Print 23 comment(s) - last by Mint.. on Nov 4 at 5:58 PM

This afforded him a nice apartment in Toyen

You always hear stories about people who tuck old comics or toys in the attic for years and later find out how valuable they've become. Some guy from Norway just did that with bitcoin.

According to The Guardian, Kristoffer Koch bought 5,000 bitcoins in 2009 for only 150 kroner ($26.60 USD). Years later, that investment unexpectedly grew into a little nest egg.

Koch originally bought the bitcoins writing a thesis on encryption. After that was complete, he forgot about them.

But when the media started heavily covering bitcoin in April 2013, Koch was reminded of his and decided to take a peek at his encrypted wallet containing those original 5,000 bitcoins. He found out that by today's rates, those 5,000 bitcoins are worth NOK5m ($886,000 USD). 

This afforded him a nice apartment in Toyen, which is a wealthy area in the Norwegian capital. 

Bitcoin value tends to fulctuate a lot, and Koch happened to see his value at the right time. In April 2013, bitcoin value peaked at $266. Then it fell to a low of $50 soon after. 

In fact, it hit a high of $197 just this month. 

For those who are unfamiliar, bitcoin is a peer-to-peer digital currency that is encrypted. It's bought with traditional currency from a bitcoin exchanger and later change them back for cash or other purchases. 

But bitcoin has had some problems in the recent past. In August, the feds questioned the legality of cryptocurrency and considered banning it or at least putting heavier restrictions on it. At that time, the bitcoin industry's largest advocacy/trade group the Bitcoin Federation met with federal regulators from the U.S. Department of Homeland Security (DHS), Federal Reserve, Department of TreasuryFederal Deposit Insurance Corp.Office of the Comptroller of the Currency (OCC), Internal Revenue Service (IRS), Federal Bureau of Investigation (FBI), and Secret Service (SS).

Earlier this month, the FBI shut down Silk Road, which was a website designed that enabled its users to buy and sell illegal drugs and other unlawful goods and services anonymously. New York U.S. Attorney Preet Bharara seized $28 million in bitcoins that belonged to Ross Ulbricht, the alleged owner of Silk Road.

Source: The Guardian

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RE: Dammit...
By Solandri on 10/31/2013 4:59:54 PM , Rating: 4
The fatal flaw with bitcoins is that there's a maximum limit of 21 million that can be mined. A bit more than half that has been mined so far. When it hits the limit, it'll run into the problem that forced us to move to fiat currencies in the first place: If your currency does not grow as your economy does, people who shove currency under the mattress and do no work get richer simply because the currency becomes more valuable. Basically what happened to the guy in the article.

Generally, an economy where everyone has an incentive to do productive work fares better than an economy where people can get richer for doing nothing (basically piggybacking off the work of those who are contributing to the economic growth). So economies based on (well-managed) fiat currencies thrived and came to dominate, while those which stayed with the gold standard stagnated. Money needs a "use it or lose it" incentive to keep people doing productive things so the economy will grow.

That said, just becomes bitcoins are fatally flawed does not mean they have no value. The value of something is what anyone else in the world is willing to pay you for it. So as long as there are people (suckers) who are on the bitcoin bandwagon, it can be a valid means to conduct economic transactions. The same could be said for oil - we buy, sell, and use it, but everyone knows there's some finite amount of it and eventually we're going to run out. Just realize that there's a sell-by date on every bitcoin, and you don't want to be the one left holding the bag at the end.

RE: Dammit...
By PontiusP on 10/31/2013 6:16:47 PM , Rating: 3
Generally, an economy where everyone has an incentive to do productive work fares better than an economy where people can get richer for doing nothing (basically piggybacking off the work of those who are contributing to the economic growth)

The part in parentheses described our current fiat system perfectly. When the primary function of government and the central bank is to create money and hand it to people, the situation you described is inevitable. Hard currencies prevent this situation from occurring.

Query: In a debt based money system, if interest is owed on every dollar in existence, how can such a debt ever be paid? I've never heard it correctly, convincingly, or conclusively answered by the Keynesian fiat supporters.

RE: Dammit...
By vol7ron on 10/31/2013 10:21:12 PM , Rating: 2
The primary function of government and the central bank is not to create and hand out money. That statement is absurd. Even if it happens, the government has other functions, none of which can be singled out as *the* primary (e.g. homeland security, regulation, roads, reciprocity agreements, protecting constitutional rights - when they're not stomping on them).

The central bank's function is also not to create or hand out money, it has more important issues like maintaining a stabile money system - despite what's happened in recent years, it's still considered stabile. Other functions include regulating trades/mergers/takeovers and protecting your dollar from counterfeit and theft.

Also, the money system seems to be designed in such a way that there will always be a growing global debt; however, a local economy (e.g. US) can outperform other nations, thus being profitable. But keep in mind that countries can default; they also merge and are taken over by other countries, just like businesses.

RE: Dammit...
By The Von Matrices on 11/1/2013 12:57:38 AM , Rating: 2
The problem is that the central bank and its associated government are inseparable even if they operate independently. In all major fiat currencies the government supporting the currency is also the single largest user of that currency. Therefore, that government indirectly influences the value and stability of that currency and the central bank has to correct for that.

The reason why governments don't like Bitcoin is because they can't control it. If you can't keep inflating your currency, then you have to pay off you debts because the interest payments become oppressive. You can't just continue to inflate your currency so that the real value of the debt becomes smaller and smaller.

In my opinion, I fully support government debt as long as it doesn't cause the currency to crash. The media has a bias toward government debt being a negative with no positive. In reality, the debt (a negative) is just from the government providing services to its citizens (a positive). The cost of these services not subsidized by taxes is paid through the loans citizens provide. Taking this to an extreme, if the government were to default, the citizens who provided the loans would be out of their money but they would also have had all the services and infrastructure that were paid for using those loans. They could have just paid taxes and have been out that same amount of money.

RE: Dammit...
By vol7ron on 11/2/2013 3:59:00 PM , Rating: 2
In my last comment, I don't know why "stable" was autocorrected to "stabile" - that was at no fault of my own and didn't notice it. Perhaps I've used "stabile" too much when discussing prototypes.

I'm not an expert, but I agree with the statement about control, but not because of their ability to affect inflation. In fact, inflation in the United States has been rather constant, which is great in terms of stability. Again, I'm not an expert, but I would surmise that the lack of control makes it harder for regulation. Private sectors are generally great at invention and innovation, but they can also be really bad when it comes to greed - consider profiteering, collusion, and intimidation. Bitcoin has the potential to be both really good and really bad and it's the bad reasons that I tend to play the conservative card.

The problem with government debt is there is such a thing as too much. The media likes to play it up for ratings, but the government could be a little more intelligent in how it allocates its finances. Remember, this income is coming from businesses, taxes, tariffs, foreign countries, etc. but people want to have a say in how their taxes are spent - after all, they are doing the work for that money.

RE: Dammit...
By Mint on 11/4/2013 2:13:52 PM , Rating: 2
Your question hasn't been answered because it's nonsensical, although I have seen others ask the same thing so I'll try to answer it.

Debt is not supposed to be entirely paid simultaneously. Money IS debt: When you earn it, somebody owes you future goods/services in return. Fiat currency basically results in assets of real societal value backing it as opposed to a precious metal given arbitrarily inflated value from its attachment to a monetary system.

If you want to understand fiat currency, think of an economy with no money at all where we just trade assets. The moneyless analogue of new money from the Fed eventually going to a mortgage is as follows: I want to build a new house, so I give the builders and the previous landowners shares of the house that is about to be built, with all this tracked by the bank. As I work for others and earn my own salary of other asset shares, mortgage payments effectively swap them for the ones on my house, until I own it entirely.

Fiat currency effectively blends all these asset shares into a homogeneous mixture so that we don't need a stupendous amount of information on hand about world assets to understand if we're getting ripped off in a transaction.

Debt is how money gets attached to assets in the way described above. Until we run out of things to build, i.e. societal endgame, there's no problem with the economy's total debt never being paid back.

Inflation targeting is, by definition, the maintenance of the common understanding of value mentioned above.

Interest is the market clearing price for building new assets, which must be controlled to prevent varying inflation/deflation breaking that common understanding of value.

RE: Dammit...
By The Von Matrices on 10/31/2013 10:41:23 PM , Rating: 2
Mining won't end any time soon. We are only in the 4th reward era, and the rewards for mining exponentially decline as more blocks are found. Found blocks in 2012 used to yield 50 BTC, now they yield 25BTC and will continue declining by half every 4 years. The current estimate is that all blocks will be found in the year 2140, which is too far away to worry about.

Yes, Bitcoin at the moment rapidly deflates, which I agree is one of its current biggest hindrances toward its use as a currency. But as Bitcoin catches on, its value will increase and its deflation rate will decrease to a point only slightly more than zero. At that point there will be little incentive to hoard coins.

The biggest advantage of Bitcoin is that it isn't government controlled. Your assets will change in value based on their fiscal merits rather than how an economist thinks the world should work.

However, there is still one hurdle I worry about that Bitcoin has yet to overcome. The block size of 1MB is too small to hold all the transactions as the currency becomes more popular. Very soon more than 1MB of transactions will occur before the next 1MB block is mined, and a queue of overflow transactions will begin to form waiting to write to the next block. This will result in transaction processing requiring more and more time to occur, and the inability to complete transactions could kill the currency.

I am hopeful that a revised protocol will form and the majority of miners will adopt this protocol thus making it the standard, but this won't happen until it is too late and a crisis forces it to be done (there is a tragedy of the commons, no individual has any incentive to avert the crisis). This crisis will result in the currency dipping in value as people try to unload their coins but can't because they have to wait for their transaction to process.

RE: Dammit...
By Jeffk464 on 11/4/2013 3:04:57 PM , Rating: 2
Money needs a "use it or lose it" incentive to keep people doing productive things so the economy will grow.

With your use it or lose it concept how do you expect people to ever be able to retire? By banking and investing money you are essentially buying your freedom from our corporate world.

RE: Dammit...
By Mint on 11/4/2013 5:58:11 PM , Rating: 2
Buy assets and sell them as needed. I know retirees are worried about assets losing value, but that's why we have social security as a fallback.

It would be great if we could magically store your labor to help you later in life, but we can't, and assets are the only way we can transmit productive value through time.

The "lose it" part - which is only 2% per year but should be a bit higher - is needed because an economy can't function if everyone saves. The wealthy are already doing too much saving in the last 5 years even with 2% inflation. Zero inflation or, more likely, deflation would make saving even more attractive than investing.

I would be open to a certain amount of cash in a 401k for debt-free individuals to get interest matching inflation, but choosing to turn money into an artificial asset of fixed supply would destroy the economy.

"So if you want to save the planet, feel free to drive your Hummer. Just avoid the drive thru line at McDonalds." -- Michael Asher

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