The value of bitcoins always settles such that the cost of the electricity to make them is approximately their value.
But because the difficulty is adjusted such that a fixed number of bitcoins are generated per time (meaning faster or more efficient computers don't help), and that the number generated per unit time is constantly shrinking, it will cost more and more electricity over time to make bitcoins.
Deflation is built into it. And I bet the creator of bitcoins never realized that the scarce resource bitcoins track is electricity.
If you want to make a ton of money, buy bitcoins just before they switch from 50 per block to 25. I'm betting the value will double.
I don't see how this is a problem. There will only be 21 coins in existence and their cost per generation (hence their intrinsic value) will rise up until that last coin is generated. At that point coins will just be subdivided many more times -- nobody will wield around an entire coin on a day to day basis the same way most people don't carry around a roll of $100 bills. Remember coins can be divided down to the 8th decimal place.
In theory it's the difficulty that should settle such that the cost of the electricity to make them is approximately equal to their value.
So, for example, when generation switches from 50 per block to 25 per block, the value will remain the same and it will simply become uneconomic to mine. As miners leave the network, the difficulty will automatically reduce until equilibrium is reached again. (In theory. In practice, the time lag until the difficulty changes could make this an unstable feedback loop rather than stable).
.. with the modern understanding of deflation. Price is not a problem if the money supply is constant. Just think about it, it is *more goods chasing the same amount money". There will be no way we can have this conversation without that kind of deflation in computer industry.
Now, money supply contraction IS painful, but so is hangover. If you have an institution with the ability to inflate the money supply almost at will, don't act surprised if from to time a correction can be in order.
The cost of electricity per Bitcoin in turn depends on the computing power invested in the network. The strength of the next block is adjusted so that it takes approximately 10 minutes for the network to solve it.
Also there are optional transaction fees.
Right, that's what I'm saying: As more people join the network it becomes uneconomic to mine bitcoins, because since it's harder now, it costs too much electricity. So those with the least efficient setups stop mining.
So the price settles at the cost of electricity.
Then they reduce the number of coins per block. So suddenly it comes even less worth it to mine. Until the value of each bitcoin rises to match, causing people to want to mine again.
If the value of each bitcoin did not rise, no one at all would mine and the network would grind to a halt (no confirmed transactions).
Unless they have a mechanism to reduce the difficulty factor at that point. I'm not sure on that point.
"If the value of each bitcoin did not rise, no one at all would mine and the network would grind to a halt (no confirmed transactions)."
This isn't true. The system has several modes of adjustment and it will always be worth it for someone to generate blocks. If the value of a coin didn't rise to match generation costs, people /should/ stop mining -- but those that remain will collect more coins or transaction fees as the difficulty drops to compensate. Overall the economy as a whole shrinks, but never grinds to a halt.
The miners can only ignore transactions that don't carry a fee or a fee that isn't large enough. But other miners will likely accept those transactions, so the miner isn't forcing the fees up but instead letting them pass him by.
More likely the inefficient miners will be forced to quit mining as they will not be able to compete with those who either don't pay for power, or are not a commercial endeavor that is doing so at a larger scale.
Whether that is two months or four years away, who knows.
4) Legislative issues. For example Germany (I'd bet) would not accept bitcoins in one's tax form ("I have to pay 345.67 bit coins of taxes to the state"). And if you have income in a non approved currency, you get into some trouble.
I'm curious. Where exactly do you see a security flaw in Bitcoin? Exchanges run by former magic the gathering admins don't count. What flaw is there is there in the security of the currency, I'm curious.
I'll add that the crypto will one day be broken (even brute force will eventually work once CPU/GPU have progressed far enough). And when it is, there is no reason you couldn't just sit back cracking those wallets in secret before funneling the coins your way. A significant weakness of the anonymity of the network means no one really "owns" a wallet in the traditional sense. They are essentially communal.
You're right that sha256 will one day be in jeopardy, but there's no reason why the system can't update itself well before then. If sha256 is broken, all it takes is for people to update their clients and only start accepting sha3, etc.
Previously, breaking a crypto was nice, but not instantly and anonymously profitable as it is with Bitcoin. It will be interesting to see how it plays out when it happens.
Exchanges run by former magic the gathering admins don't count.
Not sure what's meant by that dig, but worth pointing out that a lot of former (and some current) Magic pros do quite well in financial work. In fact, an eerie number of them seem to graduate from Magic, to poker, to finance.
Seems like an obvious selection bias, IMO - much like chess or RTSs or first person shooters. The kind of geeky person who plays Magic and has the brains to do very well even against fellow geeks - is it such a surprise that a good fraction of them might do well when they turn their efforts to poker or finance?
He's referring to how the most popular Bitcoin exchange site, mtgox.com was formerly a trading site for Magic The Gathering cards, "Magic The Gathering Online eXchange"
This site was hacked a few days ago causing much chaos in the Bitcoin community.
Agreed, I personally know 2 people who make their living playing poker...both are former magic players. It was explained to me like this...magic has so many different variables the odds on different hands are very complex, poker by comparison is very easy (odds wise vs. magic). I used to watch one of them play online, 3 monitors with 8 tournaments running per screen at the same time, I think he was in the top 50 worldwide for a bit there (not to mention winning a very large sum in one of the poker tours).
Both of them moved out of country when the Poker stars crackdown happened so they could keep playing.
When I mentioned I liked Blackjack they laughed and said "...odds are terrible...you might as well play the stock market..".
I think the lack of physical tokens for Bitcoin (or any cryptocurrency) will likely be the main hurdle for public acceptance. It'll probably take another generation or two for people to get used to the idea of not having a physical representation for currency.
People accepted credit cards decades ago. If bitcoin could work as a currency (which it can't, for other reasons), it would presumably be used via equally convenient exchange devices.
1. Technical issues (make it more secure) 2. Economic issues (deflation) 3. "Competitor" issues (governments, banks, the powerful status quo)