Buying bitcoins

Amberman wrote: »

The bitcoin markets are already regulated. Most of the big ones like mt.gox already comply with US anti-money laundering regulations.

Its still unknown how governments will react to it.
Its very much not 'inside the fold'.
There are some basic engagements with it - recent FinCEN guidance - but its all very far from mainstream or approved.

Amberman wrote: »

It really isnt. There isn't a head on the beast which you can chop off. Its a distributed peer to peer network.

http://en.wikipedia.org/wiki/Peer-to-peer

You are basically saying 'its a peer-to-peer network, therefor it can survive an attack from a nation state'.
But that argument is thin.

There's loads of vectors you can use to attack a peer-to-peer network.

Plus, Bitcoin is not like Bittorrent, where you and I and our friends can all run a Bitcoin network in Dublin, and even if we are cut off from the rest of the Internet, our network will still work. Rather, all clients need to be connected to the main network, so that they can get the authoritative blockchain.

Furthermore, if Alice is downloading songs from Bob, it'll become pretty clear to Alice if Bob is actually a malicious node; and there's no real cost associated with that - it just means that Alice has wasted some time. But if Alice, on the other hand, is connected to a set of malicious Bitcoin cancer nodes, that is an entirely different story.

And thats just one attack. What about computational attacks, or DOS, or attacks that stop clients boot strapping etc.

If someone like the USA is willing to spend national level resources on suppressing Bitcoin, perhaps because they perceive it as primarily facilitating illegal trade (and there was some very negative initial reaction form lawmakers in that direction), or funding terrorism, or just a threat to their currency - and nation states will be likely to respond to serious threats to their currency - then you're not going to get very far just saying 'its peer-to-peer'.

I'm not sure of what properties Bitcoin has that makes it particularly resilient to proper suppression measures.

In the presense of such measures, even if the network still functions in some form, its not going to be usable for average-joe at all, in which case, as this is the investment forum, if it is crippled in that way, its not really going to be the big internet currency thats worth $100k per coin, right?

Basically, you guys were very hard on Cavehill, who said there was downside here - but have you really thought about this?

srsly78 wrote: »

The part where you need to compromise over 50% of the network is what makes it resilient. Even a nation state cannot easily do this.

Network is currently at 47,597.74 GH/s [0]

Avalon ASIC, when it ships, will do 60,000 MH/s and costs $1300 [1]

You need 50,000 GH/s to take half the network.

Thats 50,000,000 MH/s.
Thats about 900 Avalon chips.

Thats about $1.2M, bought commercially at retail.

A nation state could have such a chip in Fab already. Wouldn't even be a rounding error in the NSA computational budget, and those guys do large computational projects in secret all the time.

Thats if they even bother to attack it computationally, and don't just send people around to whoever is controlling the large mining pools.


And thats only one class of attack, possibly the least effective, in its crudest possible form.

Maybe I'm missing something? I did all the calculations right there, maybe I made an error?


[0] https://blockchain.info/stats
[1] http://www.bitcoinx.com/bitcoin-mining-hardware/

srsly78 wrote: »

The rest of the world will also have ASICs, so network capacity will also go up.

So, you are saying its vulnerable now, but that you think the vulnerability to computational attack will decrease in future?

Because, if a proper computational pissing match happens between the governments and the enthusiasts, such that the governments take control of the chip fabs (very easy, probably all basically under state control already; will certainly have working relationships with national security apparatus (and by 'take control' I just mean 'require that bitcoin asics are only supplied to government')), then what?

The enthusiasts will make their own chip fabs?

Thats actually not that easy to do?

srsly78 wrote: »

Oh... it's 50% of the network... not 50% of the mining capacity. The attacker has to make their own blockchain the official one.

I don't understand your post just there, I'm afraid.

The 51% computational attack refers to a party that accumulates 51% of the hashing capability, as I understand it.
Not necessarily 51% of the nodes in the bitcoin network.

Because this then allows them always decide what gets into the longest chain, and the rest of Bitcoin accepts the longest chain as authoritative.

I think the values I quoted before are in roughly the right ballpark - are you saying something different?

fergalr wrote: »

I don't understand your post just there, I'm afraid.

The 51% computational attack refers to a party that accumulates 51% of the hashing capability, as I understand it.
Not necessarily 51% of the nodes in the bitcoin network.

Because this then allows them always decide what gets into the longest chain, and the rest of Bitcoin accepts the longest chain as authoritative.

I think the values I quoted before are in roughly the right ballpark - are you saying something different?

It's explained here: https://en.bitcoin.it/wiki/Weaknesses#Security_Vulnerabilities_and_bugs

Having over 50% gives them control over new blocks, but most blocks have been mined already. edit: Ok or not... now I am confused as well.

srsly78 wrote: »

It's explained here: https://en.bitcoin.it/wiki/Weaknesses#Security_Vulnerabilities_and_bugs

Having over 50% gives them control over new blocks, but most blocks have been mined already. edit: Ok or not... now I am confused as well.

Having 51% allows you to basically double spend.

My understanding is that in that scenario, its game over.

fergalr wrote: »

Having 51% allows you to basically double spend.

My understanding is that in that scenario, its game over.

https://en.bitcoin.it/wiki/Double-spending#51.25_attack

Apparently the honest network has an advantage over the attacker, so outcomputing the entire rest of the world just got harder.

From the link above: "however, waiting for confirmations does increase the aggregate resource cost of performing the attack, which could make it unprofitable or delay it long enough for the circumstances to change or slower-acting synchronization methods to kick in"

I think your analysis is simplistic, out computing the entire world is not easy. Maybe some nation states would choose to defend the network

Great posts fergalr, I agree with pretty much everything you wrote. Bitcoin by its promise attracts a serious tin foil hat element with a vague technical understanding, who view it as 100% untouchable from governments, when it's not, as you showed.

But will a government do something? Not a hope IMO. The anarchists love to think they're shitting it in Washington, I say they barely care about Bitcoin.

Amberman wrote: »

Fergal, just read your posts. While I don't understand what the hell you are talking about, it seems there is a technical weakness in the currency which governments could use to shut it down. I'll give you that point, though I don't understand it.

Its quite a complicated and subtle system; it took me a while to get my head into it, and I still don't understand all of it.

I'm not sure I'd say I'm talking about a 'technical weakness', as such.

Its more a known consequence of the design decisions of Bitcoin.
The designers knew that someone with enough computational resources can take over the system.

This is considered in the original Nakamoto paper on Bitcoin, where the designers say that they hope that anyone with enough computational power to take over the network would rather just use that power to mine bitcoins, rather than destroy the network.

Which is probably a fair assumption for most private entities, but maybe not for a government willing to spend a lot of resources to destroy the system, if that happened.


Overall, Bitcoin is probably a lot more resilient to attack than most other electronic currency systems you could think of. Most traditional electronic currency systems revolved around the idea of a centralised place which would store all the account balances.

Such a centralised place is relatively easy to shut down. You just need to find the one IP address or one set of computers etc.
Bitcoin decentralizes that, which makes Bitcoin much more resistant to attack.

My point, though, is that its still not invincible.
While it gains strengths, it still has weaknesses; nation state resources could still be used to attack it, and, I think, shut it down.

Amberman wrote: »

Now, is it possible that the next bitcoin, whatever that might be, could put itself beyond the control of governments, from a technical point of view...or are governments able to basically just shut down anything, given enough resources?

That is a very hard and interesting question you are asking.
I would say that the jury is still out on the final answer to that.

Bitcoin allows itself to be distributed, by doing some very clever things. Before Bitcoin, a lot of people would have said it was impossible to build a system that stores the currency balances in a distributed way, the way Bitcoin does.
So, who is to say what couldn't be done, with more advances in future?


After that, you start to get into a general question, about whether determined government level resources could stop a distributed system, a bit like Bitcoin, running on the Internet.

Asking that, looking out 20 years, is a very speculative thing to do, so what follows is my opinion only.


I general, I tend to think that governments are able to stop pretty much all such systems, if they are sufficiently motivated. As georgiecasey says, its easy to overestimate how much governments care about particular systems on the Internet. As a result of the fact that governments don't much care about it, and don't really understand it, the Internet has been relatively unregulated so far, and has grown in a pretty uncontrolled manner - which has probably been great for a lot of economic activity.

Will the internet remain relatively unregulated in future? That's hard to know. Things like wikileaks, and the 'arab spring' might change things.


From a technical point of view, while its hard to know for sure, I believe the Internet could probably be locked down in future, if there is sufficient regulatory will.


For all our talk about how decentralised the Internet is, the fact is that most traffic flows through a relatively small number of large exchanges, controlled by large corporations.

If the government is willing to pass serious legislation, and to spend resources, well, its not hard for them to bring that to bear on the big pipes through which most internet traffic flows.


But its not easy to censor internet communication, as things currently stand, because traffic can be encrypted.
This means that people trying to monitor the traffic, and censor certain systems (e.g. Bitcoin traffic) that they don't like, have a problem. If the traffic you are looking at is encrypted, you can't tell whats inside it, so you don't know what to censor.


To stop a system with certainty, the government in question would have to be willing to make some big changes to how the Internet is run. They'd probably have to be willing to require that they can read any encrypted Internet traffic. That's a very serious change, and isn't likely to happen today or tomorrow.


The other way things could go, is that it could become hard to get computers which run arbitrary code on them - i.e. where you can just install any program you want on the computer. 10 years ago, that seemed unlikely - but with the rise of the iPad, which can only run code that Apple specifically allow, that no longer seems so unlikely as it did before.
Some people think that there's a possibility that it'll be hard to find computers in future which you can just run anything you want on, without some central approval. Again, thats quite far away at the moment (?), and would be a huge change in how things are setup.


Unless something drastic like one of the above happens, it'll probably be possible to run distributed systems that are difficult to censor.


Could one of those more drastic scenarios happen in a future where an online currency is toppling the revenue streams of nation states, as some of the wilder Bitcoin proponents would believe? Your guess is as good as mine.


But, thats trying to answer the question about whether its possible to build something that governments could or could not suppress, in a fairly absolute sense.


In the short term, the answer that really matters is that its possible to build systems that are hard for governments to censor; but it doesn't matter that much, from an 'investment and markets' forum point of view, because if the government just makes a particular system illegal, and takes minimal measures to suppress it, thats probably enough to prevent it being adopted widely.

These things are already hard enough to use.


Speaking generally, its interesting to think about what might happen in the future - will we eventually have an Internet closer to the Chinese model? - there are interest groups on each side of the fence; its hard to speculate about how it will play out.

Amberman wrote: »

Not necessarily true if you have 100,010 euros these days in a bank.

You still only deal with 2%inflation.

Diversify according to risk profile naturally. Don't put eggs in one basket etc.

Amberman wrote: »

I was pointing out that the inflation rate isn't all you have to contend with in the Eurozone in this day and age if you have more than 100k in a Eurozone bank account.

I don't find what happened to larger Cyprus depositors to be witty in the slightest. It is rather worrying...and considering Bitcoins price action since the confiscation of depositor money, I'm not the only one who feels that way. Lots of people are very concerned about the rights and access they have to Eurozone deposit accounts.

I don't find using a bitcoin for a small portion of your savings and investments to be problematic at all right now. That could change though.

Look, your whole point boils down to the top percent of people in the eurozone.
The percentage of people who have 100k in the banks? If i was to have a wild guess it would be 4% of 500million people. Who cares? Bitcoins aren't an alternative for those people. It's fine if you are talking about 10 euro worth of bitcoins, or a small portion of your savings. but when you get serious, you don't use bitcoins for anything, not to mind your savings.

Your assuming 100k and below WILL be covered

Roonbox wrote: »

Whatever your opinion of Bitcoins there's no denying that this thing has gone parabolic now. $218 this morning.

I'm afraid unless you have balls of steel this boat has been missed.

Should have bought some a few years ago when they were under a cent each, that would have been a good investment

An interesting read -

Submitted by Patrik Korda via the Ludwig von Mises Institute,

Bitcoin has been all the rage lately. The stuff, or lack thereof, runs on peer-to-peer technology, is fully decentralized, has no patents, and is open source. Currently, there are almost 11 million bitcoin units in existence and the maximum amount of bitcoin units that will ever be created by the logic of its design are 21 million. For more details on how they work, see the recent Mises Daily “The Money-Ness of Bitcoins” by economist Nikolay Gertchev.
The Issue

While bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as litecoin, namecoin, and freicoin in place. This is a particularly valid point because bitcoin is a starfish, i.e., it is fully decentralized. As stated by Ori Brafman and Rod A. Beckstrom,

The starfish doesn’t have a head. Its central body isn’t even in charge. In fact, the major organs are replicated throughout each and every arm. If you cut the starfish in half, you’ll be in for a surprise: the animal won’t die, and pretty soon you’ll have two starfish to deal with.[1]

After the music-sharing service Napster went under, Niklas Zennström (the creator of Skype) stepped in with his creation called Kazaa, which had no central server that could be shut down. Eventually, such peer-to-peer programs became more numerous, to include Kazaa Lite, eDonkey, eMule, BitTorrent, etc. While this may be good news for people who like to download and share content for free, it certainly is not for people who are under the impression that bitcoin is a hedge against inflation. Those who compare bitcoin to a language neglect the fact that most people do not have an incentive to create a new language out of the blue. On the other hand, a great chunk of human history consists of people searching for the philosopher’s stone to magically produce gold. There can be no doubt that bitcoin has a built-in gold rush mechanism, which has already spilled over to litecoin and will be sure to spill over to subsequent knockoffs as well.[2]
Money

Does bitcoin jibe with the Austrian stand on money? The only way to find out is to read what the great Austrians had to say. Let’s start with Carl Menger. In Principles of Economics, Carl Menger made the point that money, a general medium of exchange, has always tended to be the most “saleable” (i.e., “marketable” or “liquid”) commodity of the time.

What is saleability? It is not simply value. One may have a Picasso at home, which will fetch quite a sum at a Sotheby’s auction during a boom, but a Picasso, like a poem by Friedrich Shiller, a work of Sanskrit, or a decades-old bottle of red wine can never be the most saleable good. As Menger put it, saleability is the

facility with which [a good] can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same. (...) Compare only the number of persons to whom bread and meat can be sold with the number to whom astronomical instruments can be sold.

Menger went on to point out that cattle were the most saleable commodity in the ancient world. This is perfectly understandable in a world where bare-bones subsistence is a reality for most people and the structure of production is virtually nonexistent. As society progressed, however, cattle became less and less marketable.

As civilization progressed, Menger states that,

… peoples who were led to adopt a copper standard as a result of the material circumstances under which their economy developed, passed on from the less precious metals to the more precious ones, from copper and iron to silver and gold, with the further development of civilization, and especially with the geographical extension of commerce.

Gold won out due to a variety of reasons, such as being durable, amalgamable, malleable, divisible, homogeneous, and rare. Yet, the ultimate reason that gold won out is because it was the most saleable of commodities. As Menger went on to write,

Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owner of [the] gold mine, provided the gypsy knows where to find the right market for his commodity. Gold nuggets can pass through any number of hands without any decrease whatsoever in marketability. But articles of clothing, bedding, prepared foods, etc., would be suspect and almost unsaleable, or at any rate of greatly depreciated value, in the hands of the gypsy, even if they had not been used by him, and even if he had, from the beginning, acquired them only with the intention of passing them on in exchange.

This leads us to another criticism of bitcoin: It can never be the most saleable good. The reasoning for this is quite simple. Until the majority of the 7 billion or so people that inhabit this planet have either a smart phone or frequent access to the internet, a digital currency is out of the question.

Gold, on the other hand, is easily recognizable, as opposed to silver that may be mistaken for other metals such as nickel. Moreover, it melts at a relatively low temperature and is a relatively soft metal, which provides superior amalgamation and partly explains why it historically won out over metals such as platinum. If one questions the role of gold in the present monetary system, one only has to walk down the street in a metropolitan area and see a ‘We Buy Gold’ sign. Moreover, central banks hold gold and lots of it. They do not hold cattle, wheat, soybeans, copper, silver, or bitcoins.

Menger also wrote,

I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost. [3]

While it may very well be true that some early adopters valued bitcoins with what Menger described as imaginary value, the point of the most saleable good bears repeating. Gold is and has been seen as an object of beauty since the dawn of civilization. Thus, the argument that bitcoins are in accord with the regression theorem because a handful of people consume them as they would a Picasso, is like saying paper money has value because John Law or Ben Bernanke really enjoy playing monopoly. In fact, we might as well say that alchemy works, considering that a significant amount of human history and energy was spent in attempting to find the philosopher’s stone. Some people may enjoy work just for the sake of working. Unfortunately, this is not a sufficient justification for slavery nor the labor theory of value.
Anonymity

With the imminent hyperinflation meme fading away and no longer holding much water, the new reason to hold bitcoins is the anonymity, nay, the freedom that it provides. Want to gamble online or buy something illegal? Bitcoins are the solution. It is a way of circumventing the authorities and uplifting free and voluntary trade, or so goes the story. Unfortunately for many of the misinformed, the reality is toto caelo. It would be best to take it from bitcoin developer Jeff Garzik himself. The fun starts at 3:20.

The ironic part about this is that anyone and everyone who has participated in illegal activity using bitcoins, presumably because they thought it was anonymous, now has a permanent record of every single one of their transactions contained on the public ledger. Those who think they are clever by using add-ons such as Tor are just as foolish as those who think prepaid cards or smart phones are anonymous. Imagine if bitcoins existed 50 years ago. Chances are, none of the last three presidents (including Barack Obama) would have run for office.


Bubble Time?

The question left to be answered is whether or not bitcoin is once again taking the shape of a bubble. The answer is yes. There is present a reflexive pattern of people buying because prices are rising, and prices rising because people are buying. The myopic are extrapolating the price trend of the past four months, which they deem is normal, and in so doing they exacerbate it to the upside, thus attracting even greater fools. The inflection point will come when the continuity of bullish thought is broken. One thing is for sure, the amount of suckers left who are willing to jump on the moving and ever-accelerating train is drawing thin, and so are their pockets.

When prices for any asset go parabolic, it does technical damage to a chart. It is sort of like someone deciding to go full speed in the middle of a marathon. Surely, one would look good for a few minutes. However, at a certain point one would inevitably collapse, with the possibilities of finishing the race being greatly diminished, let alone doing as well as they would have otherwise.

Gold went parabolic toward the second half of 2011 to $1,900/oz., which did a lot of technical damage to the charts that gold is just now beginning to shake off. Like Icarus, who had soared too high and melted the wax on his wings, parabolic moves always end in a correction, and if prolonged, a crash. Ironically, the best thing that can happen for bitcoin naysayers is if bitcoin skyrockets to $300/btc within a week.

There is nothing anti-Austrian about acknowledging that there exists in the market place a lot of naïve, irrational, and misinformed players. During the dotcom bubble, for example, a maintenance and building company called Temco Services almost tripled in a matter of minutes in 1998. The reason is because by 1998 every other layperson was involved in the market. Thus, the level of competence significantly dropped. The ticker symbol for Temco is TMCO, which was fairly close to that of Ticketmaster Online, which was TMCS. Ticketmaster Online (then TMCS) just happened to trade publicly for the first time on the day that Temco Services (TMCO) tripled. Rising asset prices create euphoria, and euphoria significantly drops the IQ of the participants.

Another reason why bitcoin is so susceptible to bubble behavior is because it is perceived as being something new. “New era” thinking always attracts lots of attention. The tulip was introduced to Europe by way of Turkey in the middle of the sixteenth century. (In fact, the word tulip came from the Turkish tulipan, which means turban.) The tulip was perceived as something new to Amsterdam, a country which at the time possessed an abundance of newly discovered gold and silver from the New World. Likewise, the Mississippi bubble, which was perpetrated by John Law, promised vast riches to be had from the New World. The manias in railways, the radio, the internet, you name it, most of them involved something new or something perceived to be new.

There is no doubt that bitcoin is a spontaneous answer to the monetary instability that we see all around us today. On one side of the pond people are worried about the glorified currency peg known as the Euro and on the other about the amount of damage that Bernanke is willing to inflict upon the world’s reserve currency. However, let us not become so enamored of an innovative stateless solution that we forget Austrian economics and hitch libertarianism’s wagon to something heading for a crash.

http://www.zerohedge.com/news/2013-04-09/guest-post-bitcoin-money-future-or-old-fashioned-bubble