The economics of Bitcoin | Hacker News Reader

The economics of Bitcoin

marginalrevolution.com

Here's my thinking on how this will play out.

There's a finite number of people in the world. Each of them hears about Bitcoin for the first time exactly once. At this point one of two things can happen -- either they say "What? That sounds stupid" or they say "Well, that sounds pretty stupid, but there's a chance it might take off, so I might as well be an early adopter and acquire a bunch of 'em".

People in Group A can be safely ignored for now. People in Group B serve to drive up the price of Bitcoins, since they say "Shit, if I spend a few tens of dollars now then I could be a zillionaire in the future!" The Group B people also now become Bitcoin evangelists, assiduously spamming and astroturfing all over the damn place in an effort to convert more people to the Bitcoin fold.

The trouble is, eventually you run out of new people. People who made the initial decision to join Group A are very unlikely to have second thoughts and jump on the speculative bandwagon six months later, since they'll later on say "Well shit, I'm not gonna pay a hundred bucks for what I could have got for five bucks a few months ago". And of course the penetration of the Bitcoin meme outside tech geek circles is likely to be incredibly low, since most people won't even understand what the hell it's supposed to be about, let alone how to use it.

Anyway, like every speculative bubble in history it'll burst when you run out of bigger suckers. This will probably happen fairly soon due to the the limited size of the target market, but not before everybody gets sick and tired of hearing about it. End result: a lot of wasted CPU cycles and a reasonably small transfer of wealth from the gullible to the canny. Life goes on.

Don't you get annoyed at how much money bankers make just because they control the infrastructure of transferring account balances around?

I like it because I think it's a clever solution to rampant government/institutional corruption..

Banks make money primarily by borrowing money from people who have it and lending it to people who need it -- this is a sensible business model regardless of what kind of currency you're using.

I think the banks could make plenty of money without forcing me to deal with paper checks.

My point is, there are lots of other reasons to use bitcoin.

thankfully, there are those of us who draw their conclusions from a pool other than that determined by hugh3. bitcoin is a very interesting experiment, and there are plenty of other valid reasons for learning about it or using it, than an insipid interest to become part of a "scheme".

Like many other people, I was skeptical about the need for bitcoins.

The thing that finally made me think BitCoin could potentially have value is internet weed dealers.

Let's say there are three people, A, B,C. A sells weed (or other illegal substances) over the internet. Previously, they'd have to accept a currency that can be easily tracked. Now, they will only accept BitCoin.

B wants to buy weed. B exchanges USD for Bitcoin with C, a bitcoin miner, and then trades BitCoin for Weed with Person A. A then converts his bitcoins back to dollars, either selling them himself, or selling them to C.

Once there is a market for weed denominated in bitcoin, bitcoin has real value, and markets for all kinds of legitimate activity can sprout up.

Of course, this is all a form of money laundering, but at least the value is rooted in something.

The restricted nature only serves to ensure that people don't produce an infinite amount of them, which would destroy any value they have. However, rarity doesn't create value, it only helps to preserve value due to the absence of any single authority that can devalue it. The actual currency value derives from what you can do with it, namely purchase services or products.

Currently, that's where I see a lack. There seems to be more interest in trading the currency than using it for products or services. For a universe equal to $5 million, there's not much to buy. I'm a bit wary of putting my app for sale on the shrooms-and-heroin page, y'know?

Agreed. Marx called from 1844; he wants his "Labor Theory of Value" back.

Simply because something is rare, doesn't mean it is valuable.

Though if it's rare, it can stay valuable, once it becomes so.

And how many times in history has this happened? Maybe once, if you want to count precious metals and stones... though these have a certain aesthetic appeal, and in any case have been considered valuable for all of recorded history.

Every other valuable asset in the world is either useful or backed by a recognised government.

Doesn't need to be a government. Just a trusted party that provides conversion into other assets.

In which case you have a currency backed by the underlying assets of the trusted party. A "one free donut" voucher from Krispy Kreme is almost as good as owning a donut, since I'm fairly confident that they'll be able to produce the donut upon demand. Whether "donut vouchers" deserve to be called an asset separate from "donuts", however, is pretty debatable -- the value of one is clearly tied to the value of the other.

This is, of course, nothing like Bitcoin, which isn't backed by any actual assets of any trusted party. In fact, it is entirely incompatible with the massive inflation which is Bitcoin's most appealing feature for its early adopters.

Why should massive inflation be an appealing feature for early adopters?

Sorry, I meant massive deflation.

Makes more sense. Thanks.

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