The predecessors of Bitcoin and what we can learn from them

by on May 5, 2015 at 1:43 am in Economics | Permalink

There is a new paper on this topic, by Thomas Kim:

To examine whether the recent price patterns and transaction costs of Bitcoin represent a general characteristic of decentralized virtual currencies, we analyze virtual currencies in online games that have been voluntarily managed by individuals since 1990s. We find that matured game currencies have price stability similar to that of small size equities or gold, and their transaction costs are sometimes lower than real currencies. Assuming that virtual currencies with a longer history can provide an estimate for Bitcoin’s prospects, we project that Bitcoin will be less influenced by speculative trades and become a low cost alternative to real currencies.

I remain more skeptical, as I do not see where the significant, non-speculative demand for Bitcoin comes from, outside a game setting.  Imagine a future where the Chinese have removed capital controls and the private clearing houses preempt and take on a version of real time clearing, based on a (partially) publicly available ledger.  Can that be more than five years away?  Maybe less?

For the pointer I thank the excellent Kevin Lewis.

1 Martin Malinowski May 5, 2015 at 2:07 am

The significant demand will come from people who want to buy illegal stuff and not get caught, surely.

2 simplicio May 5, 2015 at 2:25 am

I’m not so sure. The problem with bitcoin as a blackmarket currency is that it leaves a public record of every transaction. In theory, the transactions are anonymous, but there have been plenty of demonstrations of techniques to de-anonymonize it and similar networks. And the record is permenant, which means once you’ve used it for an illegal transaction, you have to worry about the possibility of it getting traced back to you more or less perpetually.

Early on this didn’t make much difference since the gov’t wasn’t paying much attention. But they’re obviously now working on using the blockchain to tie people to illegal transactions. As this comes up in more trials, I think the appeal of bitcoin to the underworld will shrink.

(if anything, game currencies seem more similar to traditional fiat currencies. They’re production rests on the authority of a single entity (whomever is running the game servers) and their value is fixed by “taxes” in the form of buying things from in game vendors and other NPCs where the prices are set by the entity).

3 Rahul May 5, 2015 at 4:25 am

Any real cases where a blockchain was used successfully to identify a criminal who was attempting to be anonymous?

4 Matthew May 5, 2015 at 7:30 am

I don’t think anyone has been identified through the blockchain itself, that’s too computationally intensive. But lots of people have been caught converting dollars or whatever into bitcoin–that usually leaves an identifiable record somewhere. So if you are extremely careful with the currency conversions, it is theoretically fairly anonymous, but in practice not really.

5 Ray Lopez May 5, 2015 at 7:50 am

I am aware of one Bitcoin user at the Bitcoin forum who somehow stole from another user, was tracked online using the blockchain, then was shamed into giving some of the money back to the victim (it was quite a lot, like $100k USD in bitcoin), something like one-third or one-half back. It’s in the Bitcoin Forum website from about one or two years ago.

6 Hazel Meade May 5, 2015 at 6:02 am

I think that’s why there is so much bitcoin gambling. Messes up the blockchain so it’s harder to figure out who owned what bitcoin when that transaction was made.

7 Rahul May 5, 2015 at 4:26 am

So how does the supplier of illegal stuff convert his Bitcoins into something he wants? Buy illegal stuff all the way?

8 Adrian Ratnapala May 5, 2015 at 5:16 am

A lot of the suppliers inputs are “illegal stuff” anyway. That is not just his wares, but also some of the services that he buys from other criminals.

9 Rahul May 5, 2015 at 7:26 am

Is the Colombian drug-lord or Afghan farmer going to accept Bitcoins? Where does one buy Acetic Anhydride for a drug lab in Bitcoins? Or Lactose from Walgreens. Or Cough Syrup in bulk.

10 Adrian Ratnapala May 5, 2015 at 8:13 am

I expect the drug lords, do somewhere in the chain. Or let me put it differently: organised criminals have always needed to move wealth around in unusual ways and have accepted there is a cost to doing so. If using bitcoins opens up the ex-Silk Road market to them, then they will use it for that part of their business.

11 Ray Lopez May 5, 2015 at 2:14 am

I found Bitcoin expensive in terms of transaction costs and difficult to procure (several online Bitcoin sellers refused to sell to me, despite their claims they could). I found an academic paper that predicted, based on the expected expansion of the ‘blockchain’ that Bitcoin would eventually cost as much as Western Union charges now for money transfers, which reinforces Bitcoin is mainly promoted by illegal drug dealers and speculators, as TC implies. Further, I’ve read stories of Bitcoin being stolen or lost, despite ‘deterministic wallets’ and the best efforts by Bitcoin owners. Gold is a better and safer store of value.

12 Mike Lamb May 5, 2015 at 7:57 am

I send a few hundred dollars every now and again to a couple of young people I know in the US. Checks are free but take ages to clear. A wire costs $20. Paypal costs around 5%. If I could persuade them to open an account with my bank it may be cheaper but it’s probably easier to send bitcoin via Coinbase and pay 2%

13 Ray Lopez May 5, 2015 at 8:54 am

@Mike Lamb, yes, that’s true today and 2% is reasonable for any decent sized bundle of money, but I found that for microtransactions, like less than a dollar, the mining fee made bitcoin expensive. Also getting hold of BTC electronically in a developing country like the Philippines was a problem, not insurmountable, but still a problem even if you are willing to give up your identity (I did not try exchanging cash for btc using a local meet-in-person source, though such a service is offered by a few people in Manila).

14 msgkings May 5, 2015 at 2:37 pm

Bitcoin may actually truly take off in places like Argentina with very screwed up banking systems:

http://www.nytimes.com/2015/05/03/magazine/how-bitcoin-is-disrupting-argentinas-economy.html?_r=0

15 msgkings May 5, 2015 at 2:39 pm

aaaaaaand I missed someone below already posted this.

16 John Thacker May 5, 2015 at 3:47 pm

“Further, I’ve read stories of Bitcoin being stolen or lost, despite ‘deterministic wallets’ and the best efforts by Bitcoin owners. Gold is a better and safer store of value.”

Although I must say I’ve read stories of gold being stolen or lost, despite the best efforts by gold owners.

17 johannine May 5, 2015 at 11:45 pm

yes johyn I believe that if anything is lost its govt duty to see its found [its a system where we monetise every possession [if its declared formally it cant be lost because its formal declaring is a claim of right that’s how laws were once made formal except when we do it it becomes the new age normal [one day every one will do it as we buy things completely automated..but initialy we need simply get our own page/and begin trading our assets or skill globally

18 one under god May 6, 2015 at 7:02 am

a picture=worth a 1000 bitcoin cyber credits its funny [ignoring that this blurb is to sell us on ‘smart meters’ that intend to charge us extra via ‘peak*times’ lasting over 6 hours..[at twice present peak rate]*[courtesy of enron this by name illustrates the concept…look at the picture of the mans assets ..these could easily be monetised* into underwriting his very own cyber credit availability of say 50 percent of real values present in one image *free of interest and with official underwriting assurances of preservation of their value by the state/council or other underwriters..plus of course his own standing [honour] a true capitalised asset base for cyber http://www.theguardian.com/technology/2015/may/06/what-is-the-internet-of-things-google

19 ilya May 5, 2015 at 3:11 am

Yes, it makes sense to remain sceptical.

> price stability similar to that of small size equities or gold
I wouldn’t want to use either of those as a currency, with typical price swings of 2x in a decade,

> and their transaction costs are sometimes lower than real currencies
Of couse, the transcation costs for something directly connected to the real world will be higher.

20 Oskar Sigvardsson May 5, 2015 at 4:05 am

There is a huge difference between Bitcoin and virtual currencies in online games, which is that online game currencies are centrally managed. The game developer in those situations act as central banks to ensure to keep prices stable. They arguably have a lot more power to do this than a regular central bank, given that they can directly influence the in-game economy.

For instance, there are things in games known as “money sinks”, which are things that essentially take currency directly out of circulation. In World of Warcraft, for instance, one money sink was the cost to repair your (virtual) equipment. Swords and armor got damaged overtime in the game, and in order to repair them, you had to approach an NPC (a “non-player character”, basically an AI in the world) and pay him or her a certain amount of money to get your stuff fixed. That money simply disappeared from the economy, not going to any other player. This then, is a way to control inflation/deflation: if there’s a massive inflationary surge in the economy, the developers could simply increase the cost of repairing items, to mop up some of the excess liquidity.

This is just one example, the developers have large powers of control over how the economy functions (much more than any regular central bank would), and can thus keep prices stable. This is clearly not the case with Bitcoin.

21 ladderff May 5, 2015 at 7:03 am

Those games also generally have money sources, for instance instead of issuing cash the game issues goblins or whatever which you kill and get new money from. Bitcoin has the 21 million figure instead.

I think the next time the developers spin up such a game they should see what happens if they just seed the world with 21 million bars or whatever of gold and then let it run. Alas, they are not economists, and if they hire any they’ll just tell them to have a central bank—because look how well that’s working out IRL…

22 Oskar Sigvardsson May 5, 2015 at 9:32 am

Actually, game developers for worlds like this do hire economists, for just this purpose. The online game EVE Online is famously a “libertarian capitalism simulator”, and they have an economist on staff that make sures the economy works in a way that is fun to play, and does economic research into what’s happening in the world (read more about it here: http://www.fastcompany.com/3024392/meet-the-alan-greenspan-of-virtual-currency-in-eve-online ).

Incidentally, the EVE Online in-house economist is not a fan of Bitcoin: http://www.polygon.com/2014/5/5/5677734/bitcoin-plex-isk-eve-online

23 ladderff May 5, 2015 at 10:35 am

Yes I’m well aware they hire economists. Look at the url you’ve shared: thanks to them there is a virtual Alan Greenspan.

24 johannine May 5, 2015 at 11:36 pm

ladderff economists are useless they would be better at auditing the books to create the new cyber values sysatem

25 johannine May 5, 2015 at 11:39 pm

how about a new game with no cheats and no short cuts where everyone has his own share that at minimum provides them a feed and a bed [a safe place and good true friends] plus a govt that cares for you not some old school tie mate or loayal to a party or game player https://www.facebook.com/lightlovelogiclife/posts/398816763660357

26 johannine May 5, 2015 at 11:41 pm

had much the same vision but mine seeded the world with seed we never ceded

27 Mark in CA May 5, 2015 at 4:35 am

Can Bitcoin Conquer Argentina?
With its volatile currency and dysfunctional banks, the country is the perfect place to experiment with a new digital currency.

New York Times: http://www.nytimes.com/2015/05/03/magazine/how-bitcoin-is-disrupting-argentinas-economy.html

28 John Thacker May 5, 2015 at 10:28 am

I guess that Tyler’s reply would be the same, that the use in Argentina is only because of capital controls. You know how economists are about the non-existence of arbitrage and hundred dollar bills on the sidewalk.

29 johannine May 5, 2015 at 11:34 pm

the elites who rule us can get richer than they ever dreamed simply by doing the right thing[we don’t even need their money we simply create a new system[it costs them nothing and when we begin spending they get richer just by being fair [under the sidewalk lies riches beyond belief but even more value is a working system /and we have a sound beginning we just need a little more vision and less division

30 derek May 5, 2015 at 10:39 am

And some would call the use of bitcoin in this circumstance illegal. Although I doubt if there are many in that country who use the legal channels unless it happens to be to their advantage.

31 johannine May 5, 2015 at 11:31 pm

derick how about a way we all win and our leaders rule justly over an empowered society of capitalised freemen[and woman]
who each hold simply the gifts that god has given everyone as determined by the wealth of the lands society value system we were born in

32 Dan Weber May 5, 2015 at 11:25 am

I often criticize Bitcoin for being too volatile to use for trade, but places like Venezuela and Argentina are perfect for it, because the native currencies suck.

33 johannine May 5, 2015 at 11:28 pm

dan your right of course but it needs true values underwriting the cyber promise [and as I proposed elsewhere that asset camn even be their old money coin or any physical asset talent or skill

34 Prakash May 5, 2015 at 6:49 am

The proof of work blockchain still has advantages as a greatly neutral, almost impossible to corrupt, timestamping service (to within approx. 10 minutes.) This could have value in a lot of future disputes around prior art and IP. You could show the court old notebooks showing you had the idea first, but stamping a hash on the bitcoin blockchain is a few orders of magnitude more believable.

35 ladderff May 5, 2015 at 7:12 am

Tyler still doesn’t really get this whole currency thing.

36 one under god May 5, 2015 at 7:52 am

some interesting points are being made/the issue of traceability +criminality as well as it not being a currency[its currently a medium for exchange but at some stage it needs become real asset usable much like banknotes issuable via the cash machines anyhow I have been having some ideashttps://www.facebook.com/lightlovelogiclife?fref=ts but these will need to do specific things as I like many only trust things I can physically hold in my hands knowing its a true medium of exchange when currently its just an unneeded medium of exchange held in some guys computer [ie not a bank..it relies on depositors being matched with withdrawal but who holds the default cash in their own bank account https://www.facebook.com/bitcoinIScoyoteOFwallstreet?fref=ts then there is this thing called mining that’s wasting a lot of time energy and computer memory[the bigger the better apparently and here the big banksters have an un natural advantage and im quite certain it wont really work unless people get who is doing what and who actually holds real cash when you need it to be there without paying an extra mining fee [for now it seems to me its like salting a mine just computer digits held in someone’s computer system who knows where[then the issue of lost wallets in broken computers [somewhere out there one of my broken computers holds 1000 bit coin but how to prove it] im hoping that Greece Argentina Italy spain and eventually every state city and town will hold their own cyber coin [but underwritten by a real locally circulating coin] that has collectable value a set exchange rate bsased on a common unit of exchange [I have put forward a seed [a living seed] that has a promise on it allowing the seed to produce the promise promised upon the note but heck lets sort out the other things first how do I reclaim lost coin by date? where is the block that recorded the transaction held ?it was a verbal contract on a forum long gone..is there a lost wallet system but I have wasted enough of your time..thanks for the info etc

37 one under god May 5, 2015 at 7:55 am
38 BenK May 5, 2015 at 8:00 am

In a world where Greece, Italy, etc, eliminate physical currency to enforce taxation at every transaction, one can expect a serious demand for any route around it. However, the immediate outcome is that the virtual currency becomes illegal…

39 T. Shaw May 5, 2015 at 8:30 am

True. For me, the operative phrase in the post is “decentralized virtual currencies.” The wrong-people-that-runs-things will quickly put an end to any competitor to their fiat paper. They cannot countenance an alternative, such as a gold standard or a bitcoin, to the “PhD standard.” It would hinder central planning and administrations of economies and money supplies. And, every thing that the geniuses administer/control works out just . . .

40 johannine May 5, 2015 at 11:26 pm

T shaw yes we know we are field testing the bankers cashless society for them[I even expand on that and say they set up those they don’t like just to steal our assets and the whole cyber bit system[I don’t have a dog in the game so am motivated to save some great minds from going down..but long story short we hold al the cards if its done together and done right by rebasing the base so each bit coin monetises a real thing a fixed assured asset within its own specific bit coin class

41 johannine May 5, 2015 at 11:21 pm

ben I have suggested to yanus that bitcoin is a viable option in his negotiations..[ie via local currecy bit coin that us used within each community[this absurd old way of thinking of taxation isn’t needed when its worth is underpinned by the in hand wealth of a nation house town or business..i made a case in the beginning that bit coin is a pyramid scheme [needing continual new money flowing in [because bitcoin isn’t a bank or even money..but then I explained thing and there are ways to fix this permantly via capitalisation of bit coin [and the other cyber coin with assets base just like banknotes only portable and held secure locally in its own asset specific cyber bank..if it has assts it cant be made illegal..its just another good or service[read value/asset]

42 mpkomara May 5, 2015 at 8:10 am

On May 5, 2015 the creation rate of bitcoin is somewhere between 9 and 10% per annum. In about 15 months, this rate will be about 4.5% and forever decreasing. Surely there are places in the world where someone with no more technology than a cell phone needs an alternative store of value than his native currency. I imagine 4.5% money creation rate is more than attractive for this person, not to mention the pinpoint predictability of that rate forever more. The real beauty occurs when these people stop exchanging bitcoins for local currency or USD, and they start using bitcoins as a means of payment for goods and services from their neighbors. The demand for bitcoins will come when enough people realize roughly in the same year that there is no better store of value that you can keep on your cell phone.

43 johannine May 5, 2015 at 11:15 pm

mp I will bet you real money that your wrong[but your the numbers man..so I will try to explain [bit coin relies on simple supply and demand [once demand for bitcoin wans then over night it becomes worthless..[returns over night to just bits in some guys computer system[like I accused the wal street coyote https://www.facebook.com/bitcoinIScoyoteOFwallstreet?fref=ts and as things stand today that’s a very real thing..[but] Greece looks like it must default so to head off that I have suggested a way to directly monitise real assets via bitcoin [instead of just being computer bits each bit is specially linked to its own hard asset..[medi coin would link to medicinal cannabliss or a goldbit link directly with gold people actually hold and buy in*with the physical in all asset classes [including local community bit coins that monetise peoples homes assets possession’s [I even see that we can do like china is doing and convert bits into a leveraged security or a promise to repay [;ilke bank notes of old used to be [but]decentralised /localised and personalised until it includes near anything that can be bought sold invested in financed etc etc [really the sky is the limit..bt by bit]

44 8 May 5, 2015 at 8:45 am

Is China going to announce private banking and total anonymity of the ledger from foreign governments? If so yes, Bitcoin will die and the Chinese banking system will take over the world.

45 johannine May 5, 2015 at 11:05 pm

number 8 laid on its side =eternity [just a sign for me that yuan/china holds a key*..[I recently came across a tweet that advised that there is a group of chinese who will credit bitcoin into Yuan to enable the chinese holding bitcoin to invest up to 60 percent of their coin to convert it into yuan to invest in their stockmarket [but its only presently open to chinese the idea is this corporation has this 40% margin that allows any traders to cash in to cover the 60 % of bit coin that they have ‘capitalised’ anyhow that idea led me to thinking about bit coin I[and its too many new start ups in a new way and that is what I have now been trying to explain to all here on this page [poorly I know but im a visionary doing the vision as I see em happy when others correct my human error [appreciate people telling me why im wrong so please give some feedback

46 Hadur May 5, 2015 at 2:29 pm

“No, you’re wrong Tyler. It’s not just speculators who want bitcoins. Drug dealers want them too!” — the argument for BitCoin from its supporters in this thread

47 johannine May 5, 2015 at 10:58 pm

hadar we cant mandate who uses cash for whatever they chose to use it for [if bit coin is to be condemned just because a few criminals use it the same can be said for cash/except as many say its far more traceable cause it cant go to hide in a bank [and withdrawal needs photo id hand scan and rather a lot of over complex [even officious] mucking around but we do have a way that things can change but expanding this cyber coin into the new age where bits are issued over real assets in their own bit asset class [much like banks began as a means to store gold safely we the many are asset rich collectively but its tied up in stuff [but collectively we own reasonable claim over those who we bought it off https://www.facebook.com/lightlovelogiclife?fref=nf see the key bored short cut page link

48 one under god May 5, 2015 at 4:28 pm

more info as to how to underpin cyber coin via cross holding claims [the physical asset that underwrites our own unique cyber coin these claims are to be recorded on my owm cyber coin page that monetises my inherant claim over all that i hold rightfully under my living name[in it i would record my assets [each brand name is recarded as a cross linked counter claim [for example i hold a phylips vidio recorder and seceral ibm computers these values are linked back to ibm and sanyo cyber coin claim [so we each under write the other /my physcical adds to their claim of right as theirs under writes my claim of right as determined by the serial numbers i hold claim over[same with money[pre infalted paper notes hold higher values[see the one pound note hereunder] that holds a valuation of 1 +one half million au dollars [that is credited to the libary in canberra to be l;isted under their statement of claim to which we all own our rightfull share that underpins their cyber coin and is added to mt name/page in the book of life and is available as asset i camn sell or trade or do with as i see fit [as you see ffit to do with yours too we use it to spend wosely knowing the underwitting back to ibm sanyo or the nat libary zimbawe or egypt or small town in greece who yet own the branding naming nationality etc [its just monetised] and transpherably by the block chain recording that allow the spending of a small percentage of its value dependant upon need asa determined by those holding the physical asset [shareholders] by right of p possesion or inheritance/with disputed claimcross gholding an equal right[of course many will know what to make claim over/for so we get audited and once all our claims are recorded these then are sealed and they go on auditing and recording and informing everyone of their rights and shares of cross holding we claim on their behalf [these special agents will not be allowed to use crash only credit cards ..not extend claim in their claim of right [that will be done automatically when they record the claim of others by micro percentage tythe mining [discovery] claiming right [say point ooo1 percent] sounds about right https://www.facebook.com/wikiseedwikigeld?fref=ts

49 one under god May 5, 2015 at 4:37 pm

it cant be illegal if its underwritten by real assets [we next need 6 BILLION plus other cyber coin[one for each living being and one for each state city town group and association their possessions under write[how many are they? their cyber coin our cyber coin claims underwrite each other I need simply record my sasdsdets on my own cyber coin page claim and then spread the link to get others joined in [getting a micro percentage reward for discovery[we will audit all later sort out cross claims etc but first step is to completely record our assets then spend our cyber credits by teaching everyone how it works in real time.

please keep your discussion going[but we are doing important job here
[we have only 5 more days to save Greece and a likely end game]

50 one under god May 5, 2015 at 5:20 pm

it seems we may be able to buy some more time as providence has stepped in https://twitter.com/ArkGroup/status/595003380587606016 anyhow lets get Greece fixed for now come on you guys
we know doing nuthin isn’t an option we fix this together or not at all [or will you allow the banksters to get rid of cash via a system you guys [and gals sorted out] if you don’t use it you stand to loose it all plus be outlawed and blamed when the house of cards falls [I will go now] cause I cant find a subscribe buton I will soon simply forget about this latest folly of mine good luck to you all

51 johannine May 5, 2015 at 10:36 pm

sadly it seems the best minds have left the room meanwhile lets just keep on going [posted at rt cross talk i have been looking for the means to legitimise bit coin so that it holds actual asset to underpin these ‘virtual’ encryption of intermediate money transfer that essentially are just a sneaky means to Sheppard in the cashless society via judas goats that the system will condemn then take over and cashless society then becomes direct cash transfer via then pure cyber banks [I hope to head that off by underpinning this cyber via real assets base] https://www.facebook.com/lightlovelogiclife?fref=nf in the meantime found the latest crypto working group i hope can help realise a vision that sees bitcoin re capitalising everyone by their fair share before it all falls down in a heap of smouldering ruins and a cashless society of debt slaves due to the militarised industrialised capital into asset looting via building them weapons of destruction and oppression but im dreaming yet live in hope meanwhile will watch the tape [having just watched a replay of war machine on rt that is what I im here for +was in fact searching for majorities’ evolution.not marginal revolution/link to here deleted hoping to address the-predecessors-of-bitcoin and-what-we-can-learn-from-what you have done so far to move us towards this cashless banking system . but nothing https://www.youtube.com/watch?v=nYzXNhk3Vjw&index=177&list=PLPszygYHA9K1wI7Kcpxfq6NviCKYKjXAn

52 johannine May 6, 2015 at 5:42 pm
53 one under god May 11, 2015 at 5:08 pm

its been perverted now the freaking money changer’s plan to steal the temples of the gods just using cyber promises held in money changer’s computers http://www.cnbc.com/id/102663713?utm_content=buffer4f642&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer just promissory digits

yet max is correct [but]

Max Keiser
‏@maxkeiser “Anyone can create money and program unique features. When algorithms are in the hands of the people” https://shar.es/1rbK2M @rustyrockets

it must be based on future potential /inherent right\or physical asset but im over it https://twitter.com/maxkeiser/status/597864579574702080

Comments on this entry are closed.

Previous post:

Next post: