
Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm - mrb
http://www.nytimes.com/2013/04/08/business/media/bubble-or-no-virtual-bitcoins-show-real-worth.html?pagewanted=all
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AndrewDucker
I'd love to get an economist studying why the value of bitcoins goes up.

After all, they're infinitely reusable, totally fungible, and incredibly low
friction. The only reason for their value to rise (rather than them just being
passed around at the same price indefinitely) is if people expect them to
rise, or if there's a shortage (forcing people to use fractions of a bitcoin
to represent the same number of dollars as a whole one used to).

Is the cause largely the latter, or the former? Has there been a high enough
rise in the transaction volume to explain the rise in value? Or is it all down
to investors?

~~~
skylan_q
_People value units of money because of their expected purchasing power; money
will allow people to receive real goods and services in the future, and hence
people are willing to give up real goods and services now in order to attain
cash balances. Thus the expected future purchasing power of money explains its
current purchasing power._

<http://mises.org/daily/1333>

From a theoretical perspective, this is been the clearest elucidation to me.
The reason the value of bitcoins is going up is because people who buy
bitcoins expect that others will pay a higher price for it in the future.

Like I tell people: people who buy and sell bitcoins don't care that you don't
want to participate. They just want anyone else who will participate.

~~~
danielweber
_The reason the value of bitcoins is going up is because people who buy
bitcoins expect that others will pay a higher price for it in the future._

That has a much shorter name:
<http://en.wikipedia.org/wiki/Greater_fool_theory>

The price of the _Mona Lisa_ won't go down because the art community won't let
it. It can do that because there is only 1 _Mona Lisa_. Such a force doesn't
exist with Bitcoins.

~~~
vrotaru
There will be only 21 million bitcoins. Ever.

~~~
danielweber
There are only 3 million copies of SUPERMAN #75.

~~~
vrotaru
yes, but for one thing

a) no one cares b) it is not a hard limit, actually

and, maybe, a) has something to do with b)

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ph0rcyas
Bubble or no, from a personal perspective I will not use bitcoin as a currency
to exchange goods - things like purchasing items or paying salaries. Bitcoin's
value is just too volatile, why would I pay someone a certain amount in
bitcoins, when it'll probably rise up to 10 times the current value in a few
weeks? But as a medium for investment, like buying stocks, bitcoin does
provide a novel and alluring option.

~~~
eurleif
>why would I pay someone a certain amount in bitcoins, when it'll probably
rise up to 10 times the current value in a few weeks?

Why would you pay someone a certain amount in USD, when you could buy Bitcoins
instead and they would probably rise to 10 times the current value in a few
weeks?

~~~
epaga
This is the best counterargument to the tired old "Bitcoin is deflationary" I
have ever read, and you did it in a single sentence. Thanks!

~~~
brazzy
Except it is _not_ a counterargument to that at all. If anything it reinforces
that argument by treating Bitcoin as an asset rather than a currency.

~~~
davidjohnstone
I'm no economist, but isn't this blurring the lines between what an asset is
and what a currency is? Isn't a currency fundamentally a perfectly liquid
asset?

As for previous commenters, the fact that the value of a Bitcoin might be
worth ten times more (or less) what it is now in a few weeks has more to do
with its volatility than its depreciative nature.

Why would you ever risk money by lending it when you could just "hide it under
your mattress" and make money? It's appealing to those who have the option to
do that, but I believe it's highly suboptimal from an economics point of view.

The funny thing is that even though it's bad economically, its deflationary
nature is good for the uptake of the currency, because, provided more people
start using it, those who are already using it become richer (which is why
some accuse it of being a pyramid scheme).

On the other hand, its mid-term value depends on why people are buying into it
now. At the moment, I see four groups of people: 1) the idealists who believe
it's simply a more perfect form of currency that can't be corrupted by
governments et al; 2) the technologists who think it's a neat idea; 3) the
speculators who think it's going to go up because it's going up; 4) the users
who find it more useful than regular currency (like those on Silk Road). I
can't help but think that the speculators are the biggest group at the moment.
But I might be wrong.

~~~
vrotaru
You do not "make" money, when you hide them under a mattress.

Assuming a stable money supply, when all is said and done, you own the same
fraction of total purchasing power at the end that period as you had when it
started.

You do not get richer, if that's what you mean by making money. You just keep
what you had.

I know, how unfair!

~~~
davidjohnstone
But you do make money! When the value of Bitcoin goes up, your wealth
increases because the entire Bitcoin economy is worth more, even though your
fraction of it remains constant.

Or, to look at it another way, imagine that Bitcoin was the only currency in
the world and there were only one million people who each owned 20 Bitcoins
(maybe they're communists who have just started using money). Now, give it a
few years and the population has doubled so that the average person has 10
Bitcoins. Is the person who still has 20 coins richer than he was at the
start? I say yes, because, assuming that people are just as productive, the
entire economy has doubled in size in an absolute sense (it can produce twice
as much), so those 20 Bitcoins can buy twice as much as when there were only
one million people.

(As a less important point, as Bitcoins are irretrievably lost, the fraction
of Bitcoins that a person owns of the "real" Bitcoin economy grows larger. And
I don't see why this deflationary pressure is different to the deflationary
pressure caused by somebody new getting into the Bitcoin economy.)

~~~
danielweber
I think the first-movers _want_ that effect.

Say there are 1000 people in the country, and WLOG each of them owns 1/1000th
of the wealth.

One of them goes away for 100 years and comes back. The entire country is
richer: there are more resources, more people, more goods, more IP, more of
everything. And this guy still expects to have claim to 1/1000th of everything
in the country.

It's extremely obvious why that first-mover would love that system, and try to
convince everyone else to go along with it. It's very dubious what the others
would get out of it or why they would ever buy in, besides imagining they
could some day be the one who gets to exploit the system at the expense of
everyone else.

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MacsHeadroom
I have it on good authority that this article will be in the print edition in
the morning.

~~~
genericone
Can be verified at the bottom of the article linked with the following text:

"A version of this article appeared in print on April 8, 2013, on page B3 of
the New York edition with the headline: Bubble or No, This Virtual Currency Is
a Lot of Coin in Any Realm."

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8bitpony
Is there any possibility of another virtual currency - a Bitcoin competitor -
being created? Surely this would have a big impact on the value of Bitcoin.

~~~
davidjohnstone
There have been a lot of alternatives[1] spring up, but as far as I can tell,
they're all very similar to Bitcoin, so none of them solve big problems that
Bitcoin doesn't already (variations include mining being not so biased towards
GPUs/ASICs and small changes to the way blocks and coin supply are handled).
Fundamentally, they're all variations on the same theme.

If a new currency was developed that solved some of the big problems that
Bitcoin has[2], possibly by working in a fundamentally different way, I can
see that currency becoming the dominant digital currency.

1\.
[https://en.bitcoin.it/wiki/List_of_alternative_cryptocurrenc...](https://en.bitcoin.it/wiki/List_of_alternative_cryptocurrencies)

2\. People disagree on this, but I would list things including its
deflationary nature and its fragility (human error can cause vast losses in a
way that traditional banking prevents). On the other hand, a currency that
really was anonymous would serve a purpose too.

~~~
icebraining
Can you expand on the fragility issue? Are you talking about the lack of
chargebacks/reversing transactions?

~~~
davidjohnstone
There are two aspects to it:

As epaga points out, if you lose access to your wallet (forget password,
hardware failure without backups, somebody dies without leaving the password
to their heirs) there is no way to retrieve that money.

Secondly, if a transaction is made to a valid-according-to-the-protocol
address that nobody owns, that money is lost with no possibility of getting it
back.

You could argue that these are problems that can be solved with more
technology on top of Bitcoin, so you could have Bitcoin banks that:

1) Guarantee that your wallet is stored securely. The idea is that you need to
trust that the bank is better at not doing stupid things than you.

2) Control access to it. Like modern banks, you would need to trust these
banks, for they would have access to your wallets.

3) Make sure that payments are going to the right place. To make a payment,
the bank that controls the wallet that the payment is being made to could be
required to notify via another protocol that the address is real and belongs
to a certain person/organisation. If this was widely used (so that payments to
raw addresses was considered dangerous), it would also prevent a hacker from
breaking into, say, EFF's Twitter account and tweeting "we're now accepting
donations on this address...".

~~~
Jtsummers
Re 3: I've been reading about contracts and script in bitcoin. Apparently you
can setup transactions such that they automatically roll back to the
originator after some time. Might it be feasible to use this to avoid the
'valid address/no wallet' problem? Establish on transactions a period of
days/weeks in which the destination has to complete the transaction. I haven't
had a chance to wrap my mind around it yet. Need to free up some evenings to
spend on it.

------
ultimoo
However awesome bitcoins are, I wonder how much longer till wallets can be
securely stored online, and the technology is simplified to an extent that my
barely computer-literate mother can understand bitcoins.

~~~
tudorizer
Quite a long time to go, but that's ok. How quick did such a mother adopt
credit-cards?

~~~
throwawayG9
Bitcoin needs more security than credit cards because transactions are
irreversible. Say his mother has a significant part of her savings in BTC, and
they get stolen. What's she gonna do then?

~~~
rlpb
Cash needs more security than credit cards because transactions are
irreversible. Say his mother has a significant part of her savings in cash,
and they get stolen. What's she gonna do then?

Answer: let a bank deal with it. Banks can be insured.

~~~
danielweber
For physical cash, banks don't give a hoot, and their insurance doesn't
either, because the sums stolen are so small.

Even the dollars a bank has uninvested, they are stored electronically, and
it's very easy to undo electronic transactions. Plus, the limiting factor on
stealing electronic money from banks is finding a stool pigeon who will do it
with cash.[1]

With a system where transactions cannot be undone, you need life-or-death-
level security on the entire holdings. No insurance company is going to
underwrite a policy of "there is a completely unknown chance of 100% loss."

[1] A PDF of this was on HN recently but apparently I did not bookmark it.
Help a brother out?

~~~
danielweber
Here is the paper:
[http://research.microsoft.com/apps/pubs/default.aspx?id=1618...](http://research.microsoft.com/apps/pubs/default.aspx?id=161829)

------
DigitalJack
So, what happens with the mining task after all the bitcoins have been
introduced?

~~~
lmm
It follows an exponential decay curve, so we'll never mine the last bitcoin;
rather, each year we mine half the ones that are left. (I'm not sure how the
quantization works when we do get to the literal last one, but that's many
decades away).

~~~
martindale
2140\. Roughly the year we'll hit this point.

------
myspace
I'm surprised so many people in the tech community have fallen for this Ponzi
Scheme. For example, many heard about "some guy bought a $25 pizza with 10,000
bitcoins", but no one has thought about what this means. It means someone now
has that 10,000 "coins" (which is close to 2'000,000). This also means someone
had this amount (and possibly much more). And, finally, no one questions who
posseses the first "coins". That's why the creator is anonymous. Just my 2
cents.

~~~
ramblerman
Click this guys name.

30 minutes old and he has posted this same blurb word for word on every post
regarding bitcoins.

