[Big Mac]

So I just started learning about the bitcoin project, which claims to be an alternate form of currency based on computing and backed by sourceforge and a Google engineer. Anyone knowledgeable when it comes to this project?

The reason I ask is, I don't really understand how it's supposed to work. It's supposed to be a currency that can be used to pay for goods and services. I downloaded the client and started "generating coins," and this is what I don't really understand. If you can download a client and start generating coins that you can then use to pay people with, how is that any different from producing your own dollars in your basement (aside form the obvious fact that bitcoin isn't an accepted currency at this time)? What's to stop a person from setting up a distributed network of computers to produce tons of bitcoins, given that it isn't like it's limited to a per user limitation on the generation of coins? Is this a theoretical virtual currency?

Secondly, with a real currency there are ways to exchange it for another type of currency and vice versa. If I started to believe in bitcoin after someone here explains it to me and wanted to convert some of my dollars to bitcoins, is there any way to do that? If not, how am I supposed to use it as I would a real currency if I can't convert my primary currency over to it?

[SpaceMonkey]

I had never heard of bitcoin before you posted this, but from reading the web page it sounds like you can't simply generate as many coins as you want, although you can increase your share of the total supply:

The total eventual circulation will be 21 million bitcoins. There will never be more coins than that. The coins are entering circulation gradually, at a steady pace over many years, to nodes supporting the network in proportion to the CPU time they contribute. With the current total CPU power on the network, most CPUs will usually take months between successfully generating 50 BTC.

[Big Mac]

Right, so eventually there will be a fixed amount of bitcoins in circulation, and I guess by generating them you're helping to establish the supply. But it just seems like it could be manipulated at the early stages by someone with a lot of computing power.

But besides that, without an ability to exchange currency between normal currency and bitcoin, how is it ever supposed to become popular?

[SpaceMonkey]

Originally Posted by Big Mac 

But besides that, without an ability to exchange currency between normal currency and bitcoin, how is it ever supposed to become popular?

Presumably people who want to use it see some value in it over national currencies, but like you I'm not sure what that is. And just because there is no central issuer does not mean that you cannot exchange bitcoins for dollars, as long as there is someone out there who is willing to send you dollars in exchange for a bitcoin payment.

[Big Mac]

Oh, I see. So if you want to exchange your dollars for bitcoins you just trade them openly to someone? I guess some enterprise will set up a way for bitcoins to float against other currencies assuming it takes off, but there won't be a bitcoin central bank of any kind. I'm starting to get it, but I still don't really understand how CPU time spent generating bitcoins translates to actually have bitcoins to spend.

[SSharon]

See episode #287 of Security Now.
GRC - Security Now! Episode Archive

It will explain bitcoin in far more detail than you could possible imagine. It explains how it works and many of the protections that are built into it.

[turtle777]

Voltaire had it right:

"Paper money eventually returns to its intrinsic value -- zero."

Same is true for electronic "money".

-t

[nonhuman]

Originally Posted by turtle777 

Same is true for electronic "money".

The same is true of gold and other sorts of 'hard' currency... It has value only because we all agree it has value—just like paper money—otherwise it's just a shiny rock. Value comes from human labor, money represents that value regardless of what it's made of.

[turtle777]

Originally Posted by nonhuman 

The same is true of gold and other sorts of 'hard' currency... It has value only because we all agree it has value—just like paper money—otherwise it's just a shiny rock. Value comes from human labor, money represents that value regardless of what it's made of.

You are mistaken.

Hard currencies capture human labor.
Also, it's value is not only based on agreement, but on being in limited supply.

So the intrinsic value is labor and rarety.

-t

[Big Mac]

The value of hard currencies are based on limited supply in part, but the value is still relative. If the world economy were to go tits up, the gold people have been hoarding would dramatically decrease in value because the perception of the value of gold is tied to the world economy that values it. Direct proof of this fact was seen just a couple of years ago. I think it was during the Russian war with Georgia that the dollar was under substantial pressure - I think the Russians were dumping dollar reserves. But instead of the dollar falling through the floor there was a substantial drop in the value of gold and a retreat to the dollar, the inverse of what one would expect.

[nonhuman]

Originally Posted by turtle777 

You are mistaken.

Hard currencies capture human labor.
Also, it's value is not only based on agreement, but on being in limited supply.

So the intrinsic value is labor and rarety.

-t

Hard currencies do capture human labor, but so does everything else, including fiat currencies (just less of it). Gold can only be used as currency so long as the society it is being used in agrees that gold can be used as currency (if no one will take your gold coins in exchange for their goods or services, they're worthless no matter how rare gold is).

The fact that it's rare only makes it valuable because it is also desirable. If something isn't desirable, it worth nothing no matter how rare it is.

[turtle777]

I don't really know what your point is.

Fact is: over thousands of years, people eventually assigning value to fiat currencies, where as gold and silver have remained a steady and true store of value.

So for all intents and purposes, as far as human history goes, gold and silver are hard and don't go out of style, paper currencies always ultimately failed.

-t

[Big Mac]

I don't think nonhuman is arguing against your point that precious metals have intrinsic value based on rarity that fiat currencies lack. That's beyond dispute. That does not mean, however, that precious metals always hold their value because they do not. Gold isn't guaranteed to endlessly appreciate in value and never go through periods of considerable depreciation, unless what I've read about the inflation adjusted price of early 1980s gold being above $2,000 an ounce is incorrect. Buyers of gold back then at those highs still aren't even close to having fully recovered their original investment value. Precious metals therefore do not always remain steady stores of value.

[turtle777]

Gold doesn't depreciate or apprecite.
Fiat currencies appreciate or depreciate in terms of gold.

Gold *is* money.

-t

[turtle777]

Example of how gold is the best independent representation of value:



-t

[Big Mac]

Then why is it that the inflation adjusted price of gold in the early 1980s was worth $2,000 in modern dollars? And why was gold parked around $300-$700 for a long time in the 1990s up through the mid-2000s?

In periods of high inflation and economic uncertainty, gold outperforms fiat currencies. In periods of stability, gold seems to me to under perform, especially because you don't receive any benefit for merely holding gold when it is price stable in comparison to fiat.

[nonhuman]

Originally Posted by turtle777 

Gold doesn't depreciate or apprecite.
Fiat currencies appreciate or depreciate in terms of gold.

Gold *is* money.

-t

Of course it does. Several factors affect this:

1. the global supply of available gold is constantly changing (we mine more gold)
2. the demand for gold is constantly changing (prior to the invention of electronics, it really wasn't a particularly useful substance)
3. the labor involved in retrieving gold is constantly changing (as we invent new mining and extraction technologies)

The more gold there is, the less valuable it is (as you pointed out by mentioning how it's value is tied to its rarity). Correspondingly, the more demand for gold there is, the more valuable it is (and demand increases as we find new uses for it such as electrical circuits). Additionally, mining technology represents quite a lot of labor besides simply the labor involved in pulling gold out of the ground. So the more our mining technology advances, the more labor is involved in every ounce of gold that is mined.

[Doofy]

Originally Posted by Big Mac 

Then why is it that the inflation adjusted price of gold in the early 1980s was worth $2,000 in modern dollars?

Because our governments manipulate inflation figures.

[CreepDogg]

Originally Posted by turtle777 

Gold doesn't depreciate or apprecite.
Fiat currencies appreciate or depreciate in terms of gold.

Gold *is* money.

-t

Not necessarily. Let's see how this works in simple terms.

Assume: Economy goes tits up. Dollar is worthless, and food becomes very scarce.

You have a bar of gold. I have a box of food. Try to trade me your bar of gold for my food and see what happens.

It may be more scarce than fiat currency, but it still only has value if we agree it has value.

[Big Mac]

True. I think that may be the first time I've ever agreed with something you've written, CreepDogg.

[CreepDogg]

There's a first time for everything. Wait - I think I just saw a pig fly by!

[OAW]

Originally Posted by nonhuman 

The same is true of gold and other sorts of 'hard' currency... It has value only because we all agree it has value—just like paper money—otherwise it's just a shiny rock. Value comes from human labor, money represents that value regardless of what it's made of.

QFT.

OAW

[Spheric Harlot]

Originally Posted by CreepDogg 

There's a first time for everything. Wait - I think I just saw a pig fly by!

Turn off that TV.

Simpsons re-runs are a scourge.

[turtle777]

Originally Posted by Big Mac 

In periods of high inflation and economic uncertainty, gold outperforms fiat currencies. In periods of stability, gold seems to me to under perform, especially because you don't receive any benefit for merely holding gold when it is price stable in comparison to fiat.

That is only true if you make fiat currencies the base from which you view and compare to other things, the vantage point.

To me, fiat currencies make a very bad vantage point. They are too easily manipulated.

Sure, gold can go down in terms of fiat currencies.
But this could either mean that gold "lost" value, or that (for some reason) the fiat currency temporarily was deemed more valuable.

Again, all appreciation of fiat currencies is temporary, they all go back to zero eventually.

A hallmark for hard currencies is NOT that they can prevent swings based on emotions and speculation I fiat.

-t

[turtle777]

Originally Posted by nonhuman 

1. the global supply of available gold is constantly changing (we mine more gold)
2. the demand for gold is constantly changing (prior to the invention of electronics, it really wasn't a particularly useful substance)
3. the labor involved in retrieving gold is constantly changing (as we invent new mining and extraction technologies)

The more gold there is, the less valuable it is (as you pointed out by mentioning how it's value is tied to its rarity). Correspondingly, the more demand for gold there is, the more valuable it is (and demand increases as we find new uses for it such as electrical circuits). Additionally, mining technology represents quite a lot of labor besides simply the labor involved in pulling gold out of the ground. So the more our mining technology advances, the more labor is involved in every ounce of gold that is mined.

NO.

You don't understand how people and economies create new, lasting values and wealth.

The world is growing in population and in creation of wealth. A growth of gold supply adequately shows this additional wealth creation. And even if gold growth doesn't match wealth creation 100% in lockstep, that's not a problem. Gold as a ha currency and true measure of value doesn't mean there won't be times of business exuberance or recessions.

The industrial use of gold is irrelevant to it's value, btw. That's why it's less volatile than silver.

-t

[turtle777]

Originally Posted by CreepDogg 

Not necessarily. Let's see how this works in simple terms.

Assume: Economy goes tits up. Dollar is worthless, and food becomes very scarce.

You have a bar of gold. I have a box of food. Try to trade me your bar of gold for my food and see what happens.
.

Oh geeze, that argument is so tried and stupid.

How exactly does this NOT apply to fiat currencies ?

Just because you need more than gold for your daily life doesn't mean it's not the best representation and store of value.

-t

[nonhuman]

Originally Posted by turtle777 

That is only true if you make fiat currencies the base from which you view and compare to other things, the vantage point.

To me, fiat currencies make a very bad vantage point. They are too easily manipulated.

Sure, gold can go down in terms of fiat currencies.
But this could either mean that gold "lost" value, or that (for some reason) the fiat currency temporarily was deemed more valuable.

Again, all appreciation of fiat currencies is temporary, they all go back to zero eventually.

A hallmark for hard currencies is NOT that they can prevent swings based on emotions and speculation I fiat.

-t

Yes, and if you use gold as your basis of comparison, then of course gold will always appear to hold a completely steady value...

If we can agree that the source of value is human labor, then the only real measurement of a currency is the amount of human labor that it can buy. The only way this can be determined is by a market in which individuals are able to determine how much work they are willing to do for an ounce of gold; as such, it will be subject to market forces such as supply and demand: if there is a surplus of labor an ounce of gold will buy far more than if there is a shortage of labor.

[nonhuman]

Originally Posted by turtle777 

NO.

You don't understand how people and economies create new, lasting values and wealth.

The world is growing in population and in creation of wealth. A growth of gold supply adequately shows this additional wealth creation. And even if gold growth doesn't match wealth creation 100% in lockstep, that's not a problem. Gold as a ha currency and true measure of value doesn't mean there won't be times of business exuberance or recessions.

The industrial use of gold is irrelevant to it's value, btw. That's why it's less volatile than silver.

-t

From whence does this magical, inherent value that gold has come?

[turtle777]

Originally Posted by nonhuman 

From whence does this magical, inherent value that gold has come?

Over hundreds of years, people couldn't find anything that was better at representing and storing value.

Gold is easily recognizable, easily devidible, hard to counterfeit.

Seriously, it obviously does it's function well, otherwise people wouldn't have returned to it after countless failed fiat currency attempts.

-t

-t

[Big Mac]

Originally Posted by nonhuman 

From whence does this magical, inherent value that gold has come?

Rarity and desirability humans attach to it.

[nonhuman]

Originally Posted by Big Mac 

Rarity and desirability humans attach to it.

Right, so if people stopped desiring gold it would cease to have value...

[Big Mac]

That's correct in large part and basically what I've been saying, but turtle will point out that at no point in recorded history has gold been completely devalued. Gold has never been worthless. And again, gold has an inherent edge over fiat currencies, rarity. Unless and until humans can at a very low cost create artificial gold as good as the real thing, it will have an inherent value advantage over fiat currencies that can be manipulated and inflated or defaulted on into worthlessness.

[nonhuman]

Originally Posted by Big Mac 

That's correct in large part and basically what I've been saying, but turtle will point out that at no point in recorded history has gold been completely devalued. Gold has never been worthless. And again, gold has an inherent edge over fiat currencies, rarity. Unless and until humans can at a very low cost create artificial gold as good as the real thing, it will have an inherent value advantage over fiat currencies that can be manipulated and inflated or defaulted on into worthlessness.

Very true, but artificial gold would be completely indistinguishable from real gold or else it wouldn't be gold at all. The minute we have the technology to synthesize gold, the possibility of a gold economy collapses. Or, the minute we discovery something better than gold. Or the minute we develop brain-uploading technology and move to an entirely electronic existence...

Regardless, the value of gold is contingent, rather than inherent. It obeys the dictates of supply and demand, just as everything else does.

[Big Mac]

But you acknowledge that it's distinguished in its rarity from fiat because it can't just be created out of thin air.

[nonhuman]

Originally Posted by Big Mac 

But you acknowledge that it's distinguished in its rarity from fiat because it can't just be created out of thin air.

Yes, it's a limited resource. And it has other properties that make it useful as a form of currency such as malleability, durability, density, and lack of utility.

But if we were to stumble upon (or invent) another substance that was even better in these properties it could easily supplant gold.

[Big Mac]

Very true. But if pigs could fly. . .

[turtle777]

Well, until then, I'd happily keep my gold and silver.

The Chairsatan may help us all.

-t

[turtle777]

Originally Posted by nonhuman 

Very true, but artificial gold would be completely indistinguishable from real gold or else it wouldn't be gold at all. The minute we have the technology to synthesize gold, the possibility of a gold economy collapses.

Funny thing is, this is exactly what's happening...

...to the US dollar. It's called the printing press.

-t

[nonhuman]

Originally Posted by turtle777 

Funny thing is, this is exactly what's happening...

...to the US dollar. It's called the printing press.

-t

Yes but government fiat holds the supply in control (whether or not we agree with how they choose to exercise that control).

[CreepDogg]

Originally Posted by turtle777 

Oh geeze, that argument is so tried and stupid.

And yet, it's an apt description of what's going on.

How exactly does this NOT apply to fiat currencies ?

It DOES apply. I never claimed it didn't. I even alluded to it in the example. I'm merely pointing out that gold isn't immune from this either.

Just because you need more than gold for your daily life doesn't mean it's not the best representation and store of value.

The best representation and store of value is whatever we decide it is. We could decide to make our currency Beanie Babies, and boom, human labor will be valued in Beanie Babies and that will dictate what you can buy.

Gold's scarcity would seem to give it pretty good stability as a currency, especially in relation to other commodities, and that is perhaps an advantage over fiat. Even then, it is subject to inflationary and/or deflationary pressures if wealth creation outpaces gold production or vice versa. And none of this changes the fact that there's no inherent value of gold unless we humans assign it.

So, paper money will eventually go back to the value of the paper. Gold money will eventually go back to the value of a shiny thingie. Perhaps the latter will take longer, but it's the same process.

[CreepDogg]

Originally Posted by nonhuman 

Very true, but artificial gold would be completely indistinguishable from real gold or else it wouldn't be gold at all. The minute we have the technology to synthesize gold, the possibility of a gold economy collapses.

Well, that's not quite true - it would just turn the gold to fiat. The possibility of a gold economy is still there, but the advantage over fiat is gone.

[nonhuman]

Originally Posted by CreepDogg 

Well, that's not quite true - it would just turn the gold to fiat. The possibility of a gold economy is still there, but the advantage over fiat is gone.

Good point.

[Big Mac]

I think someone may have hacked CreepDogg's account. He's making entirely too much sense in this thread!

[CreepDogg]

Nope. Still me!

[mduell]

Tyler Cowen just posted a good roundup of Bitcoin information.

[The Godfather]

Unlimited 3G plans keep their value better than gold.

[mattyb]

Gold price hits record at $1,500 an ounce

The gold price has risen above $1,500 an ounce for the first time after concerns about global economic recovery lifted the metal's appeal as a haven.

In trading in Hong Kong, gold hit a record $1,500.70 an ounce, which traders said was mainly a response to Standard & Poor's downgrade of US debt.

Silver also touched a 31-year high of $44.34 an ounce.

"In a word, sensational. Everything's feeding into this, sovereign debt, weak dollar, inflation," said one analyst.

Nowhere is labour or rarity mentioned.

[ghporter]

Originally Posted by mattyb 

Gold price hits record at $1,500 an ounce



Nowhere is labour or rarity mentioned.

The rarity and cost involved in obtaining gold have nothing to do with its current value, much as the value of diamonds has nothing to do with how difficult to mine or rare they are. The difference is that gold is freely traded while a few very concentrated (and actively manipulated) markets determine the base value of diamonds. Anything is worth what people pay for it, and nowadays people are stupid about gold.

Having more people able to directly trade in commodities and stocks may be convenient for those people, but the mob mentality appears to be pushing all the markets around like a pinball. Markets that used to be stabilizing and solid are now just as jittery as the ones that used to be considered "too volatile for serious investors." I'm thinking about making an open offering for "free harvested atmosphere" and seeing how stupid people get about that. It should be fun to watch that train wreck.

[turtle777]

Originally Posted by ghporter 

The rarity and cost involved in obtaining gold have nothing to do with its current value, much as the value of diamonds has nothing to do with how difficult to mine or rare they are.

Glenn, with all due respect, but this is nonsense.

The cost of production put a floor underneath the price of gold, silver or diamonds.
That doesn't mean it can go below that, but it means it will not stay there in the long term, or production will seize, and supply will go down, raising the price. It's a well tuned mechanism.

It's pretty obvious that if gold or diamonds could be easily "mined" by digging 20 minutes in your backyard, it wouldn't have been ascribed the value that it has today. The cost of obtaining gold and diamonds DOES matter.

-t

[ghporter]

Neither gold nor diamonds have been priced anywhere near their "floor" values for decades. The "absolute value" of gold is relatively low based on both rarity and cost to produce, especially since there are tons of gold "in circulation" and actual production costs for any given ounce of gold are minimal. Not that gold is worthless, just that independent of market forces it's a LOT lower than $1500. In real dollars the value of gold should be somewhere closer to $500-$800 based on rarity and cost to produce, along with demand for the metal in the various markets where it is used (industry, jewelry, etc.). Speculation is why "the price of gold" is at the current level.

Diamonds are relatively common, and what is called the "second market" in already circulated diamonds (don't call them "used" diamonds!) is both huge and active. DeBeers controls the cost of new-to-the-market diamonds, both by controlling a major source of fresh stones and by indirect forces. Diamonds are everywhere, and gem-quality stones are so common that they are mass produced in places that in the past used to only do the "rough cut" processing of stones. According to a jewelry maker I know, most "accent" diamonds are machine cut in India, with little attention to making these stones look good-they can always shift a bad looking stone to an industrial market. Small diamonds are commodities today, but DeBeers still keeps the "cost" of even these stones artificially high through their control of the source markets.

As for "digging for 20 minutes," there's a state park in Arkansas where you can find diamonds ON THE GROUND. It's not an industrial-level site, but it is quite an interesting place to meander through. On April 7, a person from Arkansas found a stone of almost 4 carats in weight (rough) there. Again, it's not that I'm saying diamonds are worthless, only that speculation and market control are artificially inflating the prices people pay.