

The Bitcoin Bubble - mwsherman
http://timothyblee.com/2011/04/18/the-bitcoin-bubble/

======
kiba
People in the bitcoin community periodically worries about bubbles. The only
thing that we can do is figure out cool stuff that you can only do with
bitcoin. Other than that, people are encouraged to sell and buy things for
bitcoin.

A lot of cool stuff is in the pipeline though:

1\. A decentralized DNS registration system utilizing bitcoin technology.
<http://www.bitcoin.org/smf/index.php?topic=6017.0> There's even a 3500 BTC
bounty for it: <http://www.bitcoin.org/smf/index.php?topic=2072.0>

2\. GBSE - Global Bitcoin Stock Exchange: Utilize public key cryptography and
other tech to create a bitcoin stock market.
<http://www.bitcoin.org/smf/index.php?topic=5947.0>

3\. witcoin - a micropayment social media site. <http://witcoin.com>

The bitcoin community has thought more about the weakness and strength of the
currency, failure modes and solutions to problems more than any critics about
bitcoin in the world. It's just that very few bothers writing and publish
these knowledge for distribution to the wider public.

~~~
kia
Does community have expert economists? I mean the traditional currency markets
have been around for quite a while and a lot of really smart people
participated in their development. Bitcoin has a small and immature community
and there are a lot of things which require certain expertise and experience
to judge about correctly.

~~~
kiba
_Does community have expert economists? I mean the traditional currency
markets have been around for quite a while and a lot of really smart people
participated in their development. Bitcoin has a small and immature community
and there are a lot of things which require certain expertise and experience
to judge about correctly._

It really depends on what school of economics you followed. If you follow
keynesian economic rather than the Austrian, you will have quite different
conclusion about the possible failure mode of bitcoin.

Is deflation bad for the bitcoin economy? Most bitcoiners will say no because
they don't buy the idea of deflationary spiral and Keynesian economics plus
their experience within the bitcoin economy informs their opinion.

------
pkulak
Bitcoin doesn't have to replace the dollar, it just has to replace Paypal and
some credit card business.

~~~
mbreese
But Paypal and credit cards are based on the USD, or whatever the local
currency is. So, in effect, it does have to beat the dollar. Bitcoin must be
advantageous enough so that people will want to use that _over_ the standard
local currency (e.g. USD). Because, you're assuming that you'd have to convert
USD to Bitcoin and then spend the Bitcoins. If you received Bitcoins, you'd
need to then convert them back out as dollars. When you do a credit card
transaction, you don't convert the money to a different currency. With Paypal,
you have the option to receive money and then spend it without adding funds or
incurring transaction fees, but how many people really do that?

But, if the system is big enough, you'd be able to limit the USD <-> Bitcoin
conversions and transact more of your business in Bitcoins. However, in order
for that to happen, it has a lot of currency inertia to overcome.

~~~
pkulak
If Amazon took bitcoin, and I could use it to pay people on Craigslist, and
maybe some other little things like that, I would probably just keep a bitcoin
account around with a useable balance. If it got low I'd fill it with USD, and
if I needed some funds out of it I'd take some USD out. But I don't think I'd
need to do a USD conversion for every single little transaction.

Think about if the NYT decided to charge a half a penny to read an article?
There's no way for them to collect that right now (it's too small), but
bitcoin would work for that, and I sure wouldn't be converting half a cent USD
every time I read an article.

------
mbesto
Two out of the three words of the title contain buzz words (CHECK!)

Ok but seriously I don't see the "bubble" here. If this is a "bubble" what are
the implications of it popping? The value is set by the people who exchange it
and not by a governing authority or even, groups of people. As I understand
it, that means the value can never be manipulated. Also, don't bubbles imply
that there is some sort of governing body that either decreases or increases
risk of such an asset? For example in the housing and tech bubble, this would
largely be the SEC (among many others). People were wildly spending and
loaning money because risk was largely reduced -- a combination of guaranteed
government bailouts and "everyone else is doing it!". How is any risk reduced
using Bitcoin? If anything isn't Bitcoin a way to prevent bubbles? I see it as
real value assessment set democratically by people using the currency.

I don't see Bitcoin itself as "irrational exuberance" at all, in fact quite
the opposite. It's attempting to solve a real world problem. Indeed the
referring article might suggest that the analysts covering Bitcoin are acting
irrationally by making claims like "government take heed, there's a new
currency in town". But just as the words "Bitcoin" and "Bubble" were used to
grab attention to this article, the analysts covering Bitcoin also (here-
Jerry Brito) will make irrational and largely speculative claims to bring
viewership.

~~~
stonemetal
There were bubbles long before government got involved in the market, in fact
such bubbles are why the government is involved in the market now.

The primary problem with bitcoins as it stands now is that there is no
oversight so any sort of price manipulation possible is legal.

~~~
mbesto
Re: Bubbles - Such as? Let me be more specific. If I shall quote wikipedia -
"It could also be described as a trade in products or assets with inflated
values" Doesn't Bitcoin set to eliminate inflated values? With no central
authority controlling the amount of currency available or loaned at certain
rates then valuation becomes absolute, no?

Re: Manipulation - I'm not sure I understand how the value of the currency can
be manipulated. If the value is directly set by the end user then it's
impossible to manipulate.

~~~
stonemetal
_If the value is directly set by the end user then it's impossible to
manipulate._ Only if it is impossible to manipulate the end user. Aka there is
nothing in the system to prevent fraud or any other pump and dump scheme you
can come up with. So no, with no fraud controls in place Bitcoin does nothing
to eliminate inflated values, and really can't unless they have come up with a
technological solution to lying.

An example of a bubble before the SEC was created, and in fact lead to its
creation. <http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929> _The rising
share prices encouraged more people to invest; people hoped the share prices
would rise further. Speculation thus fueled further rises and created an
economic bubble._

------
aredington
The article neglects that people have to pay income taxes on however many
dollars of income you make. If you hypothetically made 100% of your income in
bitcoins, and conducted all your financial transactions in bitcoins, then you
would have 0 tax liability and wouldn't need dollars to pay taxes.

~~~
tzs
The thing about law that often confuses geeks is that they think the law works
like a rigid algorithm with precisely defined inputs, or that it must limit
itself to objective inputs.

They conclude that if they using something other than money as money, the law
won't have a say because they are operating outside the precisely defined
input.

Not so. The law can handle fuzzy situations, and since it can deal with
subjective things such as what was in the minds of the people doing things, it
will have no trouble incorporating Bitcoin transactions into the tax
structure.

As a first pass, it could treat them as barter transactions, which are well
covered by the tax system. In fact, there is a large body of law dealing with
people trading non-currency items. It is quite interesting. Suppose I buy an X
and you buy a Y. Later, we swap them. If they are the same kind of thing (we
are trading my Picasso for your Rembrandt) there are no tax consequences. If I
later sell the Rembrandt, it is taxed as if I had bought the Rembrandt for the
price I paid for the Picasso, and so my tax is based on the profit based on
that. Same for you.

If, on the other hand, X an Y are not the same kind of thing, then it is
treated as if we did a pair of sales. For example, if I trade my Picasso for
your race horse, the law would treat it as if I had sold my Picasso to you and
used the proceeds to buy your horse, and you sold your horse to me, using the
proceeds to buy the Picasso. I have to report income equal to the difference
in value between the horse and what I paid for the Picasso, and similarly for
you.

Subsequently when I sell the race horse, it is treated as if I had bought it
for in the imaginary double sale, rather than whatever I paid for my Picasso.
This price that you track in order to determine what the base price is to use
when determining profit or loss on a real sale is called your "basis" in the
item. In a like kind exchange, your basis in the received item is the same as
your basis in the item you gave away. In an exchange that is not like kind,
you get a new basis that is what you paid for the item in the imaginary double
sale transaction.

There's case law and regulations dealing with all kinds of variations on this
theme. For instance, if I trade my male horse for your female horse, is that a
like kind exchange or not?

I don't think the law will have any trouble at all dealing with taxation and
Bitcoin.

------
omouse
The article assumes we want to pay taxes and that a significant portion of our
tax dollars are spent wisely thus making taxation an advantage of the dollar.

 _Convincing Americans to switch to a currency other than the dollar is
roughly as futile as convincing the Internet to switch to a protocol other
than TCP/IP, and for the same reasons._

Meh, you don't have to convince Americans, just convince other people. Other
countries are already working around the US dollar. Wasn't there a recent deal
announced between Russia, China, Brazil and India for them to accept their own
currencies as an alternative to US dollars for debts, loans, etc.?

~~~
anigbrowl
They will take up BitCoin after losing patience with barrels of oil, cubic
metres of gas, diamonds, each others' currencies, and rifle ammunition.

------
URSpider94
The author has given some good reasons why Bitcoin won't become the new global
currency, but there's a lot of space between global domination and fizzling
out of existence.

Consider probably the most well-known alternative currency, the Ithaca Hour
(<http://www.ithacahours.org/>), which has been going strong for decades now,
but has no pretenses of expanding beyond its narrow geographic niche.

------
rjstatic
All of the author's arguments are null when you consider that cash registers,
phones, your bank, etc. IS a computer so issues of convenience don't really
hold up. I don't think it will be that long until my local cooperative bank
enables withdrawals from my BitCoin account on my Visa. When you can store
your money in an safe and transparent system like BitCoin or a currency
controlled by a shadowy Federal Reserve, which would you pick?

------
rottendevice
The US Dollar can be used to buy anything. Bitcoin can be used on like, a few
dozen websites that support it.

Why the heck would you not use the dollar?

~~~
weavejester
There are far more restrictions on dollars if you want to transfer them
electronically, because ultimately you need to route them through large
financial institutions.

------
cubtastic71
It’s a very cute classroom project – but to really be accepted means the
government will have it’s hands on the flow, revenue and taxes from said
bitcoin just as with the dollar bill. So besides this being anything more than
a social experiment – its about as smart as buying POGS if people remember
those things...

~~~
rottendevice
Hey man, the value of my Beanie Baby collection can only go up.

~~~
kgo
FWIW, unlike Pogs or Beanie Babies or Cabbage Patch Kids, does have built-in
scarcity. If they do become some crazy fad, the manufacturer can't ramp up
production which ultimately only servers to devalue all BitCoins.

But yeah, for now I'd basically think of them as something like baseball cards
or comic books.

------
ericHosick
Would it be possible to have the concept of a Bitcoin with backing done by
commodities?

~~~
aubergene
no, that wouldn't make any sense

------
ChrisArchitect
isn't this whole make-your-own-currency, digital or not, like that Ithaca
HOURs thing?

------
gojomo
Anyone know the current ratio...

(USD price of cloud computing power to generate 1 BTC) / (USD offering bid for
1 BTC)

...?

~~~
prodigal_erik
Allegedly, using a GPGPU to mine bitcoins is still modestly profitable, though
a CPU is probably too slow for its earnings to cover the power to run it.

