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The Bitcoin bubble – Greater fool theory (economist.com)
128 points by rbanffy 36 days ago | hide | past | web | favorite | 155 comments



I was having a conversation about bitcoin, and I was saying the fact that the price goes up so fast means people cant/wont actually use it as a currency. I think someone bought a pizza with 10k bitcoin? thats now 70 million $. Even in the last year it has moved up so fast, and if people think it will continue to grow 'because of adoption', people cant actually 'adopt' it and use it as a currency, because todays bitcoin is worth a lot less than tomorrows.

then i realized, i was describing deflation.


It definitely means people won't use it as a unit of account (for debts, budgets, etc), which is one primary use for a currency...

But I don't think it means people won't spend it or trade it for some other currency or asset. If you held a bunch of bitcoin while the price in USD doubled, and you happened to want a new smartphone, you're sure you wouldn't buy one?

If you were absolutely confident the price would quickly rise even more, maybe you would prefer holding, but if you really want the phone and you think BTC/USD has some risk?


I'd spend dollars on the phone, because the same BTC might buy 10 phones in a few weeks.


It's the same opportunity cost whether you spend from your BTC account or your USD account! You're choosing between "should I buy a phone or 0.1 bitcoin with these dollars?"

I think the presence in the market of an asset that many people believe is continually underpriced would have a general effect on spending, not just on the utility of that asset as a medium of exchange...


>> It's the same opportunity cost whether you spend from your BTC account or your USD account!

Only if obtaining BTC is frictionless and fee-free, something far from universal.


> the same BTC might buy 10 phones in a few weeks.

Which is kind of crazy and defies all logic - cryptocurrencies can be manufactured without any limit, even Bitcoin can be cloned and rebooted, creating a new currency space/ledger that's fresh.


You can print out a piece of paper that says "TEN US DOLLARS" on it, but if the corner store or the bank won't take it it isn't really the same as $10.


Will you buy pizza with BTC right now?


Yes? Being BTC doesn't change the value of it.


When you buy a pizza with USD, do you think "hmm, maybe I should invest this into BTC instead?"


Other motivations exist when using deflationary currency other than hoarding. I don't believe btc deflation is bad.

Fiat currency can also rise and fall 10% in a single day. Problem is that moving the market that much in every day is impossible due to a huge market cap, which BTC does not have.

All cryptocurrencies are not user friendly. Cold, hot wallets, privacy issues, what is the best way to store them, how not to accidentally lose everything etc.

Mass adoption depends a lot on user friendliness which a bunch of cryptographers aren't concentrated on solving.

So, it won't be used as a currency not because of its deflationary nature but because it's just not as convenient as fiat currency.

Scaling issues are also a big blocker. Currently, BTC transaction fees are higher than those imposed by banks. It's no longer a cash, just a store of value.

Core devs are behind a private company, trying to milk the blockchain even more, which will also lead to bitcoin not being used as cash, but they'll sell their own sidechain and offchain solutions, probably just to enterprise.

Blockchain tech is great tech. Cryptocurrencies like Monero are absolutely brilliant. But I'm doubtful of mass adoption, mostly because torrents, free software, as amazing as they are, and convenient for superusers, don't have mass adoption too.


You are describing an insane rate of deflation. People do very different things with currencies that evaluate a more normal 3% an year.


Deflation is not a bad thing. Instead of throwing away their money at junk, people become more discriminating and buy what they actually need at the moment. Thats terrible news for our economic system short term, but great news for all of us and the planet long term.


I have used Bitcoin for purchases in the past. I try not to do it so often because of the exact thing you mentioned, but I feel like this is something that could improve with time.

If Bitcoin does get mass adoption and becomes THE worldwide currency then that also means that the volatility will decrease significantly to the point where I wouldn't have any problem transacting using Bitcoin.

I realize the idea of that actually happening is pretty insane and it is probably more likely that the value will go down to zero, but it is hard to predict the future.


How would volatility decrease in case of mass adoption?


When Bitcoin was $10 a $1 move in price was a 10% change.

When Bitcoin was $100 then a $1 move in price was a 1% change.

When Bitcoin was $1000 then a $1 move in price was a 0.1% change.

If Bitcoin gets mass adoption then the price per Bitcoin could be $50,000 (assume $1 trillion market cap) or higher. At that point a $1 market movement would be a 0.002% change. To get the same 10% movement as at $100 would require a $5,000 market price swing which while possible is less likely.

It means a lot more money would have to be bought or sold to cause the same percent movement in price.

Bitcoin is already much less volatile today than it was in the past.


> If Bitcoin gets mass adoption

That a big IF. And with the transaction costs it has, I don't see it getting mass adoption any time soon.


yeah, but why is $5,000 less likely. Is there some fundamental reason?


You could always replace the bitcoins that you used...


Or people who are sensible, are incentivized to sell or buy things because they know the crazy bubble won't last. Thus creating adoption in a deflationary model.


Isn't that deflation?


Frankly I'm astounded by the vitriol toward Bitcoin on HN. Bitcoin has the potential to actually change the world (unlike most of the BS startups coming out of SV), and yet all these voices on HN poo-pooing Bitcoin appear (to me at least) to outweigh those who are willing to give it a shot.

Why is this? Do people fear what they don't understand? Are they mad because they feel like they missed out? Does Bitcoin's success mean their loss (like the banking folks and the government establishment)?

Did people hate the internet this much in its early days?


The problem is that it has potential to change world for the worse, not the better. Fixed supply monetary systems have been tried in the history and there are reasons other than evil bankers wanting to get power for their dismissal.

And claiming that bitcoin's success would be bankers loss indicates that you don't quite get what is the utility finance sector creates. One of the main things banks do is they convert short term deposits to long term loans. There is nothing in bitcoin that reduces the need for that service in our economy. There were banks at gold standard times and there will be banks in the extremely unlikely world where bitcoin is main currency in a society.

There is no mechanism in bitcoin that would manage the volatility of the currency (against the price of bread and butter, not other currencies) That in itself makes it DOA as a proper currency. Further, even if that was sorted out and a society would want to have bitcoin as their currency, why the f*ck (pardon my french) the society would want to give the seignorage to bunch of cryptonerds? It is not like it is difficult to make a fork.

I am not mad about missing one more tulip bubble/ponzi scheme. I am mad that people never seem to learn.

Modern money is debt. It is a marker who in the society is owed and how much. Thinking that those markers should have fixed supply is just not smart.


Bitcoin may be a finite supply but cryptocurrencies in general are infinite. So can you really say it is a fixed monetary system?


Each one of the cryptocurrencies I have encountered relies on the idea that the supply is somehow predefined.

Give me a cryptocurrency whose supply is adjusted based on the needs of their users and I am interested. Give me a cryptocurrency that allows heavily negative interest rates for savings to embrace current consumption in the economy over hoarding of "money" and I am interested. But these are complete anathema for the current cryptocurrency folks.


It can be done easily. I would say it will be done in the future by governments and forced on us. The amount of control a government would have with a forced cryptocurrency is the only problem I see.


Yes, easily if it is made by government. But if you wanted to do that without government help enforcing things bit in a distributed manner, I find it a bit more difficult.


There are cryptocurrencies out there that are inflationary, although it's a set inflationary amount. Ethereum and Dogecoin are two of them.


I wonder whether scrutiny of those tax avoidance schemes revealed in the paradise papers or Panama papers will lead to those investors moving their funds to bitcoin.


Rather they would use a crypto currency with actual anonymity don't you think?

I'm not going to mention it by name lest someone thinks I'm here to "shill" it (which btw I'm not, I only hold BTC and ETH currently).


Well said. Credit is unlimited and it propelled real growth in the past. The sole use of Bitcoin would make this capability an anti-pattern.


> The problem is that it has potential to change world for the worse, not the better.

Points at Facebook/Twitter and Trump+Russia abuse of this tech


None of the above, IMHO; it's merely a reaction to what, from the "outside", looks like a speculative bubble fueled by the usual hype cycle mixed in with a dose of wanton techno-utopianism.

We're quite used by this point to new frameworks, technologies, and scientific developments promising to "CHANGE THE WORLD!!!!!11!1~~". From this perspective, Bitcoin looks no different: we have people claiming decentralized proof-of-work consensus-finding will solve all our social / societal ills. Currency isn't as internationally portable as it should be? Use the blockchain! Voting systems are broken / poorly designed? Use the blockchain! The NSA is spying on all of us? Use the blockchain!

In this hype cycle atmosphere, I think a good measure of skepticism is healthy: it reminds us that Bitcoin, like other technologies, has limitations, and that those hyping the technology have a vested interest in downplaying those limitations while promising the moon.

While the underlying technology might in fact be part of a reasonable solution to each of these problems, it's easy to forget that the technology is only part of the puzzle. Technology is always embedded in a human context: modifying the habits, social pressures, incentives, laws, etc. that support a broken system is as important, if not more so, than changing the technical implementation. (In fact, I'd argue changing the technical implementation is impossible without addressing some of these social / psychological factors.)


> Do people fear what they don't understand?

Yes.

> Are they mad because they feel like they missed out?

Eh, I doubt it.

> Does Bitcoin's success mean their loss (like the banking folks and the government establishment)?

I don't think so. It's not a zero sum game.

> Did people hate the internet this much in its early days?

Some parts of it, yes.

In the end, Bitcoin is still a wildly insane proposition and technology. It forces people to question longly held assumptions (on a millenium scale) of what money is. HNers are probably more likely to question, critique, and debate new things, and Bitcoin doesn't get a free pass simply because it's cool and exciting.


> > Are they mad because they feel like they missed out?

> Eh, I doubt it.

I think there is something to this. If you've been on HN for 5+ years and have followed the progress of Bitcoin, but never dived in - but then gone on to watch non-tech people make 10x+ returns while not understanding the currency - there must be something about that which grates some people.

I also think it's easy to dislike the "down with central banks", "fiat money is fake money" faction of bitcoin


>I also think it's easy to dislike the "down with central banks", "fiat money is fake money" faction of bitcoin

Thats the most appealing part. Most people dont like the government, they just want it to do something different.


It may be easy to dislike, but the law updates to make these banks the only game in town.


There's not that much vitriol here? Tons of people here own bitcoin and obviously believe in it and tons of people here are skeptical about it. I don't usually see anyone actually "mad" about bitcoin.


Try making a positive comment about Bitcoin or any cryptocurrency, and watch the downvotes come flying in.


Well considering the amount of forums on the net where you can't even mention bitcoin without everyone who holds it swarming you - "Buy the dip", "This is good for bitcoin", etc. - I'd say everyone is pretty aware of the positives behind bitcoin and isn't too interested in hearing them regurgitated from yet another evangelist.


HN is a large community, with many people who have opposing views of many issues. I think you're experiencing a common phenomenon in large communities: you feel the people who disagree with you much more than those that agree with you. This is, I think, a form of confirmation bias.


downvotes == vitriol?


Bitcoin is good.


I was skeptical. Then I remembered I mined some BTC back in the day and have it sitting on coinbase now. Now I realize your mind changes a bit once you own an actual bitcoin or some amound of btc or satoshi. Then you kinda don't become as critical. It's amazing to think of all the things I can buy with BTC without risking the paypal issues of account lockout or other similar cases.


The hubris Bitcoiners carry is completely different. The net started among academic wonks and University faculty pages. Bitcoiners purport to bring down Central banks and subvert the state, delivering a new social order.


I encourage you to read the Bitcoin white paper if you haven't.

https://bitcoin.org/bitcoin.pdf

I think you are a little off base in the original intentions. It was designed to solve a real problem, and its creator was likely someone who had a background in academia although we may never know for certain.

It is true that maybe a lot of the proponents today want to bring down central banks, but I think it's a little unfair to imply that that was the original intention.


I am not scoping\targeting my statement to bitcoin's original intensions and white papers.

I am referring 'Bitcoiners', the social entity, which have a separate life from the original intensions and white papers , and why there is "vitriol towards Bitcoin", as the OP requested.


> Bitcoin has the potential to actually change the world

I really doubt this. I have never seen a convincing argument about how BTC would solve any of its many technical issues, and the political ones are even larger.

I would gain a lot from Bitcoin's success. Really. Just by making it possible to do business without the gov being a bottleneck it would already change the lives of mostly everybody around here.

I just don't see it happening, for obvious and important reasons, that a bunch of people insist on ignoring. It's hard enough not to pass judgment on the people making an effort to ignore the obvious, now those same people trying to paint the others in a bad way is a bit too much.


Bitcoin is a massive waste of electricity for no good reason other than indulge early adopters fantasy for unearned wealth.

All the fantasies and benefits it was originally promoted for have fallen by the wayside and only greed remains. It's an inefficient protocol and is now simply a store of speculated value and can't perform any other function by design.

The bitcoin ecosystem is eager to sell out to the very financial establishment they were ranting about throughout its history. News of any bank even thinking about crypto sees thousands of excitable news articles and soaring prices.


I dont think poopooing bitcoin's speculative bubble has to do with poopooing it as a technology.

For its original purpose as a digital currency, USD value should not matter (as long as it doesn't fluctuate too much)


That's similar to the argument that "blockchain good, Bitcoin bad".

Bitcoin is the killer app. Similarly, the internet is great not because of TCP, but because of the information (which is what gives it value).


The medium is the message. I'd argue the underlying technology, that is blockchain, is actually the most impactful. Bitcoin is just an implementation and an example of how blockchain based technology can affect society.


PoW costs money. As PoW difficulty increases, and mining reward decreases, it makes sense for value to increase to make it sustainable.


Bitcoin's price is determined by supply and demand, not by the mining reward curve. But yes, Bitcoin would need an exponentially increasing price to be sustainable in the long term without higher transaction fees.


Proof of work is intrinsically dumb.

To store wealth in Bitcoin you are committing to the constant burn of energy in perpetuity.


Are you saying our fiat systems of transfers and settlements use no energy?


It uses like seven orders of magnitude less per transaction.


Citation? And remember a Bitcoin transaction is cash moving from my account to yours. Not just a promise of cash, after a few days of settlement, if no chargeback happens


You really think that a wire transfer takes a week's household of energy(Because that's the current energy per btc transaction)...?


What really goes into a wire transfer in order make it happen securely? And is it as secure as a Bitcoin transfer? See also: Xiphias' comment about Proof of Military Power.


Right...so you want a world where there is no collective security. But hey, at least we all have bitcoins in our wallets?


Fiat currencies use proof of military power (war) as their security system. As an example you think USA would allow Kim Jong Un to issue US bonds (like he does with Bitcoin)? I much prefer the energy cost to military cost (that's why mining over Tor / satellite system is so important)


> Bitcoin has the potential to actually change the world

Statements like this are, IHMO, the driver behind the BTC hate. It's the pure hyperbole typical of the tech scene.

It's not world-changing, it's just a payment processing platform. The decentralized aspect is interesting, but doesn't add value for most use cases. Venmo is free, super easy to use and there's little risk of my Mom permanently losing all of her funds from the account.

For the general public, the only thing BTC has changed in the world is it has given hackers the facilities to extort them.


If you are looking through the 'change the world' pink glasses, take a look at gridcoin. With Bitcoin you are only burning electricity.

Also, no need to talk that much down on the rest of us with your last paragraph.

We get what Bitcoin is all to well (heck I even have a research paper published for hashing algorithms). some of us are decently well off to not need to gamble for cash. If Bitcoin hit 10m a piece, I don't think I've lost anything (same if tulips or dogs are sold 10m a piece). I did SETI cpu donating time in the olden days, ran a BBS, and brought email to a small mountain village. I loved internet in the early days and now.

Sometimes, people like me, just want to stop the fools being burned on a pyramidal snake oil, because we are older, and have seen the shit in various forms.

On this forum, I assume the rest are similar to me, but perhaps a bit younger, so the anti Bitcoin sentiment is just a sentiment to maybe save you some of your hard earned money. That is my reason. I won't guess the others.

Tldr, we get it all to well. There is no hate. But do ask yourself why we still maintain our stance/advices.


It comes down to politics really. While Silicon Valley has a large Libertarian contingent, European tech crowds are dominated by statists.

The statists are fundamentally opposed to bitcoin on many levels, so the vitriol runs hot and heavy there.

The Libertarians love bitcoin like their forebears liked gold and distrusted the government.

What is money today but the ultimate manifestation of politics in everyday life?


That's a tempting narrative but I think for a lot of people who oppose Bitcoin it's a matter of belief in the monetary ideas behind it. Not in a political, what should we do sense, but the actual normative economics of how money works.


There are both sides to this argument, there have been posts which ask the opposite - why does every bitcoin post gets voted up so quickly. And frankly no thread goes without someone asking - but what is the "world changing" use case for bitcoin? There are no straight forward answers.

Then there is the constant use of strawman like you did here with internet question.


The fact that you believe it can change the world is the reason of the hatred.


My problem with bitcoin is that, fundamentally, it is born of mistrust of even the concept of “politics”. It considers, for example, the ability of established and democratically-controlled institutions such as central banks to conduct monetary policy as a net negative, and tries to replace it with the supposedly objective reality of an algorithm doing its thing without regards to the outside world. That’s why you will find, if you go down this rabbit hole, a large overlap of blockchain enthusiasts and the political spectrum somewhere between nihilism, Ayn-Rand-style social darwinism, and anarchism; All the handwringing over the supposed conspiracy that abolished the gold standard follows naturally.

This is even more obvious for the disaster that is the DAO: the idea that the nuances of human life and its conflicts currently settled by courts can adequately and unambiguously captured in code is, as has now been shown repeatedly, laughable. Personally, I also consider it somewhat frightening that people would actually subscribe to a philosophy so myopic as to completely deny the value of anything that isn't technology.

Technologically, bitcoin it is certainly fascinating. And a decentralised, electronic competitor to cash does seem more attractive than a future where VISA and PayPal control all that data. Unfortunately, bitcoin has completely failed in that regard. Adoption as an actual means of payment is declining. Even experts frequently lose money to hacks, hardware failures, or inattentiveness. Settlements take longer than many competing technologies, and the one area currently underserved, namely micropayment, is also priced out of bitcoin.

Bitcoin evangelist are also not doing the technology any favours. See, for example:

> Do people fear what they don't understand?

This implies that bitcoin critics are stupid. They're not.

> Are they mad because they feel like they missed out?

This implies that they are jealous. While that's obviously something that happens, I can assure you it is in no way a significant in the opposition. I do own a few dozen bitcoin, for example, because I used mining to get into cuda a few years back.

> Does Bitcoin's success mean their loss (like the banking folks and the government establishment)?

That implies some sort of conspiracy, and also portraits any critic as being a shill, or bot, or similar, whose opinion can then be considered illegitimate.

It's interesting to see how the bitcoin community was, from the start, driving by this antagonism versus government and the financial system. Bitcoin was considered as some sort of grand threat to the established order, and the government was expected to come down hart on it "any day now". In reality, however, regulatory bodies have almost without exception taken a rather relaxed approach. Questions of taxation were clarified, and existing rules such as KYC enforced to discourage the use of bc for illegal activity, yes. But overall, governments' reaction was nowhere near what the community expected, or what would be expected from a corrupt system trying to defend its power against a credible threat.

It is only with the rather obvious overheating, and widespread fraud, of ICOs that scrutiny of this market has somewhat increased.


Famous NYU valuation professor on how to value bitcoin:

http://aswathdamodaran.blogspot.com/2017/10/the-bitcoin-boom...


The key part is the statement that "it cannot be valued". Saved you a click.


To expand on this, as it is mysterious to me:

The reason it cannot be valued or invested-in is that it is a currency, and as such it only has a price. The difference is a bit murky to me (value v. price) but I think it's because as a currency it has a 'fiat' kinda representation.


This is the same NYU professor that valued Uber at $6B because his comparables were taxi companies: https://fivethirtyeight.com/features/uber-isnt-worth-17-bill...


Really interesting write-up and explanation, thanks for posting.


Without having read the post I can attest: Damodaran is the real MVP.


Do you care to elaborate? That statement (or joke?) does not make any sense to me.


MVP probably refers to most valuable player here, not minimum viable product.

He has a solid set of valuation videos on YouTube and offers a large library of finance teaching materials that most business students are sure to encounter during their studies.


Flawed argument because he doesn't understand the tech.

> The only exception that I can think off is that if it becomes a necessary component of smart contracts, it could take on the role of a commodity; that may be ethereum's saving grace, since it has been marketed less as a currency and more as a smart contracting lubricant.

This applies to bitcoin too, but he doesn't seem to be aware of it. So when he later claims

> You cannot value Bitcoin, you can only price it: This follows from the acceptance that Bitcoin is a currency, not an asset or a commodity. Any one who claims to value Bitcoin either has a very different definition of value than I do or is just making up stuff as he or she goes along.

It's just not true. There is obviously some actual inherent value to being able to do escrow via multisig rather than via mutual complete trust in some third party. You can argue that the value is very low, but obviously there's some inherent value to the system.


>Flawed argument because he doesn't understand the tech.

People don't buy technology, they buy the experiences technology creates.

If the price remains this volatile I have no reason to sell it, or to use it as a currency to purchase goods and services. The real problem is that the technology wasn't designed to increase the value of the coin, it was designed to create a currency for use in purchasing goods and services. In other words, if I can't use the technology for what it was intended for (purchasing goods and services) than I can't experience what the technology creates.


But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in "bits"; it is another to be able to get into a bubble and out again with your wealth intact.

The Mississippi Bubble is an interesting one to invoke here. It was a share bubble fueled by France's overprinting of paper money and habitual currency devaluation.

The idea was to create a monopoly that would exploit the vast riches of France's territories in North America. The company never got off the ground, but the shares were sold and began trading anyway. Investors starved for returns flocked to the trading of the shares.

So yes, it's entirely possible that the overproduction of money by the world's governments is fueling a speculative bubble in stocks, bonds, Silicon Valley startups, and even digital currencies - not unlike the Mississippi Bubble.

Unlike the other inflating assets, however, the supply of bitcoin is rigidly fixed. As world governments produce ever more currency in an attempt to keep the other bubbles inflated, we can expect the bitcoin exchange rate to respond accordingly.

It's worth noting that the basic idea behind the Mississippi company was sound. The Mississippi was set to become a hub of world economic activity and valuable almost beyond measure - but not on the time scale of the day's short-sighted investors.


The article is perfectly right when it describe what drives the current Bitcoin craze and its insane valuation but the conclusion is frankly a bit lazy:

>When the crash comes, and it cannot be too far away, it will be dramatic.

People have been saying that Bitcoin was going to crash for years now. And it has, multiple times, but always recovered so far. Seems like there's no shortage of "fools" willing to pump the currency even if for the most part they probably don't completely understand what it is, what it does and how it works.


Yeah I'm pretty disappointing in the quality of this article, especially considering its coming from the Economist.

The summary is a coin flip in essence.

It did, however, get me to think about this question: Is there a point where enough "fools" get involved that Bitcoin becomes "too big to fail"?


Well, people with no idea about how computers operate have been stopping me to ask my opinions on BTC recently. If there's a point where enough "fools" get involved for anything to happen that's a symptom this point is near.

But the way more usual outcome is that a bubble pops, not that it is lifted into infrastructural status. (But yeah, both happen, just with widely different rates.)


It's the other way around really. This "greater fool" system works as long as fresh money comes it to keep pumping the value. At some point you'll run out of "fools" to come in and invest money, at which point the bubble stops expanding.

At this point the most anxious investors will start selling their coins, fearing a crash. This in turns causes the value to start dropping and then you have a runaway effect as more and more people want to dump their coin, crashing its value more and more.


> Yeah I'm pretty disappointing in the quality of this article, especially considering its coming from the Economist.

The Economist is not really written having crypto enthusiasts or HN crowd in mind. The article is a decent summary of the current state of affairs to someone who's just curious about what the hell is bitcoin.



There is no shortage of money. Yet.


When the majority is claiming 'there's a bubble' in a certain asset, then it's undervalued or not understood. When the majority claims 'there's no bubble', then usually it's a bubble.


Reminds me of the Sequoia "RIP: Good Times" and all the "tech bubble warning" articles in 2008.


Both can be true:

- that bitcoin is an important tech that will eventually gain widespread adoption

- current high price of bitcoin is due to speculation and is a "bubble"


question at this point though: If a crypto currency were to gain widespread adoption, why would it be Bitcoin?


Probably wouldn't. You need something that scales if all are to use it. Bitcoin, in the current form doesn't at a level to replace Visa tap pay. For example, for a country of 20 million buying bagels on their way to work.


By this standard, gold and USD also don't really scale, because you can't send them fast enough. Interbank clearing is pretty slow.

We already have exchanges and clearinghouses like Coinbase for example. It's easy to imagine a Bitcoin-backed payment infrastructure offered by Coinbase or a Visa-like consortium of exchanges.

Of course this taps into a huge and messy ideological debate about what kind of thing Bitcoin ought to be.


Whatever it ought to be, it should start by supporting more than 25M transactions a day.

I hear people preaching wider adoption by all means, but none tackles the limits.

I apologize, but it looks like the proponents want money in, and scarcity remaining.


Segwit can enable that kind of scaling.


It would be bitcoin because of the strong network effects of currencies.


First Mover Advantage.


This is why we all use AltaVista and Friendster from our PalmOS phones.

That line of reasoning is especially risky in finance: right now, very few people are invested in Bitcoin. If it became popular, all of the early users would become very rich. The major players all know this and I find it extremely unlikely that they wouldn't make a serious play to avoid that line of money going to someone else. Say a few major banks, Apple/Google/Square/Venmo, etc. setup a competitor: on day one it'd be accepted by orders of magnitude more vendors and they'd presumably have paid attention to the endemic security, reliability, and performance concerns. How many people have enough of a stake in Bitcoin that they wouldn't jump ship – hundreds, maybe thousands?


Nothing in this article is new, but OK. Here is its conclusion:

> If everyone tried to realise their Bitcoin wealth for millions, the market would dry up and the price would crash; [...]. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.

Let's try this with something else:

If everyone tried to realise their Google stocks for millions, the market would dry up and the price would crash; [...]. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.

If everyone tried to realise their hoarded gold for millions, the market would dry up and the price would crash; [...]. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.

Look, I'm an economist! Sell your Google shares NOW!

(Or, to make the point directly, yes "that could happen", but that doesn't mean that it's likely. And if it's not likely, the conclusion doesn't hold. And if the conclusion doesn't hold, the author is not justified in saying that it's likely. The argument is essentially a circular one: If I assume that Bitcoin is likely to crash, I can "reason out" that it is likely to crash.)


Google shares represent a stake in Google's revenue stream. It has an intrinsic value beyond what you could currently sell a share at on the stock market. Likewise gold has some intrinsic value in manufacturing and ornamentation.

Bitcoin has no intrinsic value. Its value is just what you can trade it for at the moment.


> Google shares represent a stake in Google's revenue stream. It has an intrinsic value [...]

I'm not up to date on Google specifically, but for a long time in its existence, it did not pay a dividend, so its shares did not represent a meaningful stake in Google's revenue stream. Did they have an intrinsic value anyway?

But regardless of your answer to that, my statement stands. If everyone holding Google stocks suddenly started selling them off, the price would crash. It's just very unlikely that it would happen. More likely for Bitcoin? Maybe, but people have made this doomsday argument for quite a while now, and so far it's not proven right.


You buy stake in _future_ dividends. For companies that don't have any dividend currently you just have to compensate for the time delay when calculating the value.

If everyone would race to sell Google stocks for no reason, the price would quickly drop to a level where it would make huge sense to start buying. Imaging having a dividend to price ratio of 1000%. Even with no dividend, buying stocks (preferably with voting rights) in a company at a price to profit ratio of 1000% would be a great deal as it'd be a small thing to start paying dividends with those profit levels.

This does not mean that there aren't overvalued stocks and physical assets which does not make sense to buy at the current price. Bubbles has occurred before...


> You buy stake in _future_ dividends.

So no intrinsic value then. Just the expectation of possible future earnings. That obviously cannot work!

> the price would quickly drop to a level where it would make huge sense to start buying

Like for Bitcoin. Yes, there would be enough Bitcoin fans who got rich enough on Bitcoin to have spare cash to start buying if it dropped a lot.

Thanks for playing.


Not sure if this is true but I heard that currently less then 1% of the world population holds bitcoin deposits. Only a handful of people are holding large bitcoin deposits. Now if you believe that Bitcoin will get widely adopted then why is it so difficult to believe that the price will go up? And why do you care how much a single bitcoin is worth? As if we are going to be trading in whole bitcoin numbers. Fractions are perfectly fine and if you have problems with them just use multipliers.

Apart from the lack of legal structures, is Bitcoin that different from bonds or holding stock options which you bought for pennies? Alaska was purchased for mare $7m in 1960s which is worth $100m in today's money. You no longer can attach a price for Alaska because it not for sale but it is certainly worth a lot more. Similarly, Bitcoin is by far the largest wealth distribution most of us will experience.

Now you may disagree that with the fact that Bitcoin is currently traded for prices way above to what it used to be worth 6-7 years ago but similarly from the 1960s to 2017s the average inflation is about 1430.1% Keep mind that the 60s were neither globalised nor connected as much as today. And in a global, connected world everything happens at much faster pace.

Btw, I am not an economist, neither I claim that I have a good grasp of cryptocurrency. I just have an opinion :) and that all it is.


1%? I would have guessed 0.1 - 0.2%.


I thought about this too when I was writing my comment but then I was also hoping that someone else will correct me.


The article makes a valid point. Everyone can not possibly sell all of their Bitcoin, and if they tried, it would be defined as a crash. I would be lying if I said I wasn’t worried about this.

But I think it’s wrong to think of Bitcoin as a commodity, or that it needs some killer application. I really think Bitcoin is best thought of as a currency. Fiat currencies work because as a whole, we agree on its value. Usually, it’s backed by a country’s government, which represents the country’s populace. It’s value is inherently determined by the size of their economy.

Right now, Bitcoin isn’t backed by a government at all, but it’s still backed by people. Those people obviously feel that Bitcoin is worth what it is today. Of course, that can change, just like any currency.

But eventually, Bitcoin will reach a value high enough that more and more people will start accepting it alongside fiat. I mean, go to any border town along the Canada-U.S. border, and they all accept USD and CAD. Clearly, they do that because it’s advantageous to attract customers. That could eventually happen with Bitcoin. Then we’ll stop worrying about Bitcoin’s valuation so much, insofar as we stop worrying about the values of fiat currencies. It matters, but not that much.

When that will happen, and at what value, I have no idea. But until then, I’m hodling.


> But eventually, Bitcoin will reach a value high enough that more and more people will start accepting it alongside fiat

I think you've got the causality there a bit backwards. The exchange price of bitcoin is mostly irrelevant to a business deciding whether to accept it as a currency or not. What businesses care about is stability, transaction fees, customer convenience, and the difficulty of implementing and maintaining the payment system. They couldn't care less what the _current_ exchange rate is.

Whereas on the other hand I suspect Bitcoin speculators care very much about mainstream acceptance of Bitcoin, and therefore wider adoption by businesses is indeed likely to drive the price up.


   Fiat currencies work because as a whole, we agree on its value.
This is fuzzy thinking, as it doesn't even make sense to talk about the value of a currency - only it's price. Mixing up concepts like this is what makes a lot of bitcoin and related conversations very muddled.

When you start off your thought with a category error, as you have here, it's hard to get anywhere useful.


You got me confused now. The price of $1 is $1, no? But the value is that I need 1 or 100 to buy a bread.


$1usd == $1usd is a tautology, not a price.

how much you need to buy a loaf of bread is purchasing power.

The price of a $1USD is always relative to another currency, you can't price it in isolation.

None of these things are valuations.


The problem with bitcoin as a currency is that it's inherently a deflationary currency which provides a disincentive to use it as a currency at all. If your BTC will buy more tomorrow than today, why spend now? Thus it turns into a speculative vehicle and not a currency and prone to a big crash.


That doesn't make sense. Of you used btc for a purchase you can always buy more. The choice isn't "do i spend bitcoin or not", the choice is "do i buy this item or not and what else could i have bought".

Why spend a thousand dollars on an item when that thousand dollars could be worth more tomorrow by buying btc with it.

Its the same choice. The currency you use is irrelevant.


The difference is in trust. if you don't trust the stability of BTC, you don't want to put all your money into it. It just means that BTC would not make a good currency to replace other currencies, even if people would trust it.


How do you run an economy on a deflationary currency?

If someone want's to start a business there is next to no point in me lending them bitcoin in the hopes of getting it back with interest. My bitcoin would increase in value regardless.

>Bitcoin will reach a value high enough that more and more people will start accepting it alongside fiat.

It has value now yet it isn't being accepted by many places. If amazon adopts it i'll change my view here. For now it's just a commodity to me.


I think bitcoin and others are way beyond being a currency or commodity. We should think of it as an entirely new kind of asset that needs new definitions and theories. People are trying to fit this new tech in their old definitions or theories and it's not working.


But when a transaction costs $5, it's tough to buy into that.


A currency is something somebody somewhere pays enforceable taxes in. That's what helps give a currency wide acceptance - there is always somebody out there that needs it.

Bitcoin is worth only its intrinsic value - which is essentially the value of the electricity used to create it.


The "blockchain" hype right now feels so much like "internet" hype in the late 1990's. Was that a bubble? Yes, but successful companies and technologies did emerge from it. People did make money too: those who started companies (even the companies that aren't around anymore), those who got lucky and invested in the few winners (like Yahoo), and those who invested broadly across the whole "internet" market.


I want to believe this argument so badly, but it's been 7 years and we still don't have a widely used application related to it. How much longer do we have to wait?

While we're on this topic, why are all Ethereum projects so damn meta? Like, the top dapps are all recursively related to Ethereum in some way (like wallets for ethereum, different ways of spending ethereum etc.) If a technology is new and exciting, shouldn't it be relevant outside of its own little meta-bubble? Like Amazon, for example. Buy stuff without going anywhere. It uses the internet but doesn't somehow recursively relate to it. Where's a similar dapp today?


ARPANET adopted tcp/ip in 1983. That's a solid 16 years before the beginning of the internet bubble. Blockchain is far from being a mature technology.


That's a tricky comparison: network connections were expensive and computers which could run an operating system which supported TCP/IP cost more than your car until the 90s. In contrast, everything anyone in the world needs to use Bitcoin has been a commodity from the day it launched.

The difference is that the average person doesn't have a need which would motivate them to use it. As soon as networks became available, people jumped on them because there were tons of things they could do: download software, chat, shop, find a date, read the news, etc. Bitcoin hasn't found that draw yet — literally the only time I've heard a non-technical person mention it was because they'd heard about a VC investing in a startup and they were wondering whether they should buy some in case the price goes up.


I share the anxiety. Bitcoin has such a beautiful potential to move money from country to country, but you cant use it for that comfortably yet.

If only that use case were to become successful, it would provide tremendous value.


Bitcoin is only increasing in value because nobody wants to sell, and the small amount that is mined daily is not enough to satisfy the speculators.

In a world where bitcoin is actually use as currency, its value would crash into the ground.


I don't think that anything new could be said about bitcoins right now, and it's been like that since summer, really.

Some people do indeed believe in them, whether for technical reasons or for simply being invested, while others just keep thinking that it will crash. Both sides have a point, and majority of the people are convinced that they are right, but there's no way to predict the future.

Let's just see what happens.


I really love Ethereum and have been invested in it for a while. I think @vbuterin and crew have a clear idea as to how to move past problems, and I find it exciting to watch the Ethereum foundation execute their vision well.

Bitcoin, on the other hand, doesn't perform its simple functions well in the short term, and seems to have very little idea on how to scale long term:

1. Transactions are still pretty expensive and take a good while to settle.

2. Proof of work as a long term consensus strategy just doesn't work. The amount of energy required to mint transactions is immense.

3. Bitcoin hasn't made the headway with corporate partnerships that I think will be critical for larger adoption.

On Ethereum's end: a movement to proof of stake, sharding with global consensus, and the corresponding lightening and whisper networks all are really exciting domains of exploration. My two primary worries here are:

1. There has not been much work yet to bring well designed languages to the EVM at this point. Well designed languages, with good testing frameworks (QuickCheck from the Haskell landscape comes to mind), and formally verified fundamentals (e.g. wallets) are critical for contracts to be viable for anything other than playthings.

2. I worry about regulation totally hammering down innovation in this arena before it can sufficiently get past the rough early days. I do cautiously applaud Russia's hesitance to regulate, in an attempt to avoid destroying innovation.

On (1), I would love to get involved writing adapters for languages or subsets of languages like OCaml or Haskell to compile down to the EVM. If anyone knows of any resources I could jump into to explore this type of project, I would love it if you linked them.


Formal verification is critical. Projects like this are necessary: https://github.com/pirapira/eth-isabelle

Paper: https://yoichihirai.com/malta-paper.pdf


Smart contracts are an inusual programming environment, both in termos of what you are doing (managing state transitions, etc) and computing resources available (CPU and RAM are very expensive).

I suspect that this is better solved by more domain specific languages instead of an existing FP language


> I suspect that this is better solved by more domain specific languages instead of an existing FP language

I don't disagree, but with the current state of current Ethereum languages: Viper and Solidity, I feel as though using the good thinking in an existing well designed language might be more worthwhile to explore in the short to medium term.


So I've been giving this a lot of thought. I mean after I lick my wounds about not buying any Bitcoin at any point ever. But alas...

I honestly don't see any cryptocurrency being used as a currency possibly ever but at least not until it stabilizes in value. You have to look no further than the real world to see what happens with unstable currencies. In countries like Venezuela for example a secondary economy forms around something stable like the US dollar.

The big problem with cryptocurrency is one of the things that many advocates claim as an advantage: there's no central bank who can affect the money supply. As much as people might, say, criticize the Fed for QE policies and central banks in general for "printing money", these things are actually necessary.

Bitcoin (et al) are like "digital gold". Gold as a currency had its place but there are huge problems with it and good reasons why the world went the way of fiat currencies.

So I see these coins being used ephemerally. For example: seller converts USD to BTC, spends that BTC on something. The seller immediately converts it back to USD so neither party has a holding period of BTC as there's too much risk attached.

That's all fine and there are definitely use cases for that. Unfortunately many of them are illegal so even though the tech is agnostic to such things, illegal uses are and will continue to be a big driver in cryptocurrency usage. This too will hurt widespread adoption.

As for the stellar rise in Bitcoin, I do think it will settle at some point for this reason: there has been a proliferation of other coins. At some point people are going to realize that these are interchangeable so you can just use whichever one you need to (again, ephemerally). New coins will fill the demand and they'll simply become another commodity.

Maybe that's the solution to the central bank problem.

Still, I can't help but wish I'd bought some Bitcoin at some point.


As someone who gets paid in Bitcoin and only has Bitcoin I can explain how it works.

I make purchases using Bitcoin or credit cards. I then sell enough Bitcoin to pay the credit card bills.


When you buy a pizza for $20 when does the FX transaction happen, at purchase time or at the time you pay your credit card bill?

I would hate to be on the hook for btc denominated loan.


When I pay my credit car bill. With my San Francisco software engineer salary the FX risk of that $20 is acceptable.


Someone care to explain how forks / clone coins are not the same as money printing. The motivation behind them are the same. Greed. I would have imagined the value of Bitcoin would have went down a lot after every copy


Can someone explain why bitcoin should be worth more than any of its forks, or any of the other cryptocurrencies? It feels to me that if anyone can fork bitcoin and create a parallel currency then I don't see why bitcoin should be valued differently, other than if people feel that it is much more "useful". But even in that case, vendors and trading markets will support multiple currencies. It seems to me that bitcoin might be useful as a conduit for transactions, but not as a store of value.


This same question could be asked about many technology startups.

Why should Uber be valued higher than Lyft?

That's a pretty crude comparison, but I'm just pointing out that just cause someone comes along and makes a clone of something doesn't mean it will be worth more than the original even if it is technologically superior.

It's true that forking a cryptocurrency required much less work than starting a company, but I don't think that the value comparison is that different.

If people believe Bitcoin should be valued higher than a clone of Bitcoin even if the clone is better, Bitcoin will be valued higher.


except that Uber and Lyft are operating companies with revenue, expenses and earnings. Bitcoin is a "currency" without inherent value, or cashflow potential. I admit, Bitcoin may have some utility, but is that utility any different from another cryptocurrency? To rephrase my question, if someone was able to clone Gold, why should Gold be worth more than the clones?


> Bitcoin may have some utility, but is that utility any different from another cryptocurrency?

Yes. It's easier to find shops that accept Bitcoin than it is to find shops that accept other cryptocurrencies. That's the utility: Being able to use it to buy stuff.

This utility is not because Bitcoin made superior technical choices, it's simply due to first mover advantage and network effects. If every place that accepts Bitcoin today started accepting other cryptocurrencies, Bitcoin would be likely to lose against those with higher transaction capacity and cheaper/more transparent fees.


I'm not saying it SHOULD be worth more. Just saying that market behaviors don't always make logical sense.

Right now most cryptocurrencies trade against Bitcoin. If that were to change it would require all exchanges introducing new trading pairs against some other coin. Not saying that won't happen, but it would take some time.

Also, yes those companies have revenue, expenses, earnings which can be used to value them. My point was let's say tomorrow I release my own uber competitor. Even if it is better in every way than Uber: Better UX, faster, easier to make payments, all robotic cars (debatable if that is better :]), etc, etc.

That does not mean that my app will gain adoption and end up becoming more valuable than Uber. Some of it has to do with brand recognition, first mover advantage, press coverage, etc.

A lot of people thought Ethereum would take over as the dominant cryptocurrency cause it can arguably do everything bitcoin and more, but that didn't happen and Bitcoin is still going strong.


Unfortunately, if (or when) bitcoin crashes while being on top valuation it will dramatically harm the idea of blockchain as a technology. It's too bad that bitcoin usually associates with blockchain.


"People are not buying Bitcoin because they intend to use it in their daily lives." This is why it's a bubble.


Could a psychological problem of Bitcoin actually be, that there are not enough of them, so that to own a single one is too expensive?

I know that you can buy fractions, but somehow it does not feel right to buy 0.2347 Bitcoin, and I actually heard people say that they are buying virtually any other Coin because it is cheaper. It is not rational, but nonetheless it is happening.


If you are holding now then I would be worrying about how to get it all out in cash a.s.a.p


Non-Paywall version (archive.is)

https://archive.fo/4xW6A


Is there a non-paywall version?


Use incognito mode and you should be able to read it.


or a vpn, if it comes to that


I didn't get a paywall - maybe try a clean browser? Unless the last sentence is not "When the crash comes, and it cannot be too far away, it will be dramatic." But up to that point the article is weak, and these last words are lame. Bitcoin price increase is embedded into it, since it has limited supply by design. It will crash and burn when most of its participants quit it - which for now is unlikely. The fact that the price is so high is no indication it will crash and burn - only that the price will go down, and then, at some point, back up again.


>Bitcoin price increase is embedded into it, since it has limited supply by design

Well no. A limited supply of something doesn't guarantee value. There has to be a need and a want for it in the first place. I could issue one of my socks a day for 20 days claiming a limited supply, but that doesn't mean they are going to be worth anything by the end of it.


dang, another paywall


[flagged]


It seems like that's what you're mostly here for. Would you please stop, read the guidelines, and then not do this again? We ban accounts that continue because it's an abuse of the community.

https://news.ycombinator.com/newsguidelines.html


Not funny — the web already has more than we needed


Money is what you pay taxes with. Period. At the end of the day, that's controlled by the government.


Love the down votes, but I'd love more to see an example where this is not the case?


The Economist is owned by the Rothschild concern; just wondering if everyone knows this.




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