best interest to support such a system? Again I would have to answer no.

 

 

 

 

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Spaceman Kermit wrote: Phil
Spaceman Kermit wrote:
Phil Williams wrote:

...but seriously who cares. Not trying to deceive or make something up.

My apologies for the accusation of deception.  You made a claim that was contrary to the data available from Mt. Gox.  Without a citation, you're stating that you own that information that was in clear contradiction to what my source proved.

I was quoting the info in the video that LR posted when he started the thread. I assumed everyone had seen the video, and would know what I was referring to. I should have been more clear. My comment about who cares was my mistake on the .01 cent versus 1 cent. Again, I figured most people who saw the video got what I was referring to, and could see the error I made. Further, would anyone really care if they bought a $48 stock and it went one cent versus a tenth of a cent. Your wiped out either way.

 

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Snafui

Thanks for the info. I appreciate it. Your explanation ironed out a lot of my questions. It's still too opaque for me, and I still smell BS. For the PP members that are investing in Bit Coin, I am hoping for the best for you. I will not be rushing to catch this train. I'm sure Kunstler would have a field day with this, given his ranting on the technological fantasy world many people reside in. He should of included Bit Coin in his latest book "Too Much Magic"

By the way, Creature From Jeckyl Island is one of my favorite books. How long did that book take you to read? It must be 1000 pages or so.

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Creature

Oh man, Creature definitely took a few weeks. I had to renew the loan from the library so it was probably about a month. I loved the history but the hair on the back of my neck stands up when conspiracy theories get thrown around. Conspiracies are fun to read about and make you think and all, but I found this book a little pushy in that respect. I just shrugged it off and tried to stick to the facts. I listened to a Dan Carlin podcast at some point that made a great point about conspiracy theories. I can't recall anything more than the gist of it which was that in hind site it's easy to construct a conspiracy but usually what it amounts to is simple cultural motivations in motion within a bunch of individuals. Again that's not what Dan said but that's what I gleaned from it and I think it makes a ton of sense.

Anyway, great thread on bitcoin. This is definitely a complex issue and definitely worth getting a lot of varied input on.

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goes211
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Joined: Aug 18 2008
Posts: 1114
Bitcoin looks like a ponzi to me...
Jim H wrote:

There are only three forms of money in the world today that have scarcity integrity:  Gold, Silver, and Bitcoin.  Please correct me if you think I am wrong on this and we can discuss further

Jim,

I really don't get your facination with bitcoins.  To even put them in the same category as gold and silver seems so completely silly, it is nearly comical.  

What are the properties of money?

1) Medium of exchange - Bitcoins are not widely accepted but in theory could work for this.

2) Unit of account - Bitcoins can do this

3) Store of value - EPIC FAIL!  Just today the value of a bitcoin varied by nearly 20%.  How can you make long term economic calculations using bitcoin?  Answer is you can't!

4) Measure of value - Bitcoins ( or any money ) can do this or it would not be considered money

I could argue that paypal is a far more sophisticated money system than bitcoins will ever be.

Jim H wrote:

Like others, Trace Mayer of http://www.runtogold.com/ being one, I came to my understanding of Bitcoin using a lens honed on Gold and Silver.  If you understand Gold and Silver vs. unbacked fiat money, then I think Bitcoin is a revelation of sorts.  

1)  At present it is a completely free market.  Think about this - there are no derivatives... no futures... no paper representations.. no fractional reserve nature.. no ETF's.  There is only Bitcoins.  There are no bankers playing in the game (or if they are.. they are buying up Bitcoins.. which furthers the deflation for now).

Yes but as other pointed out, where did all the existing bitcoins come from?  Somebody ( early adopters ) got them and of course they would love to see the value of bitcoins increase.  In this respect bitcoins do seem much like a Ponzi scheme where early enterants can do quite well as long as they can find the greater fool.

I also don't get your argument about mining them requiring CPU power, electricity, ... as if that is a good thing?  Do you believe in the labor theory of value?  To me this reninds me of Keynes arguing to pay one group of people to dig holes and fill them with money and let others dig to get it back.

Jim H wrote:

2)  It is free market.  Think about this;  I have seen commentators call Bitcoin "fiat"... but it is absolutely not fiat currency.  It is completely intangible like fiat, yes.. but fiat is forced on you by your government.. you have to pay you taxes in it, and are thus forced to earn it, transact in it to some extent. etc.  Nobody has to use Bitcoin.. free choice, and yet the number of transactions per day, the total market capitalization, continues to climb.  Some guys are working Bitcoin atms (http://www.americanbanker.com/bankthink/tabletop-bitcoin-atm-is-huge-for...).. and so on, and so on.  

I would argue that I am attracted to Bitcoin through logic... what I would like to hear from the naysayers is why the freemarket is getting it so wrong?  I have explained why I think they are right, and why Bitcoin is attractive.         

Jim,

In your later link you point to wikipedia for the definition of fiat money.  Right there it says the term  fiat money has been defined variously as: ... "money without intrinsic value" which certainly bitcoins is.

All that being said, there are certainly things to like about bitcoins.  Monetary anonymity is getting harder  to find and at least in that respect, bitcoins certainly have their use.  I can imagine that as long as the ability to move other forms of money in and out of bitcoins exists, bitcoins will have their uses but it is very hard to see how it grows to be anything more than a small experiment.

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Jim H
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Goes211

Thank you for posting your thoughts.  I don't put Bitcoins in the same category as Gold and Silver.. I really don't.  Earlier I said that my advice would be no more than 1% of investable assets go into Bitcoin.  Bitcoin is the tiny Gold miner that may become a 100 bagger in investment terms.   I am perfectly comfortable with 50% in Gold/Silver and PHYS/PSLV.  Not the same category.  What I am trying to explain is why I think Bitcoin is growing in demand..and it is..  why it has been so successful thus far.  I believe the reason is scarcity integrity.

If you Google the term "scarcity integrity", one of your top hits will be a reference in a book called, "The monetary elite vs. Gold's honest discipline".  I pulled this book off the store shelf soon after it was published in 2005 as a summer vacation read... and the author (now deceased) Vincent LoCascio, basically foretold the entire financial crisis while explaining the benefits of Gold.  Without Vincent, I never would have had the balls to buy Gold when it was just breaking $1000.  I attribute this term to Vincent... and I think it is one of the most important terms a student of money needs to understand.  If you have group of men with their hands on the printing press.. history says that that money will eventually be printed into obscurity.  The best money therefore is that which cannot be printed, and is subject to limits

Please, I will ask again, name me one other form of money besides PM's that have a similar scarcity integrity?  You can't, other than Bitcoin.  Now you can argue that Bitcoin's cryptography might be broken someday, or that the freemarket will eventually reject, and others... but still.. there will only be so many Bitcoins ever in existence.  

Today, the total market cap of all Bitcoins is $456 Million.  Today, a little over 500K Bitcoins were transacted... for a total value transacted equal to $18 Million.  I do not call that a small experiment.  It is a phenomenon.  It is though still a small cap stock if you think about it... $456 M.  So you think that a small cap stock can't be volatile, especially one like Bitcoin (I know it's not a stock, but the analogy is reasonable) that has a bit of a cult following at present?  I reject your argument that this is somehow odd.. one of the Gold miners that I have owned in the recent past, TGD, with a market cap of $362M, was UP over 20% today.  With bigger market caps, and more liquidity, will come less volatility.. in any market. 

As for the CPU power... what is taking place is not just wasted computing.. the power is going into the creation of new crytographic keys.  Your mining computer becomes part of the broader Bitcoin network that maintains the "blockchain"... the evolving digital DNA that is Bitcoin.  

My prediction is that Bitcoin keeps growing in popularity.. keeps getting easier to use  (from two days ago:  http://bitcoinmagazine.com/bitpay-announces-integration-with-fulfillment... ) and keeps gaining in buying power vs. the US dollar.  Of course, I could be wrong    wink             

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Grover
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Posts: 799
Amazon is the next contestant

Jim,

I posted this on "Time to choose" http://www.peakprosperity.com/comment/147510#comment-147510 and never got an answer.

Grover wrote:

Perhaps the current version of Bitcoin is secure and limited. What is to prevent the folks who were smart enough to concoct this scheme from making another rendition(s)? If enough competitors to Bitcoin enter the marketplace, doesn't that effectively dilute Bitcoin's value as well?

All money relies on the acceptance of the receiver. Part of the internal calculation of value is the expectation that the money will have purchasing power in the future. I see lots of potential and unknowable problems with Bitcoin. Many of these problems have been identified by others on various threads.

You ride to the defense of Bitcoin about as fervently as you defend precious metals. For short term exchanges as a competitor to FRNs, I can see the logic. Bitcoins may even appreciate faster than PMs in the short term - good for them. As long as the status quo remains, it may be a profitable cause to defend.

What happens the day after?

Grover

The most sincere form of flattery is imitation:

http://www.engadget.com/2013/02/05/amazon-coins/

This link shows that Amazon.com is getting some of the action with their own version. It isn't exactly the same, but it is close enough to give me cause for concern. Bitcoin may indeed be everything you hope it to be, but when enough look-alikes bring their own rendition, it is the same as inflation.

Grover

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goes211
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Posts: 1114
Another bitcoin exchange hacked....

Hackers Pull Off $12,000 Bitcoin Heist

Events of Friday - BitInstant Back Online

AuthorBitInstant Posted on DateMonday, March 4, 2013 at 11:03AM
Afternoon folks!

As many of you know, BitInstant was down starting Thursday evening and was turned back on today (Monday) with a limited relaunch.
None of your personal or transactional information has been leaked. We keep all that data offline to protect everyones privacy.
Over the weekend the BitInstant team has been hard at work securing our system from a sophisticated attack on Thursday evening. Overall, due to major choke points and redundancies in our system, the hacker was only able to walk away with $12,480 USD in BTC, and send them in 3 installments of 333 BTC to bitcoin addresses.

15WeVhV1rSUVGqBWuzi4ogV3BGSwAw8fCX
12Sfsc4XVBfSkcz9CayqfZdhYuntbjtjXp
1Fimj1BzMBessvPw2RKeqvgPg7VLgJCQi
Background:
We've long been targeted by someone using social engineering tactics to attempt to compromise our various accounts at exchanges, with our hosting provider Amazon AWS and even on my personal accounts, mostly without success. At no time have we ever had a single system or account compromised through technical means, or indeed at all before yesterday. For the sake of convenience I'll refer to this mystery person as simply "the attacker". This individual was only successful due to the failure of the staff at our domain registrar as I will explain below, we intend to move to a more secure registrar ASAP.
What happened:
The attacker contacted our domain registrar at Site5 posing as me and using a very similar email address as mine, they did so by proxying through a network owned by a haulage company in the UK whom I suspect are innocent victims the same as ourselves. Armed with knowledge of my place of birth and mother's maiden name alone (both facts easy to locate on the public record) they convinced Site5 staff to add their email address to the account and make it the primary login (this prevented us from deleting it from the account). We immediately realized what was going on, and logged in to change the information back. After changing this info and locking the attacker out, overnight he was able to revert my changes and point our website somewhere else. Site5 is denying any damages, but we suspect this was partly their fault.
After gaining access, they redirected DNS by pointing the nameservers to hetzner.de in germany, they used hetzner's nameservers to redirect traffic to a hosting provider in ukraine. By doing this, he locked out both my login and Gareths's login and they used this to hijack our emails and reset the login for one exchange (VirWox), enabling them to gain access and steal $12,480 USD worth of BTC. No other exchanges were affected due to either Mult Factor Authentication, OTP, Yubikey's and auto lockdowns.
The hacker was also able to pull a few hours of internal company emails. However due to mandatory PGP encrytion between members of our company and tools like Cryptocat, sensitive information was not breached.
Information about the attacker:
Based on their general MO, the attacker is not highly technically skilled but is sneaky enough to cover their tracks. Some of the hosting providers they directed our domain at may have billing information, but such billing information is likely a stolen card. Geographically, I would personally suspect them to be Russian, based on the choice of providers and based on past fruitless attempts that clearly were of Russian origin. They seem focused on me in particular and have tried many times to gain access to my accounts (both personal and business)
Other parties involved (the attacker used these parties in some way):
meta.ua - email provider
hetzner.de - nameservers for the first attempt were hosted here
ukraine.com.ua - hosting provider involved in the first hijack
smtp.parkside.at - mail provider which was involved in the email hijack
Circle Express Ltd - their network was used as a proxy, the actual IP
is registered to BT PLC but is used by Circle Express on a business
line of some variety
So, we wanted to provide this update in order to continue our practice of transparency, but also as a lesson to the community - you must be ever-vigilant in making security your top priority. We outline many more of our security protocals here: bitinstant.com/security
Thanks for your patience, support, and trust during these times.
- The Team @ BitInstant. 

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Jim H
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Posts: 2379
Grover and Goes211

Grover.. I am sorry to have dropped that previous thread .. blame it on ADD   : )

My view on competitors to Bitcoin is this;  bring it on.  Bitcoin is an animal of the freemarket.  My gut on this is that once we have a form like Bitcoin gaining traction, or critical mass, or whatever you want to call it.. that the freemarket will probably reject look alikes.  I would point you back to my Linux analogy... once Linux gained a foothold.. there was not a second Linux-like alternate operating system nipping at its heels.  There was only Linux vs. Windows... and this was good enough for the free market.  My opinion is that the market has its own collective intelligence, and that while there certainly may be room for other alternative currencies that bring with them advantages beyond Bitcoin that we are not even imagining now... I don't see the market accepting or supporting Bitcoin clones.  Just my opinion.. time will tell.  There sure is room for quite a few different fiat currencies in the world, right?  There will ultimately be room for other alternate currencies .. though I suggest that some of these will be digital forms of Gold and Silver;

  https://www.igolder.com/about/

I fail to see how PayPal, which is simply another way to transact in dollars.. is a competitor to Bitcoin.  Apples vs Oranges.

Again.. .Bitcoin is a product of the freeware universe.. and I plan to delve into the nature of this universe in future posts to help folks understand how Bitcoin came to be (as opposed to the title of this thread, which supposes that Bitcoin was designed purposefully as a ponzi scheme.. a characterization that I reject completely).  My suggestion is that the first movers in Bitcoin had no idea how successful it would eventually become.. and even if they did.. it takes nothing away from the value of Bitcoin today.      
With regard to Amazon Kindle coin..  this is an arcade token of sorts.  I suppose it could attain some free market value as currency, like cigarettes do in a prison.. but it is fundamentally different than Bitcoin.  It is meant to work within the Amazon Kindle app ecosystem, and not outside of it.  Bitcoin is not tied to any ecosystem.. and it is promoted by no central commercial interest. 

Grover... you failed to put the alt. currency you have brought up, Amazon coins, to the test I have proposed;  how are they created?  What is the nature of their scarcity integrity? I did a little due diligence and these arcade coins appear to me to be infinitely printable by their maker, Amazon;  https://developer.amazon.com/help/faq.html#AmazonCoins

Which is no surprise to me.  This is exactly what I found when I investigated the nature of creation of alternative local currencies like Ithaca Hours ( I think in the old thread you mention) ..  nowhere in the FAQ's did they state whether there was any limit to the number of Hours that could be printed, or what that limiting mechanism would be.  This is the genius of Bitcoin... this is why it is different.  I will keep pounding away on this idea as long as I have to;  The reason Bitcoin has succeeded thus far is because it is unique in having transparent and rock solid scarcity integrity, literally built in to its digital DNA.  This scarcity integrity is very similar in nature to that of Gold and Silver.. thus the creation of Bitcoins is termed, "mining".  

Goes211...   Nothing is perfect.. I give you that.  Major corporations and governments themselves get hacked.. and we don't use this fact to question their viability, right?  Gold and Silver gets stolen out of houses all the time, right?  My local coin guy/buy Gold guy was out of business one day recently with no notice.. .I later learned that he had been caught in a sting operation whereby sellers of Gold and Silver (undercover police) made it clear that he was being offered stolen items... still he bought them at whatever high profit margin lowball price he usually offered.  Bitcoins can and will be stolen.. the real question is whether Bitcoin itself.. the cyrpto software DNA, is realiable.  So far, so good in that respect.

Goes.. I don't have any stake in Bitcoin.. I own none and am not talking my book.  I am excited about Bitcoin more because I view it as a pure, freemarket representation of the core reasons I use to justify holding Gold and Silver.. and that is scarcity integrity.  As I have stated before... if Gold and Silver lived in a completely unmanipulated supply vs demand world.. with no paper derivatives, no unallocated accounts, no leasing (and thereby double counting or rehypothecating), no banks, no ETF's, no shortable instruments.. no central bank holdings.. I think that they would act like Bitcoin is acting today.  The price would be going up, and up, and up vs. dollars.

In this sense, one could argue that Bitcoin is one of the purest signals available relating to the freemarket's disgust with infinitely printable fiat currencies.  I don't think this is comical.  I think it's really cool.       

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Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 799
Jim, Thanks for the followup.

Jim,

Thanks for the followup. I agree that I didn't put Amazon coins to the rigorous test. I was just trying to show that others have entered the market. As you have noted, bitcoins are self limiting. Since the market isn't mature yet, competitors (e.g. Amazon or Google) who have market share in other venues could overwhelm bitcoin's acceptance. Imagine people saying that "bitcoins are like google goins" or something like that. Poof! There goes the acceptance of bitcoin - except in the underworld where people still use them. Without widespread acceptance, their price will plummet.

Your example with Linux doesn't quite meet the same apples to apples comparison as you think. There isn't any profitable way to market a competitor to Linux. Does Linux have any market value? Bitcoin is approaching $1/2 trillion. Even an exceedingly small percentage of that would be an attractive incentive for a programmer.

You write with religious fervor about these. Are you trying to convince us or yourself?

Grover

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Jim H
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Joined: Jun 8 2009
Posts: 2379
Linux and Bitcoin

Thanks Grover,

Linux and Bitcoin are two different software platforms that are both children of the open source freeware movement.  Bitcoin is certainly different than Linux in that its adoption is directly measurable via a view of the total number of Bitcoins in existence x price (in dollars, yen, whatever) per Bitcoin;

http://bitcoincharts.com/bitcoin/

Why couldn't there be a profitable competitor to Linux?  What economic law are you referencing?  Linux is huge.. just one company that formed around the Linux ecosystem, Redhat, has a market cap north of $10B.  The value of Linux is reflected in the value of the companies the ecosystem has spawned.  In time, the same will happen with Bitcoin.. it is already happening now..     So, your argument does not actually make sense to me.. If there is truly profit to be made competing with Bitcoin.. then that goes in spades for Linux.  Maybe I don't understand your point.  You can use derogative terms like underworld, etc.. but the fact is Bitcoin continues to grow in value, more companies are forming around the ecosystem, and more vendors are accepting it everyday.   

The core of these movements are ideas... I suggest that the ideas (for Linux and Bitcoin) were released by their inventors into the world without profit motive, or any expectation of future wealth.  I have not finished thinking about this point yet.. but my gut tells me that you can't do the same thing in the world of profits and corporations and government control.. you can't excite the idealistic techie crowd to accept and support these children in their earliest youth if they have the taint of corporate or governmental control.  Linux and Bitcoin are fundamentally anti-government and anti-corporate, even if there is now a $10B company formed around packaging and supporting Linux for use by other corporate clients.  Some hippies grow up and become the venture capitalists...   : )             

Bitcoin is still small in total value (it's 1/2 Billion dollars.. not 1/2 Trillion) compared to the Linux ecosystem total value.  I can't prove to you that Bitcoin clones won't gain a foothold...  but I predict that they won't and have explained why. 

     

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goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Do you really have no dog in this fight?
Jim H wrote:

The value of Linux is reflected in the value of the companies the ecosystem has spawned.  In time, the same will happen with Bitcoin.. it is already happening now..     

That does not sound like someone that is has any questions about bitcoins future.  It is your certainty with statements like this that make me question if you could have any ulterior motive.  It just does not sound like something that would be said by someone that has never owned a bitcoin.  Jim, please realize that I am not doubting you personally.  You have been a valuable member on this site for a long time and I usually find a lot of agreement with what you are saying but, I do think you are far too certain about the future with most of your posts about money ( Bitcoins, PM's, USD,... ).

I understand your comparison with Bitcoins and Linux but I am not so sure that they are really comparable.  Linux arose out of the desire to get access to UNIX on commodity hardware w/o the expensive licensing.  Everyone knows who the author is and what his motives are.  As the project gained steam more people joined and as more people used Linux, the better and more functional it became.  At least in that respect, an operating system is very much like a monetary system.  The more people that use it and write software for it, the more valuable it becomes.

I find bitcoins to be a little different for many reasons.  Before I get into them I want to admit I am not remotely an expert in bitcoins or cryptography or how exactly they work.  I just have a high level understanding of their mechanics.  So you understand I am not completely clueless, I do have an undergraduate degree in Computer Science and have been working on financial technology for the past 20 years.

Here are a few of my issues with bitcoin.  The author is unknown and quite possibly never existed as a single person and therefore his(their) motivations are unknown.  First movers in that market were able to aquire massive positions with little cost and have an unfair advantage.  Public key encryption is very good but not infallible.  Even if the keys prove to be uncrackable, it appears that weaknesses at the exchange or local wallet can still wipeout your investment.  Many of the perceived advantages of bitcoins ( privacy, untraceablity, portability ) can quickly turn into liabilities if they get stolen.

Now if Linux was cryptographic code writen by the NSA, I might see more similarities... smiley

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