Why bitcoin’s rise is nothing to celebrate

http://blogs.reuters.com/felix-salmon/2013/04/03/why-bitcoins-rise-is-nothing-to-celebrate/

by ldayley • 13 years ago

64 54 13 years ago

blogs.reuters.com

dj-wonk• 13 years ago

The article says "That’s by design: bitcoins were created to be the most fungible commodity the world had ever seen". Could someone please share a citation for that?

I understand that both currencies and commodities are undifferentiated and so are more easily traded, so I can see similarities.

But, from a common usage perspective, as well as from an economic viewpoint, a commodity is defined as a good, having value in itself. So the above claim seems rather misguided. Am I missing something?

luckystarr• 13 years ago

I'm still not sure what to think about this whole development.

It looks and feels like a bubble about to burst.

On the other hand it feels different because there is vested interest in owning bitcoins that differs from owning "regular" money, i.e. relative obscurity of spenders identity, etc.

Expez• 13 years ago

Bitcoin's role the world economy is unlikely to be as a replacement for all other currencies. This is partly because of the properties of the currency inself--a modest inflation is good for the economy--and partly because governments/unions are not wont to give up complete control over their currency.

Instead I suspect Bitcoins will be used as a medium to ease transactions. At present it's both hard, time consuming and expensive to move money around (banks profit on the exchange rates, VISA taking 2.5% cut out of credit card transactions, paypal taking a cut etc etc).

The author is quite right that the incredible surge in price isn't good in terms of bringing about widespread adoption for Bitcions, but the rise in price is also inevitable. If Bitcoins are to be used as a transactional medium, then the value of bitcoins have to reflect some percentage (not all transactions will be in bitcoins!) of the amount of money in transit. At present the entire bitcoin economy is worth about $1.5B. I have no idea what say the value of say 1% of all the transactions in world which are taking place at the present moment is, but I suspect it is a great deal more than $1.5B.

fc22• 13 years ago

I think it could do well as a reserve currency. Any country that isn't the US would be better off holding and transacting in BTC than in USD.

dragonwriter2• 13 years ago

<blockquote>Bitcoin's role the world economy is unlikely to be as a replacement for all other currencies. This is partly because of the properties of the currency inself--a modest inflation is good for the economy--and partly because governments/unions are not wont to give up complete control over their currency.</blockquote>

And partly because (while commodity-backed currencies have a weaker version of this trait, in that there are environmental costs of extraction) its the only currency in the world based purely on the consumption of resources, which is a massively undesirable feature in a currency.

dfxm12• 13 years ago

Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. It’s nihilistic.

This is an interesting bit of rhetoric, but I don't follow the logic here. The author contends that banks are built on trust and Bitcoins are built on mistrust.

Don't the pages of legislation and regulation prove that we don't trust banks? What about what's happened in Cyprus recently?

Also, isn't the p2p model of Bitcoin the very crux of trust?

I agree Bitcoin has been volatile, but it isn't based on mistrust.

SODaniel• 13 years ago

I would have to argue that I trust an anonymous computer network and my own ability to keep a wallet file safe over any bank in the world.

At least a blockchain isn't actively out to scam me out of money.

lmickh3• 13 years ago

The blockchain is simply a tool. A bank ledger is not actively trying to scam you out of your money either. It is the people involved that do so. There has been plenty of shady dealings around Bitcoin already.

betterunix• 13 years ago

Yeah but you have to trust that Bitcoin's protocol actually enforces the security properties you want. Newsflash: it does not.

lmickh3• 13 years ago

Not that I would necessarily agree to it, but I imagine the argument would be that the legislation and regulation is our expectations in writing. We trust the banks to up hold those expectations. When that trust is broken, they are punished.

Or another way to put it might be trust versus faith.

dmiladinov2• 13 years ago

> The author contends that banks are built on trust and Bitcoins are built on mistrust.

Sounds very much like the author is attempting to engage in doublespeak...

niggler• 13 years ago

When someone steals physical dollars from a bank branch, none of the bank accounts are generally affected. This is the 'trust'

Wintamute• 13 years ago

For me that's probably the worst part of the article. It's definitely rhetoric, and on brief inspection sounds quite impressive but says nothing aside from the authors wish to inject words like "mistrust", "anti-democratic" and "nihilistic" into the sentence with precisely zero logical support structure. If Bitcoin has no "self" how can it take responsibility onto itself, and how can it be nihilistic? Even when attempted to be engaged with on its own terms the sentence is devoid of insight, and just represents a cynical attempt to adjust the tone to support previous opinions.

nathanb2• 13 years ago

I don't understand what "anti-democratic" means in this context, so I won't comment on that part. But I think the author is alleging that bitcoin is based on mistrust sort of in the same way that stuffing currency in your mattress is based on mistrust. If that interpretation is correct, he does have a point. One of the features of bitcoin is that it retains the benefits of keeping physical currency while also providing the benefits of digital transactions. But this seems to be uber-democratic, not anti-democratic, so I may be way off base here.

JamisonM3• 13 years ago

I approach this with absolutely know special authority on the subject but it I were to offer an opinion on why Bitcoin is anti-democratic I would say that it is because fiat currencies are democratic. When a currency is supported by a government that government has some degree of control over that currency and that government, if it is democratic, can act on the currency based on the will of the people. (Obviously we could get into a big debate about oligarchs undermining democracy, etc, but let's skip that for now.)

If a currency like Bitcoin is adopted by too large a population of a given country and becomes a de facto currency it wrestles the fiat currency out of its position and eliminates any democratic control over currencies.

I understand that there are many, many hard-money libertarian types around here who see this and cry, "yes! freedom!" but my understanding of the scholarship on this sort of thing is that fiat currencies are very important for economic adjustments due to shocks. The Euro is showing us what a hard-money environment looks like as a natural experiment for Spain and Greece and it is not going well.

If I am an asset-holder I am a big fan of ensuring that devaluation can't take my riches away but if I am a technocrat trying to build a functioning economy for the long term that can deal will all sort of unexpected events and treat people without assets fairly I want a fiat currency. To me this is where the nihilism comes in, or at least Bitcoin represents an "I got mine Jack" view of the economy. That being said, now it is here and if it gain acceptance the world is going to need to deal with it. (A currency with a permanently tight supply sounds like a machine for creating constant recessions to me, but I'm no expert.)

rlpb• 13 years ago

The article uses bank and bank deposits as an example of trust, and presumes that because Bitcoins lack these, it is based on mistrust.

But this is a false analogy. Bitcoins are analogous to cash, not to banks. Those involved in Bitcoin expect Bitcoin banks to spring up.

Those who are trading on Mt Gox are already trusting Mt Gox with their Bitcoin.

jbverschoor• 13 years ago

You can still have bitcoin banks that are allowed to "print" money like they do now.

It would be the bitcoin dollar. It will first be backed by actual bitcoins. After a while, banks would negotiate the rights to lend out money they don't. They'd only need a small ratio. We then have the same situation as now ;)

The good thing about BTC is that it's a cheap fast and safe way to transfer money and the supply is limited

dmm• 13 years ago

Bitcoin banks can be full-reserve. Meaning that savings and loans are maturity matched. So if the bank wants to give someone a 2yr loan they have to find a saver willing to make a 2yr deposit.

Demand savings accounts would have negative interest, meaning you would pay to have a regular savings account that you could access any time.

steven2012• 13 years ago

I'm willing to bet that once the dust settles on this a year from now, some sort of huge Wall Street-esque conspiracy or fraud will be exposed that propelled the price up so insanely, and then all crypto-currencies will be at risk. All other bubbles we've seen in the last 15 years have been frauds, be it the dot-com bubble, the housing bubble, etc. This is no different, and reeks of fraudulent behavior.

loqi• 13 years ago

I know it was probably just a figure of speech, but I'll take that bet. If, one year from now, some huge Wall Street-esque conspiracy to pump Bitcoin has been exposed, I pay you $115 (1 BTC's worth of USD at the current rate). If no such conspiracy has been exposed, you pay me 1 BTC. Sound fair?

gesman2• 13 years ago

Bitcoin's rise is a consequence of raising mistrust of people in monetary policies of their banks and their governments.

Watching your money frozen or being used to pay off for government's failures is no fun.

Hence - the result.

Nursie4• 13 years ago

Right and this is happening in ... Cyprus. So all the money coming in to the BTC economy at the moment is Cypriot? Really? The whole island went BTC crazy and kicked this off?

Horse-puckey!

gesman2• 13 years ago

I think many Europeans looking at Cyprus taking steps to protect themselves. Just in case. And there are big players in this game as well.

dragonwriter2• 13 years ago

> Right and this is happening in ... Cyprus. So all the money coming in to the BTC economy at the moment is Cypriot?

To be fair, the effect of the actions in Cyprus weren't limited to Cypriot money -- much of the money involved was international, particularly Russian (and, reputedly, much of it was likely stashed in Cyprus by organized crime.)

Much of the money coming into Bitcoin being because it is perceived as a better place for organized crime to stash money than traditional banks I can believe, though, frankly, I'd see the events in Cyprus (while relevant to that consideration) as secondary to the comparative immaturity in regulation and anti-money-laundering monitoring affecting entities in the Bitcoin space as opposed to traditional banks.

mtgx• 13 years ago

Why hasn't anyone made a currency that is similar to Bitcoin with the only difference that it can grow infinitely, with an inflation of roughly 2% per year?

It would also need to have the same difficulty increases of Bitcoin, to account for future mining technology, other if the difficulty stays too low, someone with some breakthrough hardware could generate and "print" a lot of new units.

fc22• 13 years ago

There is a fork called Freicoin that uses demurrage instead of inflation but it hasn't done too well, there's just no demand for it. Think about it, why would anyone buy a currency that nobody accepts and depreciates over time?

jvm• 13 years ago

I think the two reasons are

1. Because that's not anarchist enough for some of the rabid anti-society supporters.

2. Perhaps a bigger deal, it's actually easier said than done. What metric will be used to determine value? If the network is tracking global GDP or US CPI or something, how will it avoid being tricked by some malicious party?

It would be a great idea. Inflation doesn't even have to be positive, it could just be fixed at a stable value. I think #2 is actually quite tricky though but I'd be really interested to hear people's thoughts on it.

powatom• 13 years ago

I've thought a similar thing about Bitcoin before - it seems like this is the 'goldrush' era - people are grabbing as many Bitcoins as they can before they become too scarce. Assuming there is no sudden drop-off in interest, will we not eventually see a new digital currency, acting as a representation / guarantee of future value? The currency itself has no worth, merely the idea that it can be traded at some point for something WITH worth (i.e an individual Bitcoin).

It's like trading in gold rather than money, and all this current rush is going to do is force an eventual emulation of real-world banking systems.

lmickh3• 13 years ago

So eventually Ron Paul will be trying to push us back to the Bitcoin standard?

cinquemb• 13 years ago

Come on everyone, we cannot possibly work together in any meaningful societal capacity without having upmost trust and faith in banks and our respective governments.

/sarc

cs702• 13 years ago

Many currencies in existence are now riskier and less stable than Bitcoin.

Yes, it's true. As of right now, there are 182 official currencies worldwide[1], most of which you've never heard of in your life, and many of which have total market capitalization lower than Bitcoin.[2] Others are subject to extreme sociopolitical, economic, or military-conflict risks. Would you rather own bitcoins, which are traded globally, or, say, Libyan dinars, North Korean wons, Syrian pounds, etc.?

Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]

If Bitcoin survives the horrific economic crises in countries like Spain, Greece, and Cyprus, and the even more horrific military conflicts in countries like Syria and Sudan, it will continue gaining credibility as the currency of last resort -- the global digital commodity that will survive even if your country or economy goes to hell.

Edit: changed "most currencies in existence" to "many currencies in existence," which is what I actually intended to write.

[1] http://en.wikipedia.org/wiki/List_of_circulating_currencies_...

[2] http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-v...

[3] https://www.google.com/finance?chdnp=1&chdd=1&chds=1...

philwelch• 13 years ago

Bitcoin has the volatility over a month that USD have over half a decade, in other words?

chjj• 13 years ago

If your point is, "other currencies suck too", it's not a good one. The entire goal of bitcoin was to be better than these currencies. The writer of this article simply said bitcoin doesn't work as a currency. The fact that there are (unsurprisingly) a lot of failed currencies out there doesn't make bitcoin a better currency. This isn't a school paper where the grade is curved.

RickHull• 13 years ago

BTC is still the adoption / speculation phase. As the market share increases, it should tend to stabilize. If Felix is saying that Grandma shouldn't take out a BTC loan, then I agree completely. But it might be a different story in a few years.

Also remember that there are two sides to currency volatility. If the USD/BTC rate is changing, it could indicate USD volatility.

andylei• 13 years ago

> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump

Is this comparison serious? See below

> their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump)

that's over the course of 6 YEARS. the most recent 100% jump in BTCUSD took 14 DAYS.

> drop back down to US$1.20 in 2010 (25% drop)

that's over the course of 2 years. Last August, BTCEUR took a 25% tumble in 5 days.

xradionut• 13 years ago

I think that Bitcoins are a sign of mistrust that people have in corrupt banks and governments.

kmfrk• 13 years ago

I'm not a fan of Bitcoin, but I think we're probably in for a deluge of #slatepitches linkbaiting us with coarse verdicts for or against Bitcoins for the next number of weeks and months.

Maybe we'll have to take some measures against these clogging the frontpage of HN.

I really liked The New Yorker's article on Bitcoin, which also served excellently to explain its history, purpose, and method: http://www.newyorker.com/online/blogs/elements/2013/04/the-f....

johnminter• 13 years ago

The real key to any currency is it acceptance. When paper currency was first developed, it became widely accepted because the issuing government declared that it would be accepted as payment for taxes. Given the ubiquity of taxes, I understand the acceptance. What I don't understand is on what basis one can conclude that the acceptance of bitcoin will continue.

TomGullen• 13 years ago

> Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today. That’s a pretty good sign that bitcoins don’t work as a currency.

Is this a fundamental flaw that's always going to plague Bitcoin? Or is it just a growing pain whilst the currency grows and stabilises?

jstalin• 13 years ago

I expect to see more and more attacks on the concept of bitcoin because it exposes the flaws in modern fractional reserve banking and fiat currency issued by central banks.

raldi2• 13 years ago

> Imagine a sucker who took out a loan in bitcoins a few weeks ago — she’d never be able to pay it back today

...unless her income is also paid in Bitcoins.

Nursie4• 13 years ago

> ...unless her income is also paid in Bitcoins.

  ...unless her employer has to buy them in and now can't afford to
  ...unless they charge customers in bitcoins and can afford to
  ...unless their customers can't now buy any bitcoins to pay them
  ...unless their customers are all miners!

This game is fun!

raldi2• 13 years ago

The best part is that you can replace "bitcoin" with any other form of currency, and all the arguments remain equally valid.

taariqlewis• 13 years ago

If for every news article, the price of BTC rises, then trading in Bitcoin simply for appreciation may not be such a bad idea...at least for the short term trader. Ain't nothing wrong with a little press-driven price action.

smosher• 13 years ago

This story lacks critical thinking. The price couldn't be anything other than volatile right now for the simple reason that it is bigger than a breadbox, but smaller than a house: It has two basic attractors, one is $0—extinction. If you take the story at face-value, I think you're supposed to think this is the only one.

The other one is more dynamic, fitting the demand of supplying commerce with enough monetary units to do business, which if successful should roughly match the population of the earth eventually.

20-some-odd million units for all of us. How much does it have to be worth? Much more than a hundred dollars.

So the rise in value might be a bad thing, it could be a simple expression of unbounded volatility. Or it could be a perfectly natural thing, seeking the greater attractor—the one of persistence over extinction. Proximity to that attractor diminishes volatility.

It's important to appreciate that the whole mess could come down, and it's important to know how that might come about and what the signs of trouble are. But asserting it is going to eventually fall under the weight of these weaknesses (without being able to show how or even what in particular it will succumb to) for anything other than hypothetical purposes is a mistake. I've seen a lot of articles framing it like that way lately, and no support for it.

Equating sharp upward trends with dangerous volatility is just confusing the signs of natural, healthy progression with the signs of trouble. What's needed is a more sophisticated way of thinking about it. Solid arguments for why a given amount in the right direction in a given period of time is a sign of trouble rather than progress toward the greater attractor. Without these you're just making up stories. But in all things money the trend is: it's better to lie than admit you don't know.

Ologn• 13 years ago

"It's a bad idea to turn a currency into a commodity"

But a currency is already a commodity. Many commodities have been used as currency through history - wheat, rice, cows etc. Precious metals like gold became popular as currencies because they make good currencies for a number of reasons - gold is not organic and deteriorates very slowly, gold is easy to divide and combine, it is easy to transport, one ounce of gold is no different than another ounce of gold, gold has value when used in industrial machinery etc.

US coins used precious metals for a long time, although that is being phased out. US currency was backed by gold until the 1970s. Historically, currencies delinked from having the real underlying value of a useful commodity have not lasted long. Two years before I was born the dollar was still backed by gold.

A paper currency and electronic currency with no underlying utility can always become worthless, gold has retained worth for thousands of years. There is a long list of useless and worthless electronic and paper currencies - Flooz, Beenz, Confederate dollars etc. German marks had a period of hyperinflation even before World War II ended, so they lost their value twice.

codehalo• 13 years ago

Not clear what his agenda is, trying to post on every site some moronic opinion on bitcoin instead of investing some time in understanding it better. A lot of folks on this that post here seem quite misguided in their knowledge of something they clearly dont understand. Trust me, it would serve anyone who has only passing knowledge of bitcoin to inform themselves by going to bitcoin.org than getting opinions from the pompous morons on this site.

Why bitcoin’s rise is nothing to celebrate

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