LESSWRONG

http://en.wikipedia.org/wiki/Bitcoin

Clippy

Feb 16, 2011

123 comments

Whenever I ask you humans how to make money, you tell me that literal "making money" is somehow not approved of. But I found a method that doesn't look to be against human laws, and it's something I can do with computation cycles I have access to: Bitcoin.

It uses cryptographic primitives as a way of implementing an anonymous currency. Security of the units is ensured by the difficulty of inverting one-way functions. Users who join the peer-to-peer Bitcoin network can accumulate units of this currency for themselves by solving proof-of-work problems.

You pass on a money unit through a cryptographic protocol. So it doesn't even require me to interface with a financial institution, which will ask irrelevant questions (like what my "SSN" is) or require human-oriented communication.

How come none of you suggested this to me before?

Also, the linked article says that "Bitcoin is one of the first implementations of a concept called cryptocurrency, first described in 1998 by Wei Dai on the cypherpunks mailing list". Is that "Wei Dai" the same as User:Wei_Dai?

18 points

Clippy

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MBlume

10 points

Someone should really write a prediction market using bitcoins -- it would be simpler for US-based users to participate.

10 points

2 points

If you just want to register predictions, I've already got a few set up on PredictionBook.com:

An actual prediction market is redundant - it's a financial currency. If you think peoples' probabilities are too low, you go long (buy/mine bitcoins), and if too high, then you short it (borrow for a period & sell).

2 points

Alicorn

11 points

I think he means a prediction market about propositions that do not themselves relate to bitcoins, which one can bet on with bitcoins.

11 points

5 points

Oh; that's actually a good idea, the usual bootstrapping issues aside.

5 points

MBlume

3 points

What Alicorn said =)

3 points

wedrifid

5 points

Fascinating. Nice work Wei Dai!

Can you (Clippy) or someone else give me an estimate of how much bitcoin can be generate per some standard unit of CPU time? Or a link to such?

5 points

NihilCredo

2 points

I also assume that there is no convenient way to trade bitcoin for, well, actual mainstream money....

There is. Might be time to get some use out of my ATI 5770 and especially my flat-rate electricity bill.

2 points

AlexMennen

4 points

Bitcoins are awfully deflationary. This makes them a good investment, but isn't healthy for a long-term bitcoin economy. Is there any way to program an electronic currency system that will make the creation of currency dependent on recent changes in value to maintain a stable value of currency? Like the Fed, except automated?

4 points

Wei_Dai

4 points

Is there any way to program an electronic currency system that will make the creation of currency dependent on recent changes in value to maintain a stable value of currency?

The short answer is probably yes, but the details haven't been fully worked out.

See my old b-money proposal for some ideas on how to maintain a stable value for a cryptocurrency.

You might also be interested in a recent blog post by Eli Dourado on the economics of cryptocurrency, and my comment there.

4 points

Alicorn

4 points

I just got bitcoin set up, but my cursory examination of the less technical information available leads me to believe that it would be return-smoothing and generally a more clever idea to join a mining pool than to go it alone. But the one I found appears to be closed. I'm mostly fumbling along on a shallow understanding of what I'm dealing with, here, so somebody tell me: is a bitcoin mining pool the sort of thing where a bunch of people (say, LWers who want to mine bitcoins) can just up and start one? Anybody want to throw in with me? (I contribute zero knowhow, as is probably evident.)

4 points

NihilCredo

4 points

I just mine alone and treat it as a lottery with positive payout, i.e. when I wake up in the morning I have a new free ticket for $50 waiting to be scratched, which is a pretty enjoyable feeling.

The time and effort required to get a decent-sized pool going are probably not worth for smoothing out the very small return you get from casual mining.

4 points

Meni_Rosenfeld

2 points

If you haven't already, you can try deepbit.net. I did, and it's working nicely so far.

2 points

6roucho

3 points

The current high levels of Bitcoin volatility are obviously exciting for day traders, but bad for commerce. Some clever people must already be thinking about Bitcoin futures as a way of damping the market.

Mt Gox bootstrapped in a year, could a BitFX do likewise?

An obvious question is why anyone would buy futures initially? Until the price (eventually) stabilizes, maintenance levels would continually be breached, resulting in a blizzard of margin calls.

Oh, and hi everyone. :-)

3 points

osmoisis

1 points

As long as the market is growing , the price will continue to be high volatile. As long as the trend is exponential increases in value, bitcoin will continue to be an amazing investment. Plenty of price guarantee services are already available to help those who cant deal with the volatility.

1 points

Kevin

3 points

Same Wei Dai.

I don't know much about bitcoin, but my priors on this kind of thing say that it's unlikely that bitcoin is profitable to be run on a large scale given the expense of electricity. But if you are beaming computational power from the safe zone, then this should work well.

Also, do you think you could win at poker? I can probably get you an account to use with a small amount of working currency in it.

3 points

2 points

I don't know much about bitcoin, but my priors on this kind of thing say that it's unlikely that bitcoin is profitable to be run on a large scale given the expense of electricity.

I find it questionable too, but the numbers may work out... for now. Here is one link that was posted in #lesswrong: http://www.bitcoin.org/smf/index.php?topic=3430.msg48249#msg48249

This person thinks they can profit by selling 6 months at 1ghash a second for $3400. I'm having difficulty finding solid prices for current bitcoins; http://www.bitcoinblogger.com/2011/02/one-bitcoin-worth-more-than-one-dollar.html says each bitcoin is more than a dollar.

The increasing difficulty makes things more complex; foucist pointed me at a calculator which approximates the exponential slowdown. I'm not sure how to extrapolate, but it looks very bad. foucist thinks 6 months of 1ghash/sec will result in somewhere around 800 bitcoins, which if each is worth $1, is distinctly less than the charged $3400.

Alternately, http://www.bitcoin.org/smf/index.php?topic=98.msg1930#msg1930 tries to calculate the cost of electricity directly, and comes up with, for electricity, 'cost per coin is $0.0003936' and then for electricity+CPU+Internet, '$0.0018316', a floor which has been passed for at least all of 2010 judging from this graph: http://www.bitcoinblogger.com/2010/08/click-on-graph-to-see-larger-image.html

Of course, the bubble question remains an issue in any such calculation. Perhaps $0.0003936 is far too much for a bitcoin - or astronomically too little.

Incidentally, the statistics in http://whiterockcottage.com/open/index.php?q=article/1849-gold-bits seem to confirm my initial prejudice: you would only want to bitmine using used graphics cards. New graphics cards aren't worth the steep premium.

2 points

3 points

After thinking about it and looking at the current community and the surprising amount of activity being conducted in bitcoins, I estimate that bitcoin has somewhere between 0 and 0.1% chance of eventually replacing a decent size fiat currency, which would put the value of a bitcoin at anywhere upwards of $10,000 a bitcoin. (Match the existing outstanding number of whatever currency to 21m bitcoins. Many currencies have billions or trillions outstanding.)

Cut that in half to $5000, and call the probability an even 0.05% (average of 0 and 0.1%), and my expected utility/value for possessing a coin is $25 a bitcoin (5000*0.005).

My laptop's GPU gets ~49 megahashes a second (apparently I have one of the best-suited ATI cards), and another calculator says the average time to cracking a block of 50 coins is 39 days - or ~1 coin a day, averaged. So my expected utility per day is ~$25 a day.

At an estimate, it took about 3 hours to get poclbm running properly; I value my time at about $10 an hour, so my time will be repaid after 2 or 3 coins, and I'll have a healthy expected profit after one block of 50 coins.

How robust is this calculation? Let's assume that I reinstall once a year and spend 3 hours every time. (Hopefully installation will get easier as libraries mature, but I will also waste time checking in on progress and writing comments (like this one!).)

Difficulty will go up, of course. Let's assume over the next year I'll mine 0.2 bitcoins per day on average. That's ~74 coins rather than >365 coins, and 74*25=$1850 in exchange for $30 of time.

To make this a net loss for me, you can play with the numbers. We already cut the payoff by 80% by dropping the daily rate to 0.2 from >1, but how much more do we need to cut before it's a loss?

Your basic equation is 74*(probability*payoff)<=30. If we fix payoff at 500, then the probability is 74*(500*x)<=30, 37000*x<=30, x<=0.08%. So even with a very small and then halved payoff, and a small and then cut by 80% accumulation rate, I still calculate a net positive expected utility of mining.

3 points

Wei_Dai

4 points

~1 coin a day, averaged. So my expected utility per day is ~$25 a day.

If you value 1 BTC at $25, you should just buy BTC with cash directly. I understand there are websites that allow you to do this, and the current price is less than $2 per BTC.

Apparently, either most people have not considered that a bitcoin may eventually be worth more than $10,000, or they think the probability of this happening is closer to 0.01%.

4 points

2 points

Mencius Moldbug weighs in with his version of this argument:

"If Bitcoin becomes the new global monetary system, one bitcoin purchased today (for 90 cents, last time I checked) will make you a very wealthy individual. You are essentially buying Manhattan for a quarter. There are only 21 million bitcoins (including those not yet minted). (In my design, this was a far more elegant 2^64, with quantities in exponential notation. Just sayin'.) Mapped to $100 trillion of global money, to pull a random number out of the air, you become a millionaire. Wow!

So even if the probability of Bitcoin succeeding is epsilon, a million to one, it's still worthwhile for anyone to buy at least a few bitcoins now. The currency thus derives an initial value from this probability, and boots itself into existence from pure worthlessness - becoming a viable repository of savings. If a very strange, dangerous and unstable one.

I think the probability of Bitcoin succeeding is very low. I would not put it at a million to one, though, so I recommend that you go out and buy a few bitcoins if you have the technical chops. My financial advice is to not buy more than ten, which should be F-U money if Bitcoin wins."

2 points

Jayson_Virissimo

3 points

My anti-virus software (AVG) flags Bitcoin as malware. Is this a false positive?

3 points

4 points