Is Bitcoin a Legitimate Currency or a Potential Scam?

[phinds]

Ah, so that's called arbitrage. But how else one would extract wealth from bitcoin trading other than arbitrage, though?

No, the way to have made money on bitcoin, as on any cabbage patch doll fad is to have bought early and sold after a big run-up. Arbitrage is about very modest gains but lots of them. If you don't understand it, look it up.

The problem of course is knowing that it's still early enough to buy in and then getting out when you have made a profit, not hanging on until the crash.

 

[Pythagorean]

For Bitcoin, Arbitrage was quite successful (a year ago, anyway) because of the big differences between merchants (they aren't unified). On the order of 10k/month for the people I knew. The people that are making money off of it are using bots and using a variety of long-term analysis to account for transfer delays. Of course, the ones that are successful aren't sharing their policy.

 

[russ_watters]

Isn't that partly what undid MtGox?

 

[nsaspook]

Isn't that partly what undid MtGox?

Even if what undid MtGox would have been criminal activity at a 'real' exchange it's massive 'loss' of bitcoin currently can't be charged as a criminal act and is not listed as a liability on it's bankruptcy filing, only the cash.

Now you can see your 'limbo' bitcoin but it's just a digital mirage..
http://www.pcworld.com/article/2109...exchange-lets-users-see-bitcoin-balances.html

“The site shows the coins, but it indicates it has no real meaning with respect to claims,” said Aaron G., an investor who did not want his last name to be used. His balance indicates about 464 bitcoins (roughly $286,700 according to average bitcoin prices on other exchanges).

“So, just numbers on a screen—just as ‘real’ as they were before Gox went down,” he said in an email interview.

 

[Pythagorean]

My understanding was that when Mt. Gox first started freezing USD withdrawals, it drove down their bitcoin price and made an excellent opportunity for arbitrage. But I think there was already trouble at Mt. Gox at this point.

 

[russ_watters]

Perhaps - I think at this point what happened and the cause/effect relationship may be unclear:

What seems clear is that the value disconnect caused arbitrage trading, but the question is, did that cause or result from the disbursement slowdown? Or was it a feedback loop?

It makes me wonder if the MtGox still has all the bit coins it supposedly lost and just lost track of who owns them or bought and sold at what value.

 

[Pythagorean]

My impression is feedback loop: there was already and issue and arbitrage exasperated it.

There's some indication that Mt. Gox was really a poorly run company:

But beneath it all, some say, Mt. Gox was a disaster in waiting. Last year, a Tokyo-based software developer sat down in Gox’s first-floor meeting room to talk about working for the company. “I thought it was going to be really awesome,” says the developer, who also spoke on condition of anonymity. Soon, however, there were some serious red flags.

Mt. Gox, he says, didn’t use any type of version control software — a standard tool in any professional software development environment. This meant that any coder could accidentally overwrite a colleague’s code if they happened to be working on the same file. According to this developer, the world’s largest bitcoin exchange had only recently introduced a test environment, meaning that, previously, untested software changes were pushed out to the exchanges customers — not the kind of thing you’d see on a professionally run financial services website. And, he says, there was only one person who could approve changes to the site’s source code: Mark Karpeles. That meant that some bug fixes — even security fixes — could languish for weeks, waiting for Karpeles to get to the code. “The source code was a complete mess,” says one insider.

By the fall of 2013, Mt. Gox’s business was also a mess. Federal agents had seized $5 million from the company’s U.S. bank account, because the company had not registered with the government as a money transmitter, and Mt. Gox was being sued for $75 million by a former business partner called CoinLab. U.S. customers complained of months-long delays withdrawing dollars from the exchange, and Mt. Gox had tumbled from the world’s number one bitcoin exchange to position number three.

[...]

But Karpeles was obsessed with a new project: The Bitcoin Cafe.

[...]

One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.

[...]

According to a leaked Mt. Gox document that hit the web last week, hackers had been skimming money from the company for years.

[...]

After Mt. Gox was hacked for the first time in summer of 2011...

http://www.wired.com/wiredenterprise/2014/03/bitcoin-exchange/

 

[russ_watters]

I've read that article and that's a lot of my point. The opening line of the Bitcoin paper is:

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.

Then the premise is restated later:

What is needed is an electronic payment system based on cryptographic proof instead of trust,
allowing any two willing parties to transact directly with each other without the need for a trusted
third party.

Needed? The technology for making a cryptocurrency is not all that complicated, but the questions of whether people want a peer-to-peer currency and how it could function in a real economy aren't addressed at all. The economic system is the big issue here, not the technology (though the inclusion of mining in the technology is part of what makes me suspicious). This starting premise is an hypothesis itself that needs to be proven. Bitcoin enabled a test of it and the result is clearly a total failure:

Bitcoin did not eliminate the need for banks, it just enabled any sufficiently ambitious nerdy kid to become one. The bottom line is that in order to start using Bitcoin without a major investment in mining infrastructure, you have to buy them from someone. And unless you want to store them on your home computer, you have to store them with a company. And in order to know how much to buy/sell them for, you need to have accurate, real-time information on their value. These are the reasons banks and credit cards and stock exchanges exist in the first place! The Bitcoin community quickly recognized this and that's why the vast majority of activity happens in the exchanges.

I keep going back to this: People lost savings at MtGOX, which means they trusted MtGOX with their savings!

The idea that someone could trust a company with near zero track record and zero regulation to be their bank is near insanity and the quotes from users show it is based at least in part on a counter-culture activisim/paranoia/mistrust of authority. No doubt, the banking crisis of 5 years ago added fuel to that fire, but people turned away from the slightly shaken trust in previously rock-solid banks, to faith in a near complete unknown.

A quick bit on the technology though:

The system is secure as long as honest nodes collectively control more CPU power than any
cooperating group of attacker nodes.

Doesn't that mean that a worm that siezes control of a sufficiently large number of computers could completely destroy Bitcoin? Just as bad, doesn't it mean that Bitcoin users could band together and "overthrow" it? What fraction of Bitcoin users are angry MtGox customers?

 

[Pythagorean]

Needed? The technology for making a cryptocurrency is not all that complicated...

Technically true, but the technology alone is useless without security, and that requires more technology that is intimately linked to the mechanics of cryptocurrency. I also think your (valid) complaints about how it will work with economy can only be solved by technological implementation.

One can't deny that cryptocurrency is currently unstable (and that assertion probably varies for different cryptocurrencies) but it's not terribly surprising either. If it is to be successful (as I predict it will) it will require some degree of institutionalization and policy design. And the only way to get to that point with such an inherently organic social structure, is to go through this trial period... and there's going to be a lot of heartache involved. Of course, I wouldn't touch Bitcoin, personally. I wouldn't even to try to ride the wave and get out early. But I can appreciate that some people are in tune to Bitcoin and know how to turn a profit out of it.

I also agree that using it as a bank is a horrible idea. I expect Bitcoin to fall dramatically before it stabilizes (if it's even going to be a surviving cryptocurrency) so there's really no justifiable long-term investment in Bitcoin currently. If I would have been one of the lucky ones, I would already have cashed out most of my funds long ago.

Of course, I don't agree that the long-term value of cryptocurrency is zero. It's both a currency and a service (anonymity). But you'd really have to have a good business head and a good grasp of cryptocurrencies role in society to know which cryptocurrencies are most likely to survive this chaotic state.

 

[nsaspook]

One of the problems Bitcoin [sic] solved was the 'Double-spending' attack on decentralized accounting systems but using the native Bitcoin protection method is slow at a large exchange that needs handle many real-time transactions so MtGox effectively created a internal crypto-currency altcoin that appeared externally to investors as bitcoin that it used to manage bitcoin/cash exchanges quickly because it was the central and only authority to account for those ---coin (backed by the bitcoin that it now says were stolen or lost) transactions. IMO one of reasons 'bitcoin' at Mtgox fell so low compared to other exchanges before it completely crashed was that most people finally saw they really were not trading bitcoin anymore.

People stuck with that ---coin are now calling it goxcoin and want to use it.
http://www.humint.is/goxcoin

I have my own ideas of what it should be called.
http://www.cafepress.com/+bohica_bend_over_coin_purse,881034800

 

[Adderall]

No, the way to have made money on bitcoin, as on any cabbage patch doll fad is to have bought early and sold after a big run-up. Arbitrage is about very modest gains but lots of them. If you don't understand it, look it up.

The problem of course is knowing that it's still early enough to buy in and then getting out when you have made a profit, not hanging on until the crash.

I believe I understand the difference. Both consist in extracting wealth from trades without adding anything to, well, ANYTHING. I find fad-profiteering to be a bit more nakedly avaricious than arbitrage, but I find both to be morally murky.

I gleefully engage in arbitrage in video games. Back when I played MMOGs (yes, those MMOGs) I would constantly take advantage of market imbalances to make as much in-game currency as possible (e.g. make a no-skill combination with plentifully available reagents and sell the result +200%). This is fine in a video game, where it doesn't matter how wealth is distributed, and where you can just quit if you don't like the rules. In real life, how wealth is distributed matters greatly (I understand the difference between wealth and income) and whether you engage in fad-profiteering or arbitrage, I don't see how this ends well for anyone but the successful (fad-profiteering is still worse than arbitrage, I think).

 

[phinds]

I believe I understand the difference. Both consist in extracting wealth from trades without adding anything to, well, ANYTHING. I find fad-profiteering to be a bit more nakedly avaricious than arbitrage, but I find both to be morally murky.

...

In real life, how wealth is distributed matters greatly (I understand the difference between wealth and income) and whether you engage in fad-profiteering or arbitrage, I don't see how this ends well for anyone but the successful (fad-profiteering is still worse than arbitrage, I think).

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

 

[russ_watters]

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

No, but if someone is stupid or not all there mentally it makes me feel bad to take advantage of them.

 

[phinds]

No, but if someone is stupid or not all there mentally it makes me feel bad to take advantage of them.

Although I agree w/ you, that seems to me to be bringing in gratuitous complications outside the normal realm of what we are discussing.

Of course you COULD argue that anyone who speculates in cabbage patch dolls or bitcoins IS "stupid or not all there mentally"

 

[AlephZero]

Memo to MtGox - keep searching down the back of the sofa... http://www.bbc.co.uk/news/technology-26677291

 

[nsaspook]

Memo to MtGox - keep searching down the back of the sofa... http://www.bbc.co.uk/news/technology-26677291

It might be part of these bitcoins.
http://www.coindesk.com/gox-money-moving-through-block-chain/

Large amounts of bitcoins previously handled by Mt Gox, which have lain dormant for years, have started moving on the block chain.

Was it really 'lost'?

 

[Adderall]

Of course you COULD argue that anyone who speculates in cabbage patch dolls or bitcoins IS "stupid or not all there mentally"

I know you were joking but I kind of non-ironically agree with russ_watters about money and stupid people. That literally is what online poker is - taking money from stupid people. Even at low stakes, it just feels weird.

I 100% agree these bets are risky and not guaranteed for any outcome. I guess I feel that people can't be trusted to be safe or to effectively manage their own bankrolls. The US gov't doesn't trust people in every day life, considering seat belt & speed limit laws. I would be comfortable letting people blow their wad on inane nonsense like cabbage patch dolls if they at least had to undergo some sort of psych evaluation first.

 

[TylerH]

I know you were joking but I kind of non-ironically agree with russ_watters about money and stupid people. That literally is what online poker is - taking money from stupid people. Even at low stakes, it just feels weird.

I 100% agree these bets are risky and not guaranteed for any outcome. I guess I feel that people can't be trusted to be safe or to effectively manage their own bankrolls. The US gov't doesn't trust people in every day life, considering seat belt & speed limit laws. I would be comfortable letting people blow their wad on inane nonsense like cabbage patch dolls if they at least had to undergo some sort of psych evaluation first.

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view? By what objective reasoning could you justify subjecting everyone of the opposing view to some arbitrary standard to act on their view?

 

[Adderall]

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view? By what objective reasoning could you justify subjecting everyone of the opposing view to some arbitrary standard to act on their view?

You misread my post. I wrote inane, as in silly and stupid. Also, I said it would be nice if people were periodically evaluated to make sure they are in control of their own decisions. I understand libertarians won't think the seat belt law is useful precedent, but it is an example of the US gov't deciding on some "arbitrary" (not arbitrary) standard limiting what we can do with our own property.

Yes, this is how the real world works. No one is forced to make any of the bets we are talking about. I think your moral outraged is misplaced.

Yes thank you, I have lived in the real world before. I'm not outraged. I'm not even advocating banning gambling. I'm merely pointing out that modern psychology has shown repeatedly that people are easily manipulated and influenced. I could go into detail if you think psychology is pertinent to this discussion. And I think it must be; how can you say no one is forced to make bets when it can't be demonstrated what is driving their decision making?

 

[nsaspook]

Viewing bitcoin as simply gambling is good for bitcoin.

This is why I find the some of the “counter-economics” bitcoin boosters using the government legal systems to get their money back ironic if indeed they want independence from the costs of consumer protection. Surely they must see the governments position on gambling. If you lose for any non-(overtly)criminal reason we don't care , if you win for any reason we just want a share and don't really care about how you got the money. As long as bitcoin is seem by the government mainly as a gamblers fools game with the electronic equivalent of S&H stamps Bitcoin can live in it's little corner without much regulation but if it starts to actually become widespread people will expect consumer protection from some authority that can exercise force on perceived 'wrong doers'.
http://www.coindesk.com/life-under-bitcoin-regulation-worse-than-investors-think/

Look at PayPals state requirements. https://www.paypal-media.com/state_licenses.cfm

 

[russ_watters]

What happened to self ownership? Is it not vain to assume that your view that investment in something is insane must be the correct view?

Yes, but what if you had made a ton of money off of Beanie Babies? How would you feel about it today? I was too young at the time to have done it, but I remember talking to a friend's mom and being dumbfounded by her belief in what she was doing. It made an impression on me.

 

[Adderall]

It seems the IRS views bitcoin as gambling also.

 

[nsaspook]

It seems the IRS views bitcoin as gambling also.

The Taxman cometh but only takes cash not bitcoin for the price of freedom.


This means in case of an audit and you own bitcoin you must disclose your transactions and maybe the keys to those transactions (as digital receipts) to prove ownership so they can verify amounts using the Bitcoin networked blockchain database.

 

[nsaspook]

The IRS action also means bitcoins have lost 'Fungibility'. One bitcoin is not the same as all bitcoins because the tax consequences of using one over the other now involves a cost basis calculation using the cash value at both the buy and sell transactions unlike a 'fungible' stack of $20 bills from 1980 you hid in the basement used to buy a new car today.

The MtGox Bitcoin top 500 trading patterns.

http://bitcoin.stamen.com/

 

[nsaspook]

Interesting defense.

http://www.forbes.com/sites/andygre...onetary-instrument-moves-to-drop-all-charges/

“Count Four, which charges Mr. Ulbricht with participating in a money laundering conspiracy…must be dismissed because the allegation lacks an essential element: that the ‘financial transactions’ alleged involved ‘monetary instruments,’” the motion reads. “Bitcoins, the exclusive means of payment on Silk Road, do not qualify as ‘monetary instruments,’ and therefore cannot serve as the basis for a money laundering violation.”