Thoughts on Bitcoin(blog.samaltman.com) |
Thoughts on Bitcoin(blog.samaltman.com) |
"The estimates I’ve heard from smart people that really follow bitcoin are that legitimate transactions are up only about 2-3x from a year ago"
That's hardly scientific. I've used Bitcoin for several purchases of "legitimate" things, and look to continue to do so whenever possible.
http://austin.craigslist.org/search/?sort=rel&areaID=15&subA...
re-reading it gave me some perspective.
Good luck and Cheers!
How has the Internet outrage about NSA spying affected the US government?
this is quite the chicken and egg problem. but basically when people 'believe' it's a currency, they will accept it as one - thereby justifying that belief since it will be true due to all the other people accepting it.
dollars are only a worldwide currency because people and institutions think it's one - and if it were to stop being treated as currency it would stop being accepted as one. totally tautological - but there's currency for you.
I've been trading and investing stocks for about 7 years now, and I think I've learned a thing or two in that time, but one of the most important things I've learned is that if holding onto something is making me uncomfortable, it's time to sell. Holding my bitcoin was making me uncomfortable as of a couple of days ago, so I sold. On the other hand, I've also learned that if everyone is expecting something to do one thing, it usually does the opposite, and it seems that pretty much everyone agrees that bitcoin is in a bubble. If it does crash, I'll get back in, but if it doesn't, I won't regret selling. I've been on the emotional rollercoaster of watching relatively large sums of money invested in a volatile asset fluctuate wildly, and I'd rather not go through that again. Just my two cents.
Some of us don't want the help of a government. The revolutionary thing about Bitcoin is that it is a (nearly) zero trust method of transacting. The value is in the fact that there is no central bank to be afraid of. Most of the wealth my parents have lost in their savings was due to inflation and debt backed asset bubbles. Both of which are symptoms of a debt-prone central banking system. There might be arguments that these central banks stabilize the economy for the betterment of everyone, but that is irrelevant when it comes time to choose a currency. Do you want inflation, meddling, and regulation? Serious question. The uninformed should say "yes" and the informed might want to say "no".
As for whether or not people are right about Bitcoin being a bubble, I think that bitcoin has a highger likelihood of 20 year success than Twitter and a lower market capitalization. It's a bubble when the baby boomers get involved with their dumb money. When there are ETFs that get traded on the exchanges that are backed on Bitcoin. Then it can be a bubble. Right now, its just an inelastic supply curve and a couple million dollars.
Inflation is important because economics is all about creating incentives. We have property rights because it gives people an incentive to work hard and takes risks. We have patents because they give people an incentive to explain how their invention works. We have a market economy because it means that if a company wants to gain market share, it has to create value for the consumer. In the same way, central banks try to maintain low levels of inflation (~3%) because it encourages people to invest their money in profitable ventures, rather than just leaving it under the mattress. Investment is the way wealth is created, so it should be pretty obvious that deflation is bad for the economy.
Notice that I'm talking about the economic health of the country, not the individual citizen. If you're only concerned about immediate short term benefits, you should push for zero taxes, high deflation, and the gold standard. But that's penny wise and pound foolish. You're shooting yourself in the foot. Better by far is to support actions which improve the economy, because a rising tide lifts all boats.
But, it isn't just an issue for people in the USA. It's a blessing for people who live in more oppressed region of the world. Look at what happened in Iceland and how the bankers stole from the people.
People don't like the idea of their wallet being on someone else's hard drive. And that's exactly how the current system is ran. Your money is in a vault, and you have to go through an even worse time to get it than I do. And I don't pay fees, and so on etc.
Having the currency centrally controlled again isn't special and it doesn't deviate enough from a credit card transaction for anyone to use it.
If first-world currencies were being drastically manipulated in ways that cost currency-holders lots of wealth, then I'd expect to see currencies decline relative to things that are directly valuable, like commodities. But that's clearly not the case:
http://www.economist.com/news/economic-and-financial-indicat...
The price of gold is down, too:
http://www.bullionvault.com/gold-price-chart.do
Further, I think a government can pretty easily influence the price of bitcoin: the bitcoin market is still relatively small, so somebody with billions of dollars to spend should be able to heavily manipulate the price.
But even you were right about it being proof against government manipulation, I think it would still only be better for people seeking stability if the volatility of bitcoin were lower than government-backed currencies. But bitcoin is insanely volatile compared to first-world currencies.
But the fact that anyone can roll their own competing currency inherently kills value, doesn't it?
And it is only a small subset of the population which ascribe value to monetary decentralization. I count myself among them, but I don't delude myself into thinking that the majority feels the same way.
Just lost $2k of that investment, according to the markets. Though it seems to be recovering somewhat. Ow.
Anyway, I'm long on bitcoin. Maybe it will crash and I'll lose everything. Twice it's crashed, then the recovery has eclipsed the previous peak by several X. So I don't know.
I do know that if banks hasn't been so slow, then I would currently be telling the story of "I was able to grow $11k into $13k." One problem BTC solves is moving money around instantly. It doesn't close for Thanksgiving holiday.
Mtgox needs to become wiser as well. There's currently no trade fees, because they wanted to participate in BTC Black Friday. That kind of thing encourages people who are holding onto $15k coins to sell all of them if they think the market will go down. An extra 0.4% on that much money is significant. Mtgox really shouldn't be so willy nilly.
As with most investments, you need to think medium and long term. Barring some kind of final(!) crash, there isn't anywhere to go for BTC but up. Mainstream media and ordinary people are just now starting to talk about it. Stay with your investment, and don't sell before it at least doubled. If it crashes temporarily, that's fine too: chaos is a ladder.
Within reasonable confidence, I'd say: Whatever you do, do not sell at a loss. That's the moment when it becomes a loss. Don't lose your nerve.
Personally, I had a bit over 100 BTC. When it reached $20 the second time, I sold it because I could use the money and also because I became nervous. While it wasn't the biggest money mistake of my life, it's certainly a whopper in retrospect. Don't be like me ;)
Even though I made money obviously I'm a bit sad about it. But it just shows that nobody can see into the future. I thought at the time that $140 would be a ridiculous profit.
My advice if you plan to go long is to just resist watching the value because it will drive you crazy and you'll make stupid moves as you try to guess which way the graph is going to go.
is there a citation for this?
It isn't alone now[1].
> and once the improved versions begin showing up
They already have[1].
What about insanity? ;)
Regular currency is legally enforced by governments as the way to pay taxes, and settle debts in that currency - ergo you always need some or need to buying some, even if you don't want to deal in that currency day-to-day.
BTC does not have these things. The only thing holding it up is irrational speculation. Every person who holds bitcoin needs to sell it to a greater fool for a currency which does extinguish debts/tax obligations locally.
Consider: a population of people in the US dealing solely in BTC, and earning income, have to pay income tax. The IRS can assess income taxes as the relevant fraction of their income (easy enough: assess an approximate USD market wage that they have worked, declare they have to pay USD % of that in taxes). The effect would be BTC craters in North America, because every member of that population would have to somehow sell BTC for USD - only none of them hold USD, so they can't trade amongst each other, which means they need to convince someone else to accept BTC for USD (and I mean, why would you? You can't pay taxes with it which is why they're selling)?
For example, any real estate with a premium for its "better location," suits by Armani, sunglasses by Gucci carries a similar premium. This applies to gold as well--a huge part of the value is the expectation that others will continue to like shiny things.
Nothing anchors their price, or premium, other than a system of social beliefs and expectations. Specifically, beliefs about how others will perceive them are all crucial in how people value these items.
The same is true for bitcoin. It starts with a belief that others will also prefer to store value in currency with a higher utility--storable with no fees, and instantly transmissible lower fees--lower friction. It isn't so much the greater fool theory as it is the starting of a journey toward a Nash Equilibrium. But first everyone has to come to a belief about how they, and others view the currency. http://en.wikipedia.org/wiki/Nash_equilibrium
Once this has happened and additionally the markets have become more liquid, things can level out. Right now, the world-brain is confused about how it feels about bitcoin.
Makes you wonder if Satoshi isn't simply the NSA.
The more I think about this the more predictable this outcome becomes. BTC is making techies everywhere invest in what effectively amounts to USD.
Yeah, something's weird. BTC went up, not down, when Silk Road was busted. BTC went up, not down, when Congress started holding hearings on the subject.
The two line up basically perfectly. Conclusion? BTC in the news means some portion of people hear about the great new BTC and how much it's going up in value, and some of them buy in.
My theory is, everyone's expecting it to crash. So therefore it's more likely to do the opposite. Not much of a theory, but it seems to have been historically true.
If the market is efficient, the collective expectations is what gives the price at a given moment. It is what people are will ing to pay for it and what people are willing to sell for.
That's how a crash happens isn't it? It's not driven by any wider economic reality beyond the conviction of "investors". If the investors can be convinced that it's crashing then it crashes. That certainly appears to be how manipulative exploitation of short positions occurs.
I think your sample is too small. Old-world finance looks at the charts and expects a crash, but everyone who actually holds BTC seems to have a target price of $1M
Money supply is a function of many things that an authority needs to control as an adjustment lever for the economy. A currency with a scheduled-deflation is not the solution.
There are no problems with our currencies today. This is a solution to a non-existent problem. We have problems in the finance world that Bitcoin does not solve.
For example, regulating how money supply can adjusted, or lending & risk.
How do you expect to operate a modern economy with Bitcoin when the whole concept of lending and credit will never exist (due to the shortage of the money)? What about in 50 years when the population goes up and we'll need more money in the system?
The government will never collect taxes, or issue bonds, in a currency that is not a function of the current state of the economy (but a function of time), and one that is scheduled to stop issuing any more "bills" (coins) at some point.
The thing is, I think that acknowledges that its popularity is inevitable--tragedy of the commons can only arise when people see something in their interest that is detrimental to society. But as an average joe, given a variety of assets, some deflationary, some not, storing my wealth in the deflationary one is in my interest.
The government never has to use it. I can always convert a small portion of my increasing-value bitcoin holdings into inflationary fiat at the last minute to pay the bill.
If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods. Inputs for other ventures are cheaper.
If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.
Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.
And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.
Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.
That is called "deflation." They tried it in Japan, it didn't work.
> If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.
Inflation and cheap money/asset bubbles are completely orthogonal. If anything, inflation should increase interest rates, not lower them.
> Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.
Resources are also for the most part either perishable or they depreciate. At the very least, resources must be expended (warehousing) while unused resources are stored for later use. Ideally, resources are used closed to when they are produced. Otherwise, value is lost in some manner.
> And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.
Why grow your industry when the consumers have deferred their consumption? Once more people have deferred consumption, the economy and industry will shrink, not grow.
> Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.
They do it by doing both. I live in a country with high industrial output (aimed at export) but little consumption in comparison (people save too much + high income disparity), its a trap that the Chinese government is desperately trying to get out of. If Chinese don't consume, the gov has little choice but to buy treasuries (as upposed to investing in more unused infrastructure/ghost cities/industrial output), and they are losing money on those t-bills.
There's a big difference between "trying to make it happen" and "happened despite of them trying to not happen".
Deflation/Inflation works fine when governments aren't involved. Point being that if market can predict the inflation and deflation then every contract will account for that. No business will fail because of deflation, because they will purposefully account for the deflation in their economic calculation when they pay the workers and raw materials.
In simple words, when government isn't causing deflation, at the start of deflation the wages always falls faster than the prices of consumer goods which always clears the market(which is when the rate of fall of consumer goods prices equals the rate of fall of wages).
When government is trying to meddle with the money supply, it disrupts the economic calculation of the market which prevents the market from clearing in time and from real wages to rise up.
Why on earth you would buy an unknown inflationary currency? I mean, it would NEVER take off, except for illegal markets where use the privacy offered by a crypto-currency.
But look where we are now? Silk Road gone (well almost) but BTC unaffected and sky-rocketed. You would never have attracted that capital if you haven't a deflationary currency. Actually, by all means it's an asset.
With that aside, let me give cover my complex thoughts on inflation:
Sometimes it is possible to alter a function in such a way that the output is later maximized. Sometimes this is possible by essentially lying to people. When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this. But markets are not fixed. Technology expands, populations expand, priorities shift (from religious worship to drugs or science, for example). At some point it is possible for a portion of the system to understand the manipulation and to maximize it for that portion's gain. Just as Keynes talked about priming a pump, imaging those that sell the primer. It is in their interest for the system to stutter so they make efforts to have it so fairly frequently. The secondary effects of this manipulation are malinvestments by those not party to the information about the cycle.
But even that has a secondary effect: The effect of some informed people taking actions to minimize the harm done to their own fortunes. They sidestep property and stock bubbles, but they still need to beat inflation.
Those informed people start talking about a replacement for the inflationary monetary system. They argue on the internet about crypto-currencies and they refine their ideas, and ultimately Bitcoin gets created. We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in. The part where something by design is (essentially) non-inflationary. Even gold had its risks (Fusion, for example) but while Bitcoin is free as in liberty it is also unforgiving of mistakes. That is why the uninformed shouldn't access it. Or at least not it directly. They should trust banks or become informed, because as it stands now they are not equipped to handle it.
Lastly, I reject the notion that inflation has proved useful for stabilizing the economy.
Fractional banking by its nature monetizes all assets (since most loans are secured, the 10x multiplication window is just a fancy way of "printing" money from the value of your house or factory). But the relative value between the underlying assets and the currency is in flux (or the futures market for the good would be 0, and the information already priced into the market) and in exchange for this freeing of capital and acceleration of gains to wise economic asset allocators, this temporal variance in asset value causes an increase of volatility in the financial system ESPECIALLY when the majority of its deposits are demand deposits since there is also system wide uncertainty in cash-on-hand.
It may be that the increase volatility and subsequent government action maximize technological, ecological, and industrial advancement by allocating assets into the hands of todays best and brightest; or it may be that the cost of management (inflation, regulation, deposit insurance, super insurance, asset backed derivatives, to big to fail bailouts) exceed the gains of a fractional reserve banking + inflationary monetary supply system, but we will not be able to tell by examining the data on inflation in economies where fractional reserve is a GIVEN.
You do realize that pretty much everyone understands this in some way? What do you think OWS was, in part, about? The middle-class of the US is well aware that their wages have decreased relative to productivity.
If deflation becomes the order of the day, every business lobby group will immediately switch their narrative to the importance of indexed-wages for all! (which they currently oppose) while all labor unions will switch to arguing a contract is a contract (which they definitely oppose - you can't sign away your rights, contract fairness etc.)
It's true only if you are buying the exact same things today, that you were buying, say a decade ago. This is true for some things such as food, housing etc.
However for other things such as computers, gadgets, medicines, cars, etc. are much better today than they were before. For these things, you get much more for the same price(taking inflation into account).
For example, phones used to be only communication devices; but now they are also a camera, entertainment device and even a computer. Others, such as medicines, they have become cheaper and much more effective. In short, improvements in science and technology beat the effects of inflation.
In some markets it can actually cause a deflation. For example, computers used to cost thousands of dollars, but now you can buy a much better one for a few hundred bucks.
Inflation is bad, only when stuff that you buy doesn't improve over time.
Perhaps one could even show that inflation is somehow related to the introduction of newer and better products in the market. For example a new car, with a more fuel efficient engine, will likely cost more than the old ones. However I don't have enough evidence to justify this claim.
I don't know whether to laugh, or cry. Keynes was many things, but he was not a Time Lord.
We've been living with Keynesian policies for a tick under 70 years, which also has happened to correlate to the greatest wealth expansion in recorded history. It's a bit premature to point fingers as to why (or what has happened since the 1980's, which has caused middle class wages to stagnate).
Do keep in mind that Keynes was revolutionary because his ideas worked, even though they upended much of classical economics - they had (and continue to have) predictive power for how economies work, especially when interest rates are near-zero.
But wait, it gets worse. Even just going back a year, if you had bought and sold the right stocks at the right times, you'd be the richest person on earth by far, even if you only started with a few bucks.
But don't worry, you could do the same thing over the next year. You've learned from your "mistakes," right?
In all seriousness, your financial advice is pretty bad and akin to recommending gambling strategies for Roulette. If you both realize you are gambling and are cheering each other on for fun, that's one thing, but I get the sense that you really don't understand that you are in fact gambling.
I have never seen a clearer speculative bubble (as seen from within the midst of the bubble and not hindsight) in my lifetime than this one. You just don't invest for the medium or long term on a speculative bubble. Bitcoins do have some intrinsic value, but as the author of the article we're all commenting on noted, the price of Tulips still hasn't recovered to its 1637 peak.
I bought and sold my bitcoins when prices where bellow 100$. Well, given the fact that I doubled the money I should be happy and brag about it, but I'm not. I could be holding 10k now and it hits in the stomach when I'm thinking about it.
On the other hand, I would never invest more than I can afford to lose.
There are thousand, if not tens of thousands of trades that can get someone that RoR.
I can point towards other instruments that can have that much or more risk to reward ratio. I calculate speculative risk at 100% value + incidental costs of the trade. So if someone said they doubled their investment that would mean a ratio of 1:1 aka a coin flip.
Though if someone did not know that these regulated speculative opportunities are abundantly available, they most likely should stay away.
I have a problem classifying random things like this as a mistake. You didn't have enough information at the time to predict that BTC would exceed $1000, and you don't have enough information now to predict what it will do, either.
It's just a game of musical chairs. The only "mistake" is to play. Some mistakes we pay for, while others ultimately benefit us.
Good call divesting some of your BTC in favor of physical assets.
this is utter rubbish right here.
"> Barring some kind of final(!) crash, there isn't anywhere to go for BTC but up."
That's quite a difference there to what you implied.
> but there is nothing wrong with stating an opinion based on personal experience.
And that's really all I did.
Regarding investing: telling someone who just bought a shitload of BTC to sell at a loss after some minor and entirely expected market fluctuation is just malicious.
Why? BTC is, for our purposes, infinitely divisible. BTC is just as useful when it is worth $1, as when it is worth $1B. I believe the bitcoin network has value, but 1BTC doesn't hold any more intrinsic value than 0.1BTC. They both leverage the same network.
So the difference between 1BTC and 0.1BTC is that there are significantly fewer of the former than the latter.
Economies must be managed. Arguing whether Bitcoin is better than USD is vacuous: one is just a crypto currency, the other represents the entire US economy and all the movements that go along with that. Someone has to meddle to keep the system working, if its not the government, it would some rich guys in a smokey back room doing it.
Mouhahaha. I give you back your line. They tried it in Japan, Europe, US, Russia, and almost everywhere else and it didn't work. Countless countries sinking in huge public debt, that's hardly a way you build up a strong argument against Free Markets. Free markets and Free economy don't exist anywhere at the moment, period. What you see as a failure is centralized-economic policies at work, with more or less degree of economic freedom depending on where you live. But don't kid yourself : as long as the money supply is controlled (and this is effectively the case when you have a central bank), you are not in a Free Economy anymore.
And of course Deflation in Japan was a direct consequence of the Japanese government actions. Deflation wouldn't occur constantly for x years if there was no policy behind it to sustain it. And you will find many other particularities of Japan markets to be strongly linked to governments policies and disruption in different fields (there was an article on Japan housing on HN a couple of days ago, explaining why housing was so different in Japan... again nothing to do with Free Markets at work).
Right. They haven't existed since the neolithic revolution when we moved from being hunter gatherers to farming and living in cities.
> And of course Deflation in Japan was a direct consequence of the Japanese government actions.
Wow, that is some truthiness there. From [1]
> Deflation started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates and 'quantitative easing', but did not create a sustained increase in broad money and deflation persisted. In July 2006, the zero-rate policy was ended.
So wait...the government was trying to get rid of deflation, but you claimed they were the ones causing it? WTF?
Reasons
* Tight monetary conditions. The Bank of Japan kept monetary policy loose only when inflation was below zero, tightening whenever deflation ends.
* Unfavorable demographics. Japan has an aging population (22.6% over age 65) that is not growing and will soon start a long decline. The Japanese death rate recently exceeded its birth rate.
* Fallen asset prices. In the case of Japan asset price deflation was a mean reversion or correction back to the price level that prevailed before the asset bubble.
* Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid.
* Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy (United States or Japanese) Treasury bonds instead of saving their money in a bank account.
* Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods (due to lower wages and fast growth in those countries) and inexpensive raw materials
Here is the only point (an explicitly libercrazian one) that supports your position:
* Stimulus Spending: According to both Austrian and Monetarist economic theory, Keynesian 'stimulus' spending actually has a depressing effect.
Austerity is where you leave within your means. When you do it by choice, you're in control. When you are forced to do it because you've been borrowing and spending everything as soon as you get it, it can be a disaster.
Its not frugality that's bad. Reckless behavior that destroys investment in future productivity - that's what's bad.
To verify this, save as much as you can for a decade. Note that you have money to buy what bankrupt individuals must sell at a loss. You are better off BECAUSE of your austerity.
There is no reason to believe that economics works ass backwards for a group than it does for the individuals in the group.
Economics is fractal. Prosperous individuals make a prosperous country and a more prosperous world. Pursuing poverty never will.
With USD, you can save/lend it easily (the US government is a very strong debtor of last resort) and likewise borrow through it, oil is traded in it, and so on. Monetary policy is more about ensuring some adequate level of inflation (to push for consumption or effectively invested) + popping any asset bubbles that appear (b/c people are imperfect).
With bitcoin, you get none of that, and given the libertarian bent of the users, nothing centralized will likely arise. So the question is: are individuals good at managing an economy for the collective good? Or will they just look out for their own needs and will it implode in a classic prisoner's dilemma?
Plus are you implying that hackers, like Bill Gates, Larry Page and Satoshi, can't possibly be (or deserve to be) ultra-rich?
There isn't a "can't be happy" feeling to a market - just what people actually do. At the scales and volumes involved, it is literally impossible for any of those countries to divest themselves of treasuries suddenly (for one thing, bonds don't work that way).
Moreover, governments only invest in real things. The productive output of the US is a real thing because all those places buy tons of US goods and services. Bitcoins are not real things. Perhaps moreover, why would any one of those places invest in a currency at a scale which would simply let them purchase the computing power to take it over permanently?
Because the money levels being talked about are large enough that you could trivially destroy it. Which means your entire foreign exchange rate is subject to whether someone wants to screw with the blockchain.
Which means at any junction, some third actor can hold the entire currency hostage - unless the governments invest in huge amounts of hashing hardware to protect it. Which is (1) a colossal waste of money and energy and (2) would, in turn, give them the capability to do the exact same thing.
Bitcoin will never be a currency held or traded by governments.
cs702 had a fantastic comment a few days ago in another thread [1]:
Bitcoin befuddles experts who analyze it from a narrow perspective,
because it is not just a new medium of exchange or a new store of
value: it is also a new kind of point-of-sale payment system (one
that doesn't require payment processors), a new kind of global
financial transfer system (one that doesn't require financial
institutions), a new kind of time-stamping certification system
(one that doesn't require notaries or county clerks), a new kind of
contract-enforcing mechanism (one that doesn't require lawyers), etc.
With rising global adoption, many new kinds of applications are likely
to be created to take advantage of the Bitcoin network, the design of
which even specifies a built-in script for defining and executing new
types of transactions involving any arbitrary number of parties.
In short, Bitcoin is a technology platform -- one that is benefiting
from network effects.
It may fail as "money" (in a narrow sense) and still succeed as a
global platform.
The one takeaway he offers in closing is spot on though: "Just as it’d be stupid to convert all your dollars to bitcoin, it’d be stupid to not pay attention."
> As long as there is a large enough community of people who want to use it to transfer value for any reason, it'll continue to sustain itself.
That's precisely the problem.
A community of speculators will only remain stable or increase in number where the price of the asset continues to grow. In the case of Bitcoin, the price can only grow if legitimate transactions increase, or if more people speculate. With every increase in price the number of people willing to speculate decreases, to the point where you run out of greater fools to sell the asset onto, causing a crash.
That means that an increase in legitimate transactions is really the only way to sustainably grow the value of the network, because it is the only method resistant to falls in price.
It's just absurd, bitcoin is something completely new, and nobody knows yet how we will use it, and what it can replace.
What does it matter what your government says is legal or no. The currency will take off even if it is just used for illegal transactions its entire life.
https://blockchain.info/charts/estimated-transaction-volume?...
You see immediately from the graph that the growth in number of transactions is relatively slow, considering all the media attention, and certainly far, far slower than the increase in the exchange rate.
Note that this graph is not the same as the number of "legitimate transactions" mentioned in the OP. But it's at least consistent with the point of view suggested in the post.
If bitcoin succeeds only as a payment network, where users convert from and to dollars at both ends, it can still provide a very valuable and legal service.
They are - in fact - difficult and expensive.
From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).
Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.
EDIT: Sorry I meant to say the velocity will decrease.
http://www.amazon.com/Expectations-Investing-Reading-Prices-...
http://unqualified-reservations.blogspot.com/2011/04/on-mone...
http://unqualified-reservations.blogspot.com/2013/04/bitcoin...
I highly recommend them to anyone trying to understand the economics of bitcoin
All sorts of people I rarely speak with have been coming out of the woodwork to ask about Bitcoin. These people are invariably regular folks that have heard about this thing that has been appreciating at an unbelievable clip. This is extremely alarming for me.
This article reiterates 2 of my favorites points --
1. the lack of real-world transactions, coupled with
2. the fact that these transactions are usually done via 3rd party processor or immediate conversion back to USD. If vendors had faith in it as an actually currency, they wouldn't feel the need to do so. This is not true adoption, this is simply an attempt at expanding one's market by accepting a tradable item.
Glad to see some more sobering articles emerging as I've been wondering why no one has coherently written these things. Most of the negative BTC articles on HN are poorly written and used as a straw man.
This can happen to housing, precious metals, bitcoin or anything else. Doesn't mean that the concepts of housing, precious metals or bitcoin are flawed. It's just people that are flawed, but we carry on with that reality.
Couldn't he have said the same thing about a protocol like BitTorrent?
> No one questions the value of gold, yet not many people
> use it to make purchases.
In the future the same blockchain could be used for automated arbitration, estate planning, "smart" property ownership/transference.
Less than 1% of the value of gold has anything to do with its industrial/artistic uses.
The thing is, you don't follow commodity price news.
http://www.marketwatch.com/story/why-buffet-thinks-investing...
One title I haven't seen: "X no longer accepts bitcoin."
Its not a lack of faith l, it's lack off trade acceptance. If merchants accept bitcoin they need to convert back to dollars because that's what their business calls for. In other words, if they could pay their bills with bitcoin, then bitcoins would flow back and forth without an issue, removing your suggestion that this is about lack of faith.
Few merchants accept gold either. Yet gold reserves in the world amount to US $8.2 trillion in value.
Edit: removed part on volatility
(volatile for about 3000 years - do you mean available?)
Even if millions of people use Bitcoin for that use case, it doesn't mean Bitcoin will ever have staying power for the "reserve currency" use case.
I guess the implication is that "illegal stuff" isn't a large enough market to cover people's general needs.
Being able to buy bubble gum, well, we'll see :)
Bitcoins are inherently deflationary in nature, making them theoretically a superior store of value over longer term (e.g. retirement) than any fiat currency.
low transaction costs for worldwide commerce would still be great.
I'm late to the whole bitcoin phenomenon, but here is what I really like about crypto-currencies. My US credit union (not even a commercial bank) charges me 40 dollars for an international wire transfer to Canada, and the bank on the other end will charge me 15 dollars. If this were done in bitcoin or a similar currency? Nothing, as far as I can tell, if you do it through the right exchange. And that's how it should be.
I suspect that banks don't even know to be worried at this point.
Kraken and BTC-E resp.
What I like about alt-coins is how one can use that for games. Imagine making a game where a custom alt-coin, a bitcoin-fork coin that has no value outside of the game, used for transactions. Seems like a cool idea to me anyway.
[1] http://bitcoincharts.com/charts/bitstampUSD#rg30ztgSzm1g10zm...
Unfortunately, without the right economic motivations the system isn't secure. Many altcoins have been exploited in the past. Perhaps as part of a game thats okay, but it might be hard to balance things so that the game didn't become entirely about exploiting its currency-thing.
http://uncharted.org/frownland/books/Polanyi/POLANYI%20KARL%...
Liaquat Ahamed's _Lords of Finance: The Bankers Who Broke The World_ provides another congruent account, from a more detailed historical/economic perspective, as to why gold was abandoned.
http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/0...
To make money speculating of course. :)
The price is bitcoin is proportional to the "hot money" flowing out of China. Doesn't matter if that's an illicit market, it's still the most significant factor.
Whether or not one believes that hot money is going to stop/slow should strongly influence your estimate of the price of bitcoin.
That said, it's top heavy at $900-$1100, and reasonable people should be selling a portion of their holdings.
It's stupid that tulips would go that high, and funnily enough it didn't happen.
OP should too, actually, since his comment that
> The price of tulip bulbs has yet to recover from its 1637 peak.
betrays several fundamental misunderstandings of the tulip market at the time. Of course the top tulip bulbs depreciated. That is like saying 'a patent has never recovered its peak value' or 'Windows 3.1 never recovered its March 1992 peak'.
Markets are based on expectations about the future, which is tangentially related to present reality. Present reality is that many smart, well-funded people are working on merchant adoption.
By the time legitimate transaction volume ramps up the price will have baked it in months ahead of time.
Not saying today's price is unsustainable, but I would recommend buying as many bitcoins as you would bet on black at the roulette table during a weekend in Vegas. If you're not a betting person, get off HN and go read Reader's Digest or something.
https://blockchain.info/charts/n-transactions-excluding-popu...
This one shows a much higher growth. (Although this kind of data doesn't mean much, and i agree bitcoin isn't being used much for actual transactions)
It's definitely not a 5x or 10x increase though.
https://blockchain.info/charts/estimated-transaction-volume?...
I used the log scale to make the point that transaction volume is relatively slow-moving on a log scale. That is certainly not the case for the exchange rate!:
https://blockchain.info/charts/market-price?showDataPoints=f...
Incidentally, the volume graph has a notable spike in December 2011. I've Googled and asked around a bit, but don't have a good understanding of what caused the spike.
That freaked me out, but unfortunately it didn't freak me out enough to make me buy a bunch of Bitcoins.
business owners can't all be expected to drink the kool-aid, so they don't really seem to be assisting Bitcoin adoption outside of making it a choice in their payment processor
"It has history behind it" really seems like a fallacy to me. Many things had histories and were replaced, or changed dramatically, due to new technologies. Horses, swords, aluminum, newspapers...
I see Bitcoin being a very realistic threat to the high price of gold.
The flock of people looking to buy in allow the last group to get out of Bitcoin. Eventually you dry up the well of people who'll be able to bankroll each successive generation of "investors".
There's no commerce going on with Bitcoin on any significant scale, which means it's hugely overvalued. It's just a question of how when the next group looking to buy in on a crash is significantly smaller then the people exiting due to it.
Or possibly just that an initial-membership-fee model risks not covering costs long term and so looks like a potentially unstable proposition?
Edit:
Looks like they have this graph as well: https://blockchain.info/charts/estimated-transaction-volume-... (log scale).
This seems to support the conclusion that transaction volume (in USD) is growing significantly, although the trend is confounded by large price movements.
(That book is about DCF and bitcoin and other currencies don't give off cash flows).
Put another way, I fail to see how the BTC/USD exchange rate is related to BTC transaction volume except for tangential reasons like sentiment.
If this changed, it could at least get closer to the velocity of usd.
It also notes that while flowers in general averaged 40% annual price depreciation at the time, tulips averaged a more impressive 99.999% annual depreciation.
^ From the same wiki page ^ No idea with the picture you reference where it's from.
The point about economic theory is the market needs to be fluid. It says nothing about crazy people in a small private market(obvious I guess)
The "Tulip" craze seems to me to just be the normal fundamental dogma that you get when people don't fully understand systems. People distorting instances that are not linked to push their views. To me the interesting thing is people 400 years ago also feared financial systems.
The wiki page says that there was very little financial damage from the tulip crash. It also says that "There is no dispute that prices for tulip bulb contracts rose and then fell in 1636–37". I responded to the claim that high tulip prices were a myth. The wiki page cited does not support that idea to any degree. And the portion you cite, in particular, also does not support that idea. It says there was little economic damage from the crash, which I acknowledged, but barely mentioned, because it was irrelevant to my point.
The picture, as wikimedia notes, is from the tulip book of P. Cos, which you could read about here: http://www.oldtulips.org/index.php?section=broken&content=ea...
I don't think you understood my point: these were scarce, expiring, novel luxuries. High initial prices often followed by vast depreciation is normal, and we see it all the time in the most comparable market, fashion and art, where artists who once commanded stratospheric prices tumble into obscurity and their works get junked. Pointing out the claimed performance (and remember the extenuating factors here like a lot of the sources being polemical lies) betrays a lack of appreciation for the volatility and time factor involved.
The tulipomania page does not support the idea that high tulip prices didn't happen. Those tulip catalogs were not the polemical pamphlets (admittedly, it doesn't appear to be clear who put the prices in). The only thing my comment mentions that came from a propaganda pamphlet is the price of cheese, but I figure there's no real reason to doubt them on that. A law really was passed for the relief of people who had bought tulip futures. It seems to have been effective, but none of that means prices weren't high; it means tulip prices didn't have a major effect on the Dutch economy.
This is my last comment, as I cannot possibly respond to an endless string of unfounded criticisms.
Obviously an increase in transaction volume increases the value of currency. What is not obvious, at least to me, is that it is in direct proportion.