The Bitcoin Report 2 [pdf]

https://docs.google.com/file/d/0B2tdZG8OsWtLU1BPbGNPNnc0Unc/edit?usp=sharing

by calciphus • 13 years ago

75 94 13 years ago

docs.google.com

calciphus2• 13 years ago

Background - despite the absurd name, a friend of my posted this (relatively anonymously) to Reddit last night. Unfortunately, it got downvoted into oblivion for not possessing enough cute memes.

The data shows what happens to a currency like this is very predictable, and the behaviors we're seeing (deflation, currency hoarding, stagnation of real bitcoin output) are great predictors of crashes like this.

tdicola• 13 years ago

Nice article--I like that it's concise and sticks to the data to make its point. This article last week from Forbes makes the same point with Paul Krugman's babysitter's co-op column: http://www.forbes.com/sites/pascalemmanuelgobry/2013/04/05/k...

klochner2• 13 years ago

The deflationary aspect is only important for currencies backing an economy - if you just use bitcoin for quick anonymous transactions, say dollar-->bitcoin-->purchase, then you don't care what the value is doing over time.

It is interesting to consider alternatives though - bitcoin could be the Friendster of crypto-currencies.

zdrummond• 13 years ago

This seems spot on to me. Now the question is; is there a way to make money on the coming collapse?

smosher• 13 years ago

That's too bad, it's very convincing. It's important for interested parties to pay attention to this stuff. Ignoring it is just being ignorant in the connotative sense.

It's not absolutely convincing though... I can't succinctly describe all my objections but I will say this though: the correspondence to tulip mania just doesn't hold for me, as the the tonic that drives up the price of BTC is the same tonic that gives them any value at all (simply because it has two attractors, zero and, as the link points out, something huge.) I am of the belief that tonic will remain modulo biases against, so unless that reaches critical mass the push will still be greatly upward.

So the data looks similar in places and for similar reasons in most of those places, but the foundations work differently in many ways. None of what I've said above applies to the tulip situation, and all of it has to do with how it is valued. Consider the attractor(s) for the price of tulip bulbs. When it's going up it's open-ended, where BTC has a closed end. (How well that closed end approximates infinity is a cause for concern of course.)

agilescale• 13 years ago

``Reddit'' is worthy of bashing in many ways, but you are bashing it for the wrong reasons; the reason why the article was downvoted there most surely wasn't because of the lack of image macros, but rather that it ran against the locals (he probably posted it in a pro-Bitcoin subreddit) religious fervor.

You still see them swearing allegiance to Bitcoin and deriding those who sold during the crash, all the while holding on to their, at least temporarily, worthless Bitcoins.

plaxis• 13 years ago

Your friend goes to columbia? It's pretty good. Not perfect, but what is. Great Job!

el_senor_duerpo15• 13 years ago

Ha, um no... That would be nice.

vyrotek• 13 years ago

"There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth. The people who profit will do so by taking from those who lose.

As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid. Eventually, buyers will give up while waiting in absurdly long queues, and demand will loosen. Soon after, things will turn pear-shaped as the world's fastest liquidation occurs. The exchange rate will fall faster than orders can be fulfilled, so that less than $2.5 billion is recovered. After all, it was never really there anyway."

Nailed it.

ctbeiser• 13 years ago

"As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid."

The rest of it makes perfect sense, but why would we think this, rather than that market forces will drive prices up, and people will sell as a result, fulfilling demand?

rhizome2• 13 years ago

market forces will drive prices up, and people will sell as a result, fulfilling demand?

I'm no economist, but I'm pretty sure this state of affairs is not guaranteed.

surrealize3• 13 years ago

If you see it going up, why would you sell? In the deflationary spiral scenario, it'll just keep on going up, so it's in your interest to hold on.

ricardobeat2• 13 years ago

> The exchange rate will fall faster than orders can be fulfilled

Is that possible? In the event of a crash all buy orders will be fulfilled, ordered by price/time. The exchange rate can't move if there are no orders being executed.

el_senor_duerpo15• 13 years ago

Well, here's Mt. Gox today: http://bitcoinity.org/markets/mtgox/USD

And here's what happened on another exchange while Mt. Gox was down: http://bitcoinity.org/markets/btce/USD

Aqueous3• 13 years ago

This describes what happens in the short term, probably repeatedly. But what happens in the long term? Traders learn; they adjust with respect to risk. People will become acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result. People will hold onto the currency longer because they've seen it crash before and recover. The curve will flatten and become a slope. As the rate of deflation steadies and shrinks transactions will begin again. As more and more users flow into the BitCoin economy mass-sellings will have less and less effect because most people who hold the currency will not be responding to short term blips in the price - i.e., day trading. As the volume goes up the chance that a small number of people can destabilize the currency will shrink. There will still be bubbles but they will become cyclic on a longer period, happening on intervals of years as opposed to hours and days, much like in national economies.

samegreatsleeve2• 13 years ago

>Traders learn; they adjust with respect to risk.

Ha ha ha ha

No. Traders learn, and then they die, and are replaced by new traders, who haven't learned.

brown9-2• 13 years ago

Or perhaps the masses will never adopt a currency that requires them to become "acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result", especially when the current status quo offers none of these pitfalls.

InclinedPlane4• 13 years ago

Long term? People stop using bitcoin.

You theorize that the boom/bust swings will diminish in intensity until eventually bitcoin becomes stable.

Others theorize that the boom/bust cycles will grow in severity until eventually everyone just gives up on bitcoin.

So far there's very little evidence for the stability option and a lot of evidence (and economic theory) for the speculative bubble theory.

Do you have any evidence of the "market share" of bitcoin users who are in the market for purely currency reasons growing relative to that of those who are in the market for purely speculative reasons? From everything I can find out it seems as though the reverse is true.

el_senor_duerpo15• 13 years ago

I think it does describe what happens in the long term. Basically, if the thing can never get off the ground in the short term, then it will never get off the ground in the long term. Every surge in popularity has the high likelihood of setting off a speculative bubble. As the rate of increase in the stock of bitcoins decelerates, this problem will only get worse.

anologwintermut2• 13 years ago

Long term someone takes the core technical advances and detaches it from the libertarian economic* ideals and creates bitcoin ++ with a fixedish rate inflationary money supply and maybe some limits on trade volumes to limit volatility. Oh, and you don't use a fucking magic card exchange as the primary way people get into or out of your currency.

*you may or may not agree with those ideals but it probably wasn't the best idea to try a new technical solution to currency and a economic philosophy about currency/central banks at the same time)

el_senor_duerpo15• 13 years ago

Here's the problem. You're talking about traders, but where is the capital? You can't have a financial market purely based on currency speculation. If we're going to talk about bitcoins as though it were an asset (store of value), rather than a money supple (unit of account or medium of exchange), then we need to verify which properties of an asset it possesses.

Do bitcoins provide a consumption utility stream? Do they yield dividends. What sorts of productive risk-taking do they represent? When I buy a stock, it will perform well if the risks it takes in providing mutually beneficial exchange with business and households are successful. For bitcoins, there is no systematic market risk, because there is no capital stock. Why? The same reason as always. Deflation increases the burden of debt which decreases investment, even though the economy is awash in savings.

Our national economies do not possess cycles as you describe them. Here's a good article about macroeconomic business cycles: http://noahpinionblog.blogspot.com/2013/02/is-business-cycle.... While the level of inflation fluctuates in our economy, it does so on a much smaller scale: http://en.wikipedia.org/wiki/File:US_Historical_Inflation_An.... What really jumps out from that graph is how the best economic prosperity the world has ever seen coincides with fiat currency ending the threat of deflation.

zenocon5• 13 years ago

Did he? Time will tell. Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground. There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.) The charts were interesting, but the headline is pure bunk. No one knows -- but one thing is for sure: this is disruptive technology. Bitcoin may not survive, but finance won't be the same hereafter.

dragonwriter4• 13 years ago

> Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground.

In what relevant sense to deflation and its effects is it new?

> There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.)

How are any of these relevant to the incentives created by deflation?

Goopplesoft• 13 years ago

Looks like the title has been changed. For anyone curious it was something along the lines of "Why bitcoins will fail"

illuminate• 13 years ago

"You have to admit this is new ground."

No. It's always "different" ground, same outcome.

hotpockets3• 13 years ago

I don't get this argument. Bitcoin lets you do things you can't do without it. That's not zero sum, that's creating value that wasn't there before. And we are only at the beginning. Pretty much no one understands what can be done with it in the future. Smart property, oracles, etc.

Nursie2• 13 years ago

Such as?

el_senor_duerpo15• 13 years ago

I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the difference and assume that prices in the bitcoin economy adjust relative to the spot price, so that the real exchange rate is one-to-one. The problem isn't with the utility of a crypo currency in the abstract. It's that this will never come to fruition with built-in flaws like deflation, which inevitably lead to bubbles.

mattm• 13 years ago

> Nailed it

Can you point to a specific event in history where this actually occurred? Because so far all I've seen are people theorizing what will happen in this situation. Your argument would carry more weight if you backed it up.

SilasX2• 13 years ago

So people haven't priced their knowledge of the limited supply of bitcoins into their bids? They're too stupid to realize growth will slow asymptotically despite this having been announced years ago and built into the protocol?

Are you the kind to suggest "hey, I know how to make money! Invest in hot dogs like, right before the 4th of July, and then sell right after!"?

flyinRyan2• 13 years ago

>There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth.

So like 90%+ of what the stock market does then?

el_senor_duerpo15• 13 years ago

Sure, lots of the stock market is arbitrage. While bubbles form in different markets, they are all eventually followed by a correction. The problem with bitcoin is that there is no fundamental asset underlying the currency. So when there's a correction, there's no sense of where the bottom is.

hisabness• 13 years ago

looks like a high school homework assignment to me.

jfasi• 13 years ago

Checkmate, bitcoin doubters!

calciphus2• 13 years ago

So post a response where you address the issues raised and refute them with sound theory and provable hypotheses.

Until then you're just waving your arms.

el_senor_duerpo15• 13 years ago

Would you prefer I write in in LaTex and using fancy graphs from Matlab, R, or Matplotlib? Or are you just being mean?

bitcoinmind2• 13 years ago

Please, at least attempt to prove some of the wild predictions you are making. Science is about proofs, facts, etc. ... not just assertions.

ricardobeat2• 13 years ago

Does it even make sense to consider Bitcoin as a separate economy containing "no real value"? I see it more as an alternative banking system, the money it contains comes from real-world value and gets converted back into real-word products; it's not a virtual currency.

samegreatsleeve2• 13 years ago

It's only a separate economy to the extent that it isn't instantly being converted back into some other currency.

There is a genuine bitcoin economy, and it is centered around the trade of goods that are illegal: child porn, weapons, viruses, credit card numbers, and most important of all: illegal drugs.

The question is not whether there is potential for a non-government backed digital currency. The question is whether bitcoin will be effective in that role given the design of the currency.

If a better currency is invented that includes some kind of inflationary mechanism, perhaps the drug trade/etc will take up that currency. In that case bitcoin truly will die.

matthew-wegner2• 13 years ago

I think this is a hugely important distinction. The linked-to analysis seems to assume that BTC are bought with USD, sit around in a wallet, and then come back out as USD.

When in fact, BTC's usefulness is its frictionless-but-secure, anonymous transactional nature. Its anonymity is even stronger if you mine coins yourself (or acquire coins directly from a miner for favors or whatever).

You can probably make the case that BTC must be deflationary, in order to draw in traders/investors, who actually provide necessary market liquidity to proxy BTC as USD, backing the worth of BTC-for-goods transactions...

Nursie2• 13 years ago

It's not really anonymous though, transactions are publicly recorded for all time. It's also not 100% frictionless. There are fees and though they are currently low, they are there.

DanBC2• 13 years ago

Bitcoin is not anonymous.

(http://anonymity-in-bitcoin.blogspot.co.uk/2011/07/bitcoin-i...)

(https://en.bitcoin.it/wiki/Anonymity)

carmaa• 13 years ago

A "report" not covering the greatest current use case for the currency - namely anonymously buying weed through the Internet tubes? Not saying it is a good thing, just that there's actual value creating going on. Right now.

el_senor_duerpo15• 13 years ago

Hi there. Actually, I did cover value of Bitcoin in use as a medium of exchange in footnote 2. Because there is no production in the bitcoin economy, or very little to be entirely accurate, the real exchange rate should basically be one. Why? Because most users of bitcoin live within very large production economies. Why would buyers pay more or sellers accept less, if they would be better of transacting in the domestic economy?

You might imagine a slight premium for bitcoins because they facilitate transactions that would be difficult in the domestic economies, such as money laundering or black market trade, but you could just as easily argue that the real exchange rate is less than one due to the relatively lower number of people to trade with, concerns regarding being hacked, and uncertainty regarding future government regulation of bitcoin. That's why I decided the most neutral approach would be to assume purchasing power parity across bitcoins. Admittedly, this assumption may not be great as speculation runs rampant and everyone runs for the exits, which would imply a heavy discount in the real exchange rate.

johndevor• 13 years ago

money laundering or black market trade

Moving money across borders is an use for Bitcoin as well. If you're living in Iran (or North Korea or Syria or Palestine) Bitcoin could very well solve your liquidity problem, in the same way the TOR network helps to solve a government-imposed-firewall issue.

polshaw2• 13 years ago

The value of BTC just doubled from 60 to 120 in 40 minutes.. wtf is going on there? (looking at btce/USD)

(disclaimer: i'm not trying to hype, I expect it will come back down again shortly, it just seems weird to change that much that quickly)

Edit: yup.. back down to 80 20mins later.. can anyone tell what kind of volumes were traded in this period? ..I wonder if anyone was able to double a serious amount of money in 40 mins(!). Or how much money would have been needed to shift the price that much?? I suspect trading volumes are lower than normal due to mtGox being closed.. I really am having doubts that closing to let things 'cool down' is really going to work out (side: why should that even be a role for MtGox anyway?!).

Anyone have any thoughts on what will happen when it comes back online? Presumably a lot of people are only registered to trade with mtGox so have been prevented from buying/selling while the price has continued to fall.. it would seem to me we're either going to see a significant worsening of the crash or a recovery. ??

ghshephard• 13 years ago

spits out coffee

I just went to https://btc-e.com to copy/paste the value and show you how you were wrong, and that the price has been stable at $65USD (I've been watching it for an hour) - But, when I got there - had jumped up to $115USD.

I can only imagine this must be what it was like during the Tulip Bulb Craze.

maxerickson3• 13 years ago

Mt Gox went back online about 80 minutes ago. So about 40 minutes before your timestamp.

mrb• 13 years ago

The volatility is there because people are panicking, don't know what to do: buy or sell. Some think the bubble is imploding. Some believe in the long term and are buying coins on the cheap. And in between you have traders like me: I sold at $190 2 days ago. Re-bought at $70. Re-sold at $120. We are making money hand over fist... I love the volatility.

rms• 13 years ago

It's really low volume. Check out the crazy spreads on https://tradehill.com/

I think we'll stabilize around 100 over the next 48 hours but with crazy degrees of volatility.

waterlesscloud• 13 years ago

Interesting statistic- Bitcoin Days Destroyed skyrocketed during this crash.

http://blockchain.info/charts/bitcoin-days-destroyed

BDD measures how many "old" coins are being moved around, so it seems likely that a lot of early adopters cashed out this time. Will be interesting to see what that means for the future of the BTC itself.

maxerickson3• 13 years ago

It provides some information about the dwell time of coins. It's hard to see through it and say much about just how old the coins trading are. It doesn't take all that many old coins to get to 50 million BDD (~ a weeks worth of 3 year old coins...)

My rough calculation is that there are more than 5 billion bitcoin days outstanding, so there is still plenty of room for a wild stampede.

tquai• 13 years ago

The market is capitalized at $2.5 billion, but what does that mean in an economy with no production?

Does the author define "production" as manufacturing where the exclusive currency used (for raw materials, wages, utility bills, etc.) is bitcoin? If so then I'm not sure of the relevance.

One could make all sorts of clever but offtopic points about a fiat paper currency when viewed through the lens of a P2P currency like bitcoin. "The Canadian dollar is supposedly worth more than the USD today, but what does that mean when the Canadian network has zero nodes?" The wrongness of such a statement leaps out since fiat currencies are familiar to us. In contrast, bitcoin doesn't need a manufacturing base, but this is less obvious since P2P currency is a new idea that people (myself included) don't well understand.

el_senor_duerpo15• 13 years ago

No, production is not exclusive to manufacturing. It means valued-added. For example, if you bought a dvd from amazon using bitcoin (I have no idea if this is possible), then very little of what you paid would count in bitcoin GDP. All of the costs of production (warehouses, delivery, labor, servers, etc.) are done in the US economy using dollars, so that basically doesn't register as bitcoin GDP.

On the other hand, let's suppose someone is buying a bag of... something. Well, everything that got that bag to the dealer was done in some other production economy. So the only value added, that would count as a service in bitcoin GDP, would be the dealer's profits, measured in bitcoins.

To my knowledge, there are no investment projects being financed in bitcoins. If there were, then they probably just defaulted on their loans, which increased tremendously under deflation. Therefore, it's best to think of the bitcoin economy almost entirely as pure exchange, with very little value added and very little wealth created.

As for fiat currencies, why is everyone so interested in the nominal exchange rate anyway? This was a peculiarity that I noticed a while ago. In college, I went on a study abroad program to Mexico. When we arrived, we all exchanged our dollars for pesos. Everyone was carrying on about how strong the dollar was, because one dollar could buy ten pesos. But then I noticed something. I went to McDonalds, and instead of a "dollar menu", they had a "10 peso menu". Who cares how many pesos you get for a dollar? It's about how much you can buy with that dollar worth of pesos, and that's measured by the real exchange rate. I realized at that moment that purchasing power was much closer to parity than most people think, because they put so much weight on nominal rates.

bitcoinmind2• 13 years ago

What a bunch of nonsense. The report makes extreme predictions without any backup or weighting of arguments. There is no reason to believe that the network should crash.

The author has no clue about economics, so please.... (not that Ben Bernanke or Mario Draghi have, but anyway).

There will always be a use for Bitcoins. Think about other countries than you yourself are living in. Think about people who have to pay 20% for cross-border transactions.

mortehu• 13 years ago

> [...], sudden and large increases in the user base cause dramatic increases in the nominal exchange rate. This is because the money supply is exogenously fixed by the mining algorithm.

I think the reasoning here is too specific. Most currencies are only inflationary long term. If during a 10 day window a trillion euros flood into the US dollar market, I doubt the Fed will be able to respond fast enough to keep the prices fixed.

el_senor_duerpo15• 13 years ago

First of all, if our actual markets started to experience this kind of volatility, circuit breakers would kick in.

Second, even if they didn't the Fed could easily respond in real time. It's not as if the Fed actually, literally "prints money". They would just go onto those forex markets and sell people dollars, transferred digitally and made up out of thin air. And their servers wouldn't crash while doing it.

Edit: I should add to this that, at least to a first approximation, the Fed is not terribly concerned with the nominal exchange rate. They are charged with maintaining full employment and price stability within our own economy, while the nominal exchange rate is allowed to float against other currencies. Because have have our own production economy, there are good fundamental reasons for fluctuations in the real exchange rate that should be permitted to occur.

stevewilhelm• 13 years ago

It appears Bitcoin's primary function, namely to perform anonymous transfers of US dollars for goods and services, is being eclipsed by speculation.

Welcome to the world of foreign currency exchange.

The Bitcoin Report 2 [pdf]

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