Four days ago, Bitcoin was under $2 USD. Now it's over $4 USD (depending on when you refresh the page). There are 6 million bitcoins in existence, and trade volume is only about 54,000 according to the biggest exchange. There aren't enough bids/asks to soak up more than about $100 USD without throwing the exchange rate one direction or the other.
For example, right now (as I write this) exchanging $1000 USD for some Bitcoins is all it takes to push the exchange rate up $0.10 from $3.77 to $3.87.
What a lot of Bitcoin newcomers don't realize is that Bitcoin depends on 'mining' to generate new bitcoins. Computers run cryptographic hashes to find the 'winning' has which is less than the current difficulty target number. The computer that finds this hash is awarded 50 BTC. The difficulty target is automatically adjusted upward to keep new bitcoin generation at a constant pace.
Some quick research shows a handful of big players in the mining market who have invested heavily in high-end GPUs for dedicated bitcoin mining, some with over 50 GPUs running 24/7 for months now. These guys are bound to have huge quantities of bitcoin they are eager to unload when the price is right. Meanwhile, news coverage is driving exploding popularity, which appears to be pulling the exchange rate sky high. On paper, many of these guys have become overnight millionaires just by running a bunch of computers 24/7.
Of course, as these players cash out the exchange rate will fall. These guys are too smart to sell all at once and flood the market, but with volatility like this I'm willing to bet a lot are eager to pull their bitcoin out of the game before the bubble pops.
Meanwhile, hardware enthusiasts all over the internet are rushing to buy GPUs to dedicate to mining. They don't seem to realize that the bitcoin system automatically adjusts to keep the bitcoin generation rate constant at 50 BTC per 10 minutes. As the mining market becomes flooded with new 'miners' the difficulty will climb rapidly, until it becomes unprofitable to run a GPU if you have to pay for electricity.
Finally, bitcoin is highly illiquid. My research was brief, but I couldn't find an easy way to exchange small amounts of BTC for USD that didn't look terribly sketchy or involve a lot of fees. Stores aren't eager to accept bitcoin because the exchange rate at the moment can easily swing 10% between when the user presses 'check out' and the transaction is processed.
The bitcoin system is a very interesting concept, and it was clearly implemented by some very intelligent people. But as it currently stands it's just a playground for speculators and market manipulators. Expect some carnage in the coming months.
As a bitcoin veteran, I expect carnage, always. I learn that the hard way several months ago.
Moreover, I tend to be fatalistic about the price of bitcoin. Whether or not the market is manipulated, as long goods and services are popping up in the bitcoin economy, we'll be alright in the long run.
Exchange rates are set by supply, and demand. Bitcoin has through technical means controlled the supply part of the equation, but how can it control demand? So fluctuations in demand will cause changes. In the growth period, Bitcoin can't be stable, and it would be impossible for any currency to do so without extremely precise statistics on how a currency was being used and control over inflation (so you could, say, adjust supply exactly to match fluctuations in demand).
In the long run, most of the obvious equilibriums for Bitcoin are very far away from whatever it's currently trading at. If Bitcoin fails and becomes playmoney, then it's overpriced by hundreds of times; if it succeeds and replaces any sovereign country's currency, then it's undervalued by hundreds or thousands or millions of times. So in the long run, you must expect it to not be 'stable', but to change drastically - in some direction.
(If this isn't convincing, try applying the double reversal test Nick Bostrom devised for combating the status quo bias (http://www.nickbostrom.com/ethics/statusquo.pdf) and anchoring (http://en.wikipedia.org/wiki/Anchoring). Suppose that Bitcoin were at $2 rather than $4. Would you be saying 'obviously the right price for Bitcoin is $4, so I should buy some'? I doubt it. )
When Bitcoin is supposed to be stable is when demand for it is not varying; supply will be stable by the Bitcoin architecture, and hence, the overall equation wouldn't change in that situation. This differs from fiat currency in that you are only vulnerable to changes in the demand part of the equation - there is no Fed or other cabal that can hurt you by manipulating the supply part of the equation.
Imagine Amazon starts accepting bitcoins. The rate will probably skyrocket to more than 100 USD.
Actually, digital currency is inevitable, it's only a matter of time till there's some global currency not controlled by one government. Bitcoin is a pretty good candidate.
So far the US reaction has been positive. The CIA is paying BitCoin members to give talks about it. As someone pointed out in a Bitcoin forum, unlike Liberty Dollars or E-Gold, Bitcoin could prove to be a useful way of securely and anonymously paying people off
Personally, I think assassination markets could be a net benefit (think of the bounties on someone like Kim Jong-Il), but then, I like them enough that I write stories about them so I'm biased: http://www.gwern.net/fiction/The%20Ones%20Who%20Walk%20Towar...
"think of the bounties on someone like Kim Jong-Il"
Did you ever think of the bounties on anyone inconvenient to governments or big businesses? The founders of The Pirate Bay, Julian Assange and Bradley Manning, BP whistleblowers, environmental activists and climate scientists – would society be better off with them all dead?
One Kim Jong-Il is worth all of Pirate Bay combined, and heck, throw in Assange & Manning as well (they've informed the public, helped out the historians a lot, and caused some irritation, but I see few concrete changes to stack up against hundreds of thousands of dead).
Pennies is a bit extreme. The risk in the enterprise is pretty high, expert assassins rare, and amatures likely to get caught.
While an expert assassin may take a job on a random Joe for on the order of a hundred dollars, an amateur with any sense will not, and therefor the price will be rather high.
And, even if assassinations of pedestrians becomes realistically common..On the order of car crash mortalities, its at least a cause of death that may make people consider how they act toward one another.
e-gold was a centralized system. When they got shut down, you no longer had the ability to receive value for your holdings.
Bitcoin is decentralized. The ability to spend is protected by the private crypto keys in your wallet stored locally (assuming you store your bitcoins on your own computer.)
As long as there is a network of nodes out there ( current view: http://maps.google.com/maps?q=https://smsz.net/btcStats/bitc... ) and your software can reach one or more of them means:
1.) you still have the ability to spend your bitcoins at any time
2.) the recipient has the ability to know that those coins were not spent previously
Shutting down e-gold involved taking down the center. Bitcoin has no center, no "master node" -- only peers.
The most central aspect of bitcoin is found in the exchanges. Those worried about an e-gold situation happening again do not have amounts of any significance (either USD or bitcoins) held by an exchange.
yeah; this is what scares me more about bitcoin than e-gold.
With E-gold, the government went after the owners, and they were able to shut the whole operation down; I lost maybe two hundred bucks worth of gold.
Now, when the government decides to shut down bitcoin, what happens? there is no central 'off switch' - just like drugs, they will have to go after the users, or like illegal information, they will have to go after the viewers.
I mean, I think I'm being a little bit paranoid here, but I just don't see the government leaving a system that works so well for money laundering in place, and all the things I can think of the government doing to dismantle bitcoin seem like they would be quite unpleasant for the users, over and above just losing the money invested.
Trying to go against users is hard, the government is not as dumb as the music industry, to play whack-a-mole versus grandmothers and kids. My guess is they would attack exchanges trading BTC <-> USD. There are fewer, and separating the BTC economy from the USD one would make the currency significantly less attractive. Even the threat to do so would crash its USD price.
>the government is not as dumb as the music industry, to play whack-a-mole versus grandmothers and kids.
I think the war on drugs would be a counterexample to this statement. Especially considering that legitimate bitcoin use is largely confined to nerds, I don't think the government would have a hard time painting bitcoin users as people who ought to be punished.
When the government wages its war on drugs, it cuts supply of drugs, which raises the price, which raises the incentives to smuggle drugs. Meanwhile, there is a certain contingent of people who will basically do anything for drugs. If the government could push the price of drugs for them above "all economic value a person can possible generate in any manner including through illegal means", they would win, but they just can't do that effectively.
When the government goes after a BitCoin exchange, they make BitCoins less valuable by raising the transaction costs associated with them, and severing the BitCoin economy from the general global economy. This will cause BitCoins to reduce in value against the currencies traded in the general global economy. This will cause people to be less inclined to use them because they will be less valuable. In this case, where the economic characteristics of drug trade fights against the government's goals, the economic characteristics of alternate currencies give the government a multiplicative advantage in its efforts to shut it down.
It is not a defense of BitCoin that the government can't shut down drug trade. It's a different problem. Indeed, the question BitCoin faces is even if the government never takes exception to it, will the multiplicative advantage that any attempt to shut down or game BitCoins will obtain be insufficient to kill it or gravely wound it? I don't think the government will have a need to demonize BitCoin users, they will be perfectly capable of shutting it down without that effort.
One thing about bitcoin... since there's no central server, the bitcoin economy can live all over the world and there's no single door for the feds to bust down. A war against it would look like the music companies trying to shutdown pirates in developing countries. A decade long crusade of state department aggressive diplomacy to get a global 3 strikes copyright policy enforced.
The whole online poker kerfuffle is not an unrelated idea here.
The idea is that online poker chips were being used for money laundering, and the first point of control attempted was the exchange of chips for USD via banks.
Mining is supposed to fade away in importance - it was just a way to bootstrap. And huge computing power applied to mining means that it's so much harder for a hostile entity (hello, US government) to plug in a supercomputer and steal control.
Right now it is trivial for a government, botnet owner, or even a sysadmin with access to several thousand machines to completely corner the bitcoin market and actually use a cartel to "steal" bitcoins from others.
Bitcoin is not controlled by a central authority. Instead it is controlled by any specific individual or group that is able to get about 30% of the computing power of the network. While this is very expensive for your average middle class person, a typical millionaire or billionaire (not to mention government) could completely dominate bitcoin overnight.
Bitcoin is NOT democratic. It's ruled by people who are wealthy in conventional currency because those are the people with access to the most computing power.
This is either a bubble or probably the most awesome J-curve of the decade.
Either way, I am waiting to see what happens. I have more than enough bitcoin for a black swan hedge. I am also going to be with bitcoin to the bitter end or the ultimate victory over state-controlled monetary system.
"This is either a bubble or probably the most awesome J-curve of the decade."
The average American isn't smart enough to understand what bitcoin is, how it works, how to buy them, how to spend them, etc. In five years bitcoin is going to be just another failed standard like i-names or GPG, something that doesn't ever get used except for in very niche enterprise usecases or when nerds are trying to impress other nerds.
The average person isn't smart enough to understand what a stock market is, how it works and how to buy/sell stocks, either. That doesn't mean they're not used.
The reason they are used is that there is an entire abstraction layer around it, all you have to do is give your money to the guy whose face is on the billboard. As a crypto currency, bitcoin is fundamentally incompatible with this model.
There's nothing to prevent that level of abstraction being built around bitcoin. The average credit card user doesn't understand what's going on in the background, just that money from their bill is transferred to the merchant.
1. Average person knows how to use paypal (or thinks they know).
2. Setup paypal like web-interface for bitcoin e-wallets.
3. ...
4. Profit!
Have a look at the official bitcoin application and the paypal panel. There is not much difference and bitcoin panel actually is simpler since you can do less actions there.
So say I'd have a blog with a huge reach. I hear about bitcoins. I buy a million for $4 each. I blog about it. Next day it's at $8. I'd sell the bitcoins, maybe 10000 a day to not let the market crash, and in 3.5 months I've got $4 million more than I used to.
ha! that reminds me of my Economy class in high school. We used to do a weekly game, where in the beginning of the year we'd have a certain amount of money, and we'd have to buy stock. The teacher would every week update us with the latest stock information, and based on that we'd have to make decisions. The person with the biggest amount of money at the end of the year won.
So I picked stock of a company which was basically bankrupt already, but was still on the stock market (why I don't know, I'm not an expert.) I think the stock was £0.02. So I waited a few weeks, and it happened to be at £0.05. I sold everything, didn't do anything for the rest of the year, and won. Didn't make the game very exciting, but at 15 years old I mainly cared for winning :)
When we did a stock market game in high school, we weren't allowed to use penny stocks.
I was so excited to find stocks that were doubling or tripling daily, only to realize how worthless it'd be in real life.
If anyone out there is a trader that works with penny stocks, I'd love to hear your insight. Is it possible to "game the system" by working with just a few (10-100) shares, instead of large holdings?
The main issue with small odd lots of penny stocks is that you'd be killed by the commission costs. Most high school "stock market" simulations ignore transaction costs to keep things simple.
And I thought bitcoin wasn't going to go anywhere, I made about 3000BTC back in 2009 and just over time forgot about it and lost my 'wallet' id (a hash), kicking myself in the ass now.
There's pretty decent volume and the bid/ask spread is gradually tightening. Just for some perspctive, the US Dollar index futures trade about 15,000 contracts a day, (granted they are much easier to convert).
Just as a quick reminder, since most people commenting don't understand how bitcoin generation works.
It is not possible to "corner the market" by having more gpu power than other people. The btc algorithm was designed to only produce bitcoins at a constant rate. Adding a million more systems trying to calculate the answer to the next hash block only makes it a million times slower.
If the bubble were to pop tomorrow and it went back to being a network with only a few hundred low power systems, the btc network will auto correct to produce new bitcoins in relation.
It's very easy to game the system. You need roughly 30% of the network's total computing power and you can "steal" bitcoins from others.
The creator of bitcoin outlines a strategy for stealing bitcoins in the FAQ. In it, he claims that 50% of the computing power is necessary to do this. Later improvements to the technique (and simulations by various people) have shown that you can do it in much less, possibly as low as 15% of the computing power.
Bitcoin is highly vulnerable to a nation state or intelligence agency that wants to own it. It is also highly vulnerable to rich entrepreneurs who want to make a profit by cornering the market.
The NSA could destroy bitcoin in the blink of an eye with only a tiny fraction of their supercomputer power. Likewise for botnet operators and other professional extortionists who no doubt have their eye on bitcoin. The fact that bitcoin hasn't been destroyed yet is just a demonstration that the currency is not really worth anything right now.
My (non-expert) understanding of the issue is that a having majority of the mining computation gives you the power to roll back transactions, but not to forge transactions that transfer money to you; and that the risk of having a transaction be rolled back on you can be reduced just by waiting for the block chain to get longer.
rolling back a transaction and claiming it yourself is a kind of stealing
more advanced ways of stealing bitcoins have been developed and successfully simulated, for instance the dominant cartel can actually go several blocks ahead of everyone else but not advertise them, and then only roll back other people's finds when those people advertise them.
For instance the cartel using superior cpu power actually solves 2 blocks ahead of everyone else but does not tell the other nodes that it has solved it. It waits until someone else advertises that they have solved the block and then releases their own and rolls back the other person's.
There are many optimizations that can be made to improve this exploit. The exploit completely ruins any hope for bitcoins being an unmanipulated currency.
Even in the base case scenario where multiple cartels compete to dominate the bitcoins, the average person will be squeezed out and all the advantage will go to the cartels. It will end up WORSE than other currencies based on the credibility of the various governments.
The bitcoin concept is inherently flawed because cpu power is not democratic. Especially when it comes to the implementation details of bitcoins, which are actually very inefficiently computed on a regular person's computer. Purpose-built bitcoin computers are orders of magnitude more effective than normal computers, compounding the other issues with bitcoins.
The fact that most people's CPU cycles are migrating toward mobile battery powered devices does not help either. How many people do you know who still have bulky desktop computers plugged into the network 24/7 rather than mobile battery powered devices that spend more time offline than online?
It is not possible to "corner the market" by having more gpu power than other people. The btc algorithm was designed to only produce bitcoins at a constant rate. Adding a million more systems trying to calculate the answer to the next hash block only makes it a million times slower.
Which means you mine them as fast as everyone else used to, while everyone else mines them at one millionth the rate they used to.
There's this received wisdom among sociologists that three prerequisites for a stable country are laws, someone to enforce them and a judiciary. I mention this since Bitcoin is creating it's own economy which is analogous to a virtual country. The major benefit of Bitcoin, it's lack of jurisdiction, may also be a disadvantage. As the first disputes arise, hopefully a body of precedent will be developed that strengthens the currency rather than destroys it.
An economy is based more on the trust between the actors within it than on its medium of exchange or the goods and services being exchanged. Bitcoin doesn't address this aspect. Because fraud and collusion are still possible in a Bitcoin economy there exists the possibility of both currency instability and the creation and enforcement of monetary policy.
An irrational public can be just as damaging to a currency's value as an unwise central bank or government.
Regardless, I find Bitcoin to be a very interesting system and I'll keep tabs on its development.
It looks like had I know the article was going to air, I could have doubled my money almost overnight. I would expect the price to stop dropping any time now.
Oh goodie, another part of our economy that ignores the true cost of energy creation. Has anyone looked at models of how this system might work if the miners had to pay significantly more money for electricity?
With the term "energy creation" you are ignoring the first law of thermodynamics.
But apart from nitpicking I agree with your point. In the end the whole economy thing boils down to "having the capacity to actually do stuff.", which ultimately requires energy.
Giving a unit of currency to someone is like giving a promise that he can actually DO something later.
In the case of bitcoin, the energy is used (dissipated to heat) during the creation of the currency itself. No substantial backing of the curency beyond that.
But then again this is true for any other currency floating around right now.
I've been watching the price of BTC rise pretty steadily in the last few days but I can't bring myself to believe that this price range is in any way sustainable. $4 per bitcoin? Not even the EUR and GBP have ever reached that in my recollection. I guess it if does stay like this mining is going to become pretty lucrative and certainly financially worth it.
$4 per bitcoin? Not even the EUR and GBP have ever reached that in my recollection.
Keep in mind that the exchange rate is a function of several inputs, one of which is the rather arbitrary fact of how much total currency is in circulation. There are many fewer BTC than USD, EUR, GBP, etc. (about one million times fewer, to be precise). And conversely, there are many more JPY in circulation, which is part of the reason the yen is much cheaper than the US dollar.
That doesn't mean there's not a BTC bubble. There may very well be. But you can't do the comparison you just did and expect it to be meaningful. If the BTC protocol had specified the decimal point one place to the left, BTC would be trading at 0.40 USD right now, not 4.00 USD. There'd just be 10 times as many.
What you have to do is ask how much total wealth the world will want to store in BTC, and then divide that by how many BTC there are. The answer to the first question is a huge unknown. The answer to the latter is specified by the protocol: 21 million.
Given the current valuation though of $3.5 and the fact that there are approximately 6M bitcoin in circulation, that gives quite a large valuation on what seems to be a very limited market at the moment. You are right though, my initial simple comparison of numbers leads only to inaccuracies
You seem to be knowledgeable in this field. I have no idea about it and would like to get a small insight. Can you recommend a tutorial (Preferably less than 40 pages) that explains some of the main concepts?
That's pretty much the same as saying: What? $3 for a Big Mac? (I'm assuming they're $3).
There will only ever be 21 million BTC. Considering that according to the US deficit, there exists at least 13 trillion USD, that would put the final exchange rate at $620K USD per BTC.
That is only possible, mind you, if BTC actually catches on.
I wonder why they decided to make it 21 million BTC total instead of a larger number. It seems like you'd run into a situation like when I bought a shirt in Bahrain for some low-ish number of Dinar, not realizing that it was much higher in USD. Spending 0.1 BTC doesn't seem like it should be a lot, even though it could eventually be worth quite a bit.
It's just that people have become accustomed to price inflation so things should just "cost more". Does it make more sense for candy to cost $0.05 or $1.50? Given improvements in efficiency, you'd think that the price of candy would have gone down from what it was years ago.
However, due to inflation from the monetary system, everything keeps going up.
The advantage of BTC is that it is infinitely divisible (to the limits of floating point, which will be interesting).
In the USD system, hoarders lose, in the BTC system, hoarders win.
I'm not sure which I prefer. I'd like a decaying cryptocurrency that guarantees money remains in circulation.
"Technically, a Bitcoin can be divided down to 8 decimals, so 0.00000001 BTC is the smallest possible amount."
So instead of talking about "0.001 BTC", we could say "1 mBTC" or "1000 μBTC". The smallest amount is then 0.01 μBTC. The total amount is 21 trillion μBTC. For a comparison: As of december 2007, there were 829 billion US dollars in circulation.
Ah, you are correct. But I think that limit was said to be arbitrary and I think it is only set currently due to FP limitations. I am probably wrong though.
In any case, I think the terminology will evolve as you have suggested.
In your example of money in circulation, you have to include the debt money as well though because that is traded as if it exists.
I know what you mean... I've actually said that leaving out the decimal point altogether and having 210 quadrillion indivisible bitcoins would have been nice. But then you wouldn't get to see articles about dollar parity, dinar parity, etc. right now, when the project needs attention the most.
How can the SEC not be all over this? It's amazing to me that it has either escaped its attention or -- possibly -- it has absolutely no idea what to do about it.
If bitcoin were an equity, then the U.S. Securities and Exchange Commission might be looking at it.
But even if they did ... if you are in Brazil, Russia, India, China, or wherever, ... how would what the SEC does be relevant? (yes, I'm being purposely obtuse, but remember that bitcoin is data, and as such it knows no borders.)
There are lots of kinds of data that are illegal to possess. Classified documents, insider information, copyrighted music, etc.
And remember certain US agencies have huge power outside the US. The DEA and the IRS come to mind.
I don't know which US agency will flip out when bitcoin becomes popular, but I'm quite certain one of them will, once it becomes widespread to exchange for illegal items, and used for money laundering.
It's already widespread enough to use for some forms of money laundering. If you want to secretly move money from the US to Europe, just buy BTC in the US, deposit them on Mt. Gox (whose domain is registered in Japan, so I assume the servers are also in Japan), and from there sell the BTC and deposit the resulting money in your Swiss bank account.
It's also widespread enough to use instead of a Swiss bank account to hide money. Just move the money into a Bitcoin wallet, encrypt the wallet, and store copies of it on as many computers, in as many countries as possible.
For example, right now (as I write this) exchanging $1000 USD for some Bitcoins is all it takes to push the exchange rate up $0.10 from $3.77 to $3.87.
What a lot of Bitcoin newcomers don't realize is that Bitcoin depends on 'mining' to generate new bitcoins. Computers run cryptographic hashes to find the 'winning' has which is less than the current difficulty target number. The computer that finds this hash is awarded 50 BTC. The difficulty target is automatically adjusted upward to keep new bitcoin generation at a constant pace.
Some quick research shows a handful of big players in the mining market who have invested heavily in high-end GPUs for dedicated bitcoin mining, some with over 50 GPUs running 24/7 for months now. These guys are bound to have huge quantities of bitcoin they are eager to unload when the price is right. Meanwhile, news coverage is driving exploding popularity, which appears to be pulling the exchange rate sky high. On paper, many of these guys have become overnight millionaires just by running a bunch of computers 24/7.
Of course, as these players cash out the exchange rate will fall. These guys are too smart to sell all at once and flood the market, but with volatility like this I'm willing to bet a lot are eager to pull their bitcoin out of the game before the bubble pops.
Meanwhile, hardware enthusiasts all over the internet are rushing to buy GPUs to dedicate to mining. They don't seem to realize that the bitcoin system automatically adjusts to keep the bitcoin generation rate constant at 50 BTC per 10 minutes. As the mining market becomes flooded with new 'miners' the difficulty will climb rapidly, until it becomes unprofitable to run a GPU if you have to pay for electricity.
Finally, bitcoin is highly illiquid. My research was brief, but I couldn't find an easy way to exchange small amounts of BTC for USD that didn't look terribly sketchy or involve a lot of fees. Stores aren't eager to accept bitcoin because the exchange rate at the moment can easily swing 10% between when the user presses 'check out' and the transaction is processed.
The bitcoin system is a very interesting concept, and it was clearly implemented by some very intelligent people. But as it currently stands it's just a playground for speculators and market manipulators. Expect some carnage in the coming months.