Ahem…

The price of Bitcoin continues to drop by about a dollar every week to ten days, currently settling at about $2.80 USD, and Bitcoin enthusiasts are starting to get worried. “I am not trying to cause a panic here, but the value of Bitcoin has dropped very low today with huge spikes,” one user wrote on the Bitcoin forum on Reddit. “I do suspect it will hit 1 USD mark this week maybe even lower.We need to be discussing thoroughly on promoting Bitcoin and actively putting more effort to spread the message to newer users as I do suspect the popularity is dropping very steeply too.”

Here is more, thanks for the pointer to numerous folks on Twitter.

Comments

Well, at least there's one bubble I avoided.

Sheesh. The commenter you quoted makes it sound like a Ponzi scheme, not a currency.

Ummmm....

hahaha! way different.

It's an unfortunate fall. I had anticipated that with the greater instability in fiat currencies worldwide that there would be more people adopting Bitcoin. Underneath, the technology is sound. It solves many issues and obsolesces the banking system.

I think the tech is still good. The bubble was very bad for the currency however. Too much variance slowed adoption by vendors.

The biggest problem for Bitcoin has always been the Bitcoin community. They don't understand fuck all about economics or currency theory and think that volatility is cool.

So many peoples keep waiting for the dollar, euro to fail. Just keep investing in things (gold, bitcoin) that don't pay interest and just pretend that it's not pure speculation.

What fiat currency is to gold, bitcoin is to fiat currency. That may not be a perfect analogy, but my guess is that the people who worry that paper money has no intrinsic value (and want to move towards something backed by metal) view a move towards bits and bytes, ones and zeroes, as something with even less intrinsic value than paper. At least you can burn money or wipe your behind with it. Heck, even with real coins, even debased ones, a handful in a sock still packs a good wallop.

What can you do with a bitcoin once it loses it's use as a store of value or a medium of exchange?

Pointing being, if fiat currencies are unstable and that is worrying people, I think they'd switch to things with more intrinsic value, not less.

I would agree to the extent that it is a level of abstraction beyond paper money. The reality is, however, that paper money isn't really paper money any more. With ~90% being digital, you will only be able to wipe your behind with your credit card receipts or bank statements (if you choose to print them).

I also agree in storage in things of instrinsic value and people are doing that now to protect wealth. What Bitcoin offers is stability beyond that which a government can offer and beyond the manipulation of central banks.

It also offers immediate access to wealth anywhere in the world all the time in costless transactions. Yes, gold is better, but you can't carry it around everywhere.

I'd like to hear arguments against the fundamentals of Bitcoin rather than implementation details or anecdotal preferences. Arguments against a deflationary currency or against a fully open ledger but masked accounts. Arguments against decentralized peer-to-peer banking and certainly arguments showing weaknesses in the protocol.

Yeah, there was a bubble. Yes, early adopters pumped it like a ponzi scheme. It's still a brilliant concept.

I'd expand it to the full range of loonies on both ends: what ammo is to gold, gold is to fiat, fiat is to bitcoin.

It is a very fortunate fail, as the way the monetary base is scheduled to expand does turn it into a Ponzi scheme: Early miners hit gold by just being there early with tiny investments. People joining the game just make the early adopters ricker, as theamount of money that needs to be in active circulation increases.

At the same time, the market does need that extra liquidity to thrive, but those that sell their coin early don't gain much from its success: if it becomes popular, the hoarders win. It's not far from a prisoner's dilemma. If anything, it has worse chances of success.

I have learned more about money and economics in the 1.25 years since your original post about bitcoins than i did on MR in the same time. my original bitcoin-diamond swap offer still stands.

* at bitcoin.org, bitcointalk.org and #bitcoin on irc

Bitcoin - even weaker than a Euro.

How can I short it?

bitcoinica.com allows bitcoin shorting

Aaron: There's a reason for that.

Drawing long term conclusions about a technology thats been around is about as bad as speculating on a currency based off one year of increasing prices. I dont understand why there's so much hate for bit coin, we've had a one year experiment and so far its been a failure, this doesnt necessarily prove that it will be a failure forever. Most of bitcoins problems revolve primarily around the lack of security and secondarily around speculation. The problems with a speculative bubble are exacerbated when there are security issues to dampen the speculation and when it busts its going to go far off in the other direction. If there had been proper security in place I believe that the popping of the bubble would not have been as bad.

As of now there are plenty of places for people to protect themselves from government inflation and so it is unlikely that there will be a big demand for bitcoins in the near future. But I still think its cool that it exists and might gain traction again at some point in the future, I doubt this is last time we will see someone attempt to produce a private digital currency.

*Drawing long term conclusions about a technology thats been around for a year is about as bad as speculating on a currency based off one year of increasing prices.*

The question is now that Bitcoin isn't new and novel, can it stabilize and be used as a currency rather than an investment tool?

Maybe Iceland can adopt it so Icelandic banks can't create massive amounts of bitcoin wealth like Iceland created massive Euro wealth before 2008.

By investment tool do you mean a speculative asset? Bit coin is no more an "investment tool" than the horses at a race track. Well, I guess in this era if financial derivatives, the distinction between gambling and investing has gotten a bit fuzzy.

Wait wait wait, I thought Bitcoin was supposed to be bad because it appreciates in value to the point that people speculate on it. I thought that good currencies were supposed to fall in value so you're supposed to spend them. And then, when Bitcoin *does* fall in value ... that's vindication of its naysayers?

It appreciated because people were speculating on it. If it was actually being used in commerce, you would expect it not to have appreciated it so much. And that's the whole point. Nobody actually ever used it for commerce. People just hoarded bitcoins and then sold them for dollars when they actually wanted to buy something.

Bitcoin would be "vindicated" if it fell in value because more people used it in commerce. But that's not what's happened. People have stopped speculating on it. And even if people believe in bitcoin, if they actually want to spend their bitcoins they need to convert them to dollars. Eventually all the people who jumped on the bitcoin bankwagon first will need to draw down their savings and there won't be new bitcoin believers to take their place. The price of bitcoin thus has to fall to make a market.

If I had to sum up the issue with bitcoin believers, it would be this: they refuse to acknowledge that there just isn't a store of value that is completely, totally devoid of risks. If you have, say, 10 grand to put somewhere, stocks and bonds have obvious issues. You put all the cash in a vault, literally, and the cash could decline in value. You put it in gold or silver and that could decline in value. You put it in land and that could decline in value. Hell, the price of guns has fallen with the glut of guns from when rednecks thought Obama was taking their guns away.

In that climate, bitcoin came to the rescue as a seemingly impenetrable currency. It inflated gradually until its supply was more or less fixed. Well, here's another store of value with supply more or less fixed: land. And how has land fared if you bought it five years ago? Land supply has stayed constant but demand plummeted, pushing land prices down. Same with bitcoin. Fact is, every stable currency needs 1) a government backing it, taking it for taxes, paying their employees with it, etc., and 2) some sort of control mechanism on the value of the currency, for both supply and demand. The supply of dollars shot up in 2008, but the demand shot up even more as everybody wanted money. Does the supply of dollars mean inflation will definitely follow? No, absolutely not. The Fed just has to sell assets on their balance sheet to literally destroy dollars. The Fed could suddenly become more expansionary, but the experience of Japan is that the Fed will, if anything, contract policy too soon.

Bitcoin would be “vindicated” if it fell in value because more people used it in commerce.

So, if a new currency actually catches on, and so inevitably appreciates because of the network effects, that's proof it's failed, and so it's impossible for it to ever claim vindication?

This is just the same old game: say something negative about Bitcoin, and then if anything negative happens to Bitcoin, claim you somehow "saw it coming". Funnily enough, Tyler_Cowen et al criticize Peter Schiff types' claims of vindication in the economic crisis on pretty much the same grounds.

What Tyler_Cowen *actually* criticized Bitcoin for was stuff like "convertibility". Um, whatever the flaws, it's stayed convertible to other currencies this whole time.

Yes, there are problems with Bitcoin. No, that doesn't automatically make everyone who criticized it correct.

Suppose you were drawing up a business contract in whatever industry you happen to work in. Would you be willing to set a fixed price in a contact where goods and currency will be exchanged in three months time if that contact were priced in Bitcoin? Would you do it in dollars? A currency is not very useful if its value fluctuates more than the value of the goods whose exchange the currency is facilitating.

Why would I, a non-tech savvy individual, trust some shady anonymous hacker group, when I can buy gold coins if I get paranoid about a fiat currency meltdown...

Because you're not a "cool kid"

I know! Totally. MP3 is a lossy format. Give me the sound of a 180 gram vinyl record any day. I'd rather haul around crates of those than have a crappy ol' iPod in my pocket.

That is to say, lighter, easier to carry, and lower storage costs are some possible reasons to choose digital over gold. But overall, I actually totally agree with you. Converting to a new and not well-known system of ones and zeros established by a questionable group sounds like the last thing you'd want to do if you wanted a more stable and secure way to store your wealth.

The crypto is pretty good, so you aren't "trusting some shady anonymous hacker group." It's possible for 51% of the network to conspire against you, but they would hurt themselves more than you by doing so.

But unless you have the time and skills to verify the technology yourself, then you do have to trust those shady anonymous hackers.

Your life is full of things you don't personally verify yourself, yet you don't have to blindly trust the providers.

"HA! HA!"
nelson, of the simpsons

I am surprised by the number of people still defending Bitcoin here. Go back and read Tyler's original criticisms of the scheme. His argument was unanswerable then, and that was before exactly what he predicted started happening.

Financial predictions with no timeline always come true.

Okay, I reread them. At no point did he say he was inanswerable or that bitcoin was indefensible. I see no in depth analysis either way. He took a tentative detached position that a new thing would not last long term, that's a safe guess (to use his word).

Here are the main examples of what I mean. If these arguments are answerable, then what are the answers?

"I’ll still admit to some confusion, but I am inclined to think the following. It is a privately created fiat currency, bundled together with an anonymity scheme for transactions. The anonymity scheme means there is some reason to grant one-time seigniorage to the original currency issuers. Eventually the anonymity scheme, in some form or another, will be available without the fiat currency. At that point, or more likely before then, the fiat currency will fall to near-zero in value. Hold it at your own risk. The original issuers will have kept some of their initial gains."

"Imagine that I can convert Bitcoin assets into other, non-Bitcoin assets quite easily. Then I will, and many other people will (there is a lot more wealth tied up in the Cayman Islands than in Bitcoin), and the velocity of Bitcoin assets accelerates. That encourages even more conversion out of Bitcoin assets. Why hold Bitcoin assets?
Alternatively, imagine that I can’t convert Bitcoin assets into other, non-Bitcoin assets easily. Then I would say the system fails as an alternative money, virtually by definition. Arguably Bitcoin is still at this stage right now, and what I am pointing out is that further development, and a move to the former scenario, isn’t going to work either.
To convince me on Bitcoin, you need to discuss the store of value function more explicitly, not just its (possible) efficiency as a transactions medium. If something is a good transactions medium — let’s grant that for the sake of argument –, but not a good store of value, its velocity will accelerate and sooner or later that spells trouble."

"you can take that as a sign of the dependence of the Bitcoin upon expectations, and a sign of its bubbly nature. Just think how hard it is for a major country to establish crediblity for its currency, and then ask how much of the Bitcoin value is expectations-dependent and multiple-equilibria dependent. What will be the rate of Bitcoin appreciation five years from now? I guess it will be falling."

http://marginalrevolution.com/?s=bitcoin

I remember the answers being given, they were just ignored:

It is a privately created fiat currency, bundled together with an anonymity scheme for transactions.

It's not anonymous, it's pseudonymous. This is an important distinction. The protocol was designed to be open and transparent so everyone can see what's going on or which pseudonyms have bitcoins.

Eventually the anonymity scheme, in some form or another, will be available without the fiat currency

1. Why is this so? 2. This assumes that anonymity was the most important feature. The ability to do send money to people with tiny transaction fees and not dealing with Paypal's crap should be good enough by themselves.

Imagine that I can convert Bitcoin assets into other, non-Bitcoin assets quite easily. Then I will,

I don't understand this argument. Assume I can change gold into cash. Then I will, and so will everyone else. Therefore gold is useless. What?

Just think how hard it is for a major country to establish crediblity for its currency

Consumers always fear that the country will turn on the printing press. This can't happen with Bitcoin.

I'm not saying there aren't problems with Bitcoin; they are, but they have to do with the community desiring volatility over stability. Every time I'd try to explain the problems to them they'd just talk about how well their "investments" had done over the past week/month/year and offer to buy my bitcoins if I was having doubts. Very recognizable ingroup/outgroup thinking, but of course they didn't want to hear that, either.

"It’s not anonymous, it’s pseudonymous" - this is a too strong of a distinction. Pseudonymity is anonymity until one of your transactions gets linked to you. The fact that it is used for buying drugs, etc., strongly suggests that people use it to remain anonymous. Anyway, this is an argument against what Tyler claimed was a benefit of Bitcoin, so if you are right, this only strengthens his case.

"Why is this so?" - What barrier is there to an anonymous (or pseudonymous) transaction scheme in dollars or another currency?

"This assumes that anonymity was the most important feature. The ability to do send money to people with tiny transaction fees and not dealing with Paypal’s crap should be good enough by themselves." - Paypal is easy to use, free for personal transactions, and secure. The "crap" one has to deal with for PayPal is tiny compared to the "crap" for Bitcoin--hard to exchange for dollars, not accepted by many vendors, volatility, no redress if someone steals your coins. I just don't see it. If I'm just an average e-commerce user who doesn't need anonymity (pseudonymity) and doesn't think the government/economic/monetary status quo is about to collapse, why would I use Bitcoin? It doesn't do to say that some of these problems will go away in the future. In order to make it to that theoretical future in which Bitcoin is widely used, it has to be advantageous to use now.

"I don’t understand this argument. Assume I can change gold into cash. Then I will, and so will everyone else. Therefore gold is useless. What?" Gold has intrinsic value. It is an actual substance that can be used for things. Beyond that it has a thousands-of-years history of being highly valued. Thus, it is considered to be a good store of value--generally even better than currencies. On the other hand, why store your wealth in Bitcoin? Some numbers in a file have no intrinsic value, and it isn't backed by anything like the government/economic system that supports modern currencies. If there is no reason to store wealth in Bitcoin, then it can't maintain its value, whatever the merits of its transactional system.

"Consumers always fear that the country will turn on the printing press. This can’t happen with Bitcoin." - yes, but there are numerous arguments that could be made in the other direction.

“Why is this so?” – What barrier is there to an anonymous (or pseudonymous) transaction scheme in dollars or another currency?

You can't keep answering questions with questions. If it was easy to set up an anonymous transfer system that was actually somehow directly convertible into dollars or Euros, we would have it already.

For fun, try to design a Bitcoin analogue that is actually populated with dollars. If it would work, it would be perfect.

Paypal is not fun to deal with at all. For trading a few bucks personally, it's fine. I personally know a few people with Internet businesses and dealing with Paypal is a major headache. Those lucky enough to not have Paypal suddenly lock their account still have to deal with significant fees.

While I did not claim to have the answers, I can fill in some blanks. With respect to quote one the short answer is there is no seignorage. Anonymity is irrelevant in the consideration. The original issuer and early adopters would certainly have a large reserve of currency and would benefit if they converted into another value store. This isn’t a criticism, more of an observation.

Quote two is only partly thought out and needs more color. From the context he has argued no fiat currency could ever succeed since everyone would convert out of them as soon as possible. Longitudinally, this is true, but I don’t think that’s what he wants to say.

Regarding quote three, agreed, it's really, really hard to start a new currency. This does not make Bitcoin indefensible. Currencies are created all the time.

None of these quotes is a criticisms to be taken seriously. The store of value discussion has potential, but as I mentioned, it's not clear what he wants to say. Tyler can clarify if he likes.

The most substantive argument I’ve read against the success of Bitcoin is the lack of a governing stick to motivate and enforce its use. I realize that this is the world in which we live, but this doesn't mean there is therefore zero market for a cryptocurrency.

The concept is sound and I have yet to see a decent critique against the fundamentals.

Sure it's down 90% off its all time high. But for all this talk of a collapse, BitCoin is still up ~900% YoY. My leveraged undiversified real-estate portfolio should be so lucky.

Exactly, if it fell to a dollar or even to 50 cents it would still be one of the assets with the largest returns this year.

Thus rendering it a complete and utter failure as a currency.

As a short-term bubble play, sure.

It's losing value because it's ability to buy things is being eroded. The justice department has been going after markets where it can be traded, claiming: "people might buy drugs with it". The real reason is that competing economies are scary to the rich and powerful. They can't have people trading in a currency they can't control.

Hmmm. Or maybe the real reason is that people might buy drugs with it.

Or maybe the real reason is that people might buy drugs with it.

And that is a problem because....?

We better confiscate all the dollars, then, too, because people buy drugs with those as well.

Where has the Justice Department gone after non-drug bitcoin trading markets?

Any good mechanisms to short bitcoin?

bitcoinica.com

We need to bail out Bit Coin Specu-vesters! Maybe Feldstein will write an op-Ed

What is this money backed with ? nothing
What is the value of this money ? nothing

a friend who worked for a large bank in the fraud control area used to say that money was "nothing but a philosophy".

I liked something I heard many years ago:
Jews treat money like a tool, while goyim treat it like a sacrament.

Yup, there is no such thing as money because there is no such thing as value.

Yah, the miners who made a lot of coins are cashing out.

Also there are alternatives to bitcoin now with some better features.

That's even worse news to hear for cryptocurrencies. The market really isn't big enough to support a lot of these things.

I've heard that the recession has been really hard on all sorts of imaginary things.

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