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Thoughts on Bitcoin (samaltman.com)
239 points by patrickod on Dec 1, 2013 | hide | past | favorite | 197 comments

I normally love SA's writing, but this opinion piece is really narrow minded and I think misses the point.

cs702 had a fantastic comment a few days ago in another thread [1]:

    Bitcoin befuddles experts who analyze it from a narrow perspective,
    because  it is not just a new medium of exchange or a new store of
    value: it is also a new kind of point-of-sale payment system (one
    that doesn't require payment processors), a new kind of global
    financial transfer system (one that doesn't require financial
    institutions), a new kind of time-stamping certification system
    (one that doesn't require notaries or county clerks), a new kind of
    contract-enforcing mechanism (one that doesn't require lawyers), etc.

    With rising global adoption, many new kinds of applications are likely
    to be created to take advantage of the Bitcoin network, the design of
    which even specifies a built-in script for defining and executing new
    types of transactions involving any arbitrary number of parties.

    In short, Bitcoin is a technology platform -- one that is benefiting
    from network effects.

    It may fail as "money" (in a narrow sense) and still succeed as a
    global platform.
Even from SA's narrow perspective, it's not clear why "legitimate transactions" is a requirement for success. As long as there is a large enough community of people who want to use it to transfer value for any reason, it'll continue to sustain itself.

The one takeaway he offers in closing is spot on though: "Just as it’d be stupid to convert all your dollars to bitcoin, it’d be stupid to not pay attention."

[1] https://news.ycombinator.com/item?id=6810839

Sorry, I think the legitimate transactions idea is actually one of the stronger parts of this piece.

> As long as there is a large enough community of people who want to use it to transfer value for any reason, it'll continue to sustain itself.

That's precisely the problem.

A community of speculators will only remain stable or increase in number where the price of the asset continues to grow. In the case of Bitcoin, the price can only grow if legitimate transactions increase, or if more people speculate. With every increase in price the number of people willing to speculate decreases, to the point where you run out of greater fools to sell the asset onto, causing a crash.

That means that an increase in legitimate transactions is really the only way to sustainably grow the value of the network, because it is the only method resistant to falls in price.

This is one of the biggest problems with so many publications, they focus on a single aspect of bitcoin. I've started to think of many discussions about bitcoin as equivalent to "But email is worse than a letter, it will fail", "Email can never replace parcels", "But is email a letter or a postcard?", etc.

It's just absurd, bitcoin is something completely new, and nobody knows yet how we will use it, and what it can replace.

This is a great comment, thanks for sharing it here. There seems to be a demand for a synthetic currency that is not subject to monopoly and manipulation by a political authority. Right or wrong, people do seem to be putting there money where there mouth is. The way this author puts it, its like bit-coin is a combination of gold, farmland, london real-estate, post-war modern art, and Square/stripe all rolled into one. If nothing else, BTC is "on trend" in multiple dimensions. And connecting the dots in an interesting way...

Is buying contraceptives in a Muslim country a legitimate transaction?

What does it matter what your government says is legal or no. The currency will take off even if it is just used for illegal transactions its entire life.

The following graph shows the estimated volume of transactions:


You see immediately from the graph that the growth in number of transactions is relatively slow, considering all the media attention, and certainly far, far slower than the increase in the exchange rate.

Note that this graph is not the same as the number of "legitimate transactions" mentioned in the OP. But it's at least consistent with the point of view suggested in the post.

The author's central point is still very misguided: "Specifically, watch legitimate transaction volume--I'd suggest only buying if it shows signs of seriously ramping up."

Markets are based on expectations about the future, which is tangentially related to present reality. Present reality is that many smart, well-funded people are working on merchant adoption.

By the time legitimate transaction volume ramps up the price will have baked it in months ahead of time.

Not saying today's price is unsustainable, but I would recommend buying as many bitcoins as you would bet on black at the roulette table during a weekend in Vegas. If you're not a betting person, get off HN and go read Reader's Digest or something.

This graph may provide a better picture of the number of transactions (excluding popular addresses like satoshi dice):


This one shows a much higher growth. (Although this kind of data doesn't mean much, and i agree bitcoin isn't being used much for actual transactions)

The graph is log10-scale, so it's difficult to see a 50% or 100% increase in volume.

It's definitely not a 5x or 10x increase though.

You can remove the log scale:


I used the log scale to make the point that transaction volume is relatively slow-moving on a log scale. That is certainly not the case for the exchange rate!:


Incidentally, the volume graph has a notable spike in December 2011. I've Googled and asked around a bit, but don't have a good understanding of what caused the spike.

Since this is just volume measured by number of bitcoins exchanged, wouldn't it be more accurate to scale it by the exchange rate of your primary currency (ie. the product of the two graphs)? That seems like it would more closely represent the value being exchanged.


Looks like they have this graph as well: https://blockchain.info/charts/estimated-transaction-volume-... (log scale).

This seems to support the conclusion that transaction volume (in USD) is growing significantly, although the trend is confounded by large price movements.

Unfortunately that graph is not terribly useful, even ignoring the "legitimate" filter— it both overstates transaction volume because lots of "non-transaction" events create transaction (e.g. consolidating wallets) and because it doesn't show transaction volumes of Bitcoin value which happen invisible inside systems (many Bitcoin wallet services will clear transactiosn between customers internally)

If a receiver of bitcoins sells them for dollars right away, that isn't necessarily money laundering or tax avoidance. I don't know if you've tried to transfer money overseas lately, but banks tend to make it difficult and expensive. An international wire transfer is not a trivial thing to set up; in many cases it still involves faxes.

If bitcoin succeeds only as a payment network, where users convert from and to dollars at both ends, it can still provide a very valuable and legal service.

International transfers are not intrinsically difficult or expensive, the real cost is in pennies. The reason why cross border payments are priced like they are is due to the lack of incentive, either economic or regulatory. BTC is a massive economic incentive for banks to charge more in line with the their true costs. Even if BTC fails as a currency itself, its greatest success might be catalysing innovation on prices and products at the incumbents.

Well, there's a lot of paperwork and time involved. Most U.S. banks raised their international wire fees to ~$60 at the end of October to comply with more regulations.

Or discontinued support for outgoing international wires altogether, as my Chase account did.

That freaked me out, but unfortunately it didn't freak me out enough to make me buy a bunch of Bitcoins.

Have you ever had to deal with a large number of international transactions?

They are - in fact - difficult and expensive.

The way I value bitcoin is to take the fully diluted market cap (21 million * $850 ~= $18 billion) and apply a money velocity which I assumed to be similar to US M2 velocity of 1.6 ($18 billion * 1.6 ~= $28.5 billion). Since global ecommerce transactions are about $1 trillion / yr this implies that bitcoin should penetrate 2.85% of ecommerce. Big assumption here is that bitcoin does not work for real-world transactions as the confirmation time is > 15 min. This may be oversimplified because a lot of real-world transactions don't need to be real time. I'm also excluding time value effects which you can insert back in if you like.

From the data I have seen, the bitcoin real economy could be orders of magnitude smaller than that implied by the current price, although there is no way to know precisely how large it is. This is including "illegal" transactions (I'm not sure why sam is discounting drug transactions, unless he means to imply that these will be shutdown. It does make sense to exclude gambling transactions as they are extremely high velocity).

Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x). This would mean that BTC is pricing in a real economy even larger than $28.5 billion. Based on current BTC-denominated real transactions, fair value of BTC is at most only a few dollars.

I think much of BTC's valuation come from expectations that money velocity and market penetration will increase.

EDIT: Sorry I meant to say the velocity will decrease.

A higher money velocity => lower BTC/USD, but yes, the current price implies a huge future growth of the bitcoin economy. This is what sam is saying and I agree. I happen to think that we will not see that growth/adoption, but that is a different question.

Oops, yeah, I meant the other way around.

There's no obvious reason why BTC velocity should go lower than USD velocity. If anything, its electronic nature and potential for fast settlement times should indicate a much higher velocity than USD M2.

>Note that sam's point about merchants immediately converting BTC back to USD serves to increase the money velocity (perhaps by >10x).

If this changed, it could at least get closer to the velocity of usd.

I don't understand what you are calculating but it's circular in any case: You can't use the current price of bitcoin to derive a value.

I understand what you are saying now but I'm not convinced by the argument: It does not seem plausible that transaction volume will be affected by value of the medium of exchange. Can you show your reasoning applies to other conventional currencies? Specifically that the transaction volume changes in direct proportion to some numeraire, say USD?

(That book is about DCF and bitcoin and other currencies don't give off cash flows).

We could debate what the velocity of bitcoin is/will be, but the relationship between velocity, money supply, and transaction volume is definitional.


The definition of velocity is not at issue, the relationship between "price" and transaction volume is. If tomorrow the US gov decreed that every $1 of USD will immediately be exchanged for $2 of USDX you wouldn't expect, in theory, for the USDX transaction volume, denominated in USD, to change.

Put another way, I fail to see how the BTC/USD exchange rate is related to BTC transaction volume except for tangential reasons like sentiment.

BTC value is directly related to its velocity and the value of the goods and services that are transacted in BTC. I held the purchasing power of USD constant, simply to derive a value of BTC in 2013 dollars. If USD experiences a large shift in PP (unlikely), that would affect BTC/USD. But either way that's not an inherent source of value to BTC.

This is my last comment, as I cannot possibly respond to an endless string of unfounded criticisms.

I'm not an expert, frankly I don't even have a passing knowledge of how to value currency. My "string of criticisms" is actually one probative question: How does transaction volume imply a given value of a unit of currency?

Obviously an increase in transaction volume increases the value of currency. What is not obvious, at least to me, is that it is in direct proportion.

Sam sees the flaw in his own argument - when he mentions gold and the possibility of its use a store of value. But he doesn't understand the full significance of his own comment. Moldbug has by far the most compelling (imo) theory on the origin of money and why bitcoin (and gold) float far above their use value. These two posts cover it very well:



I highly recommend them to anyone trying to understand the economics of bitcoin

Really fascinating articles, thank you.

I think this is spot on.

All sorts of people I rarely speak with have been coming out of the woodwork to ask about Bitcoin. These people are invariably regular folks that have heard about this thing that has been appreciating at an unbelievable clip. This is extremely alarming for me.

Same. I've tried to warn them about this whole mess (even if the value is appreciating I think it's at best a risky investment and at worst partaking in an immoral scheme).

This article reiterates 2 of my favorites points --

1. the lack of real-world transactions, coupled with

2. the fact that these transactions are usually done via 3rd party processor or immediate conversion back to USD. If vendors had faith in it as an actually currency, they wouldn't feel the need to do so. This is not true adoption, this is simply an attempt at expanding one's market by accepting a tradable item.

Glad to see some more sobering articles emerging as I've been wondering why no one has coherently written these things. Most of the negative BTC articles on HN are poorly written and used as a straw man.

Re: #2 - Vendors need to pay rent, suppliers, and employees - all of whom presumably don't accept BTC. So that's probably why you see Coinbase, BitPay, and others that default to converting BTC to fiat the moment of transaction.

i see what you're saying but if they have profit margins they could opt to keep some BTC. i think the issue at this point is that if one decides to hold onto BTC they are put more in the position of an "investor" rather than a bank-account owner.

business owners can't all be expected to drink the kool-aid, so they don't really seem to be assisting Bitcoin adoption outside of making it a choice in their payment processor

It is. However it has nothing to do with the protocol, it's just a fact that a lot of people are extremely money driven.

This can happen to housing, precious metals, bitcoin or anything else. Doesn't mean that the concepts of housing, precious metals or bitcoin are flawed. It's just people that are flawed, but we carry on with that reality.

After all the insane articles that claim things like "Bitcoin is a ponzi scheme" or "Bitcoin is anonymous", it is quite nice to read a well-informed and sane article.

The metric of "legitimate transactions" is interesting, but I don't see an easy way of tracking it. http://coinmap.org/ tracks brick-and-mortar retailers that accept bitcoin. Maybe there should be an opt-in registry, like a global Bitcoin YellowPages?

A currency without the major use case being legitimate transactions is going to fail.

Couldn't he have said the same thing about a protocol like BitTorrent?

He means legitimate as in "I gave you bitcoins for a concrete purpose" rather than "recognized as legal by a government." People are using BitTorrent for an actual purpose, so it's different.

I don't know why it is required that it is used in legitimate purchases. No one questions the value of gold, yet not many people use it to make purchases. I suspect bitcoins value will follow the same pattern as gold, once it is stable. When the world is full of uncertainty, it's value will rise. When things are steady, it's value will fall.

  > No one questions the value of gold, yet not many people
  > use it to make purchases.
Gold is purchased and used to make art, jewelry, electronics, medical devices, and so on in addition to being hoarded as an investment / currency reserve. Those products have real tangible value. Very few people are interested in buying bitcoin just to use the bitcoin address as artwork, for example. Tulip bulbs had more actual value. At its peak, one tulip bulb cost around €25,000 and WAS being used for legitimate purchases: milk, cheese, cows, wine, etc. Even after the price of tulip bulbs crashed, you could still at least plant them and grow flowers. If bitcoin reaches that price and crashes to next to nothing, what could you use your bitcoin for?

Although this is true, gold's total value is much higher than could be supported by those uses alone.

A secure blockchain has a plethora of uses beyond money. Currently the Bitcoin blockchain is the only blockchain to offer the kind of security necessary for innovations such as Proof of Existence, http://www.proofofexistence.com/about

In the future the same blockchain could be used for automated arbitration, estate planning, "smart" property ownership/transference.

Less than 1% of the value of gold has anything to do with its industrial/artistic uses.

People question the value of gold all the time. That's why gold has a market price, and why people are commenting on it being way-overvalued and basically guaranteed to be in for a fall due to economic recovery - probably keyed to the Asian markets where a lot of money fled to gold.

The thing is, you don't follow commodity price news.

I agree. I think it just need a a sizable niche like illegitimate txns, tax avoidance or cross border txns to stick around in some capacity.

We've already seen few bubbles on bitcoin. Investing overshadows usage of bitcoin as a currency. Everybody knows that.

One title I haven't seen: "X no longer accepts bitcoin."

"The fact that the few merchants willing to accept bitcoin generally convert to dollars right away suggest an underlying lack of faith in bitcoin—or at least a problem with the volatility."

Its not a lack of faith l, it's lack off trade acceptance. If merchants accept bitcoin they need to convert back to dollars because that's what their business calls for. In other words, if they could pay their bills with bitcoin, then bitcoins would flow back and forth without an issue, removing your suggestion that this is about lack of faith.

> The fact that the few merchants willing to accept bitcoin generally convert to dollars right away suggest an underlying lack of faith in bitcoin—or at least a problem with the volatility.

Few merchants accept gold either. Yet gold reserves in the world amount to US $8.2 trillion in value.

Edit: removed part on volatility

Given the choice I think they will not have a problem in picking gold instead of bitcoins. Gold has some history behind it, and compared to bitcoins is more liquid and less volatile.

(volatile for about 3000 years - do you mean available?)

> Gold has some history behind it

"It has history behind it" really seems like a fallacy to me. Many things had histories and were replaced, or changed dramatically, due to new technologies. Horses, swords, aluminum, newspapers...

I see Bitcoin being a very realistic threat to the high price of gold.

Why distinguish between legal and illegal transactions? I guess the assumption is that value grounded in illegal transactions is inherently volatile due to the risk of it getting shut down?

Because the value illegal actors find in Bitcoin isn't in its role as a currency, but rather in its role as an anonymous method to globally transfer wealth.

Even if millions of people use Bitcoin for that use case, it doesn't mean Bitcoin will ever have staying power for the "reserve currency" use case.

The term for "a method to transfer wealth" is "currency". (And in fact, "currency" is used metaphorically to indicate methods of transferring anything at all.)

There's a large difference between a currency being used for anonymity and a currency being used for stability and trust (hence the use of "reserve" vs. "anonymous" in my post — I omitted "reserve" in the first sentence).

Hm? Currencies are primarily used as a means to store and exchange value. The other things are secondary features that you may use to do things like pick between two currencies.

Y'all are getting hung up on insisting that Bitcoin is a currency, which nobody is arguing. There are important differences in the use cases that make a currency valuable to society, though. And Bitcoin is a far cry from demonstrating its value beyond the anonymous use case (or speculator use case). It is not stable or trustworthy yet, and will not be used as a reserve currency until making huge gains in both areas.

> people that make their money in the underworld still need money that can buy regular things, and so whatever is used to track exchange still needs to be pegged to dollars or whatever

I guess the implication is that "illegal stuff" isn't a large enough market to cover people's general needs.

Even if it just becomes the primary mechanism for moving money around, that's a multi-billion dollar industry. Think Western Union, ACH, Paypal, etc. To me, that seems like a safe(ish) bet.

Being able to buy bubble gum, well, we'll see :)

Will it be cheaper than PayPal? A believer in Murphy's Law might speculate that the package of services needed to make Bitcoin reliable enough for regular consumer use, will also involve a level of fees comparable to PayPal.

The post assumes that Bitcoins will fail if they are not suitable as a store of value. It overlooks the fact that a currency can succeed as a medium of exchange, even if it is not suitable as a store of value.

Being a good store of value is in fact a detriment to being a good medium of exchange. A currency should not be a good store of value, it should be a predictable store of value that inflates very slowly so as to discourage hoarding and encourage spending. PPC looks like a better currency than BTC for this very reason.

Is PPC PrimeCoin, PeerCoin or something else?


Exactly true. But even government-issued currencies are not suitable stores of value over longer time-periods due to their inflationary nature; that's why we have retirement funds etc, the game being trying to out-do inflation.

Bitcoins are inherently deflationary in nature, making them theoretically a superior store of value over longer term (e.g. retirement) than any fiat currency.

From the article:

low transaction costs for worldwide commerce would still be great.

I'm late to the whole bitcoin phenomenon, but here is what I really like about crypto-currencies. My US credit union (not even a commercial bank) charges me 40 dollars for an international wire transfer to Canada, and the bank on the other end will charge me 15 dollars. If this were done in bitcoin or a similar currency? Nothing, as far as I can tell, if you do it through the right exchange. And that's how it should be.

I suspect that banks don't even know to be worried at this point.

I just looked at transaction costs on 2 exchanges and they were both at 0.2% for < $1000. One offered reductions for higher value transactions, the other was fixed.

Kraken and BTC-E resp.

I might have been a little quick to jump to a conclusion, there. ;) But is there anything currently stopping someone from opening up an exchange whose only fees are an initial membership fee?


Or possibly just that an initial-membership-fee model risks not covering costs long term and so looks like a potentially unstable proposition?

I'm going to buy a bitcoin after the bubble has passed. What do we think the real price is. Like $10 or $100? What's the projected bottom? I'm hoping for less than $10, because cheaper is better. The thought that I would never be able to afford an entire bitcoin has a negative psychological effect, which may be silly.

What I like about alt-coins is how one can use that for games. Imagine making a game where a custom alt-coin, a bitcoin-fork coin that has no value outside of the game, used for transactions. Seems like a cool idea to me anyway.

Here's an attempt to answer that question: http://falkvinge.net/2013/09/13/bitcoins-vast-overvaluation-...

To be honest I think the bottom is going to be around $500. Pretty much everyone I know who is even the slightest bit interested in bitcoin is waiting for this crash to happen so they can jump in. Just a guess though.

Looks like the last time it traded below $500 was November 17th[1] - so everyone you know who is interested has only become interested in the past two weeks?

[1] http://bitcoincharts.com/charts/bitstampUSD#rg30ztgSzm1g10zm...

Yep, since the spike.

Yes, I've been thinking this for a long time. How should it crash if everybody is just waiting to join. As soon as it goes below a certain margin (say $600) people will flock to it, and it will go up again. At some point it will probably stay level for a couple of months, just like it did at $70. This time maybe at $400 - $600 somewhere. Actually, we may just be seeing that just this moment.

You've just described a classic ponzi scheme - it's just decentralized.

The flock of people looking to buy in allow the last group to get out of Bitcoin. Eventually you dry up the well of people who'll be able to bankroll each successive generation of "investors".

There's no commerce going on with Bitcoin on any significant scale, which means it's hugely overvalued. It's just a question of how when the next group looking to buy in on a crash is significantly smaller then the people exiting due to it.

> a bitcoin-fork coin that has no value outside of the game, used for transactions. Seems like a cool idea to me anyway.

Unfortunately, without the right economic motivations the system isn't secure. Many altcoins have been exploited in the past. Perhaps as part of a game thats okay, but it might be hard to balance things so that the game didn't become entirely about exploiting its currency-thing.

Most alt-coins are thoroughly uninteresting and far less secure from 51% attacks than Bitcoin itself. It may be better to use the concept of "colored coins" on top of the Bitcoin blockchain to transact in other currencies.

Heaven help us if Bitcoin becomes the world reserve currency without some central authority like the Fed controlling the money supply. Bad things would happen without counter cyclical fiscal policy.

Just like investments in Bitcoin startups are binary, so are investments in Bitcoin itself. Put some USD into it and don't worry too much about it. People waste millions on lottery tickets with much smaller chances of success, so, I'm tired of all these negative articles, just because Bitcoin dropped 20-30% and then almost fully recovered in a day. Sell off if you wish - there are enough people to buy your Bitcoins cheap. And by the way, the tulip craze is an obvious myth.

Question: why isn't gold the international reserve currency?

Chapters 1 and 2 of Karl Polanyi's The Great Transformation provide one popular theory as to why it collapsed around World War 1, from a cultural anthropology perspective.


Liaquat Ahamed's _Lords of Finance: The Bankers Who Broke The World_ provides another congruent account, from a more detailed historical/economic perspective, as to why gold was abandoned.


Why should anyone feel compelled to follow or invest in bitcoin? The time to buy bitcoins is when you need them to get something you want (as it should be for any currency).

> Why should anyone feel compelled to follow or invest in bitcoin?

To make money speculating of course. :)

Sam - 你忘记了中国的影响。

The price is bitcoin is proportional to the "hot money" flowing out of China. Doesn't matter if that's an illicit market, it's still the most significant factor.

Whether or not one believes that hot money is going to stop/slow should strongly influence your estimate of the price of bitcoin.

That said, it's top heavy at $900-$1100, and reasonable people should be selling a portion of their holdings.

Why is it reasonable to sell a portion of their holdings? What does that actually achieve for the holder?

Can't help but wonder how many tech savy career drug dealers have just decided to become day traders after watching their btc soar in value.

The tulip craze is a myth, I'm surprised people still buy into it.

It's stupid that tulips would go that high, and funnily enough it didn't happen.


Read the Wikipedia article on Tulipomania, or _Famous First Bubbles_.

OP should too, actually, since his comment that

> The price of tulip bulbs has yet to recover from its 1637 peak.

betrays several fundamental misunderstandings of the tulip market at the time. Of course the top tulip bulbs depreciated. That is like saying 'a patent has never recovered its peak value' or 'Windows 3.1 never recovered its March 1992 peak'.

That wikipedia article seems to fully support the idea that tulips did "go that high"; it also notes that a legal change transformed tulip futures contracts into tulip option contracts, which enabled the price of tulips to rise substantially without costing speculators extra. It shows a catalog page of the time offering one tulip bulb for over ten times the contemporary annual earnings of a "skilled craftsman". If I assume that a "skilled craftsman" in the US earns $20 / hour (less than I made as a summer intern at amazon before graduating college), that puts the price of the bulb at at least $400,000. For the price listed in that catalog, you could also have bought 25,000 pounds of cheese.

It also notes that while flowers in general averaged 40% annual price depreciation at the time, tulips averaged a more impressive 99.999% annual depreciation.

> Many of the sources telling of the woes of tulip mania, such as the anti-speculative pamphlets that were later reported by Beckmann and Mackay, have been cited as evidence of the extent of the economic damage. These pamphlets, however, were not written by victims of a bubble, but were primarily religiously motivated. The upheaval was viewed as a perversion of the moral order—proof that "concentration on the earthly, rather than the heavenly flower could have dire consequences".[53] Thus, it is possible that a relatively minor economic event took on a life of its own as a morality tale.

^ From the same wiki page ^ No idea with the picture you reference where it's from.

The point about economic theory is the market needs to be fluid. It says nothing about crazy people in a small private market(obvious I guess)

The "Tulip" craze seems to me to just be the normal fundamental dogma that you get when people don't fully understand systems. People distorting instances that are not linked to push their views. To me the interesting thing is people 400 years ago also feared financial systems.

Seriously, understand what other people are saying (or make some sort of note in your comment that it's unrelated to the one you're responding to).

The wiki page says that there was very little financial damage from the tulip crash. It also says that "There is no dispute that prices for tulip bulb contracts rose and then fell in 1636–37". I responded to the claim that high tulip prices were a myth. The wiki page cited does not support that idea to any degree. And the portion you cite, in particular, also does not support that idea. It says there was little economic damage from the crash, which I acknowledged, but barely mentioned, because it was irrelevant to my point.

The picture, as wikimedia notes, is from the tulip book of P. Cos, which you could read about here: http://www.oldtulips.org/index.php?section=broken&content=ea...

> If I assume that a "skilled craftsman" in the US earns $20 / hour (less than I made as a summer intern at amazon before graduating college), that puts the price of the bulb at at least $400,000. For the price listed in that catalog, you could also have bought 25,000 pounds of cheese. It also notes that while flowers in general averaged 40% annual price depreciation at the time, tulips averaged a more impressive 99.999% annual depreciation.

I don't think you understood my point: these were scarce, expiring, novel luxuries. High initial prices often followed by vast depreciation is normal, and we see it all the time in the most comparable market, fashion and art, where artists who once commanded stratospheric prices tumble into obscurity and their works get junked. Pointing out the claimed performance (and remember the extenuating factors here like a lot of the sources being polemical lies) betrays a lack of appreciation for the volatility and time factor involved.

I didn't even understand that you had a point of your own; I saw the conversation go "It's stupid that tulips would go that high, and funnily enough it didn't happen." > "citation?" > "look at the wikipedia page for Tulipomania", and then a comment that it's in the nature of tulips to depreciate over time (side note: I get the analogy to patents, but I don't get the analogy to windows 3.1).

The tulipomania page does not support the idea that high tulip prices didn't happen. Those tulip catalogs were not the polemical pamphlets (admittedly, it doesn't appear to be clear who put the prices in). The only thing my comment mentions that came from a propaganda pamphlet is the price of cheese, but I figure there's no real reason to doubt them on that. A law really was passed for the relief of people who had bought tulip futures. It seems to have been effective, but none of that means prices weren't high; it means tulip prices didn't have a major effect on the Dutch economy.

His article is premised on this:

"The estimates I’ve heard from smart people that really follow bitcoin are that legitimate transactions are up only about 2-3x from a year ago"

That's hardly scientific. I've used Bitcoin for several purchases of "legitimate" things, and look to continue to do so whenever possible.

Well, not to belabor the point, are you saying that your anecdotal evidence is better than his anecdotal evidence? Or that we shouldn't take the perspectives of Sam Altman's experts' opinions too heavily?

Have you check Bitcoin sales on Craiglist?


Funny thing about that are the people selling the shovels. I had no idea BFL was selling firmware upgrades to increase hash rates on existing ASIC miners. Simply brilliant.

Great read! I just posted an essay from way back (2008) on bubbles to hacker news: https://news.ycombinator.com/item?id=6831300

re-reading it gave me some perspective.

Good luck and Cheers!

>Tax is a big deal, of course, but even nations can't always compete with the popular sentiment tidal forces enabled by the internet.

How has the Internet outrage about NSA spying affected the US government?

A major legitimate use is wiring money internationally at a low cost.

My biggest issue with bitcoin is that it should be redeemable for something tangible other than $USD. The first virtual currency that addresses this and is directly convertible to watts or calories will be the currency to beat.

you just defined 'currency'. basically, your issue with bitcoin is that it can't be exchanged for goods and services.

this is quite the chicken and egg problem. but basically when people 'believe' it's a currency, they will accept it as one - thereby justifying that belief since it will be true due to all the other people accepting it.

dollars are only a worldwide currency because people and institutions think it's one - and if it were to stop being treated as currency it would stop being accepted as one. totally tautological - but there's currency for you.

Huh, tangible like what? I can exchange bitcoin for EUR just fine. Or for dinner. Or bullion.

That could easily be accomplished by bitcoin using the "colored coins" proposal. All it needs is for an electric utility to issue colored coins that it's willing to redeem for watts.

Will it hold?

I've been watching bitcoin since $30, bought at $80, and sold last night. I think that Stefan Molyneux (or however you spell it) is right on when he says that bitcoin is "a revolutionary protocol for information synchronization." However, it is by no means unique, and as we've seen, anyone can start their own bitcoin-type cryptocurrency. Apparently, the Canadian government is working on their own, and I don't think it will be long before other central banks begin to follow suit by adapting the bitcoin protocol for their own purposes and presumably solving some of its myriad problems in the process. And of course, when given the choice between a new-and-improved cryptocurrency that's guaranteed by a central bank and the old one that's guaranteed by nothing, Joe Blow is going to pick the former. Bitcoin is an amazing idea and I do believe that the idea behind it it will revolutionize transactions, but it won't be alone for long, and once the improved versions begin showing up, those who've held on to bitcoin because it's an amazing idea (it is) without realizing that bitcoin itself has only a very thin economic moat are probably going to have a bad day.

I've been trading and investing stocks for about 7 years now, and I think I've learned a thing or two in that time, but one of the most important things I've learned is that if holding onto something is making me uncomfortable, it's time to sell. Holding my bitcoin was making me uncomfortable as of a couple of days ago, so I sold. On the other hand, I've also learned that if everyone is expecting something to do one thing, it usually does the opposite, and it seems that pretty much everyone agrees that bitcoin is in a bubble. If it does crash, I'll get back in, but if it doesn't, I won't regret selling. I've been on the emotional rollercoaster of watching relatively large sums of money invested in a volatile asset fluctuate wildly, and I'd rather not go through that again. Just my two cents.

I just put a sell order in for a percentage of my bitcoins because I think that there will be a pull back, but with that in mind I have the following response:

Some of us don't want the help of a government. The revolutionary thing about Bitcoin is that it is a (nearly) zero trust method of transacting. The value is in the fact that there is no central bank to be afraid of. Most of the wealth my parents have lost in their savings was due to inflation and debt backed asset bubbles. Both of which are symptoms of a debt-prone central banking system. There might be arguments that these central banks stabilize the economy for the betterment of everyone, but that is irrelevant when it comes time to choose a currency. Do you want inflation, meddling, and regulation? Serious question. The uninformed should say "yes" and the informed might want to say "no".

As for whether or not people are right about Bitcoin being a bubble, I think that bitcoin has a highger likelihood of 20 year success than Twitter and a lower market capitalization. It's a bubble when the baby boomers get involved with their dumb money. When there are ETFs that get traded on the exchanges that are backed on Bitcoin. Then it can be a bubble. Right now, its just an inelastic supply curve and a couple million dollars.

I agree with the majority of your post, but I'm not convinced that inflation should be included in your list of bad things ("do you want inflation, meddling, and regulation?"). A moderate amount of inflation is a very good thing, and this isn't really even open to debate among economists. Its importance has been empirically and theoretically proven many times.

Inflation is important because economics is all about creating incentives. We have property rights because it gives people an incentive to work hard and takes risks. We have patents because they give people an incentive to explain how their invention works. We have a market economy because it means that if a company wants to gain market share, it has to create value for the consumer. In the same way, central banks try to maintain low levels of inflation (~3%) because it encourages people to invest their money in profitable ventures, rather than just leaving it under the mattress. Investment is the way wealth is created, so it should be pretty obvious that deflation is bad for the economy.

Notice that I'm talking about the economic health of the country, not the individual citizen. If you're only concerned about immediate short term benefits, you should push for zero taxes, high deflation, and the gold standard. But that's penny wise and pound foolish. You're shooting yourself in the foot. Better by far is to support actions which improve the economy, because a rising tide lifts all boats.

Inflation is not essential.

If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods. Inputs for other ventures are cheaper.

If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.

Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.

And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.

Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.

> If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods.

That is called "deflation." They tried it in Japan, it didn't work.

> If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.

Inflation and cheap money/asset bubbles are completely orthogonal. If anything, inflation should increase interest rates, not lower them.

> Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.

Resources are also for the most part either perishable or they depreciate. At the very least, resources must be expended (warehousing) while unused resources are stored for later use. Ideally, resources are used closed to when they are produced. Otherwise, value is lost in some manner.

> And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.

Why grow your industry when the consumers have deferred their consumption? Once more people have deferred consumption, the economy and industry will shrink, not grow.

> Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.

They do it by doing both. I live in a country with high industrial output (aimed at export) but little consumption in comparison (people save too much + high income disparity), its a trap that the Chinese government is desperately trying to get out of. If Chinese don't consume, the gov has little choice but to buy treasuries (as upposed to investing in more unused infrastructure/ghost cities/industrial output), and they are losing money on those t-bills.

> They tried it in Japan, it didn't work.

There's a big difference between "trying to make it happen" and "happened despite of them trying to not happen".

Deflation/Inflation works fine when governments aren't involved. Point being that if market can predict the inflation and deflation then every contract will account for that. No business will fail because of deflation, because they will purposefully account for the deflation in their economic calculation when they pay the workers and raw materials.

In simple words, when government isn't causing deflation, at the start of deflation the wages always falls faster than the prices of consumer goods which always clears the market(which is when the rate of fall of consumer goods prices equals the rate of fall of wages).

When government is trying to meddle with the money supply, it disrupts the economic calculation of the market which prevents the market from clearing in time and from real wages to rise up.

Deflation doesn't work period: in the face of falling prices, people will save rather than spend, leading to a vicious cycle. No serious economist would claim otherwise. Deflation wasn't created by the Japanese government; they just didn't do enough to fight it, thinking austerity with its personal sacrifice was the right way to a healthy economy. They were wrong in a big way.

Economies must be managed. Arguing whether Bitcoin is better than USD is vacuous: one is just a crypto currency, the other represents the entire US economy and all the movements that go along with that. Someone has to meddle to keep the system working, if its not the government, it would some rich guys in a smokey back room doing it.

> Economies must be managed.

Mouhahaha. I give you back your line. They tried it in Japan, Europe, US, Russia, and almost everywhere else and it didn't work. Countless countries sinking in huge public debt, that's hardly a way you build up a strong argument against Free Markets. Free markets and Free economy don't exist anywhere at the moment, period. What you see as a failure is centralized-economic policies at work, with more or less degree of economic freedom depending on where you live. But don't kid yourself : as long as the money supply is controlled (and this is effectively the case when you have a central bank), you are not in a Free Economy anymore.

And of course Deflation in Japan was a direct consequence of the Japanese government actions. Deflation wouldn't occur constantly for x years if there was no policy behind it to sustain it. And you will find many other particularities of Japan markets to be strongly linked to governments policies and disruption in different fields (there was an article on Japan housing on HN a couple of days ago, explaining why housing was so different in Japan... again nothing to do with Free Markets at work).

> Free markets and Free economy don't exist anywhere at the moment, period.

Right. They haven't existed since the neolithic revolution when we moved from being hunter gatherers to farming and living in cities.

> And of course Deflation in Japan was a direct consequence of the Japanese government actions.

Wow, that is some truthiness there. From [1]

> Deflation started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates and 'quantitative easing', but did not create a sustained increase in broad money and deflation persisted. In July 2006, the zero-rate policy was ended.

So wait...the government was trying to get rid of deflation, but you claimed they were the ones causing it? WTF?


* Tight monetary conditions. The Bank of Japan kept monetary policy loose only when inflation was below zero, tightening whenever deflation ends.

* Unfavorable demographics. Japan has an aging population (22.6% over age 65) that is not growing and will soon start a long decline. The Japanese death rate recently exceeded its birth rate.

* Fallen asset prices. In the case of Japan asset price deflation was a mean reversion or correction back to the price level that prevailed before the asset bubble.

* Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid.

* Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy (United States or Japanese) Treasury bonds instead of saving their money in a bank account.

* Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods (due to lower wages and fast growth in those countries) and inexpensive raw materials

Here is the only point (an explicitly libercrazian one) that supports your position:

* Stimulus Spending: According to both Austrian and Monetarist economic theory, Keynesian 'stimulus' spending actually has a depressing effect.

[1] http://en.wikipedia.org/wiki/Deflation#In_Japan

Austerity? Japan has been running huge deficits.

Austerity is where you leave within your means. When you do it by choice, you're in control. When you are forced to do it because you've been borrowing and spending everything as soon as you get it, it can be a disaster.

Its not frugality that's bad. Reckless behavior that destroys investment in future productivity - that's what's bad.

To verify this, save as much as you can for a decade. Note that you have money to buy what bankrupt individuals must sell at a loss. You are better off BECAUSE of your austerity.

There is no reason to believe that economics works ass backwards for a group than it does for the individuals in the group.

Economics is fractal. Prosperous individuals make a prosperous country and a more prosperous world. Pursuing poverty never will.

This thread inspired me to write my thoughts down: http://jaekwon.wordpress.com/2013/12/02/the-supernova-theory...

I think many are putting too much stake in Bitcoin being a currency and not enough in the economy that goes behind the currency; the two are not independent at all.

With USD, you can save/lend it easily (the US government is a very strong debtor of last resort) and likewise borrow through it, oil is traded in it, and so on. Monetary policy is more about ensuring some adequate level of inflation (to push for consumption or effectively invested) + popping any asset bubbles that appear (b/c people are imperfect).

With bitcoin, you get none of that, and given the libertarian bent of the users, nothing centralized will likely arise. So the question is: are individuals good at managing an economy for the collective good? Or will they just look out for their own needs and will it implode in a classic prisoner's dilemma?

I also believe that a currency must be inflationary for all the good known reasons but every time I think of BTC being inflationary I realize that Satoshi didn't really had a choice.

Why on earth you would buy an unknown inflationary currency? I mean, it would NEVER take off, except for illegal markets where use the privacy offered by a crypto-currency.

But look where we are now? Silk Road gone (well almost) but BTC unaffected and sky-rocketed. You would never have attracted that capital if you haven't a deflationary currency. Actually, by all means it's an asset.

You've got it wrong. If Satoshi's purpose was to get people to pile in after him/them, it had to be deflationary. Mission accomplished. Bitcoin isn't a run of the mill ponzi scheme, it is a very new take on it. But it is still essentially front-running and hoping and planning that lemmings follow you to push up the price so you can then unload.

You have a very good point, and I hadn't considered that aspect. However, if people defer their consumption, surely they'll also have less need to spend money, and thus less incentive to perform economically productive activities in order to earn money to spend? I'm sure people will be quite happy in the short term, but over longer periods (decades) there will be much less effort (not necessarily money) invested in economic activity.

Yup, that's basically the problem with deflation. It stagnates the economy, and it is self-reinforcing. Called a deflationary spiral.

Deflation is the easiest way to turn a recession into a depression.

Note that you are the one that calls my list bad, yet I specifically said that the uninformed should prefer this currency. Why should the uninformed prefer an inflationary currency? Because the uninformed are bad at accepting a decrease in demand of their market rate (their work performance would disproportionately decrease if given a 2% decrease in nominal wages).

With that aside, let me give cover my complex thoughts on inflation:

Sometimes it is possible to alter a function in such a way that the output is later maximized. Sometimes this is possible by essentially lying to people. When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this. But markets are not fixed. Technology expands, populations expand, priorities shift (from religious worship to drugs or science, for example). At some point it is possible for a portion of the system to understand the manipulation and to maximize it for that portion's gain. Just as Keynes talked about priming a pump, imaging those that sell the primer. It is in their interest for the system to stutter so they make efforts to have it so fairly frequently. The secondary effects of this manipulation are malinvestments by those not party to the information about the cycle.

But even that has a secondary effect: The effect of some informed people taking actions to minimize the harm done to their own fortunes. They sidestep property and stock bubbles, but they still need to beat inflation.

Those informed people start talking about a replacement for the inflationary monetary system. They argue on the internet about crypto-currencies and they refine their ideas, and ultimately Bitcoin gets created. We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in. The part where something by design is (essentially) non-inflationary. Even gold had its risks (Fusion, for example) but while Bitcoin is free as in liberty it is also unforgiving of mistakes. That is why the uninformed shouldn't access it. Or at least not it directly. They should trust banks or become informed, because as it stands now they are not equipped to handle it.

Lastly, I reject the notion that inflation has proved useful for stabilizing the economy.

Fractional banking by its nature monetizes all assets (since most loans are secured, the 10x multiplication window is just a fancy way of "printing" money from the value of your house or factory). But the relative value between the underlying assets and the currency is in flux (or the futures market for the good would be 0, and the information already priced into the market) and in exchange for this freeing of capital and acceleration of gains to wise economic asset allocators, this temporal variance in asset value causes an increase of volatility in the financial system ESPECIALLY when the majority of its deposits are demand deposits since there is also system wide uncertainty in cash-on-hand.

It may be that the increase volatility and subsequent government action maximize technological, ecological, and industrial advancement by allocating assets into the hands of todays best and brightest; or it may be that the cost of management (inflation, regulation, deposit insurance, super insurance, asset backed derivatives, to big to fail bailouts) exceed the gains of a fractional reserve banking + inflationary monetary supply system, but we will not be able to tell by examining the data on inflation in economies where fractional reserve is a GIVEN.

> When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this.

You do realize that pretty much everyone understands this in some way? What do you think OWS was, in part, about? The middle-class of the US is well aware that their wages have decreased relative to productivity.

If deflation becomes the order of the day, every business lobby group will immediately switch their narrative to the importance of indexed-wages for all! (which they currently oppose) while all labor unions will switch to arguing a contract is a contract (which they definitely oppose - you can't sign away your rights, contract fairness etc.)

It's not entirely true that inflation effectively results in a pay cut.

It's true only if you are buying the exact same things today, that you were buying, say a decade ago. This is true for some things such as food, housing etc.

However for other things such as computers, gadgets, medicines, cars, etc. are much better today than they were before. For these things, you get much more for the same price(taking inflation into account).

For example, phones used to be only communication devices; but now they are also a camera, entertainment device and even a computer. Others, such as medicines, they have become cheaper and much more effective. In short, improvements in science and technology beat the effects of inflation.

In some markets it can actually cause a deflation. For example, computers used to cost thousands of dollars, but now you can buy a much better one for a few hundred bucks.

Inflation is bad, only when stuff that you buy doesn't improve over time.

Perhaps one could even show that inflation is somehow related to the introduction of newer and better products in the market. For example a new car, with a more fuel efficient engine, will likely cost more than the old ones. However I don't have enough evidence to justify this claim.

"We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in."

I don't know whether to laugh, or cry. Keynes was many things, but he was not a Time Lord.

We've been living with Keynesian policies for a tick under 70 years, which also has happened to correlate to the greatest wealth expansion in recorded history. It's a bit premature to point fingers as to why (or what has happened since the 1980's, which has caused middle class wages to stagnate).

Do keep in mind that Keynes was revolutionary because his ideas worked, even though they upended much of classical economics - they had (and continue to have) predictive power for how economies work, especially when interest rates are near-zero.

Your post is so true. My parents still have all their money tied in to their mortgage because the government said it's good for them. Maybe I don't value US currency, because I don't value my US government which is completely broken from head to toe.

But, it isn't just an issue for people in the USA. It's a blessing for people who live in more oppressed region of the world. Look at what happened in Iceland and how the bankers stole from the people.

People don't like the idea of their wallet being on someone else's hard drive. And that's exactly how the current system is ran. Your money is in a vault, and you have to go through an even worse time to get it than I do. And I don't pay fees, and so on etc.

What do you mean, you don't pay fees? What fairy system are you talking about?

I actually think the decentralized nature of bitcoin is what gives it all it's value. The fact that no bank can control it, inherently holds value. Currency manipulation is a really big problem right now, and knowing that you can buy a currency that won't be artificially controlled by it's issuer is an asset in itself.

Having the currency centrally controlled again isn't special and it doesn't deviate enough from a credit card transaction for anyone to use it.

That argument doesn't make much sense to me.

If first-world currencies were being drastically manipulated in ways that cost currency-holders lots of wealth, then I'd expect to see currencies decline relative to things that are directly valuable, like commodities. But that's clearly not the case:


The price of gold is down, too:


Further, I think a government can pretty easily influence the price of bitcoin: the bitcoin market is still relatively small, so somebody with billions of dollars to spend should be able to heavily manipulate the price.

But even you were right about it being proof against government manipulation, I think it would still only be better for people seeking stability if the volatility of bitcoin were lower than government-backed currencies. But bitcoin is insanely volatile compared to first-world currencies.

Honestly, bitcoin is less and less decentralized every day. Nobody runs bitcoin-qt anymore (it's all online wallets and lightweight clients), and mining power is steadily consolidating as the capital-intensive ASICs take over. The more widespread BTC adoption becomes, the more the network will be owned by those with the capital to purchase large quantities of GH/s

Exactly. Computational power of a few dominates the rest.

Different strokes for different folks. I think its decentralized nature is its least valuable aspect. If the only thing it accomplished were smoother and cheaper internet, small business, and interpersonal commerce, it would be incredibly valuable. The novelty of it (which I think has a lot to do with its decentralization) is currently causing too much volatility to make it useful for actually buying and selling things. A more boring government-backed (or -regulated) variant would be more useful and extremely valuable.

Decentralization is very expensive because it requires mining, so if you don't think that's important you should probably back a more efficient system like Ripple or Open-Transactions.

Expensive for whom, how exactly do you quantify that? Today we pay fee's to institutions which have massive infrastructure costs (along with their necessary profits). If anything, decentralization offers an incentive for the technically inclined to reap some potential rewards which is far more feasible than today's systems.

If you don't think decentralization is needed then Ripple is just as good as Bitcoin but it requires no mining. So the expense is the wordwide cost of all Bitcoin mining which is estimated at over $100M/year.

The fact that no bank can control it, inherently holds value.

But the fact that anyone can roll their own competing currency inherently kills value, doesn't it?

Anyone can roll a Facebook competitor, or a search engine, etc. Market adoption is important.

It does not have value. Nobody is denominating services or goods in BTC. They denominate them in USD and BTC is simply a convenient way to spend USD, maybe even make some profit for the short time you're holding it. That's the value of BTC. Hard-to-trace, global (and local), decent-rate, unregulated money transmission. Decentralized and cheaper Western Union.

Makes you wonder if Satoshi isn't simply the NSA.

The more I think about this the more predictable this outcome becomes. BTC is making techies everywhere invest in what effectively amounts to USD.

"Hard-to-trace" -- hardly: this is the easiest money to trace in the history of money! (Well, ACH transactions are easier if you are backed by an army.)

Makes you wonder if Satoshi isn't simply the NSA.

Yeah, something's weird. BTC went up, not down, when Silk Road was busted. BTC went up, not down, when Congress started holding hearings on the subject.

Just for fun, plot BTC news relevancy from Google against the BTC value.

The two line up basically perfectly. Conclusion? BTC in the news means some portion of people hear about the great new BTC and how much it's going up in value, and some of them buy in.

A central authority needs to control money supply. This is crucial in all advanced economies. It has to be capped somehow (currently, it's obviously exploited), but a decentralised currency will never work.

Under what definition of won't work. Won't be adopted? Would cause economic calamity? I think this is a crucial distinction.

With nothing anchoring the value of the currency, it'll fluctuate wildly (and then crater to zero, and that'll be the end of it).

Regular currency is legally enforced by governments as the way to pay taxes, and settle debts in that currency - ergo you always need some or need to buying some, even if you don't want to deal in that currency day-to-day.

BTC does not have these things. The only thing holding it up is irrational speculation. Every person who holds bitcoin needs to sell it to a greater fool for a currency which does extinguish debts/tax obligations locally.

Consider: a population of people in the US dealing solely in BTC, and earning income, have to pay income tax. The IRS can assess income taxes as the relevant fraction of their income (easy enough: assess an approximate USD market wage that they have worked, declare they have to pay USD % of that in taxes). The effect would be BTC craters in North America, because every member of that population would have to somehow sell BTC for USD - only none of them hold USD, so they can't trade amongst each other, which means they need to convince someone else to accept BTC for USD (and I mean, why would you? You can't pay taxes with it which is why they're selling)?

There is generally nothing anchoring the value of any asset trading above the costs of the inputs required to make it.

For example, any real estate with a premium for its "better location," suits by Armani, sunglasses by Gucci carries a similar premium. This applies to gold as well--a huge part of the value is the expectation that others will continue to like shiny things.

Nothing anchors their price, or premium, other than a system of social beliefs and expectations. Specifically, beliefs about how others will perceive them are all crucial in how people value these items.

The same is true for bitcoin. It starts with a belief that others will also prefer to store value in currency with a higher utility--storable with no fees, and instantly transmissible lower fees--lower friction. It isn't so much the greater fool theory as it is the starting of a journey toward a Nash Equilibrium. But first everyone has to come to a belief about how they, and others view the currency. http://en.wikipedia.org/wiki/Nash_equilibrium

Once this has happened and additionally the markets have become more liquid, things can level out. Right now, the world-brain is confused about how it feels about bitcoin.

Unfortunately, it won't.

Money supply is a function of many things that an authority needs to control as an adjustment lever for the economy. A currency with a scheduled-deflation is not the solution.

There are no problems with our currencies today. This is a solution to a non-existent problem. We have problems in the finance world that Bitcoin does not solve.

For example, regulating how money supply can adjusted, or lending & risk.

How do you expect to operate a modern economy with Bitcoin when the whole concept of lending and credit will never exist (due to the shortage of the money)? What about in 50 years when the population goes up and we'll need more money in the system?

The government will never collect taxes, or issue bonds, in a currency that is not a function of the current state of the economy (but a function of time), and one that is scheduled to stop issuing any more "bills" (coins) at some point.

I guess the reason I don't give this argument any weight is that it is a theoretical argument about money supply and governance when the decisions to use this currency or not are made by average joes who decide whether it is in their self interest. I understand your argument as essentially saying that this currency will cause a tragedy-of-the-commons problem.

The thing is, I think that acknowledges that its popularity is inevitable--tragedy of the commons can only arise when people see something in their interest that is detrimental to society. But as an average joe, given a variety of assets, some deflationary, some not, storing my wealth in the deflationary one is in my interest.

The government never has to use it. I can always convert a small portion of my increasing-value bitcoin holdings into inflationary fiat at the last minute to pay the bill.

What gives Bitcoin its value right now is speculators, and what speculators are betting on is widespread adoption. If that never materializes because some other currency has taken its place, bitcoin's value will decline.

And it is only a small subset of the population which ascribe value to monetary decentralization. I count myself among them, but I don't delude myself into thinking that the majority feels the same way.

I wanted to buy right when it hit $850 a few days ago. I redeemed my $11k mutual fund, but the wire transfer took until Friday to go trough. By the time I was able to buy bitcoins, they were $1111 on coinbase. Bought anyway. Got 9.89BTC.

Just lost $2k of that investment, according to the markets. Though it seems to be recovering somewhat. Ow.

Anyway, I'm long on bitcoin. Maybe it will crash and I'll lose everything. Twice it's crashed, then the recovery has eclipsed the previous peak by several X. So I don't know.

I do know that if banks hasn't been so slow, then I would currently be telling the story of "I was able to grow $11k into $13k." One problem BTC solves is moving money around instantly. It doesn't close for Thanksgiving holiday.

Mtgox needs to become wiser as well. There's currently no trade fees, because they wanted to participate in BTC Black Friday. That kind of thing encourages people who are holding onto $15k coins to sell all of them if they think the market will go down. An extra 0.4% on that much money is significant. Mtgox really shouldn't be so willy nilly.

For the love of god, be sensible - sell half on Monday and put it back into a traditional retirement investment. You'll still do well if BTC goes up. There is no reason to put 100% of your retirement funds into any single asset.

There is no reason...

What about insanity? ;)

> Though it seems to be recovering somewhat. Ow.

As with most investments, you need to think medium and long term. Barring some kind of final(!) crash, there isn't anywhere to go for BTC but up. Mainstream media and ordinary people are just now starting to talk about it. Stay with your investment, and don't sell before it at least doubled. If it crashes temporarily, that's fine too: chaos is a ladder.

Within reasonable confidence, I'd say: Whatever you do, do not sell at a loss. That's the moment when it becomes a loss. Don't lose your nerve.

Personally, I had a bit over 100 BTC. When it reached $20 the second time, I sold it because I could use the money and also because I became nervous. While it wasn't the biggest money mistake of my life, it's certainly a whopper in retrospect. Don't be like me ;)

By your definition of a "mistake", the biggest mistake you probably made in your life was not buying all the Medifast Inc stock you could get your hands on in 1999. It went up 16,210% in ten years.

But wait, it gets worse. Even just going back a year, if you had bought and sold the right stocks at the right times, you'd be the richest person on earth by far, even if you only started with a few bucks.

But don't worry, you could do the same thing over the next year. You've learned from your "mistakes," right?

In all seriousness, your financial advice is pretty bad and akin to recommending gambling strategies for Roulette. If you both realize you are gambling and are cheering each other on for fun, that's one thing, but I get the sense that you really don't understand that you are in fact gambling.

I have never seen a clearer speculative bubble (as seen from within the midst of the bubble and not hindsight) in my lifetime than this one. You just don't invest for the medium or long term on a speculative bubble. Bitcoins do have some intrinsic value, but as the author of the article we're all commenting on noted, the price of Tulips still hasn't recovered to its 1637 peak.

Really? Is there something a stock or anything accessible by mere mortals that goes up 20+ times it's value every year? :-)

I bought and sold my bitcoins when prices where bellow 100$. Well, given the fact that I doubled the money I should be happy and brag about it, but I'm not. I could be holding 10k now and it hits in the stomach when I'm thinking about it.

On the other hand, I would never invest more than I can afford to lose.

If someone wants an accessible instrument that regularly goes 20x+ times initial risk in a year or even a month! look into the options markets. Remember to always only buy to open your call and put positions and sell before the contract expires if it is in the money.

There are thousand, if not tens of thousands of trades that can get someone that RoR.

I can point towards other instruments that can have that much or more risk to reward ratio. I calculate speculative risk at 100% value + incidental costs of the trade. So if someone said they doubled their investment that would mean a ratio of 1:1 aka a coin flip.

Though if someone did not know that these regulated speculative opportunities are abundantly available, they most likely should stay away.

Well if you knew stock movements like the poster suggested, you could achieve huge returns by playing with options. Like the options on Nokia that went from a few pennies to a dollar or so when MS announced the purchase. Options jump around by a huge lot each week. So it seems that starting from $100, if you knew were things were going each week, you'd make a ton of money. (There's a limit as you get more money - it's uh, hard, to double a billion dollars on a limited set of options in a week, versus only $100.)


Emotionally it does matter. Economically there's no difference between having the $2000 cash and buying 100BTC at $20 versus having 100BTC at $20 and choosing not to sell it.

I would strongly recommend rereading skwirl's post and introspecting on the ways that emotions rather than the hard calculus of the market may be at influence.

I say this as someone who is long on BTC (and purchased right before the last great crash, where it dropped 30x in an instant). I've known the entire time that it's a wild gamble, and having a few coins just in case it becomes absurdly successful sounded fun (it's been very successful for that, watching the highs and lows, talking about it with friends and coworkers, even if it crashed again I've already gotten my money's worth).

There absolutely is. You can't effectively spend bitcoin, except on the exchanges. You can't use bitcoin to buy anything. The only thing you can do is use USD to buy bitcoin and transfer the bitcoin, and have it transferred back into USD by the merchant.

When you exaggerate points like this you undermined the reasonable advice you're trying to give people.

Product and service availability for Bitcoin is very small, indeed, but it's not zero and the point you're trying to make is probably lost on anyone who already knows that you are either exaggerating or confused.

While it wasn't the biggest money mistake of my life, it's certainly a whopper in retrospect. Don't be like me ;)

I have a problem classifying random things like this as a mistake. You didn't have enough information at the time to predict that BTC would exceed $1000, and you don't have enough information now to predict what it will do, either.

It's just a game of musical chairs. The only "mistake" is to play. Some mistakes we pay for, while others ultimately benefit us.

IMHO it would be a huge mistake not to invest a few days worth of income in bitcoins . Most likely you'll loose them, but there's a reasonable chance you'll get 100x back in a few years. I invested $2500 in the summer of 2012 and just last week cached a small part to buy a Citroen C5 saloon.

100x back in a few years? So the market cap will be >1T, and Satoshi will be the richest man (?) on earth? Don't think so. Maybe 10x, and the chance of this is probably not great enough to balance against a crash.

Good call divesting some of your BTC in favor of physical assets.

IMHO China, Saudi Arabia, Japan, Abu-Dhabi, etc. can't be happy with US printing trillions of USD every year. They need a stable currency to keep their enourmous savings in, but the Fed monetary policy is eroding those savings. Bitcoins would be a perfect alternative. If governments start buying them, the total value can easily go > 1T.

Plus are you implying that hackers, like Bill Gates, Larry Page and Satoshi, can't possibly be (or deserve to be) ultra-rich?

If any of those places were unhappy they would stop buying US treasuries. But they keep buying them.

There isn't a "can't be happy" feeling to a market - just what people actually do. At the scales and volumes involved, it is literally impossible for any of those countries to divest themselves of treasuries suddenly (for one thing, bonds don't work that way).

Moreover, governments only invest in real things. The productive output of the US is a real thing because all those places buy tons of US goods and services. Bitcoins are not real things. Perhaps moreover, why would any one of those places invest in a currency at a scale which would simply let them purchase the computing power to take it over permanently?

If an individual or group were to purchase the computing power to "take over" the currency Bitcoin would lose all of its value.

Which perhaps should highlight why nationstates aren't going to buy it?

Because the money levels being talked about are large enough that you could trivially destroy it. Which means your entire foreign exchange rate is subject to whether someone wants to screw with the blockchain.

Which means at any junction, some third actor can hold the entire currency hostage - unless the governments invest in huge amounts of hashing hardware to protect it. Which is (1) a colossal waste of money and energy and (2) would, in turn, give them the capability to do the exact same thing.

Bitcoin will never be a currency held or traded by governments.

You could make the same argument about investing in the stock market. It is not a mistake to participate, but know the risks before you do.

I think the decision to sell what would now be quite a nice Christmas bonus is, as you say and as I said above, a mistake only when viewed in retrospect. Now, however, I do have more information to go on. Yes, it's still a gamble.

"there isn't anywhere to go for BTC but up"

this is utter rubbish right here.

The whole quote is:

"> Barring some kind of final(!) crash, there isn't anywhere to go for BTC but up."

That's quite a difference there to what you implied.

The implication is obviously that there won't be a "final(!) crash." This sort of reasoning applies to every penny stock in the market. Am I supposed to read this and then invest in all of them? After all, they will all continuously go up (unless they all go down).

Thread OP here. Any time someone says that, I immediately know to disregard everything else they say about investing.

I'll just quote you from a different thread:

> but there is nothing wrong with stating an opinion based on personal experience.

And that's really all I did.

Regarding investing: telling someone who just bought a shitload of BTC to sell at a loss after some minor and entirely expected market fluctuation is just malicious.

there isn't anywhere to go for BTC but up

Why? BTC is, for our purposes, infinitely divisible. BTC is just as useful when it is worth $1, as when it is worth $1B. I believe the bitcoin network has value, but 1BTC doesn't hold any more intrinsic value than 0.1BTC. They both leverage the same network.

The argument usually hinges on simple counting: there are only 21 million possible bitcoins, and 21 million is nothing compared to the money supply of other currencies. Therefore, in the end (supposing bitcoin succeeds hugely), the exchange rate must be enormous.

So the difference between 1BTC and 0.1BTC is that there are significantly fewer of the former than the latter.

There are only 21 million possible bitcoins, but there are 2.1e15 possible satoshis, which are the only denomination that really matter.

I don't think you're following the argument at all. A bitcoin is composed of satoshis, and the price is additive. Switching units doesn't actually change the price.

I hope those 11k aren't all your savings. I have coins, am bullish long term, but buying bitcoin is speculation, and bitcoin can fall back to $0.01, even if I don't think it's likely.

It is indeed all my savings. But I was saving it anyway, so I won't be out in a doghouse if it vanishes. I guess I'm dumb, but at this stage in my life I'd rather have 9.89BTC than $11k.

My theory is, everyone's expecting it to crash. So therefore it's more likely to do the opposite. Not much of a theory, but it seems to have been historically true.

I spent all my savings back in 2011 on bitcoins. I get what you mean. Good luck.

> My theory is, everyone's expecting it to crash.

If the market is efficient, the collective expectations is what gives the price at a given moment. It is what people are will ing to pay for it and what people are willing to sell for.

>My theory is, everyone's expecting it to crash. //

That's how a crash happens isn't it? It's not driven by any wider economic reality beyond the conviction of "investors". If the investors can be convinced that it's crashing then it crashes. That certainly appears to be how manipulative exploitation of short positions occurs.

That's because short positions are defined by using borrowed money. Not only will they lose money in a crash, they will be bankrupted into unrepayable debt by a crash. So if they think it's crashing, they have to sell before a certain price because they do not have the money to cover their position.

everyone's expecting it to crash

I think your sample is too small. Old-world finance looks at the charts and expects a crash, but everyone who actually holds BTC seems to have a target price of $1M

All I can say for certain is that you're in for a hell of a ride. Good luck.

It scares me that not a word in here has anything to do with wanting to own units of this "currency" for any sort of utility or actual use, but just blind belief that the "value" will continue to go up.

welcome to the roller coaster ride! i was playing the bitcoin market with a small amount of money and had automated orders buying at $90 and selling at $120. It kept accumulating coins fairly consistently for a few months. My "sell everything" order kicked in at $140 but the value just kept rocketing up to $1000!

Even though I made money obviously I'm a bit sad about it. But it just shows that nobody can see into the future. I thought at the time that $140 would be a ridiculous profit.

My advice if you plan to go long is to just resist watching the value because it will drive you crazy and you'll make stupid moves as you try to guess which way the graph is going to go.

I'm curious how people plan on paying Capitol gains taxes on profits or reporting losses.

"the Canadian government is working on their own"

is there a citation for this?

Maybe http://en.wikipedia.org/wiki/MintChip which isn't really going anywhere

> but it won't be alone for long

It isn't alone now[1].

> and once the improved versions begin showing up

They already have[1].

[1] http://coinmarketcap.com/

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