How Bitcoin Could Become a Viable Currency

http://finance.yahoo.com/blogs/the-exchange/bitcoin-could-become-viable-currency-163337407.html

by scottcanoni • 13 years ago

48 63 13 years ago

finance.yahoo.com

jdmitch• 13 years ago

Is the volatility graph of Bitcoin in this article really representative?

Some people have mentioned that in the huge price spike in April, there were not actually that many people buying, and then there is this article on Bitcoin spreads that calls into question whether Mt. Gox is the best measure: http://www.forbes.com/sites/beltway/2013/09/03/how-bitcoin-s...

aqme28• 13 years ago

The spreads are so weird because of the difficulties with fiat currencies. Mt. Gox allows you to deposit/withdraw BTC no problem, but it charges a notorious premium if you want to withdraw USD. As a result, the BTC-USD prices are elevated by the premium.

Sites like Coinbase or Bitstamp that don't charge as much to deposit or withdraw will probably be a more accurate way to judge BTC-USD.

chris_mahan• 13 years ago

Actual coins? That I can use at the store and in vending machines? That I can use at the restaurant to buy food?

dublinben• 13 years ago

I think a BTC-denominated debit/credit card would actually be the real sign of its mainstream viability.

The transaction speed is an issue for physical purchases too. Only checks take longer to clear, and they're pretty marginal.

ufmace2• 13 years ago

That would kind of defeat the purpose of Bitcoin. The main advantage is the transaction system, rather than the store of value.

The transaction speed isn't really much of an issue as long as the block reward is much higher than the value of your transaction. For most modest transactions, like food and consumer goods, just seeing the transaction come across the network is good enough. It's possible to beat this, but doing so requires a large enough effort that nobody would bother doing it to get lunch when they could be getting dozens of block rewards worth thousands of times more instead. Waiting for one confirmation takes around 10 minutes and is likely to be good enough for anything of less value than buying houses and cars and other things that are 5+ figures in USD.

lolcraft• 13 years ago

Here's my proposal: let's forget exchange rates. Let's not confuse them with inflation[0]. That's a red herring. Exchange rates are important for BTC's legal users now because there's not (yet) production in BitCoin's economy. Apart from drugs[1], BTC is pure store of value, and it should be analyzed as such.

This is important for this discussion, because exchange rates ultimately won't matter that much. By "ultimately", I mean that phase of development when (if) BitCoin becomes a full currency, that is, when there's somebody, some corporation, operating and trading significantly in the currency. I won't lend the status of currency to any commodity which is not used this way.

And what's clear is that both BitCoin and gold are shit currencies. Even conceding the exchange rate could stabilize enough for a modern day Rockefeller[2] to pull it to a success, you still would have to contend with the deflation inherent in this "currency".

There's a reason why gold is traded in commodities markets -- and not as a currency. There's a reason why banks and states trade and store USD, instead of gold. You simply can't grow an economy like it's the 20th century with gold, or BitCoin. In fact, BitCoin is even more ruthless than gold. 19th century economies could at least pray for the discovery of a gold vein, to alleviate their deflationary comedowns. BitCoin denies even this possibility with the cold, germanic efficiency of a mathematical proof.

[0] The exchange rate we run against our future selves, if you will.

[1] Which doesn't count anyhow, since you would agree there's a risk markup on them for their illegal status, which makes dubious extrapolating any analysis from them.

[2] An improbably apt group of entrepreneurs, who even more improbably would decide to bet their future fortunes on a currency designed by computer geeks with a penchant for goldbuggering.

ufmace2• 13 years ago

I agree that the critical problem with Bitcoin is the inability to inflate at a controlled rate. It inevitably follows from the idea of having a decentralized currency - something has to control currency creation rates, and if you aren't going to trust an organization of people, then math is the only alternative, which is kinda both empowering and limiting. Because of that alone, if nothing else, I don't think we'll ever have a major economy in Bitcoin only.

That doesn't mean there's no use for it though. There may well be purposes and segments of the economy that find it very useful, and it may even be possible at some point for people in some niche markets/occupations to exist entirely in a Bitcoin economy. It'll just never be very big compared to any first-world national currency.

anologwintermut2• 13 years ago

The fact that Bitcoin is deflationary is purely a product of the software/protocol. Given consensus to change it, one could make it inflationary easily. E.g. by having blocks always pay out 25 btc as a reward or even have successive blocks pay out increasing rewards.

trts• 13 years ago

Even though it's deflationary, I don't see that as necessarily a problem since it is infinitely divisible, which fiat currency is not. It may just take time for people to start thinking in hundredths and thousandths instead of hundreds and thousands. If Bitcoin becomes less volatile in the future and deflates at a predictable rate, then I could see it being used more as currency.

Interesting to think of the reverse of "when I was a kid, a Snickers bar only cost 5 cents," e.g. "what I just paid for my new Macbook only bought me a pair of shoes ten years ago."

nhaehnle5• 13 years ago

It would still be inferior to modern fiat currency from a macro-economic perspective, because whatever your rule is going to be, it will not adapt to the development of the economy.

Think of it this way: The abundance of money should somehow correlate with the abundance of real resources. When this correlation breaks down, bad things happen to the economy.

In modern fiat currencies, the supply adapts automatically, without government intervention to the development of the economy, via the mechanism of bank loans. When a bank makes a loan, the money supply grows. When a loan is paid back, the money supply shrinks.

Bitcoin cannot work that way by design, which makes it a bad choice for a common-use currency - at least from the perspective of macro-economic behavior.

marcell• 13 years ago

There's a reason why banks and states trade and store USD, instead of gold.

Suppose you accumulate a lot of debt in a currency backed by gold. Further suppose that you control that currency, and have the power to change or remove the gold backing. It becomes very tempting to, say, issue some new currency with lower or zero gold backing to wipe out your debt.

XorNot2• 13 years ago

Which isn't a currency backed by gold then, its a fiat currency. A gold backed currency can easily inflate if new gold mines are discovered - it just uselessly doesn't track with the production of things people need.

notahacker• 13 years ago

Exchange rates are important because they indicate a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand. By contrast, responsible governments with effective tax collecting powers can generally exert a large degree of control over the purchasing power of their currency. The dollar is backed by all taxable economic activity in the United States. Stocks, which often end up worthless after promising starts, are at least backed by assets that can generate future cashflows. Bitcoin is backed by faith.

Even if BTC is better to transact with in every conceivable way, businesses will still need hard currency to pay their taxes, which makes exchange rate and liquidity risk a very real concern if you're trading real assets for BTC.

baddox• 13 years ago

a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand.

That's a strange comment, considering that seems to have been one of the fundamental deliberate choices made in the design of the currency, and is one reason why a lot of Bitcoin enthusiasts are attracted to the currency.

mrb3• 13 years ago

"You simply can't grow an economy like it's the 20th century with gold, or BitCoin"

Well, the past 4 years have proven you wrong.

Explain how the Bitcoin economy has been able to grow so much since 2009? Why is it that 10,000+ merchants decided to use Bitcoin through Bitpay alone? Why is it that Bitcoin gains more and more users every day?

The answer is that, even if deflation was a problem, which is itself debated [1], Bitcoin's advantages such as being censorship-resistant are unparalleled by any other currency, and that alone gives Bitcoin the ability to succeed where no other currency could.

[1] http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d...

Guvante2• 13 years ago

But Bitcoin isn't a currency for vendors, that is how the problem was solved. It is an investment strategy for consumers and a transaction method for vendors, but not truly a currency.

He was talking about whether Bitcoin will ever become a currency not backed by USD (or whatever) and postulating why that will never be the case.

Bitcoin is currently surviving off its liquidity, not its value as a currency.

jpadkins3• 13 years ago

I have yet to see a scholarly article showing that productivity caused deflation (currency held constant while increases in population or productivity cause prices to drop) has caused economic problems. There is much evidence of currency removal caused deflation (when a large amount of currency or credit is quickly removed from the system causing prices to drop) wreaking havoc on the economy.

I am interested if you have seen any documented evidence of the former?

Also, in the US under the gold standard (1776-1910), we saw history's greatest increase in individual wealth ever recorded (measured by per capita GDP). Yes it was more volatile than under a fiat currency, but it's hard to argue that a constant or slow growing currency dampens economic growth with that data point.

mrb3• 13 years ago

The article is right on one point: Bitcoin is volatile. No one denies that.

However the article is wrong that "volatility must decrease for it to survive". If anything, the fact it has not only survived for 4 years, but succeeded by gaining market share and gaining value (1000x since 2010!) despite its volatility shows that the market does not care that much about volatility.

agorinto• 13 years ago

I would say volatility must decrease for it to thrive. Bitcoin needs to transition from a currency for speculators to a currency for consumers.

mrb3• 13 years ago

Correct: thriving, not surviving. (I would not have made my remark, had the author used "thriving" in place of "surviving").

And we are not yet at the point where Bitcoin needs to reduce its volatility to further grow. My prediction is that there is still room for Bitcoin to grow (and it will), over the next 1-2 years, and yet volatility is going to remain just as pronounced as today. I say this because so far, its adoption curve shows no sign of slowing down.

jonnathanson• 13 years ago

When the article talks about Bitcon's need to "survive," I interpreted it to mean "survive [as a currency]." Bitcoin makes a fine speculative trading vehicle for those with the cojones to expose themselves to big positions. But as a currency, it does need to "settle down." Think about it from the perspective of a business intending to transact in Bitcoin and prepare for the years ahead. Inventory management, logistics, financial planning, and all the other necessities of running a business as a going concern are extraordinarily difficult when the currency one accepts is fluctuating this wildly.

Exchanges, such as the late Silk Road, do not hold their own inventory, and so those types of businesses make some degree of sense. (Even still, they'd have a very hard time attracting investment, if they ever sought it, because the company's fundamental financial position would change on a daily basis.)

But businesses other than open exchanges face some very serious difficulties when conducting business in BTC. This is one major source of the liquidity issue. The other is that speculative holders and traders far outweigh transactors in terms of the currency's total trading volume. BTC changes hands quite often, but not typically in the form of business transactions, which one would expect of a currency. Far more often it's in the form of buy and sell orders, like a commodity.

saejox• 13 years ago

Volatility doesn't bother as long as i can convert it to USD as fast and painless as i do with USD/EUR or Gold/USD.

But, i can't. So it's kinda worthless.

letney• 13 years ago

Ah, but that's improving rapidly. Coinbase does BTC->USD in less than 24 hours and USD->BTC instantly (with level 3 verified accounts).

j2d3• 13 years ago

I think BitCoin could be a great answer to the global dissatisfaction with the dollar as the world reserve currency. Why not use bitcoin as a non-political global reserve currency, and as an intermediary between national currencies, rather than as an everyday currency that intends to replace anything.

DennisP2• 13 years ago

Bitcoin has a market cap around $2 billion. To be a major currency, it needs a much larger cap, maybe a hundred billion. A major price increase would count as volatility but it's the only path from here to there.

robotcookies2• 13 years ago

It doesn't have to be a major currency. No one (I think) is suggesting it replace the dollar. Maybe it can be a minor currency that works along with the dollar. There are certain things you can do with bitcoins that you can't with fiat.

DennisP2• 13 years ago

$100 billion would only be about the size of the Australian dollar. That seems like a feasible level to me.

RoboTeddy3• 13 years ago

Let's say, for example, a vendor is considering whether to begin accepting bitcoin. She will need to be able feel relatively certain that, when she leaves the storefront in the evening, she will have nearly the same amount of value on balance when she returns the next morning.

Fortunately, vendors don't have to take on any such risk. There are services (e.g. CoinBase, BitPay) that let sellers accept bitcoin without ever holding a bitcoin balance. These services effectively instantly convert bitcoin revenue into something less volatile (e.g. USD).

lingben• 13 years ago

that does not address the volatility issue at all - even if bitcoin are converted immediately to dollars or euros, because they fluctuate so wildly, no business would be able to know if the amount they receive will even cover their cost or if suddenly they are charging way way 'too much'.

RoboTeddy3• 13 years ago

Potentially they could internally set their prices in dollars, and multiply by the exchange rate to get their current bitcoin price.

zalzane• 13 years ago

One tidbit that continues to bother me regarding the long-term viability of bitcoin is how long the encryption processes it relies on will stay secure. IIRC bitcoin relies on ECDSA for signing and SHA-256 for hashing.

Pretty much all forms of encryption have a shelf-life until they are broken, especially when you consider quantum computing on the horizon. What happens when ECDSA becomes viable to break, or when they start finding SHA-256 collisions? Would the currency just collapse, or is there some way provided to change the system's cryptography methods?

gwern3• 13 years ago

Bitcoin was designed to be quantum-resistant and upgradeable: https://en.bitcoin.it/wiki/Myths#Quantum_computers_would_bre...

maaku2• 13 years ago

Bitcoin was most certainly not designed to be quantum-resistant or upgradable (don't trust the wiki for these sorts of things). Thankfully we have discovered ways in it could be upgraded to be quantum-resistant without horribly breaking legacy nodes, but that's a very different statement.

dragontamer• 13 years ago

http://blockchain.info/charts/tx-trade-ratio

Transaction to Trade ratio is going up. For whatever reason, a significant portion of BTCs (in some data-points... as much as 60% of BTC transactions) have been in exchanges.

IE: BTC is probably going through a bubble right now, as any commodity. In the first few weeks of October, there were periods where MOST transactions were purely for speculation / trading.

http://blockchain.info/charts/trade-volume

Trade volume is on the rise. I don't know why or how, but a group of investors has decided to start speculating on BTCs.

------------------

Instead, for BTC to be a "useful currency", people need to transfer BTCs between each other and stop speculating on BTC / USD exchanges. Whenever there is a rise of speculators, I'm going to bet on a bubble.

erikpukinskis2• 13 years ago

Bitcoin volatility won't decrease for a long time. Right now we're in the first major phase of Bitcoin's evolution, wherein the global financial system slowly wraps it's collective brain around what Bitcoin is, how it behaves, and what it's good for.

Even experts in cryptocurrency don't agree about any of those things, so global consensus about those three things is a long way off.

A few basics are starting to emerge:

* Bitcoin is good for transactions that governments don't want you to make.

* Bitcoin is good for transactions between vastly different financial and legal systems.

* Bitcoin is good for storing money in your brain.

* Some subset of people feel Bitcoin is a good investment.

But even now, there are many people with money, not to mention many financial experts, who are not so sure about these things. With every WSJ article we creep closer and closer to consensus, but it is still quite far off.

That said, eventually the global financial markets will start to agree about these uses, and a generally accepted model will emerge. I suspect this will take at least 20 years, which is the length of time it will take for us to start having University Faculty who went through their entire undergraduate education with Bitcoin existing and at least partially understood by their professors.

That model will be something like:

    Bitcoin market cap = I + f(V)

where V = volume of global transactions for which Bitcoin is the best choice

f(V) = the float required to make those transactions

I = the amount of capital for which Bitcoin is the best investment vehicle

And of course we need models for each of these... V is going to be some portion of illegal transactions, some portion of inter-border transactions, etc. We really have no idea what this is right now.

Until then the price of Bitcoin will be very chaotic, which will influence the I term, but not the V term. The V term is just a pure result of how many people have need for a Bitcoin-like currency, and what percentage of those people are aware of Bitcoin and have the technical means to use it.

BUT, when the global financial markets do start to reach consensus on the model, then Bitcoin will stabilize. And I don't mean it will stabilize as a deflationary currency, I mean it will literally be flat. Because the financial markets have NO problem pricing deflation into their models and they absolutely will. The price will go up to where you can't make money investing in Bitcoin during a reasonable slice of a human lifetime, and then level off.

And I suspect Bitcoin will stabilize MUCH more than traditional currencies. Because there will be no capriciousness of international politics or policy, the Bitcoin price model will be based on much more stable factors: global crime, global population, etc. And those things are much easier to model than things like U.S. foreign policy.

So anyone who is thinking either A) Bitcoin has a chance at stabilizing in the next 10 years, B) Bitcoin will deflate forever, or C) Bitcoin will never stabilize, I just don't agree. It's just going to take a while.

RoboTeddy3• 13 years ago

Could it be argued that:

  Gold Market Cap = I + f(V)

with V ≈ 0, since gold isn't used for many transactions? (AFAIK)

Why hasn't gold stabilized entirely? Are there reasons why it's affected by capricious international politics or policy, but Bitcoin won't be?

If I had to guess, I'd say that Bitcoin, like gold, will be affected by e.g. future economic delveragings that cause people to expect that the government might print money.

erikpukinskis2• 13 years ago

Are there reasons why it's affected by capricious international politics or policy, but Bitcoin won't be?

Well not being used for transactions probably makes it less stable. Gold is mostly just an investment, which means it can vary a lot based on the other available investment vehicles. Bitcoin has many real world uses, which I think will add stability.

How Bitcoin Could Become a Viable Currency

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