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Interesting. I used essentially the same methodology nearly three years ago to estimate the potential maximum price of Bitcoin over time, but I reached a diffe

by cs702 13y ago

Interesting. I used essentially the same methodology nearly three years ago to estimate the potential maximum price of Bitcoin over time, but I reached a different conclusion: http://cs702.wordpress.com/2011/05/29/on-the-potential-adoption-and-price-appreciation-of-bitcoin-in-the-long-run/ http://cs702.wordpress.com/2011/05/29/on-the-potential-adopt... The main difference between BofA's analysis and mine is that I see Bitcoin as a far superior alternative for many financial and other types of applications. For one, Bitcoin as a platform provides a global, decentralized, irreversible log of programmable transactions. For another, bitcoins as "money" are easier to secure, transport, hide, and backup than all prior forms of money ever used by civilization. (Actually, no prior form of money ever used – whether made of bank credits, paper, metal, or other substances[1] – could be backed up like a Bitcoin wallet.) Therefore, if Bitcoin continues to work as intended (i.e., proves immune to attacks) and gets easier and safer to use (for non-technical people), it will slowly gain credibility in the public’s mind, not just as medium of exchange and store of value, but also as application platform. Over a period of many years or even decades, as the world gradually learns via trial-and-error how to use it, becomes familiar with its properties, and ultimately comes to trust it, nothing can prevent Bitcoin from gaining as much credibility as other alternatives, including gold. -- [1] I highly recommend Nick Szabo's essay on the origins of money: http://szabo.best.vwh.net/shell.html http://szabo.best.vwh.net/shell.html

3pt14159 13y ago
(If you didn't read the article, cs702 thinks bitcoin could hit $90k.) I still think you are off. The fractional reserve system warps incentives too much. 1. The world needs more than $600 of float. And most people think they have that. The difference is that its wrapped up in the fractional reserve banking system. 2. Due to inflation uninformed people are bullied into investing in mutual funds, stocks, housing, etc. with their savings. Just the existence of bitcoin as a major worldwide currency could transform the traditional saving model. If a 30 year old puts a days wages into an account and can expect a days wages out when he's 80 years old then he can drastically simplify his retirement. He can avoid speculative bubbles and bad mutual fund managers. 3. National currency reserves are currently done with sovereign debt - with the idea being that if a nation goes bankrupt they'll just inflate their currency anyway and the currency reserve may as well be in bonds. If Bitcoin were to become a major world currency, the reserves could be in actual Bitcoins. All of this to say I still think that there is a 90+% chance that bitcoin will fail, but on that remaining percent, the limit higher than 100 times today. I've done the math a couple ways and I end up with $100k to $10m as my outliers given that bitcoin becomes a world currency.
- fat0wl 13y ago
  I've wonder about #2 though. We see the downsides of saving in an inflationary system, but a finite currency system... do we really expect that to be stable for 50 years, and if so, based on what precedent? I was surprised to see BOA list "It's finite" as an advantage. It seems like this mentality is all anti-inflation (which seems justifiable) yet the alternative is taking a wildly experimental approach to savings. BTC hasn't proven stability within a month really yet, why trust it for 50 years? And then if you put in that 1 day's wage of Bitcoins, what happens when the market cap for BTC fluctuates? It won't always be in a steady demand, it will depend a bit on how many people are using it, no? I am a doomsdayer also I think that it can only succeed if it always remains the same price or keeps going up, but the belief that this is possible is obviously intellectually malformed.
  - onebaddude 13y ago
    >but a finite currency system... do we really expect that to be stable for 50 years No, it's deflationary. And while deflation isn't "evil" in and of itself, it causes the same problems as inflation (in reverse, obviously). For example, if Bitcoin are restricted to 21MM units, as the population of the planet increases, an individual's wages must decrease in Bitcoin terms to maintain their real value. That means that prices for goods will have to drop as well, which leads to terrible menu costs, and hoarding (why buy my car now when it will be cheaper in bitcoin terms next year?) In a predictably deflationary environment, it's always better to spend your money "later".
    - fat0wl 13y ago
      yea i hear ya... i've always been wondering what fraction of current market volatility is due to speculation & how much is just the flaw of the deflationary nature exposing itself too soon
    - cuu508 13y ago
      If in say 100 years human population growth stopped, would it still be deflationary? Surely the population cannot grow infinitely?
analog31 13y ago
In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility. "Store of value" acceptable to laypeople will never happen, so long as Btc is volatile. "Medium of exchange" will be hampered by volatility because the use of Bitcoin by laypeople will require them to exchange Btc for a stable currency such as government money. This exchange is unnecessary when using a mechanism such as PayPal, thus Btc inherently suffers a higher load of transaction fees. It's a vicious circle. Liquidity of the exchange between currency and Btc would help to address both of these problems, but is beyond the scope of the Btc concept itself. It will require further innovation. A possible scenario for success is that competition drives Btc transaction costs below credit card swipe fees, thus breaking the oligopoly of the credit card processing business. Disclaimer: I use a PayPal merchant account for my side business.
- runeks 13y ago
  > In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility. I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded. What would be helpful is a chart that plots a price average across exchanges, where the price on each exchange is weighted by the daily volume of the exchange in question. This would show a more accurate picture of volatility, and I bet that this is slowly decreasing, ever since bitcoins became tradable for USD. We've already seen the market depth increase dramatically over the past few years. One can purchase or sell $1M worth of bitcoins with a slippage of 4.35% and 1.47%, respectively - if you spread it out over exchanges. That's unprecedented, I believe, although I don't have a consolidated historical BTCUSD order book to back it up.
  - 001sky 13y ago
    I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded. You've missed the part about $100->$1,000? = Not stabile. Unfortunately.
exelius 13y ago
A big part of the issue with Bitcoin is that our global economic system is, and for the foreseeable future will continue to be based on fiat currencies issued and controlled by central banks. I see Bitcoin's role in all this as a way to exploit arbitrage in currency exchange rates for restricted currencies. This is exactly why it's popular in China. It is a currency whose supply is algorithmically limited and theoretically should track global inflation. The world has always had nominal exchange rates and de-facto exchange rates for restricted currencies; but until something like Bitcoin emerged there was no legal way to perform exchanges at the de-facto rates at scale. My big worry with Bitcoin is that the supply is too limited. Currency is subject to manipulation by many forces; much of the job of a central bank in control of money supply is to counteract any intentional manipulation. With unstable prices and a limited circulation value (the total value of all BTC in circulation is only ~$12 billion) it is very open to manipulation by investment banks and hedge funds. Until BTC reaches economic scale, it's going to be subject to all sorts of shenanigans; and with no central authority to counteract the manipulative influences, I don't know that there will ever be enough trust in it for it to reach that scale.
00rion 13y ago
What's stopping another crypto currency such as Litecoin from superceding Bitcoin?
- shawn-furyan 13y ago
  In short, network effects resulting from Bitcoin's massive first mover advantage.
  - simplemath 13y ago
    Although LTC is certainly playing into being "silver" to BTC's "gold"
headgasket 13y ago
Very interesting article, it looks very prescient right now, kudos. I agree with you that the bitcoin protocol as a p2p irreversible log of transactions is a real and still misunderstood great invention. It's akin to the gunpowder: the Chinese were the first to toy with the volatile stuff in the 8th century B.C. But the killer app (!!) took a long time to emerge. The current state of affair with bitcoin looks a lot like a bubble, there's no question in my mind. As long as it's a speculative device, it's actually dangerous/endangered. It needs to find a use and stability, which might take a while. One of the strong cases you laid out is hyperinflation: I can see local bourgeois looking for a safer place to park reserve purchasing power before escaping abroad. That's a limit case, however. The rest of the people are by definition struggling if there is such a crisis. Cheers!
dschiptsov 13y ago
Most of such rhetoric is just a word acrobatics. The confusion comes from using inappropriate words, because this phenomena needs some new words for a correct description. We cannot call this a currency because having few exchanges does not make it as such. There are option exchanges and futures exchanges and other specialized institutions. It the first place, a currency cannot be this volatile, or, if so, it is a worthless currency. The current observable behavior is alike of futures and options - the price (not a value) is determined by expectations that people are holding about further movements of the price, so, basically it is a commodity futures speculation. The particular properties of the underlying technologies, such as decentralization and publicly available log of all transactions are just nice (and unique) properties, but they does not magically create any value for a bitcoin, which is just a set of unique numbers. Therefore, it is not a currency, it is a internet powered and hence globally available digital (virtual) commodity, (as worthless and dangerous as means of legal tender as derivatives) which now is in a stage of a truly global ponzi scheme, where prices are based on the pure speculation about it further movements. The usage of familiar words in a new context is what makes the ponzi scheme rolling - people make their snap-judgments based on old "rules" about "currencies" which are not appropriate for bitcoins along with peer and bandwagon effects. Very clever.

by cs702 13y ago

3pt14159 13y ago

(If you didn't read the article, cs702 thinks bitcoin could hit $90k.) I still think you are off. The fractional reserve system warps incentives too much. 1. The world needs more than $600 of float. And most people think they have that. The difference is that its wrapped up in the fractional reserve banking system. 2. Due to inflation uninformed people are bullied into investing in mutual funds, stocks, housing, etc. with their savings. Just the existence of bitcoin as a major worldwide currency could transform the traditional saving model. If a 30 year old puts a days wages into an account and can expect a days wages out when he's 80 years old then he can drastically simplify his retirement. He can avoid speculative bubbles and bad mutual fund managers. 3. National currency reserves are currently done with sovereign debt - with the idea being that if a nation goes bankrupt they'll just inflate their currency anyway and the currency reserve may as well be in bonds. If Bitcoin were to become a major world currency, the reserves could be in actual Bitcoins. All of this to say I still think that there is a 90+% chance that bitcoin will fail, but on that remaining percent, the limit higher than 100 times today. I've done the math a couple ways and I end up with $100k to $10m as my outliers given that bitcoin becomes a world currency.

fat0wl 13y ago
I've wonder about #2 though. We see the downsides of saving in an inflationary system, but a finite currency system... do we really expect that to be stable for 50 years, and if so, based on what precedent? I was surprised to see BOA list "It's finite" as an advantage. It seems like this mentality is all anti-inflation (which seems justifiable) yet the alternative is taking a wildly experimental approach to savings. BTC hasn't proven stability within a month really yet, why trust it for 50 years? And then if you put in that 1 day's wage of Bitcoins, what happens when the market cap for BTC fluctuates? It won't always be in a steady demand, it will depend a bit on how many people are using it, no? I am a doomsdayer also I think that it can only succeed if it always remains the same price or keeps going up, but the belief that this is possible is obviously intellectually malformed.
- onebaddude 13y ago
  >but a finite currency system... do we really expect that to be stable for 50 years No, it's deflationary. And while deflation isn't "evil" in and of itself, it causes the same problems as inflation (in reverse, obviously). For example, if Bitcoin are restricted to 21MM units, as the population of the planet increases, an individual's wages must decrease in Bitcoin terms to maintain their real value. That means that prices for goods will have to drop as well, which leads to terrible menu costs, and hoarding (why buy my car now when it will be cheaper in bitcoin terms next year?) In a predictably deflationary environment, it's always better to spend your money "later".
  - fat0wl 13y ago
    yea i hear ya... i've always been wondering what fraction of current market volatility is due to speculation & how much is just the flaw of the deflationary nature exposing itself too soon
  - cuu508 13y ago
    If in say 100 years human population growth stopped, would it still be deflationary? Surely the population cannot grow infinitely?

analog31 13y ago

In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility. "Store of value" acceptable to laypeople will never happen, so long as Btc is volatile. "Medium of exchange" will be hampered by volatility because the use of Bitcoin by laypeople will require them to exchange Btc for a stable currency such as government money. This exchange is unnecessary when using a mechanism such as PayPal, thus Btc inherently suffers a higher load of transaction fees. It's a vicious circle. Liquidity of the exchange between currency and Btc would help to address both of these problems, but is beyond the scope of the Btc concept itself. It will require further innovation. A possible scenario for success is that competition drives Btc transaction costs below credit card swipe fees, thus breaking the oligopoly of the credit card processing business. Disclaimer: I use a PayPal merchant account for my side business.

runeks 13y ago
> In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility. I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded. What would be helpful is a chart that plots a price average across exchanges, where the price on each exchange is weighted by the daily volume of the exchange in question. This would show a more accurate picture of volatility, and I bet that this is slowly decreasing, ever since bitcoins became tradable for USD. We've already seen the market depth increase dramatically over the past few years. One can purchase or sell $1M worth of bitcoins with a slippage of 4.35% and 1.47%, respectively - if you spread it out over exchanges. That's unprecedented, I believe, although I don't have a consolidated historical BTCUSD order book to back it up.
- 001sky 13y ago
  I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded. You've missed the part about $100->$1,000? = Not stabile. Unfortunately.

exelius 13y ago

A big part of the issue with Bitcoin is that our global economic system is, and for the foreseeable future will continue to be based on fiat currencies issued and controlled by central banks. I see Bitcoin's role in all this as a way to exploit arbitrage in currency exchange rates for restricted currencies. This is exactly why it's popular in China. It is a currency whose supply is algorithmically limited and theoretically should track global inflation. The world has always had nominal exchange rates and de-facto exchange rates for restricted currencies; but until something like Bitcoin emerged there was no legal way to perform exchanges at the de-facto rates at scale. My big worry with Bitcoin is that the supply is too limited. Currency is subject to manipulation by many forces; much of the job of a central bank in control of money supply is to counteract any intentional manipulation. With unstable prices and a limited circulation value (the total value of all BTC in circulation is only ~$12 billion) it is very open to manipulation by investment banks and hedge funds. Until BTC reaches economic scale, it's going to be subject to all sorts of shenanigans; and with no central authority to counteract the manipulative influences, I don't know that there will ever be enough trust in it for it to reach that scale.

00rion 13y ago

What's stopping another crypto currency such as Litecoin from superceding Bitcoin?

shawn-furyan 13y ago
In short, network effects resulting from Bitcoin's massive first mover advantage.
- simplemath 13y ago
  Although LTC is certainly playing into being "silver" to BTC's "gold"

headgasket 13y ago

Very interesting article, it looks very prescient right now, kudos. I agree with you that the bitcoin protocol as a p2p irreversible log of transactions is a real and still misunderstood great invention. It's akin to the gunpowder: the Chinese were the first to toy with the volatile stuff in the 8th century B.C. But the killer app (!!) took a long time to emerge. The current state of affair with bitcoin looks a lot like a bubble, there's no question in my mind. As long as it's a speculative device, it's actually dangerous/endangered. It needs to find a use and stability, which might take a while. One of the strong cases you laid out is hyperinflation: I can see local bourgeois looking for a safer place to park reserve purchasing power before escaping abroad. That's a limit case, however. The rest of the people are by definition struggling if there is such a crisis. Cheers!

dschiptsov 13y ago

Most of such rhetoric is just a word acrobatics. The confusion comes from using inappropriate words, because this phenomena needs some new words for a correct description. We cannot call this a currency because having few exchanges does not make it as such. There are option exchanges and futures exchanges and other specialized institutions. It the first place, a currency cannot be this volatile, or, if so, it is a worthless currency. The current observable behavior is alike of futures and options - the price (not a value) is determined by expectations that people are holding about further movements of the price, so, basically it is a commodity futures speculation. The particular properties of the underlying technologies, such as decentralization and publicly available log of all transactions are just nice (and unique) properties, but they does not magically create any value for a bitcoin, which is just a set of unique numbers. Therefore, it is not a currency, it is a internet powered and hence globally available digital (virtual) commodity, (as worthless and dangerous as means of legal tender as derivatives) which now is in a stage of a truly global ponzi scheme, where prices are based on the pure speculation about it further movements. The usage of familiar words in a new context is what makes the ponzi scheme rolling - people make their snap-judgments based on old "rules" about "currencies" which are not appropriate for bitcoins along with peer and bandwagon effects. Very clever.