What can I read to better understand how money operates?

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AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

...well this doesn't really strike me as a work-relevant discussion in the first place........

But the summary goes as follows:

Money is not merely something everybody attributes value to and is easy to trade. It has several other important properties that govern how reliable and useful it is as a means of exchanging property.

Those properties are, in summary:
That it's fungible and easily quantifiable
That it's easy to exchange
That it is legal tender
That people attribute value to it and will continue to do so

To think that anything widely desirable is money is therefore incorrect; it needs to satisfy the above conditions.

Furthermore, if the commodity used as money is easy to produce, that creates intrinsic problems with the system; the value attributed to the commodity will arguably vary, and therefore it's a bad store of value.

The video argues that this is the issue with FIAT money; it does not sufficiently hold all of these properties, therefore it's a bad medium of exchange.

Which might be true or not, but if it is true, in every single way possible, bitcoins are superior to gold.
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DaveW
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Re: What can I read to better understand how money operates?

Post by DaveW »

Bitcoins are a fairly awful currency and the whole system will fail pretty soon.
AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

firstly, it's only issues are that noone can issue additional bitcoins to stimulate the economy, and that it isn't legal tender...but on every single other level, it is much preferable to different kinds of money.

Secondly, it might collapse, but at the moment the bitcoin economy is steadily growing. So long as it remains better than other money on almost all its attributes, it'll have a place.
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Re: What can I read to better understand how money operates?

Post by G-Flex »

Let's switch to a currency that is backed and guaranteed by absolutely no one, relies on cryptography and secure algorithms to not fall apart completely in an instant, and pretends to be stable but clearly isn't. Sounds wonderful.
AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

Oh, I would dream of suggesting using it as currency so long as it isn't legal tender.
That's the entire point of _switching_ to a currency. You make it legal tender.

Now I don't know whether a non-fiat currency would be flexible enough to properly run an economy, but that's not the argument I was making. I was making the argument that bitcoin is supperior to gold in every conceivable way bar one: gold is somehow thought to be a better store of value.

If, however, what we're discussing is the gold standard - that is, _making_ either gold or bitcoin legal tender - then suddenly both become good stores of value, and as a result, bitcoin is strictly supperior.

Secondly, the cryptographic algorithms used for bitcoin do not merely make it 'not fall completely apart' - they make it probably the least hackable system ever. It is significantly more secure than all available alternatives, including all current currencies, because it's mathematically impossible to counterfeit.
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Re: What can I read to better understand how money operates?

Post by G-Flex »

I mean that security algorithms and procedures have had problems in the past, and I'd hate to see a system of legal tender become compromised of a security flaw is discovered.
AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

That would be disastrous, that's correct...If the security of bitcoin was ever compromised completely, bitcoins would not merely cease to be traded, they would effectively seize to exist, as the only avenue of attack that would do anything at all would do everything.

But bitcoin is as secure as a piece of software can be. You can basically name any piece of software ever, and it's likely less secure than bitcoin. It is absolutely and undoubtedly true of your online banking solution.

In fact, hacking the bitcoin currency would be the equivalent of figuring out a way to rapidly aquire all the launch codes for all the nuclear submarines and missile silos in the US army.

It is not merely secure, it is incredibly secure.

The only way to break it for a single user is to figure out the private key of some individual by reverse engineering the public key; and the only way to break it for all users is to figure out the private keys of all individuals based on their public keys, which basically means you'd need to solve the public->private key problem....but that is essentially impossible to solve.
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Re: What can I read to better understand how money operates?

Post by DDL »

Of course, the major impediment to breaking all the nuclear codes is not so much that it's challenging (though it is), but that there's no real mileage in it. Very difficult to make money from nuclear terrorism, despite what Bond movies might have you believe.

A universal electronic currency would be a vastly more attractive target. Not that this means it's de facto hackable, but it'd be the biggest test of hackability thus far.

*stocks up on beans and shotguns*
AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

Well DDL, we're talking about the destruction of the currency.

So far as I know, bitcoin is based around _general_ private-public key cryptography and a distributed authentication system. If any one private-public scheme falls, presumably the hack wouldn't be very efficient, so as soon as it was used, people would transition their bitcoin wallets away from that scheme, and they'd be safe.

Suppose someone breaks the scheme, and then sits on it for 10 years and breaks 15% of users using a large illicit datacenter, and then he quickly steals all their bitcoins. Well, that will crash the market. Completely. He won't get anything, let alone will he be able to move all the bitcoin into a currency that has value.

Suppose he hacks 50% of the users. It would be easy to simply ban the connections in question, roll back to an earlier version of the market, and everybody could then transition away to another scheme. Sure, some people would be hacked, but the currency as a whole bounces back.

Suppose he hacks a few rich peoples keys, gets himself a load of moolah, and that's it. Well that won't break the currency - everybody else simply transitions away. It'll be no different from your bank being hacked. If bitcoin was a proper currency, there'd be banks and insurance companies who'd protect you against this type of thing, if you decided to pay for it.

The only way to destroy the currency is to figure out a general-purpose way of hacking private-public schemes and publishing that. There'd be no monetary gain in that, though...which is where the nuclear submarine analogy comes in.

At the end of the day, nomatter how you look at it, bitcoin couldn't be destroyed if people wanted to protect the concept without the destruction of the private-public key cryptography scheme itself dying, which is (rightly) considered impossible....and which would also bring about the destruction of all current network security....it would roll us back to secret-key cryptography, which is provably unbreakable, but also proveably incredibly annoying to use and therefore pretty darn unreliable.
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Re: What can I read to better understand how money operates?

Post by Hashi »

Thank you for your responses friends. Just because I haven't responded doesn't mean I'm not reading the posts. I have indeed bought The Ascent of Money and am enjoying it, even if it is just the start.
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Re: What can I read to better understand how money operates?

Post by Hashi »

Double post for the win, but what exactly are bonds? I read about them, but I don't quite understand the concept
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Re: What can I read to better understand how money operates?

Post by gamer0004 »

Bonds are a way to borrow money. A company (or government) writes out a bond, often for par value of $1000, at a certain interest rate (which depends on the average interest rate, the credit rating of the company &c.), say 5% per year. This interest rate is called the coupon and is paid on the par value, which is in almost all cases different from the actual price of the bond. A 5% coupon means the investor gets a payment of 0.05×1000 = $50 per year. Bonds have varying maturities. Some pay back the initial sum after 20 years, others after only a few months. If you buy a bond with a maturity of 2 years, you get $50 in year 1 and $1050 back in year two.
(Note that most bonds pay the coupon twice per year; a bond with a coupon of $50 thus pays $25 twice per year).

Bonds can be traded. For example, say you buy a bond with a $1000 par value and a 5% coupon. If the interest rates go up next year, you've got a bad deal. If they go down, you've got a good deal. Prices reflect these differences. If two bonds are exactly equal in all respects except for their interest rates, then everybody wants the one with the higher interest rate and dumps the one with the lower rate, which means demand for and the price of the bond with the higher interest rate go up and the price of the bond with the low interest rate goes down. The interest rate (on par value) doesn't change, but the return on the whole investment does. Whether the investor gets €1050 (5% coupon) on an investment of €1000 or €1100 (10% coupon) on an investment of €1048, in both cases the return is 5%. Thus, if interest rates in general go down, the value of existing bonds (that is, with higher interest rates) go up. Because bonds can be sold it is not actually necessary to keep the bond to maturity to profit from the relatively high interest rate: the investor can also sell the bond and immediately realise his gain.

There are many different types of bonds. Some bonds only pay back the par value without coupon payments. Some can be converted into common stock (convertible bonds). Some have a variable interest rate. Arbitrage between markets ensures these different constructions are valued "correctly"* but pricing these different financial products can be rather complicated. Sometimes bonds are sold together with a warrent, which is basically an option on common stock. Just valuing the option can be rather complicated, see the Black-Scholes formula.

*That is, to make sure every financial product yields the same amount of money (compensated for risks and time value). This return is not necessarily correct considering economic factors: a bottle of ketchup which is half empty may sell for half as much as a full bottle of ketchup, but that does not mean the ketchup itself is fairly priced.
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Re: What can I read to better understand how money operates?

Post by that guy »

in terms of how governing bodies make decisions about money the term you should look into is macroeconomics
G-Flex
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Re: What can I read to better understand how money operates?

Post by G-Flex »

AEmer wrote:Well DDL, we're talking about the destruction of the currency.

So far as I know, bitcoin is based around _general_ private-public key cryptography and a distributed authentication system. If any one private-public scheme falls, presumably the hack wouldn't be very efficient, so as soon as it was used, people would transition their bitcoin wallets away from that scheme, and they'd be safe.
"As soon as it was used"? You're overestimating both how long it would take to cause real damage, and understimating how long it takes for people and companies to actually transition to a more secure option when a security problem is found.
AEmer
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Re: What can I read to better understand how money operates?

Post by AEmer »

No - I'm not.

Suppose some weakness is found in one of the private-public key generation algorithms. Like, RSA is suddenly much easier to break. So if a bitcoin wallet has made more than 100 transactions with the same public-private key pair, some hacker figures out how to crack the private key 100 billion billion billion times quicker than what was usually possible. That's roughly 36 bits easier.

A 2k RSA key (current standard) has about 112 bits of entropy. So, that hack - which is absolutely insane, since just a billion times faster would be a huge scientific discovery and would make the hacker in question both rich and famous if he sold it and wrote about it - that hack makes something that's so hard to crack it couldn't be done if you had all the cpu cycles ever used untill now - into something that can be hacked by a personal computer in about 600 years, give or take. Nevermind the fact that these keys are changed every year. So you'd need to run a data center worth at least 600k$ in hardware for a year to break one key before it runs out.

This is using conservative estimate by the way.

So, suppose someone makes the encryption discovery of the century and figures out a method for breaking RSA quicker than normal. Suppose someone throws a 600 billion dollar hardware center at him and lets him use it for a full year. This is physically impossible to do if you're not the chinese, russian or american governments, by the way. Congrats - you've broken into 1 million bitcoin wallets. But this system of currency is, of course, used by 600 million people, because it was europe who decided to use it rather than the euro or something. That's 0.0016% of accounts who were hacked. Suppose you simply transfer all the funds of all the accounts to one account, and you throw away the key. You've cleaned out a lot of people for a lot of money, but as I said before, you can't actually get any money...if you try to use the money, your location will be traced and you'll be jailed.

Here's the kicker...all the wealthy individuals who use this currency would get most of their money back through private insurance, and all private individuals with little money would get it back from state guarantee, as is the case with the current banking system and bankruptcy of banks in many countries. You'd simply have stolen the money from the government backing the system and some insurance companies, and you couldn't ever use it. And of course, everybody will transition away from RSA based encryption to something else within a day - because all it'll take is running a patch on your personal computer, and it's really simple to do.

This is assuming no other measures are taken against this by the way. Bitcoin is many things, but it is most definitely not insecure against general hacks. Heh, and you know...if you really wanted to...you could just use a slightly more secure private-public algorithm that's provably secure. It's currently assumed that RSA is also secure in the same way, but if you really wanted to, this is an option as well. Then none of what I said would even matter.

Just saying.
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