Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm

http://www.nytimes.com/2013/04/08/business/media/bubble-or-no-virtual-bitcoins-show-real-worth.html?pagewanted=all

by mrb • 13 years ago

93 77 13 years ago

nytimes.com

MacsHeadroom• 13 years ago

I have it on good authority that this article will be in the print edition in the morning.

genericone• 13 years ago

Can be verified at the bottom of the article linked with the following text:

"A version of this article appeared in print on April 8, 2013, on page B3 of the New York edition with the headline: Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm."

ultimoo• 13 years ago

However awesome bitcoins are, I wonder how much longer till wallets can be securely stored online, and the technology is simplified to an extent that my barely computer-literate mother can understand bitcoins.

tudorizer2• 13 years ago

Quite a long time to go, but that's ok. How quick did such a mother adopt credit-cards?

throwawayG93• 13 years ago

Bitcoin needs more security than credit cards because transactions are irreversible. Say his mother has a significant part of her savings in BTC, and they get stolen. What's she gonna do then?

AndrewDucker2• 13 years ago

I'd love to get an economist studying why the value of bitcoins goes up.

After all, they're infinitely reusable, totally fungible, and incredibly low friction. The only reason for their value to rise (rather than them just being passed around at the same price indefinitely) is if people expect them to rise, or if there's a shortage (forcing people to use fractions of a bitcoin to represent the same number of dollars as a whole one used to).

Is the cause largely the latter, or the former? Has there been a high enough rise in the transaction volume to explain the rise in value? Or is it all down to investors?

brc2• 13 years ago

You've answered your own question. It is all of the above.

The price system in any market factors in all of the information and motivations of the participants, and balances them out with a single value : the price.

The killer feature of the freely-trading market is the price. It communicates the state of the market as both an input and an outcome of the actions of the market players.

Remember that for any exchange to occur, two things of unequal value have to be exchanged by two willing participants. But the inequality between the items being exchanged is in the eye of the individual holder. The motivations are rarely the same for each participant, so you can never actually make blanket statements about why a market moves where and when it does - very rarely does a single issue dominate a price, because in those circumstances you have a market that stops exchanging if everyone has the same view.

Tenoke• 13 years ago

>I'd love to get an economist studying why the value of bitcoins goes up.

Great sarcasm there!

skylan_q2• 13 years ago

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

http://mises.org/daily/1333

From a theoretical perspective, this is been the clearest elucidation to me. The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future.

Like I tell people: people who buy and sell bitcoins don't care that you don't want to participate. They just want anyone else who will participate.

danielweber12• 13 years ago

The reason the value of bitcoins is going up is because people who buy bitcoins expect that others will pay a higher price for it in the future.

That has a much shorter name: http://en.wikipedia.org/wiki/Greater_fool_theory

The price of the Mona Lisa won't go down because the art community won't let it. It can do that because there is only 1 Mona Lisa. Such a force doesn't exist with Bitcoins.

brc2• 13 years ago

Good link. This particular paragraph struck me:

"Menger's theory avoids all of these difficulties. According to Menger, money emerged spontaneously through the self-interested actions of individuals. No single person sat back and conceived of a universal medium of exchange, and no government compulsion was necessary to effect the transition from a condition of barter to a money economy."

If Bitcoin is to be a success, it is the polar opposite of the origins of money. Instead of developing naturally as a more efficient means of exchange, it has had to be designed top-down in order to work backwards against all the cruft that fiat currencies have collected - features that would have prevented the original money from ever being widley adopted.

executive• 13 years ago

or organized crime have started using Bitcoin en masse to move (drug) money out of developed markets back home.

deepblueocean• 13 years ago

I'm pretty sure the exchange price of Bitcoins is driven by the marginal supply and demand. So I think it's got to be what you call "investors" almost entirely (note that not all people buying in have to be speculators: if lots of people suddenly decided they'd rather have some Bitcoins because they want to use them, that would suffice).

So the question is how are the marginal supply and demand determined? The marginal demand is subject to spikes in interest, media coverage, the Cyprus crisis (I really doubt the latter is meaningful but perhaps it makes people everywhere think they want to move out of bank deposits. People certainly attribute things to it). The marginal supply is based on (1) mining, which happens at a fixed rate and (2) people who wish to exit Bitcoin, which is subject to lots of whims.

Lots of evidence shows that most Bitcoins are hoarded, so it's possible that what we see is just a supply crunch - nobody wants to sell their Bitcoins and some people want to buy. I suppose the natural way to answer that is to go look at historical exchange volume across all the exchanges (or, as a first-cut proxy, just Mt. Gox).

eric_bullington• 13 years ago

Can you please show me the evidence you mention that shows that most Bitcoins are hoarded? I'm genuinely curious -- the main metric I'm aware of is Bitcoin Days Destroyed, and that metric seems to show that hoarding is actually steadily decreasing over time.

kruhft7• 13 years ago

The value of bitcoins goes up because the entire system is a store of value. When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system. Due to supply (limited) and demand (increasing), the amount real currency needed to purchase a unit of Bitcoin is going up. This transfer of value can be due to hopes of appreciation (speculative investment, possibly causing a bubble) or lack of faith in a base currency (hedging wealth, as is happening in Europe).

Since our monetary systems are now based on little more than unbacked faith and look to be failing in various ways, people are looking to put their wealth into something they feel they can trust and that might have more of a future than current fiat systems. Given the decentralized lack of control of Bitcoin and the rise in the current lack of trust in the offical financial systems, the rise of Bitcoin makes as much sense as the present rise in the value of gold, a traditional hedge of value and original currency backer. Now that people are now used to storing value in non-backed, faith based monetary systems, Bitcoin is the first fiat monetary system that has no ruler, and people are transfering their government backed faith based store of value into it. It can be thought of a democratic store of value, and as more people believe in it the more value it will have.

tptacek• 13 years ago

Yes. Bitcoin is the first fiat monetary system that has no ruler. Also, it has repealed the law of parsimony (haven't you heard, on the Internet, there are no laws).

So it's totally not the case that Bitcoin is going up because Bitcoin is going up, and people are bidding up its price on the expectation that the peak is nowhere in sight, and they'll make a tidy profit off later speculators.

Because the Internet has upended all the normal ways of doing things, just like it did for Sealand (remember those message board threads?), it doesn't matter that economists look at the price chart for Bitcoin and say "uh, that is a bubble", and then "also, bubble or not, that is not productive behavior for a currency". Nor does it matter that Bitcoin mostly buys you donations to extremely independent bands, tips for blog tip jars, "Avalanche Spa Powder Not For Human Consumption", and highly marginal web hosting. No, the price makes perfect sense: people can't trust the US dollar, which reliably purchases cars, air travel, thai food, houses, Macbooks, chest freezers, pork chops, chlorinated trisphosphate, tuition at Stanford, roofing shingles, dirt, methamphetamine, hookers, and guns. Not just here, but pretty much everywhere in the world.

It's definitely not because if the current price for Bitcoin makes no sense, it's not going to matter whether your online wallet gets hacked and all the Bitcoin stolen, because you've already lost 80-90% of your investment anyways.

danielweber12• 13 years ago

When bitcions are bought, people are transfering "real" value (USD or any other government backed currency) into the Bitcoin system where the value is being held. When they sell Bitcoins they are removing value from the system.

These two sentences may be the perfect summary of how misguided the Bitcoin community is.

There is no value transferred into or out of the Bitcoin system when people buy or sell Bitcoins from each other. AAPL doesn't get money when I buy 1 share of AAPL from someone and they don't lose money when I sell 1 share of APPL to somebody. Because every purchase of AAPL is also a sale and every sale is also a purchase.

DigitalJack• 13 years ago

So, what happens with the mining task after all the bitcoins have been introduced?

AndrewDucker2• 13 years ago

Mining is also used to register transactions. The miners gain from this by charging a small fee per transaction.

lmm• 13 years ago

It follows an exponential decay curve, so we'll never mine the last bitcoin; rather, each year we mine half the ones that are left. (I'm not sure how the quantization works when we do get to the literal last one, but that's many decades away).

martindale• 13 years ago

2140. Roughly the year we'll hit this point.

ph0rcyas• 13 years ago

Bubble or no, from a personal perspective I will not use bitcoin as a currency to exchange goods - things like purchasing items or paying salaries. Bitcoin's value is just too volatile, why would I pay someone a certain amount in bitcoins, when it'll probably rise up to 10 times the current value in a few weeks? But as a medium for investment, like buying stocks, bitcoin does provide a novel and alluring option.

eurleif• 13 years ago

>why would I pay someone a certain amount in bitcoins, when it'll probably rise up to 10 times the current value in a few weeks?

Why would you pay someone a certain amount in USD, when you could buy Bitcoins instead and they would probably rise to 10 times the current value in a few weeks?

epaga3• 13 years ago

This is the best counterargument to the tired old "Bitcoin is deflationary" I have ever read, and you did it in a single sentence. Thanks!

brazzy3• 13 years ago

> why would I pay someone a certain amount in bitcoins, when it'll probably rise up to 10 times the current value in a few weeks?

Thanks for being a living example of the chilling effects of deflation.

yebyen• 13 years ago

There is an easy answer. Because you need it, and you've invested in Bitcoin (to the extent where you can't get what you wanted to buy without selling some bitcoins.)

Otherwise, with the trend as it is, I think you're right! Hoard your bitcoins and don't cash them in until you've spent every US dollar and don't have any more.

How many people have that kind of confidence that the bubble will continue to grow?

Will you bet your mortgage payment on it? I have kept a meager bitcoin savings, but every time I cash out I regret it, and I am getting used to that feeling. And as time goes on, that meager savings begins to look more and more like a full month's expenses in the bank.

Afraid that some day soon I will regret not cashing out when the price of BTC was so high. Oh well, knock on wood that day is not today.

8bitpony2• 13 years ago

Is there any possibility of another virtual currency - a Bitcoin competitor - being created? Surely this would have a big impact on the value of Bitcoin.

swinglock• 13 years ago

There are many.

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

8bitpony2• 13 years ago

Do you know if any of these are likely to reach the heights of BitCoin anytime soon, or are we a while off that?

davidjohnstone4• 13 years ago

There have been a lot of alternatives[1] spring up, but as far as I can tell, they're all very similar to Bitcoin, so none of them solve big problems that Bitcoin doesn't already (variations include mining being not so biased towards GPUs/ASICs and small changes to the way blocks and coin supply are handled). Fundamentally, they're all variations on the same theme.

If a new currency was developed that solved some of the big problems that Bitcoin has[2], possibly by working in a fundamentally different way, I can see that currency becoming the dominant digital currency.

1. https://en.bitcoin.it/wiki/List_of_alternative_cryptocurrenc...

2. People disagree on this, but I would list things including its deflationary nature and its fragility (human error can cause vast losses in a way that traditional banking prevents). On the other hand, a currency that really was anonymous would serve a purpose too.

icebraining• 13 years ago

Can you expand on the fragility issue? Are you talking about the lack of chargebacks/reversing transactions?

myspace• 13 years ago

I'm surprised so many people in the tech community have fallen for this Ponzi Scheme. For example, many heard about "some guy bought a $25 pizza with 10,000 bitcoins", but no one has thought about what this means. It means someone now has that 10,000 "coins" (which is close to 2'000,000). This also means someone had this amount (and possibly much more). And, finally, no one questions who posseses the first "coins". That's why the creator is anonymous. Just my 2 cents.

ramblerman• 13 years ago

Click this guys name.

30 minutes old and he has posted this same blurb word for word on every post regarding bitcoins.

Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm

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