9 ms·

About the Bitcoin ‘bubble’

42 points by mrb 13y ago

dnautics 13y ago
It's true that unduly tight monetary policy can be economically ruinous, as the experience of the Great Depression makes clear. But deflation is only harmful when a currency is used as what economists call a "unit of account" -- that is, the unit with which peoples' salaries, mortgages and other long-term financial commitments are denominated. ...As for the idea that the rising value of bitcoins will cause people to hoard Bitcoins rather than spending them, that's based on flawed reasoning. If everyone holding bitcoins expect their value to rise dramatically in the future, then the price will rise now, until some Bitcoin holders are willing to part with their Bitcoins. But the hoarding rationale is exactly the mechanism quoted for the reason why deflation is ruinous. The great depression in the US was not singularly a deflationary experience, in fact, after the initial deflationary contraction, the entire period was marked by several attempts by the government to goose the economy through inflationary meddling. http://www.youtube.com/watch?v=JUvm9UgJBtg http://www.youtube.com/watch?v=JUvm9UgJBtg
Aqueous 13y ago
The truth of the matter is that Bitcoin isn't at a price even a fraction of what it will ultimately be worth if it becomes a currency in wide use. If it becomes a currency in wide use its market cap will start to resemble those of national currencies, and since there will only ever be a limited number of BitCoins, that means that if this happens a single BitCoin will be worth thousands, and it won't be meaningful any more to talk about a single BitCoin as a denomination of casual expenditures. Just because something is highly valued doesn't mean it is in a bubble. It just means it is in demand. A single share of Berkshire Hathaway is worth $173,201 at the moment. Is that company in a bubble? Most people would say no - it is worth so much because the market bears that price, because Berkshire Hathaway has generated an enormous amount of value for its shareholders by investing in companies that are themselves inherently valuable. If BitCoin is capable of being traded for valuable goods and services, that means it is exactly as valuable as the market says it is. The real problem we have to contend with is the fact that it makes more sense to hold on to BitCoins than it does to spend them. And this will be the case until the BitCoin reaches some kind of plateau of value.
- gamblor956 13y ago
  Bitcoin will no monger become a means of financial exchange than wire transfer, which has been around for more than a hundred years. That is--Bitcoin may become one of many potential exchange mechanisms for transactions in which irreversibility is desirable (such as cross-border transactions) but will otherwise remain a second-class mechanism for most other transactions. Also...Berkshire Hathaway is worth $170k+ because it owns actual, valuable, real-world assets, most of which produce income. The BH stock price reflects the value of those assets, plus the expected future value of the income that those assets will produce. Bitcoin does not own assets, nor does it otherwise generate income. Thus, a comparison to BH is entirely misplaced.
  - drcode 13y ago
    Just like the internet will be nothing more than a fancy fax machine. http://en.wikiquote.org/wiki/Paul_Krugman http://en.wikiquote.org/wiki/Paul_Krugman
    - gwern 13y ago
      Ahem: https://en.wikipedia.org/wiki/Productivity_paradox https://en.wikipedia.org/wiki/Productivity_paradox
      - drcode 13y ago
        Interesting line of thought, I agree, but I don't think many Economists nowadays would seriously argue that we'd be more productive if the internet had never happened (this is mainly an idea from the 80s and 90s, pre-internet) ...but I find the section on how credit card overhead is a big factor in lost technological productivity very ironic in a bitcoin thread.
- mahranch 13y ago
  "since there will only ever be a limited number of BitCoins" While it's true that there is a limited number of bitcoins, it's a misleading claim since they can continue to add decimal points. According to FAQ on the bitcoin website, they can do this as needed, infinitely.
christiangenco 13y ago
> So the question is whether someone will develop a "killer app" that will push Bitcoin into the mainstream. If that happens, the value of Bitcoin could go even higher. If it doesn't, then sooner or later the currency's value will plummet. This right here is the heart of the problem. What we need is a way to incentivise merchants to accept bitcoin, and make the payment process from the consumer end easier, safer, and cheaper than using a credit card. What would need to happen for your locally owned restaurant to accept bitcoin?
- modeless 13y ago
  All that would need to happen is for the POS vendors they already use to add support. Around here (Seattle) the bigger restaurants and bars seem dominated by http://www.dinerware.com/ http://www.dinerware.com/, but there's a lot of innovation at the low end, e.g. sandwich shops, burger joints, and food trucks. I've seen a lot of people using Square and other iOS-based POS systems, and also one place using LevelUp. Separately there are also online ordering systems like Eat24, NetWaiter, and GrubHub, which can act as payment processors for online orders.
  - gst 13y ago
    But which advantages would this have for me as a user? As far as I know the merchant contracts with the credit card companies require merchants to charge the same fee, independent of the payment method. But then, when I pay via credit card I get some cashback from my credit card company, and it's also easy to cancel transactions in case of fraud. So paying with Bitcoin is not only more expensive, but also shifts the risk of fraud to the user. The main area where I could see potential adoption of Bitcoin are some business models, where it's currently very hard to get merchant contracts for credit card (due to the high fraud risk). If I'd found a startup in that area, I'd probably just use Bitcoin (via Coinbase or Bitpay) for the early prototype, instead of spending considerable resources trying to get credit card processing to work.
    - modeless 13y ago
      > the merchant contracts with the credit card companies require merchants to charge the same fee, independent of the payment method That's not true. There used to be clauses in the contracts prohibiting merchants from charging an extra fee for credit card transactions. However, these clauses were recently (this year) removed by the credit card industry as a result of litigation. Also, it has always been possible to give a discount for non credit card transactions. You're right, it doesn't make sense, but it's true. Since merchants usually eat the credit card fees themselves instead of passing them on to the customer, they have a big incentive to encourage consumers to switch to bitcoin. It will lower the fees they pay, which probably means discounts for bitcoin users. Merchants will also like the lack of chargebacks. On the other hand, consumers like chargebacks. There's no reason why a payment processor couldn't implement a chargeback-like system on top of bitcoin. The next Visa might be something like that, in fact.
crassus 13y ago
Of course bitcoin is a bubble. Bitcoin is irrationally overvalued. Just like the US Dollar. In the English language, that which is irrationally overvalued and stays that way is what we call money. This is Mencius Moldbug's Bubble Theory of Money[1], one of his many fascinating contributions to the world [1] http://unqualified-reservations.blogspot.com/2013/04/bitcoin-is-money-bitcoin-is-bubble.html http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
- bayesianhorse 13y ago
  So is there anything beyond basic nutrition and shelter that is not a bubble?
  - deleted 13y ago
    [deleted]
  - skylan_q 13y ago
    Since people only want to live and food and shelter are a means to this, then they too are in a bubble. Bubble everything!
- skylan_q 13y ago
  Us feeble-brained humans are uncomfortable with path-dependent outcomes. We don't want Bitcoin, or anything, to have an arbitrary price determined merely by marginal bid and ask, let alone a multiple equilibrium - we want it to have an underlying value. Which is a physical property, like weight or orangeness. It's very sadly ironic that the author who mentions Menger forgets that value is intangible and subjective. Value isn't physical. People value things for different reasons be they physical characteristics or not. (e.g. sentimental value) The BTM asserts that money and a bubble are the same thing. Both are anomalously overvalued assets. Both obtain their anomalous value from the fact that many people have bought the asset, without any intention to use it, but only to exchange it for some other asset at a later date. It's not anomalous. People value it because they can use it as a medium of exchange. That's how they value it. The notion that value is a physical characteristic of something is what causes one to believe that valuing money is irrational. There is no such thing as "underlying" economic or material value. There is only subjective value. Prices arise by the auction mechanism; people bidding on things, which causes commodities to converge somewhere between the bit-ask spread. This is the price, (objective) which is not to be confused with value. (subjective)
bayesianhorse 13y ago
The legal killer application for Bitcoin will not be e-commerce but rather the fluid trading of a yet unknown commodity which is currently not traded or very illiquid, between parties that can't trust each other and want to cut out a middle man. But once that happens, investment banking with Bitcoins is inevitable and the times of "constant money supply" are practically over, for better or for worse.
AsymetricCom 13y ago
I kind of like the way the article skirts the topic of the Fed. No, bitcoin isn't motivated by the Fed, because it's unstable in value. Uh huh.. On the contrary, you could probably write a function that estimates the value of bitcoin that included public-trust-of-Fed indicators.
wissler 13y ago
What will Bitcoin clones do to the value of Bitcoin? In principle you could have an unlimited number of them, it's not as if Bitcoin is the only possible instantiation of a cryptocurrency.
- MarcusBrutus 13y ago
  Exactly, Bitcoin will ultimately fail as money as it has no intrinsic value or real scarcity. As to those who might argue that fiat money has no intrinsic value either I beg to differ. The "intrinsic value" of, e.g., the USD is that there exists an organization (US government) with gargantuan physical force that stands to lose a lot if the value of USD goes to zero too fast and so holders of USDs can rely on that organization to deploy that force against rapid devaluation of their currency. There is no such comparable organization in the case of Bitcoin. In the absence of that, only real intrinsic value (the kind of gold or silver has) may prop up a currency and Bitcoin has none of that either. Tulip mania was very rational compared to Bitcoin.
  - ferdo 13y ago
    How does the US govt. deploy force against decentralized crypto? It can go after the exchanges and clamp down on bank-to-Bitcoin services but it can do nothing against the network itself. Should the USG clamp down on Bitcoin too hard, Bitcoin will thrive in those places that are harder for the regulatory agencies to reach. ATM, 1 bitcoin is worth ~350 times more than one Federal Reserve Note, making Bitcoin the most valuable currency in the world. I expect demand for Bitcoin will only rise elsewhere in the world even if the USG tries to make it difficult for its own citizens to use.
    - venomsnake 13y ago
      The USG could easily make transfer of USD into Bitcoin impossible, so can EU for EUR. Until we are in the matrix you need the physical world. And there governments are dominant.
      - 13y ago
lingben 13y ago
the WaPo article links to a forbes blog which argues against the deflationary effect of bitcoin by saying: "Removing the gimmicky God hypothetical doesn’t change the basic insight: if market participants become convinced that “the price of a bitcoin is on a steady upward trajectory,” they’re not going to hoard their Bitcoins for weeks or months waiting for the price to rise. They’ll bid the price up right away." This is incomplete thinking. It is true that if people internalized the deflationary aspect of bitcoin they would automatically bid up the price but there are two aspects of this the author ignores. One, the deflationary effect is small and continuous. Not at all like his "God analogy" of a one-shot increase. And for the most part that is exactly what we have been observing with bitcoin - with the occasional exacerbation of this through old fashioned human irrational exuberance thrown in for good measure (April 2013 and now). Second, at the same time as the deflationary effect which serves to increase prices, there is another force pushing prices down (slightly). That is the need to use bitcoin for purchases either illegal or legal. This obviously requires both the buying (if one does not have bitcoins) and the selling (after one has acquired them whatever means, either mining or purchasing in an exchange transaction). The conclusion is that there are several forces or layers of push/pull at work at the same time on bitcoin prices. This does not magically remove or nullify the fact that a deflationary force exists! Nor does it mean that the deflationary force is not the major one.
brunooo 13y ago
Has anybody seen good articles that address the topic of a new global reserve currency and how that role could be served by ecash/digital cryptocurrencies? Especially from two points of view: - China making remarks in that direction, enhancing the role of SDR etc. - Liberalizing currencies in general, from Airmiles to Whatevercoin with simple decentralized exchange mechanisms? (The Ripple/Bancor idea) Following Izzy Kaminska at FT Alphaville (http://ftalphaville.ft.com/tag/bitcoinmania/ http://ftalphaville.ft.com/tag/bitcoinmania/ free signup & highly recommended), but more interested in stuff by nerds within central banks etc.
jophde 13y ago
If Bitcoin ever truly rivals the dollar the government will just make it illegal. You will listen because they have guns and jails.

42 points by mrb 13y ago

It's true that unduly tight monetary policy can be economically ruinous, as the experience of the Great Depression makes clear. But deflation is only harmful when a currency is used as what economists call a "unit of account" -- that is, the unit with which peoples' salaries, mortgages and other long-term financial commitments are denominated. ...As for the idea that the rising value of bitcoins will cause people to hoard Bitcoins rather than spending them, that's based on flawed reasoning. If everyone holding bitcoins expect their value to rise dramatically in the future, then the price will rise now, until some Bitcoin holders are willing to part with their Bitcoins. But the hoarding rationale is exactly the mechanism quoted for the reason why deflation is ruinous. The great depression in the US was not singularly a deflationary experience, in fact, after the initial deflationary contraction, the entire period was marked by several attempts by the government to goose the economy through inflationary meddling. http://www.youtube.com/watch?v=JUvm9UgJBtg http://www.youtube.com/watch?v=JUvm9UgJBtg

Aqueous 13y ago

The truth of the matter is that Bitcoin isn't at a price even a fraction of what it will ultimately be worth if it becomes a currency in wide use. If it becomes a currency in wide use its market cap will start to resemble those of national currencies, and since there will only ever be a limited number of BitCoins, that means that if this happens a single BitCoin will be worth thousands, and it won't be meaningful any more to talk about a single BitCoin as a denomination of casual expenditures. Just because something is highly valued doesn't mean it is in a bubble. It just means it is in demand. A single share of Berkshire Hathaway is worth $173,201 at the moment. Is that company in a bubble? Most people would say no - it is worth so much because the market bears that price, because Berkshire Hathaway has generated an enormous amount of value for its shareholders by investing in companies that are themselves inherently valuable. If BitCoin is capable of being traded for valuable goods and services, that means it is exactly as valuable as the market says it is. The real problem we have to contend with is the fact that it makes more sense to hold on to BitCoins than it does to spend them. And this will be the case until the BitCoin reaches some kind of plateau of value.

gamblor956 13y ago
Bitcoin will no monger become a means of financial exchange than wire transfer, which has been around for more than a hundred years. That is--Bitcoin may become one of many potential exchange mechanisms for transactions in which irreversibility is desirable (such as cross-border transactions) but will otherwise remain a second-class mechanism for most other transactions. Also...Berkshire Hathaway is worth $170k+ because it owns actual, valuable, real-world assets, most of which produce income. The BH stock price reflects the value of those assets, plus the expected future value of the income that those assets will produce. Bitcoin does not own assets, nor does it otherwise generate income. Thus, a comparison to BH is entirely misplaced.
- drcode 13y ago
  Just like the internet will be nothing more than a fancy fax machine. http://en.wikiquote.org/wiki/Paul_Krugman http://en.wikiquote.org/wiki/Paul_Krugman
  - gwern 13y ago
    Ahem: https://en.wikipedia.org/wiki/Productivity_paradox https://en.wikipedia.org/wiki/Productivity_paradox
    - drcode 13y ago
      Interesting line of thought, I agree, but I don't think many Economists nowadays would seriously argue that we'd be more productive if the internet had never happened (this is mainly an idea from the 80s and 90s, pre-internet) ...but I find the section on how credit card overhead is a big factor in lost technological productivity very ironic in a bitcoin thread.
mahranch 13y ago
"since there will only ever be a limited number of BitCoins" While it's true that there is a limited number of bitcoins, it's a misleading claim since they can continue to add decimal points. According to FAQ on the bitcoin website, they can do this as needed, infinitely.

christiangenco 13y ago

> So the question is whether someone will develop a "killer app" that will push Bitcoin into the mainstream. If that happens, the value of Bitcoin could go even higher. If it doesn't, then sooner or later the currency's value will plummet. This right here is the heart of the problem. What we need is a way to incentivise merchants to accept bitcoin, and make the payment process from the consumer end easier, safer, and cheaper than using a credit card. What would need to happen for your locally owned restaurant to accept bitcoin?

modeless 13y ago
All that would need to happen is for the POS vendors they already use to add support. Around here (Seattle) the bigger restaurants and bars seem dominated by http://www.dinerware.com/ http://www.dinerware.com/, but there's a lot of innovation at the low end, e.g. sandwich shops, burger joints, and food trucks. I've seen a lot of people using Square and other iOS-based POS systems, and also one place using LevelUp. Separately there are also online ordering systems like Eat24, NetWaiter, and GrubHub, which can act as payment processors for online orders.
- gst 13y ago
  But which advantages would this have for me as a user? As far as I know the merchant contracts with the credit card companies require merchants to charge the same fee, independent of the payment method. But then, when I pay via credit card I get some cashback from my credit card company, and it's also easy to cancel transactions in case of fraud. So paying with Bitcoin is not only more expensive, but also shifts the risk of fraud to the user. The main area where I could see potential adoption of Bitcoin are some business models, where it's currently very hard to get merchant contracts for credit card (due to the high fraud risk). If I'd found a startup in that area, I'd probably just use Bitcoin (via Coinbase or Bitpay) for the early prototype, instead of spending considerable resources trying to get credit card processing to work.
  - modeless 13y ago
    > the merchant contracts with the credit card companies require merchants to charge the same fee, independent of the payment method That's not true. There used to be clauses in the contracts prohibiting merchants from charging an extra fee for credit card transactions. However, these clauses were recently (this year) removed by the credit card industry as a result of litigation. Also, it has always been possible to give a discount for non credit card transactions. You're right, it doesn't make sense, but it's true. Since merchants usually eat the credit card fees themselves instead of passing them on to the customer, they have a big incentive to encourage consumers to switch to bitcoin. It will lower the fees they pay, which probably means discounts for bitcoin users. Merchants will also like the lack of chargebacks. On the other hand, consumers like chargebacks. There's no reason why a payment processor couldn't implement a chargeback-like system on top of bitcoin. The next Visa might be something like that, in fact.

crassus 13y ago

Of course bitcoin is a bubble. Bitcoin is irrationally overvalued. Just like the US Dollar. In the English language, that which is irrationally overvalued and stays that way is what we call money. This is Mencius Moldbug's Bubble Theory of Money[1], one of his many fascinating contributions to the world [1] http://unqualified-reservations.blogspot.com/2013/04/bitcoin-is-money-bitcoin-is-bubble.html http://unqualified-reservations.blogspot.com/2013/04/bitcoin...

bayesianhorse 13y ago
So is there anything beyond basic nutrition and shelter that is not a bubble?
- deleted 13y ago
  [deleted]
- skylan_q 13y ago
  Since people only want to live and food and shelter are a means to this, then they too are in a bubble. Bubble everything!
skylan_q 13y ago
Us feeble-brained humans are uncomfortable with path-dependent outcomes. We don't want Bitcoin, or anything, to have an arbitrary price determined merely by marginal bid and ask, let alone a multiple equilibrium - we want it to have an underlying value. Which is a physical property, like weight or orangeness. It's very sadly ironic that the author who mentions Menger forgets that value is intangible and subjective. Value isn't physical. People value things for different reasons be they physical characteristics or not. (e.g. sentimental value) The BTM asserts that money and a bubble are the same thing. Both are anomalously overvalued assets. Both obtain their anomalous value from the fact that many people have bought the asset, without any intention to use it, but only to exchange it for some other asset at a later date. It's not anomalous. People value it because they can use it as a medium of exchange. That's how they value it. The notion that value is a physical characteristic of something is what causes one to believe that valuing money is irrational. There is no such thing as "underlying" economic or material value. There is only subjective value. Prices arise by the auction mechanism; people bidding on things, which causes commodities to converge somewhere between the bit-ask spread. This is the price, (objective) which is not to be confused with value. (subjective)

bayesianhorse 13y ago

The legal killer application for Bitcoin will not be e-commerce but rather the fluid trading of a yet unknown commodity which is currently not traded or very illiquid, between parties that can't trust each other and want to cut out a middle man. But once that happens, investment banking with Bitcoins is inevitable and the times of "constant money supply" are practically over, for better or for worse.

AsymetricCom 13y ago

I kind of like the way the article skirts the topic of the Fed. No, bitcoin isn't motivated by the Fed, because it's unstable in value. Uh huh.. On the contrary, you could probably write a function that estimates the value of bitcoin that included public-trust-of-Fed indicators.

wissler 13y ago

What will Bitcoin clones do to the value of Bitcoin? In principle you could have an unlimited number of them, it's not as if Bitcoin is the only possible instantiation of a cryptocurrency.

MarcusBrutus 13y ago
Exactly, Bitcoin will ultimately fail as money as it has no intrinsic value or real scarcity. As to those who might argue that fiat money has no intrinsic value either I beg to differ. The "intrinsic value" of, e.g., the USD is that there exists an organization (US government) with gargantuan physical force that stands to lose a lot if the value of USD goes to zero too fast and so holders of USDs can rely on that organization to deploy that force against rapid devaluation of their currency. There is no such comparable organization in the case of Bitcoin. In the absence of that, only real intrinsic value (the kind of gold or silver has) may prop up a currency and Bitcoin has none of that either. Tulip mania was very rational compared to Bitcoin.
- ferdo 13y ago
  How does the US govt. deploy force against decentralized crypto? It can go after the exchanges and clamp down on bank-to-Bitcoin services but it can do nothing against the network itself. Should the USG clamp down on Bitcoin too hard, Bitcoin will thrive in those places that are harder for the regulatory agencies to reach. ATM, 1 bitcoin is worth ~350 times more than one Federal Reserve Note, making Bitcoin the most valuable currency in the world. I expect demand for Bitcoin will only rise elsewhere in the world even if the USG tries to make it difficult for its own citizens to use.
  - venomsnake 13y ago
    The USG could easily make transfer of USD into Bitcoin impossible, so can EU for EUR. Until we are in the matrix you need the physical world. And there governments are dominant.
    - 13y ago

lingben 13y ago

the WaPo article links to a forbes blog which argues against the deflationary effect of bitcoin by saying: "Removing the gimmicky God hypothetical doesn’t change the basic insight: if market participants become convinced that “the price of a bitcoin is on a steady upward trajectory,” they’re not going to hoard their Bitcoins for weeks or months waiting for the price to rise. They’ll bid the price up right away." This is incomplete thinking. It is true that if people internalized the deflationary aspect of bitcoin they would automatically bid up the price but there are two aspects of this the author ignores. One, the deflationary effect is small and continuous. Not at all like his "God analogy" of a one-shot increase. And for the most part that is exactly what we have been observing with bitcoin - with the occasional exacerbation of this through old fashioned human irrational exuberance thrown in for good measure (April 2013 and now). Second, at the same time as the deflationary effect which serves to increase prices, there is another force pushing prices down (slightly). That is the need to use bitcoin for purchases either illegal or legal. This obviously requires both the buying (if one does not have bitcoins) and the selling (after one has acquired them whatever means, either mining or purchasing in an exchange transaction). The conclusion is that there are several forces or layers of push/pull at work at the same time on bitcoin prices. This does not magically remove or nullify the fact that a deflationary force exists! Nor does it mean that the deflationary force is not the major one.

brunooo 13y ago

Has anybody seen good articles that address the topic of a new global reserve currency and how that role could be served by ecash/digital cryptocurrencies? Especially from two points of view: - China making remarks in that direction, enhancing the role of SDR etc. - Liberalizing currencies in general, from Airmiles to Whatevercoin with simple decentralized exchange mechanisms? (The Ripple/Bancor idea) Following Izzy Kaminska at FT Alphaville (http://ftalphaville.ft.com/tag/bitcoinmania/ http://ftalphaville.ft.com/tag/bitcoinmania/ free signup & highly recommended), but more interested in stuff by nerds within central banks etc.

jophde 13y ago

If Bitcoin ever truly rivals the dollar the government will just make it illegal. You will listen because they have guns and jails.