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So much misinformation! MtGox and Bitcoin – what really happened?

In an earlier post here on Samizdata, Bruce Hoult posted some very informative comments about MtGox and Bitcoin that we thought it warranted a higher profile, so…

So much misinformation!

What has happened is that people who bought Bitcoins on MtGox thought they owned them. They did not, according to the Bitcoin system. MtGox did. MtGox kept their own records of who ‘owned’ what. And MtGox were incompetent.

Which should have been apparent from the start: MtGox learns Bitcoin

The proper way to use Bitcoin is to keep your wallet of Bitcoins on your own computer. And back it up. Several times. Print it on paper if you want — it will likely fit on one side of A4 in not very small print. Keep it secret. Keep it safe. It is a bearer certificates. If you lose your wallet or forget the password then those Bitcoins are gone out of circulation forever.

That is not what happened with MtGox. They gave Bitcoins that people thought they owned (but did not) to other unauthorised people. It is theft. Just like a bank robbery. Those Bitcoins still exist, just in other hands.

This has absolutely no effect on people who keep their Bitcoins on their own computer (or phone). There are the same number in circulation as before. Bitcoins still can’t be counterfeited or inflated.

If you want/need to use a place similar to MtGox to turn normal money into Bitcoins then DO NOT LEAVE THEM IN YOUR ONLINE WALLET THERE. Make yourself an identity and wallet on your own computer and make a payment from your account on the Bitcoin exchange to your own identity. Then you are perfectly safe.

Well, you are if you do your backups diligently.

Or, if you want to turn normal cash into Bitcoins, find someone who has Bitcoins and wants cash, agree a price, have them do a transfer of Bitcoins from their wallet to yours (using the actual Bitcoin system, not an exchange), and hand them the cash.

The recent problems are not with the Bitcoin system, they are with finding trustworthy and competent ‘bank’ or ‘escrow’ services who will not lose or steal what they hold in trust for you.

To amplify on the previous.

Assume you want to use Bitcoins to buy a used TV, and both you and the seller have Bitcoin software and wallets on your own computers: You make a transfer from your Bitcoin wallet to theirs, using the Bitcoin software. You wait about 10 minutes for the next block of world-wide transactions to be created (mined). If you are paranoid, you wait for another block to be created, pointing to the one with your transaction.

At this point the transaction is recorded on thousand of computers all over the world. They all agree that Bitcoins have been transferred from you to the seller. The transaction is irrevocable.

Now you ask the seller to send you the TV. There is a risk that they will not send you the TV, even though they have the money.

This is exactly the same situation as any on-line auction site, or newspaper classifieds or whatever.

The solutions are the same. You can not get your money back, but you can damage their reputation in whatever venue you used to arrange the deal. Or you can meet them in person and do both sides of the swap in person. Or you can use a trusted third party as escrow — you give them the money, and the seller gives them the goods, and when they have both they pass them on.

The problem is to find a competent and trustworthy escrow service.

56 comments to So much misinformation! MtGox and Bitcoin – what really happened?

  • Paul Marks

    This sounds like good practical advice for those people who are interested in Bit”Coin” – personally I am not interested, but I have nothing against those people who are.

  • Fred Z

    How is all this rigamarole better than what I can do in Canada, namely a straight transfer of cash from my account to a payee by an email system called Interac?

    The payee needs an email address, an account with a Canadian bank and a password which I give him separately, usually by phone. My bank charges me $1.50 for anything up to $3,000 and the payee is charged nothing. This is for a non commercial transaction, or for a small commercial one.

    Most large commercial operations are already registered with the banks and to pay them there is no charge at all. You enter your account number at the merchant, or utility firm, or whatever and click twice.

    My bank guarantees my funds against all fraudulent use of their system.

    I can do all this from my smartphone, from anywhere in the world.

    How is bitcoin better than this?

  • […] but it’s hard to figure out what really happened from the media reports. At Samizdata, Bruce Hoult explains the […]

  • Anomenat

    FredZ: I think you’ve missed the point. Bitcoin is not a method of transferring cash: it is another currency. Interac allows you to transfer Canadian dollars from one bank account to another. It does not allow you to transfer bitcoins.

  • Very informative indeed – many thanks for reposting.

  • How is bitcoin better than this?

    The whole point of this article is clearly to explain that this is not really anything to do with Bitcoin per se, but rather third parties, so your question is odd.

  • Rob Fisher (Surrey)

    Fred Z: The advantage is really the removal of a central authority. If you are concerned with the practical considerations of just sending money to someone, you will most likely find no advantages to Bitcoin, for now at least.

  • Bruce Hoult

    Here in New Zealand domestic payments are at least as easy as described in Canada, but with the fee likely to be 20c or less (even free) rather than $1.50. I’ve seen 20-something’s use interbank transfers on their smartphones to settle up one-bill-per-table cafe lunches.

    However it’s not so easy internationally. For payments to random people you have the choice of a $20-$50 bank fee for a TT (“Telegraohic Transfer”) that takes days to a bank account, or someone like Western Union charging around 10% commission for an instant transfer to a named person and city. Payoneer and PayPal are fast and cost less but few people are set up to receive that way. Ditto credit cards.

  • Runcie Balspune

    At this point the transaction is recorded on thousand of computers all over the world. They all agree that Bitcoins have been transferred from you to the seller. The transaction is irrevocable.

    How do you confirm this?

  • Runcie Balspune: The transactions are broadcast on the peer to peer network and everyone’s copy of the Bitcoin program ends up seeing all transactions. Everyone tries to gather up a set of transactions, generate a hash, and make a “block”. This task is made artificially hard so that only one person succeeds every ten minutes.

    When someone succeeds, the block is broadcast on the peer to peer network, and everyone adds it to the global ledger (called the “blockchain”).

    So the whole nature of Bitcoin is this shared global ledger that everyone can see.

    You can’t directly look at someone else’s copy of the ledger, but the whole thing is set up so that maintaining a false copy of the ledger and fooling other people into using the false copy would require having more available CPU power than everyone else. In practice it’s just not possible.

    Also, some people publish the ledger on websites, such as http://blockchain.info

  • Rob:

    Everyone tries to gather up a set of transactions, generate a hash, and make a “block”.

    and:

    This task is made artificially hard so that only one person succeeds every ten minutes.

    Why and why?

  • Nick (BTF) Gray

    Once bitcoined, twicw shy!

  • Julie near Chicago

    Nick! That’s DREADFUL! *E-ee-www* :)

  • Nick (BTF) Gray

    Thanks, Julie. I’m in a creative mood. Just found a patent attorney near my suburb. I’ll soon be licensing my ‘self-hooking button’ idea. Think I’ll call myself ‘creative genius’.
    Q. Why did the journalist cross the road?
    A. To interview the chicken, of course!

  • Julie near Chicago

    *groan*

    *mysterious sensation of distant applause*

    ROFLOL ;)

  • Fred Z

    Anomenat:

    Oddly enough my electrical utility does not accept bitcoins, so why would I want to transfer them?

    I keep posting here, there and everywhere, when MasterCard issues MasterCoins, I will take notice.

  • Fred Z

    OK you MasterCard bastards, if you do, you owe me a royalty.

  • Oddly enough my electrical utility does not accept bitcoins, so why would I want to transfer them?

    Oddly enough your electrical utility probably does not accept gold, silver, US dollars, Australian dollars, Pounds, Euros, Yen or Ghanaian Cedis either, so again I think you might be missing the point.

  • Mr Ed

    My electricity utility accepts Visa, so I can see his point.

  • And do you use Visa like gold to store value, Ed? Or just to move it around… In short, so what if your utility accepts Visa?

  • Paul Marks

    Perry the “point” is that Bit”coin” does not exist.

    It is NOT dishonest (unlike Russian Television – which just had a women on blaming the mess in Venezuela on evil American efforts to “recolonize” this country and all other Latin American countries, and now has Max Keiser on saying that fracking for oil and gas is a plot to rob the NHS – no I AM NOT MAKING THIS UP).

    The owner of “Magic the Gathering” (the real name of the “Bitcoin Exchange”) who is having his home picketed by protestors (he moved out of his company H.Q. but now they have found where he lives) keeps trying to explain to people IT IS JUST A GAME.

    There are many computer games (Magic the Gathering, originally a card game from a Japanese cartoon series, is only one of many – and many of them have their own “money”, “banks” and so on).

    There was never (at any time) any claim that Bit”coin” represented anything (not even fiat money cash – government notes and coins backed by “men with guns” as Paul Krugman put it in a rare moment of honesty).

    “Blocks” and “encryption”.

    There IS a reason for this Alisa.

    In previous computer games the owner of the game could always introduce more “money” at will – and that irritated people (especially stupid people – who kept trying to use this “money” in the real world, “but my Space Elf captain fought many battles for this money – and now it is not worth anything”).

    So with Bit”coin” – “mining” for “special numbers”, (which, due to the mathematics, would get harder and harder over time) would prevent this problem (basically the Space Elf captains would be happy – at least till various other things were done to them). “Blocks of transactions” and so on was supposed to keep the system from controlled by anyone – so “the people” would control this “new money” (UNLIKE previous computer games).

    It is a bit like the conversation between Max Keiser and some British communist thug that I have just turned off (because I can not stand any more Soviet propaganda today).

    The “Redshirts” in Thailand (actually the servants of a billionaire family that used government power to rig the rice market – to buy the votes of “the masses”) are trying to introduce “democracy” and even “a free market” (a Max Keiser Soviet “free market”)in Thailand – and their foes are just evil servants of the “rich aristocracy”.

    Bit”coin” (for which Max has been the chief pusher – for years) is to serve the same purpose – to give the “ordinary people” control of money, to break the power of “the rich”.

    We can all be like San Francisco couple who found ten million Dollars worth of gold coins in their backyard.

    Because we can buy Bit”coin” – and watch its value go up and up, till we are all very rich (without working).

    Who could be against this Alisa?

    So get into to your local “block chain” and Soviet freedom will be yours – the masses will have freedom (including a “free market”).

    Just like in Thailand (with the wonderful scheme to create high prices for rice farmers and low prices for rice consumers) and Venezuela.

    Putin’s boy (Max Keiser) says so – so it must be true.

    And remember (and this is vitally important) fracking is a PLOT AGAINST THE NHS (the evil Tories are seeking to privatise health care – and give the money to the fracking companies).

    So buy all your oil and gas from Russian state owned companies.

    This is the true free market.

  • Mr Ed

    Well i can pay my bills with it, and i can have credit on my utility bill, and the idea that gold or anything else is a ‘store of value’ (as opposed to an asset) is actually fallacious. What gold I have is either numismatic, and needs an inhaler, or small trophies for the sheer joy of it.

    My point was that I understand Fred Z’s point about MasterCard. That was the point of my post, an end in itself, and so I would have thought that there is nothing more that can usefully be said on my point.

  • Paul Marks

    Perry – are you going trying to bring credit cards into this again?

    A credit card is NOT money – and it does NOT claim to be money.

    What a credit card does (unless it is a scam) is to make a claim on money – people have to pay their credit card bills, and they have to pay them in money.

    The credit card company pays the bill for the loaf of bread (or whatever you have bought) and it pays with money (again – unless the credit card is a scam).

    Then the credit card company comes after you to pay THEM (plus their very high rate of interest) money.

    Nothing to do with Bit”coin”.

    Bit”coin” is NOT a claim on money – it is not a claim on anything.

    The only difference with “World of Warcraft” “gold” (which was also used to buy stuff in the real world – lots of people were mad enough to accept it) is that Bit”coin” can not just be doubled (over night) by the owner of the game – due to all the computer magic that BC salesmen (i.e. people who bought BC early, say when it was five Dollars a pop, and have been TALKING UP THE PRICE ever since) always boast about.

    I wish the BC salesmen (sorry I mean the “owners of Bitcoin”) would just liquidate their positions (as they always planned to – right from the start). Then we could talk about more serious matters.

    Although, hopefully, not how Thailand and Venezuela are examples of the “free market” – and how fracking is a plot against the NHS.

  • Perry the “point” is that Bit”coin” does not exist.

    No Paul that is not the point, which is why I usually stop reading your comments on the subject after the first line.

    Perry – are you going trying to bring credit cards into this again?

    Go back and read the thread.

  • Paul Marks

    “I usually stop reading your comments on the subject after the first line”.

    I love you to sweetheart.

    By the way how many Bitcoin do you own?

    Were you a bit slow in liquidating your position?

  • I will be purchasing some bitcoins next week actually. Buy low sell high is my usual approach

  • […] Frisby (that’s Dominic’s thoughts on the recent Bitcoin disaster/price plummet (which Bruce Hoult explained here)). There is not a lot of room left for more would-be attenders, but there is, as of now, […]

  • Anomenat

    I am extremely confused by Paul’s comment. By saying that “Bitcoin does not exist”, does he mean that Bitcoin is not backed by a physical commodity? If so, what’s the problem with that?

    And in what way is Bitcoin “JUST A GAME” but dollars, pounds or euros are not? Bitcoins are numbers stored on computers. So is my bank balance.

    And what does it have to do with Thailand and the Soviets?

  • Mr Ed

    Anonemat,

    I venture to suggest that Paul is saying that a bitcoin is simply a number, like 128635378992524135748372526729298263526181918272728191987454426383939 or π, so if you wish to buy and sell numbers, fine, but you might as well buy an air pie, or, as I said, propwash.

    I further venture that Paul has been watching Russia Today ‘RT’ and has been listening to Max Keiser, presumably since his wireless no longer receives Lord Haw haw for a foil, and Mr Keiser is reportedly a commentator on Bitcoin but not in the Eddie Waring sense, and RT has been reporting on the Redshirts antics in Thailand. The connection may be opaque, but it is just that one hears the faint echo of the scorn of the most bloodthirsty degenerate who ever lived, Lenin.

  • Satoshi Nakamoto's Cat is not Maru!

    Well I’ve bought a new flat and payed off an old mortgage by selling “air pie”, so feel free to scoff, clueless ones, I’m probably doing better than you are :-P

    And who the fuck is this Max Keiser you keep blathering about?

  • bloke in spain

    “Perry the “point” is that Bit”coin” does not exist”
    Paul. The point is, no money exists. It’s all promissory notes representing…. Well, they used to represent real commodities, until governments started messing with them. The point of BitCoin is it will return to money representing real commodities again. I sell my cow for X BitCoins*. I take my X BitCoins & exchange them for four sheep. No politicians are rewarded in the process.
    Just substitute IOU for BitCoin & you’ll get the idea.
    Don’t get carried away by thinking about how much BitCoins are worth in existing currencies. You’re the wrong side of the equals sign in the equation. It’s how much are the currencies worth in BitCoin. They’re being bought & sold in BitCoin
    When governments create money they create non-existant cows. When you take their money to exchange for the cow, there’s no cow there.

  • Anomenat

    Mr Ed,

    I understand that a Bitcoin is simply a number but isn’t that also true of the pounds in my bank account? My bank balance is just a number on a computer somewhere – it isn’t a physical pile of coins. So if Bitcoins are “air pies” or “propwash”, aren’t pounds, dollars and euros also “air pies” and “propwash”? What’s the difference?

  • Mr Ed

    Anomenat, the difference is slight, but it may prove important. It may be possible to receive notes and coins that are fungible and tangible and are a currency, something that may meet acceptance for your fiat balance, and for the probable future will do.

    Whereas for bitcoins, folk have swapped fiat, which has wide everyday uses (but don’t try buying a Turkish visa with a Scottish £10 note) for bitcoin and are the first to meet the problem of swapping air pies for, say, Diesel.

    All valuations are subjective, all monies depend on, not present valuations, but a speculation on future values at the point of exchange, the trick is to keep surfing ahead of the wave of collapsing valuations, and here, bitcoin is Osmium.

  • Whereas for bitcoins, folk have swapped fiat, which has wide everyday uses (but don’t try buying a Turkish visa with a Scottish £10 note) for bitcoin and are the first to meet the problem of swapping air pies for, say, Diesel.

    Try paying for your diesel with gold next time then ;-)

  • Antoine Clarke

    The true test of a currency is what it can buy.

    All the backups and gobbletygook are bugs, not features.

  • Ok Antoine. Nip off the Corner Shop and see if they will let you pay for a pint of milk and a nice bottle of plonk with a Krugerrand. If not, just give me the useless thing, I’ll take it off your hands. What are friends for, eh?

  • Anomenat

    Mr Ed,

    So when Paul Marks says “Bitcoin does not exist” and “IT IS JUST A GAME”, what he means is “Bitcoins are less liquid than more established currencies”? That’s a reasonable comment but a very strange way to express it.

  • Mr Ed

    Nip off the Corner Shop and see if they will let you pay for a pint of milk and a nice bottle of plonk with a Krugerrand.

    I don’t have a corner shop, my nearest shop is in the next county, but remember that a shopkeeper is not obliged to give change, and might be very tempted to take a Kruggerand for that. And anyway, gold is besides the point, the issue was bitcoin v fiat.

  • I think that another point repeatedly made by Paul was that unlike fiat currencies, BC is not backed by a promise of goods/services. Even if we ignore for a moment the fact that almost all, if not all, fiat currencies are by now inflated beyond all repair, and therefore are only partially so backed, my question still is: so what? People who acquired BCs did so either in exchange for one of those fiat currencies – and so said BCs are as backed (or not) by promises of goods/services as the currencies used as payment for said BCs, or in exchange for actual goods/services – and so said BCs are directly backed by same, just like any other currency.

  • And anyway, gold is besides the point, the issue was bitcoin v fiat

    No, not really, because the point is that is you that whilst you generally cannot use Bitcoin the way you can use fiat, that is also true of gold, so… so what? Bitcoin is not analogous to fiat, it is analogous to gold.

    It is also why Paul’s objection to the use of the word ‘coin’ in Bitcoin is misguided… you can make gold, which he thinks is just fine, into coins as well… a Krugerrand or Maple for example… and yet you will have difficulty spending those ‘coins’ at the corner shop too.

    Although you can sometimes negotiate to get someone to simply accept gold coins for goods and services, the same is also true of bitcoins. But for the most part, need to exchange gold, or bitcoin, for fiat and then spend that.

    So anyone who wishes to make that objection to Bitcoin is perfectly at liberty to do so, just as long as they realise the same can be said of gold.

  • Mr Ed

    Anonement:

    So when Paul Marks says “Bitcoin does not exist” and “IT IS JUST A GAME”, what he means is “Bitcoins are less liquid than more established currencies”?

    Paul has now gone into bitcoin purdah, but I don’t think that he means that at all. You can swap fiat for a bitcoin, or gold or anything. What you have is a unique number, and a means of demonstrating that you ‘own’ that number, or at least you can swap that title, or part of it. You are speculating (one assumes) on others accepting that unique number (and the means of demonstrating ownership) as a currency, and that is it. Nothing physical, no promissory notes, just a chose in action, a number, a bit like π.

    There is no copyright on numbers as far as I can see.

  • The same can be said of a complex pattern of paint on a piece of canvass. That too can be copied… indeed it is a great deal easier to precisely copy and pass off the Mona Lisa than it is a Bitcoin.

    These objections are not really that useful as yes, it depends on someone valuing the pattern, thing, song, whatever. Well yeah.

  • Mr Ed

    Seeing as π is a number, and it shall be British Pie Week next week, should we start a bitpie currency, selling unique segments of π? At least if people can eat it, there will be a built-in tendency towards deflation and an immediate alternative use for it.

  • PeterT

    I too am planning to try and get my hands on some Bitcoins, as soon as I can figure out how to do it. It strikes me that this is the kind of investment that has a small chance of producing an astronomical return. However, my main doubts are:

    – It could be banned. Whilst it may not technically be possible to ban its use, the resulting stigma around the currency is likely to stem its growth. For this reason I think it is probably advisable for the Bitcoin community to play nice and be cute with the regulators, until such time that use has become widespread and the network effects entrenched. Of course, the currency may still be of considerable value, even if banned, if the West goes the way of Argentina, and common folk have no problem with flaunting regulations. So owning the currency could be profitable in a ‘tail event’.

    – Competition. The idea is now out there and anybody could (and have) launched competing currencies. You could of course create a little hoard of digital currencies and hope that one of these will come out on top. But this would dilute aforementioned astronomical returns.

  • I had similar thoughts on this, Peter.

    Any currency can be banned. There’s currently talk in Israel (in fact, a legislation proposal, if I’m not mistaken) to prohibit the use of cash except for some very specific cases. Our betters do these things simply because they can (or try to do them because they think they can – we’ll see what comes out of this latest insanity after all).

  • PeterT

    If you want total control of your population banning cash (coins and notes) is a very good idea. Cue Bitcoin really taking off!

  • Anomenat

    Mr Ed,

    By holding onto fiat money (or gold or whatever) you are also speculating that others will accept it as currency.

    In the case of fiat money, you can be fairly sure that someone will always accept it as currency because, at the very least, the state that backs it should accept it as tax payment. But you cannot be completely sure: there are contemporary and recent examples of governments refusing their own fiat currency (for example, many state-owned organizations in Cuba will not accept Cuban pesos). So it is not guaranteed that your fiat currency will remain liquid.

    But perhaps you don’t think Western countries are likely to go the way of Cuba any time soon. In that case, a far more immediate problem with fiat money is inflation. This is effectively the same as a partial rejection of your money as currency: other people will accept it as legal tender but will demand more of it.

    So it is demonstrably the case that people will not accept your fiat money as currency in the future, at least not on the same terms as they do today. But you are quite right that you can be confident that someone will accept it on some terms.

    In the case of gold, you can hope that people will always accept it as payment because it has some value as a commodity. Gold has industrial uses such as making very good electrical contacts and pretty jewelry. So even if gold as a currency were to completely collapse, you could still trade it with jewelry makers and so on. This puts a non-zero floor on its price. At present, the price of gold is hugely inflated above its value as a commodity because it is monetized: people want it as a store of value rather than only as a commodity. So if you speculate on people accepting it as payment in the future you could lose a lot but not everything.

    In the case of bitcoin, there is no intrinsic value as a commodity. The floor on its price is zero. If you speculate on people accepting it as payment in the future and they fail to do so, you could lose everything. I think that is what you’re getting at, right? When you say it is “just a number” you mean that it has no utility except as money, so if people stop accepting it as money then it is worthless. If that is what you mean, then you are completely correct. However, the case with gold is much the same: the only difference is that the floor on gold’s price is a little higher. Instead of losing everything, you will lose almost everything.

    Gold has other disadvantages. The supply of new gold is controlled by gold miners, who can expand the (gold) money supply as they see fit (provided they can mine it, of course). In contrast, the supply of bitcoin is controlled solely by mathematics, making it completely predictable and immune to meddling by governments or anyone else.

    However, gold has one big advantage. That is that no government could plausibly outlaw it. The main reason I am not very optimistic about bitcoin (although I would very much like to be) is that I think that if it looks like it might succeed then it will soon be stamped out by governments.

  • Tedd

    There is no copyright on numbers as far as I can see.

    Mr Ed is committing the same mistake that people make when they read meaning into lottery numbers. A Bitcoin, like a lottery “number,” is not a number, it’s an identification, a tag, like Perry’s pattern of paint on canvas.

  • Anomenat:

    However, gold has one big advantage. That is that no government could plausibly outlaw it.

    Didn’t FDR do just that?

  • Herbie

    A very interesting discusion:

    Youtube Link

    Stefan Molyneux and Andreas Antonopoulos discuss the fall of Mt. Gox, the greatly exaggerated death of Bitcoin, the joy of failure within the Bitcoin economy, the incredible opportunity Bitcoin provides those without access to the modern banking system, and the difference between Bitcoin and the Federal Reserve System and fiat currencies worldwide.

    Andreas Antonopoulos is the Chief Security Officer of Blockchain.info, a host on Let’s Talk Bitcoin and an expert on Information Security and Cryptography.

    Sorry for the double posting, but it seemed relevant to both threads.

  • Bruce Hoult

    Alisa asked why blocks of transactions are limited to one every ten minutes.

    This is because the only way bitcoins are created is by awarding some to the person who successfully creates a block of transactions that is accepted by the rest of the network.

    Originally the prize for creating a block of transactions was 50 bitcoins. Since sometime on 28 Nov 2012 is has been 25 bitcoins. It will drop to 12.5 sometime around November 2016. And so on.

    The target is to halve the reward every four years (to be precise, every 210240 blocks). So 210240 times 50 = 10,512,000 bitcoins were created up to 28 Nov 2012.

    Those who understand geometric series will immediately realize that this limits the total number of bitcoins that will ever be created to 210240 times 100 = 21,024,000. This limit will never quite be reached. Every four years half of all remaining bitcoins will be created.

    The rate of block creation is controlled by making it harder or easier to create a block of transactions. As more computing power is added (whether more computers, or faster hardware such as GPUs, FPGAs, and now ASICs) the difficulty is adjusted every two weeks (2016 blocks, to be precise) so that new_difficulty = old_difficulty * “2 weeks” / “actual time to create the last 2016 blocks”.

    This also means that if people lose interest in trying to create blocks of transactions (because it becomes unprofitable) then the difficulty can decrease.

  • Bruce Hoult

    Possibly the biggest technical criticism of the design of bitcoin is that the calculations required to create a block of transactions (“mining”) have proven to be too easy to perform with custom hardware instead of software.

    It was hoped that large numbers of people would be able to use their standard computers to attempt to create blocks of transactions, and have a realistic chance of doing so.

    The more people there are mining (and therefore verifying each other’s work), the lower the chance of someone with bad intentions taking over the system.

    Unfortunately, at the moment the only people who can make a profit mining are those who have the resources to create the best new hardware chips.

    The field is currently moving so quickly that even if the creators sell this hardware, they charge so much for it that by the time normal people have it you can’t make a profit using it anyway.

    Eventually this may settle down to the normal rate of computer hardware improvement, hardware prices will drop, and ordinary people will be able to participate again.

    Unfortunately, as the bitcoin mining task is embarrassingly parallel, I don’t expect that to happen soon.

    One of the valid areas of innovation in competing crypto currencies is in devising mining tasks that are so complex that custom hardware won’t be faster than regular CPUs “scrypt” as used in Litecoin and Dogecoin: http://www.tarsnap.com/scrypt/scrypt.pdf is a step in this direction, though also imperfect.

    I think it is less likely that one of these alternative (and technically better) crypto currencies will take over than that bitcoin will issue a software update that uses a new mining algorithm starting at some block number N.

  • That’s beautiful Bruce – thanks:-)

  • Anomenat

    Alisa,

    You’re right! Somehow I never knew that before. Apparently they did something similar in Australia in 1959 as well. So I suppose gold doesn’t even have that advantage over bitcoin.

    However, you could argue that gold will probably always be treated as monetized, to some extent, just because of the centuries of cultural association with money. If we suffer some civilisational collapse and enter a new technological dark age, bitcoins will be worthless but future barbarians will probably still want shiny gold. This is not a huge concern for me…

  • Anomenat

    By the way, if anyone’s looking for a good explanation of the bitcoin protocol, i.e. in depth but without requiring a PhD in mathematics, I very much recommend this: How the Bitcoin protocol actually works by Michael Nielsen.

  • Nick (BTF) Gray

    Alisa, he outlawed gold in the USA, but Indians have hoarded gold and silver for years, as the Hunt brothers found out when they tried to corner the silver market years ago!