[Forbes] My Answer To A VC's Bitcoin Question

[Indy Vidual]

...Without government checkpoints for financial institution wire transfers, bitcoin capital flows freely, without limits, and perhaps anonymously. The harmful tools of centralized monetary policy would also not exist. And finally, the taxation of income that began in the United States in 1913 would operate on the honor system — the honor of the taxpayer, that is. This could be welcome news for some as a progressive income tax was a fundamental tenet of Marxism.
...
Bitcoin is the quintessential disruptor for not only does it disrupt established primary-level players in the field of payments, like VISA, Mastercard, and PayPal, but it disrupts the very nature of monetary authority. Bitcoin is disruption within supreme disruption....


more:
http://www.forbes.com/sites/jonmaton...coin-question/

[rpwi]

While the exchange of bitcoins is very convenient, there is no intrinsic nor extrinsic value that backs up their worth so they are a ponzi-scheme. There will come a point in which sales of bitcoins will dwarf purchases and their value and the system will collapse. And with no value mechanism to back them up (taxes, gold, silver, dollars, etc...), this engine will not get started again. The only exception would be if false confidence was injected into the system (like a media report).

It is basic economics. An exchange system can not survive if you take out less value in the aggregate than you put in...which has to be the case with bitcoins because their production enjoys seigniorage profits. The only exceptions are government regulations/aid and/or ponzi speculation (where value is maintained or grown by the introduction of new buyers...but this is not sustainable).

[RonRules]

there is no intrinsic nor extrinsic value that backs up their value so they are a ponzi-scheme.

They have intrinsic value in terms of CPU cycles. BitCoins are "mined" using CPU cycles. Lately people have been using graphic cards to mine bitcoins.

It may be weird, but that's how BitCoins are "dug up".


From Wiki:
Bitcoins are awarded to Bitcoin miners for the solution to a difficult proof-of-work problem which confirms transactions and prevents double-spending. This incentive, as the Nakamoto white paper describes it, encourages "nodes to support the network, and provides a way to initially distribute coins into circulation, since no central authority issues them."[1]

The network currently requires over 1,000,000 times more work for confirming a block and receiving an award (50 BTC as of February 2012) than when the first blocks were confirmed. The network adjusts the difficulty every 2016 blocks based on the time taken to find the previous 2016 blocks such that one block is created roughly every 10 minutes. Thus the more computing power that is directed toward mining, the more computing power the network requires to complete a block confirmation and to receive the award. The network will also halve the award every 210,000 blocks, designed to occur about every four years.

[rpwi]

They have intrinsic value in terms of CPU cycles. BitCoins are "mined" using CPU cycles. Lately people have been using graphic cards to mine bitcoins.

But that isn't really intrinsic value. What is the intrinsic value of CPU cycles? I can't eat in them. Can't sleep in them. I can't even use them to say aid in my photo editing program because they are past tense CPU cycles...not present and reusable cycles. To me, it makes as much sense to assign CPU cycles to bitcoin's value as it would clapping my hands. If I clap my hands my hands a thousand times should I be entitled to 1 dollar worth of bitcoins? How does hand clapping have intrinsic or extrinsic value?

Now a currency doesn't need to have intrinsic value to circulate if it has extrinsic value. Say the government says you will go to jail if you don't acquire 100 bitcoins a year. This then gives the bitcoins very real and very powerful extrinsic value. The most common source of extrinsic value is taxes...which in the US majorly and artificially props up bank deposit money (demand deposits).

[RonRules]

I also think that CPU cycles are kind of weird as an intrinsic value. If they could be future CPU cycles it would make more sense.

But don't forget that gold's intrinsic value is weird too.

I can't eat in them. Check!
Can't sleep in them. You're weird!
... aid in my photo editing program. Check!

Gold has value mostly because it's rare. It has industrial uses, but most industries try to avoid it because it's rare and expensive.

JUST talking efficiency:

Gold as a currency is inefficient, not only because of the weight and difficult of physically transferring it, but because it takes enormous money and labor to dig it up, an activity that has nothing productive.

If we both want to trade, electronic bits are currenty the most efficient way to trade. Paper money, less and metals least.

You don't hear these arguments from gold bugs.

[rpwi]

What you described are the reasons I'm not a goldbug. Its circulation value is far and above what its fabrication value is...which from my perspective means it is quite overpriced...and there is no guarantee that the price could suddenly and without warning nor logical reasoning, come crashing down to industrial fabrication value (not counting jewelry). So if the real price of gold is 100 dollars an ounce and the market price is 1000 dollars...sure gold could say hover and bounce around in that high range...but it could only do so with ponzi justification.

Electronic transfers are easy...the key is how they are created and how they get value. One of the major problems we have in our economy now, is that that the Fed only allows banks to hold electronic dollars...which we in turn can only indirectly hold through fractional reserve deposits (debt money). If we could hold electronic dollars directly at the Fed this would greatly increase efficiency and cut out the wasteful middleman in the banker.

[matt0611]

I also think that CPU cycles are kind of weird as an intrinsic value. If they could be future CPU cycles it would make more sense.

But don't forget that gold's intrinsic value is weird too.

I can't eat in them. Check!
Can't sleep in them. You're weird!
... aid in my photo editing program. Check!

Gold has value mostly because it's rare. It has industrial uses, but most industries try to avoid it because it's rare and expensive.

JUST talking efficiency:

Gold as a currency is inefficient, not only because of the weight and difficult of physically transferring it, but because it takes enormous money and labor to dig it up, an activity that has nothing productive.

If we both want to trade, electronic bits are currenty the most efficient way to trade. Paper money, less and metals least.

You don't hear these arguments from gold bugs.

Yes. Gold has high value because it is HARD to find. Its RARE. If it was as abundant as dirt it wouldn't have as much value.

But gold isn't "inefficient* because you don't have to use the actual physical gold. You can use certificates, checks, debit, etc

Also, the fact that gold has a small amount of value in a small amount of weight makes it MORE efficient, not less. Think about it, what if we used iron to back our money instead of gold. That would be a lot more inefficient.

Bitcoins are not at all comparable to gold. Gold is valued as gold. The bitcoin tokens are just that...tokens. They're like virtual chuck-e-cheese tokens that aren't good for anything except trading with other people as long as they decide to trade them. They have some collectible / novelty value because their supply is fixed but that's it really.

That's why I will never buy any bitcoins. Much rather have some silver or gold.

[RonRules]

Yes. Gold has high value because it is HARD to find. Its RARE. If it was as abundant as dirt it wouldn't have as much value.

Rarity does not necessarily create value. I have a few small stones of the extremely rare Benitoite, the state stone of California. Although not dirt cheap, they are not as valuable as diamonds, even though they are much more rare. They are also MUCH prettier. Apparently they are so rare that there isn't a significant market for them and thus not much comparative value.
http://en.wikipedia.org/wiki/Benitoite

But gold isn't "inefficient* because you don't have to use the actual physical gold. You can use certificates, checks, debit, etc

Now you're back with paper money. How do you know that physical gold really backs it?

Bitcoins are not at all comparable to gold.

Full disclosure: I don't have any Bitcoins. I find the concept interesting, evolving and possibly leading to something good.

Even at this stage, I find them preferable to Federal Reserve notes.

[matt0611]

Rarity does not necessarily create value. I have a few small stones of the extremely rare Benitoite, the state stone of California. Although not dirt cheap, they are not as valuable as diamonds, even though they are much more rare. They are also MUCH prettier. Apparently they are so rare that there isn't a significant market for them and thus not much comparative value.
http://en.wikipedia.org/wiki/Benitoite





Now you're back with paper money. How do you know that physical gold really backs it?



Full disclosure: I don't have any Bitcoins. I find the concept interesting, evolving and possibly leading to something good.

Even at this stage, I find them preferable to Federal Reserve notes.

You're right, the rarity in itself doesn't make it valuable in itself, its utility gives it value but the rarity lowers it supply so its price is higher.

How do I know that physical gold backs it? The same way I trust any corporation to ship me the correct things when I buy from them. Brand name, trust, legal consequences etc. Plus the fact that they would have to allow me to go to them with the paper or electronic money and exchange it for the metal.

[Elwar]

Bitcoin is like a commodity pre-IPO. It is a hedge against inflation in the way gold is plus it is in an early enough stage and developing daily to the point where it is an investment into its potential future value as the technology advances.

Bitcoin has value beyond all other currencies in that it has the potential to do more than what any other currency can do. It will allow for even more secure transactions than what we have today. It allows for more flexible transactions. It has the potential to be used as a voting system. And much more coming down the pike.

Sort of like a combination of gold and Apple Computer. It is better than a currency backed by government.