Topic: If Bitcoin is an experiment,... - page 3. (Read 5353 times)

It is a back of the envelope calculation. You are right that there are many factors involved which will skew the numbers in one direction or the other. Nevertheless, I'm pretty sure that the implied probability is correct at minimum within an order of magnitude (i.e. should be between 1 in 12 and 1 in 1200).  

If you want to specify some detailed scenario (i.e. assume that it has a velocity similar to gold [implied probability will go way down (not sure about velocity of gold)], and develops to its full extent in 20 years [implied probability will increase by about a factor of 2.5], and has a current use value of $1 [probability will go down by a factor of 4/5]), then I would be happy to investigate the implied probabilities. There is no way of justifying what the right scenario to look at is.

The only thing that would likely lead to a substantial increase in probability is much higher velocity than other currencies. I'm not sure if I'm buying this though. If the currency is intentionally deflationary (like gold), its velocity is likely to be lower, not higher.

Finally, more or less, none of this stuff matters for the design of bitcoin. It is just about interpretation of its success probability. Don't be over optimistic.

Fractional reserve banking sounds like an even bigger experiment to me.

In addition, does anyone know how this works?:
Amount x in currency X buys 1 pizza.
Amount y in currency Y buys 1 pizza.
The pizzas represent a comparable broad basket of goods that are locally available in the respective jurisdiction of each currency.
However, when exchanging the two currencies, 1x buys 5y.
Why? Because one country has a more effective tourism marketing strategy than the another? It seems one possible answer is that one country stealthily inflates their currency with various trading instruments, and is temporarily able to con the other country by restricting their access to those instruments.

I don't know nuthin about pricing risk, which is why I tell all of my relatives I have absolutely no idea whether or not they should buy Bitcoins.

But: it seems to me you're assuming that the entire $5 current price of Bitcoin is pure speculation, and ignoring that they ARE functioning as money in some fledgling markets. And don't you have to factor in time value of money into the calculation?  I'll pay a lot more for bitcoin today if I think there's a 30% chance it will be worth $600 in a year than if I think there is a 30% chance in 100 years.

You're also assuming that the velocity of bitcoin will be approximately equal to the velocity of traditional currencies. I could image it being much higher (less friction in transactions, so more transactions) or much lower (maybe bitcoin will be used mostly as a long-term store of value, with infrequent transactions; what is the velocity of an gram of gold compared to dollars?).

Sorry missed that. Reading comprehension fail. Should then be 1 in 120 then with a $600 valuation per coin. Comment about "good chance" being misleading still applies.

He's clearly saying 0.01%, not 1%.

It will be tough to tell when btc will get to 1%, except long after the fact, and with a very large margin of error. There is no reliable way to measure it's use in actual real life trade, except by relying on voluntary user reports. I think when bitcoin gets big, it will do so fairly stealthily.

1% is a pretty arbitrary number, IF it can assume international currency role, there's little reason for other value measuring unit to exist. Just like (almost) everyone  is using meters, grams, seconds etc.

It should count 50%~100% of global transactions. Then the implied probability now is 1 in 600K to 1 in 1.2 million.

Them damn good odds! Isn't there a mega lotto that currently has a record jackpot with odds a hell of a lot worse than this, yet people are standing in line to buy their losing ticket? The person who figures out a way to market Bitcoin to the buyers of said lotto would profit handsomely.

~Bruno~

Let's consider what Gavin is saying here for a moment. 1% of world txns is pretty enormous. Let's say there are only two future possibilities:
1) Gavin's dream comes true (Bitcoin accounts for 1% of world txns)
2) Bitcoin fails and value decreases to 0.

The current bitcoin price indicates a guess about the probability of the two scenarios. What is this guess? Let's refer to a back-of-the-envelope calculation

Japan accounts for about 7% of world economic activity, that is 7% of world txns. The Japanese narrowly-defined money supply (M1) was about 9 trillion USD in 2009. Therefore we might expect bitcoin market cap under possibility (1) to be about 1/7 of this. That is under scenario 1, bitcoin market cap should grow to about 1.25 trillion USD. Dividing this by the 21 million bitcoins in existence, each bitcoin should be worth about 60,000 USD.

Right now bitcoin sells for about 5 USD. Let's consider the two future scenarios again.
1) Each bitcion worth US$60k each in future
2) Each bitcion worth US$0 in future.

What probability is the market putting on scenario 1? If bitcoin has a 1 in 12000 chance of growing in value to 60k and a 11999 in 12000 chance of falling in value to 0, then a price of 5 USD implies a fair gamble. Thus the implied probability is 1 in 12000.

I am not opposed to putting some money down on a 1 in 12000 chance. It is reasonable to gamble away small amounts. However, I am opposed to describing this as a "good chance." Without any further details, your audience will likely get confused about their odds.
 
Note: it's worth noting that introducing additional, intermediate scenarios will decrease the chance below 1 in 12000. We can think of 1 in 12000 as an upper bound on the market-implied probability that Gavin's dream will come to pass.
 

On the first draft of the OP, the modifier "truly" was not included, but opted to include for some unknown reason. I guess, at the time, I felt it read better. That said, thank you, Gavin, for your unique insight.

~Bruno~

Encoin wasn't the first cryptocurrency but...

Yes, more of a political experiment than technical

Yep, this a 100times.

What is your definition of "truly mainstream" ?

If 1% of the world uses Bitcoin for 1% of their transactions, then I'd still consider it a huge success. I think there's a good chance that happens, but that doesn't fit my definition of 'mainstream.'

I think there is small possibility Bitcoin proper is used by a majority of people in some country somewhere in the world use it at least once a week to pay for things. I'd consider that mainstream success.

I think there's a tiny possibility Bitcoin will eventually become as popular as the dollar.

But I'm not very good at predicting the future, so you might want to consult you local fortune teller.

This.

The Euro is a large scale experiment started in the late 1990s. It's still in use in countries where it's a large scale failure.

Thank you, all, for your informative posts, for I needed this info to help me better understand where Bitcoin is potentially heading. Any further discussion on this issue would be most welcomed, for myself and others who'll read this thread in the future.

~Bruno~

Implied in your question is the assumption (hinted at in braces) that a crytocurrency can become mainstream at this point in human history. I don't think technology that a crypto-currency will rely one will mature for at least 7 generations (150 years or so). One thing that worries me almost as much as the possibility of hardware and software back-doors is bandwidth caps. Data and storage used by bitcoin is expected to increase at least geometrically for a long time. The average person many be excluded from caching the block-chain on that alone.

However, even if current technology is "good enough" to work in practice, it will be an experiment. There is always a risk that the big mining pools will get together and implement protocol changes that are detrimental to the currency. Even "bugfix" protocol changes are experimental. How far ahead such changes should be planned is an open question, factoring in the severity of the problem and whether existing transactions can still be trusted in the future.

This is also a political experiment. Governments around the world are increasingly cracking down on "annonymous" financial transactions. For example, the Bank of Canada has removed the $1000 bill from circulation because it is too easy to move around. Businesses dealing with Money are required to record who is sending money to whom. Bitcoin is (deliberately?) ambiguous. It is not really "virtual money" because there is no central issuer backing it. It also acts a lot like a commodity, which may have tax implications in many countries.

If space travel becomes possible, bitcoin will likely become obsolete. The protocol assumes that every node has a latency of less than 10 minutes (2 minutes if TCP is used). This can be violated on Earth as well if your Internet is cut off by the govenrment (or your ISP) and data must be smuggled out on foot. For the largest "island" of processing power, this is not a big problem. However, smaller islands of processing power face having their blockchain history re-written by malicous entites on the larger processing island.

What else could he say? "Here you go. This is money, no flaws, enjoy."? Even if the protocol was perfect it would still be a monetary experiment, no one knows what 6 billion people are going to do with something before any of them have even looked at it.

Satoshi's protocol when Bitcoin was first made available failed.  And so did subsequent revisions. On August 10th, 2010 [the leading implementation of the protocol] failed spectacularly even:
 - http://en.bitcoin.it/wiki/Incidents

But because the protocol can be modified through a certain process, the flaws are being solved (see BIP 30 as an example.).

Because the protocol started out as an experiment does not mean it hasn't or won't become a widely used and valued piece of our financial infrastructure.