Bitcoin Price Pressure

http://blog.samaltman.com/bitcoin-price-pressure

by arnauddri • 12 years ago

110 184 12 years ago

blog.samaltman.com

MarkPNeyer4• 12 years ago

The other way to get enough buy pressure would be if many people started deciding they want to hold bitcoin as a hedge or a speculation.

ding ding ding. that's all i'm doing. i've had a bunch for a while. i don't need the liquidity, so i figure i might as well hang on to them. i think a lot of us are in the same boat.

if a group of 100,000 'crazy' and 'irrational' people all decided to put $100 USD a month into bitcoin, you'd create upward pressure on BTC, with a price floor of $43 usd [1] at current reward rates, rising as the reward rate drops. The rising floor would case the price of BTC to rise, even if the _only_ volume was 'crazy bitcoin believers putting $100 a month into it'. the fixed supply of coins and large supply of 'crazy people who think they'll make money because the price keeps going up' and make the 'crazy' belief that bitcoin will be worth more in the future become a self-fullfilling prophecy.

the REAL thing that would cause it to flop is if these 'crazy' people all decided they wanted dollars instead of bitcoins. that would tank the price. but if they 'maintain the insanity' of holding onto a thing with a dollar price that flucauates wildly, their insanity becomes our reality. since most of these people think the dollar is a fucked up currency, they probably see the _dollar_ as being the thing that fluctuates wildly. anything looks crooked if you use a crazy straw as a ruler.

possible objections:

Q: how is this worth anything if it's just crazy people convinced that this thing will be worth something'

A: 'it's because there is value in trust.' people that hold onto something they can't eat, live in or use because they think it's valuable will be right - IF they have their eating, living and other needs taken care of. that's it. that's all you need to understand. if you think a group of people who 1) have their basic needs met and 2) choose to hold onto something that could let them buy big houses, cars, fame, parties, drugs, sex, and elections because they think this other thing is' worth more, i'd suggest you're wrong to call them crazy.

Q: there aren't 100,000 people in the world stupid enough to do this.

A: in 2011 there were over 100k bitcoin addresses holding a balance [2]. i don't have stats on how many of them still do, but i'd suggest that these people would be 'stupid enough' to qualify.

Q: those stupid people would all have to have $100 bucks extra a month, and not cash out any BTCs'

A: $100 a month isn't that much, and if the 'stupid people' haven't cashed out at BTC being 100 or 1000 times what they paid for it, my guess is they don't really need the money.

Q: if all they're doing is buying it, and they never sell, that makes no sense - why are they buying something they don't plan to use?

A: because it makes them feel safe. all money is - all the financial markets and stock markets - all they are is a measure of how much people trust the world and think things will be ok. the use of numbers is also becuase people find that comfortable. a subjective measure of well being would never be taken seriously by the world as a 'measure of value' and yet that's essentially what the market is - only it's weighted by people who have lots of money. having lots of money is hard to do, so we put more stock in the sense of those people. combine that with "it's hard to have lots of money if your sense of well being is shit and you try to fix that by buying things" and it starts to make sense.

one guy with an outlandish prediction is crazy. a hundred thousand people with the exact same outlandish prediction are either a cult - believing in something impossible - or a corporation - believing in something unlikely but doable with enough effort. a computer on every desk? impossible, unless you have enough people trusting that this will happen because they've seen the numbers and the math checks out.

[1] current reward rate is ~ 7200 coins per day. if 100,000 people put 100/month into the coins, that gets you a price of 46.29 per newly created coin.

[2] http://bitcoin.stackexchange.com/questions/2828/how-many-bit...

DennisP• 12 years ago

But if the price is mainly based on that, it's nothing but a tulip bubble. I don't think we get sustainable value unless people are actually using it as currency to buy things.

pmorici3• 12 years ago

Can you point to any modern day currency that is anything but a tulip bulb? So long as merchants are willing to accept it for payment it is decidedly not just a tulip bulb.

dragontamer4• 12 years ago

The only "outs" therefore are the greater fool theory (http://en.wikipedia.org/wiki/Greater_fool_theory) or a pyramid scheme structure.

Or, perhaps all of this price-mongering is the wrong way to look at things. Consider this: BTC success should instead be measured in transactions / day. The only people who care about BTC per $$$ are speculators.

MarkPNeyer4• 12 years ago

read my updated comment. you don't _need_ an out if you have your needs met and have the cash liquidity you need. since a lot of the people holding these things are libertarians with money, why would they sell them for dollars they think are worthless? they don't NEED outs.

pmorici3• 12 years ago

In order to facilitate transactions BTC has to have value greater than $0 You can't transfer value via Bitcoin if the value of a Bitcoin is zero.

Aqueous• 12 years ago

We're talking about something that was worth less than $200 a a year ago, and $0 5 years ago. So if you believe that BitCoin is following an uneven adoption cycle, where there is a boom period followed by a pullback, which is what has been the case so far, then we're still at the beginning of its adoption curve. Additionally when mainstream markets for trading BitCoin open up - like Second Market's planned BitCoin exchange - you'll see a lot more money flow into BitCoin speculation from actual investment institutions, which could cause buy pressure.

I think probably the most important - and maybe only - indicator of whether BitCoin can actually sustain its price is how many merchants are accepting it as a payment option. If this is still going up (as I believe it is) then BitCoin has a promising future. If it starts declining then I start to worry.

sanswork2• 12 years ago

Merchant adoption is a bad indicator since almost all of the benefits of using bitcoin in a commercial transaction are on the merchants side. So while they can do it for free adoption will go up even if actual usage by customers stays at or near 0.

vbuterin• 12 years ago

The Bitcoin price is falling because the Google Trends search volume is going down. That's it. All of the technical analysis and China news is just a mirage that makes a few jolts in the short term.

http://www.google.com/trends/explore#q=bitcoin&date=today%20...

And it will keep going down until the search volume stops going down, at which point it will stabilize, and then start to go up once again. Of course, this says nothing about whether the recovery will be $7 to $30 or $450 to $4000, but it's a pattern that has been quite consistently highly correlated with Bitcoin price movements in the past and I see no reason why it should not continue to be in the future.

Edit: the turnaround may be quite soon. We can already see that the price has actually moved by pretty much exactly 0% in total over the past 30 days: http://bitcoinity.org/markets/bitstamp/usd

zorpner• 12 years ago

The Bitcoin price is falling because the Google Trends search volume is going down.

This is some serious correlation/causation confusion. What do you think is causing the Google search volume to decrease?

baby• 12 years ago

This will continue to be the case until the US government takes bitcoin for taxes.

I like how this is only about the US and the world around doesn't exist.

MadManE• 12 years ago

Like it or not, the US has a very heavy influence in essentially all financial markets. If they do it, it sets the precedent for the rest of the world.

pcmonk3• 12 years ago

Using bitcoin for transactions won't help if the merchants immediately sell them (all the buying pressure just got cancelled out). Right now, bitcoin is only held in large quantities for speculation. Speculation, as he notes, has only worked for temporary bubbles.

He says that bitcoin isn't failing, but I don't see how it can succeed. It doesn't make short-term economic sense for individuals to either mine or buy bitcoins, so it seems like the only people buying bitcoin will be those who are either speculating or who simply want it to succeed. That doesn't seem sustainable. Can anyone explain why he is still optimistic about bitcoin?

sama• 12 years ago

I think, especially in emerging markets, merchants will eventually hold bitcoin.

pcmonk3• 12 years ago

Why? Why wouldn't they just sell it immediately, for all the reasons why merchants sell it now?

jbondeson2• 12 years ago

I see only three good reasons for a merchant to hold reserve in bitcoin: 1) pay their employees, 2) pay their suppliers, or 3) good old speculation.

When you start to see large suppliers get into the market then you'll start to see a decrease in immediate conversions.

logician762• 12 years ago

Mt.Gox is going to liquidate all their bitcoins for the bankruptcy proceedings. So factor that in, and creditors of Mt.Gox (especially bitcoin creditors) will get even less than the value today. I'd say get ready for a big bubble burst.

pmorici3• 12 years ago

No they aren't. A plan to buy out the exchange settle the pending fraud lawsuits and divide the remaining Bitcoin among the creditors as well as give them a % stake in the new business was announced a couple days ago. No Mt.Gox Bitcoin is getting liquidated by the bankruptcy court.

http://www.reuters.com/article/2014/04/29/us-bitcoin-mtgox-s...

logician762• 12 years ago

No mention of this on the Mt.Gox website, where the last article was talking about liquidation. But thanks for the heads up, as I am also one of the creditors I should look into it.

dnautics3• 12 years ago

"This spurs occasional bubbles..."

Actually, no. Bubbles have very clear and consistent price patterns which (so far) has not characterized any of the elevations in bitcoin price. One not mentioned in this chart is that for bubbles, the post-mania drop tends to be 2x faster than the rise, which has never been true for any of the bitcoin corrections.

http://www.theeestory.com/files/price_bubble_chart.jpg

It is certainly possible that bitcoin will at some point exhibit the characteristics of a bubble, which may even destroy bitcoin, but it has not so far.

sanswork2• 12 years ago

http://imgur.com/D9rrl0g

dnautics3• 12 years ago

Firstly the graph isn't logarithmic, which is important because popularity of viral phenomena is a locally exponential phenomenon, which is why there's a baseline drawn in the reference chart. Secondly the downward slope is steeper than the upward slope (usually by 2x).

applecore• 12 years ago

There's no such thing as "default price pressure" (up or down) in financial markets.

Every trade has both a buyer and a seller—for someone to have sold bitcoins, someone else has to have bought them.

natrius5• 12 years ago

This sounds true, but it's not. First of all, the supply of bitcoins increases every day when they are created out of thin air.

Even without that factor, having a buyer and a seller doesn't mean that prices can't have a tendency towards a trend. People who purchase goods and services with bitcoins usually aren't making a calculated decision to sell bitcoins for dollars, but that's what they're doing when they pay with bitcoins.

Humans aren't rational actors, especially when you try to judge their actions in a single market without considering other motivations.

logicallee7• 12 years ago

Imagine if any two people who reside in the Bay Area would receive $3M at a $10M valuation within three weeks of asking for it (no questions asked) as long as they have incorporated and one of them can program. What do you think would happen to the Bay Area housing market in this situation? How can you not call it "buy pressure"?

Note: interestingly this is an extreme an unrealistic example, but it's not far from relaity!

joosters2• 12 years ago

Not at all. 'Real money' currencies are inflationary, for lots of reasons, including the fact that we keep printing more money. If I stash my $millions under my mattress for a decade, do you reckon they'll be worth less or more after that time?

Bitcoin however has deflationary pressures, because there's a fixed upper limit on the coins (21 million) and they become harder and slower to mine. With a price of (say) $1000/BTC, that means there can only be 21 billion dollars worth of bitcoins out there. But if you expect bitcoin usage to explode and account for trillions of dollars of wealth, then the bitcoin price has to increase.

joosters2• 12 years ago

'More buyers than sellers' is a perfectly reasonable statement, and v-v. If one side competes more for trade, then it will have a price pressure.

Say you ran an auction of goods (paintings, junk, whatever) with 10 potential buyers in attendance, do you think you'd get higher or lower prices than if you ran an auction with 1000 buyers in attendance?

jonny_eh• 12 years ago

Sounds like he's moving the goal post. When did the conversation change from "Bitcoin is going to change everything!" to "Bitcoin itself doesn't matter, it's the blockhain idea that does!"

ThomPete• 12 years ago

For quite a long time actually. In fact go back to when bitcoin craze was on it's highest and you will see people pointing out that it's not the currency but the technology that's important.

Bicoin the technology has already changed everything.

mkempe• 12 years ago

Probably while he interviewed 7 bitcoin startups for YC-S14.

pdq• 12 years ago

  When most merchants take bitcoin for a purchase, 
  they immediately sell for dollars.

This is ignoring the other side of the equation. For someone to spend bitcoins, they had to have bought them for cash.

Bitcoin has declined lately because of 3 main reasons:

1. There was a massive 10x price increase in the past year or so. (You could call this a bubble.) Now a 50% drop from the high just means a 5x increase in the past year.

2. Much of this growth was due to China speculation, and with the Chinese government cracking down on bitcoin ownership and exchanges, this pops much of the speculation.

3. Mt. Gox going insolvent.

diego• 12 years ago

  |This is ignoring the other side of the equation. For someone to spend bitcoins, 
  |they had to have bought them for cash.

This is not true. 3600 coins are mined every day. The people with the most incentive to spend coins are early miners who have a significant chunk of their net worth in Bitcoin.

VMG4• 12 years ago

And even if bitcoin itself fails, I think the blockchain will be one of key technical innovations of this time period.

A blockchain is only useful if it is heavily secured by hashing power. This is only the case if there is significant mining equipment devoted to validating blocks. That in turn only happens if there is a reward for validating a block.

Long story short, it's currently very difficult to use a secure blockchain that is not based on Bitcoin, which puts the quote into perspective. Those who want to use blockchain technology have an incentive to use the Bitcoin blockchain because it has the greatest security.

dragontamer4• 12 years ago

Or not? Proof-of-stake is arguably better than Proof-of-work. Peercoin, NXTCoin and so forth have fundamentally moved forward from the "waste more energy than the next guy" approach that is innate to Proof-of-work.

nullc• 12 years ago

Unfortunately, this doesn't appear to be true. So far all proposed proof of stake systems suffer from problem that miners don't consume a resource to attempt to contribute to the consensis. In other words, the problem of proof-of-statke is that there is nothing at stake. There is no reason for a miner to not attempt to extend every chain that they can— or at least every that they don't hate— and, in fact, doing so is the solution maximizing behavior. In proof of work, by comparison, miners must choose to expend a resource for every attempt and so an effort to try to mine on one fork requires a choice to not spend that resource on other ones. The best strategy then becomes putting all your effort on one chain which you think most likely to survive. Optimal POS strategy is to mine all forks you can, just in case any survive. This issue seems fundamental, but perhaps someone someday will find a clever way around it be changing assumptions.

Peercoin was attacked this way— a miner grinding out alternative histories and finding ones where they were awarded almost every block— _immediately_ when POS mining became possible on it. The attack was thwarted because PPC has a central control mechanism where its developer cryptographically signs blocks to force the network to accept them over longer, otherwise better, chains... and it was later closed off by requiring POW blocks to select the POS blocks that can mine. (But now, the security of that coin reduces to the security of POW and the security of the signing key controlled by its pseudonymous developer).

bdcs• 12 years ago

With merged-mining[1], any alt-coin can hijack Bitcoin's security via PoW without any additional mining, see, e.g., Namecoin (which is unfortunately defunct for unrelated reasons).

[1] http://bitcoin.stackexchange.com/questions/273/how-does-merg...

jnbiche3• 12 years ago

Namecoin isn't defunct:

https://github.com/namecoin/namecoin

vertex-four• 12 years ago

Namecoin isn't defunct. In fact, it has several developers. The blockchain has been secured since the incident I assume you are talking about, and there's work on numerous things ongoing - a lite client, an implementation of Namecoin as a library, a proxy allowing any program to connect to Namecoin domains.

There is an IRC channel at [0], a mailing list, and a website with a wiki and forums at [1].

[0] irc.freenode.net#namecoin [1] http://namecoin.info/

gnaritas11• 12 years ago

False, just because a miner can merge mine doesn't mean they will, you don't automatically get bitcoin's hash power just because your coin can be merge mined.

sktrdie• 12 years ago

Actually Ripple's consensus algorithm can be used for a variety of different applications, the ones you would think to build using Bitcoin's blockchain. Because Ripple solves the double-spending problem without the need of mining [1].

The main thing that Bitcoin adds is of course the democratic distribution of coins based on hashing power. But if you don't intend to use "blockchain technology" as a currency, then Ripple may very well serve your needs.

1. http://bitcoin.stackexchange.com/questions/7550/how-does-rip...

makomk• 12 years ago

Ripple's consensus algorithm makes it effectively a centralized system though - there's a central clique of nodes run by the Ripple creators and a handful of people they trust, the consensus they come to cannot be influenced by anyone outside the clique unless they choose to allow it, and if any nodes decide on a different consensus this effectively hard-forks the Ripple transaction history into two branches (their version and the official version).

gwern• 12 years ago

Ripple doesn't solve the double-spending problem, as I understand it: it punts the problem to the user and tells them 'well, if someone abuses the trust you gave them, you obviously screwed up. Sucks to be you.' and lets them figure out who they can trust (if anyone). While a bitcoin is a bitcoin is a bitcoin.

philrapo5• 12 years ago

A blockchain is only useful if it is heavily secured by hashing power.

Ripple consensus keeps a distributed database in sync without requiring mining. And the network's security has no correlation to the amount of hashing power involved. (There's no 51% attack on Ripple)

I actually think PoW based systems, because of the 51% attack, present an extremely undesirable amount of systemic risk for broad adoption in the financial system.

Phlarp2• 12 years ago

the network's security has no correlation to the amount of hashing power involved. (There's no 51% attack on Ripple)

I think you are misunderstanding what the majority of users consider "security". Typically it involves a situation where someone else can't arbitrarily change the rules on a whim or influence the outcome of transactions on a one-off basis.

I'd also like to point out this account is used almost exclusively to promote ripple here on HN while rarely disclosing that the owner, Phil Rapoport, is currently involved with Ripple (the corporation) and has been since 2011 [1]

[1] https://ripple.com/blog/interview-with-phil-rapoport-directo...

canvia• 12 years ago

If miners had to be registered and were restricted to a certain amount of hashing power per unique registered user, or had to purchase a standard mining rig (maybe one that doubled as a POS, and restrict mining to merchants) in order to participate, I think that would mitigate the risk of a 51% attack. Right now the imbalance in ability to mine not only creates a risk of an attack, but it skews the distribution of newly generated bitcoin. In my opinion those are the two biggest problems with bitcoin and good enough reasons for it to fail in the long run. It would take a new crypto to address those issues since the initial distribution of bitcoin is so imbalanced.

pbreit5• 12 years ago

I guess that is the question: is there a way to get the (superior) blockchain without the (inferior) currency?

sillysaurus39• 12 years ago

In a moment of some depression, reflecting back on sinking so much money into Bitcoin at close to the peak of its price history, I made this: http://i.imgur.com/f3tIJwK.png

It's important to understand that Bitcoin is dangerous to you, and you need to respect its danger if you decide to buy some. You need to be using a secure cold storage wallet. You need to not trust services like Coinbase to hold onto your coins for you.

Growing up, I'd always heard stories about people who kept cash under their mattress because they didn't trust banks to not lose their money, which made me laugh. Now I get to laugh at myself for trusting anyone but myself to not lose my money.

Usually, when you lose money, you get something in return. Even if it's just an opportunity. A risky investment isn't necessarily a bad thing if it fails, because you may have stood to earn a lot if it turned out well.

The key thing to understand about Bitcoin is that you can lose all your money in the blink of an eye for a multitude of reasons. I've written in detail about why Bitcoin is dangerous to its users: https://news.ycombinator.com/item?id=7521906

Until there are good and convenient solutions to these problems, it's hard to imagine Bitcoin as anything but a vehicle for speculation. And it's a fine one, too. If you feel like gambling, there's nothing like the rush of seeing whether you're about to gain $50 or lose $250 in the next two minutes. And waking up at 3AM to check the price. (Most of the heavy moving seems to happen in the US off-hours, unless a big news story impacts the price.)

The reason I say it's a vehicle for speculation right now is because right now the most sensible course of action for people who are risk-averse yet still want to accept Bitcoin is to immediately convert Bitcoins into dollars. Indeed, that's exactly what Tarsnap does, and probably many other merchants as well.

And about the price: it seems mostly determined by a small group of people (probably fewer than 100) who have a lot of coin and who actively try to move the market in their favor. They've been following a rather simple scheme: dump a lot of money into bitcoin to jump the price up $50 or so, then sit back while everyone else reacts by jumping it up another $50, then sell off your newly-acquired bitcoin. Presto, you've earned some money. Possibly quite a lot of money. I don't know whether that strategy has paid off for the movers, but nonetheless it seems to be what they're doing.

The long-term price is anyone's guess. I'd say the most valuable insight I learned throughout this whole ordeal is that the market isn't logical, or if it is, you aren't going to be privy to the information it's acting on. The most obvious example of this was when people sold off thousands of bitcoins an hour or two before Mt. Gox published their update with bad news. At face value, it seemed to be a clear example of insider trading. When it happened, no one knew why the market suddenly dropped so much; it was as if the market suddenly went insane and lost faith in bitcoin. In reality, it was probably someone with a ton of coins who caught wind that hard times were about to happen.

Bitcoin is an interesting experiment. I like it a lot. I think it has a lot of potential, and that we need to figure out solutions to the fundamental problems like making it easy for people to manage their own wallets without risk of loss or robbery.

boyaka3• 12 years ago

Can you provide reasons/evidence for why I should not trust Coinbase?

mdemare• 12 years ago

Not trusting is the default. It is up to Coinbase to prove that they can be trusted.

flatline• 12 years ago

Bitcoin was meant to be a trustless system. You are handing over your private keys to a third party, and hence all the direct control over your funds. How do you know they are solvent? How transparent are their security measures? There are many, many examples of this going horribly wrong with people who could supposedly be trusted by the community, and there are more popping up on a regular basis.

You are asking the wrong question -- why should you trust Coinbase or anyone else?

sillysaurus39• 12 years ago

Indeed: https://hn.algolia.com/#!/comment/forever/0/author%3Asillysa...

(I want to preface this by saying that I'm talking about people storing their savings in Bitcoin. If you don't care about what happens to your money, then it doesn't matter whether you trust Coinbase.)

The most convincing argument, I think, is that you're putting your faith in an entity that's not FDIC insured to hold onto your entire future and keep it safe. Your savings is your future. If you lose it, you lose your future. You'll have to exchange months or years of your life to get it back, as I now have to. There are many reasons that businesses fail, and it's important to never forget that Coinbase is a startup, and the fate of startups always hang in the balance.

There's no reason not to trust an entity that's ensured by the government (banks) with your savings. They won't vanish.

The only reason right now to trust Coinbase with a lot of money is if you're hoping the price will rise, as far as I can tell, because there's no other realistic application of Bitcoin right now unless you want to send some money to a friend, in which case you can just buy it as-needed. So it's essentially long-term gambling. Now, there's nothing wrong with that. I knew when I did it that there was a chance things could turn out horribly awry (though I don't think I fully appreciated how "down" the downside could be for me). But if you're going to do it, at least be smart about it: The coolest thing about Bitcoin is that you don't have to trust anybody but yourself to keep your coins safe. There are secure cold storage wallet solutions. Find one, use it. I've heard good things about Armory, for example.

michaelt• 12 years ago

Two words: Mt Gox.

In April 2013, Mt Gox handled 70% of bitcoin trading [1] - they were a widely trusted, well known brand, operating in a stable legislative environment.

Coinbase today has what Mt Gox had a year ago.

Admittedly, coinbase also has some VC investors. If you believe, should they be hacked or robbed by an insider, that the VCs are going to throw good money after bad to compensate customers, you are much more optimistic than I am.

[1] http://www.wired.com/2013/11/mtgox/all/

selmnoo• 12 years ago

I'd say they've thoroughly wrecked any reason to be trusted, see https://news.ycombinator.com/item?id=6929705 -- they were other threads by other users too, dealing with transfer failures of 5-figure US dollars that weren't dealt with by the Coinbase CEO, unfortunately those were killed by HN.

gphilip2• 12 years ago

To add to what sillysaurus3 says, and copying from my comment from an old thread:

As far as I know (IANAL) there is no law or precedent which takes the value of stolen bitcoins into consideration while sentencing. There is also no history (AFAIK) of prosecution, of serious prosecution which takes the effort to follow up on stolen coins may have been "mixed" etc., in cases of BTC theft.

Given this, does not an online service (like Coinbase) which holds a large amount of bitcoin in "stealable" form present, to potential criminals, a lot of incentive to break in and take it all away? I, for one, wouldn't keep up to 5000 USD in such a place, at least till the time there has been some serious prosecution and proportionate sentencing of BTC thieves. But of course to each their own.

jbaudanza• 12 years ago

Coinbase is hosted on Heroku. So you are also trusting that Heroku and AWS don't have any disgruntled employees with production access that want to be instant millionaires.

jnbiche3• 12 years ago

For many of us, Bitcoin represents far more than an opportunity to gain or lose money. For us, the freedom from financial and fiscal paternalism is worth the risk.

dublinben5• 12 years ago

How does Bitcoin provide you any "freedom from financial and fiscal paternalism"?

sillysaurus39• 12 years ago

Agreed. That was actually one of the reasons I originally got into it: I wanted to try to be a part of this movement and help it grow. Even if it was just taking a gamble, I still felt like I was helping it grow into what it will ultimately become (as long as it doesn't fail). Never in the history of the world have people been able to manage a substantial amount of personal wealth without having to trust anyone else. Something like that, regardless of your feelings about Bitcoin, is fundamental and deserves to have its shot at happening.

So I just want to clarify that my comments aren't designed to steer people away from Bitcoin. They're to remind people to be smart about getting into Bitcoin. It's still in the early prototype stage. You have to respect its dangers, or else there's this huge chance you'll lose whatever you decided to risk by getting into Bitcoin in the first place.

battani3• 12 years ago

Sam is making valid points. But bitcoin's survival is not a function of its price in USD, and its adoption rate is also not a function of its price in USD. If we want to think of bitcoin as a currency, we have to stop thinking of it as a store-of-value/investment asset and start thinking of it as an efficient means of exchange.

There is no such thing as "buy pressure" or "sell pressure" in liquid markets (BTCUSD is liquid enough to qualify). Buying and selling are two sides of the same coin. There are scenarios that push people to sell (as mentioned in the article, miners selling to pay for electricity), but the volume of such trade orders is just a fraction of the volume built up by speculation, and speculation goes both ways.

I would argue that bitcoin's default "price pressure" is up because there is no easy way to short it (for the average trader) and early adopters (who own a large amount of bitcoin) are extremely evangelistic holders and buyers.

The argument that bitcoin may not survive is a valid one. Not because it's not being adopted by merchants (merchants couldn't care less about bitcoin, they receive fiat currency), but because consumers are not using it to make purchases or transfer money. Consumer adoption is the real measure of how much the ecosystem is evolving. Merchant adoption is just pure marketing at this point, and I believe that companies such as Coinbase and BitPay that are pursuing merchant adoption aggressively are in the wrong business.

I feel nobody here likes to hear it and I feel like a lot of people in SV are tuning this out, but bitcoin is really, really struggling to find a relevant use case, especially with consumers. Regular consumers have absolutely no reason to use bitcoin. The "1-click" payment and 1% price discount are not appealing enough to the average Joe who already gets 1-2% cash back, airline miles, and consumer protection on his credit card (and 1-click checkouts on many e-commerce platforms). And more regulation isn't helping the "crypto-anarchist" decentralization angle either.

Bitcoin is great, for MERCHANTS.

But payments is a two-sided market. A winning product must appeal to both sides, the buyer and the seller. Bitcoin appeals to the seller at the expense of the buyer. Even if the blockchain technology overcomes all of its flaws, we would have bootstrapped a value exchange system that does not offer greater benefit to the one that exists today.

Many are making the flawed and simplistic analogy of comparing bitcoin/blockchain technology to the early days of the Internet... That analogy is not valid. When it comes to money, consumers actually want a central authority. They want to be insured and cuddled and protected and not run the risk (however small) of being criminally liable for transactions and have someone to speak with if they make an erroneous transaction or have their card stolen. And they can already do all that, which makes it tremendously difficult to compel them to change the habits they've had in forever to adopt a system that does not provide them with significant advantages.

I've been in bitcoin since 2011 and used to be a big believer, but I don't see bitcoin or blockchain technology gaining traction with consumers, because it simply doesn't solve a problem for them.

It could be destined to eternally remain a store of value (like gold) or find targeted applications (like machine-to-machine payments). The underlying blockchain technology could be of more use if adopted by the banking system, for example, but that is still far in the future.

freddyMae• 12 years ago

This is spot on.

ISL2• 12 years ago

There's risk associated with every investment, and there are plenty of other arenas in which you can lose all of your money in an eyeblink (for example: a single-drug pharmaceutical company with a drug undergoing FDA approval; the outcome is almost binary).

I've been thankful to have experienced the highs and lows of bitcoin -- it's been a tumultuous introduction to the internal psychology of investing. The key to my bitcoin-related happiness was to never play with more than I could afford to lose. If the price goes to zero today, I'll still be thankful for the many lessons I've learned.

gphilip2• 12 years ago

There's risk associated with every investment

As things are now (and as GP points out) speculation is probably the right word, not investment. From Wikipedia [1]:

Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends.

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

obilgic• 12 years ago

This chart isn't even logarithmic.

ars2• 12 years ago

Agreed.

Any time you see a financial graph that isn't logarithmic you can immediately ignore it as garbage.

wil421• 12 years ago

When Bitcoin was at $30 and then dropped to $8 I thought it was a bad buy. At the time I didnt have any money but I am still just enjoying watching the ride.

soup10• 12 years ago

Lol when bitcoin was at $100 and crashed to as low as $3 at one point I thought that was the end of it. It's proved surprisingly resilient though. I think bitcoin only gains value when it reaches new consumers/markets, and loses value when the hype dies down. After it runs of out of hype it's long term value depends on it's effectiveness as a currency which is dubious(certainly not convincing at this point).

IvyMike3• 12 years ago

Anecdotally, I hear from merchants who start taking bitcoin that after an initial spike they see almost no volume.

To me, this is one of the biggest problems with adoption--bitcoin doesn't offer much benefit to the typical consumer for mundane transactions.

I'm about to buy a coffee machine on Overstock.com. There's no practical reason that bitcoins are better than what I'm going to do which is put it on my mastercard. And there's a lot of reasons that getting my money into bitcoin in the first place is a giant pain in the ass.

Yeah, there are some potential situations that could change this, and if I lived in a country with massive inflation I might feel differently, but as it stands, I don't see any compelling reason to use bitcoin to make purchases.

loopdoend• 12 years ago

It doesn't benefit consumers for any transaction. Unless you consider the deed itself to be a benefit, outweighing all the negative. I don't.

As a consumer, I don't like getting fucked by the spread on exchange rates on the buy AND sell sides when I try to pay in bitcoin. Want to buy some bitcoin? Unless you're doing it face-to-face you're going to get jacked a few percent. Want to spend them? Unless it's at a bitcoin-only merchant, jacked again.

Add in the fact that I'm not getting whatever points my credit card would have given me, that I've got absolutely no recourse against the merchant, and that I have to worry about hackers stealing my money... there's no reason for me to use it.

driverdan3• 12 years ago

Two words: money transfers. Bitcoin works very well for low friction P2P transfers. This may be considered a solved problem in Europe where bank transfers are easy and the norm but in the US and other parts of the world it's unsolved and a pain in the ass.

There is no easy way for me to transfer money to a friend other than handing them cash. You might suggest an awful centralized service like PayPal but there are plenty of problems with them too. What if I want to send money to a friend who lives in another country? Even harder. Bitcoin solves this problem.

gnaritas11• 12 years ago

Keeping your credit card number out of their database where it can't be hacked is a practical reason to use bitcoin. It reduces your risk of merchant's getting hacked, which happens all the time.

miros2• 12 years ago

Yeah but my credit card company protects me from that sort of fraud so it really isn't a practical concern.

Goronmon• 12 years ago

So, a merchant gets hacked and your credit card info is stolen. You notice fraudulent charges, call your credit card company and they reverse the charges and send you a new card.

If someone gets access to your bitcoin wallet or whatever storage mechanism you are using fails, then that money is gone forever with no way to recover it.

If you are a regular user with no need to make a political statement with the use of a non-traditional currency, what exactly about the second scenario sounds safer?

sanderjd• 12 years ago

I think it could (or maybe "should") be totally great for tiny payments. Less like 0.5BTC for a coffee machine, more like 0.001BTC for a single API request. It seems uniquely suited for tiny, frequent, low-risk payments. That doesn't seem like a very widespread business model, but maybe that's because it's been tough to do without something like bitcoin.

miros2• 12 years ago

It's also worth pointing out that you are probably incurring significant fees when converting from your native currency into bitcoin.

In addition, if you are holding bitcoins with the expectation that they will actually appreciate (i.e. the currency will deflate rather than inflate) you are effectively losing money by spending it, further discouraging you from engaging in the transaction.

Krugman has enjoyed making this point a few times:

http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfett...

acomjean• 12 years ago

Odd because one of the benefits of Bit Coin is lower transaction fees that what credit card companies charge.

One would think businesses would really like this and promote it.

a_c_s3• 12 years ago

The huge variations in price mean that a company could very easily lose more than the few, entirely predictable, percent the credit card companies charge.

endeavor• 12 years ago

When you say "the typical consumer", I think you are really saying "the typical, relatively wealthy consumer living in the first world". For the some billions of people on the Earth who don't have a stable currency, credit/debit cards, mortgages and other financial products Bitcoin has more benefits. Think of the WhatsApp demographic without a smart-phone.

mpyne3• 12 years ago

Honestly I think it would be the opposite; Bitcoin would be yet another way that the developed world has screwed over the developing world, once malicious actors realize that perfectly good wallet.dats exist on the cellphones of people who think that having sex with virgins cures AIDS.

joelhaus2• 12 years ago

Can anyone make the case that Bitcoin has the three primary characteristics of money [1]: medium of exchange, unit of account, and store of value?

Ignoring the blockchain, this is why Bitcoin will fail. Bitcoin as a currency is inherently inflationary because as demand increases (which is the state of a healthy currency), the supply is relatively stationary. Therefore, a drop in Bitcoin value is indicative of a disproportionate drop in demand.

[1] https://en.wikipedia.org/wiki/Money#Functions

mangeletti• 12 years ago

tl;dr

BitCoin is taking a breather on its upward speculative bubble phase, and is being used primarily as a transactional currency at the time, while downward pressures remain the same as they were before the bubble days started.

thisiswrong• 12 years ago

Yes. We hear this each time. All that i can respond to this is: log chart, log chart, log chart [1]! By looking at a simple log chart one can notice a repetitive cycle. One may even notice that now is actually the best time to buy. Following the pattern, the next boom is only 2-6 weeks away. Who knows what could cause the next boom? Russia pump, Ukraine banking shutdown, E.C.B. Quantitative Easing, USD weakening ? ...

[1] https://blockchain.info/charts/market-cap?timespan=2year&sho...

tethis2• 12 years ago

But if the currency is deflationary with a coin limit, over the long term the only way more people can enter the market / make use the currency is for, as an example, $1 USD to be represented by smaller and smaller subdivisions of BTC. This necessarily increases the value of 1 BTC.

Why is there ever any incentive to do anything with BTC besides hoarding?

gnaritas11• 12 years ago

Hoarding creates the value necessary per unit to make large funds transfers possible. Hoarding is good.

tethis2• 12 years ago

But to succeed as a currency, it needs to encourage people to spend.

robot• 12 years ago

"It still makes sense to mine if you’re living in a dorm and don’t pay for electricity" it will be nitpicking on a whole post, but I don't find it ethical to make such gains. The fact that you don't legally need to pay does not entitle you to use resources of someone else this way (in this case the educational institution). I guess he meant "it theoretically makes sense if you don't pay for electricity"

panarky• 12 years ago

It's not worth much to speculate about upward or downward price pressure. People made the same arguments when the exchange rate was $5, $25, $50 on up to $1,150, and now back down to $440/BTC.

These arguments have zero predictive value.

What's interesting to me is the repeating boom-bust pattern that we see as more people learn about cryptocurrencies, and as the Bitcoin protocol holds its own against an onslaught of attacks.

In the summer of 2010, the exchange rate was $0.05/BTC. Over the next year the price increased by 60000%, then proceeded to decline 90%. Even after losing 90% of its value, it was still up 4500% from the summer of 2010.

By the spring of 2013, the exchange rate spiked to $250/BTC, up 10000% ... then crashed and lost 80% of its value. Its post-peak minimum was still twice as high as the previous peak.

Again in late 2013, the price zoomed up nearly 3000% ... and it's now lost 60% of its peak value, still twice as high as the previous peak.

The past doesn't necessarily predict the future, but we're not seeing anything today that we haven't experienced at least three times already.

sillysaurus39• 12 years ago

The way to combat this is with arithmetic. Calculate out "if Bitcoin reaches $2000, what would its market cap be? How many people are actually using it? Can it possibly be worth that much per user?"

It paints a pretty grim picture for Bitcoin achieving even a 5x boost over the past peak, at least for years to come.

driverdan3• 12 years ago

There are far too many unknown variables to calculate that. You don't know how many people would be using it to push it to $2000. You won't know what the market cap would be until that price is reached.

nostrademons• 12 years ago

That was my reasoning for not getting into Bitcoin in a big way during the hype cycle. It's incorrect, though. The best case for Bitcoin is that it becomes the global reserve currency, in which case your dollars are worthless and it makes sense to exchange any number of dollars for Bitcoins now before the dollars become worthless.

IMHO this scenario is pretty unlikely, but it shows the difficulty of doing fundamental analysis on currencies. Currencies are based entirely on confidence; they are, by design, intrinsically worthless. (Gresham's Law dictates that any currencies with intrinsic value tend to get driven out of circulation and cease to become usable currencies.) So the only facts that matter when evaluating them are the attitudes of the population towards them. This is why ForEx speculation is usually likened towards gambling; it's pretty much impossible to make a sane rational analysis of their value.

Ologn3• 12 years ago

The other way to get enough buy pressure would be if many people started deciding they want to hold bitcoin as a hedge or a speculation. This spurs occasional bubbles, but we haven’t yet seen it work long term.

Bitcoin is doomed because it has no value.

Commodities have value. Modern trade began by people trading commodities for each other. Some commodities had attributes which made them good currencies - they were portable, fungible, divisible etc. Gold is an example of a commodity which makes a good currency, other precious metals like silver are good as well.

Bitcoins are worthless. They are hashes, that's it. Gold can be used to fill teeth, to conduct electricity and so forth. Bitcoins can do nothing.

It's funny to see his discussion of bubbles. If anything is a sign of a tech bubble, it's these worthless Bitcoins having a market cap of $5+ billion.

For people who are saying its value is that it is a currency, you have no understanding of the value of commodities and currencies. Bitcoin's inevitable collapse will be a sign of this. My argument is falsifiable - if Bitcoins retain value, I'm wrong (of course Keynes said markets seemed to remain irrational longer than he himself could remain solvent). The Bitcoin's advocates are making an argument that is not falsifiable. "It's worth something because it's worth something" or "it's worth something because people think it's worth something". So if it goes to zero, their theories for why it had value still hold. Scientific arguments are falsifiable (mine is), there's are not.

Also the rise of Dogecoin, Litecoin, Peercoin or whatnot point to the lack of value of Bitcoins. Anyone can create these valueless currencies - even joke ones like Dogecoin reach market caps in the tens of millions.

The only semi-rational argument for Bitcoin is the one that goes "1971 paper currencies like the dollar, yen etc. have not been backed by gold (or some other commodity) since 1971, so why can't Bitcoins have value"? That argument is a rather long thing to go into.

Also, not to make a big thing of it, but that posts like this questioning the value of Bitcoin are regularly downvoted on HN are instructive. I guess I'll have to live with losing some worthless HN karma to point out that Bitcoin hashes are ultimately even more worthless.

gnaritas11• 12 years ago

You have no idea what you're talking about. Bitcoin has value as a remittance network, especially internationally, your argument is trivially invalid.

Ologn3• 12 years ago

Can you tell me of any currencies or commodities, from antiquity to 1971, that had any price or value associated with them due to "value as a remittance network"?

Bitcoin's market cap was $13.9 billion four months ago. Now it is less than $6 billion. Bitcoin has only grown as a remittance network over the past four months, so if it derives its value from being a remittance network, why is its price sinking?

You say my argument is "trivially invalid", but people realizing Bitcoins are worthless has made Bitcoins worth half what they were four months ago.

philrapo5• 12 years ago

Gold can be used to fill teeth, to conduct electricity and so forth. Bitcoins can do nothing.

If that's why gold has value, then $1290 an ounce seems quite pricey for fillings!

Ologn3• 12 years ago

But people are paying $1290 an ounce for fillings. You might find it pricey, but plenty of people are getting gold fillings. Of course, not every filling needs a full ounce.

You can also go to an electronics store and find audio equipment etc. which uses gold. Too pricey for some, but others buy it.

When price flies away from value, like for subprime mortgages, a reckoning is always coming sooner or later. And collectively, even subprime mortgages have some value. Bitcoins have no value.

mrb2• 12 years ago

"as far as I can tell, mining is currently unprofitable with any reasonable cost of electricity."

I have been mining for 3.5 years. This statement is utterly false. Current mining hardware, such as the KnC Jupiter, can mine at about 500 Ghash/s at less than 600 Watt at the wall. Over a month it mines:

500e9 (hash/sec) * 3600 (sec/hour) * 731 (hour/month) / (2^32 * 8.0e9 (current difficulty)) * 25 (btc/block) * 400 ($/btc) = $383

And assuming worldwide average electricity costs of $0.10/kWh, it costs less than $44 to run over a month:

.6 (kW) * 731 (hour/month) * .10 ($/kWh) = $44

Even assuming higher prices (eg. highest-tier electricity prices in SoCal of ~$0.30/kWh), and even adding overhead like cooling, etc, it is still clearly profitable to mine with the Jupiter.

(However difficulty is rising pretty quickly, so it will certainly not remain that profitable, if at all, in the near future.)

wmf3• 12 years ago

That's marginally profitable, but if it never pays back the capex it's not actually profitable.

driverdan3• 12 years ago

You're completely ignoring the capital cost of buying the miner.

mrb2• 12 years ago

True, but this is not Altman's point. He clearly refers to operating costs, not capital costs. (This is why he later talks about free electricity, not free hardware.)

LyndsySimon2• 12 years ago

That's a sunk cost.

The question wasn't "is it profitable to begin mining Bitcoin?", it was "is it profitable to mine Bitcoin?"

Miners already have the equipment - as long as proceeds don't drop below energy costs, mining will continue at current levels.

anigbrowl3• 12 years ago

It’s important to understand that the default price pressure of the bitcoin ecosystem is down.

Only if you assume demand is static. With a mathematically-fixed supply, expanding global population, and the supposed inherently inflationary nature of fiat currencies, the default price pressure should arguably be upward. Let's face it, a great number of the early adopters are digital goldbugs with a jaundiced view of central banking. Like many quasi-political demographics, I think they overestimated the popularity of their viewpoint.

I do agree about the significance of the blockchain as a technical innovation...up to a point. Last time I looked at the dogecoin blockchain it was some multi-gigabyte monsters that I need to move off my boot drive sooner rather than later.

joelhaus2• 12 years ago

Tried making this exact point here too, but the true-believers don't seem to respond to legitimate critiques.

What's really hard to comprehend is the all of the "smart" VC money funding related startups -- this is pretty basic economics. Although, I suppose a Coinbase investment does provide some hedge against Bitcoin.

logicallee7• 12 years ago

This doesn’t mean bitcoin is doomed. It just means that for it to succeed, we’ll need significant external buy pressure. As I wrote awhile ago, I think the key thing we need for this is people actually using bitcoin for transactions instead of speculation (and merchants willing to hold bitcoin balances). [3] Unfortunately, transaction volume still appears to be trending down.

Let's look at this. Yes, one easy way in which bitcoin can "succeed" is by becoming a worldwide currency in actual use. In fact, this is probably a design objective.

However, its extremely limited supply dooms it from the start in this endeavor.

We can reason about this by counterexample (reductio ad absurdum). First, let's take for a given that within ten years bitcoin will have a role in the world money supply similar to gold (cap of $7.2 trillion on all gold ever mined) or the M2 money supply of USD. (http://money.howstuffworks.com/how-much-money-is-in-the-worl...)

This doesn't count other currencies and is not "most" of the world money supply.

There is a limit on the number of bitcoins that can ever be mined, at 21 million. (More than half have been mined, so let's use that upper limit - you may want to multiply by two to account for the current supply instead). If were to divide $7 trillion by 21 million we would get a bit over $330,000 per bitcoin.

Since we started with the assumption that bitcoin would become a world currency or money supply, and the bitcoin protocol limits supply to 21 million ever, we are forced to continue our argument with a target price of $330K/bitcoin over 10 years.

This does, however, pose a problem.

We started with the assumption that bitcoin succeeds as a currency.

That means people have to get their hands on it and use it.

But if we go from today's price ($445) to our logically mandated target price ($330K) in ten years, that means the value of bitcoins increases by a factor of 741 (330 000/445) over 10 years, i.e. a compound average of 94% per year. (1.94^10 = 741).

Do we have a contradiction yet? I think we do.

--> Is it possible for the price of bitcoin to rise an average of 94% per year, for ten years, while:

--> it is also being adopted as a world currency?

I believe the answer is "no". Let's look at some of the behavior that's necessary in order for it to count as a "world currency":

1. Borrowing BTC for productive purposes.

One of the major reasons, if not the major reason that USD is a currency of business and gold is not, is that you can borrow USD for productive purposes. Indeed, this can happen directly by increasing the money supply centrally in a way that gets to people for loan purposes, but also happens implicitly due to systemic inflation. Inflation mandates that some USD will always be lent. This is because inflation is a hidden taxes on keeping USD qua USD. If you come to possess $1M in cash, you would be insane to keep it as cash for 20 years. Inflation would just eat a large chunk of it. Not so with currencies that do not experience inflation.

2. This deflation is toxic to using bitcoins by people who have them.

If bitcoins are going to increase in value by 91% if you keep them for a year, then if you possess bitcoins, you would be crazy to spend them on anything that does not produce a 91% return for you within a shorter time period. This is going to seriously hinder spending, and adoption. Certainly, some people may be "forced" to sell some of their bitcoins. But that is not the way in which a currency succeeds. By people preferring not to spend it, but having to do so in some extraordinary cases.

3. Fees on exchanges may be higher. If btc has a high price, and is considered an investment, you may be leery of buying some from somebody (which may cost you percentages) to buy goods that are not actually denominated in BTC. The volatility may also put you off.

In this sense bitcoin would behave more like Picassos than like USD or any other world currency. People are just going to hang on to it.

4. So what if people need money? Wouldn't they still just get some BTC at the current spot price?

The thing is, if most people are hoarding BTC with very little spending of it, when it can be at all avoided, there will NOT be a price set by deep markets of goods and services. There is no "floor" on the price. That is dangerous for bitcoin. It is still possible to buy and transfer "just in time" to be sold back into fiat by the merchant.

But people are not going to print menus, catalogues, ads, or other more than transient pegs to price, just as nobody prints prices in ounces of gold.

You will therefore have a case in which there is no built-in usage or acceptance of bitcoins, denomination in bitcoins of goods and services, or large transactions such as investments being built against bitcoin. Since nobody uses bitcoins as an actual currency, there is no floor to its adoption. Essentially actual users of the currency are priced out of it. This is contrary to our initial assumpion!

You may say - well, so what if it is hard to get. People will still get it at a spot price, to pay for goods, even if nothing is denominated in BTC.

But then we must ask - well, why in BTC then? Why not another alt currency? If only the spot price matters...

So any POSSIBLE floor on the price will drop out, since btc does not have a unique position. Will it take on a role that Gold has over thousands of years - that people recognize its value implicitly, even after it has long since not been used as currency, and there is no obvious substitute (like silver and platinum)?

Well, here's the thing. Gold has several unique properties that most other precious metals don't have. It's easy to essay, very dense, can be recognized and verified, and has a long history of acceptance all over the world. Bitcoin does not have a long history of acceptance all over the world, the software can break, but, if the software is not broken, if its verifiability is in tact - THEN IT IS NOT UNIQUE IN THIS REGARD!

Indeed, anyone can use litecoins, doegecoins, or other currency. As bitcoin becomes too valuable to spend (unless you can get a 91% return), it would simply make sense to use the spot price of another currency to trade with instead.

So by the very fact that its properties are not totally unique, it does not have actual usage as a unit of account, it is failing in its bid to become the default online currency.

At best, it can end up like gold compared to USD, and fail to be an online currency. At worst, it can tank.

So while it is certainly possible for BTC to maintain their value - as a currency it can never reach much use. Moreover there is a large risk that the speculation will cease - i.e. that the hoarding behavior was a "bubble". Look at the volumes of litecoin and dogecoin versus BTC. This may easily happen.

I believe that an online currency could be created that is more like USD than like Gold.

Here is how the USD has been treated since 1913:

"The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates"."

Today, bitcoin fails at all three. (It will not create employment from people spending it to whom it is lent; the price of goods denominated in BTC is extremely unstable; and it would have extremely high interest rates.)

I believe that there is a way to do far more in a digital currency. But BTC is not it.

It simply, logically, cannot succeed as a currency or world money supply. Its behavior as an investment is also completely uncertain - nothing makes it unique versus other alt currencies, not the technology, not acceptance, and its price fights against real adoption.

This sets up a dangerous tulip-like situation. I personally would not invest in BTC holdings, nor do I think it is a good candidate for Internet money.

VLM• 12 years ago

Where does the base assumption that it has to take over in a decade come from? If you give it a century then its starting to look much less inflationary than holding USD.

You could play a spreadsheet game of finding a length of time to take over such that its always just a little more stable, just a little stronger, than the USD.

Finally another base assumption is that "being a major player" is the only success condition. Would it be an utter failure if instead of becoming as big as the USA economy it never became larger than the Australian economy? Australia isn't all that awful of a place, you know.

logicallee7• 12 years ago

Why would anything on the Internet take a century? If you look at a spreadsheet it actually turns out that there is no length of time it could "take over" such that it is a little more stable, and a little stronger, than the USD.

For this to happen, for the reasons I mentioned it would have to inflate at between 0-10% per year. If we go with the ultimate limit of 21 million bitcoins, this means that the price has to move down over time.

That cap is at $5.6 billion. If we assume no mining and a 6% inflation, that would have to move down $5.6, $5.26, $4.94, $4.65, $4.37, $4.10, $3.86 over seven years (in real terms). That is just a very low market cap for an Internet currency.

And if it's NOT an internet currency?

Then what keeps anyone tied in to bitcoin? Gold at least has the lock-in of millennia of world-wide acceptance, as well as an absolute scarcity in the sense that no other element has quite the same characteristics, including verifiability. Further, Gold has significant costs to move and exchange (including transportation, theft prevention, insurance, further verifiability, and so on.) So even if someone thought Gold was on the decline, it is not nearly so simple to move to something different.

Bitcoin has nothing that makes it unique on the Internet - except adoption. So if it is NOT getting adopted, anyone can move away very easily. If it IS getting adopted, deflation (scarcity of its supply) is a natural check to that, and people will stop adopting it for the purposes listed.

You say I claim "being a major player is the only success condition". Not exactly, though that is the situation I analyzed. Why?

Because on the Internet, you can't normally play second fiddle to someone's leading technology. There is first fiddle (violin) followed by fourth viola.

If people don't find bitcoin the most useful Internet currency, they can liquidate their holdings in it in 10 minutes * the number of confirmations they'd like. That's it. If they want, they can never use bitcoin again and not lose out on anything.

Coupled with the natural mechanism keeping it from reaching large adoption as a leading currency, this is a dangerous formula that results in a shallow market driven by speculation, based on bitcoin's historical performance and its unique properties. As there is no general acceptance of it as a currency, and very good reasons to think that such general acceptance can never materialize, bitcoin simply is in an extremely precarious situation.

(Finally a small quibble. I actually didn't compare with the U.S. economy, whose GDP is $16.8 trillion in a year. In terms of wealth, "The financial position of the United States as of Q4 2012 included ... a total of $91.72 trillion" [1]. That is net worth, obviously some entities will have both debts and assets, all of which is of some value to someone. So I really was talking about a very small portion of the economy, just the active money supply and nothing else. 7 trillion barely is enough to denominate just 5 months of GDP in just the United States alone, and is comparable to the market cap of all gold ever mined - which sees fairly low usage as a currency. If we imagine that the whole worldwide Internet is using some currency, it is quite a reasonable number on its market cap, in my opinion.)

[1] http://en.wikipedia.org/wiki/Financial_position_of_the_Unite... lead

battani3• 12 years ago

You raise interesting points, but you make many, many assumptions. It's totally possible that they may all come true, but there is a lot of speculation in your analysis.

Also, you assume that BTCUSD price will rise as bitcoin gains adoption (that is the basis of your analysis). But there is no correlation between price and adoption.

It's not hard to imagine a world where 1 BTC is stable at ~$10K for example. Denominations would be in milli- and micro-BTC, and BTCUSD price would be an afterthought.

logicallee7• 12 years ago

I don't think I make all that many assumptions. I am seeing what would happen if we imagined it is adopted as "the" Internet currency. On the Internet, especially in a situation like this where it takes 10-100 minutes to move away from holding bitcoin, it is quite difficult to play "second fiddle" to another curency. So we should look primarily at what happens if it becomes "the" Internet currency, and I think $7 trillion is a good cap to look at that under.

If you see my other comment to someone on the differences between Gold and bitcoin (https://news.ycombinator.com/item?id=7676732) you will see that it is incredibly easy to move away from and has no lock-in.

So we have to look at the macro process as BTC gains adoption as a currency, and we have to look at what would happen if it succeeded.

Bear in mind that unlike Gold, which has a poorer cousin in silver, every cousin of BTC has the exact same technical properties.

The only difference is the level of usage and acceptance. And that is dictated by what is the de facto crypto currency, and the amount of currency that is needed. If people tire of bitcoins, they can move away from them overnight.

diogenescynic• 12 years ago

Warren Buffet said this about gold, but it's still relevant to Bitcoin:

“If you put your money into gold or other non-income- producing assets [read: Bitcoin] that are dependent on what someone else values that in the future, you’re in speculation,” he said. “You’re not into investing....”
To illustrate the point, he asked readers to picture the world’s entire gold stock melded together into a cube 68 feet (21 meters) on each side valued at $9.6 trillion at then- prevailing prices. For the same amount, an investor could have purchased all the farmland in the U.S., 16 replicas of Exxon Mobil Corp., and still have about $1 trillion of “walking- around money.”
A century later, the farmland will be producing valuable crops no matter the currency, and dividends from the companies would probably added up to trillions of dollars, Buffett wrote.
The 170,000 metric tons of gold “will be unchanged in size and still incapable of producing anything,” he wrote. “You can fondle the cube, but it will not respond.”

dwaltrip• 12 years ago

Bitcoin has many extremely strong advantages compared to gold that make it a far more pragmatic monetary asset/neutral currency. I would list them out but I'm sure you know them (very fast transfer anywhere in the world, maximum portability, etc).

logicallee7• 12 years ago

As you can see in my other comments the basic things it lacks are a worldwide history of acceptance as currency (going back millennia in the case of gold) as well as uniqueness (the non-existence of equivalent substitutes). Whatever the technical characteristics of bitcoin, an alt coin can have the same technical characteristics. So we are riding a thin uniqueness, in terms of level of acceptance, that is not going to be driven deeper due to limits on adoption as a currency. (That I mention elsewhere.)

The uniqueness is a special lock-in for gold, and as gold becomes inconvenient due to price or scarcity, you can't just transfer it to Pt (platinum) or Ag (silver) in 10 minutes times however many confirmations you need. Gold has several layers of stickiness or lock-in, including historical and technical/physical.

Not so for bitcoin. It has self-limiting on adoption (due to the lack of anyone minting it by fiat, and its low total numbers), but moving away from it takes just minutes.

The most interesting chart is seeing the fall of bitcoin market cap against the rise of all other alt coins market cap - and to see if that is on the fall or on the rise.

Especially when things aren't denominated in BTC, but it is just used transiently, really, any other currency with a spot price will do just as well. There is no reason to believe bitcoin will have any greater use as a currency in the future than it does now. And unlike gold, it has no historical lock-in as a long-term store of value. No one is "stuck" with it, it is easy to verify transfer, and it is a totally liquid market (even at 3 AM on bank holidays) that is not held up by any printed prices or industrial uses.

It doesn't even have basic exchange mechanisms such as halting trading. The spot price of Bitcoin can collapse overnight. Unlike gold, there is just anything holding it up long-term.

It's a bit like pokemon cards, beanie babies, or pogs. Sure it can have value for a while, but as it doesn't see adoption as a currency, has no alternative or basic uses (less than these three examples in fact), and is very easy to move away from - there is no reason to suppose this will not happen. Bitcoin for a while was the only currency with its particular properties. But that is far from true anymore.

3pt14159• 12 years ago

The medium for exchange grows in value as a side effect of productivity increases and increased faith in its continued stability.

Government fiat money counteracts this mechanism of value growth through inflation. Some argue that this leads to a net benefit to the economy, but if Bitcoin is the currency of the world in the future, then it will gain value as the whole production of mankind grows. And unlike gold, it cannot be synthesized with very large amounts of energy.

vijayboyapati2• 12 years ago

Sam writes: "It just means that for it to succeed, we’ll need significant external buy pressure. As I wrote awhile ago, I think the key thing we need for this is people actually using bitcoin for transactions instead of speculation (and merchants willing to hold bitcoin balances). "

I think this is a very common meme about what success means for bitcoin and it's tied up with a misunderstanding of what money is; most people think money is valuable because it's used transactionally. Rather, money is valuable because it has reservation demand. An increasing level of transactional usage might increase reservation demand but it doesn't need to. On the other hand increasing reservation demand can occur even without any new transactional demand. Moldbug explained this best in his discussions on bitcoin and how money is a bubble phenomenon:

http://unqualified-reservations.blogspot.com/2013/04/bitcoin...

http://unqualified-reservations.blogspot.com/2011/04/on-mone...

Bitcoin can be "successful" even if it's not the preferred medium of exchange for most, or even many transactions. It can act as a store of value just as gold does. Except it is superior to gold is almost every way - more fungible, more verifiable, more divisible, easier to transport (especially across borders) and easier to transmit. A success case for bitcoin is that it becomes Gold 2.0. Gold's market cap is approximately 7 trillion. Bitcoin's market cap is approximately 6 billion. If Bitcoin were to replace gold as an alternatively medium of savings (say, in 50 years), its price could be hundreds or thousands of times higher than it is now without needed much, if any, increase in transactional use. Gold has almost no transactional use but it has a great deal of reservation demand.

a_c_s3• 12 years ago

"...it is superior to gold is almost every way"

Except for the part where you can actually make things with gold: it is shiny, easy to work with and highly conductive. So worst case, if the value of gold plummeted you could still make some awesome jewelry, electronics, dental fillings, etc.

While it may not be proportional to the current price, gold does have intrinsic value: Bitcoin has none.

vijayboyapati2• 12 years ago

Gold's use value is much, much lower than the current price reflects. Most of the price of gold is explained by its reservation demand - i.e., monetary demand, both by individuals and central banks.

And you're incorrect that bitcoin has no "intrisic value". As this author explains: http://blog.oleganza.com/post/42262765318/direct-use-value-o... ------ Bitcoin network has very interesting properties that allow you to use it not only as a currency. For example, the block chain (decentralized transaction history) is designed to be extremely hard to forge and very easy to verify. This, with some crypto features, allows it to be used for secure time-stamping, proving ownership of tangible property, decentralized DNS and new ways to sign contracts without having to fully trust any one party. Some of these things are already possible using existing software, some require already planned and compatible modifications. --------

There are a great many things that are now possible with the creation of bitcoin and the solving of the Byzantine Generals' problem that were previously impossible. If that's not "intrinsic value" then nothing is.

grinnbearit• 12 years ago

The blockchain makes Bitcoin less fungible than gold, think of blacklisted addresses for example. Of course using something like open transactions improves things substantially.

mhluongo• 12 years ago

In my (admittedly short) experience accepting bitcoin, our customers keep coming back. It's not much data, but we've had 25% retention these 3 weeks.

I think being able to spend bitcoin places people actually visit every day is going to be huge for adoption / stability. How often do I spend at Overstock.com? Now what about the corner coffee shop, or the grocery store?

Bitcoin Price Pressure

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