
The Bitcoin Report 2 [pdf] - calciphus
https://docs.google.com/file/d/0B2tdZG8OsWtLU1BPbGNPNnc0Unc/edit?usp=sharing
======
vyrotek
_"There is no capital nor wealth creation to speak of; only as much money as
was put in. While somebody may buy a bitcoin for $1 and then sell it for $200,
no value was added in this process, so it is simply a transfer of wealth. The
people who profit will do so by taking from those who lose.

As the deflationary feedback amplifies the desire to hoard, the exchanges will
become illiquid. Eventually, buyers will give up while waiting in absurdly
long queues, and demand will loosen. Soon after, things will turn pear-shaped
as the world's fastest liquidation occurs. The exchange rate will fall faster
than orders can be fulfilled, so that less than $2.5 billion is recovered.
After all, it was never really there anyway."_

Nailed it.

~~~
Aqueous
This describes what happens in the short term, probably repeatedly. But what
happens in the long term? Traders learn; they adjust with respect to risk.
People will become acquainted with the volatility of the BitCoin currency and
adjust their buying and selling practices as a result. People will hold onto
the currency longer because they've seen it crash before and recover. The
curve will flatten and become a slope. As the rate of deflation steadies and
shrinks transactions will begin again. As more and more users flow into the
BitCoin economy mass-sellings will have less and less effect because most
people who hold the currency will not be responding to short term blips in the
price - i.e., day trading. As the volume goes up the chance that a small
number of people can destabilize the currency will shrink. There will still be
bubbles but they will become cyclic on a longer period, happening on intervals
of years as opposed to hours and days, much like in national economies.

~~~
InclinedPlane
Long term? People stop using bitcoin.

You theorize that the boom/bust swings will diminish in intensity until
eventually bitcoin becomes stable.

Others theorize that the boom/bust cycles will grow in severity until
eventually everyone just gives up on bitcoin.

So far there's very little evidence for the stability option and a lot of
evidence (and economic theory) for the speculative bubble theory.

Do you have any evidence of the "market share" of bitcoin users who are in the
market for purely currency reasons growing relative to that of those who are
in the market for purely speculative reasons? From everything I can find out
it seems as though the reverse is true.

~~~
Aqueous
I've very rarely seen something with a > 1 Billion market cap and millions of
users simply disappear. (To use an unrelated example, even MySpace still
exists :)

Very simply, the more users are in Bitcoin the more vendors there will be who
accept BitCoin. The more goods and services can be bought in Bitcoin during
the relatively smooth periods the greater the proportion of people who like to
have the currency for currency purposes, because it can be used to buy goods
and services. There will be 'induced traffic', a network effect - more roads
into Bitcoin will pop up because there's an incentive to start an exchange
(you make money off of each transaction, after all!). More roads = greater
demand for more BitCoin. It is the fact that some buying power of BitCoin
still exists even given the boom/bust cycles that will support the currency in
the long run, and that this buying power will on average be higher on every
contraction than the previous contraction. The fact that an anonymous,
decentralized currency that prevents double-spending is desirable (i.e. has
inherent value) to a lot of people will also support this buying power, and
support the currency in the long run.

~~~
InclinedPlane
Geocities, lycos, CompuServe, Excite@Home, so many others.

Those were all companies which sold at a billion dollars or many billions of
dollars and have sense been shut down or are worth a tiny fraction of that
amount today.

And those are just examples from the last 20 years, we could go back to nearly
countless examples of other speculative bubbles going back centuries.

~~~
zenocon
If ever there were a textbook example of apples/oranges, this would be it.

~~~
Aqueous
The example is helpful, though. In each of those cases something very much
better came along to replace it.

The same thing could very well happen with BitCoin. Someone mentioned forking
BitCoin and tweaking the algorithm to remove the artificial ceiling of 21
million units, and replace it with an algorithm which monitors all the
transactions taking pace and adjusts monetary policy in response to them, in
order to produce a steady inflation rate. Such a currency might very well be
more desirable than one with deflationary tendencies.

Bottom line - unless someone figures out a way to replace BitCoin with
something better, I see no reason to believe BitCoin is going away anytime
soon.

------
polshaw
The value of BTC just doubled from 60 to 120 in 40 minutes.. wtf is going on
there? (looking at btce/USD)

(disclaimer: i'm not trying to hype, I expect it will come back down again
shortly, it just seems weird to change that much that quickly)

 _Edit:_ yup.. back down to 80 20mins later.. can anyone tell what kind of
volumes were traded in this period? ..I wonder if anyone was able to double a
serious amount of money in 40 mins(!). Or how much money would have been
needed to shift the price that much?? I suspect trading volumes are lower than
normal due to mtGox being closed.. I really am having doubts that closing to
let things 'cool down' is really going to work out (side: why should that even
be a role for MtGox anyway?!).

Anyone have any thoughts on what will happen when it comes back online?
Presumably a lot of people are only registered to trade with mtGox so have
been prevented from buying/selling while the price has continued to fall.. it
would seem to me we're either going to see a significant worsening of the
crash or a recovery. ??

~~~
waterlesscloud
Interesting statistic- Bitcoin Days Destroyed _skyrocketed_ during this crash.

<http://blockchain.info/charts/bitcoin-days-destroyed>

BDD measures how many "old" coins are being moved around, so it seems likely
that a lot of early adopters cashed out this time. Will be interesting to see
what that means for the future of the BTC itself.

~~~
maxerickson
It provides some information about the dwell time of coins. It's hard to see
through it and say much about just how old the coins trading are. It doesn't
take all that many old coins to get to 50 million BDD (~ a weeks worth of 3
year old coins...)

My rough calculation is that there are more than 5 billion bitcoin days
outstanding, so there is still plenty of room for a wild stampede.

------
ricardobeat
Does it even make sense to consider Bitcoin as a separate economy containing
"no real value"? I see it more as an alternative banking system, the money it
contains comes from real-world value _and_ gets converted back into real-word
products; it's not a virtual currency.

~~~
matthew-wegner
I think this is a hugely important distinction. The linked-to analysis seems
to assume that BTC are bought with USD, sit around in a wallet, and then come
back out as USD.

When in fact, BTC's usefulness is its frictionless-but-secure, anonymous
transactional nature. Its anonymity is even stronger if you mine coins
yourself (or acquire coins directly from a miner for favors or whatever).

You can probably make the case that BTC _must_ be deflationary, in order to
draw in traders/investors, who actually provide necessary market liquidity to
proxy BTC as USD, backing the worth of BTC-for-goods transactions...

~~~
Nursie
It's not really anonymous though, transactions are publicly recorded for all
time. It's also not 100% frictionless. There are fees and though they are
currently low, they are there.

~~~
matthew-wegner
I know there are transaction fees. I meant friction as--once you have BTC in a
wallet, you are absolutely free to spend them as you wish. There is no way for
anyone to prevent a transaction.

Bitcoin addresses are public but anonymous. But yes, you can analyze the
public ledger to tie known data (publicly-posted donation addresses, etc) to
try to de-anonymize someone. There _are_ coin tumblers/mixers in place in some
markets, although it's hard to tell how effective they are.

------
bitcoinmind
What a bunch of nonsense. The report makes extreme predictions without any
backup or weighting of arguments. There is no reason to believe that the
network should crash.

The author has no clue about economics, so please.... (not that Ben Bernanke
or Mario Draghi have, but anyway).

There will always be a use for Bitcoins. Think about other countries than you
yourself are living in. Think about people who have to pay 20% for cross-
border transactions.

------
tquai
_The market is capitalized at $2.5 billion, but what does that mean in an
economy with no production?_

Does the author define "production" as manufacturing where the exclusive
currency used (for raw materials, wages, utility bills, etc.) is bitcoin? If
so then I'm not sure of the relevance.

One could make all sorts of clever but offtopic points about a fiat paper
currency when viewed through the lens of a P2P currency like bitcoin. "The
Canadian dollar is supposedly worth more than the USD today, but what does
that mean when the Canadian network has zero nodes?" The wrongness of such a
statement leaps out since fiat currencies are familiar to us. In contrast,
bitcoin doesn't need a manufacturing base, but this is less obvious since P2P
currency is a new idea that people (myself included) don't well understand.

~~~
el_senor_duerpo
No, production is not exclusive to manufacturing. It means valued-added. For
example, if you bought a dvd from amazon using bitcoin (I have no idea if this
is possible), then very little of what you paid would count in bitcoin GDP.
All of the costs of production (warehouses, delivery, labor, servers, etc.)
are done in the US economy using dollars, so that basically doesn't register
as bitcoin GDP.

On the other hand, let's suppose someone is buying a bag of... something.
Well, everything that got that bag to the dealer was done in some other
production economy. So the only value added, that would count as a service in
bitcoin GDP, would be the dealer's profits, measured in bitcoins.

To my knowledge, there are no investment projects being financed in bitcoins.
If there were, then they probably just defaulted on their loans, which
increased tremendously under deflation. Therefore, it's best to think of the
bitcoin economy almost entirely as pure exchange, with very little value added
and very little wealth created.

As for fiat currencies, why is everyone so interested in the nominal exchange
rate anyway? This was a peculiarity that I noticed a while ago. In college, I
went on a study abroad program to Mexico. When we arrived, we all exchanged
our dollars for pesos. Everyone was carrying on about how strong the dollar
was, because one dollar could buy ten pesos. But then I noticed something. I
went to McDonalds, and instead of a "dollar menu", they had a "10 peso menu".
Who cares how many pesos you get for a dollar? It's about how much you can buy
with that dollar worth of pesos, and that's measured by the real exchange
rate. I realized at that moment that purchasing power was much closer to
parity than most people think, because they put so much weight on nominal
rates.

------
carmaa
A "report" not covering the greatest current use case for the currency -
namely anonymously buying weed through the Internet tubes? Not saying it is a
good thing, just that there's actual value creating going on. Right now.

~~~
el_senor_duerpo
Hi there. Actually, I did cover value of Bitcoin in use as a medium of
exchange in footnote 2. Because there is no production in the bitcoin economy,
or very little to be entirely accurate, the real exchange rate should
basically be one. Why? Because most users of bitcoin live within very large
production economies. Why would buyers pay more or sellers accept less, if
they would be better of transacting in the domestic economy?

You might imagine a slight premium for bitcoins because they facilitate
transactions that would be difficult in the domestic economies, such as money
laundering or black market trade, but you could just as easily argue that the
real exchange rate is less than one due to the relatively lower number of
people to trade with, concerns regarding being hacked, and uncertainty
regarding future government regulation of bitcoin. That's why I decided the
most neutral approach would be to assume purchasing power parity across
bitcoins. Admittedly, this assumption may not be great as speculation runs
rampant and everyone runs for the exits, which would imply a heavy discount in
the real exchange rate.

~~~
johndevor
_money laundering or black market trade_

Moving money across borders is an use for Bitcoin as well. If you're living in
Iran (or North Korea or Syria or Palestine) Bitcoin could very well solve your
liquidity problem, in the same way the TOR network helps to solve a
government-imposed-firewall issue.

~~~
maxerickson
How many ways are there for the people accepting the currency in country to
get their hands on bitcoins?

I guess they could also act as an intermediary for people that want to send
money in. Might need some deep currency reserves to play at that though.

------
mortehu
> [...], sudden and large increases in the user base cause dramatic increases
> in the nominal exchange rate. _This is because the money supply is
> exogenously fixed by the mining algorithm._

I think the reasoning here is too specific. Most currencies are only
inflationary long term. If during a 10 day window a trillion euros flood into
the US dollar market, I doubt the Fed will be able to respond fast enough to
keep the prices fixed.

~~~
el_senor_duerpo
First of all, if our actual markets started to experience this kind of
volatility, circuit breakers would kick in.

Second, even if they didn't the Fed could easily respond in real time. It's
not as if the Fed actually, literally "prints money". They would just go onto
those forex markets and sell people dollars, transferred digitally and made up
out of thin air. And their servers wouldn't crash while doing it.

Edit: I should add to this that, at least to a first approximation, the Fed is
not terribly concerned with the nominal exchange rate. They are charged with
maintaining full employment and price stability within our own economy, while
the nominal exchange rate is allowed to float against other currencies.
Because have have our own production economy, there are good fundamental
reasons for fluctuations in the real exchange rate that should be permitted to
occur.

------
stevewilhelm
It appears Bitcoin's primary function, namely to perform anonymous transfers
of US dollars for goods and services, is being eclipsed by speculation.

Welcome to the world of foreign currency exchange.

------
calciphus
Background - despite the absurd name, a friend of my posted this (relatively
anonymously) to Reddit last night. Unfortunately, it got downvoted into
oblivion for not possessing enough cute memes.

The data shows what happens to a currency like this is very predictable, and
the behaviors we're seeing (deflation, currency hoarding, stagnation of real
bitcoin output) are great predictors of crashes like this.

~~~
tdicola
Nice article--I like that it's concise and sticks to the data to make its
point. This article last week from Forbes makes the same point with Paul
Krugman's babysitter's co-op column:
[http://www.forbes.com/sites/pascalemmanuelgobry/2013/04/05/k...](http://www.forbes.com/sites/pascalemmanuelgobry/2013/04/05/krugman-
baby-sitting-co-op-bitcoin/)

~~~
klochner
The deflationary aspect is only important for currencies backing an economy -
if you just use bitcoin for quick anonymous transactions, say
dollar-->bitcoin-->purchase, then you don't care what the value is doing over
time.

It is interesting to consider alternatives though - bitcoin could be the
Friendster of crypto-currencies.

~~~
surrealize
_if you just use bitcoin for quick anonymous transactions, say dollar--
>bitcoin-->purchase, then you don't care what the value is doing over time_

If you expect the value of bitcoins to keep going up, why would you only hold
them for short periods of time? You're suggesting that people would wait until
the last possible moment to change their dollars into bitcoins. But by doing
that, they're losing money if the value of bitcoins is going up relative to
dollars. In that case, the best strategy is to switch into bitcoins as early
as possible, and hold them as long as possible.

~~~
klochner
You wouldn't hold bitcoin if you're not interested in currency speculation.

I'm arguing that despite likely wide swings in the value of bitcoin, it's
value as an anonymous transaction currency will prevent it from going extinct.

People hoard it, driving the price to $10,000 and driving speculators to tears
of joy, still people can make quick transactions in fractional bitcoin. It
goes bust and the value dives to $10, yet the people using it for transactions
could care less.

~~~
flyinRyan
If they transfer $500 over to buy some computer hardware parts on newegg but
can only get a mouse pad by the time the transaction takes I think they'll
care less.

BTW, it's "could _not_ care less" as in "I could not possibly care less than I
actually do". If you _could_ care less that would mean that you _do_ care.
Sorry, personal pet peeve.

~~~
DanBC
> BTW, it's "could not care less"

Oxford recognises "could care less" to mean "couldn't care less".

"I couldn't care less" is pretty new, first seen in mid 20th century. "I could
care less" is newer, but has been in use since at least 1969.

This page has some interesting talk about Yiddish stress patterns. When you
think about it you can imagine someone saying, sarcastically, with palms up
and arms spread, "I could care less", meaning "As if there's anything in the
world I could care less about".

(<http://www.worldwidewords.org/qa/qa-ico1.htm>)

------
hisabness
looks like a high school homework assignment to me.

~~~
el_senor_duerpo
Would you prefer I write in in LaTex and using fancy graphs from Matlab, R, or
Matplotlib? Or are you just being mean?

~~~
bitcoinmind
Please, at least attempt to prove some of the wild predictions you are making.
Science is about proofs, facts, etc. ... not just assertions.

