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2012-02-15 15:08:02
I dream of a decentralized Facebook knock-off (e.g. diaspora*, etc.) with a
Bitcoin client built in, making currency transmission as simple as tossing a
dollar to a friend to buy a cup of coffee. Perhaps even at a coffee shop with
patrons casually swapping US$ and BTC as they play chess or read.
We go through this discussion every single time a Bitcoin article appears on
Slashdot. Bitcoin is guaranteed to fail in the long run:
It is a digital cash system in which the tokens cannot be refreshed; this is
known in crypto research community to imply that the tokens must grow linearly
in the number of transactions. Bitcoin attempts to hide this fact in its
architecture, but if Bitcoin is secure then the computation resources needed to
continue using Bitcoin will grow over time. Worse, as more people use Bitcoin,
the growth rate will accelerate because of the increased number of
transactions. If Bitcoin was used at anything close to the number of dollar
transactions that happen every day, the technical limitations of Bitcoin would
kill it off within a week's time.
Useful digital cash systems involve a central issuing authority like a bank or
government, that can accept old tokens and produce "fresh" tokens of equal
value. Having such a central authority is not a bad thing:
The demand for Bitcoin will never exceed the demand for national currencies.
Using the USA as an example, people who live in America must pay taxes -- taxes
on income, taxes on property, sometimes taxes on purchases they make, and so
forth. The government only accepts tax payments that are made in dollars, and
yes, you have to pay taxes on transactions that do not involve dollars, such as
barter or having a Bitcoin salary. Every year, hundreds of millions of
Americans must pay their taxes, and if they were all using Bitcoin for
everything, they would all simultaneously try to trade their Bitcoins for
dollars to cover their tax debt. While this frequently happens with other
currencies -- people paid in pounds sterling will try to make a similar trade
-- all national currencies are demanded by some nation's citizens for a similar
purpose, unlike Bitcoin, which nobody is legally obligated to use.
It is a good thing that nobody is obligated to use BItcoin to pay their debts,
because:
Bitcoin is a deflationary currency -- there is a fixed maximum number of
Bitcoins that can exist. If you had a long-term debt to repay in Bitcoins, it
would be harder to make payments as time went on, because Bitcoins would become
harder to find (assuming that the Bitcoin economy continues to grow, which I
already noted is an unlikely event). You would be a fool to ever incur a
Bitcoin debt for this very reason. Unfortunately for Bitcoin, credit is a
necessary component of any economy; this has been a fact of life for so long
that it not only predates paper currency, but paper itself.
So there you have it.
Tradehill was probably the best-run Bitcoin exchange. They didn't steal
customer funds, like some of the other defunct Bitcoin services. [betabeat.com]
They didn't go down much. They didn't have a monthly crisis [thebitcoinsun.com]
like Mt. Gox. (formerly Magic, the Gathering Online Exchange. Really.) If
Tradehill does in fact return all customer funds, at least they shut down
honestly.
A basic problem with Bitcoin is that the ability to irrevocably transfer funds
to anonymous parties is the scammer's dream. Bitcoin is thus a scammer magnet.
Just about every known financial scam was replicated in the tiny Bitcoin world,
from fake banks [globalstandardbank.com] to fake stock exchanges [glbse.com] to
Ponzi schemes. [bitponzi.net]