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.
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.
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'.
"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].