A surprising number of people, including reporters, have been asking me what I think of Bitcoin. My reaction is to be somewhat underwhelmed, for all of its technical inventiveness. The best single account I’ve seen of why to be cautious is in this account by John Levine, Bitcoin and tulip bulbs.
As I wrote recently in reply to a Polish journalist’s emailed inquiry:
I am somewhat skeptical for three sets of reasons.
First – A coin that fluctuates in value is an investment, perhaps, but not a reliable store of value.
Second – There is a very limited number of things you can do with a Bitcoin at present. Projects like this first suffer from and then — occasionally — benefit from network effects.
Third – Although I have not studied the protocol carefully, I’m worried that an attacker with the services of a large botnet might be able to dominate the system of authentication.
Even the top 500 supercomputers added together aren’t powerful enough to hit 50% of bitcoin…
You can disregard number 3 🙂
The threat model isn’t the generation of a fake bitcoin but rather the approval of a duplicate spend.
well, the generation of fake bitcoin and the double-spend attack are both enabled by the same root cause, an attacker with > 50% computer power of the whole network.
1.: Store of value is not the point. Convenient, unblockable digital payment is.
2.: You can use them to buy anonymous servers, VPNs and, probably most relevant, drugs.
3.: Current computational power of the network is currently about 6Thashes/sec. That’s the computational power of about 15,000 most modern GPUs, or about 300,000 Intel Core i7 950 CPUs. Still in reach of a botnet.
If they are not useful as a store of value, then why does the seller take them? If the point of taking them is to flip them fast into a more stable asset, there must be someone who will clear them on demand. Until the market for Bitcoins is really deep on the buyer side, to the point where the ‘bank’ is no more than a very short-term arbitrager, that ‘bank’ is taking a significant risk of fluctuation in price of the coin. Who will do this? Can we really imagine such great coin velocity as to mitigate this risk?
I’m not saying that bitcoins are not useful for storing value. They’re just not very much so at the moment, due to the high volatility. Sellers seem to accept the risk of volatility because of the benefits they’re getting. Also, unless the whole system crashes (can’t really rule that one out), there will be a deflation in the long run, making short-term volatility irrelevant for value storage.
Finally, liquidity at Mt.Gox is high enough that for small to medium amounts of money, clearing is immediate. The trade volume das exceeded a million USD per day there.
(1) I don’t think that changes the excitement value (from the users’ side for anonymous financial transactions at least), but I do certainly think the investment / storage distinction is necessary to understand and knowledgably use BitCoin.
(2) While it’s true BitCoin is very limited at the moment, it’s more of the concept and the future potential that is determining the hype here.
(3) I am also fearful, though I am also not at all familiar with the security of the system.