1. Gold is a proof of work system just like bitcoin. When someone accepts gold as payment for some other commodity or service they are doing so under the assumption that the value will be stable because it takes at least X amount of time/labor/ingenuity/money to "create" more gold by mining it. This is what backs non-consumption commodities.
2. Fiat currencies ARE backed. They are just usually backed by a service and not a commodity. The USD for example is backed by several things: the fact that it is the reserve currency for buying oil (all oil is sold in US dollars), the fact that dollars are avoid-prison coupons for tax burdens (how most fiat currencies have been backed), confidence that the US will inflate less than other regimes and meet its obligations, confidence that the US will enforce debt obligations denominated in USD with their military if necessary.
I'm getting pretty tired of ALL CAPS hyperbole about gold and fiat currency.
Gold isn't really a non-consumption commodity. It's used in things like jewelry and compter circuits.
In other words, it doesn't just work because everybody agreed that it's a good mechanism for trade. It works because it actually has underlying value. Or, at least, I can't rule out that possibility, because it DOES have underlying value.
Or, to put it another way, suppose tomorrow I figure out a way to replace gold with some much cheaper tin-copper alloy in all its industrial applications. That's not gonna decrease the value of gold all that much. (Note that I don't really count jewellery as an industrial application -- gold is used in jewellery because it's valuable, not because it looks any prettier than other metals).
I'm not so sure about that. Gold is used in jewelry because (a) it looks cooler than silver/tin/copper/etc.; and (b) because it is really rare.
So I'm proposing the chain is:
Looks good & rare -> Valuable
I think if you were missing either "looks good for jewelry" OR "rare", it wouldn't be valuable and it wouldn't work as a medium of exchange.
This is a historical perspective. These days you could also use:
Used in industrial applications & rare -> Valuable
but I doubt that would drive the value of it up to where my former hypothesis does, if it's right.
It's easy to make jewelry out of wood, glass, and lots of other things.
Sorry, let me be more clear. The criteria for a sound investment as an asset is different from the criteria determining soundness in a currency (from the perspective of an individual holding an asset or currency).
I say that on the basis of a variety of discussions on what money is and what it's supposed to represent. The point of making sound investment is that you have faith that even if plans go horribly awry, you are exchanging your money and interest for an asset of some concrete worth (at least in the ideal).
The point of currency is to provide a broad-based and stable mechanism to ensure liquidity in economic markets. The whole point of US dollars and what the Fed is trying do is provide a solid fundamental basis upon which the US economy can function.
We can argue about the intrinsic worth of currency, but i don't think that's the point of currency. So, do i think gold is a good investment? No, i think it's way over-inflated, but if you have a big pile of gold, you'll be able to do something with it. Do i think gold is a good currency? Absolutely, positively, one-million-times NO. I think that using gold back currencies is being pushed by people (shysters) who want to further inflate the value of gold, and by people who have bought the bad arguments that the shysters have been pushing.
tl;dr: good asset != good currency
Yes, but... (you know the drill) World gold reserves are 60 times its annual production, which means that gold is mostly a non-consumption commodity.
There are many good reasons to use steel instead of gold for flatware, kitchen sinks, and refrigerators, in spite of the fact that steel corrodes and gold does not. This does not make gold "useless", it just means that gold has better uses.
Emeralds are very durable and far more rare than gold, but they are generally unsuitable as a monetary commodity because they are not malleable and easily divisible.
One distinct advantage of gold over bitcoin is that transacting in gold does not require a network connection of any kind, nor even the existence of computers.
I am interested in bitcoin, though, because of the obvious fact that it has something that neither gold nor dollars, euros, etc. have - it can be used anonymously over the internet. So it's possible to see it becoming popular enough to be "money", which is something important you can't say about something that is merely scarce. (I have to admit that I don't think it's likely, though, and I think investing all of your savings in it is a terrible idea.)
Bitcoin transactions are easily traceable, so to achieve anonymity you must take care to avoid associating your IP address with spend locations.
You can use gold over the internet as well, using a system such as https://loom.cc to handle the accounting. But again, to achieve anonymity you must take care to avoid associating your IP address with spend locations.
1. Don't put all your eggs in one basket.
2. If it sounds too good to be true, it probably is.
3. Past performance is no guarantee of future returns
4. Invest in stuff that has value.
I'd rather be a carpenter in the Catskills making 35K / year and producing beautiful products that enhance life than a Forex trader taking 10x that amount but simply sloshing capital around.
Perhaps. But if you know what you're doing, wide diversification may not be wise.
"How many insights do you need? Well, I'd argue: that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man—Warren's a lot more able than I am and very disciplined—devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple."
"Too much of a good thing can be wonderful."
And I agree that you probably shouldn't put all your eggs in one basket.
But that doesn't mean that wide diversification is the right strategy.
I think some of the greatest successes have occurred because of an obsessive focus (e.g. Apple, Pixar, 37signals, Trader Joes, Chipotle, Berkshire Hathaway, top professional athletes).
"Obsessive focus on being awesome" is not a non-diversified investing strategy.
I disagree. I think focusing on only owning/investing in "All-Stars" is a non-diversified investing strategy.
"Berkshire's CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required."
-Warren Buffett's 2010 letter to shareholders: http://www.berkshirehathaway.com/letters/letters.html
In the tech world VCs and angels seem to want this too. If they only invested in Google, Facebook, Twitter, Groupon, LivingSocial, Amazon, Spotify, etc., I think they'd be perfectly happy.
IMO, DST seems to be implementing this strategy, at least to some extent.
Only if you want to abuse the term "diversified investment strategy" to the point where it becomes meaningless.
When we say you should have a diverse portfolio it does not mean "diversely spread between good assets and crap assets". You should only buy good assets. But you should buy multiple good assets, largely to protect yourself from the fact that what you think is a good asset may in fact be crap.
Look, I understand you're trying to be contrarian here, but "diversify your assets" isn't a point that leaves a lot of room for contrarianism.
"Put all of your eggs in one basket -- and watch that basket!"
Don't put all your eggs in any basket even if you think you have perfect knowledge of it.
My home currency isn't the dollar but my app is priced in dollars and that sucks. I'd far prefer to have Euro earnings and earn a few bitcoins a month as a speculative investment.
Not many people, or at least not many people with nontrivial amounts of money, have all their assets in US dollars. Most folks own shares and/or property. As you say, US-dollar cash assets are a poor investment right now since interest rates are lower than inflation.
Still, keeping all your money in US dollars (in a big brown bag inside a zoo, perhaps) is a lot less nutty than keeping all your money in bitcoins. Even if nothing else, the US dollar has a history of relatively low volatility over the past couple of hundred years, whereas bitcoins have a history of insanely high volatility and dates back to (uhh, goes and checks) 2009.
Major changes to the nature or definition of the US Dollar occurred over the past 200 years:
- In 1945 the Bretton Woods agreement made the US Dollar the world's reserve currency
- In 1933 private ownership of gold in the US was outlawed. Gold was forcibly confiscated for $20 per ounce. The price was then raised to $35 per ounce.
- In 1913 the Federal Reserve System was created
- In 1861 fiat "Greenbacks" were issued
he would prefer most of his apps in Euro and a few in Bitcoin
That's not what extraordinarily low interest rates in the bond market say.
My guess is that the USD is seen as a safe haven during these risky times, but not a long-term store of wealth. That's why treasuries are (temporarily) high.
This statement lacks economic sense. The total market capitalization of bitcoin ecosystem is $50m doesn't mean that $50m has been transacted. If I accept your offer of $800 per bitcoin, the market cap based on this transaction will become $5 billion instead.
Therefore, the author has severely over-estimated how much money that people have put in to the market. He is probably thinking "So there are $50 million investment here, my savings are so insignificant that I don't have to count the risk."
The BitCoin economy is like a small country with a novel monetary system. Now, a big country, say the USA, wants to join because it sees benefits in that system. Normally, such a transition would have the USA print new money. In this case, the answer to "OK, sounds useful, how do we introduce this kind of money into our economy?" is not "together, we pick an exchange rate, then you can 'print' a BitCoin for every X dollars you destroy", but "you buy it from us, who got there earlier".
There also are huge problems integrating this "nobody can check where money flows" scheme into current economies. Income tax? Forget it. Indirect government control over inflation and interet rates?. Forget it.
In the end, I think some of the ideas of BitCoin may live on, but I do not see it live for more than a couple of years. Meanwhile, it will make quite a few people rich.
BitCoin consists only of technical aspects. The rest is just noise that people do around them.
Contrary to what lots of the Bitcoin aficionados might like people to think, the social aspects of it are the only part that really matters outside of a crypto mailing list. And they're also the reasons it's insane to expect people to actually use it.
Lots of people buy bitcoins but thats just consequence of the fact that bitcoins are excelent at being scarce and seem to be excelent at staying scarce and at some other things.
The government actually provides a system with exactly that property.
> Indirect government control over inflation and interet rates? Forget it.
A lot of people see that as a benefit.
there is also a Russian movie called PiraMMMida that came out a few months ago, which is the fictionized version of history. Now that movie, is pretty much exactly how bitcoin tends to be covered by the fanboys.
And as the movie points out, it comes down to pure greed, people give up real money in order to buy worthless paper, which they are hoping to unload before it depreciates...but they never do, because they keep seeing big returns...until the point when the whole "economy" crashes and you are left with nothing. An important point, is that these people knew that the currency was worthless, but because of their greed they continued buying it up and promoting it to others.
The fact that it is an ingenuous social engineering hack is merely an effect of the money supply.
Except, y'know, without any actual underlying asset. I don't think I've ever seen an asset bubble in something that was literally worthless before. Even the tulip bulbs of the Dutch tulip mania (http://en.wikipedia.org/wiki/Tulip_mania) could be planted in your garden and would look quite pretty, even if not ten years' salary worth of pretty.
Well, no, it doesn't have any unique properties. For instance, as I've said before, I'm running an alternative currency called "bitcoin prime" which has these two properties:
1. Every string of bits that is a bitcoin is also a bitcoin prime, and
2. Every bitcoin prime extant as of April 1, 2011 belongs to me (all subsequently mined bitcoins prime belong to whoever mined the relevant bitcoin).
Mathematically there's no difference between bitcoin and bitcoin prime. And that's just one of an infinite number of possible bitcoin alternatives which can be arbitrarily declared, at any time, to exist.
Your algorithm only piggybacks on BitCoin, you wouldn't be able to run your scheme without the existing BitCoin infrastructure. Also, the existance of bitcoin prime wouldn't enable you to send bitcoins, so bitcoins would still be unique.
In fact I would like to see you run your scheme. How would you transfer 1000 bitcoin prime to somebody else? Since you don't have the private keys of the real owners of the bitcoins, I don't think you could do it.
In the case of primary real-world goods, possession comes from being able to physically access the state of various matter and energy: I physically own a house to the extent that I can reliably live in it and make modifications to it and so forth. I physically own food to the extent that I can make use of it by eating it. Other people can alter the game by acting as environmental forces to change the set of available interactions.
In the case of fiat currency and economic goods, practical ownership (including but not strictly identical to theoretical legal ownership) is similarly determined, but with more of a focus on laws of people rather than the laws of physics; the former are backed by the latter, but usefully form a separate conceptual layer.
The case of Bitcoin is also analogous, but there is now a focus on the laws of mathematics as they apply to the state space in which the Bitcoin system operates, and in particular to the practicalities of computing—a strong cryptographic attack could still destroy the system.
So the reason that owning all the early Bitcoins prime is not useful is the same reason owning all the virtual dollars in a parallel system to the US banks is not useful despite being able to invent whatever such system you want. Because no one will recognize this, the amount this changes your set of available physical interactions with regard to primary goods is very small. (I haven't taken weird social goods into account in the above, but I think a similar argument applies since they also require external recognition.)
That said, I think the GP poster would do well to clarify what ey meant by “unique properties”, and perhaps whether (as I interpret it) “unique” is meant to be “of the set of currently active systems, for some fuzzy activity threshold”, thus excluding Bitcoin prime and the infinite variations thereof.
Bitcoins have literally zero value.
Please read this in context before you downvote. We're talking about bitcoin. If bitcoin is a kind of a Ponzi scheme, then it's no different from the "scheme" present in the current monetary system.
Those who get the new money first live at the expense of those who don't.
The central bank doesn't need to produce anything to create this new money.
Also, unlike the current monetary system in USA and most of other countries, the bitcoin network has no central control and after a certain point no more currency will be produced. In contrast, in the current monetary system more money gets pumped as needed.
Only two real risks. Crypto weakness or Bitcoin 2.0
Gold is intrinsically similarly useless as bitcoin. We used it as money only because it was durable and rare.
We used paper as money because strong, trustworthy entity declared that its supply will be limited and controlled. Bitcoin has this basic necessary quality but also much much more.
That is incorrect on many levels. Gold has applications in MANY things. I bet the device you used to type out that comment has a bit of gold in it.
The comparison to BitCoin and paper money makes more sense, but it doesn't. This is because BitCoin has no one backing it. If the dollar drops, well the US is backing it; and they will be forced to deal with the consequences. If someone pulls the rug out on BitCoin- might never happen, but who knows- then no one is responsible. BitCoin is a fun game, and that is all it should be. Such rapid deflation will not go on forever.
We still have a more gold that it is put productive uses. Gold reserves/production ratio is 60. No other commodity comes even close. So most of the world's gold is similarly useless as bitcoin, and more will be if some day gold will be re-monetized.
But, maybe, a better analogy would have been, dollar (outside of USA) is similarly useless as bitcoin.
Yes, but that's not what makes it so valuable. This was discussed elsewhere but copper, for example, has many more industrial uses than gold but because it's not this one special metal it isn't worth as much. Essentially, there are real applications for gold but those alone do not account for its high value.
Gold is expensive not only because of its applicational value(medical, space, electronics) but also its perceive value(jewelry, shiny, ect). BitCoins are perceived value.
Also, gold is used in different conditions than copper. Remember copper oxidizes which increase resistance and can even stop a circuit from functioning.
I think the price of gold is ridiculous- 1,500GBP a lbs- but it still has real value with some of that perceived- social status- value tacted on.
http://www.youtube.com/watch?v=lONRZNCuZc4 starts around 1:30
I am not a gold advocate, but a raw resource enthusiast. Copper and its alloys are 100% recyclable and very easy to do! However, gold is not as easy to recycle as copper; and usually very harmful. I think mining is horrible, but there are reasons to the madness. ...until there is a better way.
Isn't it deflation if you can buy more with the same amount of the currency?
How might someone go about doing this?
1. Government shutdown
2. BitCoins P2P network is very vulnerable to denial of service attacks; ones that actually cost money!
3. Public Node can be tracked; no more anonymity.
4. Technical merits of the crypto implementation have not been fully tested; is there a possible flaw?
5. Social engineering and one-time inflation.
6. Unreliable and opaque banking organizations; no one is backing it.
There are many more, and they could all be fixed if bit coin was a centralized currency system, but it is not. It is too soon to say "BitCoin is ridiculous and will never work", but someone with a motive and means can definitely make a miners life hell.
Here are some things BC has going for it though!
1. Distributed with no single point of failure.
2. No "mint"; could be a bad thing.
3. No individual company can be arrested and shut down.
The guys developing Bitcoin should take a look at the Phantom protocol then, which is supposedly very resilient agaisnt DDoS attacks.
No, the collapse is more likely to happen on its own. At some point the massive increase in value must draw to a close. What happens then? Big bitcoin holders no longer have an incentive to hold onto their millions of dollars' worth of bitcoins "Hmm, time to sell some of these bitcoins". Millions of bitcoins hit the market and find no buyers at the quoted price. All of a sudden the price is a lot lower, folks panic, drives prices even lower.
In an asset where the only incentive to hold the asset is the massive increase in value, panic selling happens as soon as it looks like the massive increase has gone flat. The steeper the increase, the steeper the decrease. That makes bitcoin unlike gold.
Worse yet, laundering money on this basis will almost certainly come with an increased cost to trade through another currency, especially if there is legal risk to the parties doing the laundering.
It's not like laws will stop financial trading or traders, but if you're declaring your taxes as you're legally obligated, presumably there's still a paper trail indicating irregularities if you're funneling your bitcoins through dongs.
Currencies made by governments routinely lose >99% of value in few weeks. How this "backing" helps if you lose everything? In my country it happened 15-20 years ago.
Also even US dollar drops every year.
woodall didn't say dollars won't hyperinflate. (S)He said the US "will be forced to deal with the consequences". Not the same.
Seriously, government debt is backed by the fact that the government has the legal right and the practical ability to confiscate as much of its population's wealth as it feels like. I don't like US government debt at all, but it's nowhere near the point at which the don't have the ability to pay it back.
It is far more likely that US government will do what it and every other government always has done: either inflate the currency or default or declare war or some mixture thereof.
1. There is a difference between "This is useful, I will use it," "This is useful, many people will use it, I think it is going to succeed," and "This is useful, I will invest in it." I have recently started using a text editor called Byword. I quite like it. But I am not rushing out to invest in it.
2. There is also a difference between "I will invest some of my money in it," I will invest all of my money in it," and "I will invest all of my money and all of the money I can borrow in it."
If we take a thousand people and instruct each of them to invest their life savings and everything they can borrow into a single, randomly chosen investment, some will get very rich, richer than anybody who avoids borrowing money for speculative investments, and much richer than people who take a balanced portfolio approach to investing.
But that doesn't mean it's a good strategy.
(I'm referring to "if this investment doesn't pay off, I'm jumping out a window" risk.)
I'm just looking for interesting stories, and that sounds promising.
The beginning of the end occurred on 16 January 1995, when Leeson placed a short straddle in the Singapore and Tokyo stock exchanges, essentially betting that the Japanese stock market would not move significantly overnight. However, the Kobe earthquake hit early in the morning on 17 January, sending Asian markets, and Leeson's trading positions, into a tailspin. Leeson attempted to recoup his losses by making a series of increasingly risky new trades (using a Long-Long Future Arbitrage), this time betting that the Nikkei Stock Average would make a rapid recovery. However, the recovery failed to materialize.
If I have ten million dollars, and I really think that tulip bulbs are going to go up by a factor of a thousand, it's still dumb to invest all my money in it hoping to get ten billion dollars. Instead, I invest half my money in it, because the difference between having five billion dollars and ten billion dollars is (in practical terms) small, whereas on the losing side the difference between having five million dollars and being completely broke is very large.
There's one exception to this: entrepreneurs frequently put all their money into their own company. Why? Because nobody else will, and because if the company doesn't get that money then the company will collapse. Wise? Maybe, maybe not, but it's wiser than sticking all your money in some random asset which, if not bought by you, would be bought by somebody else.
He wrote an article about it but I can't find it right now.
Soros shorting the pound. Buffett investing in Visa.
Bitcoin is going to go through the roof, speculators or not. The guy in the article is taking a calculated bet that will pay off.
(Not that I disagree with him in general, I just thought this is something to take into account reading this article)
Asset bubbles run on the bigger fool principle, and they end when you run out of bigger fools to sell to. If folks have really started cleaning out their bank accounts and borrowing money to buy bitcoins (an amount of bitcoins which, incidentally, you probably could have picked up for twenty bucks just six months ago) then it seems to me that the world is about to run out of bigger fools.
In this particular case, foolishness is denoted merely by their willingness to pay high prices for bitcoins. While there may be out there in the general population plenty of people objectively more foolish than this guy, they're less likely to fall for this.
This is the other big problem I have with bitcoin: it seems to exist in a very insular, very geeky world filled with people who don't really understand the non-geek world out there. Bitcoin will never really jump from the geek world to the real world, because the general population won't even understand its supposed benefits, much less give a damn about them. A few geeks may be able to talk their poor grandmas into buying some, but that's about it for general market penetration.
This market sounds easy to get into and hard to get out of - especially in a hurry.
...saying that. I think the value of a bitcoin is probably going to go up. Everyone loves a bubble.
At first I had some trouble understanding why you couldn't just had a client and create easier coins. The thing is, you can, but the network won't recognize them. The key to the system's security is that as long as 50% of the bitcoin nodes agree on that the current difficulty level is you can't inject 'fake' money into the system.
Right now moving money into and out of the system is a bit difficult. Mining is not worth the electricity it costs you, unless you have a GPU and join a mining pool. The 'value' of a bitcoin is very volatile, as tracked on the http://bitcoincharts.com site.
Isn't it quite easy to spawn a few million malicious nodes?
Investing all your savings in anything is a risk. Investing everything in a risky startup seems the height of madness... unless you don't have a lot of savings, I guess.
But every transaction is public. Is there anything stopping the NSA (or Amazon, or me) from subscribing and adding up his current balance? Sure, it'll be linked to his bitcoin address, not his name, but that can't be all that hard to map, can it?
Posting a static bitcoin address on your website and saying "send money here" is not considered best practice.
Can you explain why?
This is also the point when governments will start aggressively working to shut it down.
Makes you think about what money is. We're so used to it that it seems trivial but if someone explained to you about their idea for this new thing called money you would probably think it was stupid, pointless and a way of scamming a goat for some stupid round things.
So much of our world wouldn't exist without money.
Serious question: Is there currently some easy way of buying and holding bitcoin without having to know anything about it, install anything, compile anything or be able to justify it or explain why to your wife? Perhaps some relaible online wallet?
Just an incentive to learn a bit more about it.
Clearly a 'Bernard Madoff 2.0' pyramid scam.
Only profitable for the early adopters, pay by the last suckers whom enter.
Once some person tries to cash a $50,000 BTC account it will go down. The market depth is simply not there it seems. The money supply is not regulated vs. the trade volume, right?
-Because the demand to buy bitcoin is low, the likelihood being able to sell the bitcoin whenever he wants (ideally at height of bitcoins worth) is also low. This is the same reason that penny stocks are difficult to make a profit it. While the value may go up significantly, you can't realize this profit until you find someone to sell it to (and in order for them to buy it, they have to think it's going to go up even further).
-Currently there aren't too many companies that accept bitcoin for products or services.
-Any currency is only as valuable as the people using it believe it is (ie. the dollar is only a piece of paper, but because the seller believes that its worth is equivalent to a candybar, he will trade it).
-Once people realize that they cannot use bitcoin for goods or services, the likelihood is that there will be a mass exodus, and the price will fall rapidly as people want to sell their un-useable bitcoin for a currency that still has value. With so few buyers, the discount will likely have to be pretty hefty in order to attract other buyers into a falling investment.
If this trend continues, my $8 invested for 1 bitcoin will be worth $800 million in a year!
"Why I'm Putting All My Savings Into BITC". As soon as the pump scheme drives up the stock, you dump it and move onto the next thing.
I'm not saying mazsa is doing this, just that it could serve the same purpose. "Now that I'm fully invested in bitcoins, please buy it up so I can sell it later at a better price."
Why would a company do that?
EDIT: And before people reply, "it is P2P", someone runs the web site. Someone owns the code repository. Or some group. There will always be a small group with power to muck with the system. What stops abuse?
Bitcoin supports transactions as small as 0.00000001 (1e-8).