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Not sure how I missed BitCoins, but I'm trying to get a read on whether this is a real currency or not. As in: something to watch or something to ignore. I al

Not sure how I missed BitCoins, but I'm trying to get a read on whether this is a real currency or not. As in: something to watch or something to ignore. I also don't understand why the # of coins is limited to 21M. Given that there are going to be 10B people on the planet that means that, on average, a person will have about 0.002 coins. Maybe I'm just too used to having thousands of units of currency, but it seems odd to consider that prices will be in milli- or nano-BitCoins...

mrsteveman1 16y ago
There is a finite amount of gold on the planet as well, and in all of human history we've only mined something like $7-8 trillion dollars worth. That's only half the GDP of the entire U.S. for 2009, and we don't even control most of it (something like 12-15% in various reserves). Look at the price of gold now, it's over $1,000 an ounce. Either the USD has inflated dramatically since 1970 when an ounce of gold was only worth $40, or gold has skyrocketed because of scarcity (or both). Point being, bitcoins could very well end up being worth $10 or even $100 each as the years go by, or higher. At a factor of 100 that's $2.1 billion USD worth of bitcoins. Are they worth that much? Maybe, gold and USD aren't worth anything at all until someone is willing to accept them in trade, and people are definitely accepting bitcoins in trade right now.
- CoffeeDregs 16y ago
  Fair points. I guess I would be paying 0.001 ounce of gold for a candy bar, so why be concerned about paying 0.001 bitcoin. w.r.t. worth: gold is backed by being shiny, pretty, desirable; USD is backed by the US Government (cue cries of "fiat money! fiat money!") which provides huge implicit inertia; Bitcoins would be backed only by inertia. I guess the answer to my question is: Bitcoins will be interesting if they get transaction inertia. Of course, as an entrepreneurial minded fellow, the next question would be: would it make sense to help build that inertia?
  - seabee 16y ago
    From the Bitcoin FAQ: How divisible are Bitcoins? Technically, a Bitcoin can be divided down to 8 decimals, so 0.00000001 BTC is the smallest possible amount. For convenience, the program currently accepts only 2 decimal places.
nhaehnle 16y ago
BitCoin is certainly a real currency in the sense that it is traded by people, even in exchange for real goods and services. As for whether it is something to watch depends on where you're coming from. The problem of BitCoin is that of adoption. The US$ is a viable currency because the US government is able to force a US$-denominated debt onto people via taxation. This creates demand for US$, which causes people to offer goods and services in exchange for US$. Of course, once a currency is established, the circular/recursive reasoning of "you work for US$ because you can use them to buy groceries at your favourite supermarket, because the supermarket must pay its suppliers in US$, because the suppliers pay their employees, i.e. you, in US$" largely takes over. Take the base case of enforced debt away and the currency keeps working a while longer in Wile E. Coyote fashion, but at the first sign of serious doubt as to the currency's value it will inflate into worthless paper, even when the "total amount" of paper remains unchanged. There is nobody who can force BitCoin-denominated debt onto anybody, and so it's unclear how BitCoin could ever take off. It certainly has appeal to a fringe group of libertarians, but I see no mechanism by which it could possibly spread beyond that. It is true that BitCoin has some appealing feature through its distributed nature. Making small transactions between peers easier is definitely appealing - it's what makes services like M-PESA sell like sliced bread. However, BitCoin has the enormous disadvantage of not being convertible to US$ in the sense that when you want to use BitCoin, you are dealing with exchange rate risks. I would bet that this makes it too inconvenient for the majority of the population to ever take off. We can spin this further and ask what would happen if, despite all difficulties, BitCoin would ever find widespread adoption. If all prices are denominated in BitCoin, then the exchange rate risk is no longer a problem for average people. But then the economy would face the same problems that plagued gold-based economies, in particular frequent recessions. The historical cycle of monetary development would be likely to repeat itself: People would start introducing paper moneys that leverage BitCoins, frequent bank run would happen until the establishment of a new, BitCoin-based central bank. Eventually, convertibility of the new de facto currencies to BitCoin would be dropped, reverting to pure fiat money. From a public policy perspective, it is desirable to skip that cycle and just stick with fiat money. Most likely though, the question won't even come up, because BitCoin cannot really gain traction without government intervention in the first place. From a hacker perspective, the more interesting question is: What problem do people actually face in their daily lives? I am sure there are payment-related problems that can be fixed, but my feeling is the solution is more along the lines of M-PESA, working within the currencies that people are already used to. From a monetary economics perspective, it is an interesting experiment that may one day be used as empirical evidence for one or the other theory on money.

mrsteveman1 16y ago

There is a finite amount of gold on the planet as well, and in all of human history we've only mined something like $7-8 trillion dollars worth. That's only half the GDP of the entire U.S. for 2009, and we don't even control most of it (something like 12-15% in various reserves). Look at the price of gold now, it's over $1,000 an ounce. Either the USD has inflated dramatically since 1970 when an ounce of gold was only worth $40, or gold has skyrocketed because of scarcity (or both). Point being, bitcoins could very well end up being worth $10 or even $100 each as the years go by, or higher. At a factor of 100 that's $2.1 billion USD worth of bitcoins. Are they worth that much? Maybe, gold and USD aren't worth anything at all until someone is willing to accept them in trade, and people are definitely accepting bitcoins in trade right now.

CoffeeDregs 16y ago
Fair points. I guess I would be paying 0.001 ounce of gold for a candy bar, so why be concerned about paying 0.001 bitcoin. w.r.t. worth: gold is backed by being shiny, pretty, desirable; USD is backed by the US Government (cue cries of "fiat money! fiat money!") which provides huge implicit inertia; Bitcoins would be backed only by inertia. I guess the answer to my question is: Bitcoins will be interesting if they get transaction inertia. Of course, as an entrepreneurial minded fellow, the next question would be: would it make sense to help build that inertia?
- seabee 16y ago
  From the Bitcoin FAQ: How divisible are Bitcoins? Technically, a Bitcoin can be divided down to 8 decimals, so 0.00000001 BTC is the smallest possible amount. For convenience, the program currently accepts only 2 decimal places.

nhaehnle 16y ago

BitCoin is certainly a real currency in the sense that it is traded by people, even in exchange for real goods and services. As for whether it is something to watch depends on where you're coming from. The problem of BitCoin is that of adoption. The US$ is a viable currency because the US government is able to force a US$-denominated debt onto people via taxation. This creates demand for US$, which causes people to offer goods and services in exchange for US$. Of course, once a currency is established, the circular/recursive reasoning of "you work for US$ because you can use them to buy groceries at your favourite supermarket, because the supermarket must pay its suppliers in US$, because the suppliers pay their employees, i.e. you, in US$" largely takes over. Take the base case of enforced debt away and the currency keeps working a while longer in Wile E. Coyote fashion, but at the first sign of serious doubt as to the currency's value it will inflate into worthless paper, even when the "total amount" of paper remains unchanged. There is nobody who can force BitCoin-denominated debt onto anybody, and so it's unclear how BitCoin could ever take off. It certainly has appeal to a fringe group of libertarians, but I see no mechanism by which it could possibly spread beyond that. It is true that BitCoin has some appealing feature through its distributed nature. Making small transactions between peers easier is definitely appealing - it's what makes services like M-PESA sell like sliced bread. However, BitCoin has the enormous disadvantage of not being convertible to US$ in the sense that when you want to use BitCoin, you are dealing with exchange rate risks. I would bet that this makes it too inconvenient for the majority of the population to ever take off. We can spin this further and ask what would happen if, despite all difficulties, BitCoin would ever find widespread adoption. If all prices are denominated in BitCoin, then the exchange rate risk is no longer a problem for average people. But then the economy would face the same problems that plagued gold-based economies, in particular frequent recessions. The historical cycle of monetary development would be likely to repeat itself: People would start introducing paper moneys that leverage BitCoins, frequent bank run would happen until the establishment of a new, BitCoin-based central bank. Eventually, convertibility of the new de facto currencies to BitCoin would be dropped, reverting to pure fiat money. From a public policy perspective, it is desirable to skip that cycle and just stick with fiat money. Most likely though, the question won't even come up, because BitCoin cannot really gain traction without government intervention in the first place. From a hacker perspective, the more interesting question is: What problem do people actually face in their daily lives? I am sure there are payment-related problems that can be fixed, but my feeling is the solution is more along the lines of M-PESA, working within the currencies that people are already used to. From a monetary economics perspective, it is an interesting experiment that may one day be used as empirical evidence for one or the other theory on money.