[gojomo]

The 'crush' scenario presented here -- governments using their fiat currency power to alternately buy and dump Bitcoins, creating a boom-bust cycle that scares other people away -- doesn't seem very smart or likely to succeed.

Speculators would recognize it and attempt to profit by front-running the government operations (increasing the cost to the government, and dampening the volatility).

Bitcoin service providers could offer volatility-protection (instant conversion to other currencies), as some do already.

Governments could lose money on each manipulated boom-bust cycle, and at the bottom of each cycle, Bitcoin would still be alive and ready for new uses.

Far more likely, in my mind, is an attempt to coopt Bitcoin. Officially approve it, with reporting/identity conditions that don't encumber legal use but ensure tax collection. Or, launch a Bitcoin-like competitor backed by government redemption guarantees (T-Bills, TIPS, etc). So, above-ground businesses can get most of the crypto-currency benefits without the rough edges created by its most anti-State qualities.

[cabalamat]

> Governments could lose money on each manipulated boom-bust cycle, and at the bottom of each cycle, Bitcoin would still be alive and ready for new uses.

Not only that, once people realised they could make money by buying when it's cheap and selling when it's expensive, new users would flock to the currency.

So I agree with you that this attack probably wouldn't work. What is much more likely is that if banks decided they wanted to destroy Bitcoin, they would bribe governments to do so. They would also spend money on a propaganda campaign linking Bitcoin with terrorists, pedophiles and drug dealers.

[wintersFright]

A lot of governments intervene in their currency to target an exchange rate (eg: Swiss). I don't see a lot of people flocking to frontrun them. It's volatile and risky. Sure traders do it, but not 'people' as in 'the people'.

Governments also won't care about losing money when taking strategic action to protect their seignorage and inflation tax racket.

Maybe the boom/bust wouldn't matter too much. It depends on how people see bitcoin. Are they trying to save in it? Anyone trying to save in bitcoin is delusional given its infancy and volatility. A better description would be some people are trying to speculate in it. For similar reasons, people won't use it as a unit of account.

If people use it as a medium of exchange then volatility won't be of as much concern. If you need to make a trade in BTC then obtain the BTC and trade your item quickly. Given there would be spreads to pay on each trade in and out of BTC then it doesn't seem that likely a strategy unless people wrongly think of BTC as anonymous and are 'hehe, the man have no idea i'm ordering this off silkroad'.

What is interesting is that BTC is not a sovereign currency. So say BTC takes off in Russia and Putin decides to smash it: Does he need to think of the American's reaction if he does? Any country in the world - or any entity big enough (a corporation, a multi billionaire) could decide to cause mischief without it being considered an act of war - which say if China decided to sell 1 trillion of US treasuries might be construed as.

[cabalamat]

> A lot of governments intervene in their currency to target an exchange rate (eg: Swiss).

Generally to stabilise their currency, not destroy confidence in it -- only kleptocracies would deliberately damage their own currency in that way.

> Governments also won't care about losing money when taking strategic action to protect their seignorage and inflation tax racket.

Sometimes, even governments find it too expensive to manipulate currencies, e.g. in 1992 the UK government lost £3 billion in an afternoon propping up sterling. (http://en.wikipedia.org/wiki/Black_Wednesday)

> Maybe the boom/bust wouldn't matter too much. It depends on how people see bitcoin. Are they trying to save in it? Anyone trying to save in bitcoin is delusional given its infancy and volatility. A better description would be some people are trying to speculate in it.

Agreed.

> If people use it as a medium of exchange then volatility won't be of as much concern. If you need to make a trade in BTC then obtain the BTC and trade your item quickly. Given there would be spreads to pay on each trade in and out of BTC

The sprreads make this costly. My main interest in BTC is in the hope that it could be used as a cheap way of transferring money, particularly in small amounts, which obviously isn't going to be possible if there are big costs in exchanging it.

> So say BTC takes off in Russia and Putin decides to smash it

Putin can smash BTC in Russia. It would be harder fro him to do so in the rest of the world.

> Does he need to think of the American's reaction if he does?

If BTC are being heavily used in the USA or other countries, then those countries would be unhappy about Putin's meddling.

[socillion]

From the government's perspective, Bitcoin could be the least of very many evils. Don't forget that the protocol logs every single transaction publicly, and companies have the usual mandatory reporting for transactions over $10,000. In the future, if Bitcoin becomes a well established currency, Bitcoin companies would have no option to refuse requests for information - Liberty Reserve is a good example of what noncompliance will result in. They could only pray the deal is not altered further.

Sidenote: Liberty Reserve was shut down a month after the FinCen released clarification of regulations that neatly closed the loophole they exploited, and at the same time greatly legitimized Bitcoin operators that comply with the strict MSB regulations.

[cabalamat]

> From the government's perspective, Bitcoin could be the least of very many evils. Don't forget that the protocol logs every single transaction publicly

That's a good point. Would it be possible to have something like Bitcoin but with better anonymity?

[mateuszf]

There is a protocol called Zerocoin which may be integrated with Bitcoin. AFAIK it is currently being tested. However it's not sure if Bitcoin developers will integrate it with current protocol. In theory it makes possible to do totally anonymous transactions.

[fexl]

Right, it doesn't seem likely to succeed, especially if these dynamics prevail: "A currency that quintuples in a month, and then loses two-thirds of its value in the following week, is not a currency that inspires confidence in users."

A currency that behaves that way is a currency that appreciates 67% every five weeks. That will not be sustainable for long without hyperinflation. It will also inspire confidence in people who buy the dips.

[javert]

I agree that the crush scenaro wouldn't work, but you didn't specifically mention one important reason.

Every time the value dropped, people who have the intention to actually hold onto the currency and prop it up would but up lots of it _and hold onto it_, and it would be cheap to do so at that point.

So the pool of liquid bitcoin the government could work with would keep shrinking drastically.

I believe it's the case that the vast majority of bitcoin are not "on the market," they're being held for the long run.

[dragontamer]

The problem with BTC is how long it takes to confirm a transaction. Paper-based transaction is instant, you hand bills over and you're done. Credit cards are the same.

BTCs take 4 or 5 block-chains before they're "confirmed", and you don't really know if your customer has "double-spent you" until the confirmation occurs. This makes BTC unacceptable to the vast majority of typical transactions.

Its fine for say... online shopping, because 30 minutes of confirmation time isn't that big of a deal. However, waiting 30, 40, or 50 minutes for confirmations is not the best way to buy coffee in the morning.

[vbuterin]

Most merchants in practice accept transactions immediately as soon as they receive the unconfirmed notification. The security is not 100% perfect that way, but it's still way better than the risk of getting a chargeback with a more traditional system.

[csomar]

It's probably instant for the 99%. I don't think people are willing to handle the security and technical aspect of Bitcoin. They'll hand these details to a service like Coinbase, which will have merchant APIs and accept transactions instantly.

[dragontamer]

http://blog.coinbase.com/post/43285532179/unconfirmed-transa...

In this case we fell far short of that goal (some transactions were delayed for a number of days), and for that I am truly sorry

Uhhh... you were saying? If you fail to understand the technical aspects of the technology you're building a business on, be ready for it to bite you in the ass in obscure ways.

Any implementation of Bitcoin will have "leaky abstractions".

[gojomo]

This theoretical problem isn't that big in practice. Ensuring your malicious second-spend 'wins' the confirmation race requires a lot more effort than an ill-gotten morning cup of coffee is worth.

If it actually started happening -- burning merchants who accept 0-confirmation transactions -- a bunch of cheap countermeasures could be adopted. For example, only accepting 0-confirmation transactions from certain origins with a traceable reputation, performance bond at trusted third party, or subject to other recourse/debt-collection. Or, having a consortium of major pools commit (for a tiny fee) that they haven't seen a competing transaction and will prefer the one presented first, by the merchant.