How bitcoin could fail.
4 comments
Here are my thoughts on your concerns:
1) There will always be exchanges even though some governments will outlaw these. I don't see a big problem in getting money into bitcoins but I guess it will be uquite hard to get money out of it. Let's assume you have 10'000 bitcoins with a value of 1 million USD. Who's gonna have the liquidity to get your money out if there are hundreds of exchanges and no big one as they will likely be the primary target of law enforcement in the future? I see the problem more in getting out the money and especially the cost that comes along should bitcoins be outlawed.
2) As interest grows, nodes will grow as well and the system itelf will be able to handle the transactions well.
3) This is also my main concern, bitcoin as every other currency can become a victim of speculation. At the moment this is harder to accomplish though as the marketplaces have not evolved yet to offer tools such as derivatives, options, futures etc. Nevertheless, speculation is a threat to bitcoin and the psychological factor is hard to predict. The best protection against it would be a high volatility (fast in - fast out) which also opens the door to speculative agents.
I see bitcoin succeed only if it gets mass adopted and this is not very likely in the near future. The concept works well on paper but as there is no tangible good involved, mass adoption is unlikely. The savior could be the black markets. Should they decide to even test out the system with a small percentage of their fortune, bitcoin will grow exponentionally in value and provide a very nice investment return for early-adopters.
just my two cents...
1) There will always be exchanges even though some governments will outlaw these. I don't see a big problem in getting money into bitcoins but I guess it will be uquite hard to get money out of it. Let's assume you have 10'000 bitcoins with a value of 1 million USD. Who's gonna have the liquidity to get your money out if there are hundreds of exchanges and no big one as they will likely be the primary target of law enforcement in the future? I see the problem more in getting out the money and especially the cost that comes along should bitcoins be outlawed.
2) As interest grows, nodes will grow as well and the system itelf will be able to handle the transactions well.
3) This is also my main concern, bitcoin as every other currency can become a victim of speculation. At the moment this is harder to accomplish though as the marketplaces have not evolved yet to offer tools such as derivatives, options, futures etc. Nevertheless, speculation is a threat to bitcoin and the psychological factor is hard to predict. The best protection against it would be a high volatility (fast in - fast out) which also opens the door to speculative agents.
I see bitcoin succeed only if it gets mass adopted and this is not very likely in the near future. The concept works well on paper but as there is no tangible good involved, mass adoption is unlikely. The savior could be the black markets. Should they decide to even test out the system with a small percentage of their fortune, bitcoin will grow exponentionally in value and provide a very nice investment return for early-adopters.
just my two cents...
Thanks nussbi, great answer. Just on point 2, as the number of transactions grow, my understanding is that all the nodes have to have a copy of the transactions (otherwise how could I verify the coins source coins without a complete trail). Have they come up with a clever way around this or am I missing something?
1) no one builds any more apps around it (unlikely, already decent sized developer community)
2) governments make it illegal due to tax evasion (so long as the CIA has use for bitcoin it won't be made illegal)
3) multiple blockchains make it confusing and dilute values (so long as the central site promotes 1 blockchain, the largest exchanges, as do the bulk of developers, it shouldn't be an issue)
4) application too large and slow. The client requires a few hundred MBs to maintain the blockchain. It also requires internet access. If either of these are compromised, the app doesn't work (as it's intended.)
5) VCs and angels boycott bitcoin startups, or funding of bitcoin startups is made illegal
-- add:
the biggests risks are from corporate level attacks from the likes of Visa, Paypal, Banks etc, in the way the record companies have attacked various p2p networks over the years. Unlikely. More likely they open up bitcoin divisions.
To its credit, bitcoin is a darling of the mainstream press, and I'd say there are some big investors backing bitcoin for the long haul. Both strong points.
Bitcoin won't go down, something better may come along, but that's some years or many months away. Maybe some corporate or government sanctioned cryptocurrency could steal its thunder. Unlikely.
Overall I'm very bullish on bitcoin.
2) governments make it illegal due to tax evasion (so long as the CIA has use for bitcoin it won't be made illegal)
3) multiple blockchains make it confusing and dilute values (so long as the central site promotes 1 blockchain, the largest exchanges, as do the bulk of developers, it shouldn't be an issue)
4) application too large and slow. The client requires a few hundred MBs to maintain the blockchain. It also requires internet access. If either of these are compromised, the app doesn't work (as it's intended.)
5) VCs and angels boycott bitcoin startups, or funding of bitcoin startups is made illegal
-- add:
the biggests risks are from corporate level attacks from the likes of Visa, Paypal, Banks etc, in the way the record companies have attacked various p2p networks over the years. Unlikely. More likely they open up bitcoin divisions.
To its credit, bitcoin is a darling of the mainstream press, and I'd say there are some big investors backing bitcoin for the long haul. Both strong points.
Bitcoin won't go down, something better may come along, but that's some years or many months away. Maybe some corporate or government sanctioned cryptocurrency could steal its thunder. Unlikely.
Overall I'm very bullish on bitcoin.
These are all speculation. I'm not no expert on bitcoin, but this is a somewhat stream of consciousness on the area that most concerns me.
Bitcoin could suffer an implementation derived security attack, ruining all practical value. The math behind bitcoin may be rock solid. However the implementations of clients on p2p network are vulnerable to security attack. If bitcoin begins to transition to mainstream and something like SQL Slammer hits it, a rival crypto currency, or a big company derived alternative will replace it, assuming crypto-currency as a whole doesn't garner a three-mile island like reputation.
In its current state Bitcoin could fall to this from simple lack of UX. The technical complications around securing a bitcoin wallet could leave people with bitcoins they don't realize have been stolen and transfered until they attempt to use them to pay for something.
I know bitcoin has strong cyptography behind it. That is a building block for secure software. There is however a world of difference between the mathematical tools used to secure something and software that is secure in practice and use.
To me the highest risk area is how hard or easy it is for non technical people to use correctly, and how hard or easy it is for unscrupulous people to harm non-technical people who are trying to use it.
Bitcoin could suffer an implementation derived security attack, ruining all practical value. The math behind bitcoin may be rock solid. However the implementations of clients on p2p network are vulnerable to security attack. If bitcoin begins to transition to mainstream and something like SQL Slammer hits it, a rival crypto currency, or a big company derived alternative will replace it, assuming crypto-currency as a whole doesn't garner a three-mile island like reputation.
In its current state Bitcoin could fall to this from simple lack of UX. The technical complications around securing a bitcoin wallet could leave people with bitcoins they don't realize have been stolen and transfered until they attempt to use them to pay for something.
I know bitcoin has strong cyptography behind it. That is a building block for secure software. There is however a world of difference between the mathematical tools used to secure something and software that is secure in practice and use.
To me the highest risk area is how hard or easy it is for non technical people to use correctly, and how hard or easy it is for unscrupulous people to harm non-technical people who are trying to use it.
Good point about lack of UX. There's even no bitcoin matches on Cnet, which means it's very early days. I see bitcoin uptake play out much the same way as Twitter did.
It received a publicity spike due to Jason Calacanis.
Tectonic shifts don't come around like this often. It's a bit like early Linux. The first big corporate backer of bitcoin will do well. Who's going to be the Red Hat of bitcoin? Lonely Planet? Expedia, Creative, Apple, Sony, Ticketmaster?
It received a publicity spike due to Jason Calacanis.
Tectonic shifts don't come around like this often. It's a bit like early Linux. The first big corporate backer of bitcoin will do well. Who's going to be the Red Hat of bitcoin? Lonely Planet? Expedia, Creative, Apple, Sony, Ticketmaster?
Really good point, I hadn't considered the notification / revocation of stolen coins. And I can't picture my grandmother with all the good intentions in the world being able to secure a digital wallet properly.
4) The world collectively shrugs and says "meh".
This is alluded to in your statement "While it's potential minimum is 0 [...]", but isn't listed explicitly. (Miss)applying the Y-Combinator whiteboard, bitcoin is in the initial peak of excitement, it is yet to prove that it can traverse the trough of sorrow.
http://www.inc.com/ss/can-paul-graham-mass-produce-start?sli...
This is alluded to in your statement "While it's potential minimum is 0 [...]", but isn't listed explicitly. (Miss)applying the Y-Combinator whiteboard, bitcoin is in the initial peak of excitement, it is yet to prove that it can traverse the trough of sorrow.
http://www.inc.com/ss/can-paul-graham-mass-produce-start?sli...
That's a good point. There is only so much demand for slogan t-shirts and llama socks.
If this happens then it would make buying bit coins at todays prices a very attractive investment and reading on hacker news it looks like quite a few people have decided this is a smart option. Before I put my money into something like bit coin, I'd like to hear possibilities on how it could fail. The P2Pness of it obviously adds a lot of robustness but the total system is only as strong as it's weakest point so it's good to think like a hacker .. or government as to where it might be attacked or fail naturally.
My thoughts (and I'd love to see these added too.) 1) The exchanges. If they are outlawed it will be quite hard to get money from a 'legitimate' bank into the bitcoin system. It would involve sending money to some kind of grey overseas institution and I think few people would be incented to do this.
2) Transaction volume. If Bitcoin becomes popular, there would be a lot of transactions happening around the world. These all need to be passed to all nodes in the network which is ok for a small number of transactions but will this scale well?
3) I'm no expert on macro-economics but I could imagine a situation where speculation on the currency makes it's value rise and fall very quickly as it is used more as an investment tool than a purchasing tool. This would make it less useful as a currency - who wants to sell a product and have the money you receive for it halve overnight?
Does anyone have any others - or even better reasons why my concerns are unfounded?