13 ms·

The Bitcoin Bubble and the Future of Currency

179 points by ldayley 14y ago

ontoillogical 14y ago
> And in any event, bitcoin is never going to work as a global payments system. Not only does it suffer from having a slow-growing money supply and a metastasizing transactions file which has to live on every user’s computer, it also encourages destructive computer hacking. The way that the money supply grows, in the bitcoin system, is by people harnessing the power of hundreds or thousands of computers to solve very complicated mathematical tasks, earning bitcoins for doing so along the way. And the easiest and cheapest way of doing that is to do so illegally, by stealth: set up a “botnet” of hacked computers to do your bidding for you. The incentives, here, are very bad indeed. I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?
- mpyne 14y ago
  > I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right? How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.
  - Retric 14y ago
    The largest known bot net had ~30,000,000 computers at that scale CPU's work just fine. Not that it's the only thing to do with a bot-net of that size, but it's clearly a lower-bound where if your not doing a denial of service attack or sending spam you might as well mine bit-coins. Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.
- EA 14y ago
  Modest CPUs produce bitcoins very slowly. So, there is an incentive to create a botnet to harness the power of thousands of CPUs to mine bitcoins. https://en.bitcoin.it/wiki/Mining_hardware_comparison https://en.bitcoin.it/wiki/Mining_hardware_comparison
  - dragontamer 14y ago
    Botnets make a ton more money by just ad-clicks anyway. I bet its more beneficial to fraudulently ad-click with botnets than it is to mine bitcoins.
  - jacquesm 14y ago
    There is no point in even putting together a botnet with thousands of CPUs anymore, a couple of FPGAs or an ASIC based solution would run rings around that botnet. Ok, an ASIC will cost a bit of money and a botnet is free but the difference in performance is such that only a very large botnet would be worth it and those can probably be monetized more effectively in other ways.
- wladimir 14y ago
  You are right. CPUs are already useless for mining. Currently, GPUs can still mine their share (but running a GPU miner on a botnet is a risk; computers become very noisy, hot and slow, which increases the detection rate). But as the first ASICs have started shipping (or have they?) this is expected to change very soon, and the only way to make a profit with mining will be with custom hardware. This rules out botnets pretty effectively.
  - erikpukinskis 14y ago
    If botnets are free to operate, then won't they still be used? They're only less efficient than ASICs if you have to pay for electricity, right?
    - wladimir 14y ago
      Botnets are usually rented out. So there is an opportunity cost, when the nodes and their computational/network resources could be used for more profitable activities.
- lojack 14y ago
  I did a back of the napkin calculation the other day to see if a botnet could reasonably reach the 50% computing power required to overwrite transactions. The largest known botnet (BredoLab @ 30,000,000 bots) with modest hardware could have potentially done it. This computational power is a multiple of the combined computing power of the top 100 supercomputers in existence today. Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.
  - doctorfoo 14y ago
    And also, anticipated by Satoshi, was that the long tail of smaller botnets that would be unable to double spend would take to bitcoin mining because it would be more profitable, so increasing security and making it much harder for a single large botnet to take over.
- GnarlinBrando 14y ago
  There eventually wont be much point to mining when the cap is reached, then there will be a point to process blocks for their transaction fees. You are also right about the hardware issue, plus there are other more profitable ways to use a botnet. There is also just a general problem with the argument that it incentivises botnets, they are their own incentive, anything that needs bandwidth, cpu power, and stolen information will be much easier with a botnet.
Noughmad 14y ago
The big graph on top looks nice, but it really annoys the physicist in me. There should at least be another in logarithmic scale, so we can actually see how the value is rising.
- klapinat0r 14y ago
  Here you go (from source): http://blockchain.info/charts/market-cap?showDataPoints=false&show_header=true&daysAverageString=1&timespan=all&scale=1&address= http://blockchain.info/charts/market-cap?showDataPoints=fals...
  - Noughmad 14y ago
    Thanks. It looks pretty exponential this way.
josscrowcroft 14y ago
> "A few days ago, the value of all the bitcoins in the world blew past $1 billion for the first time ever" Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but... How is it possible for the "value of all the bitcoins in the world" to be anything, in truth? I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN" But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless. Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation. So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?
- drcode 14y ago
  Evaluating assets based on "Market Cap" is a standard financial analysis technique. This is nothing more than the marginal value of a security (i.e. what it's trading for this very moment) times the number of shares. You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.
- hazov 14y ago
  It's called mark to maket accounting, for example suppose I have 2 Bitcoin and will like to know what is their value, I see the market price and multiply by what I have, like you said. This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars. EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down
- deleted 14y ago
  [deleted]
- klapinat0r 14y ago
  > Nobody would pay $1BN for all of them, because that would render them all worthless Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more. Bitcoins will still be a scarce good. The demand will determine if they're worthless. A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.
cs702 14y ago
Many currencies in existence are now riskier and less stable than Bitcoin. Yes, it's true. As of right now, there are 182 official currencies worldwide[1], most of which you've never heard of in your life, and many of which have total market capitalization lower than Bitcoin.[2] Others are subject to extreme sociopolitical, economic, or military-conflict risks. Would you rather own bitcoins, which are traded globally, or, say, Libyan dinars, North Korean wons, Syrian pounds, etc.? Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3] If Bitcoin survives the horrific economic crises in countries like Spain, Greece, and Cyprus, and the even more horrific military conflicts in countries like Syria and Sudan, it will continue gaining credibility as the currency of last resort -- the global digital commodity that will survive even if your country or economy goes to hell. -- Edit: changed "most currencies in existence" to "many currencies in existence," which is what I actually intended to write. -- PS. I posted this on the other thread linking to the same article: https://news.ycombinator.com/item?id=5486100 https://news.ycombinator.com/item?id=5486100 -- [1] http://en.wikipedia.org/wiki/List_of_circulating_currencies_by_country http://en.wikipedia.org/wiki/List_of_circulating_currencies_... [2] http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-value-than-20-n http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-v... [3] https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1364991894838&chddm=1773204&q=CURRENCY:EURUSD&ntsp=0&ei=gh9cUaDRGbKr0AG8tQE https://www.google.com/finance?chdnp=1&chdd=1&chds=1...
- carbocation 14y ago
  > Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3] The USD and the Euro, in comparison to BTC, are magnificently stable. Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.
mrharrison 14y ago
"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." Wow very scientific, over time any hockey stick can look like a bump in the road.
- aethertap 14y ago
  Yes, what you said. Bitcoin is just getting started, so it seems reasonable to think that the slope from "none" to "some" might be both bumpy and steep. Does anybody know of a good source of data for the exchange rates of other currencies when they were in their infancies? That could make an interesting comparison. I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.
walru 14y ago
Regardless of what I think about Bitcoin's longterm significance in the world. I feel this spike in Bitcoins's price might just be Russian mobsters making their money back after the Cyprus nonsense. The timing between the two events is just too convenient and this whole run-up smells like a classic pump and dump from my dot-com trading days.
- GnarlinBrando 14y ago
  I thought a lot of that money was accounted for coming out of branches of Cypriot banks that remained open in the UK and Russia. Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology. Sort of the price we pay. Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.
arithma 14y ago
Let's enumerate the grand possibilities filtered by an increasing bitcoin value versus dollars (without predicting small-time-scale changes): - Bitcoins will grow to a peak and then decrease to a much smaller value - Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally. - Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm. I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet. On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).
- iSnow 14y ago
  More possibilities: - Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants. - BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers - The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.
skore 14y ago
There are a couple of core points that this article seems to get completely wrong about bitcoin. I'm certainly no expert, but quotes like: > the perfect digital currency: they’re frictionless, anonymous[...] seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.) > Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities. I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad? I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet. > And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything. Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation? Finally, a lot of the arguments employed seem rather shoddy. This is the argument against being your own bank: > In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal. This is the argument trying to discredit bitcoins principle of mistrust: > Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. So far so half-good... It’s nihilistic[...]. Nope, does not follow. > I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system. The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many". I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.
- 14y ago
tlrobinson 14y ago
"But trusting someone else to look after your coins requires the very trust that bitcoin was designed to circumvent." Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose. I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.
deleted 14y ago
[deleted]
paul 14y ago
The shape of the graph proves it's a bubble? I don't own any bitcoins, but this kind of silly fud makes me think I should buy some...
- wcgortel 14y ago
  Generally in financial time series, any exponential growth is indicative that something is growing "too fast." It has a better than "pure luck" shot at being right eventually when applied to stocks, but is misapplied when used on fiat currency....There is no constancy underlying the asset. Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.
  - alexmat 14y ago
    It's only hard to define what a bubble is if you're an armchair economist. Traditionally a bubble can be defined as: "A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."
    - rm999 14y ago
      >This cause is usually central bank inflation I hope you misplaced your quotes because this is by no means part of the definition, nor is it true. Bad central bank policy can indirectly contribute to bubbles, but inflation and bubbles are two orthogonal concepts. >for reasons unknown Actually in a bubble the reason is almost always known. An economist friend of mine put it well: "there is always an underlying story attached to a bubble that is believable and often true". The tech bubble of 2000 for example had a true story behind it: that tech was going to change the world and mint several world-changing companies.
    - wcgortel 14y ago
      I don't think that definition helps much[1]. For one, arguing that the cause is usually central bank inflation would eliminate a great deal, including the dutch tulip bubble. What about bubbles that took place before central banks existed or were powerful? What about bubbles that had nothing to do with inflation like the tech bubble? Must other markets remain stagnant to satisfy this definition of bubble? What if one market goes up a little, and another goes up a lot? If there is an underlying cause, how can the movement be "for reasons unknown"? Can bubble tendencies occur in only one direction? Is it not possible to have a bubble in negativity towards something? [1] I may be an armchair economist, but my armchair is located at a large academic institution.
Shinkei 14y ago
"rather than burying $1,000 under a black volcanic rock in a dry stone wall next to an old oak tree" Shawshank Redemption.
- danielweber 14y ago
  The next example was of Rep William Jefferson. http://articles.chicagotribune.com/2006-05-29/news/0605290207_1_freezer-mom-lids http://articles.chicagotribune.com/2006-05-29/news/060529020...
avaku 14y ago
Is there a way to short bitcoin?
- Ntrails 14y ago
  You can look for a natural short, attempting to reason something that is intrinsically linked. A good place to start would be the last bitcoin crisis and crash, and how did the gold market (for example) respond if at all.? Most likely we have no good data and you'd be making educated guesses.
- mikeburrelljr 14y ago
  Yes. Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/ https://www.bitfinex.com/ ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/ https://icbit.se/ Goodluck.
  - jellicle 14y ago
    Bitfinex is incorporated in Hong Kong. Let us suppose you make a $10,000 wager with them, and they take your money and close your account and ignore your emails. How do you suppose to get your $10,000 back? Hint: you won't. "ICBIT currently is in process of incorporating in an offshore jurisdiction." Even better.
- codesuela 14y ago
  Is this becoming a joke or something? In every god damn Bitcoin thread there is a very smart person who always asks the same question. If you are so serious about it why not just use Google? https://encrypted.google.com/search?hl=en&q=is%20there%20a%20way%20to%20short%20bitcoins https://encrypted.google.com/search?hl=en&q=is%20there%2... there you go. https://www.hnsearch.com/search#request/all&q=way+to+short+bitcoins&start=0 https://www.hnsearch.com/search#request/all&q=way+to+sho... FYI asking this question does not make you seem like a financial genius nor is it a witty reply.
  - zecho 14y ago
trusche 14y ago
> Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. If only.
Glyptodon 14y ago
Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrage mechanism. However, outside of that argument, I think there's a more fundamental problem. As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.' Meanwhile, total global economic output is around $7.9e14 USD. Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.) Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small. In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base. That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price. I'm not sure where things will go from here, but I'm sure it'll be interesting.
- altertoad 14y ago
  Deflation is a good thing
  - Glyptodon 14y ago
    Why? I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
  - pbreit 14y ago
    The article makes a decent case that it is not. Care to elaborate?
    - vrotaru 14y ago
      Price deflation or money deflation? Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
altertoad 14y ago
It can't be a bubble if it's not inflated. There's no real inflation in bitcoin there is though deflation which is a great thing. It's how all monetary systems should be
fnordfnordfnord 14y ago
>Those strengths are also weaknesses. No one wants to risk losing millions of dollars worth of currency overnight, just because they were outsmarted by some computer hacker. Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.
- jellicle 14y ago
  You may want to read up a little. People did and do abandon banks en masse if they suspect their money is not safe. "The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers." http://www.fdic.gov/about/history/index.html http://www.fdic.gov/about/history/index.html http://en.wikipedia.org/wiki/Bank_run http://en.wikipedia.org/wiki/Bank_run
  - fnordfnordfnord 14y ago
    Yeah, I've heard of the FDIC, it's no magic bullet, and it wasn't created to insure people getting mugged in the street.
michaelochurch 14y ago
The problem: debt currencies from nation-states are slowly going obsolete. Very slowly, so don't jump the gun on a bad idea. Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed. Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you. In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like. How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them. With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail. There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally. Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.
reaclmbs 14y ago
"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." Yep..
phusion 14y ago
Interesting article... but what blew me away was the page itself. Is this a CMS or a custom job? It looks fantastic.
- polarix 14y ago
  https://medium.com/about/9e53ca408c48 https://medium.com/about/9e53ca408c48
ryusage 14y ago
> how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.
fab13n 14y ago
Again this deflation misunderstanding... Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them. As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies. As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health. Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500. Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend. And anyway, when was the last time economists accurately predicted anything but the past? :)
- redblacktree 14y ago
  Gold was also deflationary, when it was used as a medium of exchange, so you can't say that "Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected." Well, you can, but you'd be wrong.
rfugger 14y ago
The fact that Bitcoin is deflationary isn't a big deal because you don't need to use it as a unit of account in order to use it as a cheap, fast, and reliable way to transfer value globally. You just need easy ways to convert to and from Bitcoin at either end of payments. Systems like ripple.com will automate this process to a large degree.
EGreg 14y ago
http://magarshak.com/blog/?p=148 http://magarshak.com/blog/?p=148
mathattack 14y ago
I liked the article until he got to this point... "Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million." This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)

179 points by ldayley 14y ago

> And in any event, bitcoin is never going to work as a global payments system. Not only does it suffer from having a slow-growing money supply and a metastasizing transactions file which has to live on every user’s computer, it also encourages destructive computer hacking. The way that the money supply grows, in the bitcoin system, is by people harnessing the power of hundreds or thousands of computers to solve very complicated mathematical tasks, earning bitcoins for doing so along the way. And the easiest and cheapest way of doing that is to do so illegally, by stealth: set up a “botnet” of hacked computers to do your bidding for you. The incentives, here, are very bad indeed. I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?

mpyne 14y ago
> I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right? How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.
- Retric 14y ago
  The largest known bot net had ~30,000,000 computers at that scale CPU's work just fine. Not that it's the only thing to do with a bot-net of that size, but it's clearly a lower-bound where if your not doing a denial of service attack or sending spam you might as well mine bit-coins. Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.
EA 14y ago
Modest CPUs produce bitcoins very slowly. So, there is an incentive to create a botnet to harness the power of thousands of CPUs to mine bitcoins. https://en.bitcoin.it/wiki/Mining_hardware_comparison https://en.bitcoin.it/wiki/Mining_hardware_comparison
- dragontamer 14y ago
  Botnets make a ton more money by just ad-clicks anyway. I bet its more beneficial to fraudulently ad-click with botnets than it is to mine bitcoins.
- jacquesm 14y ago
  There is no point in even putting together a botnet with thousands of CPUs anymore, a couple of FPGAs or an ASIC based solution would run rings around that botnet. Ok, an ASIC will cost a bit of money and a botnet is free but the difference in performance is such that only a very large botnet would be worth it and those can probably be monetized more effectively in other ways.
wladimir 14y ago
You are right. CPUs are already useless for mining. Currently, GPUs can still mine their share (but running a GPU miner on a botnet is a risk; computers become very noisy, hot and slow, which increases the detection rate). But as the first ASICs have started shipping (or have they?) this is expected to change very soon, and the only way to make a profit with mining will be with custom hardware. This rules out botnets pretty effectively.
- erikpukinskis 14y ago
  If botnets are free to operate, then won't they still be used? They're only less efficient than ASICs if you have to pay for electricity, right?
  - wladimir 14y ago
    Botnets are usually rented out. So there is an opportunity cost, when the nodes and their computational/network resources could be used for more profitable activities.
lojack 14y ago
I did a back of the napkin calculation the other day to see if a botnet could reasonably reach the 50% computing power required to overwrite transactions. The largest known botnet (BredoLab @ 30,000,000 bots) with modest hardware could have potentially done it. This computational power is a multiple of the combined computing power of the top 100 supercomputers in existence today. Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.
- doctorfoo 14y ago
  And also, anticipated by Satoshi, was that the long tail of smaller botnets that would be unable to double spend would take to bitcoin mining because it would be more profitable, so increasing security and making it much harder for a single large botnet to take over.
GnarlinBrando 14y ago
There eventually wont be much point to mining when the cap is reached, then there will be a point to process blocks for their transaction fees. You are also right about the hardware issue, plus there are other more profitable ways to use a botnet. There is also just a general problem with the argument that it incentivises botnets, they are their own incentive, anything that needs bandwidth, cpu power, and stolen information will be much easier with a botnet.

Noughmad 14y ago

The big graph on top looks nice, but it really annoys the physicist in me. There should at least be another in logarithmic scale, so we can actually see how the value is rising.

klapinat0r 14y ago
Here you go (from source): http://blockchain.info/charts/market-cap?showDataPoints=false&show_header=true&daysAverageString=1&timespan=all&scale=1&address= http://blockchain.info/charts/market-cap?showDataPoints=fals...
- Noughmad 14y ago
  Thanks. It looks pretty exponential this way.

josscrowcroft 14y ago

> "A few days ago, the value of all the bitcoins in the world blew past $1 billion for the first time ever" Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but... How is it possible for the "value of all the bitcoins in the world" to be anything, in truth? I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN" But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless. Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation. So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?

drcode 14y ago
Evaluating assets based on "Market Cap" is a standard financial analysis technique. This is nothing more than the marginal value of a security (i.e. what it's trading for this very moment) times the number of shares. You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.
hazov 14y ago
It's called mark to maket accounting, for example suppose I have 2 Bitcoin and will like to know what is their value, I see the market price and multiply by what I have, like you said. This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars. EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down
deleted 14y ago
[deleted]
klapinat0r 14y ago
> Nobody would pay $1BN for all of them, because that would render them all worthless Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more. Bitcoins will still be a scarce good. The demand will determine if they're worthless. A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.

cs702 14y ago

Many currencies in existence are now riskier and less stable than Bitcoin. Yes, it's true. As of right now, there are 182 official currencies worldwide[1], most of which you've never heard of in your life, and many of which have total market capitalization lower than Bitcoin.[2] Others are subject to extreme sociopolitical, economic, or military-conflict risks. Would you rather own bitcoins, which are traded globally, or, say, Libyan dinars, North Korean wons, Syrian pounds, etc.? Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3] If Bitcoin survives the horrific economic crises in countries like Spain, Greece, and Cyprus, and the even more horrific military conflicts in countries like Syria and Sudan, it will continue gaining credibility as the currency of last resort -- the global digital commodity that will survive even if your country or economy goes to hell. -- Edit: changed "most currencies in existence" to "many currencies in existence," which is what I actually intended to write. -- PS. I posted this on the other thread linking to the same article: https://news.ycombinator.com/item?id=5486100 https://news.ycombinator.com/item?id=5486100 -- [1] http://en.wikipedia.org/wiki/List_of_circulating_currencies_by_country http://en.wikipedia.org/wiki/List_of_circulating_currencies_... [2] http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-value-than-20-n http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-v... [3] https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1364991894838&chddm=1773204&q=CURRENCY:EURUSD&ntsp=0&ei=gh9cUaDRGbKr0AG8tQE https://www.google.com/finance?chdnp=1&chdd=1&chds=1...

carbocation 14y ago
> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3] The USD and the Euro, in comparison to BTC, are magnificently stable. Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.

mrharrison 14y ago

"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." Wow very scientific, over time any hockey stick can look like a bump in the road.

aethertap 14y ago
Yes, what you said. Bitcoin is just getting started, so it seems reasonable to think that the slope from "none" to "some" might be both bumpy and steep. Does anybody know of a good source of data for the exchange rates of other currencies when they were in their infancies? That could make an interesting comparison. I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.

walru 14y ago

Regardless of what I think about Bitcoin's longterm significance in the world. I feel this spike in Bitcoins's price might just be Russian mobsters making their money back after the Cyprus nonsense. The timing between the two events is just too convenient and this whole run-up smells like a classic pump and dump from my dot-com trading days.

GnarlinBrando 14y ago
I thought a lot of that money was accounted for coming out of branches of Cypriot banks that remained open in the UK and Russia. Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology. Sort of the price we pay. Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.

arithma 14y ago

Let's enumerate the grand possibilities filtered by an increasing bitcoin value versus dollars (without predicting small-time-scale changes): - Bitcoins will grow to a peak and then decrease to a much smaller value - Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally. - Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm. I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet. On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).

iSnow 14y ago
More possibilities: - Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants. - BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers - The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.

skore 14y ago

There are a couple of core points that this article seems to get completely wrong about bitcoin. I'm certainly no expert, but quotes like: > the perfect digital currency: they’re frictionless, anonymous[...] seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.) > Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities. I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad? I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet. > And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything. Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation? Finally, a lot of the arguments employed seem rather shoddy. This is the argument against being your own bank: > In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal. This is the argument trying to discredit bitcoins principle of mistrust: > Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto. So far so half-good... It’s nihilistic[...]. Nope, does not follow. > I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system. The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many". I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.

14y ago

tlrobinson 14y ago

"But trusting someone else to look after your coins requires the very trust that bitcoin was designed to circumvent." Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose. I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.

deleted 14y ago

[deleted]

paul 14y ago

The shape of the graph proves it's a bubble? I don't own any bitcoins, but this kind of silly fud makes me think I should buy some...

wcgortel 14y ago
Generally in financial time series, any exponential growth is indicative that something is growing "too fast." It has a better than "pure luck" shot at being right eventually when applied to stocks, but is misapplied when used on fiat currency....There is no constancy underlying the asset. Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.
- alexmat 14y ago
  It's only hard to define what a bubble is if you're an armchair economist. Traditionally a bubble can be defined as: "A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."
  - rm999 14y ago
    >This cause is usually central bank inflation I hope you misplaced your quotes because this is by no means part of the definition, nor is it true. Bad central bank policy can indirectly contribute to bubbles, but inflation and bubbles are two orthogonal concepts. >for reasons unknown Actually in a bubble the reason is almost always known. An economist friend of mine put it well: "there is always an underlying story attached to a bubble that is believable and often true". The tech bubble of 2000 for example had a true story behind it: that tech was going to change the world and mint several world-changing companies.
  - wcgortel 14y ago
    I don't think that definition helps much[1]. For one, arguing that the cause is usually central bank inflation would eliminate a great deal, including the dutch tulip bubble. What about bubbles that took place before central banks existed or were powerful? What about bubbles that had nothing to do with inflation like the tech bubble? Must other markets remain stagnant to satisfy this definition of bubble? What if one market goes up a little, and another goes up a lot? If there is an underlying cause, how can the movement be "for reasons unknown"? Can bubble tendencies occur in only one direction? Is it not possible to have a bubble in negativity towards something? [1] I may be an armchair economist, but my armchair is located at a large academic institution.

Shinkei 14y ago

"rather than burying $1,000 under a black volcanic rock in a dry stone wall next to an old oak tree" Shawshank Redemption.

danielweber 14y ago
The next example was of Rep William Jefferson. http://articles.chicagotribune.com/2006-05-29/news/0605290207_1_freezer-mom-lids http://articles.chicagotribune.com/2006-05-29/news/060529020...

avaku 14y ago

Is there a way to short bitcoin?

Ntrails 14y ago
You can look for a natural short, attempting to reason something that is intrinsically linked. A good place to start would be the last bitcoin crisis and crash, and how did the gold market (for example) respond if at all.? Most likely we have no good data and you'd be making educated guesses.
mikeburrelljr 14y ago
Yes. Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/ https://www.bitfinex.com/ ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/ https://icbit.se/ Goodluck.
- jellicle 14y ago
  Bitfinex is incorporated in Hong Kong. Let us suppose you make a $10,000 wager with them, and they take your money and close your account and ignore your emails. How do you suppose to get your $10,000 back? Hint: you won't. "ICBIT currently is in process of incorporating in an offshore jurisdiction." Even better.
codesuela 14y ago
Is this becoming a joke or something? In every god damn Bitcoin thread there is a very smart person who always asks the same question. If you are so serious about it why not just use Google? https://encrypted.google.com/search?hl=en&q=is%20there%20a%20way%20to%20short%20bitcoins https://encrypted.google.com/search?hl=en&q=is%20there%2... there you go. https://www.hnsearch.com/search#request/all&q=way+to+short+bitcoins&start=0 https://www.hnsearch.com/search#request/all&q=way+to+sho... FYI asking this question does not make you seem like a financial genius nor is it a witty reply.
- zecho 14y ago

trusche 14y ago

> Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. If only.

Glyptodon 14y ago

Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrage mechanism. However, outside of that argument, I think there's a more fundamental problem. As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.' Meanwhile, total global economic output is around $7.9e14 USD. Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.) Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small. In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base. That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price. I'm not sure where things will go from here, but I'm sure it'll be interesting.

altertoad 14y ago
Deflation is a good thing
- Glyptodon 14y ago
  Why? I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
- pbreit 14y ago
  The article makes a decent case that it is not. Care to elaborate?
  - vrotaru 14y ago
    Price deflation or money deflation? Price deflation is a good thing. I'm typing on something which is a "living" proof of these.

altertoad 14y ago

It can't be a bubble if it's not inflated. There's no real inflation in bitcoin there is though deflation which is a great thing. It's how all monetary systems should be

fnordfnordfnord 14y ago

>Those strengths are also weaknesses. No one wants to risk losing millions of dollars worth of currency overnight, just because they were outsmarted by some computer hacker. Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.

jellicle 14y ago
You may want to read up a little. People did and do abandon banks en masse if they suspect their money is not safe. "The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers." http://www.fdic.gov/about/history/index.html http://www.fdic.gov/about/history/index.html http://en.wikipedia.org/wiki/Bank_run http://en.wikipedia.org/wiki/Bank_run
- fnordfnordfnord 14y ago
  Yeah, I've heard of the FDIC, it's no magic bullet, and it wasn't created to insure people getting mugged in the street.

michaelochurch 14y ago

The problem: debt currencies from nation-states are slowly going obsolete. Very slowly, so don't jump the gun on a bad idea. Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed. Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you. In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like. How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them. With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail. There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally. Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.

reaclmbs 14y ago

"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." Yep..

phusion 14y ago

Interesting article... but what blew me away was the page itself. Is this a CMS or a custom job? It looks fantastic.

polarix 14y ago
https://medium.com/about/9e53ca408c48 https://medium.com/about/9e53ca408c48

ryusage 14y ago

> how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.

fab13n 14y ago

Again this deflation misunderstanding... Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them. As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies. As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health. Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500. Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend. And anyway, when was the last time economists accurately predicted anything but the past? :)

redblacktree 14y ago
Gold was also deflationary, when it was used as a medium of exchange, so you can't say that "Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected." Well, you can, but you'd be wrong.

rfugger 14y ago

The fact that Bitcoin is deflationary isn't a big deal because you don't need to use it as a unit of account in order to use it as a cheap, fast, and reliable way to transfer value globally. You just need easy ways to convert to and from Bitcoin at either end of payments. Systems like ripple.com will automate this process to a large degree.

EGreg 14y ago

http://magarshak.com/blog/?p=148 http://magarshak.com/blog/?p=148

mathattack 14y ago

I liked the article until he got to this point... "Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million." This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)