Felix Salmon on Bitcoin

It is a very good piece, although I fear by adding this link I will get more media requests to comment on Bitcoin.  Here is the best set of sentences I have read today:

…bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.

There is, by the way, no current way to short Bitcoin.


There is, by the way, no current way to short Bitcoin.

There might not be an official market in Bitcoins, but you could always post an offer to 'borrow' a few bit coins with a promise to return them at a future date + a reasonable fee.

Who's going to believe you.

Nobody would believe me. But somebody might believe a world traveling foodie who occasionally blogs about money.

I think the point is that there is no CURRENT way to short them, or no currently practical way. Thus the speculated bubble may go unchecked on that dimension.

If you're concerned about media inquiries, you should direct them to Link No. 1 on this past MR post:


Ouch. Time to re-evaluate the priors?

There is, by the way, no current way to short Bitcoin.

Well, if you are running a bitcoin/USD (or other pair) conversion company for vendors you could be synthetically short. This is because there is a time lag for clearing that you could assume on the USD side.

The piece is infuriating from the start. Consider the sentence:

The first is just that it’s a bubble, and any chart which looks like the one at the top of this post is bound to end in tears at some point.

Except when they don't, of course. How can you take people who write this stuff seriously?

It's different this time!

Any reason why a digital certificate would rise in price? Is there a fad out there to eat them or make jewelry out of them? No? Then it's a bubble.

BTW. I have some prime ocean-side property in Fukushima for sale.

spoken like someone who never saw a biotech get approved and then missed the google ipo.

what a nonsense comment.

clearly, we cannot prove this is not a bubble. you never can. but if we are going to compare this to a commodity, then we need to compare it to one for which a huge and important new use has just been found.

a lot of this buying is coming from europe. hey, if you had a spanish bank account and just watched cypress, think you might be looking for an alternative?


I think morganovich is talking about Cypress Hill, the band.

Shorting bitcoin sounds like a good way to go broke. I don't say that because I don't think that the value will drop by a large margin at some point, only that who knows how long from now that will be.

Is there anyone out there doing either fundamental or technical analysis of bitcoin prices?

Well, there have been lots of crashes in the exchange rate, mostly having to do with security issues at various exchanges. I imagine figuring out an efficient way to short bitcoins would provide a similar shock to finding out new insecurities with the exchanges. The bitcoin market is still immature.

No kidding. Remember the old saying, 'don't try to catch a falling knife'. Except this knife is a double-edged obsidian blade traveling at mach 3.

"there’s lots that you can do with bitcoins. You can convert them into any of a dozen currencies"


This. You can exchange tulip bulbs for any of a dozen currencies too.
Until nobody wants to buy them.

One presumes BitTulip was never actually considered.

The Bitcoin protocol itself is one of the hard limiting factors on how useful this can become as a currency. Most of the real use of the currency comes down to drug dealers and hoarding/capital flight. The exchange rate gets inflated and the anarcho types get thrilled.

SatoshiDice (https://en.bitcoin.it/wiki/SatoshiDice) is a gambling service that works as a really effective ddos on the whole protocol. It takes upwards of 10 minutes to get a transaction cleared, and that's likely to get worse.

If you're a drug dealer/lucky early adopter/Cypriot trying to avoid a wealth tax, bitcoin is awesome. For anyone else, it's a insecure, mostly speculative adventure and likely to stay that way.

So, what you are saying this brand new thing is only more legit than a country or some countries?

Well no, it's a loop hole for now, and a very insecure one at that. The bitcoin infrastructure hasn't yet even met the low, low standards of European banking infrastructure. An attack on one of the major bitcoin would make people look longingly at the knowable losses from a deposit tax.

I think there's a lot of potential for bitcoin type mechanisms, but bitcoin itself probably won't realize that potential. The spammability of the blockchain (the distributed clearinghouse mechanism in the protocol) is a real limit on usability. It's a technical snag, not a proof that a currency like bitcoin couldn't have a real future.

There is, actually, a way to short bitcoins. the website www.icbit.se allows you to trade in bitcoin futures, which while isn't a technical short, it allows you to accomplish a similar goal.

I like that quote about commodity-v-currency. I've noted before that the biggest roadblock to Bitcoins being a useful currency is that the community wants it to be a commodity, but I didn't quite have Felix's nice way of putting it.

I do have a fractional Bitcoin somewhere. It's probably time to sell it now. I expect that to be a hassle.

Isn't the "uncomfortable combination of commodity and currency" stage a necessary period in transitioning from a commodity to a currency? Maybe it will look less like a commodity and more like a currency in the years to come.

What is this uncomfortable combination thing? It seemed to work out find for gold.

How often does gold's value change by an order of magnitude in a week?

How often is gold just becoming well-known worldwide?

Gold is still a currency? In the US? In the 21st century? Try to walk into Safeway and pay for your groceries with a bar of gold. Ask for change.

No, gold is a commodity. Now, like all commodities, it can be traded. But there's no real difference between investing in a spyder for gold and, say, aluminum.

Of course bitcoin isn't really a currency either. The number of actual goods or services you can buy with it is vanishingly small and, from what I've read, is largely limited to the black market.

Felix's article is pretty good. There are lots of things you can buy with Bitcoins. Nowhere near as many as with dollars of course.

The community mostly isn't thieves or drug dealers. They are, though, bitten by the speculation bug. Trying to explain to them why deflation is a bad thing is like trying to explain the gambler's fallacy to someone currently in a gambling high.

Well, the government might have something a little to do with gold as currency, black markets, etc.

And even odder way of looking at it: "Terrible news sir, your gold is less of a currency now that it has quintupled in dollars!"

Sure, maybe it's a bubble, and maybe it's too volatile. That doesn't mean the alternatives are great shakes.

I have read the talking points from bitcoin afficionados discussing all the things you can, theoretically, buy with bitcoins. But are they actually doing it? Or is the #1 most common thing purchased with a bitcoin a dollar?



The question is this: how much is it costing us to keep the dollar as the dominant currency? If it is costing us negative or at least less than some hurdle or equilibrium cost of gold or bitcoins, then the dollar has nothing to worry about. But that isn't the same as saying that the dollar didn't also have a lot of sunk cost investment into making it a dominant currency that crowds out alternatives and is fundamentally superior.

As in, not only is gold a currency, but the exact same guy from this post used it that way. This contains the meta-data of the first google result: if the answer is that easy to find, that says something.

That doesn't mean I think it is widely circulated. But there are laws and a lot of other reasons why a currency, or a Cola brand come to dominate a market. RC is still a cola.

Did you read the article? He made numerous attempts to buy things with the gold and was rejected. He finally found one place that would take it, and got a sushi lunch, for which he traded an amount of gold worth more (at current value) than the sushi. And the counter clerk was extremely hesitant to accept the gold, and only did so on direct orders from the owner.

I mean, if you're going to redefine currency as "anything that can conceivably ever be traded for something else," then ok, gold is a currency. But it's a meaningless definition. I'm sure if I walked up to the guy at that sushi counter and offered him the keys to my car in exchange for lunch, he'd take it. Are cars currency?

Yeah, in other words it worked as a currency. It seems we are speaking a different language. Had he carried a Yen around he'd probably have never gotten it exchanged and yet Yen is currency. I guess you mean "widely circulated currency." But then, gold is growing in circulation. So, more precisely you mean "practical currency" or "darn near universal currency" or maybe you mean "dollar."

Btw, just yesterday I talked to a relative who sells artwork through art shops and when he goes to collect his money he can't get it unless the owner is there. So, the bit about the owner is completely inconsequential to me.

But no one's holding gold to be currency. They're holding gold to make money.

And by money, I mean dollars. Euros. Yen. Francs. Rubles.

It is not noone. There was that story about the gold thingy where people got together and traded using gold. As usual, there are two things going on here. Some people are saying it's not a currency because it is not widely circulated as currency, and others are saying it meets the requirements of a currency but is simply at a nadir of use as currency. As we know you can horde cash and reduce its currency as well. It's a known issue. But people accumulating gold probably wouldn't call its commodity demand "uncomfortable."

But do the people who claim it's a currency actually think it's a currency, or do they just stage these trading events to assuage themselves?

And if it really is a currency, wouldn't its recent highly deflationary character be of great concern? What of the Gold-Oil Ratio? Gold-Rice?

No, people are deluding themselves to feel like they're ahead of the curve. It's a commodity that's gaining value right now, nothing more.

Gold is money. You hold gold to protect purchasing power over time. You spend fiat. People who try to spend gold like dollars might as well try to spend yuan or rubles at a McDonald's in Peoria. Or take rubles and put it under their mattress in Peoria. The only time to spend gold is during an extreme hyperinflation/bank holiday (failure) situation, or if you are a nation state (there's a reason gold was called the money of kings). In other words, you only spend gold when the demand is extremely high and other currencies have failed. Otherwise, gold is your savings and your gold holdings change based on your preference for savings.

If there are capital controls and laws against owning precious metals, then Bitcoins have a role as intermediary. You can rapidly move Bitcoins into a foreign bank account, for lower fees, than you can using your bank.

Bitcoins price fluctuation is due to its newness. It will have to settle down because it must. If the price is unstable, holding periods will drop, velocity increases and the price falls.
Gold's price fluctuation is based on uncertainty of fiat currencies and the reestablishment of its monetary role by Eastern central banks and nations. Gold also will stabilize, but at higher prices.

I guess they mean liquid, as in dollars and piss.

Gold is a store of wealth. You hold gold to protect purchasing power over time.


So let's say you bought gold in the last 70s, looking to "protect purchasing power". Can you explain how, exactly, the two-decade bear market with a >60% drawdown protected gold holder's purchasing power? I am extremely curious.

Has the dollar protected the holder's purchasing power either? No.

My point isn't that gold is a guaranteed store of wealth, but that people see and use it as a store of wealth and not as a currency.

Econ 101: Money is a ...
Medium of exchange. Unit of account. Store of value.

The first one is the most important one, and it's an interesting point that even though bitcoin is not currently used as a medium of exchange, it has the potential to be used as such.

Nonetheless I vote with the people here who are saying that bitcoin is not a currency. Cigarettes can potentially be used as currency and famously were in that WW II prisoner of war camp. But very few people would consider cigarettes to be currency right now. Potential currency is not the same thing as actual currency. In particular, the liquidity is not the same ... those Venezuelan bolivars in your wallet work great in Caracas, but not so great in the USA. Higher transactions costs, etc. We'd still call them currency, but not the same as US dollars. As the transactions costs get higher and higher eventually we no longer consider the asset to be currency. Cigarettes, bitcoin, etc.

I think people are just saying that the best currency drives out the others. But then, when the dollar is no longer the best it will also be driven out and will cease to be a currency by that definition.

You can sell Bitcoins for 25% more in China. Nice arbitrage the past few days.

I think it's a classic bubble unfolding, I've been using Elliot Wave and it looks like a textbook wave 3 unfolding. Next the dip and the final blowoff before it implodes as it did in 2011.

A lot of people were pointing out the Cyprus bail-in. The crackdown on the Macau junkets seems to make more sense as a causal factor for the present boom in bitcoin. It also explains the china premium.

I was surprised how easy and relatively cheap it is, all-inclusive of trading costs, to move money in and out of China. Average Chinese can only move $50,000 out of the country and they get busted in Canada with suitcases of cash. But nobody is watching Bitcoins and as long as you're not moving illicit funds, you're free and clear once you're past the capital controls.

If it were easier to get money on Mt Gox, BitCoins would be much, much more valuable. Right now it's a pain so you would only want them if you want to hold them like a commodity or use them for some illicit reason. For merchants, though, they could be godsend, particularly people who want to be able to accept micro-payments, because transaction fees per-transfer are essentially zero, with most of the transaction costs going to getting money on or off exchanges.

Even in the face of massive exchange rate uncertainty, it's already possible to pre-arrange with a merchant to set the sale price in BTC immediately before they are ready to cash out, so you just keep some money in your currency on Mt. Gox and buy BTC at market value, send them to the merchant's wallet, and he sells them at market value in his own currency. Transaction costs are much higher than for a stable price, but if volume is high enough this system should work fine - and in a sense it does help the merchants because they only have to keep track of one exchange rate - BTC to their local currency, and they can accept money easily and securely from anywhere in the world.

BTC is a terrible digital cash. Other digital cash schemes are more securely anonymous, more scalable, and easier to use... or at least, they would be if they were actually implemented and widely adopted.

Widespread adoption is the only advantage BTC has. But that advantage is the one that counts, and it probably cannot be overcome.

Depending on the countries involved, it is possible to send money overseas for lower total cost than using banks.

re rapid rise is a bubble:

isn't it possible that this is just an indication of growing acceptance? Order of magnitude or 2 or 3 doesn't matter.
If it goes from near zero to real "market discovered" value, the change cannot be bounded.

We are talking magnitude 2 or 3 on the Richter scale. 10x10x10 It sounds insane, but I have seen legitimate price targets near $1000 if this unfolds like other bubbles. The post bubble price is going to be double digits.

"there are really no traders in bitcoins, since for the time being it’s (almost) impossible to bet that the price of bitcoins will go down"

'Almost impossible' is the opposite of 'impossible'.

If you want to see a bubble in real life, created through trades by ostensibly financially smart econ graduate students bidding where a known value should dictate one price, but because others believe they can get out in time without getting hurt, look at the video of an experiment conducted by Charlie Plott (a great economist) at Caltech beginning at around 58 minutes into the lecture:


This is a humbling experience for economists who think they can time things and get out when they know there is a bubble.

Nice link!

There is an important difference between BitCoins as commodity money and gold as commodity money.

As the use of gold as a currency increases, its price rises. The rising price encourages gold mining, bringing more gold into the market and lowering its price. The size of the gold economy determines how much will get mined, but the price of gold will be constrained to its marginal production cost.

As the use of BitCoins as a currency increases, its price rises. But the rising price of BTC does not spur the creation of more BTC. The rate of BTC creation is fixed (and declining over time) and nothing can ever change that. The size of the BTC economy does not affect the quantity of BTC created... it only affects its price. Thus, the price of BTC is going to fluctuate even more dramatically than the price of gold ever could.

Even worse: the COST to create BTC is unbounded. It is created via "electronic potlatch". You receive newly created bitcoins by devoting computing resources to creating bitcoins, but the amount of BTC you receive is not proportional to the amount of resources you spend. Instead, it's proportional to your SHARE of the total resources spent by everyone. If the value of a bitcoin doubles, then people will devote twice as much computing power to bitcoin production, even though doing so will not actually increase the amount of bitcoins produced.

In other words: when the dollar price of bitcoin doubles, then the dollar cost of producing new bitcoins also doubles.

Current daily transaction volume is about 200K to 400K BTC, or about 2% to 4% of the total amount of bitcoin in existence. Assume that that holds true into the future. In eight years there will 18 million bitcoins in existence and 900 new bitcoins produced every day. So the amount of resources devoted to producing bitcoins will equal between one quarter and one eighth of one percent of the total transaction volume. This is true no matter how large or small the bitcoin economy is, what the price of bitcoin is, or how cheap computing power becomes.

0.25 percent is cheap compared to how much overhead financial transactions cost today. But it's not nothing. And it's pretty much baked into the BitCoin protocol.

The size of the BTC economy does not affect the quantity of BTC created

Why not? More people start mining for bitcoins. On a per computer-cycle basis Bitcoins get harder to discover, no doubt. But on a per day basis the chance of a block discovered is higher.

The short answer is "That's not how bitcoin works."

The slightly longer answer is that the BitCoin protocol is very cleverly designed to soak up as much computer power as everyone wishes to throw at it while simultaneously producing bitcoins at a constant rate. See http://en.wikipedia.org/wiki/Bitcoin#Bitcoin_mining - "To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they're generated too fast, the difficulty increases."

If you know enough to use the word "block", then you're probably technical enough to understand the details. They're fascinating. The protocol really is quite clever. See https://en.bitcoin.it/wiki/Target and https://en.bitcoin.it/wiki/Difficulty for starters.

You are right! Fascinating indeed.

Of course there is a way to short bitcoin. Just borrow some bitcoin and exchange it. Bitcoin lenders are already out there. https://btcjam.com/

" The commodity value of bitcoins is rooted in their currency value"

The value of all currency is in it being a commodity.

If currency can only be spent in restricted and limited ways, it loses value - it needs to be a universal commodity to have maxium value.

Imagine you have 100k of life savings in a Greek bank and you just saw what happened to people in Cyprus. It isn't really hard if you try. Do you think you might decide to put away 10k in bitcoins just in case?

"There is, by the way, no current way to short Bitcoin."

Incorrect. You can short bitcoins on bitfloor.

We had a bit of a response to Felix Salmon's article here -


This seems wrong if Bitcoin is only one of many currencies:

"As economies grow, the money supply has to be able to grow with them. And that’s why bitcoin can never really succeed over the long term."

Here Salmon is probably referring to the *bitcoin* economy, i.e. the number and size of transactions conducted using bitcoins. And he's right. If the bitcoin economy grows, then the supply of bitcoins has to keep up with it. But it won't because it can't because it's deliberately designed to be unable to (the supply of bitcoins grows at a fixed and diminishing rate which cannot be changed by anyone ever).

Which means that the dollar price of bitcoins will continue to increase as long as the size of the bitcoin economy increases, i.e. as long as more and more people use bitcoins for more and more transactions. And conversely, if bitcoin use falls, the dollar price of bitcoins will fall as well (bitcoins can be destroyed and thereby shrink the money supply, but this will not happen because nobody will voluntarily destroy their own coins and nobody can force anyone else to do it involuntarily).

This kind of price instability makes for a lousy currency.

So if bitcoin is too popular, this will set off a chain reaction that makes it unpopular? Wouldn't there be some stable equilibrium in the middle with moderate growth in use, and just moderate deflation?

Interesting article, but I felt like there were some lazy arguments scattered throughout.

1. Re: liquidity, as others have mentioned you can indeed short Bitcoin if you are so inclined. Plus you can already trade in small fractions of a Bitcoin,

2. Bitcoin has been around for just four years, so of course the trading volume is minuscule compared to well-established currencies. That's inevitable when starting out.

3. Since the Bitcoin code is open source, what is stopping people from creating identical, competing digital currencies? Once Bitcoin becomes prohibiitvely expensive, wouldn't "Bitcoin_2" gain traction?

4. "In order to have economic growth, you need monetary growth as well" - that's a common claim, often stated with certainty, but I've never seen a convincing argument for such a claim.The doomsday "hyperdeflation" scenario is completely unrealistic, since Bitcoin could only appreciate at such extreme rates if it were still in its early days of adoption, meaning the vast majority of economic activity would still take place using traditional currencies.

5. Felix hims

5. Felix himself points out that by 2021 the rate of growth of Bitcoins will be incredibly low, so the botnet mining will be a non-issue then. Of course tech security will still be an important issue to address, but in other areas -- wallet hackers, exchange integrity, etc.

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