What benefits does Bitcoin (i.e. cryptocurrency) offer?

Question

I really, really like moderate inflation. I live in Sweden where the interest rates just went negative because we are on the brink of deflation, and the rate of inflation we have now is far too low. We have huge problems attracting foreign attention and the swedes don't want to take out loans to invest since paying them back ten years down the road hurts just as bad as paying them now (and there's a real risk it might take more to pay them back later, if we go into deflation). It's a real head ache that's all the talk in our financial world.

Getting a hold of Bitcoin is very, very hard and expensive. The value of it has deflated dramatically from when it was introduced, and despite occasional crashes, it could very well just keep climbing in value. It also has a cap, which to me looks like it would unleash a deflationary spiral that would only end once we find a new currency (like the Great Depression was alleviated when we stopped using the gold standard).

But, I'm a computer scientist and I just can't stop finding bit coin supporters everywhere. It has thousands of evangelical missionaries using blogs and magazines to tout it as a means to liberate us from the bankers. I don't know, can't computer scientists be just as corrupt? It looks like dot coms with access to good cryptographic algorithms and server farms who can work in parallel could game the system even more, and once they've swept up all the bit coins they would wield more power than nation states.

Am I missing something? What does bit coin bring to the table that is worth disregarding deflation? Does it bring positive GDP growth? Ease of investment? Monetary power to the people? How? And, I keep coming back to this, wouldn't all these positives be completely wiped out once the 30s come knocking deflation style?

Why does this currency have so many supporters? Are everyone mad?

I agree that this is very broad. It also needs some editing (I'm about to provide some). It's a good topic though. — Hack-R, Feb 18 '15 at 19:48
invariably anyone touting bitcoin stands to benefit from further adoption. — Thufir, Jul 25 '16 at 07:29

Hack-R · Accepted Answer · 2020-04-18T22:16:19.160

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I'd say that some benefits of Bitcoin and other cryptocurrencies (i.e. "altcoins"), include:

Decentralization -- which is advantageous for those who are skeptical of monetary policy, runs on banks, etc.
Anonymity, or at least the perception thereof -- with increasingly comprehensive monitoring of transactions (particularly non-cash transactions), those seeking relatively anonymous methods of exchange have traditionally been out of luck in the realm of digital transactions. Bitcoin has widely been regarded as a "digital cash", providing some measure of relative anonymity in online transactions, though this is a decreasingly accurate perception as government databases cataloging transactions grow in sophistication (and some of these databases, such as that of the FBI's, have been opened up to public developers via coding marketplaces like Kaggle). Some altcoins, such as Monero (XMR), add measures to enhance the benefit of relative anonymity.
Portability -- they can be easily stored and transported offline (paper-based hashes or QR codes), on portable media, over the Internet, with or without the aid of a "wallet" or bank-like service.
Region Neutrality -- unlike fiat currency or Eastern-only currencies such as Perfect Money, cryptocurrencies seem to have less bias based on location or language.

edited Apr 18 '20 at 22:16

answered Feb 18 '15 at 20:01

Hack-R

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People hoping to get rich quick.

dwjohnston

Feb 18 '15 at 21:32

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It's, perhaps, worth remarking that there is a potential "real" benefit to decentralization. Right now we have all kinds of institutions and intermediairies that exist as trusted third-parties to facilitate transcations. Running those organisations has a resource cost. Since Bitcoin transactions are verified by the community, some of these institutions can (in principle) be gotten rid of. The question is whether the saved resources are enough to compensate for the resource cost of running the bitcoin network. – Ubiquitous Feb 19 '15 at 15:56

@dwjohnston LOL right -- people who heard about the early bubbles years ago and think they can get in on the up-swing of it now – Hack-R Feb 19 '15 at 16:42

Would it be advisable then to model an economy based on Bitcoin as an economy based on gold, but just more efficient since it travels at the speed of light, is protected against theft and does not need to be converted to do international trade? Oh, and let's not forget, we know how many Bitcoins there can be in the world but the best geologists and prospectors in the world can't be as precise when asked to estimate the amount of gold we can get. – pimmen Feb 21 '15 at 11:24

You should state that the money cannot be abused regarding print/emmision – Luis Masuelli Mar 10 '15 at 22:53

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Bitcoins do not prevent theft - no money system keeps you from that (you can threat someone to rob its digital wallet - which is just a huge set of files, or your market agency like MtGox can suddenly disappear and so will your bitcoins) – Luis Masuelli Mar 10 '15 at 22:55

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@LuisMasuelli Oh, you're definitely right that it doesn't prevent theft. Theft may be on the decline (?) but I think I lost about 95% of the Bitcoins I bought in the early days to a fake online wallet website. There have been a lot of high profile cases of theft... some of them even seem like they would make for good Hollywood movies (modern day bank/jewel heist material). Yet increases in user education and/or improvements in the security of related software must have made some improvement as cryptocurrency usage has continued to grow significantly over the years. – Hack-R Mar 11 '15 at 15:41

@Hack-R you're right in that point. It's a pity that, in order to prevent theft, you have to mount your own wallet/market/blockchain (which is currently weighted many GBs right now, and I estimate it will reach one TB in a near future. – Luis Masuelli Mar 11 '15 at 16:10

I would put a big fat warning sign on the anonymity part. It's similar to the TOR network in that regard. I know you've set " at least the perception thereof", but that's not sufficient in my opinion. – FooBar Oct 13 '15 at 08:57

Also, whether holding a currency that is decentralized is good for someone does not depend on their belief on monetary policy (MP), but rather whether they are on average positively affected by MP or not. It sounds like nitpicking but it ain't: If the whole US is full of libertarians, but they're wrong (in the sense that MP improves their lives), then bitcoins are not good for the US - despite their skepticism. It's a feature, not necessarily a benefit. – FooBar Oct 13 '15 at 09:00

I agree with @FooBar that you need a warning sign to go with anonymity. That being said, I don't know if using Tor as an analogy is right. For Tor to be beat requires that snoopers set themselves up as exit nodes. In short, breaking the anonymity of Tor requires a concerted effort. Bitcoin isn't designed to be anonymous. Every transaction a person makes with bitcoin is recorded. It is possible to obfuscate where bitcoins came from by using tumblers and multiple wallets to become more anonymous but anonymity is in no way an intrinsic feature of bitcoin. – Frank Shmrank Oct 14 '15 at 17:21

@DeanMacGregor Yes, It's not a perfect example. My point being: Tor was partially broken/read by the NSA, so don't even get started having hopes on bitcoin on that regard. – FooBar Oct 14 '15 at 18:26

@FooBar I don't know how broken Tor is. I mean they caught the silk road guy because he was careless with his stackoverflow posts (among other things) not because they tracked him through the onion. – Frank Shmrank Oct 14 '15 at 19:09

How is decentralization an advantage? – An old man in the sea. Oct 05 '17 at 18:09

@Anoldmaninthesea Just in the context of the comment - for those who are skeptical of monetary policy, runs on banks, etc. So for example, if you distrust monetary policy then decentralization is nice because there's no central bank that can prescribe monetary policy. – Hack-R Oct 05 '17 at 18:23

@LuisMasuelli Isn't a non-custodial wallet like Electrum sufficient to prevent theft? – ThePirate42 Feb 15 '21 at 17:34

score 6 · Answer 2 · answered Feb 19 '15 at 14:58

One of the patterns to watch for, which may or may not be a benefit, is what happens during periods of capital controls, account confiscations, hyperinflation, or other financial controls imposed on citizens. Many people will highlight Cyprus as an example, but that's only one example and it's too early to tell if it will be an alternative electronic safe haven for savings (whereas physical commodities aren't). An enthusiast may say this will be a benefit, but there haven't been enough periods to determine this.

Examples:

A family in Venezuela, before experiencing hyperinflation, manages to convert 50% of their savings to bitcoin to hold until the central bank gets in control, then re-converts their savings. In this case, bitcoin is only used to preserve savings, like gold would, electronically.

Capital controls are imposed on families in Greece, though one family managed to move 50% of their savings to bitcoin. [Assuming here] When Greece creates its own currency after leaving the Euro, the family re-converts their bitcoin, able to retain a part of their savings.

Why isn't this a benefit now and not settled? It depends on what attempts are made to stop the above examples from happening, and if - over the long run - this is even possible in the electronic age (China seems to think so); for instance, the Venezuela family may convert some of their savings, but have absolutely no way of re-converting it or trading with it to someone else. Also, if the value of bitcoin fluctuates too much (going from 200 to 1000 to 200), this creates a problem in that someone may buy bitcoin to preserve savings in a crisis, only to lose a huge amount of value when they re-convert because bitcoin's value has fallen. This would be compared and contrasted with a basket of commodities, which is the current popular approach for the above problem.

Forgot to add, what I'm looking for on this is post crisis. When a country experiences one of the above - severe capital controls, hyperinflation, etc, and moves beyond it, but has trouble getting investors to return, do they open the door to bitcoin? If this is a pattern that emerges, then bitcoin, on the basis of this point, does have some advantages. Recently, notice how quickly Russia changed its perspectives on its former oligarchs who had left the country => a country, which was anti-bitcoin, might suddenly be pro-bitcoin when it needs capital.

But this 'extra' functionality could as well be made by converting venezuelan bolívares(VEF) into USD or EUR... Also, what prevents cryptocurrencies from having crashes in values, or hyperinflated values (as currently happening)? — An old man in the sea., Oct 05 '17 at 18:04

score 3 · Answer 3 · answered Oct 14 '15 at 17:38

To the question "can't computer scientists be just as corrupt?" of course the answer is yes. The thing of it is that every bit of bitcoin is open source so everything is trust and verify with bitcoin. With status quo banking everything is trust and.... trust some more.

Everything that I'll list as a benefit could equally be seen as a deterrent to a statist.

Bitcoins are decentralized. That means that no matter what a court says, they can't be confiscated, assuming a secure wallet. There's no amount of banking security you can instill that supersedes a court from ordering a bank to transfer your funds out. Of course, this sounds bad if you live in a country with low corruption and will never become corrupt. However, if you live in a country that is or may become corrupt then this is clearly good.

Being decentralized also allows for cheaper transfers of money. I can send a bitcoin to someone on the other side of the globe with the same ease that I can send bitcoin to someone in the same room as me.

Keeping money secure with bitcoin doesn't require a bank so you are never forced to choose between keeping cash under a mattress or accepting a negative savings rate.

Dean, are you a programmer knowledge in bitcoin? Otherwise the verification of every bitcoin is also done elsewhere...
Being decentralized weakens the it's 'base of value', i.e. who guarantees the value of the currency? With usual currency, the central bank guarantees it, to a very great extension, its value. — An old man in the sea., Oct 05 '17 at 18:05

score 0 · Answer 4 · answered Nov 14 '19 at 14:41

Bitcoin as a store of value is an improved version of gold.

A bitcoin based system would be like returning to the gold standard, without the actual need of any intermediaries or trusted parties and with the convenience of a digital medium with respect to a physical material.

In the book The Bitcoin Standard: The Decentralized Alternative to Central Banking the author argues that many of the current macroeconomic problems are caused by getting rid of the gold standard, and allowing central banks to artificially create money out of nowhere. Central banks are now in charge of artificially maintain equilibrium internationally among many currencies and nations, without a common underlying denominator (gold). This was done at the beginning of the World War I in many countries. Unfortunately the very nature of gold (it is physical and need protection, therefore is better to store it in central vaults, therefore it need a centralized system overlooking it) caused centralization in the long term.

If you buy this line of reasoning, you understand why using Bitcoin could achieve the good things about a gold standard (everybody share the same base unit, sound store of value since durable, scarce, etc.), but improving on that. (no need for centralization, digital, scarce by default, not subject to future macro changes like asteroid mining, etc.)

What benefits does Bitcoin (i.e. cryptocurrency) offer?

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