I hate to say it, but everything in your post is fundamentally wrong, and it sounds like you're understanding of Bitcoin is limited. The current laws of economics does not apply here, because Bitcoin is not your average customer when it comes to currency. Old world thinking does not apply to it at all. I don't mean to antagonize, but ill informed posts like these only add to the existing pool of misconceptions which confuses people already.
I have little programming knowledge. But I am a student of economics, I'm not sure how many of these criticisms have been made before.
I'm not sure, but would it be possible for the number of honest transactions to exceed available bandwidth for most computers (if they engaged in checking as well).
Restricting the total amount of bitcoins that can be mined will become a bottleneck. Supposedly the Winklevossi own 1% of the current bitcoin supply. This doesn't harm it's use as a medium of exchange (except for menu costs of tracking the Mt. Gox exchange rate), but it won't replace the dollar as a medium of transaction.
You obviously don't know anything about mining, or computers/networking for that matter, as you spent your time studying economics instead
. The design of Bitcoin is built to scale naturally to network power, and also self correct as power is added or removed from the available pool of total mining hashpower to keep the coins flowing at an even rate. Transactions vs bandwidth is an invalid measure, mining (really, transaction processing) is not using a finite pool of "bandwidth", it is all about raw processing power to crunch the cryptography algorithms for forward and backward authentication. The more power there is, the harder it is to mine a whole block of coins.
Bitcoin also is divisible by a magnitude larger than fiat currency. The Winklevii have 1%, even if they held it indefinitely, it would only make the rest more valuable, and divided further down to compensate. BTC needs the support of big Bitcoin spenders, that is $11 Million that now belongs to Bitcoin instead of the United States government.
This is bad for a few reasons.
One, it incentives large mining pools. Small mining operations that generate 2 GHash/s may never generate a bitcoin block, thus they must use pools to net a few bitcoins per week. This probably is a minor issue, as long as the major pools are trustable.
That is a good thing, because it enables more average hobbyists to add power to the network and reap a small reward for it. True, make sure you can trust your pools. Though soon with the arrival of ASIC mining units, these little GPU miners will be obsolete with the vast rise in difficulty, even a 2 GHash/s machine will have a much harder time mining, even in a pooled scenario, and the miner stands to make little profit if any after system overhead is considered. Miners must amp up the hardware to compete, turning it into a new cottage industry on its own. Mining is going pro, there will be no shortage of network power coming online in the coming months.
Two, it will simply mean that Bitcoins will be become a means of money laundering, particularly since 90% of bitcoins will be sat upon, and the remaining 10% to be used for whatever purpose. Every so often, there will price bubbles caused by a real world event. Those bubbles will pop because maybe 2% of that 90% will cash out (cash in?). If the value of bitcoin continually increases, the portion of bitcoins that will remain out of circulation will increase, only to decrease slightly whenever a bubble bursts. It's entirely possible that there will be a huge crash at some future point, because there is no possible tracking of the number of bitcoins out of circulation (to my knowledge). Current statistics only show (1) the number of bitcoins generated, (2) the number of bitcoins exchanged. Nothing on the number of bitcoins actually in circulation, or the velocity of the bitcoins in circulation. It is possible the velocity of what few bitcoins are in circulation are very high due to satoshi dice.
Three, if Bitcoins become primarily use as a form of money laundering, a government can and will be able to ban bitcoins through some method. This is not out of some power grab, but because the majority of citizens believe people should not take drugs such as heroin. While it is possible to create an alternate internet using your phone line, this would shut down bitcoins for all intents and purposes. Fortunately, it appears as if most transactions involve Satoshi dice, although it's possible drug dealers use multiple accounts to reduce their "popularity."
The Dollar is the primary form of laundering today as it always has been, what is the difference if it is Bitcoin instead? It is an invalid point. No one called to ban cash because it happens to be used to buy illegal things (which are only illegal
because of the government). Those that call on that point means there isnt anything else bad about Bitcoin they can speak about.
The Government would have to ban the entire internet to stop Bitcoin (I dont put it past them to try), being a freely distributed application that lives on 1000's of computers all over the world. By the time they are done making the first draft of some vague SOPA like bill against Bitcoin it will be far to late to stop it now. Fighting it would just push it underground much like BitTorrent did. After millions of dollars and armies of lawyers, P2P sharing is still alive and well. They cannot attack the core system, they can only attack individuals at the fringe and they cant prosecute all of us.
Bitcoin does not have accounts, it has addresses (aside online wallet's or exchange accounts, about as close to a Bitcoin account you can have). You can use a unique address if you want to for every transaction you make, making it very difficult forensically to track where the payment came from, or from whom. e-Drugdealers already do this unless they are complete idiots (and most are), they only get busted for the same reason they get busted in the real world, because they were careless in other aspects of their business (insecure communications, for example). Bitcoin simply removed the hassle of paying criminals with traceable money and opening their trade to the whole world instead of just their own neighborhood. Overall it changes nothing, it's not like the DEA ha been anywhere near close to winning their ridiculous, expensive, and ultimately useless War on Drugs that we taxpayers must burden (and considering the CIA runs drugs to fund black ops, (they got caught red handed in the 80s) so the DEA is fighting the CIA...and we pay for it). If it is bought with BTC instead of cash, it makes no difference.
Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins, prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.
Bitcoin's currency supply cannot simply triple by law of the system. The supply is governed by the mining process to only put so many into the system over time. Today you get 25 BTC for mining a whole block, when it reaches the next limit, this will go down by half while total network hashpower goes up as well as overall difficulty in calculating the equations, making each coin harder and harder to mine and ride a logarithmic scale to zero coins per block mined when it hits the max 21 Million. When there are no more coins to mine, these machines will collect transaction fees instead as the network must still process transaction authentication after the last coin is minted sometime in 2140.
Bitcoin has never once crashed to zero, even this latest dip recovered into the $100 range, which was needed to blow off some steam so the price keeps going up overall, which it only has over the whole history of BTC. Transaction volume is only going up despite the USD price. People are way to concerned with the exchange and not the other stats that actually matter, which is use and transactions going up showing adoption by users and businesses alike. 1 Bitcoin is always a Bitcoin, the only variable is its spending power.
BTC is only acting like a "gold" type commodity is because it is new and has speculators foaming at the mouth as a simple investment, and they are gaining value rapidly. However unlike gold, you can spend Bitcoins as well. Unless someone knows a shop you can pay for things with gold bars, though I doubt they would argue if you did
In a way that is the beauty of the system, is that over time coins will be lost, as they become more rare their buying and trading power increases. If Bitcoin was the only defacto currency in the future, it still appreciates even after every coin has been mined because the supply will naturally decrease (backup that wallet!), but thanks to BTC using an 8 decimal system which could later be expanded if needed dividing the currency further as it increases with value is accounted for indefinitely. If it gets big enough, we might need a smaller denomination than the Satoshi. Bitcoin can be split and reconfigured endlessly which fiat cannot do. 21 Million Bitcoins is 100 Million Satoshies, 1 Satoshi is .0000001 of a whole Bitcoin, and smaller denominations can be created by moving the decimal over a place to divide it further. This is why even with the Winklevii holding a lot of BTC at the moment doesn't really matter.
Because 21 Million (there will already be less than this total because coins have already been lost) will only ever exist, those that do exist get more valuable, but it is easy to divide their spending power further and further. I've read that if the entire worlds market cap was in BTC was converted right this second, each full coin would be worth around $3 Million in spending power, making a Satoshi around $.03 each. If another division was added, the new denomination (we'll call Operatrs to stroke my vanity) would be worth around $.003. And on and on. Seems we wont need any more than Satoshis though, but obviously it is difficult to speculate that far ahead in time. It allows for a very fine tuning when it comes to pricing products.
Ideally in my opinion, a better bitcoin (cryptodollar?) would set the number of bitcoins per block based not on a preset formula restricting the total money supply at some future date, but by a formula that would exponentially decrease the return of cryptodollars generated per day based upon mining. Something like (hashes/(10^6)*2^(years since creation))^.5 [1]. While the inventor of bitcoin wanted to reward early adopters, like I said, the current system has perverse incentives that prevent using bitcoin like an actual currency. I would prefer a block generation method using diseconomies of scale, but another person could come up with a better method. Hash difficulty should be high enough to prevent hyperinflation, but not too low to prevent deflation.
Unfortunately, you cannot easily conduct trial and error test runs for what the ideal formula is, unless you are immortal and own a time machine.
But it is also too late to see anything created based on my proposal until bitcoin collapses in one final panic. Bitcoin is the household name for cryptocurrencies at the moment, and names do carry inertia. A major institution/government would need to back an any new cryptocurrency for the cryptocurrency to displace bitcoin.
Bitcoin is an open standard, you literally could create your own version. Others already have that differ from Bitcoin to fill a certain purpose.
BTC won't collapse in a final flame like that I dont think. It could certainly perish someday, as we really dont know what happens next. This has never been tried before ever, every day is a new day. The only way for Bitcoin to die is if everyone stops using it. Again, old world economics don't apply here. Bitcoin also has something no other currency has right now: believers. These are the ones who don't give a good god damn about the current exchange rate, but simply believe it is the future.
1. The formula is hashes generated in the current time period, divided by one million, multiplied 2 times the years since creation, to the half power (or the whole formula is square rooted). Basically, ceteris paribus (all else being equal), for every doubling of hash production, the total amount of cryptodollars produced will only increase by 40%. Ceteris paribus, for every year after adoption, the total amount of cryptodollars produced will halve. For example, multiplying hash production by 55,000,000 will only multiply cryptodollar production by 7,416. Thus exponentially less hashes will be used. This would also curtail the effects of Moore's laws.
To a certain degree, this is draft, so I might add more to it later.
I look forward to maybe mining CryptoDollars someday
Again I'm not trying to be an ass, I simply found your post to be more imaginary than factual. Bitcoin is rewriting money from the ground up, we must rewrite economics along with it as it doesn't work like any fiat currency.
Regardless, who really knows where it goes from here.
