Good or bad news for Bitcoin?

by on March 3, 2013 at 7:37 am in Current Affairs, Economics | Permalink

You tell me:

After hitting bottom at $1.994 in November [2011], however, Bitcoin simply refused to die. The price bounced back to a high of $7.22 in January 2012 before settling down at $4.90, and news slowly began to once again turn positive…

The Bitcoin price has just broken the all-time high of $31.9099 that it set on June 9, 2011 on MtGox. After a persistent, one-and-a-half month rally from $13 to $28, followed by nearly two weeks of bumping up against $30 and then hovering around the $28-$31.5 range, the bulls have finally won…

With apologies to Scott Sumner, I say Bitcoin is a bubble.  Outside of war and rebellion, do “normal” new currencies behave this way?

bitcoin

The full story is here.  For the pointer I thank Mark Thorson.

Addendum: Scott Sumner comments.

Ashok Rao March 3, 2013 at 8:03 am

Why should we consider Bitcoin to be a ‘normal’ currency? It’s not in anyway. Of course private fiat money has its value, but really only in times of hyperinflation. I can’t think of a time where private fiat money has taken off with stable price levels.

Normal currencies are legal tender: required to purchase goods in a given locale. No one wants Bitcoin to buy goods, and no one wants Bitcoin denominated debt. Many people also don’t know about Bitcoin. I bet the people who hold on are more active traders etc etc.

I’d agree it’s a bubble, that is people are just holding it for speculation. It doesn’t seem to have much other value, which makes it very volatile as demonstrated by your graph.

mofo March 3, 2013 at 9:05 am

Its not just a bubble, it shows all the signs of a manipulated, thinly traded asset. Read this article and tell me this doesnt smack of a small cadre of users manipulating its price:

http://arstechnica.com/tech-policy/2012/10/78-percent-of-bitcoin-currency-stashed-under-digital-mattress-study-finds/

David H. March 3, 2013 at 10:45 am

But aren’t manipulated markets a perfect opportunity to profit? If you’re really so sure about this, why aren’t you placing bets? Don’t you like free money? I don’t need to cite precedent about all the wealth that’s to be made in correctly predicting bubble collapses…

Hazel Meade March 3, 2013 at 10:50 am

Is there a way to short bitcoin?

Leo March 4, 2013 at 1:06 am

Yes, mpex.co

Rahul March 4, 2013 at 7:41 am

mpex.co charges a 30 BTC setup fee!! Who in the world will pay $600 to set up a bitcoin account. Crazy.

JWatts March 3, 2013 at 10:57 am

To follow up on HM’s comment, the only way to bet against bitcoin is not to play.

BC March 3, 2013 at 1:46 pm

Really? There is no mechanism by which someone could lend bitcoins to you? Does that mean bitcoin owners can’t earn interest?

JWatts March 4, 2013 at 4:51 pm

It’s not a matter if it’s possible. It matters if it’s common.

mofo March 4, 2013 at 3:05 pm

No, manipulated markets are a perfect opportunity to lose money to the person or persons who are doing the manipulating.

steve March 3, 2013 at 10:51 am

It’s NEW and there are the places to spend Bitcoin are only starting to grow. (Wordpress, Reddit and Mega being some of note).

Of course its thinly traded and being held on to as it is so new! Give it time.

I hold Bitcoin, but I’m certainly not manipulating its price on purpose. People see its properties and growing potential as valuable.
Manipulators exist in all exchanges.

It’s risky, so if you are risk-averse stay away. Right now it probably is acting more like a commodity, rather than a currency.
In my opinion this will change (and is as we speak).

I consider it a bet on the future of online commerce. If you don’t agree and don’t value its properties, that’s cool. Who am I to tell you you are wrong.

mort dubois March 3, 2013 at 11:11 am

Holding bitcoin is manipulating the price.

JWatts March 3, 2013 at 11:51 am

Indeed, if you are holding bitcoin in a non-interest bearing fashion, then you are speculating. The large percentage of the currency that’s not actively being used in transactions, indicates to me that BitCoin isn’t a medium of exchange as much as it is a commodity. A virtual commodity.

Dan Weber March 4, 2013 at 11:19 am

Holding a bitcoin in an interest-bearing account would be a weird concept. You aren’t holding the bitcoin. You are holding a debt on a bank.

Maybe this was your point.

Silas Barta March 5, 2013 at 12:38 am

Using the term that way is manipulating the concept.

jack March 7, 2013 at 7:18 pm

“Holding bitcoin is manipulating the price.”

So if he had never bought bitcoin and was holding that value in dollars instead, would he then be manipulating dollars?

Lets not get carried away with semantics here.

Hugo March 3, 2013 at 2:26 pm

That article is based in a flawed study. The authors saw a pattern in the Bitcoin blochchain and made an assumption as to why that pattern was ocurring. The problem is the guys doing the article were mathematicians with no knowledge of the Bitcoin economy or its comunity and the assumption they made is completely ridiculous while they ignored the more sensible possibilities.

I agree with you that it behaves like a thinly traded asset (because it is).

Rahul March 3, 2013 at 8:22 am

If I’d bought Bitcoins the last time Tyler was screaming “Bubble!” I’d have been 15x richer now. Sigh.

http://marginalrevolution.com/marginalrevolution/2011/10/ahem-3.html

ThomasH March 3, 2013 at 9:13 am

Which you could use to purchase ……?

Andrew March 3, 2013 at 9:19 am

Pizza, VPN, etc.

Pål Driveklepp March 3, 2013 at 9:34 am

dollars…

John S March 3, 2013 at 9:40 am

“dollars…”

winnar

jack March 7, 2013 at 7:21 pm

FOR NOW you have to exchange bitcoin to dollars before you can buy something at Walmart.

So?

I don’t think anyone who saw GOLD as a good store of value in 1999 is complaining about having to exchange it to dollars before they can buy a soda.

byomtov March 3, 2013 at 10:21 am

Customer: It’s gone up enough. I’m happy. Sell.

Broker: Sell? To who??

justin March 3, 2013 at 10:39 am

Sell to who? The thousands who want Bitcoin that’s who.

There are 87 exchanges… MtGox (the largest) currently has $2.2m worth of buy orders.
And weekends are usually slow.
MtGox is coming to the US at the end of this month so the market is set to grow massively.

byomtov March 3, 2013 at 12:58 pm

Is that trading volume on the left vertical axis?

Tomasz Kaye March 3, 2013 at 10:19 am

Lots of things: http://www.bitcointrading.com/forum/spend-bitcoins/online-stores-accepting-bitcoins/

Especially of note is the newly opened http://www.bitcoinstore.com/ for hi-tech goods. Currently undercutting amazon by a large margin.

JWatts March 3, 2013 at 11:02 am

“Currently undercutting amazon by a large margin.”

I wouldn’t necessarily consider that a good sign.

byomtov March 3, 2013 at 9:16 pm

They are also undercutting B&H Photo, the biggest discount retailer of photography equipment, probably the biggest seller in the country, by about 10%, at least on the popular product I looked at (Sony NEX-7 with kit lens).

Well, I don’t believe it. Have you ordered from them, and gotten product delivered?

blablabla March 4, 2013 at 7:05 am

The price is lower on websites like bitcoinstore because there is 0 fraud risk and smaller fees. B&H by contrast must spend massive amounts of money to combat fraud and another 3% on top of that in fees to the credit card companies.

byomtov March 4, 2013 at 11:27 am

No. Large merchants don’t pay 3% on credit card transactions. And if they did that would account for 30% of the difference.

Do they have security costs? Sure, but 7% of sales volume? No way. That’s a ridiculous overestimate.

Further, do you seriously think that bitcoinstore commands the kind of volume discounts from manufacturers that B&H, or Amazon, does? Not even close.

And bitcoinstore has a problem that B&H doesn’t – the volatility of bitcoin values. Look at the chart. That’s a massive risk. They can’t pay their suppliers or employees in bitcoins.

It’s nonsense.

iteathen March 19, 2013 at 1:31 am

I bought many things from bitcoinstore.com. My items arrive 4 days after ordering. And they do have access to big box bulk rates since the same guys own memorydealers.com. amazing how wrong assumptions can be. I’m using a asus eee transformer that i bought with btc while eating popcorn that i made in a microwave that i bought with btc and playing wot on my new computer which was bought with btc while i write this reply with my sons acer touch pad that was bought with btc. All 10% under amazon prices. Now I’m off to check how much i can sell my 2930 btc for… oh look the price is at $52. Well, shit i guess i don’t need to find work this year. $150,000 dollars not bad for nothing more than foresight and a head on my shoulders. Looking at houses now mine is too small. GL, nay sayers! Wish you the best.

mpkomara March 3, 2013 at 3:04 pm

If I’d bought Bitcoins the first time Tyler mentioned Bitcoins, I’d have been 1133x richer now. http://marginalrevolution.com/marginalrevolution/2010/06/assorted-links-24.html

Tuxavant March 3, 2013 at 8:24 am

Bitcoin cannot function as a store of wealth nor transfer of value unless it is adopted by hundreds of millions of people, otherwise, where are you going to spend it?

Adoption means increase market exchange rate. There is no getting around this point. The monetary units of bitcoin are fixed, or at least very well known to inflate to a maximum. This only leaves room for one fluctuating component in the formula of market capitalization: price.

Example, if Bitcoin only takes 1% of Western Union’s 80 billion dollar remittance business, that would mean a price of $76 per bitcoin.

HM March 3, 2013 at 9:40 am

A single bitcoin could perform all Western Union’s business probided it was recycled quickly enough. If I change a follar for a bitcoin, send it abroad, and it is resold in a nanosecond for money in the target country, total market cap of bitcoins can be very low and a large number of transactions can be performed.

It is impossible to discuss the reasonable value pf bitcoins in terms of number of transactions performed only. We have to go back to basic monetary economics, look at stock demabd for money,and discuss what dollar/bitcoin-price path which cleara the bitcoin market.

Justin March 3, 2013 at 8:24 am

What on earth is a “normal new currency”?
That’s like 20 years ago when the Internet arrived “This is not acting like a normal new computer service”

“I say Bitcoin is a bubble”… and your reason being? That is is growing?

If this is to be the next big thing in digital currency (which it is increasingly looking like being)… massive growth and volatility are to be expected. At least until many more services take Bitcoin. At present it’s only big sites like Wordpress, Reddit, Mega and most VPNs.
This coming year there will be plenty of new services to spend your Bitcoin on.

RPLong March 3, 2013 at 8:43 am

I agree. Even if the ultimate “winner” in this space is someone other than Bitcoin, we are looking at the future of currency. Right now, it’s only the early-adopters. Eventually, everyone will need to set up some kind of digital currency account.

I just bought something online last week and the online retailer was surprised that I payed with credit card instead of PayPal. PayPal has the infrastructure. If the two concepts merged, we’d have a monetary revolution on our hands.

Justin March 3, 2013 at 8:52 am

PayPal are cool, they have saved my bacon a few times with Ebay problems.
They are however not going to like Bitcoin… it is a direct competitor!

The advantages of Bitcoin being, tiny fees, near anonymity and the fact that PayPal is still essentially FIAT currency.
The problems with FIAT are that our countries keep printing more and more money making our savings worthless.

A worldwide digital currency is needed, is it Bitcoin? who knows… I see no reason why it shouldn’t be though.

RPLong March 3, 2013 at 9:00 am

I agree with you, but I do think Bitcoin requires better infrastructure to be successful. If they had the same kind of infrastructure PayPal had, then Bitcoin would already be huge.

…which makes me think that a lot of this volatility could potentially be explained by the relatively small number of Bitcoin users. For example, if I issued my own currency, PLongs, and issued PLongs only to myself, then every time I acquired more PLongs or spent them on something, there would be enormous volatility changes – not because the currency is unstable but simply because I am the only one using PLongs. “Volatility” in that case would only be a measure of currency use.

If I issued PLongs to hundreds of other people, this “volatility” would start to disappear. If I issued them to thousands of people, we would start to see more regular currency behavior. If millions used PLongs, then it would look like a normal currency.

So it might simply be a concept similar to the Central Limit Theorem at play.

byomtov March 4, 2013 at 1:46 pm

Eventually, everyone will need to set up some kind of digital currency account.

Why?

Nicholas Weaver March 3, 2013 at 9:38 am

BitCoin is weird: The true believers are goldbug variation types turned up to 11. The money supply grows gradually as part of the transaction validation process, with an eventual limit of ~21M BTC from the current ~11M BTC now. Currently, the # of BTC increases at a rate of approximately 3600 BTC/day.

They are also insanely resistant to the idea of fractional reserve banking, thus outside of BitCoin Ponzi schemes (the biggest one run by a guy called “PirateAt40″, sucking up 600K BTC!), anyone storing bitcoins on your behalf can’t lend them out again…

But as such, this means that the price is low, actually. Lets assume that every voter for Gary Johnson wants 10 BTC… Well, thats the entire money supply. If you believe in the future of bitcoin, the ONLY thing to do is hord bitcoins: buy them cheap (mine, purchase, whatever) and just hold onto them.

Its also remarkably thinly traded: Many bitcoins just do nothing. So those that do trade are basically the ones who define the market, and its small: $40M total volume in a month. It doesn’t take many short term speculators to rack up $40M/month in trades.

As for bitcoin use, its interesting. As a medium of exchange (Buyer to USD to BTC to Seller to USD) its friction is high: cheaper and more convenient to use paypal or square for legitimate transactions. Thus pretty much its Silk Road (drugs) and stupid gambling (1/2 the in BTC transactions are Satoshi Dice).

But its illegal use exists only as long as it is also comparatively small: the medium of exchange use (eg. for drugs) is part of that $40M/month total volume. If it ever took off, the complete lack of anonymity in BitCoin (it is only pseudonymous, and there is a very big difference as every transaction is public record), combined with the very limited # of gateways to the real world money supply (Mt Gox and Intersango are the only ones) will allow law enforcement to really hurt/kill BitCoin as tender for illegal goods.

gwern March 3, 2013 at 11:01 am

Pirateat40 didn’t get 600k btc. His official claim was 100k less, 500k. And who knows what that means – why would you trust a Ponzi’s figures? Is that just the purely hypothetical supposed outstanding balance due to the investors based on their deposits compounding weekly at 7% for a while? How much of the balance was paid out to other bitcoiners (even Madoff had ‘net winners’)? If you try to look at the blockchain, well, that’s notoriously hard to interpret (you could be looking at a wealthy investor who’s laundered his bitcoins, Silk Road, dead coins etc) and attempts to estimate the size of the pirate40 Ponzi are especially complicated due to his use of mining pools.

And personally, I would think that the poor track record of third-parties in the Bitcoin world means that trusting entities with your money to do fractional-reserve banking would be even stupider than investing in a Ponzi…

> the complete lack of anonymity in BitCoin (it is only pseudonymous, and there is a very big difference as every transaction is public record)

Bitcoin is about as un anonymous as the Internet. You’ll notice this has not stopped Tor from existing.

Justin March 3, 2013 at 9:47 am

Bitcoin is only young, and the infrastructure is still developing. The main exchange (MtGox) is in Japan, but recently coinlab announced they will be making it easier for people to get hold of Bitcoin by handling MtGox’s US side actually in the US. They are backed by some big players in Silicon valley which the market sees as a good sign that Bitcoin is gaining traction (hence the recent price increase).
When there is a closed loop and more businesses accept Bitcoin the price will stabilize… it’s hard to price something that nobody has seen before! One of the main drivers in the coming months will be online gambling. The Satoshi Dice service which has mathematically provable odds reported $500,000 profit in six months! Other bigger players in that sector are sure to have taken note of that.
Services like Bitpay are growing in to very user friendly payment portals for Bitcoin… so PayPal like infrastructure is growing.
The advantage of Bitcoin is that it is not centralized though… PayPal can freeze your account and dictate who you can and cannot pay. Many people don’t like that.

Well if you ever release PLogs can I have a couple? ha
Even if Bitcoin doesn’t become the default world wide digital currency, it will find a niche. (It already does, but for fairly nefarious things on the Dark-Net unfortunately). Not great for the image of Bitcoin, but a kind of proof of concept!

Justin March 3, 2013 at 10:12 am

Hey Nicholas, please don’t stereo type Bitcoin users… I certainly wouldn’t class myself as a Goldbug.
There are about 87 exchanges according to this:

https://en.bitcoin.it/wiki/Category:Exchanges

You have valid points about the low volume, but as I have said before… this is a young currency.
In the early days of the Web there were probably few WebSites!

I would also disagree with you “Complete lack of anonymity”, yes there is a permanent ledger… but your name is not tied to that ledger!
You can’t possibly know who I am from this 1DKhWRNND7P5t8Wrhu3CTMERsMQmacSF8J

There are also services which can obfuscate or mix addresses for the paranoid.
True Bitcoin is used for illegal reasons… (so are $’s and £’s!).

Lending services and such could easily be developed in time… as I said before this is a really young currency! Its early adopter stage. If you don’t believe in it thats cool, I wouldn’t try and convince anyone to use it. I find the technology and potential fascinating though.

I’m not following you when you say Bitcoin is a more expensive way to pay than PayPal though. It’s possible to pay with Bitcoin with zero fees (although the transaction takes longer to confirm).

Ape Man March 3, 2013 at 10:14 am

It can’t be a bubble. I have not seen anyone on TV tell me to buy them yet.

That said, I am not fan of bitcoins. Anyone who thinks they free you from government control has not been paying attention to how quickly and easily governments in other countries have seized control of the internet.

iteathen March 19, 2013 at 1:56 am

If it was so easy to shutdown, torrent would have been gone a long time ago. Bitcoin uses a similar system to protect itself. The government would have to shut the whole internet down… not going to happen. And no, port blocking will not work. Btc can be exchange via any electronic communication medium. Not conveniently and not without some skill but it can be done. Sms has been used to exchange btc during a internet blackout in Egypt as an example.

sam March 3, 2013 at 10:26 am

I still have hope for bitcoin but its developer(s) made a bad decision in designing it to be so deflationary. The supply of coins is asymptotic and will lead to high prices just by virtue of increased demand. This is why it’s accused of being a ponzi scheme. That’s technically a misnomer, but on the other hand early adopters can get rich quick simply by ginning up demand.

Prakash March 3, 2013 at 1:20 pm

Sam,

There are other crypto currencies which do not have this deflationary feature. You can spinoff your own currency using the code provided by bitcoin. The question is how are you going to convince others to accept it?

sam March 3, 2013 at 4:05 pm

That’s the point. The deflationary nature of Bitcoin is the very incentive driving people to popularize it. It’s like MLM. I buy bitcoins (or Avon lady products) and then have a motive to convince 10 of my friends to buy, too. An alternative BitCoin doesn’t exist because the “stable”-currency meme doesn’t self replicate. Yet I still have hope for bitcoin. There may be a path dependency towards a stable crypto currency where you must first pass through an Avon Lady currency in order to sell the idea door-to-door as it were, and build the requisite infrastructure, such as MtGox. Sort of like how the roaring twenties created Miami.

Prakash March 4, 2013 at 6:15 am

More people coming into bitcoin creates a tendency towards, but not a surety of Bitcoin’s value rising. Bitcoin value can fluctuate greatly.

The scenario where all early adopters get extremely rich requires Bitcoins to become very valuable, the default international trade currency of the world, which means that the early adopters who disposed of their coins are infact selling something valuable.

The scenario where some early adopters get extremely rich and some remain poor, requires them to sell at a time of Bitcoin mania and Bitcoin crashing after that, with the faithful suffering.

We honestly don’t know what will happen. So, the jury is still out on whether the Bitcoin sellers are conning people or giving them the best deal of thier lives.

Mark March 4, 2013 at 10:37 am

Paypal are not cool – they may seem cool to a consumer, but as a business I hate paypal – they are just a necessary evil.
At least 5 times per month I get charge backs becasue of ‘stolen accounts’ (or people claiming their 12 year old kid used their account without permission). And you have to wait 90 days to be certain that no charge back is going to occur.
They can close your account at a moments notice and hold onto your funds. Their customer service is non-existent. They have a monoploy on online money transactions. They block transactions to people who they don’t like (like wikileaks)
Paypal represents the opposite of freedom – they are a fascist dictatorship who want to tell us how and when we can use out own money.
With bitcoin you, the consumer, take full responsibility – if you don’t trust the merchant – or the merchant does not use a 3rd party escrow service – then you can choose not to buy from them.

mike March 4, 2013 at 2:35 pm

you could try Stripe to replace PayPal. I hear they’re much better to deal with.

Steve March 3, 2013 at 10:34 am

Sam: It *could* be seen as unfair… but do you consider the early buyers of Apple shares to be unfair? Early adopters will benefit true… but with out them, there will be no adopters!
The same is true of the guys who first found gold.

It is deflationary, but it will reach a stable price eventually. It’s surely better than inflationary (your current currency)… each year your wealth is worth less with that system. The only way the US is ever going to pay of their ridiculous debt is by printing more and more money.

A Bitcoin can be subdivided to 8 decimal places… so there is plenty of scope for growth.

ApeMan: The worlds governments don’t own the internet… I use a VPN (paid for with Bitcoin), so no authority can tell me what I can and cannot do online. That is why I am attracted to Bitcoin. Some Governments won’t like it, and may try to ban exchanges and companies from accepting Bitcoin.
But there is no World Government! So they won’t be able to stop Bitcoin, just as they can’t stop Torrents. The Pirate Bay is still alive after all this time.

Bitcoin will do to currency what MP3′s did to Music. :)

sam March 3, 2013 at 4:17 pm

The deflationary point is that over time bitcoins supply becomes increasingly inelastic. It’s price stability will thus be dependent on the stability of demand. You should therefore expect bitcoins long run equilibrium to be highly volatile (and highly manipulable). You see why the Apple shares analogy doesn’t make any sense? The number of shares isn’t fixed. A multi-level marketing or pyramid scheme analogy is better. Early adopters have many people to sell door to door too, as evangelism becomes increasingly difficult the further down the pyramid you go.

iteathen March 19, 2013 at 2:15 am

It is currently sub dividable to 8 decimal places, it can be expanded with updates. 1 btc is enough for the worlds market cap. I know some folks have trouble with this part i think largely because this is not something remotely possible with printed fiat currency.

gwern March 3, 2013 at 10:45 am

So, during the previous runup and peak, Tyler called it a bubble. During the year of stability following (with no collapse to zero as skeptics had forecast), he never called it not a bubble. And now that the price has increased again, he is calling it a bubble.

Exercise for readers: under what circumstances will Tyler say that Bitcoin is not a bubble? If this set is non-empty, is it a subset or a superset of all the circumstances in which Bitcoin is genuinely not a bubble?

Don March 3, 2013 at 10:58 am

When he says Jump! you Duck!

ha. ha. So many Luddites here who couldn’t see a revolution happening if it slapped them in their faces.

Remember the Dot Com Bubble?! long term that turned out alright didn’t it!

Even if it is a bubble, that doesn’t mean its longevity in doubt. It’s bounced back from much worse.
This is a young mans world these days, owned by Nerds.

Prepare to have your worlds rocked by a very disruptive technology, the likes of which have not been seen before, regardless of how you claim this is a “normal” new currency.
There is nothing normal about it!

Hazel Meade March 3, 2013 at 11:00 am

I posted this once before but …
http://crypto.stanford.edu/~xb/fc12/bitcoin.pdf

The gist of it is BitCoin will eventually become vulnerable to hacking, and collapse.

Justin March 3, 2013 at 11:14 am

I’m not going to read all that, but are you referring to the less and less likely 51% attack or its encryption being hacked?
(In which case your bank and Governments secrets are in big trouble too).

Bitcoin is open source so any future security threats can be addressed, and the protocol will adapt.

gwern March 3, 2013 at 1:57 pm

The argument of that paper, IIRC, is that after the mining subsidy disappears and miners profit only from altruism and transaction fees, this will be too little to make much mining worthwhile and so it’ll be cheap to assemble enough mining to do one of the 51% attacks. I’m not sure it works, since it seems pretty handwavy and doesn’t include any actual calculations.

blablabla March 4, 2013 at 7:15 am

i didnt read the paper but if what you say is true than the writer does not understand economics or bitcoin. There is a limited amount of space in each block and the only way to get your transaction included in a block under those circumstances would be to out bid everyone else for control of that limited space. Thus transaction fees under those circumstances would not be a product of altruism at all, but a necessary expenditure in order to transact in bitcoin.

Hazel Meade March 4, 2013 at 12:54 pm

The transaction fees aren’t a product of altruism. it’s that ponce there is little profit in mining, there are fewer and fewer transaction verifiers in the network. So the network has to rely on a combination of altruism and the (small) profit in transaction fees to keep people interested in verifying. Then you combine that with moores law and it gets progressively easier over time for someone with sufficient computing power to launch a history revision attack.

Dan Weber March 4, 2013 at 11:26 am

There’s a pattern when economists debate bitcoin enthusiasts.

When economists criticize the security of bitcoin, they are always wrong.

When bitcoin defend the economics of bitcoin, they are almost always wrong.

For bitcoin to be useful in commerce, it has to be stable, but stability is the last thing the enthusiasts want.`

JWatts March 3, 2013 at 11:17 am

All this talk about Bitcoin and not much talk about the fundamental aspect. Why should I buy Bitcoins? Most of the reasons seem to be centered around either the cult of the new and/or paranoia.

affenkopf March 3, 2013 at 11:45 am

Best currency to buy drugs with on the internet.

JWatts March 3, 2013 at 11:55 am

I’d classify that as paranoia. Or does is it really better than an anonymous “credit” transaction. I can go buy a Visa/Mastercard gift card at the grocery store with cash. Then use it for an internet purchase and the payment is anonymous from the buyers point of view. Granted, you still have to ship the goods somewhere in either case and that’s why I consider it a pretty useless concept.

Rahul March 3, 2013 at 9:52 pm

Which internet drug seller accepts Visa / Master? And by drug I don’t mean Viagralis.

affenkopf March 4, 2013 at 4:36 am

Well, Silk Road only accepts Bitcoin.

Alex March 3, 2013 at 12:01 pm

Greater fool theory.

Jim Glass March 3, 2013 at 12:31 pm

Bitcoin isn’t money, it is a commodity. But it is a very interesting commodity.

Like wheat or orange juice or copper or platinum, it exists in a finite amount, and its price goes up and down in response to change in demand for it. The price is very volatile because there is no supply response to changes in demand to mitigate price moves, so all change in demand goes right into the price. Textbook.

Except it is a “virtual commodity” that consists of nothing — a nothing that exists in fixed amount the supply of which grows by a set, known rule. There is no “use value” for the commodity as there is for orange juice and platinum (and as there is for gold which supposedly creates its value as money) because it doesn’t exist.

Bitcoin is an experiment in the value of “pure limited supply”, of nothing!

There are market prices for all kinds of things that one would think would have *no* value — such as canned automobile exhaust fumes — provided they exist in limited amount.

Now we see that demand creates a market price even for nothing as long as it exists in a limited amount. Bitcoin demonstrates the use value of scarcity itself — scarcity in its purest form, the scarcity of nothing!

Could it become “money”? Well, if it is possible with fiat money — our closest prior experiment with the scarcity value of nothing — then … well … maybe. In principle.

But in practice, it is a long long long long long long way from becoming the universally used measure of value and medium of exchange. For it to travel that distance, that volatility in price is going to have to end. And its lack of supply response isn’t going to help it any in that regard. Even gold has a significant supply response. I’ll wager that bitcoin will remain a commodity forever. A commodity with a volatile price tracking the changing positive value of a limited supply of nothing!

sam March 3, 2013 at 4:20 pm

+1.00000001

Tomasz Kaye March 3, 2013 at 5:31 pm

“There is no “use value” for the commodity as there is for orange juice and platinum (and as there is for gold which supposedly creates its value as money) because it doesn’t exist.”

Not so. The use value of Bitcoin consists in the value attached to being able to (for instance): Pseudonymously (or anonymously if you’re careful) transfer funds without having to trust any entity other than the receiver. Or the value attached to the ability to pay/receive funds without geographical limitation while avoiding or minimising transfer fees and avoiding any storage or subscription fees.

So a strictly limited supply is only part of the appeal. If you didn’t see it already the Bitcoin FAQ may be illuminating: https://en.bitcoin.it/wiki/FAQ

Joe March 3, 2013 at 8:37 pm

.” For it to travel that distance, that volatility in price is going to have to end ”

That statement is what I would call paradoxical. It can’t suddenly become a universally used measure of value without having a corresponding value increase (a volatile one ) because of this new userbase.

prakash March 3, 2013 at 10:58 pm

In addition to tomasz’s most obvious use case, bitcoin has use value in provably fair gaming.
Also, bitcoin is this world’s first source of record that is not dependent on any one source. That could have some value in the future.

Gavin Andresen March 3, 2013 at 1:01 pm

I’d be very interested to hear some ideas on how to avoid bubbles during the introduction of a de-centralized “bottom up” currency like Bitcoin. Obviously steady, long-term growth would be ideal, but without a central issuer deciding what the long-term growth ought to be how could that be accomplished? Early adopters could try to sell into rallies, but eventually they’d run out of coins. And nobody can force the early adopters to do that (I’m the lead developer for the Bitcoin project but have no power beyond persuasion to get people to do anything with their bitcoins).

jack March 7, 2013 at 10:04 pm

a sign of how under the radar bitcoin is that Gavin can post here and go completely unnoticed. This is like Ben Bernanke commenting on an article about the dollar. Think he’d get any replies?

Fred March 3, 2013 at 2:36 pm

I want all of you to keep thinking it’s a bubble. It keeps you away from the market until you realize it’s actually a viable currency. This will allow us to gather more bitcoins until the sheep realize it’s not a bubble and come stampeding into the market.

You’ll make us rich.

Dan Weber March 4, 2013 at 11:45 am

You forgot the petulant “if you all think bitcoins are worthless please send yours to me at e6a92ec2fe5fba022c31c32c97ea455cee4b2736 lol!!!!111″

bob March 4, 2013 at 1:55 pm

Except anyone could recreate bitcoin with extremely minor tweaks, and wipe the whole lot of you out. It’s still a popularity contest: Why would most people pick an option where the large majority of wealth has been assigned already, if there are any other alternatives?

And, since it’s naturally deflationary, its value as a currency is awful, since you need extremely specific macro conditions for a deflationary, popular currency to not to be hoarded.

jack March 7, 2013 at 10:15 pm

“And, since it’s naturally deflationary, its value as a currency is awful, since you need extremely specific macro conditions for a deflationary, popular currency to not to be hoarded.”

Deflation is only bad when you have one currency controlling the entire economy.

When you have competing currencies, you can hold in the form of the deflationary currency, then switch to the inflationary one to buy.

Arthur B. March 4, 2013 at 8:27 am

Of course it’s a bubble, every currency is a bubble. You only ever hold currency (be it dollars, gold) because you expect other people to value it as currency, and they value it as currency for exactly the same reason. The thing is, a good currency is a very stable bubble.

Max March 4, 2013 at 2:41 pm

Many people here think BTC are useless. BTCs are extremely useful for Americans trying to gamble on the internet. The online poker industry was worth billions of dollars before the US government blocked banks from participating. Bitcoin could easily capture a fraction of that market and be worth a lot of money in USD terms.

Max March 4, 2013 at 2:44 pm

Gavin,

To answer your questions, building in 1% inflation to an altcoin might help with price stability. While many bitcoins are still being created now, many actors in the market are hoarding because they expect deflation with the hard 21M limit. 1% inflation may or may not be the right number, but having less of a cap on the currency would encourage more spending over hoarding.

Dave March 5, 2013 at 1:12 am

The Welfare State is expensive, more so than all other government functions combined. It can only be funded by a combination of income tax and monetary expansion. If widely adopted, Bitcoin would cut both legs off at the knees.

You live in a mansion, drive a Rolls Royce, and dine in five-star restaurants, so the government knows you’re not poor. But if, thanks to Bitcoin, the IRS can only guess your income by observing your lifestyle, it’s not an income tax anymore, it’s a consumption tax. Such taxes always hit the poor harder than the rich, who can postpone and/or relocate their consumption. Every dollar collected by the Luxury Boat Tax (1990-1993) cost the government five dollars in benefits to unemployed yacht-builders.

Almost half of all Americans get all or most of their income from government. For these bureaucrats, retirees, and welfare moms to survive, Bitcoin must die.

iteathen March 19, 2013 at 2:32 am

You are drinking the cool aid. Banks received far more government welfare than citizens, only the don’t call it welfare they call it “quantitative easing” (or “bailout” for the headlines) to trick jackasses that don’t read past the front page. Sadly, it seems to work. Help! I spent all my money on crack and cant afford food vs help! We made tons of money selling bad loans and wrecked the banking system. I’d rather poor people steal from me through taxation than fat cat bankers though taxation.

jack March 7, 2013 at 10:19 pm

If the US dollar didn’t have the government behind it, it would be worthless.

Bitcoin has nothing behind it, yet it is still valued for transactions. Point: Bitcoin.

BrIZzz March 9, 2013 at 3:15 am

An alternative scenario…

Bitcoin is a social experiment implemented by some form of government or other individual with a desire for true Capitalism (Capitalism is the creation of competition and the elimination of monopolies to facilitate that competition). This Bitcoin experiment has obvious flaws and a slightly cheezy name. To me Bitcoin screams BETA TEST!!!

It does however undermine central banks who ultimately hold a gun to the head of the global economy. If they feel like pulling the trigger they can at any moment. And say oops… Sorry, little ole me made a boo boo. We can clean this up. We wont let it happen again we swear.

They know they can get away with whatever they want because they rule the world. They are, after all, “Too big to fail”, or in other words too big to indict.
So they go on with this social experiment/world domination scheme and never pay for the crimes they commit.
Then along comes Bitcoin and ruins the party. I dont think Bitcoin will last due to it’s inherent and obvious intentional flaws. But this could easily turn into the future of banking and the destruction of the global domination of the few. This could empower humanity and propel us into a future we all deserve. Capitalism needs competition even when it comes to the manufactured commodity we call money.

I personally have made quite a bit of money on Bitcoin. I even set some aside to pay my taxes like a good little slave. However, like in any currency trading I take profit when I can, and don’t risk more than I can afford to lose.

Make your money on Bitcoin and get out. It is an obvious experiment and will collapse when a new full blown Bitcoin 2.0 is implemented in society. Bitcoin 2.0 will obviously need a less cheezy name and more stable structure. Enjoy this while it lasts, it may stay around for a while. An experiment of this caliber needs time to churn and grow. Though, like all experiments the test subject usually dies or is put down.

I’m sure we will see many versions and variations of Bitcoin arise due to its ability to undermine authority and evade taxes. However, we pay taxes for the services our governments provide. The governments around the world just have not realized that they are merely a business providing a service. The citizens are, put quite simply, customers of that business.
I see the future of government being forced to run as a proper business and less like a social control mechanism as it is today. This I see happening very soon due to the fact that people will continue to evade taxes until the money is being utilized in a way the “customer” actually sees and benefits from.

Governing a society the way we do today is becoming obsolete. Rethinking our approach to dealing with massive populations of people is imperative to our survival as a human race. With increasing levels of high speed communication and social networking the world is becoming a no BS environment. The internet is becoming a way for people to govern themselves. This is happening simply by publicly stating the current facts and situation in a way everyone sees and understands.

While this comes at a cost and creates new social issues, this is where people begin to finally evolve from irrational animals to a global society sensitive to global issues.

Globalization is real, it is evolving, and it is unstoppable.
time will only tell what happens, but I am hopeful. Things have done nothing but get better throughout history. This is a trend that has never changed. From the dawn of human kind til today things have only improved and enhanced.

I think it’s time our monetary structure evolved and enhanced as well. It needs to evolve into a new kind of tool that pushes us even farther into prosperity as a species and not as individual countries.
We are all here on this planet and it’s only getting smaller relative to our population growth.
Our children depend on us to create a future they will be proud to inherit.

We need to create a monetary structure that promotes global prosperity. We have the technology to feed and clothe the world, why not create a monetary system to facilitate this global prosperity.
at this point it seems self destructive to continue on the way we have.
Some say we are reaching the age of abundance, lets embrace it enjoy it and move beyond our futile barbaric and undeveloped ways of the past.

sincerely,
A hopeless/hopeful futurist…

tomschmidtty March 19, 2013 at 8:13 am

I thought the same thing about PayPal in 1999…cheesy name.
Now Elon Musk has a spaceship company.

angelinajhon March 30, 2013 at 11:26 pm

The Rise Of Bitcoin What Is It And Is It Worth It? | Bitter Bananas

Bitcoin is starting to get very popular these days, but still the majority of people know nothing about it. It is considered as one of the best investments you could have made, because of its’ massive price jump over the last year.

So what is Bitcoin?

This article best describes the overivew of Bitcoin, which is largest online used digital currency in online world.
http://bitterbananas.com/the-rise-of-bitcoin-what-is-it-and-is-it-worth-it/

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