The full block chain has been growing at an average of 700 MB/month the past year. At the cost of my last hard drive purchase, that is 2.5 cents a month. If I save mailing one paper check, that pays for two years of block chain storage (49 cents for postage, and 20 cents for check printing and envelope). I can deal with that flaw for a while. Eventually people will come up with a solution. The simplest would be dedicated block chain servers, who do nothing else but store a copy, and people subscribe to using it.
You are neglecting the "Network Effect", the reason there is only one big auction market or social network at any given time.
Bitcoin had about a three year head start on other cryptocurrencies, therefore the client software is better developed, more merchants accept it, more users have wallet apps on their smartphones, etc. Your statement about "nothing prevents a new one popping up" is true, and has already happened: http://coinmarketcap.com/
They list 53 coins so far, but the top two, bitcoin and litecoin, represent 98% of the total market value. It's definitely possible for another coin to be a better product, and eventually overtake bitcoin, but it won't happen next week. I expect it to take years to overcome the leader's head start.
> The inability to charge back is the #1 reason that prevents any consumer from perceiving it as a safe currency against vendor fraud.
Although they dealt in illegal products, the now closed Silk Road marketplace solved that problem. They had to, because vendor fraud is an especially high risk buying an illegal product online from an unknown seller. The solution was simple. The Silk Road held the payment in escrow until the buyer reported receipt and posted a positive review. A seller that racked up too many negative reviews (a) didn't get paid, and (b) stopped having customers. That was a good enough incentive that very few people got screwed over, reportedly less than with in-person deals.
It's true that bitcoin transactions are irreversible, but that does not stop you from using a third party who can send the money back. Think of it as programmable money. At an assembler language level, moving data from one memory location to another is not reversible when you only look at a single line of code. But nothing prevents creating more complex results by using longer programs. Similarly, you can build more complex payment methods on top of the atomic one way transactions. In fact, the bitcoin protocol has scriptable transactions with conditional events, though they are rarely used so far. People are too busy building payment networks and smartphone apps so you can more easily use it. They haven't had time to do fancy transactions.
Does $100 million in merchant transactions make it real enough?
Between BitPay and Coinbase (the two large merchant processors), they have 32,000 merchants accepting bitcoin. That's nowhere near the acceptance of bank cards, but it's growing fast. And these are not just mom and pop retailers, through http://www.gyft.com/bitcoin/ you can use them a 150 major national brands,
If you are in the US, you can sign up with https://coinbase.com/ They just got $25 million of venture funding: http://www.bloomberg.com/news/2013-12-12/bitcoin-startup-gets-25-million-in-andreessen-led-funding-round.html so they are not a fly by night outfit.
You have a choice to keep your bitcoins on their system, which is OK for small amounts, or transfer it to a personal "wallet" on your own computer. All bitcoin balances actually live on a distributed database called the "block chain", which every full copy of the client software audits independently. A wallet contains the private cryptographic keys that allow you to *move* a balance from your address to another one in the database. Thus wallet files are pretty lightweight, and can be backed up onto pretty much anything, including paper. Bitcoin wallets should be treated like house keys - have backup copies, but don't lose them, because then someone else can steal your stuff/bitcoins.
The distributed database is why bitcoin transactions are so cheap. A transaction is basically a message that says "Move X bitcoins from address A to address B", which is signed by your private key. The block chain database includes every past transaction, so everyone can audit your current balance simply by adding up all the past transactions for that address. If your balance is too low to cover the new transaction, it gets rejected. If it meets all the audit tests, it gets passed along to everyone else on the network. Since everyone now knows you spent your balance, you can't spend it again.
Bitcoin balances are tracked to 8 decimal places, so you don't have to deal in whole bitcoins. These days people are transitioning to reporting in millibitcoins (mBTC) since those are closer to dollars and other fiat currencies than a full bitcoin is these days.
> If anything, Bitcoin is a concordant currency, its value determined by agreement.
The Bitcoin network provides a useful service - moving money from one person to another. It does it faster and cheaper than many of the alternatives, therefore people value the *network*. In order to use the network, you need some of the bitcoin currency units. Thus demand to use the network also drives demand for the currency units. Since the number of units grows slowly (1.1% per month), but the demand measured by number of merchants and online wallet accounts grows fast (25-30%/month), the price of a unit is driven up by simple supply and demand at about 25% per month.
The number of units available to buy, and the demand for those units, both vary on a daily or even minute to minute basis, thus the market rate fluctuates. But seen on longer time scales of several months or more, it sticks to the expected average growth pretty well. Events like China caused in the original article create a predictable drop in demand (people can't use their Yuan to buy bitcoins) and an increase in supply (speculators dump their coins on the market before it drops), leading to the big drop in exchange rate we have seen.
But that is a temporary disturbance in the market. Once people return to their normal use of the network to move money around, supply and demand will come into balance at a "normal" price.
Since it's winter in the northern hemisphere, just think of the energy going into your mining hardware as partly heating your house. So basically it offsets the other heating system you have, and thus is free (minus wear and tear on the hardware).
That paper has factual errors. For example, on page 6 it says "...because bitcoins are mined in integer units, not satoshis". This is incorrect. The mining reward halves every 210,000 blocks (about 4 years). It dropped from 50 in Jan 2009 to 25 in Nov 2012, the current rate. The next halving, in about 3 years, will reduce it to 12.5 bitcoin units per block. The arithmetic series 50 + 25 + 12.5 + . . . = 100, and since it stays at that level for 210,000 blocks at a time, the total number of coins has a limit at 100 x 210,000 = 21,000,000.
The mining algorithm is a basic feature of the bitcoin system. If the paper's author got that wrong, I don't have much confidence in the rest of his arguments.
> The other thing is of course that Bitcoin is not a real currency and may crash at any time and without warning.
You are confused about the nature of bitcoin. There are two entities with that name. One is the "Bitcoin network", which consists of software, apps, computers that relay and verify transactions, and a big database. That network does the same job as Western Union or bank wires - moving value from place to place. But it does it much faster and cheaper. Therefore the network has value because of it's usefulness. The other entity is the unit of measure for address balances and transactions, also called "a bitcoin", in the same sense a unit of length is called "a meter". Thus an address may have a balance of "3.436 bitcoins".
However, balances have value only because of the network they are part of. So long as the network does its job better than the alternatives, people will want to use it. Since using it requires having a balance to make transactions with, that creates a demand for balances, thus they acquire value. The exchange rate may fluctuate from day to day, but the underlying value of the network is more steady.
> Nobody is going to arrest them.
That's not necessary. The major phone companies can sue the Indiana State Police for whatever the corporate lawyers can come up with. And those lawyers don't live in Indiana, so they aren't subject to being pulled over in a traffic stop by the local cops. Alternately, independent lawyers can start a class action on behalf of the phone customers for violation of their civil rights. The cops may not go to jail, but their employers may face big financial settlements.
Actually, they *are* empty when shipped, so if they are stolen en route they don't net the thief anything. Once arrived, the buyer "activates" it and it gets filled with Bitcoins by means of sending some to the correct address.
When I send my nephew a birthday card with a check enclosed, I guess that makes me a money transmitter. Time to turn myself in.
> You can never create anything new without building on the past.
That's an argument for limited copyright terms. Society grants you free use of all the pre-existing stuff, in return for adding your contribution to the free pool after a certain time. You get a short time for exclusive distribution as an incentive. If you want perpetual copyright, you can't have used anything provided by society, starting with things like language and music notation. Yeah, Disney, society lets you use those fairy tales, and the motion picture camera, and lots of other stuff. Now give something back.
What you are talking about is called "international remittances" (sending money internationally person-to-person). It's a $500 billion/year activity, and the average fees are 9 percent! This is the killer app for bitcoin at the moment.