What Do You Want to Know About Bitcoin? And Do You Really Care?

(Photo: Zach Copley)

(Photo: Zach Copley)

We get a lot of e-mails with requests/suggestions for podcast and writing topics. These days, the most popular request by far is for  Bitcoin. I am still not sure we’ll do it but I’m thinking about it. If so, what do you want to know? Please be specific. Also: do you really care? It strikes me that, at the moment, Bitcoin is one of those things that a small number of people care about hugely but that most people couldn’t care less. (Freakonomics readers aren’t, of course, “most people.”) The rapid spikes and drops in value of course invites lots of news coverage but that is among the least-interesting aspects of a cryptocurrency, isn’t it?

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  1. John says:

    What are bitcoins? Not as in what are you talking about, but what do they classify as. Arguments could be made about them being a security, currency, or a commodity. So which is it?

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    • Danielle says:

      Perhaps they are a kind of negotiable instrument. David Graeber’s history of debt has an anecdote about English bank checks circulating as currency in Hong Kong. The indorsements on such checks strike me as analogous to Bitcoin’s blockchain.

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      • graeber theory demolished says:

        Centralized english banks in no way resemble bitcoin enough to make a comparison like that.

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    • p2plove says:

      @John:

      Bitcoin is a decentralized payment system. At least that’s why I value it :)

      here’s the white paper, must read:

      http://bitcoin.org/bitcoin.pdf

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      • Nick says:

        Bump, Read the white paper.
        It would be cool if they somehow talked with satoshi but that seems unlikely

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    • Hugh says:

      I’m a huge fan of the show and someone newly fascinated by bitcoin. In fact, bitcoin has greatly increased my interest in and even understanding of economics.

      Most early bitcoin adopters are technologically savvy, but not so much economically. Criticism of bitcoin generally comes from economics pundits and defences against these criticisms are generally technological. There is a great lack of information on what a bitcoin economy would actually look like should it gain widespread adoption.

      I would love to hear a podcast that looks at what an economy with bitcoin’s unique (or not so unique) traits would look like and how it might behave. In particular: an economy with a finite number of units of exchange that are released at a fixed and decreasing rate, but are nonetheless divisible to the 8th decimal; an economy that provides free banking and nearly free global transmission to anyone with the Internet or even just SMS; an economy with reduced friction for the average individual (reduced fees, 24/7 banking, etc); and an economy that is managed, in large part, by programmers and in which changes are subject first to open debate and then to democratic voting in the form of choosing to update software or not.

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    • Plausible says:

      Hidden due to low comment rating. Click here to see.

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    • Gary Rowe says:

      For anyone wanting a gentle introduction into Bitcoin without any hype, have a read of this FAQ: https://multibit.org/faq.html

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    • Welly says:

      1. Is an entirely new currency (i.e. Bitcoin) necessary to improve payments?

      2. Or is a new payment system – one that supports any currency; even Bitcoin – more useful and likely to be adopted?

      https://ripple.com/ is a solution to #2

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  2. Ricardo Rodriguez says:

    Very interested in hearing about this topic. Whether this is the actual tender of the future or not, paper money will be,obsolete regardless (or will it).

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  3. Ankit says:

    Since a fixed number of bit coins will be in circulation, what happens to its value in terms of dollar or any other major currency, due to the restriction when it reaches the limit? Although the time to reach the limit is substantial

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    • David Perry says:

      The time to reach the limit is substantial, true, but we approach the limit logarithmically. Block rewards halve about every 2 years, starting at 50 BTC, now 25 and soon 12.5, 6.25 etc. It will be a long time before all 21 million are created, but we’ll spend most of that time generating the last handful of coins a tiny fraction at a time. We’re already approaching 60% of all Bitcoins mined.

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      • DanielleE says:

        The block reward halves every 210,000 blocks, which is nominally 3.9927 years at 10 minutes per block, but we are running a few months ahead of schedule because of the growth of the mining power. The sum of 50 + 25 + 12.5 + … = 100. Since each 4 year interval generates 210,000 times the reward, the grand total comes to 100 x 210,000 = 21 million

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  4. john.deatherage says:

    bitcoin and others of it’s type are important because they are a viable alternative to the dollar. Currently, the government (Fed & Treasury) are fee to manipulate the dollar to achieve political goals (anything beyond price stability). And we are largely powerless to do anything about it. Sure you can invest in other currencies but they are controlled by some other central bank (sames guys, different language). Bitcoin provides an alternative that (hopefully) is beyond government manipulation.

    Or we could return the Fed to the single mandate of price stability. Control the growth in the money supply to closely approximate the growth in the economy.

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  5. Mark Horn says:

    I’m curious about how life in a world with competing non-fiat currencies would be different than it was before. I take the experience of “before” from here:

    http://www.npr.org/blogs/money/2013/08/27/216125279/episode-421-the-birth-of-the-dollar-bill

    Would new technology be able to overcome this? Would we be better off with the competition or would things be less stable?

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  6. Jason Viana says:

    I am curious about Bitcoin, but only because it is getting so much attention. If you did a podcast I would want to know more about other currencies similar to bitcoin in the past, or why this particular currency has some remarkable element to it that will alter our economic behavior. I trust you to determine if there is enough there to teach us about :)

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  7. Ryan Isaacs says:

    I’m eager to know an economist’s take on Bitcoin. Personally, I think it serves no mainstream purpose. If I want to go to Starbucks, I can’t pay for my latte with a Bitcoin. Nor would the average joe in the economy ever care about bitcoins. But from a theoretical perspective and a financial theory perspective, it’s definitely interesting.

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    • Adam says:

      You should keep in mind that there is nothing fundamentally barring transactions such as buying a coffee in a store using bitcoins. The only reason it isn’t being done is due to the lack of widespread acceptance of bitcoin as a currency (which can occur), and the lack of surrounding infrastructure to support the protocol (which can also occur). Time will obviously tell, but to say it has no mainstream purpose is short-sighted.

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    • DanielleE says:

      > I can’t pay for my latte with a Bitcoin.

      The exact same thing could be said for credit cards in 1955, when they had been around for 5 years like bitcoin is now. This year the number of places accepting bitcoin has grown about 15-fold to 35,000. Credit cards are still accepted at about 650 times as many places, but the ratio is rapidly shrinking.

      Why are merchants starting to accept bitcoins? Between bank card fees, fraud, and charge-backs they can save an average of 5% on the sale, which is a pretty good incentive.

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    • Phil Persinger says:

      Ryan–

      For an interesting take on “money” in everyday transactions, you should read about J.S.B. Boggs and his campaign to exchange paper money he has carefully drawn–often on the spot–for everyday items such as a cup of coffee and a motorcycle. (Lawrence Weschler’s “Shapinsky’s Karma, Boggs’s Bills, and Other True-life Tales” provides a very well-written account.) It’s an art project, of course, (and more complicated than I am describing here) but the essential ingredient in each completed transaction is trust.

      If the person across the counter and I both trust the US Government, then we have no problem using Federal Reserve notes. Same with the currencies some localities issue to encourage shopping in town. Same with Bitcoin, however weird at first that may seem.

      You might be able to buy that cup of coffee with a Bitcoin, but the amount of change you get in return might be a subject of considerable on-the-spot research…

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  8. Wade says:

    Thanks for considering this topic. We’ve already seen that Bitcoin is being used to pay for illegal things (e.g., illegal drugs), what prevents people that may be predisposed to thwarting authority to steal Bitcoin (e.g., taking it without providing services)? What protections do we have as consumers when this is a completely artificial currency with no real backing (e.g., counterfeiting)?

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    • Dave says:

      I personally have only ever used buffoon for purchasing legal things. (Computers, amazon, target, groupon, applebee’s, etc. giftcards. auto repair services. lunch from friends. sushi, cupcakes, tea, video games), and my best understanding is that the majority of bitcoin purchases are similar.

      On your second point, bitcoin has no consumer protection against theft, so e.g. hacking theft of bitcoins is a big risk.

      On the final point, asking the question indicates you don’t know what bitcoin is. There has never been a less counterfeitable currency. Regarding consumer protections in general, its definitely caveat emptor.

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      • Dave says:

        Oh swipe. Buffoon = bitcoin above. There may be other mixups.

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      • Phil Persinger says:

        Dave–

        Your initial post sent me into a desperate ransacking of my dictionaries for this hip, alternate money-meaning of “buffoon.” I’m almost sorry that it was a typo.

        I’m not a gold bug by any stretch of the imagination, but “buffoon” seems pretty good slang for currency of whatever origin:

        “I keep my bullion tucked away against the hard times and use buffoon to buy my necessaries.”

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    • Dan says:

      The dollar is used to pay for illegal thing, in fact more illegal things are bought with dollar than anything else. When Silk Road was taken down, it allowed bitcoins exchange price to rise. Bitcoin’s security is provided by secret keys, so keep them protected. Some of us don’t want a nanny taking care of us and want you and your nanny to leave us the hell alone. Bitcoin has no problem with counterfeiting like the dollar. Heck, Starbucks won’t even take hundreds. Every time I flash one, they give me free coffee! They seem terrified if them. I don’t blame then.

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    • DanielleE says:

      > What protections do we have as consumers

      The bitcoin protocol internally, and third party services externally, offer escrow payments. This means the payment is held until the consumer gets their product.

      Before the Silk Road drug marketplace was shut down, they offered an escrow service. Buying illegal drugs by mail from people you have never met is especially prone to fraud. So the market held payments from buyers until they got their goods and posted a positive quality review. Then the bitcoins were released to the seller.

      This is not so necessary when buying a coffee in person, the shop has the item in front of you before you pay, but for big purchases, or buying internationally, it’s a useful feature.

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    • bbqroast says:

      In terms of counterfeiting Bitcoins are only valid if the receiver is presented with a full history of the transaction.

      Jill mines fifty Bitcoins (by completing an algorithm on a block before anyone else can, her solution – which includes all the valid transactions in the last 10 minutes, is accepted by the rest of the Bitcoin network). Jill receives a key pair, the private key can only encrypt a message and the public key (called an “address”) can decrypt messages.

      I generate my own key pair, buy two Bitcoins from Jill and give her my public key. Jill broadcasts a message that says “I take (hash of the transaction of 50BTC from the block she mined) and send 2BTC to (my public key) and 48BTC to (her public key).” and signs it with her private key.

      The network looks at the block chain (think of a giant public ledger), sees that Jill did in fact receive that transaction and that her message was signed by her. The transaction is included in the next block, if it were invalid (ie she never received that 50BTC) it will not be included by trustworthy nodes. New nodes always sync with the longest blockchain, and current nodes “vote” on a valid block which they agreewith by mining at it using CPU power. As long as 51% of the processing power is held by trustworthy parties the system is secure – even if it isn’t they can only reverse old transactions (the difficulty of reversing a transaction increases dramatically for each block ahead of it in the chain).

      Bitcoins aren’t counterfeitable because in order to spend an amount Bitcoin you have to provide a history of every transaction which eventually resulted in you receiving that money (note that you don’t technically provide the history – the blockchain contains every single transaction in the history of Bitcoin).

      It’s important to understand, Bitcoin is not a system for minting coins. It’s a system for verifying transactions – technically there’s no difference between a wallet file with 500BTC and 0 BTC, the wallet file just contains a key to verify that it is the receiver of various transactions stored in a giant cloud network.

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    • Prynwyd says:

      Many more dollars are being used to pay for illegal things (e.g., illegal drugs) than bitcoins. That is a nonce argument that should be abandoned the moment its ridiculousness manifests in your mind.

      “What prevents people that may be predisposed to thwarting authority to steal bitcoin> What protections do we have as consumers when this is a completely artificial currency with no real backing?”

      On your first question, the same exact things that prevent people from stealing your current currencies.

      On your second question, I cannot answer you because you have assumed something that is invalid in posing the question: that the currency is artificial because it isn’t backed. No currency is artificial merely because it isn’t backed. In fact, the definition of currency requires that it be only a representative of real money. Therefore, a fiat currency is backed by consent. Therefore, a dollar is a currency in that it is a representative of a real value backed by the fiat of the Federal Reserve.

      Think: Nothing “backs” gold. Nothing. Yet it has maintained a powerful & intimidating value with very little fluctuation for thousands of years. That’s because gold isn’t a currency, but rather a commodity. Bitcoin is superior in a sense to gold in that it is both a commodity & a nontraditional currency.

      A bitcoin is technically in its own category, since on the one hand it is itself a scarce resource (a commodity) but also in itself a representative of itself (the total available bitcoin). In this sense, a bitcoin may never lose its value unless each and every bitcoin disappears. In the same way that gold has had value for thousands of years, a bitcoin will have value until it is impossible to access a single .0000001th of a bitcoin for all peoples. This is why the value of bitcoin fluctuates so excessively: It isn’t a currency in the traditional sense. Yet, it has value, is precious, scarce, and desirable to others, and extraordinarily divisible. One of the fallacies we make with bitcoin is we treat it like a dollar rather than treating it like a share in gold or silver.

      You do not have any protections other than your own diligence in bitcoin, and neither should you. It is no one’s job except those you personally employ to protect you, and the assumption that anyone should protect you is faulty.

      It is much more economically appropriate to liken bitcoins to gold, in that each is a scarce, valuable commodity backed by perceived value.

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