LessWrong is where I learned about Bitcoin, several years ago, and my greatest regret is that I did not investigate it more as soon as possible, that people here did not yell at me louder that it was important, and to go take a look at it.  In that spirit, I will do so now.


First of all, several caveats:

* You should not go blindly buying anything that you do not understand.  If you don't know about Bitcoin, you should start by reading about its history, read Satoshi's whitepaper, etc.  I will assume that hte rest of the readers who continue reading this have a decent idea of what Bitcoin is.

* Under absolutely no circumstances should you invest money into Bitcoin that you cannot afford to lose.  "Risk money" only!  That means that if you were to lose 100% of you money, it would not particularly damage your life.  Do not spend money that you will need within the next several years, or ever.  You might in fact want to mentally write off the entire thing as a 100% loss from the start, if that helps.

* Even more strongly, under absolutely no circumstances whatsoever will you borrow money in order to buy Bitcoins, such as using margin, credit card loans, using your student loan, etc.  This is very much similar to taking out a loan, going to a casino and betting it all on black on the roulette wheel.  You would either get very lucky or potentially ruin your life.  Its not worth it, this is reality, and there are no laws of the universe preventing you from losing.

* This post is not "investment advice".

* I own Bitcoins, which makes me biased.  You should update to reflect that I am going to present a pro-Bitcoin case.


So why is this potentially a time to buy Bitcoins?  One could think of markets like a pendulum, where price swings from one extreme to another over time, with a very high price corresponding to over-enthusiasm, and a very low price corresponding to despair.  As Warren Buffett said, Mr. Market is like a manic depressive.  One day he walks into your office and is exuberant, and offers to buy your stocks at a high price.  Another day he is depressed and will sell them for a fraction of that. 

The root cause of this phenomenon is confirmation bias.  When things are going well, and the fundamentals of a stock or commodity are strong, the price is driven up, and this results in a positive feedback loop.  Investors receive confirmation of their belief that things are going good from the price increase, confirming their bias.  The process repeats and builds upon itself during a bull market, until it reaches a point of euphoria, in which bad news is completely ignored or disbelieved in.

The same process happens in reverse during a price decline, or bear market.  Investors receive the feedback that the price is going down => things are bad, and good news is ignored and disbelieved.  Both of these processes run away for a while until they reach enough of an extreme that the "smart money" (most well informed and intelligent agents in the system) realizes that the process has gone too far and switches sides. 


Bitcoin at this point is certainly somewhere in the despair side of the pendulum.  I don't want to imply in any way that it is not possible for it to go lower.  Picking a bottom is probably the most difficult thing to do in markets, especially before it happens, and everyone who has claimed that Bitcoin was at a bottom for the past year has been repeatedly proven wrong.  (In fact, I feel a tremendous amount of fear in sticking my neck out to create this post, well aware that I could look like a complete idiot weeks or months or years from now and utterly destroy my reputation, yet I will continue anyway).


First of all, lets look at the fundamentals of Bitcoin.  On one hand, things are going well. 


Use of Bitcoin (network effect):

One measurement of Bitcoin's value is the strenght of its network effect.  By Metcalfe's law, the value of a network is proporitonal to the square of the number of nodes in the network. 


Over the long term, Bitcoin's price has generally followed this law (though with wild swings to both the upside and downside as the pendulum swings). 

In terms of network effect, Bitcoin is doing well.


Bitcoin transactions are hitting all time highs:  (28 day average of number of transactions).



Number of Bitcoin addresses are hitting all time highs:



Merchant adoption continues to hit new highs:

BitPay/Coinbase continue to report 10% monthly growth in the number of merchants that accept Bitcoin.

Prominent companies that began accepting Bitcoin in the past year include: Dell, Overstock, Paypal, Microsoft, etc.


On the other hand, due to the sustained price decline, many Btcoin businesses that started up in the past two years with venture capital funding have shut down.  This is more of an effect of the price decline than a cause however.  In the past month especially there has been a number of bearish news stories, such as Bitpay laying off employees, exchanges Vault of Satoshi and CEX.io deciding to shut down, exchange Bitstamp being hacked and shut down for 3 days, but ultimately is back up without losing customer funds, etc.


The cost to mine a Bitcoin is commonly seen as one indicator of price.   Note that the cost to mine a Bitcoin does not directly determine the *value* or usefulness of a Bitcoin.   I do not believe in the labor theory of value: http://en.wikipedia.org/wiki/Labor_theory_of_value

However, there is a stabilizing effect in commodities, in which over time, the price of an item will often converge towards the cost to produce it due to market forces. 


If a Bitcoin is being priced at a value much greater than the cost (in mining equipment and electricity) to create it, people will invest in mining equipment.  This results in increased 'difficulty' of mining and drives down the amount of Bitcoin that you can create with a particular piece of mining equipment.  (The amount of Bitcoins created is a fixed amount per unit of time, and thus the more mining equipment that exists, the less Bitcoin each miner will get).

If Bitcoin is being priced at a value below the cost to create it, people will stop investing in mining equipment.  This may be a signal that the price is getting too low, and could rise.


Historically, the one period of time where Bitcoin was priced significantly below the cost to produce it was in late 2011.  It was noted on LessWrong.  The price has not currently fallen to quite the same extent as it did back then (which may indicate that it has further to fall), however the current price relative to the mining cost indicates we are very much in the bearish side of the pendulum.


It is difficult to calculate an exact cost to mine a Bitcoin, because this depends on the exact hardware used, your cost of electricity, and a prediction of the future difficulty adjustments that will occur.  However, we can make estimates with websites such as http://www.vnbitcoin.org/bitcoincalculator.php

According to this site, every available Bitcoin miner will never give you back as much money as it cost, factoring in the hardware cost and electricity cost.   Upcoming more efficient miners which have not yet released yet are estimated to pay off in about a year, if difficulty grows extremely slowly, and that is for upcoming technology which has not yet even been released. 


There are two important breakpoints when discussing Bitcoin mining profitability.  The first is the point at which your return is enough that it pays for both the electricity and the hardware.  The second is the point at which you make more than your electricity costs, but cannot recover the hardware cost.


For example, lets say Alice pays $1000 on Bitcoin mining equipment.  Every day, this mining equipment can return $10 worth of Bitcoin, but it costs $5 of electricity to run.  Her gain for the day is $5, and it would take 200 days at this rate before the mining equipment paid for itself.  Once she has made the decision to purchase the mining equipment, the money spent on the miner is a sunk cost.  The money spent on electricity is not a sunk cost, she continues to have the decision every day of whether or not to run her mining equipment.  The optimal decision is to continue to run the miner as long as it returns more than the electricity cost. 

Over time, the payout she will receive from this hardware will decline, as the difficulty of mining Bitcoin increases.  Eventually, her payout will decline below the electricity cost, and she should shut the miner down.  At this point, if her total gain from running the equipment was higher than the hardware cost, it was a good investment.  If it did not recoup its cost, then it was worse than simply spending the money buying Bitcoin on an exchange in the first place.


This process creates a feedback into the market price of Bitcoins.  Imagine that Bitcoin investors have two choices, either they can buy Bitcoins (the commodity which has already been produced by others), or they can buy miners, and produce Bitcoins for themself.   If the Bitcoin price falls sufficiently that mining equipment will not recover its costs over time, investment money that would have gone into miners instead goes into Bitcoin, helping to support the price.  As you can see from mining cost calculators, we have passed this point already.  (In fact, we passed it months ago already).


The second breakpoint is when the Bitcoin price falls so low that it falls below the electricity cost of running mining equipment.  We have passed this point for many of the less efficient ways to mine.  For example, Cointerra recently shut down its cloud mining pool because it was losing money.  We have not yet passed this point for more recent and efficient miners, but we are getting fairly close to it. Crossing this point has occurred once in Bitcoin's history, in late 2011 when the price bottomed out near $2, before giving birth to the massive bull run of 2012-2013 in which the price rose by a factor of 500.


Market Sentiment: 

I was not active in Bitcoin back in 2011, so I cannot compare the present time to the sentiment at the November 2011 bottom.  However, sentiment currently is the worst that I have seen by a significant margin. Again, this does not mean that things could not get much, much worse before they get better!  After all, sentiment has been growing worse for months now as the price declines, and everyone who predicted that it was as bad as it could get and the price could not possibly go below $X has been wrong.  We are in a feedback loop which is strongly pumping bearishness into all market participants, and that feedback loop can continue and has continued for quite a while.


A look at market indicators tells us that Bitcoin is very, very oversold, almost historically oversold.  Again, this does not mean that it could not get worse before it gets better. 


As I write this, the price of Bitcoin is $230.  For perspective, this is down over 80% from the all time high of $1163 in November 2013.  It is still higher than the roughly $100 level it spent most of mid 2013 at.

* The average price of a Bitcoin since the last time it moved is $314.


The current price is a multiple of .73 of this price.  This is very low historically, but not the lowest it has ever ben.  THe lowest was about .39 in late 2011. 


* Short interest (the number of Bitcoins that were borrowed and sold, and must be rebought later) hit all time highs this week, according to data on the exchange Bitfinex, at more than 25000 Bitcoins sold short:



* Weekly RSI (relative strength index), an indicator which tells if a stock or commodity is 'overbought' or 'oversold' relative to its history, just hit its lowest value ever.


Many indicators are telling us that Bitcoin is at or near historical levels in terms of the depth of this bear market.  In percentage terms, the price decline is surpassed only by the November 2011 low.  In terms of length, the current decline is more than twice as long as the previous longest bear market.


To summarize: At the present time, the market is pricing in a significant probability that Bitcoin is dying.

But there are some indicators (such as # of transactions) which say it is not dying.  Maybe it continues down into oblivion, and the remaining fundamentals which looked bullish turn downwards and never recover.  Remember that this is reality, and anything can happen, and nothing will save you.



Given all of this, we now have a choice.  People have often compared Bitcoin to making a bet in which you have a 50% chance of losing everything, and a 50% chance of making multiples (far more than 2x) of what you started with. 

There are times when the payout on that bet is much lower, when everyone is euphoric and has been convinced by the positive feedback loop that they will win.  And there are times when the payout on that bet is much higher, when everyone else is extremely fearful and is convinced it will not pay off. 


This is a time to be good rationalists, and investigate a possible opportunity, comparing the present situation to historical examples, and making an informed decision.   Either Bitcoin has begun the process of dying, and this decline will continue in stages until it hits zero (or some incredibly low value that is essentially the same for our purposes), or it will live.  Based on the new all time high being hit in number of transactions, and ways to spend Bitcoin, I think there is at least a reasonable chance it will live.  Enough of a chance that it is worth taking some money that you can 100% afford to lose, and making a bet.  A rational gamble that there is a decent probability that it will survive, at a time when a large number of others are betting that it will fail.


And then once you do that, try your hardest to mentally write it off as a complete loss, like you had blown the money on a vacation or a consumer good, and now it is gone, and then wait a long time.



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I used to believe that bitcoin is under-priced before, but there are so many agents involved in it now (including Wall Street), that I can't really convince myself that I know better than them - the market is too efficient for me.

Additionally, I'd be especially wary about buying based on arguments regarding the future price based on such obvious metrics, that many agents pay attention to.

It would be an interesting analysis to find out how many traditional players are involved and to derive from that confidence in the optimality of the bitcoin price.

I am not very knowledgeable about bitcoins but I do have some famiality with banks responsiblies under US and EU anti money laundering regimes. I think that bit coins would pose a number of complience challenges and that it would be pretty tough for banks to be confidbet they weren't running afoul of regs. So my guese is that but coins probably have very little bank activity. Similarly I bet they don't have much activity from the large hedge funds. It's probabky limited to small funds.
Correct, few banks are willing to go anywhere near bitcoin or bitcoin-related companies. Doesn't stop people from actually using bitcoin though, because the whole point of bitcoin is that it invalidates the need for a bank... Hedge funds aren't investing in bitcoin because for the moment they are not really able to, except for a few weird, esoteric, accredited-investor-only funds. That should change if the Winklevoss COIN ETF is accepted though.
You're confused between hedge funds and mutual funds. Hedge funds have pretty much no legal restrictions on what they can do with their money.
By not able to I mean literally not able to, as in not possible / convenient. There simply isn't sufficient investing infrastructure or liquidity in place for most hedgies.
It's worth noting that efficient markets are a modeling assumption to make certain economic problems computationally tractable and easy to model. It's not a law of nature confirmed by observation. On the contrary a lot of times markets are observed to be inefficient (eg the housing market mid 2000s or at a higher level of sophistication the mortgage backed securities market in the same period). Even very liquid markets like the FX market with technically sophiscated arbitrage free pricing models still have had long running well known ineffiencies like the forward rate bias.
Sure, but they are still a useful heuristic.
That's fair enouph. So long as it is remembered that it's a heuristic and is used to guide thinking rather than stop thinking it is certianly valuable.
Corollary: if you want to find investments with significantly higher than average expected values, look for structural reasons that a market might be inefficient, or reasons that many smart players might be making the same evaluation mistake. Note that actually following the above as advice might be extremely hazardous: taken in a different light, it feels a lot like the advice "seek out confirmation bias".
What about a possible federal regulation?

I'm always amused by statements like "This post is not 'investment advice'", followed by exactly that. I understand that it's necessary ass-covering, but the transparency of it is hilarious.

That said, this is interesting. I don't plan on buying in, but I might start watching the market. I didn't realize BTC had survived a previous crash. That actually improves my estimate of its long-term survival chances.

This is, IIRC the long aftermath of the 3rd major bubble. One in June 2011 (to ~$30), one in April 2013 (To ~$220) and one in November 2013 (To ~$1100). Personally, I'm not expecting a major recovery until the protocol hits the next halving of the mining rate, which is July of 2016 on the current mining timetable. In the mean time, I'm dollar cost averaging my investment in Bitcoin, and stacking up whatever I can get.
What's the point of dollar cost averaging? Why not just pick a % of your asset allocation that you want in Bitcoin and rebalance from 0% up to that ASAP? I see this as a special case of the virtue of rebalancing as often as possible.
It's just a hedge for if you're risk-averse or if you're worried that market fluctuations will negatively influence your behavior about when to rebalance or invest. Here's a Vanguard study comparing the two historically if you're curious.
Yes, it is similar to rebalancing. The benefit is that you get more shares during the times when it is down, the mathematics helps reduce your average cost. For example, lets say I take $3000 and buy a stock all at once at $50. I get 60 shares. Now instead, what if I buy $1000 each at 3 different times, once at $40, once at $50, and once at $60. I end up with 25+20+16.66 shares = 61.66 shares, even though the average price I bought at was identical. This is generally a good idea, whether one is buying stocks or Bitcoin or anything else. It works similar to reallocating. For example, lets say you wanted to keep 10% of your net worth in Bitcoin (or anything else). If Bitcoin doubles in price, you now are misallocated, and have close to 20% of your net worth in it (if other things stayed the same), so you would sell some. If it dropped by 50%, you would have a little over 5% of your new net worth in it, so you would need to buy some. This helps you to, on average, buy low and sell high, even without really knowing what you are doing. You don't want to reallocate constantly, due to trading fees, but you need to do it sometimes, to gain the benefit.
When I see the concept of dollar cost averaging my math intuition module throws up a big red "This Is Clearly Wrong" sign. I never seem to have that thought when I have the time and inclination to tease out what's wrong and write a clear explanation of why it's BS (or find out that it's not). Today is no exception. But here are some pointers my math intuition module is producing which say "investigate this, it will show you what's wrong": 1. If you flip a coin and invest the lump sum $3000 at either $40, $50, or $60 with equal probability, your expected value is 61.66 shares, not 60. 2. The "average price" should be the harmonic mean, not the arithmetic mean, and buying at the harmonic mean gets you 61.66 shares. 3. If you have the option of buying $3000 worth at $50, that doesn't mean you could switch to instead buying at a non-zero-variance-distribution with arithmetic mean $50 over time.
DCA lowers risk, while keeping the same EV. And the most common alternative, trying to time the market, has a long history of miserable failure by virtually all investors. It's canonical investment advice for a reason.
Ander's claim, which I see repeated a lot, seems to be that it is positive EV rather than neutral. That's the bit that raises my hackles.
For a normal person who's saving money off their paycheque, DCA is superior to saving up a lump sum and investing that. This is true for exactly the same reason that DCA is inferior to a lump sum in the case where you're investing a lump sum - it gets you into the market faster, and stocks outperform cash.
Fleshing out my intuition. For that argument for DCA to go through, we must justify that it's the correct argument to choose from these three: * For example, lets say I take $3000 and buy a stock all at once at $50 for 1 share. I get 60 shares. Now instead, what if I buy $1000 each at 3 different times, once at $40 for 1 share, once at $50 for 1 share, and once at $60 for 1 share. I end up with 25+20+16.66 shares = 61.66 shares, even though the average price per share I bought at was identical. (original argument) * For example, lets say I take $3000 and buy a stock all at once at 0.02 shares for $1. I get 60 shares. Now instead, what if I buy $1000 each at 3 different times, once at 0.025 shares for $1, once at 0.02 shares for $1, and once at 0.0167 shares for $1. I end up with 25+20+16.66 shares = 61.66 shares, because the average shares per dollar I bought at was 0.02057 which is better than 0.02. (original argument with prices preserved, "average metric was the same" changed, and conclusion changed) * For example, lets say I take $3000 and buy a stock all at once at 0.02 shares for $1. I get 60 shares. Now instead, what if I buy $1000 each at 3 different times, once at 0.025 shares for $1, once at 0.02 shares for $1, and once at 0.015 shares for $1. I end up with 25+20+15 shares = 60 shares, because the average shares per dollar I bought at was 0.02 which is identical to 0.02. (original argument with prices changed, "average metric was the same" preserved, and conclusion changed)
Off the top of my head whether the DCA (dollar cost averaging) works depends on the persistence of the underlying time series (returns on the asset you're buying). If the asset returns are following a random walk, DCA is useless. It won't hurt you and it won't help you. If the asset returns are persistent (momentum dominates), DCA will hurt you and decrease your performance. If the asset returns are anti-persistent (mean-reversion dominates), DCA will help you.
Thing about the stock market is, if either momentum or mean-reversion dominated, people would use that in trading algorithms and destroy the phenomenon. Over the long run, it can be safely assumed to be neither, so DCA doesn't hurt you(other than perhaps by delaying your investments, if you're thinking of streaming a lump-sum in over time instead of investing it all right away, but most people invest from paycheques instead of from lump sums), but it does lower variance.
Some people disagree. Compared to what?
That may be the single most colloquial academic paper I've ever seen. They do lay out a decent case, but remember that they're discussing a different kind of momentum than we are - we're discussing momentum of market returns, they're discussing momentum in relative ranking of different securities. Also, I tend to take it as given that if a simple stock-trading strategy produced returns that were that superior, the hedge fund crowd would have jumped on it with both feet by now. Some of the hedge fund strategies I've seen have exploited far smaller inefficiencies to make significant returns. Compared to saving up a lump sum and investing that. And it sure returns better than just not saving at all, which is the usual default of most would-be investors. In practice, DCA is usually used by retail advisors(of which I am one) as a psychological argument that investors should ignore short-term market turmoil in their long-term investments. Frankly, any argument that makes retail investors stop buying high and selling low is doing the lord's work, and DCA is even mildly accurate.
Do note that the main author of that paper runs a hedge fund. That's apples and oranges, isn't it? All you're saying is that holding cash is less volatile in nominal terms :-) That's an entirely different claim from saying that DCA improves your returns (or your Sharpe ratio).
Noted. It's the same argument that the above paper is making, just in the opposite circumstances. DCA says investing into a down market improves your returns, and the best way to systematically do so is to to just always be investing, which is accurate and a useful psychological argument besides.
This claim is not compatible with EMH.
I'm not speaking of trying to time investments. I'm speaking retrospectively - if you can invest at a time that is a local minimum in retrospect, that money will grow faster. Also, I'm not a big believer in the EMH - it's valid over a period of seconds and over a period of decades, but in between, psychological effects and the joys of market timing(i.e., knowing an investment is crap, but riding the bubble anyways) can swamp EMH easily.
It's certainly true that a time machine can produce outstanding investment returns :-/ but I don't see what does it have to do with DCA. That's perfectly fine, but if you don't believe in EMH and believe that DCA improves your returns, then this necessarily means that you believe that markets are mean-reverting and in that case there are better than DCA ways to take advantage of it.
I'm coming at this from two angles at once, so my points are a touch scattered. 1) The basic math. This says that putting money in as you get it is the best way to invest, because the market goes up over time, and that dominates any gains from DCA or market timing. When investing a lump sum there's a small reduction in risk from DCA, but not enough to make it worthwhile in general. 2) The fact that I advise middle-class people on how to invest, and that this advice needs to be built primarily on psychology and not math. DCA is a good strategy for increasing real-world investment returns for normal people, because it convinces them that a down market is not the end of the world, and in some cases it convinces them to save at all(which far too many don't, whether out of fear or short-sighted spending goals). Also, normal people tend to invest a portion of their paycheques, and that is a payment stream that leads naturally to DCA, even if the ostensible benefits of DCA don't materialize.
I am sorry, "the basic math" says no such thing. It's your strong assumptions ("the markets always go up") which say this, assumptions I don't consider to be self-evident. It would be helpful to clearly distinguish what you believe is the true state of the world ("math") and what you think not-quite-rational people need to be told in order to do what you want to make them do ("psychology").
I do not assume that "the markets always go up". I merely claim that historically, the market has generally gone up faster than cash over the long run. This was the whole point of the paper linked above that said lump-sum beats DCA, and the same is true when investing a steady stream of income - you will generally do better in the market, so to maximize EV, invest right away when you get the money. The post above was an attempt to draw that distinction. Are there any points I wasn't sufficiently clear about?
That is not true. You advise your clients to act a way which implies a specific forecast: that the "markets" will, in the future, outperform other assets, e.g. cash, over the relevant holding period.
Quite right. Any financial advisor who does not do so is being grossly irresponsible.
Agreed, and I've also been dollar cost averaging it. From the 400s on down. The risk is that the previous bubble was the last one and it never recovers. The upside is that the previous bubble was another in the string of booms that must occur in something that is growing exponentially from 0.
Indeed! Whats even funnier is how many different people that there are that you can subscribe to and pay a monthly fee to, in tons of different financial markets, who also "don't give investment advice". :) You should mentally replace this statement with "you are responsible for your own actions, not me". Indeed, Bitcoin has survived a previous crash (severe bear market), several times in fact. Buying now is essentially a bet it will survive again. That bet will either pay off, or it wont.

Upvoted for making a testable prediction.

Let the record show that Bitcoins lost 21% of their value the day after this article was posted.
Let the record also show that 2 years later, bitcoin is up 243% https://bitcoinity.org/markets/bitstamp/USD
Let the record show that 6 years later, the price of bitcoin has increased 250-fold over the price at the time at which this article was written.
OP Downvoted for being bad advice. But yes, testable.

If you look at net worth counterfactuals, the person deciding whether to borrow money to buy BTC is facing the same decision as someone who is already in debt and is deciding whether to buy BTC or use the same money to pay off some of their debt. If you think leveraged investments in BTC are unwise, you should also categorically advise people with any amount of debt to not buy BTC.

I thought it is a given that if you have debt you should spend all your disposable income paying off the dept. Unless, of course, you can safely invest somewhere where the interest is higher than that of your debt. The advice here is to treat it as if you bought consumer goods, or vacation. Paying off your debt instead of going on vacation seems like a really elementary advice in personal finance. Unless, of course, you are sufficiently certain that not going on the vacation will result in a mental illness or something. I'm curious.. Is there any data about how much personal debt LWers have?
Essentially, if your condition for investing in bitcoin is that it should only be done with money you are happy to lose, then you have proved it is not a good investment, rather it is a game you are playing and are willing to pay to play. Like going to Las Vegas.
I agree, people who are in debt should probably pay off their debts first. Bitcoin is the definition of a risk investment. You only buy with money that you can afford to lose 100% of. You must accept that a 100% loss is possible.
Surely this is just a risk calculation, and depends on many factors. Currently debt is cheap, so high risk, high return investments make some sense if the expectation is good. Paying down debt if it is cheap is a silly mistake. You can still make good returns on the stock market betting that the market is risk averse, we have feeble brains. Currently the cash you have is probably denominated in a conventional currency which also carries risk, we just tend to assume our own currency is some sort of fix point. I'll probably have had been buying bitcoins if my wealth was in Roubles, although the Rouble has rallied recently I believe, especially if I was dodgy character with difficulty finding a reliable bank in the West. Deciding if I should buy BitCoins if I have cash in a reasonably stable currency is another question. Interesting question is when to start buying Roubles, you know eventually Putin will die, or the war will be over.

People have often compared Bitcoin to making a bet in which you have a 50% chance of losing everything, and a 50% chance of making multiples (far more than 2x) of what you started with.

There are times when the payout on that bet is much lower, when everyone is euphoric and has been convinced by the positive feedback loop that they will win. And there are times when the payout on that bet is much higher, when everyone else is extremely fearful and is convinced it will not pay off.

A good way to think about how much money to invest in these kind of bets... (read more)

One could think of markets like a pendulum, where price swings from one extreme to another over time, with a very high price corresponding to over-enthusiasm, and a very low price corresponding to despair.

This is very misleading. Pendulums are extremely predictable with continuously varying momentum while markets are anti-inductive.

Possibly stupid questions:

  1. Why do you assume that the price of Bitcoin, and its uptake are tightly connected? Why couldn't it be possible for the price to stay around $200 from now on, even while Bitcoin becomes massively used all over the world? The price of the dollar is not continuously rising (indeed it falls over time) but it is nevertheless widely used.

  2. There is an asymmetry regarding Bitcoin price. If the price of Bitcoins is higher than the cost of mining them, that will cause more investment in Bitcoin miners, leading to more Bitcoins created an

... (read more)
Your item 2 is wrong. More investment in bitcoin mining does NOT increase the rate of bitcoin creation. The "difficulty" level of mining is automatically increased to keep the creation rate of bitcoin at a predetermined constant. More investment in mining simply lowers the return (counted in bitcoin) on all previous investments in mining. Bitcoin mining is not like gold mining. If you buy a mine with 100 ounces of gold in it, you will extract 100 ounces of gold before the mine is dead. But the amount of "bitcoin" in a bitcoin mine depends on how many other mines there are. If the investment in mining doubles, the mine you have already invested in will produce only half as many bitcoins, because the "difficulty threshold" of successful mining is constantly and automatically adjusted to keep the rate of new bitcoin creation constant.
Bitcoins are created at the same pace no matter what, so 1. If there is a lot of demand for bitcoin, the price will necessarily increase since we can't mine at a faster rate. 2. Miners don't affect the rate of bitcoin creation,
1. But "demand" for bitcoin is not the same as bitcoin adoption. Bitcoins are neither created nor destroyed when (for example) a merchant accepts bitcoins in a transaction. Similarly, demand for dollars is not a function of how many people are willing to use dollars in their transactions, but rather how many people want to hold dollars (and at what liquidity price). I agree that increased demand for bitcoin (relative to supply) will increase the price, I just don't see why that relative demand has to increase if bitcoin catches on as a medium of exchange. For example, suppose bitcoin neither 'dies' nor expands, but stays at its current level. In that case, we'd expect the price of bitcoins to fall over time, as more bitcoins are created but demand does not increase. 2. Good catch. But doesn't this re-inforce my point that the cost of mining bitcoins will cap, rather than set, the price?
You are correct. There can be an increasing number of transactions per unit time, but whether those transactions are in microbitcoins or megabitcoins is orthogonal.
I thought Bitcoins were a proof of work thing, with a limited total number, so the rate of mining changes over time and in response to the price, or has that changed? When I lasted looked mining on your own electricity bill was madness, but botnets were being used to mine, and had sufficient benefits in being easy to convert that the botnet operators were preferring bitcoin mining over riskier endeavours.
The rewards of mining half every 4 years or so, and this can be sped up some if the total network hashrate doubles up a lot, but that's about it.
A little ambiguous. The total return to all miners halves every 4 years or so. If the total investment in mining equipment is doubling every 4 years, then the return to unit investment in mining will decrease by 75% every 4 years. Both the total rate of BTC creation and the increasing investment chasing that creation are decreasing the return to the mining investment.
Mining doesn't impose any sort of cap on prices in the traditional sense. High prices lead to more mining activity, but more mining activity doesn't change the creation rate, it just spreads the proceeds of creation out over more miners. If BTC doubles in price, but the miners double in quantity, then mining is exactly as profitable as it was before. If BTC halves in price, and half the miners shut off their rigs, ditto.
The proceeds overwhelmingly don't go to miners. They go to electricity utilities and the upstream value chain of those businesses. Because the cost of electricity is always nearly identical to the proceeds. Basically, bitcoin is a way to turn perfectly good dollars into an extra load on the grid for no good reason.
I have a friend who mines bitcoin...but only in the winter, because he has electrical heating anyways, so there's no net new electrical load.
It doesn't necessarily do that either. The more mining gets specialized, the more centralization we see.
Fair. For added precision, "spreads the process of creation out over more dollars worth of mining equipment".

Heh. What's the odds of you having that winning lottery ticket?

50/50! Either I win, or I don't.

Seems like you're mostly saying that price-like things tend to return to an average price, then presenting a lot of evidence on why the price is low and likely to continue to be low, then claiming that it's therefore got to go up, because things return to their average price.

I have some bit-coin. It's still worth more than when I brought it. My best guess, as it was then, is that it'll be worth exactly zero in a decade or two.

Sounded like a lottery-ticket with ex... (read more)

This is NOT a good case for investing in Bitcoin.

There is in here a good case that an investment in Bitcoin is better than an investment in Bitcoin mining equipment. Unfortunately it is a common error in investment analysis to compare a potential investment to another bad investment and then mistakenly conclude it is good merely because it is better than another bad investment.

There is a good case here that Bitcoin is a much better investment now than it was when it cost 2x or 4x or whatever x as much as it costs now. The fundamentals have not change... (read more)

Do you own any Bitcoin?

If you do, a conflict-of-interest statement is in order, and I would recommend examining one's own confirmation bias as well.

I am also amused by the LW's belief that markets are efficient except for the Bitcoin market :-)

Thanks, I added a statement. (I thought it was obvious that I do own Bitcoin, but I'll make it more obvious!) I do not believe in the efficient market hypothesis. I do believe in a weaker form of it, but not in a strict form in which there no way to benefit from information. I think that evidence does not support the efficient market hypothesis. You can make testable predictions using fundamental analysis or technical analysis, and see whether following certain rules would allow you to beat the market over time. But that would be another post which would be even longer than this one.

18 months later its worth about 3x this price. You could sell 1/3 and have no risk, and let the rest ride.

What do you mean by "no risk"? This sentence seems to imply that your decisions are influenced by the sunk cost fallacy. Try to imagine an alien who has been teleported into your body, who is trying to optimize your wealth. The fact that the coins were worth a third of their current price 18 months ago would not factor into the alien's decision.

It seems that it not so easy to purchase bitcoins in Russia. If you have any reccomendations please contact me

I've been following Bitcoin for a while with fascination. Are there are reputable exchanges left, or is trading money for cryptocurrency back to being the wild west?

There are plenty of reputable exchanges, depending on your jurisdiction, and you can always use localbitcoins too.

If I had to make a guess as to the price trend over the next few months, I would say that the fact that Bitcoin has just broken the apr 2013 high would lead to panic, maybe including some news articles about the death of Bitcoin. If I had to guess how far the price is going to drop, I would say somewhere between $150 and $100 for various reasons, including the fact that $100 is a big round number. I'd guess that maybe the drop would stop in April, around the two year anniversary of the previous 2013 bubble pop, as this will generate publicity and remind pe... (read more)

I bought Bitcoins at great prices online from LiviaCoins .com without registration and verification

This post was written in January 2015

As I write this, the price of Bitcoin is $230.

It is now August 2015 and the price of Bitcoin is about $230. Not much volatility, the price didn't go anywhere.

So, eight month later, any need for updates or staying the course?

8 months later, price still in the same range of around $200-300 all year. Transaction rate has continued to rise steadily throughout the year, though a spike occurred this summer due to stress testing of the network, but has not experienced the rapid growth needed to sustain the late-2013 enthusiasm. Bitcoin is suffering a bit recently with the Core vs XT debate. If it can make it through this and get to a state with a better block size, without forking and splintering the community, then it will be in better shape. As time goes on and blockchain technologies continue to be worked on, the likelihood that Bitcoin eventually becomes surpassed/replaced by a useful 2.0 altcoin rises, imo. By 'useful' I mean something that could be a useful real world application of the blockchain, and be profitable to holders of the crypto token, rather than just have a value fueled by speculation. So not something like Dogecoin or Litecoin, but projects that are actually trying to do something cool with the blockchain, such as smart contracts, prediction markets, financial stock/bond/forex exchange, decentralized web, etc. The era when you can just copy bitcoin, and change parameters like block time or switch to scrypt or whatever are past. For a blockchain project to be interesting/promising now, it has to be useful. However, there is not yet any clear successor. There are a number of promising projects, but most of them are really still in alpha stages of development right now (Ethereum, Bitshares, Maidsafe, etc). They are really at the stage where only super users can do anything with them yet. Ripple is the most advanced and highest market cap, and is being used by a some financial institutions, but it is still extremely centralized, and the value proposition of its coin (XRP) is questionable in my mind, given that multiple companies have cloned the technology, stripping out the XRP token from the network because it really isnt necessary. Still, I own a bit. Given that I now
So, if I am reading your mood right, Bitcoin is looking old and tired, but those sexy 2.0 alts, they are so fine :-) The only problem is, you can't choose one :-D
Diversification is good.
And without the mining pool becoming too centralized.

Bad timing there - BTC price has been falling further, hitting less than $180. As I write this, it's around $190 - see here for updates (referencing the BitStamp exchange).

Kindof amazing timing, haha! The process of a new person learning about bitcoin, getting an account with an exchange, getting money there, etc probably takes a week or more, even if they started right away. I'd rather post a few days before a bottom than after it really. That said, we were already in full on crash mode when I posted, which is exactly why I posted, because those are the best times historically to buy. Of course, there is really no way to know where the crash will stop. Catching the exact bottom is pretty much a matter of luck. The principle still stands, and is more true now than yesterday: Either Bitcoin is dying, or buying it now is a good idea in the long term. Either of those could be true.
Yoiks! Please tell me this history of which you speak! The history of which I am aware summarizes its lessons about buying things that are crashing with the descriptive term "catch a falling knife." It is not a way to make money, it is a way to get hurt. THAT is the history of buying things as they crash. The time to buy something which is crashing is AFTER it has fallen. After it has stopped falling that is. After all the speculators, those who thought it was worth something merely because other fools thought it was worth something have been bankrupted from the market, and the only remaining buyers are the people who actually want to use the thing things for whatever they are used for. It is the value of thing in use which puts a floor under the price, not the speculators. This is the history of bubbles.
So, let's say the Bitcoin outcome is binary -- either you lose all your investment or you will get a very high return (in many multiples). Under this assumption: * What's your current estimate of the probability of Bitcoin going to zero? * Is that estimate a function of the Bitcoin price? In particular, will it change if Bitcoin goes to $100? to $20 to $1? Will it change if Bitcoin recovers to $500? to $1000?
A few years ago, I joked that my probability estimate was linear in the price of Bitcoin- and so my decision of whether or not to buy was independent of the price.
I believe that the moving average of number of transactions is a better indicator of the health of bitcoin than the price. If transactions are declining, then bitcoin is declining in use. If they are increasing, then adoption is growing, even if the price drops. The price reflects the average market participant's opinion about whether bitcoin will succeed or fail. Right now a lot more people believe it is going to fail, who used to believe it would succeed. To some extent this could be a self fulfilling prophecy, but I think that the fact that transactions have been steadily growing over the past year indicates that bitcoin is still doing fine. Bitcoin has dropped over 90% and been proclaimed dead before and recovered. This does not mean that it is guaranteed to do so again, but it does mean it is possible it will do so again. Heck, the price could go to around $50-75 or so, and then recover and go to $10000 two years later! That would merely be a repeat of its history. If I had to give a 90% confidence interval of what the bitcoin price would be in a year, and I said "between $10 and $10000" I think I would still be overconfident, and that range would be too small. Bigger moves than that have already happened in its history. Literally anything could happen here.
I have to note you didn't answer any of the questions in the grandparent comment :-)
The transactions can take place over a large order of magnitude. Bitcoin can experience healthy growth in transaction volume, and still shrink by many orders of magnitude in its tradability against the dollar or the euro or gold or whatever.

If you don't know about Bitcoin, you should start by reading about its history, read Satoshi's whitepaper, etc.

This is only relevant if you're arguing that there is some systematic investment error being made by people unfamiliar with bitcoin, that knowledgeable investors can exploit. If not, extra knowledge has no added value.

In your analysis, it doesn't seem there is any strong division between the behaviour of the knowledgeable and the not, so there seems no reason to go and get that knowledge.

This is a persuasive post. I'll look into doing this. Thank you.

I'd totally forgotten I got this idea from Less Wrong. Thanks again original poster, this was lucrative.

It is difficult to calculate an exact cost to mine a Bitcoin, because this depends on the exact hardware used, your cost of electricity, and a prediction of the future difficulty adjustments that will occur.

How much does a botnet cost?

I've given estimates in some of my other comments, and you can find them in the academic literature, or Brian Krebs's Spam Nation, as to how much it costs to rent a botnet. If you run them through a mining difficulty calculator, the income from mining will be trivial at this point and you will wipe out any gains by greater attrition of your botnet. You'll be much better off using them to send spam, display scareware to users, and ransack personal data. (And this is assuming you could get the highly heterogenous computers of the botnet to all run GPU mining, which is quite a feat on its own.)
You need to account costs of getting caught. Botnets are easily create and maintained fairly anonymously, but renting them out means taking money, and spamming means having customers and sales, all of which increase your chance of getting caught doing something illegal. Doing computational proof of work for electronic cash is very low risk, and at the peak of BitCoin pricing a lot of the hacked servers were being used for BitCoin mining. Even if you were able to bust a botnet which is mining bitcoins, compared to credit card fraud, bank fraud, this is going to be bottom of your priorities - at least till those setting the priorities own a shed load of BitCoins. Botnets are often not heterogenous, sure you don't guarantee graphics cards, but most of those I saw were webservers hacked using the same small set of exploits, or same sets of default credentials.
Botnet operators hardly ever get caught. Cite please. I was paying close attention during the boom to, among other things, the (non)use of botnets for Bitcoin mining, and I saw next to zero evidence of nontrivial usage. Aren't botnets primarily home computers or routers?
ASICs are used to mine bitcoin now. If you have a botnet, you would use it to mine altcoins, most of which uses memory-intensive POW to render ASICs ineffective.
How much does it cost to hack the ASIC controllers?
I think that depends whether the PC the ASIC is plugged into has been downloading dodgy files. I don't think you can just pay a certain amount of money to hack into any arbitrary computer. Plus, if you can hack computers, you might as well just steal the bitcoin wallets.
http://www.forbes.com/sites/andygreenberg/2012/03/23/shopping-for-zero-days-an-price-list-for-hackers-secret-software-exploits/ http://www.zdnet.com/article/hackonomics-street-prices-for-black-market-bugs/ http://1337day.com/ Found by Googling "zero day exploit market". Did you know that there was a bug in Windows for 19 years only fixed recently and still not for XP? http://www.pcworld.com/article/2846004/microsoft-fixes-severe-19-year-old-windows-bug-found-in-everything-since-windows-95.html Yes, you can pay a certain amount of money to hack into any arbitrary computer. Just ask N̶o̶r̶t̶h̶ ̶K̶o̶r̶e̶a̶ whoever http://sony.attributed.to/ says it is today.
WEll, those links are generally worrying, not just for bitcoin but for anyone who doesn't want hackers stealing intellectual property/bank details/watching you through your webcam. But I still don't think its insurmountable. Sony were presumably not expecting a state to try to hack them, and perhaps should have taken more precautions. AFAIK these zero-day exploits require someone to visit a dodgy website or open an email attachment or run a file or whatever. From your link: If you have expensive ASICs then the simple solution is to hook them up to a cheap rasberry pi, and then use this computer for nothing but mining. You wouldn't be using win XP, you'red be using a security-concious version of linux, perhaps. The problem of securing wallets is more difficult. One tactic is to put most of your bitcoins in cold storage, and a few in a 'hot wallet' for immediate spending. Hacking is worrying from many points of view, but given that the large majority of bitcoins have not been stolen, I really doubt its that easy.
As you seem to have missed it, http://sony.attributed.to/ is a parody. Refresh to see a different source blamed. For the right budget, anything can be hacked. Many large banks have been hacked before, despite spending lots and lots on security. I'm sure whatever operating system is running on a pi has zero day exploits that don't require phishing. My point in mentioning the 19 year bug was that up until a few months ago, every windows computer out there had a bug that could be exploited by anyone for remote access. There was a huge openssl exploit last year also, and a big bash one. The large majority of bitcoins are either held in small individual wallets which would be time consuming to go after and not worth it, or held in cold wallets. There was a $5 million hack of bitstamp just 2 weeks ago. A mining setup can't be held in a cold wallet, because blocks must be transmitted to the network.
Counterexample: Snowden and people around him (Greenwald, Poitras). I think the spooks tried very hard to hack them; I also think they failed in that.
Hm. If I had a billion dollar budget I could do it. I don't think the NSA can just put a billion into hacking a single person. If you disagree with either of these points I'll try to defend them.
I disagree with both, but I don't think arguing over them is worthwhile as they both are not falsifiable.
Also, the NSA has a $10 billion budget. The Snowdon revelations are incredibly embarrassing to them, and I think they would easily spend a little over a month's budget in order to hack him.
By the time they already knew who it was, much of those document were already in too many hands to hide. If I was Snowden, I'd have some set up on hidden prepaid hosting set to leak automatically if I didn't keep on cancelling well before anything at all goes public. They wouldn't just have to hack him, but every journalist who may have made copies, anywhere he may have copied it to, etc. I don't think it's likely that their procedures on spending are that fast. By the time they got approval from whoever needs to approve it, it would be too late to be effective. Most of the damage was already done when Snowden handed over the first batch of documents, and if he suddenly disappeared, media wouldn't forget about him.
But, if you spend a billion developing a zero-day exploit, surely you can use the exploit against anyone with the same operating system, or using the same program. In which case you are not paying a billion just to hack one person.
Snowden is sort of a special case here, as he uses Tails, which has very low adoption, and the value of an exploit is not as large as the value of an exploit in Windows. That said, there have been exploits in Tails:https://www.schneier.com/blog/archives/2014/07/security_vulner_4.html http://www.forbes.com/sites/thomasbrewster/2014/07/21/exploit-dealer-snowdens-favourite-os-tails-has-zero-day-vulnerabilities-lurking-inside/. NSA could probably find one for a few million (consider that a wild guess). But just a zero day in Tails wouldn't be enough to get Snowden. It would maybe let them get into his accounts, which we would have no idea about unless someone told us, but to silence him, they'd need to delete the files or find where he was. For whatever reason, they are unable to kill him while he's in Russia, and I doubt Snowden keeps the only copy of the files hooked up to his computer while he's online. You can do all your work offline, and only go online while sending something. (I think they haven't gone and killed Snowden yet because Russia would respond with World War 3. The probability of Russia doing that is high enough to justify inaction. Or in other words, the NSA knows how to lose.)
Ok, well I only breifly skimmed http://sony.attributed.to/ , but its a fairly subtle parody until you refresh it. Large banks have lots of employees, which provides lots of opportunities for persuading someone to run programs they shouldn't. A bitcoin mine can be run with only one person having access. Are you telling me that if I had found this exploit first, I could just have decided to read the NSA's files, Obama's email, stolen blueprints and conducted insider trading without any further work?
The NSA's files probably aren't hooked up to the Internet. They might not use Windows, either. What you're looking for is the Heartbleed bug. That would have allowed you to hack perhaps 2 thirds of websites http://www.huffingtonpost.com/2014/04/08/heartbleed-66-percent_n_5112793.html (There are different estimates given, but many of the top websites were compromised.) This Windows bug could have made you millions if you'd known about it earlier. Insider trading would have worked if you get someone into the right networks. Blueprint could be stolen. Obama's email: that depends on whether any computers that have access to it are Windows and on a network, probably not, but you could with a few more zero days. The really expensive hacks "burn" multiple zero days. Put it this way: if you knew everything in the public domain today about computers and went back 5 years, you pwn >99% of computers out there, and I fully expect the same to be true in 5 years. For starters, you can impersonate any website by using an md5 collision attack. (This was fixed in 2008, so more than 5 years, but you get the point.) Have I convinced you to change careers yet?
I understand that websites are vulnerable - after all, they are public and have to interact with users. But what about a computer sitting in a basement, not publicising its IP address and just interacting with the blockchain? Contrary to your assumptions, I am not a bitcoin miner, just an interested layperson. Even if I was, I would simply move my coins into cold storage at regular intervals, and assume that the hackers know they can make more money insider trading and carding then going after a security-conscious bitcoin miner. And if I lost one hot wallet, its not the end of the world. You have made me worry more about AI and BCI however, imagining a 'Ghost in the shell' future where people can hack into each other's brains. Incidentally, are you a computer security professional of any form?
Every computer getting info from the blockchain publicises its IP address. But you can use proxies which make it harder, or a pool which has its own servers. But pools have websites, and they make up the majority of mined coins, so there's an attack vector. I see I wasn't clear again; my "Have I convinced you to change careers yet" was asking if you were planning to become a hacker (or the cleaner version, "security researcher" or "bounty hunter"). I've done my good deed for the day, then. No, at least not formally. I have gotten paid for fixing people's computers as a hobby. (I recently got the code for someone's ransomware encrypted computer without having to pay by exploiting the attackers' bitcoin setup. Not as cool as it sounds, they basically used the same address for multiple infections, which was a hole.) I've done a little freelance work in web design and SEO. I read a lot of Hacker News stuff and elsewhere, use Linux for my own computer (plus Whonix for really sensitive things), but I'm not "officially there". I do want to be someday.
Since there are a small number of mining pools there are presumable only a small number of avenues of attack which must be secured, which helps. Well, I have hacked into an email account to prove it could be done (with consent), but in general I have no knowledge of any hacking anywhere near as advanced as finding zero-day exploits. Even disregarding interesting moral questions such as "is it ok to steal money if you give half of it to effective altruism?", I think there are probably easier & safer legal ways to make large amounts of money. Isn't Hacker News mostly about startups are random stuff, not hacking in the sense of breaking into computers? I use Linux too, plus I try to run anything which might be hostile within a virtual machine. Whonix looks interesting. Dare I ask what sort of really sensitive things you get up to, or would that be completely missing the point?
Here's the kinds of things having to do with actual hacking I find on Hacker News (just going through my browser history now, so it may not catch everything; anything I didn't see the comments on is missed): https://news.ycombinator.com/item?id=8876929 https://news.ycombinator.com/item?id=8608941 https://news.ycombinator.com/item?id=8854330 https://news.ycombinator.com/item?id=8839265 https://news.ycombinator.com/item?id=8834595 https://news.ycombinator.com/item?id=8834275 https://news.ycombinator.com/item?id=8814901 https://news.ycombinator.com/item?id=8651675 https://news.ycombinator.com/item?id=6148347 https://news.ycombinator.com/item?id=8758196 https://news.ycombinator.com/item?id=8693980 https://news.ycombinator.com/item?id=8712277 https://news.ycombinator.com/item?id=8808754 That should give you an idea of the kinds of stuff I read. There are a lot of posts on HN detailing exactly how someone broke down a system. Not all of these are "breaking into computers", but a lot are very similar.
Yes. And about "hacking" in the older sense of (very crudely) "doing clever things with computers" and the even older sense of (very crudely) "doing clever things".
Also see "hacker".
Right, so you go in, pwn a box -- oh, look! a whole bunch of juicy info, let me grab it... And a... slightly alternative view: "What a n00b, blundered into our network, triggered all the IDS systems and is now glued to the honeypot downloading the stuff we prepared for him... Think he's ripe for swatting?" X-D
If this is serious, then I'd point out that most of these exploits weren't known by anyone 5 years ago, so they couldn't have been on the lookout for them. If someone's network was still open after these exploits have been revealed, then they are likely be a honeypot, but the chances of (X is a honeypot: X is vulnerable to this exploit that no one will know about for years) is pretty much the chances of any random computer being a honeypot. Personally, I think if the NSA had known about Heartbleed as soon as it was introduced (around 2 years before it was fixed), it would have been fixed sooner. Maybe you milk all the data you can out of it, then get it fixed, but having that kind of thing open is a disaster waiting to happen, and NSA would try to fix it sooner.
And I'd point out that proper computer security is mutli-layered and does not depend on which particular 'sploit is used against it. Snort, for example, does not care at all whether you got in with a zero-day or not.
How would Snort detect the Heartbleed exploit? It looks exactly like a regular request, and from what I understand the IP address it comes from isn't even stored in logs at the point you're exploiting. Not all zero days are equal. It could look like legitimate activity. How about this? Set up a website using only software and hardware that's at least 5 years old, make sure you don't apply any updates, and offer a bounty to anyone that hacks it. I predict anything over $500 will get you results. Do you disagree?
You seem to think about computer security in a very binary manner: pwned or not pwned. In reality it's, ahem, a bit more complicated.
Hm. I don't think that's accurate (as either how I think about it, nor how it works). There are a few lines you could draw where anything beyond one line is definitely bad and anything not beyond a different line is not too bad, but not a single line that does that. What would convince you that my claim about 5 year old software not being secure (or rephrase that however you want that satisfies what you consider enough of a hack) is correct? I proposed an experimental test, do you have a better/cheaper one in mind? I realize mine is kind of difficult (and probably the hardware can be faked to make it easier, or just use new hardware), so what would you suggest?
Running a botnet would cost more (control servers, opportunity cost, etc.) than you could expect to receive in coins.

Also, while I don't believe that the EMH prevents an entity that is smarter than the average market participant from beating the market, the 'relative strength index' is public knowledge, and should not have any predictive power unless you can analise it in some way others can't.

Bitcoin systematically does the following things: 1: Destroy economic value when people trade money (fiat currency backed by the real economy/the government) for electricity to make it. - The value of it is backed by people wanting to own it, but the money entering the bitcoin market overwhelmingly go to electric utilities, not to current holders, so the pool of actual value does not go up linearly with increasing demand, but it does drop linearly with falls in demand - its built to crash in value, repeatedly. I suspect it even still exists at all only be... (read more)

Canonical investment advice is to invest in all assets in direct proportion to their scale in the world economy, if you can(and adjust to your risk tolerance by determining how much of your money to invest at all). Right now there's some 13.75 million BTC in existence, worth just over $200 per, for a total value of about $2.78 billion. For comparison, total stock market assets were $63.4 trillion in Nov 2013, and when you include things like the bond market and housing, that can easily be doubled. As such, BTC are less than 1/50,000 of the world's investab... (read more)

Citation needed. The reality is that most criminals avoid bitcoin. Bitcoins can be traced, cash can't.
Most non-criminals avoid bitcoin too. The ratio is still leaning criminal. You don't tend to see stories of the FBI seizing an appreciable percentage of the USD supply from criminals, you know? Also, to some extent reality is less relevant than perception here. If the government thinks bitcoin is only used by scruffy anarchists trying to get high, they'll come down on it whether that's true or not.
Actually, if that's what government thinks, it will be content to leave bitcoin alone. Now, the second someone in the government realizes that bitcoin could be used to avoid taxes...
Remember, the only people who vote are old, which means that the government is selected by people who have a poor grasp of technology and for whom "Won't somebody please think of the children!" is a rallying cry and not a Simpsons quote. Drugs get hammered flat as best they can manage(which isn't well, of course, but they do try). That said, you raise a valid point too. I've seen the similarity drawn to bearer bonds, which were shut down for similar reasons(and shockingly easily - the government said interest paid on bearer bonds wasn't a deductible expense any more, and they basically disappeared).
I don't think the drug war is driven by the age of the voters. I think it's driven by the desire for power and money.
What percentage of the population wants to legalize heroin? How much of the population gains power and money from its illegality? (Also, the above post may have been intended with a mild spirit of sarcasm)
You don't understand. It's not the people who want to continue the drug war for power and money. It's the government and its enforcement arms. You don't happen to think that government lacks agency and just meekly fulfills the desires of the voters, do you? X-D
Government has agency, but only a limited amount. When it comes to things like Congressmen being allowed to insider-trade legally, I'll totally believe that's political agency at work. But implementing popular policies aggressively is just common sense, not a manifestation of political corruption.
I think we have deep disagreements about this :-)
Did you forget about Silk Road even as the comment you responded to named it?
Silk Road may get a ton of press but it's a really tiny part of the bitcoin ecosystem.
But assuming that you are an enthusiast who uses bitcoin for ideological motives, what is the point of using bitcoin for anything that is not shady and/or illegal? What competitive advantage does it have over other forms of digital funds transfer? I mean practical, short-term advantages available on the margin to the parties involved in every transaction, not political things like "the government can't regulate the supply".
It's cheap. You can send a large amount of bitcoins anywhere in the world with very very low transaction fees. Merchants can accept it without a ridiculous fee. While your funds are stationary they are not subject to seizure. That's not a political statement by the way.
If you convert it from/to cash immediately before/after each transaction, then you face exchange fees. And if I understand correctly, most exchanges have daily limits. And anyway exchanges are shady businesses: see what happened to MtGox. If you hold significant amounts of bitcoin then you face volatility risk. Why not? I'm pretty sure that your government can force you to hand out your wallet.
Maybe? I mean probably you wouldn't say that if you didn't have a reliable source for it/it wasn't probably true, but I don't think it's obviously true enough that you can just start off assuming everyone's on the same page and ignore darknet markets to say "citation needed", especially not if you're at the same time acknowledging that the darknet markets get a lot of press.