Editorial: BitCoins & LiteCoins; Mining the Future?

[dgstorm]

We have a slightly off-topic story to share with you guys today, but it is a subject that is garnering great interest around the world especially in the technology and financial sectors. That subject is the new internet digital currency called bitcoins and/or litecoins. Interest in this subject has been growing at a rapid pace and it has even been showing up in the main-stream media very often lately. News organizations from Yahoo! and Bloomberg to CNNMoney and the Wall Street Journal have been increasing their coverage of the strange virtual money phenomenon.

If you haven't heard of bitcoins or litecoins, don't feel too bad, it's still a fledgling trend despite having been around since 2009. Furthermore, it has mostly been the purview of very computer/tech savvy folks. Let me attempt a brief and crude summation to help you understand the concept. A developer using the pseudonym Satoshi Nakamoto created bitcoins in 2009. The true identity of this developer has still never been conclusively found. The idea he/she started was a digital virtual currency that exists because of its relative value due to its rarity and the faith that backers are willing to put into it. This virtual currency has no central banking nor any controlling central authority. It instead relies on peer-to-peer network sharing. No one knows who actually started it, nor why, but it appears it was an idea to create a truly democratized monetary system.

The bitcoin supply comes from an automated system and given to servers. The way you get bitcoins is by "mining" them. The way you mine them is by running the bitcoin peer-to-peer mining client software on your computer. This software crunches algorithms used for public key cryptography which are based on "one-way" mathematical relationships. The system then logs when you have found a piece of a bitcoin. Once you have enough pieces of a bitcoin, you have a whole bitcoin. These bitcoins are actually being used as viable currency by some online venues, thus it has value in the real world. Currently one bitcoin is worth about $180-190 in US dollars. It all sounds terribly complicated and almost scary, but the reality is far from nefarious. The algorithms and encryptions being used are already known and completely open, so those CPU/GPU cycles aren't being funneled away by some secret organization.

To put it in laymans terms, it's kind of like a virtual gold rush, only this gold has already been created in the virtual world of the computer. The algorithm (gold) is in a finite amount of 21 million bitcoins, and is set to run out in 2140. Miners leave their computers on crunching numbers to try to mine these virtual flecks of bitcoin-gold in an attempt to gain more, hoping their time spent mining will pay off. Imagine that you are mining in your backyard for physical gold. It takes a pick and shovel and your energy to dig for it, which results in finding the gold or not. With bitcoins you use your computer as your pick and shovel and the electricity to run it as the energy you expend to find these little bits of electronic gold.

There is one caveat to this. The algorithm that started the bitcoins is designed to get exponentially harder as time progresses and more bitcoins are mined. This basically means it becomes harder and harder to find the pockets of gold.

Now, it's important to make a quick distinction. Bitcoins started this internet currency idea, but there is a new version 2.0 of them called litecoins. Litecoins use the same concept, but the algorithms were designed to make data mining easier for the layman. There is a good reason for this, and that is because it is likely no longer profitable for the average person to mine for bitcoins. It requires electricity and a powerful computer rig. Currently there are organizations that have sprouted up using specialized hardware to mine the bitcoins. They can operate in ways that the average home computer cannot. Furthermore, at the current difficulty "level" for the mining of bitcoins, the amount of bitcoins an individual could mine would actually cost more in electricity than it is worth. Although litecoins aren't worth nearly as much as bitcoins ($4.50 versus $188), it is still much easier to mine for litecoins, and the calculations are designed so that specialized hardware will not have as much of an edge.

Ultimately, the bitcoins & litecoins concept seems like an interesting trend, and many financial experts have weighed in calling it a huge bubble waiting to burst. While that is a distinct possibility, it still opens up a world of intriguing philosophical conversations about the nature of currency and even the nature of reality. The imagination begins to wonder what the world will be like in another 10-20 years with the advent of digital currencies. If a virtual digital currency like bitcoins or litecoins really takes off in a big way, and the world starts utilizing this currency in a more mainstream manner, what does that mean for the currency of individual countries? Could we be seeing the infancy of a future global currency that could change the world's financial markets forever, or is it just a passing fad?

We wanted to see what you guys think of this trend, and how many of you are mining for little bits of electronic gold. We also wanted to share our dedicated sections on the subject over at our computer hardware sister-site @ PureOverclock.com. We created several sections and links to resources to help you understand it better and have a place to discuss it within the Forum Foundry family.

Here's a link to our main Bitcoin/Litecoin section over at PureOverclock.com: Digital Currency Forums

Here's the original story over there: Editorial: BitCoins & LiteCoins; Mining the Future? | Pure Overclock

 

[kodiak799]

Tripled in value the last month or two...Yeah, I'd say it's a bubble.

And the biggest flaw is exposed by the advent of Litecoins itself - who's to say the financial community won't chase/agree on something else? There's no productive value, no true rare physical commodity. But with no real backing it's kind of a game of musical chairs.

Interesting idea. It would be cool, in a really nerdy kind of way, to get some sort of framed certificate of ownership of a bitcoin.

 

[xeene]

These bitcoins are actually being used as viable currency by some online venues, thus it has value in the real world.

the only venue i'm aware of is buying illegal drugs on tor sites like silkroad. for everything else there is mastercard

 

[dgstorm]

the only venue i'm aware of is buying illegal drugs on tor sites like silkroad. for everything else there is mastercard

You are mistaken.

Here are some links:

http://mashable.com/2013/03/29/bitcoin-vendors/

https://www.spendbitcoins.com/places/

Online Stores Accepting Bitcoins List - bitcointrading.com - bitcoin buy/sell classifieds forum

Reddit Starts Accepting Bitcoin for Reddit Gold Purchases Thanks To Partnership With Coinbase | TechCrunch

 

[dgstorm]

There's no productive value, no true rare physical commodity. But with no real backing it's kind of a game of musical chairs.

This argument is irrelevant to whether bitcoins/litecoins have value. One could make the argument that throughout the history of the world, gold didn't have the value that was assigned to it. Until current times when we started using gold in electronics, the "rare and precious" metal was relatively useless. It is too soft to be of much use other than in Jewelry. It was only valuable because it was rare and shiny and because people believed it had the value assigned to it. You could easily make the same argument about bitcoins/litecoins, except for the shiny part.

The only reason they have value is because they are rare and someone is willing to exchange a product or service for them. Guess what... the American dollar (and nearly all currency on the planet now) is just the same. Since the dollar is no longer backed by the gold standard, it only has value because we are willing to trade it for goods and services, and we choose to trust that the government will provide it with value. Even if we went back to the gold standard, that is really just an illusion too. Just because gold has a physical existence doesn't make it worth more than a bitcoin in theory. What would happen to the value of gold if new technology found a giant deposit of gold the size of a mountain. The "value" would plummet.

Ultimately it boils down to a philosophical debate about the intrinsic value of energy. Money is really just a psychological representation of the relative value we put on the amount of energy spent to offer a product or a service.

A bitcoin/litecoin requires energy to "mine" from the data stream, just as a gold nugget requires energy to mine from the ground. If someone is willing to pay "real world" dollars for a bitcoin, then it has the value that person was willing to assign to it.

However, your other points are very valid. It's possible that bitcoins are experiencing a large bubble right now which may burst at any moment. And you are right that the financial community could just chase something else... they have been doing that for centuries. Only time will tell what actually happens with this new virtual currency. It definitely forces us to look at things in a new way and reevaluate our perspectives.

 

[kodiak799]

You could easily make the same argument about bitcoins/litecoins, except for the shiny part. The only reason they have value is because they are rare and someone is willing to exchange a product or service for them. Guess what... the American dollar (and nearly all currency on the planet now) is just the same.

Just because gold has a physical existence doesn't make it worth more than a bitcoin in theory. What would happen to the value of gold if new technology found a giant deposit of gold the size of a mountain. The "value" would plummet.

And people have often said gold could collapse if financial markets were to stop valuing it. But there's a HUGE difference between a rare commodity who's physical production is limited. That difference is everything. No one is really to say more bitcoin can't just be created, or counterfeited. Or something else come along such as Litecoin. Bitcoin can't really be compared to a physical commodity with centuries of experience backing it as value - that circular sort of agreement is everything. And, in fact, if there should be some big new discovery of gold reserves its value WOULD collapse to reflect that.

The currency argument is wholly different and not comparable. It's backed by the full faith of govt, and it has value because people want to buy and trade it for purchase of goods and services produced in that country - the world could reject the USD but I could still go into a McD's in NY and buy a hamburger with it.

Who regulates bitcoin and the control and limitation of its production are huge issues for it. Who bears the credit risk for it? Because open competition in currency is something economists have been talking about for years, but there has to be the full faith and credit of the bank or whomever is issuing it, that you can walk in there and they be able to exchange it at market rates for any currency you desire. That market mechanism is critical to the function and clearing of the currency, and I just don't see that for bitcoin.

 

[Beardface]

Oh you better believe this is a bubble ready to burst.

Hot internet trend that is gaining in popularity and causing people to gain a lot of wealth that cannot be backed by any physical entity in the event their creditors come calling? We saw this exact same scenario in the stock market in the 90s and early 2000s with the DotCom bubble. When this craze goes sour, and much like every technology craze in the past, it inevitably will, you're going to see the bottom fall out on it. This is the same reason you're starting to see states in the US try to go back to a gold based currency rather than continue with fiat money, because currency based on intangible things can be extremely volatile. We have already seen this last week when a Bitcoin server was hit with a DDoS attack, and caused the value to drop 30% overnight. It really is just a big bubble thats growing thinner by the day.

 

[Sydman]

Has plenty of value to me. I bought 2 bitcoins for 24 bucks back in the beginning of January. I can sell those same bitcoins today and get 500 bucks for them, only wish I had gotten more back then.

Now of course they are going to level off eventually, but for me that is good enough profit to call it a happy day. Will pay for my next gadget!

 

[akhenax]

Has plenty of value to me. I bought 2 bitcoins for 24 bucks back in the beginning of January. I can sell those same bitcoins today and get 500 bucks for them, only wish I had gotten more back then.

Now of course they are going to level off eventually, but for me that is good enough profit to call it a happy day. Will pay for my next gadget!

Bitcoins remind me of Stocks in a business or company.

You buy a stock one day, the next day it's up 300%. You sell for a profit.
You buy a bitcoin one day, the next day it's up 300%. You sell for a profit.

Maybe it's not a bubble, but will expand and fluctuate.

You bought in January, it's 3 months later, and it's up 2000% All I can say is kudos. But methinks, maybe you should sell now.

 

[Sydman]

Bitcoins remind me of Stocks in a business or company.

You buy a stock one day, the next day it's up 300%. You sell for a profit.
You buy a bitcoin one day, the next day it's up 300%. You sell for a profit.

Maybe it's not a bubble, but will expand and fluctuate.

You bought in January, it's 3 months later, and it's up 2000% All I can say is kudos. But methinks, maybe you should sell now.

You are right, I think I probably will here either today or tomorrow. It dropped down a bit to 238 a coin, so when it goes back up today where I am at 500 or above for both coins I will pull the trigger.

 

[dgstorm]

And people have often said gold could collapse if financial markets were to stop valuing it. But there's a HUGE difference between a rare commodity who's physical production is limited. That difference is everything. No one is really to say more bitcoin can't just be created, or counterfeited. Or something else come along such as Litecoin. Bitcoin can't really be compared to a physical commodity with centuries of experience backing it as value - that circular sort of agreement is everything. And, in fact, if there should be some big new discovery of gold reserves its value WOULD collapse to reflect that.

The currency argument is wholly different and not comparable. It's backed by the full faith of govt, and it has value because people want to buy and trade it for purchase of goods and services produced in that country - the world could reject the USD but I could still go into a McD's in NY and buy a hamburger with it.

You just turned around and used my same arguments and proved my point again.

1. First, you just said there is a huge difference between a physical commodity whose production is limited. Bitcoins are limited. They will run out in 2140. We don't know when/if gold will run out. The fact that gold is physical is irrelevant. The US Dollar isn't physical, even though it has a physical representation.
2. Second, the USD can be counterfeited. Why do you think our government spends millions of dollars every few years making new money with harder ways to fake it? The US Secret Service focuses on chasing counterfeiters for a reason. A bitcoin is encrypted so it is actually much harder to counterfeit than an actual physical dollar.
3. Third, you make the argument that the USD is backed by the full faith of the government. That means it is backed by "our" faith in our government. If our government collapsed or our faith in our government collapsed, it will tank in value.
4. Fourth, you say that the USD has value because people want to buy and trade it for goods and services produced in that country. People buy and trade the bitcoin in the "country" of the internet for goods and services they consider valuable.

Just so you know kodiak, I am not picking on you, nor trying to be deliberately argumentative. We could be seeing the birth of a new form of currency that might shape the future. The fact that it isn't backed by a particular institution means it isn't controlled and manipulated. Because of this it might actually hold its value better over time. It's possible it will just be a passing fad and will eventually fade away, but it isn't something that is easily dismissed, and it is great food for thought!

 

[Sydman]

1. Third, you make the argument that the USD is backed by the full faith of the government. That means it is backed by "our" faith in our government. If our government collapsed or our faith in our government collapsed, it will tank in value.

Wonder how much "faith" those poor folks over in Cypress have in their Government. At least they can't come in and take 10% of my bitcoins

Those events were one of the driving factors in the explosion of bitcoin value.

 

[cereal killer]

[/LIST]Wonder how much "faith" those poor folks over in Cypress .

Literally and figuratively...what a sham that is. Extorting your own people because of your mistakes. Got to love that. SMH

 

[liftedplane]

Tripled in value the last month or two...Yeah, I'd say it's a bubble.

And the biggest flaw is exposed by the advent of Litecoins itself - who's to say the financial community won't chase/agree on something else? There's no productive value, no true rare physical commodity. But with no real backing it's kind of a game of musical chairs.

Interesting idea. It would be cool, in a really nerdy kind of way, to get some sort of framed certificate of ownership of a bitcoin.

it's the exact same thing as the USD, it's a fiat currency. 100% fake backed by nothing.

now do I have an extra computer and have I thought about setting it to mine because who knows it may get me 20 or 30 bucks? sure.... am I going to go out of my way to do it? probably not.

And people have often said gold could collapse if financial markets were to stop valuing it. But there's a HUGE difference between a rare commodity who's physical production is limited. That difference is everything. No one is really to say more bitcoin can't just be created, or counterfeited. Or something else come along such as Litecoin. Bitcoin can't really be compared to a physical commodity with centuries of experience backing it as value - that circular sort of agreement is everything. And, in fact, if there should be some big new discovery of gold reserves its value WOULD collapse to reflect that.

go read [HTML=[url=http://www.amazon.com/Rich-Dads-Advisors-Investing-Financial/dp/0446510998]Rich Dad's Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future: Michael Maloney: 9780446510998: Amazon.com: Books[/url]]Guide to Investing In Gold and Silver[/HTML] it explains how gold has continually revalued itself, it's certainly not a worthless commodity and it has been fallen back on by governments as far back as the Romans, and farther. Silver and gold have always shared a 9:1 ratio on price, that is silver is 9x more expensive than gold, due to the fact that there has historically been 9x more gold on the face of the earth i.e. readily accesible is compared to gold.

this number has dropped dramatically because of electronics and it's actually closer to a 6:1 or even a 5:1, prices haven't caught up yet

This argument is irrelevant to whether bitcoins/litecoins have value. One could make the argument that throughout the history of the world, gold didn't have the value that was assigned to it. Until current times when we started using gold in electronics, the "rare and precious" metal was relatively useless. It is too soft to be of much use other than in Jewelry. It was only valuable because it was rare and shiny and because people believed it had the value assigned to it. You could easily make the same argument about bitcoins/litecoins, except for the shiny part.

people, humans, terrans whatever you want to call us, always have and probably always will assign value to gold, it's has always been used as a currency is some form or another. the USD used to be backed by gold, at that time the USD was a true really currency because it was backed by something that had (you are right the value is perceived, however perception is reality in most cases) value, that was gold. After the USD was taken off the gold standard it caused the dollar to become a fiat currency: The term fiat money is used to mean: *any money declared by a government to be legal tender. state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard, money without intrinsic value. gold has, as I said before, historically revalued itself over and over again. the problem with bitcoins is should something as ridiculous as the show revolution happen bitcoins would have zero value. gold would have value though.

 

[kodiak799]

I didn't turn around your arguments at all, you miss the point. You're missing critical distinctions for why gold and USD are effective and widely spread vs, say, the Albanian lek. That might be a good comparison - I would say bitcoin has the potential of some horribly unstable 3rd world currency.

1) No, there's a HUGE difference between limitations on a PHYSICAL commodity and one arbitrarily limited digitally, especially with questions on the regulation and administration of the latter.

2) Yes, the USD can be counterfeited, but it HAS NOT been done successfully in meaningful quantities such as to devalue everyone else. This goes back to the regulation and administration I referred to. The history for gold and the USD has a ton of value in terms of future expectations.

3) Again, "full faith of the US govt" is also not arbitrary. Once again, we are back to regulation, administration, and consistency of expectations. This is far from trivial - the PESO certainly doesn't carry the same weight. This is critical in efficiently functioning debt markets, whether it be private or govts seeking to raise funds in dollar-denominated bonds. Political stability is a big deal, too. And the fact is, thru debt markets, the USD is actually linked to physical claims on good and properties.

4) I'm aware people trade bitcoin. The float and market isn't remotely comparable. Liquidity is a big deal, and bitcoin suffers from the chicken/egg dilemma in that you don't have sufficient liquidity to give it legs until it is more widely accepted everywhere, but that won't happen until it has greater liquidity.

These are not trivial differences I'm pointing out even if it's subtle nuances. A fiat currency is not effective or liquid if it's not credible, and it can't be credible created by some blackbox on the internet with no real apparent regulation and oversight. It needs to have confidence as a store of value and medium of exchange - this is why economists have advocated competing currencies issued by large bulge bracket banks.

You make an interesting distinction between control and manipulation. I'd suggest they are one in the same - something not controlled is as easily manipulated as something that is controlled, but that manipulation (in the case of bitcoin) might not be so visible or easy to detect.

The emergence of litecoin is a huge problem. How do you pick the winner, or how do you know something else won't come along to replace it? That's the inherent problem with something created with the push of a button and distributed by "lottery" - there's no tangible or physical good of value, not in the end product or production, and there's no sweat equity in its creation. I think you're better of playing blackjack with your money because at least you know your odds.