The Bitcoin Bubble and the Future of Currency

https://medium.com/money-banking/2b5ef79482cb

by ldayley • 13 years ago

179 189 13 years ago

> And in any event, bitcoin is never going to work as a global payments system. Not only does it suffer from having a slow-growing money supply and a metastasizing transactions file which has to live on every user’s computer, it also encourages destructive computer hacking. The way that the money supply grows, in the bitcoin system, is by people harnessing the power of hundreds or thousands of computers to solve very complicated mathematical tasks, earning bitcoins for doing so along the way. And the easiest and cheapest way of doing that is to do so illegally, by stealth: set up a “botnet” of hacked computers to do your bidding for you. The incentives, here, are very bad indeed.

I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?

mpyne• 13 years ago

> I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?

How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.

Retric• 13 years ago

The largest known bot net had ~30,000,000 computers at that scale CPU's work just fine. Not that it's the only thing to do with a bot-net of that size, but it's clearly a lower-bound where if your not doing a denial of service attack or sending spam you might as well mine bit-coins.

Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.

EA• 13 years ago

Modest CPUs produce bitcoins very slowly. So, there is an incentive to create a botnet to harness the power of thousands of CPUs to mine bitcoins.

https://en.bitcoin.it/wiki/Mining_hardware_comparison

dragontamer4• 13 years ago

Botnets make a ton more money by just ad-clicks anyway. I bet its more beneficial to fraudulently ad-click with botnets than it is to mine bitcoins.

jacquesm• 13 years ago

There is no point in even putting together a botnet with thousands of CPUs anymore, a couple of FPGAs or an ASIC based solution would run rings around that botnet. Ok, an ASIC will cost a bit of money and a botnet is free but the difference in performance is such that only a very large botnet would be worth it and those can probably be monetized more effectively in other ways.

wladimir2• 13 years ago

You are right. CPUs are already useless for mining. Currently, GPUs can still mine their share (but running a GPU miner on a botnet is a risk; computers become very noisy, hot and slow, which increases the detection rate). But as the first ASICs have started shipping (or have they?) this is expected to change very soon, and the only way to make a profit with mining will be with custom hardware. This rules out botnets pretty effectively.

erikpukinskis• 13 years ago

If botnets are free to operate, then won't they still be used? They're only less efficient than ASICs if you have to pay for electricity, right?

lojack2• 13 years ago

I did a back of the napkin calculation the other day to see if a botnet could reasonably reach the 50% computing power required to overwrite transactions. The largest known botnet (BredoLab @ 30,000,000 bots) with modest hardware could have potentially done it. This computational power is a multiple of the combined computing power of the top 100 supercomputers in existence today.

Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.

doctorfoo• 13 years ago

And also, anticipated by Satoshi, was that the long tail of smaller botnets that would be unable to double spend would take to bitcoin mining because it would be more profitable, so increasing security and making it much harder for a single large botnet to take over.

GnarlinBrando5• 13 years ago

There eventually wont be much point to mining when the cap is reached, then there will be a point to process blocks for their transaction fees. You are also right about the hardware issue, plus there are other more profitable ways to use a botnet. There is also just a general problem with the argument that it incentivises botnets, they are their own incentive, anything that needs bandwidth, cpu power, and stolen information will be much easier with a botnet.

Noughmad2• 13 years ago

The big graph on top looks nice, but it really annoys the physicist in me. There should at least be another in logarithmic scale, so we can actually see how the value is rising.

klapinat0r3• 13 years ago

Here you go (from source): http://blockchain.info/charts/market-cap?showDataPoints=fals...

Noughmad2• 13 years ago

Thanks. It looks pretty exponential this way.

josscrowcroft• 13 years ago

> "A few days ago, the value of all the bitcoins in the world blew past $1 billion for the first time ever"

Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but...

How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?

I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN"

But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless.

Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation.

So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?

drcode4• 13 years ago

Evaluating assets based on "Market Cap" is a standard financial analysis technique. This is nothing more than the marginal value of a security (i.e. what it's trading for this very moment) times the number of shares.

You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.

hazov2• 13 years ago

It's called mark to maket accounting, for example suppose I have 2 Bitcoin and will like to know what is their value, I see the market price and multiply by what I have, like you said.

This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars.

EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down

klapinat0r3• 13 years ago

> Nobody would pay $1BN for all of them, because that would render them all worthless

Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more.

Bitcoins will still be a scarce good. The demand will determine if they're worthless.

A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.

ghaff• 13 years ago

Look at it this way: You print 1 billion klapinat0r bills. You're the only one who owns any and they're not backed by any other asset such as gold. What would one of those bills be worth? Why would it be worth anything? Why would there be any demand?

pbreit2• 13 years ago

It would then be up to the owner to figure out how to make them valuable and I suspect the owner would have a very difficult time. With only one owner, there could be no trading and hence, no market value.

lojack2• 13 years ago

> But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them.

I don't understand how this is any different from a fiat currency. The value of bitcoins are currently being quantified by its exchange rate in USD. Sure, someone could buy all BTC and drive its exchange rate (and thus its value) down. Someone could also print more USD which would create a mass inflation and the exchange rate would be driven up. The exchange rate of all currencies would all be driven up, and the value of USD would go down.

drcode4• 13 years ago

> someone could buy all BTC and drive its exchange rate (and thus its value) down

If someone buys it like crazy, why would the price go down?

> Someone could also print more USD...

The use of the word "also" here is wrong since btcs can't be "printed" by "someone" like the dollar.

dllthomas• 13 years ago

Really, I'm not sure it's that different than a commodity commonly held principally as a store of value.

niggler• 13 years ago

It's the same type of gamesmanship that explains why Facebook was worth 100B at one point: the marginal price is multiplied by the number of units outstanding. There is no guarantee that every BTC can be cashed out at the current price (or even for a nontrivial price) in much the same way as how Dorsey can't dump his entire twitter stake at the current valuation of twitter.

daniel-cussen• 13 years ago

Perhaps "market cap" is a better word.

GnarlinBrando5• 13 years ago

Same things are true for any currency, this is partly why they work. We can trust because we have common interest in the solvency of any commonly used currency. A dollar is only worth what someone will give you for it.

betterunix4• 13 years ago

"A dollar is only worth what someone will give you for it."

Dollars also have value because they can be used to pay taxes and settle other debts in the United States. It is not like people woke up one morning thinking that the US dollar was a great currency to use; it has actual utility.

fnordfnordfnord7• 13 years ago

>How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?

Only because you can sell/trade it.

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.

PS. I posted this on the other thread linking to the same article: https://news.ycombinator.com/item?id=5486100

[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...

carbocation2• 13 years ago

> 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]

The USD and the Euro, in comparison to BTC, are magnificently stable.

Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.

ok_craig2• 13 years ago

I don't think even bitcoin enthusiasts are saying bitcoin will be stable in the near future. Only that once it's widely adopted and reaches its growth potential or near it, it will then be stable.

If it is to be adopted widely, at some point it has to go from being distributed among a few million, to being distributed among a few billion. The continual price rise will correlate with that adoption continuing to happen.

So yeah, I understand all these arguments about volatility, but the reason they don't bother me is because they don't seem to point out anything bad about bitcoin in principle, in the long-term, they only point out the negative aspects of using it as a currency while its undergoing its adoption phase. I don't think there's actually any argument that using bitcoin as a currency right now isn't going to work as well as dollars/euros.

Guvante• 13 years ago

Bitcoins look interesting but the current price shift caused by interest in them is disturbing. Mining on anything but a current generation AMD card isn't worth the electricity and the advent of ASIC cards is going to make mining on any consumer hardware pointless. So you can't mine and you can't buy without exposing yourself to a lot of risk right now. Given the current bubble is based on people joining the game , that is a risky proposition for bitcoins as a whole.

fc22• 13 years ago

You forget people can join the game by just accepting BTC as payment for their goods and services.

polarix4• 13 years ago

Lots of risk to buy. Far more upside risk to not buy.

hazov2• 13 years ago

I think there's too much wishful thinking in your analysis, first people that are really rich are only interested in two things, one is that their wealth do not lose value, they will go to bitcoin, private equity, platinum, dollars, North Korean wons, stocks, fixed income titles, futures, whatever only to have this as a guarantee. The second is to increase their wealth.

Now your post appears to talk about the first point, which I agree, I only do not see how you jump to the conclusion that bitcoin is more stable than Swiss francs for example, stability is the guarantee that you'll not lose money if you trade all your wealth from one state to another, I do not see how bitcoin guarantees that (no store of value does), the only real alternative to not lose value is diversification, put your money in as many different things as you possibly could, never let a bank have more than 20% of your entire cash money, buy as many different investments as you could, precious metals, stocks, solid bonds and let them be on safes or clearing houses that's not attached to a bank.

And most important stay away from banks from countries with large public debt.

rjtavares4• 13 years ago

I wouldn't own Libyan dinars unless I lived in Libya. Since I don't live on the Internet, I won't own Bitcoins.

carbocation2• 13 years ago

Multinational corporations use foreign currencies as a hedge against exchange rate fluctuations. Speculators win and lose big on bets re: exchange rates. Owning foreign currency can make sense for a variety of reasons.

And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.

meerita2• 13 years ago

Many people pays their loans in Yens or other currencies just to save money. Argentinians for example are best know for putting all savings in american dollars.

johndevor• 13 years ago

You don't live in a gold mine either, but I bet you wouldn't mind owning gold. Same thing with Bitcoin, no?

pseut3• 13 years ago

If we needed to buy everything in the US but store all of our wealth in Euros, this would be the right comparison. But since we don't, "stability" means low and predictable inflation for the Euro and the dollar. The exchange rate matters for Bitcoin because wages, goods, and services are all denominated in non-Bitcoin currency. Look at inflation over the same period and you'll see that the dollar really is a "bastion of stability" (in that narrow sense, the Euro is too... but the Euro's got other problems beyond the scope of this discussion that make me reluctant to vigorously defend its stability).

rrrrtttt2• 13 years ago

You're presenting a strawman. The choice for Lybians and Syrians isn't between their local currency and Bitcoins, it's between the local currency, Bitcoin and one of the first-world currencies. And people in the third world have been choosing to hold USD for decades.

In fact your comparison exposes the biggest problem with Bitcoin: it's a solution in search of a problem. The USD has a long track record as the best managed currency in the world. The 70's stagflation debacle was a minor hiccup by world standards, and the current quantitative easing policy is nothing. Why would anyone in their right mind convert their dollars into Internet funny money? I mean, sure, back in 2009 when Bitcoin started, people were panicking having witnessed the Lehman collapse and TARP. But now we know the world isn't coming to an end, so why bother?

tolmasky3• 13 years ago

This is not true, or at the very least, only true of the higher echelons of society. I can't speak about Libya, but in Argentina there are currently currency controls against USD. As a (non-politically connected) Argentinian citizen it is incredibly difficult to hold USD right now. This btw is not new, it happens every time Argentina goes into its ~9 year bust cycle.

I think the issue is that you are speaking from a position of comfort from the US. Of course USD seems fine to you, the US suffers the least in all these recessions. But for people outside the US, they often see their entire life's savings vanish. In Argentina inflation is not something that is only academically talked about, it has a real effect on every day life, the government understands this (and exploits it), and thus works hard to prevent everyone from fleeing the currency. Bitcoin does offer a real new alternative in this regard. Whether it will prove to be any better is admittedly an open question, but the idea that USD is some saving grace for foreigners is naive.

brown9-2• 13 years ago

Are these movements different than a historical norm? You provide numbers with no context - it seems as if a movement of 100% in 6 years is meant to be shocking because 100% is a big number.

mrharrison• 13 years ago

"The first is just that it’s a bubble, and any chart which looks like the one at the top of this post is bound to end in tears at some point."

Wow very scientific, over time any hockey stick can look like a bump in the road.

aethertap• 13 years ago

Yes, what you said. Bitcoin is just getting started, so it seems reasonable to think that the slope from "none" to "some" might be both bumpy and steep. Does anybody know of a good source of data for the exchange rates of other currencies when they were in their infancies? That could make an interesting comparison.

I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.

walru• 13 years ago

Regardless of what I think about Bitcoin's longterm significance in the world. I feel this spike in Bitcoins's price might just be Russian mobsters making their money back after the Cyprus nonsense. The timing between the two events is just too convenient and this whole run-up smells like a classic pump and dump from my dot-com trading days.

GnarlinBrando5• 13 years ago

I thought a lot of that money was accounted for coming out of branches of Cypriot banks that remained open in the UK and Russia.

Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology.

Sort of the price we pay.

Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.

arithma• 13 years ago

Let's enumerate the grand possibilities filtered by an increasing bitcoin value versus dollars (without predicting small-time-scale changes): - Bitcoins will grow to a peak and then decrease to a much smaller value

- Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally.

- Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm.

I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet.

On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).

iSnow• 13 years ago

More possibilities:

- Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants.

- BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers

- The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.

skore3• 13 years ago

There are a couple of core points that this article seems to get completely wrong about bitcoin. I'm certainly no expert, but quotes like:

> the perfect digital currency: they’re frictionless, anonymous[...]

seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.)

> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities.

I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?

I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.

> And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.

Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation?

Finally, a lot of the arguments employed seem rather shoddy.

This is the argument against being your own bank:

> In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.

This is the argument trying to discredit bitcoins principle of mistrust:

> 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.

So far so half-good...

It’s nihilistic[...].

Nope, does not follow.

> I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system.

The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many".

I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.

jeremyjh2• 13 years ago

> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities. I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?

Would it be better to have government responsible for most investment ? I don't really care about consumers hoarding their cash - they'll buy the things they really need or want. But I am concerned if investors are better served by hoarding than by demand deposits or any other kind of debt instrument. This could drive up interest rates to unprecedented levels. Higher interest rates mean higher cost of goods and thus higher costs for consumers.

skore3• 13 years ago

I'm really no expert on finance, which is why I put up my question as that.

Your reply actually raised more questions than it answered. I get that high interest rates are bad for a market that is built mostly on credit and I can kinda-sorta see how that would slow down an economy. But I don't see how that completely eliminates investment.

At some point, people have to exchange goods. People have labor to provide and goods to sell and services that they need provided and goods to buy. How is credit the only thing that enables that? Or is the argument that only credit enables it at the level that we see in current day capitalism?

dragontamer4• 13 years ago

Higher interest rates will correlate to higher inflation.

So on the contrary, Bitcoins are a deflationary economy. Deposits will have a negative interest rate (ie: holding your money in a bitcoin bank will correlate to fees), and borrowing BTC means you only will have to return bits of it. (ie: if I borrow 100 BTC from you today, I only will have to repay you 75 BTC two months from now).

It is only fair, as people learn to expect BTC to keep growing in price.

I don't think its a very healthy economy to be in, but its a completely different endgame scenario than what you describe.

GnarlinBrando5• 13 years ago

Don't forget that bitcoin can be broken down into arbitrarily small fractions. It caps, but it can still grow by being traded in increasingly smaller values. Which I don't think we really have an economic model for.

And yeah, the author seems to miss a lot of the things in the bitcoin website. The whole thing presumes there are unforeseen consequences, that something will replace or complement it, and that it will be remarkably volatile for some time. It is first in breed and very well aware of that.

skore3• 13 years ago

> Don't forget that bitcoin can be broken down into arbitrarily small fractions.

Yeah, I too found that to be conspicuously missing in the article.

jcfrei• 13 years ago

>I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.

With productivity steadily rising in the developed countries it's gonna be tricky employing 6 billion people. as an example: if all the farmers were as productive as US farmers, we'd need to employ about 0.3% to feed the world. a lot of the "useless" products and services (think about the back office of your local government, which is printing documents, scanning them again and the typing them into a computer form) actually employs a large part of the population - have you thought about the implications if 90% of the population is not required to work?

We need inflation, we need people who keep spending their money and hence we'll ultimately need some sort of devaluation. A possible scenario: inflation will be introduced by new cryptocurrencies, which broaden the monetary base. hence it's ultimately the consumers who will steer the rate of inflation (and the adoption of new crypto currencies) and that seems to me like the most democratic thing that ever happened to a currency.

deelowe• 13 years ago

> I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.

It's an issue with macro economics, not the individual. Sure, having people buy less useless stuff is great, but they all still need to agree on a medium for exchange, else doing anything with currency becomes impossible. Individuals buying and selling goods and services don't make currency markets, money flowing through the exchanges does. Market prices are set mostly based on leading indicators from these transactions. When a currency starts deflating, these numbers start looking bad. This is when things start to snowball. Currency worth more tomorrow than today? Stop exchanging BTC for USD(or any other currency). Investments going south and BTC doing well due to scarcity? Then pull out of the markets and hoard BTCs. Market crashed? Get all your BTC out of the bank. At a certain point it all falls apart and everyone is left holding worthless digital currency. This happened before with the great depression and has been studied in great detail. Hence the movement away from the gold standard. Again, very little of this has anything to do with buying TVs and stereos(micro vs macro economics). People don't really need currency to do that anyways. Currency is needed for the exchange of derivatives(specifically debt, AKA loans).

tlrobinson2• 13 years ago

"But trusting someone else to look after your coins requires the very trust that bitcoin was designed to circumvent."

Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose.

I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.

paul• 13 years ago

The shape of the graph proves it's a bubble? I don't own any bitcoins, but this kind of silly fud makes me think I should buy some...

wcgortel2• 13 years ago

Generally in financial time series, any exponential growth is indicative that something is growing "too fast." It has a better than "pure luck" shot at being right eventually when applied to stocks, but is misapplied when used on fiat currency....There is no constancy underlying the asset.

Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.

alexmat2• 13 years ago

It's only hard to define what a bubble is if you're an armchair economist. Traditionally a bubble can be defined as:

"A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."

waterlesscloud2• 13 years ago

http://www.paulgraham.com/growth.html

Shinkei• 13 years ago

"rather than burying $1,000 under a black volcanic rock in a dry stone wall next to an old oak tree"

Shawshank Redemption.

danielweber5• 13 years ago

The next example was of Rep William Jefferson. http://articles.chicagotribune.com/2006-05-29/news/060529020...

avaku• 13 years ago

Is there a way to short bitcoin?

Ntrails• 13 years ago

You can look for a natural short, attempting to reason something that is intrinsically linked. A good place to start would be the last bitcoin crisis and crash, and how did the gold market (for example) respond if at all.?

Most likely we have no good data and you'd be making educated guesses.

mikeburrelljr• 13 years ago

Yes.

Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/

ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/

Goodluck.

jellicle2• 13 years ago

Bitfinex is incorporated in Hong Kong. Let us suppose you make a $10,000 wager with them, and they take your money and close your account and ignore your emails.

How do you suppose to get your $10,000 back? Hint: you won't.

"ICBIT currently is in process of incorporating in an offshore jurisdiction."

Even better.

codesuela• 13 years ago

Is this becoming a joke or something? In every god damn Bitcoin thread there is a very smart person who always asks the same question. If you are so serious about it why not just use Google?

https://encrypted.google.com/search?hl=en&q=is%20there%2...

there you go.

https://www.hnsearch.com/search#request/all&q=way+to+sho...

FYI asking this question does not make you seem like a financial genius nor is it a witty reply.

zecho• 13 years ago

It is a legitimate question, though, with an answer that is yes you can, in theory, but no large markets currently support it, and the ones that do don't allow naked shorts.

As mentioned elsewhere in the thread, two that allow shorting look pretty sketchy.

So I guess it sort of is a joke. When do the markets for bitcoins start acting like actual markets instead of hype machines for bitcoins?

trusche• 13 years ago

> Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions.

If only.

Glyptodon4• 13 years ago

Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrage mechanism. However, outside of that argument, I think there's a more fundamental problem.

As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.'

Meanwhile, total global economic output is around $7.9e14 USD.

Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.)

Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small.

In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base.

That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price.

I'm not sure where things will go from here, but I'm sure it'll be interesting.

altertoad2• 13 years ago

Deflation is a good thing

Glyptodon4• 13 years ago

Why?

I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)

pbreit2• 13 years ago

The article makes a decent case that it is not. Care to elaborate?

fnordfnordfnord7• 13 years ago

Berkshire Hathaway BRK-A doesn't seem to have been harmed by not being watered-down.

SkyMarshal• 13 years ago

It's not a currency either.

tlrobinson2• 13 years ago

The protocol is malleable (the majority of miners need to agree on changes) and can be migrated to use sub-Satoshi units if necessary.

Glyptodon4• 13 years ago

So bitcoin miners as a whole become a de-facto central bank based on majority adoption?

That's actually a very interesting possibility.

redman25• 13 years ago

It's happening right now where the majority of the world's ISPs and companies are switching over to IPv6 (as a comparison).

saalweachter• 13 years ago

You're implicitly assuming that everyone holds all of their BTC for one year before spending them.

To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value.

Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC.

Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.

notahacker• 13 years ago

Why make a "realistic estimate" without reference to actual figures?

US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion

i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP)

Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.

Glyptodon4• 13 years ago

You make a good point in noting that I didn't address the issue of short term holding and possible frequent circulation. It would certainly seem to make the valuation of a bitcoin smaller.

That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high.

Does anybody have any idea what the rate of bitcoins being 'stranded' is?

NateDad• 13 years ago

Why is 37 cents too large for the granularity of a currency?

In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage.

Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.

altertoad2• 13 years ago

It can't be a bubble if it's not inflated. There's no real inflation in bitcoin there is though deflation which is a great thing. It's how all monetary systems should be

fnordfnordfnord7• 13 years ago

>Those strengths are also weaknesses. No one wants to risk losing millions of dollars worth of currency overnight, just because they were outsmarted by some computer hacker.

Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.

jellicle2• 13 years ago

You may want to read up a little. People did and do abandon banks en masse if they suspect their money is not safe.

"The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers."

http://www.fdic.gov/about/history/index.html

http://en.wikipedia.org/wiki/Bank_run

fnordfnordfnord7• 13 years ago

Yeah, I've heard of the FDIC, it's no magic bullet, and it wasn't created to insure people getting mugged in the street.

michaelochurch6• 13 years ago

The problem: debt currencies from nation-states are slowly going obsolete. Very slowly, so don't jump the gun on a bad idea.

Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed.

Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you.

In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like.

How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them.

With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail.

There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally.

Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.

hcho• 13 years ago

Your point about copycats is moot. There's already a number of offshoots of bitcoin and they don't seem to matter.

Creating Zoogle, Foogle, Poogle and Loogle is kind of trivial at this day and age, and many people have a go at doing that. None of which seem to take away anything from Google.

michaelochurch6• 13 years ago

Oh sure, and Bitcoin will always be the first.

That said, do you remember the first search engine? I don't. I'm sure I could look it up, but it's irrelevant.

There will be demand for something like a cryptocurrency. I doubt it will be Bitcoin. Once people realize that it was set up to transfer wealth to early adopters, they're going to hate it and Bitcoin will have a real brand-image problem. It might overcome that; who knows? I'm just saying that it's too speculative to take it seriously as a currency.

mapgrep3• 13 years ago

>"we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it."

Is this really a new condition?

>"The new currency... will be some proof-of-work model related to technical talent"

So other types of talent will all be secondary to technical talent? That would be quite a revolution, even with a 65-year timeframe.

michaelochurch6• 13 years ago

Is this really a new condition?

Actually, yes. In less than 20 hours (probably) I'm going to release a gigantic blog post (the 2nd-to-last in my Gervais/MacLeod series; I'm finishing that up because I have technical projects I want to start and will probably be starting a new job soon) that gets into the economics of it.

Essentially, convexity pertains to work that's hard and where the maximal possible performance isn't well-defined. Now, Sharpe Ratio (ratio of yield to risk) is an affine exponential that decays as the work gets harder. In other words, it's exponentially favorable for easiness on concave work, but for convex work (no matter how difficult) the yield/risk curve is almost constant.

Old, industrial work: favor concavity because the limiting factor is how much capital you have to put at risk. Though convex work has more yield, it's yield-per-risk is unfavorable.

If work is concave, we can define "perfect completion" (it's a commodity) and machines can be programmed to do it. So they're pushing us out of that. The convex work is all that's left for humans. It won't all be technical; there is convex service work.

Financial risk (not smart people with good ideas) was the limiting factor for old-style industrial processes, but all that concave work is being given over to machines by the convex labor of programming them. With convex work in the technological era, the Sharpe Ratio is constant and irrelevant. Your limiting factor, instead, is the time and attention of the highly talented people capable of doing (usually specialized) convex work.

Check my blog in about 6-18 hours and there'll be more on this topic than you'd ever want to see.

tbrownaw2• 13 years ago

Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. [....] You were rich if you had gold and could defend the land you had and get more if needed.

...because weapons made out of gold work so very well?

redblacktree6• 13 years ago

No, but a gold coin buys a lot of swords and pays a lot of soldiers.

This was typically because gold was required to pay taxes.

reaclmbs• 13 years ago

"The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency."

Yep..

phusion• 13 years ago

Interesting article... but what blew me away was the page itself. Is this a CMS or a custom job? It looks fantastic.

polarix4• 13 years ago

https://medium.com/about/9e53ca408c48

ryusage• 13 years ago

> how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next

I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.

fab13n• 13 years ago

Again this deflation misunderstanding...

Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them.

As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies.

As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health.

Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500.

Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend.

And anyway, when was the last time economists accurately predicted anything but the past? :)

redblacktree6• 13 years ago

Gold was also deflationary, when it was used as a medium of exchange, so you can't say that "Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected."

Well, you can, but you'd be wrong.

rfugger• 13 years ago

The fact that Bitcoin is deflationary isn't a big deal because you don't need to use it as a unit of account in order to use it as a cheap, fast, and reliable way to transfer value globally. You just need easy ways to convert to and from Bitcoin at either end of payments. Systems like ripple.com will automate this process to a large degree.

EGreg• 13 years ago

http://magarshak.com/blog/?p=148

mathattack• 13 years ago

I liked the article until he got to this point...

"Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million."

This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)

The Bitcoin Bubble and the Future of Currency

Related Stories