9 ms·

I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, t

by ap22213 12y ago

I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system. I can maybe see where it'd be useful in minimizing electronic transaction costs. But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin. And, I guess I can see that it'd be useful to maintain anonymity, but I don't have that use case. Isn't it just easier to buy things with Dollars? I also don't understand the dynamics of it. Doesn't it require increasingly more capital to mine coins and to maintain the ledger? What happens when the value of a coin is less than the mining costs or ledger maintenance? Or, does the coin just keep continuing to increase in value? And, if so, what's to stop people from just using another crypto-currency? And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people).

ivanche 12y ago
Just to add, regarding value of (real world) coins and their relationship with precious metals one can see https://en.wikipedia.org/wiki/Fiat_money https://en.wikipedia.org/wiki/Fiat_money
gnopgnip 12y ago
The average transaction cost is around $40 right now. You have to consider that each block mines coins, and the miners are getting those at the cost of everyone else. A decentralized system will be more expensive than a centralized one. An bitcoin transaction fee is going to be about 40 cents, plus $40 per transaction for the block reward. The value of bitcoin is that you can trade resources for trust. With traditional money you have to trust that visa or your bank will not just zero out your account.
- autokad 12y ago
  You're bank just cant 0 out your account. and if your bank gets robbed or goes out of business, you still have your money. not the same for a bitcoin 'bank' as we have seen. they even resorted to telling clients to put their keys on paper, funny that
sp332 12y ago
Bitcoin has just one advantage, and it's not minimizing transaction fees or anonymization. It's just that it's decentralized. The big breakthrough with Bitcoin over other distributed systems is that it prevents double-spending. That's what all the mining is for: a node verifies every transaction and then cryptographically signs the result. So you get all the benefits of a decentralized system - you don't have to trust any single source of truth, and transactions are publicly auditable - without the biggest downside they usually have.
sirsar 12y ago
> But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin. It's not common yet, but I have in fact saved money by buying with bitcoins, because the merchant passed on some of the savings. >Isn't it just easier to buy things with Dollars? Sure, if you're allowed to, and you have that preference, why not? Bitcoin can facilitate the circumvention of censorship (a la Wikileaks). And once you have bitcoins, sending them is faster than paying with a credit card online. >Doesn't it require increasingly more capital to mine coins and to maintain the ledger? Yes, if you ignore hardware advances. It might even be true if you don't ignore that. >What happens when the value of a coin is less than the mining costs or ledger maintenance? There are transaction fees that go to the block miner. >Or, does the coin just keep continuing to increase in value? Hopefully not too quickly! >what's to stop people from just using another crypto-currency? Network effects. People do use other crypto-currencies. Just not as much. For now. >And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people). Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion. There are historical examples of currency which was neither a debt derivative nor an intrinsically useful object being used as currency. Ultimately, anything sellable is "worth" what other people will pay for it. Bitcoin provides a means of transferring information in a cryptographically signed manner. We happen to use that fact to transfer information about value. Other people are willing to buy bitcoins. The price is capped by the fact that there is a finite number of bitcoins and a finite number of people. Beyond that, it's pretty much new ground we're breaking here. Bitcoin is not perfect. I don't know the future. But if you have other questions, I'm happy to answer them from the perspective of a bitcoin holder.
- jdreaver 12y ago
  > Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion. I still don't understand how economists can say that BTC has no "intrinsic value," so should be worthless, but the fiat currencies around the world are just dandy. The whole concept of "intrinsic value" is nonsense. If you can make a Bitcoin transaction faster, cheaper, and with fewer people knowing about it (if you value anonymity), then BTC has value. You can send Bitcoin to someone overseas without anyone else knowing. How powerful is that? > Ultimately, anything sellable is "worth" what other people will pay for it. Precisely. I wish we could teach people this before they dismiss Bitcoin for unfounded reasons.
meh_master 12y ago
> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system. I don't either. Which brings me to a point, is it even intended for a mass audience and wide-spread adoption? How could I explain Bitcoin to my mother for instance? I'd end up down the rabbit hole just to explain the words and concepts used in the definition of Bitcoin...cryptography, private keys, wallets, addresses, miners, the block-chain, and on and on
- jontas 12y ago
  The time I attempted to explain bitcoin to my parents I ended up starting with explaining how public key crypto works (to the best of my ability) and wound up dealing with so many tangential questions we barely managed to touch on bitcoin. I'm sure they took away almost nothing from an hour long conversation. I think it is possible to understand bitcoin as a financial system if you have some background in financial concepts (my dad was able to pick up the open ledger concept pretty easily). But to understand the technical details you really need an implicit understanding of a lot of different technologies.
joeyspn 12y ago
> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system. You don't have to be embarrassed. Surprisingly 99.9% of the people doesn't know how our monetary/banking system works (creating money out of thin air) but that doesn't prevent them from using $ or €... Henry Ford once said: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning"
- danielq 12y ago
  this. This https://www.youtube.com/watch?v=8Fm5NSeVPog https://www.youtube.com/watch?v=8Fm5NSeVPog about the Fed seems to be less sensational than others.
the_decider 12y ago
According to the labor theory of value, the value of anything is derived from the amount of labor required to produce or obtain it. http://en.wikipedia.org/wiki/Labour_theory_of_value http://en.wikipedia.org/wiki/Labour_theory_of_value. Thus, the value of gold is derived from the amount of labor required to dig it from the ground. Analogously, the value of Bitcoin is derived from the amount of labor that's required to build, run, and sustain a crypto-mining apparatus (definitely not an easy task to do). There, Bitcoin has value! In fact, its source of value easier to comprehend than that of the dollar, which seems to appear out of nowhere.
ericecook 12y ago
I would argue that most of the perceived value right now is speculative. The actual benefits over using USD in transactions is marginal, for most use cases. IMO, the speculation comes from the enormous potential of the idea. What is something you can do with an electronic currency, not tied to a single government, which has a great deal of value to the average person? I don't know the answer to that question, but I see most altcoins as people trying to crack this nut. It seems likely to me that someone will find a use, partly just because the cost of attempting it is quite low.
- deleted 12y ago
  [deleted]
tabrischen 12y ago
You're not the only one. I've been following bitcoin for a while now, and still learning little nuances of the bitcoin protocol everyday. For instance, I just learnt recently that there's transaction cost associated with each transaction, and if you set the transaction cost to zero, the transaction may take a while to get accepted (or never) into the blockchain because of the reduced incentive to miners. This comes as a bit of surprise to me because one of the popular benefits of bitcoin touted by advocates is the reduced transaction fee over traditional means of monetary payments, but I guess that's a fault in my own understanding as 'reduced' does not mean 'none'. The complexity of the concept is a barrier to the mass adoption of bitcoin. Wallet and payment merchants make it easy for people to use bitcoin without understanding the underlying technology, however I believe there's still a perception problem. People are hesitant to use things they can't wrap their minds around, especially when it's tied to money. We need more articles like this that can ELI5 to lower that barrier.

by ap22213 12y ago

ivanche 12y ago

Just to add, regarding value of (real world) coins and their relationship with precious metals one can see https://en.wikipedia.org/wiki/Fiat_money https://en.wikipedia.org/wiki/Fiat_money

gnopgnip 12y ago

The average transaction cost is around $40 right now. You have to consider that each block mines coins, and the miners are getting those at the cost of everyone else. A decentralized system will be more expensive than a centralized one. An bitcoin transaction fee is going to be about 40 cents, plus $40 per transaction for the block reward. The value of bitcoin is that you can trade resources for trust. With traditional money you have to trust that visa or your bank will not just zero out your account.

autokad 12y ago
You're bank just cant 0 out your account. and if your bank gets robbed or goes out of business, you still have your money. not the same for a bitcoin 'bank' as we have seen. they even resorted to telling clients to put their keys on paper, funny that

sp332 12y ago

Bitcoin has just one advantage, and it's not minimizing transaction fees or anonymization. It's just that it's decentralized. The big breakthrough with Bitcoin over other distributed systems is that it prevents double-spending. That's what all the mining is for: a node verifies every transaction and then cryptographically signs the result. So you get all the benefits of a decentralized system - you don't have to trust any single source of truth, and transactions are publicly auditable - without the biggest downside they usually have.

sirsar 12y ago

> But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin. It's not common yet, but I have in fact saved money by buying with bitcoins, because the merchant passed on some of the savings. >Isn't it just easier to buy things with Dollars? Sure, if you're allowed to, and you have that preference, why not? Bitcoin can facilitate the circumvention of censorship (a la Wikileaks). And once you have bitcoins, sending them is faster than paying with a credit card online. >Doesn't it require increasingly more capital to mine coins and to maintain the ledger? Yes, if you ignore hardware advances. It might even be true if you don't ignore that. >What happens when the value of a coin is less than the mining costs or ledger maintenance? There are transaction fees that go to the block miner. >Or, does the coin just keep continuing to increase in value? Hopefully not too quickly! >what's to stop people from just using another crypto-currency? Network effects. People do use other crypto-currencies. Just not as much. For now. >And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people). Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion. There are historical examples of currency which was neither a debt derivative nor an intrinsically useful object being used as currency. Ultimately, anything sellable is "worth" what other people will pay for it. Bitcoin provides a means of transferring information in a cryptographically signed manner. We happen to use that fact to transfer information about value. Other people are willing to buy bitcoins. The price is capped by the fact that there is a finite number of bitcoins and a finite number of people. Beyond that, it's pretty much new ground we're breaking here. Bitcoin is not perfect. I don't know the future. But if you have other questions, I'm happy to answer them from the perspective of a bitcoin holder.

jdreaver 12y ago
> Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion. I still don't understand how economists can say that BTC has no "intrinsic value," so should be worthless, but the fiat currencies around the world are just dandy. The whole concept of "intrinsic value" is nonsense. If you can make a Bitcoin transaction faster, cheaper, and with fewer people knowing about it (if you value anonymity), then BTC has value. You can send Bitcoin to someone overseas without anyone else knowing. How powerful is that? > Ultimately, anything sellable is "worth" what other people will pay for it. Precisely. I wish we could teach people this before they dismiss Bitcoin for unfounded reasons.

meh_master 12y ago

> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system. I don't either. Which brings me to a point, is it even intended for a mass audience and wide-spread adoption? How could I explain Bitcoin to my mother for instance? I'd end up down the rabbit hole just to explain the words and concepts used in the definition of Bitcoin...cryptography, private keys, wallets, addresses, miners, the block-chain, and on and on

jontas 12y ago
The time I attempted to explain bitcoin to my parents I ended up starting with explaining how public key crypto works (to the best of my ability) and wound up dealing with so many tangential questions we barely managed to touch on bitcoin. I'm sure they took away almost nothing from an hour long conversation. I think it is possible to understand bitcoin as a financial system if you have some background in financial concepts (my dad was able to pick up the open ledger concept pretty easily). But to understand the technical details you really need an implicit understanding of a lot of different technologies.

joeyspn 12y ago

> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system. You don't have to be embarrassed. Surprisingly 99.9% of the people doesn't know how our monetary/banking system works (creating money out of thin air) but that doesn't prevent them from using $ or €... Henry Ford once said: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning"

danielq 12y ago
this. This https://www.youtube.com/watch?v=8Fm5NSeVPog https://www.youtube.com/watch?v=8Fm5NSeVPog about the Fed seems to be less sensational than others.

the_decider 12y ago

According to the labor theory of value, the value of anything is derived from the amount of labor required to produce or obtain it. http://en.wikipedia.org/wiki/Labour_theory_of_value http://en.wikipedia.org/wiki/Labour_theory_of_value. Thus, the value of gold is derived from the amount of labor required to dig it from the ground. Analogously, the value of Bitcoin is derived from the amount of labor that's required to build, run, and sustain a crypto-mining apparatus (definitely not an easy task to do). There, Bitcoin has value! In fact, its source of value easier to comprehend than that of the dollar, which seems to appear out of nowhere.

ericecook 12y ago

I would argue that most of the perceived value right now is speculative. The actual benefits over using USD in transactions is marginal, for most use cases. IMO, the speculation comes from the enormous potential of the idea. What is something you can do with an electronic currency, not tied to a single government, which has a great deal of value to the average person? I don't know the answer to that question, but I see most altcoins as people trying to crack this nut. It seems likely to me that someone will find a use, partly just because the cost of attempting it is quite low.

deleted 12y ago
[deleted]

tabrischen 12y ago

You're not the only one. I've been following bitcoin for a while now, and still learning little nuances of the bitcoin protocol everyday. For instance, I just learnt recently that there's transaction cost associated with each transaction, and if you set the transaction cost to zero, the transaction may take a while to get accepted (or never) into the blockchain because of the reduced incentive to miners. This comes as a bit of surprise to me because one of the popular benefits of bitcoin touted by advocates is the reduced transaction fee over traditional means of monetary payments, but I guess that's a fault in my own understanding as 'reduced' does not mean 'none'. The complexity of the concept is a barrier to the mass adoption of bitcoin. Wallet and payment merchants make it easy for people to use bitcoin without understanding the underlying technology, however I believe there's still a perception problem. People are hesitant to use things they can't wrap their minds around, especially when it's tied to money. We need more articles like this that can ELI5 to lower that barrier.