I think Bitcoin's doomed to fail, but not for the reasons the article suggest.
There're ample historical counterexamples of currencies that are not tied to a government. Gold is the most obvious example; if currency was inextricably tied to governments, there would not have been a mad rush to colonize the New World (and extract its gold reserves). In prisons cigarettes frequently serve as currency, as a medium of exchange that is widely valued.
What really makes a currency is confidence. People have to believe that other people will continue to value the currency later. Government backing can provide one source of confidence. But so can strong crypto, and one could argue that these days people have more confidence in crypto than in governments.
What'll really kill Bitcoin is that this speculative wave has made the price incredibly volatile, so volatile that real merchants selling real goods have no idea what to price things at. So everyone holding Bitcoins purchases them for investment value, and then the price will crash when it stops going up. That destroys confidence in the currency, which destroys the currency.
I could easily see a successor currency based on the Bitcoin protocol emerging from the ashes, though. By then the speculators will have been burned so badly that they'll stay far away, so it'll quietly gain adoption in the background, and then eventually become the new currency of choice when inflation starts to make it's way through current fiat currencies.
> Government backing can provide one source of confidence. But so can strong crypto, and one could argue that these days people have more confidence in crypto than in governments.
Not quite. The confidence in "normal" fiat currency arises not so much from government backing, but from the fact that a well-managed national currency envelopes the GDP of a national economy. Government really needs fiscal discipline to not break the system (the consequences are well known); the trust part comes from the health of national economy and intersection of interests of all involved players.
Consider a major issuer like USA or Eurozone. The strength of their currencies stems from strength of the backing economies. In theory, the government could try fooling the system and run the printing press amok. In practice, such a government would be very short-lived, as it would piss off just about every person with money.
Save for outliers like Zimbabwe, there aren't really many cases of modern governments running themselves in the ground like that. Usually, runaway inflation is a consequence of a catastrophic event in the economy (bubbles, wars, loss of markets and other externalities).
Now, a super-fiat currency like Bitcoin is not backed by anything like that. It is a virtual construct with finite supply, and crypto is just a production vehicle here. It envelopes no economy, so the all trust here comes from compound interest of people who invest into it.
In addition, there are various measures a government or a central bank can take to stop or at least slow down escalating inflation. If there was a sudden loss of confidence in BitCoin (or more realistically, people lost confidence in other people’s confidence in BitCoin), such hyperinflation would spread and escalate with the speed of light with nothing to stop it. This kind of volatility might be interesting for speculative investment purposes but not incredibly useful as currency.
Then again, it’s entirely possible that we will be proven wrong.
I'm not sure how to answer that question. An answer would either be horribly generic or extremely long (or both). I suggest you start reading some history books (or just start on Wikipedia).
Basically, a full bitcoin economy is a bit like an economy on a gold standard. Not perfectly, since gold is still being mined, and the rate of mining depends on its price.
If you use a service like BitPay, which most BitCoin merchants too, you declare your price in dollars and the API uses the current exchange rate to convert it to BitCoin, minute-by-minute. The prices float up and down with the currency, so pricing is largely a non-problem.
It makes rational sense for merchants to accept BitCoin and to keep some holdings in BitCoin because the price is increasing at such a rapid pace. Why wouldn't you want to sell something for x BTC today when that amount could be worth twice as much tomorrow? For the same reason it doesn't make a whole lot of sense to spend a BitCoin. Eventually the currency will level out when the incentive to spend equalizes with the incentive to receive. This might not happen for a while as long as speculation remains the predominant driving force.
If you're valuing everything in dollars, setting your price in dollars, and converting to and from dollars, why not just use dollars. I think this is the leap BitCoin is yet to make. When we no longer have to convert it and compare it to dollars.
It has loads of benefits over using the dollar, but a lot of those benefits are lost the second you're having it exchanged.
For instance, if I wanted to use bitcoin for contracting, my clients would have to convert their dollars into bitcoins, then I'd accept the bitcoins smoothly and easily, and then I'd have to exchange them (sell them) back for dollars to buy groceries and pay for the bus. Whereas right now, I get an Interac e-transfer and in less than 30 seconds I have money I can go to the store with, and it cost the sender only a dollar in fees. Sure, it's taxable, but the second I convert it from bit coins it's trackable anyway.
I definitely think this is a model we're going to see a lot more of in the future, but Bitcoin with it's thousand dollar and rising valuation and constant fluctuations is very difficult to get behind and actively use. And with the number of people, just of the people I know, who bought in hoping to cash out, there might be quite the tumble on the way. Who knows though, it will be interesting to watch, that's for sure.
I read a great comment at a local forum earlier along the lines of: No one wants bitcoin, everyone wants ... to exchange their bitcoins for as many dollars as possible.
Because bitcoin acts as a proxy between the buyer's local currency and the seller's local currency, regardless of what those are. Particularly in the case of digital goods, this opens a buyer up to accepting business from anywhere in the world.
I would argue that it doesn't make sense for the average merchant to keep holdings in BitCoin. Most merchants have no desire to take on currency risk (http://en.wikipedia.org/wiki/Foreign_exchange_risk). They're not in the business of speculating, they're in the business of selling things.
>>It makes rational sense for merchants to accept BitCoin and to keep some holdings in BitCoin because the price is increasing at such a rapid pace. Why wouldn't you want to sell something for x BTC today when that amount could be worth twice as much tomorrow?
By this logic you should put all your available cash into bitcoins right now. Are you? If not, why not?
I don't put all of my money into BitCoin right now for the same reason I don't put it into any other promising investment. The simple answer is that I don't know everything and something could come out of left field tomorrow and demolish BitCoin's value. A bug in the software, more overbearing government regulation, some government in the world (not the US, I don't think) banning BitCoin, etc.... I'm betting that this won't happen which is why I have as much as I do in BitCoin right now.
Nice observation. Yes bitcoins are exactly like tulips but moreso. In fact, in the future, bitcoin prices will drop below zero and these idiots will have to pay others to get rid of them. I'm looking forward to the expressions on their dumb faces when they realize they are in a pyramid scheme balanced on top of a bubble resting on top of a bridge over some swampland in Florida.
That would probably be the case if any of us were stupid enough to put our retirement savings or anything that we critically need into BitCoin. The smart money is on putting an early investment in, waiting till it doubles or triples then pulling the initial investment out. That way you literally can't lose - at the very worst you break even. Most people have put a quite expendable amount of money into BitCoin. Even without pulling it out, I could stand to lose my initial investment completely right now and not break a drop of sweat.
Most Bitcoin payment processors provide merchants with direct bank deposits. It's really little different to using a credit card processor, except the rates are cheaper and the audience smaller.
Personally, I don't believe in Bitcoin either, but one thing I was considering is that Bitcoin is usable as long as its value isn't 0 (though it might be incredibly difficult to use with fluctuations).
So the question is will it crash to 0? Seeing the price soar to 1,000 means that people in the future might always be willing to purchase it at some price, hoping that it will return to that level.
Though, as it stands I don't think speculation gives it credibility. People who believe that are creating the positive reinforcement cycle so common in economic bubbles.
Have you seen the interview with Bobby Lee recently? I think he made a great point. They asked him if he is worried that the bitcoin fluctuations undermine bitcoins' ability to function as a currency and discourages merchant adoption rate. He said that's what he initially thought as well, but since has come to the conclusion that bitcoin has to be seen foremost as a store of value and only through the "confidence" as you put it in a long term storage of value will the adoption as a currency eventually come all by itself. So he is not worried at all.
"There're ample historical counterexamples of currencies that are not tied to a government. Gold is the most obvious example"
...governments were accepting gold for tax purposes, kings were filling their treasuries with gold, armies were sent to steal gold from other countries, etc. Gold was absolutely tied to government when it was used as currency, and I am using the past tense here because gold is not a currency outside of a few highly niche markets.
"What really makes a currency is confidence"
I think you are confusing confidence with demand. What makes currencies work is demand -- the fact that everyone in the market demands the currency. Typically this happens because of a government, or more precisely because of a government that enforces certain laws.
"so can strong crypto"
Oh yeah? Let's just assume that Bitcoin actually qualified as "strong crypto." I'll release my fork of Bitcoin that is identical in every way, but happens to have its own block chain that I started using this post. How successful do you think that will be as a currency? Why can't we all just create our own personal block chains (and thus all be rich)? There is more to the story than "strong crypto."
> Gold is the most obvious example; if currency was inextricably tied to governments, there would not have been a mad rush to colonize the New World (and extract its gold reserves).
wut. you do know what middle-ages, gov't issued currency was made of, don't you? and who funded the new world expeditions? and for what reason? and you do know that even given the spanish crown's desire to repay their debtors, the bulk of that gold and silver windfall ended up going to china to fund their switch away from paper money by the Ming dynasty?
acting like gold != governments is... well, frankly, it's ignorant.
This assumes that stability comes from a lack of speculation. This is not true. A majority of any modern currency's stability comes from its government's ability to ease and tighten the money supply as they see fit.
What you describe is the failing of bitcoin itself. What the author discusses is the failing of all electronic, not-gov-backed currencies. I think as with every new thing we can be sure that bitcoin will go through a lot of trouble and the string b-i-t-c-o-i-n might be unusable in a short future. But pure electronic currencies will still strive when happen what you explain. What the author discusses are problems that will make all electronic currencies fail. So both topics can be discussed, but they are not really the same thread. And you might actually both be correct.
Also, with gold, there is intrinsic value beyond the monetary - jewelry use, or in these moderns days in electronics. That provides a value floor. Bitcoin doesn't have that.
Something that might be considered an "intrinsic" value of bitcoin is its ability to instantly and securely transfer wealth across large distances at zero or near-zero cost. This is an feature not present in some of the incumbent currencies and store-of-value assets.
For example, physically shipping hundreds of kilograms of gold (or physical, folding USD) is a costly exercise fraught with security risks, and the risk profile varies depending on many factors, for instance the political situations in the sending and receiving countries.
Transferring large amounts of electronic USD across international borders via the traditional banking system is going to invoke all kinds of reporting requirements, and possibly higher transaction costs (though you can do large wire transfers for like $25 I think).
Transferring arbitrary amounts via bitcoin is easy, secure and the transaction itself is cost-effective (notwithstanding the current relative difficulty/expense of moving large amounts of fiat currency into and out of bitcoin in the first place, which problem I'd expect to ease as the btc economy matures).
This intrinsic value can be mirrored by any cryptocurrency or even just a parallel network of Bitcoin. It is no justification for $1000/coin the way overzealous BTC investors claim.
$1000, for 1/12000000th the total current supply of bitcoins in existence? Sounds like a deal to me. The same fraction of USD is $100,000. There are 313 million people in the US. These are the majority of people using the dollar. There are 1.35 billion in China and another 1.2 billion in India. The former has already started using bitcoin. But only just barely. The market for bitcoin is enormous.
Now let me ask you: do you really feel a global currency is worth less than $12 billion USD? The market cap for Facebook is $113 billion. Call me crazy, but I think there is more long term value in a digital currency with the properties of Bitcoin than a social network.
In order for bitcoin to be useful, it's going to have to grow. If it grows fast (network effects) then you'll get instability. I don't think there is a solution to this unique problem. The fiat solution of printing more money doesn't apply here. There has never been a sudden rush to USD like there is to bitcoins. If you can even call a few billion dollars a "rush". If bitcoin is to be used, then it's going to see $1000/coin and beyond.
i am 1000% confident that this particular bitcoin implementation of global currency is worth less than $12 billion USD. you are treating this currency like we are dividing up slices of the world money supply. We are not. People are paying $1000 and basically receiving an IOU from no one, with the hope they will be able to sell to future speculators.
If Bitcoin succeeded as an actual currency, it would be trivial to implement new blockchains and many such systems would exist in parallel (Litecoin, Ripple?). But so far, Bitcoin has proven nothing regarding stability, it is just wowing naive investors by increasing in value rapidly.
The problem in your analogy is that Facebook never sold accounts for $1000 because people are not that stupid, except when they start seeing $$ signs flash in front of their eyes. And why does it need to keep increasing in value if its divisible to like 6 decimal places? It's perfectly usable as a currency now. This is the internet, who the fuck needs WHOLE NUMBERS.
Is there any chance of you giving it a rest? We get it. You think Bitcoin and Bitcoiners are stupid. You passed Intro to Econ in college. You've drawn completely arbitrary lines in the sand and given nothing to justify them but emotional appeal. You, like many others, seem to waltz into every thread thinking that you've just independently come up with the fatal flaw of Bitcoin as it chugs along it's third year of existence.
You display a nearly D-K effect when you act as if these are foregone conclusions with your "Just....... jesus, man." Especially after the catastrophe that was the last paragraph about price&divisibility. It's completely nonsense from an economic perspective. And there are clear benefits in using a highly divisible currency (and especially since it can be represented as a whole number... rather than a float. Ironic, whoops).
Also if you want to be more interactive than your peers, will you answer a scenario for me? Now, I am actually asking for your opinion on this, not being a smart-ass. Ready? Let's go.
If we had a bunch of "units" of something we have 1 each and there are 10 total. We use them to buy melons and each 1 is roughly valued as 1 melon. Then people see the success our new system is having and want to use our units to buy melons as well. So, one of the 10 friends decides its a smart idea to sell his unit for 2 melons to someone who really wants to be a part of our cool club. The next day someone else sells their unit for 4 melons because even more people want in.
Is every unit now worth 4 melons now just because someone sold one for 4 melons to an outside trader? If I go to the store where I used to buy a melon for 1 unit and tell them now that I think I deserve 4 melons for a unit, what will they say?
Explain to me how you think storeowners should react or how Bitcoin is unlike this. Sincerely, I will listen as best I can.
> Is every unit now worth 4 melons now just because someone sold one for 4 melons to an outside trader?
Well, yes. That's why currencies increase in value, because they're in demand. That's why the value of the pound or dollar or whatever goes up and down.
> If I go to the store where I used to buy a melon for 1 unit and tell them now that I think I deserve 4 melons for a unit, what will they say?
Who knows? They might refuse to sell at that price. They might see that if they don't sell to you, you're likely to import melons more cheaply than you can buy them locally.
The storeowner should react by buying melons in bulk using his units and then selling them to you more cheaply than you can import them yourself. Bitcoin is not unlike this. It's the same. Things are worth what people are willing to pay for them.
My intuition says that the storeowner has no reason to accept. I think what a lot of the merchants are doing is using 3rd party processors, basically just saying "Fine yeah I'll take it" as long as a Bitcoin buyer is already lined up (which is essentially what a 3rd party exchange functions as). That way they get cash less transaction fee.
But really even if they accept Bitcoin for 4 melons that doesn't mean they have embraced Bitcoin. It is just a credit to the power of Bitcoin's infrastructure that the trading network is there to accept the coins, no?
That's my biggest worry. Bitcoin culture seems to believe that at a certain point all individuals will give up resistance and embrace/adopt Bitcoin, whereas there are many many barriers standing before that and I believe it is only the trading network that is strong. However, I do not believe Bitcoin is a stock, so I'm not sure what it is.
> My intuition says that the storeowner has no reason to accept.
Well, of course they don't. Things have just got worse for them. But that's exactly what happened to many local retailers when their customers realised they could get stuff cheaper by ordering over the Internet than they could buying locally. It's just how things go.
> However, I do not believe Bitcoin is a stock, so I'm not sure what it is.
It's an infrastructure. It happens to have a currency built in on top of it, but at heart it's an infrastructure. Its worth depends entirely on what people do with it, like the Internet itself.
So, it's a little meta to consider what a currency that's an infrastructure is worth in it's own terms, but no-one has to decide that....just let people pay what they want for their share.
eh you lost me, man. he still has the option to only take USD or use a 3rd party payment processor. At the moment, it seems that this approach is not costing any businesses in sales, since Bitcoin is still used infrequently as currency. The only point it actually becomes a currency itself is when the shop owner stops using a 3rd party processor and says "you know what? I'm comfortable just holding onto these". With the market volatility of Bitcoin this is unlikely to happen for a while, unless they are among the believers who think the value can increase indefinitely and accurately represented by trading prices.
I definitely understand the value as an infrastructure, but this is the web. Better solutions will emerge and could just co-opt the Bitcoin infrastructure. Like the way ISPs came in and bought access to the data lines of phone companies, same idea.
> eh you lost me, man. he still has the option to only take USD or use a 3rd party payment processor.
Uh, no he doesn't. He only takes Units. We're talking about your hypothetical melon salesman, remember?
> Better solutions will emerge and could just co-opt the Bitcoin infrastructure.
Probably. I would certainly hope so! That doesn't stop Bitcoin being valuable right now and new solutions being more valuable in the future. There's no reason not to have several competing digital currencies on the go.
Eh I get where you're coming from, but I'm tired of this shit too. this one really got to me. It's not that I think Bitcoiners are stupid, it's a combination of a few things --
All these threads are "Yay Bitcoin reached a new price plateau, proof that it's perfect!". So finally they pick an article that says it's a mess, but the thing is it's pretty much the dumbest article ever.
So then the Bitcoiners use it as a straw man, coming on saying "See this article's author is dumb he doesn't have our enlightened view of economics.... If you divide all the world's money by the number of Bitcoins I'm so rich!!!"
I'm sorry but even 3 years existence proves nothing, as there are many screwed up things in history with longer lifespans than that.
So yeah I'm frustrated as hell because this is pretty much the spam of the tech world now but it's front page news on HN every 20 minutes with some new story like "Researchers believe Bitcoin founder once visited zoo in Denmark". One could argue that it is a cargo cult, one could argue that it is a success, a failure. Many things could be argued.
The one thing that I think is for sure is that this whole phenomenon is tabloid-esque garbage that is mostly servicing greedy arrogant Bitcoin holders and their machine, since publicity seems to be one of the only true price correlates (nothin odd about that, huh?). I'm probly gonna get off this bent just because it's not worth the time but without the detractors Bitcoin is just like a digital Jonestown -
every post is met with more mindless optimism and every criticism with a response that is a complete non-sequitur followed by boo-hooing about hurt feelings and poor etiquette. I'm not on an online forum to get popular agreeing with everyone I'm here to test the waters and see what kind of knowledge is floating around.
Those I've had arguments with fail to articulate even simple points.
For example -- I agree that using a highly divisible currency is good. That was, in fact, my point. My issue is that a frequent explanation for the rapid price increase is "Well it's natural that the coins are going to gain a lot of value. Heck, maybe Bitcoin will surge in the real estate market and 1 coin will be worth a whole house!". With a highly divisible currency, why would the unit price have to increase to represent some arbitrary figure in the market (a house in this case). Because it seems logical to people? Because there are only a limited number of Bitcoins in circulation so of course there is scarcity and rather than using a different currency that can release more we simply have to bid the price up because "well, SN is god after all"?
If anything the fact that I want to argue should show that I do respect the potential of the community in that I actually want to take my time to interact with them. It shows that I give them the benefit of the doubt that even though I disagree I still think "well let's not write it off as a cult just yet". But when I get responses that are as cock-eyed and zombie-ish as the one above ("why analyze supply and demand curve when soon the entire planet will soon be bitcoin?!! i will own your country merely for investing now.") i will probably continue to lose my shit. So yes, I will need to stop looking.
But the value floor for the USD is effectively the tax obligations denominated in USD, which is 5.5 trillion. Meaning a hell of a lot of powerfull people have a legal obligation to collect -at least- 5.5 trillion USD.
Any protocol could come along and displace http, or a parallel internet could come along and displace it. But we're going on 22 years now and that's how we're communicating.
What if these protocols are not so easily displaced as you imagine?
yeah as ars mentions, it's already happened... plus there is litecoin, buttcoin, etc etc
When people compare to internet & DNS & things like that I get kinda pissed off. Those are standard protocol that we agree to because it helps ensure successful communication. Bitcoin is not anything like this stuff, it falls more into the category of "some code that runs on the internet".
Think of it more like a website (Facebook) instead of providing the false analogy that its like the internet itself. If Facebook were an open-source trading platform and it started looking askew, what do you think people would do? (hint: open-source)
if making a mild semantic error regarding the universe whose fundamental premises i believe are flawed makes me a troll, troll i am
ad hominem is bad enough dont bring in semantics please. in bitcoin there are 3 types of people -- hypemongerSpeculators, techDesigners, nonBelievers. The hypemongers call all the nonbelievers trolls, the trolls talk trash to the hypemongers for blindly defending a greedpile, and the techDesigners (who are supposedly the enlightened HN readers) generally don't care.
The only reason I even bring these arguments here is cuz all the HN headlines are hypemonger trash. I'm readying myself to accept this model of Bitcoin forums and move on, lol
The chain has already forked before. The community so far has managed to agree on which to follow. That might not be the case if a government like China interferes with the protocol, splitting it into two very active forks.
Bitcoin's security against double-spending is proportional to how many clock cycles are spent mining, which is affected by the price of Bitcoin. A parallel network with a far lower market cap would be less secure.
$1000 per coin is speculation, but it's not particularly different from a startup people are buying into purely because of where it might be in five to ten years. The effect on Bitcoin is magnified somewhat because the maximum number of shares is capped.
Unless something radically better than Bitcoin comes along, I don't see it being replaced any time soon.
I think you misunderstand me. I am talk about non-currency use. If the Bitcoin network collapses, you have nothing. The market for gold by definition cannot collapse to zero as it has non-currency industrial and decorative value.
Seriously, in these threads there's hardly any middle ground between, "eventually these young fools will see they are standing at the foot of a pyramid of tulips," and, "fuck the police fuck fiat currency eventually dollars will be obsolete." Both sides are ignorant IMO.
Nope. Gold is used in limited quantities for plating pins in electronics, covering space helmets, and probably a few other things. It's really not that valuable for getting shit done and need a lot of it type of stuff.
For bitcoin it's easy to argue that it's useful for almost zero-cost transactions, world wide, with relatively short confirmation times. Other applications are being invented: cryptographic proof-of-existence (on top of the block chain) or perhaps also distributed/anonymous DNS.
You really need to see it as a powerful idea, not just a speculative asset
There was a mad rush to acquire gold from the new world, which promptly collapsed the economy of Spain.
In practice, no one suddenly got richer because they'd gotten all this new gold, they just experienced massive inflation (and forgot to peg their tax rate to it, so their revenues collapsed but their expenditures did not and they went bankrupt).
Because it turns out you can't eat gold nor make weapons or ships with it.
I love your point about pricing - was just thinking the other day about how I might accept bitcoin for an item. Presumably there could be a mechanism for determining the right price on the fly (similar to share pricing) but volatility would still be killer - hence there would be desire for a bartered item or non-volatile currency.
I have been thinking about this also and I concluded I would either account for the bitcoin volatility risk in my BTC price or by raising the dollar price.
There're ample historical counterexamples of currencies that are not tied to a government. Gold is the most obvious example; if currency was inextricably tied to governments, there would not have been a mad rush to colonize the New World (and extract its gold reserves). In prisons cigarettes frequently serve as currency, as a medium of exchange that is widely valued.
What really makes a currency is confidence. People have to believe that other people will continue to value the currency later. Government backing can provide one source of confidence. But so can strong crypto, and one could argue that these days people have more confidence in crypto than in governments.
What'll really kill Bitcoin is that this speculative wave has made the price incredibly volatile, so volatile that real merchants selling real goods have no idea what to price things at. So everyone holding Bitcoins purchases them for investment value, and then the price will crash when it stops going up. That destroys confidence in the currency, which destroys the currency.
I could easily see a successor currency based on the Bitcoin protocol emerging from the ashes, though. By then the speculators will have been burned so badly that they'll stay far away, so it'll quietly gain adoption in the background, and then eventually become the new currency of choice when inflation starts to make it's way through current fiat currencies.